Tax 1-5 Analyze a situation to calculate adjusted gross income. Flashcards
Adjusted Gross Income
- Which one of the following is correct regarding the qualified education interest deduction?
a. The deduction may only be taken as an itemized deduction.
b. The maximum deduction of $2,500 may be taken by a married taxpayer filing jointly with $200,000 of MAGI.
c. The deduction may only be claimed by the taxpayer legally obligated to make the loan payments.
(LO 1-5)
c. The deduction may only be claimed by the taxpayer legally obligated to make the loan payments.
The deduction may only be claimed by the taxpayer legally obligated to make the loan payments. If the loan is in the student’s name, the parents may not claim the deduction, even if they make the payments.
Adjusted Gross Income
- If neither spouse of a couple is an active participant in a company-maintained retirement plan, the deduction for a traditional IRA is phased out at which of the following modified adjusted gross income levels for 2016?
$61,000 to $71,000
$98,000 to $118,000
$184,000 to $194,000
There is no phaseout.
(LO 1-5)
There is no phaseout.
The IRA deduction is not subject to an adjusted gross income limitation if neither spouse is an active participant in a company-maintained retirement plan. The MAGI limits come into play only if the taxpayer (or spouse, if married) is an active participant in a company-maintained retirement plan. For this purpose, MAGI is the AGI without deduction for the IRA itself.
Adjusted Gross Income
- Mary is an active participant in an employer-sponsored retirement plan, but her husband, Frank, is not. Their combined AGI for 2016 is $197,000. They each contributed $5,500 to an IRA this year. Which one of the following statements is correct regarding the deductibility of the IRA contributions?
a. Neither Mary nor Frank may deduct an IRA contribution.
b. Both Frank and Mary may deduct their IRA contributions.
c. Frank may deduct his IRA contribution, but Mary may not deduct hers.
(LO 1-5)
a. Neither Mary nor Frank may deduct an IRA contribution.
Mary may not deduct her contribution because, as an active participant, her ability to take the deduction is completely phased out at $118,000. An individual who is not an active participant but whose spouse is an active participant may take a deduction for an IRA contribution, subject to a phaseout between $184,000 and $194,000. Because the couple’s AGI exceeds $194,000, neither spouse may deduct an IRA contribution.
Adjusted Gross Income
- Mildred is an active participant in an employer-sponsored retirement plan, but her husband, Franklin, is not. Their combined AGI for 2016 is $125,000. They each contributed $5,500 to an IRA this year. Which one of the following statements is correct regarding the deductibility of the IRA contributions?
a. Neither Mildred nor Franklin may deduct an IRA contribution.
b. Both Franklin and Mildred may deduct their IRA contributions.
c. Franklin may deduct his IRA contribution, but Mildred may not deduct hers.
(LO 1-5)
c. Franklin may deduct his IRA contribution, but Mildred may not deduct hers.
An individual who is not an active participant but whose spouse is an active participant may take a deduction for an IRA contribution, subject to a phaseout between $184,000 and $194,000. Because Mildred is an active participant but Franklin is not, he may fully deduct his IRA contribution, as their combined AGI is less than $184,000. Mildred may not deduct her IRA contribution because the combined AGI exceeds $118,000.
Adjusted Gross Income
- Phil Franklin is a single taxpayer with wages of $450,000. Phil has no retirement plan available to him. He contributes $5,500 to his IRA during the 2016 tax year. What amount, if any, of his IRA contribution is deductible?
$0
$2,750
$5,500
(LO 1-5)
$5,500
Phil’s IRA contribution is fully deductible. Phil is not an active participant in a company-maintained retirement plan, so the AGI limits do not come into play.
Adjusted Gross Income
- Sharon and Oliver South are a married couple filing jointly, with one dependent child. For the 2016 tax year, they have the following items relevant to their income tax situation:
$100,000 Wages $10,000 Sole proprietorship net income $18,000 Alimony paid to former spouse $12,000 Child support paid $5,500 IRA contribution $1,413 Self-employment tax liability $4,200 Net capital loss $1,000 Child tax credit $17,000 Unreimbursed medical expenses
Neither spouse is an active participant in a company-maintained retirement plan. What is the amount of the Souths’ AGI?
$70,500
$82,500
$82,793
(LO 1-5)
$82,793
$100,000 Wages
+ 10,000 Schedule C Income
- $3,000 Net capital loss
= $107,000 Total Income
- $18,000 Alimony paid
- $5,500 IRA contribution
- $707 1/2 Self-employment tax liability ($1,413 / 2)
= $82,793 AGI
Remember that net capital losses are only deductible up to $3,000 in a given year. Child support payments are neither deductible by the payor, nor taxable to the recipient. The child tax credit is deducted after computing the income tax (a tax credit is a dollar-for-dollar reduction of the tax liability). Medical expenses are an itemized deduction, which are deducted after computing AGI.
Adjusted Gross Income
The following are examples of what?
the penalty on early withdrawal of savings, alimony payments, qualified moving expenses, contributions to a Keogh (self-employed) retirement plan, self-employed health insurance deductions, qualified health savings account (HSA) contributions, qualified education interest, deductible IRA contributions, jury duty fees paid over to the employer, fees and costs related to discrimination lawsuits, and one-half of the self-employment tax.
(LO 1-5)
Adjustments to income
Adjusted Gross Income
A qualified higher education loan is a debt incurred to pay higher education expenses, which include tuition, fees, room and board, and related expenses such as books and supplies, reduced by any amount excluded from gross income under such programs as employer-provided educational assistance and qualified scholarships. The maximum annual interest deduction is $_____.
$1,000
$2,000
$2,500
(LO 1-5)
$2,500
Adjusted Gross Income
For an IRA contribution, the non-active participant spouse may take a deduction for the contribution subject to a phaseout?
(LO 1-5)
Yes the non active spouse can take the 184-194k phaseout for 2016.
Adjusted Gross Income
The Higher Education Deduction (Tuition and Fees Deduction [is / is not] available for an individual who may be claimed as a dependent by another taxpayer, or by a married taxpayer filing separately.
(LO 1-5, pg 25)
is not
Adjusted Gross Income
Adjustments to income reduce the total income figure to arrive at the adjusted gross income (AGI) figure—the bottom line on the front of Form _____. These adjustments often are referred to as “deductions for AGI” that is, those deductions that reduce total income dollar for dollar.
(LO 1-5, pg 23)
1040
Adjusted Gross Income
A _____ is a debt incurred to pay higher education expenses, which include tuition, fees, room and board, and related expenses such as books and supplies, reduced by any amount excluded from gross income under such programs as employer-provided educational assistance and qualified scholarships.
(LO 1-5, pg 24)
qualified higher education loan
Adjusted Gross Income
The maximum qualified higher education loan annual interest deduction is applied to both single taxpayers and married taxpayers filing jointly. For example, if John and Karen, a married couple filing jointly, each have $2,000 of student loan interest, the maximum deduction on their return is _____.
$1,000
$2,000
$2,500
(LO 1-5, pg 24)
$2,500
Adjusted Gross Income
Higher Education Deduction (Tuition and Fees Deduction)
Student-activity fees and expenses for course-related books, supplies, and equipment are included only if
(LO 1-5, pg 25)
the fees must be paid to the institution as a condition of enrollment or attendance.
Adjusted Gross Income
Higher Education Deduction (Tuition and Fees Deduction)
The deduction is allowed for expenses incurred by the _____
(LO 1-5, pg 25)
taxpayer, spouse, or dependent.
Adjusted Gross Income
Higher Education Deduction (Tuition and Fees Deduction)
The deduction may not be taken in the same year as the _____ for the same student.
(LO 1-5, pg 25)
Hope or Lifetime Learning credit
Adjusted Gross Income
Higher Education Deduction (Tuition and Fees Deduction)
the higher education deduction is not available for an individual who may be claimed as a _____ by another taxpayer, or by a married taxpayer filing separately.
(LO 1-5, pg 25)
dependent
Educator Expense Deduction
An annual deduction of up to $250 of trade or business expenses incurred by an educator for books, supplies, computer equipment, and supplementary materials used in the classroom may be deducted. In addition, relevant qualified Education courses may be treated as a qualifying expense. A _____ _____ is a kindergarten through grade 12 teacher, instructor, aide, counselor, or principal in a school for 900 hours during a school year.
(LO 1-5, pg 26)
qualified educator
Educator Expense Deduction
Any annual educator expenses in excess of $250 are treated as an unreimbursed employee business expense, a _____ itemized deduction
(LO 1-5, pg 26)
Tier II miscellaneous
Individual Retirement Account Deduction
An individual is considered an _____ in an employer-sponsored qualified plan under the following circumstances:
For defined contribution plans, an individual is considered an active participant if either contributions (from the employer or the employee) or forfeitures are credited to the individual’s account. Note that the allocation of investment earnings to an individual’s account does not result in active participant status. The plan may permit eligible employees to waive participation; those who waive participation will not be considered active participants.
(LO 1-5, pg 29)
active participant
For defined benefit plans, active status results if the individual is merely eligible to participate in the plan, even if the individual declines participation in the plan.
Legal Fees and Court Costs Related to Discrimination Lawsuits
For court costs and attorney’s fees related to these lawsuits, an _____ deduction is allowed. There is no line on the Form 1040 to account for this deduction. Instead, the taxpayer merely deducts these expenses against the taxable settlement, and reports the net taxable settlement on the “other income” line on the Form 1040.
(LO 1-5, pg 29)
above-the-line
Jury Duty Fees Paid Over to an Employer
If the taxpayer gave her jury duty pay to her employer because the employer continued to pay the taxpayer’s salary while she served on the jury, the taxpayer can _____ the amount paid over to the employer. The jury duty fees received are reported as income, on the “other income” line on Form 1040, in calculating
gross income.
(LO 1-5, pg 29)
deduct
Qualified Education Interest
An individual who is eligible to be claimed as a _____ does not qualify for the deduction.
1-5
Dependent
Qualified Education Interest
The deduction may only be claimed by the individual legally _____ to make the payments on the loan.
1-5
obligated
Adjusted Gross Income
The following are calculated for what:
Wages, salaries, tips, etc. Taxable interest. Tax-exempt interest. Ordinary dividends. Qualified dividends Taxable refunds, credits, or offsets of state and local income taxes Alimony received Business income or (loss). Capital gain or (loss). Other gains or (losses). IRA distributions Pensions and annuities Rental real estate, royalties, partnerships, S corporations, trusts, Farm income or (loss). Unemployment compensation Social security benefits Other income.
1-5
Total Income
Practice Test 2
Adjusted Gross Income
- Fred Jackson, age 59, is a single taxpayer. He has wage income of $90,000 for the current tax year. Fred is not an active participant in a company-maintained retirement plan. In addition, he has the following:
$4,000 Long term capital gains $9,000 Short term capital losses $3,700 Loss from active participation from rental real estate $5,200 Alimony paid to ex wife $7,100 Gambling winnings $3,500 Interest Income $2,000 Sole Proprietorship (Schedule C) income $283 Self employment tax liability $6,890 Qualified Home Mortgage Interest $1,840 Real Estate tax paid $4,925 Investment Interest Expense $2,975 Charitable contributions $4,217 Total medical expenses $1,625 State and local income taxes $2,180 Consumer Interest $1,560 Unreimbursed employee business expense $5,500 IRA contribution
What is the amount of Fred’s total income?
$93,900
$95,900
$98,900
$99,600
(LO 1–5)
$95,900
The total income is computed by starting with the wage income of $90,000. To that $90,000, we add the interest of $3,500, the self-employment income of $2,000, and the gambling winnings of $7,100. Of the $9,000 of short-term capital losses, the first $4,000 would offset the long-term capital gains. Of the remaining $5,000 net capital loss, only $3,000 would be deductible in computing the current year total income. The $3,700 active participation real estate loss is fully deductible, as the AGI (computed without regard to the active participation loss) is less than $100,000. Thus, the total income is $95,900.
$90,000 wages
+ $3,500 Interest Income
+ $2,000 Sole Proprietorship (Schedule C) income
+ $7,100 Gambling winnings
- $3,000 Net Capital Loss
- $3,700 Loss from active participation from rental real estate
= $95,900
Practice Test 2
Adjusted Gross Income
- Fred Jackson, age 59, is a single taxpayer. He has wage income of $90,000 for the current tax year. Fred is not an active participant in a company-maintained retirement plan. In addition, he has the following:
$4,000 Long term capital gains $9,000 Short term capital losses $3,700 Loss from active participation from rental real estate $5,200 Alimony paid to ex wife $7,100 Gambling winnings $3,500 Interest Income $2,000 Sole Proprietorship (Schedule C) income $283 Self employment tax liability $6,890 Qualified Home Mortgage Interest $1,840 Real Estate tax paid $4,925 Investment Interest Expense $2,975 Charitable contributions $4,217 Total medical expenses $1,625 State and local income taxes $2,180 Consumer Interest $1,560 Unreimbursed employee business expense $5,500 IRA contribution
What is the amount of Fred’s AGI?
$84,059
$85,059
$86,700
$86,841
(LO 1–5)
$90,000 wages
+ $3,500 Interest Income
+ $2,000 Sole Proprietorship (Schedule C) income
+ $7,100 Gambling winnings
- $3,000 Net Capital Loss
- $3,700 Loss from active participation from rental real estate
= $95,900 Total (gross) income
$95,900 Total (gross) income - $5,200 Alimony paid to ex wife - $141 1/2 Self employment tax liability - $5,500 IRA contribution = $85,059
From the $95,900 of total income, we would subtract the adjustments to income. The adjustments to income total $10,841. This is comprised of the $5,200 of alimony payments, one-half of the self-employment tax liability ($141), and the IRA contribution of $5,500. Note that the IRA contribution is deductible in this situation because Fred is not an active participant in a company-maintained retirement plan. Subtracting the $10,841 from the total income of $95,900 leaves us with $85,059.
Practice Test 2
Adjusted Gross Income
- Lowell Benson has Schedule C net income of $55,000 for the current year. In addition, he has a flow-through of interest and dividends of $27,000 from an investment partnership.
What is the amount of the adjustment to income for a portion of the self-employment tax? Round your answer to the nearest dollar.
$3,378
$3,886
$4,208
$5,793
(LO 1–5)
$3,886
The flow-through of interest and dividends is not subject to the self-employment tax. (Answers may vary slightly due to rounding.)
$55,000 - 7.65% = $50,792.50 * 15.3% = $7,771.25 / 2 = $3,886
The above the line deduction equals one-half of the self-employment tax. One-half of $7,771.25 equals $3,886 (rounded).
Practice Test 1
Adjusted Gross Income
- Lowell and Thelma Jordan are married and will file a joint return for the current tax year. Lowell and Thelma are contributing to their respective 401(k) plans through their employers. They have provided you with the following information.
$60,000 Lowell's salary after 401k cont $35,000 Thelma's salary after 401k cont $24,000 Alimony payments to Lowell's ex wife $7,000 Net long term capital loss $2,000 property taxes $5,500 IRA contribution for Lowell $5,500 IRA contribution for Thelma
Based on the information given, what is the Jordans’ adjusted gross income for the current tax year?
$51,000
$53,000
$57,000
$88,000
$95,000
$57,000
$60,000 Lowell’s salary after 401k cont
+ $35,000 Thelma’s salary after 401k cont
- $3,000 Capital gain or (loss capped at 3k)
- $11,000 IRA Contribution (deductible)
- $24,000 Alimony paid
= $57,000 AGI
The salaries of $95,000 reduced by the $24,000 of alimony payments equals $71,000. This is further reduced by $3,000 of net capital losses. Remember that only $3,000 of net capital losses are deductible in a given year, with an indefinite carryforward of the excess. The $11,000 of IRA contributions is also deductible. Even though both spouses are active participants in company-maintained retirement plans, their MAGI (AGI without the IRA contributions) is only $68,000. This is well under $98,000—the beginning of the phaseout range for married couples filing jointly, where both spouses are active participants. The property taxes are an itemized deduction, and do not affect the AGI.
- Mary is an active participant in an employer-sponsored retirement plan, but her husband, Frank, is not. Their combined AGI is $200,000 for 2016. They each contributed $5,500 to an IRA for the current year. Which of the following statements is correct regarding the deductibility of the IRA?
Neither Mary nor Frank may deduct the IRA contributions.
Both Frank and Mary may deduct the IRA contributions.
Frank may deduct his IRA contribution, but Mary may not.
(LO 1-5)
Neither Mary nor Frank may deduct the IRA contributions.
Neither Mary nor Frank may deduct their IRA contributions. The active participant spouse is subject to a phaseout between $98,000 and $118,000. The spouse who is not an active participant but whose spouse is an active participant may take a deduction for the contribution, subject to a phaseout between $184,000 and $194,000. Because the AGI exceeds $194,000, neither spouse may deduct the IRA contribution. Remember that those phaseouts apply only if the taxpayer (and/or spouse, if married) is an active participant in a company-maintained retirement plan.
