Tax Ch 6

Answer 1

DEDUCTIONS IN GENERAL
* Deductions are not entitlements: They are a matter of legislative grace
* Substantiation requirements
* Taxpayer has burden of proof
* Adequate records of expenses must be maintained

Answer 2

CLASSIFICATION OF DEDUCTIBLE EXPENSES

• Above-the-line deductions
• Below-the-line deductions

Answer 3

ADJUSTMENTS TO INCOME: 2022

Answer 4

COMPARISON OF ABOVE- AND BELOW-THE-LINE
DEDUCTIONS (2024)

Single taxpayer has gross income of $50,000.
What is the taxpayer’s taxable income if she has an $8,000 for-AGI (above-the-line) deduction in comparison to an $8,000 itemized (below-the-line) deduction.

Answer 5

TRADE OR BUSINESS EXPENSES

• Only net profit (after expenses) is included in taxpayer’s income
• Above-the-line deduction
• Expenses must be
• Ordinary
• Necessary
• Reasonable
• Additional expenses for Sole Proprietors, Partners, > 2% owners of S- Corporations
• Half of self-employment tax paid
• Self-employed retirement plan contributions
• Self-employed health insurance premiums

Answer 6

LIMITATION ON LTC INSURANCE

Answer 7

LIMITATION ON LTC INSURANCE

Answer 8

WHO CAN DEDUCT CONTRIBUTIONS TO A TRADITIONAL IRA?

• Taxpayer(s) is(are) not an active participant
  -No AGI phaseout limit
• Taxpayer(s) is(are) an active participant
  –Single AGI phaseout $77,000 - $87,000 (2024)
  – MFJ AGI phaseout $123,000 - $143,000 (2024)
• One spouse is an active participant, the other spouse is not
  –Non-active participant spouse AGI phaseout $230,000 - $240,000 for
  2024.
  –Active participant spouse follows MFJ AGI phaseout

Answer 9

ROTH IRA CONTRIBUTION PHASEOUTS

Answer 10

MOVING EXPENSES: BEFORE 2018 AND AFTER 2025 (1 OF 2)
* Deductible
–Cost of moving household goods and personal effects
– Storage while in transit
—Travel expenses (one trip)

• Not Deductible
  – Meals
  – Expenses of buying or selling home
  – Temporary living expenses
  – Home hunting expenses

Answer 11

MOVING EXPENSES: BEFORE 2018 AND AFTER 2025 (2 OF 2)

• Distance Test
• The distance between the old home and the new job must be at least 50 miles greater than the distance between the old home and the old job location.
• Time Test
• Full time employee: 39 weeks out of the 12-month period following the move.
• Self employed: 78 weeks out of 24-month period following the move

Answer 12

MOVING EXPENSES: 2018 THROUGH 2025

• Moving expenses are not excludible from income and are not deductible unless they are for in-kind moving and storage expenses for members of the armed forces (or their spouse or dependents) on active duty that move pursuant to a military order and incident to a permanent change of station

Answer 13

OTHER ABOVE-THE-LINE DEDUCTIONS

• Penalty on early withdrawal of savings
• Educator expenses
• Student loan interest
• Alimony paid
  – If pursuant to a decree entered into on or before December 31, 2018
  –Alimony required pursuant to a decree entered into after December 31, 2018, will not be deductible

Answer 14

STUDENT LOAN INTEREST (1 OF 2)

• Up to $2,500
• Taxpayer must have primary obligation to repay debt

Answer 15

STUDENT LOAN INTEREST (2 OF 2)
* Phaseout applies to MAGI

• MAGI = AGI plus
• Exclusion for foreign earned income
• Exclusion for income from U.S. possession and Puerto Rico

Answer 16

ALIMONY DEDUCTION: EXAMPLE

Willie and Maye divorced in October 2018. They had been married for 15 years, and had two children, Erin (14 years old) and Hank (12 years old). Under the terms of the divorce decree, Willie is required to pay Maye $2,000 per month in alimony for four years, $1,500 for the next
two years, and $1,000 per month for the following two years.
Willie’s alimony deduction each month will be $1,000. Even though the divorce decree classified the payment as alimony.

Answer 17

DEDUCTION RULES FOR BUSINESSES

• Corporations
  –Ordinary, necessary and reasonable expenses deducted on corporate return
  – S-Corporations cannot deduct medical insurance premiums or retirement plan contributions for 2% owners
• Partnerships
  – Expenses deducted on information return
  –Cannot deduct medical insurance premiums or retirement plan
  contributions for owners
• Sole Proprietorships
  – Expenses deducted on Schedule C of Form 1040
  –Cannot deduct medical insurance premiums or retirement plan
  contributions for owners

Answer 18

BUSINESS EXPENSE REQUIREMENTS

• Ordinary
  – Incurred in the normal, usual conduct of business
• Necessary
  – One that a prudent businessperson would incur
• Reasonable
  – Question of fact
  – Overlaps ordinary and necessary requirements

Answer 19

COMMON DEDUCTIONS FOR EMPLOYERS

• Fringe Benefits
• Self-Employed Retirement and Health Plan Contributions
• Social Security Self-Employment Tax
• Investigation of Business Expenditures
• Home Office Expenses

Answer 20

INVESTIGATION OF BUSINESS EXPENSES

• Must purchase the business to qualify for a deduction
• New (unrelated) line of business
  -Up to $5,000 of start up costs deducted
  – –Costs beyond $5,000 amortized ratably over 180-month period
• Same line of business
  – Expenses are deducted currently

Answer 21

HOME OFFICE DEDUCTION

• General Rules
  – Expenses are prorated
  –Depreciation on 39-year straight line basis
• Business Owner
  – Regular and exclusive use requirement
  –Cannot deduct expenses to show loss
• Employee
  – Must be for convenience of employer to deduct expenses before 2018 and after 2025
  – From 2018-2025, no deduction is permitted on Schedule A for home
  office expenses

Answer 22

TAX PLANNING WITH DEDUCTIONS

• Employees
  –Most deductions are below-the-line
• Business Owners
  – Deductions are above-the-line (no phase-out limitations).
  – Allocate as many expenses as possible to the business.
• Investors
  –Real Estate Expenses – above-the-line deductions
  –Portfolio Expenses – below-the-line deductions
  —-Investment interest is not subject to the 2% floor.
  —- Investment advisory fees are subject to the 2% floor and are,
  therefore, suspended for tax years 2018-2025.

Question 23

All of the following requirements must be met for a payment to be treated as alimony except:

The payment must be required by a court decree.

The payment must cease at the death of the payor.

The parties may not live in the same household.

The payment must not be a form of disguised child support.

Answer 23

The payment must cease at the death of the payor. TEST TEST

Rationale

In order to be considered alimony for income tax purposes, the payment must be made pursuant to a court decree, the payor and payee may not be members of the same household, the payment must not be a form of disguised child support, and

the payment must cease at the death of the payee (not the payor) spouse.

Question 24

On January 1, 2018, Bryce and Harper were divorced. Under the terms of the divorce decree, Harper was given custody of their only child, Maxine, who is 16 years old. The court decree also requires Bryce to pay Harper $1,000 a month in alimony for two years, followed by $800 a month for the next four years. Which of the following statements concerning the payments that Bryce makes to Harper is correct?

Bryce will be able to reduce his AGI by the $12,000 in alimony payments he makes to Harper this year.

Harper will not be required to report any of the payments that Bryce makes to her as income on her tax return.

Bryce will not be able to take a deduction for the alimony payments made.

Bryce’s tax deduction will be limited to $9,600 per year during the six year period.

Answer 24

Bryce’s tax deduction will be limited to $9,600 per year during the six year period.

Rationale

For income tax purposes, alimony payments that are reduced when a minor child reaches the age of majority (18 in most states), are considered to be a form of child support.

Since Bryce’s alimony payments will be reduced by $200 per month once Maxine reaches age 18, $200 of the payment will be considered child support, leaving the remaining $800 as alimony.

As a result, Bryce will only be able to deduct from his income, and Harper will be required to include in her income, $9,600 per year.

Question 25

All of the following statements concerning Health Savings Accounts (HSAs) are correct except:

Excess contributions to HSAs are subject to a 6% penalty tax.

When a self-employed individual makes a contribution to an HSA, the contribution is disregarded when calculating self-employment (Social Security) taxes.

Contributions to HSAs must be distributed to cover health care costs by the end of the taxable year, or they are forfeited.

Distributions from HSAs that are not used to cover medical expenses are subject to a 20% penalty until the taxpayer reaches age 65.

Answer 25

Contributions to HSAs must be distributed to cover health care costs by the end of the taxable year, or they are forfeited.

Rationale

Unlike Health Care Flexible Spending Accounts (which are accounts maintained by employers that allow employees to allocate part of their income on a pre-tax basis to the account), amounts contributed to HSAs that are not used by the end of the taxable year can be carried forward and used in future years. Excess contributions to HSAs are subject to a 6% penalty tax, and early distributions used for non-qualified expenses (before age 65) are subject to a 20% penalty tax. Furthermore, contributions to HSAs are not taken into consideration when determining the amount of income subject to Social Security taxes for self-employed individuals.

Question 26

In 2024, Dottie, a single individual who is not in the U.S. Armed Forces, received a salary of $89,000 after making a contribution to her 401(k) plan. Dottie had the following expenditures:

Moving Expenses (due to change in employment) $5,000
Individual Retirement Account Contribution $7,000
Mortgage Interest $6,500
Charitable Gifts $2,000

What is Dottie’s adjusted gross income for 2024?

Answer 26

$89,000.

Rationale

Dottie is not entitled to take a deduction for the contribution to her individual retirement account, since her AGI exceeds the deductibility threshold as she is an active participant in a qualified plan (401k).

Mortgage interest and charitable deductions are itemized deductions and will therefore not affect Dottie’s AGI.

Moving expenses are not deductible between 2018 and 2025, except for members of the U.S. Armed Forces.

Question 27

Which of the following statements concerning Medical Savings Accounts (MSAs) and Health Savings Accounts (HSAs), is correct?

MSAs can be created by anyone who has a high deductible health insurance plan.

Taxpayers who use MSAs and HSAs convert below-the-line deductions into above-the-line deductions.

Retired taxpayers enrolled in Medicare can use HSAs to generate tax benefits for out-of-pocket medical costs.

MSA and HSA contributions are permitted to be claimed as a medical expense on the taxpayer’s Schedule A (Itemized Deductions).

Answer 27

Taxpayers who use MSAs and HSAs convert below-the-line deductions into above-the-line deductions.

Rationale

A significant advantage of HSAs and MSAs is an ability to transform what would otherwise be below-the-line medical expense deductions (taken as an itemized deduction) to above the line deductions.

Taxpayers receive a tax deduction when they make a contribution to the HSA or MSA, and do not have to pay tax on distributions to the extent that the distributions are used to pay medical expenses.

To set up an MSA, a taxpayer must be a business owner, making option A incorrect. Individuals enrolled in Medicare (which is not a high-deductible health plan) are not eligible to make MSA or HSA contributions, making option C incorrect.

Since contributions to these accounts are claimed as adjustments to income (above-the-line), option D incorrectly states that they are below-the-line deductions.

Question 28

Reggie is the three-year-old son of Jackson. Since he was born, Reggie has received large gifts from family members, which have been invested for his benefit, and are now beginning to generate some investment income even though a majority of the funds are invested in growth-type investments. This year, Reggie will earn $2,000 in investment income, but due to his age, he does not have any earnings from employment. Jackson recently attended a tax planning seminar sponsored by Fly-By-Nite Financial Services, and, based on advice he received at the seminar, has decided to take Reggie’s income and contribute it to an IRA for Reggie’s benefit. Jackson feels that the additional deferral of tax on the income would be beneficial from an income tax standpoint. How much can Reggie contribute to his IRA this year?
$0.
$2,000.
$4,000.
$6,500

Answer 28

$0.
Rationale

Since Reggie does not have any earned income, he may not make a contribution to either a traditional or Roth IRA. Even though Reggie has investment income, he has no earned income.

Question 29

2. All of the following requirements must be met for a payment to be treated as alimony EXCEPT:

a. The payment must be required by a court decree.
b. The payment must cease at the death of the payor.
c. The parties may not live in the same household.
d. The payment must not be a form of disguised child support.

Answer 29

The correct answer is b.

In order to be considered alimony for income tax purposes, the payment must be made pursuant to a
court decree, the payor and payee may not be members of the same household, the payment must not be
a form of disguised child support, and the payment must cease at the death of the payee (not the payor)
spouse.

Question 30

All of the following individuals are considered to be self-employed individuals EXCEPT:

a. Sole Proprietors.
b. Partners.
c. Greater-than-2% owners of S corporations.
d. Greater-than-5% owners of C corporations.

Answer 30

The correct answer is d.

For income tax purposes, sole proprietors, partners (including members in LLCs and LLPs, and limited
partners), and greater-than-two-percent owners of S corporations are considered self-employed
individuals. When computing the AGI of a self-employed individual, special adjustments must be made.
Owners of C corporations, without regard to the extent of their ownership interest, are not considered
self-employed individuals, but are rather considered to be employees of the corporation if they work for
that corporation (recall that a corporation is an entity separate and distinct from its owners that pays tax
on its income, while pass-through entities and sole proprietorships require the owners to pay the tax on
the business income

Question 31

Which of the following expenses can a taxpayer deduct as an adjustment to gross income (above-the-line)?

a. Expenses incurred in conducting a sole proprietorship.
b. Real estate taxes paid on the taxpayer’s principal residence.
c. Charitable gifts of property made to the taxpayer’s church.
d. Employee business expenses that are not reimbursed by the taxpayer’s employer.

Answer 31

The correct answer is a.

Business expenses incurred by business owners directly offset income from a business activity. A sole
proprietor reports gross income from business operations on Schedule C and deducts expenses on
Schedule C. It is only the net income from the business that is included in the Gross Income section of the
taxpayer’s income tax return. By reducing income subject to tax, business expenses incurred by a
business owner in the active conduct of a trade or business are always deducted “above-the-line,” or for
AGI. Real estate taxes paid on a principal residence, charitable gifts, and employee business expenses are
not taken into account when calculating AGI. Charitable contributions are below-the-line deductions.

Question 32

Jimmy is preparing his personal tax return for the year. He represents major pharmaceutical firms, and operates his sales business as a sole proprietorship. This year was not the best for Jimmy, and he has net earnings of $2,000. Since the pharmaceutical companies he works for do not provide him with office space, Jimmy has a room in his home that he uses exclusively and regularly for the conduct of his business. The expenses Jimmy incurred that could be properly allocated to the home office were $5,000. How much can Jimmy take as a home office deduction this year?

Answer 32

$2,000.

Rationale

Provided that a business owner uses part of his home exclusively and regularly for the conduct of a trade or business, he can claim a portion of the expenses associated with the home as a business expense.

The amount claimed, however, cannot exceed the income of the business. I

n this case, the business income was $2,000 and the home office expenses were $5,000, so the maximum home office deduction allowed for the year is $2,000. Home office expenses can reduce business income to, but not below, zero.

Question 33

Which of the following expenses can a taxpayer deduct as an adjustment to gross income (above-the-line)?

Expenses incurred in conducting a sole proprietorship.

Real estate taxes paid on the taxpayer’s principal residence.

Charitable gifts made to the taxpayer’s church.

Employee business expenses that are not reimbursed by the taxpayer’s employer.

Answer 33

Expenses incurred in conducting a sole proprietorship.

Rationale

Business expenses incurred by business owners directly offset income from a business activity.

A sole proprietor reports gross income from business operations on Schedule C and deducts expenses on Schedule C. It is only the net income from the business that is included in the Gross Income section of the taxpayer’s income tax return. By reducing income subject to tax, business expenses incurred by a business owner in the active conduct of a trade or business are always deducted “above-the-line,” or for AGI. Real estate taxes paid on a principal residence, charitable gifts, and employee business expenses are not taken into account when calculating AGI. Charitable contributions are below-the-line deductions.

Question 34

Ty is a 20% owner in Beverly Farms, Inc., an S corporation. All of the following expenses incurred by or on behalf of Ty by the corporation are deductible on the corporation’s tax return,

except:

Travel expenses associated with a corporate business trip.

Premiums for Ty’s medical insurance, paid entirely by the S corporation.

Subscriptions to business research services used for business purposes.

Salary costs for Ty’s executive assistant.

Answer 34

Premiums for Ty’s medical insurance, paid entirely by the S corporation.

Rationale

Since Ty is a greater-than-2-percent owner in the S corporation, the corporation may not deduct medical insurance premiums paid on Ty’s behalf.

Instead, the medical insurance premiums must be “passed through” to Ty on his W-2 as gross wages, and Ty will report the premiums as an adjustment to income on his personal tax return.

Note that if medical insurance premiums were paid on behalf of Ty’s assistant (and the assistant was not a greater-than-2% owner of the corporation), the corporation would deduct that payment on its tax return.

Question 35

Derek, who is an oil and gas engineering consultant, recently moved due to a change in employment. Before his move, Derek only had a 20 mile commute to work, but after his move, he had to commute 25 miles to his new job. If he had stayed in his old home, however, he would have had to commute 75 miles to his new job. If Derek incurred $5,000 of moving expenses of which $4,000 was reimbursed by his employer. How much can Derek take as a tax deduction?

$0.
$1,000 as an adjustment to income.
$5,000 as an employee business expense.
$5,000 as an adjustment to income.

Answer 35

$0.

Rationale

Derek meets the distance test, but he is not a member of the U.S. Armed Forces. Moving expenses for non-active duty military are not deductible between 2018 and 2025 as a result of the TCJA 2017. In addition to no tax deduction, Derek would have $4,000 in income due to the employer reimbursement.

Question 36

Manny is a single individual who works for Dutch Enterprises, Inc., and is a participant in their qualified defined benefit plan and profit sharing plan. His adjusted gross income this year was $90,000 and Manny is interested in generating some deductions to offset his income. While watching the television show of a financial planner who claims to have all the answers for everyone, Manny follows the planner’s advice and makes a contribution to a traditional IRA of $7,000. How will the contribution be reflected on his income tax return for the year?

Manny may not deduct any portion of the IRA contribution.

Manny may deduct $2,000 of the contribution as an adjustment to income (above-the-line).

Manny may deduct $7,000 of the contribution as an itemized deduction.

Manny may deduct $7,000 of the contribution as an adjustment to income (above-the-line).

Answer 36

Manny may not deduct any portion of the IRA contribution.

Rationale

Since Manny is an active participant in his company’s qualified plan, and his income exceeds the deductibility limits for IRAs, Manny will not be able to deduct his IRA contribution for the year.

He will, however, benefit from tax deferral on the earnings generated from the $7,000 investment and will pay tax on those earnings when he withdraws them from the IRA.

A better course of action for Manny would have been to contribute the $7,000 to a Roth IRA. He could not get a tax deduction for the Roth IRA either, but the earnings on the contribution would escape federal income taxation (provided certain rules are met).

Question 37

Kit works for Mad Hatter Chemical Company, Inc. as an engineer. She has been employed there for the past 5 years, and earns a salary of $100,000. Earlier this year, acting on advice given to her by her financial planner, Kit purchased a qualified long-term care insurance policy, and paid a premium of $800. All of her other medical expenses are covered by her employer-sponsored health insurance plan. Which of the following statements concerning the long-term care policy is correct?

Kit is not permitted to deduct the cost of long-term care insurance that she purchased, since it is treated as a disability policy for income tax purposes.

Kit can deduct the cost of the long-term care insurance as an adjustment to income.

Kit can receive a tax benefit by claiming the cost of the long-term care insurance as a medical expense deduction.

Mad Hatter Chemical Company could have provided the long-term care policy to Kit as an employee benefit even if they did not provide similar coverage for other employees.

Answer 37

Mad Hatter Chemical Company could have provided the long-term care policy to Kit as an employee benefit even if they did not provide similar coverage for other employees.

Rationale

Qualified long-term care insurance contracts are treated as health insurance contracts for income tax purposes, and are deductible.

Kit cannot deduct the cost as an adjustment to income because she is an employee – only self-employed individuals can receive above-the-line deductions for long-term care premiums that are personally paid by them.
Companies can, however, provide long-term care coverage for their employees on a discriminatory basis (there is no need to cover all employees – the employer can pick and choose those employees the employer wishes to cover), so option D is correct. Even though Kit can claim the cost as a medical expense deduction on her itemized deduction schedule, she will not get any tax benefit because medical expenses are only deductible to the extent that they exceed 7.5% of AGI in 2024.

Question 38

All of the following individuals are considered to be self-employed individuals except:

Sole Proprietors.
Partners.
Greater-than-2% owners of S corporations.
Greater-than-5% owners of C corporations.

Answer 38

Greater-than-5% owners of C corporations.

Rationale

For income tax purposes, sole proprietors, partners (including members in LLCs and LLPs, and limited partners), and greater than 2 percent owners of S corporations are considered self-employed individuals.

When computing the AGI of a self-employed individual, special adjustments must be made. Owners of C corporations, without regard to the extent of their ownership interest, are not considered self-employed individuals, but are rather considered to be employees of the corporation if they work for that corporation.

(Recall that a corporation is an entity separate and distinct from its owners that pays tax on its income, while pass-through entities and sole proprietorships require the owners to pay the tax on the business income.)

Question 39

Marla owns a security consulting firm. She gained experience in security issues through her tenure in the Marine Corps. The security business was established 10 years ago, and now practically runs itself. Aside from helping with occasional projects, Marla has found herself in the enviable position of collecting a large residual cash flow from the business while expending minimal effort in running it. To fill up the empty hours in her day, Marla decides to investigate new lines of business, and has been looking into purchasing a retail Army-Navy store chain. She has taken several trips to inspect the properties and has retained accountants and lawyers to review the financial and business operations.

Which of the following statements concerning these business investigation expenses is correct?

Marla may deduct the costs incurred regardless of whether she purchases the Army-Navy retail business.

Marla may immediately deduct the costs incurred in the tax year that she acquires the Army-Navy retail business.

Marla may deduct the costs incurred up to $5,000 of start up expenses in the year the start up begins operations.

Investigation of business expenses are not deductible for federal income tax purposes.

Answer 39

Marla may deduct the costs incurred up to $5,000 of start up expenses in the year the start up begins operations.

Rationale

The Army-Navy retail store is a different trade or business than the security consulting business. Taxpayers may deduct up to $5,000 of start up costs (reduced (but not below zero) by the amount the start up expenditures exceed $50,000) in the year that the new active trade or business begins its operations. Start up organizational costs in excess of $5,000 are amortized for 180 months beginning with the month the new business begins its operations.

Question 40

Which of the following are deductions for AGI?

Qualified moving expenses
Unreimbursed employee business expenses
Alimony paid under a  pre-12/31/2018 agreement

A. Only I and III
B. I, II, and III
C. III only
D. Only I and II

Answer 40

olution: The correct answer is C.

Question 41

Saul is divorced(under a 2010 agreement), under age 65, and has gross income of $50,000. His deductible expenses are as follows:

Alimony - $12,000

Charitable contributions - $2,000

Contribution to a traditional IRA - $3,000

Interest on home mortgage and property taxes on personal residence - $7,000

State income tax - $2,200

What is Saul’s AGI?

A. $19,800
B. $30,000
C. $35,000
D. $38,000
E. $42,000

Answer 41

Solution: The correct answer is C.

Saul’s AGI is calculated as follows:

Gross income $50,000 less deductions for AGI:

Alimony $12,000 & IRA $3,000 = ($15,000)

AGI $35,000

Question 42

During the year, Michael is transferred by his employer from Tampa to Philadelphia. His moving expenses are not reimbursed and are as follows:

Cost of moving household furnishings $6,000

Transportation $1,000

Meals $800

Lodging $1,400

His qualified moving expenses are:

A. $0
B. $8,800
C. $8,400
D. $7,000
E. None of the choices

Answer 42

Solution: The correct answer is A.

No deduction is permitted after 1/1/18.

Question 43

Which of the following are deductions for AGI?

Qualified moving expenses
Unreimbursed employee business expenses
Alimony paid under a pre-12/31/2018 agreement

A. Only I and III
B. I, II, and III
C. III only
D. Only I and II

Answer 43

Solution: The correct answer is C.

TCJA 2017 suspended moving expense deductions for 2018 - 2025. There is an exception for military personnel change of station moves.

Question 44

Which of the following statements is true regarding an HSA?

A. HSA contributions for the current tax year must be completed by December 31st.

B. Similar to an IRA, individuals age 50 or older are entitled to a catch-up contribution of $1,000 per year.

C. If a self-employed individual makes a contribution to their own HSA, that contribution is not taken into account when calculating net earnings from self-employment. 

D. Contributions to HSAs are not required to be spent or forfeited at the end of each tax year, allowing taxpayers to accumulate an emergency fund available for future health care expenses only.

Answer 44

Solution: The correct answer is C.

C is true. If a self-employed individual makes a contribution to their own HSA, that contribution is not taken into account when calculating net earnings from self-employment. The contribution to the HSA is subject to employment tax.

A is false - HSA contributions can be made at any time during the tax year and up to the typical tax filing deadline.

B is false - HSA catch-up contributions can be made by those age 55 or older.

D is false - HSAs can be used for health care expenses as well as non-medical expenses (although taxes and/or a 20% penalty may apply).

Question 45

Kristie, a full-time 3rd-grade teacher, spent $500 out of pocket in 2024 for classroom supplies, books, disinfectant, and math flashcards. How much can Kristie deduct on her 2024 taxes for the supplies?

A. $500 as an above-the-line adjustment
B. $300 as an above-the-line adjustment plus $200 as an unreimbursed employee business expense.
C. $500 as an unreimbursed employee business expense.
D. $300 as an above-the-line adjustment

Answer 45

Solution: the correct answer is D.

Teachers in elementary and secondary schools (K-12), principals, aides, and counselors may deduct up to $300 (in 2024) of out-of-pocket expenses as an adjustment to gross income.

A is false – it exceeds the $300 maximum above-the-line adjustment

B and C are false - Expenses in excess of the $300 above-the-line max may not be treated as an unreimbursed business expense during the 2018-2025 tax years.

Question 46

Which of the following are deductions for AGI?

Qualified moving expenses
Unreimbursed employee business expenses
Alimony paid under a  pre-12/31/2018 agreement

A. Only I and III
B. I, II, and III
C. III only
D. Only I and II

Answer 46

The correct answer is C.

TCJA 2017 suspended moving expense deductions for 2018 - 2025. There is an exception for military personnel change of station moves.

Question 47

Saul is divorced (under a 2010 agreement), under age 65, and has gross income of $50,000. His deductible expenses are as follows:

Alimony - $12,000

Charitable contributions - $2,000

Contribution to a traditional IRA - $3,000

Interest on home mortgage and property taxes on personal residence - $7,000

State income tax - $2,200

What is Saul’s AGI?

A. $19,800
B. $30,000
C. $35,000
D. $38,000
E. $42,000

Answer 47

Solution: The correct answer is C.

Saul’s AGI is calculated as follows:

Gross income $50,000 less deductions for AGI:

Alimony $12,000 & IRA $3,000 = ($15,000)

AGI $35,000

Divorces finalized by 12/31/2018 follow the old rules. Divorces finalized after 12/31/2018 will follow the new rules under TCJA 2017

Question 48

Kristie, a full-time 3rd-grade teacher, spent $500 out of pocket in 2023 for classroom supplies, books, disinfectant, and math flashcards. How much can Kristie deduct on her 2023 taxes for the supplies?

$500 as an above-the-line adjustment
$300 as an above-the-line adjustment plus $200 as an unreimbursed employee business expense.
$500 as an unreimbursed employee business expense.
$300 as an above-the-line adjustment

Answer 48

the correct answer is D.

Teachers in elementary and secondary schools (K-12), principals, aides, and counselors may deduct up to $300 (in 2023) of out-of-pocket expenses as an adjustment to gross income.

A is false – it exceeds the $300 maximum above-the-line adjustment

B and C are false - Expenses in excess of the $300 above-the-line max may not be treated as an unreimbursed business expense during the 2018-2025 tax years.

Question 49

Which of the following statements is true regarding an HSA?

A. HSA contributions for the current tax year must be completed by December 31st.
B. Similar to an IRA, individuals age 50 or older are entitled to a catch-up contribution of $1,000 per year.
C. If a self-employed individual makes a contribution to their own HSA, that contribution is not taken into account when calculating net earnings from self-employment. 
D. Contributions to HSAs are not required to be spent or forfeited at the end of each tax year, allowing taxpayers to accumulate an emergency fund available for future health care expenses only.

Answer 49

C is true. If a self-employed individual makes a contribution to their own HSA, that contribution is not taken into account when calculating net earnings from self-employment. The contribution to the HSA is subject to employment tax.

A is false - HSA contributions can be made at any time during the tax year and up to the typical tax filing deadline.

B is false - HSA catch-up contributions can be made by those age 55 or older.

D is false - HSAs can be used for health care expenses as well as non-medical expenses (although taxes and/or a 20% penalty may apply).