tax updates Flashcards
Phil is age 67 and has just received a $20,000 taxable HSA distribution that he is using to supplement his retirement income. What tax penalty, if any, applies to his HSA distribution for other than qualified medical expenses?
(Search Chapter 2)
- a. $4,000
- b. $3,000
- c. $2,000
- d. $0
Answer: 0
Your answer is correct. Phil is not liable for a tax penalty on account of the taxable HSA distribution because he has reached the age for Medicare. HSA distributions are includible in income and subject to income tax penalties of 20% when they are used for other than qualified medical expenses and fail to meet specific exceptions. The exceptions to the tax penalty apply to distributions received while the account holder is disabled, following the account holder’s death or by the account holder after reaching the eligibility age for Medicare.
1. Bill Walters is a 52-year-old single client. His adjusted gross income in 2022 is $200,000, and he is not an active participant in an employer-sponsored retirement plan. What is the maximum 2022 traditional IRA contribution that he may deduct?
(Search Chapter 3)
- a. $0
- b. $2,000
- c. $6,000
- d. $7,000
Answer: $7,000
Your answer is correct. Bill may make and deduct a traditional IRA contribution in 2022 that is neither eliminated nor reduced by his relatively high adjusted gross income. Because he is age 50 or older, the maximum contribution allowable in 2022 includes both a regular IRA contribution of $6,000 and a catch-up contribution of an additional $1,000. Since he is not an active participant in an employer-sponsored qualified plan, his entire traditional IRA contribution is tax-deductible.
2. Peter, age 45, made his first Roth IRA contribution ten years ago and has made contributions to the IRA every year since. His total contributions amount to $40,000, and he has never previously taken a distribution from the IRA. If he withdrew $50,000 this year from the Roth IRA in a nonqualified distribution, what is the maximum amount of the distribution, if any, he may exclude from income?
(Search Chapter 3)
- a. $0
- b. $10,000
- c. $40,000
- d. $50,000
Answer: $40,000
Your answer is correct. Peter may exclude $40,000 of the distribution from his income, i.e., an amount equal to his total contributions. Because a Roth IRA receives FIFO tax treatment, all contributions to the Roth IRA are deemed to be distributed before any earnings are distributed. Since Roth IRA contributions are made with after-tax dollars, they are withdrawn tax free, even though earnings withdrawn in a distribution that is not a “qualified distribution” would be subject to income tax and, possibly, to a premature distribution tax penalty.
1. Harold is a sole proprietor of a small company. He sponsors an employee picnic each year at a local park that costs him $25,000. If he incurs $15,000 in food and $10,000 in beverage expenses for his 2022 employee picnic, how much of the expense may he deduct for income tax purposes?
(Search Chapter 4)
- a. $0
- b. $10,000
- c. $12,500
- d. $25,000
Answer: $25,000
Your answer is correct.
Taxpayers are generally permitted to deduct 50% of the expenses for food and beverages paid or incurred in conducting their trade or business as well as the expenses for food and beverages provided by the taxpayer on the taxpayer’s premises primarily for employees. However, the 50% limitation on the deduction of an employer’s food and beverage expenses does not apply to any expenses if, among other exceptions, the expenses are for recreational, social or similar activities primarily for the benefit of employees other than highly compensated employees.
2. What is George’s business expense deduction if he uses a 400 square foot office in his rented home, assuming he qualifies for a home office deduction, pays $1,200 for business telephone service, uses 20% of the home for business and elects the simplified home office deduction method?
(Search Chapter 4)
- a. $1,500
- b. $1,740
- c. $2,000
- d. $2,700
Answer: $2,700
Your answer is correct. George’s business deduction is $2,700, comprised of a $1,500 home-office deduction and business expenses not related to his home of $1,200.
1. Harold is a sole proprietor of a small company. He sponsors an employee picnic each year at a local park that costs him $25,000. If he incurs $15,000 in food and $10,000 in beverage expenses for his 2022 employee picnic, how much of the expense may he deduct for income tax purposes?
(Search Chapter 4)
- a. $0
- b. $10,000
- c. $12,500
- d. $25,000
Answer: D
1. Bob, an Army colonel, was transferred from Germany to Moscow for a permanent change of station. His spouse chose not to accompany him and returned to the United States. If she received a $10,000 relocation allowance and was later reimbursed an additional $2,500, how much of the allowance, if any, must she include in her income?
(Search Chapter 5)
- a. $0
- b. $2,500
- c. $10,000
- d. $12,500
Answer: 0
Your answer is correct.
In the case of a military relocation, the taxpayer’s move must be pursuant to a military order and involve a permanent change of station. In such a case, no paid or incurred moving and storage expenses (1) furnished in kind, or (2) for which reimbursement or allowance is provided to the service member, spouse or dependents are includible in gross income or reported.
In addition, if the moving expenses paid or incurred in connection with a military relocation are furnished or reimbursed (or an allowance is provided) to the service member’s spouse and dependents to move (1) to a location other than the one to which the service member moves, or (2) from a location other than the one from which the service member moves such expenses are likewise neither includible in gross income nor reported.
2. Howard and Sharon, a married couple, purchased their primary residence in 2022 and took out a $400,000 mortgage for the purchase. Since the house required repairs and updating, they took an additional home equity loan of $150,000 which they used to improve their home. If their 2022 interest paid on the $400,000 mortgage was $12,000 and on the home equity loan was $7,000, what is their 2022 mortgage interest deduction?
- a. $0
- b. $7,000
- c. $12,000
- d. $19,000
Answer: $19,000
Your answer is correct.
They may deduct the entire amount. The TCJA made the following changes to the existing home mortgage interest deduction for taxable years 2018 through 2025:
* Interest paid on home equity indebtedness—home equity loans and lines of credit, in other words—incurred after December 15, 2017, is not tax-deductible unless used to buy, build or substantially improve the taxpayer’s home that secures the loan;
* Interest paid on acquisition debt incurred after December 15, 2017, less any acquisition debt incurred on or before December 15, 2017, is limited to interest paid on total acquisition indebtedness but only if the total of such mortgages is $750,000 or less ($375,000 or less if married filing separately); and
* Interest paid on acquisition debt incurred on or before December 15, 2017, is limited to interest paid on acquisition indebtedness of $1,000,000 or less ($500,000 or less if married filing separately).
1. Sharon and Bill, a married couple filing a joint tax return, have three children, ages 5, 8 and 18, and a modified adjusted gross income of $160,000. What amount of Child Tax Credit are they eligible for in 2022?
(Search Chapter 6)
- a. $4,000
- b. $6,100
- c. $6,600
- d. $9,100
Answer: $4,000
Your answer is correct. The Child Tax Credit is a nonrefundable credit that may reduce the taxpayer’s tax up to $2,000 for each of the taxpayer’s qualifying children younger than age 17. Only the children age 5 and 8 qualified for the $2,000 CTC. The 18-year-old child would not be considered a qualifying child. Since two of the children qualify for the Child Tax Credit, the maximum amount for which Sharon and Bill are eligible is $4,000.
2. Tanya is a single taxpayer who has two qualifying children and qualifies for the Earned Income Credit in 2022. What is the maximum investment income she can have in 2022 and still be eligible for the credit?
(Search Chapter 6)
- a. A taxpayer eligible for EIC cannot have any investment income
- b. $1,000
- c. $3,650
- d. $10,300
Answer: D $10,300
Your answer is correct. Internal Revenue Code § 32(i) denies the Earned Income Tax Credit to those taxpayers having excessive investment income. ARPA modifies IRC § 32(i) and provides that, for 2022, excessive investment income is that investment income in excess of $10,300, subject to inflation adjustment for years beginning after 2022.
1. Audrey is a single sole proprietor who owns and operates an accounting business, a business considered an SSTB. She has no REIT or PTP interests. She has no capital gains or losses and, after allowable deductions not relating to her business, her total taxable income for 2022 is $110,000. The applicable taxable income threshold in 2022 is $170,050. The business’s QBI is $100,000. What is her pass-through deduction, if any?
(Search Chapter 7)
- a. $20,000
- b. $22,000
- c. $32,145
- d. Audrey is ineligible for a deduction because her business is an SSTB.
Answer: $20,000
Your answer is correct.
Audrey’s § 199A deduction for 2022 is equal to $20,000, computed as the lesser of A and B where: A equals 20 percent of Audrey’s QBI from the business, and B equals 20 percent of Audrey’s total taxable income for the taxable year. Accordingly, the deduction for Audrey is the smaller of $100,000 x 20 percent = $20,000; or $110,000 x 20 percent = $22,000. Since she has no REIT dividends or PTP income, her pass-through deduction is $20,000, i.e., the smaller number.
2. As a single taxpayer, Arthur’s alternative minimum taxable income exemption in 2022 would be $75,900 if his income does not exceed $539,900. What is his AMTI exemption amount if his alternative taxable income is $639,900?
(Search Chapter 7)
- a. $0
- b. $25,000
- c. $50,900
- d. $75,900
Answer: $50,900
- Your answer is correct. Arthur’s reduced AMTI exemption is $50,900. The AMTI exemption amount is reduced (but not below zero) by 25 percent of the amount by which the taxpayer’s alternative minimum taxable income exceeds $539,900 for taxpayers whose filing status is “single,” “head of household,” “married filing separately.”
1. Harriet, a tax return preparer, failed to comply with the EITC due diligence requirements in completing her client’s income tax return. If the IRS determined that her failure was not due to reckless disregard for the EITC rules or maintaining an unreasonable position, to what dollar penalty is she subject?
(Search Chapter 8)
- a. $100
- b. $560
- c. $1,000
- d. $5,000
Your answer is correct.
Harriet is subject to a $560 penalty. IRC section 6695(g) imposes a financial penalty on any income tax return preparer failing to comply with the due diligence requirements related to determining a taxpayer’s eligibility for the credit or its amount. The financial penalty was increased by subsequent legislation from $100 to $500 for returns filed after December 31, 2011, and is subject to annual inflation adjustments. Answer: $560
2. Phil, a tax return preparer, charged his client $500 to prepare her income tax return that claimed a $5,000 refund based on an unreasonable position. To what penalty is Phil subject if Phil knew the position was unreasonable, but it was not determined to be the result of his willful and reckless conduct?
(Search Chapter 8)
- a. $250
- b. $500
- c. $1,000
- d. $5,000
Answer: $1,000
Your answer is correct. In this case, the preparer is subject to a $1,000 penalty. If a tax return preparer prepares a tax return or claim of refund based on an unreasonable position and the preparer knew or reasonably should have known it was an unreasonable position, the preparer is subject to a penalty equal to the greater of a) $1,000, or b) 50% of the income derived, or to be derived, by the tax return preparer with respect to the return or claim.
