In 2020, a self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony per a 2018 divorce agreement. The taxpayer also contributed $2,000 to a traditional IRA. What
correct answer: d. $40,000
In 2020, self-employed individuals can deduct 50% of FICA taxes paid and 100% of payments made for health insurance coverage for the individual and his or her family. Alimony is gross income to the recipient and deductible by th
In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes?
a. As a $500 deductio
correct answer: b. As a $1,000 deduction to arrive at AGI for the year.
Taxpayers may deduct up to $2,500 of interest paid on qualified educational loans. The deduction is subject to income limits. The phaseout range begins when AGI exceeds $70,000 for un
For 2020, Val and Pat White, both age 30, filed a joint return. Val earned $45,000 in wages and was covered by his employer's qualified pension plan. Pat was unemployed and received $6,000 in alimony payments (pursuant to a pre-2019 divorce) for the first
correct answer: a. $12,000
The maximum amount that any taxpayer under the age of 50 may deduct for a contribution to an IRA is limited to the lesser of $6,000 ($7,000 if qualified for a catch-up contribution) or the taxpayer's compensation gross income fo
Which allowable deduction can be claimed in arriving at an individual's adjusted gross income?
a. Alimony paid pursuant to a pre-2019 divorce.
b. Charitable contribution.
c. Federal disaster casualty loss.
d. Unreimbursed business expense of an outside sa
correct answer: a. Alimony paid pursuant to a pre-2019 divorce.
Adjusted gross income (AGI) determines the allowable amount of several deductions from AGI. AGI equals gross income minus only those deductions named in Sec. 62(a). Alimony paid pursuant to a
Paul and Lois Lee, both age 50, are married and filed a joint return for 2020. Their 2020 adjusted gross income was $126,000, including Paul's $121,000 salary. Lois had no income of her own. Neither spouse was covered by an employer-sponsored pension plan
correct answer: d. $14,000
The maximum amount that any taxpayer may deduct for a contribution to an IRA is limited to the lesser of $6,000 or the taxpayer's compensation gross income for the year. If the taxpayer is age 50 or older, a $1,000 catch-up cont
Mark established a Roth IRA at age 40 and contributed $6,000 per year to the account for 20 years. He met the income limits for contributing to the account and was therefore eligible to hold a Roth IRA. Mark now wishes to withdraw the $200,000 of accumula
correct answer: a. $0
Qualified distributions from a Roth IRA are not included in the taxpayer's gross income and are not subject to the 10% early withdrawal tax. To be a qualified distribution, the distribution must satisfy a 5-year holding period and mu
Cole earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and contributed $100 to a charity. What is Cole's adjusted gross income?
a. $3,000
b. $2,600
c. $2,500
d. $1,600
correct answer: b. $2,600
Above-the-line deductions are subtracted from gross income to arrive at adjusted gross income. The $3,000 of wages is included in gross income, and the only above-the-line deduction is for the $400 student loan interest. Therefor
Moore, a single taxpayer, had $50,000 in adjusted gross income for 2020. During 2020, she contributed $23,000 in cash to her church. She had a $10,000 charitable contribution carryover from her 2019 church contribution. What was the maximum amount of prop
correct answer: c. $30,000
Properly substantiated cash contributions by individuals to qualified charities are limited to 60% of the taxpayer's AGI, or $30,000 in this case. The carryover is deductible this year to the extent that the total deduction does
In 2020, the Browns borrowed $20,000, secured by their home, to pay their son's college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as
a. Ded
correct answer: c. Nondeductible interest.
Qualified residence interest is deductible. It is interest paid or accrued during the tax year on home acquisition or home equity indebtedness. Home equity indebtedness is all debt other than acquisition debt tha
In 2020, Smith paid $6,000 to the tax collector of Big City for realty taxes on a two-family house owned by Smith's mother. Of this amount, $2,800 covered back taxes for 2019, and $3,200 covered 2020 taxes. Smith resides on the second floor of the house,
correct answer: d. $0
Taxes may be deducted only by the person on whom they are legally levied or by someone with a legally recognized interest in the property. Smith does not own the house, therefore none of the taxes paid can be deducted on his tax retu
In 2020, Welch paid the following expenses:
Premiums on an insurance policy against loss of earnings due to sickness or accident - $3,000
Physical therapy after spinal surgery- $2,000
Premium on an insurance policy that covers reimbursement for the cost o
correct answer: c. $1,000
Medical expenses are deductible to the extent they exceed 7.5% of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose
The 2020 deduction by an individual taxpayer for interest on investment indebtedness is
a. Limited to investment interest paid in 2020.
b. Limited to the taxpayer's 2020 interest income.
c. Limited to the taxpayer's 2020 net investment income.
d. Not limi
correct answer: c. Limited to the taxpayer's 2020 net investment income.
The deduction for interest on investment indebtedness is limited to the amount of net investment income for the taxable year. Any disallowed investment interest may be carried over a
Alan Curtis, who is single, had an adjusted gross income of $40,000 in 2020, and he used the standard deduction in his 2020 return. During 2020, Alan contributed $300 to the building fund of State University. What amount was deductible for contributions i
correct answer: a. $0
Charitable contributions are allowed as an itemized deduction. Itemized deductions are an election in lieu of the standard deduction.
Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for Year 12. During Year 12, Taylor donated land to a church and made no other contributions. Taylor purchased the land in Year 1 as an investment for $14,000. The land's fair market valu
correct answer: a. $25,000
Charitable deductions at FMV of capital assets to a church are limited to 30% of AGI. However, the FMV ($25,000) of the land is less than 30% ($27,000) of Taylor's AGI. Therefore, Taylor's maximum deductible charitable contribut
On January 2, 2015, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In 2020, they borrowed $15,000 secured by their home and used the cash to add a new room to their residence. That same year, they took out a $5,000 auto
correct answer: c. $18,500
The $500 of personal interest paid on the auto loan is not deductible. Qualified residence interest is deductible and includes home acquisition or equity indebtedness used for buying, building, or improving a qualified residence
Spencer, who itemizes deductions, had adjusted gross income of $60,000 in 2020.
The following additional information is available for 2020:
Cash contribution to church- $4,000
Purchase of art object at church bazaar (with a fair market value of $800 on th
correct answer: c. $5,000
The cash contribution to the church is fully deductible. The clothing donation is $600. The amount of the contribution with respect to the art object is the excess of what was given over what was received, or $400.
Which one of the following expenditures qualifies as a deductible medical expense for tax purposes?
a. Vitamins for general health not prescribed by a physician.
b. Health club dues.
c. Transportation to physician's office for required medical care.
d. Ma
correct answer: c. Transportation to physician's office for required medical care.
The IRC defines medical care as including transportation for needed medical care.
Sam and Ann Jefferson filed a joint federal income tax return for the calendar year 2020. Among their cash expenditures during 2020 were the following:
$3,000 real estate tax on residence; $400 state and city sales taxes; $900 state income tax.
What is th
correct answer: b. $3,900
State and local real property taxes and state and local personal property taxes are deductible. Also allowed is a deduction for state income taxes (even if the income is exempt from federal tax) and a deduction of state and local
Phil and Joan Crawley made the following payments during 2020:
Interest on bank loan (loan proceeds used to purchase U.S. Series HH savings bonds) - $4,000
Credit card interest- $500
Interest on home mortgage for period April 1 to December 31, 2020 - $2,7
correct answer: b. $6,600
The interest on U.S. savings bonds is taxable, and interest is deductible on the loan to purchase them. Investment interest expense is deductible only to the extent of net investment income. The interest on the credit card is per
Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be
a. Neither carried back nor carried forward.
b. Carried back 3 years or carried forward 15 years.
c. Carried forward 5 years.
d. Carried forward indefi
correct answer: c. Carried forward 5 years.
Any contributions that exceed the 50% limitation may be carried over and deducted in the subsequent 5 years. These carryovers are subject to the limitations that apply in subsequent years. Thus, carryovers may b
Jim and Nancy Walton, both age 55, had adjusted gross income of $25,000 in 2020. During the year, they paid the following medical-related expenses:
Over-the-counter medicines - $400
Prescription drugs -$300
Doctor fees - $830
Health club membership (recom
correct answer: d. $0
The cost of the health club membership is not included in the computation of the medical expense deduction since the cost is incurred for the purpose of improving the taxpayers' general health, not for curing a specific ailment or di
During 2020, Jack and Mary Bronson paid the following taxes:
Taxes on residence (for period January 1to September 30, 2020) - $2,700
State motor vehicle tax on value of the car - $360
The Bronsons sold their house on June 30, 2020, under an agreement in w
correct answer: b. $2,160
A deduction is allowed for state and local real property taxes and for state and local personal property taxes. Real estate taxes must be apportioned between the buyer and seller on the basis of the number of days the property wa
Fred Harvey, a cash-basis taxpayer, elected to itemize his deductions on his 2019 income tax return. Harvey plans to itemize again in 2020, and the following information relating to his state income taxes is available:
Taxes withheld in 2020 - $2,500
Refu
correct answer: d. State and local income taxes of $3,200 and gross income from state and local income tax refund of $500.
State and local income taxes are deductible. A cash-basis taxpayer is entitled to deduct state income taxes withheld by his or her e
Tom and Sally White, married and filing joint income tax returns, derive their entire income from the operation of their retail stationery shop. Their 2020 adjusted gross income was $100,000. The Whites itemized their deductions on Schedule A for 2020. Th
correct answer: a. $8,600
The repair and maintenance of the wheelchair for a handicapped, dependent child is a qualifying medical expense. In addition, the expenses for tuition, meals, and lodging at a residence primarily for medical care for the child ar
Wilson, CPA, uses a commercial tax software package to prepare clients' individual income tax returns. Upon reviewing a client's computer-generated Year 1 itemized deductions, Wilson discovers that the schedule's deductible investment interest expense is
correct answer: a. I only.
The IRC allows the deduction of a limited amount of investment interest as an itemized deduction. The limit is to the extent of net investment income.
An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current year's tax return for investment interest expenses?
correct answer: b. $2,000
Investment interest may be deducted only to the extent of net investment income, which is any excess of investment income over investment expense. Net investment income equals $2,000 ($10,000 investment income - $8,000 noninteres
An individual taxpayer reports the following information:
U.S. Treasury bond income - $100
Municipal bond income - $200
Rental income - $500
Investment interest expense - $1,000
What amount of investment interest can the taxpayer deduct in the current yea
correct answer: a. $100
Investment interest expense is only deductible to the extent of taxable investment income. Taxable investment income does not include tax-exempt municipal bond interest or rental income (which is accounted for separately). Because
Which of the following is not an itemized deduction?
a. Gambling losses up to the amount of gambling winnings.
b. Medical expenses.
c. Real estate tax.
d. Employee business expenses.
correct answer: d. Employee business expenses.
The miscellaneous itemized deductions subject to a 2%-of-AGI exclusion were suspended after 2017. The three categories of these miscellaneous itemized deductions were employee expenses, tax determination expe
Robert Francis O'Connor, a single taxpayer age 30, had adjusted gross income of $17,250 in 2020. Upon examining his records, he listed the following deductions for the year:
Medical expenses - $3,000
Charitable contributions - $2,300
State income taxes pa
correct answer: c. $5,166
Qualifying medical expenses in excess of 7.5% of AGI may be deducted. State income taxes and qualifying charitable contributions also may be deducted. An employee's reimbursed business expenses must be covered under an accountabl
Mary, an unmarried taxpayer, made the following charitable contributions during the current year:
A cash contribution to a church - $2,000
A donation of used furniture to a hospital's thrift shop, with a fair market value of - $500
A donation to a state u
correct answer: b. $5,500
Cash contributions are deducted at the cash amount ($2,000). The donation of used furniture is tangible personal property, which is deducted at the lower of FMV or AB ($500, because only the FMV is given). The stock donation is o
In computing an individual's net operating loss, which of the following is not considered business income or deduction(s)?
a. Wages.
b. Personal casualty loss.
c. Gain on sale of investment property.
d. Gain on sale of business property.
correct answer: c. Gain on sale of investment property.
Business and nonbusiness income and deductions need to be distinguished because nonbusiness deductions are deductible in computing a NOL only to the extent of nonbusiness income. Nonbusiness deductio
Cobb, an unmarried individual, had an adjusted gross income of $200,000 in 2020 before any IRA deduction, taxable Social Security benefits, or passive activity losses. Cobb incurred a loss of $30,000 in 2020 from rental real estate in which he actively pa
correct answer: a. $0
Any rental activity is a passive activity, whether or not the taxpayer participates in the activity. An individual who actively participates in rental real estate activity may use up to $25,000 of net losses from rental real estate a
The following information pertains to Cole's personal residence, which sustained (federally declared disaster area) casualty fire damage in 2020:
Adjusted basis - $150,000
Fair market value immediately before the fire - $200,000
Fair market value immediat
correct answer: b. $20,000
The amount of a personal casualty loss in a federally declared disaster area is the lesser of the decrease in the fair market value of the property resulting from the casualty or the taxpayer's adjusted basis in the property. Th
In the current year (2020), Jensen had the following items:
Salary - $50,000
Inheritance- $25,000
Alimony from ex-spouse paid pursuant to a 2020 divorce decree - $12,000
Child support from ex-spouse - $9,000
Capital loss on investment stock sale - $(6,000
correct answer: b. $47,000
Adjusted gross income is gross income minus above the line deductions. Gross income includes wages but does not include inheritance, alimony paid pursuant to a 2020 divorce decree, or child support. Net capital losses are deduct
In the current year, a taxpayer reports the following items:
Salary - $50,000
Income from partnership A, in which the taxpayer materially participates - $20,000
Passive activity loss from partnership B - ($40,000)
During the year, the taxpayer disposed of
correct answer: a. $20,000
The salary and income from partnership A are taxable. The amount of a loss attributable to a person's passive activities is allowable as a deduction only to the extent of income attributable to passive activities. However, suspe
Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduc
correct answer: b. $15,000
A person who actively participates in rental real estate activity is entitled to deduct up to $25,000 in losses from the passive activity against other than passive income. However, the $25,000 limit is reduced by 50% of that pe
A review of Bearing's Year 2 records disclosed the following tax information:
Wages - $18,000
Taxable interest and qualifying dividends - $4,000
Schedule C trucking business net income - $32,000
Rental (loss) from residential property - ($35,000)
Limited
correct answer: c. $29,000
Since the loss from the limited partnership interest is passive and there is no passive income, no loss deduction is permitted. Additionally, real estate losses for active participants are limited to $25,000 per year. Therefore,
Based on the following information, compute the 2020 net operating loss (NOL) that an individual can carry over to 2021.
2019 NOL - ($15,000)
Wages - $25,000
S corporation ordinary loss - ($40,000)
Schedule C net profit - $7,000
Interest income - $1,000
S
correct answer: b. $8,000
A net operating loss is defined as the excess of allowable deductions (as modified) over gross income [Sec. 172(c)]. An NOL generally includes only items that represent business income or loss. Personal casualty losses and wage o
What is the amount of the net operating loss for 2020 based on the following information?
Total income:Interest on nonbusiness savings - $850
Net long-term capital gain on sale of business property - $2,000
Salary - $1,000
Total deductions:Net loss from b
correct answer: c. $3,000
A net operating loss is defined as the excess of allowable deductions (as modified) over gross income [Sec. 172(c)]. An NOL generally includes only items that represent business income or loss. Personal casualty losses and wage o
Mrs. King is a general partner with a 20% interest in a partnership that leases equipment on a long-term basis. She is not regularly involved in the partnership business. During the current year, the partnership has a $200,000 loss, which includes a $250,
correct answer: d. $50,000
A passive activity includes a rental activity when the average rental period is not short-term. However, portfolio income of an activity (e.g., interest, dividend, royalty, or annuity income earned on funds set aside for the fut
Maria, a single taxpayer, had losses totaling $30,000 from a rental real estate activity in which she actively participated. Maria also had $15,000 of income from another rental real estate activity in which she actively participated. She acquired both in
correct answer: b. $15,000
The $25,000 allowance of losses from rental real estate activities in which an individual actively participates is applied by first netting the income and losses from all rental real estate activities in which the taxpayer activ
Select the true statement based on the following information for the taxpayer's current year:
Nonpassive income from activity A - $35,000
Passive activity income from activity B - $10,000
Suspended loss carryover from passive activity C [activity C was di
correct answer: d. The suspended loss reduces activity A income to $33,000.
Suspended losses from a passive activity become deductible in full in the year the taxpayer completely disposes of all interest in the passive activity. The loss is deductible fir
Browne, a self-employed taxpayer, had 2020 business taxable income of $1,030,000 prior to any expense deduction for equipment purchases. In 2020, Browne purchased and placed into service, for business use, office machinery costing $1,035,000. This was Bro
correct answer: a. $1,030,000
Tangible and depreciable personal property can be expensed by up to $1,040,000 in 2020, the year of acquisition. This amount is reduced when the amount of Sec. 179 property placed in service in a given year exceeds $2,590,000
A taxpayer purchased and placed in service during the year a $100,000 piece of equipment. The equipment is 7-year property. The first-year depreciation for 7-year property is 14.29%. Assume that, of the allowable Sec. 179 limit for the current year, $25,0
correct answer: c. $35,718
Depreciation for an asset is first determined based upon the election of the taxpayer to take a Sec. 179 expense on the asset. However, if the taxpayer chooses to expense any of the property, the property's adjusted basis is red
With regard to depreciation computations made under the general MACRS method, the half-year convention provides that
a. One-half of the first year's depreciation is allowed in the year in which the property is placed in service, regardless of when the pro
correct answer: a. One-half of the first year's depreciation is allowed in the year in which the property is placed in service, regardless of when the property is placed in service during the year, and a half-year's depreciation is allowed for the year in
In 2020, Roe Corp. purchased and placed in service a machine to be used in its manufacturing operations. This machine cost $2,591,000. What portion of the cost may Roe elect to treat as a Sec. 179 expense rather than as a capital expenditure?
a. $1,019,00
correct answer: c. $1,039,000
A taxpayer may treat up to $1,040,000 of the cost of Sec. 179 property acquired during 2020 as an expense rather than as a capital expenditure. The amount deductible under Sec. 179 must be reduced by the amount by which the c
Kell Corporation's financial accounting income for 2020 includes operating expenses of $4,000 for depreciation of a machine that Kell purchased and placed in service in January 2020 for use in the active conduct of Kell's business. This machine cost $1,32
correct answer: c. $1,040,000
If a firm wishes to minimize its taxable income for a given year, a Sec. 179 deduction may be made. Section 179 allows a taxpayer to elect to treat all or part of the cost of Sec. 179 property as an expense. The maximum amoun
Which of the following statements regarding the Sec. 179 deduction is not true?
a. The amount that is not deductible due to the taxable income limitation can be carried forward.
b. The amount expensed cannot exceed the taxable income derived from any trad
correct answer: d. The maximum cost that is deductible for 2020 is $1,020,000.
There are several limitations on the deduction allowed by Sec. 179. One limitation is taxable income and, to the extent that causes an amount to be nondeductible, such amount m
Data Corp., a calendar-year corporation, purchased and placed into service office equipment during November 2020. No other equipment was placed into service during 2020. Under the general MACRS depreciation system, what convention must Data use?
a. Full-y
correct answer: c. Mid-quarter.
The taxpayer must apply the mid-quarter convention to all depreciable property acquired during the tax year when the sum of the bases of all depreciable personal property placed in service during the last quarter of the yea
Juliet bought and placed in service computer equipment in 2020. She paid $10,000 and received a $2,000 trade-in allowance for her old computer equipment. She had an adjusted basis of $3,000 in the old computer equipment. Juliet used both the old and new e
correct answer: d. $9,000
In 2020, Sec. 179 allows a taxpayer to treat up to $1,040,000 of the cost of Sec. 179 property acquired as an expense rather than as a capital expenditure. However, the cost of Sec. 179 property does not include the basis determi
Lobster, Inc. purchased the following assets during Year 1:
Computers - $35,000
Computer desks - $22,000
Office furniture - $4,000
Delivery trucks -$25,000
Building - $425,000
What should be reported as the cost basis for a MACRS 7-year property?
$26,000
correct answer: a. $26,000
Computers and delivery trucks are MACRS 5-year property. Buildings are real property and are depreciated using the straight-line method and the mid-month convention. Office furniture and computer desks are the only items listed
George wants to take bonus depreciation on equipment he placed in service in 2020. What percentage of the cost of equipment can George deduct in 2020 as bonus depreciation?
a. 80%
b. 40%
c. 60%
d. 100%
correct answer: d. 100%
The 50% first-year bonus depreciation increased to 100% for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. For certain properties with longer production periods, the acquisit
Taxpayer G had the following items of income and loss in 2020:
Wages - $28,000
Nonbusiness bad debt - $1,000
Gain on commodity futures held14 months -$1,000
Loss on stock purchased in 2000 - $800
Flood loss on personal residence owned since 2002 and locat
correct answer: c. $3,700 long-term capital gain.
Nonbusiness bad debts are treated as short-term capital losses. The nonbusiness bad debt is the only short-term transaction. The long-term transactions are the $800 loss on stock, the $4,500 gain on stock,