Taxation for Decision Makers 2019 Edition by Shirley Dennis-Escoffier - Test Bank

Taxation for Decision Makers 2019 Edition by Shirley Dennis-Escoffier – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 5 Summary of Testbank Revisions

 

2019 Edition Problem Number	2018 Edition Problem Number	2019 Edition Modification
True-False 1	True-False 1
True-False 2	True-False 2
True-False 3	True-False 3
True-False 4	True-False 4
True-False 5	True-False 5
True-False 6	True-False 6
True-False 7	True-False 7
True-False 8	True-False 8
True-False 9	True-False 9
True-False 10	True-False 10
True-False 11	True-False 11
True-False 12	True-False 12
True-False 13	True-False 13	Year updated
True-False 14	True-False 14	Problem modified
True-False 15	True-False 15	Problem modified
True-False 16	True-False 16
True-False 17	True-False 17	Problem modified
True-False 18	True-False 18
True-False 19		New problem
True-False 20	True-False 20	Problem & LO modified
True-False 21		New problem
True-False 22	True-False 22	Problem and LO modified
True-False 23	True-False 23	Problem & LO modified
True-False 24	True-False 24	LO modified
True-False 25	True-False 25	LO modified
True-False 26	True-False 26	LO modified
True-False 27	True-False 27	LO modified
True-False 28	True-False 28	LO modified
True-False 29	True-False 29	LO modified
True-False 30	True-False 30	LO modified
Short-Answer 1	Short-Answer 1
Short-Answer 2	Short-Answer 2	Solution modified
Short-Answer 3	Short-Answer 3	Problem and solution modified
Short-Answer 4	Short-Answer 4
Short-Answer 5	Short-Answer 5	Solution modified
Short-Answer 6	Short-Answer 6	Solution modified
Short-Answer 7	Short-Answer 7
Short-Answer 8	Short-Answer 8
Short-Answer 9	Short-Answer 9	Solution modified
Short-Answer 10	Short-Answer 10
Short-Answer 11	Short-Answer 11
Short-Answer 12	–	New Problem
Short-Answer 13	Short-Answer 12	Problem and solution modified
Short-Answer 14	–	New Problem
Short-Answer 15	Short-Answer 14	LO modified
Short-Answer 16	Short-Answer 15	LO modified
Problem 1	Problem 1	Problem, solution, and LO modified
Problem 2	Problem 2	Problem modified
Problem 3	Problem 3	Problem, solution, and LO modified
Problem 4	Problem 4	Problem, solution, and LO modified
Problem 5	Problem 5	Problem, solution, and LO modified
Problem 6	Problem 6	Problem, solution, and LO modified
Problem 7	Problem 7	Solution and LO modified
Problem 8	Problem 8	Problem, solution, and LO modified
Problem 9	Problem 9	Problem, solution, and LO modified
Problem 10	Problem 10	Problem, solution, and LO modified
Problem 11	Problem 11	Problem, solution, and LO modified
Problem 12	Problem 12	Problem, solution, and LO modified
Problem 13	Problem 13	Problem, solution, and LO modified
Other Obj. a	Other Obj. a	Problem modified
Other Obj. b	Other Obj. b	Problem modified
Other Obj. c	Other Obj. c
Other Obj. d	Other Obj. d
Other Obj. e	Other Obj. e
Other Obj. f	Other Obj. f
Other Obj. g	Other Obj. g
Other Obj. h	Other Obj. h
Other Obj. i	Other Obj. i	Problem modified
Other Obj. j	Other Obj. j
Other Obj. k	Other Obj. k
Other Obj. l	Other Obj. l	Problem modified
Other Obj. m	Other Obj. m	Problem modified
Other Obj. n	Other Obj. n	Problem modified
Other Obj. o	Other Obj. o
MC 1	MC 1	Problem modified
MC 2	MC 2
MC 3	MC 3	Years updated
MC 4	MC 4
MC 5	MC 5
MC 6	MC 6	Problem modified
MC 7	MC 7	Problem modified
MC 8	MC 8	Problem and solution modified
MC 9	MC 9	Problem and solution modified
MC 10	MC 10	Problem and solution modified
MC 11	MC 11	Problem modified
MC 12	MC 12	Years updated
MC 13	MC 13	Problem and solution modified
MC 14	MC 14	Problem and solution modified
MC 15	MC 15	Problem and solution modified
MC 16	MC 16	Problem, solution, and LO modified
MC 17	MC 17	Problem, solution, and LO modified
MC 18	MC 18	Problem and solution modified
MC 19	MC 19	Years updated
MC 20	MC 20	Years updated
MC 21	MC 21	Years and solution modified
MC 22	MC 22	Years and solution modified
MC 23	MC 23	Problem and solution modified
MC 24	MC 24	Problem and solution modified
MC 25	MC 25	Problem and solution modified
MC 26	MC 26	Years and solution modified
MC 27	MC 27	Years updated
MC 28	MC 28	Years and solution modified
MC 29	MC 29
MC 30	MC 30	Problem and solution modified
MC 31	MC 31
MC 32	MC 32	Problem modified
MC 33	MC 33	Problem, solution  and LO modified
MC 34	MC 34	LO modified
MC 35	MC 36	Problem and LO modified
MC 36	MC 37	Problem, solution and LO modified
MC 37	MC 40	Problem, solution and LO modified
MC 38	MC 41	Problem, solution and LO modified
MC 39	MC 42	Problem, solution and LO modified
MC 40	MC 43	Problem, solution and LO modified
MC 41		New problem
MC 42		New problem
MC 43		New problem
MC 44	MC 44	LO modified
MC 45	MC 45	Problem, solution, and LO modified
MC 46	MC 46	Problem, solution, and LO modified
MC 47	MC 47	LO modified
MC 48	MC 48	LO modified
MC 49	MC 49	Years and LO modified
MC 50	MC 50	Problem, solution, and LO modified
MC 51	MC 51	Problem, solution, and LO modified
MC 52	MC 52	Problem, solution, and LO modified
MC 53	MC 53	Problem, solution, and LO modified
MC 54	MC 54	Problem, solution, and LO modified
MC 55	MC 55	LO modified
MC 56	MC 56	Years and LO modified
MC 57	MC 57	Years and LO modified
MC 58	MC 58	Years and LO modified
MC 59	MC 59	Problem, solution, and LO modified
MC 60	MC 60	Problem, solution and LO modified
MC 61	MC 61	LO modified
MC 62	MC 62	Problem, solution, and LO modified
MC 63	MC 63	Problem, solution, and LO modified
	True-False 19	Problem deleted
	True-False 21	Problem deleted
	Short-Answer 13	Problem deleted
	MC 35	Problem deleted
	MC 38 & 39	Problems deleted

Chapter 5

Deductions for Individuals and Tax Determination

 

True-False: Insert T for True and F for False before the questions.

 

_____  1.   The tax model is the formula for how individuals report their tax liability.

 

ANSWER         True     LO 5.1

DIFFICULTY: Easy

 

_____  2.   Contributions to health savings accounts are made with before-tax dollars.

 

ANSWER         True     LO 5.2

DIFFICULTY: Easy

 

_____  3.   The deduction for student loan interest has limits placed on it based on the taxpayer’s AGI.

 

ANSWER        True     LO 5.2

DIFFICULTY: Easy

 

_____  4.   To file as a surviving spouse, a taxpayer must maintain a home for a dependent child for the entire year.

 

ANSWER         True     LO 5.3

DIFFICULTY: Easy

 

_____  5.   Surviving spouse status may be claimed for three years after the year of the spouse’s death.

 

ANSWER        False    LO 5.3

DIFFICULTY: Easy

 

_____  6.   A legally married couple can elect to file as married filing jointly or single individuals.

 

ANSWER        False    LO 5.3

DIFFICULTY: Easy

 

_____  7.   To qualify as head of household, the taxpayer must pay more than half of the costs of a home in which a qualifying person lives for the entire year.

 

ANSWER        False    LO 5.3

DIFFICULTY: Easy

 

_____  8.   An abandoned spouse must only live apart from his or her spouse during the last six months of the tax year.

 

ANSWER         True     LO 5.3

DIFFICULTY: Easy

 

_____  9.   Jan and James’s divorce is final on December 31 of the current year. They must file married filing separately for the tax year.

 

ANSWER        False    LO 5.3

DIFFICULTY: Easy

 

_____  10. The basic and additional standard deductions are both indexed for inflation.

 

ANSWER         True     LO 5.3

DIFFICULTY: Easy

 

_____  11. A taxpayer’s filing status determines the basic standard deduction allowed.

 

ANSWER         True     LO 5.3

DIFFICULTY: Easy

 

_____  12. A married person filing a separate return has the lowest standard deduction amount.

 

ANSWER         False    LO 5.3

DIFFICULTY: Easy

 

_____  13. Beginning in 2019, qualified medical expenses for a 66-year-old single individual must exceed 10 percent of AGI to be deductible for regular income tax purposes.

 

ANSWER        True     LO 5.4

DIFFICULTY: Easy

 

_____  14. In 2018 safe deposit box rental fees are deductible as miscellaneous itemized deductions and must exceed two percent of AGI to be deductible.

 

ANSWER        False    LO 5.4

DIFFICULTY: Easy

 

_____  15.  Up to $10,000 ($5,000 if married filing separately) of income and real property taxes are deductible for state, local, and foreign real property.

 

 

ANSWER         True     LO 5.4

DIFFICULTY: Easy

 

_____ 16.  Sales taxes levied on the purchase of depreciable business property are deductible as part of depreciation.

 

ANSWER         True     LO 5.4

DIFFICULTY: Easy

 

_____  17.  In 2017, a personal theft loss could be deducted if it exceeded $100 plus 10 percent of AGI.

 

ANSWER         True     LO 5.4

DIFFICULTY: Easy

 

_____ 18.   A homeowner who itemizes his or her deductions can only deduct the property taxes on his or her primary residence and one other residence.

 

ANSWER        False    LO 5.4

DIFFICULTY: Easy

 

_____ 19.   Health insurance premiums that are deductible as medical expenses include premiums paid pre-tax through a flexible spending account.

 

ANSWER        False    LO 5.4

DIFFICULTY: Easy

 

_____  20.  For 2018-2025, the personal and dependency exemption is essentially zero.  Although the deduction is suspended, the rules for determining who is a dependent may be used in other provisions (such as determining head of household status and the child tax credit).

 

ANSWER         True     LO 5.6

DIFFICULTY: Easy

 

_____  21.  The taxpayer must provide more than half the support for an individual to be considered a dependent.

 

ANSWER         True     LO 5.6

DIFFICULTY: Easy

 

_____ 22.  A parent cannot be considered as a dependent if his or her gross income equals or exceeds the amount of the dependency exemption.

 

ANSWER         True     LO 5.6

DIFFICULTY: Easy

 

_____ 23. A taxpayer’s standard deduction is limited by the taxpayer’s AGI if AGI exceeds a certain threshold.

 

ANSWER        False    LO 5.3

DIFFICULTY: Easy

 

_____  24. Taxpayers can apply any excess FICA tax paid to their income tax liability.

 

ANSWER         True     LO 5.7

DIFFICULTY: Easy

 

_____  25. Qualifying low-income wage earners may not only deduct their IRA contributions but they may take a credit for their contribution.

 

ANSWER         True     LO 5.7

DIFFICULTY: Moderate

 

_____  26. The maximum annual lifetime learning credit is $2,000 per taxpayer.

 

ANSWER         True     LO 5.7

DIFFICULTY: Easy

 

 

_____  27. The additional 0.9 percent Medicare surtax applies to earned income of individuals with wages in excess of $200,000 but does not apply to self-employed individuals.

 

ANSWER        False    LO 5.8

DIFFICULTY: Easy

 

 

_____  28 The NII tax is assessed on the greater of net investment income or modified adjusted gross income.

 

ANSWER        False    LO 5.8

DIFFICULTY: Easy

 

_____  29 The tax rate applied to the AMTI for individuals is 2 percent higher than the top individual regular tax rate.

 

ANSWER        False    LO 5.8

DIFFICULTY: Easy

 

_____  30. The alternative minimum tax is a tax determined on a broadened definition of income with no deductions permitted.

 

ANSWER         False LO 5.8

DIFFICULTY: Easy

 

 

Short-Answer Questions: Provide a brief written answer to each of the following questions.

 

1. When should a taxpayer itemize deductions rather than taking the standard deduction?

 

ANSWER        A taxpayer should itemize deductions rather than take the standard deduction when the total of all the itemized deductions after consideration of all limitations is greater than the standard deduction for the filing status of the taxpayer.

LO 5.1

DIFFICULTY: Easy

 

2. What is the purpose of the Health Savings Account?

 

ANSWER        The Health Savings Account allows a person (and family, if applicable) who is covered by a medical insurance plan that has a high deductible ($1,350 minimum for a single person or $2,700 for family coverage in 2018) to put aside an amount equal to the lesser of $3,450 ($6,850 for family coverage) or the annual deductible amount on a before-tax basis to pay the deductible. The threshold of 7.5% of AGI before medical expenses (for persons under 65) are deductible often prevents a taxpayer from getting the benefit of a tax deduction for high deductible policies. Thus, this allows the taxpayer to pay all or a portion of the deductible with before-tax income.

LO 5.2

DIFFICULTY: Moderate

 

3. What is the standard deduction for a person who is a dependent of another person in 2018?

 

ANSWER        The standard deduction for a person who is a dependent of another taxpayer is the greater of $1,050 or $350 plus the person’s earned income up to the usual standard deduction for the filing status; for example, up to $12,000 for a single person in 2018.

LO 5.3

DIFFICULTY: Easy

 

4. What is required for a taxpayer to qualify to file as a surviving spouse?

 

ANSWER        To qualify to file as a surviving spouse, a taxpayer’s spouse must have died during either the first or second year prior to the current tax year and he or she must not have remarried. The taxpayer must also provide a home for a dependent child for the entire tax year and pay for more than one-half of the cost of maintaining the home.

LO 5.3

DIFFICULTY: Moderate

 

5. How is the deductibility of itemized deductions limited in determining taxable income?

 

ANSWER        Medical expenses and casualty losses resulting from disasters are limited directly to an amount that exceeds a certain percentage of AGI. Charitable contributions cannot exceed a specific percentage of AGI based on the type of contribution. Mortgage interest and investment interest are limited to the interest on a specific amount of debt. State and local taxes cannot exceed a dollar limit.

LO 5.4

DIFFICULTY: Moderate

 

6. What limits are placed on the deduction for interest on debt that is secured by a person’s personal residence?

 

ANSWER        A taxpayer may only deduct interest on qualified residence interest. The interest on acquisition indebtedness is limited to debt principal of no more than $1,000,000 for mortgages obtained before December 16, 2017 and  $750,000 for loans made after December 15, 2017. Debt on no more than two homes can be combined to reach the $1 million or $750,000 limit.

LO 5.4

DIFFICULTY: Moderate

 

7. What types of insurance premiums are deductible as an itemized deduction?

 

ANSWER        Health insurance premiums for a taxpayer and his or her dependents are deductible if paid with after-tax income. Health insurance includes coverage for doctor, dentist, and hospital bills. All or a portion of a taxpayer’s premium for long-term care insurance is also deductible; the deduction may be limited if the cost exceeds a certain amount related to the taxpayer’s age, however. Nondeductible insurance premiums include disability insurance and other insurance that covers loss of life, limb, or income.

LO 5.4

DIFFICULTY: Moderate

 

8. What is included in investment income? What is the limit on the deduction for investment interest?

 

ANSWER        Investment income includes interest, annuity payments, and net short-term capital gains from the sale of investment property. Long-term gains from investment property and dividends are excluded unless their favorable tax rates are forgone. Investment interest is deductible to the extent of net investment income with any excess carried forward to future years.

LO 5.4

DIFFICULTY: Moderate

 

9. What limits are placed on an individual’s charitable contribution deduction?

 

ANSWER        An individual’s total charitable contribution deduction is limited to 50 percent of AGI.  The limit for cash contributions increases to 60 percent of AGI for 2018-2025. Excess contributions can be carried forward for up to five years. The deduction for property other than a capital asset is the lesser of the property’s fair market value or basis. The deduction for long-term capital gain property is the property’s fair market value, but the deduction cannot exceed 30 percent of adjusted gross income (unless the alternate valuation of the lower basis is used); this limit is determined after the contribution of other property.

LO 5.4

DIFFICULTY: Moderate

 

10. Which is more advantageous, a deduction for or a deduction from adjusted gross income? Why?

 

ANSWER        A deduction for adjusted gross income is more valuable than an equal amount of deduction from adjusted gross income because many of the deductions from AGI have some limitation imposed on their deductibility based on AGI. The deductions for AGI generally are not subject to any reduction but they do reduce the amount of AGI before the limitations on deductions from AGI are imposed—meaning the limitations based on AGI are smaller. In addition, deductions for AGI are allowed to be deducted regardless of the taxpayer’s filing status; deductions from AGI are only valuable if they exceed the taxpayer’s standard deduction.

LO 5.1, 5.2  & 5.4

DIFFICULTY: Moderate

 

11. What uses are made of adjusted gross income (AGI) in the individual tax model?

 

ANSWER        The intermediate income concept of adjusted gross income provides a number that can be used as a limit for some itemized deductions, as a threshold minimum for the deduction of other itemized deductions, and as a basis for determining the phase-out of other benefits.

LO 5.1 & 5.4

DIFFICULTY: Easy

 

12. How is qualified business income (QBI) defined and how is the QBI deduction calculated?

 

ANSWER         QBI is defined as the net amount of items of income, gain, deduction, and loss from an eligible business conducted in the U.S. It excludes investment-related items, reasonable compensation paid to the individual, and guaranteed payments from a partnership.

 

This deduction is 20 percent of qualified business income (QBI). This new deduction was added for 2018-2025 to address the difference between the tax rates applicable to C corporations and the rates applicable to pass-through businesses that are taxed at their owners’ individual rates.  Several rules may limit the amount of the deduction for taxpayers with taxable income in excess of $157,000 ($315,000 for married couples filing a joint return). These limitations are based on the W-2 wages and the adjusted basis of qualified property acquired by the business. The deduction cannot exceed the greater of (1) 50 percent of the taxpayer’s share of W-2 wages paid by the business or (2) the sum of 25 percent of such W-2 wages plus 2.5 percent of the unadjusted basis of tangible depreciable business property acquired. Additional rules prevent taxpayers with taxable income above the threshold from converting compensation for personal services into income eligible for this deduction. The deduction gradually phases out for taxpayers in a service business (except for engineering and architecture) when taxable income is between $157,500 and $207,500 ($315,000 and $415,000 if married filing jointly).

 

LO 5.6

DIFFICULT:  Hard

 

13. Who are qualifying relatives for the dependency exemption that was allowed prior to 2018? When will this deduction be reinstated?

 

ANSWER        Qualifying relatives for a dependency exemption include children, grandchildren, and other lineal descendants; parents, grandparents,  and other direct ancestors, sisters and brothers (including stepsisters and stepbrothers), sisters and brothers of the taxpayer’s parents, children of brothers and sisters, and in-laws such as mothers-, fathers-, sisters-, brothers-, sons-, and daughters-in law. (Cousins, aunts, uncles, nieces and nephews not related by blood are not qualified relatives.)  This deduction will be reinstated in 2026.

LO 5.6

DIFFICULTY: Moderate

 

14. What is the purpose of preserving the rules for determining who is a dependent?

 

ANSWER        The rules for determining who is a dependent are preserved for use in other provisions such as determining head of household status and the child tax credit.

LO 5.6

DIFFICULTY: Moderate

 

15. Explain the difference in benefits between a tax deduction and a tax credit?

 

ANSWER        The benefit of a tax deduction is limited to the deductible amount times the taxpayer’s marginal tax rate. Because this rate is different for different taxpayers, the benefit of a deduction is not consistent across taxpayers. A tax credit will reduce all taxpayers’ tax liabilities by the same amount (unless it reduces the tax liability to zero and is nonrefundable).

LO 5.4 & 5.7

DIFFICULTY: Moderate

 

16. What is the purpose of the alternative minimum tax?

 

ANSWER        The alternative minimum tax is designed to ensure that higher income taxpayers pay some amount of income tax. The tax base on which the tax is levied is broadened by including certain income items that are exempt from tax for regular tax purposes and disallowing certain regular tax deductions.

LO 5.8

DIFFICULTY: Easy

 

 

Problems: Provide numerical solutions for each of the following.

Note to Instructor: The reference tables in the appendix of the text may be required for a limited number of answers to the questions and problems in this chapter. This is indicated by “REFERENCE TABLES REQUIRED” after the learning objective.

 

1. Torri is a sixth grade teacher. In 2018, she earned a salary of $33,500. She contributed $675 to her Roth IRA and paid $800 in student loan interest. What is Torri’s taxable income and income tax if she is single and does not itemize deductions?

 

ANSWER  $33,500 – $800 loan interest = $32,700 AGI. $32,700 –  $12,000 standard deduction = $20,700 taxable income; ($20,700 – $9,525) x .12 + $952.50 =  $1,341 + $952.50 = $2,293.50  income tax. The contribution to the Roth IRA is not deductible.

LO 5.2, LO 5.3  & LO 5.8     REFERENCE TABLES REQUIRED

DIFFICULTY: Hard

 

2. Sonja is a talented 18 year-old dancer and has earned quite a bit of money over the last six years that her parents invested for her. During 2018, however, she earned only $5,500 from dancing but $1,900 in interest. If she qualifies as a dependent of her parents, what is her income tax liability in the current year?

 

ANSWER  $5,500 + $350 = $5,850 standard deduction; $5,500 + $1,900 – $5,850 = $1,550 taxable income; $1,550 x .10 = $155.

LO 5.2 – LO 5.5 & LO 5.7    REFERENCE TABLES REQUIRED

DIFFICULTY: Hard

 

3. John is a 36-year-old calendar-year taxpayer whose wife died in August of 2018. His eight year-old son lives with him. During 2018, he had salary income of $52,000, $600 of dividend income, and received $50,000 from the life insurance policy on his wife. He made a $2,000 contribution to his regular IRA and paid $9,800 for a hospital bill and $3,000 for a doctor bill for his deceased wife. He also paid $4,000 in mortgage interest, $800 in property taxes, $300 of credit card interest and $400 in job hunting expenses when he tried to find a better paying job in the same line of work in March. Determine John’s income tax liability for 2018, before any allowable credits, if he itemizes his deductions. Should John consider using the standard deduction?

 

ANSWER  $52,000 + $600 – $2,000 = $50,600 AGI; $9,800 + $3,000 – (7.5% x $50,600) = $9,005; $50,600 – $9,005 – $4,000 – $800 = $36,795  taxable income. Tax on $36,795 (including $600 dividend) = ($36,795 – $600 – $19,050) x .12 + $1,905 + ($600 x .0) = $2,057.40 + $1,905 = $3,962.4. (Life insurance proceeds are not taxable. The $400 for job hunting and credit card interest are not deductible.)  Yes, John should use the $24,000 standard deduction because it is more than his total itemized deductions of $13,805 ($9,005 + $4,000 + $800).

LO 5.2 – LO 5.4 & LO 5.8  REFERENCE TABLES REQUIRED

DIFFICULTY: Hard

 

4. Charles has gross income of $80,000 and is single but provides the sole support of his elderly parents, paying all their housing, food and clothing costs in 2018

What is his filing status and how much is his standard deduction?

 

ANSWER

Charles qualifies as head of household and his standard deduction is $18,000.

LO 5.3                    REFERENCE TABLES REQUIRED

DIFFICULTY: Moderate

 

5. Carl and Carla are a very wealthy retired couple in their late sixties and file a joint tax return. During 2018 they had AGI of $980,000 that is all from investments and equals their net investment income. Their only itemized deduction was a $30,000 charitable contribution because they had sold their homes last year and spent all 2018 traveling around the world.
6. If they itemize, what is their taxable income for 2018 and their income tax?
7. How would your answers change if they claimed the standard deduction instead of itemizing?

 

 

ANSWER  a. Their 2018 regular taxable income is $950,000 [$980,000 – $30,000]; their regular income tax is $290,879 [(950,000 – 600,000) x 37% + $161,379]. They are subject to the Medicare surtax on $730,000 ($980,000 – $250,000) of investment income at 3.8% or an additional $27,740 for a total of $318,619 in income tax. For itemized deductions, the charitable contribution is deductible.

1. If they claim the standard deduction, their 2018 taxable income is $953,400 ($980,000 – $26,600). Standard deduction = $24,000 + $1,300 + 1,300 = $26,600; their income tax would have been increased by $1,258 [($30,000 – $26,600) x 37%)] to $319,877 ($318,619 + $1,258).

LO 5.3 – LO 5.4 & LO 5.8              REFERENCE TABLES REQUIRED

DIFFICULTY: Hard

 

6. George (49) and Jean (36), a married couple with no dependents, have AGI of $2,400,000. They have $120,000 of medical expenses related to a kidney transplant, $80,000 of property taxes on their principal residence, $65,000 of interest expense on the $680,000 acquisition mortgage, and $25,000 in charitable contributions before applying any limitations. If they have a $400,000 preference item, what is their regular taxable income, their alternative minimum taxable income, and their alternative minimum tax in 2018? (Exclude any medicare surtaxes on regular taxable income in your solution.)

 

ANSWER  The medical expenses are not allowed as they do not exceed the AGI limitation (medical expenses of $120,000 do not exceed 7.5% of AGI  ($180,000).  The deduction for taxes is limited to $10,000.   Regular taxable income: $2,400,000 – ($10,000 + $65,000 + $25,000) = $2,300,000. The regular tax on $2,300,000 = $161,379 + .37 x ($2,300,000 – $600,000) = $161,379 + $629,000 = $790,379.

 

AMT Income: $2,400,000 – $65,000 – $25,000 + $400,000 = $2,710,000. (They lose their deduction for taxes and their income exceeds the limit for any AMT exemption). Their TAMT is [($191,100 x .26) + .28 x (2,710,000 – 191,100)] = $49,686 + $705,292 = $754,978. Since this is less than their regular income tax, they pay $790,379 and have no AMT liability.

LO 5.3 & LO 5.4 – LO 5.8              REFERENCE TABLES REQUIRED

DIFFICULTY: Hard

 

7. Sophie, age 68, has AGI of $47,000. Her itemized deductions after limitations are $1,400 for medical expenses, $700 in property taxes, $4,500 of mortgage interest and $800 for charitable contributions. What are her AMTI itemized deductions?

 

ANSWER  $1,400 + $4,500 + $800 = $6,700 AMTI itemized deductions. Taxes are not deductible for AMT.

LO 5.3, LO 5.4 & LO 5.8

DIFFICULTY: Hard

 

8. Cora, who is single, has $58,000 of salary income, $2,350 in dividends, and $3,800 in interest income. She has $13,200 of itemized deductions. Determine her tax liability for 2018.

 

ANSWER  $58,000 + $2,350 + $3,800 = $64,150 AGI; $64,150 – $13,200 = $50,950 taxable income; tax = $4,453.50 + [($50,950 – $2,350 dividends – $38,700) x .22] + ($2,350 dividends x .15) = $4,453.50 + $2,178 + $352.50 = $6,984.

LO 5.3, LO 5.4, & 5.8                      REFERENCE TABLES REQUIRED

DIFFICULTY: Hard

 

9. John and Joanna have $125,000 in combined salary and wages, $8,000 in dividend income, and $3,000 in interest income. What is their tax liability for 2018 if they are married filing jointly and have $35,000 in itemized deductions?

 

ANSWER  $125,000 + $8,000 + $3,000 = $136,000 AGI; taxable income = $136,000 –$35,000 = $101,000; tax = $8,907 + [($101,000 – $8,000 dividends – $77,400) x .22] + ($8,000 dividends x .15) = $8,907 + $3,432 + $1,200 = $13,539.

LO 5.3, LO 5.4, & LO 5.8                REFERENCE TABLES REQUIRED

DIFFICULTY: Hard

 

10. Buffy and Biff are both employed. They have two dependent children ages 9 and 10 and they pay $7,200 for child care while they work. In 2018, their combined salary and wage income is $560,000. They each put $4,000 into their traditional IRAs (these IRAs are their only retirement plans). Their itemized deductions are $28,000. What is their net tax liability after all allowable credits if they file jointly and the child tax credit begins to phase out at $400,000?

 

ANSWER  $560,000 – $8,000 IRA contributions = $552,000 AGI.

($552,000 – $400,000)/1,000 = 152; 152 x $50 = $7,600 so their $4,000 child tax credit is fully phased out.        Childcare credit = .20 x $6,000 maximum amount eligible for credit = $1,200

$552,000 –$28,000 itemized deductions = $532,000 taxable income; ($532,000 – $400,000) x .35 + $91,379 = $46,200 + $91,379 = $137,579 – $1,200 credit = $136,379

LO 5.2, LO 5.3, LO 5.4. LO 5.6 LO 5.7 & LO 5.8      REFERENCE TABLES REQUIRED

DIFFICULTY: Hard

 

11. Wallace and Clarice (both age 45) have combined salary and wages of $114,900. They each contribute $3,000 to a Roth IRA and take the standard deduction when they file jointly in 2018. If they have a $60,000 preference item and the AMT exemption is $109,400, what is their alternative minimum tax?

 

ANSWER  Regular tax: $114,900 – $24,000 standard deduction = $90,900; ($90,900 – $19,050) x .12 + $1,905 = $8,622 + $1,905 = $10,527.  (The Roth IRA is not deductible.)  AMTI = $90,900 + $60,000  + $24,000 standard deduction = $174,900 less the $109,400 AMT exemption = $65,500; $65,500 x .26 = $17,030; $17,030 – $10,527 regular tax= $6,503 AMT.

LO 5.3 & LO 5.8                REFERENCE TABLES REQUIRED

DIFFICULTY: Hard

 

12. Seth and Clara have three dependent children ages 2, 6, and 10. They have AGI of $409,250 in 2018. What is their allowable child tax credit if it begins to phase out at $400,000?

 

ANSWER  $409,250 – $400,000 = $9,250; $9,250/$1,000 = 9.25 rounded to 10; 10 x $50 = $500; (3 x $2,000) – $500 = $5,500 child tax credit.

LO 5.7

DIFFICULTY: Moderate

 

13. Margo is single and has twin sons who are freshmen in college and a daughter who is a junior during 2018. Margo also attends the local college and took one graduate course each semester. She pays $4,000 tuition and fees for each of the three children and $1,900 in tuition and fees for her courses. What are her allowable education credits if her AGI is $61,000 and the LLC phaseout range is $57,000-$67,000?

 

ANSWER  American opportunity credit: (3 x $2,000) + (3 x [.25 x $2,000]) = $7,500 for the three children. Lifetime learning credit: .20 x (1,900) = $380. Phase-out: ($61,000 – $57,000)/$10,000 = .4 x ($380) = $152. Total credits after phaseout = [$7,500 + ($380 – $152)] = $7,728.

LO 5.7

DIFFICULTY: Moderate

 

Other Objective Questions

 

Designate by an R is an item is a deduction FOR AGI or an M is an item is a deduction FROM AGI.

 

_____  a.   Alimony paid (divorce agreement executed in 2017)

_____  b.   Standard deduction

_____  c.   Health savings account contribution

_____  d.   IRA contribution

_____  e.   Charitable contribution

_____  f.   Personal property taxes

_____  g.   Self-employed health insurance deduction

_____  h.   Student loan interest

_____ i.    Investment interest expense

_____  j.   State income taxes paid

_____  k.   Penalty on early withdrawal of savings

_____  l.   Costs for prescription drugs and insulin

_____  m.  Mortgage interest expense

_____  n.  Educator expenses (classroom supplies for elementary school teacher)

_____  o.  Employee portion of health insurance premium

 

Test Bank Answers: Other Objective Questions

 

1. R b. M c. R      d. R      e. M     f. M      g. R      h. R      i. M      j. M      k. R
2. M m. M n. R      o. M

LO 5.2  & LO 5.4

DIFFICULTY: Easy

 

Multiple Choice: Select the best answer for each of the following questions.

Note to Instructor: The reference tables in the appendix of the text are required for a limited number of answers to the questions and problems in this chapter. This is indicated by “REFERENCE TABLES REQUIRED” after the learning objective.

 

1. What is Cheryl’s AGI if she has a taxable salary of $34,000, receives $6,000 of alimony (from a divorce agreement executed in 2017) and $600 of interest on her various savings accounts, contributes $3,000 to her traditional IRA, and paid a $100 penalty for cashing in her Certificates of Deposit early?
2. $40,000
3. $39,600
4. $37,500
5. $36,900

 

ANSWER c; $34,000 + $6,000 + $600 – $3,000 – $100 = $37,500

LO 5.1 & 5.2

DIFFICULTY: Easy

 

2. All of the following are deductions for AGI except:
3. IRA contributions
4. Student loan interest
5. Interest on loan to purchase stocks
6. Health Savings Account contribution

 

ANSWER c

LO 5.2

DIFFICULTY: Easy

 

3. Lisa’s husband died in 2015. Lisa did not remarry, and continued to maintain a home for herself and her dependent daughter during 2016, 2017, and 2018 providing full support for herself and her daughter during these years. For 2018, Lisa’s filing status is:

a.. Single

1. Married filing separately
2. Head of household
3. Surviving spouse, using married filing jointly rate

 

ANSWER c

LO 5.3

DIFFICULTY: Moderate

 

4. Which of the following filing statuses can never be used by a single individual?
5. Surviving spouse
6. Head of household
7. Married filing separately
8. Single

 

ANSWER c

LO 5.3

DIFFICULTY: Easy

 

5. Which of the following is a requirement to file for head of household?
6. A single individual (except abandoned spouse)
7. Provides over one-half the cost of maintaining a household for a dependent or a child
8. Qualifying dependent (except a parent) or child must live in the taxpayer’s household
9. All of the above are requirements

 

ANSWER d

LO 5.3

DIFFICULTY: Easy

 

6. Ethan, age 67, and Abigail, age 64, with good eyesight, are married and file a joint tax return. They have adjusted gross income of $1,200,000 for 2018. They have only $5,000 of itemized deduction, so they claim their standard deduction. How much of their standard deduction is phased out in 2018?
7. $13,850

b.$12,600

c.$10,682

d.0

 

ANSWER d; the standard deduction is not phased out.

LO 5.3

DIFFICULTY: Moderate

 

7. In 2018, which of the following is allowed as an addition to a nonitemizer’s standard deduction?
8. Sales tax on new automobile purchases
9. $500 for real property taxes
10. Medical expenses in excess of 10% of AGI
11. None of the above

 

ANSWER d

LO 5.3

DIFFICULTY: Easy

 

8. The 2018 standard deduction for a married taxpayer, age 68, who files a separate return is:
9. $6,350
10. $7,600
11. $12,000
12. $13,300

 

ANSWER d; $12,000 + $1,300

LO 5.3

DIFFICULTY: Moderate

 

9. Sebastian (age 46) and Kaitlin (age 45) are married and file a joint tax return. Their 2018 adjusted gross income is $390,000 and includes $2,600 in investment income ($2,000 in short-term capital gains and $600 of interest income). They provided 100% of the support for their daughter, Olivia, age 26, who lives with them, and earned $4,700 from her part-time job. They also provided 100 percent of the support for Sebastian’s mother, Emily, who is 67, blind, and lives in a nursing home. Emily received $4,000 in Social Security benefits and $450 of interest income. What is Sebastian and Kaitlin standard deduction on their 2018 tax return if they do not itemize?
10. $13,950
11. $12,700
12. $24,000
13. $25,300

 

ANSWER  c; $24,000. There is no additional standard deduction for a blind dependent.

LO 5.3

DIFFICULTY: Moderate

 

10. Carl, age 42, is married and has three children. In preparing to go to his accountant, he determines that he has $63,100 of salary income and $250 in dividends. He contributes $4,000 to a Roth IRA and has $6,800 of itemized deductions. His wife has no income. What is the taxable income on their 2018 joint return?

 

1. $63,350
2. $39,350
3. $30,500
4. $30,250

 

ANSWER b; $63,100 + $250 – $24,000 = $39,350

LO 5.1, 5.2 & 5.3

DIFFICULTY: Hard

 

11. Which of the following expenditures is not subject to some form of limitation on its deductibility based on AGI?
12. IRA contribution
13. Surgery to replace a hip joint
14. Contribution to a university endowment fund
15. Property taxes

 

ANSWER a

LO 5.4

DIFFICULTY: Moderate

 

12. Colin (age 40) is single, itemizes his deductions, and has AGI of $100,000. Colin provided the following information about his cash expenditures for 2018:

Interest on American Express card                                                     1,200

Points to refinance his home for 10 years at the end of December        2,600

Mortgage interest payments on $250,000 principal amount               11,800

Real estate taxes                                                                               2,100

State income taxes withheld on salary                                                5,400

Additional state income tax estimated payment                                  1,200

Contribution to Republican Party                                                       2,000

Contribution to United Way                                                                 500

 

If Colin itemizes, what are his total itemized deductions in 2018:

1. $18,100
2. $21,000
3. $24,200
4. $27,000

 

ANSWER  b; $11,800 + 2,100  + $5,400  + $1,200  + $500 = $21,000

LO 5.4

DIFFICULTY: Moderate

 

13. Sebastian (age 46) and Kaitlin (age 45) are married and file a joint tax return. Their 2018 adjusted gross income is $390,000 and includes $2,600 in investment income ($2,000 in short-term capital gains and $600 of interest income). They provided 100% of the support for their daughter, Olivia, age 26, who lives with them, and earned $4,700 from her part-time job. They also provided 100 percent of the support for Sebastian’s mother, Emily, who is 67, blind, and lives in a nursing home. Emily received $4,000 in Social Security benefits and $450 of interest income. Sebastian and Kaitlin also paid the following amounts in 2018:

• $38,500 interest on their home mortgage (acquisition debt) on their principal residence purchased in 1995. The principal amount of the mortgage is $1,250,000. They also paid $8,250 in real estate taxes on the home.
• $6,000 investment interest expense
• $7,600 unreimbursed employee business expenses (none for meal or entertainment expenses)
• $1,650 in state income taxes to the state of California where Sebastian worked for part of the year
• $1,400 in state and local general sales taxes
• $490 fee for preparation of their 2017 tax return, paid to their CPA in 2018
• $2,500 contributed to the State University Athletic Booster Club (to allow them to purchase tickets in good seat locations for football games) and $1,000 contributed to the State University Business School Alumni Association for academic scholarships. They also donated a painting (purchased 11 years ago for $4,200) to the Salvation Army, which was then sold for its fair market value of $17,000 at its fundraising auction.

How much can Sebastian and Kaitlin deduct for interest expense for 2018?

1. $30,800
2. $33,400
3. $2,600
4. $49,500

 

ANSWER b; $1,000,000/$1,250,000 x $38,500 = $30,800; $6,000 investment interest expense is limited to $2,600 net investment income; $30,800 + $2,600 = $33,400.

LO 5.4

DIFFICULTY: Hard

 

14. Sebastian (age 46) and Kaitlin (age 45) are married and file a joint tax return. Their 2018 adjusted gross income is $390,000 and includes $2,600 in investment income ($2,000 in short-term capital gains and $600 of interest income). They provided 100% of the support for their daughter, Olivia, age 26, who lives with them, and earned $4,700 from her part-time job. They also provided 100 percent of the support for Sebastian’s mother, Emily, who is 67, blind, and lives in a nursing home. Emily received $4,000 in Social Security benefits and $450 of interest income. Sebastian and Kaitlin also paid the following amounts in 2018:

• $38,500 interest on their home mortgage (acquisition debt) on their principal residence purchased in 1995. The principal amount of the mortgage is $1,250,000. They also paid $8,250 in real estate taxes on the home.
• $6,000 investment interest expense
• $7,600 unreimbursed employee business expenses (none for meal or entertainment expenses)
• $1,650 in state income taxes to the state of California where Sebastian worked for part of the year
• $1,400 in state and local general sales taxes
• $490 fee for preparation of their 2017 tax return, paid to their CPA in 2018
• $2,500 contributed to the State University Athletic Booster Club (to allow them to purchase tickets in good seat locations for football games) and $1,000 contributed to the State University Business School Alumni Association for academic scholarships. They also donated a painting (purchased 11 years ago for $4,200) to the Salvation Army, which was then sold for its fair market value of $17,000 at its fundraising auction.

How much can Sebastian and Kaitlin deduct for charitable contributions for 2018?

1. $5,200
2. $7,200
3. $7,700
4. $20,500

 

ANSWER a; $1,000 + $4,200 = $5,200. Painting not used in charity’s exempt function so deduction limited to basis. Contribution to booster club not deductible in 2018.

LO 5.4

DIFFICULTY: Hard

 

15. Sebastian (age 46) and Kaitlin (age 45) are married and file a joint tax return. Their 2018 adjusted gross income is $390,000 and includes $2,600 in investment income ($2,000 in short-term capital gains and $600 of interest income). They provided 100% of the support for their daughter, Olivia, age 26, who lives with them, and earned $4,700 from her part-time job. They also provided 100 percent of the support for Sebastian’s mother, Emily, who is 67, blind, and lives in a nursing home. Emily received $4,000 in Social Security benefits and $450 of interest income. Sebastian and Kaitlin also paid the following amounts in 2018:

• $38,500 interest on their home mortgage (acquisition debt) on their principal residence purchased in 1995. The principal amount of the mortgage is $1,250,000. They also paid $8,250 in real estate taxes on the home.
• $6,000 investment interest expense
• $7,600 unreimbursed employee business expenses (none for meal or entertainment expenses)
• $1,650 in state income taxes to the state of California where Sebastian worked for part of the year
• $1,400 in state and local general sales taxes
• $490 fee for preparation of their 2017 tax return, paid to their CPA in 2018
• $2,500 contributed to the State University Athletic Booster Club (to allow them to purchase tickets in good seat locations for football games) and $1,000 contributed to the State University Business School Alumni Association for academic scholarships. They also donated a painting (purchased 11 years ago for $4,200) to the Salvation Army, which was then sold for its fair market value of $17,000 at its fundraising auction.

 

How much can Sebastian and Kaitlin deduct for taxes for 2018?

1. $11,000
2. $12,800
3. $9,900
4. $17,500

 

ANSWER  c; $8,250 + $1,650 = $9,900. State income tax exceeds sales tax and only sales or income tax is deductible.

LO 5.4

DIFFICULTY: Moderate

 

16. Sebastian (age 46) and Kaitlin (age 45) are married and file a joint tax return. Their 2018 adjusted gross income is $390,000 and includes $2,600 in investment income ($2,000 in short-term capital gains and $600 of interest income). They provided 100% of the support for their daughter, Olivia, age 26, who lives with them, and earned $4,700 from her part-time job. They also provided 100 percent of the support for Sebastian’s mother, Emily, who is 67, blind, and lives in a nursing home. Emily received $4,000 in Social Security benefits and $450 of interest income. Sebastian and Kaitlin also paid the following amounts in 2018:

• $38,500 interest on their home mortgage (acquisition debt) on their principal residence purchased in 1995. The principal amount of the mortgage is $1,250,000. They also paid $8,250 in real estate taxes on the home.
• $6,000 investment interest expense
• $7,600 unreimbursed employee business expenses (none for meal or entertainment expenses)
• $1,650 in state income taxes to the state of California where Sebastian worked for part of the year
• $1,400 in state and local general sales taxes
• $490 fee for preparation of their 2017 tax return, paid to their CPA in 2018
• $2,500 contributed to the State University Athletic Booster Club (to allow them to purchase tickets in good seat locations for football games) and $1,000 contributed to the State University Business School Alumni Association for academic scholarships. They also donated a painting (purchased 11 years ago for $4,200) to the Salvation Army, which was then sold for its fair market value of $17,000 at its fundraising auction.

 

What is Sebastian and Kaitlin’s taxable income for 2018 if they do not itemize their deductions and file as married filing jointly?

1. $333,700
2. $366,000
3. $377,300
4. $390,000

 

ANSWER b; $390,000 – $24,000 standard deduction = $366,000.

LO 5.1 and LO 5.3

DIFFICULTY: Moderate

 

17. Sebastian (age 46) and Kaitlin (age 45) are married and file a joint tax return. Their 2018 adjusted gross income is $390,000 and includes $2,600 in investment income ($2,000 in short-term capital gains and $600 of interest income). They provided 100% of the support for their daughter, Olivia, age 26, who lives with them, and earned $4,700 from her part-time job. They also provided 100 percent of the support for Sebastian’s mother, Emily, who is 67, blind, and lives in a nursing home. Emily received $4,000 in Social Security benefits and $450 of interest income. Sebastian and Kaitlin also paid the following amounts in 2018:

• $38,500 interest on their home mortgage (acquisition debt) on their principal residence purchased in 1995. The principal amount of the mortgage is $1,250,000. They also paid $8,250 in real estate taxes on the home.
• $6,000 investment interest expense
• $7,600 unreimbursed employee business expenses (none for meal or entertainment expenses)
• $1,650 in state income taxes to the state of California where Sebastian worked for part of the year
• $1,400 in state and local general sales taxes
• $490 fee for preparation of their 2017 tax return, paid to their CPA in 2018
• $2,500 contributed to the State University Athletic Booster Club (to allow them to purchase tickets in good seat locations for football games) and $1,000 contributed to the State University Business School Alumni Association for academic scholarships. They also donated a painting (purchased 11 years ago for $4,200) to the Salvation Army, which was then sold for its fair market value of $17,000 at its fundraising auction.

 

What is Sebastian and Kaitlin’s marginal tax rate for 2018 if they do itemize their deductions and file as married filing jointly?

1. 12%
2. 22%
3. 24%
4. 32%

 

ANSWER d; $390,000 – $33,400 – $9,900 – $5,200 = $341,500; 32% marginal tax rate.  Home equity loan interest, unreimbursed employee business expenses, and tax prep fees are not deductible in 2018.

LO 5.1, LO 5.4, and LO 5.8

DIFFICULTY: Moderate

 

18. Sean bought a home in 2010 for $625,000 financing $550,000 of the purchase price with a 30 year mortgage. In 2018 when his existing mortgage balance was $520,000, he took out a home equity loan for $150,000. He used the proceeds to pay off credit card debt of $40,000 and purchase a car for $85,000; the balance he used to buy an engagement ring for his girlfriend. In 2018 he paid $30,000 interest on the mortgage and paid interest only of $6,600 on the home equity loan. What is his deduction for qualified residential interest for 2018?
19. $36,600
20. $34,400
21. $30,000
22. $6,600

 

ANSWER c; $30,000. No deduction for home equity loan interest expense after 2017.

LO 5.4

DIFFICULTY: Moderate

 

19. Colin (age 40) is single and itemizes his deductions. His AGI is $100,000. Colin provided the following information about his cash expenditures for 2018:

Interest on loan to purchase corporate securities                               $   900

Interest on American Express card                                                     1,200

Points to refinance his home at the end of December                          2,600

Mortgage interest payments                                                            11,800

Real estate taxes                                                                               2,100

State income taxes withheld on salary                                                5,400

Additional state income tax estimated payment                                  1,200

Contribution to Republican Party                                                       2,000

Contribution to United Way                                                                 500

 

What is the amount of Colin’s deductible interest expense if he received $600 in corporate dividends that are taxed at the 15% tax rate?

1. $11,800
2. $12,400
3. $12,700
4. $14,400

 

ANSWER a; interest on the American Express card is not deductible and the points to refinance must be amortized; his net investment income is zero unless he elects to give up the favorable tax rate on dividend income.

LO 5.4

DIFFICULTY: Moderate

 

20. Colin (age 40) is single and itemizes his deductions. His AGI is $100,000. Colin provided the following information about his cash expenditures for 2018:

Interest on loan to purchase corporate securities                               $   900

Interest on American Express card                                                     1,200

Points to refinance his home at the end of December                          2,600

Mortgage interest payments                                                            11,800

Real estate taxes                                                                               2,100

State income taxes withheld on salary                                                5,400

Additional state income tax estimated payment                                  1,200

Contribution to Republican Party                                                       2,000

Contribution to United Way                                                                 500

 

How much are Colin’s deductible contributions?

1. $500
2. $1,000
3. $1,500
4. $2,500

 

ANSWER a

LO 5.4

DIFFICULTY: Moderate

 

21. Colin (age 40) is single and itemizes his deductions. His AGI is $100,000. Colin provided the following information about his cash expenditures for 2018:

Interest on loan to purchase corporate securities                               $   900

Interest on American Express card                                                     1,200

Points to refinance his home at the end of December                          2,600

Mortgage interest payments                                                            11,800

Real estate taxes                                                                               2,100

State income taxes withheld on salary                                                5,400

Additional state income tax estimated payment                                  1,200

Contribution to Republican Party                                                       2,000

Contribution to United Way                                                                 500

What is Colin’s deduction for taxes?

1. $8,700
2. $7,500
3. $5,400
4. $2,100

 

ANSWER a; $2,100 + $5,400 + $1,200 = $8,700

LO 5.4

DIFFICULTY: Moderate

 

22. Sonjay had AGI of $60,000 in 2018 and made several charitable contributions as follows:

Land donated to county for new school: FMV = $30,000; basis = $20,000

Appraisal fee for the land: $2,500

Contributions to his church: $4,000

Contributions to the Red Cross: $1,000

What is the maximum charitable contribution deduction that Sonjay could claim in 2018?

1. $30,000
2. $27,500
3. $25,000
4. $24,000

 

ANSWER c; $20,000 (reduced land basis to avoid 30% of AGI limit if FMV used) + $4,000 + $1,000 = $25,000 maximum 2018 current-year deduction. Appraisal fees are a miscellaneous itemized deduction, for 2018-2025 no deduction is allowed for expenses in this miscellaneous category.

LO 5.4

DIFFICULTY: Moderate

 

23. Ikito’s AGI was $68,000 in 2017 and 2018. His home was broken into and his TV, DVD, VCR and computer were all stolen. The properties had a basis of $15,000 and a current fair market value of $9,000. Later that year, his car was hit by a garbage truck. It cost Ikito $9,000 to have the car repaired. Ikito didn’t believe in insurance, so he received no reimbursements. In addition, the garbage company filed for bankruptcy after the accident. How much may Ikito deduct as an itemized deduction if these events occurred in 2018 and if they instead happened in 2017, respectively??
24. $11,000 in 2018; $0 in 2017
25. $17,800 in 2018; $0 in 2017
26. $0 in 2018; $11,000 in 2017
27. $10,200 in 2018; $0 in 2017

 

ANSWER c; $0; $9,000 – $100 + $9,000 – $100 – (.10 x $68,000) = $11,000.  For 2018, the deduction for nondisaster casualty losses is suspended.

LO 5.4

DIFFICULTY: Moderate

 

24. Vera and Jake (both age 45) are a married couple with AGI of $327,300 for 2018. They paid $20,000 of mortgage interest, $8,000 of unreimbursed medical expenses, $4,000 of property taxes, and $9,000 of charitable contributions for the year. How much may they claim for itemized deductions in 2018?
25. $40,220
26. $33,000
27. $32,520
28. $25,000

 

ANSWER b; $20,000 + $4,000 + $9,000 = $33,000. (Medical expenses do not exceed 7.5 percent of AGI.)

LO 5.4

DIFFICULTY: Moderate

 

25. Camila, age 60, is single and has adjusted gross income of $100,000. She paid (with after-tax dollars) the following medical expenses in 2018:

Medical insurance premiums	$9,000
Doctors’ fees	5,000
Hospital fees	3,000
Eyeglasses	400
Prescription drugs	300
General purpose vitamins	100

She received only $2,000 in reimbursements from her insurance company for her medical expenses. How much can Camila deduct for medical expenses in 2018 if she has $30,000 of other itemized deductions?

1. $8,200
2. $8,300
3. $5,800
4. $5,700

 

ANSWER a; $9,000 + $5,000 + $3,000 + $400 + $300 – $2,000 – ($100,000 x .075) = $8,200. No deduction for general purpose vitamins.

LO 5.4

DIFFICULTY: Moderate

 

26. Emma purchased investment land in 2012 for $46,000. At the end of 2017, she was approached by the local Girl Scout organization in which she had been an active troop leader, about donating the land for a summer camp site. Emma agreed and deeded the land to the Girl Scouts for their camp in February 2018. The fair market value of the land at the end of 2017 was $55,000 and in February 2018 was $56,000. Emma’s adjusted gross income was $100,000 for 2017 and $110,000 for 2018. Emma expects her AGI to decrease to $10,000 in 2019 because most of her future retirement income will be from tax-exempt sources. What is the maximum amount Emma can deduct for 2018 if this is her only itemized deduction?
27. $46,000
28. $50,000
29. $55,000
30. $56,000

 

ANSWER a; $46,000. Emma should elect to use the $46,000 basis; the 50% of AGI limit would then apply but with no carryover to future years. Her deduction for capital gain property is limited to $33,000 ($110,000 x .3 = $33,000), 30% of AGI if fair market value is used in 2018 with a carryover of the remaining $23,000 limited to 30% of AGI in future years ($10,000 x .3 = $3,000).

LO 5.4

DIFFICULTY: Hard

 

27. Amelia, an accountant, normally bills her clients $125 per hour for her time and her adjusted gross income for 2018 was $100,000. In January and February 2018, however, Amelia spent 80 hours of her time volunteering for the Salvation Army doing accounting work. She paid $100 out of her own pocket for supplies and made an additional cash contribution of $1,000 to the Salvation Army in 2018.What is Amelia’s charitable contribution deduction for 2018?
28. $11,100
29. $11,000
30. $1,100
31. $1,000

 

ANSWER c; $1,000 + $100 = $1,100. No deduction for value of services.

LO 5.4

DIFFICULTY: Moderate

 

28. Patricia’s AGI was $80,000 in both 2017 and 2018. She made cash contributions to public charities of $43,000 in 2017 and $50,000 in 2018. Patricia’s charitable contribution carryover to 2019 is:
29. $4,000
30. $5,000
31. $8,000
32. $44,000

 

ANSWER b; $5,000. $3,000 from 2017 + $2,000 from 2018.  Prior to 2018, the ceiling is 50%.  For 2018 – 2025, the ceiling on cash contributions is increased to 60%.

LO 5.4

DIFFICULTY: Moderate

 

29. Which of the following statements is true regarding the deductibility of investment interest expense?
30. Deductible in full subject to the 2% of AGI floor that applies to miscellaneous itemized deductions.
31. Deductible only to the extent of net investment income, excess amounts cannot be carried forward and thus are non-deductible.
32. Deductible only to the extent of the interest on a principal amount that does not exceed $1,000,000.
33. Deductible only to the extent of net investment income; any excess amounts can be carried forward indefinitely.

 

ANSWER d

LO 5.4

DIFFICULTY: Moderate

 

30. Which of the following is true regarding miscellaneous itemized deductions?
31. Other investment expenses and tax return preparation fees are included in the miscellaneous category.
32. For 2018 – 2025 no deduction is allowed.
33. Prior to 2018, miscellaneous itemized deductions were only deductible if the total expenses in this category exceed 2% of the taxpayer’s AGI.
34. All of the above are true.
35. All of the above are false.

 

ANSWER d.

LO 5.4

DIFFICULTY: Easy

 

31. What is Beth’s maximum allowable deduction for the following contributions to qualified public charities during the current year if her adjusted gross income is $90,000?

Stock Contributions	Basis	Fair Market Value
Markum stock acquired in 1997	$8,000	$16,000
Dotcom stock acquired in 1999	$7,000	$14,000
Ford stock acquired in 2001	$1,500	$3,000

1. $45,000
2. $33,000
3. $27,000
4. $16,500

 

ANSWER c; $90,000 x 30%; $6,000 carried forward.

LO 5.4

DIFFICULTY: Moderate

 

32. All of the following are qualifying relatives who can qualify as dependents except:
33. Cousin
34. Father-in-law
35. Mother’s sister
36. Sister

 

ANSWER a

LO 5.5

DIFFICULTY: Easy

 

33. John and Mary have three children: Aaron (age 14), Anna (age 16), and Tammy (age 21). Anna works after school and earned $4,000 in 2018. Tammy works 30 hours per week and is a part-time student at the local community college earning $8,400 in 2018. If John and Mary’s AGI in 2018 is $200,000, how much can they claim on their joint tax return for the child tax credit?
34. $6,000
35. $4,500
36. $4,000
37. $2,000

ANSWER c; $2,000 x 2 children = $4,000. Tammy does not qualify.

LO 5.7

DIFFICULTY: Moderate

 

34. All of the following are a common filing status for a married person except:
35. Married filing jointly
36. Head of household
37. Married filing separately
38. Surviving spouse

 

ANSWER d; Head of household permitted for an abandoned spouse.

LO 5.3

DIFFICULTY: Easy

 

 

35. For a 21-year-old child to be considered a dependent in 2018:
36. The child must be a full-time student the entire year
37. The child’s income must be less than $4,150
38. The child must be a full-time student for at least 5 months during the year
39. Either (b) or (c)

 

ANSWER d

LO 5.6

DIFFICULTY: Easy

 

36. To qualify as a dependent, most individuals (except a qualifying child) must earn gross income that is less than an amount equal to:
37. The personal exemption
38. The standard deduction
39. The standard deduction plus the personal exemption
40. There is no gross income test to determine dependency status.

 

ANSWER a

LO 5.5

DIFFICULTY: Easy

 

 

37. Colin (single and age 40) has AGI of $100,000. Colin provided the following information about his cash expenditures for 2018:

Interest on loan to purchase corporate securities                               $   900

Interest on American Express card                                                     1,200

Points to refinance his home for 10 years at the end of December        2,600

Mortgage interest payments                                                            11,800

Real estate taxes                                                                               2,100

State income taxes withheld on salary                                               5,400

Additional state income tax estimated payment                                  1,200

Contribution to Republican Party                                                       2,000

Contribution to United Way                                                                 500

If Colin does not itemize, what is his total deduction from AGI in 2018:

 

1. $4,050
2. $6,350
3. $10,400
4. $12,000

 

ANSWER d; $12,000 standard deduction.

LO 5.3       REFERENCE TABLES REQUIRED (unless the instructor expects students to memorize the standard deduction amount)

DIFFICULTY: Moderate

 

38. Cleo’s husband died in January of 2016. She has a 20 year-old son and a sister who live with her. Her son attends a trade school part-time and earned $11,000 from his part-time job. Cleo’s sister is a full-time student and only earned $2,800 from her part-time job. What is Cleo’s 2018 filing status?
39. Surviving spouse
40. Head of household
41. Married filing separately
42. Married filing jointly
43. Single

 

ANSWER b.

LO 5.3 & LO. 5.6

DIFFICULTY: Moderate

 

 

39. Justin, age 42 and divorced, is the sole support of his mother, age 69, who resided in a local nursing home for the entire year. Justin’s mother had no income for the year. Justin’s filing status is:
40. Single
41. Surviving Spouse
42. Head of household
43. Married filing separately

 

ANSWER c

LO 5.3 & LO 5.6

DIFFICULTY: Moderate

 

40. In 2018, Carol, who is 54 and single, earned a salary of $54,000 and $6,000 of interest on State of Nevada bonds. She contributed $2,000 to her Roth IRA, paid a $12,000 hospital bill, state income taxes of $1,500, real estate taxes of $900, mortgage interest of $4,500, and $2,000 interest on her margin account under which she purchased the bonds. What is Carol’s taxable income?
41. $37,050
42. $39,150
43. $41,050
44. $43,050

 

ANSWER b; $54,000 – [($12,000 – (7.5% x $54,000)) + $1,500 + $900 + $4,500) = $54,000 – ($7,950 + $1,500 + $900 + $4,500) = $39,150; the contribution to a Roth IRA is not deductible; the tax-exempt bond interest and related interest paid on the margin account do not affect taxable income.

LO 5.1, 5.2, 5.4 & 5.6

DIFFICULTY: Hard

 

41 Rina is a 30% partner in a partnership that produces $750,000 ordinary income from manufacturing a product, her share of partnership income is $225,000. The partnership paid $150,000 of W-2 wages and the total unadjusted basis of tangible depreciable business property is $650,000. Rina is single and has taxable income of $500,000. What is Rina’s qualified business income deduction?

1. $11,250
2. $16,125
3. $22,500
4. $45,000

 

ANSWER  c; $22,500.  Although 20% of Rina’s $225,000 partnership QBI is $45,000 ($225,000 x 20%), her deduction is limited to $22,500 by the W-2 wage limitation [($150,000 x 30%) x 50% = $22,500)]

LO  5.5

DIFFICULTY:  Hard

 

42 Jessica is single and has taxable income of $305,000 of which $130,000 is attributable to her consulting sole proprietorship. She paid W-2 wages to her employees of $75,000.  What is Jessica’s qualified business income deduction?

1. $0
2. $15,000
3. $22,500
4. $39,000

 

ANSWER  a; Zero.  No deduction because her income is above $207,500.

LO  5.5

DIFFICULTY:  Hard

 

43  Jessica is single and has taxable income of $190,000 of which $140,000 is attributable to her consulting sole proprietorship.  She paid W-2 pages to her employees of $75,000.  What is Jessica’s qualified business income deduction?

1. $42,000
2. $28,000
3. 11,250
4. $9,800

 

ANSWER  d; $9,800.  Because her taxable income exceeds the $157,500 threshold by $32,500, 65% will be phased out ($32,500 excess above threshold/$50,000 phase out range = 65%) so she can take into account only 35% of her $140,000 consulting income or $49,000 in determining her QBI. She then takes into account 35% of $75,000 wages, or $26,250. Jessica computes her deduction by taking the lesser of (1) 20% x $49,000 eligible QBI = $9,800 or (2) 50% x $26,250 eligible wages = $13,125. Jessica can take a deduction of $9,800.

LO  5.5

DIFFICULTY:  Hard

 

44. 44. Susan pays $4,700 for daycare for her dependent mother who had a stroke last year. What is her dependent care credit if her AGI is $40,100 if the phaseout begins at $15,000?
45. $600
46. $660
47. $940
48. $1,034

 

ANSWER b; ($40,100 – $15,000)/$2,000 = 12.55; round to 13%; 35% – 13% = 22%; $3,000 maximum x .22 = $660.

LO 5.7

DIFFICULTY: Hard

 

45. Stephanie and Cal have three dependent children in college. Sally is a freshman and Teri is a sophomore at a small private college in their town where their expenses are $6,500 per year for each student; Lexi is in her third year of medical school in Wisconsin and her related expenses are $12,500 per year. What is the maximum education credit allowed Stephanie and Cal on their joint tax return if their AGI is $124,000 in 2018 and the LLC phaseout range is $114,000 – $134,000?
46. $5,000
47. $6,000
48. $7,000
49. $7,500

 

ANSWER b; [2 x [$2,000 + $500) ]= $5,000 American opportunity credit + (.20 x $10,000) –{[($124,000 – $114,000)/$20,000] x $2,000} = $1,000 lifetime learning credit = $5,000 + $1,000 = $6,000

LO 5.7

DIFFICULTY: Hard

 

46. Marcia and Tim, a married couple, file a joint return in 2018. Marcia went back to college this year as a full-time graduate student. What is the maximum reduction they can achieve in their taxes for the $6,800 in tuition that Marcia pays if their AGI is $116,000 and the LLC phaseout range is $114,000-$134,000?
47. $2,000
48. $1,360
49. $1,224
50. $1,000

 

ANSWER c; The lifetime learning is $6,800 x .2 = $1,360; but it is subject to a $136 reduction [$1,360 – (2,000/$20,000 x $1,360) or a credit of $1,224 based on their AGI of $116,000.

LO 5.7

DIFFICULTY: Hard

 

47. Which of the following is a refundable credit?
48. Dependent care credit
49. Residential energy credit
50. Lifetime learning credit
51. Earned income credit

ANSWER d

LO 5.7

DIFFICULTY: Easy

 

48. Nonrefundable tax credits
49. allow the excess credit over the taxpayer’s income tax liability to be paid to the taxpayer
50. can only be used in years the taxpayer has a tax refund
51. can only offset a taxpayer’s tax liability
52. can be carried forward up to 5 years if they exceed the current year’s tax liability

 

ANSWER c

LO  5.7

DIFFICULTY: Easy

 

49. A single taxpayer, studying for his master’s degree, has an AGI of $58,000. In 2018 he paid $8,000 for college tuition and $2,500 interest on his student loan. In 2018:
50. He may deduct $2,500 of student loan interest and claim a lifetime learning credit of $1,600.
51. He may deduct $2,500 of student loan interest but must begin to phase out his $1,600 lifetime learning credit.
52. He must begin to phase out part of his deductions for both student loan interest and his college tuition.
53. He gets no deduction for student loan interest and must reduce his deduction for college tuition.

 

ANSWER b; The lifetime learning credit phases out proportionately over a modified AGI range of $57,000 – $67,000 for single taxpayers.

LO 5.2 & 5.7

DIFFICULTY: Moderate

 

50. Susan (age 29) is single but has the son of her brother living with her as her dependent. If her AGI is $27,450, what is her tax liability in 2018 before any allowable tax credits?
51. $900
52. $945
53. $1,486
54. $2,094

 

ANSWER b; $27,450 – $18,000 = $9,450. $9,450 x .10 = $945.

LO 5.3, 5.6 & 5.8     REFERENCE TABLES REQUIRED

DIFFICULTY: Moderate

 

 

51. Holly and Ken (both age 46) are married and have two children living at home: Sara is 19 and earned $19,000 as a secretary. Claudia is 15 and is in high school. Claudia made $4,200 as a model this year, all of which was put into a trust account except for her manager’s fee. Ken made $67,200 as an engineer and Holly earned $7,000 as a substitute teacher. If they have $18,000 of itemized deductions, what is Holly and Ken’s tax liability on their joint return in 2018 after any allowable credits?
52. $1,643.00
53. $3,643.00
54. $5,643.00
55. $6,287.50

 

ANSWER b; $67,200 + $7,000 – $24,000 = $50,200; ($50,200 – $19,050) x .12 + $1,905 = $3,738 + $1,905 = $5,643 – $2,000 child tax credit for Claudia = $3,643.

LO 5.5 & 5.8     REFERENCE TABLES REQUIRED

DIFFICULTY: Hard

 

52. What is the difference in tax savings between a $1,000 tax credit and a $1,000 tax deduction for a single taxpayer with $45,000 in taxable income?
53. 0
54. $850
55. $780
56. $300

 

ANSWER c; $1,000 – ($1,000 x .22) = $780

LO 5.7 & 5.8     REFERENCE TABLES REQUIRED

DIFFICULTY: Moderate

 

53. Maurice and Judy (both age 32) have one natural daughter, age 4, and adopted twin boys, age 8. Their adjusted gross income on their joint return is $410,000. If they take the standard deduction, what is their tax liability after any allowable tax credits in 2018 if the child tax credit begins to phase out at $400,000?
54. $86,899
55. $81,399
56. $80,899
57. $64,179

ANSWER b; $410,000 –$24,000 = $386,000; Tax on $386,000 = $64,179 + ($386,000 – $315,000) x .32 = $64,179 + $22,720 = $86,899; ($410,000 – $400,000)/$1,000 x $50 = $500; ($2,000 x 3) – $500 = $5,500; $86,899 – $5,500 = $81,399.

LO 5.5, 5.6, 5.7 & 5.8     REFERENCE TABLES REQUIRED

DIFFICULTY: Hard

 

54. Cindy has taxable income of $67,000 excluding a $20,000 taxable gain on the sale of bonds she purchased 7 years ago. If Cindy is single, what is her total tax liability for 2018?
55. $10,679.50
56. $13,679.50
57. $14,740
58. $17,521

 

ANSWER b. [($67,000 – $38,700) x .22] + $4,453.50 + ($20,000 x .15) = $6,226 + $4,453.50 + $3,000 = $13,679.50

LO 5.8     REFERENCE TABLES REQUIRED

DIFFICULTY: Moderate

 

55. The kiddie tax can only be imposed on
56. the earned income of a child under 19.
57. unearned income of a child in excess of $2,100.
58. income only from property given to a child by a parent.
59. the unearned income of a child in excess of the amount of the dependency exemption.

 

ANSWER  b

LO 5.8

DIFFICULTY: Easy

 

56. Cailey and Dimitri are married and file a joint tax return. Cailey has $170,000 in salary and Dimitri has $210,000 in self-employment income in 2018. How much must they pay on their individual tax return for their Medicare surtax?
57. $0
58. $1,025
59. $1,170
60. $3,420

 

ANSWER: c; $210,000 x 92.35% = $193,935 SE income + $170,000 salary – $250,000 threshold) x 0.9% = $1,025.42 Medicare surtax.

LO: 5.8     REFERENCE TABLES REQUIRED

DIFFICULTY: Moderate

 

57. In 2018, Jacob earned a salary of $185,000 and also had the following items of investment income: $39,000 net short-term capital gain on sale of stock, $7,000 dividend income, $5,000 interest income from corporate bonds, and $4,000 interest income from tax-exempt municipal bonds. Compute Jacob’s net investment income (NII) tax.
58. $0
59. $1,368
60. $1,520
61. $2,090

 

ANSWER: b;  NII is $51,000 ($39,000 + $7,000 +$5,000); tax-exempt income is excluded. Modified AGI in excess of the threshold is $36,000 ($185,000 + $51,000 – $200,000). The NII tax is assess on the lesser of $51,000 NII or $36,000 excess. $36,000 x 3.8% = $1,368.

LO: 5.8     REFERENCE TABLES REQUIRED

DIFFICULTY: Hard

 

58. In 2018, Amber earned a salary of $230,000 and also had the following items of investment income: $28,000 net short-term capital gain on sale of stock, $8,000 dividend income, $6,000 interest income from corporate bonds, and $5,000 interest income from tax-exempt municipal bonds. Compute Amber’s net investment income (NII) tax if the tax rate is 3.8% and the threshold is $200,000.
59. $1,596
60. $1,786
61. $2,736
62. $2,926

 

ANSWER: a:  NII is $42,000 ($28,000 + $8,000 +$6,000); tax-exempt income is excluded. Modified AGI in excess of the threshold is $72,000 ($230,000 + $42,000 – $200,000). The NII tax is assess on the lesser of $42,000 NII or $72,000 excess. $42,000 x 3.8% = $1,596.

LO: 5.8     REFERENCE TABLES REQUIRED

DIFFICULTY: Hard

 

59. Cliff is married and files a joint return. His return shows AGI of $1,268,000 and a net tax liability of $392,259 on taxable income of $1,224,000. He has $30,000 of preference items and $21,000 of net positive adjustments (including adjustments for itemized deductions). The $109,400 exemption begins to phase out at $1 million. What is his AMTI exemption amount?
60. $109,400
61. $68,750
62. $40,650
63. $28,825

 

ANSWER c; $1,224,000 + $30,000 + $21,000 = $1,275,000; [($1,275,000 – $1,000,000) x .25] = $68,750. $109,400 – $68,750 = $40,650.

LO 5.8     REFERENCE TABLES REQUIRED

DIFFICULTY: Moderate

 

60. Tina is 60 and single. She has AGI of $71,000. If she paid for $9,625 in unreimbursed medical expenses, what is her medical deduction for AMTI in 2018?
61. $9,625
62. $4,300
63. $3,870
64. $2,525

 

ANSWER  b; $9,625 – (.075 x $71,000) = $4,300

LO 5.8

DIFFICULTY: Moderate

 

61. All of the following are allowable deductions in determining the alternative minimum tax except:
62. interest expense on a home acquisition mortgage
63. charitable contributions
64. real property taxes
65. investment interest expense

 

ANSWER c

LO  5.8

DIFFICULTY: Easy

 

62. Samuel, a single individual, has adjusted gross income of $150,000 and the following itemized deductions before applicable floor limitations for 2018:

Medical expenses	$17,000
Qualified residence acquisition interest	20,000
Taxes	9,000
Charitable contributions	7,000
Miscellaneous itemized deductions	5,000

What are Samuel’s itemized deductions for alternative minimum tax purposes?

1. $32,750
2. $20,000
3. $44,000
4. $29,000

 

ANSWER    a; [$17,000 – ($150,000 x .075)] + $20,000 + $7,000 = $32,750. Taxes and miscellaneous itemized deductions are not allowed for AMT.

LO 5.8

DIFFICULTY: Moderate

 

63. Toni is 61 and blind; her husband, Saul, is 67. What is their standard deduction if they file a joint tax return in 2018?
64. $1,300
65. $24,000
66. $25,300
67. $26,600

 

ANSWER d; $24,000 + $1,300 + $1,300 = $26,600.

LO 5.3     REFERENCE TABLES REQUIRED

DIFFICULTY: Easy