ch06

Student:

1. 2. 3. 4. 5. 6.

The profit motive distinguishes "business" activities from "personal" activities. True False All business expense deductions are claimed above the line. True False All investment expenses are itemized deductions. True False Rental or royalty expenses are deductible "for" AGI. True False To be deductible, business expenses must be directly related to a business activity. True False The phrase "ordinary and necessary" means that an expense must be appropriate and helpful for generating a profit. True False Generally, losses from rental activities are considered to be active losses. True False Passive losses that exceed passive income are deferred until the taxpayer generates passive income to offset these passive losses. True False A loss from a passive activity is fully deductible as long as the taxpayer has sufficient tax basis in the activity. True False

7. 8.

9.

10. A passive activity is any activity that involves a trade or business or rental activity in which the taxpayer does not materially participate. True False 11. To qualify under the passive activity rental real estate exception, the taxpayer must (1) own at least 15 percent of the property and (2) participate in the process of making management decisions. True False 12. In certain circumstances, a taxpayer could rent her personal residence at a profit and not pay any tax on the income. True False 13. Taxpayers who use a vacation home for both personal and rental use generally must allocate expenses associated with the home to the personal use and the rental use. True False 14. When allocating expenses of a vacation home between personal use and rental use, the amount of depreciation expense allocated to the rental use is always the ratio of rental days over rental days plus personal use days. True False 15. Expenses of a vacation home allocated to rental use are deductible for AGI. True False

16. Compared to the Tax Court method of allocating expenses between rental use and personal use, the IRS method tends to allocate more expenses to personal use than does the Tax Court method. True False 17. Taxpayers renting a home would generally report the rental income and expenses on Schedule E. True False 18. Jorge owns a home that he rents for 360 days and uses for personal purposes for five days. Jorge is not required to allocate expenses associated with the home between rental and personal use. True False 19. Jennifer owns a home that she rents for 364 days and uses for personal purposes for one day. Jennifer is required to allocate expenses associated with the home between rental and personal use. True False 20. A tax loss from a rental home is generally a passive activity loss. True False 21. A self-employed taxpayer reports home office expenses as for AGI deductions while employees report home office expenses as from AGI deductions. True False 22. Taxpayers with home offices must allocate indirect expenses of the home between personal use and home office use. Only expenses allocated to the home office use are deductible. True False 23. In general, total deductible home office expenses are limited to the gross income derived from the business minus business expenses unrelated to the home. (this is net Schedule C income before home office expenses). True False 24. Taxpayers who participate in an employer-sponsored retirement plan are not allowed to deduct contributions to individual retirement accounts (IRAs) under any circumstances. True False 25. Qualifying distributions from traditional IRAs are nontaxable while qualifying distributions from Roth IRAs are fully taxable as ordinary income. True False 26. Taxpayers contributing to and receiving distributions from a Roth IRA generally earn a before-tax rate of return on their contributions equal to their after-tax rate of return. True False 27. If a taxpayer's marginal tax rate is decreasing, a taxpayer contributing to a traditional IRA can earn an after-tax rate of return greater than her before-tax rate of return. True False 28. A SEP IRA is an example of a self-employed retirement account. True False 29. All reasonable moving expenses are deductible if the move is a minimum of 35 miles in distance. True False 30. To deduct a moving expense, the taxpayer must be employed or self employed for a specific amount of time after the move. True False 31. Self employed taxpayers can deduct the cost of health insurance as long as they do not actually participate in their spouses' employer-provided health plan. True False

32. Self employed taxpayers can choose between claiming a deduction or a credit for the employer portion of self employment taxes paid. True False 33. An individual who forfeits a penalty for prematurely withdrawing a certificate of deposit (CD) is allowed to net the penalty against the interest income from the CD. True False 34. Qualified education expenses for purposes of the deduction of interest on educational loans are expenses paid for the education of the taxpayer, the taxpayer's spouse, or a taxpayer's dependent to attend a postsecondary institution of higher education. True False 35. The definition of qualifying expenses is more restrictive for the qualified educational expense deduction than it is for the education loan interest expense deduction. True False 36. What is the correct order of the loss limitation rules? A. tax basis, at-risk amount, passive loss limits B. at-risk amount, tax basis, passive loss limits C. passive loss limits, at-risk amount, tax basis D. tax basis, passive loss limits, at-risk amount E. passive loss limits, tax basis, at-risk amount 37. Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent interest in the partnership. The partnership had $20,000 of debt she is not responsible to repay because she is a limited partner. Sue is allocated a 10 percent share of the debt resulting in a tax basis of $7,000 and an at risk amount of $5,000. During the year, ABC LP generated a ($70,000) loss. How much of Sue's loss is disallowed due to her tax basis or at-risk amount? A. Zero; all of her loss is allowed to be deducted. B. $2,000 disallowed because of her at-risk amount. C. $2,000 disallowed because of her tax basis. D. $4,000 disallowed because of her tax basis. E. $4,000 disallowed because of her at-risk amount. 38. Which taxpayer would not be considered a material participant of an activity? A. taxpayer materially participated in the activity for any five of the preceding ten years B. taxpayer participated on a regular, continuous, and substantial basis during the year C. taxpayer participated 95 hours during the year and participation is not less than any other participants for the year D. taxpayer participated in the activity for 995 hours during the year E. None of these 39. Generally, which of the following does not correctly categorize the type of income? A. rental real estate - passive income/loss B. salary - active income/loss C. dividends - portfolio income/loss D. capital losses - passive income/loss E. All of these 40. Michelle is an active participant in the rental condominium property she owns. During the year, the property generates a ($15,000) loss; however, Michelle has sufficient tax basis and at-risk amounts to absorb the loss. If Michelle has $115,000 of salary, $10,000 of long-term capital gains, $3,000 of dividends, and no additional sources of income or deductions, how much loss can Michelle deduct? A. Zero; losses from rental property are passive losses and can only be offset by passive income. B. $4,000. C. $11,000. D. $15,000. E. None of these.

41. The rental real estate exception favors: A. lower income taxpayers (AGI less than $80,000) B. middle income taxpayers (AGI greater than $80,000 and less than $150,000) C. upper income taxpayers (AGI greater than $150,000) D.lower income taxpayers (AGI less than $80,000) and middle income taxpayers (AGI greater than $80,000 and less than $150,000) E middle income taxpayers (AGI greater than $80,000 and less than $150,000) and upper income . taxpayers (AGI greater than $150,000) 42. On the sale of a passive activity, any suspended losses cannot be used to offset income from: A. other passive activities B. capital gains C. interest income D. wages and tips E. None of these 43. A taxpayer's at-risk amount in an activity is increased by: A. a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying B. cash contributions to the activity C. cash distributions from the activity D. A and B E. A and C 44. Kenneth lived in his home for the entire year except for when he rented his home (near a very nice ski resort) to a married couple for 14 days in December. The couple paid Kenneth $14,000 in rent for the two weeks. Kenneth incurred $1,000 in expenses relating to the home for the 14 days. Which of the following statements accurately describes the manner in which Kenneth should report his rental receipts and expenses for tax purposes? A. Kenneth would include the rental receipts in gross income and deduct the rental expenses for AGI. B. Kenneth would exclude the rental receipts from gross income and deduct the rental expenses for AGI. CKenneth would include the rental receipts in gross income and would not deduct the rental expenses . because he used the residence for personal purposes for most of the year. D. Kenneth would exclude the rental receipts, and he would not deduct the rental expenses. 45. Katy owns a second home. During 2012, she used the home for 20 personal use days and 50 rental days. Katy allocates expenses associated with the home between rental use and personal use. Katy did not incur any expenses to obtain tenants. Which of the following statements is correct regarding the tax treatment of Katy's income and expenses from the home? A.Katy includes the rental receipts in gross income and deducts the expenses allocated to the rental use of the home for AGI. B.Katy deducts from AGI interest expense and property taxes associated with the home not allocated to the rental use of the home. CAssuming Katy's rental receipts exceed the interest expense and property taxes allocated to the rental . use, Katy's deductible expenses for 2012 may not exceed the amount of her rental receipts (she may not report a loss from the rental property). D. All of these statements are correct. 46. Which of the following statements regarding the IRS and/or Tax Court approaches to allocating homerelated expenses between rental use and personal use is correct? A. The Tax Court approach allocates more property tax and interest expense to rental use than does the IRS approach. B The Tax Court and the IRS approaches allocate the same amount of expenses other than interest . expense and property taxes to rental use. C The IRS approach allocates interest expense and property taxes to rental use based on the ratio of the . number of days of rental use to the total days of the year. D. None of these statements is correct.

47. Brady owns a second home that he rents to others. During the year, he used the second home for 50 days for personal use and for 100 days for rental use. Brady collected $20,000 of rental receipts during the year. Brady allocated $7,000 of interest expense and property taxes, $10,000 of other expenses, and $4,000 of depreciation expense to the rental use. What is Brady's net income from the property and what type and amount of expenses will he carry forward to next year, if any? A. $0 net income. $1,000 depreciation expense carried forward to next year. B. ($1,000) net loss. $0 expenses carried over to next year. C. $0 net income. $1,000 of other expense carried over to next year. D. $0 net income. $1,000 of interest expense and property taxes carried over to next year. 48. Braxton owns a second home that he rents to others. During the year, he used the second home for 50 days for personal use and for 100 days for rental use. After allocating the home-related expenses between personal use and rental use, which of the following statements regarding the sequence of deductibility of the expenses allocated to the rental use is correct (assume taxpayer has no expenses to obtain tenants)? A. Depreciation expense, other expenses, property taxes and interest expense. B. Other expenses, depreciation expense, property taxes and interest expense. C. Property taxes and interest expense, depreciation expense, other expenses. D. Other expenses, property taxes and interest expense, depreciation expense. E. None of these statements is correct. 49. Harriet owns a second home that she rents to others. During the year, she used the second home for 10 personal days and for 200 rental days. Which of the following statements regarding the manner in which she should account for her income and/or expenses associated with the home is incorrect? A. Harriet's deductible expenses are not limited to the amount of gross rental income from the property. B. Harriet will be allowed to deduct all of the mortgage interest on the loan secured by the property. C. Harriet is required to include all of the rental receipts in gross income. D. Harriet is required to allocate all expenses associated with the home to rental use or personal use. 50. When a taxpayer experiences a net loss from a nonresidence (rental property) A The taxpayer will not be allowed to deduct the loss under any circumstance if the taxpayer does not . have passive income from other sources. B. The loss is fully deductible against the taxpayer's ordinary income no matter the circumstances. C If the taxpayer is not an active participant in the rental, the taxpayer can deduct the loss even if the . taxpayer does not have any sources of passive income. DIf the taxpayer is not allowed to deduct the loss due to the passive activity limitations, the loss is . suspended and carried forward until the taxpayer generates passive income or until the taxpayer sells the property. 51. Harvey rents his second home. During 2012, Harvey reported a net loss of $35,000 from the rental. If Harvey is an active participant in the rental and his AGI is $80,000, how much of the loss can he deduct against ordinary income in 2012? A. $35,000 B. $25,000 C. $5,000 D. $0 52. Ilene rents her second home. During 2012, Ilene reported a net loss of $15,000 from the rental. If Ilene is an active participant in the rental and her AGI is $140,000, how much of the loss can she deduct against ordinary income in 2012? A. $15,000 B. $10,000 C. $5,000 D. $0

53. Jamison is self-employed and he works out of an office in his home. After allocating the home-related expenses between the business office and the rest of the home, which of the following statements regarding the sequence of deductibility of the expenses allocated to the home office business use is correct? A. Depreciation expense, other expenses, property taxes and interest expense. B. Other expenses, depreciation expense, property taxes and interest expense. C. Property taxes and interest expense, depreciation expense, other expenses. D. Other expenses, property taxes and interest expense, depreciation expense. E. None of these statements is correct. 54. Which of the following statements regarding limitations on the deductibility of home office expenses of employees is correct? A.Deductible home office expenses of employees are miscellaneous itemized deductions subject to the 2 percent of AGI floor. B. Deductible home office expenses of employees are miscellaneous itemized deductions not subject to the 2 percent floor. C. Deductible home office expenses of employees are for AGI deductions limited to gross income from the business. D. Deductible home office expenses of employees are for AGI deductions not limited to gross income from the business. 55. Which of the following statements regarding limitations on the deductibility of home office expenses of self-employed taxpayers is correct? A. Deductible home office expenses are miscellaneous itemized deductions subject to the 2 percent of AGI floor. B. Deductible home office expenses are miscellaneous itemized deductions not subject to the 2 percent floor. C Deductible home office expenses are for AGI deductions limited to gross income from the business . minus non-home office related expenses. D. Deductible home office expenses are for AGI deductions and may be deducted without limitation. 56. Which of the following statements regarding the home office expense deduction is correct? A.Taxpayers allocate expenses of the home to the home office based on the size of the office relative to the size of the home. B. A taxpayer is not allowed to deduct any home office expenses unless the taxpayer has no other place to do business. C. A taxpayer is not allowed to deduct any depreciation associated with a home as a home office expense. D. A taxpayer must own a home in order to claim home office expenses. 57. During 2012 Jacob, a 19 year old full-time student, earned $4,500 during the year and was not eligible to participate in an employer-sponsored retirement plan. The general limit for deductible contributions during 2012 is $5,000. How much of a tax-deductible contribution can Jacob make to an IRA? A. $0 (Full-time students are not allowed to participate in IRAs) B. $500 C. $4,500 D. $5,000 58. Which of the following statements regarding traditional IRAs is true? A. Once a taxpayer reaches age 55 years of age she is allowed to contribute an additional $1,000 a year. B. Taxpayers with high income are not allowed to contribute to traditional IRAs. C Taxpayers who participate in an employer-sponsored retirement plan are allowed to deduct . contributions to a traditional IRA regardless of their AGI. D. A single taxpayer with no earned income is not allowed to deduct contributions to traditional IRAs.

59. Which of the following statements regarding IRAs is false? A Taxpayers who participate in an employer-sponsored retirement plan may be allowed to make . deductible contributions to a traditional IRA. B The ability to make deductible contributions to a traditional IRA and nondeductible contributions to a . Roth IRA may be subject to phase-out based on AGI. C. A taxpayer may contribute to a traditional IRA in 2013 but deduct the contribution in 2012. D Taxpayers who have made nondeductible contributions to a traditional IRA are taxed on the full . proceeds when they receive distributions from the IRA. 60. Bryan, who is 45 years old, had some surprise medical expenses during the year. To pay for these expenses (which were claimed as itemized deductions on his tax return), he received a $20,000 distribution from his traditional IRA (he has only made deductible contributions to the IRA). Assuming his marginal ordinary income tax rate is 15%, what amount of taxes and/or early distribution penalties will Bryan be required to pay on this distribution? A. $3,000 income tax; $2,000 early distribution penalty B. $3,000 income tax; $0 early distribution penalty C. $0 income tax; $2,000 early distribution penalty D. $0 income tax; $0 early distribution penalty 61. In 2012, Jessica retired at the age of 65. The current balance in her traditional IRA was $200,000. Over the years, Jessica had made $20,000 of nondeductible contributions and $60,000 of deductible contributions to the account. If Jessica receives a $50,000 distribution from the IRA, what amount of the distribution is taxable? A. $0 B. $5,000 C. $37,500 D. $45,000 E. $50,000 62. Which of the following statements regarding Roth IRAs is false? A. Contributions to Roth IRAs are not deductible. B. Qualifying distributions from Roth IRAs are not taxable. CWhether or not they participate in an employer-sponsored retirement plan, taxpayers are allowed to . contribute to Roth IRAs as long as their AGI does not exceed certain thresholds. D. Taxpayers who are married and file separately are not allowed to contribute to a Roth IRA. 63. Which of the following statements regarding Roth IRAs distributions is true? A A distribution is not a qualifying distribution unless the distribution is at least two years after the . taxpayer has opened the Roth IRA. B A taxpayer receiving a distribution from a Roth IRA before reaching the age of 55 is generally not . subject to an early distribution penalty. C. A Roth IRA does not have minimum distribution requirements. D. The full amount of all nonqualifying distributions is subject to tax at the taxpayer's marginal tax rate. 64. Daniela retired at the age of 65. The current balance in her Roth IRA is $200,000. Daniela established the Roth IRA 10 years ago. Through a rollover and annual contributions Daniela has contributed $80,000 to her account. If Daniela receives a $50,000 distribution from the Roth IRA, what amount of the distribution is taxable? A. $0 B. $20,000 C. $30,000 D. $50,000

65. Lisa, age 45, needed some cash so she received a $50,000 distribution from her Roth IRA. At the time of the distribution, the balance in the Roth IRA was $200,000. Lisa established the Roth IRA 8 years ago. Through a rollover and annual contributions, she has contributed $80,000 to her account. What amount of the distribution is taxable and subject to early distribution penalty? A. $0 B. $20,000 C. $30,000 D. $50,000 66. Lisa, age 45, needed some cash so she received a $50,000 distribution from her Roth IRA. At the time of the distribution, the balance in the Roth IRA was $200,000. Lisa established the Roth IRA 10 years ago. Over the years, she has contributed $20,000 to her account. What amount of the distribution is taxable and subject to early distribution penalty? A. $0 B. $5,000 C. $30,000 D. $50,000 67. Tyson (48 years old) owns a traditional IRA with a current balance of $50,000. The balance consists of $30,000 of deductible contributions and $20,000 of account earnings. Convinced that his marginal tax rate will increase in the future, Tyson receives a distribution of the entire $50,000 balance of his traditional IRA and he immediately contributes the $50,000 to a Roth IRA. Assuming his marginal tax rate is 25%, what amount of penalty, if any, must Tyson pay on the distribution from the traditional IRA? A. $0. B. $1,250. C. $3,750. D. $5,000. 68. Tyson (48 years old) owns a traditional IRA with a current balance of $50,000. The balance consists of $30,000 of deductible contributions and $20,000 of account earnings. Tyson's marginal tax rate is 25%. Convinced that his marginal tax rate will increase in the future, Tyson receives a distribution of the entire $50,000 balance of his traditional IRA. He retains $12,500 to pay tax on the distribution and he contributes $37,500 to a Roth IRA. What amount of income tax and penalty must Tyson pay on this series of transactions? A. $0 income tax; $0 penalty. B. $12,500 income tax; $1,250 penalty. C. $12,500 income tax; $3,000 penalty. D. $12,500 income tax; $5,000 penalty. E. $0 income tax; $5,000 penalty. 69. Congress allows self-employed taxpayers to deduct the cost of health insurance above the line (for AGI) because: A. employers are allowed to deduct social security (FICA) taxes as a business expense. B. self-employed taxpayers need an alternate mechanism for reducing the cost of health care. C. this deduction provides a measure of equity between employees and the self-employed. D. health insurance premiums cannot be deducted otherwise. E. None of these. 70. Which of the following is a true statement? A. Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax. BTo deduct expenses associated with any profit motivated activity taxpayers must maintain a high level . of involvement or effort in the activity throughout the year. C. Business activities never require a relatively high level of involvement or effort from the taxpayer. D. All business expenses are deducted for AGI. E. All of these are true.

71. Which of the following is a true statement? A. Individuals qualify for the moving expense deduction only if they change employers. BTo satisfy the distance test, the distance from the taxpayer's old residence to the new place of work must . be at least 50 miles more than the distance from the old residence to the old place of work. C. To satisfy the business test, the taxpayer must be employed full-time for 50 of the first 52 weeks after the move. D.The moving expense deduction is restricted to expenses associated with moving personal possessions to the new residence. E. All of these are true. 72. Which of the following is a true statement? A. The deduction for interest on educational loans is subject to a phase-out limitation. B. The deduction for moving expenses is subject to a phase-out limitation. C Self-employed taxpayers are allowed to deduct health care premiums even if the taxpayer is eligible to . participate in an employer-provided health plan. D. Taxpayers are not allowed to receive a moving allowance from their employers. E. All of these are false. 73. Which of the following is a true statement? A.For purposes of the deduction for educational interest, an educational loan must be used to pay tuition to any type of school. B. The maximum deduction for educational interest is $5,000 for married taxpayers filing jointly. C Self-employed taxpayers are not allowed to deduct health care premiums if the taxpayer is eligible to . participate in their spouse's employer-provided health plan. D. Self-employment taxes paid by self employed taxpayers are deductible as business expenses. E. All of these are true. 74. Which of the following is a true statement? A.For purposes of the deduction for educational interest, expenses do not include expenses for room and board and travel. BFor purposes of the deduction for educational interest, qualified education expenses are those paid for . the education of the taxpayer, the taxpayer's spouse, or a taxpayer's dependent. C. The maximum deduction for interest expense on qualified education loans is $6,000. D.A penalty paid for prematurely withdrawing a certificate of deposit or similar deposit is deductible as an investment expense. E. All of these are false. 75. This year, Jong paid $3,000 of interest on a qualified education loan. Jong files married joint and reports modified AGI of $137,000. What is Jong's deduction for interest expense on an educational loan? A. $2,500. B. $3,000. C. $1,500. D. $1,000. E. None of these. 76. Mason paid $4,100 of interest on a loan that paid tuition for him to attend a private university this year. How much of this payment can Mason deduct as a qualifying education expense if he files single and reports modified AGI of $90,000? A. $4,100. B. $4,000. C. $2,667. D. $2,000. E. None of these - no deduction is allowed.

77. This year Riley files single and reports AGI of $66,000. Riley paid $1,200 of interest on a qualified education loan. What amounts can Riley deduct for qualifying education interest? A. The deduction for qualifying education interest is $1,200. B. The deduction for qualifying education interest is $1,000. C. The deduction for qualifying education interest is $720. D. The deduction for qualifying education interest is $200. E. None of these - no deduction is allowed. 78. Han is a self-employed carpenter and his wife, Christine, works full-time as a grade school teacher. Han paid $525 for carpentry tools and supplies, and Christine paid $3,600 as her share of health insurance premiums for Han and herself in a qualified plan provided by the school district. Which of the following is a true statement? A. The tools and supplies are deductible for AGI while the health insurance is an itemized deduction. B. Both expenditures are deductible for AGI. C. The tools and supplies are an itemized deduction but the health insurance is deductible for AGI. D. Both expenditures are itemized deductions. E. Neither of the expenditures is deductible. 79. Bruce is employed as an executive and his wife, Marie, is a self-employed realtor. Besides Bruce's salary, Bruce and Marie own a warehouse that they rent to a local business for storage. This year they paid $1,250 for electric service in the warehouse. Marie also paid self-employment tax of $6,200 and Bruce had $7,000 of Social Security taxes withheld from his pay. Marie paid $45 fee to rent a safe deposit box to store records associated with her realty operation. Which of the following is a true statement? A. One-half of the social security tax is deductible for AGI. B. Only the electric bill is deductible for AGI. C. The self-employment tax is not deductible. D. The safe deposit fee and the electric bill are deductible for AGI. E. None of these is true. 80. Casey currently commutes 35 miles to work in the city. He is considering a new assignment in the suburbs on the other side of the city that would increase his commute considerably. He would like to accept the assignment, but he thinks it might require that he move to the other side of the city. Which of the following is a true statement? A.Casey can deduct moving expenses if the distance between his current residence and his new assignment is at least 50 miles. B.If Casey's move qualifies for the moving expense deduction, he can deduct the cost of meals while en route to his new residence. C To qualify for a moving expense deduction the new commute from Casey's current residence would . need to be a minimum of 85 miles. D If Casey's move qualifies for the moving expense deduction, he can deduct half the cost of meals while . en route to his new residence. E. All of these are false. 81. Jill currently lives in the suburbs and commutes 25 miles to her office in downtown Freeport. She is considering quitting her current job to look for new employment in the downtown area. Which of the following statements best describes how Jill can satisfy the distance test for deducting moving expenses if she accepts a new job in downtown Freeport? A. Jill must move at least 25 miles further away from downtown Freeport. B. Jill must move 25 miles east from downtown Freeport. C. Jill must move 50 miles further away from downtown Freeport. D. Jill need not move her residence because she is starting a new job. E. Jill cannot satisfy the distance test if she accepts a job in downtown Freeport.

82. Which of the following expenses can be deducted as moving expenses? 1. The cost of a trip to purchase a new residence 2. The cost of moving personal belongings 3. Lodging (one night) while en route 4. The cost of gasoline when traveling to the new residence 5. One-half of the cost of meals while en route to the new residence A. Numbers 1, 2, and 4 only. B. Numbers 1 through 3 only. C. Numbers 2 through 4 only. D. Numbers 2 through 5 only. E. All of these are deductible as moving expenses. 83. Brice is a single, self-employed electrician who earns $60,000 per year in self-employment income. Brice paid the following expenses this year. Which of the expenses are deductible for AGI? 1. The cost of health insurance 2. The employer portion of self-employment tax paid 3. Penalty on early withdrawal of funds from a certificate of deposit A. Numbers 1 and 2 only. B. Numbers 1 and 3 only. C. Numbers 2 and 3 only. D. None of these is deductible for AGI. E. All of these are deductible for AGI. 84. Hector is a married self-employed taxpayer, and this year he paid $3,000 for his health insurance premiums. Under which of the following alternative conditions can Hector deduct the cost of the premiums for AGI? A. Hector chose not to participate in the employer-sponsored plan of his spouse. B. Hector's spouse participates in an employer-sponsored plan but Hector is not eligible to participate in this plan. C.Neither Hector nor his spouse participates in an employer-sponsored plan although both are eligible to participate in a plan. D. Hector can deduct the health insurance premiums regardless of the insurance status of his spouse. E. None of these - health insurance premiums can only be deducted as an itemized deduction. 85. Lewis is an unmarried law student at State University, a qualified educational institution. Last year Lewis borrowed $30,000 and used the proceeds to pay his university tuition. This year Lewis paid $1,500 of interest on the loan. Which of the following is a true statement if Lewis reports $40,000 of salary and no other items of income or expense? A. Lewis can deduct all the interest on his student loan for AGI. B. Lewis can deduct all the interest on his student loan as an itemized deduction. C. Lewis can only deduct $1,000 of the interest on his student loan for AGI. D. Lewis can only deduct $1,000 of the interest on his student loan as an itemized deduction. E. All of these are false. 86. Grace is a single medical student at State University, a qualified educational institution. This year Grace paid university tuition of $12,000. Grace works part-time at the University library, and this year she reports $15,000 of salary and no other items of income or expense. Which of the following is a true statement? A. Grace can deduct all of her tuition for AGI as a business expense. B. Grace can deduct all of her tuition as a miscellaneous itemized deduction. C. Grace can only deduct half of her tuition for AGI as a business expense. D. Grace can only deduct half of her tuition as a miscellaneous itemized deduction. E. All of these are false.

87. This fall Manfred enrolled in the law school at State University (a qualified educational institution) and paid $6,200 in tuition. Until his enrollment Manfred worked as a stock broker and this year he reports $70,000 in wages. If Manfred files single and reports no other items of income or expense how much of the tuition can he deduct as a business expense? A. Manfred can deduct half of his tuition for AGI. B. Manfred can deduct half of his tuition as a miscellaneous itemized deduction. C. Manfred can deduct $6,200 for AGI. D. Manfred can deduct $6,200 as a miscellaneous itemized deduction. E. None - the tuition is not deductible as a business expense. 88. This fall Millie finally repaid her student loan. She originally borrowed the money to pay tuition several years ago when she attended at State University (a qualified educational institution). This year Millie paid a total of $2,400 of interest on the loan. If Millie files single and reports $65,000 of income and no other items of income or expense how much of the interest can she deduct? A. Millie can deduct $2,400 for AGI. B. Millie can deduct $1,600 for AGI. C. Millie can deduct $2,400 as an itemized deduction. D. Millie can deduct $2,000 as an itemized deduction. E. None - the interest is not deductible. 89. This fall Marsha and Jeff paid $5,000 for their son Josh's tuition and fees at State University (a qualified education institution). They also paid $1,000 for Josh's books. How much of these two payments can Marsha and Jeff deduct this year, assuming Josh is their dependent and their modified AGI is $135,000? A. Marsha and Jeff can deduct $5,000 for AGI. B. Marsha and Jeff can deduct $4,000 for AGI. C. Marsha and Jeff can deduct $2,500 for AGI. D. Marsha and Jeff can deduct $2,000 for AGI. E. None - the tuition is not deductible. 90. This fall, Josh paid $5,000 for his tuition and fees at State University (a qualified education institution). Assume that Josh is Marsha and Jeff's son and that Marsha and Jeff claim Josh as a dependent. Marsha and Jeff's modified AGI is $100,000. How much of Josh's $5,000 tuition and fees payments can Marsha and Jeff deduct this year? A. Marsha and Jeff can deduct $5,000 for AGI. B. Marsha and Jeff can deduct $4,000 for AGI. C. Marsha and Jeff can deduct $2,500 for AGI. D. Marsha and Jeff can deduct $2,000 for AGI. E. None - the tuition is not deductible by Marsha and Jeff. 91. Describe the three main loss limitations that taxpayers must overcome before deducting losses allocated to them from a specific activity.

92. Given that losses from passive activities can only offset income from passive activities unless the passive activity is sold, what types of activities are not considered to be passive? Name at least three ways a taxpayer may be treated as an active participant in an activity.

93. Roy, a resident of Michigan, owns 25 percent of a fourplex in the nearby college town of Ann Arbor with three other friends. The fourplex is rented to students who attend the University of Michigan. Roy's responsibility is to approve new tenants each year and take care of any maintenance issues. During the year, the rental property generated a $25,000 loss which was split equally among Roy and his three friends. Assuming Roy's only source of income was $145,000 of salary, how much of the rental loss can Roy deduct this year and what amount must be carried forward?

94. Judy, a single individual, reports the following items of income and loss:

Judy owns 100% of the rental property and actively participates in the rental of the property. Calculate Judy's AGI.

95. On January 1, 20X8, Jill contributed $18,000 of cash to the XYZ limited partnership for a 25 percent limited partnership interest (without management rights). On April 6, 20X8, XYZ, limited partnership distributed $2,000 to Jill. For the year ended December 31, 20X8, Jill received the following income/loss allocations from her partnership investments: (1) XYZ, limited partnership allocated a $5,000 loss to Jill (2) ABC limited partnership allocated $2,300 of income to Jill. Jill is a limited partner in ABC with no management rights. How much of the $5,000 loss from XYZ limited partnership can Jill deduct in 20X8?

96. Kristen rented out her home for 10 days during the year for $5,000. She used the home for personal purposes for the other 355 days. She allocated the following home expenses to the rental use of the home:

Kristen's AGI is $120,000 before considering the effect of the rental activity. What is Kristen's AGI after considering the tax effect of the rental use of her home?

97. Careen owns a condominium near Newport Beach in California. This year, she incurs the following expenses in connection with her condo:

During the year, Careen rented the condo for 90 days, receiving $20,000 of gross income. She personally used the condo for 50 days. Assuming Careen uses the IRS method of allocating expenses to rental use of the property. What is Careen's net rental income for the year?

98. Tyson owns a condominium near Laguna Beach, California. This year, he incurs the following expenses in connection with his condo:

During the year, Tyson rented the condo for 100 days, receiving $25,000 of gross income. He personally used the condo for 60 days. Assuming Tyson uses the Tax Court method of allocating expenses to rental use of the property. What is Tyson's net rental income for the year?

99. Rayleen owns a condominium near Orlando, Florida. This year, she incurs the following expenses in connection with her condo:

During the year, Rayleen rented the condo for 130 days and she received $25,000 of rental receipts. She did not use the condo at all for personal purposes during the year. Rayleen is considered to be an active participant in the property. Rayleen's AGI from all sources other than the rental property is $130,000. Rayleen does not have passive income from any other sources. What is Rayleen's AGI?

100.Ashton owns a condominium near San Diego, California. This year, he incurs the following expenses in connection with his condo:

During the year, Ashton rented the condo for 120 days and he received $24,000 of rental receipts. He did not use the condo at all for personal purposes during the year. Ashton is considered to be an active participant in the property. Ashton's AGI from all sources other than the rental property is $120,000. Ashton does not have passive income from any other sources. What is Ashton's AGI?

101.Don owns a condominium near Orlando, California. This year, he incurs the following expenses in connection with his condo:

During the year, Don rented the condo for 70 days and he received $17,400 of rental receipts. He did not use the condo at all for personal purposes during the year. Don is considered to be an active participant in the property. Don's AGI from all sources other than the rental property is $140,000. Don does not have passive income from any other sources. What is Don's AGI?

102.Mercury is self-employed and she uses a room in her home as her principal place of business. She meets clients there and doesn't use the room for any other purpose. The size of her home office is 400 square feet. The size of her entire home is 2,400 square feet. During the year, Mercury received $6,300 of gross income from her business activities and she reported $2,500 of business expenses unrelated to her home office. For her entire home in the current year, she reported $3,500 of mortgage interest, $1,000 of property taxes, $600 of insurance, $500 of utilities and other operating expenses, and $3,200 of depreciation expense. What amount of home office expenses is Mercury allowed to deduct in 2012? Indicate that amount and type of expenses she must carry over to the next year, if any.

103.Alfredo is self-employed and he uses a room in his home as his principal place of business. He meets clients there and doesn't use the room for any other purpose. The size of his home office is 600 square feet. The size of his entire home is 3,000 square feet. During the current year, Alfredo received $10,000 of gross income from his business activities and he reports $7,500 of business expenses unrelated to his home office. For his entire home, he reported $10,000 of mortgage interest, $2,000 of property taxes, $2,500 of home operating expenses, and $4,500 of depreciation expense. What amount of home office expenses is Alfredo allowed to deduct in the current year? Indicate the amount and type of expenses he must carry over to next year, if any.

104.In 2012, Tyson (age 22) earned $3,500 from his part-time job and he reported $15,000 of interest income (unearned income). Assuming he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2012?

105.In 2012, Tyson (age 52) earned $50,000 of salary. Assuming he does not participate in an employersponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2012?

106.In 2012, Madison is a single taxpayer who is 25 years of age. During 2012, she contributed $3,000 to her employer sponsored 401(k) account. Her 2012 AGI was $62,500 (before considering IRA deductions). What is the maximum deductible contribution, if any, that Madison can make her to IRA?

107.Carmello and Leslie (ages 34 and 35, respectively) are married and want to contribute to a Roth IRA. In 2012, their AGI totaled $42,000. Of the $42,000, Carmello earned $35,000 and Leslie earned $7,000. How much can each spouse contribute to a Roth IRA if they file jointly? How much can each spouse contribute to a Roth IRA if they file separately?

108.Cassandra, age 33, has made deductible contributions to her traditional IRA over the years. When the balance in her IRA was $40,000, Cassandra received a distribution of $34,000 from her IRA in order to purchase a new car. How much of the $34,000 distribution will she have remaining after paying income taxes and early distribution penalties on the distribution? Her marginal tax rate is 25 percent.

109.Ryan, age 48, received an $8,000 distribution from his traditional IRA to pay for medical expenses. Ryan has made only deductible contributions to the IRA and his marginal tax rate is 28 percent. What amount of taxes and early distribution penalties will Ryan be required to pay on the distribution?

110.Tatia, age 38, has made deductible contributions to her traditional IRA over the past few years. When her account balance was $32,000, she transferred the entire $32,000 out of her traditional IRA and immediately into a Roth IRA. Her current marginal tax rate is 25 percent. What amount of tax and penalty is she required to pay on this rollover?

111.Tatia, age 38, has made deductible contributions to her traditional IRA over the past few years. When her account balance was $30,000, she received a distribution of the entire $30,000 balance of her traditional IRA. She retained $5,000 of the distribution to help her pay the taxes due on the distribution and she immediately contributed the remaining $25,000 to a Roth IRA. What amount of tax and early distribution penalty is she required to pay on the $30,000 distribution from the traditional IRA if her marginal tax rate is 25 percent?

112.Scott is a self employed plumber and his wife, Emily, is a full-time employee for the University. Emily has health insurance from a qualified plan provided by the University, but Scott has chosen to purchase his own health insurance rather than participate in Emily's plan. Besides paying $5,400 for his health insurance premiums, Scott also pays the following expenses associated with his plumbing business:

What is the amount of deductions for AGI that Scott can claim this year (2012)?

113.Constance currently commutes 25 miles from her house to her existing part time job in the suburbs. Next week she begins a new full time job in another state, and this job location is 105 miles from her existing home. Because of the additional distance Constance is selling her house, and she has rented an apartment that is only 2 miles from her new job. Constance expects to pay the following moving expenses.

Determine if this move qualifies for a moving expense deduction and calculate the amount (if any) of the deduction.

114.Alexandra operates a garage as a sole proprietorship. Alexandra also owns a half interest in a partnership that operates a gas station. This year Alexandra paid or reported the following expenses related to her garage and other property. Determine Alexandra's AGI for 2012.

115.Last year Henry borrowed $15,000 to help pay for his dependent daughter's college tuition. This year Henry paid $2,800 of interest on the loan. How much, if any, interest can Henry deduct if he files single with AGI of $67,500?

116.Collin and Christine are married and file joint. Their dependent son, Trevor, is a full-time college student at a qualified educational institution. This year Collin and Christine borrowed $30,000 to pay for Trevor's tuition ($22,000) and room and board ($8,000). At year end Collin paid $3,200 in interest on the loan. What amounts can Collin and Christine deduct for interest and education expenses if they estimate that their AGI will be $128,000 absent any deductions for AGI?

117.Kaylee is a self-employed investment counselor who also owns a rental property. This year, she collected $85,000 in fees and paid the following expenses:

Kaylee files single with one personal exemption. Calculate her adjusted gross income.

118.This year Tiffanie files as a single taxpayer. Tiffanie received $57,700 of salary and paid $3,200 of qualified educational interest. This year Tiffanie has also paid deductible moving expenses of $2,200 and received $12,000 of alimony. What is Tiffanie's AGI?

ch06 Key
1. TRUE 2. FALSE 3. FALSE 4. TRUE 5. TRUE 6. TRUE 7. FALSE 8. TRUE 9. FALSE 10. TRUE 11. FALSE 12. TRUE 13. TRUE 14. TRUE 15. TRUE 16. FALSE 17. TRUE 18. FALSE 19. TRUE 20. TRUE 21. TRUE 22. TRUE 23. TRUE 24. FALSE 25. FALSE 26. TRUE 27. TRUE 28. TRUE 29. FALSE 30. TRUE 31. FALSE 32. FALSE 33. FALSE 34. TRUE 35. TRUE 36. A

37. B 38. C 39. D 40. C 41. D 42. E 43. B 44. D 45. D 46. B 47. A 48. E 49. B 50. D 51. B 52. C 53. E 54. A 55. C 56. A 57. C 58. D 59. D 60. B 61. D 62. D 63. C 64. A 65. A 66. C 67. A 68. B 69. C 70. A 71. B 72. A 73. C 74. B

75. C 76. E 77. C 78. A 79. D 80. C 81. E 82. C 83. E 84. B 85. A 86. E 87. E 88. B 89. D 90. E Passive loss limits - limits the amount of loss from any passive activity (activities in which the taxpayer does not materially participate) to the taxpayer's passive income for the year. Limited partnership interests (without management rights) and rental activities are generally considered to be passive activities. Losses limited by the passive activity loss rules are carried forward until the taxpayer generates passive income or until the taxpayer disposes of the activity producing the passive losses. At-risk amount - limits the amount of deductible loss to the amount the taxpayer has at risk in the activity. Generally, the taxpayer's at risk amount corresponds to his tax basis except that debt allocated to the taxpayer and included in tax basis may not be included in the taxpayer's amount at risk - i.e., the types of debt that increase a taxpayer's at-risk amount is more restrictive than the types of debt that increase tax basis. Losses limited by the taxpayer's amount at risk are carried forward and deducted when the taxpayer's amount at risk becomes positive again. 91. Tax basis - limits the amount of deductible loss to the tax basis the taxpayer has in the activity. Thus, losses from an activity may not reduce the tax basis in that activity below zero. Losses in excess of the taxpayer's basis are carried forward until the taxpayer's basis becomes positive again.

7. Taking into account all the facts and circumstances, the individual participates on a regular, continuous, and substantial basis during the year. 6. The individual materially participated for any three preceding years in any personal service activity (personal services in health, law, accounting, architecture, etc). 5. The individual materially participated in the activity for any five of the preceding 10 taxable years. 4. The activity qualifies as a "significant participation activity" (more than 100 hours) and the aggregate of all "significant participation activities" is greater than 500 hours for the year. 3. The individual participates more than 100 hours during the year, and the individual's participation is not less than any other individual's participation in the activity. 2. The individual's activity constitutes substantially all of the participation in such activity by all individuals including non-owners. 1. The individual participates in the activity more than 500 hours during the year. 92. To be considered an active participant in an activity, a taxpayer must materially participate in the activity. An individual will qualify as a material participant in an activity if any one of the seven tests below is satisfied:

Carried forward: $6,250 - $2,500 = $3,750 Deducted for current year: $2,500 Step 3: Rental loss allowed to be deducted for current year and amount carried forward $25,000 - [($145,000 - $100,000) x .5] = $2,500 Step 2: Maximum deduction for current year $25,000/4 = $6,250 Step 1: Portion of rental loss to Roy Feedback: See calculations below: 93. Current year deduction - $2,500 and carried forward amount - $3,750

Feedback: See calculations below: 94. $105,000

Jill has sufficient tax basis and amount at-risk in XYZ to deduct her $5,000 loss allocation from XYZ; however, she must assess how much passive income she has from other sources that she may offset with her $5,000 passive loss from XYZ. Because she is a limited partner without management rights in XYZ and ABC, her losses and income from these activities are considered to be passive. The only passive income she has is $2,300 from ABC. Thus, she would only be allowed to deduct $2,300 of her $5,000 loss from XYZ this year and must carry forward $2,700 of the remaining loss until she generates additional passive income in the future or sells her interest in XYZ. Feedback: See calculations below: 95. $2,300 of loss from XYZ is deducted in 20X8.

Feedback: She ignores the income and the expenses. 96. $120,000

Feedback: See calculations below 97. $5,633

Feedback: See calculations below 98. $16,317

Feedback: $130,000 + 2,550. 99. $132,550

Feedback: $120,000 + (400). 100. $119,600

Because Don is an active participant in the property, he is allowed to deduct ($5,000) of the passive loss this year [$25,000 active participant maximum less $25,000 (140,000 - 100,000) *.5].

Feedback: $140,000 + (5,000). 101. $135,000

Feedback: See computation below 102. $1,466, no carry over

Alfredo reports $2,500 of income before deducting home office expenses. His expenses reduce his net business income to $0, but he must carryover $400 of home operating expenses and all $900 of depreciation expenses. Feedback: See computation and discussion below. 103. Alfredo is allowed to deduct $2,500 of home office expenses. He must carryover, $400 of home operating expenses and $900 of depreciation expense.

Feedback: Deductible contributions to an IRA are limited to the lesser of $5,000 or earned income. 104. $3,500

Feedback: The maximum deductible contribution to an IRA in 2012 is $5,000. Taxpayers who are at least 50 years of age at the end of the year may deduct an additional $1,000. 105. $6,000.

Feedback: Because she participates in an employer-sponsored retirement plan, her contribution is subject to phase out. Before phase-out, the maximum deductible contribution is $5,000. Because her AGI is 45 percent of the way through the $58,000 - $68,000 phase-out range for a single taxpayer (4,500/10,000), her deductible contribution is phased-out or reduced by $2,250 ($5,000 .45). Thus, the maximum deductible contribution is $2,750 ($5,000 - 2,250). 106. $2,750

Feedback: If the couple files jointly, Carmello and Leslie can each contribute $5,000 to Roth IRAs because their AGI is below the beginning of the phase out range ($173,000). However, if they file separately, contributions are phased out for AGI between $0 and $10,000. Because Carmello's AGI exceeds $10,000 he is not allowed to contribute. Because Leslie's AGI is 70 percent of the way through the phase-out range, she must phase out or reduce the $5,000 contribution by 70 percent. Consequently, she is allowed to contribute $1,500 ($5,000 - (70% 5,000)). 107. If they file jointly, each spouse can contribute $5,000. If they file separately, Carmello cannot contribute to a Roth IRA and Leslie can contribute $1,500.

Feedback: She must pay $8,500 income taxes on the distribution ($34,000 25%). In addition, she must pay a 10 percent early distribution penalty of $3,400 ($34,000 distribution 10%). This leaves her with $22,100 after tax and penalties ($34,000 - $8,500 taxes - $3,400 penalties) to purchase the car. 108. $22,100

Feedback: The full distribution is subject to income tax at 28 percent ($8,000 28% = $2,240). However, because the distribution was used to pay qualified medical expenses, it is not subject to the 10-percent early distribution penalty. 109. $2,240 tax; $0 penalty.

Feedback: She is taxed on the full amount transferred out of the traditional IRA ($32,000 25%). Because she transferred the entire balance into a Roth IRA within the required time period, she is not required to pay an early distribution penalty. 110. $8,000 tax; $0 penalty.

Feedback: Tatia is taxed at 25 percent on the full $30,000 distribution ($30,000 25%). She also must pay a 10% penalty on the $5,000 distribution she received but did not contribute to the Roth IRA ($5,000 10%). 111. $7,500 income tax; $500 early distribution penalty.

Feedback: $15,530 = $1,300 + $6,250 + $500 + $50 + $7,200 + ($400 * .5751). All of the expenses are deductible for AGI except for Scott's health insurance and .5751 of the self employment tax. 112. $15,530

Feedback: The move qualifies under the distance test (commute of 25 miles is extended by 80 miles to 105 miles) and the transportation and the moving van is deductible for AGI. 113. The move qualifies for a deduction of $834.

Feedback: All of the expenses are deductible, except only .5751 of the self-employment tax is deductible ($5,864). 114. $77,156

Feedback: The deduction for student loan interest is reduced for single taxpayers with AGI above $60,000 but below $75,000. The deduction is the amount paid up to $2,500, reduced by the phase-out percentage. The percentage is equal to $67,500 less $60,000 divided by $15,000. In this problem, there is a phase out of 50 percent ($7,500/$15,000) thereby reducing the amount paid up to $2,500 (in this case, $2,500) to a deduction of $1,250 [$2,500 - ($2,500 x ($7,500/$15,000)) = $1,250]. 115. $1,250

Feedback: The deduction for student loan interest is reduced for taxpayers with AGI above $125,000 but below $155,000. The deduction is the amount paid up to $2,500, reduced by the phase-out percentage. The percentage is equal to $128,000 less $125,000 divided by $30,000. This results in a phase out of 10 percent ($3,000/$30,000) thereby reducing the maximum to $2,250 [$2,500 - ($2,500 x ($3,000/$30,000)) = $2,250]. Since Collin and Christine's modified AGI does not exceed $130,000, they may deduct the $22,000 tuition expense paid up to the $4,000 maximum deduction. 116. $2,250 for interest and $4,000 for qualified education expenses.

Feedback: All of the expenses are deductible for AGI (self employed trade or rental activity) except only .5751 of the self employment taxes ($5,865) is deductible and the whole life insurance premiums and state income taxes are not deductible. 117. $72,515 = $85,000 - $12,485

Feedback: The alimony and salary are income, and the moving expense and part of the educational interest are deductible for AGI. Tiffanie's maximum educational interest deduction (amount paid up to $2,500) is limited to $1,250. The deduction for educational interest ($2,500) is subject to phase-out because Tiffanie's modified AGI exceeds $60,000. The phase out is calculated by subtracting $60,000 from Tiffanie's modified AGI ($57,700 + $12,000 - $2,200 = $67,500) and dividing by $15,000 as follows: $2,500 * [($67,500 - $60,000)/$15,000] = $1,250. Thus, the amount deductible is $1,250 [$2,500 - $1,250 = $1,250]. 118. $66,250 ($57,700 + $12,000 - $2,200 -$1,250 = $66,250)

ch06 Summary
Category AACSB: Analytic AACSB: Reflective Thinking AICPA BB: Critical Thinking Blooms: Analyze Blooms: Apply Blooms: Remember Blooms: Understand Learning Objective: 06-01 Identify the for AGI deductions directly related to business activities. Learning Objective: 062 Describe the loss limitation rules for passive activities; the rental use of a home; and home office deductions. Learning Objective: 063 Explain the for AGI deductions indirectly related to business activities and for AGI deductions that subsidize specific activities. Level of Difficulty: 1 Easy Level of Difficulty: 2 Medium Level of Difficulty: 3 Hard Spilker - Chapter 06 # of Questions 22 113 118 50 20 34 23 7 56 55 33 73 12 118