Exam 5: Deductions for Individuals and Tax Determination

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. a. If they itemize, what is their taxable income for 2018 and their income tax? b. How would your answers change if they claimed the standard deduction instead of itemizing?

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(Essay)

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Question 1

Correct Answer:

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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.
b. 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).

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.

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(True/False)

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Question 2

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True

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

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(True/False)

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Question 3

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True

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.

(Multiple Choice)

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Question 4

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

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Question 5

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

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Question 6

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?

(Multiple Choice)

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Question 7

Which of the following is a requirement to file for head of household?

(Multiple Choice)

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Question 8

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?

(Multiple Choice)

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Question 9

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

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Question 10

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?

(Multiple Choice)

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Question 11

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.

(True/False)

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Question 12

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

(True/False)

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Question 13

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

(True/False)

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Question 14

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

(True/False)

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Question 15

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?

(Multiple Choice)

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Question 16

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?

(Multiple Choice)

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Question 17

In 2018, which of the following is allowed as an addition to a nonitemizer's standard deduction?

(Multiple Choice)

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Question 18

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

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Question 19

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?

(Multiple Choice)

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Question 20

Showing 1 - 20 of 120

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.

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

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

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

Which of the following is a requirement to file for head of household?

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

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?

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.

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

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

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

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?

In 2018, which of the following is allowed as an addition to a nonitemizer's standard deduction?

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

Introduction to Taxation

The Tax Practice Environment

Determining Gross Income

Employee Compensation

Business Expenses

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Tax-Deferred Exchanges

Taxation of Corporations

Sole Proprietorships and Flow-Through Entities

Estates, Gifts, and Trusts

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