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Exam 10: Individuals: Income, deductions, and Credits

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Question 1

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George and Erin are divorced,and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is required to include the alimony payments in gross income although George earned the income.

A) True
B) False

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Question 2

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Workers' compensation benefits are included in gross income if the employer also pays the employee while the employee is recovering from his or her injury.

A) True
B) False

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Question 3

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Which of the following items would be an itemized deduction on Schedule A of Form 1040 not subject to the 2%-of-AGI floor?

Joseph and Sandra,married taxpayers,took out a mortgage on their home for $350,000 15 years ago.In May of this year,when the home had a fair market value of $450,000 and they owed $250,000 on the mortgage,they took out a home equity loan for $220,000.They used the funds to purchase a single engine airplane to be used for recreational travel purposes.What is the maximum amount of debt on which they can deduct home equity interest?

Joe,who is in the 33% tax bracket this year,expects to retire next year and be in the 25% tax bracket.He plans to donate $50,000 to his church.Because he will not have the cash available until next year,Joe donates land (long-term capital gain property)with a basis of $10,000 and fair market value of $50,000 to the church in December of the current year.He reacquires the land for $50,000 in February of next year.Discuss Joe's tax objectives and all tax issues related to his actions.

Which of the following is not a requirement for an alimony deduction?

Child and dependent care expenses include amounts paid for general household services.

Jermaine and Kesha are married,file a joint tax return,have AGI of $82,500,and have two children.Devona is beginning her freshman year at State University during Fall 2015,and Arethia is beginning her senior year at Northeast University during Fall 2015 after having completed her junior year during the spring of that year.Both Devona and Arethia are claimed as dependents on their parents' tax return.Devona's qualifying tuition expenses and fees total $4,000 for the fall semester,while Arethia's qualifying tuition expenses and fees total $6,200 for each semester during 2015.Full payment is made for the tuition and related expenses for both children during each semester.The American Opportunity credit available to Jermaine and Kesha for 2015 is:

Judy paid $40 for Girl Scout cookies and $40 for Boy Scout popcorn.Judy may claim an $80 charitable contribution deduction.

Child care payments to a relative are not eligible for the credit for child and dependent care expenses if the relative is a child (under age 19)of the taxpayer.

Ross,who is single,purchased a personal residence eight years ago for $170,000 and took out a mortgage of $100,000 on the property.In May of the current year,when the residence had a fair market value of $220,000 and Ross owed $70,000 on the mortgage,he took out a home equity loan for $110,000.He used the funds to purchase a BMW for himself and a Lexus SUV for his wife.For both vehicles,100% of the use is for personal activities.What is the maximum amount on which Ross can deduct home equity interest?

Joe,a cash basis taxpayer,took out a 12-month business loan on December 1,2015.He prepaid all $3,600 of the interest on the loan on December 1,2015.Joe can deduct only $300 of the prepaid interest in 2015.

Brooke works part-time as a waitress in a restaurant.For groups of 7 or more customers,the customer is charged 15% of the bill for Brooke's services.For parties of less than 7,the tips are voluntary.Brooke received $11,000 from the groups of 7 or more and $7,000 in voluntary tips from all other customers.Using the customary 15% rate,her voluntary tips would have been only $6,000.Brooke must include $18,000 ($11,000 + $7,000)in gross income.

Excess charitable contributions that come under the 30%-of-AGI ceiling are always subject to the 30%-of-AGI ceiling in the carryover year.

A taxpayer's earned income credit is dependent on the number of his or her qualifying children.

Georgia contributed $2,000 to a qualifying Health Savings Account in the current year.The entire amount qualifies as an expense deductible for AGI.

Which of the following statements regarding the adoption expenses credit is not true?

In 2015,Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2016,Theresa collected from his insurance company.She received $15,000 for loss of income,$10,000 for pain and suffering,$50,000 for punitive damages,and $6,000 for medical expenses which she had deducted on her 2015 tax return (the amount in excess of 10% of adjusted gross income).As a result of the above,Theresa's 2016 gross income is increased by $56,000.

The child tax credit is based on the number of the taxpayer's qualifying children under age 17.

For purposes of computing the credit for child and dependent care expenses,the qualifying employment-related expenses are limited to an individual's actual or deemed earned income.