Chapter 06 Test Bank

1. Award: 1.
00 point
The profit motive distinguishes "business" activities from "personal" activities.
 True
 False
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True / False Difficulty: 1 Easy Learning Objective: 06-01 Identify the common deductions
necessary for calculating adjusted gross income (AGI).
2. Award: 1.00 point
All business expense deductions are claimed as "from" AGI deductions.
 True
 False
Most business expenses are claimed as for AGI deductions.
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True / False Difficulty: 2 Medium Learning Objective: 06-01 Identify the common deductions
All investment expenses are itemized deductions.
 True
 False
Rental/royalty deductions are for AGI deductions.
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Rental or royalty expenses are deductible "for" AGI.
 True
 False
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To be deductible, business expenses must be directly related to a business activity.
 True
 False
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To be deductible, business expenses must be appropriate and helpful for generating a profit.
 True
 False
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All reasonable moving expenses are deductible by employees.
 True
 False
Moving expenses are generally not deductible.
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Self-employed taxpayers can deduct the cost of health insurance as a "for" AGI deduction as long as they do not actually participate in their spouses' employer-
provided health plans.
 True
 False
A self-employed individual cannot be eligible to participate in a plan.
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True / False Difficulty: 3 Hard Learning Objective: 06-01 Identify the common deductions
Self-employed taxpayers can choose between claiming a deduction or a credit for the employer portion of self-employment taxes paid.
 True
 False
A for AGI deduction for the employer portion of the SE tax is available.
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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, reducing the amount of gross income reported.
 True
 False
The early withdrawal penalty is treated as a for AGI deduction.
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Excess business losses are carried back and then forward.
 True
 False
Excess business losses are carried forward.
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Excess business losses in 2020 are carried back and then forward.
 True
 False
Excess business losses are fully deductible in 2020.
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For married taxpayers filing separately, excess business losses are defined as aggregate business deductions over the sum of aggregate business gross
income or gain of the taxpayer plus $259,000.
 True
 False
The threshold amount for all taxpayers other than those married filing jointly is $259,000.
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For married taxpayers filing separately, excess business losses are fully deductible in 2020.
 True
 False
Under the CARES Act, the excess business loss limitation for individuals does not apply in 2020.
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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
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The medical expense deduction is designed to provide relief for doctors and medical practitioners.
 True
 False
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True / False Difficulty: 1 Easy Learning Objective: 06-02 Describe the different types of itemized
deductions available to individuals.
Deductible medical expenses include payments to medical care providers such as doctors, dentists, and nurses and medical care facilities such as hospitals.
 True
 False
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True / False Difficulty: 2 Medium Learning Objective: 06-02 Describe the different types of itemized
Taxpayers traveling for the primary purpose of receiving essential and deductible medical care may deduct the cost of travel.
 True
 False
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The deduction for medical expenses is limited to the amount of unreimbursed qualifying medical expenses paid during the year reduced by 2 percent of the
taxpayer's AGI.
 True
 False
10 percent of AGI is the floor limit.
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The itemized deduction for taxes includes all types of state, local, and foreign taxes.
 True
 False
The deduction is limited to state, local, and foreign income (or sales taxes); state or local property taxes; and state or local personal property taxes, based on
value.
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True / False Difficulty: 3 Hard Learning Objective: 06-02 Describe the different types of itemized
Taxpayers may elect to deduct state and local sales taxes instead of deducting state and local income taxes.
 True
 False
Taxpayers may elect to deduct state and local sales taxes in lieu of deducting state and local income taxes.
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Taxpayers are allowed to deduct mortgage interest on up to $1,000,000 of acquisition debt for their qualified residence if the acquisition debt is incurred after
December 15, 2017.
 True
 False
The limit is $750,000 for acquisition debt incurred after December 15, 2017.
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The deduction for investment interest in excess of the net investment income carries forward to the subsequent year.
 True
 False
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To qualify as a charitable deduction, the donation must be made by cash or by check.
 True
 False
Donations of property also qualify.
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In general, taxpayers are allowed to deduct the fair market value of long-term capital gain property on the date of the donation to a qualified charitable
organization.
 True
 False
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The deduction to individual taxpayers for charitable contributions paid in cash to public charities is limited to 10 percent of the taxpayer’s AGI.
 True
 False
60 percent of AGI is the ceiling for donations of cash to public charities.
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In 2020, the deduction to individual taxpayers for charitable contributions paid in cash to public charities is limited to 10 percent of the taxpayer’s AGI.
 True
 False
Under the CARES Act, cash contributions to charitable organizations (except contributions to donor advised funds or Section 509(a)(3) supporting
organizations) are not subject to limit in 2020.
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Unreimbursed employee business expenses and hobby expenses are not deductible.
 True
 False
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Bunching itemized deductions is one form of tax evasion.
 True
 False
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True / False Difficulty: 1 Easy Learning Objective: 06-03 Determine the standard deduction
available to individuals.
Taxpayers generally deduct the lesser of their standard deduction or their itemized deductions.
 True
 False
Taxpayers generally deduct the greater of their standard deduction or their itemized deductions.
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True / False Difficulty: 1 Easy Learning Objective: 06-03 Determine the standard deduction
Taxpayers filing single and taxpayers filing married separate have the same basic standard deduction amount.
 True
 False
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True / False Difficulty: 2 Medium Learning Objective: 06-03 Determine the standard deduction
An individual who is eligible to be claimed as a dependent on another's return and has $1,000 of earned income may claim a standard deduction of $1,350.
 True
 False
The dependent may claim a standard deduction for the greater of (1) $1,100 or (2) $350 plus her $1,000 earned income = $1,350.
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True / False Difficulty: 2 Medium Learning Objective: 06-03 Determine the standard deduction
Generally, service businesses are considered qualified trade or businesses for purposes of the deduction for qualified business income.
 True
 False
Service businesses are generally excluded from the definition of qualified trade or businesses for purposes of the deduction.
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True / False Difficulty: 2 Medium Learning Objective: 06-04 Calculate the deduction for qualified
business income.
Congress allows self-employed taxpayers to deduct the cost of health insurance for AGI because:
 employers are allowed to deduct Social Security (FICA) taxes as a business expense
 self-employed taxpayers need an alternate mechanism for reducing the cost of health care
 this deduction provides a measure of equity between employees and the self-employed
 health insurance premiums cannot be deducted otherwise
 None of the choices are correct.
Employers are allowed to deduct the premium as a compensation expense, and employees are allowed to exclude from taxable income the value of the
premiums paid on their behalf.
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Multiple Choice Difficulty: 2 Medium Learning Objective: 06-01 Identify the common deductions
Which of the following is a true statement?
 Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax
 To deduct expenses associated with any profit-motivated activity, taxpayers must maintain a high level of involvement or effort in the activity
throughout the year
 Business activities never require a relatively high level of involvement or effort from the taxpayer
 All business expenses are deducted for AGI
 All of these choices are correct.
See discussion of the self-employment deduction in the text.
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Multiple Choice Difficulty: 3 Hard Learning Objective: 06-01 Identify the common deductions
 Unreimbursed employee business expenses are not deductible
 Investment advisory expenses are not deductible
 Business deductions are one of the most common deductions for AGI, but they are not readily visible on Schedule 1 of Form 1040
 The distinction between business and investment expenses is critical for determining whether a deduction is claimed for AGI, or as an itemized
deduction, or not at all
 All of these choices are correct.
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 Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax
 To deduct expenses associated with any profit-motivated activity, taxpayers must maintain a high level of involvement or effort in the activity
throughout the year
 Business activities never require a relatively high level of involvement or effort from the taxpayer
 All business expenses are deducted for AGI
See discussion of the self-employment deduction in the text.
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 Individuals qualify for the moving expense deduction only if they change employers
 Individuals qualify for the moving expense deduction if their employer does not pay for the moving expenses
 Moving expenses are deductible from AGI
 Moving expenses are generally not deductible.
Moving expenses are not deductible except for members of the Armed Forces.
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 The deduction for interest on educational loans is subject to a phase-out limitation
 The deduction for moving expenses is subject to a phase-out limitation
 Self-employed taxpayers are allowed to deduct health care premiums even if the taxpayer is eligible to participate in an employer-provided health
plan
 Excess business losses are deductible up to $100,000
 All of these choices are false.
Self-employed taxpayers are not allowed to deduct health care premiums if they are eligible to participate in an employer-provided health plan.
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 For purposes of the deduction for educational interest, an educational loan must be used to pay tuition to any type of school
 The maximum deduction for educational interest is $5,000 for married taxpayers filing jointly
 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
 Self-employment taxes paid by self-employed taxpayers are deductible as business expenses
Simply being eligible to participate in a spouse's employer-provided health plan precludes the deduction for health care premiums for self-employed taxpayers.
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 For purposes of the deduction for educational interest, expenses do not include expenses for room, board, and travel
 For purposes of the deduction for educational interest, qualified education expenses are those paid for the education of the taxpayer, the
taxpayer's spouse, or the taxpayer's dependent
 The maximum deduction for interest expense on qualified education loans is $6,000
 A penalty paid for prematurely withdrawing a certificate of deposit or similar deposit is deductible from AGI as an investment expense
Penalties for early withdrawal are deductible for AGI.
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This year, Jong paid $3,000 of interest on a qualified education loan. Jong files married filing jointly and reports modified AGI of $152,000. What is Jong’s
deduction for interest expense on an educational loan?
 $2,500
 $3,000
 $1,500
 $1,000
2020 phase-out percentage = [$152,000 − $140,000] ÷ $30,000 = 40%; maximum = $2,500 × (1 − 40%) = $1,500.
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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 interest
expense on an educational loan if he files single and reports modified AGI of $90,000?
 $4,100
 $4,000
 $2,667
 $2,000
 None of the choices are correct.
The deduction is eliminated for single taxpayers with modified AGI over $85,000 (2020).
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This year Riley files single and reports modified AGI of $76,000. Riley paid $1,200 of interest on a qualified education loan. What amounts can Riley deduct for
qualifying education interest?
 The deduction for qualifying education interest is $1,200
 The deduction for qualifying education interest is $1,000
 The deduction for qualifying education interest is $720
 The deduction for qualifying education interest is $200
Riley may deduct the amount paid ($1,200) up to $2,500, reduced by the phase-out amount. The phase-out amount is the amount paid up to $2,500 ($1,200
for Riley) multiplied by 40 percent [(76,000 − 70,000) ÷ 15,000 = 40%]. Hence, Riley may deduct $720 [$1,200 − ($1,200 × 40%) = $720].
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Max, a single taxpayer, has a $270,000 loss from his sole proprietorship. How much of this loss is deductible after considering the excess business loss rules?
 $270,000
 $259,000
 $11,000
 $0
The nondeductible excess business loss is $11,000 (the taxpayer’s aggregate business deductions ($270,000) over the sum of his business gross income, $0
and $259,000).
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Max, a single taxpayer, has a $270,000 loss from his sole proprietorship in 2020. How much of this loss is deductible after considering the excess business
loss rules?
 $270,000
 $259,000
 $11,000
 $0
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Max, a single taxpayer, has a $270,000 loss from his sole proprietorship. How much of this loss is not deductible after considering the excess business loss
rules?
 $270,000
 $259,000
 $11,000
 $0
The nondeductible excess business loss is $11,000 (the taxpayer’s aggregate business deductions ($270,000) over the sum of his business gross income, $0
and $259,000).
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Max, a single taxpayer, has a $270,000 loss from his sole proprietorship in 2020. How much of this loss is not deductible after considering the excess business
loss rules?
 $270,000
 $259,000
 $11,000
 $0
Under the CARES Act, the excess business loss limitation for individuals does not apply in 2020
References
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 (not with pretax dollars) for Han and herself in a qualified plan provided by the school district
(not through an exchange). Which of the following is a true statement?
 The tools and supplies are deductible for AGI while the health insurance is an itemized deduction
 Both expenditures are deductible for AGI
 The tools and supplies are an itemized deduction but the health insurance is deductible for AGI
 Both expenditures are itemized deductions
 Neither of the expenditures is deductible.
Business expenses for self-employed individuals are Schedule C deductions but health insurance premiums are itemized deductions if the taxpayers are
eligible to participate in an employer-provided health plan.
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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 a $45 fee to rent a safe-deposit box to store records associated with her realty operation.
 One-half of the Social Security tax is deductible for AGI
 Only the electric bill is deductible for AGI
 The self-employment tax is not deductible
 The safe-deposit fee and the electric bill are deductible for AGI
The safe-deposit fee is a business expense, and the electric bill is a rental expense. The employer portion of the self-employment taxes is deductible for AGI.
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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 (not purchased through an exchange)

2. The employer portion of self-employment tax paid
3. Penalty on early withdrawal of funds from a certificate of deposit
 Numbers 1 and 2 only
 None of the choices is deductible for AGI.
 All of these choices are deductible for AGI.
All of these expenditures are deductible for AGI.
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Multiple Choice Difficulty: 1 Easy Learning Objective: 06-01 Identify the common deductions
Hector is a married, self-employed taxpayer, and this year he paid $3,000 for his health insurance premiums (not through an exchange). Under which of the
following alternative conditions can Hector deduct the cost of the premiums for AGI?
 Hector chose not to participate in the employer-sponsored plan of his spouse
 Hector's spouse participates in an employer-sponsored plan, but Hector is not eligible to participate in this plan
 Neither Hector nor his spouse participates in an employer-sponsored plan although both are eligible to participate in a plan
 Hector can deduct the health insurance premiums regardless of the insurance status of his spouse
 None of the choices – health insurance premiums can only be deducted as an itemized deduction.
Health insurance premiums for the self-employed are deductible for AGI if the taxpayer is not eligible to participate in an employer-provided plan.
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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?
 Lewis can deduct all the interest on his student loan for AGI
 Lewis can deduct all the interest on his student loan as an itemized deduction
 Lewis can only deduct $1,000 of the interest on his student loan for AGI
 Lewis can only deduct $1,000 of the interest on his student loan as an itemized deduction
Up to $2,500 of interest on student loans is deductible for AGI. The interest deduction is phased out for single taxpayers with AGI exceeding $70,000.
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Multiple Choice Difficulty: 1 Easy Learning Objective: 06-01 Identify the common deductions
This fall Millie finally repaid her student loan. She originally borrowed the money to pay tuition several years ago, when she attended 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 $75,000 of income and no other
items of income or expense, how much of the interest can she deduct?
 Millie can deduct $2,400 for AGI
 Millie can deduct $1,600 for AGI
 Millie can deduct $2,400 as an itemized deduction
 Millie can deduct $800 for AGI
 None—the tuition is not deductible.
Millie may deduct the amount of interest paid ($2,400) reduced by the phase-out amount ($2,400 × [($75,000 − $70,000) ÷ $15,000] = $800). Thus, Millie may
deduct $1,600 ($2,400 − $800 = $1,600).
References
Ned is a head of household with a dependent son, Todd, who is a full-time student. This year Ned made the following expenditures related to Todd's support:
Auto insurance premiums $ 1,700

Room and board at Todd’s school 2,200
Health insurance premiums (not through an exchange) 600
Travel (to and from school) 350
What amount can Ned include in his itemized deductions?
 $1,700 included in Ned's other itemized deductions
 $2,050 included in Ned's other itemized deductions
 $950 included in Ned's other itemized deductions
 $600 included in Ned's medical expenses
The premiums paid for health and medical insurance for dependents are included in the taxpayer's medical expenses when determining itemized deductions.
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Multiple Choice Difficulty: 2 Medium Learning Objective: 06-02 Describe the different types of itemized
 A taxpayer can deduct medical expenses incurred for members of his family who are dependents
 A taxpayer can deduct medical expenses incurred for a qualified relative even if the relative does not meet the gross income test
 A divorced taxpayer can deduct medical expenses incurred for a child even if the child is claimed as a dependent by the former spouse
 Deductible medical expenses include long-term care services for disabled spouses and dependents
 All of these choices are true.
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Which of the following costs are deductible as an itemized medical expense?
 The cost of prescription medicine and over-the-counter drugs
 Medical expenses incurred to prevent disease
 The cost of elective cosmetic surgery
 Medical expenses reimbursed by health insurance
 None of these costs are deductible.
Medical expenses include any payments that health care does not reimburse for the care, prevention, diagnosis, or cure of injury, disease, or bodily function.
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Multiple Choice Difficulty: 1 Easy Learning Objective: 06-02 Describe the different types of itemized
Which of the following costs is NOT deductible as an itemized medical expense?
 The cost of eyeglasses
 Payments to a hospital
 Transportation for medical purposes
 The cost of insurance for long-term care services
 All of these choices are deductible as medical expenses.
References
Opal fell on the ice and injured her hip this winter. As a result she paid $3,000 for a visit to the hospital emergency room and $750 for follow-up visits with her
doctor. While she recuperated, Opal paid $500 for prescription medicine and $600 to a therapist for rehabilitation. Insurance reimbursed Opal $1,200 for these
expenses. What is the amount of Opal's qualifying medical expense?
 $3,000
 $3,750
 $3,650
 $4,850
The qualifying expenses are calculated as follows:
Emergency room and doctor visits $ 3,750

Prescription medication 500
Physical therapy 600
Total qualifying medical expenses $ 4,850
Less insurance reimbursement (1,200)
Qualifying medical expenses from the accident $ 3,650
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Opal fell on the ice and injured her hip this winter. As a result she paid $3,140 for a visit to the hospital emergency room and $890 for follow-up visits with her
doctor. While she recuperated, Opal paid $640 for prescription medicine and $740 to a therapist for rehabilitation. Insurance reimbursed Opal $1,340 for these
expenses. What is the amount of Opal's qualifying medical expense?
 $3,140
 $4,030
 $4,070
 $5,410
The qualifying expenses are calculated as follows:
Emergency room and doctor visits $ 4,030

Prescription medication 640
Physical therapy 740
Total qualifying medical expenses $ 5,410
Less insurance reimbursement (1,340)
Qualifying medical expenses from the accident $ 4,070
References
Which of the following taxes will not qualify as an itemized deduction?
 Personal property taxes assessed on the value of specific property
 State, local, and foreign income taxes
 Real estate taxes on a residence
 Gasoline taxes on personal travel
 None of the choices qualify as itemized deductions.
Gasoline taxes on personal travel are not deductible.
References
This year Amanda paid $749 in federal gift taxes on a gratuitous transfer to her nephew. Amanda lives in Texas and does not pay any state or local income
taxes. Which of the following is a true statement?
 Amanda cannot deduct federal gift taxes
 Amanda can deduct federal gift taxes for AGI
 Amanda can deduct federal gift taxes paid as an itemized deduction
 Amanda must include federal gift taxes with other itemized deductions
 None of the choices are true.
Federal gift and estate taxes are not deductible.
References
This year Norma, a single taxpayer, paid $11,200 of real estate taxes on her personal residence and $9,500 of state income taxes. Which of the following is
true?
 Norma can deduct $11,200 of real estate taxes as an itemized deduction
 Norma can deduct $9,500 of state income taxes as a for AGI deduction
 Norma can deduct $10,000 of taxes as an itemized deduction
 If Norma has no other itemized deductions, she should still itemize her deductions
The itemized deduction for state and local taxes is limited to $10,000 for single taxpayers.
References
Madeoff donated stock (capital gain property) to a public charity. He purchased the stock three years ago for $100,000, and on the date of the gift, it had a fair
market value of $200,000. What is his maximum charitable contribution deduction for the year related to this stock if his AGI is $500,000?
 $100,000
 $200,000
 $150,000
 $250,000
The stock is appreciated capital gain property limited to 30 percent of AGI.
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Carly donated inventory (ordinary income property) to a church. She purchased the inventory last month for $100,000, and on the date of the gift, it had a fair
market value of $92,000. What is her maximum charitable contribution deduction for the year related to this inventory if her AGI is $200,000?
 $100,000
 $92,000
 $60,000
 $46,000 if the church sells the inventory
The charitable deduction for ordinary income property is the lesser of FMV or basis, limited to 50 percent of AGI.
References
Simone donated a landscape painting (tangible capital gain property) to a library, a public charity. She purchased the painting five years ago for $50,000, and
on the date of the gift, it had a fair market value of $200,000. What is her maximum charitable contribution deduction for the year if her AGI is $300,000?
 $100,000
 $200,000
 $90,000 if the library uses the painting in its charitable purpose
 $150,000
The painting is appreciated capital gain property given to a public charity. However, because it is also tangible personal property, the donation is FMV only if it
is related to the charitable use or purpose. If so, the deduction is limited to 30 percent of AGI. If not, the deduction is basis limited to 50 percent of AGI.
References
Multiple Choice Difficulty: 3 Hard Learning Objective: 06-02 Describe the different types of itemized
Larry recorded the following donations this year:
$500 cash to a family in need

$2,400 to a church
$500 cash to a political campaign
To the Salvation Army household items that originally cost $1,200 but are worth $300.
What is Larry's maximum allowable charitable contribution if his AGI is $60,000?
 $2,900
 $1,000
 $2,700
 $4,600
$2,400 to church + $300 FMV of household items.
References
Larry recorded the following donations this year:
$580 cash to a family in need

$2,480 to a church
$580 cash to a political campaign
To the Salvation Army household items that originally cost $1,280 but are worth $380.
What is Larry's maximum allowable charitable contribution if his AGI is $60,800?
 $3,060
 $1,160
 $2,860
 $4,920
 None of the choices are correct..
$2,480 to church + $380 FMV of household items.
References
 The deduction of cash contributions to public charities is limited to 30 percent of AGI
 The deduction of capital gain property to private nonoperating foundations is limited to 50 percent of AGI
 The deduction of capital gain property to public charities is limited to 20 percent of AGI
 The deduction of cash contributions to private nonoperating foundations is limited to 30 percent of AGI
The deduction of cash contributions to public charities is limited to 60 percent of AGI, the deduction of capital gain property to private nonoperating
foundations is limited to 20 percent of AGI, and the deduction of capital gain property to public charities is limited to 30 percent of AGI.
References
Which of the following is a true statement in 2020?
 The deduction of cash contributions to public charities is limited to 30 percent of AGI
 The deduction of capital gain property to private nonoperating foundations is limited to 50 percent of AGI
 The deduction of capital gain property to public charities is limited to 20 percent of AGI
 The deduction of cash contributions to private nonoperating foundations is limited to 30 percent of AGI
The deduction of cash contributions to public charities is not limited in 2020, the deduction of capital gain property to private nonoperating foundations is
limited to 20 percent of AGI, and the deduction of capital gain property to public charities is limited to 30 percent of AGI.
References
When taxpayers donate cash and capital gain property to a public charity, the AGI percentage limitation is applied in the following order:
 a 30 percent of AGI limitation is applied to the aggregate donation
 a 60 percent of AGI limitation is applied to the cash donation and a 20 percent of AGI limitation is applied to the fair market value of the capital
gain donation
gain donation
 a 60 percent of AGI limitation is applied to the cash donation and the fair market value of the capital gain donation is subject to the lesser of a 30
percent of AGI limitation or a 50 percent of AGI limitation after subtracting the cash contributions
 donations to public charities are not subject to AGI limitations
Capital gain property is subject to lower AGI limits, but the aggregate donation cannot exceed 50 percent of AGI.
References
When taxpayers donate cash and capital gain property to a public charity, the AGI percentage limitation is applied in the following order in 2020:
 a 30 percent of AGI limitation is applied to the aggregate donation
 there is no limit applied to the cash donation and a 20 percent of AGI limitation is applied to the fair market value of the capital gain donation
gain donation
 there is no limit applied to the cash contribution; the fair market value of the capital gain donation is subject to the lesser of a 30 percent of AGI
limitation or a 50 percent of AGI limitation after subtracting the cash contributions
 donations to public charities are not subject to AGI limitations
Capital gain property is subject to lower AGI limits, but the aggregate donation cannot exceed 50 percent of AGI.
References
 Taxpayers may only deduct interest on up to $1,500,000 of acquisition indebtedness
 Taxpayers may deduct interest on up to $1,000,000 of home-equity debt
 The deduction for investment interest expense is not subject to limitation
 A taxpayer who incurs acquisition indebtedness in 2018 may only deduct interest on up to $750,000 of acquisition indebtedness
The $750,000 limit applies to acquisition indebtedness incurred after December 15, 2017.
References
Margaret Lindley paid $15,000 of interest on her $300,000 acquisition debt for her home (fair market value of $500,000), $4,000 of interest on her $30,000
home-equity loan, $1,000 of credit card interest, and $3,000 of margin interest for the purchase of stock. Assume that Margaret Lindley has $10,000 of interest
income this year and no investment expenses. How much of the interest expense may she deduct this year?
 $23,000
 $22,000
 $19,000
 $18,000
The credit card interest is nondeductible personal interest and the home-equity interest is not deductible. The remaining interest is deductible as qualified
residence interest ($15,000) and investment interest ($3,000). The $3,000 investment interest is not restricted by her net investment income ($10,000).
References
Margaret Lindley paid $15,070 of interest on her $300,700 acquisition debt for her home (fair market value of $500,700), $4,070 of interest on her $30,070
home-equity loan, $1,070 of credit card interest, and $3,070 of margin interest for the purchase of stock. Assume that Margaret Lindley has $10,070 of interest
income this year and no investment expenses. How much of the interest expense may she deduct this year?
 $23,280
 $22,210
 $19,140
 $18,140
The credit card interest is nondeductible personal interest and the home-equity interest is not deductible. The remaining interest is deductible as qualified
residence interest ($15,070) and investment interest ($3,070). The $3,070 investment interest is not restricted by her net investment income ($10,070).
References
 A casualty loss on personal-use assets is generally not deductible
 A casualty loss on investment property is generally not deductible
 All casualty losses are deductible
 A casualty loss on a personal-use asset is deductible for AGI
Casualty losses on personal-use assets are generally nondeductible.
References
Glenn is an accountant who races stock cars as a hobby. This year Glenn was paid a salary of $80,000 from his employer and won $2,000 in various races.
What is the effect of the racing activities on Glenn's taxable income if Glenn has also incurred $4,200 of hobby expenses this year? Assume that Glenn
itemizes his deductions.
 Increase in taxable income of $2,000
 Increase in taxable income of $1,640
 No change in taxable income
 Decrease in taxable income of $560
 Decrease in taxable income of $2,200
Hobby expenses are not deductible, whereas hobby revenue is included in gross income.
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Which of the following is deductible as an other itemized deduction?
 Gambling losses to the extent of gambling winnings
 Fees for investment advice
 Employee business expenses
 Tax preparation fees
Employee business expenses, tax preparation fees, investment expenses, and hobby expenses are not deductible.
References
Frieda is 67 years old and deaf. If Frieda files as a head of household, what amount of standard deduction can she claim in 2020? Use Exhibit 6-12. (Do not
round intermediate calculations. Round your final answers to the nearest whole dollar amount.)
 $12,400
 $14,050
 $18,650
 $19,950
 $20,300
$20,300 = $18,650 + $1,650. The regular standard deduction is increased if the taxpayer is age 65 or older or blind.
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 06-03 Determine the standard deduction
Andres and Lakeisha are married and file jointly. Andres is 72 years old and in good health. Lakeisha is 62 years old and blind. What amount of standard
deduction can Andres and Lakeisha claim in 2020?
 $27,400
 $28,100
 $26,250
 $26,100
$27,400 = $24,800 + ($1,300 × 2). The married filing jointly standard deduction is increased $1,300 for each blind taxpayer and/or each taxpayer at or over age
65 by year-end.
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Multiple Choice Difficulty: 3 Hard Learning Objective: 06-03 Determine the standard deduction
 The standard deduction is increased for taxpayers who are blind or deaf at year-end
 A married couple is only entitled to one addition to their standard deduction even if both spouses are both over age 65
 Bunching itemized deductions is a legal method of tax avoidance
 The standard deduction is subject to a phase-out based on AGI
 All of these choices are true.
Bunching is perfectly legal.
References
Multiple Choice Difficulty: 1 Easy Learning Objective: 06-03 Determine the standard deduction
Campbell, a single taxpayer, has $95,000 of profits (net of the deduction for self-employment taxes, the self-employed health insurance deduction, and the
deduction for contributions to qualified self-employment retirement plans) from her general store, which she operates as a sole proprietorship. She has no
employees, $40,000 of qualified property, and $50,000 of taxable income before the deduction for qualified business income. How much is Campbell’s
deduction for qualified business income?
 $95,000
 $19,000
 $10,000
 $8,000
 $0
Her deduction for qualified business income is limited to 20 percent of her taxable income before the deduction. She is not subject to the wage limit because
her income falls below the $163,300 threshold.
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 06-04 Calculate the deduction for qualified
business income.
deduction for contributions to qualified self-employment retirement plans) from her general store, which she operates as a sole proprietorship. She has no
employees, $40,000 of qualified property, and $500,000 of taxable income before the deduction for qualified business income. How much is Campbell’s
deduction for qualified business income?
 $100,000
 $80,000
 $20,000
 $1,000
 $0
Her deduction for qualified business income is limited to 25 percent of her wages ($0) plus 2.5 percent of her qualified property (2.5% × $40,000 = $1,000).
References
business income.
deduction for contributions to qualified self-employment retirement plans) from her general store, which she operates as a sole proprietorship. She has
$100,000 of employee wages, $40,000 of qualified property, and $500,000 of taxable income before the deduction for qualified business income. How much
is Campbell’s deduction for qualified business income?
 $100,000
 $80,000
 $50,000
 $26,000
 $0
Her deduction for qualified business income is limited to 50 percent of her wages ($100,000 × 50% = $50,000).
References
business income.
Scott is a self-employed plumber and his wife, Emily, is a full-time employee for a 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:
Plumbing tools and supplies $ 1,300

Rent on Scott’s plumbing shop 6,250
Transportation between Scott’s shop and various jobsites 500
Plumber’s uniform 50
Plumbing truck rental 7,200
Self-employment tax (half is employer share) 400
What is the amount of deductions for AGI that Scott can claim this year (2020)?
$15,500.
$15,500 = $1,300 + $6,250 + $500 + $50 + $7,200 + ($400 × 0.50). All of the expenses are deductible for AGI except for Scott's health insurance and 50
percent of the self-employment tax.
References
Essay Difficulty: 1 Easy Learning Objective: 06-01 Identify the common deductions
Scott is a self-employed plumber and his wife, Emily, is a full-time employee for a 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 $5,450 for his health insurance
premiums, Scott also pays the following expenses associated with his plumbing business:
Plumbing tools and supplies $ 1,350

Rent on Scott’s plumbing shop 6,300
Transportation between Scott’s shop and various jobsites 550
Plumber’s uniform 50
Plumbing truck rental 7,250
Self-employment tax (half is employer share) 450
What is the amount of deductions for AGI that Scott can claim this year (2020)?
$15,725.
$15,725 = $1,350 + $6,300 + $550 + $50 + $7,250 + ($450 × 0.50). All of the expenses are deductible for AGI except for Scott's health insurance and 50
percent of the self-employment tax.
References
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 2020.
Revenue from auto repairs $ 143,930

Salaries paid to mechanics 72,210
Supplies and tools 18,500
Revenues from gas station partnership (Alexandra’s share) 125,000
Expenses from gas station partnership (Alexandra’s share) 95,200
Self-employment tax (half is employer’s share) 12,702
$76,669
All of the expenses are deductible, but only 50 percent of the self-employment tax is deductible ($6,351).
References
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 2020.
Revenue from auto repairs $ 144,730

Salaries paid to mechanics 72,290
Supplies and tools 18,580
Revenues from gas station partnership (Alexandra’s share) 125,800
Expenses from gas station partnership (Alexandra’s share) 95,280
Self-employment tax (half is employer’s share) 12,782
$77,989.
All of the expenses are deductible, but only 50 percent of the self-employment tax is deductible ($6,391).
References
Tita, a married taxpayer filing jointly, has a $700,000 business loss from her S corporation. Assume the $700,000 loss satisfies the basis, at-risk amount, and
passive loss rules. Assume also that neither she nor her husband has any other business losses or business income. How much of the $700,000 loss may she
deduct this year?
$518,000.
She has a nondeductible excess business loss of $182,000, defined as her $700,000 over the sum of her other business income, $0 and $518,000.
References
Tita, a married taxpayer filing jointly, has a $700,000 business loss from her S corporation in 2020. Assume the $700,000 loss satisfies the basis, at-risk
amount, and passive loss rules. Assume also that neither she nor her husband has any other business losses or business income. How much of the $700,000
loss may she deduct this year?
$700,000.
References
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 $77,500?
$1,250.
The deduction for student loan interest is reduced for single taxpayers with AGI above $70,000 but below $85,000. The deduction is the amount paid up to
$2,500, reduced by the phase-out percentage. The percentage is equal to $77,500 less $70,000, 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 × ($7,500 /
$15,000)) = $1,250].
References
Essay Difficulty: 2 Medium Learning Objective: 06-01 Identify the common deductions
Last year Henry borrowed $28,000 to help pay for his dependent daughter's college tuition. This year Henry paid $3,550 of interest on the loan. How much, if
any, interest can Henry deduct if he files single with AGI of $78,700?
$1,050.
The deduction for student loan interest is reduced for single taxpayers with AGI above $70,000 but below $85,000. The deduction is the amount paid up to
$2,500, reduced by the phase-out percentage. The percentage is equal to $78,700 less $70,000, divided by $15,000. In this problem, there is a phase-out of
58 percent ($8,700 / $15,000), thereby reducing the amount paid up to $2,500 (in this case, $2,500) to a deduction of $1,050 [$2,500 − ($2,500 × ($8,700 /
$15,000)) = $1,050].
References
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:
Health insurance premiums (not through an exchange) $ 4,200

Life insurance premiums (whole life) 1,900
Books on investing 200
Repairs of the rental property 450
Advertising for investment clients 1,770
State income taxes 4,300
Self-employment tax (half is employer share) 11,732
Kaylee files single. Calculate her adjusted gross income.
$72,514 = $85,000 − $12,486.
The books on investing, advertising for investment clients, repairs for the rental property, 50 percent of the self-employment taxes, and health insurance
premiums are deductible for AGI. The whole life insurance premiums are not deductible, and the state income taxes are only deductible from AGI.
References
Kaylee is a self-employed investment counselor who also owns a rental property. This year, she collected $86,400 in fees and paid the following expenses:
Health insurance premiums (not through an exchange) $ 4,340

Life insurance premiums (whole life) 2,040
Books on investing 340
Repairs of the rental property 590
Advertising for investment clients 1,910
State income taxes 4,440
Self-employment tax (half is employer share) 11,872
Kaylee files single. Calculate her adjusted gross income.
$73,284 = $86,400 − $13,116.
The books on investing, advertising for investment clients, repairs for the rental property, 50 percent of the self-employment taxes, and health insurance
premiums are deductible for AGI. The whole life insurance premiums are not deductible, and the state income taxes are only deductible from AGI.
References
This year Tiffanie files as a single taxpayer. Tiffanie received $67,700 of salary and paid $3,200 of qualified educational interest. This year Tiffanie paid moving
expenses of $5,000 and received $9,800 of alimony (from her ex-husband, whom she divorced in 2012). What is Tiffanie’s AGI?
$76,250 ($67,700 + $9,800 − $1,250 = $76,250).
The alimony and salary are income, the moving expense is not deductible, and part of the educational interest is 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 $70,000. The phase-out is calculated by subtracting $70,000 from Tiffanie’s modified AGI ($67,700 + $9,800 = $77,500) and
dividing by $15,000 as follows: $2,500 × [($77,500 − $70,000) ÷ $15,000] = $1,250. Thus, the amount deductible is $1,250 [$2,500 − $1,250 = $1,250].
References
Essay Difficulty: 3 Hard Learning Objective: 06-01 Identify the common deductions
This year Tiffanie files as a single taxpayer. Tiffanie received $68,000 of salary and paid $2,800 of qualified educational interest. This year Tiffanie paid moving
expenses of $5,100 and received $9,750 of alimony (from her ex-husband, whom she divorced in 2012). What is Tiffanie’s AGI?
$76,542 ($68,000 + $9,750 - $1,208 = $76,542).
The alimony and salary are income, the moving expense is not deductible, and part of the educational interest is deductible for AGI. Tiffanie’s maximum
educational interest deduction (amount paid up to $2,500) is limited to $1,208. The deduction for educational interest ($2,500) is subject to phase-out because
Tiffanie’s modified AGI exceeds $70,000. The phase-out is calculated by subtracting $70,000 from Tiffanie’s modified AGI ($68,000 + $9,750 = $77,750) and
dividing by $15,000 as follows: $2,500 × [($77,750 − $70,000) ÷ $15,000]=$1,292. Thus, the amount deductible is $1,208 [$2,500 − $1,292 = $1,208].
References
Essay Difficulty: 3 Hard Learning Objective: 06-01 Identify the common deductions
Detmer is a successful doctor who earned $204,800 in fees this year, but he also competes in weekend golf tournaments. Detmer reported the following
expenses associated with competing in almost a dozen tournaments:
Transportation to various tournaments $ 3,450

Lodging 1,890
Entry fees 920
Golf supplies (balls, tees, etc.) 75
This year Detmer won $5,200 from competing in various golf tournaments. Assuming that Detmer itemizes his deductions, what amount of the golfing
expenses are deductible after considering all limitations if the tournament golfing is treated as a hobby activity?
$0
Hobby expenses are not deductible.
References
Essay Difficulty: 2 Medium Learning Objective: 06-02 Describe the different types of itemized
Jenna (age 50) files single and reports AGI of $40,000. This year she has incurred the following medical expenses:
Dentist charges $ 90
Physicians' fees 2,800
Cosmetic surgery 400
Cost of eyeglasses 250
Hospital charges 1,330
Prescription drugs 240
Over-the-counter drugs 75
Medical insurance premiums (not through an exchange) 1,200
Calculate the amount of medical expenses that will be included with Jenna's other itemized deductions.
$1,910.
All expenses are qualified medical expenses except for the cosmetic surgery and over-the-counter drugs. Hence, the medical expense deduction is $5,910
less $4,000 (10 percent × 40,000) = $1,910, and this amount is included with other itemized deductions.
References
Chuck has AGI of $70,000 and has made the following payments:
State income tax withholding $ 1,900

State income tax estimated payments 850
Federal income tax withholding 7,100
Social Security tax withheld from wages 4,800
State excise tax on liquor 400
State inheritance tax 1,200
County real estate tax 790
School district tax on realty 510
Calculate the amount of taxes that Chuck can include with his itemized deductions.
$4,050 = $1,900 + $850 + $790 + $510.
The deductible taxes include county real estate and school district tax on real estate. State income taxes paid and withheld are also deductible.
References
Essay Difficulty: 1 Easy Learning Objective: 06-02 Describe the different types of itemized
Chuck has AGI of $70,300 and has made the following payments:
State income tax withholding $ 1,930

State income tax estimated payments 880
Federal income tax withholding 7,130
Social Security tax withheld from wages 4,830
State excise tax on liquor 430
State inheritance tax 1,230
County real estate tax 820
School district tax on realty 540
Calculate the amount of taxes that Chuck can include with his itemized deductions.
$4,170 = $1,930 + $880 + $820 + $540.

The deductible taxes include county real estate and school district tax on real estate. State income taxes paid and withheld are also deductible.
References
This year, Benjamin Hassell paid $20,000 of interest on a mortgage on his home (Benjamin borrowed $600,000 in 2015 to buy the residence and it is currently
worth $1,000,000), $12,000 on a $150,000 home-equity loan on his home, and $10,000 of interest on a mortgage on his vacation home (loan of $300,000;
home purchased for $400,000 in 2016; home is not rented out at any time). How much interest expense can Benjamin deduct as an itemized deduction?
$30,000.
Benjamin’s acquisition debt incurred before December 16, 2017, on his home and vacation home does not exceed $1,000,000. Thus, he can deduct the
$20,000 mortgage interest on his home and the $10,000 of mortgage interest on his vacation home. The home-equity interest is not deductible.
References
This year, Benjamin Hassell paid $16,800 of interest on a mortgage on his home (Benjamin borrowed $560,000 in 2015 to buy the residence and it is currently
worth $896,000), $13,000 on a $162,500 home-equity loan on his home, and $10,950 of interest on a mortgage on his vacation home (loan of $365,000; home
purchased for $465,000 in 2016; home is not rented out at any time). How much interest expense can Benjamin deduct as an itemized deduction?
$27,750.
Benjamin's acquisition debt incurred before December 16, 2017, on his home and vacation home does not exceed $1,000,000. Thus, he can deduct the
$16,800 mortgage interest on his home and the $10,950 of mortgage interest on his vacation home. The home-equity interest is not deductible.
References
This year Darcy made the following charitable contributions:
Donee Property Cost FMV

State University IBM stock $ 15,000 $ 10,500
Salvation Army Clothes 2,500 500
State Art Museum Painting 5,000 45,000
City Hospital Cash 8,000
Determine the maximum amount of charitable deduction for Darcy's contribution of the painting if her AGI is $80,000 this year. You may assume that both the
stock and painting have been owned for 10 years and that the painting was used by the State Art Museum in a manner consistent with the museum's charitable
purpose.
The charitable deduction is $21,000 for the painting and $40,000 overall.
Description Amount Explanation

(1) AGI $ 80,000
(2) 60 percent contributions 8,000 Cash contribution
(3) 60 percent AGI contribution limit 48,000 (1) × 60%
(4) Allowable 60 percent deductions 8,000 Lesser of (2) or (3)
(5) 50 percent contributions 11,000 IBM stock and clothes
(6) 50 percent AGI contribution limit 32,000 [(1) × 50%] − (4)
(7) Allowable 50 percent deductions 11,000 Least of (5) or (6)
(8) 30 percent contributions 45,000 Painting
(10) Remaining 50 percent AGI contribution limit 21,000 (6) − (7)
(11) Allowable 30 percent deductions 21,000 Least of (8), (9), or (10)
Deductible charitable contributions $ 40,000 (4) + (7) + (11)
The stock and clothes are not subject to the 30 percent AGI limit because these are ordinary income properties (basis exceeds its value so neither is capital
gain property). The painting is long-term tangible personal property apparently related to the purpose of the charity. The deduction this year is $40,000,
consisting of cash of $8,000, IBM stock of $10,500, clothes of $500, and the painting of $21,000. The remaining value of the painting, $24,000 ($45,000 −
$21,000), is carried over to next year, subject to the 30 percent of AGI limit.
References
Essay Difficulty: 3 Hard Learning Objective: 06-02 Describe the different types of itemized
In 2020, Darcy made the following charitable contributions:

State University IBM stock $ 15,000 $ 10,500
State Art Museum Painting 5,000 45,000
Determine the maximum amount of charitable deduction for Darcy's contribution of the painting if her AGI is $80,000 this year. You may assume that both the
stock and painting have been owned for 10 years and that the painting was used by the State Art Museum in a manner consistent with the museum's charitable
purpose.
The charitable deduction is $21,000 for the painting and $40,000 overall.

(1) AGI $ 80,000
(3) 60 percent AGI contribution limit N/A No limit for 2020
(4) Allowable 60 percent deductions 8,000 Line (2) since no limit for 2020
(5) 50 percent contributions 11,000 IBM stock and clothes
(7) Allowable 50 percent deductions 11,000 Least of (5) or (6)
(8) 30 percent contributions 45,000 Painting
The stock and clothes are not subject to the 30 percent AGI limit because these are ordinary income properties (basis exceeds its value so neither is capital
gain property). The painting is long-term tangible personal property apparently related to the purpose of the charity. The deduction this year is $40,000,
consisting of cash of $8,000, IBM stock of $10,500, clothes of $500, and the painting of $21,000. The remaining value of the painting, $24,000 ($45,000 −
$21,000), is carried over to next year, subject to the 30 percent of AGI limit.
References
This year Latrell made the following charitable contributions:

Jones Foundation IBM stock $ 15,000 $ 25,000
Determine the maximum amount of Latrell’s charitable deduction assuming the Jones Foundation is a private nonoperating foundation and Latrell’s AGI is
$100,000 this year. You may assume that the stock and painting have been owned for 10 years.
The charitable deduction is $40,500 overall.

(1) AGI $ 100,000
(4) Allowable 60 percent deductions 20,000 Lesser of (2) or (3)
(5) 50 percent contributions 500 Clothes
(7) Allowable 50 percent deductions 500 Least of (5) or (6)
(8) 20 percent contributions 25,000 IBM stock
The clothes are not subject to the 30 percent AGI limit because they are ordinary income property (basis exceeds their value so they are not capital gain
property). The IBM stock is long-term capital gain property, but because the donee is a private nonoperating foundation, the deduction for the value of the
stock is subject to a 20 percent of AGI limitation. The deduction this year is $40,500, consisting of cash of $20,000, clothes of $500, and IBM stock of
$20,000. The remaining value of the stock, $5,000 ($25,000 − $20,000), is carried over to next year, subject to the 20 percent of AGI limit.
References
In 2020, Latrell made the following charitable contributions:

Jones Foundation IBM stock $ 15,000 $ 25,000
Determine the maximum amount of Latrell’s charitable deduction assuming the Jones Foundation is a private nonoperating foundation and Latrell’s AGI is
$100,000 this year. You may assume that the stock and painting have been owned for 10 years.
The charitable deduction is $40,500 overall.

(1) AGI $ 100,000
(3) 60 percent AGI contribution limit N/A No limit for 2020
(4) Allowable 60 percent deductions 20,000 Line (2) since no limit for 2020
(5) 50 percent contributions 500 Clothes
(7) Allowable 50 percent deductions 500 Least of (5) or (6)
(8) 20 percent contributions 25,000 IBM stock
The clothes are not subject to the 30 percent AGI limit because they are ordinary income property (basis exceeds their value so they are not capital gain
property). The IBM stock is long-term capital gain property, but because the donee is a private nonoperating foundation, the deduction for the value of the
stock is subject to a 20 percent of AGI limitation. The deduction this year is $40,500, consisting of cash of $20,000, clothes of $500, and IBM stock of
$20,000. The remaining value of the stock, $5,000 ($25,000 − $20,000), is carried over to next year, subject to the 20 percent of AGI limit.
References
Claire donated 200 publicly traded shares of stock (held for five years) to her father's nonoperating private foundation this year. The stock was worth $15,000
but Claire's basis was only $4,000. Determine the maximum amount of charitable deduction for the donation if Claire's AGI is $60,000 this year.
$12,000
The stock is long-term capital gain property donated to a nonoperating private foundation, so the maximum donation is limited to 20 percent of AGI. The
remaining deduction of $3,000 will carry over to next year.
References
Claire donated 220 publicly traded shares of stock (held for five years) to her father's nonoperating private foundation this year. The stock was worth $15,080
but Claire's basis was only $4,080. Determine the maximum amount of charitable deduction for the donation if Claire's AGI is $60,800 this year.
$12,160
The stock is long-term capital gain property donated to a nonoperating private foundation, so the maximum donation is limited to 20 percent of AGI. The
remaining deduction of $2,920 will carry over to next year.
References
Erika (age 62) was hospitalized with injuries from an auto accident this year. She incurred the following expenses from the accident:
Hospital charges $ 3,280

Prescription medicine 510
Doctors' fees 1,240
In addition, Erika's auto was completely destroyed in the accident. She bought the car several years ago for $18,000 and it was worth $4,700 at the time of the
accident. What are Erika's itemized deductions this year if she was uninsured and her AGI is $40,000?
$1,030 of medical expenses.
The medical expenses of $5,030 are reduced by 10 percent of AGI ($4,000), and the casualty loss is not deductible.
References
Karin and Chad (ages 30 and 31, respectively) are married and together have $110,000 of AGI. This year they have recorded the following expenses:
Home mortgage interest (acquisition debt of $300,000) $ 16,640

Real estate taxes 5,400
State income taxes paid 6,300
Medical expenses (unreimbursed) 1,800
Employee business expenses (unreimbursed) 450
Charitable contributions (cash to their church) 760
Karin and Chad will file married jointly. Calculate their taxable income.
$82,600 = $110,000 − ($16,640 mortgage interest + 10,000 taxes + $760 charitable contributions).
Karin and Chad will choose to itemize their deductions. The medical expenses will not generate any addition to the itemized deductions because they are
subject to a 10 percent of AGI floor limit. The taxes are limited to $10,000, and the unreimbursed business expenses are not deductible.
References
Misti purchased a residence this year. Misti, age 32, is a single parent and lives with her 1-year-old daughter. In 2020, Misti received a salary of $160,000 and
made the following payments:
Home mortgage interest ($500,000 acquisition debt) $ 15,000

Income tax preparation fee 2,250
Misti files as a head of household. Calculate her taxable income this year.
$141,350 = $160,000 − $18,650.
Misti’s itemized deductions total $17,985 ($15,000 + $1,525 + $1,340 + $120). Thus, Misti will elect the standard deduction of $18,650. The income tax
preparation fee is nondeductible.
References
Essay Difficulty: 2 Medium Learning Objective: 06-03 Determine the standard deduction
Misti purchased a residence this year. Misti, age 32, is a single parent and lives with her 1-year-old daughter. In 2020, Misti received a salary of $160,000 and
made the following payments:
Home mortgage interest ($500,000 acquisition debt) $ 15,000

Income tax preparation fee 2,250
Misti files as a head of household. Calculate her taxable income this year.
$141,230 = $160,000 salary − $120 for AGI charitable contribution deduction − $18,650 standard deduction.
Misti’s itemized deductions total $17,985 ($15,000 + $1,525 + $1,340 + $120). Thus, Misti will elect the standard deduction of $18,650. The income tax
preparation fee is nondeductible.
References
Essay Difficulty: 2 Medium Learning Objective: 06-03 Determine the standard deduction
Jon and Holly are married and live in a retirement community. This year Jon celebrated his 65th birthday and Holly turned 68 years old. For their ages, both
Jon and Holly are in good health. What is the amount of their standard deduction this year?
$27,400.
The married filing jointly standard deduction is $24,800, increased by $2,600 because both taxpayers are age 65 by year-end ($1,300 each).
References
Essay Difficulty: 1 Easy Learning Objective: 06-03 Determine the standard deduction
This year Kelly bought a new auto for $20,000 plus $1,650 in state and local sales taxes. Besides this sales tax, Kelly also paid $8,260 in state income taxes
and had mortgage interest of $5,500 ($400,000 acquisition indebtedness on her residence). If Kelly files single with AGI of $56,000, what amount of itemized
deductions will she be eligible to claim?
$13,760 = $8,260 + $5,500.
State income taxes, but not sales taxes, are included with other itemized deductions when determining total itemized deductions. A taxpayer could elect to
deduct state sales taxes instead of state income taxes. Nonetheless, Kelly would not make this election because her state income taxes ($8,260) exceed her
state sales taxes.
References
Toshiomi works as a sales representative and travels extensively for his employer's business. This year Toshiomi was paid $75,000 in salary and made the
following expenditures:
State income taxes withheld $ 6,300

Employee business expenses (unreimbursed portion) 1,450
Charitable cash contributions 200
Investment counseling fees 780
Tax preparation fee 310
Toshiomi also made a number of trips to Las Vegas for gambling. This year Toshiomi won $12,000 in a poker tournament, and this amount was almost enough
to offset his other gambling losses ($13,420). Calculate Toshiomi’s 2020 taxable income if he files single.
$68,500.
$68,500 = ($75,000 salary + $12,000 gambling winnings) − ($6,300 state taxes + $12,000 gambling losses + $200 charitable contributions). The employee
expenses, investment fees, and tax preparation fee are nondeductible. The gambling losses (up to gambling winnings) are an other itemized deduction, and
the state income taxes and charitable contributions are also itemized deductions.
References
Essay Learning Objective: 06-02

Describe the different types of
itemized deductions available to
individuals.
Difficulty: 3 Hard Learning Objective: 06-03

Determine the standard
deduction available to individuals.
Cesare is 16 years old and works throughout the year at a local coffee shop. This year, he made $9,200 at the coffee shop and earned $2,000 in interest
income from his savings account. Assume that Cesare is claimed as a dependent on his parents' tax return. What is Cesare’s standard deduction for the year?
$9,550.
Since Cesare is claimed as a dependent on another’s tax return, his standard deduction ($12,400) is limited to his earned income ($9,200) plus $350.
References
Essay Difficulty: 3 Hard Learning Objective: 06-03 Determine the standard deduction
Rachel is an accountant who practices as a sole proprietor. This year, Rachel had net business income of $270,000 (net of the deduction for self-employment
taxes, the self-employed health insurance deduction, and the deduction for contributions to qualified self-employment retirement plans) from her practice.
Assume that Rachel pays $50,000 wages to her employees, she has $20,000 of property (unadjusted basis of equipment she purchased last year), she has no
capital gains, and her taxable income before the deduction for qualified business income is $225,000, and she is unmarried. Calculate Rachel’s deduction for
qualified business income.
$0.
Since Rachel has taxable income of $225,000 (before the deduction for qualified business income) and above $213,300, her accounting would be considered
a specified service or trade business. Thus, she would not be eligible for the deduction for qualified business income.
References
Essay Difficulty: 2 Medium Learning Objective: 06-04 Calculate the deduction for qualified
business income.
Rachel is an accountant who practices as a sole proprietor. This year, Rachel had net business income of $200,000 (net of the deduction for self-employment
taxes, the self-employed health insurance deduction, and the deduction for contributions to qualified self-employment retirement plans) from her practice.
Assume that Rachel pays $50,000 wages to her employees, she has $20,000 of property (unadjusted basis of equipment she purchased last year), she has no
capital gains, her taxable income before the deduction for qualified business income is $140,000, and she is unmarried. Calculate Rachel’s deduction for
$28,000.
Since Rachel has taxable income of $140,000 (before the deduction for qualified business income) and below $163,300, her accounting would not be
considered a specified service or trade business. Thus, she is eligible for the deduction for qualified business income. Because her taxable income is below
$163,300, the wage limitation would not apply. Thus, her deduction is $28,000, the lesser of (a) $40,000 (20 percent of her qualified business income, 20% ×
$200,000) or (b) $28,000 (20 percent of her taxable income before the deduction, 20% × $140,000).
References
business income.
Rachel is an engineer who practices as a sole proprietor. This year, Rachel had net business income of $400,000 (net of the deduction for self-employment
taxes, the self-employed health insurance deduction, and the deduction for contributions to qualified self-employment retirement plans) from her business.
Assume that Rachel pays $150,000 wages to her employees, she has $20,000 of property (unadjusted basis of equipment she purchased last year), she has
no capital gains, her taxable income before the deduction for qualified business income is $380,000, and she is unmarried. Calculate Rachel’s deduction for
$75,000.
Engineering is a qualified trade or business. So, Rachel is eligible for the deduction for qualified business income. Rachel is limited by the wage-based
limitation because her taxable income is above $163,300. Her deduction of 20 percent of her qualified business income ($400,000 × 20% = $80,000) is limited
to the greater of (a) 50 percent of her wages paid ($150,000 × 50% = $75,000) or (b) 25 percent of her allocable wages ($150,000 × 25% = $37,500) plus 2.5
percent of the unadjusted basis of qualified property ($20,000 × 2.5% = $500). Thus, the wage limit reduces her potential deduction for qualified business
income to $75,000. Rachel is not limited by the taxable income limitation because 20 percent of her qualified business income ($400,000 × 20% = $80,000,
limited to $75,000 by the wage limit) is less than 20 percent of her taxable income before the deduction ($380,000 × 20% = $76,000). Thus, she may deduct
$75,000 as a deduction for qualified business income.
References
business income.
Rachel is an engineer who practices as a sole proprietor. This year, Rachel had net business income of $500,000 (net of the deduction for self-employment
taxes, the self-employed health insurance deduction, and the deduction for contributions to qualified self-employment retirement plans) from her business.
Assume that Rachel pays $20,000 wages to her employees, she has $500,000 of property (unadjusted basis of equipment she purchased last year), she has
no capital gains, her taxable income before the deduction for qualified business income is $380,000, and she is unmarried. Calculate Rachel’s deduction for
$17,500.
Engineering is a qualified trade or business. So, Rachel is eligible for the deduction for qualified business income. Rachel is limited by the wage-based
limitation because her taxable income is above $163,300. Her deduction of 20 percent of her qualified business income ($500,000 × 20% = $100,000) is
limited to the greater of (a) 50 percent of her wages paid ($20,000 × 50% = $10,000) or (b) 25 percent of her allocable wages ($20,000 × 25% = $5,000) plus
2.5 percent of the unadjusted basis of qualified property ($500,000 × 2.5% = $12,500). Thus, the wage limit reduces her potential deduction for qualified
business income to $17,500. Rachel is not limited by the taxable income limitation because 20 percent of her qualified business income ($500,000 × 20% =
$100,000, limited to $17,500 by the wage limit) is less than 20 percent of her taxable income before the deduction ($380,000 × 20% = $76,000). Thus, she may
deduct $17,500 as a deduction for qualified business income.
References
business income.

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1. Award: 1.

The proﬁt motive distinguishes "business" activities from "personal" activities.

2. Award: 1.00 point

All business expense deductions are claimed as "from" AGI deductions.

Most business expenses are claimed as for AGI deductions.

3. Award: 1.00 point

All investment expenses are itemized deductions.

Rental/royalty deductions are for AGI deductions.

Rental or royalty expenses are deductible "for" AGI.

5. Award: 1.00 point

To be deductible, business expenses must be directly related to a business activity.

6. Award: 1.00 point

7. Award: 1.00 point

All reasonable moving expenses are deductible by employees.

Moving expenses are generally not deductible.

A self-employed individual cannot be eligible to participate in a plan.

9. Award: 1.00 point

10. Award: 1.00 point

The early withdrawal penalty is treated as a for AGI deduction.

Excess business losses are carried back and then forward.

Excess business losses are carried forward.

12. Award: 1.00 point

Excess business losses are fully deductible in 2020.

13. Award: 1.00 point

15. Award: 1.00 point

16. Award: 1.00 point

17. Award: 1.00 point

19. Award: 1.00 point

10 percent of AGI is the ﬂoor limit.

20. Award: 1.00 point

22. Award: 1.00 point

23. Award: 1.00 point

To qualify as a charitable deduction, the donation must be made by cash or by check.

Donations of property also qualify.

25. Award: 1.00 point

26. Award: 1.00 point

60 percent of AGI is the ceiling for donations of cash to public charities.

28. Award: 1.00 point

29. Award: 1.00 point

Bunching itemized deductions is one form of tax evasion.

30. Award: 1.00 point

32. Award: 1.00 point

33. Award: 1.00 point

 health insurance premiums cannot be deducted otherwise

 None of the choices are correct.

35. Award: 1.00 point

Which of the following is a true statement?

 All business expenses are deducted for AGI

 All of these choices are correct.

See discussion of the self-employment deduction in the text.

36. Award: 1.00 point

Which of the following is a true statement?

 Unreimbursed employee business expenses are not deductible

 Investment advisory expenses are not deductible

 All of these choices are correct.

Which of the following is a true statement?

 All business expenses are deducted for AGI

 All of these choices are correct.

See discussion of the self-employment deduction in the text.

38. Award: 1.00 point

Which of the following is a true statement?

 Moving expenses are deductible from AGI

 Moving expenses are generally not deductible.