Deck 10: Individuals: Income, Deductions, and Credits

Question 1

In the case of a person with other income of $300,000, 15% of his or her Social Security benefits received are excluded from gross income.

Answer 1

True

Question 2

Ashley received a scholarship to be used as follows: tuition, $6,000; room and board, $9,000; and books and laboratory supplies, $2,000.Ashley is required to include only $9,000 in her gross income.

Answer 2

True

Question 3

Paula transfers stock to her former spouse, Fred.The transfer is pursuant to a divorce agreement.Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000.Fred later sells the stock for $100,000.Fred's recognized gain from the sale of the stock is $5,000.

Answer 3

False

Question 4

Sam was unemployed for the first two months of 2019.During that time, he received $4,000 of state unemployment benefits.He worked for the next six months and earned $14,000.In September, he was injured on the job and collected $5,000 of workers' compensation benefits.Sam's Federal gross income from this is $18,000 ($4,000 + $14,000).

Question 5

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.

Question 6

Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement entered into in 2017, Emily paid Jacob cash for his interest in the personal residence.This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.

Question 7

Chad pays the medical expenses of his son, James.James would qualify as Chad's dependent except that he earns $7,500 during the year.Chad may claim James' medical expenses even if he is not a dependent.

Question 8

Ted earned $150,000 during the current year.He paid Alice, his former wife, $75,000 in alimony.The couple divorced in 2017.Under these facts, the tax is paid by the person who benefits from the income rather than the person who earned the income.

Question 9

On the recommendation of a physician, Ed has a swimming pool installed at his residence because of a heart condition.If he is allowed to deduct all or part of the cost of the pool, Ed's increase in utility bills due to the operation of the pool qualifies as a medical expense.

Question 10

Brooke works part-time as a waitress in a restaurant.For groups of seven or more customers, the customer is charged 15% of the bill for Brooke's services.For parties of less than seven, the tips are voluntary.Brooke received $11,000 from the groups of seven 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.

Question 11

Adrienne sustained serious facial injuries in a motorcycle accident.To restore her physical appearance, Adrienne had cosmetic surgery.She cannot deduct the cost of this procedure as a medical expense.

Question 12

If a lottery prize winner transfers the prize to a qualified government unit or nonprofit organization, then the prize is excluded from the winner's gross income if the amount of the prize does not exceed 30% of the winner's AGI.

Question 13

After his divorce in 2015, Jeff was required to pay $18,000 per year to his former spouse, Darlene, who had custody of their child.Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21.During the year, Jeff paid the $18,000 required under the divorce agreement.Darlene must include the $12,000 in gross income.

Question 14

George and Erin divorced in 2020, 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.

Question 15

In 2019, Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2020, 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 that she had deducted on her 2019 tax return (the amount in excess of 10% of adjusted gross income).As a result of this, Theresa's 2020 gross income is increased by $56,000.

Question 16

If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross income.

Question 17

John told his nephew, Steve, "if you maintain my house when I cannot, I will leave the house to you when I die." Steve maintained the house and when John died, Steve inherited the house.The value of the residence can be excluded from Steve's gross income as an inheritance.

Question 18

In December 2019, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the spring semester of 2020. However, she did not use the funds to pay the tuition until January 2020.Emily can exclude the $2,500 from her gross income in 2019.

Question 19

Betty received a graduate teaching assistantship that was awarded on the basis of academic achievement.The payments must be included in her gross income.

Question 20

Mason, a physically handicapped individual, pays $10,000 this year for the installation of wheelchair ramps, support bars, and railings in his personal residence.These improvements increase the value of his personal residence by $2,000.Only $8,000 of the expenditure qualifies as a medical expense for tax purposes.

Question 21

The election to itemize is appropriate when total itemized deductions are less than the standard deduction based on the taxpayer's filing status.

Question 22

A taxpayer pays points to obtain financing to purchase a second residence.At the election of the taxpayer, the points can be deducted as interest expense for the year paid.

Question 23

Personal expenditures that are deductible as itemized deductions include medical expenses, Federal income taxes, state income taxes, property taxes on a personal residence, mortgage interest, and charitable contributions.

Question 24

Interest paid or accrued during 2019 on aggregate acquisition indebtedness of $2 million or less ($1 million or less for married persons filing separate returns) is deductible as qualified residence interest.

Question 25

In January 2020, Pam, a calendar year cash basis taxpayer, made an estimated state income tax payment for 2019. The payment is deductible in 2019.

Question 26

Shirley pays FICA (employer's share) on the wages she pays her housekeeper to clean and maintain Shirley's personal residence.The FICA payment is not deductible as an itemized deduction.

Question 27

Tom, whose MAGI is $40,000, paid $3,500 of interest on a qualified student loan in 2019.He is single and may deduct the $3,500 interest as an itemized deduction.

Question 28

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

Question 29

For purposes of computing the deduction for qualified residence interest, a qualified residence includes only the taxpayer's principal residence.

Question 30

Herbert is the sole proprietor of a furniture store.He can deduct real property taxes on his store building as a business deduction but he cannot deduct state income taxes related to his net income from the furniture store as a business deduction.

Question 31

Grace's sole source of income is from a restaurant that she owns and operates as a proprietorship.Any state income tax Grace pays on the business net income must be deducted as a business expense rather than as an itemized deduction.

Question 32

Phyllis, who is single, has itemized deductions totaling $20,000.She overpaid her 2018 state income tax and is entitled to a refund of $400 in 2019.Phyllis chooses to apply the $400 overpayment toward her state income taxes for 2019.She is required to recognize that amount as income in 2019.

Question 33

Trent sells his personal residence to Chester on July 1, 2019.He had paid $7,000 in real property taxes on March 1, 2019, the due date for property taxes for 2019.Trent may not deduct the portion of the taxes he paid for the period the property was owned by Chester.

Question 34

A taxpayer may not deduct the cost of new curbing (relative to a personal residence) even if the construction is required by the city and the curbing provides an incidental benefit to the public welfare.

Question 35

For purposes of computing the deduction for qualified residence interest, a qualified residence includes the taxpayer's principal residence and two other residences of the taxpayer or spouse.

Question 36

Bill paid $2,500 of medical expenses for his daughter, Marie.She is married to John and they file a joint return.Bill can include the $2,500 of expenses when calculating his medical expense deduction.

Question 37

Sergio was required by the city to pay $2,000 for the cost of new curbing installed by the city in front of his personal residence.The new curbing was installed throughout Sergio's neighborhood as part of a street upgrade project.Sergio may not deduct $2,000 as a tax, but he may add the $2,000 to the basis of his property.

Question 38

Fees for automobile inspections, automobile titles and registration, bridge and highway tolls, parking meter deposits, and postage are not deductible if incurred for personal reasons, but they are deductible as deductions for AGI if incurred as a business expense by a self-employed taxpayer.

Question 39

Matt, a calendar year taxpayer, pays $11,000 in medical expenses in 2019.He expects $5,000 of these expenses to be reimbursed by an insurance company in 2020.In determining his medical expense deduction for 2019, Matt must reduce his 2019 medical expenses by the amount of the reimbursement he expects in 2020.

Question 40

In 2019, Rhonda received an insurance reimbursement for medical expenses incurred in 2018.She is not required to include the reimbursement in gross income in 2019 if she claimed the standard deduction in 2018.

Question 41

For all of the current year, Randy (a calendar year taxpayer) allowed the Salvation Army to use rent-free a building he owns.The building normally rents for $24,000 a year.Randy will be allowed a charitable contribution deduction this year of $24,000.

Question 42

Maria made significant charitable contributions of capital gain property in the current year.In fact, the amount of the contributions exceeds 30% of her AGI.The excess charitable contribution that is not deductible this year can be carried over for five years.

Question 43

This year Allison drove 800 miles to volunteer in a project sponsored by a qualified charitable organization in Utah.In addition, she spent $250 for meals while away from home.In total, Allison may take a charitable contribution deduction of $112 (800 miles × $0.14) relating to her volunteer work.

Question 44

Sadie mailed a check for $2,200 to a qualified charitable organization on December 31, 2019.The $2,200 contribution is deductible on Sadie's 2019 tax return if she itemizes her deductions.

Question 45

Dan contributed stock worth $16,000 to his college alma mater, a qualified charity.He acquired the stock 11 months ago for $4,000.He may deduct $16,000 as a charitable contribution deduction (subject to percentage limitations).

Question 46

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

Question 47

Ronaldo contributed stock worth $12,000 to the Children's Protective Agency, a qualified charity.He acquired the stock 20 months ago for $7,000.He may deduct $7,000 as a charitable contribution deduction (subject to percentage limitations).

Question 48

On December 31, Lynette used her credit card to make a $500 contribution to the United Way, a qualified charitable organization.She will pay her credit card balance in January of the following year.If Lynette itemizes, she can deduct the $500 in the year she used the card.

Question 49

During the year, Victor spent $300 on bingo games sponsored by his church.If all profits went to the church, Victor has a charitable contribution deduction of $300.

Question 50

Noah gave $750 to a good friend whose house was destroyed by an earthquake.In addition, Noah contributed his time, valued at $250, in the cleanup effort.Noah may claim a charitable deduction of $1,000 on his tax return for the current year.

Question 51

Charitable contributions that exceed the percentage limitations for the current year can be carried over for up to three years.

Question 52

Jack sold a personal residence to Steven and paid points of $3,500 on the loan to help Steven finance the purchase. Jack can deduct the points as interest.

Question 53

Capital assets donated to a public charity that would result in long-term capital gain if sold are subject to the 30%-of- AGI ceiling limitation on charitable contributions for individuals.

Question 54

Points paid by the owner of a personal residence to refinance an existing mortgage must be capitalized and amortized over the life of the new mortgage.

Question 55

Al contributed a painting to the Metropolitan Art Museum of St.Louis, MO.The painting, purchased six years earlier, was worth $40,000 when donated, and Al's basis was $25,000.If this painting is immediately sold by the museum and the proceeds are placed in the general fund, Al's charitable contribution deduction is $25,000 (subject to percentage limitations).

Question 56

Letha incurred a $1,600 prepayment penalty to a lending institution because she paid off the mortgage on her home early.The $1,600 is deductible as interest expense.

Question 57

Contributions to public charities in excess of 50% of AGI may be carried back three years or forward for up to five years.

Question 58

Joe, a cash basis taxpayer, took out a 12-month business loan on December 1, 2019.He prepaid all $3,600 of the interest on the loan on December 1, 2019.Joe can deduct only $300 of the prepaid interest in 2019.

Question 59

Leona borrows $100,000 from First National Bank and uses the proceeds to purchase City of Houston bonds.The interest Leona pays on this loan is deductible as investment interest subject to the investment interest limits.

Question 60

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

Question 61

The tax benefit received from a tax credit never is affected by the tax rate of the taxpayer.

Question 62

Gambling losses may be deducted to the extent of the taxpayer's gambling winnings.

Question 63

The education tax credits (i.e., the American Opportunity credit and the lifetime learning credit) are available to help defray the cost of higher education regardless of the income level of the taxpayer.

Question 64

Certain high-income individuals are subject to three additional Medicare taxes on wages, unearned income, and tax credits claimed.

Question 65

The additional Medicare taxes assessed on high-income individuals carry differing tax rates depending on the tax base.

Question 66

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

Question 67

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.

Question 68

The tax benefits resulting from tax credits and tax deductions are affected by the tax rate bracket of the taxpayer.

Question 69

The earned income credit is available only if the taxpayer has at least one qualifying child in the household.

Question 70

Qualifying tuition expenses paid from the proceeds of a tax-exempt scholarship do not give rise to an education tax credit.

Question 71

The maximum credit for child and dependent care expenses is $2,100 if only one spouse is employed and the other spouse is a full-time student.

Question 72

A taxpayer may qualify for the credit for child and dependent care expenses if the taxpayer's dependent is under age 17.

Question 73

Only married taxpayers with children can claim the earned income credit.

Question 74

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

Question 75

The earned income credit, a form of a negative income tax, is a refundable credit.

Question 76

The maximum child tax credit under current law is $1,500 per qualifying child.

Question 77

Expenses that are reimbursed by a taxpayer's employer under a dependent care assistance program also can qualify for the credit for child and dependent care expenses.

Question 78

Both education tax credits are available for qualified tuition expenses, and in certain instances, also may be available for room and board.

Question 79

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.

Question 80

A taxpayer's earned income credit may be determined by the number of his or her qualifying children.