Question 1

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

Accepted Answer

According to IRS regulations, business expenses must have a direct connection to a business activity in order to be deductible. This means that the expenses must be ordinary and necessary for carrying out the business, as well as meet the criteria set forth by the IRS for each category of deduction.

Question 2

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.

Accepted Answer

False

Question 3

The itemized deduction for taxes includes all types of state, local, and foreign taxes.

Accepted Answer

The itemized deduction for taxes is limited to state and local taxes, and does not include all types of foreign taxes. It primarily includes state and local income taxes or sales taxes, and property taxes, but there are limitations and not all foreign taxes are deductible under this category.

Question 4

The medical expense deduction is designed to provide relief for doctors and medical practitioners.

Accepted Answer

The medical expense deduction is designed to provide relief for individuals who have incurred substantial medical expenses for themselves, their spouse, or their dependents. It is not specifically for doctors or medical practitioners.

Question 5

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.

Accepted Answer

The answer of Self-employed taxpayers can deduct the cost of...

Question 6

Excess business losses are carried back and then forward as net operating losses.

Accepted Answer

Excess business losses are not carried back; they are carried forward to subsequent years as part of the taxpayer's net operating loss (NOL).

Question 7

Deductible medical expenses include payments to medical care providers such as doctors, dentists, and nurses and medical care facilities such as hospitals.

Accepted Answer

Deductible medical expenses include payments to medical care providers and facilities.

Question 8

All business expense deductions are claimed as "below the line" deductions.

Accepted Answer

"Below the line" deductions are taken from adjusted gross income (AGI) to arrive at taxable income, but business expense deductions are typically "above the line," meaning they are deducted from gross income to arrive at the AGI.

Question 9

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.

Accepted Answer

The Tax Cuts and Jobs Act of 2017 reduced the limit on mortgage interest deduction from $1,000,000 to $750,000 for new mortgages taken out after December 15, 2017.

Question 10

The phrase "ordinary and necessary" means that an expense must be appropriate and helpful for generating a profit.

Accepted Answer

The phrase "ordinary and necessary" is a term used by the IRS to determine if a business expense is deductible. It means that the expense must be common and accepted in the taxpayer's trade or business and must be helpful and appropriate for generating a profit.

Question 11

Self-employed taxpayers can choose between claiming a deduction or a credit for the employer portion of self-employment taxes paid.

Accepted Answer

Self-employed taxpayers must pay both the employee and employer portions of Social Security and Medicare taxes, but they can only claim a deduction for the employer-equivalent portion of these taxes on their income tax return. There is no option to claim a credit for these taxes.

Question 12

All investment expenses are itemized deductions.

Accepted Answer

Investment expenses used to be deductible as miscellaneous itemized deductions subject to the 2% floor, but this provision was suspended by the Tax Cuts and Jobs Act (TCJA) for tax years 2018 through 2025. Therefore, investment expenses are not currently deductible.

Question 13

Rental or royalty expenses are deductible "for" AGI.

Accepted Answer

Rental or royalty expenses are considered as trade or business expenses and are deductible before arriving at Adjusted Gross Income (AGI). Therefore, they are deductible "for" AGI.

Question 14

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 $255,000.

Accepted Answer

This is the correct definition of excess business losses for married taxpayers filing separately according to the IRS.

Question 15

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.

Accepted Answer

The deduction for medical expenses is actually limited to the amount of unreimbursed qualifying medical expenses that exceed 7.5% of the taxpayer's adjusted gross income (AGI), not 2%.

Question 16

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.

Accepted Answer

Qualified education expenses for purposes of the deduction of interest on educational loans are indeed 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.

Question 17

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

Accepted Answer

The profit motive, or the desire to make a profit, is a key factor in business activities. Personal activities may not involve a profit motive and are often done for other reasons such as enjoyment or personal growth.

Question 18

Taxpayers may elect to deduct state and local sales taxes instead of deducting state and local income taxes.

Accepted Answer

This is true. Taxpayers can choose to deduct either state and local income taxes or sales taxes, but not both. However, this option is only available for taxpayers who itemize their deductions on their federal income tax return.

Question 19

All reasonable moving expenses are deductible by employees.

Accepted Answer

Only certain moving expenses related to a job relocation that meets specific distance and time tests were deductible, and as of the Tax Cuts and Jobs Act of 2017, moving expense deductions for employees have been suspended for tax years 2018 through 2025, except for members of the Armed Forces on active duty who move pursuant to a military order.

Question 20

Taxpayers traveling for the primary purpose of receiving essential and deductible medical care may deduct the cost of travel.

Accepted Answer

According to the IRS, taxpayers can deduct the cost of travel if it is primarily for the purpose of receiving essential medical care. The deduction includes transportation expenses (such as the cost of a rental car, ambulance service, or taxis), lodging (including hotels and meals), and other incidental expenses (such as parking fees and tolls). However, there are certain limitations and restrictions on this deduction, so taxpayers should consult with a tax professional to ensure that they are eligible and have proper documentation.

Quiz 6: Individual Deductions