Chapter 6 Quiz

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Question #1

Cara, who is 42 years old, had some unexpected medical expenses during the year. To pay for these expenses (which were above the 10% of AGI threshold and claimed as itemized deductions on her tax return), she received a $10,000 distribution from her traditional IRA (she has only made deductible contributions to the IRA). Assuming her marginal ordinary income tax rate is 22%, what amount of taxes and/or early distribution penalties will Cara be required to pay on this distribution?

A $0 income tax; $0 early distribution penalty

B $2,200 income tax; $100 early distribution penalty

C $2,200 income tax; $0 early distribution penalty

D $2,200 income tax; $1,000 early distribution penalty

Question #2

Which of the following is a true statement?

A The deduction for interest on educational loan is claimed as an itemized deduction.

B The deduction for interest on educational loans is subject to a phase-out limitation.

C Taxpayers are allowed to deduct reasonable moving if the expenses are not reimbursed by their employers.

D The deduction for the employer portion of self employment taxes is subject to a phase-out limitation.

E All of the choices are false.

Question #3

Ben is employed as a carpenter and his wife, Marilyn is a self-employed consultant. Besides Ben’s salary, Ben and Marilyn own a condominium that they only rent to tourists. This year they paid $2,200 for utilities in the condo. Marilyn also paid self-employment tax of $4,200 and Ben had $3,000 of Social Security taxes withheld from his pay. Which of the following is a true statement?

A The cost of the utilities is deductible for AGI.

B One-half of Ben’s social security tax is deductible for AGI.

C None of Marilyn’s self-employment tax is deductible

D Only the $2,200 utility bill is deductible for AGI.

E None of the choices are true.

Question #4

How is depreciation expense on a residence with significant rental use (vacation home) allocated to rental use?

A None of the choices are correct.

B Depreciation expense × (number of rental days/365).

C Depreciation expense × [number of rental days/(number of rental days + number of personal use days)].

D Depreciation expense × (number of rental days/number of personal days).

Question #5

Which of the following is a true statement?

A Rental expenses are deducted for AGI but all other business expenses must be itemized.

B All of the choices are true.

C To deduct expenses associated with any profit motivated activity taxpayers must maintain a high level of involvement or effort in the activity throughout the entire tax year.

D Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax for AGI.

E Business activities cannot require a relatively high level of involvement or effort from the taxpayer.

Question #6

Self-employed taxpayers can deduct for AGI the cost of health insurance as long as they are not eligible to participate in their spouses’ employer-provided health plan.

A TRUE

B FALSE

Question #7

In general, total deductible home office expenses are limited to the gross income derived from the business minus business expenses unrelated to the home (this is net Schedule C income before home office expenses).

A TRUE

B FALSE

Question #8

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

A TRUE

B FALSE

Question #9

Mike paid $4,000 of interest on a qualified education loan that he used to pay for his dependent son’s college education. How much of this payment can Mike deduct as a for AGI deduction if he files married-joint and reports modified AGI of $155,000?

A None of the choices are correct – no deduction is allowed.

B $2,000

C $1,250

D $2,500

E $4,000

Question #10

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

A FALSE

B TRUE

Question #11

All reasonable moving expenses are generally deductible.

A FALSE

B TRUE

Question #12

A loss from a passive activity is fully deductible as long as the taxpayer has sufficient tax basis in the activity.

A TRUE

B FALSE

Question #13

All business expense deductions are claimed as itemized deductions.

A TRUE

B FALSE

Question #14

During 2020, Rebekah, a 20-year-old full-time student, earned $3,400 during the year and was not eligible to participate in an employer-sponsored retirement plan. The general limit for deductible contributions during 2020 is $6,000. How much of a tax-deductible contribution can she make to an IRA?

A $3,400

B $6,000

C $9,400

D $0 (Full-time students are not allowed to participate in IRAs)

Question #15

Generally, losses from rental activities are considered to be passive activity losses.

A TRUE

B FALSE

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