TAX 4001 Exam 2 2024/2025 Exam
Questions and Answers | 100% Solved
It has been suggested that tax policy favors deductions for AGI compared
to itemized deductions. Describe two ways in which deductions for AGI are
treated more favorably than itemized deductions. - 🧠ANSWER ✔✔Itemized
deductions must exceed the standard deduction before taxpayers receive
any tax benefit from the deductions (this is equivalent to an overall floor
limit). In contrast, business deductions that are deductible for AGI (above
the line) reduce taxable income without being subject to an overall floor
limit. Also, itemized deductions are subject to many mechanical limitations
including ceilings, floors, and phase-outs whereas business deductions are
generally not subject to these limits (there are limits on certain specific
deductions, but this will be described in greater detail in chapter 9).
How is a business activity distinguished from an investment activity? Why
is this distinction important for the purpose of calculating federal income
taxes? - 🧠ANSWER ✔✔Both business and investment activities are
motivated primarily by profit intent, but they can be distinguished by the
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,level of profit-seeking activity. A business activity is commonly described as
a sustained, continuous, high level of profit-seeking activity, whereas
investment activities don't require a high level of involvement. The
distinction can be important for the location of deductions, because
business deductions are claimed above the line (for AGI on Schedule C)
while investment deductions are generally itemized or from AGI deductions
(with the exception of rent and royalty expenses which are deductible for
AGI on Schedule E).
Describe how a business element is reflected in the requirements to deduct
moving expenses and how Congress limited this deduction to substantial
moves. - 🧠ANSWER ✔✔A business element is reflected in both the
distance test and time test associated with the move. To satisfy the
distance test, the distance from the taxpayer's old residence to the new
place of work (business element) must be at least 50 miles more than the
distance from the old residence to the old place of work (business
element). The time test for a moving expense deduction requires the
taxpayer to be employed full time 39 of the first 52 weeks (or self-employed
for 78 of the first 104 weeks) after the move (obviously reflecting a
business element).
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,Explain why Congress allows self-employed taxpayers to deduct the cost of
health insurance above the line (for AGI) when employees can only itemize
this cost as a medical expense. Would a self-employed taxpayer ever
prefer to claim health insurance premiums as an itemized deductions rather
than a deduction for AGI? Explain. - 🧠ANSWER ✔✔This deduction
provides a measure of equity between employees and the self-employed.
The cost of health insurance is essentially a personal expense. However,
employees typically aren't required to pay insurance premiums because
their employers pay the premiums for them as a form of compensation. The
employer is allowed to deduct the premium as a compensation expense,
and the employee is allowed to exclude from taxable income the value of
the premiums paid on his behalf. Thus, from the employee's perspective,
this arrangement has the same effect as if (1) the employer pays the
employee cash compensation in the amount of the premium and (2) the
employee pays the premium and deducts the expense for AGI (completely
offsetting the compensation income). In contrast to employees, self-
employed taxpayers pay their own health insurance costs, because they
don't have an employer to pay these costs for them. Absent a rule to the
contrary, self-employed taxpayers would deduct their medical expenses as
itemized deductions subject to strict limitations, because the cost of the
COPYRIGHT©PROFFKERRYMARTIN 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE.
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PRIVACY STATEMENT. ALL RIGHTS RESERVED
, health insurance is a personal expense rather than a business expense. To
treat employees and self-employed taxpayers similarly, Congress allows
self-employed taxpayers to deduct personal health insurance premiums as
for AGI rather than itemized deductions. Thus, self-employed taxpayers are
able to (1) receive business income and (2) use the business income to
pay their health insurance premiums and deduct the premiums as a for AGI
deduction (completely offsetting the business income they used to pay the
premium). Given the preferential treatment of for AGI deductions relative to
itemized deductions, a self-employed taxpayer should never prefer to claim
health insurance premiums as an itemized deduction rather than a
deduction for AGI.
Explain why Congress allows self-employed taxpayers to deduct the
employer portion of their self-employment tax. - 🧠ANSWER ✔✔To put self-
employed individuals on somewhat equal footing with other employers that
are allowed to deduct the employer's share of the social security tax.
Hence, self-employed taxpayers are allowed to deduct the employer's
share of the self-employment tax.
Using the Internal Revenue Code, describe two deductions for AGI that are
not discussed in this chapter. - 🧠ANSWER ✔✔§62 is the quickest way to
COPYRIGHT©PROFFKERRYMARTIN 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE.
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PRIVACY STATEMENT. ALL RIGHTS RESERVED
Questions and Answers | 100% Solved
It has been suggested that tax policy favors deductions for AGI compared
to itemized deductions. Describe two ways in which deductions for AGI are
treated more favorably than itemized deductions. - 🧠ANSWER ✔✔Itemized
deductions must exceed the standard deduction before taxpayers receive
any tax benefit from the deductions (this is equivalent to an overall floor
limit). In contrast, business deductions that are deductible for AGI (above
the line) reduce taxable income without being subject to an overall floor
limit. Also, itemized deductions are subject to many mechanical limitations
including ceilings, floors, and phase-outs whereas business deductions are
generally not subject to these limits (there are limits on certain specific
deductions, but this will be described in greater detail in chapter 9).
How is a business activity distinguished from an investment activity? Why
is this distinction important for the purpose of calculating federal income
taxes? - 🧠ANSWER ✔✔Both business and investment activities are
motivated primarily by profit intent, but they can be distinguished by the
COPYRIGHT©PROFFKERRYMARTIN 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE.
1
PRIVACY STATEMENT. ALL RIGHTS RESERVED
,level of profit-seeking activity. A business activity is commonly described as
a sustained, continuous, high level of profit-seeking activity, whereas
investment activities don't require a high level of involvement. The
distinction can be important for the location of deductions, because
business deductions are claimed above the line (for AGI on Schedule C)
while investment deductions are generally itemized or from AGI deductions
(with the exception of rent and royalty expenses which are deductible for
AGI on Schedule E).
Describe how a business element is reflected in the requirements to deduct
moving expenses and how Congress limited this deduction to substantial
moves. - 🧠ANSWER ✔✔A business element is reflected in both the
distance test and time test associated with the move. To satisfy the
distance test, the distance from the taxpayer's old residence to the new
place of work (business element) must be at least 50 miles more than the
distance from the old residence to the old place of work (business
element). The time test for a moving expense deduction requires the
taxpayer to be employed full time 39 of the first 52 weeks (or self-employed
for 78 of the first 104 weeks) after the move (obviously reflecting a
business element).
COPYRIGHT©PROFFKERRYMARTIN 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE.
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PRIVACY STATEMENT. ALL RIGHTS RESERVED
,Explain why Congress allows self-employed taxpayers to deduct the cost of
health insurance above the line (for AGI) when employees can only itemize
this cost as a medical expense. Would a self-employed taxpayer ever
prefer to claim health insurance premiums as an itemized deductions rather
than a deduction for AGI? Explain. - 🧠ANSWER ✔✔This deduction
provides a measure of equity between employees and the self-employed.
The cost of health insurance is essentially a personal expense. However,
employees typically aren't required to pay insurance premiums because
their employers pay the premiums for them as a form of compensation. The
employer is allowed to deduct the premium as a compensation expense,
and the employee is allowed to exclude from taxable income the value of
the premiums paid on his behalf. Thus, from the employee's perspective,
this arrangement has the same effect as if (1) the employer pays the
employee cash compensation in the amount of the premium and (2) the
employee pays the premium and deducts the expense for AGI (completely
offsetting the compensation income). In contrast to employees, self-
employed taxpayers pay their own health insurance costs, because they
don't have an employer to pay these costs for them. Absent a rule to the
contrary, self-employed taxpayers would deduct their medical expenses as
itemized deductions subject to strict limitations, because the cost of the
COPYRIGHT©PROFFKERRYMARTIN 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE.
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PRIVACY STATEMENT. ALL RIGHTS RESERVED
, health insurance is a personal expense rather than a business expense. To
treat employees and self-employed taxpayers similarly, Congress allows
self-employed taxpayers to deduct personal health insurance premiums as
for AGI rather than itemized deductions. Thus, self-employed taxpayers are
able to (1) receive business income and (2) use the business income to
pay their health insurance premiums and deduct the premiums as a for AGI
deduction (completely offsetting the business income they used to pay the
premium). Given the preferential treatment of for AGI deductions relative to
itemized deductions, a self-employed taxpayer should never prefer to claim
health insurance premiums as an itemized deduction rather than a
deduction for AGI.
Explain why Congress allows self-employed taxpayers to deduct the
employer portion of their self-employment tax. - 🧠ANSWER ✔✔To put self-
employed individuals on somewhat equal footing with other employers that
are allowed to deduct the employer's share of the social security tax.
Hence, self-employed taxpayers are allowed to deduct the employer's
share of the self-employment tax.
Using the Internal Revenue Code, describe two deductions for AGI that are
not discussed in this chapter. - 🧠ANSWER ✔✔§62 is the quickest way to
COPYRIGHT©PROFFKERRYMARTIN 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE.
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PRIVACY STATEMENT. ALL RIGHTS RESERVED
