Tax Final Exam 2 Questions Fully
Answered Rated A+.
Three categories of deductions for AGI - Answer -Directly related to business activities
-Indirectly related to business activities
-Deductions subsidizing specific activities
Directly Related to Business Activities - Answer Taxpayers are allowed to deduct expenses
incurred to generate business income.
For tax purposes, activities are either
profit-motivated or motivated by personal objectives.
Profit-motivated activities are classified as
-Business activities (called "trade or business") (involve high level of effort. ex: land developer)
-Investment activities (not much effort, just sit back and wait. ex: land buy and sell)
business expenses - Answer all deducted for agi except unreimbursed employee expenses.
employees who incur unreimbursed business expenses relating to their employment cannot
deduct these expenses.
investment expenses - Answer typically very limited. only deductible is from agi (investment
interest) with the exception of rent and royalty exps that are for AGI no matter the amt of use)
Although both are motivated primarily by profit, business activities are distinguished from
investment activities. - Answer Trade or business activities require a relatively high
involvement or effort from the taxpayer whereas investment activities do not.
Investment activities involve investing in property for appreciation or for income payments.
Trade or business expenses must be - Answer -directly connected to the business activity
-ordinary and necessary for the activity (e.g., appropriate and helpful for generating a profit)
-reasonable in amount (not extravagant)
Expenses are claimed on Schedule C. - Answer Revenues from the same activity are also
reported on the same Schedule C
,Rental and Royalty Expenses - Answer Claimed above the line (for AGI)
Could either be an investment activity or a trade activity depending on facts
Taxpayers report expenses and revenue on Schedule E and transfer the net income or loss from
Schedule E to Form 1040 (page 1), line 17
Flow-Through Entities - Answer Expenses and losses incurred by a flow-through entity pass
through to the entity owners who typically report these amounts on Schedule E and Line 17
Losses - Answer Taxpayers disposing of trade or business assets at a loss are allowed to deduct
the loss for AGI.
Losses from investment assets (called capital assets) are offset against capital gains.
If capital losses exceed capital gains, this is called a net capital loss.
A net capital loss is deducted for AGI but limited to $3,000.
-Losses in excess of the $3,000 limit are carried forward indefinitely to subsequent years.
Excess Business Loss Limitation - Answer Excess business loss is excess of aggregate business
deductions over the sum of business gross income or gain plus $250,000 ($500,000 for married
filing jointly).
Excess business loss is not deductible but is carried forward as net operating loss.
theres now a limit on business loss. rest goes to next yr
Health Insurance Deduction by Self-Employed Taxpayers - Answer Deduction provides equity
with employees who receive health insurance as a qualified fringe benefit.
Insurance must be provided for taxpayer or dependents who are not eligible for employer-
provided health insurance.
Penalty for Early Withdrawal of Savings - Answer Reduces the taxpayer's net interest income
to the amount actually received
like interest. penalty we pay to the bank
SE Tax Deduction - Answer Employer and employees each pay the employee's Social Security
tax.
Employers deduct the portion of Social Security taxes they pay for employees.
, deduct the employer part of the taxes paid to make it more equitable bc theyre self employed
and paying both (deduction for 1/2 of self employment taxes paid)
Alimony payments - Answer are deductible for AGI to maintain equity if paid pursuant to a
divorce or separation agreement executed before 2019.
Contributions to a qualified retirement account - Answer are deductible for AGI to encourage
savings.
ex: contributing to IRA
Interest expense on qualified educational loans - Answer deduction for agi. ex: student loan
interest deduction.
Deduction for interest expense on loans used to fund qualified educational expenses - Answer
Up to $2,500 of interest on education loans is deductible for AGI.
The interest deduction is phased out for taxpayers with AGI exceeding $65,000 ($135,000 filing
jointly).
The deduction is eliminated for taxpayers with AGI exceeding $80,000 ($165,000 filing jointly).
cab be used on required books, supplies, tuition, fees, and room and board. (for scholarships
room and board wasnt included, but for student loans it is).
MFS cant get this deduction
deductions from agi: itemized deductions - Answer calculation picture
Medical Expenses - Answer Taxpayers may deduct medical expenses incurred to treat
themselves, their spouse, and their dependents.
Qualifying medical expenses include unreimbursed payments for care, prevention, diagnosis, or
cure of injury, disease, or bodily function.
Taxpayers using personal automobiles for medical transportation purposes may deduct a
standard mileage allowance (18 cents per mile in 2018) in lieu of actual costs.
most people dont have these count in their taxes unless really large
Hospitals and Long-Term Care Facilities - Answer Taxpayers may deduct the costs of actual
medical care whether the care is provided at hospitals or other long-term care facilities
Answered Rated A+.
Three categories of deductions for AGI - Answer -Directly related to business activities
-Indirectly related to business activities
-Deductions subsidizing specific activities
Directly Related to Business Activities - Answer Taxpayers are allowed to deduct expenses
incurred to generate business income.
For tax purposes, activities are either
profit-motivated or motivated by personal objectives.
Profit-motivated activities are classified as
-Business activities (called "trade or business") (involve high level of effort. ex: land developer)
-Investment activities (not much effort, just sit back and wait. ex: land buy and sell)
business expenses - Answer all deducted for agi except unreimbursed employee expenses.
employees who incur unreimbursed business expenses relating to their employment cannot
deduct these expenses.
investment expenses - Answer typically very limited. only deductible is from agi (investment
interest) with the exception of rent and royalty exps that are for AGI no matter the amt of use)
Although both are motivated primarily by profit, business activities are distinguished from
investment activities. - Answer Trade or business activities require a relatively high
involvement or effort from the taxpayer whereas investment activities do not.
Investment activities involve investing in property for appreciation or for income payments.
Trade or business expenses must be - Answer -directly connected to the business activity
-ordinary and necessary for the activity (e.g., appropriate and helpful for generating a profit)
-reasonable in amount (not extravagant)
Expenses are claimed on Schedule C. - Answer Revenues from the same activity are also
reported on the same Schedule C
,Rental and Royalty Expenses - Answer Claimed above the line (for AGI)
Could either be an investment activity or a trade activity depending on facts
Taxpayers report expenses and revenue on Schedule E and transfer the net income or loss from
Schedule E to Form 1040 (page 1), line 17
Flow-Through Entities - Answer Expenses and losses incurred by a flow-through entity pass
through to the entity owners who typically report these amounts on Schedule E and Line 17
Losses - Answer Taxpayers disposing of trade or business assets at a loss are allowed to deduct
the loss for AGI.
Losses from investment assets (called capital assets) are offset against capital gains.
If capital losses exceed capital gains, this is called a net capital loss.
A net capital loss is deducted for AGI but limited to $3,000.
-Losses in excess of the $3,000 limit are carried forward indefinitely to subsequent years.
Excess Business Loss Limitation - Answer Excess business loss is excess of aggregate business
deductions over the sum of business gross income or gain plus $250,000 ($500,000 for married
filing jointly).
Excess business loss is not deductible but is carried forward as net operating loss.
theres now a limit on business loss. rest goes to next yr
Health Insurance Deduction by Self-Employed Taxpayers - Answer Deduction provides equity
with employees who receive health insurance as a qualified fringe benefit.
Insurance must be provided for taxpayer or dependents who are not eligible for employer-
provided health insurance.
Penalty for Early Withdrawal of Savings - Answer Reduces the taxpayer's net interest income
to the amount actually received
like interest. penalty we pay to the bank
SE Tax Deduction - Answer Employer and employees each pay the employee's Social Security
tax.
Employers deduct the portion of Social Security taxes they pay for employees.
, deduct the employer part of the taxes paid to make it more equitable bc theyre self employed
and paying both (deduction for 1/2 of self employment taxes paid)
Alimony payments - Answer are deductible for AGI to maintain equity if paid pursuant to a
divorce or separation agreement executed before 2019.
Contributions to a qualified retirement account - Answer are deductible for AGI to encourage
savings.
ex: contributing to IRA
Interest expense on qualified educational loans - Answer deduction for agi. ex: student loan
interest deduction.
Deduction for interest expense on loans used to fund qualified educational expenses - Answer
Up to $2,500 of interest on education loans is deductible for AGI.
The interest deduction is phased out for taxpayers with AGI exceeding $65,000 ($135,000 filing
jointly).
The deduction is eliminated for taxpayers with AGI exceeding $80,000 ($165,000 filing jointly).
cab be used on required books, supplies, tuition, fees, and room and board. (for scholarships
room and board wasnt included, but for student loans it is).
MFS cant get this deduction
deductions from agi: itemized deductions - Answer calculation picture
Medical Expenses - Answer Taxpayers may deduct medical expenses incurred to treat
themselves, their spouse, and their dependents.
Qualifying medical expenses include unreimbursed payments for care, prevention, diagnosis, or
cure of injury, disease, or bodily function.
Taxpayers using personal automobiles for medical transportation purposes may deduct a
standard mileage allowance (18 cents per mile in 2018) in lieu of actual costs.
most people dont have these count in their taxes unless really large
Hospitals and Long-Term Care Facilities - Answer Taxpayers may deduct the costs of actual
medical care whether the care is provided at hospitals or other long-term care facilities
