COMPLETE EXAM FOR CFP 4 - CHAPTER 2 (INCOME TAX FUNDAMENTALS AND CALCULATIONS: DEDUCTIONS AND CREDITS)

COMPLETE EXAM FOR CFP 4 - CHAPTER 2 (INCOME TAX FUNDAMENTALS AND CALCULATIONS: DEDUCTIONS AND CREDITS) Standard Deduction - CORRECT ANSWER-AGI is reduced by greater of Standard Deduction or Itemized Deduction Based on filing status and calendar year of filing Taxpayer 65 and older can take an additional deduction, another deduction available to those who are blind Itemized Deductions - CORRECT ANSWER-AGI is reduced by greater of Standard Deduction or Itemized Deduction Reported on Schedule A of 1040 Expenses must be ordinary and necessary Timing of deductions depend on accounting method (accrual vs. cash basis) Cash basis - receive deduction in the tax year where expense is paid Accrual basis - Receive a deduction when expense is incurred Cluster - CORRECT ANSWER-Maximize amount deductible in a given year to reduce taxable income Limits on Itemized Deductions - CORRECT ANSWER-For higher income levels, allowable itemized deductions are reduced by 3% of the amount of the taxpayer's AGI exceeds the threshold for the filing status. Reduction cannot be more than 80% (311, 285, 155 - AGI Phaseout) Medical Expenses - CORRECT ANSWER-Include taxpayer, spouse and dependents. Cannot be reimbursed by insurance 10% of AGI for younger than 65 7.5% of AGI for over 65 (changing to 10% after 2016) Taxes - CORRECT ANSWER-Taxes that are deductible on Schedule A Form 1040 State, local and foreign real estate taxes State and local sales taxes State and local personal property taxes States, local, foreign income taxes Interest - CORRECT ANSWER-Consumer interest is never deductible Business interest - allowable schedule C expense Passive interest Investment Interest expense Qualified residence interest Acquisition Indebtedness - CORRECT ANSWER-Interest incurred in acquiring, constructing or improving a qualified residence of taxpayer (one other residence included) Debt must be secured by real property in amount to total $1,000,000 ($500,000 for married filing separately) Home Equity Indebtedness - CORRECT ANSWER-Interest incurred on loan or line of credit secured by equity in primary residence, secondary residence, or both Deductible interest is limited to a loan/line of credit not in excess of $100,000 ($50,000 for married filing separately) - may be restricted by FMV of property Loan in excess of $100,000 - ($100,000/Loan Amount)* Interest Payment = Amount deductible Personal Casualty Losses - CORRECT ANSWER-Losses of tangible property and real property Event must be identifiable Property damage results Event is sudden unusual and unexpected Insurance claim must be filed in a timely manner (termite damage not included) Taxpayer adjusted basis in property (or difference between FMV before and after loss) - insurance amounts for reimbursement -$100 (for 2016) -10% of AGI = Deductible Casualty Loss Miscellaneous Itemized Deductions - CORRECT ANSWER-Two Types Tier I - Not subject to an AGI limitation Tier II - Subject to an AGI 2% limitation (above 2% threshold is deductible) Tier II Miscellaneous Deductions - CORRECT ANSWER-Unreimbursed employee business expense (travel and entertainment Investment expense (investment advisory fees) Tax return prep fees Professional dues and subscriptions Job Hunting expenses Employment-related educational expense Home office expense Loss of Basis in IRA/Roth IRA Tier I Miscellaneous Deductions - CORRECT ANSWER-Federal Estate Tax that is attributable to items included in the taxpayer's estate as income Gambling losses to the extent of gambling winnings Impairment related work expenses - handicapped taxpayers Unrecovered investment in an annuity contract because taxpayer died Employment-related Education Expenses (Unreimbursed) - CORRECT ANSWER Subject to 2% AGI floor Deductible if incurred primarily for the purpose of maintaining or improving skills on the job