Adjustments if Self Employed
self-employed taxpayer may take a deduction on his/her personal return for ___ of the employment tax paid.
One-half (employer-equivalent portion)
A self-employed taxpayer may take a deduction on his personal return for the employer-equivalent portion of the employment tax paid.
Who can contribute to a taxpayer's HSA?
All of the above
Any eligible individual can contribute to an HSA. For an employee's HSA, the employee, the employee's employer, or both may contribute to the account in the same year. For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. Family members or any other person may also make contributions on behalf of an eligible individual. The sum of the contributions cannot exceed the annual contribution limit.
A taxpayer can make contributions to a traditional IRA at any time during the year, but at the latest by:
April 15 – the due date for filing the return
A taxpayer can make contributions to a traditional IRA at any time during the year or by the due date for the filing the return for that year, not including extensions. For most taxpayers, this is April 15th.
An active member of the US Armed Forces may deduct qualified moving expenses from gross income. Which of the following items is considered a qualified moving expense?
Airfare for the taxpayer’s spouse to fly to the new duty station (the taxpayer drove separate).
The members of a household relocating to a new duty station do not have to travel together for the trip expenses to be deductible. However, taxpayer’s may only deduct expenses for one trip per person.
Dean's 2018 divorce decree requires him to pay $2,000 per month to his ex-wife Cathy until their son reaches his twenty-first birthday. Does Cathy include these payments she receives in her 2021 income?
No, because the payments cease when their son reaches his twenty-first birthday.
She does not include the payments in income. The payments are child support because they terminate on the happening of a contingency relating to the child. There is no requirement that the payment be so designated in the divorce decree; however, payment of alimony must be designated.
A payment that is specifically designated as child support or treated as specifically designated as child support under a divorce or separation instrument is not alimony. A payment is treated as specifically designated as child support to the extent that the payment is reduced either on the happening of a contingency relating to the child or at a time that can be clearly associated with the contingency. Child support payments are not deductible by the payer and are not taxable to the recipient. A payment may be treated as specifically designated as child support even if other separate payments are specifically designated as child support.
To claim the student loan interest deduction, a single taxpayer's 2021 modified adjusted gross income (MAGI) has to be less than?
$85,000
In 2021, the $2,500 maximum deduction for interest paid on qualified education loans begins to phase out for taxpayers with MAGI in excess of $70,000 ($140,000 MFJ) and is completely phased out for taxpayers with MAGI of $85,000 or more ($170,000 or more MFJ).
If you are self-employed you may be able to deduct 100% of the premiums paid for health insurance established under your business for yourself and your family. The following are considered self-employed for purposes of the deduction, EXCEPT:
Shareholder owning 100% of stock in a C Corporation
A taxpayer is considered self-employed if he is a general partner (or a limited partner receiving guaranteed payments) or if he receives wages from an S corporation in which he is more than a 2% shareholder. The deduction cannot be more than the earned income from the business.
A health savings account is a tax-favored savings account used in conjunction with a high deductible health insurance plan. Which of the following statements about health savings accounts is FALSE?
Health savings accounts allow for employer contributions only; employees may not contribute
The question asks for the statement that is false. Employers and employees can contribute to a health savings account up to the maximum annual contribution amount.
Barry reached age 50 in 2021. Which of the following is an allowable catch-up contribution for Barry to a retirement plan?
All of the above
The maximum catch-up amount for 401(k) plans is $6,500. The SIMPLE plan catch-up limit is $3,000. The limit is $1,000 both a traditional IRA and Roth IRA.
When does moving expenses get reinstated after being cut in the TCJA?
After Dec. 31, 2025
Frank is making monthly payments to his ex-wife Nancy in the amount of $1,500 per month under a divorce decree that was signed in September 2018. Of this total, $500 is intended for child support and $1,000 is for alimony. He is required to make payments for all of 2021. Frank's payments to Nancy in 2021 totaled only $14,000. How much of this amount does Nancy report as income for 2021?
$8,000
f both alimony and child support payments are called for by a divorce or separation instrument, and the taxpayer pays less than the total required, the payments apply first to child support and then to alimony. Child support is not include in the recipient's income. Required annual child support is $6,000. Nancy's taxable alimony income is therefore $8,000 ($14,000 - $6,000). If the divorce decree was dated after 12/31/2018, alimony would not be included in Nancy's taxable income and the answer would be $0.
Pedro borrows money to pay for his junior year at State University. Pedro may be able to deduct the interest he pays on the loan if he obtains the loan from which of the following sources?
A loan he obtains from a federal post-secondary education loan program.
Interest paid on a qualified student loan may be tax deductible if the taxpayer meets the required tests. A qualified student loan is a loan that was taken out solely to pay qualified education expenses and cannot be a loan from a related person or made under a qualified employer plan.
The following items are reported on Mr. and Mrs. Spice's joint return:
Compute their adjusted gross income (AGI).
$32,174
AGI = $32,174 ($40,000 Schedule C net profit – $5,000 alimony – $2,826 deduction for one-half of self-employment tax).
A self-employed (Schedule C) taxpayer includes the business profit or loss in gross income but is allowed a deduction equal to one-half of self-employment tax. For 2020, the self-employment (SE) tax rate is 15.3%. A self-employed taxpayer deducts 7.65% (or one-half of self-employment tax) from Schedule C profit before calculating SE tax. The result is $36,940 ($40,000 Schedule C net profit × .9235). To calculate SE tax multiply 15.3% by $36,940, arriving at $5,652 self-employment tax. One-half of $5,652 is $2,826, the deduction for one-half of self-employment tax.
Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation instrument. Alimony paid under the terms of a divorce decree finalized before 2019 is deductible by the payer and must be included in the spouse's or former spouse's income.
The Section 199A deduction for Qualified Business Income is a deduction from, not for, AGI.
An eligible individual and his dependent child are covered under an "employee plus one" HDHP offered by the individual's employer. What kind of HDHP coverage does this employee have?
Family plan.
This is family HDHP coverage. Self-only HDHP coverage is an HDHP covering only an eligible individual. Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual regardless of whether that individual is an eligible individual.
Alice and Mike file a joint return for 2021 on April 15, 2022. Alice, who is a non-working spouse, is 49. Both Alice and Mike contributed $4,000 each to a traditional IRA although they qualified to contribute the maximum amount. They filed their return timely. On June 1st, 2022, Mike's mother gave each of them $1,000. What additional amount of the gift may Alice and Mike contribute to each of their IRAs for the year 2021?
0
Contributions to a traditional IRA must be made by the due date of the return, not including extension. Their due date was April 15, 2022. A contribution for 2021 cannot be made on June 1, 2022.
Michael, an active duty member of the US Army, incurs the following expenses when he moves duty stations from Texas to Georgia.
If Michael is reimbursed for 100% of the above expenses, how much of the reimbursement can be excluded from gross income?
$515.80
Because Michael is an active member of the US Armed Forces, reimbursements for moving expenses when he changes duty stations are excluded from gross income, except for the cost of meals. No deduction or tax-free reimbursement is allowed for the cost of meals.
Elaine and Hugh divorced on September 1, 2021. As part of the divorce decree, beginning in September, Hugh agreed to pay Elaine's last tuition payment of $8,000, child support payments of $500 per month, and $1,500 a month for the mortgage payment on a home titled in his name. Elaine and the children will continue to live in the home. What is the amount that Hugh can deduct as alimony for 2021?
$0
Hugh cannot deduct any amount for alimony because the divorce decree was signed after December 31, 2018. If the divorce had been finalized prior to 2019, the $8,000 tuition would have counted as alimony. The mortgage payments wouldn't be alimony because the home is titled in his name only. Always remember child support is never considered alimony.
Miriam Wallesto has come to Wilma Randolph to do her federal income taxes. Ms. Wallesto has gross income for the year of $40,000. She spent $100 this year and wants to know if that amount can be used to reduce her adjusted gross income. Under which of the following will she NOT be able to use that amount to reduce the amount reported as her adjusted gross income?
She changed jobs this year and spent the money moving 55 miles to be closer to the new place of business because she rides her bicycle to work.
The TCJA suspends the deduction for moving expenses for taxable years 2018 through 2025 for taxpayers other than members of the Armed Forces.
The TCJA retains the deduction for moving expenses for members of the Armed Forces (or their spouse or dependents) on active duty that move pursuant to a military order and incident to a permanent change of station.
Therefore, since her move was not pursuant to a military order, she can not deduct her moving expenses.
The other three costs can all be deducted from gross income to arrive at adjusted gross income.
Which of the following is more than the allowable deductible contribution amount to a self-employed retirement plan?
Contribution of $10,000 to a self-employed individual's own defined contribution Keogh plan. The individual's net earnings from self-employment (on Schedule C) are $40,000
he deduction for annual contributions (other than elective deferrals) to a self-employed owners' own defined contribution plan (Keogh) plan cannot be more than 20% of net earnings (figured without deducting contributions for yourself) from the business that has the plan. Answer A is not allowable because the contribution percentage exceeds 20% of net earnings from self-employment.
Please note, the contribution limit for an employee is different. For purposes of calculating contributions for a self-employed individual, compensation refers to net earnings from self-employment, which is the net profit (Line 31 of 2021 Schedule C) of the business reduced by both one-half of the self-employment tax and certain contributions to the owner's account. To calculate the correct deduction, reduce the net profit of the business by one-half of self-employment tax, then apply the applicable percentage from the rate table for self-employed shown below.
Lacy has family coverage under a high deductible health insurance plan and participates in a health savings account through a cafeteria plan. At the beginning of the year, Lacy’s HSA has a $10,000 balance. She contributes $3,000 to her health savings account and her employer matches her contribution. Additionally, the following amounts are distributed from the health savings account during the year:
What is the total amount excluded from gross income?
$6,900
An employer's contributions (including an employee's contributions through a cafeteria plan) to an employee's HSA are excludable from the employee's income. Lacy made a $3,000 contribution through a cafeteria plan and her employer matched it, thus $3,000 employer contribution, for total contributions of $6,000 which is excluded from Lacy's gross income.
Distributions from the account to pay for qualified medical expenses are also excluded from gross income. The prescription eyeglasses ($300) and insulin ($600) are qualified medical expenses, therefore, $900 is excluded from Lacy's gross income.
Hair transplants and wigs do not qualify as medical expenses; therefore, the $1,000 distributed is included in gross income and may be subject to the 20% early withdrawal penalty.
The total amount excluded from gross income is $6,900 ($6,000 + $900).
Lenny, age 52, and Norma, age 49, file a joint return for tax year 2021. Lenny and Norma are not covered by retirement plans. Their modified AGI is $150,000 all of which came from Lenny's wages. They wish to make the maximum allowed deductible IRA contributions for tax year 2021, which of the following is correct:
Norma may make a deductible contribution of $6,000 and Lenny may make a deductible contribution of $7,000.
For 2021, an individual that is not covered by a retirement plan at work may make an IRA contribution up to $6,000 ($7,000 if over age 50) or 100% of taxable compensation (of both spouses), whichever is less. There is no income limit as neither spouse is covered by a retirement plan at work. This means Lenny can make $7,000 ($6,000 + $1,000 catch-up contribution) deductible contribution because he is over age 50 and Norma can make a $6,000 deductible contribution.
Jonah moves from Florida to Virginia at the request of his employer. Which of the following statements regarding moving expenses incurred by Jonah is correct?
If Jonah is an active member of the US military moving permanent duty stations, any qualified moving expenses for which Jonah is reimbursed may be excluded from income
For all taxpayers except active members of the US Armed Forces, the Tax Cuts and Jobs Act repealed the exclusion of qualified moving expense reimbursements from gross income and wages for taxable years beginning 1/1/18 and ending 12/31/25.
Mr. West must pay his former spouse $20,000 annually under a 2018 divorce decree in the following amounts:
In addition to the above amounts, the former Mrs. West also received a lump-sum amount of $150,000 from the sale of their other marital assets.
Assume the parties did not file a joint return and were not members of the same household. Also, assume that there were no written statements between the parties as to how the amounts should be treated. What is the amount of Mr. West's alimony deduction?
$11,000
As a pre-2019 divorce decree, the old alimony rules apply regarding deductibility by payor spouse and inclusion in income by the recipient spouse.
Since it is a jointly owned home, half of the mortgage payments are includable in alimony ($6,000), as is the $5,000 yearly cash payment, for a total of $11,000. The $11,000 includable as alimony to his former spouse, is the amount of Mr. West's alimony deduction. The tuition is child support because of the contingency relating to the child (age and/or staying in school). The $150,000 is not alimony as it is a transfer of property.
Mr. Jones is a high school counselor and Mrs. Jones is an elementary school aide who works 1,000 hours per year. Mr. Jones spent $200 of his own money for educational software that was common and accepted in his field. Mrs. Jones spent $320 of her own money for books that were also ordinary and necessary for her job. If a joint return is filed, how much of a deduction can they take in arriving at their adjusted gross income for the tax year?
$450
An eligible educator can deduct up to $250 of qualified expenses paid during the tax year. If the taxpayer and spouse are filing jointly and both are eligible educators, the maximum deduction is $500. However, neither spouse can deduct more than $250 of his or her qualified expenses.
An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year. Qualified expenses include ordinary and necessary expenses.
Mr. Jones can deduct his $200 but Mrs. Jones can only deduct $250 of her expenses.
Hahn Company, a calendar year taxpayer operating as a sole proprietorship, reports Federal income taxes employing the accrual method of accounting. Hahn Company shows the following items of income and expense for 20X1:
For the 20X1 year tax, what is the amount of Hahn Company's net income reportable on Schedule C, Profit or Loss from Business (Sole Proprietorship)?
$117,500
Hahn Company's Schedule C net income is $117,500, calculated as follows:
$230,000Sales– 70,000Cost of Sales– 40,000Operating Expenses– 2,500Business liability insurance (6 months of the 36-month policy)$117,500Schedule C Net income
You cannot deduct amounts credited to a reserve set up for self-insurance. The deduction for self-employed health insurance is taken on Form 1040, not Schedule C.
A taxpayer using the accrual method does not accelerate deductions for prepaid interest and rent or other items where economic performance will not take place until a future date. The business liability insurance is prepaid and must be capitalized. $2,500, or 6 months (July to Dec) of the 36-month policy, of the insurance is deductible in the current year.
Brenda, age 52, participates in a high deductible health plan at work and contributes 3% of her salary to a health savings account (HSA). Her employer matches her 3% contribution. During the tax year, Brenda pays $1,200 for doctor appointments, $400 for prescriptions, and another $375 in over-the-counter nutritional supplements from funds in her health savings account. She also pays for a $600 membership to a health club. What amount of Brenda’s expenses may be excluded from gross income as qualified medical expenses?
$1,600
The funds spent on doctor appointments ($1,200) and prescriptions ($400) are excluded from gross income as qualified medical expenses under Brenda’s health savings account.
The over-the-counter supplements and health spa membership are not qualified expenses. The amount distributed from the HSA for these items will be included in taxable income and, because Brenda is not 65, will be subject to the 20% additional tax penalty.
As of 2020, in addition to certain feminine care products, certain over-the-counter medications qualify as deductible medical expenses. These include things like pain relievers, sinus and allergy medication, and medications for stomach upset or heartburn. Nutritional supplements still aren't classified as qualified medical expenses.
Which of the following statements is correct regarding a Roth IRA?
Contributions may be made at any age
Contributions can be made at any age provided other requirements are met. You are allowed to have both traditional and Roth IRAs. Distributions are not taxable, but contributions to Roth IRAs are never deductible.
Miriam Wallesto has come to Wilma Randolph to do her federal income taxes. Ms. Wallesto has gross income for the year of $40,000. She spent $100 this year and wants to know if that amount can be used to reduce her adjusted gross income. Under which of the following will she NOT be able to use that amount to reduce the amount reported as her adjusted gross income?
She changed jobs this year and spent the money moving 55 miles to be closer to the new place of business because she rides her bicycle to work.
The TCJA suspends the deduction for moving expenses for taxable years 2018 through 2025 for taxpayers other than members of the Armed Forces.
The TCJA retains the deduction for moving expenses for members of the Armed Forces (or their spouse or dependents) on active duty that move pursuant to a military order and incident to a permanent change of station.
Therefore, since her move was not pursuant to a military order, she can not deduct her moving expenses.
The other three costs can all be deducted from gross income to arrive at adjusted gross income.
Frank and Nancy were divorced in 2018. Nancy has custody of their 8-year-old daughter and they live in a house that is still owned by Frank and Nancy. Frank paid all of the mortgage payments in 2021, as required by the divorce decree. Does Nancy include the mortgage payments in her 2021 income?
Yes, but she only needs to report one-half of the mortgage payments made.
If a divorce or separation instrument executed prior to 2019 provides that one spouse make mortgage payments for a home that is jointly owned by the former spouses, the payer deducts one-half of the mortgage payments made as an adjustment to income and the payee reports one-half of the payments as alimony received.
Max Snyder teaches science in the fifth grade of his local public school. Because of budgetary cutbacks, he is forced to buy certain supplies (such as test tubes) himself. In the current year, he spent three hundred dollars for supplies to be used by his students. Which of the following statements is true?
These expenditures can be deducted in arriving at the taxpayer's adjusted gross income but only up to a set limit.
Educators in all of the grades from K-12 are allowed to deduct their out-of-pocket costs up to a maximum amount.
An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year. Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment, software, and even the costs to participate in professional development courses related to the curriculum.
A taxpayer that was an eligible educator during the tax year, can deduct up to $250 ($500 if married filing jointly and both were eligible educators) of qualified expenses paid in 2021 as an adjustment to gross income on Form 1040. The maximum deduction is $500. However, neither spouse can deduct more than $250 of his or her qualified expenses.
Qualified expenses that are not claimed as an adjustment to gross income are no longer deductible as an itemized deduction subject to the 2% limit.