Chapter 4: Business Income and Expenses, Part II Key
1. Passive losses are fully deductible as long as they do not exceed $50,000 during the year.
2. Net losses on the rental of vacation homes are limited to 15 percent of total gross income.
3. Dividend income is considered “passive income.”
4. Wages are considered “active income.”
5. If a taxpayer receives an early distribution from an IRA due to disability, he or she will not be subject to a
penalty.
6. In some cases, a taxpayer may deduct an otherwise allowable contribution to an IRA, even though the
contribution is made after the close of the tax year.
7. Subject to the annual dollar limitation and the earned income limitation, deductible IRA contributions are
allowed for all taxpayers who do not participate in a qualified retirement plan.
8. A taxpayer must make contributions to a regular or Roth IRA prior to the end of the year in order to claim the
deduction for that year.
9. If under 50 years of age, a taxpayer may make a nondeductible contribution to an IRA, subject to the earned
income limitation and the $5,000 annual limitation.
10. In most cases, a taxpayer reports rental income and the related expenses on Schedule E.
11. When a residence is rented for less than 15 days during the year, the rental income is excluded from gross
income.
12. If a residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or
10 percent of the days rented, whichever is greater, no allocation of expenses is required and the taxpayer may
claim a deduction for the full amount of the expenses.
13. Without regard to their involvement in the management of the rental property, individual taxpayers may
deduct up to $25,000 of rental real estate losses against other income, provided their income does not exceed
certain limits.
14. Under the passive loss rules, real estate rental activities are specifically defined as passive, even if the
15. Passive losses of one activity may not be used to offset passive income from another activity.
16. Earnings on nondeductible IRA contributions are allowed to accumulate tax-free until they are withdrawn.
17. Since a contribution to an IRA is a voluntary action, a taxpayer may withdraw amounts from an IRA at any
time without penalty.
18. If an employer makes a contribution to a qualified retirement plan on behalf of an employee, the amount is
currently deductible by the employer, and the employee must include the amount in gross income at the time the
contribution is made.
19. Under a defined contribution plan, the contribution made on behalf of the employee is determined using a
formula dependent on the employee’s current compensation.
20. If a Section 401(k) plan allows an employee to choose between a direct payment of compensation in cash or
a contribution to the retirement plan, the plan is not a “qualified” plan.
21. In order for a pension plan to be considered a “qualified” retirement plan, the plan must satisfy certain
minimum vesting requirements.
22. In 2011, all taxpayers may make a deductible or nondeductible contribution to an IRA.
23. In a distribution rollover from an IRA, the recipient must contribute 80 percent of the distributed amount to
the new trustee in order for the rollover to be tax free.
24. Unreimbursed qualifying moving expenses are an itemized deduction for 2011.
25. To qualify for the moving expense deduction, an employee must change job sites, move a required distance,
and change employers.
26. Lester rents his vacation home for 6 months and lives in the home during the other 6 months of 2011. The
gross rental income from the home is $4,500. For the entire year, real estate taxes are $800, interest is $3,000,
utilities and maintenance expenses are $2,200, and depreciation expense on the entire home would be $4,000.
What is Lester’s allowable net loss from renting his vacation home?
27. Bill is the owner of a house with two identical apartments. He resides in one apartment and rents the other
apartment to a tenant. The tenant made timely monthly rental payments of $500 per month for the months of
January through December, 2011. The following expenses were incurred on the entire building:
Utilities
$3,600
Maintenance and repairs
800
Insurance on building
600
In addition, depreciation allocable to the rented apartment is $1,500. What amount should Bill report as net rental income for 2011?
28. Mort is the owner of an apartment building containing ten identical apartments. Mort resides in one
apartment and rents out the remaining units. For 2011, the following information is available:
Gross rents
$21,600
Utilities for total building
2,500
Maintenance and repairs (rental apartments only)
1,200
Advertising for vacant apartments
300
Depreciation of building (all ten units)
5,000
What amount should Mort report as net rental income for 2011?
29. Donald owns a two-family home. He rents out the first floor and resides on the second floor. The following
expenses attributable to the total building were incurred by Donald for the year ended December 31, 2011:
Real estate taxes
1,800
Mortgage interest
1,200
Utilities
1,000
Repairs (first floor)
300
Painting (second floor)
400
In addition, the depreciation attributable to the entire building would be $2,000. What is the total amount of the expenses that Donald can deduct on
Schedule E of Form 1040 (before any limitations)?
30. Arnold purchased interests in two limited partnerships 6 years ago. During 2011, Arnold had income of
$22,000 from one of the partnerships. He had a loss from the other partnership of $32,000, salary income of
$35,000, and dividend income of $2,000. What is Arnold’s net passive income or loss before any limitations?
31. Arnold purchased interests in two limited partnerships 6 years ago. During 2011, Arnold had income of
$22,000 from one of the partnerships. He had a loss from the other partnership of $32,000, salary income of
$35,000, and dividend income of $2,000. What is the amount of net passive losses that Arnold may deduct for
2011?
32. Warren invested in a limited partnership tax shelter in 2000. During 2011, his losses from the partnership
amount to $100,000. If Warren has no passive income, what is the amount of Warren’s deduction for passive
losses for 2011?
33. Carey, a single taxpayer, purchased a rental house in 2011, which he actively manages. During 2011, Carey
had a loss of $14,000 from the rental house. If Carey’s adjusted gross income for 2011 is $140,000 before the
rental loss, what is the amount of Carey’s allowable deduction for the rental activity for 2011?
34. Under the Keogh plan provisions, deductible contributions to a qualified retirement plan on behalf of a self–
employed individual whose net earned income is $20,000 are limited to:
35. Jody is a physician (not covered by a retirement plan) with a salary of $40,000 from the hospital where she
is employed. She supports her husband, Andre, who sells art work and has no earned income. Both are in their
twenties. What is the maximum total amount that Jody and Andre may contribute to their IRAs and deduct for
the 2011 tax year?
A. $5,000
36. Which of the following taxpayers qualifies for the maximum individual retirement account deduction for
2011?
37. Contributions by a self-employed individual to a Keogh plan for 2011 are limited to the lesser of 20 percent
of net earned income or
38. Paul earns $55,000 during the current year. His employer contributes $3,000 during the year to a qualified
retirement plan on behalf of Paul. The amount of the contribution for the year is based on Paul’s desire to have a
monthly retirement benefit of $3,500. What type of retirement plan is this?
39. Ursula, an employee of Ficus Corporation, is 35 years old and plans to retire in 20 years. The corporation
has a qualified retirement plan and contributes $2,000 during 2011 for Ursula. How should Ursula treat the
$2,000 contribution made on her behalf by the corporation?
40. Which of the following statements is true of a distribution rollover (not a trustee-to-trustee transfer) from a
retirement plan?
A. The taxpayer must instruct the trustee of the retirement plan to transfer assets to the trustee of another plan.
41. Polly, age 45, participates in her employer’s Section 401(k) plan which allows employees to contribute up to
15 percent of their salary. Her annual salary is $100,000 in 2011. What is the maximum she can contribute to
this plan on a tax-deferred basis under a salary reduction agreement?
A. $20,500
42. Donald, a 40-year-old married taxpayer, has a salary of $55,000 and interest income of $6,000. What is the
maximum amount Donald can contribute to a Roth IRA?
43. Monica has a Roth IRA to which she contributed $15,000. The IRA has a current value of $37,500. She is
54 years old and takes a distribution of $25,000. How much of the distribution will be taxable to Monica?
44. A 42-year-old single taxpayer earning a salary of $125,000 a year can make which of the following IRA
contributions if he is not covered by a plan at work?
45. The expenses associated with the rental of a residence used for both personal and rental purposes are subject
to three possible tax treatments. Which of the following is not included as one of the three?
A. If a residence is rented for fewer than 15 days during the year the rental period is disregarded and the
residence is regarded as a personal residence for tax purposes.
46. Choose the correct statement. Passive losses
47. Choose the incorrect answer. Money removed from a traditional IRA is taxable as ordinary income and
subject to a 10 percent penalty except for taxpayers who are:
48. Which of the following statements is correct?
49. Nancy has active modified adjusted gross income before passive losses of $125,000. She has a loss of
$10,000 on a rental property she actively manages. How much of the loss is she allowed to take against the
$125,000 of other income?
50. Ned has active modified adjusted gross income before passive losses of $170,000. He has a loss of $15,000
on rental property he actively manages. How much of the loss is he allowed to take against his other income?
51. Norm is a real estate professional with a real estate trade or business as defined in the tax law. He has
$150,000 of business income and $50,000 of losses from actively managed real estate rentals. How much of the
$50,000 in losses is he allowed to claim on his tax return?
52. What is the deadline for making a contribution to traditional IRA or a Roth IRA for 2011?
53. Patrick owns a home on the beach in Daytona. He lives in the house for most of the year but leaves town
during the big motor sports race that comes through every year. During that time he rents his home out for 3
weeks to race fans for $5,000. Which of the following is true?
A. Because Patrick rents the house for such a short period of time, the rental income is not taxable but he may
deduct a percentage of expenses such as utilities and depreciation on the home.
54. Thelma works at a liquor store in 2011 and makes $45,000. She also has dividend income of $12,000 and
interest income of $1,000. She owns a beach house that gives her $11,000 in rental income and she owns a
stake in a limited partnership that generates a $15,000 loss. What is her adjusted gross income in 2011?
55. Steven is 27 years old and has a total AGI of $110,000 in 2011. In 2011, he gets pneumonia and has a
medical bill that totals $7,500. He withdraws $7,500 from his traditional IRA to pay for the bill. Which of the
following is true?
A. He is not subject to penalties on the IRA withdrawal because it was for medical expenses.
56. Which of the following statements is true about health savings accounts (HSAs)?
A. There is no restriction on the kind of health insurance taxpayers must carry in order to qualify for an HSA.
57. Which of the following statements is false about health savings accounts (HSAs)?
A. HSAs must be paired with qualifying high-deductible health insurance.
58. Which of the following is true about the self-employed health insurance deduction?
A. Dental insurance is not part of the allowable deduction.
59. Ellen supports her family as a self-employed attorney. She reports $90,000 of income on her Schedule C
and pays $8,000 on health insurance for her family, $2,500 on dental insurance, $4,000 on health insurance for
her 23-year-old daughter who is no longer a dependent, and $3,000 on disability insurance for herself. What is
Ellen’s self-employed health insurance deduction?
A. $8,000
60. Which of the following is not deductible as a moving expense?
A. The cost of moving household goods
61. What percentage of medical insurance payments can self-employed taxpayers deduct for adjusted gross
income on their 2011 tax returns?
62. Carmen owns a house that she rents out for $500 per month. Her expenses for the 2011 tax year are as
follows:
$ 900
4,000
300
320
Carmen bought the property in March of 1990, and her basis for depreciation on the house is $110,000. She uses straight-line depreciation with a
27.5-year life, so the depreciation on the house is $4,000. Calculate Carmen’s net income or loss from renting the house if her gross rental income is
$6,000 ($500 x 12 months).
63. Donald rents out his vacation home for 9 months and lives in his vacation home for the remainder of the
year. His gross rental income for 2011 is $7,200. The expenses attributable to the vacation home for the entire
year are as follows:
Real estate taxes
$2,000
Interest on mortgage loan
4,000
Utilities
1,200
Repairs/maintenance
600
Depreciation
3,500
What amount would Donald report as net income or loss from the rental of the vacation home?
64. Christian, a single taxpayer, acquired a rental house in 1981. The rental house, which Christian actively
manages, generated a $15,000 loss in 2011. In addition, Christian owns a limited partnership interest which he
acquired in 1988. His share of the partnership loss for 2011 is $10,000. Christian has modified adjusted gross
income, before the rental loss and partnership loss, of $130,000.
What is the amount of these losses that Christian may deduct in 2011?
65. Wilson and Joan, both in their 30’s, file a joint income tax return for 2011. Wilson’s wages are $15,000 and
Joan’s wages are $23,000 for the year. Their total adjusted gross income is $38,000, and Joan is covered by a
qualified pension plan at work but Wilson is not.
a.
What is the maximum amount that Wilson and Joan may each deduct for contributions to their individual retirement accounts?
b.
If Joan’s wages are $80,000 for 2011, instead of $23,000, and their adjusted gross income is $95,000, what is the maximum amount that
Wilson and Joan may each deduct for contributions to their individual retirement accounts?
a.
Wilson
Joan
Wilson
Joan
66. Serissa Corporation has a Section 401(k) plan for its employees. The plan provides for a maximum
contribution equal to 15 percent of the employees’ salaries. Scott, an employee of Serissa Corporation, elects to
contribute the maximum amount possible to the Section 401(k) plan. During 2011, Scott has $40,000 in wages.
For 2011, what is the maximum amount that Scott may contribute to the plan on a tax-deferred basis?
67. Karen is 48 and a single taxpayer, with income of $90,000, all from salary. She is covered by a retirement
plan at work. Can Karen make a tax deductible contribution to an IRA? Explain.
68. Walt and Jackie rent out their residence in San Diego to friends for 10 days while they vacation in Europe.
They collect $1,000 of rental income. How is the rental income treated on their tax return? Explain.
69. Jeremy, age 38, has $25,000 in a traditional IRA account and is considering taking the money out to buy
himself a new car. What will be the tax consequences to Jeremy if he withdraws the $25,000 from his IRA in
2011 for this purpose? Explain.
70. Johnice’s employer contributes $3,000 to a qualified retirement plan in 2011 for Johnice‘s retirement.
a.
Is the $3,000 deductible by Johnice’s employer in 2011? Explain.
b.
Is the $3,000 income to Johnice in 2011? Explain.
c.
Is either the interest or dividend earnings on the $3,000 contribution taxable to Johnice in 2011? Explain.
71. Clay changes jobs in 2011 and decides to roll his $50,000 retirement plan balance from his old employer’s
plan into an IRA. He instructs the trustee of the retirement plan to transfer the money directly to the IRA he has
chosen.
What are the tax consequences of the transfer to Clay? Explain.
72. Mike owns a house that he rents out for $1,000 per month. His expenses for the 2011 tax year are as
follows:
$ 1,500
4,200
600
620
Mike bought the property in September of 1995, and his basis for depreciation on the house is $137,500. He uses straight-line depreciation with a
27.5-year life, so the depreciation on the house is $5,000. Mike does not use a property manager and handles all aspects of the rental activity himself.
a.
Calculate Mike’s net income or loss from renting the house if his gross rental income is $12,000 ($1,000 ´ 12 months).
b.
Is the income or loss on Mike’s rental considered to be active, passive, or portfolio income?
a.
b.
a.
b.
paid to the employee.
73. Ralph has a $120,000 IRA with the Red Association. For personal reasons, he decides to move his funds to
the Blue Association. He requests that his funds be distributed to him on August 20, 20xx.
a. What amount will Ralph receive from the Red Association?
b. What is the last day Ralph can deposit the funds from the Red Association and avoid taxation in the current
year?
c. If the funds were distributed from a qualified retirement plan (not an IRA), how much would Ralph receive?
d. Assuming the funds were distributed from a qualified retirement plan, not an IRA, how much will Ralph have
to contribute to the Blue Association to avoid taxable income and any penalties?
74. Christine is a self-employed graphics artist who has net earned income of $155,000 from her business.
Christine has a defined contribution Keogh Plan and plans to contribute the maximum allowable. How much
can Christine contribute?
75. Rob and Julie, both in their 30’s, file a joint income tax return for 2011. Rob’s wages are $25,000 and Julie’s
wages are $33,000 for the year. Their total adjusted gross income is $58,000, and Julie is covered by a qualified
pension plan at work but Rob is not.
a.
What is the maximum amount that Rob and Julie may each contribute to their Roth IRAs?
b.
If Julie’s wages are $110,000 for 2011, instead of $33,000, and their adjusted gross income is $135,000, (1) what is the maximum amount
that Rob and Julie may each deduct for contributions to their individual retirement accounts, and (2) what is the maximum amount they
could each contribute to Roth IRAs instead?
a.
Rob
Julie
Rob
Julie
Rob
Julie
76. Chorisia Corporation has a Section 401(k) plan for its employees. The plan provides for maximum
contributions equal to 15 percent of the employee’s salary. Donna, a 55-year-old employee of Chorisia
Corporation, elects to contribute the maximum amount possible to the Section 401(k) plan. During 2011, Donna
has $110,000 in wages. For 2011, what is the maximum amount that Donna may contribute to the plan on a tax-
deferred basis?
77. What is the maximum amount a 30-year-old taxpayer and a 35-year-old spouse can put into a Traditional or
Roth IRA for 2011, assuming they earn $50,000 in total and are not covered by pension plans?
78. What is the maximum amount a 55-year-old taxpayer and a 48-year-old spouse can put into a Traditional or
Roth IRA for 2011, assuming they earn $85,000 in total and are not participants in pension plans?
79. Ben is a 19-year-old single software inventor earning $200,000 a year and is not covered by a pension plan
at work. How much can he put into a Roth IRA in 2011?
80. John is a single 40-year-old landscape architect earning $125,000 a year and is not covered by a pension
plan at work. How much can he put into a Traditional IRA in 2011?
81. Debbie is 63 years old and retired in 2011. She receives Social Security payments of $12,000 a year and
interest income of $30,000. She wishes to put the maximum allowed into an IRA. How much can she contribute
to her IRA?
82. Tony makes a maximum contribution to his employer’s 401(k) plan. He earns $60,000 a year. How much
income is he allowed to contribute to the plan for 2011?
83. Barrett is a 45-year-old political commentator who has self-employed net earned income of $150,000 in
2011. What is the maximum amount he can contribute to his simplified employee pension (SEP) for the year?
84. Penny, age 52, takes a distribution of $30,000 from her Traditional IRA account. She plans to deposit it in
an IRA with a different bank. Shortly after the distribution she drives her car through the front of her credit
union in a freak accident, and uses the funds to pay for the damages. What income and/or penalties related to
the failed rollover must she show on her tax return ?
85. For purposes of the passive loss rules, income is classified into three separate categories. What are the three
categories of individual income? Give an example of each.
(1)
(2)
(3)
86. What is the difference between the tax treatment of contributions and distributions from a traditional IRA
and a Roth IRA?