Individual Taxation Paper 9

(a) The requirement is to determine the amount of unreimbursed employee expenses that can be deducted by Gilbert if he does not itemize deductions. Gilbert cannot deduct any of the expenses listed if he does not itemize deductions. The unreimbursed employee business expenses are deductible only as itemized deductions, subsequent to the 2% of AGI floor.

(a) Only the direct costs incurred for transporting a taxpayer, his or her family, and their household goods and personal effects from their former residence to their new residence can qualify as deductible moving expenses. The indirect moving expense costs incurred for meals while in transit, house hunting, temporary lodging, to sell or purchase a home, and to break or acquire a lease are not deductible.

(d) The requirement is to determine the incorrect statement concerning a Roth IRA. The maximum annual contribution to a Roth IRA is subject to reduction if the taxpayer’s adjusted gross income exceeds certain thresholds. Unlike a traditional IRA, contributions are not deductible and can be made even after the taxpayer reaches age 70½. The contribution must be made by the due date of the taxpayer’s tax return (not including extensions).

(d) The requirement is to determine the maximum amount of adjusted gross income that a taxpayer may have and still qualify to roll over a traditional IRA into a Roth IRA for 2013. For tax years beginning before 2010, a conversion or rollover of a traditional IRA to a Roth IRA could occur if the taxpayer’s AGI did not exceed $100,000 and the taxpayer was not married filing a separate return. The IRA conversion or rollover amount was not taken into account in determining the $100,000 AGI ceiling. However, both the AGI limit and the joint filing requirement have been eliminated for tax years beginning after 2009.

(d) The requirement is to determine which statement concerning an education IRA is not correct. Contributions to an education IRA are not deductible, but withdrawals of earnings will be tax-free if used to pay the qualified higher education expenses of the designated beneficiary. The maximum amount that can be contributed to an education IRA is limited to $2,000, but the annual contribution is phased out by adjusted gross income in excess of certain thresholds. Contributions generally cannot be made to an education IRA if the designated beneficiary is age eighteen or older.

(a) The requirement is to determine the Whites’ allowable IRA deduction on their 2012 joint return. For married taxpayers filing a joint return for 2012, up to $5,000 ($5,500 for 2013) can be deducted for contributions to the IRA of each spouse (even if one spouse is not working), provided that the combined earned income of both spouses is at least equal to the amounts contributed to the IRAs. Even though Val is covered by his employer’s qualified pension plan, the Whites are eligible for the maximum deduction because their gross income of $55,000 + $4,000 = $59,000 does not exceed the base amount ($92,000) at which the maximum $5,000 deduction would be reduced. Also note that Pat’s $4,000 of taxable alimony payments is treated as compensation for purposes of qualifying for an IRA deduction. Since they each contributed $5,000 to an IRA account, the allowable deduction on their joint return is $10,000.

(d) The requirement is to determine the definition of “earned income” for purposes of computing the annual contribution to a Keogh profit-sharing plan by Davis, a sole proprietor. A self-employed individual may contribute to a qualified retirement plan called a Keogh plan. For 2013, the maximum contribution to a Keogh profit-sharing plan is the lesser of $51,000 or 25% of earned income. For this purpose, “earned income” is defined as net earnings from self-employment (i.e., business gross income minus allowable business deductions) reduced by the deduction for one-half of the self-employment tax, and the deductible Keogh contribution itself.

(d) A single individual with AGI over $68,000 for 2012 would only be entitled to an IRA deduction if the taxpayer is not covered by a qualified employee pension plan.

(c) The requirement is to determine the allowable IRA deduction on the Cranes’ 2012 joint return. Since Sol is covered by his employer’s pension plan, Sol’s contribution of $5,000 is proportionately phased out as a deduction by AGI between $92,000 and $112,000. Since the Cranes’ AGI exceeded $112,000, no deduction is allowed for Sol’s contribution. Although Julia is not employed, $5,000 can be contributed to her IRA because the combined earned income on the Cranes’ return is at least $10,000. The maximum IRA deduction for an individual who is not covered by an employer plan, but whose spouse is, is proportionately phased out for AGI between $173,000 and $183,000 for 2012. Since Julia is not covered by an employer plan and the Cranes’ AGI is below $173,000, the $5,000 contribution to Julia’s IRA is fully deductible for 2012.

(d) The requirement is to determine the Lees’ maximum IRA contribution and deduction on a joint return for 2013. Since neither taxpayer is covered by an employer-sponsored pension plan, there is no phase-out of the maximum deduction due to the level of their adjusted gross income. For married taxpayers filing a joint return, up to $5,500 can be deducted for contributions to the IRA of each spouse (even if one spouse is not working), provided that the combined earned income of both spouses is at least equal to the amounts contributed to the IRAs. Additionally, an individual at least age 50 can make a special catch-up contribution of $1,000 for 2013, resulting in an increased maximum contribution and deduction of $6,500 for 2013. Thus, the Lees may contribute and deduct a maximum of $13,000 to their individual retirement accounts for 2013, with a maximum of $6,500 placed into each account.