AWMA Module 5 Quiz – Income Tax Planning, Tax Efficiency Strategies & High Net Worth Tax
MCQ Test
Which one of the following is NOT an allowable itemized deduction in computing the alternative
minimum taxable income?
A) Charitable contribution deduction
B) State and local income taxes
C) Qualified housing interest
D) Investment interest expense - correct answer ✔✔B.
State and local income taxes are not an allowable itemized deduction for the AMT. Thus, clients
in states with high income taxes (and property taxes) are more likely to be affected by the AMT
than those in states with lower taxes. Remember that only $10,000 of taxes may be deducted as
an itemized deduction.
Which one of the following statements is true with regard to self-employment taxes?
A) A taxpayer is allowed to deduct one-half of his or her self-employment tax liability as an
adjustment to income.
B) Self-employment tax is the government's way of discouraging entrepreneurship and
innovation.
C) Net earnings from self-employment must be calculated under the accrual method of
accounting.
D) Once the wage base has been exceeded, there is no self-employment tax on the excess. -
correct answer ✔✔A.
A taxpayer may deduct one-half of his or her self-employment tax liability as an "above the line"
deduction—an adjustment to income.
Which one of the following statements is incorrect regarding investment interest expense?
, A) Investment interest expense is deductible up to the amount of the net investment income.
B) Excess investment interest expense cannot be carried forward into succeeding tax years.
C) Interest paid or accrued to purchase or carry tax-exempt investments is not deductible.
D) Investment interest expense may only be deducted if the taxpayer itemizes. - correct answer
✔✔B
Net investment income is the taxpayer's investment income—typically interest, nonqualified
dividends, and short-term capital gains. Investment interest is an itemized deduction. Excess
investment interest expense can be carried forward into succeeding tax years.
For a taxpayer with an AGI in excess of $150,000 for the prior tax year ($75,000 if married filing
separately), the estimated tax penalty safe harbor is
A) 90% of the current year's tax liability or 100% of the prior year's tax liability.
B) 110% of the current year's tax liability or 125% of the prior year's tax liability.
C) 80% of the current year's tax liability or 120% of the prior year's tax liability.
D) 90% of the current year's tax liability or 110% of the prior year's tax liability. - correct answer
✔✔D.
The safe harbor is 90% of the current year's tax liability or 110% of the prior year's tax liability if
the taxpayer's prior year AGI exceeded $150,000.
If the prior year's AGI was $150,000 or less, then the safe harbor is 90% of the current year's tax
liability or 110% of the prior year's tax liability.
In March of 2020, Jennifer sold her residential rental property for $925,000. Jennifer acquired
the property in May 2007 for $225,000, and has been depreciating it using the straight-line
method for realty. Assume that the amount of depreciation taken is $90,000. Jennifer is in the
35% marginal income tax bracket.
What is the amount and character of the gain resulting from the sale?
MCQ Test
Which one of the following is NOT an allowable itemized deduction in computing the alternative
minimum taxable income?
A) Charitable contribution deduction
B) State and local income taxes
C) Qualified housing interest
D) Investment interest expense - correct answer ✔✔B.
State and local income taxes are not an allowable itemized deduction for the AMT. Thus, clients
in states with high income taxes (and property taxes) are more likely to be affected by the AMT
than those in states with lower taxes. Remember that only $10,000 of taxes may be deducted as
an itemized deduction.
Which one of the following statements is true with regard to self-employment taxes?
A) A taxpayer is allowed to deduct one-half of his or her self-employment tax liability as an
adjustment to income.
B) Self-employment tax is the government's way of discouraging entrepreneurship and
innovation.
C) Net earnings from self-employment must be calculated under the accrual method of
accounting.
D) Once the wage base has been exceeded, there is no self-employment tax on the excess. -
correct answer ✔✔A.
A taxpayer may deduct one-half of his or her self-employment tax liability as an "above the line"
deduction—an adjustment to income.
Which one of the following statements is incorrect regarding investment interest expense?
, A) Investment interest expense is deductible up to the amount of the net investment income.
B) Excess investment interest expense cannot be carried forward into succeeding tax years.
C) Interest paid or accrued to purchase or carry tax-exempt investments is not deductible.
D) Investment interest expense may only be deducted if the taxpayer itemizes. - correct answer
✔✔B
Net investment income is the taxpayer's investment income—typically interest, nonqualified
dividends, and short-term capital gains. Investment interest is an itemized deduction. Excess
investment interest expense can be carried forward into succeeding tax years.
For a taxpayer with an AGI in excess of $150,000 for the prior tax year ($75,000 if married filing
separately), the estimated tax penalty safe harbor is
A) 90% of the current year's tax liability or 100% of the prior year's tax liability.
B) 110% of the current year's tax liability or 125% of the prior year's tax liability.
C) 80% of the current year's tax liability or 120% of the prior year's tax liability.
D) 90% of the current year's tax liability or 110% of the prior year's tax liability. - correct answer
✔✔D.
The safe harbor is 90% of the current year's tax liability or 110% of the prior year's tax liability if
the taxpayer's prior year AGI exceeded $150,000.
If the prior year's AGI was $150,000 or less, then the safe harbor is 90% of the current year's tax
liability or 110% of the prior year's tax liability.
In March of 2020, Jennifer sold her residential rental property for $925,000. Jennifer acquired
the property in May 2007 for $225,000, and has been depreciating it using the straight-line
method for realty. Assume that the amount of depreciation taken is $90,000. Jennifer is in the
35% marginal income tax bracket.
What is the amount and character of the gain resulting from the sale?
