Question

1.    Above-the-line” deductions are more valuable than “below-the-line” deductions. (True/False)

2.    For purposes of determining "above-the-line" and "below-the-line" deductions, the "line" is:

a.            gross income

b.            earned income

c.            taxable income

d.            adjusted gross income

3.    Medical and dental expenses are a(n):

a.            "above-the-line" deduction

b.            "below-the-line" deduction

c.            standard deduction

d.            personal exemption

4.    Your clients are seeking to minimize their tax liability. You advise them to do all of the following, except:

1. Maximize their IRA contributions
2. Make payments on outstanding student loans
3. Contribute to a Health Savings Account
4. Postpone stock sales if new capital losses are incurred

5.    Individuals are subject to income tax and self-employment tax liability only. Businesses may be subject to income tax, AMT, NIIT, and the Additional Medicare Surtax liability. (True/False)

6.    Interest from treasury bonds is subject to federal tax, but is exempt from all state and local income taxes. (True/False)

7.    In addition to income tax and self-employment tax, Taxpayers may be subject to:

1. the Alternative Minimum Tax.
2. the Net Investment Income Tax.
3. the Additional Medicare Surtax.
4. all of the above.

8.    All of the following are examples of “above-the-line” deductions that are subtracted from gross income, EXCEPT:

1. contributions to health savings accounts
2. charitable contributions

c.            qualified tuition and fees

d.            IRA contributions

   9. Deductions are better than credits for most taxpayers. (True/False)

10. Filing status has little or no effect on the taxpayer’s tax liability. (True/False)

Answer 1

1) True; 'above the line' deductions are the ones which are deducted from the income before the Adjusted Gross income is calculated for tax purposes. 'Below the line' items are deductions after the adjusted gross income is calculated.

Above-the-line” deductions are more valuable than “below-the-line” deductions. This is because:

a) We can get deuctions of the above the line items even if we don't itemize the deduction.

b) Above the line items help in reducing the Adjusted gross income which in turn is a qualifying factor for an assessee to receive any credit or tax perk.

2) ans: D) Adjusted Gross Income: 'above the line' deductions are the ones which are deducted from the income before the Adjusted Gross income is calculated for tax purposes. 'Below the line' items are deductions after the adjusted gross income is calculated.

3) b) below the line deduction: Medical and dental expenses can be deducted only to the extent they exceed 10% (7.5 % for 65 and over ) of a taxpayer's Adjusted gross income

4) ans d) postpone stock sales if new capital losses are incurred: losses on sale of property is an 'above the line ' deduction which will eventually help in reducing the adjusted gross income and thereby minimize the tax liability.

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