Study Unit 5: Above-the-Line Deductions and Losses

1. Caitlin served as a kindergarten aide for 1,000 hours. She incurred $400 in expenses for books and supplies used in the classroom and was not reimbursed by the school. What amount is Caitlin entitled to as the educator’s expense deduction on her income tax return?

2. Julie and Frank were married on March 10. Both are full-time third-grade teachers, and they each incurred a total of $400 in expenses for books and supplies used in the classroom and were not reimbursed by the school. What amount are they entitled to deduct as an education expense on their joint income tax return?

3. Horace and Matilda are married and filing a joint tax return for the year. Horace teaches a 3rd grade class and Matilda teaches a 6th grade class at Oak Elementary School. What is the maximum amount of qualified educator expenses they may deduct on their tax return for the year?

4. James (33) and his wife Erica (31) established a Health Savings Account (in conjunction with a high-deductible health plan) on February 1, 2025. What is the maximum amount that can be contributed to the Health Savings Account?

5. All of the following are true about Health Savings Accounts EXCEPT

6. Chris, age 35, contributes the following amounts to his self-only Health Savings Account:

1. $500 on April 30, 2025
2. $300 on September 16, 2025
3. $750 on December 31, 2025
4. $1,000 on February 5, 2026
5. $2,250 on April 30, 2026

What amounts are considered contributions to the Health Savings Account for 2025?

7. Bernie is a self-employed accountant in 2025. He reported net income of $54,150 on his Schedule C for 2025. During the year, Bernie paid the following: $5,200 in child support, $5,000 in alimony (pre-2019 divorce), $6,000 in medical insurance premiums, self-employment tax of $7,650, and $2,000 to his IRA plan. What amounts are deductible in arriving at adjusted gross income?

8. For 2024 and 2025, Malcom and Julie, husband and wife, paid health insurance premiums of $3,000 each year ($1,500 for each person). Malcom was self-employed, and his net profit was $70,000 in 2024 and $80,000 in 2025. Julie was unemployed in 2024 then took a job in January 2025. She had the option to join a subsidized health plan for the family with her employer but declined. Since this expense is not deductible on Schedule C, what amount can they deduct elsewhere as a business expense for the health insurance premiums on their 2024 and 2025 joint tax returns?

9. Fern is a self-employed florist. In 2025, she paid self-employment tax of $5,000 ($2,500 employer’s portion) and $8,000 in medical insurance premiums. What amount of these expenses may Fern deduct in arriving at adjusted gross income?

10. Which of the following items may be considered alimony for pre-2019 divorces?

11. All of the following are requirements for a payment to be alimony (under instruments executed after 1984 but before 2019), EXCEPT

12. Each of the following would be one of the requirements for a payment to be alimony under instruments executed after 1984 but before 2019 EXCEPT

13. Which of the following is NOT a payment deductible as alimony for pre-2019 divorces?

14. Your divorce decree, which became final in 2018, requires that you pay $400 a month, of which $250 is specified as child support. During 2025, you pay only $4,000, although in no month did you pay less than $250. What amount may you deduct and must your former spouse report as alimony?

15. Starting in 2025, Mr. West must pay his former spouse $20,000 annually under a 2025 divorce decree in the following amounts:

1. $1,000 a month for mortgage payments (including principal and interest) on a jointly-owned home
2. $250 a month for tuition fees paid to a private school until their son attains the age of 18 or leaves the school prior to age 18
3. $5,000-a-year cash payment to the former Mrs. West
4. In addition to the above amounts, the former Mrs. West also received in 2025 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 2025 alimony deductions?

16. The following items are reported on Mr. and Mrs. Spice’s 2025 joint return:

1. Net profit on Mrs. Spice’s Schedule C of $40,000
2. Mr. Spice’s paid court-ordered alimony of $5,000 for a pre-2019 divorce
3. Self-Employment Tax of $5,650 on Mrs. Spice’s Schedule C profit ($2,825 employer’s portion)

Compute their adjusted gross income for 2025.

17. Todd and Susan divorced on September 1, 2025. As part of the divorce decree, beginning in September, Todd was to make payments of $2,000 a month for the balance of the year to Susan’s doctor for recent medical expenses, child support payments of $500 per month, and $1,500 a month for the mortgage payment on a jointly owned home. Susan and the children will continue to live in the home. What is the amount that Todd can deduct as alimony for 2025?

18. John divorced Lisa in 2017. During 2025, per the divorce decree, John made the following payments:

The entire mortgage payment on house (jointly owned)	$10,800
Tuition for their child	6,000
Child support	4,500
Life insurance premiums on policy owned by Lisa	3,000

What is the amount John can deduct as alimony on his 2025 tax return?

19. A payment by a taxpayer to a former spouse pursuant to an agreement executed prior to 2019 may qualify as alimony even though

20. Rick and Stacy were divorced in February of the current year. Requirements of the divorce decree and Stacy’s performance follow:

1. Transfer title to their residence to Rick. Stacy’s basis was $95,000, the fair market value was $105,000, and the residence was subject to a mortgage of $90,000.
2. Make the mortgage payments of $1,000 per month (beginning in March) for the remaining 20 years or until Rick dies, if sooner.
3. Pay Rick $500 per month (beginning in March) for 6 years or until Rick dies, if sooner. Of this amount, $200 is designated as child support.

Stacy’s current-year alimony deduction is

21. Mr. K paid $500 a month for 3 months to his estranged wife while they were negotiating a written separation agreement. Mr. K filed a separate return for the current year. An agreement reached June 1 of the current year required Mr. K to pay $300 a month as alimony. Mr. K made payments of $2,100 for the period June 1 to December 31 of the current year. What is Mr. K’s correct alimony deduction for the current year?

22. Which of the following items might be considered alimony for a divorce executed prior to 2019?

23. Joe divorced Renee in 2018. During the current year, per the divorce decree, Joe made the following payments to Renee:

The entire mortgage payment on house jointly owned	$9,600
Tuition for their child	2,800
Child support	6,000
Life insurance premiums on policy owned by Renee	5,400

What is the amount Joe can deduct as alimony on his tax return?

24. Which of the following would NOT be considered alimony with respect to payments to or for a spouse under a divorce or separation instrument executed prior to 2019?

25. Mrs. Domino made deductible contributions to traditional individual retirement accounts for several years. Mrs. Domino decides to withdraw $10,000 from one of her accounts in 2025. Mrs. Domino is 61 years old. How does this transaction affect Mrs. Domino’s tax return for 2025?

26. Which IRA distributions made to a taxpayer before age 59 1/2 are NOT subject to the 10% penalty tax?

27. Harry and Sally are married and both are under age 50. During 2025, Harry earned $1,500 and Sally earned $38,000. Neither is covered by an employer retirement plan. What is the maximum amount they can contribute to their individual retirement accounts for 2025?

28. All of the following types of income are considered includible compensation for purposes of deductible contributions to an individual retirement account EXCEPT

29. Sol and Julia Crane are married and filed a joint return for 2025. Sol earned a salary of $148,000 in 2025 from his job at Troy Corporation, where he is covered by his employer’s pension plan. In addition, Sol and Julia earned interest of $6,000 in 2025 on their joint savings account. Julia is not employed, and the couple had no other income. On January 15, 2026, Sol contributed $7,000 to an IRA for himself and $7,000 to an IRA for his spouse. The allowable IRA deduction in the Cranes’ 2025 joint return is

30. Mr. and Mrs. Smith are both employed and file joint federal income tax returns. Both Mr. and Mrs. Smith are covered by their employers’ retirement plans. For 2025, Mr. Smith’s salary was $41,000 and Mrs. Smith’s was $13,000. They both have IRAs, and their combined modified adjusted gross income was $54,000. Mr. Smith contributed $7,000 to his IRA, and Mrs. Smith contributed $3,500 to her IRA. What is the maximum IRA deduction each is entitled to for 2025?

31. Larry and Marge Strong, ages 45 and 46, are married and living together. They have decided to file joint federal income tax returns for 2025. Larry is an active participant in his employer’s pension plan. Marge is not an active participant in any plan. Each contributed the maximum allowed for the year of $7,000 to an individual retirement account (IRA) on February 1, 2026. Larry’s adjusted gross income is $156,000 and Marge’s is $85,000. The deductible portion of Marge’s contribution to her IRA is

32. Sunnie is single and under the age of 50 and does not actively participate in her employer’s pension plan. She received taxable compensation of $6,500 in 2024 and $6,000 in 2025. Her modified adjusted gross income was $25,000 in both years. For 2024, she contributed $8,000 to her IRA but deducted only $6,500 on her income tax return. For 2025, she contributed $4,500 but deducted $6,000 on her income tax return. Based on this information, which of the following statements is true?

33. In which situation must a taxpayer pay the additional 10% tax on a premature distribution from his IRA?

34. Ms. Seabreeze had the following during the current year:

Alimony received (post-2018 divorce)	$  6,500
Wages	14,000
Net loss from self-employment	(10,000)
Interest income	5,000

For the purpose of an IRA, Ms. Seabreeze had compensation for the current year of

35. In 2025, Rusty paid $5,000 of interest on a qualified education loan. Rusty is not claimed as a dependent by another taxpayer. What is the maximum deduction available to him for the education loan interest?

36. Kathy paid $8,000 of interest on qualified education loans in 2025. Kathy is not claimed as a dependent by another taxpayer. Since she graduated from medical school 7 years ago, she has faithfully paid the minimum interest due each month. What is the maximum deduction available to her for education loan interest in 2025?

37. Mr. Jones had a student loan for qualified higher education expenses on which interest was due. The loan payments were required from July 1, 2020, until December 31, 2025. The interest payments were $1,200 per year. How much may he deduct in arriving at adjusted gross income in 2025?

38. Which of the following is NOT a qualified education expense for purposes of the student loan interest deduction?

39. Rebecca graduated from college in 2024. She refinanced her qualified education loans in 2025 with another loan. She is not claimed as a dependent by another taxpayer. What is the maximum deduction available to her for the $3,000 paid for education loan interest in 2025?

40. An individual starts paying student loan interest in the current year. For how many years may the individual deduct a portion of the student loan interest?

41. Joanna completed 4 years of higher education in 2022 and makes a payment on her student loan debt each year. In 2025, Joanna paid $11,000 on her student loans, of which $8,400 is attributable to principal. What amount of the interest may be deducted as an above-the-line deduction for 2025?

42. Henry, a single taxpayer, completed his graduate degree in April of 2020 with a significant amount of student loan debt but now makes a modified adjusted gross income of $125,000 per year. Each year, Henry makes payments toward his debt. In 2025, Henry paid $16,000 toward the principal of his debt and $4,000 of interest. How much interest may Henry deduct on his 2025 tax return?

43. Cole earned $40,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and spent $100 on supplies for use in his kindergarten classroom, which was not reimbursed. Cole is single and does not itemize. What is Cole’s adjusted gross income?

44. When funds from an Archer MSA are distributed for qualified medical expenses, these funds are

45. Which one of the following is NOT an adjustment to total income in arriving at adjusted gross income?

46. Who is eligible for an Archer MSA in 2025?

47. Consider the following expenditures and determine the total amount that would be deducted as adjustments to income in arriving at adjusted gross income (assuming no income limitations and including appropriate amounts in Gross Income as required) on Form 1040, Individual Income Tax Return:

1. $1,000 interest paid on student loan
2. $2,000 paid to a deductible IRA plan
3. $100 jury duty pay given to the employer
4. $500 nondeductible expenses from the nonbusiness rental of personal property ($500 income received)

48. Susie was paid $150 for serving as a juror. Susie’s employer continued to pay Susie her salary while she served on the jury, so she is required to turn the jury duty pay over to her employer. How should Susie account for the jury duty pay?

49. Archer MSA contributions are subject to an annual limitation, which is

50. All of the following are true about Archer MSAs EXCEPT

51. In the current year, Ms. Smith withdrew her funds from a time-savings account before maturity and was charged a penalty of $2,000 for early withdrawal. The interest earned on the account in the current year was $1,600. Ms. Smith had no other interest income. How should Ms. Smith report this transaction on her current-year individual income tax return?

52. Which of the following would be considered passive activity income?

53. Heathcliff and Gertrude file a joint income tax return for the current year. During the current year, Heathcliff received wages of $120,000 and taxable Social Security benefits of $5,000. Gertrude actively participated in a rental real estate activity in which she had a $30,000 loss. They had no other income during the current year. How much of the rental loss may they deduct on their current-year income tax return?

54. Larry purchased 100 shares of ABC stock on May 31, Year 1, for $100 per share. On October 28, Year 1, he sold the 100 shares for $90 per share. On November 22, Year 1, his wife, Vickie, purchased 100 shares of ABC stock for $80 per share. Vickie held the stock until September 30, Year 2. On that date, she sold the stock for $110 per share. They filed married filing separately on all returns.

55. Under the rules governing the existence of a passive activity, which of the following would NOT constitute material participation in a trade or business activity for the current tax year?

56. Bill took out a $100,000 non-recourse loan and bought an apartment building. The building is not security for the loan. Bill spent $25,000 of his own money on repairs before he rented the apartment building to the public. Bill is single, works full-time, and earns $80,000 per year. Bill’s loss from the rental real estate activity, in which he actively participates, is $30,000. He has no passive income. For what amount is Bill at-risk, and how much of Bill’s passive loss from his rental activity is deductible?

57. During the current year, Amanda, who is single, received $110,000 in salary and realized a $30,000 loss from her rental real estate activities in which she actively participates. She contributed $2,000 to an IRA. What is the amount that Amanda may claim as loss from her current-year real estate activities?

58. Barry is a lawyer. He owns 10 apartment buildings that are managed by his brother’s real estate business. At the end of the year, the apartment buildings resulted in a $40,000 loss. Barry earned $80,000 in wages. His wife, Claire, earned $20,000 from her part-time job. Their other income included $5,000 in dividends from their mutual funds. They had no other income. How much of the rental loss can Barry use assuming Barry actively participates in the apartment buildings?

59. Tom Brown, who is single, owns a rental apartment building property. This is the only rental property that Tom owns. He actively participates in this rental activity as he collects the rents and performs ordinary and necessary repairs. In the current year, Tom had a loss of $30,000 on this rental activity and had no reportable passive income. His adjusted gross income, without regard to this rental loss, is $60,000. How much of the rental loss may Tom deduct on his current year return?

60. Alex started his own welding business this year. He paid $8,000 for a truck, contributed $15,000 cash and paid $20,000 for tools for the business. His bank loaned $50,000 to buy a building for the business. The building secures the loan. What is Alex’s at-risk amount for this activity?

61. Passive activity rules apply to

62. Erica received $40,000 in wages, and her husband Paul had a net loss of $2,000 on his Schedule C. Paul materially participated in his Schedule C activity. They had interest income of $500. Paul also had a $28,000 loss from a rental real estate activity in which he actively participates. How much of the rental loss can they deduct on their current-year joint income tax return?

63. In the current year, Heidi, a self-employed individual, had net profits from her Schedule C business of $125,000. Besides her Schedule C deductions, Heidi took a $9,563 deduction for her self-employment taxes, and her deduction for self-employed health insurance was $650. Heidi also realized a $30,000 loss from her rental real estate activity in which she actively participated. What is Heidi’s deductible rental real estate loss for the current year?

64. Maria received $40,000 in wages, and her husband Scott had a net gain of $8,500 on a passive partnership interest. Scott also had a $35,000 loss from a rental real estate activity in which he actively participated. How much of the rental loss can they deduct on their current-year joint income tax return?

65. Which of the following is a true statement concerning losses from passive activities?

66. Which of the following is NOT an example of a passive activity?

67. A taxpayer who materially participates in rental real estate activities in the current year may offset some losses and credits from the activity against nonpassive income (salary, self-employment earnings, etc.) provided that the taxpayer performs more than 50% of his or her personal services for the year in real property trades or businesses in which (s)he materially participates and the number of service hours performed in those real property trades or businesses in which (s)he materially participates is more than

68. All of the outstanding stock of Bryant Corporation is owned equally by three individuals (i.e., it is a closely held corporation). Bryant is not a personal service corporation. During the current year, Bryant had active rental real estate income of $250,000, a passive loss on the rental of an office building (acquired in 1989) of $300,000, and portfolio income of $150,000. The corporation earns more than 60% of its gross receipts from the rental real estate in which it materially participates. How much of Bryant’s income may be offset by the rental loss?

69. The at-risk rules

70. All of the following statements relating to net operating losses and the at-risk limits are true EXCEPT

71. With regard to the passive loss rules involving rental real estate activities, which one of the following statements is true?

72. Miss Jones owns several rental properties, which she acquired in January of last year, and actively participates in all activities connected with the rentals. She received a salary of $42,300 from her advertising job in the current year. Her net rental loss for the current year was $60,000. What is the amount of rental loss that Miss Jones can deduct in the current year?

73. Dr. J has adjusted gross income for the current year of $130,000 before the deduction for a $7,000 contribution to his IRA, and before any potential deduction for $40,000 of losses from rental real estate activities in which he actively participates. How much of the rental losses may he deduct if the rental real estate activities were acquired in the current year?

74. Bonnie received $30,000 in wages, and her husband Clyde had a net loss of $2,500 on his Schedule C (the loss was not a hobby loss under the tax code). Clyde materially participated in his Schedule C activity. They had dividend income of $1,500. Clyde also had a $20,000 loss from a rental real estate activity in which he actively participated. How much of the rental loss can they deduct on their current-year joint income tax return?

75. In the current year, the Aloha Gardens apartment complex had rental losses of $40,000. Which of the following is true?

76. Clarence, a real estate professional, owned 10 rental properties. Clarence’s real estate activities are his sole occupation, which he works at all year. Throughout 2025, Clarence was involved in the operation of all properties on a regular, continuous, and substantial basis. At the end of the year, his real estate operations resulted in a $75,000 net loss. Clarence’s spouse, Carlette, had received $90,000 in wages in 2025. Their only other income during the year was $5,000 interest. Which of the following statements is true?