Adjustments to Gross Income - See Special Enrollment Exam

1. What amount can he deduct as an HSA adjustment for 2025?
   Answer: $4,000 Under IRC § 223(b), the maximum HSA contribution for self-only coverage in 2025 is $4,300, and employer contributions count toward that limit. The employer's $300 contribution therefore leaves only $4,000 that the taxpayer may contribute without creating an excess. His actual contribution of $4,300 exceeds that amount by $300; because the excess was not withdrawn, it is not deductible. Choice A ignores the employer contribution and the resulting excess; Choice C treats the employer contribution as deductible by the taxpayer as well; Choice D treats the excess as disqualifying the entire deduction, but the deduction is lost only to the extent of the $300 excess.
2. What is the maximum amount Lena may deduct as an adjustment to gross income on Schedule 1 (Form 1040) for these health insurance premiums?
   Answer: $22,304 Authority: IRC §§ 162(l) and 62(a). Choice B is correct. Although Lena paid $32,000 of premiums, the above-the-line deduction for self-employed health insurance cannot exceed her net earnings from the business. Net earnings for this limit are Schedule C net profit minus one-half of self-employment tax: $24,000 − ($3,391 / 2) = $22,304, rounded. The excess premiums may be treated only as a medical expense if she itemizes; they are not an adjustment to gross income. Choice A subtracts the full self-employment tax instead of only one-half. Choice C uses the unreduced Schedule C net profit as the limit. Choice D deducts the entire premium amount and ignores the net-earnings limit.
3. What amount may the taxpayer deduct for student loan interest in computing the taxpayer's 2025 adjusted gross income?
   Answer: $1,250 IRC § 221. The student loan interest deduction is an adjustment to gross income, capped at $2,500 of interest actually paid, and phased out for single taxpayers with MAGI between $85,000 and $100,000. The taxpayer's MAGI is $92,500 ($88,000 of wages plus $4,500 of taxable interest), which is $7,500 above the $85,000 threshold; $7,500 is half of the $15,000 phase-out range, so the $2,500 cap is reduced by 50%, leaving $1,250. Choice B is correct. Choice A treats the $85,000 threshold as a complete cut-off, but the deduction is reduced gradually and does not reach zero until MAGI is $100,000. Choice C applies the 50% reduction to the $3,200 of interest actually paid before applying the $2,500 statutory cap. Choice D ignores the phase-out and would be correct only if MAGI were $85,000 or less.
4. What total amount may Rafael and Marta deduct for traditional IRA contributions in computing adjusted gross income?
   Answer: $15,200 IRC §§ 62(a)(7) and 219(b), (c) and (g). For 2025 the traditional IRA limit is $7,000 plus a $1,000 catch-up for a taxpayer age 50 or older, so each spouse may contribute up to $8,000. Rafael is an active participant in his employer's 401(k), so his deduction phases out for a joint return with modified AGI between $126,000 and $146,000. Their modified AGI is $128,000, which is $128,000 − $126,000 = $2,000 into the $20,000 range, or 10%. The reduction is 10% × $8,000 = $800, so Rafael may deduct $8,000 − $800 = $7,200. Marta is not an active participant; for the spouse of an active participant, the phase-out range is $236,000 to $246,000, so her full $8,000 is deductible. Total: $7,200 + $8,000 = $15,200. Choice C is correct. Choice A ($7,200) is wrong because it deducts only Rafael's reduced contribution and omits Marta's spousal IRA contribution. Choice B ($14,400) is wrong because it applies Rafael's 10% reduction to Marta's contribution as well; her phase-out range begins at $236,000. Choice D ($16,000) is wrong because it ignores Rafael's active-participant phase-out.
5. What amount can they claim as an educator expense adjustment on their 2025 return?
   Answer: $300 Under IRC § 62(a)(2)(D) and § 62(d), an eligible educator may deduct up to $300 of unreimbursed qualified classroom expenses as an adjustment to gross income. Greg's $340 expense is capped at $300. Dana is not an eligible educator because she worked only 400 hours, short of the 900-hour requirement, so her expenses do not qualify. Choice B ignores the $300 cap for Greg; Choice C treats Dana as an eligible educator and applies the per-educator cap to both spouses; Choice D deducts both spouses' actual expenses without applying the 900-hour rule or the per-educator cap.
6. What is the correct treatment of the $11,200 of premiums in computing Darius's 2025 adjusted gross income?
   Answer: Deduct none of the $11,200 as an adjustment because he was eligible for subsidized employer coverage through his spouse's employer for the entire year. IRC § 162(l)(1) and (2)(B). The self-employed health insurance deduction is an adjustment to gross income, but it is denied for any month in which the taxpayer or the taxpayer's spouse is eligible to participate in a subsidized employer health plan. The test is eligibility, not enrollment, and it applies to a plan maintained by the spouse's employer as well as the taxpayer's own employer. Because Darius was eligible for all of 2025 for subsidized coverage through Priya's employer, none of the premiums is deductible under § 162(l). Choice C is correct. Choice A overlooks the spouse-eligibility rule. Choice B states the general net-earnings limit of § 162(l) but ignores that the eligibility condition bars the deduction entirely before that limit is ever reached. Choice D is not an adjustment to gross income, and the Schedule A medical deduction is unavailable because the couple does not itemize.
7. What amount may Ben and Clara deduct as an educator expense adjustment for 2025?
   Answer: $300 IRC § 62(a)(2)(D) and § 62(d). The educator expense adjustment is available to an eligible educator — a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who performs at least 900 hours of service in a school during the school year — and is limited to $300 per eligible educator. Ben meets the 900-hour test and may deduct $300 of his $420 of expenses. Clara is not an eligible educator because a private preschool is not an elementary or secondary school, so her $260 of expenses is not deductible. The total adjustment is $300. Choice D is correct. Choice A deducts both spouses' expenses in full, ignoring the $300 cap and Clara's ineligibility. Choice B caps Ben at $300 but treats Clara as an eligible educator and allows her full $260. Choice C applies the $600 joint-return ceiling, which is available only when both spouses are eligible educators; because only Ben qualifies, the ceiling here is $300.
8. What amount of the taxpayer's $4,300 HSA contribution may be deducted as an adjustment to gross income for 2025?
   Answer: $0, because the general-purpose health FSA was disqualifying coverage for the entire year, so the contribution is not deductible. IRC § 223(a) and (c)(1)–(2). An individual may deduct HSA contributions only if he or she is an eligible individual: covered by an HDHP and not covered by disqualifying coverage. A general-purpose health FSA is disqualifying coverage. Whether an FSA is limited-purpose depends on the terms of the plan, not on how the taxpayer used it, and no rule reduces the HSA limit by FSA reimbursements. Because the taxpayer was covered by a general-purpose FSA for all of 2025, the taxpayer was not an eligible individual, and the $4,300 contribution is not deductible (it is an excess contribution unless timely corrected). Choice A is correct. Choice B ignores the disqualifying FSA coverage. Choice C applies the limited-purpose exception based on the types of expenses actually reimbursed, which is the wrong test. Choice D applies a reduction that no provision of the law authorizes.
9. Which of the following is correct regarding the treatment of alimony and separate maintenance payments on a 2025 federal income tax return?
   Answer: Cash alimony under a 2017 divorce decree is an adjustment to gross income for the payor and includible in the recipient's gross income unless a post-2018 modification expressly provides that the new law applies. Under IRC §§ 71 and 215, payments under a divorce or separation instrument executed before 2019 remain deductible by the payor as an adjustment to gross income and includible in the recipient's gross income, unless the instrument is modified after 2018 and the modification expressly provides that the new rules apply. Choice A states this rule correctly. Choice B misstates the modification rule: a post-2018 modification does not automatically trigger the new law; the modification must expressly adopt it. Choice C misstates the character of the deduction: pre-2019 alimony is an adjustment to gross income, not an itemized deduction. Choice D misstates post-2018 treatment: alimony under a post-2018 instrument is neither deductible by the payor nor includible in the recipient's gross income.
10. Which of the following is correct regarding the deduction for health insurance premiums by a self-employed individual on a 2025 Form 1040?
    Answer: The deduction is taken on Schedule 1, is limited to earned income from the trade or business, and is not allowed for any month the taxpayer or spouse was eligible for employer-subsidized health coverage. Under IRC § 162(l), a self-employed individual may deduct health insurance premiums as an adjustment to gross income on Schedule 1, but the deduction is limited to earned income from the business and is denied for any month the taxpayer or the taxpayer's spouse was eligible for employer-subsidized coverage. Choice A misstates the placement and effect: the deduction is not on Schedule C and does not reduce net profit for self-employment tax. Choice B misstates the limit: the limit is earned income, not one-half of self-employment tax. Choice C describes the itemized medical expense deduction, which is subject to the 7.5% AGI floor, not the self-employed health insurance adjustment.
11. Which of the following is correct regarding Owen's treatment of the alimony payments on his 2025 federal income tax return?
    Answer: He may deduct the full $25,200 as an adjustment to gross income because the 2024 modification did not expressly elect the post-2018 rules. Section 11051(c) of the Tax Cuts and Jobs Act (P.L. 115-97), the effective-date rule for the repeal of former IRC §§ 71 and 215. The post-2018 rule — alimony is neither deductible by the payor nor includible by the recipient — applies to instruments executed after December 31, 2018, and to a pre-2019 instrument modified after that date only if the modification expressly provides that the new rule applies. The 2024 modification is silent, so the pre-2019 rules continue: Owen deducts the $25,200 paid in 2025 as an adjustment to gross income, and the former spouse must include the payments in her income. Choice A is correct. Choice C reverses the statutory default; silence preserves the old rules, and an express opt-in is required for the new rules to apply. Choice B splits the payments between the original decree and the increase, but the modified instrument governs all payments made after the modification. Choice D treats the recipient's reporting as a condition of the deduction; the recipient's inclusion is a required consequence of the payor's deduction, not a condition precedent.
12. What is the maximum amount the taxpayer may deduct as an adjustment to gross income for the 2025 SEP contribution?
    Answer: $18,587 IRC §§ 404(a)(8), 415(c), and 164(f). The SEP contribution for a self-employed individual is an adjustment to gross income and is based on net earnings from self-employment — net profit reduced by the § 164(f) deduction for one-half of self-employment tax. Because the contribution itself reduces compensation, the self-employed contribution rate is 20% of net earnings, not the 25% rate used for employees. The taxpayer's net earnings are $92,935 ($100,000 minus the $7,065 deductible one-half of self-employment tax), and 20% of that amount is $18,587, which is below the $70,000 annual-additions limit. Choice B is correct. Choice A applies the 25% employee rate to net profit without reducing for one-half of self-employment tax. Choice C applies the correct 20% rate but fails to reduce net profit by one-half of self-employment tax. Choice D applies the 25% employee rate to net earnings after one-half of self-employment tax, the rate for employees rather than the rate for the self-employed.
13. What amount of the contribution is deductible on her 2025 federal income tax return?
    Answer: $1,400 Under IRC § 219(g), the 2025 traditional IRA deduction phase-out range for a single taxpayer who is an active participant in an employer plan is $79,000 to $89,000. At $87,000, she is 80% through the range, so the $7,000 limit is reduced by $5,600 and the deductible amount is $1,400. The contribution was timely because it was made by April 15, 2026. Choice A treats the contribution as fully phased out; Choice B ignores the active-participant phase-out; Choice D reflects the $5,600 reduction rather than the $1,400 amount remaining deductible.
14. What total amount may Marcus and Eva deduct for their traditional IRA contributions in computing their 2025 adjusted gross income?
    Answer: $4,200 IRC § 219(g). Because both spouses had compensation of at least $7,000, each $7,000 contribution is within the regular contribution limit. The traditional IRA deduction phases out for active participants, with a separate higher phase-out range on a joint return for a nonparticipant spouse whose spouse is an active participant. For 2025, the active participant's joint range is $126,000–$146,000, and the nonparticipant spouse's range is $236,000–$246,000. At the couple's modified AGI of $240,000, Eva, the active participant, is fully phased out. Marcus's deduction is reduced by 40% — ($240,000 − $236,000) ÷ $10,000 — leaving 60% of his $7,000 contribution, or $4,200. Choice D is correct. Choice A ignores both phase-outs. Choice B applies Eva's $126,000–$146,000 range to Marcus, who is subject to the nonparticipant spouse's range. Choice C uses the 40% phased-out portion of Marcus's contribution rather than the 60% that remains deductible.
15. What total amount may Gina deduct as adjustments to gross income on Schedule 1 (Form 1040)?
    Answer: $3,350 Authority: IRC §§ 62(a) and 221. Choice B is correct. Gina may deduct $300 of educator expenses because the deduction is limited to $300 even though she spent $500; she may deduct the full $1,800 early-withdrawal penalty; and she may deduct a partial student loan interest amount. For the student loan interest deduction, modified AGI is $94,600 total income before adjustments minus $300 educator expense and $1,800 early-withdrawal penalty, or $92,500. For a single filer in 2025, the $2,500 maximum student loan interest deduction phases out between $85,000 and $100,000 of modified AGI. The reduction is ($92,500 − $85,000) / $15,000 × $2,500 = $1,250, so the allowable deduction is $2,500 − $1,250 = $1,250. Total adjustments: $300 + $1,800 + $1,250 = $3,350. Choice A includes the educator expense and the student loan interest deduction but omits the early-withdrawal penalty. Choice C uses $500 of educator expenses instead of the $300 cap. Choice D ignores the student loan interest phase-out and deducts the full $2,500.

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