Special Webinar Question: Tax Reduction/Management Techniques

Posted by Adam Scherer, CFP®, MS

May 28, 2020

This question is a part of BIF's Special Webinar series which was created to help students affected by the July 2020 CFP® Exam postponement to September 2020.


In 2020, Jon and Olivia had the following transactions:

  • Olivia, a full-time 5th grade teacher, incurred $500 of unreimbursed expenses on supplies for her classroom.
  • Jon, age 60, maximized available contributions to his family HSA.
  • Jon and Olivia contributed $7,000 to their Traditional IRA. Both are active participants.
  • Olivia paid $3,000 of educational loan interest from Subsidized and Unsubsidized Federal Stafford Loans.
  • Jon made alimony payments to his ex-wife, Nina, ($500/month) according to terms of a separation agreement established in 2019.

Jon and Olivia filed MFJ and had an AGI of $137,000.

Identify the total above-the-line deductions taken by Jon and Olivia in 2020.

  1. $10,850
  2. $21,100
  3. $16,350
  4. $18,350

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Correct answer: A. $10,850


Instructor insight:

Here are the above-the-line deductions available to Jon and Olivia:

  • $250 for unreimbursed expenses on school supplies.
  • $8,100 for contributions to the family HSA ($7,100 + $1,000 over 55 catch-up).
  • $0 for Traditional IRA contributions. $137,000 AGI exceeds allowable range ($104,000-$124,000).
  • $2,500 of educational loan interest.
  • $0 for alimony payments since the separation agreement was established in 2019. Alimony payments are not deductible for post-2019 separation agreements.

CFP® Exam insight:

Remember that deductions and exemptions reduce taxable income and credits offer a dollar-for-dollar reduction of tax liability. In other words, a $2,000 deduction for a taxpayer in the 22% marginal tax bracket reduces taxes by $440, while a $2,000 credit directly offsets $2,000 of tax liability.

 

Topics: Practice Questions