Chapter 6: Review Questions · 2019. 10. 24. · Chapter 6: Review Questions 1. Carrie, 35, and Chris, 38, were legally separated on November 30, 2018. Chris moved out of ... who

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Chapter 6: Review Questions

1. Carrie, 35, and Chris, 38, were legally separated on November 30, 2018. Chris moved out of the house they shared on June 1, at which time they agreed to share joint custody of their 4-year-old son, Travis. Each parent had Travis an equal number of days and nights. Carrie’s AGI for the tax year was $35,000 and Chris’s was $40,000. They split the $8,000 cost of daycare provided for Travis during the tax year. Carrie and Chris plan to file separate returns. Who is eligible to claim the Child and Dependent Care Expenses Credit and what is the amount of expenses on which the credit will be calculated?

a) Carrie – $8,000 b) Chris – $3,000 c) Carrie or Chris may claim the credit – $4,000 d) Carrie and Chris can split the credit – $4,000

a) This answer is incorrect. Carrie is not eligible, even though the couple agreed to share

joint custody of Travis. Also, $8,000 is not the correct amount on which the credit would be calculated.

b) Correct. Even though Travis lived with both parents for an equal number of days and nights, Chris is the custodial parent because his AGI is greater than Carrie’s. $3,000 is the correct amount on which the credit will be calculated. Pages 6.7-6.9

c) This answer is incorrect. Only one of the parents is eligible to claim the credit. Also, $4,000 is not the correct amount on which the credit would be calculated.

d) This answer is incorrect. The parents are not allowed to split the credit; only one is eligible to claim the credit. Also, $4,000 is not the correct amount on which the credit would be calculated.

2. Ron owns 25% of GG Partnership, a California business. Ron and his partners wish to

encourage lower-income college students to complete their education. He has heard about the College Access Tax Credit (CATC) Fund, which is administered by the California Educational Facilities Authority (CEFA) and supported by cash contributions from individuals and businesses. This fund provides money to lower-income college students and provides a state tax credit to contributors. If GG Partnership contributes $15,000, then passes the credit to the four equal partners, the credit for each partner in tax year 2018 would be:

a) $3,750 b) $2,250 c) $2,063 d) $1,875

a) This answer is incorrect. This is the full contribution allocated to each partner. b) This answer is incorrect. This calculation is based on 60% of the contribution. c) This answer is incorrect. This is the calculation based on 55% of the contribution. d) Correct. This is the calculation for 2018, based on 50% of the contribution. There

are 4 equal partners, so each partner is entitled to claim 25% of the total credit ($15,000 x 0.50 x 0.25 = $1,875). Pages 6.10-6.11


3. Rachel and Mike spent a year and a half going through the adoption process. They attempted to adopt a child in 2017 from a California licensed adoption agency but were unsuccessful. They paid $2,400 to that agency. In 2018, they went through a California public agency and successfully finalized the adoption of a different child. During the process, they spent $2,600 in unreimbursed medical expenses for the child and $1,000 in travel expenses to meet with the child and complete the adoption with the agency. How much is the allowable credit for adoption costs on their 2018 California return?

a) $1,800 b) $2,500 c) $3,000 d) $6,000

a) This answer is incorrect. This amount doesn’t include qualifying costs of all adoption

attempts. b) Correct. 50% of the total of all qualifying adoption costs ($2,400 + $2,600 + $1,000

= $6,000) is $3,000. The credit limit for 2018 is $2,500. The excess $500 can be carried over to future years until the credit is used up. Page 6.12

c) This answer is incorrect. The credit has a limit. d) This answer is incorrect. This is the total of all qualifying costs, not the allowable credit.

4. Tom and Geneva are married and file a joint return. Their only income is Tom’s W-2 for

$14,050 and $3,000 from a small business. Tom operates repairing lawn equipment. They have 2 children; Amy, age 7, and Joseph, age 5. They are barely making ends meet and rely on the federal EIC to get by. Now that California also has an EITC, how much will they be able to claim on their 2018 tax return?

a) $ 0 b) $190 c) $192 d) $189

a) This answer is incorrect. They are eligible for CA EITC. The amount of qualifying earned

income should be used for this calculation. b) Correct. $190 is from the CA EITC Table for earned income of at least $17,001 but

not over $17,050. Pages 6.13-6.14 & CA EITC Table c) This answer is incorrect. This is the amount of the CA EITC for three children. d) This answer is incorrect. This is the amount of the CA EITC for earned income of at least

$17,051 but not over $17,100.


5. Which of the following taxpayers qualifies for the California EITC?

a) A 59-year-old RDP, filing a separate return, who was separated from his RDP for the last two months of the tax year, has 2 qualifying children (15 and 18 years old), and has income from Form W-2 in the amount of $25,588

b) A 32-year-old single man with income reported on Form W-2 in the amount of $17,800 c) A married couple, both 29 years old, with one qualifying child, total income from

Form W-2 in the amount of $9,475, and unemployment compensation of $6,735 d) A 40-year-old single mother of four children between the ages of 6 and 16, with earned

income from Form W-2 in the amount of $10,892, and investment income of $3,797

a) This answer is incorrect. There are at least two disqualifying factors. b) This answer is incorrect. The taxpayer’s income is too high. c) Correct. The couple meets all qualifications. Their earned income falls within the

CA EITC limits for earned income. The unemployment income does not affect the couple’s eligibility for CA EITC. Pages 6.13-6.14

d) This answer is incorrect. The amount of investment income disqualifies the taxpayer.

6. Mark and Vicki are married and will file a joint return for the taxable year. Mark is a doctor for General Hospital and received a Form W-2 showing wages of $130,000 and SDI withheld of $1,300. Vicki works for a CPA firm and received a Form W-2 with wages of $78,000 and SDI withheld of $780. She also does accounting work for a law office and received a Form W-2 from them with wages of $42,000 and SDI withheld of $420. What amount of excess SDI withheld can they claim on their California return?

a) $200 b) $ 0 c) $ 50 d) $150

a) This answer is incorrect. This total includes excess SDI related to Mark’s income. b) This answer is incorrect. There should be an excess SDI credit on Mark and Vicki’s

California tax return. c) Correct. Only Vicki’s excess SDI can be included on the return since she had two

employers. Her total SDI withheld was $1,200. The 2018 limit is $1,149.67. Although Mark’s employer withheld excess SDI, Mark is not eligible for a credit on his California tax return. He must request a refund of excess SDI from his employer. Page 6.15

d) This answer is incorrect. This is the amount of excess SDI withheld by Mark’s employer. Mark only has one employer.


7. Denise is a sole proprietor operating a gourmet catering company. Her growing business required her to employ one new full-time employee in 2018 at a rate of $19.50 per hour. She received a tentative credit reservation for the employee as required. During the taxable year, the employee worked 1,000 hours (at an $11 applicable minimum wage rate). What is the tentative credit amount?

a) $3,850 b) $3,000 c) $2,975 d) $1,050

a) This answer is incorrect. This uses the minimum wage amount and the total number of

hours worked, multiplied by 35%. ($11 × 1,000) × 0.35 = $3,850. b) This answer is incorrect. This uses the minimum wage amount multiplied by 150%, then

subtracted from the hourly wage, and multiplied by the total number of hours worked. ($19.50 – $16.50) × 1,000 = $3,000. This equation is missing one additional step.

c) This answer is incorrect. This uses the difference between the minimum wage amount and the hourly wage, multiplied by the number of hours worked, then multiplied by 35%. ($19.50 – 11) × 1,000 × 0.35 = $2,975.

d) Correct. The employee’s actual wage is $19.50/hour; 150% of minimum wage is $16.50 per hour, so the qualified wage is $3.00 per hour ($19.50 – $16.50). Therefore, the tentative credit amount is ($3.00 × 1,000) × 35% = $1,050. Pages 6.16-6.17

8. Joey and Julia are married with no children. Joey’s California AGI was $32,000 and Julia’s

was $43,000. They lived apart for the entire tax year and would like to file separate returns. They each rented and paid for their own apartments in southern California. They may decide to move back together sometime soon. What is the maximum amount of Nonrefundable Renter’s Credit may each spouse claim on their separate returns?

a) Joey $60; Julia $0 b) Joey $120; Julia $0 c) Joey $60; Julia $60 d) Joey $0; Julia $120

a) Correct. Because they lived apart all year, they each determine their eligibility

separately. Joey is eligible for $60. Julia’s California AGI exceeds the limit and disqualifies her from claiming the credit. Page 6.18

b) This answer is incorrect. The amount listed for Joey exceeds the allowable credit. c) This answer is incorrect. The amount listed for Julia exceeds the allowable credit. d) This answer is incorrect. Joey qualifies for the credit. The amount listed for Julia

exceeds the allowable credit.


9. Jason separated from his spouse in November 2017. The couple didn’t live together for all of 2018 and they are filing separate returns for the tax year. They share joint custody of their 5-year-old son. Jason’s son stayed with him in his home for 190 days in 2018. He provided more than 50% of the household expenses for the home. The custody arrangement is part of their legal separation; however, they were not declared legally separated before the end of 2018. The amount on line 35 of Jason’s Form 540 is $3,570. What amount, if any, of Credit for Joint Custody Head of Household may Jason claim on his California return?

a) $ 0 b) $1,071 c) $ 469 d) $ 71

a) This answer is incorrect. Jason is eligible for the credit. b) This answer is incorrect. The credit is subject to a limit. c) Correct. The credit is 30% of the amount on line 35 of Form 540 or $469, whichever

is less. $3,570 x 0.3 = $1,071. Page 6.19 d) This answer is incorrect. This amount uses a credit percentage that does not apply to the

Credit for Joint Custody Head of Household.

10. Judi is a California resident. She owns two rental properties in Colorado. In 2018, she had net rental income from the properties and paid income tax of $1,580 to Colorado. Her California tax liability attributable to the same rental income is $1,358. How much will Judi be allowed to claim for the Other State Tax Credit on her California tax return?

a) $1,580 b) $ 0 c) $1,358 d) $ 790

a) This answer is incorrect. This is the full amount Judi paid to the other state (Colorado).

However, she may or may not claim the full amount. b) This answer is incorrect. Judi is allowed to take the Other State Tax Credit for the

income taxed by both California and Colorado. c) Correct. Judi is allowed to take the Other State Tax Credit for the income taxed by

both California and Colorado. However, the credit may be limited by her California tax liability on the double-taxed income. In this case, Judi’s California tax on the rental income from Colorado is less than the tax she paid to Colorado, so she is entitled to the Other State Tax Credit of $1,358. Page 6.22

d) This answer is incorrect. This is 50% of the income tax paid to Colorado.


11. Xavier, a California resident, made contributions of $15,000 to establish a child care program for employees in 2011. His nonrefundable Employer Child Care Contribution Credit was 30% of the contribution, or $4,500. He used $600 of the credit on his 2011 tax return and carried the balance of $3,900 forward. He used $2800 of the credit to offset taxes on his 2012–2017 returns resulting in a carryover of $1,100. His 2018 California tax liability is $600. How should Xavier apply this credit to his 2018 state tax return?

a) He will claim a $4,500 credit on his 2018 tax return. b) He will claim a $1,100 credit on his 2018 tax return. c) He will claim a $600 credit on his 2018 tax return and have the remaining $500 unused

portion refunded to him. d) He will claim a $600 credit on his 2018 tax return and carry over $500 to next year’s

return.

a) This answer is incorrect. This is the total amount of the original credit. b) This answer is incorrect. Xavier is not eligible to use the remaining carryover balance

since the credit is a nonrefundable credit. c) This answer is incorrect. The Employer Child Care Contribution Credit is not a

refundable credit. d) Correct. Xavier may only use the Employer Child Care Contribution Credit to

reduce his net tax liability. He can then carry over the remaining $500 to next year’s return. Pages 6.24-6.25



1. Sam retired while residing in the state of Washington. On November 1, 2017, a month prior to permanently moving to California, Sam elected to receive his pension as a lump-sum distribution. His pension is 100% attributable to work he performed while a Washington resident. Sam received the lump-sum distribution in March 2018, after he became a California resident. Sam was born in 1935 and is eligible for special averaging (which could result in less tax). The taxable amount of the lump-sum distribution on the federal return is $80,000. What amount of the distribution is taxable on his 2018 California return?

a) $ 8,000 b) $ 0 c) $80,000 d) $66,667

a) This answer is incorrect. This amount only 10% of the total distribution. b) This answer is incorrect. All or part of his pension is taxable in California. c) Correct. California residents are taxed on all income, including pension income

from sources outside California. Sam was a full-year California resident; therefore, the entire pension distribution is taxable. Page 7.2

d) This answer is incorrect. This is 10 months ÷ 12 months (83.33%) of $80,000. The percentage taxed has nothing to do with the number of months left in the year at the time Sam elected to receive the pension.

2. Diana resided in and worked in Florida for 25 years. She worked for a large corporation

which made all of the contributions to her pension plan. She retired in 2017 and began receiving her monthly pension on January 1, 2018 while she was still living in Florida. Diana’s pension income is $3,000 a month. Diana moved to California on September 1, 2018 and she intends to spend her retirement years there. What amount of her pension income is taxable in California?

a) $12,000 b) $36,000 c) $ 0 d) $24,000

a) Correct. As a part-year resident of California, Diana is only taxed on her pension

income received while she was a CA resident: 4 months x $3,000 = $12,000. Therefore, $12,000 is the taxable portion of the pension to be entered on Schedule CA (540NR), line 4b, column E. Page 7.5

b) This answer is incorrect. This is the amount she received for the entire year: 12 x $3,000 = $36,000.

c) This answer is incorrect. All or part of her pension is taxable in California. d) This answer is incorrect. This is the amount of pension income she received while she

was still a Florida resident: 8 months x $3,000 = $24,000.


3. Marvin was a California resident for several years until he moved to Kansas on February 1, 2018. For the entire year, he has been receiving income from his pension plan of $4,000 per month. During his career, he made after-tax contributions to his pension plan. His pension is 50% taxable on his federal return. How much of his pension income is taxable in California?

a) $ 4,000 b) $ 0 c) $ 2,000 d) $24,000

a) This answer is incorrect. This is the full pension amount he received while a California

resident. b) This answer is incorrect. All or part of his pension is taxable in California. c) Correct. For the month of January, he was a California resident. 50% of his

pension is taxable; therefore, $2,000 ($4,000 x 50%) is taxable in California. Page 7.5

d) This answer is incorrect. This amount is 50% of $4,000/month x 12 months.

4. Robert is a California resident receiving his military pension. He served 20 years in the military. Robert was stationed in California for 4 years during his military career. Robert’s federal AGI of $30,000 is from pension income. What amount of his military pension income is taxable in California?

a) $ 0 b) $ 6,000 c) $24,000 d) $30,000

a) This answer is incorrect. All or part of his pension is taxable. b) This answer is incorrect. The taxable portion of the pension is not allocated based on a

percentage earned while stationed in California. c) This answer is incorrect. The taxable portion of the pension is not calculated based on

where the retiree was stationed. d) Correct. All military retirement income is taxable to California residents,

regardless of where the retiree was stationed. Page 7.5

5. Malcolm, single with no dependents, received Social Security benefits of $20,000, of which $500 was taxable on the federal return, and earned wages of $16,000 during the taxable year. His total income on his federal Form 1040, line 6 is the same as his federal adjusted gross income (AGI). What amount should Malcolm enter on his Schedule CA (540), Part I, line 5(b), column B?

a) $ 0 b) $ 500 c) $10,000 d) $17,000

a) This answer is incorrect. A portion of the Social Security benefits will be listed on

Schedule CA (540). b) Correct. $500 was included on the federal return as taxable Social Security

benefits. California does not tax U.S. Social Security benefits included in federal AGI, so $500 must be subtracted on Schedule CA (540), Part I, line 5(b). Page 7.8

c) This answer is incorrect. This is 50% of the amount of Social Security benefits received. d) This answer is incorrect. This is 85% of the amount of Social Security benefits received.


6. Amy is a California resident. During the year, she had $5,000 of California lottery winnings and $12,000 of Oregon lottery winnings. On the federal Schedule A (Form 1040), line 16, she reported gambling losses of $3,500, including $800 in losses from California gambling activities. What adjustments are needed on Amy’s California tax return?

a) Report $4,200 on Schedule CA (540), Part I, line 21a, column B. b) No adjustments are needed. c) Report $5,000 on Schedule CA (540), Part I, line 21a, column B. d) Report $5,000 on Schedule CA (540), Part I, line 21a, column B and $800 on

Schedule CA (540), Part II, line 16, column B.

a) This answer is incorrect. This is the net amount of California lottery winnings and losses. b) This answer is incorrect. Adjustments are necessary on Schedule CA (540). c) This answer is incorrect. It is true that an adjustment of $5,000 from California lottery

winnings is necessary; however, an additional adjustment is required. d) Correct. California does not tax winnings from the California lottery. Lottery

winnings from all other states are fully taxable. Enter $5,000 on Schedule CA (540), Part I, line 21a, column B. For the gambling losses reported on federal Schedule A (Form 1040) related to California lottery activities, report the $800 in losses as a subtraction (from Other Itemized Deductions) on Schedule CA (540), Part II, line 16, column B. Page 7.10


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1. Sara, 22 and single, is a ballet dancer who was employed by 3 different ballet companies during the tax year. She qualifies to take a deduction for her performing artist business expenses on Schedule 1 (Form 1040), line 24. She was required to travel often and used her own vehicle. She took a section 179 deduction of $800 as well as a bonus depreciation deduction for her vehicle. Her federal depreciation deduction is $3,000, while her California depreciation is $1,800. On Schedule CA (540), Part I, line 24, for what amount and in which column should an adjustment be made?

a) $ 800; column B b) $ 800; column C c) $1,200; column B d) $1,200; column C

a) This answer is incorrect. This is just a portion of the difference between federal and

California depreciation. b) This answer is incorrect. This is just a portion of the difference between federal and

California depreciation. c) Correct. If the federal depreciation deduction ($3,000) is more than the California

depreciation ($1,800), the difference is entered in column B as a subtraction. Page 8.3

d) This answer is incorrect. The federal depreciation deduction is greater than the California depreciation deduction.

2. During the tax year, Dorothy contributed $1,500 to her HSA and her employer contributed

$1,000. She deducted her full contribution amount on her Schedule 1 (Form 1040), line 25. What amounts will she need to report on her Schedule CA (540), Part I, line 1, column C and line 25, column B?

a) $1,000 on line 1, column C; $1,500 on line 25, column B b) $ 0 on line 1, column C; $1,500 on line 25, column B c) $1,000 on line 1, column C; $ 0 on line 25, column B d) $ 0 on line 1, column C; $2,500 on line 25, column B

a) Correct. In contrast to federal law, in California, employer contributions to an HSA

cannot be excluded from wages. In addition, the taxpayer’s contributions are not deductible. Page 8.3

b) This answer is incorrect. California does not conform to the federal law on this provision. c) This answer is incorrect. California does not conform to the federal law on this provision. d) This answer is incorrect. California does not follow the federal law on this provision.


3. Andrew, 35 and single, is an art teacher employed by a public middle school in California. On his federal return, he was allowed to deduct $250 for educator expenses and $400 for student loan interest. He also had $1,680 moving expenses which he could not deduct on his federal return as a result of the TCJA. What are Andrew’s total adjustments to income on Schedule CA (540), line 36, in column B and column C?

a) $2,330 in column B; $ 0 in column C b) $ 250 in column B; $1,680 in column C c) $ 250 in column B; $2,080 in column C d) $ 650 in column B; $1,680 in column C

a) This answer is incorrect. Some of the adjustments to income are allowed in California

and some of the adjustments are not. b) Correct. The deduction for educator expenses does not conform to California law

and must be added back to income on line 23, column B. And, the deduction for moving expenses is suspended on the federal return but is allowed on the California return, so his moving expenses would be entered on line 26, column C, decreasing the California AGI. Pages 8.2, 8.4-8.5

c) This answer is incorrect. Some of the federal adjustments are allowed in California while others are not.

d) This answer is incorrect. Some of the adjustments to income are allowed in California while some of the adjustments are not.

4. Henry, 45 and single, contributed $3,000 to his IRA during the tax year. His federal modified

AGI was $45,000. On his federal return, he elected to designate $1,000 as a nondeductible contribution. He does not want to make this same election on his California return. What amount will he enter as a California adjustment on Schedule CA (540), line 36, column C?

a) $3,000 b) $ 0 c) $2,000 d) $1,000

a) This answer is incorrect. This is the full amount of his contribution. b) This answer is incorrect. He has to make an adjustment since he elected to treat his

federal and California contributions differently. c) This answer is incorrect. This is the amount he claimed as a deduction on his federal

return. d) Correct. He elected to deduct $2,000 on his federal return. He did not make this

election on his California return. His California deduction would be $3,000. The difference of $3,000 – $2,000 = $1,000 would be reported on Schedule CA (540), line 36, column C. Page 8.7


5. Clarissa is an actor who performed in 3 musicals during the tax year, produced by 2 different entertainment companies. Her gross income from her 2 employers was $15,000 ($6,000 and $9,000). She reported related expenses of $2,200, of which federal depreciation on her vehicle was $500. Her California depreciation on the same vehicle is $300. She had no other income. Where will she report these expenses on her California return?

a) Schedule CA (540), line 24, columns A and C b) Form 2106, Employee Business Expenses c) She does not need to report a California adjustment. d) Schedule CA (540), line 24, columns A and B

a) This answer is incorrect. The difference in the California depreciation amount should not

be reported in column C. b) This answer is incorrect. This is a federal form. The question asks where expenses are

reported on the California return. c) This answer is incorrect. Since Clarissa meets the criteria to be a qualified performing

artist, she is entitled to a deduction as an adjustment to income. d) Correct. Since Clarissa meets the criteria to be a qualified performing artist, she is

entitled to an above-the-line deduction, reported on line 24. The federal amount is reported in column A. The difference in the California depreciation amount is $200 ($500 – $300) and should be reported in column B as a subtraction. Page 8.3

6. Linda is a single, nonresident alien taxpayer. She was employed as a salesperson for all of

2018. In August 2018, she was hired by a new employer, which required her to relocate from Los Angeles to San Francisco. She incurred $1,860 in moving expenses for a plane ticket and transportation for moving her personal belongings to the new home. She was not reimbursed for her moving expenses. She also paid $25,500 in alimony to her ex-husband, who is also a nonresident alien. How should Linda report these amounts on her Schedule CA (540NR) for 2018 (disregard columns D and E)?

a) Enter $1,860 on line 26, columns A and C; enter $25,500 on line 31a, columns A and C,

and enter the recipient’s SSN or ITIN on line 31b. b) Enter $25,500 on line 31a, columns A and C, and enter the recipient’s SSN or ITIN on

line 31b. c) Enter $1,860 on line 26, column C; enter $25,500 on line 31a, column C, and enter

the recipient’s SSN or ITIN on line 31b. d) Enter $1,860 on line 26, columns A and C.

a) This answer is incorrect. The moving expenses deduction on the federal return is

suspended for non-military taxpayers. Also, on the federal return, nonresident alien taxpayers are not allowed to deduct alimony paid.

b) This answer is incorrect. Nonresident aliens are not allowed to deduct alimony paid on the federal return.

c) Correct. The moving expenses deduction for nonmilitary individuals is suspended under federal law. Nonresident aliens may not deduct alimony paid on the federal return. The column A amounts for lines 26 and 31a are zero. California does not conform to federal law regarding the suspension of the deduction for moving expenses. Enter the amount of moving expenses on line 26, column C. California allows nonresident aliens to deduct alimony paid as an adjustment to income. Enter the amount paid on line 31a, column C. These adjustments will decrease the California AGI. Page 8.10

d) This answer is incorrect. Linda is not allowed to deduct the moving expenses on her federal return.


7. Susan sold her business in Kansas in April, moved to California in May, and opened a business in her new resident state of California on July 1. Her self-employment income from California sources while a resident was $50,000. Total self-employment income reported on her federal return was $80,000. Her federal self-employment tax was $11,304. How would she report the deductible part of self-employment tax on her Schedule CA (540NR)?

a) Her California amount of $2,826 would be reported on line 27, column E. b) Her California deduction will be the same as her federal deduction. c) Her California amount of $3,533 would be reported on line 27, column E. d) California does not allow a deduction for any self-employment tax.

a) This answer is incorrect. This amount does not use the correct California ratio. b) This answer is incorrect. Not all the self-employment tax was attributable to California;

therefore, an adjustment will be needed. c) Correct. The first step is to calculate the California ratio (California self-

employment income/total self-employment income = $50,000/$80,000 = 0.625. The federal deduction is 50% of the self-employment tax ($11,304 × 0.50 = $5,652). The California amount is the California ratio × the federal deduction for self-employment tax = 0.625 × $5,652 = $3,533 (rounded). This amount would be reported as the California amount on line 27, column E. Page 8.14

d) This answer is incorrect. California does allow a deduction for self-employment tax as long as the self-employment income upon which the tax is based was from California sources.

8. Over the course of many years, Mina, age 62, made nondeductible contributions of $80,000

to her IRA. She didn’t contribute every year but $10,000 of her nondeductible contributions were made prior to 1987. In 2018, she took her first distribution in the amount of $8,000. How much of her distribution is taxable by California?

a) $ 8,000 b) $10,000 c) $ 6,500 d) $ 0

a) This answer is incorrect. This is the total amount of her distribution. Some or all of the

distribution is not taxable. b) This answer is incorrect. This is the amount of pre-1987 contributions she made. c) This answer is incorrect. This is Mina’s IRA contribution limit for 2018. d) Correct. None of Mina’s IRA distribution is taxable. Her pre-1987 nondeductible

contributions in the amount of $10,000 are a return of basis. Pages 8.17-8.19



1. Michael and Amy separated on May 1, 2018. Michael moved out of their jointly owned home. They have two qualifying children who lived with Michael all year. Michael provided more than half of the children’s support. Michael and Amy are planning to file separate returns. Michael paid the following expenses: mortgage and real estate taxes of $8,150 for the year and personal property tax of $380. Amy paid personal property tax of $350 and gave a charitable contribution of $500 to her church. If Michael itemized deductions on his state return, what is Amy’s deduction amount on her state return?

a) $ 850 b) $4,401 c) $8,802 d) $ 0

a) Correct. Because Michael itemized deductions on his return, Amy must also

itemize deductions on her return even though her standard deduction ($4,401) would be higher than her itemized deductions ($350 + $500 = $850). Page 9.1

b) This answer is incorrect. Amy cannot use the standard deduction. Michael itemized deductions on his return.

c) This answer is incorrect. Amy does not qualify for the Head of Household filing status. d) This answer is incorrect. Amy is eligible to itemize deductions on her state return.


2. Bob and Ellen always a file joint tax return. Their federal AGI is $395,000 and their itemized deductions are $48,500 on Schedule A (Form 1040). Among the $48,500 in itemized deductions, they have California state and local income taxes of $12,500 (including CASDI). The amount on Schedule CA (540), line 28 is $36,000 and the amounts on federal Schedule A, line 4, line 9, line 15, and line 16 are all zero. What is the total itemized deductions they may claim on their California return?

a) $35,641 b) $28,800 c) $36,000 d) $29,806

a) Correct. Use the Itemized Deductions Worksheet to calculate the allowable

itemized deductions. Pages 9.3-9.4

b) This answer is incorrect. This is 80% of the itemized deductions. The calculation is not complete here.

c) This answer is incorrect. This amount is $48,500 – $12,500 = $36,000. It would be this amount if the couple’s federal AGI did not exceed the California limitation.

d) This answer is incorrect. This amount is using the California limitation amount for Head of Household ($291,760). $395,000 – $291,760 = $103,240 × 6% = $6,194. $36,000 – $6,194 = $29,806.


3. Rudolph deducted state taxes of $472, State Disability Insurance of $432, real estate taxes of $1,103, and property taxes of $390 on his federal Schedule A. What adjustment amount must be made on Schedule CA (540), Part II, line 5e?

a) $2,379 b) $ 472 c) $ 904 d) $ 0

a) This answer is incorrect. This amount includes all of the taxes paid. There may be items

listed above for which there is no adjustment necessary. b) This answer is incorrect. There are additional items listed above which should be

included. c) Correct. California does not allow the deduction of any state income tax or the

deduction of SDI. An adjustment must be made ($472 + $432 = $904) on line 5e, column B. Pages 9.5-9.6

d) This answer is incorrect. An adjustment must be made. There are items listed above which require an adjustment.

4. Peggy and Tom, married and both 40 years old, have a combined federal AGI of $65,000.

They filed a joint federal return and had medical expenses totaling $12,000 during the tax year. They paid $2,000 of the total $12,000 in medical expenses from their health savings accounts. They are also filing a joint state return. What adjustment amount must be made on their Schedule CA (540) for the medical expense deduction?

a) $5,125 b) $ 0 c) $7,125 d) $2,000

a) This answer is incorrect. This is the amount of federal deduction allowed [$10,000 –

(7.5% x $65,000) = $5,125]. b) This answer is incorrect. The federal and California deduction differ; therefore, an

adjustment is required. c) This answer is incorrect. This is the amount of California deduction allowed [$12,000 –

(7.5% x $65,000) = $7,125]. d) Correct. This is the difference between the amount of expenses claimed on

federal Schedule A and the amount allowed by California ($7,125 – $5,125 = $2,000). Page 9.5


5. Kourtney made several charitable donations during the tax year, including $5,000 in tithes to her church, an old car with a fair market value of $4,000 to the Red Cross, and furniture and clothes valued at $4,500 to Goodwill. On this year’s tax return, she wants to donate $50 of her 2018 state refund to a California Voluntary Contribution Fund. Her federal AGI is $25,000. What amount of her charitable contributions is deductible on her California return?

a) $13,500 b) $12,500 c) $12,550 d) $13,550

a) This answer is incorrect. Her total qualified donations are $13,500. The TCJA increased

the federal deduction limit to 60% of the taxpayer’s federal adjusted gross income; however, the California deduction limit differs from the federal.

b) Correct. The California deduction is limited to 50% of the taxpayer’s federal adjusted gross income ($25,000 x 0.50 = $12,500). Her total qualified donations are $13,500. Page 9.7

c) This answer is incorrect. This amount includes the 2018 donation to a California Voluntary Contribution Fund, which will be deductible on the 2019 tax return.

d) This answer is incorrect. This is the total amount of her donations plus her 2018 donation to a California Voluntary Contribution Fund (allowable on next year’s return).

6. Kim is a first-grade teacher employed by a California public school. During the tax year, she

paid $400 for classroom supplies and materials for her students that were not reimbursed by the employer. She will claim the maximum educator expenses adjustment allowed on her federal return. Kim will itemize deductions on her federal and California returns. What amount should she enter on Schedule CA (540), Part II, line 19 for these expenses?

a) $ 0 b) $150 c) $250 d) $400

a) This answer is incorrect. Kim will require an adjustment on Schedule CA (540), Part II. b) This answer is incorrect. This is the difference between the actual expenses Kim paid

and her federal educator expenses deduction. This is not the amount Kim should enter on Schedule CA (540), Part II, line 19.

c) This answer is incorrect. The is the educator expenses deduction allowed on her federal return. An adjustment will be necessary on Schedule CA (540), Part I, line 23 for this amount. Then, an additional adjustment is needed on Schedule CA (540), Part II.

d) Correct. The federal return allows for a $250 adjustment to income that California does not conform to. The $250 federal deduction must be eliminated for California by entering $250 on Schedule CA (540), Part I, line 23, column B. The full amount she paid ($400) is then entered on Schedule CA (540), Part II, line 19 as unreimbursed employee business expenses. Page 9.11


7. Kris’s grandma passed away at the beginning of the tax year. Her grandma left all of her assets to Kris. Kris paid federal estate taxes of $12,000 and generation-skipping transfer taxes (GSTT) of $13,000 once the estate was settled later in the year. She itemized deductions on her federal return. If she itemizes on her California return, how much will she be allowed to deduct?

a) $25,000 b) $12,000 c) $ 0 d) $13,000

a) This answer is incorrect. One or more of these taxes are either limited or not deductible

on the California return. b) This answer is incorrect. The federal estate tax is not deductible on the California return. c) Correct. Under California law, federal estate tax and generation-skipping transfer

tax (GSTT) are not deductible. Pages 9.5-9.6, 9.10 d) This answer is incorrect. The generation-skipping transfer tax (GSTT) is not deductible

on the California return.

8. Khloe ’s lottery winnings in California totaled $2,000. She spent $3,000 on tickets before she won. She itemized her deductions on her federal return. What adjustment amount must be made to the gambling losses on her Schedule CA (540), Part II, line 16?

a) $2,000 b) $3,000 c) $ 0 d) $1,000

a) Correct. California law does tax California lottery winnings; therefore, California

lottery (gambling) losses are not deductible. $2,000 must be subtracted from federal itemized deductions on Schedule CA (540), Part II, line 16 column B. Page 9.10

b) This answer is incorrect. This is the total amount of her gambling losses. Khloe cannot deduct her California lottery losses because the income is not taxable by California.

c) This answer is incorrect. Federal law taxes gambling winnings and allows a deduction for gambling losses up to a certain amount. Khloe cannot deduct her California lottery losses because the income is not taxable by California, so an adjustment must be made on Schedule CA (540), Part II, line 16.

d) This answer is incorrect. This is the difference between Khloe’s winnings and losses.


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1. Morgan established his home in California with his family eight years ago. In March 2017, he moved to Wisconsin for an indefinite job assignment. He shares an apartment with a co-worker who was was sent to Wisconsin for the same job assignment. His wife and children stayed behind in the home he owns and he retained his California bank account. He is still living and working in Wisconsin. He does not know when he will move back to California. He returns to California four days each month to spend time with his family. What is Morgan’s residency status?

a) Wisconsin resident b) California resident c) California part-year resident d) California nonresident

a) This answer is incorrect. Morgan is not a resident of Wisconsin, although he has been

living in Wisconsin. Morgan still has some ties to California. b) Correct. Morgan retains strong ties with California because his family remains in

his home during his absence and his bank account is in California. He also failed to meet the safe harbor rules. Pages 10.2-10.4

c) This answer is incorrect. Although he physically lived in two states during the tax year, he doesn’t satisfy the requirements for a part-year resident, due to his strong ties with California.

d) This answer is incorrect. Morgan failed to meet the safe harbor rules.

2. Leah, a single taxpayer born in Virginia, worked and lived in California for years until she accepted a two-year job assignment in Singapore. The assignment covers January 1, 2018, through December 31, 2019. She rented out her condo and placed her possessions in storage. She maintains her California financial accounts and her professional CPA license. While in Singapore, she took a two-week vacation to visit friends in California. For the 2018 tax year, what is Leah’s residency status?

a) California resident b) California part-year resident c) California nonresident d) California nonresident alien

a) This answer is incorrect. Leah is no longer a California resident, even though she owns a

condo in California and has California rental income. However, her rental income is required to be reported in and is taxable in California.

b) This answer is incorrect. Leah is not a part-year resident of California. She doesn’t meet the requirements to be considered a part-year resident.

c) Correct. Leah satisfies the safe harbor rule and is a nonresident during her absence from California. Pages 10.3-10.4

d) This answer is incorrect. She cannot be a nonresident alien because she is a U.S. citizen.


3. Daniel is a resident of Maryland who worked on assignment in California for eight months during the tax year. Which of the following will require a prorated calculation on the 540NR?

a) Exemption Credits b) Nonrefundable Renter’s Credit c) Other State Tax Credit d) Earned Income Tax Credit

a) Correct. As a nonresident, Daniel must prorate his exemption credits. Page 10.5 b) This answer is incorrect. There are no prorations for the nonrefundable renter’s credit. c) This answer is incorrect. There are no prorations for the other state tax credit. d) This answer is incorrect. There are no prorations for the earned income tax credit.

4. Scott, a military servicemember domiciled in California, was stationed in Hawaii on PCS

orders during the entire tax year. His wife, Rachelle, decided to join him in Hawaii temporarily so she and her friends could enjoy vacationing on the beautiful beaches and the nightlife. During the time Scott is stationed in Hawaii, what is his California residency status? What is Rachelle’s California residency status?

a) Both are residents. b) Scott is a nonresident and Rachelle is a resident. c) Scott is a resident and Rachelle is a nonresident. d) Both are nonresidents.

a) This answer is incorrect. Scott is domiciled in California and considered to be a

nonresident while stationed outside of California b) Correct. While he is away on PCS orders, Scott is considered a nonresident.

Rachelle is a resident because she only went along for a temporary purpose to vacation with her friends. Page 10.7

c) This answer is incorrect. Scott received PSC orders; therefore, he is not a resident of California. Rachelle is not affected by Scott’s PCS orders since she only went to Hawaii for a short vacation.

d) This answer is incorrect. Rachelle cannot have nonresident status because she only went along for a temporary purpose to vacation with her friends. Rachelle is a California resident because she was absent for a temporary purpose; to vacation with her friends.

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Chapter 6: Review Questions · 2019. 10. 24. · Chapter 6: Review Questions 1. Carrie, 35, and Chris, 38, were legally separated on November 30, 2018. Chris moved out of ... who