Question 1

In February of the current year (assume a non-leap year), Ken and Kelsey received their property tax statement for last calendar-year taxes of $1,600, which they paid to the taxing authority on March 1 of the current year. They had purchased their home on May 1 last year. What amount of property tax on this statement may they claim as an itemized deduction this year?

Accepted Answer

(245 days [May 1 - Dec. 31]/365 × $1,600 = $1,074)

Question 2

Hui pays self-employment tax on her sole proprietorship income, supplemental Medicare surtaxes on excess wages and self-employment income (the .09% tax) and supplemental Medicare taxes on investment income (the 3.8% tax). Which of the following statements is correct regarding the deductibility of these taxes?

Accepted Answer

The two supplemental Medicare taxes are not deductible at all, but one-half of the self-employment tax is allowed as a deduction for AGI.

Question 3

Acquisition indebtedness for a personal residence includes debt incurred to substantially improve the residence.

Accepted Answer

Acquisition indebtedness is any debt secured by the residence and incurred in acquiring, constructing or substantially improving the qualified residence.

Question 4

On September 1, of the current year, James, a cash-basis taxpayer, sells his cottage to Bill, also a cash-basis taxpayer, for $100,000. James' basis in the cottage is $65,000. The real property tax year is the calendar year. Real estate taxes on the property for the year are $3,650 and are payable in November of the current year. The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller. Assume Bill pays all of the real estate taxes in the current year. The effects of this sales structure will be:

Accepted Answer

Since James is a cash-basis taxpayer and the sales agreement does not provide for apportionment of real estate taxes, James cannot deduct the $3,650 real estate taxes for the current year, since Bill paid them. Therefore, James will report a gain on the sale of the cottage of $31,350 ($100,000 - $65,000), and Bill will have a cost basis in the cottage of $100,000. The fact that real estate taxes are payable in November does not affect the tax treatment for the current year.

Question 5

Qualified residence interest consists of both acquisition indebtedness and home equity interest.

Accepted Answer

The IRC specifies that to be deductible, the interest payment must be either acquisition indebtedness or home equity indebtedness with respect to a qualified residence of the taxpayer.

Question 6

While points paid to purchase a residence are deductible as interest in the period paid, points associated with the refinancing of a residence must be amortized and deducted over the life of the loan.

Accepted Answer

Prepaid interest must generally be capitalized and amortized, but an exception allows immediate deduction only in the case of points paid for a loan to purchase a primary residence.

Question 7

Peter is assessed $630 for street improvements in front of his house. Which of the following statements is correct?

Accepted Answer

Tax law requires capitalization of assessments as part of the property's adjusted basis.

Question 8

On September 1, of the current year, Samuel, a cash-basis taxpayer, sells his cottage to Edward, also a cash-basis taxpayer for $100,000. Samuel's basis in the cottage is $65,000. The real property tax year is the calendar year. Real estate taxes on the property for the year are $3,650 and are payable on April 1 of the following year. The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller. Assume Samuel pays all of the real estate taxes prior to the sale. The effects of this sales structure will be:

Accepted Answer

The answer of On September 1, of the current year,...

Question 9

Taxpayers may not deduct interest expense on most personal debt, including credit card debt, car loans, and other consumer debt.

Accepted Answer

Except for interest expense on debt to acquire a personal residence and on certain student loans, interest expense on personal loans is not deductible.

Question 10

A taxpayer is allowed to deduct interest expense incurred on home equity indebtedness limited to the lesser of $100,000 or the home equity (FMV of the residence less the acquisition indebtedness).

Accepted Answer

Home equity indebtedness is any indebtedness, other than acquisition indebtedness, that is secured by a qualified residence.

Question 11

Investment interest expense which is disallowed because it exceeds the taxpayer's net investment income may be carried over and treated as incurred in subsequent years.

Accepted Answer

There is no time limit on investment interest expense carryovers.

Question 12

In general, the deductibility of interest depends on the purpose for which the indebtedness is incurred.

Accepted Answer

Treasury Regulations require that taxpayers allocate interest expense to the different interest expense categories based on the use of the borrowed funds.

Question 13

Finance charges on personal credit cards are deductible interest expense.

Accepted Answer

The charge is a nondeductible personal expense.

Question 14

During the year Jason and Kristi, cash basis taxpayers, paid the following taxes:  What amount can Kristi and Jason claim as an itemized deduction for taxes on their federal income tax return in the current year?

Accepted Answer

$4,100 + 3,000 + 800 = 7,900. Gift taxes, federal income taxes and assessments are not allowed as deduction by the IRC.

Question 15

Doug pays a county personal property tax on his automobile of $1,500. The $1,500 includes $800 based on the weight of the car and $700 based on the value of the car. How much of the tax can Doug deduct on his tax return?

Accepted Answer

Personal property taxes are deductible to the extent that they are ad valorem or based on value.

Question 16

Interest expense incurred in the taxpayer's trade or business is deductible as a for AGI deduction without limitation if the taxpayer materially participates in the business.

Accepted Answer

If the taxpayer does not materially participate, the interest is subject to the passive loss limitations.

Question 17

Discuss what circumstances must be met for personal property taxes to be deductible.

Accepted Answer

The answer of Discuss what circumstances must be met for...

Question 18

Taxpayers may elect to include net capital gain as part of investment income.

Accepted Answer

Net capital gain and qualifying dividend income are not normally included in the net investment income ceiling, but an election is available to the taxpayer to include them if the taxpayer is willing to forego the applicable favorable tax rates.

Question 19

Investment interest includes interest expense incurred to purchase tax-exempt securities.

Accepted Answer

Interest expense related to tax-exempt securities is not deductible.

Question 20

During the current year, Deborah Baronne, a single individual, paid the following amounts:  How much can Deborah deduct in taxes as itemized deductions?

Accepted Answer

The answer of During the current year, Deborah Baronne, a...

Quiz 7: Itemized Deductions