Question 1

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

Self-employment tax is deductible for AGI and is claimed on Form 1040 Schedule 1, Line 9. However, the .09% tax and 3.8% tax are not deductible as itemized deductions.

Question 2

Finance charges on personal credit cards are deductible interest expense.

Accepted Answer

The answer of Finance charges on personal credit cards are...

Question 3

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

Accepted Answer

The street improvement assessment is considered a capital improvement and should be added to the property basis. This will reduce the capital gains tax liability when the property is ultimately sold. Peter cannot deduct the assessment as a tax and cannot reduce the property basis by $630. There is no option to deduct the assessment currently, as it is a capital improvement.

Question 4

In 2016, Carlos filed his 2015 state income tax return and paid taxes of $800. Also in 2016, Carlos's employer withheld state income tax of $750 from Carlos's salary. In 2017, Carlos filed his 2016 state income tax return and paid an additional $600 of state income tax due for 2016. How much state income tax can Carlos deduct on his 2016 federal income tax return for state income tax?

Accepted Answer

The answer of In 2016, Carlos filed his 2015 state...

Question 5

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

This is correct according to IRS regulations. The disallowed investment interest expense can be carried over and treated as incurred in subsequent years, up to the limit of the taxpayer's net investment income in each year.

Question 6

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

Doug can only deduct personal property taxes that are based on the value of the car, which in this case is $700. The portion of the tax that is based on the weight of the car, which is $800, is not deductible. Therefore, the total amount Doug can deduct on his tax return is $700.

Question 7

During the current year, Deborah Baronne, a single individual, paid the following amounts:
 $\begin{array}{ll}
\text { Federal income tax } & \$ 10,000 \
\text { State income tax } & \$ 4,000 \
\text { Real estate taxes on land in France } & \$ 1,500 \
\text { Real estate taxes on land in U.S. } & \$ 1,700 \
\text { State sales taxes } & \$ 2,000 \
\text { State occupational license fee } & \$ 600
\end{array}$  How much can Deborah deduct in taxes as itemized deductions?

Accepted Answer

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

Question 8

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

According to IRS regulations, 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, therefore the statement is true.

Question 9

Investment interest expense is deductible when incurred to purchase tax-exempt securities.

Accepted Answer

Investment interest expense is generally tax deductible, but if it is incurred to purchase tax-exempt securities, the interest expense cannot be deducted. This is because the income from tax-exempt securities is already free from federal income tax, so the related expenses cannot be used to offset taxable income.

Question 10

During the year Jason and Kristi, cash basis taxpayers, paid the following taxes: $$\begin{array} { | l | r | } 
\hline \text { State gift tax } & \$ 1,000 \
\hline \text { Property tax on home in the United States } & 4,100 \
\hline \text { State income tax (withholdings) } & 3,000 \
\hline \text { Estimated federal income tax } & 4,500 \
\hline \text { Estimated state income tax (paid by check) } & 800 \
\hline \begin{array} { l } 
\text { Special assessment by city for sidewalks and street lighting } \
\text { on their street }
\end{array} & 2,000 \
\hline
\end{array}$$ 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

The only taxes that can be deducted as itemized deductions are property taxes and state and local income taxes. Therefore, the total amount that Jason and Kristi can deduct is $4,100 + $3,000 + $800 = $7,900.

Question 11

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

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

Question 12

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

Accepted Answer

The purpose for which the indebtedness is incurred determines whether the interest is deductible or not under various tax laws.

Question 13

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

Ken and Kelsey can only deduct the portion of the property tax that they paid during the current year. Since they paid the $1,600 property tax on March 1 of the current year, they can only deduct the portion of the tax that applies to the period they owned the home during the year.

They owned the home from May 1 to December 31 of the previous year (8 total months). Therefore, they can deduct 8/12 or 2/3 of the $1,600 property tax, which equals $1,066.67. However, the IRS requires rounding to the nearest dollar, so the amount they can claim as an itemized deduction this year is $1,074 (2/3 of $1,600 rounded up).

Question 14

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 15

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

Accepted Answer

Qualified residence interest refers to the interest paid on a mortgage that is secured by the taxpayer's main home or a second home that is also used for personal purposes. It includes both acquisition indebtedness (which is used to acquire, construct, or substantially improve the home) and home equity interest (which is based on the value of the home and can be used for any purpose).

Question 16

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

Accepted Answer

Taxpayers may elect to include net capital gain as part of investment income for the purpose of calculating their investment income tax credit. This election is made by completing Form T936 with their tax return.

Question 17

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

Accepted Answer

Taxpayers are generally not permitted to deduct interest expense on personal debt, including credit cards, car loans, and other consumer debt. Exceptions may apply for certain types of debt, such as a qualified student loan or a mortgage on a primary residence.

Question 18

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

This is true according to IRS guidelines. However, it is important to note that starting in 2018, the home equity interest deduction is suspended until 2026 under the Tax Cuts and Jobs Act.

Question 19

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