Question 1

Finance charges on personal credit cards are deductible interest expense.

Accepted Answer

Interest on personal credit cards is considered personal interest, which is not deductible on federal tax returns.

Question 2

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

Accepted Answer

This is true. Taxpayers can only deduct interest expense on certain types of debt, such as mortgage interest and investment interest. Personal debt, such as credit card debt and car loans, usually does not qualify for a deduction.

Question 3

Qualified residence interest must be acquisition indebtedness and be secured by the residence.

Accepted Answer

According to the IRS, for interest on a mortgage to qualify as "qualified residence interest," it must be acquisition indebtedness (meaning it was used to buy, build, or improve the residence) and be secured by the residence.

Question 4

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 net investment income tax.

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

According to IRS regulations, investment interest expense disallowed in a given year due to the limitation of exceeding net investment income can be carried forward to future years and treated as if it were incurred in those subsequent years. This is known as the investment interest expense carryover.

Question 6

When both borrowed and owned funds are mingled in the same account,for purposes of categorizing interest expense,a repayment of the debt is allocated first to
A)personal expenditures.
B)trade or business expenditures.
C)investment expenditures.
D)passive activity expenditures in real estate.

Accepted Answer

The answer of When both borrowed and owned funds are...

Question 7

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

Accepted Answer

According to the IRS, acquisition indebtedness for a personal residence includes debt incurred to substantially improve the residence, in addition to debt incurred to acquire, construct, or substantially improve the residence. This means that the interest on this debt may be deductible as qualified mortgage interest.

Question 8

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

Accepted Answer

This statement is true. The IRS allows deduction of interest on loans used for business or investment purposes, but limits or disallows deductions for interest on personal loans or credit card debt.

Question 9

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

Points paid for the purchase of a residence can be deducted in the period paid, while points associated with refinancing must be amortized over the life of the loan and deducted accordingly.

Question 10

Subject to net equity and dollar limitations,a taxpayer may deduct interest on a home equity loan,secured by the residence,used to purchase an automobile.

Accepted Answer

Interest on a home equity loan can only be deducted if it is used to buy, build, or improve the taxpayer's home. It cannot be deducted if it is used to purchase a vehicle.

Question 11

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?
A)All three of the taxes are deductible as itemized deductions.
B)One-half of the self-employment tax is deductible for AGI,and the .09% and 3.8% taxes are itemized deductions.
C)None of the taxes are allowed as a deduction.
D)One-half of the self-employment tax is deductible for AGI,but the .09% and 3.8% taxes are not allowed as deductions.

Accepted Answer

Self-employment tax is deductible for AGI, but the supplemental Medicare surtaxes on excess wages and self-employment income (the .09% tax) and supplemental Medicare taxes on investment income (the 3.8% tax) are not allowed as deductions.

Question 12

Christopher,a cash-basis taxpayer,borrows $1,000 from ABC Bank by issuing a 3-month note on December 1,2019.Christopher receives $940 but must repay $1,000 on the due date.The amount of interest expense deductible in 2019 is $20.

Accepted Answer

Christopher did not pay any interest in 2019 since he only received $940 and must repay $1,000 on the due date. Therefore, there is no interest expense deductible in 2019.

Question 13

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

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

Question 14

PG LLC is an accrual method partnership,manufacturing drones.Patty,75% partner in PG and a cash method taxpayer,lends $100,000 to PG as a working capital loan on January 1,2019,with interest due at an arms-length rate.PG accrues,and reports on its income statement,$5,000 of interest expense on this loan.PG pays the interest due to Patty on January 2,2020.On PG LLC's 2019 tax return,it will deduct the $5,000 interest expense.

Accepted Answer

Under the accrual method, PG LLC can only deduct the interest expense when it is both incurred and paid. Since the interest was paid in 2020, it cannot be deducted on the 2019 tax return.

Question 15

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
A) $$\begin{array} {| l | l | l |} 
\hline\text { Taxes allocated to } & & \
 \text { James } & \text { Taxes allocated to Bill } & \text { Effect on James' Gain } \
\hline \$ 0 & \$ 3,650 & \text { no effect on gain } \
\hline
\end{array}$$
B) $$\begin{array} { |l | l | l | } 
\hline \begin{array} { l } 
\text { Taxes allocated to } \
\text { James }
\end{array}  & \text { Taxes allocated to Bill } & \text { Effect on James' Gain } \
\hline \$ 3,650 & \$ 0 & \text { decrease gain by } \$ 1,220 \
\hline
\end{array}$$
C) $$\begin{array} {| l | l | l | } 
\hline \begin{array} { l } 
\text { Taxes allocated to } \
\text { James }
\end{array}  & \text { Taxes allocated to Bill } & \text { Effect on James' Gain } \
\hline \$ 2,430 & \$ 1,220 & \text { increase gain by } \$ 2,430 \
\hline
\end{array}$$
D) $$\begin{array} {| l | l | l | } 
\hline \begin{array} { l } 
\text { Taxes allocated to } \
\text { James }
\end{array} & \text { Taxes allocated to Bill } & \text { Effect on James' Gain } \
\hline \$ 1,220 & \$ 2,430 & \text { increase gain by } \$ 1,220 \
\hline
\end{array}$$

Accepted Answer

The answer of On September 1,of the current year,James,a cash-basis...

Question 16

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

Accepted Answer

Investment interest expense is generally deductible only to the extent of investment income. However, interest expense incurred to purchase tax-exempt securities is not deductible because the income from those securities is already exempt from tax.

Question 17

Peter is assessed $630 for street improvements in front of his house.Which of the following statements is correct?
A)Peter must deduct the assessment as a tax.
B)Peter must reduce the property basis by $630.
C)Peter must increase the property basis by $630.
D)Peter can elect to deduct the $630 currently or increase the basis in the property.

Accepted Answer

When a homeowner is assessed for street improvements, the assessment is added to the property basis, which is the amount used to determine gain or loss when the property is sold. Therefore, Peter should increase the property basis by $630, not deduct it as a tax or reduce the property basis. Option D is not applicable as deductions and basis adjustments are not interchangeable.

Question 18

Riva borrows $10,000 that she intends to use for purchasing supplies for her business.She temporarily deposits the funds in her personal checking account.Prior to the deposit,the checking account held $40,000 of personal funds.Riva books a vacation for $6,000 and writes a check to the travel agency from her personal account.Later in the month,the business supplies bill arrives and Riva writes a check for $10,000 from the personal account.With respect to the interest expense on the $10,000 loan
A)it will all be treated as trade or business expense.
B)60 percent will be treated as personal interest expense and 40 percent as trade or business expense.
C)it will all be treated as personal expense.
D)20 percent will be treated as trade or business expense.

Accepted Answer

Since Riva deposited the $10,000 loan into her personal account before using it for business purposes, it becomes indistinguishable from her personal funds. Therefore, any interest expense incurred on the loan will need to be allocated between personal and business use. The allocation is based on the ratio of average monthly balances of personal and business accounts. In this case, the personal checking account had an average balance of $40,000, while the business account balance is unknown. Therefore, the interest expense on the loan will be allocated 60 percent as personal interest and 40 percent as trade or business expense.

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
A) $$\begin{array} {| l | l | l | } 
\hline \begin{array} { l } 
\text { Saxes allocated to } \
\text { Samuel }
\end{array} & \begin{array} { l } 
\text { Taxes allocated to } \
\text { Edward }
\end{array} & \text { Effect on Samuel's Gain } \
\hline \$ 1,220 & \$ 2,430 & \text { increase gain by } \$ 1,220 \
\hline
\end{array}$$
B) $$\begin{array} { |l | l | l | } 
\hline \begin{array} { l } 
\text { Taxes allocated to } \
\text { Samuel }
\end{array} & \begin{array} { l } 
\text { Taxes allocated to } \
\text { Edward }
\end{array} & \text { Effect on Samuel's Gain } \
\hline \$ 2,430 & \$ 1,220 & \text { increase gain by } \$ 2,430 \
\hline
\end{array}$$
C) $$\begin{array} { |l | l | l | } 
\hline \begin{array} { l } 
\text { Taxes allocated to } \
\text { Samuel }
\end{array} & \begin{array} { l } 
\text { Taxes allocated to } \
\text { Edward }
\end{array} &  \text { Effect on Samuel's Gain }\
\hline \$ 2,430 & \$ 1,220 &\text { decrease gain by } \$ 1,220 \
\hline
\end{array}$$
D) $$\begin{array} { |l | l | l | } 
\hline \begin{array} { l } 
\text { Taxes allocated to } \
\text { Samuel }
\end{array} & \begin{array} { l } 
\text { Taxes allocated to } \
\text { Edward }
\end{array} &  \text { Effect on Samuel's Gain }\
\hline \$ 1,220 & \$ 2,430 &\text { decrease gain by } \$ 1,220 \
\hline
\end{array}$$

Accepted Answer

The answer of On September 1,of the current year,Samuel,a cash-basis...

Question 20

Which of the following is deductible as interest expense?
A)personal credit card interest
B)interest to purchase tax-exempt bonds
C)bank service charges on personal account
D)none of the above

Accepted Answer

Personal credit card interest and interest to purchase tax-exempt bonds are not deductible as interest expenses. Bank service charges are not considered interest.

Quiz 24: Itemized Deductions