Question 1

Six years ago, Milo Lenz, an amateur artist, sculpted a garden gnome as a gift for his mother. This year, his mother sold the gnome on eBay for $1,200. What is the amount and character of the mother's gain?

Accepted Answer

The answer of Six years ago, Milo Lenz, an amateur...

Question 2

Josh donated a painting to the local art museum. He purchased the painting twenty years ago for $34,000, and its appraised FMV at date of gift was $115,000. Which of the following statements about this donation is true?

Accepted Answer

When donating appreciated property, the donor is allowed a charitable contribution deduction for the fair market value of the property at the date of the gift, and does not have to recognize any capital gain. Therefore, Josh would recognize no gain and is allowed a $115,000 charitable contribution deduction.

Question 3

Which of the following events will result in a deductible casualty loss?

Accepted Answer

The answer of Which of the following events will result...

Question 4

Mr. Haugh owns a sporting goods store as a sole proprietorship. This year, he donated baseball equipment (bats, gloves, balls) to the local YMCA to use in their community sports programs. His cost basis in the inventory items was $45,700, and their retail value was $68,200. Which of the following statements about this donation is true?

Accepted Answer

Mr. Haugh is allowed a charitable contribution deduction for the cost basis of the inventory items donated, which is $45,700. This is because, for tax purposes, businesses can deduct the cost basis of the inventory donated, not the retail value.

Question 5

Mr. and Mrs. Shohler received $25,200 Social Security benefits this year. Their only other source of income was Mrs. Shohler's $10,479 taxable pension from her former employer. How much of their Social Security is included in gross income?

Accepted Answer

To determine the taxable portion of Social Security benefits, one must first calculate the combined income, which includes the total of one-half of the Social Security benefits, plus all other taxable income. In this case, the combined income is (1/2 of $25,200) + $10,479 = $12,600 + $10,479 = $23,079. For married couples filing jointly, if the combined income is between $32,000 and $44,000, up to 50% of Social Security benefits may be taxable. If it's below $32,000, then the benefits are not taxable. Since their combined income is below $32,000, none of their Social Security benefits are included in their gross income.

Question 6

Which of the following tax payments is allowed as an itemized deduction?

Accepted Answer

Local property tax on personal automobile is allowed as an itemized deduction on Schedule A of the individual income tax return. Federal gift tax, payroll tax on wages paid to a housekeeper, and Social Security tax withheld from salary are not deductible as itemized deductions.

Question 7

Which of the following expenditures is not a medical expense for federal tax purposes?

Accepted Answer

All of the listed expenditures (payment for eyeglasses, health insurance premiums, and payment for prescription antibiotics) are considered deductible medical expenses for federal tax purposes.

Question 8

A flood (federally declared disaster) destroyed an antique Persian rug owned by Mr. and Mrs. McConnell. The couple purchased the rug for $13,000 fifteen years ago, but its appraised FMV before the flood was $42,500. Unfortunately, their homeowners' insurance policy does not cover flood damage. Compute the McConnells' casualty loss (before the 10% AGI threshold).

Accepted Answer

The casualty loss is calculated as the lesser of the decrease in FMV or the adjusted basis (original cost of $13,000). Since the FMV before the flood was $42,500 and the adjusted basis is $13,000, the loss is limited to the adjusted basis of $13,000. Therefore, the casualty loss is $13,000. However, the McConnells' casualty loss is subject to the 10% AGI threshold, which is not included in this question. Therefore, the correct answer is D.

Question 9

Which of the following statements about tax subsidies for higher education is false?

Accepted Answer

All of the statements are true, so none of them are false.

Question 10

Ms. Bjorn contributed $600,000 cash to qualified public charities this year. Her AGI was $814,000. Which of the following statements is true?

Accepted Answer

The IRS limits cash contributions to public charities to 60% of AGI. 60% of $814,000 is $488,400, so Ms. Bjorn can deduct $488,400 this year and carry over the remaining $111,600 to future years.

Question 11

Three years ago, Suzanne bought a new personal automobile for $26,900. This year, she sold it for $19,000. What is the amount and character of Suzanne's recognized loss?

Accepted Answer

Losses on the sale of personal-use property are not deductible for tax purposes, so no loss is recognized.

Question 12

Which of the following government transfer payments is included in the recipient's gross income?

Accepted Answer

Unemployment compensation is considered taxable income and is therefore included in the recipient's gross income for tax purposes. Food stamps and need-based welfare payments are not taxable income.

Question 13

Spencer paid the following taxes this year. $\begin{array}{llr}
  \text {Federal income tax  } &\$12,034\
 \text { Federal employee payroll tax } &\$4,590\
 \text { State and local income tax } &\$5,725\
 \text {state and local sales tax  } &\$2,998\
 \text { Local property tax on personal residence } &\$3,300\
\end{array}$
 Compute Spencer's itemized deduction for taxes.

Accepted Answer

The answer of Spencer paid the following taxes this year....

Question 14

Dotty Sprauge incurred the following medical expenses this year. $\begin{array}{llr}
  \text {  Payments to physicians and dentists} &\$4,300\
 \text { Eayment for two-day stay at Mercy Hospital } &\$6,250\
 \text {Payments to physical therapist  } &\$2,100\
 \text {Prescription drugs  } &\$1,010
\end{array}$
 Dotty's insurance company reimbursed her for $8,800 of these expenses. If Dotty's AGI is $26,550, compute her medical expense deduction.

Accepted Answer

To calculate the medical expense deduction, we must first find out Dotty's total unreimbursed medical expenses, which is $12,200 ($8,800 reimbursed from the total $21,000). Next, we must find out Dotty's deduction threshold, which is 7.5% of her AGI. Multiplying 7.5% by Dotty's AGI of $26,550 gives us a threshold of $1,991. Since Dotty's total unreimbursed medical expenses ($12,200) exceed the threshold ($1,991), we can subtract the threshold from the total expenses to get the medical expense deduction, which is $10,209. However, the medical expense deduction is subject to further limitations and phaseouts, so it's important to consult with a tax professional for guidance.

Question 15

Mr. and Mrs. McGraw received $50,160 Social Security benefits this year. They also received $108,000 taxable pension payments and earned $47,300 interest and dividends from their investment portfolio. How much of the McGraws' Social Security is included in gross income?

Accepted Answer

The amount of Social Security benefits that are included in gross income is determined by calculating the couple's provisional income. To do this, you add together their adjusted gross income (which includes their taxable pension payments and investment income) plus half of their Social Security benefits.

Provisional income = Adjusted gross income + 1/2 Social Security benefits
Provisional income = $108,000 + $47,300 + 1/2($50,160)
Provisional income = $108,000 + $47,300 + $25,080
Provisional income = $180,380

Since their provisional income is over $44,000 (for a married couple filing jointly), some of their Social Security benefits are included in gross income. The amount that is included is the lesser of:
- 50% of their total Social Security benefits
- 50% of the amount that their provisional income exceeds the $44,000 threshold

In this case, the amount that is included is:
50% of $50,160 = $25,080

Therefore, the answer is C, $42,636 of their Social Security benefits are included in gross income.

Question 16

Ted and Alice divorced in 2014. Pursuant to the divorce decree, Ted pays $5,000 alimony and $7,500 child support to Alice every month. Alice is the custodial parent. Which of the following statements is true?

Accepted Answer

Under the Tax Cuts and Jobs Act of 2017, for divorce agreements executed after December 31, 2018, alimony payments are no longer deductible by the payer and are not considered taxable income for the recipient. Since Ted and Alice divorced in 2014, this law does not apply directly to them; however, traditionally, child support payments are not deductible by the payer (Ted) and are not taxable income for the recipient (Alice). Therefore, Alice does not include child support in her gross income, and Ted cannot deduct child support payments. Alimony payments, under the pre-2019 rules, would be deductible by Ted and includable by Alice, but the question's statement applies a general principle without specifying the tax year for the income inclusion or deduction. The statement about Ted being entitled to child credits is incorrect because the custodial parent, Alice, typically has the right to claim the child tax credits unless she releases that right to Ted, which is not mentioned in the scenario.

Question 17

Which of the following donations doesn't qualify as a charitable contribution for federal tax purposes?

Accepted Answer

Cash given directly to an individual, such as a panhandler, does not qualify as a charitable contribution for federal tax purposes.

Question 18

Which of the following statements about divorce settlements is true?

Accepted Answer

A) Property transfers related to divorce are generally not subject to income tax, allowing for the division of property without immediate tax implications. B) Child support payments are not considered taxable income for the recipient, nor are they deductible for the payer, distinguishing them from alimony payments in tax treatment.

Question 19

Mr. and Mrs. Trent divorced last year. Pursuant to the divorce, Mr. Trent transferred marketable securities (FMV $100,000; basis $67,000) to Mrs. Trent. This year, Mrs. Trent sold the securities for $112,000. Which of the following statements is true?

Accepted Answer

Mrs. Trent's basis in the securities is the same as Mr. Trent's basis ($67,000) due to the transfer incident to divorce. When she sold them for $112,000, she recognized a gain of $112,000 - $67,000 = $45,000.

Question 20

Mr. and Mrs. Oliva incurred the following unreimbursed medical expenses this year. $\begin{array}{llr}
  \text { Payments to physicians and dentists } &\$2,250\
 \text {  Eayment for hospital emergency room visit} &\$3,520\
 \text { Prescription drugs } &\$750\
 \text { Cost of wheelchair } &\$1,800
\end{array}$
 If the Olivas' AGI is $43,150, compute their medical expense deduction.

Accepted Answer

The answer of Mr. and Mrs. Oliva incurred the following...

Quiz 17: Tax Consequences of Personal Activities