Deck 6: Accounting for Income Taxes

Question 1

Describe how a business element is reflected in the requirements to deduct moving expenses and how Congress limited this deduction to substantial moves.

Answer 1

Indirect business expenses
Sometimes taxpayers incur certain expenses that are not directly attributed to the business activities he carries,but would not have incurred,if his business would not have been there.These kind of expenses are known as indirect business expenses.Example: Moving expenses
Moving expenses refers to the cost of transporting personal possessions and belongings from one place to another.Even though the moving expenses is not directly related to do business or being employed,taxpayers are allowed to show it as for AGI deductions,as this expenses are considered as indirect business expenses.However,Congress has stipulated that the moving expenses would be eligible for deductions,only if the taxpayers move and change their principal place of work and subject to satisfying the two tests as explained below;
1.Distance test: This test requires the taxpayers to move 50 miles more than the distance they were commuting before moving.2.Time test: Time test requires the taxpayers to be either a full-time employee for 39 of the first 52 weeks,or a self-employed for 78 of the first 104 weeks.

Question 2

This week Jim's residence was heavily damaged by a storm system that spread destruction throughout the region.While Jim's property insurance covers some of the damage, there is a significant amount of uninsured loss.The governor of Jim's state has requested that the president declare the region a federal disaster area and provide federal disaster assistance.Explain to Jim the income tax implications of such a declaration and any associated tax planning possibilities.

Answer 2

Income tax implication associated with tax planning
Essence of the case:
• Mr.J's property was damaged in a storm, and also the entire region is affected.Out of the affected property Mr.J has insured some of the property, but the value of uninsured property was significant.
• The government has declared federal disaster, and recommended for federal disaster assistance.The following are the income tax implications of Mr.J with the declaration of federal disaster and tax planning:
• As per IRC (Internal Revenue Code) section 165(I), "the individuals who incur a disaster loss are subject to the regular casualty loss floor limits ($100/10 percent of AGI), but the individuals may elect to claim a disaster loss for the tax year before the loss occurred (e.g., by filing an amended return if the original return has been filed)".
• A casualty loss refers to the loss incurred by the taxpayer because of sudden and unusual situations, like; storm, file earthquake.
• This deduction will accelerate the tax benefit of the loss incurred by the taxpayer.Also it allows the taxpayer to choose the year with the most attractive tax outcome (in terms of AGI (Aggregate Gross Income) limits, other casualty losses (or gains), and marginal tax rate).

Question 3

Clyde currently commutes 55 miles to work in the city.He is considering a new assignment in the suburbs on the other side of the city that would increase his commute considerably.He would like to accept the assignment, but he thinks it might require that he move to the other side of the city.Assume that Clyde is employed for 39 of the next 52 weeks.Determine if Clyde's move qualifies for a moving expense deduction and calculate the amount (if any) under the following circumstances:
a.Clyde estimates that unless he moves across town, his new commute would be almost 70 miles.He also estimates the costs of a move as follows:
b.Same as (a.) above, except Clyde estimates that unless he moves across town, his new commute would be almost 115 miles.
c.Same as (a.) above, except Clyde's new commute would be almost 150 miles and the mover's intend to impose a $450 surcharge on the moving fee for the additional distance.

Answer 3

Moving expense deduction
Moving expenses are indirectly related to business activities which are allowed as AGI deduction to calculate taxable income.Costs incurred for change in principal place of work or which are related to business is only allowed as deduction.Moving expenses incurred for personal reasons are not allowed as deduction.There are two tests to be fulfilled for moving expenses which are distance test and business test related to move.In order to clear the distance test the new office should be at least 50 miles far from existing residence or place of business.For business test, tax payer should be full time employed for 39 weeks out of first 52 weeks or be self-employed for 78 of first 104 weeks after moving of place.Tax payers if are using their own transport then they can deduct 19 cents of mile for driving personal automobile while moving the items.Along with their personal belongings to move expense can also include belongings of their households.House hunting costs and meal costs during the move are not allowed as deduction.If tax payers are receiving benefit from employer by way of reimbursement of actual moving expenses then this reimbursement may not be part of gross income and they should also not deduct the moving expenses.Any amount received in excess of actual moving expenses should be considered as part of gross income.a.In the given case C's move does not qualify for moving expense deduction.This is because C is not able to fulfil the distance test.As per distance test, C will have to travel more 50 miles and he would actually be computing additional 15 miles (70 miles-55 miles).Since, C is not eligible for deduction there would be no amount required to be calculated.b.In the given case C would be qualified for moving expense deduction as he would be travelling additional 60 miles (115-55) more than 50 miles as per distance test.C would be eligible for deduction of mileage costs and mover's fee only.Lodging costs, meals costs are not allowed for moving expense deduction
Calculate amount of moving expense deduction allowed as shown below
Thus, estimated moving expense deduction is
c.In the given case C would be qualified for moving expense deduction as he would be travelling additional 95 miles (150-55) more than 50 miles as per distance test.C would be eligible for deduction of mileage costs mover's fee and surcharge on moving expense only.Lodging costs, meals costs are not allowed for moving expense deduction
Calculate amount of moving expense deduction allowed as shown below
Thus, estimated moving expense deduction is

Question 4

This year, Major Healy paid $40,000 of interest on a mortgage on his home (Major Healy borrowed $800,000 to buy the residence and it is currently worth $1,000,000), $6,000 on a $120,000 home equity loan on his home, and $10,000 of interest on a mortgage on his vacation home (loan of $200,000; home purchased for $500,000).
a.How much interest expense can Major Healy deduct as an itemized deduction
b.Assume the same facts, except Major Healy does not have the vacation home or related interest.How much interest expense can Major Healy deduct as an itemized deduction
c.Assume the same facts in a., except that Major Healy's home had a fair market value of $1,000,000 when he purchased the home and took out the home equity debt, but now the home is worth $500,000.How much interest expense can Major Healy deduct as an itemized deduction

Question 5

Explain why Congress allows self-employed taxpayers to deduct the cost of health insurance above the line (for AGI) when employees can only itemize this cost as a medical expense.Would a self-employed taxpayer ever prefer to claim health insurance premiums as an itemized deductions rather than a deduction for AGI Explain.

Question 6

Describe the types of expenses that constitute miscellaneous itemized deductions and explain why these expenses rarely produce any tax benefits.

Question 7

Smithers is a self-employed individual who earns $30,000 per year in self-employment income.Smithers pays $2,200 in annual health insurance premiums for his own medical care.In each of the following situations, determine the amount of the deductible health insurance premium for Smithers.
a.Smithers is single, and the self-employment income is his only source of income.
b.Smithers is single, but besides being self-employed, Smithers is also employed part-time by SF Power Corporation.This year Smithers elected not to participate in SF's health plan.
c.Smithers is self-employed, and he is also married.Smithers' spouse, Samantha, is employed full-time by SF Power Corporation and is covered by SF's health plan.Smithers is not eligible to participate in SF's health plan.
d.Smithers is self-employed, and he is also married.Smithers' spouse, Samantha, is employed full-time by SF Power Corporation and is covered by SF's health plan.Smithers elected not to participate in SF's health plan.

Question 8

Ray Ray made the following contributions this year.
Determine the maximum amount of charitable deduction for each of these contributions ignoring the AGI ceiling on charitable contributions and assuming that the American Heart Association plans to sell the antique painting to fund its operations.

Question 9

Explain why Congress allows self-employed taxpayers to deduct half of their self-employment tax.

Question 10

Explain why the cost of commuting from home to work is not deductible as a business expense.

Question 11

Hardaway earned $100,000 of compensation this year.He also paid (or had paid for him) $3,000 of health insurance.What is Hardaway's AGI in each of the following situations (ignore the effects of Social Security and self-employment taxes)
a.Hardaway is an employee, and his employer paid Hardaway's $3,000 of health insurance for him as a nontaxable fringe benefit.Consequently, Hardaway received $97,000 of taxable compensation and $3,000 of nontaxable compensation.
b.Hardaway is a self-employed taxpayer, and he paid $3,000 of health insurance himself.He is not eligible to participate in an employer-sponsored plan.

Question 12

Calvin reviewed his cancelled checks and receipts this year for charitable contributions.Calculate Calvin's charitable contribution deduction and carryover (if any) under the following circumstances:
a.Calvin's AGI is $100,000.
b.Calvin's AGI is $100,000 but the State Museum told Calvin that it plans to sell the painting.
c.Calvin's AGI is $50,000.
d.Calvin's AGI is $100,000 and Hobbs is a nonoperating private foundation.
e.Calvin's AGI is $100,000 but the painting is worth $10,000.

Question 13

Using the Internal Revenue Code, describe two deductions for AGI that are not discussed in this chapter

Question 14

When is the cost of education deductible as an employee business expense

Question 15

Betty operates a beauty salon as a sole proprietorship.Betty also owns other property including a half interest in a partnership that operates a delivery service, a half interest in a partnership that operates a movie theatre, and an apartment building.This year Betty paid or reported the following expenses related to her salon and her share of other businesses.Determine Betty's AGI.

Question 16

In addition to cash contributions to charity, Dean decided to donate shares of stock and a portrait painted during the earlier part of the last century.Dean purchased the stock and portrait many years ago as investments.Dean reported the following recipients:
a.Determine the maximum amount of charitable deduction for each of these contributions ignoring the AGI ceiling on charitable contributions.
b.Assume that Dean's AGI this year is $150,000.Determine Dean's itemized deduction for his charitable contributions this year and any carryover.
c.Assume that Dean's AGI this year is $240,000.Determine Dean's itemized deduction for his charitable contributions this year and any carryover.
d.Suppose Dean is a dealer in antique paintings, and he held the painting for sale before the contribution.Determine Dean's itemized deduction for his contribution of the antique painting this year and any carryover.
e.Suppose that Dean's objective with the donation to the museum was to finance expansion of the historical collection.Hence, Dean was not surprised when the museum announced the sale of the portrait because of its limited historical value.What is Dean's charitable contribution for the painting in this situation (ignoring AGI limitations)

Question 17

Explain why Congress allows taxpayers to deduct interest forfeited as a penalty on the premature withdrawal from a certificate of deposit.

Question 18

How might the reimbursement of a portion of an employee expense influence the deductibility of the expense for the employee

Question 19

Lionel is an unmarried law student at State University Law School, a qualified educational institution.This year Lionel borrowed $24,000 from Counti Bank and paid interest of $1,440.Lionel used the loan proceeds to pay his law school tuition.Calculate the amounts Lionel can deduct for interest on higher education loans under the following circumstances:
a.Lionel's AGI before deducting interest on higher education loans is $50,000.
b.Lionel's AGI before deducting interest on higher education loans is $69,000.
c.Lionel's AGI before deducting interest on higher education loans is $90,000.
d.Lionel's AGI is $50,000 before deducting interest on higher education loans.Lionel used $16,000 of the loan to pay law school tuition and $8,000 of the loan to purchase a car.

Question 20

Tim suffered greatly this year.In January a freak storm damaged his sailboat and in July Tim's motorcycle was stolen from his vacation home.Tim originally paid $27,000 for the boat, but he was able to repair the damage for $6,200.Tim paid $15,500 for the motorcycle, but it was worth $17,000 before it was stolen.Insurance reimbursed $1,000 for the boat repairs and the cycle was uninsured.
a.Calculate Tim's deductible casualty loss if his AGI is $50,000.
b.Calculate Tim's deductible casualty loss if his AGI is $150,000.
c.How would you answer a.if Tim received an additional $65,000 in interest from municipal bonds this year

Question 21

Describe the mechanical limitation on the deduction for interest on qualified educational loans.

Question 22

Explain why an employee should be concerned about whether his employer reimburses business expenses using an "accountable" plan

Question 23

This year Jack intends to file a married-joint return with two dependents.Jack received $157,500 of salary, and paid $5,000 of interest on loans used to pay qualified tuition costs for his dependent daughter, Deb.This year Jack has also paid qualified moving expenses of $4,300 and $24,000 of alimony.
a.What is Jack's adjusted gross income Assume that Jack will opt to treat tax items in a manner to minimize his AGI.
b.Suppose that Jack also reported income of $8,800 from a half share of profits from a partnership.What AGI would Jack report under these circumstances Again, assume that Jack will opt to treat tax items in a manner to minimize his AGI.

Question 24

{Planning} Trevor is a single individual who is a cash method, calendar-year taxpayer.For each of the next two years (year 1 and year 2), Trevor expects to report AGI of $80,000, contribute $3,000 to charity, and pay $2,200 in state income taxes.
a.Estimate Trevor's taxable income for year 1 and year 2 using 2011 amounts for the standard deduction and personal exemption for both years.
b.Now assume that Trevor combines his anticipated charitable contributions for the next two years and makes the combined contribution in December of year 1.Estimate Trevor's taxable income for each of the next two years using the 2011 amounts for the standard deduction and personal exemption.Reconcile the total taxable income to your solution to a.above.
c.Trevor plans to purchase a residence next year, and he estimates that property taxes and residential interest will each cost $4,000 annually ($8,000 in total annually).Estimate Trevor's taxable income for each of the next two years (year 1 and year 2) using the 2011 amounts for the standard deduction and personal exemption.
d.Assume that Trevor makes the charitable contribution for year 2 and pays the real estate taxes for year 2 in December of year 1.Estimate Trevor's taxable income for year 1 and year 2 using the 2011 amounts for the standard deduction and personal exemption.Reconcile the total taxable income to your solution to c.above.
e.Explain the conditions in which the bunching strategy in part d.will generate tax savings for Trevor.

Question 25

Explain why the medical expense and casualty loss provisions are sometimes referred to as "wherewithal" deductions and how this rationale is reflected in the limits on these deductions.

Question 26

Jake is a retired jockey who takes monthly trips to Las Vegas to gamble on horse races.Jake also trains race horses part time at his Louisville ranch.So far this year, Jake has won almost $47,500 during his trips to Las Vegas while spending $27,250 on travel expenses and incurring $62,400 of gambling losses.Jake also received $60,000 in revenue from his training activities and he incurred $72,000 of associated costs.Explain how Jake's gambling winnings and related costs will be treated for tax purposes.Describe the factors that will influence how Jake's ranch expenses are treated for tax purposes.

Question 27

In each of the following independent cases, indicate the amount (1) deductible for AGI, (2) deductible from AGI, and (3) neither deductible for nor deductible from AGI before considering income limitations or the standard deduction.
a.Ted paid $8 rent on a safety deposit box at the bank.In this box he kept the few shares of stock that he owned.
b.Tyler paid $85 for minor repairs to the fence at a rental house he owned.
c.Timmy paid $545 for health insurance premiums this year.Timmy is employed full-time and his employer paid the remaining premiums as a qualified fringe benefit.
d.Tess paid $850 for self-employment taxes and $1,150 of state income taxes on her consulting income.

Question 28

Baker paid $775 for the preparation of his tax return and incurred $375 of employee business expenses of which $60 was reimbursed by his employer through an accountable plan.Baker also paid a $100 fee for investment advice.Calculate the amount of these expenses that Baker is able to deduct assuming he itemizes his deductions in each of the following situations:
a.Baker's AGI is $50,000.
b.Baker's AGI is $100,000.

Question 29

Describe the type of medical expenditures that qualify for the medical expense deduction.Do the cost of meals consumed while hospitalized qualify for the deduction Do over-the-counter drugs and medicines qualify for the deduction

Question 30

Frank paid $3,700 in fees for an accountant to tabulate business information (Frank operates as a self-employed contractor and files a Schedule C).The accountant also spent time tabulating Frank's income from his investments and determining Frank's personal itemized deductions.Explain to Frank whether or not he can deduct the $3,700 as a business expense or as an itemized deduction, and provide a citation to an authority that supports your conclusion.

Question 31

In each of the following independent cases, indicate the amount (1) deductible for AGI, (2) deductible from AGI, and (3) neither deductible for nor deductible from AGI before considering income limitations or the standard deduction.
a.Fran spent $90 for uniforms for use on her job.Her employer reimbursed her for $75 of this amount under an accountable plan.
b.Timothy, a plumber employed by ACE Plumbing, spent $65 for small tools to be used on his job, but he was not reimbursed by ACE.
c.Jake is a perfume salesperson.Because of his high pay, he receives no allowance or reimbursement from his employer for advertising expenses even though his position requires him to advertise frequently.During the year, he spent $2,200 on legitimate business advertisements.
d.Trey is a self-employed special-duty nurse.He spent $120 for uniforms.
e.Mary, a professor at a community college, spent $340 for magazine subscriptions.The magazines were helpful for her research activities but she was not reimbursed for the expenditures.
f.Wayne lost $325 on the bets he made at the race track, but he won $57 playing online poker.

Question 32

Zack is employed as a full-time airport security guard.This year Zack's employer transferred him from Dallas to Houston.At year-end, Zack discovered a number of unreimbursed expenses related to his employment in Dallas prior to his move to Houston.Identify which expenses are deductible and whether the deductions are for or from AGI.

Question 33

Under what circumstances can a taxpayer deduct medical expenses paid for a member of his family Does it matter if the family member reports significant amounts of gross income and cannot be claimed as a dependent

Question 34

Contrast ceiling and floor limitations, and give an example of each.

Question 35

Ted is a successful attorney, but when he turned 50 years old he decided to retire from his law practice and become a professional golfer.Ted has been a very successful amateur golfer, so beginning this year Ted began competing in professional golf tournaments.At year-end, Ted reported the following expenses associated with competing in 15 professional events:
a.Suppose that Ted reports $175,000 in gross income from his pension and various investments.Describe the various considerations that will dictate the extent to which Ted can deduct the expenses associated with professional golf.
b.Calculate Ted's deduction for golf expenses assuming that the IRS and the courts are convinced that Ted engages in competitive golf primarily for enjoyment rather than the expectation of making a profit.Assume Ted wins $100,000 this year and his AGI is $275,000.

Question 36

Stephanie is a twelve-year old who often assists neighbors on weekends by babysitting their children.Calculate the 2011 standard deduction Stephanie will claim under the following independent circumstances (assume that Stephanie's parents will claim her as a dependent).
a.Stephanie reported $850 of earnings from her babysitting.
b.Stephanie reported $1,500 of earnings from her babysitting.
c.Stephanie reported $6,200 of earnings from her babysitting.

Question 37

What types of taxes qualify to be deducted as itemized deductions Would a vehicle registration fee qualify as a deductible tax

Question 38

Identify which itemized deductions are subject to floor limitations, ceiling limitations, or some combination of these limits.

Question 39

Simpson is a single individual who is employed full-time by Duff Corporation.This year Simpson reports AGI of $50,000 and has incurred the following medical expenses:
a.Calculate the amount of medical expenses that will be included with Simpson's itemized deductions after any applicable limitations.
b.Suppose that Simpson was reimbursed for $650 of the physician's charges and $1,200 for the hospital costs.Calculate the amount of medical expenses that will be included with Simpson's itemized deductions after any applicable limitations

Question 40

Tammy teaches elementary school history for the Metro School District.In 2011 she has incurred the following expenses associated with her job:
Tammy's base salary is $45,000, and she receives a $200 salary supplement to help her cover expenses associated with her school extracurricular activities.
a.Identify the amount and type (for AGI or from AGI) of deductible expenses.
b.Calculate Tammy's AGI and taxable income for 2011 assuming she files single with one personal exemption.
c.Calculate Tammy's AGI and taxable income assuming she files single with one personal examption and the year is 2009.

Question 41

Compare and contrast the limits on the deduction of interest on home acquisition indebtedness versus home equity loans.Are these limits consistent with horizontal equity Explain.

Question 42

Describe the tax benefits from "bunching" itemized deductions in one year.Describe the characteristics of the taxpayers who are most likely to benefit from using bunching and explain why this is so.

Question 43

This year Tim is age 45 and is considering enrolling in an insurance program that provides for long-term care insurance.He is curious about whether the insurance premiums are deductible as a medical expense and, if so, what is the maximum amount that can be deducted in any year.

Question 44

Evan graduated form college,and took a job as a deliveryman in the city.Evan was paid a salary of $63,00 and he received $700 in hourly pay for part-time work over the weekends.Evan summarized his expenses below.
Calculate Evan's AGI and taxable income if he files single with one personal exemption.

Question 45

Explain the argument that the deductions for charitable contributions and home mortgage interest represent indirect subsidies for these activities.

Question 46

Explain how the standard deduction is rationalized and why the standard deduction might be viewed as a floor limit on itemized deductions.

Question 47

Doctor Bones prescribed physical therapy in a pool to treat Jack's broken back.In response to this advice (and for no other reason), Jack built a swimming pool in his backyard and strictly limited use of the pool to physical therapy.Jack paid $25,000 to build the pool, but he wondered if this amount could be deducted as a medical expenses Determine if a capital expenditure such as the cost of a swimming pool qualifies for the medical expense deduction.

Question 48

Read the following letter and help Shady Slim with his tax situation.Please assume that gross income is $172,900 for purposes of this problem.
December 31, 2011
To the friendly student tax preparer:
Hi, it's Shady Slim again.I'm told that you need some more information from me in order to complete my tax return.I'm an open book! I'll tell you whatever I think you need to know.
Let me tell you a few more things about my life.As you may recall, I am divorced from my wife, Alice.I know that it's unusual, but I have custody of my son, Shady, Jr.The judge owed me a few favors and I really love the kid.He lives with me full-time and my wife gets him every other weekend.I pay the vast majority of my son's expenses.I think Alice should have to pay some child support, but she doesn't have to pay a dime.The judge didn't owe me that much, I guess.
I had to move this year after getting my job at Roca Cola.We moved on February 3 of this year, and I worked my job at Roca Cola for the rest of the year.I still live in the same state, but I moved 500 miles away from my old house.I left a little bit early to go on a house-hunting trip that cost me a total of $450.I hired a moving company to move our stuff at a cost of $2,300.Junior and I got a hotel room along the way that cost us $40 (I love Super 8!).We spent $35 on meals on the way to our new home.Oh yeah, I took Junior to a movie on the way and that cost $20.
Can you believe I'm still paying off my student loans, even after 15 years I paid a total of $900 in interest on my old student loans this year.
Remember when I told you about that guy that hit me with his car I had a bunch of medical expenses that were not reimbursed to me by the lawsuit or by my insurance.I incurred a total of $20,000 in medical expenses, and I was only reimbursed for $11,000.Good thing I can write off medical expenses, right
I contributed a lot of money to charity this year.I'm such a nice guy! I gave $1,000 in cash to the March of Dimes.I contributed some of my old furniture to the church.It was some good stuff! I contributed a red velvet couch and my old recliner.The furniture is considered vintage and is worth $5,000 today (the appraiser surprised me!), even though I only paid $1,000 for it back in the day.When I contributed the furniture, the pastor said he didn't like the fabric and was going to sell the furniture to pay for some more pews in the church.Some people just have no taste, right Roca Cola had a charity drive this year and I contributed $90.Turns out, I don't even miss it, because Roca Cola takes it right off my paycheck every month…$15 a month starting in July.Oh, one other bit of charity from me this year.An old buddy of mine was down on his luck.He lost his job and his house.I gave him $500 to help him out.
I paid a lot of money in interest this year.I paid a total of $950 in personal credit card interest.I also paid $13,000 in interest on my home mortgage.I also paid $2,000 in real estate taxes for my new house.
A few other things I want to tell you about last year.Someone broke into my house and stole my kid's brand new bicycle and my set of golf clubs.The total loss from theft was $900.I paid $100 in union dues this year.I had to pay $1,000 for new suits for my job.Roca Cola requires its managers to wear suits every day on the job.I spent a total of $1,300 to pay for gas to commute to my job this year.
Oh, this is pretty cool.I've always wanted to be a firefighter.I spent $1,000 in tuition to go to the local firefighter's school.I did this because someone told me that I can deduct the tuition as an itemized deduction, so the money would be coming back to me.
That should be all the information you need right now.Please calculate my taxable income.You're still doing this for free, right

Question 49

Cash donations to charity are subject to a number of very specific substantiation requirements.Describe these requirements and how charitable gifts can be substantiated.Describe the substantiation requirements for property donations.

Question 50

Explain how the calculation of the standard deduction limits the ability to shift income to a dependent.

Question 51

Charles has AGI of $50,000 and has made the following payments related to (1) land he inherited from his deceased aunt and (2) a personal vacation taken last year.Calculate the amount of taxes Charles may include in his itemized deductions for the year under the following circumstances
a.Suppose that Charles holds the land for appreciation.
b.Suppose that Charles holds the land for rent.
c.Suppose that the vacation was actually a business trip for his employer.:

Question 52

Jeremy and Alyssa Johnson have been married for five years and do not have any children.Jeremy was married previously and has one child from the prior marriage.He is self-employed and operates his own computer parts store.For the first two months of this year, Alyssa worked for Staples, Inc.as an employee.In March, Alyssa accepted a new job with Super Toys, Inc.(ST) where she worked for the remainder of the year.This year the Johnsons received $255,000 of gross income.Determine the Johnson's AGI given the following information:
a.Expenses associated with Jeremy's store include $40,000 in salary (and employment taxes) to employees, $45,000 of cost of goods sold, and $18,000 in rent and other administrative expenses.
b.As a salesperson, Alyssa incurred $2,000 in travel expenses related to her employment that were not reimbursed by her employer.
c.The Johnsons own a piece of investment real estate.They paid $500 of real property taxes on the property and they incurred $200 of expenses in travel costs to see the property and to evaluate other similar potential investment properties.
d.The Johnsons own a rental home.They incurred $8,500 of expenses associated with the property.
e.The Johnson's home was only five miles from the Staples store where Alyssa worked in January and February.The ST store was 60 miles from their home, so the Johnsons decided to move to make the commute easier for Alyssa.The Johnson's new home was only ten miles from the ST store.However, it was 50 miles from their former residence.The Johnsons paid a moving company $2,000 to move their possessions to the new location.They also drove the 50 miles to their new residence.They stopped along the way for lunch and spent $60 eating at Denny's.None of the moving expenses were reimbursed by ST.
f.Jeremy paid $4,500 for health insurance coverage for himself.Alyssa was covered by health plans provided by her employer, but Jeremy is not eligible for the plan until next year.
g.Jeremy paid $2,500 in self-employment taxes.
h.Jeremy paid $5,000 in alimony and $3,000 in child support from his prior marriage.
i.Alyssa paid $3,100 of tuition and fees to attend night classes at a local university.The Johnsons would like to deduct as much of this expenditure as possible rather than claim a credit.
j.The Johnsons donated $2,000 to their favorite charity.

Question 53

Describe the conditions in which a donation of property to a charity will result in a charitable contribution deduction of fair market value and when it will result in a deduction of the tax basis of the property.

Question 54

Determine if a taxpayer can change his election to itemize deductions once a return is filed.( Hint : Read about itemization under Reg.§1.63-1.)

Question 55

Dan has AGI of $50,000 and paid the following taxes during this tax year.Calculate the amount of taxes Dan may include in his itemized deductions for the year.

Question 56

Shauna Coleman is single.She works as an architectural designer for Streamline Design (SD).Shauna wanted to determine her taxable income.She correctly calculated her AGI.However, she wasn't sure how to compute the rest of her taxable income.She provided the following information with hopes that you could use it to determine her taxable income.
a.Shauna paid $2,000 for medical expenses and Blake, Shauna's boyfriend, drove Shauna (in her car) a total of 115 miles so that she could receive care for a broken ankle she sustained in a biking accident.
b.Shauna paid a total of $3,400 in health insurance premiums during the year.SD did not reimburse any of this expense.Besides the health insurance premiums and the medical expenses for her broken ankle, Shauna had Lasik eye surgery last year and she paid $3,000 for the surgery (she received no insurance reimbursement).She also incurred $450 of other medical expenses for the year.
c.SD withheld $1,800 of state income tax, $7,495 of Social Security tax, and $14,500 of federal income tax from Shauna's paychecks throughout the year.
d.In 2011, Shauna was due a refund of $250 for overpaying her 2010 state taxes.On her 2010 state tax return that she filed in April of 2011, she applied the overpayment towards her 2011 state tax liability.She estimated that her state tax liability for 2011 will be $2,300.
e.Shauna paid $3,200 of property taxes on her personal residence.She also paid $500 to the developer of her subdivision, because he had to replace the sidewalk in certain areas of the subdivision.
f.Shauna paid a $200 property tax based on the state's estimate of the value of her car.
g.Shauna has a home mortgage loan in the amount of $220,000 that she secured when she purchased the home.The home is worth about $400,000.Shauna paid interest of $12,300 in interest on the loan this year.
h.Shauna made several charitable contributions throughout the year.She contributed stock in ZYX Corp.to the Red Cross.On the date of the contribution, the FMV of the donated shares was $1,000 and her basis in the shares was $400.Shauna also contributed $300 cash to State University and religious artifacts she has held for several years to her church.The artifacts were valued at $500 and Shauna's basis in the items was $300.Shauna had every reason to believe the church would keep them on display indefinitely.Shauna also drove 200 miles doing church-related errands for her minister.Finally, Shauna contributed $1,200 of services to her church last year.
i.Shauna's car was totaled in a wreck in January.The car was worth $14,000 and her cost basis in the car was $16,000.The car was a complete loss.Shauna received $2,000 in insurance reimbursements for the loss.
j.Shauna paid $300 for architectural design publications, $100 for continuing education courses to keep her up to date on the latest design technology, and $200 for professional dues to maintain her status in a professional designer's organization.
k.Shauna paid $250 in investment advisory fees and another $150 to have her tax return prepared (that is, she paid $150 in 2011 to have her 2010 tax return prepared).
l.Shauna is involved in horse racing as a hobby.During the year, she won $2,500 in prize money and incurred $10,000 in expenses.She has never had a profitable year with her horse racing activities, so she acknowledges that this is a hobby for federal income tax purposes.
m.Shauna sustained $2,000 in gambling losses over the year (mostly horse-racing bets) and only had $200 in winnings.

Question 57

It has been suggested that tax policy favors deductions for AGI compared to itemized deductions.Describe two ways in which deductions for AGI are treated more favorably than itemized deductions.

Question 58

Describe the type of event that qualifies as a casualty for tax purposes.

Question 59

Determine whether a taxpayer who is claimed as a dependent on another return is entitled to an addition to the standard deduction for age or blindness.( Hint : Read the calculation of the standard deduction under IRC §63.)

Question 60

Tim is a single, cash-method taxpayer with one personal exemption.In April of this year Tim paid $1,020 with his state income tax return for the previous year.During the year, Tim had $5,400 of state income tax and $18,250 of federal income tax withheld from his salary.In addition, Tim made estimated payments of $1,360 and $1,900 of state and federal income taxes, respectively.Finally, Tim expects to receive a refund of $500 for state income taxes when he files his state tax return for this year in April next year.What is the amount of taxes that Tim can deduct as an itemized deduction

Question 61

Joe and Jessie are married and have one dependent child, Lizzie.Lizzie is currently in college at State University.Joe works as a design engineer for a manufacturing firm while Jessie runs a craft business from their home.Jessie's craft business consists of making craft items for sale at craft shows that are held periodically at various locations.Jessie spends considerable time and effort on her craft business and it has been consistently profitable over the years.Joe and Jessie own a home and pay interest on their home loan (balance of $220,000) and a personal loan to pay for Lizzie's college expenses (balance of $35,000).
Neither Joe nor Jessie is blind or over age 65, and they plan to file as married-joint.Based on their estimates, determine Joe and Jessie's AGI and taxable income for the year.They have summarized the income and expenses they expect to report this year as follows:

Question 62

How is a business activity distinguished from an investment activity Why is this distinction important for the purpose of calculating federal income taxes

Question 63

A casualty loss from the complete destruction of a personal asset is limited to the lesser of fair market value or the property's adjusted basis.Explain the rationale for this rule as opposed to just allowing a deduction for the basis of the asset.

Question 64

Clem is married and is a skilled carpenter.Clem's wife, Wanda, works part-time as a substitute grade school teacher.Determine the amount of Clem's expenses that are deductible for AGI this year (if any) under the following independent circumstances:
a.Clem is self-employed and this year he incurred $525 for tools and supplies related to his job.Since neither were covered by a qualified health plan, Wanda paid health insurance premiums of $3,600 to provide coverage for herself and Clem.
b.Clem and Wanda own a garage downtown that they rent to a local business for storage.This year they incurred $1,250 in utilities and depreciation of $780.
c.Clem paid self-employment tax of $14,200 and Wanda had $3,000 of Social Security taxes withheld from her pay.
d.Clem paid $45 to rent a safe deposit box to store his coin collection.Clem has collected coins intermittently since he was a boy and he expects to sell his collection when he retires.

Question 65

This year Randy paid $28,000 of interest (Randy borrowed $450,000 to buy his residence, and it is currently worth $500,000).Randy also paid $2,500 of interest on his car loan and $4,200 of margin interest to his stockbroker (investment interest expense).How much of this interest expense can Randy deduct as an itemized deduction under the following circumstances
a.Randy received $2,200 of interest this year and no other investment income or expenses.
b.Randy had no investment income this year.