Deck 17: Tax Consequences of Personal Activities

Question 1

A charitable contribution in excess of the AGI limitation may be carried forward five years.

Answer 1

True

Question 2

Losses realized on the sale of personal use assets are deductible.

Answer 2

False

Question 3

For federal income tax purposes, property transfers pursuant to a divorce are nontaxable events.

Answer 3

True

Question 4

For federal income tax purposes, a taxpayer may elect to deduct state and local sales taxes ($10,000 maximum) as itemized deductions.

Question 5

The cost of commuting to and from a place of employment is a nondeductible personal expense.

Question 6

Under the terms of a divorce decree, Harold transferred his one-half interest in the marital residence to his former wife Francine. Francine must include the value of the interest in gross income.

Question 7

Gifts are not included in the recipient's gross income.

Question 8

Mrs. Kronin received $16,200 child support payments from her former husband. These payments are excluded from Mrs. Kronin's gross income.

Question 9

If alimony is paid under a 2015 divorce decree, the annual payments are included in the recipient's gross income.

Question 10

Congress provides an indirect subsidy to charities by allowing a deduction for charitable contributions.

Question 11

Recipients of the Nobel Peace Prize must include the prize in gross income.

Question 12

Gains realized on the sale of personal use assets aregenerally taxable.

Question 13

Unemployment benefits are excluded from gross income.

Question 14

Taxpayers include a maximum of 85% of Social Security benefits in gross income.

Question 15

A drunk driver seriously injured Leah. The court awarded her $200,000 for her physical injuries and $300,000 as punitive damages. Leah must include $300,000 in gross income.

Question 16

This year, David paid his physician $6,200 for routine examinations and lab tests and received a $3,000 reimbursement from his medical insurance company. David is allowed to deduct the $3,200 unreimbursed medical expense as an above-the-line deduction.

Question 17

Ben received a $5,000 tuition scholarship from his local community college. He can exclude the $5,000 from gross income.

Question 18

For purposes of the child credit, a child of divorced parents is considered a dependent of the custodial parent unless that parent agrees to allow the noncustodial parent to claim the child as a dependent.

Question 19

For federal income tax purposes, a taxpayer may deduct state and federal employment taxes ($10,000 maximum) as itemized deductions.

Question 20

Mia inherited $1 million from her deceased grandfather. Mia must include the inheritance in gross income.

Question 21

An activity will be classified as a hobby if the taxpayer fails to make a profit from the activity.

Question 22

A taxpayer must purchase a new personal residence in order to exclude any gain from the sale of the old residence.

Question 23

Carl had $2,000 gambling winnings and $8,400 gambling losses this year. Carl must include $2,000 in gross income and can deduct $8,400 as an itemized deduction.

Question 24

Mary Stone, a single individual, sold a personal residence on June 3, 2018, and excluded her $93,600 gain from gross income. If she sells another personal residence before June 4, 2020, she can exclude a maximum of $156,400 of any gain.

Question 25

Which of the following statements about divorce settlements is false?

A) Alimony required under a pre-2019 divorce decree is excluded from the recipient's gross income.
B) Child support is excluded from the recipient's gross income.
C) Alimony required under a pre-2019 divorce decree is an above-the-line deduction for the payer.
D) None of these choices arefalse.

Question 26

Tax return preparation fees are itemized deductions.

Question 27

Damage to a personal residence caused by a hurricane that is a federally declared disaster is an example of a casualty loss.

Question 28

Which of the following is excluded from gross income?

A) $50,000 slot machine winnings
B) $13,900 value of Hawaiian vacation won on a game show
C) $85,000 Pulitzer prize for journalism
D) None of these choices areexcluded.

Question 29

Which of the following items is included in the recipient's gross income?

A) Life insurance death benefit
B) Legal award for personal injury
C) Legal award for punitive damages
D) Scholarship for college tuition, fees, and books

Question 30

Mr. Lightfoot owns three mortgaged residences that he occupies at different times of the year. He can treat the interest paid on only one mortgage as qualified residence interest.

Question 31

William took out a $440,000 mortgage to purchase his personal residence. The residence is worth almost $1 million, and William wants to take out a $200,000 second mortgage and use the proceeds to consolidate his credit card debt. William can deduct the interest he pays on both mortgages.

Question 32

James Dean received the following this year. $\begin{array}{lr}\text {Scholarship for college tuition and fees }&\$20,000\\\text {Scholarship for college room and board }&\$13,100\\\text { chamber of Commerce citizenship award }&\$1,500\\\text { Inheritance from great uncle}&\$38,000\\\end{array}$
Compute James' gross income.

A) $0
B) $14,600
C) $39,500
D) $38,000

Question 33

The federal income tax system provides incentives for individual taxpayers to meet their housing needs by purchasing instead of renting a home.

Question 34

Any gain recognized on the sale of a personal residence is excluded from the seller's gross income.

Question 35

Polly Nolan received the following items this year. $\begin{array}{lr}\text {Interest on New York City School bonds }&\$1,600\\\text {Gift from grandparents }&\$5,000\\\text { Jackpot from state lottery}&\$42,500\\\text { Gambling winnings}&\$3,000\\\end{array}$
Compute Polly's gross income.

A) $47,100
B) $42,500
C) $45,500
D) $47,500

Question 36

In 2009, Mr. and Mrs. Violet took out a $900,000 mortgage to purchase their personal residence. They can deduct the annual mortgage interest payments as an itemized deduction.

Question 37

Helen makes quilts and sells them at the regional county fairs. This year, she earned $950 from quilt sales and spent $3,300 on supplies and travel relating to her quilting activity. If the IRS determines that this activity is a hobby instead of a business, Helen can't deduct her $3,300 expenses.

Question 38

A taxpayer must have owned and lived in a personal residence at least two of the last five years in order to qualify for the maximum exclusion of gain on the sale of that residence.

Question 39

A thief broke into Kate's condominium and stole her laptop computer and $725 cash. Kate may be allowed a casualty loss deduction because of the theft.

Question 40

Lori owns a vacation home that she rents out for about three months each year. Her deduction for expenses allocable to the rental periods is limited to her gross rental income less any home mortgage interest or property taxes allocable to the rental period.

Question 41

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?

A) No gain recognized on the sale of a personal asset.
B) $1,200 ordinary gain.
C) $1,200 long-term capital gain.
D) None of these choices are correct.

Question 42

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?

A) Josh must recognize an $81,000 long-term capital gain and is allowed a $115,000 charitable contribution deduction.
B) Josh recognizes no gain and is allowed a $115,000 charitable contribution deduction.
C) Josh recognizes no gain and is allowed a $34,000 charitable contribution deduction.
D) None of these choices are true.

Question 43

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

A) Theft of a family's automobile.
B) Fire in a blocked fireplace resulting in smoke damage.
C) Electrical lightning strike that destroys a family's electronic devices.
D) None of these events.

Question 44

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?

A) Mr. Haugh must recognize $22,500 ordinary business income and is allowed a $68,200 business deduction.
B) Mr. Haugh must recognize $22,500 ordinary business income and is allowed a $68,200 charitable contribution deduction.
C) Mr. Haugh is allowed a $45,700 charitable contribution deduction.
D) Mr. Haugh is allowed a $68,200 charitable contribution deduction.

Question 45

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?

A) $0
B) $12,600
C) $21,420
D) $25,200

Question 46

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

A) Federal gift tax
B) Payroll tax on wages paid to a housekeeper
C) Social Security tax withheld from salary
D) Local property tax on personal automobile

Question 47

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

A) Payment for eyeglasses
B) Health insurance premiums
C) Payment for prescription antibiotics
D) All of these choices are deductible medical expenses

Question 48

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).

A) $42,400
B) $42,500
C) $13,000
D) $12,900

Question 49

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

A) Individuals may be allowed to exclude interest earned on the redemption of education savings bonds from gross income.
B) Individuals may be able to deduct a limited amount of interest paid on qualified education loans as an above-the-line deduction.
C) Individuals may be able to claim an American Opportunity Credit for a limited amount of college tuition, fees, and course materials.
D) None of these choices arefalse.

Question 50

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

A) Ms. Bjorn's charitable contribution deduction is limited to $488,400, and she has a $111,600 contribution carryover to future years.
B) Ms. Bjorn's charitable contribution deduction is $360,000.
C) Ms. Bjorn's charitable contribution deduction is limited to $488,400. The $111,600 nondeductible amount will never result in a tax benefit.
D) Ms. Bjorn's charitable contribution deduction is $600,000.

Question 51

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?

A) No loss recognized on the sale of a personal asset.
B) $26,900 long-term capital loss.
C) $7,900 ordinary loss.
D) $7,900 long-term capital loss.

Question 52

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

A) Food stamps
B) Need-based welfare payments
C) Unemployment compensation
D) None of these choices areincluded.

Question 53

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.

A) $5,725
B) $13,615
C) $9,025
D) $10,000

Question 54

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.

A) $0
B) $1,991
C) $2,869
D) $4,860

Question 55

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?

A) $0
B) $25,080
C) $42,636
D) $50,160

Question 56

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?

A) Alice includes the monthly alimony and child support payments in gross income.
B) Ted is allowed to deduct the monthly alimony and child support payments.
C) Ted is entitled to the child credits for the couples' two minor children because he is paying child support.
D) None of these choices aretrue.

Question 57

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

A) $50 cash given to a homeless panhandler
B) Used furniture valued at $300 given to the Salvation Army
C) $3,000 cash given to the University of Georgia
D) $600 cash given to the Boy Scouts of America

Question 58

Which of the following statements about divorce settlements is true?

A) Property transfers pursuant to divorce have no income tax consequences.
B) Child support is excluded from the recipient's gross income.
C) Child support is an above-the-line deduction for the payer.
D) Statements A. and B. are true.

Question 59

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?

A) Mrs. Trent recognized a $45,000 gain on sale this year.
B) Mrs. Trent recognized $100,000 income last year.
C) Mrs. Trent recognized a $12,000 gain on sale this year.
D) Mrs. Trent recognized no income last year and no gain on sale this year.

Question 60

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.

A) $0
B) $90
C) $3,236
D) $5,124

Question 61

Mr. and Mrs. Hunt have the following allowable itemized deductions this year.
$\begin{array}{llr} \text { Medical expenses } &\$3,279\\ \text { state and local taxes } &\$7,400\\ \text { Casualty loss (less \( \$ 100 \) per casualty floor)} &\$3,990\\ \text { charitable contributions } &\$3,500\\ \text { } &\\ \text { } &\\\end{array}$
Determine the effect on the amount of each deduction if the Hunts engage in a transaction generating $10,000 additional AGI this year.

Question 62

Mr. and Mrs. King had only one casualty loss this year when a tornado (a federally declared disaster) damaged their home, decreasing its value by $70,000. The couple received a $48,000 reimbursement from their insurance company. Compute the Kings' itemized deduction for casualty losses if their AGI was $98,200.

A) $22,000
B) $21,900
C) $12,080
D) $60,080

Question 63

Mr. and Mrs. Darwin sold their principal residence on September 12, 2019, and purchased and moved into a new residence three weeks later. They excluded their $353,000 gain realized on this sale from gross income. On October 2, 2020, the Darwins realized a gain on sale of the new residence. Which of the following statements about this second gain is true?

A) If the Darwins sold the new residence because of a change in place of Mr. Darwin's employment, they may exclude up to $500,000 of the gain from gross income.
B) The Darwins may not exclude any of the gain from gross income regardless of the reason for their 2020 move.
C) The Darwins may exclude $147,000 of the gain from gross income regardless of the reason for their 2020 move.
D) None of these statements aretrue.
81) Mrs. Hanson's financial support this year consisted of: $14,650 Social Security benefits; $9,600 pension from her former employer's qualified retirement plan, and $15,000 cash gifts from her children. Compute Mrs. Hanson's AGI.

Question 64

On February 1, Alan, a single individual, purchased his first personal residence for $400,000. On July 1, Alan sold this residence for $460,000 because he accepted a new job in another state. Consequently, Alan occupied the home for only 150 days. How much gain must Alan recognize?

A) $0
B) $8,630
C) $30,000
D) $51,370

Question 65

On February 1, Alan, a single individual, purchased his first personal residence for $400,000. On July 1, Alan sold this residence for $460,000 because he decided to move in with his girlfriend. Consequently, Alan occupied the home for only 150 days. How much gain must Alan recognize?

A) $0
B) $8,630
C) $51,370
D) $60,000

Question 66

Mr. and Mrs. Allen made the following interest payments. Determine their deduction for each payment.$28,000 on a $400,000 acquisition mortgage secured by their personal residence.$5,000 on a $60,000 second mortgage secured by their personal residence. The Allens used the proceeds to pay off credit card debt and take a second honeymoon.$2,400 on credit card debt.$1,500 on a bank loan incurred to purchase a new family car.$1,890 on an unsecured bank loan incurred to pay for a new roof on their personal residence.

Question 67

Mr. and Mrs. Perry own three homes, each of which is subject to a mortgage incurred to purchase the home. The mortgage on their principal residence is $290,000, the mortgage on the second home is $100,000, and the mortgage on the third home is $317,000. Which of the following statements is true?

A) Mr. and Mrs. Perry are allowed an itemized deduction for the interest paid on all three mortgages.
B) The Perrys' itemized deduction is limited to the interest on the $290,000 mortgage.
C) The Perrys' itemized deduction is limited to the interest on the $317,000 mortgage.
D) None of these statements are true.

Question 68

Mr. and Mrs. Frazier recognized a $723,000 gain on sale of a home that had been their principal residence for 29 years. They moved into a rented condominium in Naples, Florida. What are the tax consequences of the sale to the Fraziers?

A) $723,000 long-term capital gain
B) $223,000 long-term capital gain
C) $473,000 ordinary gain
D) $473,000 long-term capital gain

Question 69

This year, Mr. and Mrs. Franklin paid $93,000 interest on a mortgage incurred in 2008 to build their home in Santa Fe. The average principal balance of the mortgage was $1.43 million. The home has an appraised FMV of only $1.2 million. Compute the Franklins' itemized deduction for their home mortgage interest.

A) $65,035
B) $58,531
C) $93,000
D) None of these choices are correct

Question 70

Over the course of the year, Mr. Soo won $8,200 and lost $5,900 gambling in the local casino. Mr. Soo does not itemize deductions on his federal tax return. What is the net effect of his gambling on Mr. Soo's taxable income?

A) No effect on taxable income.
B) $8,200 increase in taxable income.
C) $2,300 increase in taxable income.
D) None of these choices are correct.

Question 71

Mr. and Mrs. Blake suffered two casualty losses this year. Mr. Blake's wallet containing $1,300 cash was stolen, and their uninsured sailboat (basis $67,000; FMV $50,000) was destroyed by a tsunami (federally declared disaster). Compute the Blakes' itemized deduction for casualty losses if their AGI was $112,200.

A) $39,880
B) $55,680
C) 38,680
D) None of these choices are correct.

Question 72

Gary is an architect who also sings at weddings. This year, he received $5,400 in fees from his singing and spent $6,250 on singing lessons, sheet music, and travel to the weddings. If Gary considers this activity as a hobby for federal tax purposes, which of the following statements is true?

A) Gary is not required to include the $5,400 in gross income.
B) Gary is allowed to deduct $5,400 of his expenses as an above-the-line deduction.
C) Gary is not allowed to deduct any of his hobby expenses.
D) Gary is allowed to deduct $5,400 of his expenses as an itemized deduction.

Question 73

Mr. Jain paid the following taxes this year.
$\begin{array}{lcr}\text { Federal income tax } & \$ & 32,450 \\\text { Federal self-employment tax } & \$ & 7,921 \\\text { State and local income tax } & \$ & 3,450 \\\text { State and local sales tax } & \$ & 4,060 \\\text { Local property tax on principal residence } & \$ & 4,320 \\\text { Local property tax on investment land } & \$ & 1,880 \\\text { Local property tax on two automobiles } & \$ & 750\end{array}$
Compute Mr. Jain's itemized deduction for taxes.

Question 74

Jenna Leigh is employed as a receptionist for a CPA firm, but on evenings and weekends, she bakes wedding cakes. In each of the past four years, Jenna's baking activity resulted in a net profit. This year, the activity generated a $720 net loss. Which of the following statements is true?

A) The legal presumption is that Jenna's $720 loss is a business loss.
B) The legal presumption is that Jenna's $720 loss is a nondeductible hobby loss.
C) Jenna must include the revenues from her baking activity in gross income but can't deduct any of her related expenses.
D) Jenna is allowed to report her $720 loss as an itemized deduction.

Question 75

Sue, a single taxpayer, purchased a principal residence in 2009 for $415,000. In 2012, she paid $18,000 to add a sunroom. This year, Sue sold the residence for $686,000. Her selling expenses were $5,000. How much gain must Sue recognize on the sale?

A) $0
B) $3,000
C) $16,000
D) $25,000

Question 76

Which of the following is not a tax incentive for individuals to purchase a home instead of renting?

A) Real property taxes on the home are deductible.
B) Premiums paid on homeowner's insurance are deductible.
C) Interest paid on a home mortgage is deductible.
D) All of these choices are tax incentives.

Question 77

Ms. Ruang, a single taxpayer, purchased her principal residence on August 19, 2018 and financed the purchase with a mortgage secured by the residence. In 2018, the average balance of the mortgage was $817,000, and Ms Ruang paid $35,000 of mortgage interest. How much of this interest is an itemized deduction?

A) $0
B) $20,270
C) $32,130
D) $35,000

Question 78

Twelve years ago, Mr. Drake incurred a $790,000 mortgage to purchase his principal residence. Last year, he took out a $32,000 loan secured by his considerable equity in the residence and used the proceeds to send his daughter to Stanford University. Which of the following statements is true?

A) Mr. Drake can report the interest paid on both his first and second mortgages as an itemized deduction.
B) Mr. Drake can deduct the interest paid on both his first and second mortgages as an above-the-line deduction.
C) Mr. Drake can report the interest paid on his first mortgage as an itemized deduction.
D) Mr. Drake can report the interest paid on his first mortgage as an above-the-line deduction and the interest paid on his second mortgage as an itemized deduction.

Question 79

Which of the following statements about the tax consequences of gambling is true?

A) Gambling winnings are not taxable, and gambling losses are not deductible.
B) Gambling losses are an above-the-line deduction.
C) Gambling losses are deductible as itemized deductions only to the extent of gambling winnings.
D) Gambling winnings are taxable, but gambling losses are not deductible.

Question 80

Gary is an architect who also sings at weddings. This year, he received $5,400 in fees for his singing and spent $6,250 on voice lessons, sheet music, and travel to the weddings. Which of the following statements is true?

A) Because the singing activity resulted in a loss, Gary can't treat it as a business.
B) If facts and circumstances support Gary's claim that his singing activity is a business, he can deduct an $850 above-the-line loss.
C) Because Gary's primary source of income is his architecture practice, he can't treat the singing activity as a business.
D) Gary can deduct his $850 hobby loss as an itemized deduction.