Deck 17: Tax Consequences of Personal Activities

Question 1

For federal income tax purposes, a taxpayer may deduct state and federal employment taxes as an itemized deduction.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Chad won a car valued at $25,000 from a game show. Because he immediately donated the car to the Red Cross, Chad can exclude $25,000 from gross income.

Answer 3

False

Question 4

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

Question 5

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

Question 6

Alimony payments are included in the recipient's gross income.

Question 7

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

Question 8

For federal income tax purposes, a taxpayer may elect to deduct state and local sales taxes as an itemized deduction.

Question 9

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

Question 10

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 11

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

Question 12

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 13

Unemployment benefits are excluded from gross income.

Question 14

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

Question 15

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

Question 16

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

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

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

Question 19

A child of divorced parents is considered a dependent of the parent with custody unless that parent agrees to allow the noncustodial parent to claim the dependency exemption.

Question 20

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

Question 21

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 $2,350 net loss.

Question 22

Personal exemptions are allowed in computing alternative minimum taxable income (AMTI).

Question 23

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 sale of that residence.

Question 24

Real estate taxes deducted for regular tax purposes must be added back in computing alternative minimum taxable income (AMTI).

Question 25

Tax return preparation fees are miscellaneous itemized deductions subject to the 2% AGI floor.

Question 26

Mary Stone, a single individual, sold a personal residence on June 3, 2014, and excluded her $93,600 gain from gross income. If she sells another personal residence before June 4, 2016, she can exclude a maximum of $156,400 of any gain.

Question 27

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.

Question 28

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

Question 29

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

Question 30

Violet took out a $900,000 mortgage to purchase her personal residence. She can deduct the mortgage interest payments as an itemized deduction.

Question 31

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

Question 32

William took out a $740,000 mortgage to purchase his personal residence. The residence is worth over $1.4 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 50% of the interest he will pay on the second mortgage.

Question 33

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

Question 34

Interest paid on home equity debt is not deductible in computing alternative minimum taxable income (AMTI).

Question 35

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 36

A thief broke into Kate's condominium and stole her laptop computer. Kate purchased the computer for $1,400, but its current value is only $300. Kate's casualty loss is $1,400.

Question 37

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

Question 38

A nondeductible charitable contribution may be carried forward five years.

Question 39

Damage to a personal residence by a tornado is an example of a casualty loss.

Question 40

Interest paid on debt incurred to acquire, build, or improve a personal residence is a preference item for computing the alternative minimum tax.

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 the above.

Question 42

Spencer paid the following taxes this year. Compute Spencer's itemized deduction for taxes.

A) $5,725
B) $13,615
C) $9,025
D) $12,023

Question 43

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) $21420
D) $25,200

Question 44

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 tuition, fees, and books

Question 45

James Dean received the following this year. Compute James' gross income.

A) $12,500
B) $14,000
C) $34,000
D) None of the above.

Question 46

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 47

Polly received the following items this year. Compute Polly's gross income.

A) $59,600
B) $58,000
C) $53,000
D) $50,000

Question 48

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 49

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 the above is excluded.

Question 50

Mr. and Mrs. Oliva, ages 70 and 67, incurred the following unreimbursed medical expenses this year. If the Olivas' AGI is $23,200, compute their medical expense deduction.

A) $0
B) $6,040
C) $8,360
D) None of the above.

Question 51

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 McGraw's Social Security is included in gross income?

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

Question 52

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 the above is true.

Question 53

Which of the following statements about divorce settlements is false?

A) Alimony is excluded from the recipient's gross income.
B) Child support is excluded from the recipient's gross income.
C) Alimony is an above-the-line deduction for the payer.
D) None of the above is false.

Question 54

Which of the following items is not included in the recipient's gross income?

A) Alimony
B) Unemployment compensation from a state government
C) Gain on sale of an antique car
D) Welfare payments from a state government

Question 55

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 the above is included.

Question 56

Dotty, age 45, incurred the following medical expenses this year. Dotty's insurance company reimbursed her for $8,800 of these expenses. If Dotty's AGI is $35,400, compute her medical expense deduction.

A) $0
B) $1,320
C) $10,120
D) $13,660

Question 57

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 58

Which of the following tax payments is allowed as an itemized income tax 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 59

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 the above are deductible medical expenses

Question 60

Ted and Alice divorced this year. Pursuant to the divorce agreement, Ted pays $5,000 alimony and $7,500 child support to Alice every month. 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 exemptions for the couples' two minor children because he is paying child support.
D) None of the above is true.

Question 61

A flood 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 resulting from the flood.

A) $41,900
B) $42,000
C) $13,000
D) $12,900

Question 62

Sue, a single taxpayer, purchased a principal residence in 2001 for $415,000. In 2005, 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 63

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 only 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 64

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 65

Mr. and Mrs. Perry own three personal residences, all of which are subject to an acquisition mortgage. The mortgage on the first residence is $290,000, the mortgage on the second residence is $400,000, and the mortgage on the third residence is $357,000. Which of the following statements is true?

A) Mr. and Mrs. Perry can report an itemized deduction for the interest paid on all three mortgages.
B) The Perrys' itemized deduction is limited to the interest on $1 million of their acquisition debt.
C) The Perrys' itemized deduction is limited to the interest on the $400,000 mortgage.
D) None of these statements is true.

Question 66

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 the above are tax incentives.

Question 67

Ms. Bjorn's only contribution this year was a donation of marketable securities (FMV $600,000; tax basis $273,000) to a public charity. Her AGI was $814,000. Which of the following statements is true?

A) Ms. Bjorn's charitable contribution deduction is limited to $407,000, and she has a $193,000 contribution carryover to future years.
B) Ms. Bjorn's charitable contribution deduction is $273,000.
C) Ms. Bjorn's charitable contribution deduction is limited to $407,000. The $193,000 nondeductible amount will never result in a tax benefit.
D) Ms. Bjorn's charitable contribution deduction is $600,000.

Question 68

This year, Mr. and Mrs. Franklin paid $93,000 interest on a mortgage they incurred 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 $900,000. Compute the Franklin's itemized deduction for their home mortgage interest.

A) $65,035
B) $58,531
C) $93,000
D) None of the above.

Question 69

Gary is a successful architect who also sings at weddings. This year, he received $5,400 fees from his singing and spent $6,250 on singing lessons, sheet music, and travel to the weddings. If Gary reports 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 not allowed to deduct any of his hobby expenses.
C) Gary is allowed to deduct $5,400 as an above-the-line deduction.
D) None of the above is true.

Question 70

Ms. Ruang owns a principal residence subject to an $817,000 acquisition mortgage. The home has an $875,000 appraised FMV. What is the maximum home equity debt that Ms. Ruang could incur for federal tax purposes?

A) $183,000
B) $100,000
C) $58,000
D) $0

Question 71

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 deductible as miscellaneous itemized deductions only to the extent of gambling winnings.
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 72

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 73

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) sank after colliding with a reef. Compute the Blakes' itemized deduction for casualty losses if their AGI was $112,200.

A) $40,080
B) $56,080
C) $39,980
D) None of the above.

Question 74

Which of the following donations does not 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 75

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 the above.

Question 76

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

A) Individuals can deduct a limited amount of qualified tuition expenses as an above-the-line deduction.
B) Individuals can deduct a limited amount of interest paid on qualified education loans as an above-the-line deduction.
C) Individuals can claim an American Opportunity Credit for a limited amount of college tuition, fees, and course materials.
D) None of the above is false.

Question 77

Mr. Rex had his car stolen this year. The car had $35,600 basis and a $22,000 FMV. Rex received a $16,500 reimbursement from his insurance company. Compute Rex's casualty loss resulting from the theft.

A) $5,400
B) $5,500
C) $19,000
D) $22,000

Question 78

Mr. and Mrs. King had only one casualty loss this year. A tornado severely 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 79

Gary is a successful architect who also sings at weddings. This year, he received $5,400 of 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) None of the above is true.

Question 80

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 a miscellaneous itemized deduction.