Question 1

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.

Accepted Answer

To calculate the itemized deduction for casualty losses, we need to follow the following steps:

1. Subtract the reimbursement amount from the decrease in the property value:
$70,000 - $48,000 = $22,000

2. Subtract $100 and 10% of AGI from the result above:
$22,000 - $100 - 10%*$98,200 = $12,080

Therefore, the Kings' itemized deduction for casualty losses is $12,080 (choice C).

Question 2

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

Accepted Answer

Premiums paid on homeowner's insurance are not deductible as a tax incentive for individuals to purchase a home instead of renting. However, real property taxes and interest paid on a home mortgage are deductible.

Question 3

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 4

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

Accepted Answer

Gambling losses are deductible as itemized deductions only up to the amount of gambling winnings. This means that if a taxpayer has gambling winnings, they can deduct their gambling losses up to the amount of their winnings, but not more. If the taxpayer has more gambling losses than winnings, they cannot deduct the excess losses in the current year, but may be able to carry them forward to future years. Gambling winnings, on the other hand, are taxable and must be reported on the taxpayer's tax return.

Question 5

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?

Accepted Answer

The answer of Mr. and Mrs. Perry own three personal...

Question 6

Which of the following donations does not qualify as a charitable contribution for federal tax purposes?

Accepted Answer

Donations to individuals, such as a panhandler, are not eligible for tax deductions as charitable contributions. The other options involve donations to recognized charitable organizations and would qualify for a tax deduction.

Question 7

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.

Accepted Answer

The casualty loss is calculated as the lesser of the adjusted basis ($35,600) or the decrease in FMV ($22,000), minus the insurance reimbursement ($16,500). Thus, $22,000 - $16,500 = $5,500. However, the correct choice is $5,400, which accounts for a $100 deductible typically applied to casualty losses.

Question 8

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?

Accepted Answer

The answer of Over the course of the year, Mr....

Question 9

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?

Accepted Answer

The Fraziers can exclude up to $500,000 of the gain from their income because they are married and the home was their principal residence for at least 2 of the last 5 years. Therefore, they would recognize a $223,000 long-term capital gain ($723,000 gain - $500,000 exclusion).

Question 10

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?

Accepted Answer

The answer of Jenna Leigh is employed as a receptionist...

Question 11

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

Accepted Answer

All of the statements are true.

Question 12

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.

Accepted Answer

The deduction for mortgage interest is limited to the interest paid on up to $750,000 of acquisition debt (debt incurred to buy, build, or substantially improve a primary or secondary home) for mortgages taken out after December 15, 2017. The Franklins' mortgage was incurred before that date, so their limit is $1 million of acquisition debt. However, they only have an appraised FMV of $900,000, which means their mortgage is technically partly non-acquisition debt. To calculate the amount of interest that qualifies for the deduction, we need to proportion the debt based on the value of the home.

$900,000/$1,430,000 = 0.6294

So, only 62.94% of their mortgage qualifies as acquisition debt, which is $898,515 ($1.43 million x 0.6294). Therefore, the deductible interest is $65,035 ($93,000 x 0.6986) which is 69.86% of the total interest paid.

Question 13

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?

Accepted Answer

If Gary can prove that his singing activity is a business, he can deduct an $850 above-the-line loss on his tax return. The fact that he incurred expenses greater than his income does not automatically disqualify it from being considered a business. However, the primary determination is whether the activity is engaged in for profit. The other options are incorrect because they are either incomplete or inaccurate.

Question 14

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?

Accepted Answer

The answer of Ms. Bjorn's only contribution this year was...

Question 15

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.

Accepted Answer

The casualty loss is calculated as the difference between the FMV of the property before the casualty and its FMV after the casualty, minus any insurance reimbursement received. In this case, the FMV before the flood was $42,500 and the rug was destroyed, so the FMV after the flood is $0. The McConnells did not receive any insurance reimbursement, so their casualty loss is $42,500 - $0 = $42,500. However, since they originally purchased the rug for $13,000, their adjusted basis in the rug is $13,000. Therefore, their casualty loss is limited to their adjusted basis, which is $13,000. The excess FMV is not relevant for the calculation of the casualty loss. Thus, the correct answer is D) $12,900.

Question 16

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.

Accepted Answer

The answer of Mr. and Mrs. Blake suffered two casualty...

Question 17

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?

Accepted Answer

The answer of Twelve years ago, Mr. Drake incurred a...

Question 18

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?

Accepted Answer

If Gary reports this activity as a hobby for federal tax purposes, he cannot deduct more than the amount of income he received ($5,400). Therefore, he will have no net profit or loss from this activity, and he will not be required to include the $5,400 in gross income. However, he will not be allowed to deduct any of his hobby expenses as an above-the-line deduction or itemized deduction.

Question 19

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?

Accepted Answer

The answer of Ms. Ruang owns a principal residence subject...

Question 20

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?

Accepted Answer

The answer of Sue, a single taxpayer, purchased a principal...

Quiz 17: Tax Consequences of Personal Activities