Question 1

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

As long as Gary can prove that his singing activity is a bona fide business, he can deduct the loss of $850 above the line as an ordinary and necessary business expense. The fact that he received $5,400 in fees for his singing suggests that he is engaged in a profit-oriented activity, which is one of the factors the IRS considers when determining whether an activity is a business or a hobby. While Gary's primary source of income is his architecture practice, it doesn't necessarily mean that his singing activity can't be treated as a business.

Question 2

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 answer of Mr. Rex had his car stolen this...

Question 3

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

Accepted Answer

While real property taxes and mortgage interest are both tax deductible for homeowners, premiums paid on homeowner's insurance are generally not tax deductible. Therefore, option B is not a tax incentive for individuals to purchase a home instead of renting.

Question 4

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 5

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 6

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 7

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 8

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 9

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 10

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 11

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 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

A flood destroyed an antique Persian rug owned by Mr. and Mrs. McConnel. 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 McConnels' casualty loss resulting from the flood.

Accepted Answer

The casualty loss is calculated as the decrease in FMV due to the casualty, which is $42,500 - $0 (since the rug was destroyed) = $42,500. However, the loss is limited to the cost basis (i.e. the purchase price) of the property, which in this case is $13,000. Therefore, the casualty loss is $13,000 - $0 = $12,900.

Question 14

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

Accepted Answer

Gambling losses are deductible as itemized deductions only to the extent of gambling winnings. This means that a person can only deduct their gambling losses up to the amount of their gambling winnings. Any excess losses cannot be deducted in the current year but can be carried forward to future tax years. Additionally, gambling winnings are taxable and must be reported as income on a person's tax return.

Question 15

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...

Question 16

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

Accepted Answer

Cash given to an individual panhandler is not considered a qualified charity or organization for tax-deductible donations.

Question 17

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

Accepted Answer

None of the statements about tax subsidies for higher education are false. All three statements are true and accurately describe tax subsidies available for individuals pursuing higher education.

Question 18

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 19

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 20

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...

Quiz 17: Tax Consequences of Personal Activities