Question 1

Karen,a calendar year taxpayer,made the following donations to qualified charitable organizations during the year: Basis Fair Market Value Cash donation to State University $30,000 $ 30,000 Unimproved land to the City of Terre Haute,Indiana 70,000 210,000 ​ The land had been held as an investment and was acquired 4 years ago.Shortly after receipt,the City of Terre Haute sold the land for $210,000.Karen's AGI is $450,000.The allowable charitable contribution deduction this year is:

Accepted Answer

For the cash donation made to State University, Karen can deduct $30,000.

For the donation of unimproved land to City of Terre Haute, Karen's contribution is limited to her basis in the property or its fair market value, whichever is less. In this case, the lesser of the two is Karen's basis of $70,000.

Therefore, Karen can deduct a total of $30,000 + $70,000 = $100,000.

Note that the fact that the land was held as an investment and later sold by the City of Terre Haute does not affect Karen's charitable contribution deduction.

Question 2

Phillip,age 66,developed hip problems and was unable to climb the stairs to reach his second-floor bedroom.His physician advised him to add a first-floor bedroom to his home.The cost of constructing the room was $32,000.The increase in the value of the residence as a result of the room addition was determined to be $17,000.In addition,Phillip paid the contractor $5,500 to construct an entrance ramp to his home and $8,500 to widen the hallways to accommodate his wheelchair.Phillip's AGI for 2015 was $100,000.How much of these expenditures can Phillip deduct as a medical expense in 2015?

Accepted Answer

Phillip can deduct the cost of the first-floor bedroom ($32,000) and the cost of the entrance ramp ($5,500) and hallway widening ($8,500) to the extent that the total cost of these improvements exceeds the increase in the value of his residence as a result of the improvements ($17,000).

Therefore, the amount of these expenditures that Phillip can deduct as a medical expense is calculated as follows:

$32,000 + $5,500 + $8,500 - $17,000 = $29,000

However, medical expenses are only deductible to the extent that they exceed 10% of Phillip's AGI.

10% of $100,000 (Phillip's AGI) = $10,000

Since $29,000 is greater than $10,000, Phillip can deduct $21,500 ($29,000 - $10,000) as a medical expense in 2015.

Therefore, the best choice is C) $21,500.

Question 3

Your friend Scotty informs you that he received a "tax-free" reimbursement in 2015 of some medical expenses he paid in 2014.Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income?

Accepted Answer

To qualify for tax-free treatment of a medical reimbursement or a distribution from a health savings account, the taxpayer is required to substantiate that the reimbursement or distribution was used to pay for qualified medical expenses. However, the taxpayer does not have to itemize deductions to exclude the reimbursement or distribution from income. Therefore, the fact that Scotty did not itemize deductions in 2014 is the best explanation for why he is not required to report the reimbursement in gross income.

Question 4

Joseph and Sandra,married taxpayers,took out a mortgage on their home for $350,000 15 years ago.In May of this year,when the home had a fair market value of $450,000 and they owed $250,000 on the mortgage,they took out a home equity loan for $220,000.They used the funds to purchase a single engine airplane to be used for recreational travel purposes.What is the maximum amount of debt on which they can deduct home equity interest?

Accepted Answer

Under the Tax Cuts and Jobs Act of 2017, taxpayers can only deduct home equity interest on debt that is used to "buy, build, or substantially improve the taxpayer's home that secures the loan." The interest on debt used for other purposes, like purchasing a plane for recreational travel, is not deductible.

In this case, Joseph and Sandra took out a home equity loan for $220,000 and used the funds to purchase a plane for recreational travel purposes. Therefore, they can only deduct the interest on the $250,000 mortgage that is used to purchase, build, or substantially improve their home.

The maximum amount of debt on which they can deduct home equity interest is $100,000 ($250,000 total mortgage debt - $150,000 acquisition debt). Therefore, the correct answer is B) $100,000.

Question 5

Pedro's child attends a school operated by the church the family attends.Pedro made a donation of $1,000 to the church in lieu of the normal registration fee of $200.In addition,Pedro paid the regular tuition of $6,000 to the school.Based on this information,what is Pedro's charitable contribution?

Accepted Answer

Pedro's charitable contribution is $800, which is the amount of the donation ($1,000) minus the normal registration fee ($200) that the donation was intended to cover. The tuition payment is not considered a charitable contribution.

Question 6

In 2015,Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family.In addition,he contributes $3,400 to a Health Savings Account.Which of the following statements is true?

Accepted Answer

If Boris is self-employed, he may deduct $7,200 as a deduction for AGI because the premiums for high-deductible health insurance and contributions to a Health Savings Account are both deductible for self-employed individuals.

Question 7

Brad,who would otherwise qualify as Faye's dependent,had gross income of $9,000 during the year.Faye,who had AGI of $120,000,paid the following medical expenses in 2015: Cataract operation for Brad $ 5,400 Brad's prescribed contact lenses 1,800 Faye's doctor and dentist bills 12,600 Prescribed drugs for Faye 2,550 Total $22,350 ​ Assuming Faye is age 45,she has a medical expense deduction of:

Accepted Answer

In order to calculate Faye's medical expense deduction, we need to first determine the amount of total medical expenses that exceed 10% of Faye's AGI.

10% of Faye's AGI is $12,000 (120,000 x 0.1).

The total medical expenses paid by Faye are $22,350.

However, we need to subtract the medical expenses paid for Brad, since he had gross income of $9,000 and would not qualify as Faye's dependent.

So, the adjusted medical expenses are $22,350 - $5,400 - $1,800 = $15,150.

Since this amount is greater than 10% of Faye's AGI, her medical expense deduction is $15,150 - $12,000 = $3,150.

Therefore, the correct answer is C) $10,350 (total medical expenses paid minus medical expense deduction).

Question 8

In the current year,Jerry pays $8,000 to become a charter member of Mammoth University's Athletic Council.The membership ensures that Jerry will receive choice seating at all of Mammoth's home basketball games.Also this year,Jerry pays $2,200 (the regular retail price) for season tickets for himself and his wife.For these items,how much qualifies as a charitable contribution?

Accepted Answer

Only the portion of the payment that exceeds the fair market value of the benefits received can be considered a charitable contribution. The fair market value of the choice seating at all home basketball games is not given, so we cannot determine its value. However, we know that Jerry paid $2,200 for season tickets, which is the regular retail price, so he did not receive any additional benefits beyond that. Therefore, the portion of the $8,000 payment that qualifies as a charitable contribution is $8,000 - $2,200 = $5,800. Adding this to the $2,200 for the season tickets, the total that qualifies as a charitable contribution is $5,800 + $2,200 = $6,400.

Question 9

Rick and Carol Ryan,married taxpayers,took out a mortgage of $160,000 when purchasing their home ten years ago.In October of the current year,when the home had a fair market value of $200,000 and they owed $125,000 on the mortgage,the Ryans took out a home equity loan for $110,000.They used the funds to purchase a sailboat to be used for recreational purposes.The sailboat does not qualify as a residence.What is the maximum amount of debt on which the Ryans can deduct home equity interest?

Accepted Answer

The maximum amount of debt on which the Ryans can deduct home equity interest is limited to the lesser of $100,000 ($50,000 for married filing separately) or the fair market value of the home reduced by the acquisition debt (mortgage) on the home. In this case, the fair market value of the home is $200,000 and the acquisition debt is $125,000, leaving $75,000 as the maximum amount of debt on which the Ryans can deduct home equity interest. The fact that they used the funds to purchase a sailboat that does not qualify as a residence does not affect the calculation of the limit.

Question 10

Hannah makes the following charitable donations in the current year: Basis Fair Market Value Inventory held for resale in Hannah's business (a sole proprietorship) $8,000 $ 7,200 Stock in HBM,Inc. ,held as an investment (acquired four years ago) 16,000 40,000 Baseball card collection held as an investment (acquired six years ago) 4,000 20,000 ​ The HBM stock and the inventory were given to Hannah's church,and the baseball card collection was given to the United Way.Both donees promptly sold the property for the stated fair market value.Disregarding percentage limitations,Hannah's current charitable contribution deduction is:

Accepted Answer

The answer of Hannah makes the following charitable donations in...

Question 11

Zeke made the following donations to qualified charitable organizations during the year: Basis Fair Market Value Used clothing (all acquired more than a year ago) of taxpayer and his family $ 1,350 $ 375 Stock in ABC,Inc. ,held as an investment for fifteen months 12,000 10,875 Stock in MNO,Inc. ,held as an investment for eleven months 15,000 18,000 Real estate held as an investment for two years 15,000 30,000 ​ The used clothing was donated to the Salvation Army;the other items of property were donated to Eastern State University.Both are qualified charitable organizations.Disregarding percentage limitations,Zeke's charitable contribution deduction for the year is:

Accepted Answer

The answer of Zeke made the following donations to qualified...

Question 12

During 2015,Hugh,a self-employed individual,paid the following amounts: Real estate tax on Iowa residence $3,800 State income tax 1,700 Real estate taxes on land in Puerto Rico (held as an investment) 1,100 Gift tax paid on gift to daughter 1,200 State sales taxes 1,750 State occupational license fee 300 Property tax on value of his automobile (used 100% for business) 475 ​ What is the maximum amount Hugh can claim as taxes in itemizing deductions from AGI?

Accepted Answer

Hugh can deduct the real estate tax on his Iowa residence ($3,800), state income tax ($1,700), real estate taxes on land in Puerto Rico ($1,100), and state sales taxes ($1,750). The gift tax and occupational license fee are not deductible, and the property tax on the business automobile is a business expense, not an itemized deduction. Total deductible taxes are $3,800 + $1,700 + $1,100 + $1,750 = $8,350. However, since the state income tax and state sales tax are subject to a $10,000 cap for state and local taxes, the total is $6,650.

Question 13

Tom,age 48,is advised by his family physician that he needs back surgery to correct a problem from his last back surgery.Since Tom is in a wheel chair,he needs his wife,Jean,to accompany him on his trip to Rochester,Minnesota,for in-patient treatment at the Mayo Clinic,which specializes in this type of surgery.Tom incurred the following costs in 2015: Round-trip airfare ($350 each) $ 700 Jean's hotel in Rochester for four nights ($95 per night) 380 Jean's meals while in Rochester 105 Tom's medical treatment 3,500 Tom's prescription medicine 600 ​ Compute Tom's medical expenses for the trip (subject to the 10% floor).

Accepted Answer

The answer of Tom,age 48,is advised by his family physician...

Question 14

During 2015,Nancy paid the following taxes: Tax on residence (for the period from March 1 through August 31,2015) $5,250 State motor vehicle tax (based on the value of the personal use automobile) 430 State sales tax 3,500 State income tax 3,050 ​ Nancy sold her personal residence on June 30,2015,under an agreement in which the real estate taxes were not prorated between the buyer and the seller.What amount qualifies as a deduction from AGI for 2015 for Nancy?

Accepted Answer

The only tax that qualifies as a deduction from AGI is the state income tax. Therefore, Nancy can deduct $3,050. The tax on residence, state motor vehicle tax, and state sales tax are not deductible from AGI. Therefore, the total deduction from AGI is $3,050.

Question 15

Emily,who lives in Indiana,volunteered to travel to Louisiana in March to work on a home-building project for Habitat for Humanity (a qualified charitable organization).She was in Louisiana for three weeks.She normally makes $500 per week as a carpenter's assistant and plans to deduct $1,500 as a charitable contribution.In addition,she incurred the following costs in connection with the trip: $600 for transportation,$1,200 for lodging,and $400 for meals.What is Emily's deduction associated with this charitable activity?

Accepted Answer

Emily can deduct her actual expenses while volunteering for Habitat for Humanity, including transportation, lodging, and meals. This amounts to a total of $2,200 ($600 + $1,200 + $400). However, she cannot also deduct her $1,500 contribution since it is already included in her expenses. Therefore, her total deduction is $2,200.

Question 16

In Lawrence County,the real property tax year is the calendar year.The real property tax becomes a personal liability of the owner of real property on January 1 in the current real property tax year (assume this year is not a leap year).The tax is payable on June 1.On May 1,Reggie sells his house to Dana for $350,000.On June 1,Dana pays the entire real estate tax of $7,950 for the year ending December 31.How much of the property taxes may Reggie deduct?

Accepted Answer

Reggie owned the house from January 1 to May 1, which is 121 days (since it is not a leap year). Therefore, he is responsible for paying property taxes for 121/365 of the year, or approximately 33% of the total tax.

33% of $7,950 is $2,623.50, but since we are only concerned with whole dollars, Reggie may deduct $2,614 of the property taxes.

Question 17

Quinn,who is single and lives alone,is physically handicapped as a result of a diving accident.In order to live independently,he modifies his personal residence at a cost of $30,000.The modifications included widening halls and doorways for a wheelchair,installing support bars in the bathroom and kitchen,installing a stairway lift,and rewiring so he could reach electrical outlets and appliances.Quinn pays $200 for an appraisal that places the value of the residence at $129,000 before the improvements and $140,000 after.As a result of the operation of the stairway lift,Quinn experienced an increase of $680 in his utility bills for the current year.Disregarding the percentage of AGI limitation,how much of the above expenditures qualify as medical expense deductions?

Accepted Answer

The answer of Quinn,who is single and lives alone,is physically...

Question 18

Brad,who uses the cash method of accounting,lives in a state that imposes an income tax (including withholding from wages).On April 14,2015,he files his state return for 2014,paying an additional $600 in state income taxes.During 2015,his withholdings for state income tax purposes amount to $3,550.On April 13,2016,he files his state return for 2015 claiming a refund of $800.Brad receives the refund on June 3,2016.If he itemizes deductions,how much may Brad claim as a deduction for state income taxes on his Federal income tax return for calendar year 2015 (filed in April 2016)?

Accepted Answer

Brad can deduct the lesser of his actual state income tax payments or the amount of state income tax shown on his W-2 form ($3,550). Additionally, he can deduct the $600 in state income tax payments made in 2015, as long as he did not claim them as an itemized deduction on his 2014 federal income tax return. Finally, he can include the $800 state income tax refund received in 2016 as income on his 2016 federal income tax return if he deducted the state income taxes paid in 2015 on his 2015 federal income tax return. Therefore, Brad can deduct a total of $4,150 ($3,550 + $600).

Question 19

Barry and Larry,who are brothers,are equal owners in Chickadee Corporation.On July 1,2015,each loans the corporation $10,000 at an annual interest rate of 10%.Both shareholders are on the cash method of accounting,while Chickadee Corporation is on the accrual method.All parties use the calendar year for tax purposes.On June 30,2016,Chickadee repays the loans of $20,000 together with the specified interest of $2,000.How much of the interest can Chickadee Corporation deduct in 2015?

Accepted Answer

Since all parties use the calendar year for tax purposes and the loans were made on July 1, 2015, there was no interest expense incurred by Chickadee Corporation in 2015. The interest expense of $2,000 was incurred and paid in 2016.

Question 20

Byron owned stock in Blossom Corporation that he donated to a museum (a qualified charitable organization) on June 8 this year.What is the amount of Byron's deduction assuming that he had purchased the stock for $10,500 last year on August 7,and the stock had a fair market value of $13,800 when he made the donation?

Accepted Answer

The answer of Byron owned stock in Blossom Corporation that...

Quiz 10: Deductions and Losses: Certain Itemized Deductions

Your friend Scotty informs you that he received a "tax-free" reimbursement in 2015 of some medical expenses he paid in 2014.Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income?

Pedro's child attends a school operated by the church the family attends.Pedro made a donation of $1,000 to the church in lieu of the normal registration fee of $200.In addition,Pedro paid the regular tuition of $6,000 to the school.Based on this information,what is Pedro's charitable contribution?

In 2015,Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family.In addition,he contributes $3,400 to a Health Savings Account.Which of the following statements is true?