Question 1

Sadie mailed a check for $2,200 to a qualified charitable organization on December 31, 2017. The $2,200 contribution is deductible on Sadie's 2017 tax return.

Accepted Answer

Sadie made the charitable contribution in the year 2017, so it can be claimed as a deduction on her 2017 tax return.

Question 2

Points paid by the owner of a personal residence to refinance an existing mortgage must be capitalized and amortized over the life of the new mortgage.

Accepted Answer

According to IRS Publication 936, points paid by the owner of a personal residence to refinance an existing mortgage must be capitalized and amortized over the life of the new mortgage.

Question 3

For purposes of computing the deduction for qualified residence interest, a qualified residence includes the taxpayer's principal residence and two other residences of the taxpayer or spouse.

Accepted Answer

A qualified residence for the purpose of computing the deduction for qualified residence interest includes the taxpayer's principal residence and only one other residence of the taxpayer or spouse, not two.

Question 4

Phyllis, a calendar year cash basis taxpayer who itemized deductions totaling $20,000, overpaid her 2016 state income tax and is entitled to a refund of $400 in 2017. Phyllis chooses to apply the $400 overpayment toward her state income taxes for 2017. She is required to recognize that amount as income in 2017.

Accepted Answer

Since Phyllis itemized her deductions in 2016 and received a tax benefit from the state tax deduction, the $400 refund applied to her 2017 taxes must be recognized as income in 2017 under the tax benefit rule.

Question 5

Jack sold a personal residence to Steven and paid points of $3,500 on the loan to help Steven finance the purchase. Jack can deduct the points as interest.

Accepted Answer

Points paid by a seller on a loan for the purchase of a personal residence are considered a selling expense and cannot be deducted as interest by the seller. They may, however, reduce the seller's capital gain on the sale.

Question 6

Trent sells his personal residence to Chester on July 1, 2017. He had paid $7,000 in real property taxes on March 1, 2017, the due date for property taxes for 2017. Trent may not deduct the portion of the taxes he paid for the period the property was owned by Chester.

Accepted Answer

Trent can only deduct the portion of the property taxes that he paid for the time period when he owned the property. Since he sold the property to Chester on July 1, 2017, he cannot deduct the portion of the taxes paid for the period after that date.

Question 7

In January 2018, Pam, a calendar year cash basis taxpayer, made an estimated state income tax payment for 2017. The payment is deductible in 2017.

Accepted Answer

According to the cash method of accounting, deductions are allowed in the year the payment is actually made. Therefore, since Pam made the estimated state income tax payment in January 2018, it cannot be deducted on her 2017 tax return.

Question 8

Tom, whose MAGI is $40,000, paid $3,500 of interest on a qualified student loan in 2017. Tom is single. He may deduct the $3,500 interest as an itemized deduction.

Accepted Answer

The student loan interest deduction is an adjustment to income, not an itemized deduction, and is subject to income limits.

Question 9

For purposes of computing the deduction for qualified residence interest, a qualified residence includes only the taxpayer's principal residence.

Accepted Answer

A qualified residence includes both the taxpayer's principal residence and one other residence selected by the taxpayer that is used for personal purposes for a certain minimum amount of time during the taxable year.

Question 10

In April 2017, Bertie, a calendar year cash basis taxpayer, had to pay the state of Michigan additional income tax for 2016. Even though it relates to 2016, for Federal income tax purposes the payment qualifies as a tax deduction for tax year 2017.

Accepted Answer

State income tax payments can be deducted on the federal return in the year they are paid, regardless of the tax year they relate to. So, Bertie can deduct the payment on his 2017 federal tax return.

Question 11

Herbert is the sole proprietor of a furniture store. He can deduct real property taxes on his store building as a business deduction but he cannot deduct state income taxes related to his net income from the furniture store as a business deduction.

Accepted Answer

Real property taxes on a business property can be deducted as a business expense, while state income taxes related to the business owner's net income cannot be deducted as a business expense.

Question 12

Joe, a cash basis taxpayer, took out a 12-month business loan on December 1, 2017. He prepaid all $3,600 of the interest on the loan on December 1, 2017. Joe can deduct only $300 of the prepaid interest in 2017.

Accepted Answer

As a cash basis taxpayer, Joe can only deduct expenses that are actually paid during the tax year. Since he prepaid all $3,600 of the interest on December 1, 2017 but the loan extends for 12 months, he can only deduct the portion of the prepaid interest that applies to the month of December 2017: $3,600/12 months = $300 deductible in 2017. The remaining $3,300 will be deductible in 2018, as long as Joe continues to be in business and the loan remains outstanding.

Question 13

Grace's sole source of income is from a restaurant that she owns and operates as a proprietorship. Any state income tax Grace pays on the business net income must be deducted as a business expense rather than as an itemized deduction.

Accepted Answer

State income tax paid on business net income from a sole proprietorship is not deducted as a business expense on Schedule C but is instead deducted as an itemized deduction on Schedule A of the individual's personal income tax return.

Question 14

Judy paid $40 for Girl Scout cookies and $40 for Boy Scout popcorn. Judy may claim an $80 charitable contribution deduction.

Accepted Answer

The answer of Judy paid $40 for Girl Scout cookies...

Question 15

Letha incurred a $1,600 prepayment penalty to a lending institution because she paid off the mortgage on her home early. The $1,600 is deductible as interest expense.

Accepted Answer

The answer of Letha incurred a $1,600 prepayment penalty to...

Question 16

Leona borrows $100,000 from First National Bank and uses the proceeds to purchase City of Houston bonds. The interest Leona pays on this loan is deductible as investment interest subject to the investment interest limits.

Accepted Answer

The answer of Leona borrows $100,000 from First National Bank...

Question 17

On December 31, 2017, Lynette used her credit card to make a $500 contribution to the United Way, a qualified charitable organization. She will pay her credit card balance in January 2018. If Lynette itemizes, she can deduct the $500 in 2017.

Accepted Answer

Lynette can deduct the $500 contribution on her 2017 tax return, even though she will not actually pay her credit card bill until January 2018. The deduction is allowed in the year the contribution was charged to her credit card, regardless of when the payment is actually made.

Question 18

Interest paid or accrued during the tax year on aggregate acquisition indebtedness of $2 million or less ($1 million or less for married persons filing separate returns) is deductible as qualified residence interest.

Accepted Answer

The answer of Interest paid or accrued during the tax...

Question 19

A taxpayer pays points to obtain financing to purchase a second residence. At the election of the taxpayer, the points can be deducted as interest expense for the year paid.

Accepted Answer

The answer of A taxpayer pays points to obtain financing...

Question 20

For all of the current year, Randy (a calendar year taxpayer) allowed the Salvation Army to use a building he owns rent-free. The building normally rents for $24,000 a year. Randy will be allowed a charitable contribution deduction this year of $24,000.

Accepted Answer

The answer of For all of the current year, Randy...

Quiz 10: Deductions and Losses: Certain Itemized Deductions