Question 1

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 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 530, points paid by a borrower to refinance an existing mortgage on their personal residence must be capitalized and amortized over the life of the new mortgage, just like points paid on a purchase of the home.

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

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 5

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 6

Interest paid or accrued during 2018 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 2018 on...

Question 7

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 8

Tom, whose MAGI is $40,000, paid $3,500 of interest on a qualified student loan in 2018. 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 a limit of $2,500 per year.

Question 9

In January 2019, Pam, a calendar year cash basis taxpayer, made an estimated state income tax payment for 2018.
The payment is deductible in 2018.

Accepted Answer

According to the general rule of the cash basis method, expenses and deductions are recognized in the year they are paid, not in the year they are incurred. Therefore, because Pam made the estimated state income tax payment in 2019, it cannot be deducted in the 2018 tax year. However, if Pam made the payment prior to December 31, 2018, it would be deductible in the 2018 tax year.

Question 10

Joe, a cash basis taxpayer, took out a 12-month business loan on December 1, 2018. He prepaid all $3,600 of the interest on the loan on December 1, 2018. Joe can deduct only $300 of the prepaid interest in 2018.

Accepted Answer

According to the IRS rules, a cash basis taxpayer can deduct prepaid interest only in the tax year to which it relates. Since Joe prepaid all $3,600 of the interest on the loan on December 1, 2018, he can deduct only $300 of the prepaid interest in 2018, which is the interest for one month. The remaining $3,300 can be deducted in the future tax years to which they relate.

Question 11

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

Accepted Answer

Purchases of goods, such as cookies and popcorn, do not qualify as charitable contributions for tax deduction purposes.

Question 12

Trent sells his personal residence to Chester on July 1, 2018. He had paid $7,000 in real property taxes on March 1, 2018, the due date for property taxes for 2018. Trent may not deduct the portion of the taxes he paid for the period the property was owned by Chester.

Accepted Answer

Trent is only allowed to deduct the portion of the property taxes that he paid for the period of time that he owned the property during the year. Since he sold the property on July 1, he is not allowed to deduct the taxes paid for the period of time that the property was owned by Chester.

Question 13

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 IRS does not allow a charitable contribution deduction for the use of property, only for the donation of property or cash.

Question 14

In April 2018, Bertie, a calendar year cash basis taxpayer, had to pay the state of Michigan additional income tax for 2017. Even though it relates to 2017, for Federal income tax purposes the payment qualifies as a tax deduction for tax year 2018.

Accepted Answer

The payment of state income tax can be deducted on the taxpayer's Federal income tax return for the year in which it was paid, regardless of which tax year it pertains to. Therefore, Bertie can deduct the additional income tax payment made to the state of Michigan in 2018 on his 2018 Federal income tax return.

Question 15

Phyllis, who is single, has itemized deductions totaling $20,000. She overpaid her 2017 state income tax and is entitled to a refund of $400 in 2018. Phyllis chooses to apply the $400 overpayment toward her state income taxes for 2018. She is required to recognize that amount as income in 2018.

Accepted Answer

Phyllis is required to recognize the $400 overpayment as income in 2018 because it is a refund of a previously deducted expense.

Question 16

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

Prepayment penalties on mortgages are considered interest expenses and are deductible on Schedule A of the taxpayer's federal income tax return.

Question 17

On December 31, 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 of the following year. If Lynette itemizes, she can deduct the $500 in the year she used the card.

Accepted Answer

Lynette made a qualified charitable contribution using her credit card before the end of the year, which allows her to deduct the donation on her tax return for that year, even if she doesn't pay off the credit card balance until the following year.

Question 18

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 19

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 are deductible as a business expense for a sole proprietor, while state income taxes related to net income from the business are not deductible.

Question 20

Sadie mailed a check for $2,200 to a qualified charitable organization on December 31, 2018. The $2,200 contribution is deductible on Sadie's 2018 tax return if she itemizes her deductions.

Accepted Answer

Charitable contributions are deductible in the year they are made, so Sadie can claim the deduction on her 2018 tax return if she itemizes her deductions.

Quiz 10: Deductions and Losses: Certain Itemized Deductions