REG 2 - Adjustments and Itemized Deductions

Question 1

Smith, a single individual, made the following charitable contributions during the current year. Smith’s adjusted gross income is $60,000.
Donation to Smith’s church: $5,000
Art work donated to the local art museum
(Smith purchased it for $2,000 four months ago and a local art dealer appraised it for): $3,000
Contribution to a needy family: $1,000
What amount should Smith deduct as a charitable contribution?
a. $7,000
b. $8,000
c. $5,000
d. $9,000

Answer 1

Choice “a” is correct. This question is asking for the actual deduction and requires the candidate to determine which items are deductible charitable contributions. The $5,000 donation to the church is allowable. The artwork donated to the local art museum is deductible to its basis, $2,000. Although it is appreciated property, Smith held the property for only four months, making it short-term capital gain property. Donations of short-term capital gain property are deductible to the donor to the extent of his/her adjusted basis. The contribution to a needy family is not a deductible contribution, as it was not made to a qualifying organization.

Question 2

Carroll, a 35 year old unmarried taxpayer with an adjusted gross income of $100,000, incurred and paid the following unreimbursed medical expenses for the year:
Doctor bills resulting from a serious fall $$ 5,000
Cosmetic surgery that was necessary to correct a congenital deformity $15,000

Carroll had no medical insurance. For regular income tax purposes, what was Carroll’s maximum allowable medical expense deduction, after the applicable threshold limitation, for the year?

a. $20,000
b. $10,000
c. $15,000
d. $0

Answer 2

Choice "b" is correct. Both medical expenses are deductible. The cosmetic surgery is not elective, since it was necessary to correct a congenital deformity.
Doctor Bills $ 5,000
Surgery       $ 15,000
                     $ 20,000
AGI Limitation ($100,000 × 10%)
                        (10,000)
Deduction    $ 10,000

Question 3

Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for the current year. During the current year, Taylor donated land to a church and made no other contributions. Taylor purchased the land 15 years ago as an investment for $14,000. The land’s fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for the current year?

a. $11,000
b. $14,000
c. $25,000
d. $0

Answer 3

c. $25,000

Question 4

Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amount should be reported in Mel’s gross income for the year?

a. $4,800
b. $0
c. $1,200
d. $3,600

Answer 4

Choice “a” is correct. Under a nonaccountable plan, $4,800 ($400 per month x 12 months) must be reported as part of Mel’s gross income for the year (in fact, the $4,800 will be included as part of Mel’s taxable wages on Mel’s W-2).
Rule: Under a nonaccountable plan (i.e., expenses are not reported to the employer), any amounts received by an employee from the employer must be reported by the employer as part of wages on the employee’s W-2 for the year (and subject to income tax withholding requirements). The gross amount received is reported as income.
Rule: Any expenses taken against the gross amount received in a nonaccountable plan (e.g., the car mileage expenses and the reimbursement to the company) are considered miscellaneous itemized deductions and are subject to the 2% AGI limitation.
Note: The examiners have attempted to trick the candidate into thinking that this is in some way an accountable plan because they provided for a return of excess funds received to the employer. However, remember that the question specifically states that the plan is nonaccountable.

Question 5

Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year. Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed. What is the amount of charitable contributions deductible on Stein’s current year income tax return?

a. $17,000
b. $21,000
c. $24,000
d. $25,000

Answer 5

Choice “c” is correct. Stein may deduct $24,000 on Stein’s current year income tax return.
Rule: For 50%-type charities only (which include tax-exempt educational organizations), the taxpayer has the option to deduct long-term (i.e., held longer then 12 months) capital gain appreciated property at the higher fair market value (higher than cost basis) without paying capital gains tax on the appreciated portion. This deduction is limited to 30% of adjusted gross income (AGI). A 5-year carryforward period applies.

Question 6

Jackson owns two residences. The second residence, which has never been used for rental purposes, is the only residence that is subject to a mortgage. The following expenses were incurred for the second residence in the current year:
Mortgage interest: $5,000
Utilities: $1,200
Hazard insurance: $6,000
For regular income tax purposes, what is the maximum amount allowable as a deduction for Jackson’s second residence in the current year?
a. $12,200 as an itemized deduction.
b. $5,000 as an itemized deduction.
c. $6,200 in determining adjusted gross income.
d. $11,000 in determining adjusted gross income.

Answer 6

Choice “b” is correct. For a personal residence that is not used for rental purposes, no deduction is allowed for utilities costs or insurance, thus the only deductible amount here is for the mortgage interest. Note that property taxes (not present in this problem) are deductible. In this problem we are not told whether the interest relates to acquisition indebtedness or home equity indebtedness. The deduction for interest on home equity indebtedness is limited to interest on $100,000 of indebtedness, but this is unlikely to be a problem here even if the interest relates solely to home equity indebtedness. This is because of the amount of interest and the fact that there is no debt associated with Jackson’s other residence. The deduction for personal residence interest is an itemized deduction.

Question 7

During the current year, Wood’s residence had an adjusted basis of $150,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $175,000. Later in the current year, Wood received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Wood’s current year adjusted gross income was $60,000 and he did not have any casualty gains.
What total amount can Wood deduct as a current year itemized deduction for casualty loss, after the application of the threshold limitations?
a. $25,000
b. $13,900
c. $20,000
d. $19,900

Answer 7

b. $13,900
Casualty losses are generally computed as the decline in fair market value, except that the fair market value is limited to the property’s basis, here $150,000. Casualty losses are reduced by the amount of any insurance recovery, reducing this loss to $20,000. Next, each individual loss is reduced by $100, bringing this loss to $19,900. Finally, the remaining total amount of all casualty losses (here there is only one) are deductible only to the extent that the amount exceeds 10% of AGI, or $6,000 here. ($150,000 - $130,000 = $20,000; $20,000 - $100 - $6,000 = $13,900.)

Question 8

Deet, an unmarried taxpayer, qualified to itemize current year deductions. Deet’s adjusted gross income was $40,000 and he made a $1,500 substantiated cash donation directly to a needy family. Deet also donated art, valued at $11,000, to a local art museum. Deet had purchased the art work two years earlier for $2,000. What was the maximum amount of the charitable contribution allowable as an itemized deduction on Deet’s current year income tax return?

a. $11,000
b. $3,500
c. $12,500
d. $2,000

Answer 8

a. $11,000

Question 9

Grey, a calendar-year taxpayer, was employed and resided in New York. On February 2, of the current year, Grey was permanently transferred to Florida by his employer. Grey worked full-time for the entire year. In the current year, Grey incurred and paid the following unreimbursed expenses in relocating:
Lodging and travel expenses while moving: $ 1,000
Pre-move househunting costs: $1,200
Costs of moving household furnishings and personal effects: $1,800
What amount was deductible as moving expense on Grey’s current year tax return?
a. $2,800
b. $1,800
c. $1,000
d. $4,000

Answer 9

a. $2,800

Question 10

Moore, a single taxpayer, had $50,000 in adjusted gross income for the year. During the year she contributed $18,000 to her church. She had a $10,000 charitable contribution carryover from her prior year church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for the current year?

a. $28,000
b. $18,000
c. $10,000
d. $25,000

Answer 10

d. $25,000

Question 11

Matthews was a cash basis taxpayer whose current year records showed the following:
State and local income taxes withheld: $ 1,500
State estimated income taxes paid December 30 of the current year: $400
Federal income taxes withheld: $2,500
State and local income taxes paid April 17 of the following year: $300
What total amount was Matthews entitled to claim for taxes on her current year Schedule A of Form 1040?
a. $2,200
b. $1,500
c. $1,900
d. $4,700

Answer 11

c. $1,900

Question 12

In the current year, Joan Frazer’s residence was totally destroyed by fire. The property had an adjusted basis and a fair market value of $130,000 before the fire. During the year, Frazer received insurance reimbursement of $120,000 for the destruction of her home. Frazer’s current year adjusted gross income was $70,000. Frazer had no casualty gains during the year. What amount of the fire loss was Frazer entitled to claim as an itemized deduction on her current year tax return?

a. $8,600
b. $8,500
c. $10,000
d. $2,900

Answer 12

Choice “d” is correct $2,900. The casualty loss is measured by the difference in the property’s value before ($130,000) and after (zero) the casualty, in other words, $130,000. The casualty loss must be reduced by the $120,000 insurance recovery to $10,000. This loss is reduced by $100 per casualty to $9,900. The sum of all such casualty losses (there is only one in this case) is further reduced by 10% of the taxpayer’s adjusted gross income for the year. That is 10% x $70,000 = $7,000. The amount of the casualty loss that is deductible on Frazer’s tax return is $9,900 - $7,000 = $2,900.

Question 13

Tom and Sally White, married and filing joint income tax returns, derive their entire income from the operation of their retail stationery shop. Their current year adjusted gross income was $100,000, and the Whites itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Whites during the year:

Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 600
Tuition, meals, and lodging at special school for physically handicapped dependent child in an institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care $8,000
Without regard to the adjusted gross income percentage threshold, what amount may the Whites claim in their current year return as qualifying medical expenses?
a. $600
b. $0
c. $8,000
d. $8,600

Answer 13

d. $8,600
Repair and maintenance of medical devices for a disabled dependent child ($600) are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care ($8,000) is also a deductible medical expense.

Question 14

The self-employment tax is:

a. One-half deductible from gross income in arriving at adjusted gross income.
b. Fully deductible in determining net income from self-employment.
c. Fully deductible as an itemized deduction.
d. Not deductible.

Answer 14

a. One-half of the self-employment tax is deductible to arrive at adjusted gross income.

Question 15

For the current year, Val and Pat White filed a joint return. Val earned $35,000 in wages and was covered by his employer’s qualified pension plan. Pat was unemployed and received $5,000 in alimony payments for the first 4 months of the year before remarrying. The couple had no other income. Each contributed $5,000 to an IRA account. The allowable IRA deduction on their current year joint tax return is:

a. $2,000
b. $0
c. $10,000
d. $5,000

Answer 15

c. $10,000

Question 16

The deduction by an individual taxpayer for interest on investment indebtedness is:

a. Limited to the investment interest paid during the year.
b. Limited to the taxpayer's net investment income for the year.
c. Limited to the taxpayer's interest income for the year.
d. Not limited.

Answer 16

Choice “b” Limited to the taxpayer’s net investment income for the year. The deduction for interest expense on investment indebtedness is limited to net investment income (investment income less investment expenses).

Question 17

Which expense, both incurred and paid in the same year, can be claimed as an itemized deduction subject to the two percent-of-adjusted-gross-income floor?

a. Employee's unreimbursed moving expense.
b. Self-employed health insurance.
c. One-half of the self-employment tax.
d. Employee's unreimbursed business car expense.

Answer 17

Choice “d” is correct: Employee’s unreimbursed business car expense.. Employee business expenses, including unreimbursed car expense, are deductible as itemized deductions subject to the 2% floor.

Question 18

The Browns borrowed $20,000, secured by their home, to pay their son’s college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as:

a. Investment interest expense.
b. Nondeductible interest.
c. Deductible qualified residence interest.
d. Deductible personal interest.

Answer 18

Choice “c” is correct: Deductible qualified residence interest.. Interest paid on a debt secured by a home mortgage is classified as deductible qualified residence interest. The Browns would be able to deduct the interest paid as an itemized deduction. The limit is $100,000 of mortgage interest since the loan was not to buy, build, or improve the home.

Question 19

On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In Year 4 they borrowed $15,000 secured by their home, and used the cash to add a new room to their residence. That same year they took out a $5,000 auto loan.
The following information pertains to interest paid in Year 4:
Mortgage interest: $17,000
Interest on room construction loan: $1,500
Auto loan interest: $500
For Year 4, how much interest is deductible, prior to any itemized deduction limitations?
a. $19,000
b. $17,500
c. $17,000
d. $18,500

Answer 19

Choice “d” is correct: $18,500. Mortgages of up to $1,000,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible.

Question 20

Wells paid the following expenses during the year:
Premiums on an insurance policy against loss of earnings due to sickness or accident $ 3,000
Physical therapy after spinal surgery $2,000
Premium on an insurance policy that covers reimbursement for the cost of prescription drugs $500

In the current year, Wells recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Wells’ current year income tax return for medical expenses?

a. $500
b. $1,000
c. $3,500
d. $4,000

Answer 20

Choice “b” is correct: $1,000. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Prescription drugs are considered medical care. Insurance against loss of income is not payment for medical care and therefore is not deductible. Qualified medical expenses must be reduced by insurance reimbursement ($2,000 + $500 - $1,500 = $1,000).

Question 21

Which allowable deduction can be claimed in arriving at an individual’s adjusted gross income?

a. Charitable contribution.
b. Alimony payment.
c. Unreimbursed business expense of an outside salesperson.
d. Personal casualty loss.

Answer 21

Choice “b” is correct. Alimony payments are deductible to arrive at adjusted gross income (AGI). Charitable contributions, personal casualty losses, and unreimbursed business expenses of outside salespersons are all deductible from AGI as itemized deductions.

Question 22

Charitable contributions subject to the 50-percent limit that are not fully deductible in the year made may be:

a. Carried back two years or carried forward twenty years.
b. Carried forward indefinitely until fully deducted.
c. Carried forward five years.
d. Neither carried back nor carried forward.

Answer 22

Choice “c” is correct. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward five years.

Question 23

Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute and deduct 25% of his annual earned income. For this purpose, “earned income” is defined as net self-employment earnings reduced by the:

a. Deductible Keogh contribution and one-half of the self-employment tax.
b. Deductible Keogh contribution.
c. Self-employment tax.
d. Self-employment tax and one-half of the deductible Keogh contribution.

Answer 23

Choice “a” is correct. For Keogh plans, earned income is defined as net self-employment earnings reduced by the amount of the allowable Keogh deduction and ½ the self-employment tax.

Question 24

Which itemized deduction is included in the category of unreimbursed expenses that are deductible only to the extent that the aggregate amount of such expenses exceeds 2% of the taxpayer’s adjusted gross income?

a. Medical expense.
b. Charitable contributions.
c. Interest expense.
d. Tax return preparation fee.

Answer 24

Choice “d” is correct. Tax return preparation fee is a miscellaneous itemized deduction subject to the 2% adjusted gross income (AGI) floor.

Question 25

Spencer, who itemizes deductions, had adjusted gross income of $60,000 for the current year. The following additional information is available for the year:
Cash contribution to church $ 4,000
Purchase of art object at church bazaar (with a fair market value of $800 on the date of purchase) $1,200
Donation of used clothing to Salvation Army (fair value evidenced by receipt received) $600

What is the maximum amount Spencer can claim as a deduction for charitable contributions in the current year?

a. $4,400
b. $5,200
c. $5,400
d. $5,000

Answer 25

Choice “d” $5,000: is correct. The $4,000 cash contribution to the church is deductible. Relative to the purchase of the art object at the church bazaar, only the excess paid over fair market value ($1,200 - $800 = $400) is deductible. The used clothing donation to the Salvation Army is deductible at its fair market value of $600. The total deduction is $5,000 ($4,000 + $400 + $600). Note that the total contributions deduction is below the 50% of adjusted gross income ceiling (50% x $60,000 = $30,000), since $5,000 is less than $30,000.

Question 26

In Year 10, Farb, a cash basis individual taxpayer, received an $8,000 invoice for personal property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and immediately started legal action to recover the overstatement. In November, Year 11, the matter was resolved in Farb’s favor, and he received a $5,000 refund. Farb itemizes his deductions on his tax returns.
Which of the following statements is correct regarding the deductibility of the property taxes?
a. Farb should not deduct any amount in his Year 10 income tax return when originally filed, and should file an amended Year 10 income tax return in Year 11.
b. Farb should deduct $3,000 in his Year 10 income tax return.
c. Farb should deduct $8,000 in his Year 10 income tax return and should report the $5,000 refund as income in his Year 11 income tax return.
d. Farb should not deduct any amount in his Year 10 income tax return and should deduct $3,000 in his Year 11 income tax return.

Answer 26

Choice “c” is correct. Under the tax benefit rule, Farb should report the $5,000 refund as income in Year 11 since Farb itemizes deductions and would have received a tax benefit from deducting the $8,000 paid in Year 10.

Question 27

During the year, Barlow moved from Chicago to Miami to start a new job, incurring costs of $1,200 to move household goods and $2,500 in temporary living expenses. Barlow was not reimbursed for any of these expenses. What amount should Barlow deduct as itemized deduction for moving expense?

a. $0
b. $3,700
c. $2,700
d. $3,000

Answer 27

Choice “a” is correct $0. There is no itemized deduction for temporary living expenses, and the direct moving expenses (such as the costs to move the goods and the costs to move the taxpayer’s family from the old to the new location) are deductible before adjusted gross income, not as an itemized deduction.

Question 28

In the current year, Drake, a disabled taxpayer, made the following home improvements:
Cost
Pool installation, which qualified as a medical expense and increased the value of the home by $25,000…..$ 100,000
Widening doorways to accommodate Drake’s wheelchair (the improvement did not increase the value of his home)…..$10,000
For regular income tax purposes and without regard to the adjusted gross income percentage threshold limitation, what maximum amount would be allowable as a medical expense deduction in the current year?
a. $10,000
b. $85,000
c. $75,000
d. $110,000

Answer 28

b. $85,000

Question 29

Smith paid the following unreimbursed medical expenses:
Dentist and eye doctor fees $ 5,000
Contact lenses $500
Facial cosmetic surgery to improve Smith’s personal appearance (surgery is unrelated to personal injury or congenital deformity) $10,000
Premium on disability insurance policy to pay him if he is injured and unable to work $2,000

What is the total amount of Smith’s tax-deductible medical expenses before the adjusted gross income limitation?

a. $15,500
b. $7,500
c. $5,500
d. $17,500

Answer 29

Choice “c” is correct $5,500. The doctor fees ($5,000) and the contact lenses ($500) are deductible medical expenses. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses.

Question 30

The Rites are married, file a joint income tax return, and qualify to itemize their deductions in the current year. Their adjusted gross income for the year was $55,000, and during the year they paid the following taxes:
Real estate tax on personal residence $ 2,000
Ad valorem tax on personal automobile 500
Current-year state and city income taxes withheld from paycheck 1,000
What total amount of the expense should the Rites claim as an itemized deduction on their current-year joint income tax return?
a. $3,000
b. $2,500
c. $1,000
d. $3,500

Answer 30

Choice “d” $3,500: is correct. In answering this question, we must assume that the examiners mean to ask, “What total amount of the tax expense should the Rites claim as an itemized deduction?” Obviously, the Rites have more deductions than just those tax deductions above, or they would take advantage of the standard deduction. In any case, for cash-basis taxpayers, deductible taxes are generally deductible in the year paid, and real estate taxes, income taxes, and personal property taxes (e.g., ad valorem taxes on personal automobile) are allowable deductions.

Question 31

In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes?

a. As a nondeductible item of personal interest.
b. As a $1,000 deduction to arrive at AGI for the year.
c. As a $1,000 itemized deduction.
d. As a $500 deduction to arrive at AGI for the year.

Answer 31

b. As a $1,000 deduction to arrive at AGI for the year. Rule: The adjustment for education loan interest (an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment. The adjustment is phased-out for single taxpayers with modified AGI between $65,000 and $80,000 (2016) and married filing jointly between $130,000 and $160,000 (2016).

Question 32

Tana’s divorce decree requires Tana to make the following transfers to Tana’s former spouse during the current year:
Alimony payments of $3,000.
Child support of $2,000.
Property division of stock with a basis of $4,000 and a fair market value of $6,500.
What is the amount of Tana’s alimony deduction?
a. $11,500
b. $9,500
c. $7,000
d. $3,000

Answer 32

$3,000. RULE: Alimony payments to a former spouse are adjustments to arrive at AGI. Child support payments are NOT alimony and are NOT deductible. Property settlements are NOT alimony and are NOT deductible.

Question 33

A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a six-month extension to file until October 15 but did not file the return until November 1. What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year’s return?

a. October 15.
b. April 15.
c. August 15.
d. November 1.

Answer 33

April 15. Choice “b” is correct. For IRAs, the adjustment is allowed for a year ONLY if the contribution is made by the due date of the tax return for individuals (April 15). The due date for filing the tax return under a filing extension is NOT allowed (i.e., filing extensions are NOT considered).

Question 34

Wilson, CPA, uses a commercial tax software package to prepare clients’ individual income tax returns. Upon reviewing a client’s computer-generated year 1 itemized deductions, Wilson discovers that the schedule’s deductible investment interest expense is less than the amount paid by the taxpayer and the amount that Wilson entered into the computer. After analyzing the entire tax return, Wilson determines that the computer-generated investment interest expense deduction is correct. Why is the computer-generated investment interest expense deduction correct?
I. The client’s investment interest expense exceeds net investment income.
II. The client’s qualified residence interest expense reduces the deductible amount of investment interest expense.
a. Neither I nor II.
b. I only.
c. Both I and II.
d. II only.

Answer 34

The client’s investment interest expense exceeds net investment income. I only. Choice “b” is correct. The computer-generated investment interest expense deduction will be limited to the net investment income of the taxpayer. Any excess amount will be carried forward indefinitely. For example, assume the taxpayer had $5,000 of investment interest for a year but had investment income of only $3,000. The tax preparer would enter the $5,000 paid as investment interest, and the computer would then allow only a $3,000 deduction for investment interest in the year. The remaining $2,000 of expense would be carried forward indefinitely to be applied to investment income in future years. Qualified residence interest is NOT investment interest and would not affect investment interest income in any manner.

Question 35

Cassidy, an individual, reported the following items of income and expense during the current year:
Salary $ 50,000
Alimony paid to a former spouse 10,000
Inheritance from a grandparent 25,000
Proceeds of a lawsuit for physical injuries 50,000
What is the amount of Cassidy’s adjusted gross income?
a. $115,000
b. $40,000
c. $50,000
d. $125,000

Answer 35

$40,000. Choice “b” is correct. Gross income includes salary, but it excludes inheritance and proceeds from a lawsuit for physical injuries. Alimony paid is an adjustment from gross income to arrive at Adjusted Gross Income,

Question 36

Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for Year 13. During Year 13, Taylor donated land to a church and made no other contributions. Taylor purchased the land in Year 1 as an investment for $14,000. The land’s fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for Year 13?

a. $25,000
b. $11,000
c. $0
d. $14,000

Answer 36

$25,000. Choice “a” is correct. The charitable contribution deduction for contributions of property is normally the lesser of the property’s basis or the fair market value of the property, on the date of the donation, or the lesser of $14,000 or $25,000 in this question. However, contributions of appreciated property, as in this question, are deducted at fair market value, provided the taxpayer held the property for over one year. That deduction might be limited to 50% of AGI ($45,000) or 30% of AGI for long-term appreciated property ($27,000), but the $25,000 is the maximum deduction in this case. The “lesser of” rule really applies to depreciated property and keeps a taxpayer from taking a fair market value deduction for such property.

Question 37

Which of the following is a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor?

a. Gambling losses up to the amount of gambling winnings.
b. Real estate tax.
c. Medical expenses.
d. Employee business expenses.

Answer 37

Choice “d” is correct. Employee business expenses are a miscellaneous itemized deduction subject to the 2% of adjusted gross income (AGI) floor.
Choice “a” is incorrect. Gambling losses up to the amount of gambling winnings are not a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor. Those losses may offset gambling winnings up to the amount of the winnings (without a further reduction of the item). Any additional gambling losses are not deductible at all and do not carry forward).
Choice “c” is incorrect. Medical expenses are an itemized deduction not subject to the 2% of adjusted gross income floor (they are subject to a 10% floor).
Choice “b” is incorrect. Real estate taxes are an itemized deduction not subject to the 2% of adjusted gross income floor.

Question 38

A self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer’s adjusted gross income?

a. $55,000
b. $50,000
c. $40,000
d. $46,000

Answer 38

$40,000. Choice “c” is correct. Adjusted gross income is gross income plus or minus certain other amounts. Half of the $8,000 self-employment tax is an adjustment for AGI, as is the $6,000 self-employed health insurance, the $5,000 alimony, and the $2,000 contribution to a traditional IRA. All of these amounts (total of $17,000) are subtracted from the $57,000 gross income to arrive at AGI. The AGI is thus $40,000.

Question 39

Jeffrey, a single taxpayer, had $55,000 in adjusted gross income for the current year. During the current year he contributed $19,500 to his church. He had a $5,000 charitable contribution carryover from his prior year church contribution. What was the maximum amount of properly substantiated charitable contributions that Jeffrey could report as an itemized deduction for the current year?

a. 19,500
b. 5,000
c. 24,500
d. 27,500

Answer 39

$24,500. Choice “c” is correct. The contribution limit for a church is 50% of the contribution base (adjusted gross income in this case). Jeffrey’s contribution limit for the current year would be $55,000 × 50% = $27,500. Against that limit, he would be able to take his contribution carryover from the prior year ($5,000) and the current year’s contributions ($19,500) for a total of $24,500.

Question 40

During the year, the Andradis’, who were both under age 65, paid the following expenses:
Unreimbursed costs for prescription drugs required for their dependent daughter’s medical condition $ 2,300
Mrs. Andradis’ face lift $4,000
Physical therapy for their dependent son’s soccer injury $3,000
Massage therapy fees at Mr. Andradis’ health club obtained because he enjoys massages $500

The Andradis’ adjusted gross income for the current year was $65,000. What amount could be claimed on the Andradis’ current year tax return for medical expenses?

a. $5,300
b. $2,300
c. $0
d. $4,875

Answer 40

$0. Choice “c” is correct. Deductible medical expenses are limited to the amount that exceeds 10% of the taxpayer’s adjusted gross income. Deductible medical expenses are those expenses that are “necessary” (such as doctors, prescriptions, required surgery, etc.) Non-deductible expenses are such things as elective surgeries, health club memberships and unnecessary medical expenditures. The Andradis’ AGI is $65,000; 10% of that is $6,500. Qualified medical expenses are $2,300 for their daughter’s prescriptions and $3,000 for physical therapy for their son. Total allowable gross expenditures of $5,300 are less than the threshold of $6,500. So the answer is zero.

Question 41

For the current year, the Stevenson’s are filing married filing joint, and their adjusted gross income was $58,250. Additional information is as follows:
Interest paid on their home mortgage $ 5,200
State taxes paid $2,000
Medical expenses in excess of 10% AGI $1,500
Deductible contributions to IRAs $4,000
Alimony paid to Mr. Stevenson’s first wife $5,000
Child support paid for Mr. Stevenson’s daughter $5,100

What amount may the Stevenson’s claim as itemized deductions on their current year Schedule A?

a. $8,700
b. $13,800
c. $12,300
d. $7,200

Answer 41

$8,700. Choice “a” is correct. Interest on a home mortgage, state taxes paid, and medical expenses in excess of 10% AGI are itemized deductions reported on Schedule A. Contributions to IRAs and alimony paid are adjustments to gross income to arrive at AGI. Child support is neither an adjustment nor an itemized deduction.
Home mortgage interest $ 5,200
State taxes paid 2,000
Medical expenses 1,500
Total itemized deductions $ 8,700

Question 42

Which of the following is not an adjustment to arrive at adjusted gross income?

a. Self-employed FICA (50%).
b. Self-employed health insurance.
c. Alimony paid.
d. Qualified mortgage interest paid.

Answer 42

Qualified mortgage interest paid. Choice “d” is correct. Qualified mortgage interest paid is deductible on Schedule A as an itemized deduction.
Choices “b”, “c”, and “a” are incorrect. Each of these items is an adjustment to gross income to arrive at adjusted gross income.

Question 43

Which of the following items are not allowable as adjustments for moving expenses without regard to employer provided benefits or other limitations?

a. Cost of hotel during drive to new home.
b. Cost of moving household goods.
c. Expense of breaking lease.
d. Transportation.

Answer 43

Expense of breaking lease.

Question 44

During the current year, Tarbet’s residence was destroyed by a hurricane. Tarbet’s basis in the property was $150,000. The fair market value determined by an appraiser shortly before the hurricane was $450,000. In November of the current year, Tarbet received $300,000 from the insurance company. Tarbet’s adjusted gross income was $75,000 and she did not have any casualty gains during the year. What total amount can Tarbet deduct as a current year casualty loss itemized deduction, after the application of the threshold limitations?

a. $0
b. $142,400
c. $450,000
d. $75,000

Answer 44

$0. Choice "a" is correct. The calculation for the deduction is as follows:
Smaller loss (lesser of cost or decrease in FMV)
$ 150,000
Less: Insurance Recovery
(300,000)
Taxpayer's Loss
(150,000)
negative, thus it is treated as zero
Less: Floor Amount of $100
(100)
Eligible Loss
0
Less: 10% of AGI
$ (7,500)
Deductible Loss
0

Question 45

In the current year, Mike and Jane Smith filed a joint return. Mike earned $40,000 in wages and was covered by his employer’s qualified pension plan. Jane was employed part-time and received $7,000 in wages. The couple had no other income. Each contributed $5,000 to an IRA account. The allowable IRA deduction on their current year joint tax return is:

a. $10,000
b. $2,500
c. $0
d. $5,000

Answer 45

$10,000. Choice “a” is correct. In 2016, taxpayers can contribute and deduct up to $5,500 to an IRA. For couples filing a joint return, where at least one spouse is an active participant in a retirement plan, the deductible portion is phased out. For a spouse who is an active participant, the phase-out range in 2016 begins at $98,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range in 2016 begins at $184,000. The Smith’s income is below both phase-out ranges, so they can each deduct the full $5,000 contributed, or $10,000 in total.

Question 46

Pat’s divorce decree requires Pat to make the following transfers to Pat’s former spouse during the current year:
Alimony payments of $9,000 to be reduced to $7,000 when their child attains the age of 18.
Property division of stock with a basis of $2,000 and a fair market value of $3,500.
What is the amount of Pat’s alimony deduction?
a. $10,500
b. $1,500
c. $9,000
d. $7,000

Answer 46

$7,000. Choice “d” is correct. Any amount of “alimony” that is dependent on a child reaching the age of 18, will be considered child support (which is not deductible) for tax purposes. Accordingly, only the $7,000 is deductible as alimony.

Question 47

Bob and Nancy Goldberg are both age 67 and file a joint return. For the current year, the regular standard deduction for a couple married filing jointly is $12,600. What is the maximum standard deduction available to Bob and Nancy?

a. $13,800
b. $12,600
c. $15,100
d. $13,850

Answer 47

$15,100. Choice “c” is correct. Because both Bob and Nancy are 65 or older, they are entitled to the additional standard deduction of $1,250 each in addition to the regular amount.
$12,600 + $1,250 + $1,250 = $15,100

Question 48

On January 2, Year 1, the Kanes paid $60,000 cash and obtained a $300,000 mortgage to purchase a home. In Year 4, they borrowed $20,000 secured by their home on a home equity line of credit and used the cash to pay bills and take a vacation. That same year they took out a $7,000 auto loan.
The following information pertains to interest paid in Year 4:
Mortgage interest on first loan $19,000
Interest on home equity line of credit $2,500
Auto loan interest $500
For Year 4, how much interest is deductible?
a. $19,500
b. $19,000
c. $22,000
d. $21,500

Answer 48

$21,500. Choice “d” is correct. Interest on mortgages of up to $1,000,000 to buy, build, or substantially improve a home (the first loan) are fully deductible. Interest on home equity loans of up to $100,000 in principal are fully deductible. Note, provided the loan is secured by the home, it does not matter what the proceeds are used for. Interest on auto loans is not deductible. Note that if the money borrowed for the auto had been borrowed from a home equity line of credit and the total principal of that revolving credit line had been less than $100,000, the related interest for the auto purchase could have qualified for a deduction; however, in this case, the auto loan was a separate loan. The total deduction is $21,500 ($19,000 + $2,500)

Question 49

in Year 1, Kane’s residence had an adjusted basis of $250,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $425,000. Later that same year, Kane received $200,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Kane’s Year 1 adjusted gross income was $100,000 and he did not have any casualty gains.
What total amount can Kane deduct as a Year 1 itemized deduction for casualty loss, after the application of the threshold limitations?
a. $40,000
b. $49,900
c. $50,000
d. $39,900

Answer 49

Choice "d" is correct. The starting point is the lesser of adjusted basis or decrease in FMV. Here, that is the $250,000 adjusted basis. The computation is then as follows:
 Smaller Loss	$ 250,000
 Insurance Recovery	(200,000)
 Taxpayer's Loss	50,000
 Less $100	(100)
 Eligible Loss	49,900
 10% AGI Limitation	(10,000)
 Deductible Loss	$ 39,900

Question 50

Which of the following transportation expenses incurred by an employee is not deductible?

a. An employee drives from his or her office to the office of a client.
b. An employee drives from home to his or her office.
c. An employee flies from San Francisco to Miami on business.
d. An employee drives from a first job to second.

Answer 50

Choice “b” is correct: An employee drives from home to his or her office.. This is an example of a commuting expense and is not deductible.

Question 51

Which itemized deduction is included in the category of unreimbursed expenses that are deductible only to the extent that the aggregate amount of such expenses exceeds 2% of the taxpayer’s adjusted gross income?

a. Medical expenses.
b. Subscriptions to professional journals.
c. Moving expenses.
d. Gambling losses to the extent of winnings.

Answer 51

Subscriptions to professional journals.

Question 52

Robbe, a cash basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $5,500, consisting solely of $5,500 of state income taxes paid last year. Robbe’s itemized deduction amount, which exceeded the standard deduction available to single taxpayers for last year by $1,150, was fully deductible and it was not subject to any limitations or phase-outs. In the current year, Robbe received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund?

a. Include $1,500 in income in the current year.
b. Include $1,150 in income in the current year.
c. Include none of the refund in income in the current year.
d. Amend the prior-year's return and reduce the claimed itemized deductions for that year.

Answer 52

Include $1,150 in income in the current year. Rule: IRC Section 111 provides that gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax previously imposed (the tax benefit rule).
Choice “b” is correct. Under the tax benefit rule, an itemized deduction recovered in a subsequent year is included in income in the year recovered. In this question, only $1,150 of the state income taxes was actually deducted as an itemized deduction last year. The recovery is thus limited in the amount actually deducted (and not to the entire amount of the state tax refund).

Question 53

An individual starts paying student loan interest in the current year. How many years may the individual deduct a portion of the student loan interest?

a. Duration of time that interest is paid.
b. Five years.
c. Ten years.
d. Current year only.

Answer 53

Duration of time that interest is paid. Rule: IRC Section 221 allows the deduction of student loan interest (above-the-line for AGI) paid on qualified education loans up to a maximum of $2,500 for the tax year. There is a phase-out for the deduction in 2016, and there are other minor restrictions, such as a married couple must file joint returns to take the deduction.

Question 54

Carter incurred the following expenses in the current year: $500 for the preparation of a personal income tax return, $100 for custodial fees on an IRA, $150 for professional publications, and $2,000 for union dues. Carter’s current year adjusted gross income is $75,000. Carter, who is not self-employed, itemizes deductions. What will Carter’s deduction be for miscellaneous itemized deductions after any limitations in the current year?

a. $1,250
b. $750
c. $2,750
d. $0

Answer 54

$1,250

Question 55

Which one of the following expenditures qualifies as a deductible medical expense for tax purposes?

a. Health club dues.
b. Transportation to physician's office for required medical care.
c. Vitamins for general health not prescribed by a physician.
d. Mandatory employment taxes for basic coverage under Medicare A.

Answer 55

Transportation to physician’s office for required medical care.

Question 56

For regular tax purposes, with regard to the itemized deduction for qualified residence interest, home equity indebtedness incurred during a year:

a. May exceed the fair market value of the residence.
b. Is limited to $100,000 on a joint income tax return.
c. Includes acquisition indebtedness secured by a qualified residence.
d. Must exceed the taxpayer's net equity in the residence.

Answer 56

Is limited to $100,000 on a joint income tax return.

Question 57

An individual’s losses on transactions entered into for personal purposes are deductible only if:

a. The losses can be characterized as hobby losses.
b. The losses qualify as casualty or theft losses.
c. No part of the transactions was entered into for profit.
d. The losses do not exceed $3,000 ($6,000 on a joint return).

Answer 57

The losses qualify as casualty or theft losses.

Question 58

Which of the following statements is correct regarding the deductibility of an individual’s medical expenses?

a. A medical expense deduction is not allowed for Medicare insurance premiums.
b. Medical expenses, net of insurance reimbursements, are disregarded in the alternative minimum tax calculation.
c. A medical expense paid by credit card is deductible in the year the credit card bill is paid.
d. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.

Answer 58

A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.

Question 59

Which of the following statements is correct regarding the deductibility of donations made to qualifying charities by a cash-basis individual taxpayer?

a. A contemporaneous written acknowledgement is required for donations of $100.
b. A charitable contribution deduction is not allowed for the value of services rendered to a charity.
c. A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $10,000.
d. The charitable contribution deduction for long-term appreciated stock is limited to 50% of adjusted gross income.

Answer 59

A charitable contribution deduction is not allowed for the value of services rendered to a charity.

Question 60

Which of the following is not a deduction to arrive at adjusted gross income?

a. Alimony payments.
b. Capital losses in excess of capital gains.
c. Trade or business expenses.
d. Unreimbursed employee business expenses.

Answer 60

Unreimbursed employee business expenses.