Sim 2 Chapter 1 Flashcards
In Year 6, Oate paid $900 toward continuing education courses and was not reimbursed by her employer
Deductible in Schedule A – Itemized Deductions as miscellaneous deduction subject to a threshold of 2% of adjusted gross income.
For Year 6, Oate had a $30,000 cash charitable contribution carryover from her Year 5 cash donation to the American Red Cross. Oate made no additional charitable contributions in Year 6.
Deductible in Schedule A – Itemized Deductions subject to a limitation of 50% of adjusted gross income.
Charitable contributions may be carried over from a previous year and deducted as an itemized deduction in the current year. The total deduction for charitable contributions, including amounts carried over, is limited to 50% of adjusted gross income.
During Year 6, Oate had investment interest expense that did not exceed her net investment income.
Deductible in full on Schedule A – Itemized Deductions.
Investment interest expense is fully deductible to the extent that it does not exceed net investment income.
Investment interest in excess of net investment income may be carried forward to offset net investment income in future years. Note: Investment interest expense can be easily mistaken as an investment expense, which is a miscellaneous itemized deduction subject to the 2% of AGI limitation; these items are not reported on the same line in Schedule A.
Oate’s Year 6 lottery ticket losses were $450. She had no gambling winnings.
Not deductible on Form 1040.
Gambling losses are deductible only to the extent of gambling winnings. Losses in excess of winnings are not deductible and may not be carried forward.
During Year 6, Oate paid $2,500 in real property taxes on her vacation home, which she used exclusively for personal use.
Deductible in full on Schedule A – Itemized Deductions.
Real property taxes imposed on a taxpayer’s real property are fully deductible as an itemized deduction on Schedule A as long as the property is maintained for personal use. If the property were used for rental purposes, the property taxes would be a deduction in calculating net rental income on Schedule E. If the property is used both personally and as a rental, the taxes must be allocated accordingly.
In Year 6, Oate paid a $500 premium for a homeowner’s insurance policy on her principal residence.
Not deductible on Form 1040.
Regulation §1.262-1(b)(2) specifies that homeowner’s insurance on a principal residence is an example of a personal expense that is not deductible.
For Year 6, Oate paid $1,500 to an unrelated baby-sitter to care for her child while she worked.
A credit is allowable.
In Year 6, Oate paid $4,000 interest on the $60,000 acquisition mortgage of her principal residence. The mortgage is secured by Oate’s home.
Deductible in full on Schedule A – Itemized Deductions.
Mortgage interest paid on up to $1 million in acquisition indebtedness for a principal residence is deductible as an itemized deduction on Schedule A so long as the loan is secured by the residence.
During Year 6, Oate paid $3,600 real property taxes on residential rental property in which she actively participates. There was no personal use of the rental property.
Deductible on Schedule E – Supplemental Income and Loss.
Real property taxes paid on residential rental property are deducted from rental income in determining the net income or loss from the rental property on Schedule E – Supplemental Income and Loss. If the property had been used personally as well, the taxes imposed must be allocated between Schedule E and Schedule A – Itemized Deductions.
True/False
The funeral expenses paid by Mr. Vick’s estate is a Year 2 itemized deduction.
False.
Funeral expenses are considered a personal expense under IRC §262 and are thus not deductible on individual income tax returns. Note: Funeral expenses can be deducted on an estate tax return in determining the taxable estate if such expenses were paid out of the estate.
True/False
Any federal estate tax on the income in respect of decedent, to be distributed to Mrs. Vick, may be taken as a miscellaneous itemized deduction not subject to the 2% of adjusted gross income floor.
True.
If income earned by a decedent is reported on the income tax return of the recipient, an itemized deduction may be taken for federal estate taxes paid on that income without limitation.
True/False
A casualty loss deduction on property used in Mrs. Vick’s part-time real estate business is reported as an itemized deduction.
False.
Business casualty losses are claimed as business expenses on Schedule C.
True/False
The Vicks’ income tax liability will be reduced by the credit for the elderly or disabled.
False.
The credit for the elderly or disabled was intended for low-income taxpayers; there aren’t any circumstances in which a married couple with AGI exceeding $25,000 will qualify for the credit, even if both spouses are elderly and/or disabled.
True/False
The CPA preparer is required to furnish a completed copy of the Year 2 income tax return to Mrs. Vick.
True.
A paid preparer is required to furnish a copy of the completed return to the taxpayer.
True/False
Since Mr. Vick died during the year, the income limitation for the earned income credit does not apply.
False.
The limitations placed on the earned income credit are not waived by the death of the taxpayer.
