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Flashcards in chapter 2 - Adjustments and Deductions Deck (125):
1

What are the limits on IRA Deductions?

For IRAs, the maximum deduction is limited to the lesser of $5,500 or the individual's compensation. For married taxpayers filing jointly (with a nonworking spouse) the limit is $11,000 provided the combines earnings of both spouses totals at least that much (working spouse earns over $11,000. Compensation includes: salary, wages, commissions, bonuses and alimony.

When a spouse is an active participant in an employer retirement plan, the allowable deduction to arrive at AGI is phased out for modified AGI between $61,000 (base) and $71,000 and for married taxpayers filing jointly it is phased out by $98,000 and $118,000. Once AGI exceeds $71,000 (single/HOH) and $118,000 (MFJ) it is disqualified.

Phase out is 20% [taxpayer's AGI minus the base ($61,000/98,000) (which equals the excess) divided by the phase out range ($10,000)] of the maximum IRA deduction.

20% of max IRA Deduction ($5,500) = amount of IRA phased out.

Max Ira deduction minus amount phased out = amount of allowable IRA deduction.

2

Which is a deduction for AGI: Child Support or Alimony?

Alimony paid.
(child support non deductible and non taxable)

3

what are the limits on non deductible IRAs?

The limits on nondeductible IRAs include the lesser of:
1 - $5,500
2 - taxpayer's compensation
3 - limit not contributed to other regular and Roth IRAs

Earnings on such contributions will accumulate tax free (deferred) until withdrawn.

Previously accumulated untaxed earnings will be taxable.

4

What are the limits on a Roth IRA?

contributions to a Roth IRA are nondeductible when made and earnings accumulate tax free, qualified distributions are also tax free. The limits are the same for regular IRA's: $5,500 for single taxpayer and $11,000 for married taxpayers.

The amount that can be contributed to a roth IRA is the amount remaining after subtracting any contribution made to the regular IRA.

phase out income limits (modified AGI):
1 - single taxpayers with modified AGI between $116,000 to $131,000.
2 - MFJ with modified AGI from $183,000 to $193,000.
3 - MFS with modified AGI from $0 to $10,000.

Transfers (ROLLOVERS) can be made from regular IRAs to Roth IRAs, there are no AGI limitations on these transfers.

5

What is the time limit on Coverdell Education Savings Accounts (Education IRAs) ?

These are trust/custodial accounts set up to pay for qualified education expenses of a designated beneficiary (who must be under 18).

These contributions are non deductible and the max contribution per beneficiary is $2,000 per year.

Distributions (withdrawals) of principle and interest are tax free.

Qualified education expenses include: tuition, fees, books, room and board, supplies and equipment.

Time limit:
Any amounts remaining after the beneficiary reaches 30 must be distributed.

"Leftover funds":

- must be distributed to a beneficiary, are taxable and a 10% penalty must be assessed
or
- rollover to another family member is permitted with no tax or 10% penalty.

Contribution amount is Phased out for taxpayers with the following modified AGIs between these amounts:
Single - $95,000 - $110,000
Married - $190,000 - $220,000

6

What are the limits for deductions to KEOGH (self-employed retirement) plans?

Keogh plans are for self employed taxpayers whoa re subject to self employment tax and their employees.

Max deductible amount is lesser of:
1) 25% of net earnings from self employment (after Keogh deduction) and 1/2 of self employment tax OR
2) $53,000.

The maximum annual addition (contribution) may exceed the deductible amount for the year.
Max annual addition is limited to the lesser of:
1) $53,000 OR
2) 100% net earnings if compensation is less than $53,000.


Net earnings:
Business income

= net business income


= Keogh net earnings

25% of self employment after the Keogh deduction = 20% of self employment before the keogh deduction.

gross self employment income (after half self employment tax but before Keogh deduction) X 20% = max allowable deduction.

7

What is the Limit for Student loan interest expense?

The adjustment for education loan interest is limited to $2,500.

Is is phased out for AGI between:
Single - $65,000 and $85,000
MFG - $130,000 - $160,000

The taxpayer cannot be a dependent and must be legally obligated to pay the loan (not a parent for child).

Interest is only deductible on loans incurred by a taxpayer solely to pay for qualified education expenses.

8

What is the limit for tuition and fees deduction?

The qualified education expenses (above line deduction) apply regardless of whether the education is work related. If the expenses are above the max deductible expense they are only allowed as itemized education expenses (below line deduction - subject to 2% of AGI limitation)

Max adjustment:
$4,000 -
When AGI equal to or less than $65,000 for single taxpayers and $130,000 for MFJ.

$2,000 -
For taxpayers with AGI between $65,000 and $80,000 for single and $130,000 and $160,000 for MFJ.

After AGI exceeds $80,000 for single and $ 160,000 for MFJ there is no adjustment.

Cannot take deduction if expenses were applied to the american opportunity credit, lifelong learning credit or nontaxable education savings account.

9

What is the limit on Health Savings Accounts?

Health Savings Accounts (HSAs) enable workers with high deductible health insurance (plan that has at least $1,300 annual deductible for self only coverage and $2,600 deductible for family coverage) to make pretax contributions of up to $3,350 ($6,650 for families) to cover health costs. These amounts increase by $1,000 for those who reach age 55 within the tax year.
No contributions allowed once taxpayer is covered by medicare A or B.

Annual out of pocket expenses (deductibles, co-payements) paid under the plan must be limited to $6,450 for individuals and $12,900 for families.

10

What are the limits on the Archer Medical Savings Account Contributions?

Medical Savings Accounts (MSAs) are used when HSAa are unavailable for self employed individuals or employees of firms with 50 employees or less.

Must be a high deductible plan defined as - $3,300 for single and $6,650 for families
Max out of pocket limit - $4,450 for single and $8,150 for families

11

What are the limits for Moving Expenses?

Moving expenses may be deducted in connection with a new workplace which is 50 miles farther from the old house than the old workplace and the employee works full time in the new location for at least 39 weeks during the 12 month (78 weeks for 24 month period for self employed individuals) period immediately following his arrival.

The following moving costs are allowable deductions:
1) travel and lodging for the taxpayer and his family
- transportation expenses are deductible at actual out of pocket amounts or 23 center per mile
- tolls and parking fees can be added to mileage rate

2) transporting household goods and personal effects to the new location

Employer reimbursements are excludable from income to the extent the amounts qualify as deductions.

Non deductible moving expenses:
- meals
- pre - move house hunting
- expense of breaking a lease
- temporary living expenses


12

What is the Limit of tax on self employment?

50% of the self employment tax (medicare/social security) is deducted as an above the line deduction.

13

What is the limit on self employed health insurance?

No limit - Self employed individuals can deduct 100% of all medical insurance premiums paid for by the taxpayer, spouse and dependents provided that the plan is set up in the name of the self employed individual/business.

14

Penalty on early withdraw of savings (interest withdraw penalty)

Above the line deduction for interest forfeited (interest penalty on early withdraw of savings before maturity).

15

Alimony payements

Alimony payments are above the line adjustments deductible to arrive at AGI.
They are income to person receiving and deductible adjustment for payor.
In order for alimony to be deductible the payments must:
1. be legally required under written divorce agreement
2. be in cash or its equivalent
3. cannot extend beyond death of receiving spouse
4. cannot be made to members of the same household
5. must not be designed as anything other than alimony
6. The spouses cannot file a joint tax return

Child Support and property settlements are both non taxable to receiving spouse and not deductible for contributing spouse.

Payment first applies to child support then goes to alimony.

16

What is the limit on Attorney fees paid in discrimination cases?

Above the line adjustment allowed for attorney fees paid in connection with age, sex or racial discrimination and whistle blower cases.
Adjustment amount is limited to amount claimed as income from the judgement.

17

What is the limit Domestic Production activities ?

There is an above the line deduction for domestic production activities for businesses of architectural and engineering, construction, film production, and the sale, rental or lease of a company;s manufactures equipment.

Deduction is Limited to 9% of the lesser of:
1 - the taxpayers income without considering the deduction
2 - qualified production activities income

18

Deductions from AGI (to arrive at taxable income)

These are below the line deductions and are the greater of:
1) the standard deduction or
2) itemized deductions

19

Standard deduction

Those who do not itemize (because itemized are less than standard) receive a standard deduction, with the amount determined based on filing status:

Single/MFS - $6,300
HOH - $9,250
MFJ - $12,600

20

What is the additional standard deduction for the elderly and blind?

If blind or 65 and older add the following amounts to the regular standard deduction:
single/HOH - add $1,550
MFJ/MFS/qualifying widower - add $1,250

If both are over 65 and blind, amounts are single $3,100 and MFJ $2,500

2 qualified (married) :
- each 65 or blind = $2,500
- both 65 and blind = $5,000
being elderly/blind do not entitle the taxpayer to any additional exemptions (only standard deductions)

21

What taxpayers are not eligible to claim the standard deduction?

- one spouse itemizes deductions on a separate return
- taxpayer is a dual status or nonresident alien
- taxpayer has a short tax year

22

What is the limit on standard deduction if a taxpayer can be claimed as a dependent on anothers return?

limited to the greater of:
1. $1,050 or
2. earned income of dependent + $350 (up to the basic standard deduction amount)

23

Itemized deductions

Below the line (itemized deductions):
1) medical/dental expenses
2) taxes paid
3) interest paid
4) charitable contributions
5) casualty and theft losses
6) miscellaneous deductions subject to the 2% floor (such as job expenses, investment expenses, tax preparation)
7) other miscellaneous deduction not subject to the 2% floor (such as gambling losses to the extent of winnings)

24

What are the limitations on Itemized deductions?

The phase out of itemized deductions starts when AGI exceeds:
- MFJ - $309,900
- HOH - $284,050
- Single - $258,250
- MFS - $154,950

Itemized deductions are reduced by 3% of the amount by which the taxpayers AGI exceeds the phase out amounts.

The itemized deductions cannot be reduced below 80% of the amount allowed before the phase out.

25

What are the limitations on medical expenses?

Medical Payments on behalf of the following individuals qualify for the deduction:
- taxpayer
- spouse
- dependent who received half of support form taxpayer

(no limitation on dependents gross income for medical and dental expense deductions but support, relationship and residency/citizenship tests still apply)

limited to:
-Qualified Medical expenses are deductible to the extent they exceed medical insurance reimbursement and 10% of AGI (7.5% for 65 and older)
- cost of surgery for elective cosmetic reasons is not deductible
- self employed individuals may deduct 100% of medical insurance premiums from gross income

Timing of deduction:
- most individuals are cash basis taxpayers therefore in order to be tax deductible the item must have been:
- incurred as an expense
- paid or charged before year end



26

How much of medical expenses can be deducted?


Qualified medical expenses include:

1) qualified medical expenses paid

2) deductible medical expenses

27

What are deductible medical expenses?

1. medicine/prescription drugs
2. doctors
3. medical and accident insurance (including qualified long term care premiums - deduction limited based on age)
4. required surgery/ physical therapy
5. transportation to medical facility (actual cost and 23 cents per mile)
6. physically disabled costs (costs to make a home eligible for disables persons to live)
7. cosmetic surgery due to an accident or deformity

28

What are Non deductible medical costs?

1. elective cosmetic surgery
2. part of social security tax paid for medicare
3. vitamins
4. funerals/cemetery lots
5. insurance against loss of earnings due to sickness or accident
6. life insurance
7. capital expenditures except those listed above ( up to the increase in FMV of the property due to expenditure)
8. health club memberships recommended by doctors for general health
9. personal hygiene/ other ordinary personal expenses


29

What are (itemized deductions) deductible taxes?

Taxes that can be deducted as itemized deductions include:
1. Choice of local sales tax OR state/local income tax
2. real estate taxes
3. personal property taxes
4. foreign taxes (take as deduction or credit)

30

Timing of deductions

Cash basis - deduct taxes in year paid (there is no matching to the year the tax is applicable)
Accrual method - deduct taxes in year in which they accrue

31

What are Non deductible Taxes?

Taxes that are not deductible as itemized deductions include:
1. Federal taxes such as social security
2. Inheritance taxes for states
3. Business (sched C) and rental property taxes (Sched E)

32

What are deductible interest expenses?

1. Home mortgage interest:

--> Deductions allowed for qualified residence interest on a taxpayers first/primary home and second home that is used at least 14 days out of the year for personal purposes
--> limited to:

A) Acquisition indebtedness (debt that is incurred in buying, constructing, or substantially improving the principal or second home and it is secured by home)
limit: $1,000,000 ($500,000 for MFS)
- points related to acquisition indebtedness are deductible immediately
- refinancing points are amortized over the period of the loan

B) Home Equity Indebtedness (Debt secured by the taxpayers principal or second residence , but is not used to acquire, build or improve the homes.
Max amount is the lesser of:
- $100,000 ($50,000 for MFS) OR
- FMV of property reduced by the amount of outstanding acquisition indebtedness

C) Mortgage insurance premiums paid in connection with qualified acquisition debt are deductible as home mortgage interest.

2. Investment interest expense:

-Interest on loans for investment purposes , limited to net investment income, can be carried forward indefinitely and deducted.


3. Prepaid Interest:

- Prepaid interest must be allocated over the period of the loan (accrual).
The amount deductible is the amount of interest allocated to this period for the taxpayer making the payments (even for cash basis taxpayers)


(person receiving the interest, includes the interest as taxable income in the year received and does not allocate it over the period of the loan)

33

What are non deductible interest expenses?

1. Proceeds of home equity loans that are used to buy securities or certificates to produce tax free income
2. Any excess amount of home equity indebtedness
3. personal interest
4. educational loan interest ( adjustment/above the line deduction not itemized/below the lines adjustment)

34

What is included as investment (taxable income)?

1. interest and dividends (portfolio income)
2. dividends (portfolio/investment income)
3. Rents
4. Royalties (in excess of expenses)
5. net long term and short term capital gains (only if the taxpayer elects no to claim the reduced capital gains tax rate)

Any dividend income (from stock purchased with borrowed funds) which the taxpayer treats as investment income for purposes of the limitation on investment expense is not a qualified dividend available for the reduced 15% tax rate.

35

What is excluded from investments (Taxable) Income?

1. interest expense used to purchase tax free bonds is not deductible (because the interest earned on this bond is not taxable)

36

What is included as investment expense?

Investment expenses (advice fees/safe deposit box rentals) other than interest are deductible on sched A as miscellaneous itemized deductions (subject to the 2% of AGI limit).
Only those expenses deducted on sched A ( those exceeding 2% of AGI) are used when calculating the amount of net investment income (which is the limit for the investment interest deduction).

37

What is excluded as investment expense?

Any interest expense taken into account when determining income/loss from:
1. A passive activity
2. rental real estate in which the taxpayer does not actively participate

38

What are the limitations on charitable contributions?

charity = items given to an organization which are tax deductible

gifts = items given to needy individuals/families are NON- DEDUCTIBLE.

political contributions = items given to candidates are NON DEDUCTIBLE.

Gift must be in the form of cash or FMV property

Deduction for contributed property is the lesser of:
1. the property's basis OR
2. property's FMV at time of contribution

Maximum allowable deduction:
overall limit = 50% of AGI
Cash limit = 50% of AGI
FMV property limit = 30% of AGI for gifts of long term capital gain property to public charities

Appreciated property (property having a value greater than its basis) is deductible at FMV if it was held over one year. If it was not held over a year then it is considered short term capital gain and is deductible up to the properties basis.

Taxpayer may deduct the full value of long term capital gain property (without paying capital gains tax on the appreciation) if if the total value of the property deducted does not exceed 30% of the taxpayer's AGI for gifts to a public charity.

No more than 20% may be deducted for gifts to a non operating private foundation.

Total deduction of all gifts ( long term capital gain property, cash and other property) cannot exceed 50% of AGI.

39

charitable contribution limits

limit on amounts to be deducted:
overall limit = 50% AGI
1. cash - may be all 50%
2. general property - lesser of FMV or basis
3. long term appreciated property - limited to the lesser of:
a) 30% of AGI
b) remaining amount to reach 50% after cash contributions

40

What is the carryover period for excess charitable contributions?

Can be carried forward for 5 years on a first in, first out basis, after current year contributions are deducted, subject to income limitations

41

Charitable contribution deduction requirements

-Taxpayer must itemize deductions to deduct charitable contributions (cant take standard deduction and deduct)

- may only deduct excess contribution over consideration received.

- deduction is only allowed for the tax year in which the contribution is actually made:
1. cash/check - actually paid
2. credit card - when charged

- can deduct out of pocket services incurred as a result of giving services to a charity (cost of driving to and from volunteer work, 14 cents per mile) but cannot deduct the time or value of services donated.

- charitable deduction can be taken for expenses incurred when a taxpayer takes into the home a full time student (foreign exchange student) below 12th grade limit is $50 per month.

42

What is the limit on non business casualty and theft losses?

deduction only if casualty/theft is sudden, insurance claim must be filed and losses are not covered by insurance (no deduction for lost or broken property).

-Deductible to the extent that each individual loss exceeds $100 for each separate casualty event and the aggregate of these excess losses (excess over $100) exceeds 10% of AGI.

amount regarded as loss = market value before casualty/loss - market value after casualty/loss not to exceed the adjusted basis

If partial loss: Deduction based on decrease in FMV not to exceed adjusted basis

If total loss: Deduction is adjusted basis

Aggregate losses are reduced by:
-insurance recovery
- $100 per casualty/theft event
- 10% of AGI

smaller loss


taxpayer's loss


eligible loss


= deductible loss
--> 1. lost cost/adjusted basis or 2. decreased FMV

43

What are the miscellaneous itemized deductions subject to the 2% of AGI floor?

A deduction is allowed only to the extent that these miscellaneous deductions combined exceed 2% of AGI and were not taken as part of an allowable adjustment.

1. Unreimbursed business expenses (employee goes away from home on business who stays overnight can deduct meals, lodging, traveling, transportation incurred in furtherance of employee's business except for commuting costs(57.5 cents per mile), 50% of meals and entertainment expenses related to the business).

2. Educational expenses (those not deducted as above line adjustments) which include those to maintain or improve the skills needed for the job or meet the requirements by the employer to keep the job (do not include expenses to meet minimum job requirements or to qualify for a new trade or business).

3. Uniforms (purchase, cleaning, and repair of uniforms)

4. Business gifts (limit to $25 per recipient per year)

5. Business use of home (used exclusively and on a regular basis for work purposes and to convenience of employer)

6. Employment agency fees (job hunting expenses for new job in the same profession, but not first job)

7. Expenses of investor (safe deposit box rental, investment advice and investment newsletters)

8. Subscriptions to professional journals

9. Tax preparation Fee (legal and accounting fees related to preparation of taxpayers return)

10. Debit Card convenience fees incurred to pay federal income taxes (including estimated taxes)

11. Certain Hobbies that create a profit:
Interest and Taxes that would be allowed are deductible regardless of whether the activity was engaged in for profit ( activity was engaged in for profit if the activity shows a profit for 3 out of 5 consecutive years or in regards to in regards to training/racing horses 2 out of 7 years). The deduction is equal to the amount of the deduction that would be allowed if the activity were engaged in for profit, but only to the extent that the gross income derived from such activity exceeds allowable deductions ( no losses allowed)

44

Miscellaneous Deduction not subject to the 2% AGI test

1. Gambling losses ( fully deductible up to extent of gambling winnings)
2. Federal income tax paid on income of the beneficiary of an estate (the federal estate tax paid in regard to the value of this income will be an allowable deduction).

45

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 - $3,000
(Smith purchased it for $2,000 four months ago and a local art dealer appraised it for)

Contribution to a needy family- $1,000

What amount should Smith deduct as a charitable contribution?
a.$9,000
b.$8,000
c.$5,000
d.$7,000

$7,000 (2,000 basis because it is short term gain - less than a year + 5,000 allowable donation to the church).

Explanation:
Choice "d" 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.

46

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

$10,000 is deductible.

Explanation:
Choice "a" 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%, excess over 10% AGI) = $10,000 --> ($20,000 - $10,000 = $10,000 that is over the AGI threshold is deductible).

47

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

$25,000 is deductible.

Explanation
Choice "a" is correct. Individual taxpayers may deduct the FMV of property donated to charity. The limit is 30% of the taxpayer's AGI (30% × $90,000 = $27,000). The FMV of the property is $25,000 and is within the allowable amount.

48

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

$4,800 would be included in Mel's gross income.

Explanation:
Choice "b" 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.
Choices "c", "a", and "d" are incorrect, per the above rules.

49

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

$24,000 is deductible.

Explanation:
Choice "a" 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.

Fair market value of appreciated long-term stock - $ 25,000
Less: Limitation
AGI $ 80,000
Times 30% × 0.30
Deduction limit ($24,000)
Carryforward = $ 1,000

Note: Stein could have elected to deduct the cost of the stock instead of the appreciated amount, but the deduction would have been limited to 50% of AGI ($40,000) and then further limited by the cost basis of the stock ($17,000). In this case, this option would have given Stein a smaller deduction than that allowed under the above rule.

50

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.$11,000 in determining adjusted gross income.
b.$5,000 as an itemized deduction.
c.$12,200 as an itemized deduction.
d.$6,200 in determining adjusted gross income.

$5,000 as an itemized deduction.

Explanation:
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.

Choice "d" is incorrect. The utilities cost is not deductible; furthermore, the deduction for personal residence interest is an itemized deduction.
Choice "a" is incorrect. The insurance cost is not deductible; furthermore, the deduction for personal residence interest is an itemized deduction.
Choice "c" is incorrect. For a personal residence, neither insurance costs nor utilities costs are deductible.

51

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.$19,900
b.$13,900
c.$20,000
d.$25,000

$13,900.

Explanation:
Choice "b" is correct. 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 ($150,000 - $130,000). Next, each individual loss is reduced by $100, bringing this loss to $19,900 ($20,000-$100). 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 ($60,000 x 10%) here. ($150,000 - $130,000 = $20,000; $20,000 - $100 = $19,900; $19,900 - $6,000 = $13,900.)

Choice "d" is incorrect. This is the market value decline minus the adjusted basis.
Choice "c" is incorrect. This is the adjusted basis minus the insurance reimbursement, without any limitations being applied.
Choice "a" is incorrect. In addition to the $100 per loss nondeductible portion of each separate casualty loss, there is an overall limitation that the remaining total amount of all casualty losses is deductible only to the extent that it exceeds 10% of AGI.

52

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

$11,000 is the allowable deduction.

Explanation:
Choice "b" is correct. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Because the artwork had been held for more than one year, the fair market value could be deducted. In this case, the $11,000 was within the taxpayer's limitation of $12,000 (30% of AGI of $40,000) for donations of appreciated property.

Choice "d" is incorrect. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization.
Choice "c" is incorrect. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Furthermore, the fair market value of the artwork could be deducted because it had been held for more than one year and that value fell within the 30% of AGI overall limitation for appreciated property.
Choice "a" is incorrect. The fair market value of the artwork could be deducted because it had been held for more than one year and that value fell within the 30% of AGI overall limitation for appreciated property.

53

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 house hunting 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.$1,000
b.$2,800
c.$4,000
d.$1,800

$2,800 is deductible.

Explanation:
Choice "b" is correct. The $1,000 lodging and travel expenses are fully deductible. A pre-move househunting trip is not deductible. The $1,800 expense of moving household furnishings and personal effects is fully deductible. The total deductible amount is $2,800 ($1,000 + $1,800).

Choice "c" is incorrect. Pre-move househunting costs are not deductible.
Choice "d" is incorrect. Lodging and travel expenses while moving are fully deductible.
Choice "a" is incorrect. Costs of moving household furnishings and personal effects are fully deductible.

54

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

$25,000.

Explanation
Choice "c" is correct. The contribution limit for a church is 50% of the contribution base (adjusted gross income in this case). Moore's contribution limit for the current year is 50% × $50,000 = $25,000. Against this limit she can take her current year contributions ($18,000) plus the prior year carry-over ($10,000) until she reaches the current year limit. Therefore, she can take all the current year contributions plus $7,000 of the carryover for a $25,000 total.

Choice "d" is incorrect. Moore is not limited to her prior year charitable contribution carryover.
Choice "a" is incorrect. Moore may use part of her prior year charitable contribution carryover.
Choice "b" is incorrect per the explanation above.

55

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.$1,500
b.$1,900
c.$4,700
d.$2,200

$1,900.

Explanation:
Choice "b" is correct. State and local income taxes withheld from a cash-basis taxpayer are deductible in the year withheld, so Matthews can deduct the $1,500 withheld. She can also deduct the $400 in estimated tax liability she paid in the current year. The $2,500 federal income tax withheld is not deductible in calculating federal income tax. The current year state and local income tax paid in the following year is not deductible until paid because she is a cash-basis taxpayer. The total amount of deductible taxes, therefore, is $1,900.

Choice "c" is incorrect. Federal income tax withheld is not deductible in calculating federal income tax. Since Matthews is a cash basis taxpayer, the $300 state and local income taxes paid in the following year are not deductible until paid.
Choice "d" is incorrect. Since Matthews is a cash basis taxpayer, the $300 state and local income taxes paid in the following year are not deductible until paid.
Choice "a" is incorrect. The $400 state estimated income taxes are deductible in the current year since the amount was paid in the current year.

56

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

$2,900.

Explanation
Choice "a" is correct. 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.

57

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.$8,600
b.$8,000
c.$0
d.$600

$8,600.

Explanation:
Choice "a" is correct. 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.
Choice "b" is incorrect. Repair and maintenance of medical devices for a disabled dependent child are deductible medical expenses.
Choice "d" is incorrect. 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 is a deductible medical expense.
Choice "c" is incorrect. Repair and maintenance of medical devices for a disabled dependent child 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 is also a deductible medical expense.

58

The self-employment tax is:

a.Not deductible.

b.One-half deductible from gross income in arriving at adjusted gross income.

c.Fully deductible in determining net income from self-employment.

d.Fully deductible as an itemized deduction.

One half of self employment tax is deductible from gross income in arriving at AGI.

Explanation:
Choice "b" is correct. One-half of the self-employment tax is deductible to arrive at adjusted gross income.
Choice "d" is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross income.
Choice "c" is incorrect. Self-employment tax is not deductible in determining self-employment income.
Choice "a" is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross income.

59

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

$10,000.

Explanation:
Choice "b" is correct. In 2016, taxpayers can contribute and deduct up to $5,500 per year to an IRA, and alimony is considered earned income for IRA purposes. For couples filing a joint return where at least one spouse is an active participant in a retirement plan, the deductible portion of the contribution is phased out. For a spouse who is an active participant, the phase-out range in 2016 begins at AGI of $98,000 and is complete at $118,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range begins at $184,000 and is complete at $194,000 (2016). The earned income for IRA purposes here is $40,000 ($35,000 + $5,000), which is below both phase-out ranges, so each spouse receives a deduction of the $5,000 contribution actually made.

Choice "c" is incorrect. Pat's alimony is deemed "earned income" for the IRA contributions. However, even if Pat had no earned income, a spouse with no earned income can deduct up to $5,500, provided the couple's combined earned income is at least $11,000.
Choice "d" is incorrect. The $2,000 was a pre-2002 rule for IRA contribution limits for individuals and is a distractor in this case.
Choice "a" is incorrect. When a taxpayer or taxpayer's spouse is an active participant in a pension plan at work, the full deduction is allowed if the earned income of the couple is below the phase-out ranges (as is in this case).

60

The deduction by an individual taxpayer for interest on investment indebtedness is:
a. Limited to the taxpayer's interest income for the year.
b.Not limited.
c.Limited to the taxpayer's net investment income for the year.
d.Limited to the investment interest paid during the year.

Limited to the taxpayers net investment income for the year.

Explanation:
Choice "c" is correct. The deduction for interest expense on investment indebtedness is limited to net investment income (investment income less investment expenses).

61

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

Employee's unreimbursed business car expense.

Explanation:
Choice "b" is correct. Employee business expenses, including unreimbursed car expense, are deductible as itemized deductions subject to the 2% floor.

Choice "d" is incorrect. One-half of the self-employment tax is deductible, but it is a deduction to arrive at adjusted gross income, not as an itemized deduction.
Choice "c" is incorrect. The employee's unreimbursed moving expense is deductible, but it is a deduction to arrive at adjusted gross income, not an itemized deduction.
Choice "a" is incorrect. Self-employed health insurance is deductible, but not as an itemized deduction subject to the 2% floor.

62

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.$17,000
b.$17,500
c.$18,500
d.$19,000

$18,500.

Explanation:
Choice "c" is correct. 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.

Choice "a" is incorrect. Mortgages of up to $1,000,000 to buy, build, or substantially improve a home allow for the full deduction of interest.
Choice "b" is incorrect. 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.
Choice "d" is incorrect. Interest on auto loans (consumer interest) is not deductible.

63

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

$1,000.

Explanation:
Choice "b" is correct. 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).

Choice "a" is incorrect. Insurance against loss of income is not payment for medical care and therefore is not deductible.
Choice "d" is incorrect. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care.
Choice "c" is incorrect. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care.

64

Which allowable deduction can be claimed in arriving at an individual's adjusted gross income?
a.Alimony payment.
b.Unreimbursed business expense of an outside salesperson.
c.Personal casualty loss.
d.Charitable contribution.

Alimony Payment.

Explanation:
Choice "a" 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.

Choice "d" is incorrect. Charitable contributions are deductible from adjusted gross income as itemized deductions.
Choice "c" is incorrect. Personal casualty losses are deductible from adjusted gross income as itemized deductions.
Choice "b" is incorrect. Unreimbursed business expenses of outside salespersons are deductible from adjusted gross income as itemized deductions.

65

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

Self-employment tax and one-half of the deductible Keogh contribution.

Explanation:
Choice "b" 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.

Choice "c" is incorrect. For Keogh plans, earned income is also reduced by ½ the self-employment tax.
Choice "d" is incorrect. For Keogh plans, earned income is reduced by ½ the self-employment tax, not the entire tax.
Choice "a" is incorrect. For Keogh plans, earned income is reduced by ½ the self-employment tax and the full amount of the deductible Keogh contribution.

66

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

Tax preparation fees.

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

Choice "b" is incorrect. Medical expenses are itemized deductions not subject to the 2% adjusted gross income (AGI) floor, but instead are subject to a 10% AGI floor.
Choice "c" is incorrect. Charitable contributions are not subject to the 2% AGI floor.
Choice "d" is incorrect. Interest expense on a home mortgage, second home, or on investments are deductible as an itemized deduction not subject to the 2% adjusted gross income (AGI) floor.

67

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

$5,000.

Explanation:
Choice "a" 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.

Choice "b" is incorrect. The art object deduction is not its fair market value of $800, but the $400 excess paid over its fair market value.
Choice "d" is incorrect. The used clothing donated to the Salvation Army is deductible at its $600 fair market value. In addition, the art object deduction is only the $400 excess paid over fair market value, not the $1,200 paid.
Choice "c" is incorrect. The used clothing donated to the Salvation Army is deductible at its $600 fair market value.

68

Charitable contributions subject to the 50-percent limit that are not fully deductible in the year made may be:
a.Neither carried back nor carried forward.
b.Carried forward five years.
c.Carried back two years or carried forward twenty years.
d.Carried forward indefinitely until fully deducted.

Carried forward five years.

Explanation:
Choice "b" is correct. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward five years.

Choice "a" is incorrect. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward.
Choice "c" is incorrect. Net operating losses, not charitable contributions, are carried back 2 years and forward 20 years.
Choice "d" is incorrect. Individual capital losses, not charitable contributions, are carried forward indefinitely until used up (or taxpayer's death).

69

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 deduct $3,000 in his Year 10 income tax return.
b. 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.
c. 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.
d. 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.

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.

Explanation:
Choice "d" 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.

Choice "b" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net the refund against the amount paid and deduct the net amount in Year 11.
Choice "a" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net the refund against the amount paid and deduct the net amount in Year 10.
Choice "c" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. There is no need to wait and file an amended Year 10 return in Year 11.

70

Tax benefit rule

A provision that limits the recognition of income from the recovery of an expense or loss properly deducted in a prior tax year to the amount of the deduction that generated a tax benefit. For instance, if a taxpayer properly deducted from the federal income tax return state taxes that were paid, and then receives a refund on some/all of those state taxes, the refund is income, to the extent it was deducted in the prior year.

71

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

$0 moving expenses are above the line deductions, not itemized deductions.

Explanation:
Choice "b" is correct. 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.

72

Which of the following requirements must be met in order for a single individual to qualify for the additional standard deduction?
Must support
dependent child Must be age 65
or aged parent or older or blind
a. Yes Yes
b. No No
c. No Yes
d. Yes No

No, Yes.

Explanation:
Choice "c" is correct. In order to qualify for the additional standard deduction, an individual must be age 65 or older or blind by the end of the tax year. He or she does not have to support a dependent child or aged parent.

73

In the current year, Drake, a disabled taxpayer, made the following home improvements:

Pool installation, which qualified as a medical expense and increased the value of the home by $25,000, Cost = $ 100,000

Widening doorways to accommodate Drake's wheelchair (the improvement did not increase the value of his home), Cost = $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.$75,000
b.$110,000
c.$85,000
d.$10,000

$85,000.

Explanation:
Choice "c" is correct. A capital expenditure for the improvement of a home qualifies as a medical expense if it is directly related to the prescribed medical care. However, it is deductible to the extent that the expenditure exceeds the increase in value of the home. Thus, Drake may only deduct $75,000, the difference between the cost of improvement ($100,000) and the increase in market value ($25,000) of the home. In addition, the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. The widening of hallways qualifies as this type of expense and, therefore, the entire $10,000 is deductible.

Choice "b" is incorrect. Although a capital expenditure for the improvement of a home qualifies as a medical expense, it is only deductible to the extent that the expenditure exceeds the increase in value of the home. Thus, Drake may only deduct $75,000, the difference between the cost of improvement ($100,000) and the increase in market value ($25,000) of the home.
Choice "a" is incorrect. In addition, to the capital improvement expenditure of $75,000, the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. The widening of hallways qualifies as this type of expense and, therefore, the entire $10,000 is deductible.
Choice "d" is incorrect. Both the capital improvement expenditure of $75,000 and the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively ($10,000) qualify as medical expenses.

74

Home mortgage interest (qualified residence interest - interest = itemized deduction) : Acquisition indebtedness (&) vs. home equity indebtedness

Home equity indebtedness is secured by the taxpayers primary or second residence like acquisition indebtedness. But unlike acquisition indebtedness, home equity indebtedness is not used to acquire, build or improve the home.

75

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

$5,500.

Explanation:
Choice "d" is correct. 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.
Choice "a" is incorrect. 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.

Choice "b" is incorrect. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health.
Choice "c" is incorrect. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses.

76

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.$3,500
b.$3,000
c.$1,000
d.$2,500

$3,500 personal property taxes (e.g., ad valorem taxes on personal automobile) are allowable itemized deductions.

Explanation:
Choice "a" 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. The total amount of deductions for tax expense is calculated as follows:
Real estate tax on personal residence $ 2,000
Ad valorem tax on personal automobile 500
Current-year state and city income taxes withheld 1,000
Total deduction for taxes $ 3,500

Choice "c" is incorrect. Real estate taxes and personal property taxes are allowable itemized deductions.
Choice "d" is incorrect. Current-year state and city income taxes withheld from a paycheck are allowable itemized deductions.
Choice "b" is incorrect. Personal property taxes (e.g., ad valorem taxes paid) are allowable itemized deductions.

77

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

.As a $1,000 deduction to arrive at AGI for the year.

Explanation:
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).
Choice "b" is correct. Per the above rule, the $1,000 of qualified education loan interest paid in the year is reported as a deduction to arrive at AGI for the year.

Choice "a" is incorrect. 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. Therefore, the total amount paid of $1,000 is an allowable adjustment. (The $500 limit likely refers to an older education tax law that is no longer in effect.)
Choice "c" is incorrect. Allowable education loan interest paid is deductible as an adjustment, which is an above-the-line deduction to arrive at AGI. It is not reported as the less-advantageous itemized deduction.
Choice "d" is incorrect. Allowable education loan interest paid is deductible as an adjustment, which is an above-the-line deduction to arrive at AGI. Only the disallowed portion (in this case there is no disallowed portion) is a nondeductible item of personal interest.

78

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.$3,000
b.$9,500
c.$7,000
d.$11,500

$3,000.

Explanation:
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.
Choice "a" is correct. Only the amount of alimony ($3,000) is allowed as Tana's alimony deduction.

Choice "c" is incorrect. The basis of property division of stock ($4,000) is NOT alimony and is NOT deductible, but the $3,000 in alimony paid is deductible.
Choice "b" is incorrect. The fair market value of property division of stock ($6,500) is NOT alimony and is NOT deductible, but the $3,000 in alimony paid is deductible.
Choice "d" is incorrect. The fair market value of property division of stock ($6,500) and the child support ($2,000) are NOT alimony and are NOT deductible, but the $3,000 in alimony paid is deductible.

79

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

April 15.

Explanation:
Choice "a" 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).
Choices "c", "b", and "d" are incorrect, per the above explanation.

80

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.I only.
b.Neither I nor II.
c.Both I and II.
d.II only.

I only.

Explanation:
Choice "a" 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.
Choices "d", "c", and "b" are incorrect, per the above discussion.

81

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.$125,000
b.$50,000
c.$40,000
d.$115,000

$40,000 ($50,000 - $10,000)

Explanation:
Choice "c" is correct. Gross income includes salary, but it excludes inheritance and proceeds from a lawsuit for physical injuries (nontaxable items). Alimony paid is an adjustment from gross income to arrive at Adjusted Gross Income, as follows:
Gross Income:
Salary - $ 50,000
Inheritance - $0
Proceeds from physical injury lawsuit - $0
Adjustments:
Alimony paid - ($10,000)
Adjusted gross income - $ 40,000

Choice "b" is incorrect. Although salary is the only item of taxable gross income on the list, alimony is an allowable adjustment to arrive at adjusted gross income.
Choice "d" is incorrect. This answer choice includes all items of income given and deducts the alimony paid. Inheritance and proceeds from a lawsuit for physical injuries are NOT items of taxable gross income.
Choice "a" is incorrect. This answer choice includes all items of income given and does not deduct the alimony paid. Inheritance and proceeds from a lawsuit for physical injuries are NOT items of taxable gross income, and alimony IS an allowable deduction from gross income.

82

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

$25,000.

Explanation:
Choice "d" 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.

Choice "a" is incorrect. The $14,000 is the original cost of the asset. The maximum deduction for appreciated property is the fair market value of the property, not the original cost.
Choice "c" is incorrect. The $11,000 is the difference between the $25,000 fair market value of the land and the $14,000 original cost. It is thus the appreciation of the land before the date of donation. The appreciation of appreciated property is not the amount of the charitable contribution deduction.
Choice "b" is incorrect. Taylor has income in Year 13 of $90,000; therefore, at least a portion of a deduction for the land can be deducted, even if the fair market value of the land exceeded the defined limits for the year.

83

Which of the following is a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor?
a.Medical expenses.
b.Employee business expenses.
c.Gambling losses up to the amount of gambling winnings.
d.Real estate tax.

Employee business expenses.

Explanation:
Choice "b" is correct. Employee business expenses are a miscellaneous itemized deduction subject to the 2% of adjusted gross income (AGI) floor.

Choice "c" 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 "a" 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 "d" is incorrect. Real estate taxes are an itemized deduction not subject to the 2% of adjusted gross income floor.

84

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

$40,000.

Explanation:
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.

Choice "d" is incorrect. The $55,000 is the $57,000 gross income subtracting only the $2,000 IRA contribution.
Choice "a" is incorrect. The $50,000 is the $57,000 subtracting only the $5,000 alimony and the $2,000 IRA contribution.
Choice "b" is incorrect. The $46,000 is the $57,000 subtracting everything but the $6,000 self-employed health insurance.

85

What are Adjustments for (to arrive at) AGI (above the line deductions)?

Adjustments that are AGI are subtracted from gross income to arrive at AGI. These include:

1. Educator Expenses
2. IRA
3. Student Loan interest expense
4. Tuition and Fee deduction
5. Health Savings Account
6. moving expenses
7. One half of self employment taxes (FICA - SS and medicare)
8. self employed health insurance
9. self employed retirement
10. interest withdrawal penalty
11. alimony paid
12. attorney fees paid in certain discrimination and whistle blower cases
13. domestic production activities deduction

86

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

$24,500.

Explanation:
Choice "b" 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.

Choice "d" is incorrect. This is the maximum allowed; however, Jeffrey cannot deduct more than he actually contributed.
Choice "c" is incorrect. Jeffrey is able to take his carryover contributions from the prior year as well.
Choice "a" is incorrect. Jeffrey is not limited to only his carryover contributions.

87

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

$0, qualified medical expenses must exceed 10% of AGI.

Explanation:
Choice "a" 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.

Choice "b" is incorrect. The son's physical therapy is also a deductible expenditure, and the $2,300 does not take into account the 10% threshold.
Choice "d" is incorrect. This answer is the threshold, which should then be compared to the qualified expenses in order to figure the amount to be deducted on Schedule A.
Choice "c" is incorrect. This answer is the total deductible medical expenses; however, the answer does not take into account the 10% threshold.

88

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

$8,700.

Explanation:
Choice "c" 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

Choice "d" is incorrect. This answer includes only the interest paid on the mortgage and the state taxes. The medical expenses in excess of 10% AGI are also deductible on Schedule A.
Choice "a" is incorrect. This answer includes the interest, state taxes paid and the child support. It does not include the medical expenses (as is proper) and should not include the child support.
Choice "b" is incorrect. This is the total of all items listed, three of which (the IRA contributions, alimony, and child support) should not be included.

89

Which of the following is not an adjustment to arrive at adjusted gross income?
a.Self-employed health insurance.
b.Alimony paid.
c.Self-employed FICA (50%).
d.Qualified mortgage interest paid.

Qualified mortgage interest paid.

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

90

For the current year, Seth and Sheila intend to file a joint return. Seth expects to earn $35,000 in wages from his teaching job. He is covered by the university's pension plan. Sheila is a volunteer at their son, Stephen's, school. In addition to Seth's income, they received $500 in interest income and $50 in prize winnings from a local radio contest. Each would like to make a deductible contribution to an individual retirement account for the current year. They also believe they will be eligible to claim a tax credit for these contributions. Which of the following is correct?
Deductible Contribution Claim Credit
a. No Yes
b. Yes No
c. Yes Yes
d. No No
Explanation
Choice "c" is correct. Although Seth is covered by a plan, the second factor (the income limitation) is not exceeded, thus, both Seth's and Sheila's contributions should be deductible. In addition, both should qualify for a portion of the credit.
Choices "b", "a", and "d" are incorrect based upon the above explanation.

Yes, Yes.

Explanation:
Choice "c" is correct. Although Seth is covered by a plan, the second factor (the income limitation, $183,000) is not exceeded, thus, both Seth's and Sheila's contributions should be deductible. In addition, both should qualify for a portion of the credit.

Choices "b", "a", and "d" are incorrect based upon the above explanation.

91

Which of the following items are not allowable as adjustments for moving expenses without regard to employer provided benefits or other limitations?
a.Transportation.
b.Cost of hotel during drive to new home.
c.Expense of breaking lease.
d.Cost of moving household goods.

Expense of breaking a lease.

Explanation:
Choice "c" is correct. The costs associated with breaking an existing lease are not deductible as moving expenses.

Choices "a", "d", and "b" are all allowable moving expenses. All moving expenses must be offset with employer reimbursement amounts prior to claiming any deduction. Additional requirements of length of employment apply and may require adjustment of a previously claimed adjustment if they are not met.

92

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

$0.

Explanation:
Choice "d" 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 (negative,so it is treated as zero) = ($150,000)
Less: Floor Amount of $100 ($100)
Eligible Loss = $0
Less: 10% of AGI $ (7,500)
Deductible Loss =$0

93

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

$10,000.

Explanation:
Choice "d" 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.
Choices "c", "a", and "b" are incorrect, per the above explanation.

94

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.$7,000
b.$9,000
c.$1,500
d.$10,500

$7,000.

Explanation:
Choice "a" 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.

Choice "b" is incorrect as it includes the amount deemed to be child support.
Choices "c" and "d" are incorrect. The property division is considered to be a property settlement and is not considered to be alimony. Accordingly, neither the basis, fair market value, nor realized gain has any effect on the alimony deduction.

95

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

$15,100.

Explanation:
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

Choices "b", "d", and "a" are incorrect. Per the above explanation, they would each be entitled to the additional standard deduction in the amount of $1,250 each.

96

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.$19,000
b.$21,500
c.$22,000
d.$19,500

$21,500.

Explanation:
Choice "b" 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)

Choices "a", "c", and "d" are incorrect, per the above explanation.

97

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. $49,900
b.$40,000
c.$50,000
d.$39,900

$39,900.

Explanation:
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 (rather than $425,000 decline in FMV). 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

Choices "b", "a", and "c" are incorrect, per the above explanation.

98

Which of the following transportation expenses incurred by an employee is not deductible?
a.An employee flies from San Francisco to Miami on business.
b.An employee drives from his or her office to the office of a client.
c.An employee drives from home to his or her office.
d.An employee drives from a first job to second.

An employee drives from home to his or her office..

Explanation:
Choice "c" is correct. This is an example of a commuting expense and is not deductible.

Choice "a" is incorrect. This is deductible out-of-town travel.
Choice "d" is incorrect. Transportation from one job to another is deductible.
Choice "b" is incorrect. Transportation from a main office to another office or temporary location is deductible.

99

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

Subscriptions to professional journals.

Explanation:
Choice "b" is correct. Subscriptions to professional journals are miscellaneous itemized deductions subject to the 2% of AGI limitation.
Choice "d" is incorrect. Gambling losses to the extent of winnings are considered to be miscellaneous itemized deductions. However, they are not subject to the 2% of AGI limitation.
Choice "c" is incorrect. Medical expenses are a category of itemized deductions that are subject to a 10% AGI limitation (or 7.5% if age 65 or older).
Choice "a" is incorrect. Moving expenses are an adjustment and not an itemized deduction.

100

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

Include $1,150 in income in the current year.

Explanation:
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).

Choice "c" is incorrect. The amount deducted, not $0, is included in income in the current year.
Choice "d" is incorrect. The amount originally deducted, not necessarily the entire amount of the refund, is included in income in the current year.
Choice "a" is incorrect. The amount deducted is included in income in the current year. It is not necessary to amend the prior year's return.

101

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

Duration of time that interest is paid.

Explanation:
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.

Choice "b" is correct. There is no limitation of the number of years that the interest may be deducted, other than that the interest may be deducted only when paid.
Choices "a", "d", and "c" are incorrect, based on the above rule.

102

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

$1,250.

Explanation:
Choice "c" is correct. Miscellaneous itemized deductions are deductible to the extent that such miscellaneous itemized deductions exceed 2% of Adjusted Gross Income (AGI).
2% of AGI = AGI: $ 75,000 x 2% = $1,500
Tax preparation: $ 500
Custodial Fees: $100
Publications: $150
Union Dues: $2,000
Total Miscellaneous Deductions: $2,750
2% of AGI: ($1,500)
Allowable Misc. Deductions: = $ 1,250

103

Cole earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and contributed $100 to a charity. What is Cole's adjusted gross income?
a.$2,600
b.$1,600
c.$3,000
d.$2,500

$2,600.

Explanation:
Choice "a" is correct. Adjusted Gross Income (AGI) is gross income less adjustments or deductions to arrive at AGI. $3,000 in wages is part of gross income. The only adjustment listed is $400 in student loan interest, resulting in an AGI of $2,600.

Choice "c" is incorrect. Student loan interest is a deduction to arrive at AGI.
Choice "d" is incorrect. Charitable contributions are itemized deductions subtracted from AGI.
Choice "b" is incorrect. Unreimbursed employee business expense is an itemized deduction subtracted from AGI.

104

Doyle has gambling losses totaling $7,000 during the current year. Doyle's adjusted gross income is $60,000, including $3,000 in gambling winnings. Doyle can itemize the deductions. What amount of gambling losses is deductible?
a.$7,000
b.$5,800
c.$3,000
d.$0

$3,000.

Explanation:
Choice "c" is correct. Gambling losses are miscellaneous itemized deductions not subject to the 2% AGI limitation. The deduction for gambling losses are, however, limited to gambling winnings.

Choice "d" is incorrect. Gambling losses are deductible up to gambling winnings.
Choice "b" is incorrect. Gambling losses are not subject to the 2% limitation.
Choice "a" is incorrect. The deduction for gambling losses cannot exceed gambling winnings.

105

Which one of the following expenditures qualifies as a deductible medical expense for tax purposes?
a.Transportation to physician's office for required medical care.
b.Health club dues.
c.Vitamins for general health not prescribed by a physician.
d.Mandatory employment taxes for basic coverage under Medicare A.

Transportation to physician's office for required medical care.

Explanation:
Choice "a" is correct. Transportation to physician's office for required medical care is a deductible medical expense for tax purposes.

Choice "c" is incorrect. Vitamins are not deductible.
Choice "b" is incorrect. Health club dues paid on a membership for general health care are not deductible. In order for the dues to be deductible, the membership would need to be recommended by a physician for a specific illness.
Choice "d" is incorrect. Premiums paid for insurance that covers the expenses of medical care are deductible as medical expenses, including Medicare B premium payments and any voluntary premiums for Medicare A.

106

For regular tax purposes, with regard to the itemized deduction for qualified residence interest, home equity indebtedness incurred during a year:
a.Must exceed the taxpayer's net equity in the residence.
b.Is limited to $100,000 on a joint income tax return.
c.Includes acquisition indebtedness secured by a qualified residence.
d.May exceed the fair market value of the residence.

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

Explanation:
Choice "b" is correct. Home equity indebtedness is limited to $100,000 on a joint income tax return (or single return), but only $50,000 if married filing separately.

Choices "c" and "d" are incorrect. Home equity indebtedness is all debt, other than acquisition debt, that is secured by a qualified residence to the extent it does not exceed the fair market value of the residence reduced by any acquisition indebtedness.
Choice "a" is incorrect. There is no requirement that home equity indebtedness must exceed the taxpayer's net equity in the residence.

107

An individual's losses on transactions entered into for personal purposes are deductible only if:
a.The losses do not exceed $3,000 ($6,000 on a joint return).
b.The losses qualify as casualty or theft losses.
c.No part of the transactions was entered into for profit.
d.The losses can be characterized as hobby losses.

The losses qualify as casualty or theft losses.

Explanation:
Choice "b" is correct. An individual's losses on transactions entered into for personal purposes are deductible only if the losses qualify as casualty or theft losses. In addition, the individual must itemize deductions and the loss must exceed 10% of AGI plus $100 per casualty.

Choice "d" is incorrect. If the losses can be characterized as hobby losses, none of the loss is deductible.
Choice "a" is incorrect. Losses entered into for personal purposes other than casualty losses are not deductible in any amount.
Choice "c" is incorrect. If no part of the transaction was entered into for profit, none of the related loss is deductible.

108

During the year, Scott charged $4,000 on his credit card for his dependent son's medical expenses. Payment to the credit card company had not been made by the time Scott filed his income tax return in the following year. In addition, in the current year, Scott paid a physician $2,800 for the medical expenses of his wife, who died in the prior year. Disregarding the adjusted gross income percentage threshold, what amount could Scott claim in his current year income tax return for medical expenses?
a.$6,800
b.$4,000
c.$0
d.$2,800

$6,800.

Explanation:
Choice "a" is correct. $6,800. Scott could claim $6,800 on his current year tax return for medical expenses.
Rules:
Medical expenses charged to a credit card is expensed in the year the charge is made. It does not matter when the amount charged is actually paid.
Expenses paid for the medical care of a decedent by the decedent's spouse are included as medical expenses in the year paid, whether they are paid before or after the decedent's death.

Choices "c", "d", and "b" are incorrect, per the above rules.

109

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year:
Repair and maintenance of motorized wheelchair for physically handicapped dependent child - $ 300
Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care - $4,000
State income tax - $1,200
Self-employment tax - $7,650
Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office - $160
Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident - $90
Fee for breaking lease on prior apartment residence located 20 miles from new residence - $500
Security deposit placed on apartment at new location - $900
Without regard to the adjusted gross income percentage threshold, what amount may the Burgs claim in their current year return as qualifying medical expenses?
a.$4,300
b.$0
c.$4,000
d.$300

$4,300.

Explanation:
Choice "a" is correct. $4,300 medical expenses.
Wheelchair repair $ 300
School for handicapped $ 4,000
Total = $ 4,300

110

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year:
Repair and maintenance of motorized wheelchair for physically handicapped dependent child - $ 300
Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care - $4,000
State income tax - $1,200
Self-employment tax - $7,650
Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office - $160
Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident - $90
Fee for breaking lease on prior apartment residence located 20 miles from new residence - $500
Security deposit placed on apartment at new location - $900
What amount should the Burgs deduct for taxes expense in their itemized deductions on Schedule A for the current year?
a.$5,025
b.$1,200
c.$3,825
d.$7,650

$1,200.

Explanation
Choice "b" is correct. $1,200 tax deduction for state income tax.
Self-employment tax is not an itemized deduction, but 50% can be used as adjustment in arriving at AGI.

111

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year:
Repair and maintenance of motorized wheelchair for physically handicapped dependent child - $ 300
Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care - $4,000
State income tax - $1,200
Self-employment tax - $7,650
Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office - $160
Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident - $90
Fee for breaking lease on prior apartment residence located 20 miles from new residence - $500
Security deposit placed on apartment at new location - $900
What amount should the Burgs deduct for gifts to charity in their itemized deductions on Schedule A for the current year?
a.$60
b.$0
c.$160
d.$100

$60.

Explanation
Choice "a" is correct, $60.

Payment to qualified charity $ 160
Fair value of 4 tickets at $25 ($100)
Charitable contribution = $ 60

112

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year:
Repair and maintenance of motorized wheelchair for physically handicapped dependent child - $ 300
Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care - $4,000
State income tax - $1,200
Self-employment tax - $7,650
Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office - $160
Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident - $90
Fee for breaking lease on prior apartment residence located 20 miles from new residence - $500
Security deposit placed on apartment at new location - $900
Without regard to the $100 "floor" and the adjusted gross income percentage threshold, what amount should the Burgs deduct for the casualty loss in their itemized deductions on Schedule A for the current year?
a.$400
b.$300
c.$0
d.$90

$0.

Explanation:
Choice "c" is correct. $0 casualty loss deduction on Schedule A because damage caused in home by dog is controllable, and avoidable, and, thus, is not unexpected and does not qualify as a "casualty." Broken or lost items are not considered casualty or theft loss deductions.

113

On December 1 of the prior year, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30 of the current year. Michaels paid the entire interest of $12,000 on December 1 of the prior year. What amount of interest was deductible on Michaels' current year income tax return?
a.$1,000
b.$12,000
c.$11,000
d.$0

$11,000.

Explanation:
Choice "c" is correct. Michaels may deduct $11,000 on her current year return.
Rule: Interest that is prepaid is deductible in the tax year to which, and to the extent that the interest is allocable―i.e., as it accrues. This allocation is required even by cash basis taxpayers.

Term of loan = 12 months (December 1, prior year − November 30, current year)
Interest paid − $12,000 on December 1 of the prior year.
Allocated interest per month = $12,000 ÷ 12 = $1,000/month
Interest deductible in prior year = $1,000 x 1 (December) = $1,000
Interest deductible in current year = $1,000 × 11 = $11,000

114

Jimet, an unmarried taxpayer, qualified to itemize deductions. Jimet's adjusted gross income was $30,000 and he made a $2,000 cash donation directly to a needy family. During the year, Jimet also donated stock, valued at $3,000, to his church. Jimet had purchased the stock four months earlier for $1,500. What was the maximum amount of the charitable contribution allowable as an itemized deduction of Jimet's current year income tax return?
a.$1,500
b.$2,000
c.$0
d.$5,000

$1,500 (lower of cost or FMV for short term property).

Explanation:
Choice "a" is correct, $1,500.

Deductible amount is lower of:
Stock at cost (short term property) - $1,500*
AGI limit (50% of $30,000) - $15,000

*Allowable contribution:
Rule: Contributions of long-term property are generally deductible at fair market value at the date of the gift.

Contributions of short-term property are generally deductible at the lower of cost or fair market value.

The cash gift to the "needy family" is not deductible because charitable contributions need be made to organizations that are qualified by the IRS to be deductible.

115

On December 1 of the current year, Krest, a self-employed cash basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30 of the following year. Krest paid the entire interest amount of $24,000 on December 1 of the current year. What amount of interest was deductible on Krest's current year income tax return?
a.$0
b.$22,000
c.$24,000
d.$2,000

$2,000.

Explanation
Choice "d" is correct. $2,000 of interest is deductible on her current year tax return.
Total interest - $ 24,000
Divide by # of months of the loan - ÷ 12
Monthly deduction = (24,000/12) - $ 2,000
Times: Months in current year - (DEC) × 1
Total current year deduction - = $ 2,000
Rule: Prepaid interest must be allocated over the period of the loan and is deducted in the period that it paid, even for a cash basis taxpayer.
Choices "a", "b", and "c" are incorrect, per the above rule.

116

Davidson was transferred from Chicago to Atlanta. In connection with the transfer, Davidson incurred the following moving expenses:
Moving the household goods - $ 2,000
Temporary living expenses in Atlanta - $400
Lodging on the way to Atlanta - $100
Meals - $40
What amount may Davidson deduct if the employer reimbursed Davidson $2,000 (not included in form W-2) for moving expenses?
a.$500
b.$520
c.$120
d.$100

$100.

Explanation:
Choice "d" is correct. The moving expense deduction is allowable only for direct moving expenses: (i) travel and along-the-way lodging of the taxpayer and the taxpayer's family and (ii) transportation, to the new location, of the taxpayer's household goods and personal effects. Deductible expenses must be reduced by the amount of employer reimbursements not properly included on IRS form W-2. No longer is there a deduction for either (i) temporary living expenses at the new location or (ii) along-the-way meal expenses.
Moving the household goods - $ 2,000
Lodging on the way to Atlanta - $100
Less: employer reimbursement not included on IRS form W-2 - (2,000)
Deduction (adjustment) for (towards) AGI = $ 100
=( 2,000 + 100 - $2,000) = $100

Choices "c", "a", and "b" are incorrect per the above rule: The $400 temporary living expenses in Atlanta and the $40 meal expense are not deductible.

117

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

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

Explanation:
Choice "b" is correct. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.

Choice "a" is incorrect. A medical expense paid by credit card is deductible in the year the amount is charged to credit card (rather than in a subsequent year when the credit card bill is paid).
Choice "d" is incorrect. Medical expenses, net of insurance reimbursements, are not disregarded in the alternative minimum tax calculation. However, the allowable amount for AMT purposes is the net amount in excess of 10% of adjusted gross income (for regular tax purposes, the allowable amount is the net amount in excess of 10% of adjusted gross income or 7.5% of adjusted gross income for taxpayers age 65 and older).
Choice "c" is incorrect. A medical expense deduction is allowed for Medicare insurance premiums (for A and B).

118

An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current-year's tax return for investment interest expenses?
a.$3,000
b.$0
c.$2,000
d.$5,000

$2,000 (lesser of: $2,000 net investment income or $5,000 investment interest expense.).

Explanation
Choice "c" is correct. The deduction for investment interest expenses is limited to net taxable investment income which is defined as taxable investment income minus all related investment expenses (other than investment interest expense). If the investment expense is an itemized deduction, then only those expenses exceeding 2% of AGI are considered.
Taxable investment income includes: (i) interest and dividends (if taxed at ordinary income tax rates), (ii) rents (if the activity is not a passive activity), (iii) royalties (in excess of related expenses), (iv) net short-term capital gains, and (v) net long-term capital gains if the taxpayer elects not to claim the net capital gains reduced tax rate.
Calculation:
Investment income - $ 10,000
Less: Related investment expenses other than investment interest expenses - ($8,000)
Net investment income = $ 2,000

Net investment income = investment income - Related investment expenses other than investment interest expense

The taxpayer's deduction for investment interest expense is:
the lesser of (i) $2,000 net investment income or (ii) $5,000 investment interest expense.

Choices "b", "a", and "d" are incorrect per the above rule and per the above computations.

119

Brenda, employed full time, makes beaded jewelry as a hobby. In year 2, Brenda's hobby generated $2,000 of sales, and she incurred $3,000 of travel expenses. What is the proper reporting of the income and expenses related to the activity?
a.Sales of $2,000 are reported in gross income, and $2,000 of expenses is reported as an itemized deduction subject to the 2% limitation.
b.Sales and expenses are netted, and the net loss of $1,000 is reported as an itemized deduction not subject to the 2% limitation.
c.Sales and expenses are netted and deducted for AGI.
d.Sales of $2,000 are reported in gross income, and $3,000 of expenses is reported as an itemized deduction subject to the 2% limitation.

Sales of $2,000 are reported in gross income, and $2,000 of expenses is reported as an itemized deduction subject to the 2% limitation.

Explanation:
Choice "a" is correct. Based upon the facts presented ("Brenda makes jewelry as a hobby..."), this activity is not a trade or business activity but is an activity not engaged in for profit. As such, the taxpayer can only deduct as itemized deductions on Schedule A of IRS form 1040 the following: (i) expenses, such as state and local income taxes and property taxes, which would be allowed regardless of whether or not the activity were engaged in for profit and (ii) all other expenses that would be allowed if such activity were engaged in for profit. However, the amount of these "other expenses" cannot exceed gross income reduced by the expenses described in "(i)," above. Furthermore, the allowable "other expenses" are subject to the "2% of AGI" limitation.

Because Brenda had only $2,000 of gross income, the most she can deduct is $2,000 of the $3,000 travel expenses she incurred. Because the travel expenses constitute "all other expenses" (see "(ii)," above), this amount is subject to the "2% of AGI" limitation.

Note that the activity-is-engaged-in-for-profit statutory presumption does not apply. Reason: that presumption applies only if the activity shows a profit for at least three taxable years during the five consecutive taxable year period ending with the year in question (year 2 for this question). Because the facts do not state that during the five year period ending with year 2 Brenda had a profit in at least three of those five years, the presumption is not available to Brenda. If the presumption would have been available to her and if she had had a profit in at least three of the five consecutive, ending with year 2, then the sales and expenses would have been netted and deducted for AGI.

Choices "d", "b", and "c" are incorrect per the above rules.

120

Poole is 45 years old and unmarried. Assume that he is subject to a 15% tax bracket. He had adjusted gross income of $20,000. The following information applies to Poole:
Medical expenses - $ 8,000
Standard deduction - $4,700
Personal exemption - $3,000
Poole wishes to minimize his income tax. What is Poole's total income tax?
a.$1,350
b.$3,000
c.$1,650
d.$1,845

$1,650.

Explanation:
Choice "c" is correct. Poole's total income tax would be calculated as follows:
Adjusted gross income (AGI) - $ 20,000
Itemized deductions - ($6,000)
= $14,000
Personal exemption - ($3,000)
Taxable income - = $ 11,000
Tax rate - × 0.15
Total income tax - = $ 1,650

Medical expenses are limited to 10% of AGI (10% x $20,000 = 2,000). $8,000 - $2,000 = $6,000.
* Larger of $4,700 standard deduction or $6,000 itemized deduction ($8,000 medical expenses less 10% × $20,000 AGI).
Choice "b" is incorrect. Deduct itemized deductions and the personal exemption from adjusted gross income to arrive at the taxable income.


Choice "d" is incorrect. Deduct $6,000 itemized deductions ($8,000 medical expenses less 10% × $20,000 adjusted gross income) since it is larger than the $4,700 standard deduction.
Choice "a" is incorrect. Deduct $6,000 in itemized deductions, not $8,000. Reduce the $8,000 medical expenses by 10% of the adjusted gross income ($8,000 − $2,000 = $6,000).

121

Which of the following statements is correct regarding the deductibility of donations made to qualifying charities by a cash-basis individual taxpayer?
a.A charitable contribution deduction is not allowed for the value of services rendered to a charity.
b.A contemporaneous written acknowledgement is required for donations of $100.
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.

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

Explanation:
Choice "a" is correct. A charitable contribution is not allowed for the value of services rendered to a charity.

Choice "b" is incorrect. A contemporaneous written acknowledgement is required for donations of $250 or more.
Choice "c" is incorrect. A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $5,000.
Choice "d" is incorrect. The charitable contribution deduction for long-term appreciated stock is limited to 30% of adjusted gross income.

122

Pat, a single taxpayer, has adjusted gross income of $40,000 in the current year. During the year, a hurricane causes $4,100 damage to Pat's personal use car on which Pat has no insurance. Pat purchased the car for $20,000. Immediately before the hurricane, the car's fair market value was $11,000 and immediately after the hurricane its fair market value was $6,900. What amount should Pat deduct as a casualty loss for the current year after all threshold limitations are applied?
a.$0
b.$4,100
c.$100
d.$4,000

$0, (lesser of adjusted basis ($20,000) or decrease in FMV $4,100 ($11,000 - $6,900) = $4,100 - $4,000 (10% of $40,000 AGI) and then minus $100 = 0.

Explanation:
Choice "a" is correct. The calculation starts with the lesser of adjusted basis or decrease in FMV. That is $4,100. This amount is then reduced by $4,000 (10% of AGI) and the $100 per casualty. The result is zero ($4,100 – $4,000 – $100).

Choice "b" is incorrect. $4,100 is the starting point of the calculation. It is before the 10% of AGI and $100 reductions.
Choice "d" is incorrect. $4,000 is the amount after the $100 reduction but before the 10% of AGI reduction.
Choice "c" is incorrect. $100 is merely the amount of the reduction per casualty.

123

Which of the following is not a deduction to arrive at adjusted gross income?
a.Trade or business expenses.
b.Capital losses in excess of capital gains.
c.Alimony payments.
d.Unreimbursed employee business expenses.

Unreimbursed employee business expenses.

Explanation:
Choice "d" is correct. Unreimbursed employee business expenses are not a deduction to arrive at adjusted gross income. They are an itemized deduction from adjusted gross income.

Choice "c" is incorrect. Alimony payments are an adjustment, which is a deduction to arrive at adjusted gross income.
Choice "a" is incorrect. Trade or business expenses are deducted on Schedule C. This is before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income.
Choice "b" is incorrect. Capital losses in excess of capital gains are deducted (up to $3,000) on Form 1040 before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income.

124

An individual taxpayer reports the following information:
U.S. Treasury bond income - $100
Municipal bond income - $200
Rental income - $500
Investment interest expense - $1,000
What amount of investment interest can the taxpayer deduct in the current year?
a.$800
b.$300
c.$100
d.$1,000

$100.

Explanation:
Choice “c” is correct. Investment interest expense deduction is an itemized deduction limited to net investment income. Taxable interest is included in net investment income. Rental income and tax exempt interest are not. Therefore, the limitation is the $100 U.S. Treasury bond interest.

Choice “b” is incorrect. $300 incorrectly includes the tax-exempt municipal bond interest.
Choice “a” is incorrect. $800 incorrectly includes the tax-exempt municipal bond interest and the rental income.
Choice “d” is incorrect. $1,000 would be correct if all of the interest qualified for deduction without limitation.

125

Four years ago, an individual taxpayer purchased silver coins at face value for $200. The coins were stolen in the current year, when their fair market value was $1,000. The coins were not covered by insurance. Without considering the limit based on AGI, what is the maximum amount of loss that the taxpayer can deduct on the current year's tax return?
a.$1,000
b.$100
c.$900
d.$200

$100.

Explanation:
Choice “b” is correct. This is a casualty and theft loss. The loss starts at the lesser of decrease in FMV or adjusted basis. That is $200. There is no insurance recovery by which to reduce the loss. However, the tax code requires a reduction of $100 per event. This brings the $200 loss down to $100.

Choice “d” is incorrect. $200 is the full amount of the loss before the reduction of $100 per event.
Choice “c” is incorrect. $900 incorrectly uses the FMV of $1,000 and then reduces it by the $100 per event.
Choice “a” is incorrect. $1,000 is the FMV of the coins, which is not relevant.