chapter 2 - Adjustments and Deductions Flashcards

Question

What are the limitations on medical expenses?

Answer 1

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

Answer 2

Qualified medical expenses include: 1) qualified medical expenses paid 2) deductible medical expenses

Answer 3

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

Answer 4

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

Answer 5

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)

Answer 6

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

Answer 7

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)

Answer 8

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)

Answer 9

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)

Answer 10

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.

Answer 11

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

Answer 12

``` 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). ```

Answer 13

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

Answer 14

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.

Answer 15

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

Answer 16

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

Answer 17

- 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.

Answer 18

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

Answer 19

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)

Answer 20

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).

Answer 21

$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.

Answer 22

$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).

Answer 23

$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.

Answer 24

$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.

Answer 25

$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.

Answer 26

$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.

Answer 27

$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.

Answer 28

$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.

Answer 29

$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.

Answer 30

$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.

Answer 31

$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.

Answer 32

$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.

Answer 33

$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.

Answer 34

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.

Answer 35

$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).

Answer 36

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).

Answer 37

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.

Answer 38

$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.

Answer 39

$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.

Answer 40

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.

Answer 41

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.

Answer 42

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.

Answer 43

$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.

Answer 44

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).

Answer 45

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.

Answer 46

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.

Answer 47

$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.

Answer 48

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.

Answer 49

$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.

Answer 50

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.

Answer 51

$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.

Answer 52

$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.

Answer 53

.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.

Answer 54

$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.

Answer 55

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.

Answer 56

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.

Answer 57

$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.

Answer 58

$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.

Answer 59

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.

Answer 60

$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.

Answer 61

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

Answer 62

$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.

Answer 63

$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.

Answer 64

$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.

Answer 65

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

Answer 66

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.

Answer 67

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.

Answer 68

$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

Answer 69

$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.

Answer 70

$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.

Answer 71

$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.

Answer 72

$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.

Answer 73

$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.

Answer 74

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.

Answer 75

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.

Answer 76

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.

Answer 77

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.

Answer 78

$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

Answer 79

$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.

Answer 80

$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.

Answer 81

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.

Answer 82

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.

Answer 83

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.

Answer 84

$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.

Answer 85

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

Answer 86

$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.

Answer 87

$60. Explanation Choice "a" is correct, $60. Payment to qualified charity $ 160 Fair value of 4 tickets at $25 ($100) Charitable contribution = $ 60

Answer 88

$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.

Answer 89

$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

Answer 90

$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.

Answer 91

$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.

Answer 92

$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.

Answer 93

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).

Answer 94

$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.

Answer 95

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.

Answer 96

$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).

Answer 97

.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.

Answer 98

$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.

Answer 99

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.

Answer 100

$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.

Answer 101

$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.