Itemized Deductions and Qualified Business Income Deduction Flashcards
1
Q
Jill divorced her husband James in 2018. Their son Harry lived with Jill for all of 2019 and qualified as her dependent. However, the divorce decree indicates James can take the exemption. Jill paid $1,200 in medical expenses for Harry, and James paid $2,000. Jill entered into a multiple support agreement with her 3 brothers to assist with their mother’s care and took the exemption. Jill provided one-fourth of her mother’s support and paid $1,500 in medical expenses, which was her quarter share. Without regard to adjusted gross income limitations, compute Jill’s medical expense deduction for 2019. A. $0 B. $1,200 C. $2,700 D. $1,500
A
$2,700
Answer (C) is correct.
To qualify for a deduction, an expense must be paid during the taxable year for the taxpayer, the taxpayer’s spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year. The deduction is allowed for a person who was either a spouse or a dependent at the time the medical services were rendered or at the time the expenses were actually paid. To qualify as a dependent, the dependent person must have over half of his or her support for the year paid by the taxpayer; must fall within a family relationship with the taxpayer; and must be a citizen, national, or resident of the U.S., Canada, or Mexico during a portion of the tax year. However, the individual need not satisfy the gross income test or the joint return test, and a child of divorced parents is treated as a dependent of both parents. Under a multiple support agreement, Jill is considered to have given more than 50% of the support of her mother and is able to deduct all the medical expenses that she paid on behalf of her mother (Publication 502). A multiple support agreement occurs when two or more people provide 50% of the support of an individual, but nobody on their own provides 50% or more of the support of the individual. Jill can also deduct the medical expenses that she paid for her son, since a child of divorced parents is a dependent for both parents with regard to medical expense deductions. Thus, Jill’s total deductions for medical expenses, before any limitations, is $2,700 ($1,200 for her son + $1,500 for her mother). See Study Unit 1 for multiple support.
2
Q
Generally, the taxpayer may deduct the cost of medical expenses on Schedule A for which of the following?
A. Doctor-prescribed birth control pills.
B. Marriage counseling.
C. Trips for general health improvement.
D. Controlled substances like marijuana that are in violation of federal law.
A
Doctor-prescribed birth control pills.
Answer (A) is correct.
Medical expenses include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of a disease or for the purpose of affecting any structure or function of the body; transportation and lodging costs incurred on trips primarily for and essential to medical care; qualified long-term care service; and medical insurance. Thus, a prescription of birth control pills qualifies as a medical expense (Publication 502).
3
Q
Mr. E, a single, 35-year-old taxpayer, had an adjusted gross income of $10,000 for the current year. In addition, he paid the following expenses: Surgeon’s fee (outpatient) $600 Psychiatrist’s fee 700 Hospital bill as follows: Medical services 300 Meals in hospital 200 Hospital room charge 500 Transportation to/from doctor’s office and hospital 50 Contact lenses 200 Prescription drugs 80 Vitamins for general health 60 Weight-loss program 300 Chiropractor’s fee 400 Mr. E also paid $900 for medical insurance premiums and received reimbursement of $850 from the insurance company on claims for the above expenses. Compute Mr. E’s current-year medical deduction for Schedule A. A. $3,080 B. $2,690 C. $2,330 D. $3,180
A
$2,330 Answer (C) is correct. Section 213 allows a deduction for medical care expenses to the extent that they exceed 7.5% of adjusted gross income. Medicine and drugs are limited to prescription drugs and insulin. Vitamins and the weight-loss program are not deductible because they are for the purpose of improving the taxpayer’s general health and not for a specific ailment. The total amount of expenses paid during the year must be reduced by the amount of insurance reimbursements received (Publication 502). Surgeon’s fee $ 600 Psychiatrist’s fee 700 Hospital bills ($300 + $200 + $500) 1,000 Transportation 50 Contact lenses 200 Prescription drugs 80 Chiropractor’s fee 400 Medical insurance premium 900
$3,930
Less: Insurance reimbursement
(850)
$3,080 Less: 7.5% of AGI (750) Medical expense deduction $2,330
4
Q
Of the following medical expenses paid by Bill during 2019, how much can he deduct (before limitations)?
$1,000 for his wife Mary’s hospitalization in 2018; they were married in 2019.
$1,000 for Mary’s daughter’s braces; she is Bill and Mary’s dependent in 2019.
$2,000 for Bill’s son’s 2018 medical treatment; he was Bill’s dependent in 2018 but does not qualify for 2019.
A. $0
B. $4,000
C. $1,000
D. $2,000
A
$4,000
Answer (B) is correct.
To qualify for a deduction, an expense must be paid during the taxable year for the taxpayer, the taxpayer’s spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year. The deduction is allowed for a person who was either a spouse or a dependent at the time medical services were rendered or at the time the expenses were actually paid. Deductible medical expenses include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body (Publication 502).
5
Q
Mr. Green must use a wheelchair. Upon advice from his doctor, in 2019, he installed an elevator and widened the front entrance of his house, incurring $10,000 and $3,000 in respective costs. Mr. Green had purchased his house for $146,000. An appraisal showed the fair market value of Mr. Green’s house immediately after these modifications at $154,000. Also in 2019, Mr. Green decided to join a health club primarily to improve business contacts and for recreational purposes. He paid a $1,250 annual membership fee to make use of this facility.
Compute Mr. Green’s currently deductible medical expenses.
A. $13,000
B. $6,250
C. $5,000
D. $14,250
A
$5,000
Answer (C) is correct.
Expenditures for new building construction or for permanent improvements to existing structures primarily for medical care may be deductible in part as a medical expense. The excess of the cost of a permanent improvement over the increase in value of the property is a deductible medical expense (Publication 502). Mr. Green incurred $13,000 in costs to make improvements to his house. The increase in value of his home was $8,000 ($154,000 – $146,000). Thus, Mr. Green may deduct $5,000 ($13,000 – $8,000).
6
Q
Which of the following statements are true about health insurance deductions?
A taxpayer is allowed a medical expense deduction for health insurance premiums.
The deduction is subject to the 7.5%-of-AGI floor.
Self-employed persons may deduct up to 75% of health insurance premiums paid from gross income.
A. I only.
B. I and II.
C. III only.
D. I, II, and III.
A
I and II.
Answer (B) is correct.
A taxpayer is allowed a medical expense deduction (subject to the 7.5%-of-AGI floor) for amounts paid for health insurance premiums. Self-employed persons may deduct 100% of health insurance premiums paid from gross income.
7
Q
Which of the following qualify as deductible medical expenses?
Payments to physician
Payments for elective cosmetic face-lifting operation
Medical portion of your auto insurance premium (although not separately stated)
Payments for acupuncture service
Domestic help
A. 1, 2, and 4.
B. 1, 3, and 5.
C. 1 and 4.
D. 1 and 5.
A
1 and 4.
Answer (C) is correct.
Payments to a physician and payments for acupuncture service are both expenditures made for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. Accordingly, they fall within the definition of medical care under Sec. 213 and are deductible expenses. Expenditure 2 is not a deductible expense under Sec. 213, unless the procedure was necessary to “ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.” Expenditures 3 and 5 are also not deductible medical expenses. Although insurance covering medical care is a deductible medical expense, if the insurance contract covers losses other than medical care and the charge for the medical insurance is not separately stated, no portion of the premium may be deducted as a medical expense. Domestic help does not fall within the definition of medical care under Sec. 213(d) and is not deductible (Publication 502).
8
Q
To qualify for a medical expense deduction as your dependent, a person must be your dependent either at the time the medical services were provided or at the time you paid the expenses. A person generally qualifies as your dependent for purposes of the medical expense deduction if
A. The person was a foreign student staying briefly at your home.
B. The person is the unrelated caregiver for your elderly parents.
C. The person would qualify as a dependent except for the amount of gross income.
D. The person is your sibling’s unmarried adult child.
A
The person would qualify as a dependent except for the amount of gross income.
Answer (C) is correct.
For the purpose of a medical deduction, a person qualifies as a “dependent” if (s)he meets the requirements in Sec. 152 except for the following two criteria:
The amount of the individual’s gross income is not considered [Reg. Sec. 1.213-1(a)(3)].
A child with divorced parents is treated as a dependent by both parents [Sec. 213(d)(5)].
(Publication 502.)
9
Q
Alan is a cash-basis taxpayer. During the year, he paid the following medical expenses for himself and his daughter, Johanna, whom he claims as a dependent on his tax return.
$310 for glasses for Johanna and $290 for glasses for himself
$650 for a dental root canal procedure for him
$900 for hospital emergency services of which $700 was paid by insurance in the same year
$1,250 for Johanna’s braces which he charged to his credit card in December and paid in January of the next year
$500 for prescriptions for allergies
$2,200 for cosmetic plastic surgery
The taxpayer’s medical expense deduction before limitations is
A. $3,200
B. $6,100
C. $4,150
D. $5,400
A
$3,200
Answer (A) is correct.
Medical expenses include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease or for the purpose of affecting any structure or function of the body; transportation and lodging costs incurred primarily for and essential to medical care; qualified long-term care service; and medical insurance. However, these costs are only deductible if they are not reimbursed. The deductible medical expenses include
$600 for eyeglasses for the taxpayer and his dependent,
$650 for a root canal,
$200 for emergency services that were not reimbursed,
$1,250 for the dependent’s braces, and
$500 for prescriptions for allergies.
Thus, the total medical expense deduction before limitations is $3,200 (Publication 502).
10
Q
All of the following capital improvements may be itemized and deducted as medical expenses EXCEPT
A. Cost of modifying a car with special hand controls.
B. Cost of constructing wheelchair accessible ramps for your home.
C. An elevator costing $8,000 that adds $8,000 to the appraised value of your home.
D. Lowering or modifying kitchen cabinets and equipment.
A
An elevator costing $8,000 that adds $8,000 to the appraised value of your home.
Answer (C) is correct.
Capital expenditures for obtaining items such as eyeglasses, a seeing eye dog, wheelchair, crutches, or artificial limbs are included as deductible medical expenses. The costs of special beds, air conditioning, and dehumidifying equipment are also included as deductible medical expenses. Expenditures for new building construction or for permanent improvements to existing structures primarily for medical care may be deductible in part as a medical expense. The excess of the cost of a permanent improvement over the increase in value of the property is a deductible medical expense (Publication 502).
11
Q
Insurance premiums for which of the following policies qualify as a medical expense?
A. Membership in an association that gives cooperative (free choice) medical service.
B. Both replacement of lost or damaged contact lenses and membership in an association that gives cooperative (free choice) medical service.
C. None of the answers are correct.
D. Replacement of lost or damaged contact lenses.
A
Both replacement of lost or damaged contact lenses and membership in an association that gives cooperative (free choice) medical service.
Answer (B) is correct.
A medical expense deduction is allowed for premiums paid for medical insurance, subject to a 7.5%-of-AGI limitation. This provision includes premiums made for contact lens insurance and membership in associations that give cooperative medical service (Publication 17).
12
Q
James and his two brothers each provided one-third of their mother’s total support. Under a multiple support agreement, James is allowed to claim his mother as a dependent for the current year. Medical expenses paid by James for his mother amounted to $6,000, and his brothers reimbursed him two-thirds of these expenses. What is the amount James can consider as part of medical expenses in the preparation of his individual tax return? A. $0 B. $1,850 C. $6,000 D. $2,000
A
$2,000
Answer (D) is correct.
Section 213(a) allows a deduction for expenses paid for medical care of the taxpayer, his or her spouse, or a dependent. “Dependent” is defined in Sec. 152 to include the mother of the taxpayer. The medical expenses paid, however, must be reduced by the amount of reimbursement to calculate the deduction (Publication 502). Thus, James can consider $2,000 as part of the medical expenses ($6,000 paid – $4,000 reimbursement from the other brothers).
13
Q
Which one of the following expenses does NOT qualify as a deductible medical expense?
A. Cost of long-term care for a person who is intellectually and developmentally disabled in a relative’s home.
B. Cost and care of guide dogs used by a blind person in his business.
C. Special school for a deaf child to learn lip reading.
D. Cost of elevator installed for individual who had heart bypass surgery (in excess of increase in value of individual’s home).
A
Cost of long-term care for a person who is intellectually and developmentally disabled in a relative’s home.
Answer (A) is correct.
Section 213 allows a deduction for expenses paid for medical care of the taxpayer, spouse, and dependents to the extent such expenses exceed 7.5% of adjusted gross income. The term medical care includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of a disease or physical handicap, or for the purpose of affecting any structure or function of the body [Sec. 213(d)]. The cost of keeping a person who is intellectually and developmentally disabled in a relative’s home is an expenditure for the support of the person and does not fall within the definition of medical care. The cost of institutional care could be deductible as a medical expense (Publication 502).
14
Q
During 2019, Mr. and Mrs. Duhon paid the following expenses for their son, Joel: Medical insurance premiums $1,500 Contact lenses 210 Household help recommended by a doctor 2,200 For 2019, Joel had gross income of $9,850. Because Joel had gross income of $9,850, the Duhons did not claim him as a dependent. How much of Joel’s medical expenses can Mr. and Mrs. Duhon include with their deductible medical expenses? A. $1,500 B. $3,910 C. $1,710 D. $0
A
$1,710
Answer (C) is correct.
An individual is entitled to an itemized deduction for expenses paid during the tax year for the medical care of the individual, the individual’s spouse, or a dependent to the extent that such expenses exceed 7.5% of adjusted gross income. For purposes of this deduction, “dependent” is defined in Publication 502. The household help does not qualify as a medical expense. Therefore, $1,710 qualifies as deductible medical expenses. Even though Joel is not a dependent, the parents may claim the amount of qualified medical expenses.
15
Q
Josef had to have the following improvements made to his home because he was handicapped: Cost of ramps 1/2/19 $ 300 Increase in value of home due to ramps 0 Cost of decorative lattice work over ramp area 1/2/19 100 Increase in value of home due to lattice work 50 Cost of chair lift on stairs 1/2/19 2,500 Increase in value of home due to chair lift 1,500 Cost of repairing ramps 12/1/19 50 Cost of repairing chair lift 12/1/19 200 None of the expenses were covered by insurance. How much would qualify as a deductible medical expense in 2019 (before any limitations)? A. $3,050 B. $2,800 C. $1,550 D. $1,430
A
$1,550
Answer (C) is correct.
Home-related capital expenditures incurred by a physically handicapped individual are deductible. An example of such an expenditure is an elevator needed for someone with a heart condition. However, the amount of any increase in value of the existing property cannot be deducted. Once a capital expense qualifies as a medical expense, amounts paid for the operation and upkeep also qualify as medical expenses. This is true even if the original capital expenditure was not entirely deductible (because it may have increased the fair market value of the residence). Therefore, the cost of the ramps ($300), the cost of the chair lift not attributed to an increase in the value of the property ($2,500 – $1,500 = $1,000), the cost of repairing the ramps ($50), and the cost of repairing the chair lift ($200) are deductible. These expenses total $1,550. The cost of the decorative work is not deductible (Publication 502).
16
Q
Mr. Cedar broke his hip and must now use a wheelchair. He modified his home to accommodate the wheelchair. He had his home appraised for refinancing just before the improvements to his home. The value of his home was $200,000. After he made the modifications and improvements listed below, the value was $202,000. Mr. Cedar incurred the following expenses during the year. Without consideration of adjusted gross income limitations, compute the amount Mr. Cedar may claim on his 2019 tax return as a medical expense:
$3,000 to construct a ramp in the entrance of his home to accommodate his wheelchair
$4,000 for installation of a lift to transport the wheelchair from the first to the second floor of his house
$1,000 for adding handrails around his tub
$200 to repair his chimney
A. $6,000
B. $8,200
C. $6,200
D. $8,000
A
$6,000
Answer (A) is correct.
Expenditures for new building construction or for permanent improvements to existing structures primarily for medical care may be deductible in part as a medical expense. The excess of the cost of a permanent improvement over the increase in value of the property is a deductible medical expense. Construction of handicapped entrance or exit ramps, installation of elevators, widening of doorways, or lowering of kitchen cabinets or equipment may each qualify. Mr. Cedar’s total expenses to make his house more handicapped-accessible is $8,000. However, this must be reduced by the increase in value of his home of $2,000 ($202,000 – $200,000). Thus, Mr. Cedar may deduct $6,000 for medical expenses (Publication 502).
17
Q
Jim and Nancy Walton, both age 55, had adjusted gross income of $25,000 in 2019. During the year, they paid the following medical-related expenses: Over-the-counter medicines $400 Prescription drugs 300 Doctor fees 830 Health club membership (recommended by the family doctor for general health care) 800 Medical care insurance 280 How much may the Waltons use as medical expenses in calculating itemized deductions for 2019? A. $735 B. $1,410 C. $465 D. $0
A
$0 Answer (D) is correct. The cost of the health club membership is not included in the computation of the medical expense deduction since the cost is incurred for the purpose of improving the taxpayers’ general health, not for curing a specific ailment or disease. Only prescription drugs and insulin are deductible, so the over-the-counter medicines are not included. Medical care insurance $ 280 Doctor fees 830 Prescription drugs 300 Total expenses $1,410 Less: 7.5% of AGI (1,875) Allowable medical expense deduction $ 0
18
Q
Which of the following will NOT usually be 100% deductible as a medical expense?
A. Modifying the hardware on doors.
B. Lowering the kitchen cabinets.
C. Building entrance and exit ramps.
D. Adding an elevator to your home to allow access to a second-floor bedroom.
A
Adding an elevator to your home to allow access to a second-floor bedroom.
Answer (D) is correct.
Home-related capital expenditures incurred by a physically handicapped individual are deductible. An example of such an expenditure is an elevator needed for someone with a heart condition. However, the amount of any increase in value of the existing property cannot be deducted. Since the addition of an elevator to a home would normally increase the value of the home, the entire cost would not be deductible as a medical expense (Publication 502).
19
Q
Ruth and Mark Cline are married and will file a joint 2019 income tax return. Among their expenditures during 2019 were the following discretionary costs that they incurred for the sole purpose of improving their physical appearance and self-esteem:
Face lift for Ruth, performed by a licensed surgeon
$5,000
Hair transplant for Mark, performed by a licensed surgeon
3,600
Disregarding the adjusted gross income percentage threshold, what total amount of the aforementioned doctors’ bills may be claimed by the Clines in their 2019 return as qualifying medical expenses?
A. $0
B. $5,000
C. $3,600
D. $8,600
A
$0
Answer (A) is correct.
To be a medical deduction, expenses must be primarily to alleviate or prevent a physical or mental disability or illness. Cosmetic surgery is defined as any procedure that is “directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease.” The cost of cosmetic surgery is not deductible unless it is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.
20
Q
Scott is an 8-year-old with a rare lung problem. His doctor wants him to be examined by a specialist at the Mayo Clinic. Scott and his mother travel to Rochester, Minnesota. Scott is not sick enough to be admitted to the hospital, so he stays in a nearby hotel from which he can go to the hospital daily for the specialist to monitor his reaction to a new drug. Scott and his mother have separate rooms so that Scott can rest properly. They remain for 10 nights, and the rooms each cost $60 per night. How much of the hotel expense is allowable as a medical expense? A. $1,000 B. $1,200 C. $600 D. $500
A
$1,000
Answer (A) is correct.
The amounts paid for lodging will be considered paid-for medical care if the medical care is provided by a physician in a licensed hospital and if there is no significant element of personal pleasure, recreation, or vacation in the travel away from home. The amount for lodging is limited to $50 for each night for each individual (including a parent with his or her child). Therefore, Scott and his mother are limited to $100 per night for 10 nights, or $1,000 (Publication 17).
21
Q
Chris flew to Chicago for surgery. He incurred the following costs in connection with the trip: Round-trip airfare $ 350 Lodging ($100/night × 2 nights) 200 Restaurant meals 80 Hospital and surgeon 5,000 What is Chris’s medical expense? A. $5,000 B. $5,450 C. $5,490 D. $5,630
A
$5,450
Answer (B) is correct.
Medical expenses include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease or for the purpose of affecting any structure or function of the body; transportation cost of a trip primarily for and essential to medical care; qualified long-term care service; and medical insurance. A medical expense deduction is allowed for lodging, but not meals, while away from home on a trip primarily for and essential to medical care. This lodging deduction is limited to amounts that are not lavish or extravagant and cannot exceed $50 per night for each individual. The deduction may also be claimed for a person who must accompany the individual seeking medical care (Publication 17).
Thus, Chris can deduct $350 for airfare, $100 for lodging, and $5,000 for the surgery.
22
Q
Which one of the following expenditures qualifies as a deductible medical expense for tax purposes?
A. Vitamins for general health not prescribed by a physician.
B. Transportation to physician’s office for required medical care.
C. Health club dues.
D. Mandatory employment taxes for basic coverage under Medicare A. Taxpayer is covered by Social Security.
A
Transportation to physician’s office for required medical care.
Answer (B) is correct.
Section 213(d) defines medical care as including transportation for needed medical care (Publication 17).
23
Q
During 2019, the Pack family incurred the following medical expenses: Doctor fees $2,400 Prescription medicine 900 Health club dues (advised by doctor for general health purposes) 4,000 Medical insurance premiums 3,200 The Packs’ AGI for 2019 was $60,000. They received insurance reimbursements of $1,000 for their 2019 expenses. What is the amount the Packs would be able to deduct as an itemized deduction on their tax return after any limitation? A. $1,000 B. $2,000 C. $5,500 D. $4,500
A
$1,000 Answer (A) is correct. The cost of the health club membership is not included in the computation of the medical expense deduction since the cost is incurred for the purpose of improving the taxpayers’ general health, not for curing a specific ailment or disease. Prescription drugs and insulin and medical insurance premiums are deductible (Publication 502). Medical care insurance $3,200 Doctor fees 2,400 Prescription drugs 900 Insurance reimbursement (1,000) Total expenses $5,500 Less: 7.5% of AGI (4,500) Allowable medical expense deduction $1,000
24
Q
John has a heart ailment. On his doctor’s advice, he installed an elevator in his home so that he would not have to climb stairs. The cost of the elevator was $7,000. An appraisal shows that the elevator increased the value of his home by $5,000. John can claim a medical deduction of A. $5,000. B. $2,000. C. $7,000. D. None of the answers are correct.
A
$2,000.
Answer (B) is correct.
Home-related capital expenditures incurred by a physically handicapped individual are deductible. An example of such an expenditure is an elevator needed for someone with a heart condition. However, the amount of any increase in value of the existing property cannot be deducted. Once a capital expense qualifies as a medical expense, amounts paid for the operation and upkeep also qualify as medical expenses. This is true even if the original capital expenditure was not entirely deductible (because it may have increased the fair market value of the residence). Therefore, $2,000 of the cost of the elevator is deductible as a medical expense ($7,000 cost – $5,000 increase in value of home). The maintenance and repair expense of the elevator is deductible, even though a portion of the cost of the elevator was not deductible (Publication 502).
25
Which of the following may NOT be deducted as medical expenses? (Disregard any limitations that may apply.)
A. $3,000 to a family physician for medical care.
B. $1,000 long-term care insurance.
C. $600 for eyeglasses.
D. $300 for maternity clothes.
$300 for maternity clothes.
Answer (D) is correct.
Deductible medical expenses are amounts paid for
Diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body
Transportation primarily for and essential to medical care
Medical insurance
Qualified long-term care premiums and services
Smoking cessation programs and prescribed drugs designed to alleviate nicotine withdrawal
Eyeglasses used for medical purposes
The cost of maternity clothes is not a qualified medical expense because it does not fall into any of the categories for deductible medical expenses (Publication 502).
26
Which of the following is deductible as medical insurance?
A. None of the answers are correct.
B. Medicare Part B.
C. Medical portion of auto insurance policy that provides coverage for all persons injured in or by the taxpayer’s car.
D. Insurance policy that pays you $50 a day if you are unable to work due to illness or injury.
Medicare Part B.
Answer (B) is correct.
To qualify for a deduction, a medical expense must be paid during the taxable year for the taxpayer, the taxpayer’s spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year. The basic cost of Medicare insurance (Medicare Part A) is not deductible unless voluntarily paid by the taxpayer for coverage. However, the extra cost of Medicare (Medicare Part B) is deductible (Publication 17).
27
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. $5,500
B. $7,500
C. $15,500
D. $17,500
$5,500
Answer (A) is correct.
Medical expenses are deductible to the extent they exceed 7.5% of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. Therefore, $5,500 ($5,000 dentist and eye doctor fees + $500 contact lenses) qualifies for the deduction before the AGI limitation.
28
```
During the year, the Ship family incurred the following medical expenses:
Doctor fees
$1,450
Prescription medicine
650
Health club dues (advised by doctor
for general health purposes)
2,000
Medical insurance premiums
1,900
Medical insurance reimbursements
500
The Ships’ AGI for the year was $40,000. What is the amount the Ships would be able to deduct on their tax return after any limitation?
A. $500
B. $3,000
C. $3,500
D. $1,000
```
```
$500
Answer (A) is correct.
The cost of the health club membership is not included in the computation of the medical expense deduction since the cost is incurred for the purpose of improving the taxpayers’ general health, not for curing a specific ailment or disease [Reg. 1.213-1(e)]. Only prescription drugs and insulin are deductible, so any over-the-counter medicines are not included (Publication 502).
Doctor fees
$ 1,450
Prescription drugs
650
Medical insurance premiums
1,900
Insurance reimbursement
(500)
Total expenses
$ 3,500
Less: 7.5% of AGI
(3,000)
Allowable medical expense deduction
$ 500
```
29
Gail and Jeff Payne are married and filed a joint return for the current year. During the year, they paid the following doctors’ bills:
For Gail’s mother, who received over half of her support from Gail and Jeff but who does not live in the Payne household, and who earned $2,000 in the current year for baby-sitting.
$700
For their unmarried 26-year-old son, who earned $4,000 in the current year but was fully supported by his parents. He is not a full-time student.
500
Disregarding the adjusted gross income percentage test, how much of these doctors’ bills may be included on the Paynes’ joint return in the current year as qualifying medical expenses?
A. $700
B. $500
C. $0
D. $1,200
$1,200
Answer (D) is correct.
Section 213(a) allows a deduction for expenses paid for medical care of the taxpayer, his or her spouse, or a dependent. Dependent is defined in Publication 502 and Sec. 152 to include the mother of the taxpayer and the son of the taxpayer if each received over half of his or her support from the taxpayer. Gail’s mother and son are thus considered dependents for purposes of the medical deductions, regardless of their gross income or filing status (these other factors do affect the availability of the dependency exemption). Therefore, all the medical expenses incurred by Gail and Jeff ($1,200) for their son and Gail’s mother are considered qualifying medical expenses.
30
Billy had bypass heart surgery in February Year 1. At the advice of his doctor, he had an elevator installed in his home so that he would not have to climb stairs. The costs associated with this capital improvement are as follows:
Cost of elevator installed 6/30/Yr 1
$5,000
Increase in value of home due to elevator
2,500
Cost of decorative lattice work over elevator 6/30/Yr 1
500
Increase in value of home due to lattice work
0
Maintenance and repair of elevator 9/30/Yr 1
500
None of the expenses were covered by insurance. How much would qualify as a deductible medical expense in Year 1, before any limitation?
A. $3,000
B. $2,500
C. $5,500
D. $3,500
$3,000
Answer (A) is correct.
Home-related capital expenditures incurred by a physically handicapped individual are deductible. An example of such an expenditure is an elevator needed for someone with a heart condition. However, the amount of any increase in value of the existing property cannot be deducted. Once a capital expense qualifies as a medical expense, amounts paid for the operation and upkeep also qualify as medical expenses. This is true even if the original capital expenditure was not entirely deductible (because it may have increased the fair market value of the residence). Therefore, $2,500 of the cost of the elevator is deductible as a medical expense ($5,000 cost – $2,500 increase in value of home). The cost of the lattice work over the elevator, on the other hand, is not deductible since it is not a medical necessity. The maintenance and repair expense of the elevator is deductible, even though a portion of the cost of the elevator was not (Publication 502).
Thus, Billy can deduct the increase in value of his home due to the elevator ($2,500) and the cost of the maintenance ($500) for a total deduction of $3,000.
31
Which of the following is a medical deduction?
A. Maternity clothing.
B. None of the answers are correct.
C. Health club dues advised by your doctor.
D. Legal abortion.
Legal abortion.
Answer (D) is correct.
The amount paid for a legal abortion is allowed as a deduction for a medical expense (Publication 502).
32
John is a cash-basis taxpayer. During the year, he incurred the following expenses for himself and his son, Michael, whom he claims as a dependent on his return.
$800 for braces;
$100 for babysitting so he could visit the chiropractor;
$900 for emergency room services for Michael;
$875 was covered by insurance;
John paid the remaining $25 in the next year.
John’s medical expense deduction before limitations is
A. $825
B. $800
C. $925
D. $900
$800
Answer (B) is correct.
Deductible medical expenses are amounts paid for
Diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body
Transportation primarily for and essential to medical care
Medical insurance
Qualified long-term care premiums and services
Smoking cessation programs and prescribed drugs designed to alleviate nicotine withdrawal
Expenses for unnecessary cosmetic surgery are not deductible. Cosmetic surgery includes any procedure directed at improving the patient’s appearance that does not meaningfully promote the proper function of the body or prevent or treat illness or disease [Sec. 213(d)(9)]. Braces meaningfully promote the proper function of the mouth, and hence are deductible. The babysitting is not deductible. The emergency room services are reduced by the insurance received. However, the $25 is paid in the following year and therefore is not deductible in the current year. John’s medical expense deduction before limitations is therefore $800 (Publication 502).
33
The taxpayer may deduct the cost of medical expenses for the following items EXCEPT
A. Guide dogs for the visually impaired and the cost of the dogs’ care.
B. Controlled substances in violation of federal law.
C. Doctor-prescribed drugs including birth control pills.
D. Laser eye surgery, contacts, eyeglasses, and hearing aids.
Controlled substances in violation of federal law.
Answer (B) is correct.
Only medicines and drugs that require a prescription are qualified medical expenses. Capital expenditures for obtaining items such as eyeglasses, a seeing eye dog, wheelchair, crutches, or artificial limbs are deductible medical expenses (Publication 502).
34
Which of the following expenses are NOT deductible as medical expenses?
A. Swimming lessons, recommended by a doctor for improvement of general health.
B. Insulin used for diabetes.
C. Acupuncture used for migraines.
D. Wig, purchased upon the advice of a physician for the mental health of a patient who has lost all of his or her hair from disease.
Swimming lessons, recommended by a doctor for improvement of general health.
Answer (A) is correct.
Amounts paid for qualified medical expenses that exceed 7.5% of AGI may be deducted. To qualify for a deduction, an expense must be paid during the taxable year for the taxpayer, the taxpayer’s spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year. Amounts paid to improve general health, such as health club membership dues and fees paid for swimming lessons, are not deductible (Publication 502).
35
All of the following taxes are deductible on Schedule A (Form 1040) EXCEPT
A. State real estate tax on a personal residence.
B. State or local inheritance tax.
C. State income tax.
D. Foreign income tax.
State or local inheritance tax.
Answer (B) is correct.
No deduction is allowed for state or local inheritance taxes. On the federal estate tax return, a credit may be allowed. But for income tax purposes, no deduction is available (Publication 17).
36
Which of the following taxes may be deducted on Form 1040, Schedule A?
A. Homeowners’ association charges.
B. Assessments for sewer lines.
C. State income taxes on municipal bond interest.
D. State and local taxes on gasoline.
```
State income taxes on municipal bond interest.
Answer (C) is correct.
Section 164(a) allows a deduction for state income taxes (even if the income is exempt from federal tax). Since this is not allowed as a deduction in arriving at adjusted gross income as defined in Sec. 62, it is an itemized deduction as defined in Sec. 63(d) and is reported on Schedule A.
```
37
During the year, Mark paid his first quarter county real estate taxes of $1,400 on his personal home. Mark paid real estate taxes on his unemployed brother-in-law’s home of $800. During the year, Mark was assessed a tax for trash pick-up of $165. He also paid a tax of $250 for improvements made by the town in his development, which increased the value of his property. Mark also withdrew the entire amount of $10,400 from his traditional IRA of which $2,400 was interest earned. Mark, in previous years, had taken deductions for his IRA contributions. Mark is 48 years old. What is deductible on his Form 1040 for real estate taxes and what is the tax penalty, if any, on the early withdrawal from his IRA?
Deductible Real Estate
Tax on Schedule A Tax on IRA
```
A.
$1,400
$0
B.
$1,815
$1,040
C.
$1,400
$1,040
D.
$1,400
$240
```
$1,400
$1,040
Answer (C) is correct.
State and local taxes on real property levied for the general public welfare may be deductible as real estate taxes on Form 1040, Schedule A. The taxes must be for general community or governmental purposes and assessed uniformly against all property under the jurisdiction of the taxing authority. Taxes charged for a special privilege granted, services rendered for the taxpayer, or local benefits and improvements that increase the value of the taxpayer’s property are not deductible. Additionally, itemized charges assessed against specific property or certain people are not deductible. This includes services, such as trash collection, even when paid to the taxing authority. Therefore, Mark can only deduct the $1,400 of real estate taxes paid on his personal home.
A taxpayer must include early distributions of taxable amounts from a traditional IRA in gross income. Early distributions are amounts distributed from a traditional IRA account or annuity before the taxpayer is age 59 1/2 and are subject to an additional 10% tax. The additional tax on Mark’s early distribution is $1,040 ($10,400 IRA withdrawal × 10%).
38
```
In the current year, Smith paid $6,000 to the tax collector of Big City for realty taxes on a two-family house owned by Smith’s mother. Of this amount, $2,800 covered back taxes for the previous year, and $3,200 covered the current-year taxes. Smith resides on the second floor of the house, and his mother resides on the first floor. In Smith’s itemized deductions on his current-year return, what amount was Smith entitled to claim for realty taxes?
A. $3,000
B. $6,000
C. $3,200
D. $0
```
$0
Answer (D) is correct.
Taxes may be deducted only by the person on whom they are legally levied. Since Smith does not own the house, none of the taxes paid by Smith can be deducted by Smith. Smith’s mother is entitled to the deduction only if she pays the taxes.
39
```
During the current year, Anthony paid the following taxes:
County real estate taxes on rental property he owns
$3,000
County real estate taxes on his own residence
2,500
Federal income taxes
7,000
State income taxes
2,700
Local city income taxes
500
Social Security taxes for household help
500
Anthony did not use the rental property for personal purposes. What amount is deductible as an itemized deduction on Anthony’s current-year income tax return?
A. $5,700
B. $8,700
C. $5,200
D. $14,000
```
$5,700
Answer (A) is correct.
Publication 17 and Sec. 164(a) list the taxes that are deductible from adjusted gross income. The county real estate taxes on the personal residence, the state income taxes, and the local city income taxes are deductible as itemized deductions. The county real estate taxes on the rental property and the Social Security taxes for household help may be deductible but not as itemized deductions. Federal income taxes are not deductible.
40
```
During the current year, Luca paid the following taxes:
State and local real estate taxes on rental property he owns
$ 4,500
State and local real estate taxes on his own residence
3,750
Federal income taxes
10,500
State income taxes
4,050
Local city income taxes
750
Social Security taxes for household help
750
Luca did not use the rental property for personal purposes. What amount is deductible as an itemized deduction on Luca’s current-year income tax return?
A. $21,000
B. $7,800
C. $13,050
D. $8,550
```
$8,550
Answer (D) is correct.
Section 164(a) lists the taxes that are deductible from adjusted gross income. The real estate taxes on the personal residence, the state income taxes, and the local city income taxes are deductible as itemized deductions. The real estate taxes on the rental property are deductible on Schedule E and the Social Security taxes for household help may qualify for the dependent care credit. Federal income taxes are not deductible (Publication 17).
41
In the current year, Maria paid the following taxes:
Special assessment to provide local benefits
$2,500
County real estate taxes paid on her vacation home
1,250
Sales taxes paid when she purchased a new auto
900
Personal property taxes paid to her local government
350
What amount is allowable as an itemized deduction for the current year?
A. $3,750
B. $5,000
C. $2,500
D. $1,250
$2,500
Answer (C) is correct.
Publication 17 and Sec. 164(a) list the taxes that are deductible from adjusted gross income. The state and local general sales tax (in lieu of state and local income taxes), the county real estate taxes paid on her vacation home, and the personal property taxes are deductible as itemized deductions.
42
Jeremy decided to itemize on his Year 1 return. He has the following receipts:
State income tax, $3,000
Federal income tax, $12,000
County real estate tax, $2,000
Fee for inspection of car that he uses only personally, $50
Homeowners’ association fees on his personal home, $500
Self-employment tax of $1,000
Compute the amount of tax deductions he can take on his Schedule A, Itemized Deductions.
A. $6,000
B. $18,550
C. $5,000
D. $5,500
$5,000
Answer (C) is correct.
State and local real property taxes are deductible by the person on whom they are imposed in the year in which they were paid or accrued. Ad valorem and personal property taxes are deductible, but only if the tax is substantially in proportion to the value of the property, imposed on an annual basis, and actually imposed. State income taxes paid are deductible, and foreign income taxes paid are deductible unless a foreign tax credit is claimed. The following taxes are not deductible:
Federal taxes on income, estates, gifts, inheritances, legacies, and successions
State taxes on sales, cigarettes and tobacco, alcoholic beverages, gasoline, and registration
Licensing fees of highway motor vehicles
Jeremy is able to deduct the state income taxes ($3,000) and the county real estate taxes ($2,000) on Schedule A, Itemized Deductions. Fifty percent of self-employment taxes are deductible, but they are deductible from gross income to arrive at AGI, not on Schedule A (Publication 17).
43
```
Lonnie and Judy Landers bought a home July 1, 2019. Real estate taxes are assessed in their state on April 1, 2019, for property owned in 2018. The 2018 tax is due October 1, 2019. When the Landers bought the house they agreed to pay all taxes due after the date of purchase. Taxes of $1,200 for 2018 were due October 1, 2019, and the Landers paid this amount on October 1, 2019. In 2020, the Landers received a property tax bill for $1,500 for 2019. Payment is due October 1, 2020. What amount can the Landers deduct on their 2019 return as real property tax?
A. $0
B. $1,200
C. $750
D. $600
```
$0
Answer (A) is correct.
Real property taxes are generally deductible only by the person against whom the tax is imposed in the year in which they were paid or accrued. Since no tax paid in 2019 was imposed on the Landers ($1,200 imposed on the sellers for 2018), the Landers have a $0 deduction on their 2019 return. Section 164(d) requires real estate taxes to be apportioned between the buyer and the seller based on the number of days in the real property tax year that the property was held by each (Publication 17). Since the Landers paid $1,200 for 2018 taxes, they are capitalized as an additional cost of the property. For 2019 taxes, the total tax of $1,500 is apportioned based on the amount of time each party held the property for the year. Thus, the Landers are deemed to own the property for 50% of the year (183 days ÷ 365 days) and are permitted to deduct $750 ($1,500 × 50%) in 2020.
44
Mr. and Mrs. Smith’s real property tax year is the calendar year. Real estate taxes for the previous year are assessed in their state on January 2 and become due on May 1 and October 1. The tax becomes a lien on May 1. The Smiths bought a home on July 1 of the current year. The real estate taxes on the home for the previous year, which became due in the current year, were $1,000. The Smiths agreed to pay the $1,000 after the sale. They paid $500 in late taxes on August 1 and $500 on October 1. How should the Smiths treat the tax payments for federal income tax purposes for the current year?
A. The entire $1,000 is deductible.
B. They may deduct only the $500 payment made on October 1.
C. They may deduct only the $500 payment made on August 1 as a settlement fee or closing cost.
D. They may not deduct any amount but must add the $1,000 to the cost of their home.
They may not deduct any amount but must add the $1,000 to the cost of their home.
Answer (D) is correct.
Real property taxes are generally deductible only by the person against whom the tax is imposed. Section 164(d) requires real estate taxes to be apportioned between the buyer and the seller based on the number of days in the real property tax year that the property was held by each. If the buyer pays the seller’s taxes, they are capitalized as an additional cost of the property. The Smiths paid $1,000 in real estate taxes for the previous year after they purchased the property in the current year. They have, in effect, paid taxes owed by the seller and will not be able to deduct any of the amount and instead must add the $1,000 to the basis of the property.
45
Which of the following taxes is NOT deductible?
A. One-half of the self-employment tax paid.
B. Personal property tax.
C. Special assessment to provide local benefits.
D. State and local real estate tax.
Special assessment to provide local benefits.
Answer (C) is correct.
An assessment for a local benefit is a payment tending to increase the value of the property and is not deductible under Sec. 164. It may, however, be capitalized (Publication 17).
46
Which of these taxes is deductible on Schedule A?
A. Current-year property taxes paid for real property purchased on December 31 of the current year.
B. A special assessment paid to improve the taxpayer’s neighborhood.
C. Current-year property taxes paid on land owned in Canada.
D. Personal property tax paid annually on a luxury car based on its value.
Personal property tax paid annually on a luxury car based on its value.
Answer (D) is correct.
State and local personal property taxes are deductible if the tax is actually imposed, imposed on an annual basis, and substantially in proportion to the value of the property.
47
```
During the current year, Paul and Mary Davis, cash-basis taxpayers, paid the following taxes:
State income taxes withheld
$ 300
Estimated federal income tax
250
Estimated state income tax
1,500
Sales tax on new auto used 60% for business
1,400
State gift tax
1,050
State and local property tax, including $50 for trash pickup
2,600
Property tax on their vacation home in Canada
1,000
What amount can Mary and Paul claim as an itemized deduction on their current-year federal income tax return?
A. $5,450
B. $4,350
C. $5,400
D. $5,350
```
```
$4,350
Answer (B) is correct.
Section 164(a) allows a deduction for state and local real property taxes. The deduction for foreign real property tax ended in 2017. Thus, the $2,550 of other property taxes ($2,600 – $50 trash pickup fee) may be deducted, but not the Canadian tax. A deduction is also allowed for state income taxes or state sales taxes. The taxpayers would select the greater deduction; therefore, the $300 of state income taxes withheld and the $1,500 of estimated state income taxes paid may be deducted. Section 164 does not allow a deduction for federal income taxes in any case. The business portion of the sales tax paid on the automobile would be deducted as a business expense on the taxpayer’s Schedule C through the claiming of a depreciation deduction, not as an itemized deduction on Schedule A. Section 164 does not allow a deduction for gift taxes. The $50 fee paid for trash pickup would not be allowed as an itemized deduction.
State income taxes withheld
$ 300
Estimated state income tax
1,500
State and local property tax ($2,600 – $50 trash pickup)
2,550
$4,350
```
48
Which of the following types of taxes can be deducted on Schedule A?
A. A tax on a motor vehicle based on vehicle weight.
B. Transfer taxes on the sale of a residence.
C. A tax on a motor vehicle based on engine horsepower.
D. None of the answers are correct.
None of the answers are correct.
Answer (D) is correct.
To deduct a personal property tax on Schedule A, the tax imposed must be determined solely on the value of the property. Transfer taxes incurred on the sale of a residence are not allowed as Schedule A deductions. They are added to the buyer’s cost basis of the residence if paid by them. If paid by the seller, transfer taxes serve to lower the realized amount of the sale as sale expenses (Publication 17).
49
Taxes deductible as an itemized deduction up to $10,000 include all of the following EXCEPT
A. State and local income taxes.
B. Personal property taxes based on the value of the personal property.
C. Taxes that the taxpayer paid on property owned by his or her parents or children.
D. State and local real estate taxes based on the assessed value of the property and charged uniformly against all property.
Taxes that the taxpayer paid on property owned by his or her parents or children.
Answer (C) is correct.
The taxes that are deductible from adjusted gross income include state and local income taxes withheld, state and local real estate taxes paid, and personal property taxes, all of which are deductible as itemized deductions (Publication 17). However, taxes paid on another person’s property are not deductible because the tax liability is the liability of the other person.
50
Humberto purchased a new home on March 15, 2018, in a county that assesses real estate property taxes in the succeeding year (i.e., 2018 taxes assessed in 2019). At the closing on his new home, Humberto received the following credits against the purchase price of the home:
2017 real estate property taxes
$2,000
2018 real estate property taxes prorated
420
In 2018, when the real estate property tax bill for 2017 came in, Humberto had to pay $2,200 total. The real estate property tax bill for 2018 rose to a total of $2,350, which he paid when he received it in 2019. What is the amount of Humberto’s deduction for real estate property taxes on his 2018 and 2019 income tax returns?
2018
2019
```
A.
$200
$1,930
B.
$2,200
$2,350
C.
$0
$1,930
D.
$0
$1,880
```
$0
$1,880
Answer (D) is correct.
State and local real property taxes are generally deductible only by the person against whom the tax is imposed. Even though Humberto received credits for the seller’s portion of the real estate taxes, Sec. 164(d) requires real estate taxes to be apportioned between the buyer and the seller based on the number of days in the real property tax year that the property was held by each (Publication 17). Since Humberto paid an additional $200 for 2017 taxes, they are capitalized as an additional cost of the property. For 2018 taxes, the total tax of $2,350 is apportioned based on the amount of time each party held the property for the year. Thus, Humberto is deemed to own the property for 80% of the year (292 days ÷ 365 days) and is permitted to deduct $1,880 ($2,350 × 80%) in 2019.
51
```
Mr. Jones filed an amended federal income tax return during the current year for an earlier tax year. This amended return resulted in an additional tax payment of $400, a penalty of $100, and an interest payment of $40. How much of these payments will be deductible on the current-year tax return?
A. $0
B. $40
C. $440
D. $8
```
$0
Answer (A) is correct.
Federal income taxes and penalties imposed by the IRS are never deductible, and there is no deduction for personal interest. None of the payments made by Jones is deductible in the current year (Publication 17).
52
All of the following taxes could be deductible as itemized deductions EXCEPT
A. Ad valorem personal property tax.
B. Service charges for police protection.
C. Tobacco tax.
D. Local property tax.
Tobacco tax.
Answer (C) is correct.
State taxes on sales of cigarettes and tobacco, alcoholic beverages, gasoline, and licensing/registration (based on weight of the vehicle and not the value) are not deductible (Publication 17).
53
```
Ms. L, a cash-basis taxpayer, lives in a county where the real estate tax year runs from July 1 to June 30. The tax bills are due in two installments--July 1 and January 1. Ms. L purchased her first house on September 1 of the current year. As part of her purchase price, she reimbursed the sellers $700 for her share of the current-year real estate taxes. At the date of purchase, she also paid her mortgage company $450, which was credited to her tax escrow account. From her monthly mortgage payments in the current year, a total of $600 was credited to her tax escrow account. On January 4 of the following year, the bank paid the escrow balance to the county tax office. L’s real estate tax deduction for the current year is
A. $1,150
B. $450
C. $700
D. $1,750
```
$700
Answer (C) is correct.
Section 164(d) provides for the apportionment of taxes on real property between sellers and purchasers. Ms. L paid her share of the real estate taxes ($700) in the current year. The amounts credited to her account by the mortgage company and held in escrow are not deductible as taxes until the tax is actually paid (Publication 17). The $1,050 ($450 + $600) held by the mortgage company in escrow will be deductible by Ms. L in the following year, the year paid.
54
```
During the current year, Ms. Gonzales paid $2,000 for local real estate taxes on property she rents to others and $3,425 real estate taxes on her residence. In addition, she paid gift taxes of $650 and $1,250 for state income taxes to New Jersey. What amount can Ms. Gonzales deduct as an itemized deduction on her tax return for the current year?
A. $5,325
B. $7,325
C. $6,675
D. $4,675
```
$4,675
Answer (D) is correct.
Section 164(a) lists the taxes that are deductible from adjusted gross income. The local real estate taxes on the personal residence ($3,425) and the state income taxes ($1,250) are deductible as itemized deductions for a total of $4,675. The real estate taxes on the rental property may be deductible, but not as an itemized deduction. Gift taxes are not deductible (Publication 17).
55
Which of the following costs are deductible on Form 1040, Schedule A, as taxes for 2019?
Personal property tax on an airplane
Garbage pickup itemized on the real estate bill
Real estate tax on property owned in Canada
Sales tax paid on the purchase of your personal car
A. All of the answers are correct.
B. None of the answers are correct.
C. 1 and 4.
D. 2, 3, and 4.
1 and 4.
Answer (C) is correct.
Taxes not directly connected with a trade or business or with property held for the production of rents or royalties may only be deducted as an itemized deduction on Schedule A of Form 1040. Publication 17 and Sec. 164(a) list the taxes that are included as
State or local real property tax
State or local personal property tax
State, local, or foreign income; war profits or excess tax profits
Generation-skipping tax imposed on income distributions
State and local general sales taxes (in lieu of state and local income taxes)
State and local taxes on personal property are only deductible if they meet all three of the following criteria:
The tax is in proportion to the property,
The tax is imposed annually, and
The tax is imposed with respect to personal property.
Foreign real property taxes are not deductible by individuals during tax years 2018-2025.
56
```
During the current year, Marlena paid $4,000 for county real estate taxes on property she rents to others and $6,850 county real estate taxes on her residence. In addition, she paid Social Security taxes of $1,300 for household help and $2,500 for state income taxes to New Jersey. What amount can Marlena deduct as an itemized deduction on her tax return for the current year?
A. $14,650
B. $13,350
C. $10,650
D. $9,350
```
$9,350
Answer (D) is correct.
Section 164(a) lists the taxes that are deductible from adjusted gross income. The county real estate taxes on the personal residence ($6,850) and the state income taxes ($2,500) are deductible as itemized deductions for a total of $9,350 ($6,850 + $2,500). The real estate taxes on the rental property and the Social Security taxes for household help may be deductible, but not as itemized deductions (Publication 17).
57
During the current year, Jack and Mary Bronson paid the following taxes:
County taxes on residence (for period January 1
to September 30 of the current year)
$2,700
State motor vehicle tax on value of the car
360
The Bronsons sold their house on June 30 of the current year under an agreement in which the real estate taxes were not prorated between the buyer and sellers. What amount should the Bronsons deduct as taxes in calculating itemized deductions for the current year?
A. $1,800
B. $2,700
C. $3,060
D. $2,160
$2,160
Answer (D) is correct.
Section 164(a) allows a deduction for state and local real property taxes, and for state and local personal property taxes. Real estate taxes must be apportioned between the buyer and the seller on the basis of the number of days the property was held by each in the year of sale, regardless of an agreement not to prorate them [Sec. 164(d)]. The taxpayers held the property for 6 months of the 9-month period the taxes covered. The amount of the taxes apportioned to the Bronsons is $1,800 ($2,700 × 6 ÷ 9). The state motor vehicle tax on the value of the car is a tax on the value of personal property, so the $360 may also be deducted (Publication 17). The taxpayers may deduct a total of $2,160 as taxes in calculating their itemized deductions.
58
Which of the following interest expenses incurred by Leila is treated as a personal interest?
A. Ordinary bank loan used to pay for her son’s medical care.
B. Interest incurred by a partnership in which Leila is a limited partner.
C. Interest on a $200,000 home mortgage she took out in 2009.
D. Bonds purchased with accrued interest.
Ordinary bank loan used to pay for her son’s medical care.
Answer (A) is correct.
Personal interest is defined in Sec. 163(h)(2) as any interest other than qualified residence interest, investment interest, interest taken into account in computing income or loss from a passive activity, interest in connection with a business, certain student loan interest, and interest during certain extensions of time to pay the estate tax. Interest on an ordinary bank loan incurred for medical care is personal interest. Personal interest is not deductible (Publication 17).
59
Which of the following is treated as personal interest of Individual A?
A. Interest incurred to purchase bonds as an investment.
B. Interest incurred on refinancing A’s home if the funds are used for a vacation.
C. Interest incurred on an ordinary bank loan if the funds are used to provide medical care for a dependent of A.
D. Interest incurred by a limited partnership in which A is a limited partner.
Interest incurred on an ordinary bank loan if the funds are used to provide medical care for a dependent of A.
Answer (C) is correct.
Personal interest is defined in Sec. 163 as any interest other than qualified residence interest, investment interest, interest taken into account in computing income or loss from a passive activity, interest in connection with a business, student loan interest, and interest during certain extensions of time to pay the estate tax. Interest on an ordinary bank loan incurred for medical care is personal interest. Personal interest is not deductible (Publication 17).
60
How much of the following interest expense is deductible on Schedule A before limitations? The taxpayer is reporting $1,500 in investment income.
$1,200 interest paid on a loan used to purchase a vacant lot held for investment
$750 interest paid on a qualifying student loan
$2,700 credit card interest on an advance used to make a down payment on a new home
$625 interest on a loan used to invest in tax-free bonds
A. $1,200
B. $3,900
C. $1,950
D. $4,650
$1,200
Answer (A) is correct.
The general rule is that no personal interest may be deducted. Personal interest includes interest on credit card debt, revolving charge accounts and lines of credit, car loans, medical fees and premiums, etc. Investment interest is interest paid or incurred (on debt) to purchase or carry property held for investment and is allowed within limits. Student loan interest is deductible on line 20 of Form 1040 Schedule 1 as an above-the-line deduction. No deduction is permitted for interest on debt incurred to purchase or carry tax-exempt bonds. Therefore, the interest expense deductible on Schedule A, before limitations, is $1,200 (Publication 17).
61
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On June 30, Jeff, who uses the cash method of accounting, borrowed $25,000 from a bank for use in his business. Jeff was to repay the loan in one payment with interest on December 30 of the same year. On December 30, he renewed that loan plus the interest due. The new loan was for $27,000. What amount of interest expense can Jeff deduct for the current year?
A. $1,000
B. $0
C. $2,000
D. $333
```
$0
Answer (B) is correct.
Under the cash method of accounting, expenses are deductible when they are actually paid. Paying interest with another debt instrument is only substitution of debt. Since Jeff paid no interest on the loan in the current year, no interest expense is deductible for the current year (Publication 535).
62
Luke took out a mortgage on his home for $250,000 10 years ago. He filed as single for Year 1. In April Year 1 when the home had a fair market value of $430,000 and he owed $180,000 on the mortgage, he took out a home equity loan for $140,000. Luke used the proceeds as follows:
$90,000 was for substantial home improvements.
$30,000 was for credit card debt.
$20,000 was used to purchase securities that produce tax-free income.
How much of the $140,000 loan would produce deductible mortgage interest in Year 1?
A. $140,000
B. $0
C. $90,000
D. $120,000
$90,000
Answer (C) is correct.
Luke’s first mortgage is acquisition indebtedness, which has fully deductible interest. Of the second mortgage, $90,000 is acquisition indebtedness because it was used to improve the residence. The $20,000 used to produce tax-free income cannot also be permitted a mortgage interest deduction. For 2019, the prior deduction for interest on home equity loans used for personal expenses such as as credit card debt, is disallowed. Thus, the total amount of the loan that produces deductible mortgage interest is only the $90,000 for home improvements.
63
Matt paid interest in 2019 as follows:
$100 on his personal credit card
$200 on funds borrowed in order to purchase $6,000 in tax-exempt securities
$500 interest on his personal car loan since he does not use his car for business
$10,000 on his home mortgage
What is the amount of Matt’s deductible interest in 2019?
A. $10,600
B. $10,000
C. $10,800
D. $17,400
$10,000
Answer (B) is correct.
The general rule is that no personal interest may be deducted. Personal interest includes interest on credit card debt, revolving charge accounts and lines of credit, car loans, medical fees, and premiums, etc. Personal interest also includes any interest on underpaid tax liabilities. Personal interest does not include interest on trade or business debt, investment interest, passive activity interest, qualified residence interest, or student loan interest. In addition, no expenses may be deducted on tax-exempt securities, including interest on a loan to purchase the securities (Publication 17). The only interest that Matt can deduct in 2019 is the $10,000 from his home mortgage.
64
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Johnny has been divorced for 5 years. He failed to make his alimony and support payments. The court ordered him to pay $1,500 as interest on the back alimony and support payments. He paid interest of $1,000 on a car loan, $2,500 on his outstanding credit card balance, $6,000 on a home equity loan that was not used to substantially improve his residence, and $10,000 on his mortgage. Other interest payments amounted to $2,500 on various appliance loan payments. How much is Johnny’s deductible interest?
A. $18,500
B. $17,500
C. $10,000
D. $23,500
```
$10,000
Answer (C) is correct.
Qualified residence interest is interest paid or accrued during the tax year on acquisition or home equity indebtedness that is secured by a qualified residence. The general rule is that no personal interest may be deducted. Personal interest includes interest on credit card debt, revolving charge accounts and lines of credit, car loans, medical fees, and premiums, etc. There is no deduction for “fines and penalties for violations of law, regardless of their nature” (Publication 17).
65
Which of the following types of interest payments, not allowed because of one of the limitations, may be carried over to the next year?
A. Interest on money borrowed to buy stocks.
B. Interest on a personal car loan.
C. Interest on a personal residence mortgage.
D. Interest on credit cards.
Interest on money borrowed to buy stocks.
Answer (A) is correct.
The deduction for interest on investment indebtedness is limited by Sec. 163(d) to the amount of net investment income. Any disallowed investment interest may be carried over and treated as investment interest paid or accrued in the succeeding taxable year (Publication 550) [Sec. 163(d)(2)].
66
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?
The client’s investment interest expense exceeds net investment income.
The client’s qualified residence interest expense reduces the deductible amount of investment interest expense.
A. Neither I nor II.
B. Both I and II.
C. II only.
D. I only.
I only.
Answer (D) is correct.
The IRC allows the deduction of a limited amount of investment interest as an itemized deduction. The limit is to the extent of net investment income.
67
George had the following income and expenses:
Interest and dividend income of $8,000
Gross wages of $100,000
Margin interest of $10,000
Mortgage interest of $6,000
Interest on a mobile home used as a second home, $3,000
Credit card interest of $2,000
How much interest can George deduct on Schedule A?
A. $17,000
B. $18,000
C. $21,000
D. $19,000
$17,000
Answer (A) is correct.
A taxpayer generally can deduct interest paid or accrued during the tax year as long as the interest pertains to a debt of the taxpayer and results from a debtor-creditor relationship [Publication 17 and Sec. 163(a)]. Limitations and exclusions from interest deductions are listed below.
Investment indebtedness interest. The deduction is limited to net investment income (margin interest) [Sec. 163(d)].
Life insurance. Interest on loans to pay life insurance premiums on certain contracts are not deductible.
Personal interest. Personal interest (which includes credit card interest) is not deductible [Sec. 163(h)].
Prepaid interest. Cash-basis taxpayers must generally capitalize prepaid interest and deduct it as it accrues [Sec. 461(g)].
Loan to purchase and carry tax-exempt securities. Expenses (including interest) on tax-exempt securities are generally denied [Sec. 265(a)].
Related taxpayers. Accrual-basis taxpayers can only deduct interest paid when interest is owed to related cash-basis taxpayers [Sec. 267(a)].
Thus, $8,000 of the margin interest is deductible (since it is limited to the interest and dividend income), in addition to the mortgage interest of $6,000 and the interest on the mobile home of $3,000 (since neither of these are excluded from deductibility).
68
Investment interest generally includes
A. Interest expense for an investment in property subject to a net lease.
B. Interest expense to acquire a limited partnership interest.
C. Interest expense for rental activity in which the taxpayer materially participates.
D. Interest expense to acquire stocks and bonds.
Interest expense to acquire stocks and bonds.
Answer (D) is correct.
Investment interest includes (1) interest paid or accrued on indebtedness that is incurred or continued in order to purchase or carry property held for investment, and (2) interest expense for a business activity in which the taxpayer does not materially participate if that activity is not treated as a passive activity under Sec. 469 [Sec. 163(d)]. Interest to acquire stocks and bonds meets the first part of this definition as interest on indebtedness incurred to purchase property held for investment (Publication 17).
69
Which of the following payments may be deducted in full in the current year as interest expense on Form 1040, Schedule A?
Mortgage prepayment penalty
Interest relating to tax-exempt interest income
Installment plan interest for clothes purchases
Mortgage interest
Credit investigation fees
A. 1, 3, and 5.
B. 2, 4, and 5.
C. 3 and 4.
D. 1 and 4.
1 and 4.
Answer (D) is correct.
Section 163 allows a deduction for certain interest paid or accrued within the taxable year on indebtedness. Interest is compensation for the use or forbearance of money. Personal interest is not deductible, but mortgage interest is generally deductible, provided that it is “qualified residence interest” as defined in Sec. 163(h)(3). Mortgage prepayment penalties have also been held to be compensation for the use of money and are deductible as interest (Publication 17).
70
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Geraldine, a single taxpayer, had investment income from dividends and a net gain on the sale of investment property that totaled $12,000. Geraldine’s investment expenses of $2,980, other than interest, were directly connected with the production of the investment income. Geraldine’s adjusted gross income was $100,000, and her investment interest paid was $12,500. When figuring her investment interest deduction, she chooses to include all of her net capital gain in investment income. What is Geraldine’s investment interest deduction?
A. $9,020
B. $11,020
C. $12,000
D. $12,500
```
$9,020
Answer (A) is correct.
The deduction for interest on investment indebtedness is limited by Sec. 163(d) to the amount of net investment income. Net investment income is the excess of investment income over deductible investment expenses (other than interest expense) (Publication 17). Geraldine’s net investment income is $9,020 ($12,000 – $2,980), and her investment interest deduction is therefore limited to $9,020.
71
All of the following statements regarding deductible interest expense are true EXCEPT
A. “Points” paid by a seller are deductible as interest only by the seller.
B. A mortgage prepayment penalty is deductible as interest.
C. “Points” paid by the borrower for the use of money are deductible as interest either ratably as the loan is repaid or in the year of payment.
D. The day you mail a check for the payment of interest is the date the interest is paid.
“Points” paid by a seller are deductible as interest only by the seller.
Answer (A) is correct.
Points are generally a fee paid for processing, placing, or finding a loan. Points are deductible as interest if considered compensation to a lender for the use of the money. For many years, points paid by a seller were not deductible as interest because the debt on which they are paid was not the debt of the seller. Instead, they were treated as a reduction of the selling price. The IRS changed its position for seller-paid points paid by cash-method taxpayers. Revenue Procedure 94-27 permits the purchaser to deduct seller-paid points. A basis reduction must be made for the seller paid points that are deducted.
Authors’ note: Revenue Procedure 94-27 does not prohibit the purchaser from adopting the general amortization rules of prepaid interest. In the event the purchaser’s standard deduction exceeds his or her itemized deductions, (s)he may elect to amortize the “points” over the duration of the loan.
72
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Keith and Margaret had adjusted gross income of $100,000. They had real estate taxes of $4,000, mortgage interest of $12,000, home equity loan interest of $6,000 used to substantially improve the residence, automobile loan interest of $3,000, second home mortgage interest of $4,000, and credit card interest of $2,000. The total allowable interest deduction is
A. $24,000
B. $31,000
C. $18,000
D. $22,000
```
$22,000
Answer (D) is correct.
Qualified residence interest is interest paid or accrued during the tax year on acquisition or home equity indebtedness that is used to substantially improve the residence and secured by a qualified residence. The general rule is that no personal interest may be deducted. Personal interest includes interest on credit card debt, revolving charge accounts, lines of credit, car loans, medical fees, and premiums. The real estate taxes are deductible but are not included in the total allowable interest deduction (Publication 17). Thus, only the $4,000 of the second home mortgage interest, $12,000 of mortgage interest, and $6,000 of home equity loan interest are deductible interest expenses.
73
Earl took out a mortgage on his home for $250,000 in 2009. He filed as single for 2019. In April 2019, when the home had a fair market value of $430,000, Earl took out a home equity loan for $140,000. He used the proceeds as follows:
$90,000 for home improvements
$30,000 for payment of credit card debt
$20,000 for purchase of securities that produce tax-free income
How much of the $140,000 loan would produce deductible mortgage interest in 2019?
A. $0
B. $120,000
C. $140,000
D. $90,000
$90,000
Answer (D) is correct.
Earl’s first mortgage is acquisition indebtedness, which has fully deductible interest. Of the second mortgage, $90,000 is acquisition indebtedness because it was used to improve the residence. The $20,000 used to produce tax-free income is not permitted a mortgage interest deduction. For 2019, the prior deduction for interest on home equity loans used for personal expenses such as as credit card debt, is dissallowed. Thus, the total amount of the loan that produces deductible mortgage interest is only the $90,000 for home improvements.
74
Which of the following payments can Demi deduct, at least in part, as interest in the current year?
A. Interest on income taxes paid to the IRS.
B. Interest she paid on a loan used to purchase tax-exempt bonds.
C. Points that the seller paid to a lender to arrange financing for Demi’s purchase of her main home.
D. Property insurance premiums on a policy entered into in 2016.
Points that the seller paid to a lender to arrange financing for Demi’s purchase of her main home.
Answer (C) is correct.
Prepaid interest paid in the form of points on a home mortgage to purchase a home is deductible in the year paid as long as points are normal business practice and are reasonable in the area. Points paid by the seller in connection with the loan to the taxpayer are treated as directly paid by the taxpayer (Publication 17). Therefore, the interest is considered as paid by Demi.
75
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Mary and George are both employed by H.T. Forest & Co. Her salary was $35,000 and his was $30,000. During the year, they made the following interest payments: mortgage $8,000, car loan $2,000, home equity loan (for substantial home improvements) $3,000, and interest on margin account $4,000. In addition to their salaries, they had interest income of $1,500 and dividend income of $1,000. What is the amount that Mary and George will be able to deduct on Schedule A?
A. $17,000
B. $15,500
C. $13,500
D. $15,000
```
$13,500
Answer (C) is correct.
Qualified residence interest is interest paid or accrued during the tax year on acquisition or home equity (used to buy, build, or improve the residence) indebtedness that is secured by a qualified residence. The general rule is that no personal interest may be deducted. Personal interest includes interest on credit card debt, revolving charge accounts and lines of credit, car loans, medical fees, and premiums, etc. Investment interest may be deducted only to the extent of net investment income. Net investment income is any excess of investment income over investment expense(s) other than interest expense. Therefore, net investment income is $2,500 [($1,500 + $1,000) – $0]. (Publications 17 and 550.) Therefore, the answer is $13,500 ($8,000 + $3,000 + $2,500).
76
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On July 1, 2016, Correy refinanced his mortgage and obtained a new 30-year loan. He paid $3,600 (1% of the loan value) to obtain an 8% rate. On March 1, 2019, Correy sold his home and purchased a new house, with a down payment of $10,000. He paid an additional 1% of the loan value ($3,600) to obtain a 30-year loan with an 8% interest rate. Points are normal business practice and were reasonable in the area in which Correy lived. Assuming mortgage payments were made at the end of the month, how much can Correy deduct as points on his 2019 tax return?
A. $3,600
B. $6,900
C. $3,400
D. $0
```
```
$6,900
Answer (B) is correct.
Prepaid interest paid in the form of points on a home mortgage to purchase a home is deductible in the year paid as long as points are normal business practice and are reasonable in the area. Points paid to refinance a mortgage are not currently deductible (Publication 17). Instead, the points are deductible over the term of the loan ($3,600 ÷ 360 months = $10/month). If the mortgage is repaid early, the balance of the points is deductible in the year of the repayment. By the beginning of 2019, Correy will have deducted $300 ($10 × 30 months) in points, leaving a $3,300 balance. Thus, Correy’s 2019 point deduction is calculated as follows:
July 1, 2016, mortgage points
$3,600
Amount previously deducted
300
Balance after 30 months
$3,300
Points on purchase of new home
3,600
Total 2019 points deduction
$6,900
```
77
Which of the following would disqualify points from being fully deductible in the year paid?
A. The points are clearly stated on the settlement statement.
B. The points were computed as a percentage of the amount of the mortgage.
C. The loan proceeds were used to purchase a second home.
D. The payment of points is common in your area.
The loan proceeds were used to purchase a second home.
Answer (C) is correct.
Points paid by the borrower with respect to a home mortgage are prepaid interest, which is typically deductible over the term of the loan. The amount paid as points for a home may only be deducted in the year paid if the points are paid on acquisition indebtedness and the home is the taxpayer’s principal place of residence.
78
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Chester and Mary, a married couple, have interest and dividends (investment income) of $14,000. They have margin interest expense of $16,000, home mortgage interest of $12,000 on a $360,000 loan, equity loan interest (for substantial improvements to the home) of $3,000 on a $50,000 loan, credit card interest of $4,500 and automobile loan interest of $2,000. They have no tax-exempt investments. What amount can they take as interest deductions after limitations?
A. $37,500
B. $52,500
C. $31,000
D. $29,000
```
$29,000
Answer (D) is correct.
All interest that is not personal interest, is associated with a trade or business, or is associated with the production of investment income may be deducted. Qualified residence interest does not qualify as personal interest and is any interest paid or accrued on the acquisition of a qualified residence through a mortgage and home equity indebtedness with respect to the qualified residence. The aggregate amount of acquisition of a qualified residence including qualified home equity shall not exceed $750,000 ($375,000 for married filing separately). Investment interest is limited to investment income (Publication 17 and Sec. 163).
Thus, the amount of deductible interest is $29,000 ($14,000 for margin interest, $3,000 on home equity loan, and $12,000 of mortgage interest).
79
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Carla borrowed $100,000 to buy land for investment. Her income sources for the year include $3,000 interest, $1,000 dividends, and $4,000 royalties. How much of the $5,000 interest expense paid on the land loan can she deduct this year?
A. $4,000
B. $8,000
C. $5,000
D. $3,000
```
$5,000
Answer (C) is correct.
Interest that accrues on money borrowed that is used to purchase an investment in land may be deducted subject to limitations. In general, the deduction may not exceed net investment income. Net investment income is derived from investment income less investment expenses excluding interest expense. Investment income is defined to include any gross income derived from investment property including royalties, dividends, and interest (Publication 550).
80
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In the current year, Mr. A, a sole proprietor, made interest payments of $800 on his personal credit cards, $650 on his business truck loan, $3,000 to the bank for a loan origination fee (charge for services) for his Veterans Administration mortgage, and $8,000 on his home mortgage. What is the total allowable interest deduction on Schedule A, Form 1040?
A. $9,450
B. $8,000
C. $11,800
D. $12,450
```
$8,000
Answer (B) is correct.
Personal interest is not allowed as an itemized deduction. Therefore, the $800 of credit card interest is not deductible. The $650 interest on the business truck loan probably may be deducted as business interest on Schedule C; it is not a deduction on Schedule A. Points paid on a Veterans Administration loan are not deductible as interest. Note also that points charged as compensation for services are not deductible as interest. Therefore, none of the $3,000 loan origination fees (points) are deductible as interest. The $8,000 of home mortgage interest is deductible in full. Mr. A’s interest deduction on Schedule A for the current year is $8,000 (Publication 17).
81
During the current year, Ms. Cheung used corporate stock that she held for investment as collateral to borrow funds. The funds were used to purchase personal property for sale in her business. Which of the following statements concerning the interest expense paid or incurred by Ms. Cheung is true?
A. The expense is fully deductible in the year paid or incurred.
B. The expense is limited by the personal interest limitation.
C. The expense is limited by the investment interest limitation.
D. The expense has to be capitalized.
The expense is fully deductible in the year paid or incurred.
Answer (A) is correct.
Interest expense incurred in a trade or business is deductible from gross income. It is the use to which borrowed funds are put, not the security behind the obligation, which is the determining factor in deciding whether interest is a business or nonbusiness expense deduction. Ms. Cheung used the borrowed funds to purchase personal property for sale in her business, so the interest expense is deductible as a business expense without regard to the nature of the collateral.
82
```
All of the following are qualified organizations for charitable contribution purposes EXCEPT
A. War veterans’ organization.
B. Medical research organization.
C. Nonprofit volunteer fire company.
D. Civic league.
```
Civic league.
Answer (D) is correct.
A contribution is deductible only if made to a state or possession of the U.S. or any subdivisions thereof; a corporation, trust, community chest, fund, or foundation that is situated in the United States and is organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals; a veterans’ organization; a fraternal organization operating under the lodge system; or a cemetery company [Sec. 170(c)]. A civic league does not fall within these categories of qualified organizations.
83
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Tyler and Ross are married, have taxable income of $426,000, and own a partnership together. They have qualified business income (QBI) of $334,600 from the partnership and do not have any qualified property. The partnership pays a total of $127,500 in W-2 wages. What is Tyler and Ross’s QBID allowed amount for the partnership?
A. $33,460
B. $66,920
C. $85,200
D. $63,750
```
$63,750
Answer (D) is correct.
Because Tyler and Ross do not have any qualified property, the QBID allowed amount for this qualified trade or business is limited to the lesser of 20% of the taxpayer’s QBI with respect to the qualified trade or business or 50% of the W-2 wages with respect to the qualified trade or business. Because their taxable income of $426,000 is greater than $421,400, the W-2 wages/ qualified property limit needs to be considered. Thus, their deduction is limited to the lesser of 20% of QBI ($66,920) or 50% of W-2 wages with respect to the partnership ($63,750). Tyler and Ross can claim a deduction of $63,750.
84
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Which of the following organizations qualifies for deductible contributions (not dues)?
A. Churches.
B. All of the answers are correct.
C. A public library in your city.
D. The Salvation Army.
```
All of the answers are correct.
Answer (B) is correct.
Code Sec. 501(c)(3) states that corporations and any community chest, fund, or foundation organized and operated exclusively for religious, charitable, scientific, testing of public safety, literary, or educational purposes, to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals are organizations that qualify for deductible contributions. However, no part of the charity’s net proceeds may be used for the benefit of any private shareholder or individual (Publication 17).
85
The acknowledgment an individual needs from any charitable organization to claim a deduction for any cash contribution of $250 or more in a single donation must include which of the following?
A. The reason for the contribution.
B. A contemporaneous written receipt.
C. The returned check showing the donation amount.
D. A description of past contributions and any plans for future contributions.
A contemporaneous written receipt.
Answer (B) is correct.
Generally, charitable contributions of $250 or more made on or after January 1, 1994, must be substantiated by a contemporaneous written acknowledgment from the donee organization. The acknowledgment must include the amount of cash contributed along with a description and good-faith estimate of the value of any goods or services (other than goods or services with insubstantial value) received for the contributions (Publication 17).
86
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On December 30, 2019, Mr. and Mrs. Anchor’s personally owned yacht was wrecked in a federally declared disaster. Based on the following information, what is the amount of loss Mr. and Mrs. Anchor can deduct for 2019?
Fair market value of yacht before the wreck
$34,500
Fair market value of yacht after the wreck
0
Adjusted basis of yacht before wreck
40,000
Insurance reimbursement received 2/1/20
19,500
Replacement cost
45,000
A. $34,500
B. $40,000
C. $34,000
D. $14,500
```
```
$14,500
Answer (D) is correct.
Section 165(h) allows a casualty deduction for nonbusiness casualty losses to the extent that it occurs in a federally declared disaster area and each uninsured loss exceeds $500. The amount of a loss is the lesser of the decrease in the fair market value of the property resulting from the casualty or the property’s adjusted basis. If any insurance reimbursements result in casualty gains, the gains are netted against casualty losses before computing the casualty loss deduction. In any case, a deduction for casualty losses is allowed to the extent of any casualty gain (Publication 17).
Lesser of adjusted basis ($40,000)
or decrease in FMV ($34,500)
$ 34,500
Less: Insurance reimbursement
(19,500)
$500 per occurrence
(500)
Deductible casualty loss
$ 14,500
```
87
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On December 20 of the current year, Mr. and Mrs. Garrison purchased four tickets for a New Year’s Eve party at their church, a qualified charitable organization. Each ticket cost $75 and had a fair market value of $50. The Garrisons gave two of the tickets to a needy family in the community. Mr. Garrison tended bar at the party from 8 p.m. to 4 a.m. and was paid $40. The usual charge for such services is $80. Immediately before midnight, Mr. Garrison pledged $200 to the building fund and delivered a check for that amount on January 2 of the following year. Of the amounts described above, the total amount the Garrisons can include as a charitable contribution deduction for the current year on a joint return is
A. $140
B. $340
C. $50
D. $100
```
$100
Answer (D) is correct.
The taxpayers may deduct as a charitable contribution the excess of what they gave over the probable fair market value of what they received, or $100. The taxpayers gave $300 (4 tickets × $75 per ticket) to a qualified charitable organization in return for property with a fair market value of $200 (four tickets with a fair market value of $50 each). The donation of the two tickets to the needy family was not a donation to a qualified organization and therefore was not deductible. No deduction is allowable for a contribution of services [Reg. 1.170A-1(g)], so the taxpayer may not deduct the value of his time. The pledge of $200 is not deductible until actually paid, i.e., in the following year (Publication 17).
88
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Jane bought an old mountain cabin as a second home and began to remodel it. Immediately after she had removed the old appliances and cleaned the cabin, a fire destroyed it. The area was declared a federal disaster. The cost of the cabin was $100,000 (including $10,000 for the land). The fair market value (FMV) of the property before the fire was $120,000 ($105,000 for the building and $15,000 for the land). After the fire, the FMV was $15,000 (value of the land). Jane collected $85,000 from her insurance company. Her casualty loss (before applying any limits) is
A. $15,000
B. $20,000
C. $5,000
D. $0
```
$15,000
Answer (A) is correct.
Under Reg. 1.165-7(a)(2)(ii), in determining a casualty loss involving real property and improvements thereon not used in a trade or business or in any transactions entered into for profit, the improvements to the property damaged or destroyed shall be considered an integral part of the property, and no separate basis apportionment is made (Publication 547). The basis of the land and building is $100,000 which is smaller than the decline in FMV of $105,000 ($120,000 FMV before and $15,000 FMV after). The $100,000 is then reduced by the $85,000 insurance proceeds leaving a loss of $15,000.
89
Ms. Rosen, a volunteer Girl Scout leader, gave you the following list regarding her charitable contributions for 2019:
The use of Ms. Rosen’s basement as the Scouts’ meeting room, with fair rental value of $500 ($10 per week for 50 weeks)
Ms. Rosen’s services of $2,500 (5 hours per week for 50 weeks at $10 per hour)
Airfare of $550 to attend and speak at a national Girl Scout meeting as a representative of the local organization
Automobile expenses of $116 (200 miles to and from Girl Scout summer camp in August at $0.58 per mile)
What is the amount, if any, of Ms. Rosen’s charitable contribution?
A. $3,078
B. $1,078
C. $666
D. $578
$578
Answer (D) is correct.
Section 170 allows for a deduction for expenses and payments made to, or on behalf of, a charitable organization. However, the value of services rendered to an institution, including the provision of the meeting room, are not deductible as contributions. Deductions are allowed for transportation and other travel expenses incurred in the performance of services away from home on behalf of a charitable organization. Individuals who qualify for a deduction for the use of an automobile may use the statutory standard mileage rate of $0.14 per mile. Therefore, Ms. Rosen may deduct $578 of her expenses as a charitable contribution [$550 + (200 miles × $0.14)].
90
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In the current year, Donald donated his old car to the local high school to be used by students studying car repair and received a written receipt. Donald had originally purchased the car for $10,000 5 years ago. The “blue book” value of the car was listed as $2,000. However, it needed some major repair work. Donald checked with several local dealers and determined that the car would not sell for more than $1,000. What amount can Donald deduct as a charitable contribution for the current year?
A. $1,000
B. $2,000
C. $0
D. $10,000
```
$1,000
Answer (A) is correct.
The amount considered as a charitable contribution is based on the item’s fair value, not generalized valuations or the original purchase price. Thus, since Donald’s car is appraised at approximately $1,000, that is the amount he may deduct as a charitable contribution (Publication 526).
Authors’ note: Donald must have a contemporaneous written receipt from the organization in order to receive the deduction.
91
Mr. Young’s records for the year reflect the following information:
Paid $7,500 to a church of which $4,500 was contributed to the church and $3,000 was paid to enroll his child in the school.
Paid $100 to the local bank.
Paid $1,000 cash to qualified public charitable organizations.
Donated stock having a fair market value of $1,800 to a qualified charitable organization. He purchased the stock 5 months earlier for $1,000.
Mr. Young’s adjusted gross income (AGI) for the year was $25,000. What is the amount of his charitable contribution deduction?
A. $7,500
B. $6,500
C. $10,600
D. $6,600
$6,500
Answer (B) is correct.
Taxpayers may deduct as a charitable contribution the excess of what they gave over the probable fair market value of what they received. Accordingly, Mr. Young may deduct the $4,500, out of $7,500, contributed to the church. The contribution to the bank is not deductible; the entity does not qualify as a charitable organization under Sec. 170. The cash contributions to the qualified public charitable organizations, however, are deductible in full. Since the stock was not held long term, it is considered ordinary income property. The amount of a charitable contribution of ordinary income property is the fair market value of the property reduced by the amount of gain that would not have been long-term capital gain if the property had been sold by the taxpayer at its fair market value [Sec. 170(e)(1)(4)]. Therefore, only the basis of the stock ($1,000) is considered in the charitable contribution deduction. The total amount of these deductions is $6,500 ($4,500 church contribution + $1,000 cash to qualified charitable organizations + $1,000 stock basis), an amount below the 50%- and 60%-of-AGI limits (Publication 17).
92
Which of the conditions below is NOT required for a taxpayer to claim a casualty loss deduction if his or her personal residence is demolished or relocated after a federally declared disaster?
A. The residence is damaged as a result of the disaster.
B. The residence is located in an area designated to warrant assistance under the Disaster Relief Act of 1974.
C. The residence has been rendered unsafe for use as a residence owing to the disaster.
D. Within 120 days of the disaster relief determination, the state or local government orders the residence demolished or relocated.
The residence is damaged as a result of the disaster.
Answer (A) is correct.
Section 165(k) allows a casualty loss deduction to taxpayers who are ordered to have their personal residences demolished or relocated as a result of a federally declared disaster. The requirements for the casualty loss treatment are that the residence be located in an area designated to warrant assistance under the Disaster Relief Act of 1974, the residence has been rendered unsafe for use as a residence owing to the disaster, and the taxpayer has been ordered by the state or local government, not later than 120 days after the federal determination, to demolish or relocate the residence.
However, there is not a requirement that the residence actually be damaged.
93
Which of the following items are included in qualified business income (QBI)?
A. Allocable losses associated with a qualified trade or business.
B. Short-term capital losses.
C. Guaranteed payments paid for services rendered with respect to a qualified trade or business.
D. Pre-2018 previously disallowed losses or deductions that are allowed in the current year.
Allocable losses associated with a qualified trade or business.
Answer (A) is correct.
QBI includes any items of income, gain, deduction, and loss to the extent that such items are effectively connected with the conduct of a trade or business within the United States and are included or allowed in determining taxable income for the taxable year.
94
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For 2019, Mrs. Lynn had adjusted gross income of $30,000. During the year, she contributed $9,000 to her church, $10,000 to qualified public charities, and a painting she has owned for 8 years with a fair market value of $16,000 and a $4,000 adjusted basis to her city’s library. What is the amount of Mrs. Lynn’s charitable contributions deduction for the year?
A. $19,000
B. $18,000
C. $23,000
D. $35,000
```
$18,000
Answer (B) is correct.
Because there are cash donations involved, Mrs. Lynn’s charitable deduction limitation is $18,000 (60% of her adjusted gross income). All of her contributions qualify under Sec. 170; thus, the amount of her contribution is $35,000. However, the amount of her allowable charitable contribution deduction for the year is limited to $18,000. The excess $17,000 [($16,000 – $9,000 painting 30% limitation) + $10,000 balance for 60% limit property, i.e., cash] can be carried forward and deducted in the 5 succeeding tax years [Sec. 170(d)]. The amount of the contribution of the painting is its $16,000 FMV. The fair market value is not reduced by what would have been long-term capital gain had Mrs. Lynn sold it because it is presumed that the property is used in connection with the library’s tax-exempt purpose. Because no reduction occurs, the 30% limitation on contributions of capital gain property is applicable (Publication 17).
95
Which of the following would qualify as a deductible charitable contribution in Year 1 for an individual taxpayer?
A. A $1,000 contribution to a foreign charity on December 31, Year 1.
B. A contribution on December 31, Year 1, of $500 worth of clothing to the Salvation Army for which substantiation was not obtained.
C. A $200 contribution to the taxpayer’s church charged by credit card on December 31, Year 1.
D. A $450 contribution to a senator’s campaign on December 31, Year 1.
A $200 contribution to the taxpayer’s church charged by credit card on December 31, Year 1.
Answer (C) is correct.
A church is a qualified charitable organization. Once the rights of the donation have been transferred to the qualified organization, the charitable contribution is considered complete. A deduction is generally allowed in the year the contribution is paid, including the amount charged to a credit card.
96
All of the following statements relating to a contribution of $500 or more of charitable deduction property (property other than money or publicly traded securities) are true EXCEPT
A. The donor of such property is required to get a qualified appraisal if the claimed value of the property exceeds $1,000.
B. An organization selling such property must provide the donor with a copy of Form 8282, Donee Information Return, or be subject to a penalty.
C. The organization receiving such property is not a qualified appraiser for the purpose of making a qualified appraisal.
D. An organization that received such property in July of the current year and sells it in December of the following year must file a special return Form 8282, Donee Information Return, within 125 days after the disposition.
The donor of such property is required to get a qualified appraisal if the claimed value of the property exceeds $1,000.
Answer (A) is correct.
A donor of noncash charitable contributions is not required to obtain a qualified appraisal unless the value of the property exceeds $5,000. If the value of the property exceeds $500 but is not over $5,000, then the person making the contribution must retain a description of the property, including its fair market value and how the fair market value was computed (Reg. 1.170A-13) (Publication 17).
97
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Kevin, a single taxpayer, has a taxable income of $321,400. His share of the income from a law firm LLC is $50,000, and his share of W-2 wages is $70,000. What is Kevin’s deductible QBI amount for the law firm LLC?
A. $0
B. $35,000
C. $64,280
D. $321,400
```
$0
Answer (A) is correct.
The law firm is a specified service trade or business from which the taxpayer is not allowed to claim the deduction when taxable income exceeds the upper threshold. Because Kevin has a taxable income greater than $210,700, the disallowance rule applies. Thus, Kevin is not allowed a QBI deduction.
98
Which of the following are NOT other itemized deductions?
A. Federal estate tax on income in respect of a decedent.
B. Impairment-related work expenses of persons with disabilities.
C. Safety deposit box expenses.
D. Gambling losses up to the amount of gambling winnings.
Safety deposit box expenses.
Answer (C) is correct.
According to Publication 17, the following expenses are deductible as other itemized deductions and are reported on line 16 of Schedule A (Form 1040):
Amortizable premium on taxable bonds
Federal estate tax on income in respect of a decedent
Gambling losses up to the amount of gambling winnings
Impairment-related work expenses of persons with disabilities
Repayment of more than $3,000 under a claim of right
Unrecovered investment in a pension
Safety deposit box expenses formerly were second-tier miscellaneous itemized deductions subject to the 2% adjusted gross income limitation. However, those deductions are no longer allowed.
99
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A flood damaged an auto owned by Mr. and Mrs. Miller on June 15 of the current year. The area of the flood was a federally declared disaster area. Based on the following facts, what is the amount of the Millers’ casualty loss deduction (assume an election was not made to file an amended return for the previous year)?
Fair market value before the flood
$7,000
Fair market value after the flood
1,300
Cost basis
9,500
Insurance proceeds
2,000
Replacement property through disaster relief
1,100
Business use of auto
0
A. $4,100
B. $3,200
C. $2,100
D. $3,700
```
```
$2,100
Answer (C) is correct.
Section 165(h) allows a casualty deduction for nonbusiness casualty losses to the extent that each uninsured loss exceeds $500. The amount of a loss is the lesser of the decrease in the fair market value of the property resulting from the casualty or the property’s adjusted basis. If any insurance reimbursements result in casualty gains, the gains are netted against casualty losses before computing the casualty loss deduction (Publication 547).
Lesser of adjusted basis ($9,500)
or decrease in FMV ($5,700)
$ 5,700
Less:
Insurance proceeds
(2,000)
```
Replacement relief
(1,100)
$500 per occurrence
(500)
Deductible casualty loss
$ 2,100
100
Which of the following statements is NOT true regarding documentation requirements for charitable contributions?
A. A contribution charged to a credit card is a cash contribution for purposes of documentation requirements.
B. A noncash contribution of less than $250 must be supported by a receipt or other written acknowledgment from the charitable organization.
C. If the total deduction for all noncash contributions for the year is more than $500, Section A of Form 8283, Noncash Charitable Contributions, must be completed.
D. A deduction of more than $1,000 for one property item generally requires that a written appraisal be obtained and attached to the return.
A deduction of more than $1,000 for one property item generally requires that a written appraisal be obtained and attached to the return.
Answer (D) is correct.
No deduction is allowed for a contribution of $250 or more unless it is substantiated by a contemporaneous written receipt from the organization. A check is insufficient. The receipt must both (1) state the amount of cash or describe the property contributed and (2) provide a good-faith estimate of the value of any goods or services given in return by the charitable organization. For each cash contribution that is less than $250, the taxpayer may keep a canceled check or a legible and readable account statement that shows the amount paid, the transaction date, and to whom it was paid. Payments made by credit card and electronic funds transfer are considered cash payments and are deductible in the year they are charged/transferred (Publication 526). In determination of whether the contribution is $250 or more, separate contributions are not combined. Finally, any noncash contributions in excess of $500 must be reported on Form 8283, Noncash Charitable Contributions. In this case, the statement that reads “A deduction of more than $1,000 for one property item generally requires a written appraisal be obtained and attached to the return” is false because the taxpayer need only provide a good-faith estimate of the property.
101
When taxable income exceeds the upper threshold limit, for each qualified trade or business, the QBI deductible amount with respect to the qualified trade or business is limited to the lesser of 20% of the taxpayer’s qualified business income (QBI) or
A. The greater of 50% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property or 25% of the W-2 wages with respect to the qualified trade or business.
B. The greater of 50% of the W-2 wages with respect to the qualified trade or business or 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.
C. The lesser of 50% of the W-2 wages with respect to the qualified trade or business or 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the adjusted basis of all qualified property.
D. The lesser of 50% of the W-2 wages with respect to the specified service trade or business or 20% of the W-2 wages with respect to the specified service trade or business plus 5% of the unadjusted basis immediately after acquisition of all qualified property.
The greater of 50% of the W-2 wages with respect to the qualified trade or business or 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.
Answer (B) is correct.
For each qualified trade or business of a taxpayer, the deductible amount is limited to the lesser of (1) 20% of the taxpayer’s QBI with respect to the qualified trade or business or (2) the W-2 wages/qualified property limit, which is the greater of (a) 50% of the W-2 wages with respect to the qualified trade or business or (b) 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.
102
In 2019, Jorge’s pleasure boat was destroyed by a flood (a federally declared disaster). He had purchased the boat in 2017 for $30,000. His insurance policy had lapsed at the time of the flood. On what form(s) will Jorge report this loss?
A. Schedule A, Itemized Deductions, and Form 4684, Casualties and Thefts.
B. On the first page of Form 1040.
C. Schedule D, Capital Gains and Losses, and Form 4797, Sales of Business Property and Involuntary Conversions.
D. Schedule D, Capital Gains and Losses, and Form 4684, Casualties and Thefts.
Schedule A, Itemized Deductions, and Form 4684, Casualties and Thefts.
Answer (A) is correct.
Taxpayers may deduct a limited amount for casualty losses to nonbusiness property that arise from theft, fire, storm, shipwreck, or other casualty (within a federally declared disaster area). The loss is calculated on Form 4684, Casualties and Thefts, and carried over to Schedule A, Itemized Deductions (Publication 547).
103
Mr. Hardwood has an adjusted gross income of $50,000. In 2019, he donated capital gain property valued at $25,000 to his church and did not choose to reduce the fair market value of the property by the amount that would have been long-term capital gain if he had sold it. His basis in the property was $20,000. In addition, he made the following contributions:
$500 to upgrade the city public park
$1,000 to the Hill City Chamber of Commerce
$5,000 to a charitable organization in Germany
Compute Mr. Hardwood’s deduction for charitable contributions in the current year (without regard to any carryover or carryback amounts).
A. $15,500
B. $25,000
C. $16,500
D. $31,500
$15,500
Answer (A) is correct.
Charitable contributions are deductible only if they are made to qualified organizations. Donations can be made in the form of cash or noncash property. Qualified organizations include corporations, trusts, community chests, funds, or foundations, created or organized in the U.S. and organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. The amount that Hardwood may deduct for the capital gain property donated to the church is $15,000 ($50,000 × 30% special limitation). Hardwood also may deduct the $500 upgrade to the city public park. The donation to the charitable organization in Germany is not deductible, since donations to foreign organizations generally are not considered to be charitable contributions as defined in Sec. 170(c). The total charitable contribution deduction is equal to $15,500 ($15,000 + $500) (Publication 17).
104
Raul and Monika (husband and wife) are both lawyers, and they contribute money to various organizations each year. They file a joint return, and their adjusted gross income for 2019 is $100,000. They contributed to the following organizations in 2019:
$5,000 to Alta Sierra country club
$10,000 to prevent cruelty to animals
$2,000 to state bar association (This state bar association is not a political subdivision of the state, serves both public and private purposes, and the funds used are unrestricted and can be for private purposes.)
$12,000 to cancer research foundation
Donated clothing to Salvation Army (Raul purchased the items for $1,000, but the fair market value of the same items at a thrift store is equal to $50.)
How much can Raul and Monika deduct as charitable contributions for 2019?
A. $25,000
B. $29,050
C. $24,000
D. $22,050
$22,050
Answer (D) is correct.
Charitable contributions are deductible only if they are made to qualified organizations. Donations can be made in the form of cash or noncash property. The organizations may be both public and private but should be organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Charitable deductions also are subject to various AGI limitations (Publication 17). Raul and Monika may deduct $22,050 ($10,000 + $12,000 + $50) of their charitable contributions.
105
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John, a single taxpayer, has taxable income of $303,000. He owns a qualified sole proprietorship that generated $100,000 of qualified business income (QBI) and paid no wages. The sole proprietorship has a qualified property with an unadjusted basis of $50,000. What is the QBI deductible amount John can claim for the sole proprietorship?
A. $10,000
B. $50,000
C. $1,250
D. $60,600
```
$1,250
Answer (C) is correct.
Because John’s taxable income is greater than $210,700, the W-2/qualified property limit applies. Thus, for the sole proprietorship, the deductible amount is limited to the lesser of (1) 20% of QBI, $20,000 ($100,000 × 20%), or (2) 2.5% of the unadjusted basis of qualified property, $1,250 ($50,000 × 2.5%). Thus, John can claim $1,250 under the Sec.199A deduction for the sole proprietorship.
106
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For the current year, Mr. Reid had adjusted gross income of $50,000. During the year, he contributed $5,000 to his church and $2,000 to qualified public charities. He also contributed land with a fair market value of $25,000 and a basis of $20,000 to his church. If Reid itemizes his deductions and does not make the 50% election, what is the amount of his deduction for charitable contributions?
A. $22,000
B. $32,000
C. $25,000
D. $27,000
```
$22,000
Answer (A) is correct.
The $5,000 contribution to his church and the $2,000 contribution are deductible but are subject to the maximum deduction of 60% (for cash contributions) of the taxpayer’s AGI for the taxable year. Since $7,000 is below the limitation of $30,000 [$50,000 AGI × 60% (for cash contributions)], the entire amount of these contributions may be deducted. The gift of appreciated property to the church is also deductible but subject to the maximum deduction of 30% of the taxpayer’s contribution base for the taxable year since the land is unrelated to the church’s charitable purpose. Generally, gifts of capital gain property are deductible at their fair market value on the date of contribution (Publication 17). However, the gain is limited to $15,000 ($50,000 AGI × 30%). Therefore, the total amount is $22,000 ($15,000 + $7,000).
107
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A taxpayer may NOT claim the QBI deduction if (s)he has qualified business income from which of the following entities?
A. C corporations.
B. S corporations.
C. Trusts.
D. Sole proprietorships.
```
C corporations.
Answer (A) is correct.
The QBI deduction is available to noncorporate taxpayers who have qualified business income from qualified pass-through entities. Qualified pass-through entities include sole proprietorships, S corporations, partnerships, trusts, and estates.
108
Brian kept the following information to be used in filing his 2019 tax return:
Brian paid $100 to his church to go to a dinner-dance. The dinner and entertainment provided normally would have cost $50.
Brian used his car to take a tax-exempt youth group on a caving trip. Brian was the only troop leader who attended and was in charge for the entire trip. He drove his car 500 miles and elected to use the standard rate for mileage. He also determined his time of 10 hours for the trip to be worth $10 per hour.
Brian contributed $1,000 each to his church and the local chamber of commerce.
What is the amount that Brian can claim as a charitable contribution in 2019?
A. $1,440
B. $1,220
C. $1,120
D. $1,490
$1,120
Answer (C) is correct.
Brian may deduct as a charitable contribution the excess of what he gave ($100) to the church over the probable fair market value ($50) of the dinner and entertainment he received. The 500 miles driven in the personal auto was directly related to the services performed for the tax-exempt youth group. Therefore, for the current tax year, the amount of that contribution will be $70 (500 miles × $0.14 per mile). Brian is not able to deduct the value of his time contributed to the youth group. Finally, the contribution to the church of $1,000 is deductible, but the contribution to the chamber of commerce is not. A contribution is deductible only if made to an organization described in Sec. 170(c). Hence, the total amount that may be claimed as a charitable contribution is $1,120 (Publication 17).
109
Which of the following statements about losses in federally declared disaster areas is NOT true?
A. If the taxpayer’s home is located in a federally declared disaster area, and the state government orders that it be torn down, the taxpayer may be able to treat the loss in value as a casualty loss from a disaster.
B. Disaster area loss deductions are figured using the usual rules for casualty losses.
C. Once made, the election to deduct the loss on the prior-year return cannot be revoked.
D. The taxpayer has the option of deducting the loss on the return for the year immediately preceding the year in which the disaster actually occurred.
Once made, the election to deduct the loss on the prior-year return cannot be revoked.
Answer (C) is correct.
If a taxpayer sustains a loss from a disaster in an area subsequently designated as a federal disaster area, a special rule may help the taxpayer to cushion his loss [Sec. 165(i)]. Disaster loss treatment is available with respect to a personal residence declared unsafe and ordered to be demolished by the state or local government. The taxpayer also has the option of deducting the loss on his return for the year in which the loss occurred or on the return for the previous year. Revocation of the election to deduct the loss on the preceding year’s tax return may be made before the expiration of time for filing the return for the year of loss. The calculation of the deduction for a disaster loss follows the same rules as those for nonbusiness casualty losses (Publication 547).
110
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Lana and Luke are married and have a taxable income of $305,000. Their share of the income from an accounting partnership is $250,000. The accounting partnership pays a total of $90,000 in W-2 wages. What is their allowed QBID for the partnership?
A. $125,000
B. $50,000
C. $0
D. $61,000
```
$50,000
Answer (B) is correct.
Lana and Luke’s taxable income is less than $321,400, and they can simply deduct 20% of qualified business income, $50,000 ($250,000 × 20%). The limitations and disallowance do not apply at this taxable amount.
111
Which of the following expenses are deductible on Form 1040 Schedule A in 2019?
A. Repayment of $3,000 of ordinary income that had been included in taxable income in an earlier year.
B. Fees paid to a broker to collect taxable bond interest or dividends on shares of stock.
C. Damages paid to a former employer for breach of employment contract, when the damages are attributable to pay received from that employer.
D. Gambling losses up to the amount of gambling winnings.
Gambling losses up to the amount of gambling winnings.
Answer (D) is correct.
Gambling losses are deductible to the extent of gambling winnings (Reg. 1.165-10). They are a loss deduction for adjusted gross income if gambling is a trade or business, but in most cases they are an other itemized deduction [Publication 17 and Sec. 67(b)(3)].
112
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A flood damaged an auto owned by Mr. and Mrs. Horton on June 15, 2019. The area of the flood was a federally declared disaster area. Based on the following facts, what is the amount of the Hortons’ casualty loss deduction for 2019 (assume an election was not made to file an amended return for 2018)?
Fair market value before the flood
$11,000
Fair market value after the flood
5,000
Cost basis
5,500
Insurance proceeds
1,500
Replacement property through disaster relief
200
Business use of auto
0
A. $3,500
B. $3,300
C. $4,800
D. $4,000
```
```
$3,300
Answer (B) is correct.
A federally declared disaster area loss is computed the same way as a casualty loss. Section 165(h)(3) allows a casualty deduction for nonbusiness casualty losses to the extent that each uninsured loss exceeds $500. The amount of a loss is the lesser of the decrease in the fair market value of the property resulting from the casualty or the property’s adjusted basis. If any insurance reimbursements result in casualty gains, the gains are netted against casualty losses before computing the casualty loss deduction (Publication 547).
Lesser of adjusted basis ($5,500)
or decrease in FMV ($6,000)
$5,500
Less: Insurance proceeds
(1,500)
Replacement relief
(200)
$500 per occurrence
(500)
Deductible casualty loss
$3,300
```
113
Which of the following is an other itemized deduction on Schedule A?
A. Home office expense.
B. Job hunting expenses.
C. Trade association dues.
D. Federal estate taxes on income in respect of a decedent.
Federal estate taxes on income in respect of a decedent.
Answer (D) is correct.
The following expenses are deductible as other itemized deductions and are reported on line 16, Schedule A (Form 1040):
Amortizable premium on taxable bonds
Casualty and theft losses from income-producing property
Federal estate tax on income in respect of a decedent
Gambling losses up to the amount of gambling winnings
Impairment-related work expenses of persons with disabilities
Repayments of more than $3,000 under a claim of right
Unrecovered investment in a pension
114
Which of the following expenses related to casualty losses are deductible?
Appraisal of a casualty loss
Cost of insuring a personal asset
```
A.
Yes
No
B.
No
Yes
C.
Yes
Yes
D.
No
No
```
No
No
Answer (D) is correct.
The cost of appraising a casualty loss is treated as a cost to determine tax liability, for which there is no deduction, and the cost of insuring a personal asset is a nondeductible personal expense.
115
If the taxpayer makes a contribution by cash, check, credit card, or payroll deduction to a qualified organization, what record of the contribution is the taxpayer required to obtain from the organization?
A. If the amount is for some item or service, like a charity dinner, and over $100, the taxpayer must have a separate acknowledgment for each contribution.
B. For annual payroll deductions over $250, the taxpayer must have a separate acknowledgment for each contribution.
C. Weekly contributions of $50 to the taxpayer’s church must have a separate acknowledgment for each contribution.
D. For contributions under $250, the taxpayer must keep an account, statement, receipt or other reliable written record.
For contributions under $250, the taxpayer must keep an account, statement, receipt or other reliable written record.
Answer (D) is correct.
For each cash contribution of less than $250, the taxpayer must retain one of the following:
A canceled check or a legible and readable account statement that shows one of the following:
If payment was made by check -- the check number, amount, date posted, and to whom paid
If payment was by electronic funds transfer -- the amount, date posted, and to whom paid
If payment was charged to a credit card -- the amount, transaction date, and to whom paid
A receipt (or other written confirmation) from the charitable organization showing the name of the organization and the date and amount of the contribution
Other reliable written records (that include the information described in 2.)
A taxpayer may claim a deduction for a contribution of $250 or more only if (s)he has an acknowledgment of the contribution from the qualified organization or certain payroll deduction records (Publication 526).
116
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On March 28, 2020, Rita sustained a loss to her personal property due to an earthquake. The property was in an area declared by the President of the United States to be eligible for federal disaster assistance. Based on the following facts, what is the maximum amount of Rita’s casualty loss that can be deducted on her 2019 tax return, due April 15, 2020?
Fair market value before the earthquake
$23,000
Fair market value after the earthquake
6,300
Cost basis
30,000
Disaster relief funds received to replace
lost property
2,300
A. $13,900
B. $14,400
C. $16,700
D. $30,000
```
```
$13,900
Answer (A) is correct.
A federally declared disaster area loss is computed the same way as a pre-2018 casualty loss. Section 165(i) provides that a taxpayer who has suffered a disaster loss that is allowable as a deduction under Sec. 165(a) may, if the disaster is in an area that warrants assistance from the federal government under the Disaster Relief and Emergency Assistance Act, elect to deduct such loss for the taxable year immediately preceding the taxable year in which the disaster occurred. Section 165(h) allows a casualty deduction for nonbusiness casualty losses to the extent that each uninsured loss exceeds $500. The amount of a loss is the lesser of the decrease in the fair market value of the property resulting from the casualty or the property’s adjusted basis. If any reimbursements result in casualty gains, the gains are netted against casualty losses before computing the casualty loss deduction (Publication 547).
Lesser of adjusted basis ($30,000)
or decrease in FMV ($16,700)
$16,700
Less: Disaster relief funds
(2,300)
$500 per occurrence
(500)
Deductible casualty loss
$13,900
```
117
Vera and Jack (wife and husband) contributed $18,000 in cash to their synagogue during 2019. They also donated $3,000 to a private foundation which is a non-profit cemetery organization. They knew a 30% limit applies to contributions to such foundations. Their adjusted gross income for the year 2019 was $30,000. Vera and Jack’s deductible contribution for the year 2019 and any carryover to next year is
A. $18,000 with $3,000 carryover to next year.
B. $7,200 with $2,100 carryover to next year.
C. $21,000 with $0 carryover to next year.
D. $15,000 with $6,000 carryover to next year.
$18,000 with $3,000 carryover to next year.
Answer (A) is correct.
Charitable contributions are deductible only if they are made to qualified organizations. Charitable contribution deductions are subject to limitations. The overall limitation on charitable deductions is 50% (60% if cash) of AGI. Any donations that exceed this limitation can be carried forward and deducted in the next 5 years. Contributions to churches and other religious organizations are subject to the 50% (60% if cash) limitation. Thus, Vera and Jack may deduct $18,000 ($30,000 × .6) in the current year and carry over $3,000 ($21,000 – $18,000) into the next 5 years (Publication 17).
118
The following information pertains to Cole’s personal residence, which sustained federally declared disaster fire damage in the current year:
Adjusted basis
$150,000
Fair market value immediately before the fire
200,000
Fair market value immediately after the fire
180,000
Fire damage repairs paid for by Cole in the current year
10,000
The house was uninsured. Before consideration of any “floor” or other limitation on tax deductibility, the amount of the casualty loss was
A. $10,000
B. $20,000
C. $0
D. $30,000
$20,000
Answer (B) is correct.
The amount of a casualty loss under Sec. 165 is the lesser of the decrease in the fair market value of the property resulting from the casualty or the taxpayer’s adjusted basis in the property. The decrease in the fair market value of Cole’s residence is $20,000 ($200,000 – $180,000). This is less than the adjusted basis, so the casualty loss is $20,000. The repairs paid by Cole are not an additional loss. Instead, they are an effort by Cole to replace the loss that has already occurred and are added to the basis of the property (Publication 17).
119
Which of the following is NOT an itemized deduction reported on Schedule A?
A. Gambling losses up to the amount of gambling winnings.
B. Repayments of $5,000 under a claim of right.
C. Qualified business income.
D. Unrecovered investment in a pension.
Qualified business income.
Answer (C) is correct.
The qualified business income deduction is a below-the-line deduction on Form 1040 but is not an itemized deduction.
120
Which of the following is an other itemized deduction reported on Schedule A?
A. Amortizable premium on taxable bonds.
B. Business start-up costs.
C. Business expenses of a taxpayer’s sole proprietorship.
D. Medical expenses.
Amortizable premium on taxable bonds.
Answer (A) is correct.
Amortizable premium on taxable bonds is an other itemized deduction reported on Schedule A.
121
Ms. Boone’s records for 2019 reflect the following information:
Paid $8,500 to a church of which $5,000 was contributed to the church and $3,500 was paid to enroll her child in its school.
Paid $100 dues to a business organization.
Paid $1,500 cash to the University of Florida scholarship fund.
Donated stock having a fair market value of $1,500 to a qualified charitable organization. She purchased the stock 2 years earlier for $3,000.
Ms. Boone’s adjusted gross income for 2019 was $25,000. What is the amount of her charitable contribution deduction?
A. $7,500
B. $12,500
C. $9,600
D. $8,000
$8,000
Answer (D) is correct.
Taxpayers may deduct as a charitable contribution the excess of what they gave over the probable fair market value of what they received. Accordingly, Ms. Boone may deduct the $5,000, out of $8,500, contributed to the church. The dues paid to the business organization are not deductible; the entity does not qualify as a charitable organization under Sec. 170. The $1,500 to the University of Florida is fully deductible since the donation was for educational purposes. The stock contribution is valued at the lower of FMV or adjusted basis. Therefore, the donated stock is valued at $1,500. The total amount of these deductions is $8,000, and this amount is below the 50%-of-adjusted-gross-income limitation (Publication 17).
122
A calendar-year taxpayer’s home was destroyed by a flood in Year 2 and was located in a town declared a federal disaster area. A casualty loss of $10,000 was figured under the usual rules. On what return can the casualty loss be claimed?
A. Split the loss between Year 2 and Year 1.
B. Only on the Year 1 return.
C. On either the Year 2 or the Year 1 return.
D. Only on the Year 2 return.
On either the Year 2 or the Year 1 return.
Answer (C) is correct.
If a taxpayer sustains a loss from a disaster in an area subsequently designated as a federal disaster area, a special rule may help the taxpayer to cushion his loss [Sec. 165(i)]. The taxpayer has the option of deducting the loss on his return for the year in which the loss occurred or on the return for the previous year. Revocation of the election to deduct the loss on the preceding year’s tax return may be made before the expiration of time for filing the return for the year of loss (Publication 547).
123
In 2019, the U.S. President declared a federal disaster due to flooding in Minnesota. Lisa lives in that area and lost her home in the flood. What choice does she have regarding when she can claim the loss on her tax return?
A. It may be claimed in 2018 or 2019.
B. It may be claimed in 2020 if an election is filed with the 2019 return.
C. It must be claimed in 2019 if the loss is greater than the modified adjusted gross income.
D. It must be claimed in 2018 if the return has not been filed by the date of the loss.
It may be claimed in 2018 or 2019.
Answer (A) is correct.
If a taxpayer has a casualty loss from a disaster that occurred in a federally declared disaster area, (s)he can choose to deduct that loss on the current year’s tax return or (s)he may amend the return for the tax year immediately preceding the tax year in which the disaster occurred (Publication 547).
124
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During the current year, John donated $100 to the United Way, $200 to Veterans of Foreign Wars, and $300 to his neighbor whose home was destroyed by a tornado. How much is John’s deduction for charitable contributions?
A. $600
B. $400
C. $500
D. $300
```
$300
Answer (D) is correct.
Charitable contributions are deductible only if they are made to qualified organizations. Qualified organizations can be either public charities or private foundations. (Generally, a public charity is one that derives more than one-third of its support from its members and the general public.) Donations can be made in the form of cash or noncash property. However, any amounts donated to individuals are not allowed as a deduction (Publication 17).
125
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Paula won $5,000 in the lottery in 2019. She also won $200 playing bingo at her lodge hall. She is not a professional gambler. She kept meticulous records of the $6,550 she spent on gambling expenses. How much may she deduct on her Schedule A as an other deduction?
A. $0
B. $6,550
C. $200
D. $5,200
```
$5,200
Answer (D) is correct.
Gambling losses may be deducted, but only to the extent of gambling winnings. In order to deduct these expenses, they must be listed next to line 16 on Schedule A (Publication 17). The type and amount of each expense must be listed (a statement showing these expenses may be attached if there is not enough room). Paula had $5,200 in winnings ($5,000 + $200); thus, $5,200 of the $6,550 of meticulously kept expenses may be deducted.
126
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In 2019, Janice volunteered at her local art museum where she conducted art-education seminars. She was required to wear a blazer that the museum provided, but she paid the dry cleaning costs of $200 for the year. The blazer was not suitable for everyday use. Her travel to and from the museum was 1,000 miles for the year. She estimates the value of the time she contributed during the year at $2,000 ($20/hr × 100 hours). Her Schedule A deduction for charitable contributions is which of the following?
A. $2,340
B. $340
C. $2,140
D. $140
```
$340
Answer (B) is correct.
The tax code allows for a deduction for expenses and payments made to, or on behalf of, a charitable organization. However, the value of services rendered to an institution is not deductible as contributions. Deductions are allowed for transportation and other travel expenses incurred in the performance of services away from home on behalf of a charitable organization. Individuals who qualify for a deduction for the use of an automobile may use the statutory standard mileage rate of $0.14 per mile. Also, out-of-pocket expenses are included if they involve items that can be used solely for the purpose of volunteer work (Publication 17). Therefore, Janice may deduct $340 of her expenses as a charitable contribution [($200 + (1,000 miles × $0.14)].
127
```
Robin and Monica are married and filing a joint return. They have a taxable income of $300,000. Robin owns a qualified sole proprietorship that generates qualified business income (QBI) of $50,000, and Monica is the sole owner of a qualified S corporation that generates a QBI of $75,000. How much is Robin and Monica’s combined QBID amount for the year?
A. $125,000
B. $60,000
C. $300,000
D. $25,000
```
$25,000
Answer (D) is correct.
The combined QBID allowed amount is the sum of the amount for each qualified trade or business carried on by the taxpayer. Because Robin and Monica’s income is less than $321,400, the W-2 wages/qualified property limit does not apply. Thus, their QBID allowed amount for the sole proprietorship is 20% of QBI, $10,000 ($50,000 × 20%), and their QBID allowed amount for the S corporation is 20% of QBI, $15,000 ($75,000 × 20%). Therefore, the combined qualified business income deduction is $25,000 ($10,000 + $15,000).
128
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During the current year, Vincent Tally gave to the municipal art museum title to his private collection of rare books that was appraised and valued at $60,000. However, he reserved the right to the collection’s use and possession during his lifetime. For the current year, he reported an adjusted gross income of $100,000. Assuming that this was his only contribution during the year and that there were no carryovers from prior years, what amount can he deduct as contributions for the current year?
A. $0
B. $30,000
C. $50,000
D. $60,000
```
$0
Answer (A) is correct.
Payment of a charitable contribution which consists of a future interest in tangible personal property is treated as made only when all intervening interests and rights to the actual possession and enjoyment of the property have expired or are held by persons other than the taxpayer or those related to the taxpayer [Sec. 170(a)(3) and (f)(3)]. Therefore, the contribution of the rare books will be treated as made only when Tally’s intervening lifetime right to use and possess the books has terminated, i.e., at his death (Publication 17).
129
What is the proper method of calculating total personal casualty losses attributable to a federally declared disaster?
A. Aggregate the amount of each individual loss to the extent that they exceed $100 and deduct the total amount.
B. Aggregate then deduct the amount of each individual loss to the extent that they exceed 10% of adjusted gross income.
C. Aggregate the amount of each individual loss to the extent that they exceed $500 and deduct the total amount.
D. Deduct the total amount of each loss because personal losses are only deductible if due to federally declared disasters, which are not subject to limitations.
Aggregate the amount of each individual loss to the extent that they exceed $500 and deduct the total amount.
Answer (C) is correct.
To calculate total personal casualty losses, individual casualty losses in excess of $500 are aggregated. The aggregate amount is deductible.
130
Mr. and Mrs. Mead, both full-time teachers, wanted to volunteer their services to work for the tsunami victims. Their services consisted of going to various neighborhoods in the community to raise funds for the tsunami cause. While volunteering, the Meads kept records of the costs involved. These costs included time spent, out-of-pocket expenses for travel, and car expenses.
The Meads valued their volunteered time at $500 total for the year;
Out-of-pocket expenses directly related to their services rendered were at $25 for parking fees and $350 for gas and oil; and
Car expenses for new tires were at $200 and registration fees at $90.
If the Meads elect to take the actual expenses, how much can they deduct in 2019?
A. $375
B. $1,165
C. $665
D. $875
$375
Answer (A) is correct.
The value of service provided to a charitable organization is not deductible. However, out-of-pocket, unreimbursed expenses incurred in rendering the services are deductible (Publication 17). The only out-of-pocket expenses Mr. and Mrs. Mead incurred that were directly related to their services were the $25 spent for parking fees and $350 for gas and oil. Thus, they may deduct only $375.
131
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Ilene made the following cash contributions to qualifying organizations for the year:
Veterans of All Wars
$8,000
University of Nevada Las Vegas
5,000
Hospital for Children
7,000
Ilene’s AGI for the year was $30,000. What is her allowable contribution deduction?
A. $20,000
B. $9,000
C. $15,000
D. $18,000
```
$18,000
Answer (D) is correct.
The charitable deduction allowed to an individual for any one tax year is limited to a percentage of the individual’s AGI. Such percentage is determined by two factors: the type of organization to which the donation is made and the type of property donated. All of Ilene’s contributions were cash contributions to organizations that qualify for the 60% maximum deduction limit. Therefore, Ilene may deduct $18,000 of her charitable deductions in the current year ($30,000 contribution base x 60% limit). Any amount in excess may be carried forward for a period of 5 years (Publication 17).
132
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Zachary owns 40% of an S corporation that pays him $70,000 of wages and $10,000 of dividends and allocates him $89,000 of income. What is Zachary’s qualified business income (QBI)?
A. $70,000
B. $89,000
C. $159,000
D. $99,000
```
$89,000
Answer (B) is correct.
QBI is the net amount of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer conducted within the United States and included or allowed in determining taxable income for the taxable year.
133
Which of the following statements is correct regarding the deductibility of donations made to qualifying charities by a cash-basis individual taxpayer?
A. A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $10,000.
B. The charitable contribution deduction for long-term appreciated stock is limited to 50% of adjusted gross income.
C. A contemporaneous written acknowledgment is required for donations of $100.
D. A charitable contribution deduction is not allowed for the value of services rendered to a charity.
A charitable contribution deduction is not allowed for the value of services rendered to a charity.
Answer (D) is correct.
The costs of services rendered to a charity (such as legal advice, accounting assistance, or volunteering time) as a donation are not deductible as a charitable contribution. However, any expenses incurred in the rendering of those services (such as travel costs, mileage, supplies, etc.) are deductible.
134
Jack, age 50, had the following income in 2019:
$59,800 in wages
$200 in interest
$10,000 in gambling winnings
$5,000 in short-term capital gains
Jack filed a Schedule A, Itemized Deductions, for 2019. While preparing that schedule, Jack listed the following deduction items he had incurred during the year:
```
$2,500 in medical expenses
$8,000 of mortgage interest paid
$2,000 in real estate taxes
$1,600 in state taxes
$12,000 in gambling losses
$3,400 in employee business expenses
What is the total amount of Schedule A itemized deductions that Jack can report in 2019?
```
A. $27,500
B. $21,600
C. $20,000
D. $25,000
$21,600
Answer (B) is correct.
Jack may take a deduction for all of the items except the $2,500 in medical expenses. Because the $2,500 in medical expenses does not exceed the 7.5%-of-AGI limitation, Jack will be unable to use those deductions. The total of Jack’s deductions equals $21,600 [$8,000 mortgage interest + $2,000 real estate taxes + $1,600 in state taxes + $10,000 ($12,000 gambling losses – $2,000 excess over gambling winnings) (Publication 17).
135
The written acknowledgment an individual needs from any charitable organization to claim a deduction for any cash contribution of $250 or more in a single donation must include all of the following EXCEPT
A. The amount of cash contributed.
B. A description and good-faith estimate of the value of any goods or services provided to the donor.
C. Whether the organization is a 50% or a 30% organization.
D. Whether goods or services were provided to the donor.
Whether the organization is a 50% or a 30% organization.
Answer (C) is correct.
Generally, charitable contributions of $250 or more made on or after January 1, 1994, must be substantiated by a contemporaneous written acknowledgment from the donee organization. The acknowledgment must include the amount of cash contributed along with a description and good-faith estimate of the value of any goods or services (other than goods or services with insubstantial value) received for the contributions (Publication 17).
136
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Tom owns a domestic sole proprietorship that allocates $55,000 of income to him and pays $30,000 of wages to employees. He also owns 30% of a foreign trust that allocates $60,000 of income to him and pays him $50,000 of wages. Neither the sole proprietorship nor the trust are specified service businesses. What is the total amount of qualified business income for Tom?
A. $110,000
B. $55,000
C. $12,000
D. $85,000
```
$55,000
Answer (B) is correct.
Qualified business income are items of income, gain, deduction, and loss to the extent such items are effectively connected with the conduct of a trade or business within the United States; it does not include wages and foreign income. Thus, Tom has qualified business income of $55,000.
137
Mr. U is actively involved in church activities in his community. During the current year, he incurred the following church-related expenses:
Cash contributed to the church
$2,000
Round-trip mileage to attend church services (400 miles × $0.14)
56
Round-trip mileage to do church volunteer work (500 miles × $0.14)
70
Fair market value of used clothing given to church mission
500
Raffle tickets purchased from the church
200
Value of time and services contributed to the church
400
Mr. U’s adjusted gross income is $25,000, and he itemizes his deductions on his tax return. What is his charitable contribution deduction?
A. $2,570
B. $2,770
C. $2,500
D. $3,226
```
$2,570
Answer (A) is correct.
The cash contribution of $2,000 to the church will be fully deductible. The $70 at the standard mileage rate for church-related volunteer work will also be deductible [Sec. 170(i)]. The clothing donated is capital gain property, and the donation would be $500.
Cash
$2,000
Mileage for volunteer work
70
Value of used clothing
500
Total
$2,570
The mileage to and from church does not constitute a charitable contribution for Mr. U. The purchase price of raffle tickets also is not a deductible charitable contribution. The value of a service rendered to a charitable organization is not deductible as a contribution, either. Therefore, Mr. U may not deduct the $56 in mileage to attend church services, the cost of the raffle tickets, or the $400 in services contributed to the church (Publication 17).
```
138
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Alberta and Archie (wife and husband) had water damage in their home during 2019, which ruined the furniture in their basement. This was in a federal disaster area. The following items were completely destroyed and not salvageable.
Damaged items
Fair market value just prior to damage
Original item cost
Antique bed frame
$5,000
$ 4,000
Pool table
8,000
10,000
Large-screen TV
700
2,500
Their homeowner’s insurance policy had a $10,000 deductible for the personal property, which was deducted from their insurance reimbursement of $12,700. What is the amount of casualty loss that Alberta and Archie can claim on their joint return for 2019?
A. $13,200
B. $9,500
C. $0
D. $700
```
$9,500
Answer (B) is correct.
The loss is the lesser of the decrease in FMV of the property due to the casualty or the property’s adjusted basis. The loss is reduced by any amount recovered by insurance and a $500 floor to any nonbusiness loss. The $500 floor applies only once to a married filing joint return. The casualty loss can therefore be calculated as follows: $12,700 loss – $2,700 insurance reimbursement – $500 floor = $9,500. The $12,700 loss is calculated as follows: $4,000 from the antique bed frame (decrease in FMV > original cost); $8,000 from the pool table (original cost > decrease in FMV); $700 from the large-screen TV (original cost > decrease in FMV).
139
Frank and Melody’s home was completely destroyed by fire in a federally declared disaster. They had no insurance. On which of the following forms would they report their loss?
A. Form 4684, Casualties and Thefts, and Form 1040, U.S. Individual Income Tax Return, as an adjustment to gross income.
B. Form 4684, Casualties and Thefts, only.
C. Form 4684, Casualties and Thefts, and Schedule A, Itemized Deductions.
D. Schedule A, Itemized Deductions, only.
Form 4684, Casualties and Thefts, and Schedule A, Itemized Deductions.
Answer (C) is correct.
Form 4684, Section A, Personal Use Property, lists and calculates the amount of the loss. The amount of the loss is then added to Schedule A, Itemized Deductions (Publication 547).
140
Alona is a student, and her personal car disappeared during a hurricane in May of 2019 (a federally declared disaster). It was found several days later severely damaged. The decrease in fair market value (less than her adjusted basis) was $3,500. In addition, a personal laptop computer in the car at the time was never recovered (fair market value $500, also less than her adjusted basis). What is the amount and treatment of the casualty loss after considering the $500 minimum floor?
A. Schedule A loss of $3,500 for the car and the computer.
B. Schedule D loss of $4,000 for the car and the computer.
C. Schedule D loss of $3,500 for the car and a Schedule A loss of $500 for the computer.
D. Schedule A loss of $3,000 for the car and computer.
```
Schedule A loss of $3,500 for the car and the computer.
Answer (A) is correct.
Losses incurred from casualty or theft in a federally declared disaster are deductible. The amount of the loss is the lesser of the decrease in fair market value (FMV) of the property due to the casualty or the property’s adjusted basis. Thus, the amount of the deduction is the loss in FMV. This, however, is limited to a $500 floor (Publication 547). The computation is illustrated below.
Decrease in FMV of the car
$3,500
Decrease in FMV of the laptop computer
500
$4,000
Less: $500 minimum floor
(500)
Total loss
$3,500
This loss is reported on line 15 of Schedule A.
```
141
Casualty gains from the loss of personal property are considered to be
A. Ordinary for taxpayers who use the cash method and capital for taxpayers who use the accrual method.
B. Ordinary.
C. Nontaxable.
D. Capital.
Capital.
Answer (D) is correct.
If the net amount of all personal casualty gains and losses after applying the $100 limit (but before the 10%-of-AGI threshold) is positive, each gain or loss is treated as a capital gain or loss.
142
Which of the following statements about qualified business income (loss) in relation to QBID is correct?
A. If the net amount of qualified income, gain, deduction, and loss is less than zero, the loss must be carried over to the next year.
B. If the net amount of qualified income, gain, deduction, and loss is less than zero, the loss must be carried back to the prior year.
C. If the net amount of qualified income, gain, deduction, and loss is greater than zero, the deduction must be carried over to the next year.
D. The net amount of qualified income, gain, deduction, and loss is always greater than zero.
If the net amount of qualified income, gain, deduction, and loss is less than zero, the loss must be carried over to the next year.
Answer (A) is correct.
If the net amount of qualified income, gain, deduction, and loss is less than zero, the loss must be carried over to the next year.
143
Mr. Q’s records for the year contain the following information:
Donated stock having a fair market value of $1,000 to a qualified charitable organization. He acquired the stock 5 months previously at a cost of $800.
Paid $3,000 to a church school as a requirement for the enrollment of his daughter.
Paid $200 for annual homeowner’s association dues.
Drove 300 miles in his personal auto that were directly related to services he performed for his church. Actual costs were not available.
Paid $40 in parking fees and tolls in connection with the 300 miles.
What is Mr. Q’s charitable contribution deduction for the year?
A. $882
B. $1,082
C. $4,042
D. $4,082
```
$882
Answer (A) is correct.
The amount of a charitable contribution of ordinary income property is the fair market value of the property reduced by the amount of gain that would not have been long-term capital gain if the property had been sold by the taxpayer at its fair market value [Sec. 170(e)(1)(A)]. Accordingly, Q will be allowed a deduction of $800 ($1,000 – $200) on the contribution of the stock. The 300 miles driven in the personal auto were directly related to services performed for the church and would therefore constitute a deductible contribution. For tax years beginning after December 31, 1998, the amount of the contribution would be $42 (300 × $0.14) [Sec. 170(i)]. The $40 in parking fees and tolls associated with the travel would also qualify as a charitable contribution.
Contribution of stock ($1,000 – $200)
$800
Mileage (300 × $0.14)
42
Parking fees and tolls
40
Total
$882
The tuition payments of $3,000 are required for the daughter’s enrollment and do not qualify as a charitable contribution. Neither are the homeowner’s association dues considered a charitable contribution under the tax code [Sec. 170] (Publication 17).
```
144
Some contributions may be limited to 50% of the taxpayer’s adjusted gross income. Deductions to the following organizations are subject to the 50% limitation on deductible contributions:
A. Hospitals and certain medical research organizations associated with them.
B. Churches; church organizations; conventions; educational organizations with regular faculty, curriculum, and regularly enrolled students; and hospitals and certain medical research organizations associated with them.
C. Kiwanis, Rotary, and Lions Clubs who raise money for public causes.
D. Churches; church organizations; conventions; and educational organizations with regular faculty, curriculum, and regularly enrolled students.
Churches; church organizations; conventions; educational organizations with regular faculty, curriculum, and regularly enrolled students; and hospitals and certain medical research organizations associated with them.
Answer (B) is correct.
Code Sec. 170 describes eight organizations that qualify as a charitable organization in which contributions are limited to 50% (60% if cash) of adjusted gross income (AGI). Included in this list are
Churches or conventions or associations of churches;
Educational organizations that normally maintain a regular faculty, curriculum, and have regularly enrolled students in attendance at a place where educational activities are regularly carried on; and
Organizations whose principal purpose or function is to provide medical or hospital care, medical education, or medical research.
Fundraising activities, in which tickets to an event are purchased and the proceeds are donated to a charitable organization, are not deductible. The exception is when the taxpayer can prove a difference between the purchase price and the fair market value, in which case, the difference is deductible (Publication 17).
145
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During the current year, Mr. K, who is single and 45 years of age, made cash contributions of $500 to his church. Mr. K is taking the standard deduction on his current-year return. What is the amount of Mr. K’s deduction for charitable contributions?
A. $500
B. $75
C. $0
D. $300
```
$0
Answer (C) is correct.
Charitable contributions are allowed in Sec. 170 as itemized deductions (below the line to arrive at taxable income). Itemized deductions are an election in lieu of taking the standard deduction. Since Mr. K claimed the standard deduction, he is not entitled to any additional deduction for a charitable contribution (Publication 17).
146
Kate’s records for the year reflect the following information:
Paid a church $9,500, of which $6,000 was contributed to the church and $3,500 was paid to enroll her child in its school.
Paid $100 dues to a business organization.
Paid $1,500 cash to qualified public charitable organizations.
Donated stock having a fair market value of $1,500 to a qualified charitable organization. She purchased the stock 2 years earlier for $3,000.
Kate’s adjusted gross income (AGI) for the year was $20,000. What is the amount of her charitable contribution deduction?
A. $13,500
B. $10,000
C. $7,500
D. $9,000
$9,000
Answer (D) is correct.
Taxpayers may deduct as a charitable contribution the excess of what they gave over the probable fair market value of what they received. Accordingly, Kate may deduct the $6,000 out of $9,500 contributed to the church. The dues paid to the business organization are not deductible; the entity does not qualify as a charitable organization under Sec. 170. The $1,500 to the qualified public charitable organizations, however, is deductible in full. The stock contribution is valued at the fair market value, not the purchase price. Therefore, the donated stock is valued at $1,500. The total amount of these deductions is $9,000, and this amount is below the 50%-of-adjusted-gross-income (60% for the cash donations) limitation (Publication 17).
147
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A flood completely destroyed Mr. and Mrs. Washington’s home on November 30, 2019. The home was located in a federally declared disaster area. They claimed the loss on their 2019 tax return. Based on the following facts, what is the amount of loss Mr. and Mrs. Washington can deduct for 2019?
Basis (contents not considered for this purpose)
$110,000
Fair market value before flood
150,000
Fair market value after flood
30,000
Insurance reimbursement received 2/15/20
80,000
Replacement 2/1/20 (property provided under disaster relief programs of government agencies)
8,000
A. $21,500
B. $31,500
C. $0
D. $39,500
```
```
$21,500
Answer (A) is correct.
Section 165(h) allows a casualty deduction for nonbusiness casualty losses to the extent that each uninsured loss exceeds $500. The amount of a loss is the lesser of the decrease in the fair market value of the property resulting from the casualty or the property’s adjusted basis. If any insurance reimbursements result in casualty gains, the gains are netted against casualty losses before computing the casualty loss deduction (Publication 547).
Lesser of adjusted basis ($110,000)
or decrease in FMV ($120,000)
$110,000
Less:
Insurance reimbursement
(80,000)
Replacement property
(8,000)
$500 per occurrence
(500)
Deductible casualty loss
$ 21,500
```
148
On December 30, 2019, Mr. and Mrs. Brady’s personally owned yacht was wrecked in a federally declared disaster. Based on the following information, what is the amount of loss Mr. and Mrs. Brady can deduct for 2019?
Fair market value of the yacht before the wreck
$55,000
Fair market value of the yacht after the wreck
0
Adjusted basis of the yacht before the wreck
45,000
Insurance reimbursement received 2/1/2020
22,500
Replacement cost
45,000
A. $22,500
B. $22,000
C. $32,500
D. $44,500
```
$22,000
Answer (B) is correct.
Section 165(h) allows a casualty deduction for nonbusiness casualty losses to the extent that it occurs in a federally declared disaster area and each uninsured loss exceeds $500. The amount of a loss is the lesser of the decrease in the fair market value of the property resulting from the casualty or the property’s adjusted basis. If any insurance reimbursements result in casualty gains, the gains are netted against casualty losses before computing the casualty loss deduction. In any case, a deduction for casualty losses is allowed to the extent of any casualty gain (Publication 547).
Lesser of adjusted basis ($45,000)
or decrease in FMV ($55,000)
$ 45,000
Less:
Insurance reimbursement
(22,500)
```
$500 per occurrence
(500)
Deductible casualty loss
$ 22,000
149
Joe has the following records of charitable contributions he made in 2019. How much can he deduct on Schedule A, Itemized Deductions?
$300 check to local church but no written acknowledgment
$600 by payroll deduction of $50 per month to United Way
$400 fair market value of furniture to a qualifying shelter with receipt and acknowledgment from the shelter dated after the return is filed.
A. $1,300
B. $600
C. $900
D. $1,000
$600
Answer (B) is correct.
Generally, charitable contributions of $250 or more must be substantiated by a contemporaneous written acknowledgment from the donee organization. The acknowledgment must include the amount of cash contributed along with a description and good-faith estimate of the value of any goods or services (other than goods or services with insubstantial value) received for the contributions. The acknowledgment must be received by the earlier of
The date you file your return for the year you make the contribution or
The due date, including extensions, for filing the return.
Thus, the payroll deduction of $600 is the only allowable deduction.
150
```
Hannah, a single taxpayer, owns 50% of a partnership and has taxable income of $85,000. She has qualified business income of $70,000 from the partnership. The partnership paid a total of $27,500 in W-2 wages and does not have any qualified property. Under Sec. 199A, what is Hannah’s deductible amount for the partnership (i.e., before applying the taxable income/overall limitation)?
A. $6,875
B. $14,000
C. $35,000
D. $13,750
```
$14,000
Answer (B) is correct.
Because Hannah’s taxable income is less than the $160,700 threshold amount, the W-2 wages/qualified property limit does not apply. Thus, for this partnership, there is a deduction equal to 20% of qualified business income ($70,000), $14,000.
151
Robin, Monica, and Rose have a partnership that is a qualified business. In the partnership agreement, each partner has a one-third share in income and expenses. The partnership generated qualified business income (QBI) of $150,000, paid total W-2 wages of $120,000, and purchased qualified property with an unadjusted basis of $60,000. There are no special allocations to partners. What is Robin’s allocable share of QBI, W-2 wages, and qualified property, respectively?
QBI
W-2 Wages
Qualified Property
```
A.
$450,000
$360,000
$180,000
B.
$50,000
$40,000
$20,000
C.
$150,000
$120,000
$60,000
D.
$50,000
$40,000
$60,000
```
```
$50,000
$40,000
$20,000
Answer (B) is correct.
The taxpayer should take into account his or her allocable share of each qualified item of income, gain, deduction, and loss; only allocable share of the taxpayer’s wages and qualified property should be taken into account to calculate the W-2 wages/qualified property limit. Because Robin is a one-third owner, his allocable share of QBI is $50,000 ($150,000 ÷ 3), his allocable share of W-2 wages is $40,000 ($120,000 ÷ 3), and his allocable share of qualified property is $20,000 ($60,000 ÷ 3).
```
152
Jerry’s adjusted gross income for the current year is $40,000. How much of the following contributions (after limitations, if any) can he deduct on Schedule A?
$1,000 paid at a charity auction for a week at a fishing resort in Arkansas. The trip is valued at $1,000.
$500 to the local Chamber of Commerce.
Land adjacent to his church for use as a parking lot. The fair market value of the land is $35,000. Jerry paid $20,000 for the land. He does not elect to reduce the fair market value to qualify for a different AGI limit.
A. $10,500
B. $8,000
C. $12,000
D. $20,000
$12,000
Answer (C) is correct.
The value of a ticket to a charitable event is a deductible contribution to the extent the purchase price exceeds the FMV of the admission or privilege associated with the event. Jerry paid $1,000 for the privilege of attending the fishing resort that had a FMV of $1,000. Therefore, no deduction is allowed. Chambers of Commerce do not qualify under Sec. 170(c) as a charitable organization, so the $500 is not deductible. The land donated to the church is considered capital gain property and is subject to a 30%-of-AGI limitation on the associated deduction (Publication 17). Jerry had an AGI of $40,000 allowing only $12,000 ($40,000 × .30) of the $35,000 FMV of the land to be deducted in the current year. The remaining $23,000 will be carried forward to subsequent years.
153
Julie made cash contributions to her local chapter of the Society for Prevention of Cruelty to Animals (SPCA) to care for stray dogs and cats. She donated several times a year but paid less than $250 for the entire year. These are the only charitable contributions Julie makes during the year. What documentation must Julie keep and provide to the Internal Revenue Service upon request in order to substantiate her tax return charitable contribution deduction?
A. A self-prepared statement or letter would be sufficient for contributions less than $250.
B. A receipt for each donation that shows the amount, date, and to whom paid.
C. No documentation is necessary since the contribution is less than $250.
D. An acknowledgment from the SPCA that she made contributions during the year.
A receipt for each donation that shows the amount, date, and to whom paid.
Answer (B) is correct.
For contributions less than $250, a canceled check is permissible documentation. In determination of whether the contribution is $250 or more, separate contributions are not combined (Publication 17). Thus, the only plausible choice is a receipt for each donation that shows the amount, date, and to whom paid.
154
```
Mr. E donated stock, which he had held for 10 months, to his church. The stock had a fair market value of $1,000 at the time of the gift, but had only cost Mr. E $800. What amount can he deduct as a charitable contribution?
A. $1,000
B. $800
C. $200
D. $600
```
$800
Answer (B) is correct.
The amount of a charitable contribution of property is the fair market value of the property reduced by the amount of gain, which would not have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value [Sec. 170(e)(1)] (Publication 17). The fair market value of the stock at the time of the contribution was $1,000, and the amount of the gain, which would not have been a long-term capital gain, was $200 ($1,000 FMV – $800 basis). Accordingly, the amount E can deduct as a charitable contribution is $800 ($1,000 – $200).
155
```
Shirley, a single taxpayer, has taxable income of $150,000. She has qualified business income (QBI) of $50,000 and no qualified property. The qualified business paid a total of $15,000 in wages. Under Sec. 199A, what is Shirley’s deductible amount for the qualified business?
A. $15,000
B. $10,000
C. $9,975
D. $7,500
```
$10,000
Answer (B) is correct.
Because Shirley’s taxable income of $150,000 is less than $160,700, the W-2 wages/qualified property limit does not apply. Therefore, the deductible amount equals 20% of QBI, or $10,000.
156
```
In 2011, Mr. P bought a residential lot for $8,000 and built a house on it at a cost of $52,000. He added an in-ground swimming pool costing $15,000 in 2013. The house was destroyed by fire in 2019 in a federally declared disaster, and he received a $45,000 insurance settlement. The fair market value of the property was determined to be $115,000 immediately before the fire and $25,000 immediately after. What is the amount of his nonbusiness casualty loss deduction?
A. $30,000
B. $29,500
C. $74,500
D. $44,500
```
```
$29,500
Answer (B) is correct.
The amount of a casualty loss under Sec. 165 is the lesser of the decrease in the fair market value of the property resulting from a casualty or the adjusted basis. In the case of a residence (not used for business purposes), no allocation is required among the land and improvements [Reg. 1.165-7(b)(2)]. Therefore, Mr. P’s basis of the residence for purposes of determining the casualty loss is $75,000 ($8,000 + $52,000 + $15,000). Since this is less than the decrease in fair market value of $90,000 ($115,000 – $25,000), the casualty loss is $75,000. The casualty loss must be reduced by the insurance proceeds, and a deduction is allowed only to the extent the loss exceeds $500 (Publication 547). Mr. P’s casualty loss is $29,500 as computed below:
Loss
$ 75,000
Less:
Insurance
(45,000)
$500 per occurrence
(500)
Deductible casualty loss
$ 29,500
```
