R1 M5 - Itemized Deductions Flashcards
(18 cards)
Ordinary income property includes:
- Inventory ( donated furniture, shoes)
- Short-term assets (held for one year or less)
- Investment or personal-use assets that have depreciated in value
Private operating foundation and public charities are the most tested
private operation foundation distributes to its own charitable foundation.
Carryover of Excess Charitable Contributions - (Five years)
Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year. Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed. What is the amount of charitable contributions deductible on Stein’s current year income tax return?
A. $17,000 B. $21,000 C. $24,000 D. $25,000
Which of the following statements is correct regarding the deductibility of donations made to qualifying charities by a cash-basis individual taxpayer?
A. A contemporaneous written acknowledgement is required for donations of $100. B. A charitable contribution deduction is not allowed for the value of services rendered to a charity. C. A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $10,000. D. The charitable contribution deduction for long-term appreciated stock is limited to 50% of adjusted gross income.
Choice “B” is correct. A charitable contribution is not allowed for the value of services rendered to a charity.
Choice “A” is incorrect. A contemporaneous written acknowledgement is required for donations of $250 or more.
Choice “C” is incorrect. A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $5,000.
Choice “D” is incorrect. The charitable contribution deduction for long-term appreciated stock is limited to 30% of adjusted gross income.
- Age 65 or older or blind $1,550 is added to your standard deduction (MFJ).
- Age 65 or older or blind $1,950 is added to your standard deduction (MFJ).
- Medical expense deduction is allowed for Medicare insurance premiums
Qualified medical expenses
< Insurance reimbursement>
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Qualified medical expenses “ paid”
<7.5% of AGI>
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Deductible medical expenses
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List of Itemized Deduction
-Medical Expenses
- Real Estate Taxes (State and local taxes)
- Personal Property Taxes (State and local taxes)
- Income Taxes (State, local and foreign taxes)
-Sales tax
(Itemized deduction for state, local and income taxes (SALT), state and local property tax and sales tax are limited to $10,000 on aggregate)
- Casualty loss (10% of AGI floor)
- Interest paid on their home mortgage
-Gambling loss
Nondeductible Taxes as itemized deduction on Schedule A
- Federal Taxes (incl social sec)
- Inheritance taxes for states
- Business (on Sch C and rental property taxes on Sch E)
Type of Medical Expenses (Deductible)
- Doctors
- Prescription drugs, including Medicare part D premiums and Part B.
- Necessary surgery
- Transportation to medical facility
- Physically disabled costs
Type of Medical Expenses (Non-deductible)
- Elective surgery
- Life Insurance and insurance against loss of earning due to sickness or accident
-Health Club membership
- Capital expenditures (up to increase in the FMV of the property b/c of the expenditure).
- Health Saving Accounts is an adjustment in R1 M4 Adjustments
Robinson’s personal residence was partially destroyed by a hurricane. Robinson resided in a federally declared disaster area. The fair market value (FMV) before the hurricane was $500,000, and the FMV after the hurricane was $300,000. Robinson’s adjusted basis in the home was $350,000. Robinson settled the insurance claim for $175,000. If Robinson’s adjusted gross income for the year is $120,000, what amount of the casualty loss may Robinson claim after consideration of threshold limitations?
A. $12,900 B. $13,000 C. $24,900 D. $25,000
In Year 1, Kane’s residence had an adjusted basis of $250,000 and it was destroyed by a tornado. The residence was located in a federally declared disaster area. An appraiser valued the decline in market value at $425,000. Later that same year, Kane received $200,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Kane’s Year 1 adjusted gross income was $100,000 and he did not have any casualty gains.
What total amount can Kane deduct as a Year 1 itemized deduction for casualty loss, after the application of the threshold limitations?
A. $39,900 B. $40,000 C. $49,900 D. $50,000
Pat, a single taxpayer, has adjusted gross income of $40,000 in the current year. During the year, a hurricane causes $4,100 damage to Pat’s personal use car on which Pat has no insurance. Pat resides in a federally declared disaster area. Pat purchased the car for $20,000. Immediately before the hurricane, the car’s fair market value was $11,000 and immediately after the hurricane its fair market value was $6,900. What amount should Pat deduct as a casualty loss for the current year after all threshold limitations are applied?
A. $4,100 B. $4,000 C. $100 D. $0
Explanation
Choice “D” is correct. The calculation starts with the lesser of adjusted basis or decrease in FMV. That is $4,100. This amount is then reduced by $4,000 (10% of AGI) and the $100 per casualty. The result is zero ($4,100 – $4,000 – $100).
Choice “A” is incorrect. $4,100 is the starting point of the calculation. It is before the 10% of AGI and $100 reductions.
Choice “B” is incorrect. $4,000 is the amount after the $100 reduction but before the 10% of AGI reduction.
Choice “C” is incorrect. $100 is merely the amount of the reduction per casualty.
Jackson owns two residences. The second residence, which has never been used for rental purposes, is the only residence that is subject to a mortgage. The following expenses were incurred for the second residence in the current year:
Mortgage interest
$5,000
Utilities
$1,200
Hazard insurance
$6,000
For regular income tax purposes, what is the maximum amount allowable as a deduction for Jackson’s second residence in the current year?
A. $6,200 in determining adjusted gross income. B. $11,000 in determining adjusted gross income. C. $5,000 as an itemized deduction. D. $12,200 as an itemized deduction.
Choice “C” is correct. For a personal residence that is not used for rental purposes, no deduction is allowed for utilities costs or insurance, thus the only deductible amount here is for the mortgage interest. Note that property taxes (not present in this problem) are deductible. In this problem we are not told whether the interest relates to acquisition indebtedness or home equity indebtedness. If it is home equity indebtedness, the proceeds of the loan must be used to substantially improve the home and are subject to an overall loan amount of $750,000 including any acquisition indebtedness.
Choice “A” is incorrect. The utilities cost is not deductible; furthermore, the deduction for personal residence interest is an itemized deduction.
Choice “B” is incorrect. The insurance cost is not deductible; furthermore, the deduction for personal residence interest is an itemized deduction.
Choice “D” is incorrect. For a personal residence, neither insurance costs nor utilities costs are deductible.
Home mortgage Interest - Deduction are allowed for “qualified residence interest” on a first or a second home ( a taxpayer’s principal residence or other residence). A home that is used for personal purposes for at least 14 days in a tax year qualifies as a second home. Interest on up to $750,000 ($350,000 MFS) of home-related indebtedness as home mortgage interst.
If it’s more than $750k ($350k) it is considered a personal interest and it would not be deductible under Sch A
If the mortgage interest is exclusively used for business than it will be deducted on Sch C and if it is exclusively used as a rental property than it will be deducted on Schedule E.
Real estate taxes and mortgage interest are either deducted on the rental schedule E or as an itemized deduction (subject to limitations). Therefore, real estate taxes will be deductible whether the Griffins rent their cabin or not.
Only the rental portion of the utilities is deducted on Schedule E. Because the Griffins rented their cabin for more than 15 days and used the cabin for the greater of (1) 14 days or (2) more than 10% of the rental days, their cabin is treated as a personal/rental residence. The rental portion is deducted on Schedule E. The personal use portion of the utilities expense is not deductible.
Because the Griffins rented their cabin for more than 15 days and used the cabin for the greater of (1) 14 days or (2) more than 10% of the rental days, their cabin is treated as a personal/rental residence. The Griffins would include the rental income received in their gross income on Schedule E.
** Depreciation is only deductible as a rental expense on Schedule E**. If the Griffins had rented their cabin out for fewer than 15 days, then the cabin would be treated as a personal residence. As a personal residence, depreciation is not deductible. Therefore, depreciation is not deductible under all rental circumstances.
An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current-year’s tax return for investment interest expenses?
A. $0 B. $2,000 C. $3,000 D. $5,000
Choice “D” is correct. The deduction for investment interest expense is limited to net taxable investment income. The noninterest investment expenses are not deductible; therefore, net investment income is equal to $10,000. All $5,000 of the investment interest expense is deductible because it is less than $10,000.
Taxable investment income includes: (i) interest and dividends (if taxed at ordinary income tax rates), (ii) rents (if the activity is not a passive activity), (iii) royalties (in excess of related expenses), (iv) net short-term capital gains, and (v) net long-term capital gains if the taxpayer elects not to claim the net capital gains reduced tax rate.
Choices “A”, “B”, and “C” are incorrect per the above explanation.
Contribution for service is not deductible, but your out-of-pocket expenses incurred as a result of providing a service to charity is. Example the soap to wash the car.
Itemized Deduction
Real Estate Tax ( state and local)
- It does not include sidewalk assessment tax, sewer , and street.
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TBS Simulation
- Real estate taxes paid and State income tax paid are itemized deduction on Sch A. All source of taxes paid on Schedule a Should not exceed $10,000.
- Life insurance premium is not deductible.
- Homeowners insurance is a personal expense and there *not deductible.**
- Penalty of $50 for early withdrawal from a certificate is an Adjustment. Deductible for AGI.
- Medical Insurance Premiums qualifies as a deduction from AGI.
Smith, a single taxpayer who itemizes deductions, paid the following unreimbursed medical expenses:
Dentist and eye doctor fees. $5,000
Contact lenses. $500
Facial cosmetic surgery to improve Smith’s personal appearance (surgery is unrelated to personal injury or congenital deformity). $10,000
Premium on disability insurance policy to pay him if he is injured and unable to work. $2,000
What is the total amount of Smith’s tax-deductible medical expenses before the adjusted gross income limitation?
A. $17,500 B. $15,500 C. $7,500 D. $5,500
Explanation
Choice “D” is correct. The doctor fees ($5,000) and the contact lenses ($500) are deductible medical expenses. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses.
Choice “C” is incorrect. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses.
During the year, the Andradis, who were both under age 65, paid the following expenses:
Unreimbursed costs for prescription drugs required for their dependent daughter’s medical condition
$1,300
Mrs. Andradi’s face lift (to improve personal appearance)
$4,000
Physical therapy for their dependent son’s soccer injury
$3,000
Massage therapy fees at Mr. Andradi’s health club obtained because he enjoys massages
$500
The Andradis’ adjusted gross income for the current year was $65,000, and the current year percentage of adjusted gross income floor is 7.5 percent. What amount could be claimed on the Andradis’ current year tax return for medical expenses?
A. $1,300 B. $0 C. $4,875 D. $4,300
