R2-1 Flashcards
Smith, a single individual, made the following charitable contributions during the current year. Smith’s adjusted gross income is $60,000.
Donation to Smith’s church $5,000
Art work donated to the local art museum
(Smith purchased it for $2,000 four months ago and a local art dealer appraised it for) 3,000
Contribution to a needy family 1,000
What amount should Smith deduct as a charitable contribution?
a.
$5,000
b.
$9,000
c.
$8,000
d.
$7,000
Choice “d” is correct. This question is asking for the actual deduction and requires the candidate to determine which items are deductible charitable contributions. The $5,000 donation to the church is allowable. The artwork donated to the local art museum is deductible to its basis, $2,000. Although it is appreciated property, Smith held the property for only four months, making it short-term capital gain property. Donations of short-term capital gain property are deductible to the donor to the extent of his/her adjusted basis. The contribution to a needy family is not a deductible contribution, as it was not made to a qualifying organization.
Choice “a” is incorrect. This choice excludes the donation of the artwork to the art museum.
Choice “c” is incorrect. This choice erroneously includes the donation of the artwork at the art’s fair market value.
Choice “b” is incorrect. This choice includes all three contributions. It erroneously includes the artwork at its fair market value as well as including the donation to the needy family, which is not a deductible donation.
Carroll, a 35 year old unmarried taxpayer with an adjusted gross income of $100,000, incurred and paid the following unreimbursed medical expenses for the year:
Doctor bills resulting from a serious fall $ 5,000
Cosmetic surgery that was necessary to correct a congenital deformity 15,000
Carroll had no medical insurance. For regular income tax purposes, what was Carroll’s maximum allowable medical expense deduction, after the applicable threshold limitation, for the year?
a.
$15,000
b.
$20,000
c.
$0
d.
$10,000
Choice “d” is correct. Both medical expenses are deductible. The cosmetic surgery is not elective, since it was necessary to correct a congenital deformity.
Doctor Bills $ 5,000
Surgery 15,000
$ 20,000
AGI Limitation ($100,000 × 10%) (10,000)
Deduction $ 10,000
Choices “c”, “a”, and “b” are incorrect, per the computation above.
Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for the current year. During the current year, Taylor donated land to a church and made no other contributions. Taylor purchased the land 15 years ago as an investment for $14,000. The land’s fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for the current year?
a.
$14,000
b.
$0
c.
$11,000
d.
$25,000
Choice “d” is correct. Individual taxpayers may deduct the FMV of property donated to charity. The limit is 30% of the taxpayer’s AGI (30% × $90,000 = $27,000). The FMV of the property is $25,000 and is within the allowable amount.
Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amount should be reported in Mel’s gross income for the year?
a.
$3,600
b.
$1,200
c.
$4,800
d.
$0
Choice “c” is correct. Under a nonaccountable plan, $4,800 ($400 per month x 12 months) must be reported as part of Mel’s gross income for the year (in fact, the $4,800 will be included as part of Mel’s taxable wages on Mel’s W-2).
Rule: Under a nonaccountable plan (i.e., expenses are not reported to the employer), any amounts received by an employee from the employer must be reported by the employer as part of wages on the employee’s W-2 for the year (and subject to income tax withholding requirements). The gross amount received is reported as income.
Rule: Any expenses taken against the gross amount received in a nonaccountable plan (e.g., the car mileage expenses and the reimbursement to the company) are considered miscellaneous itemized deductions and are subject to the 2% AGI limitation.
Note: The examiners have attempted to trick the candidate into thinking that this is in some way an accountable plan because they provided for a return of excess funds received to the employer. However, remember that the question specifically states that the plan is nonaccountable.
Choices “d”, “b”, and “a” are incorrect, per the above rules.
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.
$25,000
b.
$17,000
c.
$24,000
d.
$21,000
Choice “c” is correct. Stein may deduct $24,000 on Stein’s current year income tax return.
Rule: For 50%-type charities only (which include tax-exempt educational organizations), the taxpayer has the option to deduct long-term (i.e., held longer then 12 months) capital gain appreciated property at the higher fair market value (higher than cost basis) without paying capital gains tax on the appreciated portion. This deduction is limited to 30% of adjusted gross income (AGI). A 5-year carryforward period applies.
Fair market value of appreciated long-term stock $ 25,000
Less: Limitation
AGI $ 80,000
Times 30% × 0.30
Deduction limit (24,000)
Carryforward $ 1,000
Note: Stein could have elected to deduct the cost of the stock instead of the appreciated amount, but the deduction would have been limited to 50% of AGI ($40,000) and then further limited by the cost basis of the stock ($17,000). In this case, this option would have given Stein a smaller deduction than that allowed under the above rule.
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.
$5,000 as an itemized deduction.
b.
$6,200 in determining adjusted gross income.
c.
$11,000 in determining adjusted gross income.
d.
$12,200 as an itemized deduction.
Choice “a” is correct. For a personal residence that is not used for rental purposes, no deduction is allowed for utilities costs or insurance, thus the only deductible amount here is for the mortgage interest. Note that property taxes (not present in this problem) are deductible. In this problem we are not told whether the interest relates to acquisition indebtedness or home equity indebtedness. The deduction for interest on home equity indebtedness is limited to interest on $100,000 of indebtedness, but this is unlikely to be a problem here even if the interest relates solely to home equity indebtedness. This is because of the amount of interest and the fact that there is no debt associated with Jackson’s other residence. The deduction for personal residence interest is an itemized deduction.
Choice “b” is incorrect. The utilities cost is not deductible; furthermore, the deduction for personal residence interest is an itemized deduction.
Choice “c” 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.
During the current year, Wood’s residence had an adjusted basis of $150,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $175,000. Later in the current year, Wood received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Wood’s current year adjusted gross income was $60,000 and he did not have any casualty gains.
What total amount can Wood deduct as a current year itemized deduction for casualty loss, after the application of the threshold limitations?
a.
$13,900
b.
$19,900
c.
$20,000
d.
$25,000
Choice “a” is correct. Casualty losses are generally computed as the decline in fair market value, except that the fair market value is limited to the property’s basis, here $150,000. Casualty losses are reduced by the amount of any insurance recovery, reducing this loss to $20,000. Next, each individual loss is reduced by $100, bringing this loss to $19,900. Finally, the remaining total amount of all casualty losses (here there is only one) are deductible only to the extent that the amount exceeds 10% of AGI, or $6,000 here. ($150,000 - $130,000 = $20,000; $20,000 - $100 - $6,000 = $13,900.)
Choice “d” is incorrect. This is the market value decline minus the adjusted basis.
Choice “c” is incorrect. This is the adjusted basis minus the insurance reimbursement, without any limitations being applied.
Choice “b” is incorrect. In addition to the $100 per loss nondeductible portion of each separate casualty loss, there is an overall limitation that the remaining total amount of all casualty losses is deductible only to the extent that it exceeds 10% of AGI.
Deet, an unmarried taxpayer, qualified to itemize current year deductions. Deet’s adjusted gross income was $40,000 and he made a $1,500 substantiated cash donation directly to a needy family. Deet also donated art, valued at $11,000, to a local art museum. Deet had purchased the art work two years earlier for $2,000. What was the maximum amount of the charitable contribution allowable as an itemized deduction on Deet’s current year income tax return?
a.
$12,500
b.
$2,000
c.
$3,500
d.
$11,000
Choice “d” is correct. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Because the artwork had been held for more than one year, the fair market value could be deducted. In this case, the $11,000 was within the taxpayer’s limitation of $12,000 (30% of AGI of $40,000) for donations of appreciated property.
Choice “a” is incorrect. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization.
Choice “c” is incorrect. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Furthermore, the fair market value of the artwork could be deducted because it had been held for more than one year and that value fell within the 30% of AGI overall limitation for appreciated property.
Choice “b” is incorrect. The fair market value of the artwork could be deducted because it had been held for more than one year and that value fell within the 30% of AGI overall limitation for appreciated property.
Grey, a calendar-year taxpayer, was employed and resided in New York. On February 2, of the current year, Grey was permanently transferred to Florida by his employer. Grey worked full-time for the entire year. In the current year, Grey incurred and paid the following unreimbursed expenses in relocating:
Lodging and travel expenses while moving
$ 1,000
Pre-move househunting costs
1,200
Costs of moving household furnishings and personal effects
1,800
What amount was deductible as moving expense on Grey’s current year tax return?
a.
$4,000
b.
$1,000
c.
$2,800
d.
$1,800
Choice “c” is correct. The $1,000 lodging and travel expenses are fully deductible. A pre-move househunting trip is not deductible. The $1,800 expense of moving household furnishings and personal effects is fully deductible. The total deductible amount is $2,800 ($1,000 + $1,800).
Choice “a” is incorrect. Pre-move househunting costs are not deductible.
Choice “d” is incorrect. Lodging and travel expenses while moving are fully deductible.
Choice “b” is incorrect. Costs of moving household furnishings and personal effects are fully deductible.
Moore, a single taxpayer, had $50,000 in adjusted gross income for the year. During the year she contributed $18,000 to her church. She had a $10,000 charitable contribution carryover from her prior year church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for the current year?
a.
$25,000
b.
$28,000
c.
$18,000
d.
$10,000
Choice “a” is correct. The contribution limit for a church is 50% of the contribution base (adjusted gross income in this case). Moore’s contribution limit for the current year is 50% × $50,000 = $25,000. Against this limit she can take her current year contributions ($18,000) plus the prior year carry-over ($10,000) until she reaches the current year limit. Therefore, she can take all the current year contributions plus $7,000 of the carryover for a $25,000 total.
Choice “d” is incorrect. Moore is not limited to her prior year charitable contribution carryover.
Choice “c” is incorrect. Moore may use part of her prior year charitable contribution carryover.
Choice “b” is incorrect per the explanation above.
Matthews was a cash basis taxpayer whose current year records showed the following:
State and local income taxes withheld $ 1,500
State estimated income taxes paid December 30 of the current year 400
Federal income taxes withheld 2,500
State and local income taxes paid April 17 of the following year 300
What total amount was Matthews entitled to claim for taxes on her current year Schedule A of Form 1040?
a.
$4,700
b.
$2,200
c.
$1,500
d.
$1,900
Explanation
Choice “d” is correct. State and local income taxes withheld from a cash-basis taxpayer are deductible in the year withheld, so Matthews can deduct the $1,500 withheld. She can also deduct the $400 in estimated tax liability she paid in the current year. The $2,500 federal income tax withheld is not deductible in calculating federal income tax. The current year state and local income tax paid in the following year is not deductible until paid because she is a cash-basis taxpayer. The total amount of deductible taxes, therefore, is $1,900.
Choice “a” is incorrect. Federal income tax withheld is not deductible in calculating federal income tax. Since Matthews is a cash basis taxpayer, the $300 state and local income taxes paid in the following year are not deductible until paid.
Choice “b” is incorrect. Since Matthews is a cash basis taxpayer, the $300 state and local income taxes paid in the following year are not deductible until paid.
Choice “c” is incorrect. The $400 state estimated income taxes are deductible in the current year since the amount was paid in the current year.
Note: According to the 2013 tax law, taxpayers may claim either sales tax or state and local income tax, whichever is greater. This provision was not renewed for 2014.
In the current year, Joan Frazer’s residence was totally destroyed by fire. The property had an adjusted basis and a fair market value of $130,000 before the fire. During the year, Frazer received insurance reimbursement of $120,000 for the destruction of her home. Frazer’s current year adjusted gross income was $70,000. Frazer had no casualty gains during the year. What amount of the fire loss was Frazer entitled to claim as an itemized deduction on her current year tax return?
a.
$8,500
b.
$10,000
c.
$2,900
d.
$8,600
Choice “c” is correct. The casualty loss is measured by the difference in the property’s value before ($130,000) and after (zero) the casualty, in other words, $130,000. The casualty loss must be reduced by the $120,000 insurance recovery to $10,000. This loss is reduced by $100 per casualty to $9,900. The sum of all such casualty losses (there is only one in this case) is further reduced by 10% of the taxpayer’s adjusted gross income for the year. That is 10% x $70,000 = $7,000. The amount of the casualty loss that is deductible on Frazer’s tax return is $9,900 - $7,000 = $2,900.
Tom and Sally White, married and filing joint income tax returns, derive their entire income from the operation of their retail stationery shop. Their current year adjusted gross income was $100,000, and the Whites itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Whites during the year:
Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 600
Tuition, meals, and lodging at special school for physically handicapped dependent child in an institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 8,000
Without regard to the adjusted gross income percentage threshold, what amount may the Whites claim in their current year return as qualifying medical expenses?
a.
$8,000
b.
$8,600
c.
$0
d.
$600
Choice “b” is correct. Repair and maintenance of medical devices for a disabled dependent child ($600) are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care ($8,000) is also a deductible medical expense.
Choice “a” is incorrect. Repair and maintenance of medical devices for a disabled dependent child are deductible medical expenses.
Choice “d” is incorrect. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care is a deductible medical expense.
Choice “c” is incorrect. Repair and maintenance of medical devices for a disabled dependent child are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care is also a deductible medical expense.
The self-employment tax is:
a.
Fully deductible as an itemized deduction.
b.
Fully deductible in determining net income from self-employment.
c.
One-half deductible from gross income in arriving at adjusted gross income.
d.
Not deductible.
Choice “c” is correct. One-half of the self-employment tax is deductible to arrive at adjusted gross income.
Choice “a” is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross income.
Choice “b” is incorrect. Self-employment tax is not deductible in determining self-employment income.
Choice “d” is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross income.
For the current year, Val and Pat White filed a joint return. Val earned $35,000 in wages and was covered by his employer’s qualified pension plan. Pat was unemployed and received $5,000 in alimony payments for the first 4 months of the year before remarrying. The couple had no other income. Each contributed $5,000 to an IRA account. The allowable IRA deduction on their current year joint tax return is:
a.
$10,000
b.
$2,000
c.
$5,000
d.
$0
Choice “a” is correct. In 2015, taxpayers can contribute and deduct up to $5,500 per year to an IRA, and alimony is considered earned income for IRA purposes. For couples filing a joint return where at least one spouse is an active participant in a retirement plan, the deductible portion of the contribution is phased out. For a spouse who is an active participant, the phase-out range in 2015 begins at AGI of $98,000 and is complete at $118,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range begins at $183,000 and is complete at $193,000 (2015). The earned income for IRA purposes here is $40,000 ($35,000 + $5,000), which is below both phase-out ranges, so each spouse receives a deduction of the $5,000 contribution actually made.
Choice “c” is incorrect. Pat’s alimony is deemed “earned income” for the IRA contributions. However, even if Pat had no earned income, a spouse with no earned income can deduct up to $5,500, provided the couple’s combined earned income is at least $11,000.
Choice “b” is incorrect. The $2,000 was a pre-2002 rule for IRA contribution limits for individuals and is a distractor in this case.
Choice “d” is incorrect. When a taxpayer or taxpayer’s spouse is an active participant in a pension plan at work, the full deduction is allowed if the earned income of the couple is below the phase-out ranges (as is in this case).
The deduction by an individual taxpayer for interest on investment indebtedness is:
a.
Limited to the taxpayer’s net investment income for the year.
b.
Not limited.
c.
Limited to the taxpayer’s interest income for the year.
d.
Limited to the investment interest paid during the year.
Choice “a” is correct. The deduction for interest expense on investment indebtedness is limited to net investment income (investment income less investment expenses).
Which expense, both incurred and paid in the same year, can be claimed as an itemized deduction subject to the two percent-of-adjusted-gross-income floor?
a.
Employee’s unreimbursed business car expense.
b.
Employee’s unreimbursed moving expense.
c.
Self-employed health insurance.
d.
One-half of the self-employment tax.
Choice “a” is correct. Employee business expenses, including unreimbursed car expense, are deductible as itemized deductions subject to the 2% floor.
Choice “d” is incorrect. One-half of the self-employment tax is deductible, but it is a deduction to arrive at adjusted gross income, not as an itemized deduction.
Choice “b” is incorrect. The employee’s unreimbursed moving expense is deductible, but it is a deduction to arrive at adjusted gross income, not an itemized deduction.
Choice “c” is incorrect. Self-employed health insurance is deductible, but not as an itemized deduction subject to the 2% floor.
The Browns borrowed $20,000, secured by their home, to pay their son’s college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as:
a.
Deductible qualified residence interest.
b.
Nondeductible interest.
c.
Investment interest expense.
d.
Deductible personal interest.
Choice “a” is correct. Interest paid on a debt secured by a home mortgage is classified as deductible qualified residence interest. The Browns would be able to deduct the interest paid as an itemized deduction. The limit is $100,000 of mortgage interest since the loan was not to buy, build, or improve the home.
Choice “d” is incorrect. Personal interest is not deductible. It is also called consumer interest.
Choice “b” is incorrect. Interest paid on debt secured by a home mortgage is deductible.
Choice “c” is incorrect. Interest paid on a debt secured by a home mortgage is not classified as investment interest.
On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In Year 4 they borrowed $15,000 secured by their home, and used the cash to add a new room to their residence. That same year they took out a $5,000 auto loan.
The following information pertains to interest paid in Year 4:
Mortgage interest $17,000
Interest on room construction loan 1,500
Auto loan interest 500
For Year 4, how much interest is deductible, prior to any itemized deduction limitations?
a.
$17,500
b.
$17,000
c.
$18,500
d.
$19,000
Choice “c” is correct. Mortgages of up to $1,000,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible.
Choice “b” is incorrect. Mortgages of up to $1,000,000 to buy, build, or substantially improve a home allow for the full deduction of interest.
Choice “a” is incorrect. Mortgages of up to $1,000,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible.
Choice “d” is incorrect. Interest on auto loans (consumer interest) is not deductible.
Wells paid the following expenses during the year:
Premiums on an insurance policy against loss of earnings due to sickness or accident $ 3,000
Physical therapy after spinal surgery 2,000
Premium on an insurance policy that covers reimbursement for the cost of prescription drugs 500
In the current year, Wells recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Wells’ current year income tax return for medical expenses?
a.
$3,500
b.
$1,000
c.
$500
d.
$4,000
Choice “b” is correct. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Prescription drugs are considered medical care. Insurance against loss of income is not payment for medical care and therefore is not deductible. Qualified medical expenses must be reduced by insurance reimbursement ($2,000 + $500 - $1,500 = $1,000).
Choice “d” is incorrect. Insurance against loss of income is not payment for medical care and therefore is not deductible.
Choice “a” is incorrect. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care.
Choice “c” is incorrect. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care.
Which allowable deduction can be claimed in arriving at an individual’s adjusted gross income?
a.
Unreimbursed business expense of an outside salesperson.
b.
Charitable contribution.
c.
Alimony payment.
d.
Personal casualty loss.
Choice “c” is correct. Alimony payments are deductible to arrive at adjusted gross income (AGI). Charitable contributions, personal casualty losses, and unreimbursed business expenses of outside salespersons are all deductible from AGI as itemized deductions.
Choice “b” is incorrect. Charitable contributions are deductible from adjusted gross income as itemized deductions.
Choice “d” is incorrect. Personal casualty losses are deductible from adjusted gross income as itemized deductions.
Choice “a” is incorrect. Unreimbursed business expenses of outside salespersons are deductible from adjusted gross income as itemized deductions.
Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute and deduct 25% of his annual earned income. For this purpose, “earned income” is defined as net self-employment earnings reduced by the:
a.
Self-employment tax.
b.
Deductible Keogh contribution and one-half of the self-employment tax.
c.
Self-employment tax and one-half of the deductible Keogh contribution.
d.
Deductible Keogh contribution.
Choice “b” is correct. For Keogh plans, earned income is defined as net self-employment earnings reduced by the amount of the allowable Keogh deduction and ½ the self-employment tax.
Choice “d” is incorrect. For Keogh plans, earned income is also reduced by ½ the self-employment tax.
Choice “a” is incorrect. For Keogh plans, earned income is reduced by ½ the self-employment tax, not the entire tax.
Choice “c” is incorrect. For Keogh plans, earned income is reduced by ½ the self-employment tax and the full amount of the deductible Keogh contribution.
Which itemized deduction is included in the category of unreimbursed expenses that are deductible only to the extent that the aggregate amount of such expenses exceeds 2% of the taxpayer’s adjusted gross income?
a.
Interest expense.
b.
Charitable contributions.
c.
Tax return preparation fee.
d.
Medical expense.
Explanation
Choice “c” is correct. Tax return preparation fee is a miscellaneous itemized deduction subject to the 2% adjusted gross income (AGI) floor.
Choice “d” is incorrect. Medical expenses are itemized deductions not subject to the 2% adjusted gross income (AGI) floor, but instead are subject to a 10% AGI floor.
Choice “b” is incorrect. Charitable contributions are not subject to the 2% AGI floor.
Choice “a” is incorrect. Interest expense on a home mortgage, second home, or on investments are deductible as an itemized deduction not subject to the 2% adjusted gross income (AGI) floor.
Spencer, who itemizes deductions, had adjusted gross income of $60,000 for the current year. The following additional information is available for the year:
Cash contribution to church $ 4,000
Purchase of art object at church bazaar (with a fair market value of $800 on the date of purchase) $1,200
Donation of used clothing to Salvation Army (fair value evidenced by receipt received) $600
What is the maximum amount Spencer can claim as a deduction for charitable contributions in the current year?
a.
$5,200
b.
$5,400
c.
$5,000
d.
$4,400
Choice “c” is correct. The $4,000 cash contribution to the church is deductible. Relative to the purchase of the art object at the church bazaar, only the excess paid over fair market value ($1,200 - $800 = $400) is deductible. The used clothing donation to the Salvation Army is deductible at its fair market value of $600. The total deduction is $5,000 ($4,000 + $400 + $600). Note that the total contributions deduction is below the 50% of adjusted gross income ceiling (50% x $60,000 = $30,000), since $5,000 is less than $30,000.
Choice “b” is incorrect. The art object deduction is not its fair market value of $800, but the $400 excess paid over its fair market value.
Choice “a” is incorrect. The used clothing donated to the Salvation Army is deductible at its $600 fair market value. In addition, the art object deduction is only the $400 excess paid over fair market value, not the $1,200 paid.
Choice “d” is incorrect. The used clothing donated to the Salvation Army is deductible at its $600 fair market value.
Charitable contributions subject to the 50-percent limit that are not fully deductible in the year made may be:
a.
Carried forward indefinitely until fully deducted.
b.
Neither carried back nor carried forward.
c.
Carried forward five years.
d.
Carried back two years or carried forward twenty years.
Choice “c” is correct. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward five years.
Choice “b” is incorrect. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward.
Choice “d” is incorrect. Net operating losses, not charitable contributions, are carried back 2 years and forward 20 years.
Choice “a” is incorrect. Individual capital losses, not charitable contributions, are carried forward indefinitely until used up (or taxpayer’s death).
In Year 10, Farb, a cash basis individual taxpayer, received an $8,000 invoice for personal property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and immediately started legal action to recover the overstatement. In November, Year 11, the matter was resolved in Farb’s favor, and he received a $5,000 refund. Farb itemizes his deductions on his tax returns.
Which of the following statements is correct regarding the deductibility of the property taxes?
a.
Farb should not deduct any amount in his Year 10 income tax return and should deduct $3,000 in his Year 11 income tax return.
b.
Farb should deduct $3,000 in his Year 10 income tax return.
c.
Farb should deduct $8,000 in his Year 10 income tax return and should report the $5,000 refund as income in his Year 11 income tax return.
d.
Farb should not deduct any amount in his Year 10 income tax return when originally filed, and should file an amended Year 10 income tax return in Year 11.
Choice “c” is correct. Under the tax benefit rule, Farb should report the $5,000 refund as income in Year 11 since Farb itemizes deductions and would have received a tax benefit from deducting the $8,000 paid in Year 10.
Choice “a” is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net the refund against the amount paid and deduct the net amount in Year 11.
Choice “b” is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net the refund against the amount paid and deduct the net amount in Year 10.
Choice “d” is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. There is no need to wait and file an amended Year 10 return in Year 11.
During the year, Barlow moved from Chicago to Miami to start a new job, incurring costs of $1,200 to move household goods and $2,500 in temporary living expenses. Barlow was not reimbursed for any of these expenses. What amount should Barlow deduct as itemized deduction for moving expense?
a.
$3,000
b.
$0
c.
$2,700
d.
$3,700
Choice “b” is correct. There is no itemized deduction for temporary living expenses, and the direct moving expenses (such as the costs to move the goods and the costs to move the taxpayer’s family from the old to the new location) are deductible before adjusted gross income, not as an itemized deduction.
Which of the following requirements must be met in order for a single individual to qualify for the additional standard deduction?
~~Must support dependent child or aged parent
~~Must be age 65 or older or blind
a.
No
Yes
b.
Yes
No
c.
No
No
d.
Yes
Yes
Choice “a” is correct. In order to qualify for the additional standard deduction, an individual must be age 65 or older or blind by the end of the tax year. He or she does not have to support a dependent child or aged parent.
In the current year, Drake, a disabled taxpayer, made the following home improvements:
Cost
Pool installation, which qualified as a medical expense and increased the value of the home by $25,000 $ 100,000
Widening doorways to accommodate Drake’s wheelchair (the improvement did not increase the value of his home) $10,000
For regular income tax purposes and without regard to the adjusted gross income percentage threshold limitation, what maximum amount would be allowable as a medical expense deduction in the current year?
a.
$85,000
b.
$110,000
c.
$10,000
d.
$75,000
Choice “a” is correct. A capital expenditure for the improvement of a home qualifies as a medical expense if it is directly related to the prescribed medical care. However, it is deductible to the extent that the expenditure exceeds the increase in value of the home. Thus, Drake may only deduct $75,000, the difference between the cost of improvement ($100,000) and the increase in market value ($25,000) of the home. In addition, the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. The widening of hallways qualifies as this type of expense and, therefore, the entire $10,000 is deductible.
Choice “b” is incorrect. Although a capital expenditure for the improvement of a home qualifies as a medical expense, it is only deductible to the extent that the expenditure exceeds the increase in value of the home. Thus, Drake may only deduct $75,000, the difference between the cost of improvement ($100,000) and the increase in market value ($25,000) of the home.
Choice “d” is incorrect. In addition, to the capital improvement expenditure of $75,000, the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. The widening of hallways qualifies as this type of expense and, therefore, the entire $10,000 is deductible.
Choice “c” is incorrect. Both the capital improvement expenditure of $75,000 and the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively ($10,000) qualify as medical expenses.
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.
$17,500
d.
$15,500
Choice “a” 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. 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 “d” is incorrect. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health.
Choice “b” 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.
