ACCT 3210 Deductions

Indicate whether the following statements are "True" or "False" regarding the deductibility of education expenses by an employee. c. The expenses were incurred to maintain or improve existing skills required in the present job.

True

Indicate whether the following types of interest are "Deductible" or "Nondeductible" as an itemized deduction. You may ignore any limitation considerations. d. Qualified residence interest

Deductible. Qualified residence interest is interest paid or accrued during the taxable year on indebtedness (subject to limitations) secured by any property that is a qualified residence of the taxpayer. Qualified residence interest falls into two categories: (1) interest on acquisition indebtedness and (2) interest on home equity loans. A qualified residence includes the taxpayer's principal residence and one other residence of the taxpayer or spouse. The one other residence, or second residence, refers to one that is used as a residence if not rented or, if rented, meets the requirements for a personal residence under the rental of vacation home rules.

Indicate whether the following statements are "True" or "False" regarding the charitable contributions for tax purposes. b. A deduction is allowed for a contribution of one's services to a qualified charitable organization.

False

Indicate whether the following statements are "True" or "False" regarding the charitable contributions for tax purposes. d. Property donated to a charity is generally valued at donor's basis at the time of gift.

False

Miller owns a personal residence with a fair market value of $195,000 and an outstanding first mortgage of $157,500. This year, Miller gets a home equity loan of $10,000 to purchase new jet skis. How much of this mortgage debt is treated as qualified residence indebtedness?

Miller can deduct all of the interest on the $157,500 first mortgage because it is acquisition indebtedness. In addition, all of the interest on the $10,000 home equity loan is deductible. Interest is deductible only on the portion of a home equity loan that does not exceed the lesser of: • The fair market value of the residence, reduced by the acquisition indebtedness ($195,000 FMV −$157,500 acquisition indebtedness = $37,500). • $100,000 ($50,000 for married persons filing separate returns). Therefore, all $167,500 of the debt ($157,500 + $10,000) will be treated as qualified residence indebtedness.

Indicate whether the following are "Deductible" or "Nondeductible" as medical expenses for tax purposes. c. Nonprescription drugs

Nondeductible

Indicate whether the following types of interest are "Deductible" or "Nondeductible" as an itemized deduction. You may ignore any limitation considerations. c. Interest on personal car loans

Nondeductible. Currently, personal (consumer) interest is not deductible. This includes credit card interest; interest on car loans; and other types of interest.

Classify each of the following expenditures paid in 2021 as a deduction "For AGI", "From AGI", or "Not deductible". Note: Assume the taxpayer itemizes and ignore any possible limitations. a. Roberto gives cash to his father as a birthday gift.

Not deductible

Indicate whether the following personal expenditures are "Deductible" or "Not deductible" for tax purposes. c. Life insurance premiums

Not deductible

Answer the following regarding the bad debt deduction. b. How is a nonbusiness bad debt classified? -Long-term capital loss -Ordinary loss -Short-term capital loss

Short-term capital loss

Indicate whether the following statements are "True" or "False" regarding the deductibility of education expenses by an employee. b. The expenses were incurred to meet the express requirements of the employer or the requirements imposed by law to retain his or her employment status.

True

Indicate whether the following statements are "True" or "False" regarding the charitable contributions for tax purposes. c. A charitable contribution generally is deducted in the year the payment is made. This rule applies to both cash and accrual basis individuals.

True

Indicate whether each of the following statements is "True" or "False" regarding when a theft loss generally is recognized. d. Generally, a theft loss is deducted in the year of discovery.

True

Indicate whether the following statements are "True" or "False" regarding the charitable contributions for tax purposes. a. Generally, when a donor derives a tangible benefit from a contribution, he or she cannot deduct the value of the benefit.

True

When would an account receivable give rise to a bad debt deduction? -When the account receivable was not included in gross income. -When the account receivable was previously included in gross income. -When the taxpayer is a cash basis taxpayer.

When the account receivable was previously included in gross income.

Amir, who files single, has AGI of $58,000 and incurred the following itemized deductions this year: -Union dues and work uniforms: $350 -Home office expenses: $1,200 -Unreimbursed employee expenses: $415 -Gambling losses to the extent of gambling winnings: $890. What is Amir's total itemized deduction related to these items?

$890 Amir may deduct $890. All of the expenses other than the gambling loss are miscellaneous itemized deductions (and cannot be deducted from 2018 through 2025). The gambling loss remains deductible.

Indicate whether the following personal expenditures are "Deductible" or "Not deductible" for tax purposes. Ignore any limitations that may affect the deduction. c. Fines and penalties

Not deductible

Indicate whether the following personal expenditures are "Deductible" or "Not deductible" for tax purposes. Ignore any limitations that may affect the deduction. d. Political contributions

Not deductible

Indicate whether the following personal expenditures are "Deductible" or "Not deductible" for tax purposes. Ignore any limitations that may affect the deduction. f. Hobby losses

Not deductible

Indicate whether the following statements are "True" or "False" regarding the office in the home deduction. b. The home office may be where the taxpayer meets clients, patients, or customers.

True.

During the year, Addison is involved in the following transactions. What are the possible income tax ramifications of these transactions? Transaction 1: Lost money gambling on a recent trip to a casino. Gambling losses ____. -are deductible to the extent of winnings -are never deductible

are deductible to the extent of winnings

During the year, Addison is involved in the following transactions. What are the possible income tax ramifications of these transactions? Transaction 3: Received from the IRS a tax refund due to Addison's overpayment of last year's Federal income taxes. A Federal income tax refund ____ income since it is an adjustment of a prior expenditure that ____ deductible. -is / is not -was / was not

is not, was not

During the year, Addison is involved in the following transactions. What are the possible income tax ramifications of these transactions? Transaction 2: Helped pay for her neighbor's dental bills. The neighbor is a good friend who is unemployed. Barring an exception for dependents, ____ is allowed for payment of some other person's expenses. -no deduction -a deduction

no deduction

Jim discovers that his residence has extensive termite damage. May he take a deduction for the damage to his residence? ______, -Yes -No because the current position of ______ -all of the courts -the IRS -the Supreme Court is that termite damage _______ -is -is not deductible as a casualty loss. Generally, _______ -disease damage does not -insect damage does not -nonsudden events do -nonsudden events do not qualify as casualties. In addition, from 2018 through 2025, personal casualty losses are ______ -allowed for a personal residence if lived there for at least 3 years -reduced by 50% of adjusted gross income. -only allowed if the loss occurs in a Federally declared disaster area.

-No -the IRS -is not -nonsudden events do not -only allowed if the loss occurs in a Federally declared disaster area

During the year, Addison is involved in the following transactions. What are the possible income tax ramifications of these transactions? Transaction 7: Sold a houseboat and a camper on eBay. Both were personal use items, and the gain from one offset the loss from the other. Gains and losses from the sale of personal-use assets ____ -can -cannot offset each other. The gains ____ -are -are not taxable and the losses ____ -are -are not deductible.

-cannot -are -are not

The millionaires' provision ____ -does -does not limit the amount of compensation that can be paid to an employee. Instead it ____ -does -does not limit the amount the employer can deduct for the compensation of ____ -any employee -a covered executive to $______ annually.

-does not -does -a covered executive -1,000,000

Vella owns and operates an illegal gambling establishment. In connection with this activity, he has the following expenses during the year: -Rent: $24,000 -Bribes: $40,000 -Travel expenses: $4,000 -Utilities: $18,000 -Wages: $230,000 -Payroll taxes: $13,800 -Property insurance: $1,600 -Illegal kickbacks: $22,000 Vella's total deductible expenses for tax purposes are $______.

291,400 -Rent: $24,000 -Travel expenses: $4,000 -Utilities: $18,000 -Wages: $230,000 -Payroll taxes: $13,800 -Property insurance: $1,600 Only legal activities in illegal business are deductible

Indicate whether the following are "Deductible" or "Nondeductible" as medical expenses for tax purposes. a. Transportation for medical care

Deductible

Indicate whether the following are "Deductible" or "Nondeductible" as medical expenses for tax purposes. b. Medical and hospital insurance premiums

Deductible

Indicate whether the following are "Deductible" or "Nondeductible" as medical expenses for tax purposes. e. Eyeglasses (including contact lenses)

Deductible

Indicate whether the following are "Deductible" or "Nondeductible" as medical expenses for tax purposes. f. Hearing aids

Deductible

Indicate whether the following personal expenditures are "Deductible" or "Not deductible" for tax purposes. a. Medical expenses

Deductible

Indicate whether the following personal expenditures are "Deductible" or "Not deductible" for tax purposes. b. Mortgage insurance

Deductible

Indicate whether the following personal expenditures are "Deductible" or "Not deductible" for tax purposes. e. Charitable contributions

Deductible

Indicate whether the following personal expenditures are "Deductible" or "Not deductible" for tax purposes. Ignore any limitations that may affect the deduction. a. Traditional IRA Contributions

Deductible

Indicate whether the following personal expenditures are "Deductible" or "Not deductible" for tax purposes. Ignore any limitations that may affect the deduction. b. Alimony (pre-2019 divorce agreement)

Deductible

Indicate whether the following personal expenditures are "Deductible" or "Not deductible" for tax purposes. Ignore any limitations that may affect the deduction. e. State income taxes

Deductible

Indicate whether the following types of interest are "Deductible" or "Nondeductible" as an itemized deduction. You may ignore any limitation considerations. b. Investment interest

Deductible. Taxpayers frequently borrow funds they use to acquire investment assets. Congress, however, has limited the deductibility of interest on funds borrowed for the purpose of purchasing or continuing to hold investment property. Under this limitation, the deduction for investment interest expense may not exceed the net investment income for the year.

Indicate whether each of the following statements is "True" or "False" regarding when a theft loss generally is recognized. b. A theft loss is permitted if a reimbursement claim with a reasonable prospect of full recovery exists.

False

Indicate whether the following statements are "True" or "False" regarding bad debts. b. A bad debt deduction is allowed for a bad debt arising from the sale of a product or service when the taxpayer is on the cash basis.

False

Indicate whether the following statements are "True" or "False" regarding bad debts. c. Most taxpayers may use only the reserve method in accounting for bad debts.

False

Indicate whether the following statements are "True" or "False" regarding deductions from gross income. a. Nonbusiness expenses are expenses incurred in connection with an income-producing activity that does not qualify as a trade or business. Such expenses are deductions for adjusted gross income.

False

Indicate whether the following statements are "True" or "False" regarding the deductibility of education expenses by an employee. a. The expenses were incurred to meet the minimum educational standards for qualification in the taxpayer's existing job.

False

Indicate whether the following statements are "True" or "False" regarding the deduction criteria for § 162 and § 212. a. The Code refers to reasonableness solely with respect to interest and employee benefits.

False

Indicate whether the following statements are "True" or "False" regarding the definition of medical expenses for tax purposes. c. The cost of weight reduction programs related to obesity is excluded from the definition of allowable medical expenses.

False

Indicate whether the following statements are "True" or "False" regarding the standard deduction. c. Taxpayers are allowed to deduct the lesser of itemized deductions or the standard deduction. The choice is elective.

False

Indicate whether the following statements are "True" or "False" regarding the tax treatment of casualty and theft loss. Assume all requirements are met for a deduction as a casualty loss. b. All acts of God are treated as casualty losses for income tax purposes.

False

Indicate whether the following statements are "True" or "False" regarding travel expenses. a. A one-day business trip is travel status, and meals and lodging for such a trip are deductible.

False. A one-day business trip normally does not warrant travel status.

True/False: All income must be reported, and all deductions are allowed unless specifically disallowed in the Code.

False. All income must be reported and only specific deductions are deductible.

Indicate whether the following statements are "True" or "False" regarding employment-related transportation expenses. c. Usually commuting between home and one's place of employment is a business, deductible expense.

False. It is a personal, nondeductible expense.

Indicate whether the following statements are "True" or "False" regarding business gifts. a. Business gifts are subject to the 50 percent cut-back adjustment.

False. Although not subject to a cutback adjustment, business gifts are deductible only to the extent of $25 per donee per year.

Indicate whether the following statements are "True" or "False" regarding employment-related transportation expenses. a. An employee may deduct unreimbursed employment-related transportation expenses as an itemized deduction for AGI.

False. Deduction is FROM AGI.

Indicate whether the following statements are "True" or "False" regarding retirement plans. a. A contribution to a Roth IRA allows the taxpayer a deduction for AGI.

False. For a traditional IRA, an employee is allowed a deduction for AGI. No tax benefit (i.e., exclusion or deduction) results from the initial contribution to a Roth IRA. Instead, later distributions (including post-contribution earnings) are recovered tax-free.

Indicate whether the following statements are "True" or "False" regarding business gifts. d. The annual limitation on business gifts can be circumvented by having the donor's spouse join in the gift.

False. The $25 limitation on business gifts cannot be circumvented by having the donor's spouse join in the gift or by making multiple gifts that include the customer's family.

Indicate whether each of the following statements is "True" or "False" regarding when a theft loss generally is recognized. a. Generally, a theft loss is deducted in the year the loss occurs.

False. Year of discovery, not year of loss occur

Classify each of the following expenditures paid in 2021 as a deduction "For AGI", "From AGI", or "Not deductible". Note: Assume the taxpayer itemizes and ignore any possible limitations. d. Mia pays alimony to Bill in accordance with their separation agreement which was signed in 2018.

For AGI

Classify each of the following expenditures paid in 2021 as a deduction "For AGI", "From AGI", or "Not deductible". Note: Assume the taxpayer itemizes and ignore any possible limitations. e. Rex, who is self-employed, contributes to his pension plan.

For AGI

Classify each of the following expenditures paid in 2021 as a deduction "For AGI", "From AGI", or "Not deductible". Note: Assume the taxpayer itemizes and ignore any possible limitations. f. Bonita pays expenses associated with her rental property.

For AGI

Classify each of the following expenditures paid in 2021 as a deduction "For AGI", "From AGI", or "Not deductible". Note: Assume the taxpayer itemizes and ignore any possible limitations. b. Sandra gives cash to her church.

From AGI

Classify each of the following expenditures paid in 2021 as a deduction "For AGI", "From AGI", or "Not deductible". Note: Assume the taxpayer itemizes and ignore any possible limitations. c. Albert pays Dr. Dafashy for medical services rendered.

From AGI

Answer the following regarding the bad debt deduction. a. When can a bad debt deduction be taken for a nonbusiness debt? -In the year of total worthlessness. -In the year when there is sufficient ordinary income. -When any amount of the total is deemed worthless.

In the year of total worthlessness.

During the year, Addison is involved in the following transactions. What are the possible income tax ramifications of these transactions? Transaction 8: Paid for dependent grandfather's funeral expenses. _____ can be claimed for income tax purposes for the funeral expenses. -No deduction -A deduction

No deduction

Indicate whether the following are "Deductible" or "Nondeductible" as medical expenses for tax purposes. d. Diaper service, maternity clothes

Nondeductible

Indicate whether the following items are "Deductible" or "Nondeductible" as licenses, fees or taxes. Assume each item is personal in nature. a. Parking meter deposits

Nondeductible

Indicate whether the following items are "Deductible" or "Nondeductible" as licenses, fees or taxes. Assume each item is personal in nature. b. Dog licenses

Nondeductible

Indicate whether the following items are "Deductible" or "Nondeductible" as licenses, fees or taxes. Assume each item is personal in nature. c. Bridge and highway tolls

Nondeductible

Indicate whether the following items are "Deductible" or "Nondeductible" as licenses, fees or taxes. Assume each item is personal in nature. d. Automobile titles and registration

Nondeductible

Indicate whether the following items are "Deductible" or "Nondeductible" as licenses, fees or taxes. Assume each item is personal in nature. e. Postage

Nondeductible

Indicate whether the following types of interest are "Deductible" or "Nondeductible" as an itemized deduction. You may ignore any limitation considerations. a. Credit card interest

Nondeductible. Currently, personal (consumer) interest is not deductible. This includes credit card interest; interest on car loans; and other types of interest.

Indicate whether the following personal expenditures are "Deductible" or "Not deductible" for tax purposes. d. Child support payments

Not deductible

Indicate whether the following personal expenditures are "Deductible" or "Not deductible" for tax purposes. f. Funeral expenses

Not deductible

Indicate whether the following personal expenditures are "Deductible" or "Not deductible" for tax purposes. g. Credit card expense

Not deductible

Indicate whether each of the following statements is "True" or "False" regarding when a theft loss generally is recognized. c. If the taxpayer has a partial claim of recovery, only part of the loss can be claimed in the year of discovery.

True

Indicate whether the following statements are "True" or "False" regarding bad debts. a. If a taxpayer sells goods or provides services on credit and the account receivable subsequently becomes worthless, a bad debt deduction is permitted only if income arising from the creation of the account receivable was previously included in income.

True

Indicate whether the following statements are "True" or "False" regarding bad debts. d. One of the more difficult tasks is determining if and when a bad debt is worthless.

True

Indicate whether the following statements are "True" or "False" regarding bad debts. e. A taxpayer using the specific charge-off method may claim a deduction when a specific business debt becomes either partially or wholly worthless or when a specific nonbusiness debt becomes wholly worthless.

True

Indicate whether the following statements are "True" or "False" regarding deductions from gross income. b. As a general rule, personal expenditures are disallowed as deductions in arriving at taxable income.

True

Indicate whether the following statements are "True" or "False" regarding deductions from gross income. c. AGI is an important subtotal that serves as the basis for computing percentage limitations on certain itemized deductions.

True

Indicate whether the following statements are "True" or "False" regarding deductions from gross income. d. In lieu of claiming itemized deductions, taxpayers will use the standard deduction.

True

Indicate whether the following statements are "True" or "False" regarding employment-related transportation expenses. b. Transportation expenses include only the cost of transporting the employee from one place to another in the course of employment when the employee is not away from home in travel status.

True

Indicate whether the following statements are "True" or "False" regarding the deduction criteria for § 162 and § 212. b. To be deductible, any trade or business expense must be "ordinary and necessary." Such expenses are deducted for AGI.

True

Indicate whether the following statements are "True" or "False" regarding the deduction criteria for § 162 and § 212. c. An expense is ordinary if it is normal, usual, or customary in the type of business conducted by the taxpayer and is not capital in nature.

True

Indicate whether the following statements are "True" or "False" regarding the deduction criteria for § 162 and § 212. d. Neither "ordinary" nor "necessary" is defined in the Code or Regulations.

True

Indicate whether the following statements are "True" or "False" regarding the definition of medical expenses for tax purposes. a. The term medical care includes expenditures incurred for the diagnosis, cure, mitigation, or treatment of a disease.

True

Indicate whether the following statements are "True" or "False" regarding the definition of medical expenses for tax purposes. b. The term medical care includes expenditures incurred for the prevention of disease.

True

Indicate whether the following statements are "True" or "False" regarding the definition of medical expenses for tax purposes. d. The cost of medical care does not include the expenses of a special school for a mentally or physically handicapped individual.

True

Indicate whether the following statements are "True" or "False" regarding the definition of medical expenses for tax purposes. e. A medical expense does not have to relate to a particular ailment to be deductible.

True

Indicate whether the following statements are "True" or "False" regarding the standard deduction. a. The standard deduction is the sum of two components: the basic standard deduction and the additional standard deduction.

True

Indicate whether the following statements are "True" or "False" regarding the standard deduction. b. Certain taxpayers are not allowed to claim any standard deduction, and the standard deduction is limited for others.

True

Indicate whether the following statements are "True" or "False" regarding the standard deduction. d. Special rules apply to the standard deduction of an individual who can be claimed as a dependent on another person's tax return.

True

Indicate whether the following statements are "True" or "False" regarding the tax treatment of casualty and theft loss. Assume all requirements are met for a deduction as a casualty loss. a. An individual taxpayer suffering losses from damage to nonbusiness property can deduct only those losses attributable to fire, storm, shipwreck, or other casualty or theft.

True

Indicate whether the following statements are "True" or "False" regarding the tax treatment of casualty and theft loss. Assume all requirements are met for a deduction as a casualty loss. c. Theft includes, but is not necessarily limited to, larceny, embezzlement, and robbery.

True

Indicate whether the following statements are "True" or "False" regarding the tax treatment of casualty and theft loss. Assume all requirements are met for a deduction as a casualty loss. d. A theft loss is deducted in the year of discovery, not the year of the theft (unless the discovery occurs in the same year as the theft).

True

Indicate whether the following statements are "True" or "False" regarding travel expenses. b. The employee must be away from home for a temporary period.

True

Indicate whether the following statements are "True" or "False" regarding travel expenses. c. When a taxpayer has more than one place of business or work, the main one is considered to be the tax home.

True

Indicate whether the following statements are "True" or "False" regarding travel expenses. d. The tax home is the area in which the taxpayer derives his or her source of income.

True

Indicate whether the following statements are "True" or "False" regarding business gifts. c. An exception to the annual gift per donee limitation is made for gifts costing $4 or less or promotional materials.

True. An exception is made for gifts costing $4 or less (e.g., pens with the employee's or company's name on them) or promotional materials. Such items are not treated as business gifts subject to the $25 limitation. In addition, incidental costs such as engraving of jewelry and nominal charges for gift-wrapping, mailing, and delivery are not included in the cost of the gift in applying the limitation.

Indicate whether the following statements are "True" or "False" regarding business gifts. b. Gifts to superiors are not deductible.

True. Gifts to superiors and employers are not deductible.

Indicate whether the following statements are "True" or "False" regarding retirement plans. c. Most pension plans allow an exclusion for the contributions the employee makes to the plan.

True. Pension plans covering employees follow one of two income tax approaches. Most plans allow an exclusion for the contributions the employee makes to the plan. The employee's income tax return shows nothing regarding the contribution—no income, exclusion, or deduction.

Indicate whether the following statements are "True" or "False" regarding retirement plans. b. Self-employed taxpayers can also participate in retirement plans known as Keogh (or H.R. 10) plans.

True. Self-employed taxpayers can also participate in retirement plans with tax-favored benefits. Known as Keogh (or H.R. 10) plans, these arrangements follow the deduction approach of traditional IRAs. The amount contributed under a plan is a deduction for AGI.

Indicate whether the following statements are "True" or "False" regarding the office in the home deduction. a. Office in the home expenses are deductible if the residence is used exclusively on a regular basis as a principal place of business for any trade or business of the taxpayer.

True. The term principal place of business now includes a place of business that satisfies the following requirements: (1) The office is used by the taxpayer to conduct administrative or management activities of a trade or business. (2) There is no other fixed location of the trade or business where the taxpayer conducts these activities.

Indicate whether the following statements are "True" or "False" regarding the office in the home deduction. c. The exclusive use requirement means that part of the home must be used solely for business purposes.

True. An exception allows mixed use (both business and personal) of the home if a licensed day-care business is involved.

During the year, Addison is involved in the following transactions. What are the possible income tax ramifications of these transactions? Transaction 4: Paid a traffic ticket received while double parking to attend a business meeting. Fines and penalties _____ deductible. -are -are not

are not

During the year, Addison is involved in the following transactions. What are the possible income tax ramifications of these transactions? Transaction 5: Contributed to the mayor's reelection campaign. The mayor had promised Addison to have some of her land rezoned. The mayor was reelected and got Addison's land rezoned. Political contributions ____ deductible. -are -are not

are not

During the year, Addison is involved in the following transactions. What are the possible income tax ramifications of these transactions? Transaction 9: Paid premiums on her dependent son's life insurance policy. Premiums on personal life insurance policies ____ deductible even when paid on behalf of a dependent. -are -are not

are not

During the year, Addison is involved in the following transactions. What are the possible income tax ramifications of these transactions? Transaction 6: Borrowed money from a bank to make a down payment on an automobile. Borrowing money _____ in income. -results -does not result

does not result