Chapter 6

Fill in the blanks to complete the sentence. Cash donations to public charities are limited to (1)% of a taxpayer's AGI. Donations of capital gain property to public charities are generally limited to (2)% of a taxpayer's AGI. And, donations of certain capital gain property to private nonoperating foundations are limited to (3)% of AGI.

1. 60 2. 30 3. 20

For mortgages obtained in 2020, homeowners may deduct interest on up to $(1) of acquisition indebtedness.

1. 750,000

Nancy donated an antique desk to her church. Nancy paid $800 for the desk six years ago. An appraisal of the desk reported the fair market value to be $1,000. The church officers decided to donate the desk to a family whose home had been destroyed in a fire. Nancy will be able to deduct $(1) for her contribution.

1. 800

Owen wants to contribute cash or capital gain property or stock to a charitable organization this year. Assume his adjusted gross income for the year will be $150,000 and that he only plans to make one of the following donations. If he contributes $100,000 cash to a public charity, he can deduct $(1) this year. If he contributes property that is worth $80,000 to a public charity, he can deduct $(2). Or, if he contributes publicly traded stock with a FMV of $60,000 and a basis of $40,000 to a private non-operating foundation, he can deduct $(3) this year.

1. 90,000 2. 45,000 3. 30,000

Fill in the blanks to complete the sentence. A(n) (1) loss is defined as a loss from a sudden, unexpected, or unusual event such as a fire, storm, or shipwreck that occurs as part of a (2) (3) disaster.

1. casualty 2. federally 3. declared

A taxpayer may deduct interest expense paid on qualified (1) loans where the proceeds were used for tuition, fees, books, and other necessary expenses. The interest is deductible (2) (for/from) AGI.

1. educational 2. for

Fill in the blanks to complete the sentence. Entities such as partnerships, LLCs, and S corporations are known as (1)-(2) entities because their income is reported on the owners' tax returns. Any expenses or losses from these entities are typically deductible (3) AGI.

1. flow 2. through 3. for

With the exception of rent/royalty expenses, investment interest expense is deducted (1) AGI while self-employed business expenses are deducted (2) AGI. (Enter only one word per blank.)

1. from 2. for

Activities which are profit-motivated, but do NOT require a relatively high level of involvement from the taxpayer are referred to as (1) activities.

1. investment

When donating (1) (2) property as a charitable contribution, taxpayers can only deduct the lesser of (1) the property's fair market value or (2) the property's adjusted basis.

1. ordinary 2. income

In order to be deductible, business expenses must be (1) and (2) for the business activity. (Enter only one word per blank.)

1. ordinary 2. necessary

For purposes of the qualified business income deduction, a qualified trade or business is any trade or business other than a(n) (1) (2) trade or business or business of being a(n) (3).

1. specified 2. service 3. employee

The (1) (2) is a flat amount that most individuals can elect to deduct instead of deducting their itemized deductions.

1. standard 2. deduction

Mike sold equipment he is no longer using in his business at a loss of $4,000, and he sold investments at a loss of $8,000. Mike had no other sales of property in the current year. What are the tax implications of these losses to Mike?

Deduct the $4,000 loss on equipment and $3,000 of the loss on investment in the current year. The remaining investment loss is carried forward.

Select all that apply Which of the following characteristics are required for a business expense to be deductible? (Check all that apply.)

Directly related to business activity Ordinary Necessary

Which one of the following medical payments would be deductible for the taxpayer in the current year?

Doctor bills paid by the taxpayer for his dependent son who lives with the taxpayer's ex-wife

Edward is a partner in ENS, Ltd. The partnership generated a loss during the current year. Edward's share of the loss was $7,000. How should Edward handle the loss for tax purposes assuming there are no basis, at-risk, or passive loss limitations?

Edward can deduct $7,000 for AGI.

Match the amount of the 2019 standard deduction with the filing status of the taxpayer.

Head of Household: 18,350 Married filing jointly: 24400 Single: 12200 Additional - for age or blindness (married): 1300

Which of the following statements is accurate when referring to hobby expenses?

Hobby expenses are NOT deductible, but revenues generated by the hobby are taxable.

Select all that apply Which of the following medical costs would be deductible as qualified medical expenses? (Check all that apply.)

Chiropractic services Health insurance premiums paid with after tax dollars Plastic surgery to reduce scarring after a dog bite Prescription medications Dental work Laser eye surgery Eyeglasses

In the current year, Ellen sold investment stock that she had owned for five years. The sale generated a loss of $5,000. Assuming she had no other asset sales during the year, how should Ellen handle the loss for the current tax year purposes?

Ellen can deduct $3,000 for AGI.

Select all that apply Which of the following expenses are deductible FOR AGI? (Check all that apply.)

Expenses generated by rental and royalty activities Most expenses generated by business activities

True or false: A self-employed individual may deduct the cost of his self-employed health insurance premiums even if his spouse's employer offers family coverage to him.

False

True or false: Hobby expenses are deductible to the extent of hobby income reported in AGI.

False

Certain charitable contributions of capital gain property do not qualify for a fair market value deduction. Which of the following characteristics of capital gain property will definitely cause it to qualify for a fair market value deduction?

It is intangible property such as stocks and bonds.

Lance paid $21,000 for seven acres of land six years ago. During the current year, Lance donated the land to his church. An appraisal of the land determined that the fair market value of the land is $30,000. Which of the following statements is true concerning the donation of land?

Lance will be able to deduct $30,000 as a charitable contribution.

Which of the following donations will qualify as a deductible charitable contribution?

Land donated to a public university

Chose the statement that is INCORRECT regarding a loss that is generated from the disposal or sale of assets for individuals?

Losses from personal use assets are deductible for AGI.

Isabella, age 50, pays $500 each month for health insurance premiums with after-tax dollars. She is not self-employed. During 2020, she also incurred $200 in doctor bills and $50 in over-the-counter medications. Her AGI is $45,000. What amount will she be able to deduct as an itemized deduction after the AGI floor is applied?

$1,700

Activities that are profit-motivated and require a relatively high level of involvement from the taxpayer are referred to as (1) activities. (Enter only one word per blank.)

1. business

Select all that apply Which of the following terms describes business expenses that would be deductible by the taxpayer? (Check all that apply.)

Necessary Ordinary Helpful Appropriate

Select all that apply Which of the following types of taxes may be considered when determining the itemized deduction for taxes? (Check all that apply.)

Personal property tax on the value of a boat Real estate taxes on property held for investment

Which of the following descriptions BEST defines business activities?

Profit-motivated and requiring a high level of effort from the taxpayer

Which of the following descriptions BEST defines investment activities?

Profit-motivated, but not requiring a high level of effort from the taxpayer

Which of the following statements is correct regarding the deductibility of self-employment tax for self-employed taxpayers?

Self-employed taxpayers can deduct the employer portion of the self-employment tax they pay for AGI.

How much of a self-employed taxpayer's self-employment tax may be deducted for AGI?

The employer portion of self-employment tax is deductible.

Which of the following is CORRECT concerning the deduction for qualified medical expenses?

The expenses must be reduced by a percentage of AGI

Which of the following statements is NOT accurate regarding the deduction for qualified education loan interest?

The full amount of interest paid on qualified educational loans is deductible.

Markita donated stock that she has held for less than a year to a qualified charitable organization. Her basis in the stock is $1,000 and the fair market value of the stock is $1,200. Which one of the following statements is true regarding Markita's donation?

The stock is ordinary income property. She will deduct $1,000, since her basis is less than fair market value.

Which of the following statements is INCORRECT regarding charitable donations of capital gain property?

The taxpayer must include the appreciation of the asset in gross income.

Which one of the following items is NOT a qualified medical expense?

Vitamins for promoting good health

Which of the following terms does NOT describe a casualty that could be deductible for tax purposes if it occurs in a federally-declared disaster area?

Weakened

Horatio and Maria are married and have three children. Horatio is self-employed and pays health insurance premiums for himself and his family. Which of the following situations would disqualify part or all of the premium costs from being deductible for AGI?

Maria has an employer-sponsored health insurance plan available at work, but they do not participate.

The intent of the terms ordinary and necessary when referring to deductible business expenses means the expenses must be ______.

appropriate and helpful for generating a profit

Donations to ______ organizations are NOT deductible for federal income tax purposes.

political

Holly is single and reports taxable income of $240,000 ($260,000 AGI - $20,000 itemized deductions) before the deduction for qualified business income. She has no capital gains or dividends included in taxable income. Holly's engineering consulting service generates $20,000 of qualified business income. She paid $5,000 in wages during the current year and has no qualified property. What is Holly's deduction for qualified business income?

$2,500

Jenny and Jerry have a home with a fair market value of $625,000. They borrowed $400,000 ten years ago to purchase the home (home value at that time was $450,000). They currently owe $250,000 on the acquisition loan. They recently borrowed $110,000 on a home-equity loan. The proceeds were used to purchase a car and take a vacation. What is the maximum amount of their indebtedness that can generate deductible interest in the current year?

$250,000

Holly files married filing jointly and reports income of $300,000 ($340,000 AGI - $40,000 itemized deductions) before the deduction for qualified business income. She has no capital gains or dividends included in taxable income. Holly's engineering consulting service generates $20,000 of qualified business income. She paid no wages during the current year. What is Holly's deduction for qualified business income?

$4,000

Which one of the following types of charitable contributions is NOT deductible for federal income tax purposes?

Cash paid to purchase fundraising products where a portion of the proceeds go to fund a charitable cause

Select all that apply Which of the following statements are CORRECT when comparing For AGI deductions to From AGI deductions? (Choose all that apply.)

Certain from AGI deductions may not have an effect on taxable income despite the taxpayer incurring the expense. Deduction for AGI reduce AGI thus reducing the limitations on other tax benefits that are decreased or phased out for higher income taxpayers.

Taxpayers have a choice of deducting the standard deduction or their itemized deductions. Therefore, ______ AGI deductions are considered to be beneficial to more taxpayers because:

for; they are available to all eligible taxpayers, not just those that itemize deductions.

Gary incurred $5,200 in qualified medical expenses in 2020. His AGI for the year is $50,000. Gary will be able to deduct $(1) as an itemized deduction for medical expenses.

1. 200

Patrick has an adjusted gross income of $160,000 in the current year. He donated $30,000 in cash to a public charity; capital gain property with a basis of $15,000 and a fair market value of $40,000 to a public charity; and publicly traded stock with a basis of $20,000 and a fair market value of $35,000 to a private nonoperating foundation. What is deductible as a charitable contribution for the current year?

$30,000 in cash to the public charity, $40,000 in property to the public charity, and $8,000 in stock to the private nonoperating foundation

Select all that apply A specified service trade or business for purposes of the Qualified Business Income Deduction includes all of the following except: (Check all that apply.)

Architecture Engineering

Select all that apply Which of the following types of taxes may be deducted from AGI as itemized deductions? (Check all that apply.)

Personal property tax on the value of a car State and local income taxes Real estate taxes on a primary residence

Patrick has an adjusted gross income of $120,000 in the current year. He donated $50,000 in cash to a public charity; capital gain property with a basis of $15,000 but a fair market value of $35,000 to a public charity; and publicly traded stock with a basis of $12,000 and a fair market value of $25,000 to a private nonoperating foundation. What is deductible as a charitable contribution for the current year?

The $50,000 in cash to the public charity and $10,000 of the capital gain donation to the public charity

Select all that apply Andrew volunteered for the American Red Cross after a recent hurricane. He traveled 200 miles and helped the victims of the disaster in the clean up for five days. He also donated $1,500 to the American Red Cross, but charged the amount of the donation on his credit card. He plans to pay $300 plus interest each month on the credit card charge, so he will pay $900 of the $1,500 charge by the end of the year. What amounts will Andrew be able to deduct for his charitable contributions? (Check all that apply.)

The cost of lodging while he is volunteering Mileage for the 200 miles he drove to the ravaged area $1,500 charged to the credit card during the year

Harli is taking her 6-month-old daughter to the doctor to receive vaccinations. Which of the following statements is correct regarding the deductibility of the vaccinations?

The cost of vaccinations is deductible because it is for the prevention of a disease.