Tax Chapter 7
17) Dana paid $13,000 of investment interest expense in a year in which she earned $4,500 in dividends, $5,400 in interest income, and had a short-term capital gain of $1,000 and a long-term capital gain of $2,200. The capital gains resulted from the sale of stock held as an investment. She has no other investment-related expenses. What is her maximum deduction for investment interest expense if Dana makes the proper elections to raise her ceiling as high as possible? A) $13,000 B) $13,100 C) $5,400 D) $9,900
A) $13,000
44) Mitzi's 2018 medical expenses include the following: Medical premiums $10,850 Doctors fees 2,000 Hospital fees 3,350 Prescription drugs 600 Eyeglasses 350 General purpose vitamins 100 Mitzi's AGI for the year is $33,000. She is single and age 49. None of the medical costs are reimbursed by insurance. After considering the AGI floor, Mitzi's medical expense deduction is A) $14,675. B) $16,325. C) $13,850. D) $12,900.
A) $14,675.
2) Carol contributes a painting to a local museum for display. Her AGI is $60,000. Carol paid $22,000 for the painting in 2006, but its market value at the date of the contribution is $25,000. With no special elections, Carol's deductible contribution this year is A) $18,000. B) $22,000. C) $25,000. D) $7,000.
A) $18,000.
14) In 2018, Sela traveled from her home in Flagstaff to San Francisco to seek specialized medical care. Because she was unable to travel alone, her father accompanied her. Total expenses included: Hotel room en route ($150 × 2 rooms × 3 nights) $900 Mileage, 1,000 miles Doctors bills in San Francisco 1,600 The total medical expenses deductible before the 7.5% limitation are A) $2,080. B) $1,600. C) $2,500. D) $2,680.
A) $2,080.
40) Don's records contain the following information: 1. Donated stock having a fair market value of $3,600 to a qualified charitable organization. He acquired the stock five months previously at a cost of $2,400. 2. Paid $700 to a church school as a requirement for the enrollment of his daughter. 3. Paid $200 for annual homeowner's association dues. 4. Drove 400 miles in his personal auto. The travel was directly related to volunteer services he performed for his church. How much can Don deduct as a charitable contribution? A) $2,456 B) $3,356 C) $3,156 D) $3,656
A) $2,456
11) Leslie, who is single, finished graduate school this year and began repaying her student loan. The proceeds of the loan were used to pay her qualified higher education expenses. She has not received any type of educational assistance or scholarships. The amount of interest paid during the year amounted to $3,800. What is the amount and classification of her student loan interest education deduction if her modified AGI is $40,000? A) $2,500 for AGI B) $3,800 for AGI C) $3,800 from AGI D) $2,500 from AGI
A) $2,500 for AGI
31) Grace has AGI of $60,000 in 2018 and 2019. She makes cash contributions to public charities of $40,000 in 2018 and $37,000 in 2019. Grace's charitable contribution carryover to 2020 is A) $5,000. B) $4,000. C) $1,000. D) $0.
A) $5,000.
29) Erin's records reflect the following information: 1. Paid $200 dues to a fraternal organization (such as the Elks Club). 2. Donated stock having a fair market value of $3,500 to a qualified charitable organization. She purchased the stock 2 years earlier for $3,000. 3. Paid $1,600 cash to qualified public charitable organizations. Erin's adjusted gross income for this year was $50,000. What is the amount of her charitable contribution deduction for the year? A) $5,100 B) $5,300 C) $4,600 D) $4,800
A) $5,100
30) Doug pays a county personal property tax on his automobile of $1,500. The $1,500 includes $800 based on the weight of the car and $700 based on the value of the car. How much of the tax can Doug deduct on his tax return? A) $700 B) $0 C) $1,500 D) $800
A) $700
46) On September 1, of the current year, James, a cash-basis taxpayer, sells his cottage to Bill, also a cash-basis taxpayer, for $100,000. James' basis in the cottage is $65,000. The real property tax year is the calendar year. Real estate taxes on the property for the year are $3,650 and are payable in November of the current year. The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller. Assume Bill pays all of the real estate taxes in the current year. The effects of this sales structure will be A) Taxes allocated to James Taxes allocated to Bill Effect on James' Gain $2,430 $1,220 increase gain by $2,430 B) Taxes allocated to James Taxes allocated to Bill Effect on James' Gain $3,650 $0 decrease gain by $1,220 C) Taxes allocated to James Taxes allocated to Bill Effect on James' Gain $0 $3,650 no effect on gain D) Taxes allocated to James Taxes allocated to Bill Effect on James' Gain $1,220 $2,430 increase gain by $1,220
A) Taxes allocated to James Taxes allocated to Bill Effect on James' Gain $2,430 $1,220 increase gain by $2,430
55) All of the following payments for medical items are deductible with the exception of the payment for A) nonprescription medicine for treatment of a specific medical condition. B) acupuncture for specific medical purposes. C) insulin. D) general appointment for teeth cleaning.
A) nonprescription medicine for treatment of a specific medical condition.
26) Which of the following is not required substantiation for a noncash charitable contribution? A) use of donation by charitable organization B) date and location of property donated C) name and address of charitable organization D) method used to determine the donated property's fair market value
A) use of donation by charitable organization
10) Teri pays the following interest expenses during the year: Home mortgage interest on personal residence $8,500 Credit card interest on personal purchases 550 Interest on loans used to purchase investments (Net investment income is $2,000) 2,400 Interest on loans used for a business conducted as a sole proprietorship 3,800 Interest on a credit card used exclusively in the business 470 What is the amount of interest expense that can be deducted as an itemized deduction? A) $14,700 B) $10,500 C) $10,900 D) $14,300
B) $10,500
33) During February and March, Jade spends approximately 90 hours of her time volunteering at the Salvation Army (a public charity) preparing tax returns for low-income families. As a CPA, Jade normally bills her clients at $130 per hour for her time. Jade also drives her car a total of 800 miles in performing her voluntary work. Jade's deductible contribution is A) $11,812. B) $112. C) $0. D) $11,700
B) $112.
38) Hugh contributes a painting to a local museum for display. His AGI is $35,000. Hugh paid $16,000 for the painting in 2000, but its market value at the date of the contribution is $22,000. If Hugh makes the election to maximize the current year deduction, his deductible contribution for this year will be A) $22,000. B) $16,000. C) $17,500. D) $10,500.
B) $16,000
47) Linda had a swimming pool constructed at her house. Her physician advised and prescribed to her that the pool would slow the effects of her degenerative disease. The pool was not suitable for recreational use. Prior to the construction of the pool, the fair market value of her house was $172,000. After the construction of the pool, the appraised fair market value of the house was $181,000. The cost of the pool was $13,000. What is the amount of Linda's qualified medical expense (before considering limits based on AGI)? A) $0 B) $4,000 C) $13,000 D) $9,000
B) $4,000
42) In 2017, Mario earned $9,000 in net investment income and incurred $14,000 of investment interest expense. Mario paid off the loan in early 2018, so he only paid $2,000 of investment interest expense in 2018. He earned $10,000 of net investment income in 2018. How much investment interest expense can Mario deduct in 2018? A) $2,000 B) $7,000 C) $10,000 D) $0
B) $7,000
3) Steve and Marian purchase a new condominium in Manhattan on February 1, 2018 to use as their primary residence. The purchase price of the condominium is $1.5 million. The couple obtained a $1.0 million mortgage from the bank and paid the balance in cash. On their joint tax return the couple will be allowed an itemized deduction for interest expense on a principal balance of up to A) $500,000. B) $750,000. C) $1.0 million. D) $1.5 million
B) $750,000.
52) Ted pays $2,100 interest on his automobile loan, $120 interest on a loan to purchase a computer for personal use, $630 interest on credit cards, and $1,100 investment interest expense. Ted has net investment income of $850. Ted's deductible interest is A) $2,950. B) $850. C) $1,100. D) $3,200.
B) $850.
43) In the current year, Julia earns $9,000 in net investment income and incurs $14,000 of investment interest expense. What is the maximum amount of investment interest expense she is allowed to deduct this year? A) $14,000 deductible this year; nothing to be carried forward to next year B) $9,000 deductible this year; $5,000 carried forward to next year C) $3,000 deductible this year; $11,000 carried forward to next year D) $0
B) $9,000 deductible this year; $5,000 carried forward to next year
27) Mr. and Mrs. Gere, who are filing a joint return, have adjusted gross income of $50,000 in 2018. During the tax year, they paid the following medical expenses for themselves and for Mrs. Gere's mother, Mrs. Williams. The Gere's could claim Mrs. Williams as their dependent, but she has too much gross income. Insulin for Mr. Gere $1,000 Health insurance premiums for Mr. and Mrs. Gere $3,100 Hospital bill for Mrs. Williams $5,200 Doctor bill for Mrs. Gere $4,000 Mr. and Mrs. Gere (both age 40) received no reimbursement for the above expenditures. What is the amount of their deductible itemized medical expenses? A) $5,200 B) $9,550 C) $8,300 D) $13,300
B) $9,550
18) Riva borrows $10,000 that she intends to use for purchasing supplies for her business. She temporarily deposits the funds in her personal checking account. Prior to the deposit, the checking account held $40,000 of personal funds. Riva books a vacation for $6,000 and writes a check to the travel agency from her personal account. Later in the month, the business supplies bill arrives and Riva writes a check for $10,000 from the personal account. With respect to the interest expense on the $10,000 loan, A) 20 percent will be treated as trade or business expense. B) 60 percent will be treated as personal interest expense and 40 percent as trade or business expense. C) it will all be treated as trade or business expense. D) it will all be treated as personal expense.
B) 60 percent will be treated as personal interest expense and 40 percent as trade or business expense.
4) On September 1, of the current year, Samuel, a cash-basis taxpayer, sells his cottage to Edward, also a cash-basis taxpayer for $100,000. Samuel's basis in the cottage is $65,000. The real property tax year is the calendar year. Real estate taxes on the property for the year are $3,650 and are payable on April 1 of the following year. The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller. Assume Samuel pays all of the real estate taxes prior to the sale. The effects of this sales structure will be A) Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel's Gain $1,220 $2,430 decrease gain by $1,220 B) Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel's Gain $2,430 $1,220 decrease gain by $1,220 C) Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel's Gain $2,430 $1,220 increase gain by $2,430 D) Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel's Gain $1,220 $2,430 increase gain by $1,220
B) Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel's Gain $2,430 $1,220 decrease gain by $1,220
45) All of the following statements are true except A) short-term capital gains meet the definition of net investment income. B) investment interest expense includes interest expense to purchase or carry tax-exempt securities. C) net investment income is the taxpayer's investment income in excess of investment expenses. D) investment interest expense is deductible to the extent of a taxpayer's net investment income.
B) investment interest expense includes interest expense to purchase or carry tax-exempt securities.
48) When both borrowed and owned funds are mingled in the same account, for purposes of categorizing interest expense, a repayment of the debt is allocated first to A) investment expenditures. B) personal expenditures. C) trade or business expenditures. D) passive activity expenditures in real estate.
B) personal expenditures
8) Wayne and Maria purchase a home on April 1 of the current year. In order to obtain a thirty-year mortgage, they are required to pay $7,200 in points at closing. Charging points is a customary business practice in the area. In addition, they pay $4,400 of interest during the year. What is their current year deduction related to their home? A) $4,400 B) $4,580 C) $11,600 D) $7,200
C) $11,600
57) Mr. and Mrs. Thibodeaux (both age 35), who are filing a joint return, have adjusted gross income of $100,000 in 2018. During the tax year, they paid the following medical expenses for themselves and for Mrs. Thibodeaux's mother, Mrs. Watson (age 63). Mrs. Watson provided over one-half of her own support. Prescription drugs for Mr. Thibodeaux $3,600 General vitamins for Mrs. Thibodeaux $ 100 Doctor bill for Mr. Thibodeaux $1,800 Doctor bill for Mrs. Thibodeaux $4,000 Hospital bill for Mrs. Watson $2,200 Mr. and Mrs. Thibodeaux received no reimbursement for the above expenditures. What is the amount of their deductible itemized medical expenses? A) $4,100 B) $2,000 C) $1,900 D) $9,400
C) $1,900
21) Carl purchased a machine for use in his trade or business two years ago for $30,000. During the current year, Carl donates the machine to the local community college. At the time of the contribution, the machine's adjusted basis is $10,000 and its FMV is $15,000. Carl's AGI for the year is $48,000. What is the amount of his charitable contribution deduction? A) $14,000 B) $15,000 C) $10,000 D) $25,000
C) $10,000
7) Doris donated a diamond brooch recently appraised at $25,000 to her local church. Doris had purchased it many years ago for $10,000. The church sold the brooch to provide funding for church programming. Doris' AGI is $40,000. Doris will be able to take a charitable deduction of A) $20,000. B) $12,000. C) $10,000. D) $25,000.
C) $10,000
56) Patrick's records for the current year contain the following information: -He donated stock having a fair market value of $5,000 to a qualified charitable organization. Patrick acquired the stock two years ago at a cost of $3,000. -He donated 20 hours of his time as a professional plumber to a qualified charitable organization. He bills his time to his customers at $50 per hour. -He also donated $7,500 cash to a qualified charitable organization. Patrick's adjusted gross income for the year is $100,000. What is the amount of his charitable contribution deduction? A) $11,500 B) $13,500 C) $12,500 D) $10,500
C) $12,500
50) Corner Grocery, Inc., a C corporation with high taxable income, donates some of its inventory to the County Food Bank (a charitable organization) which distributes food to the needy. At the time of the contribution, the FMV of the inventory was $20,000, and Corner Grocery's basis was $12,000. Corner Grocery will be allowed a charitable contribution deduction of A) $20,000. B) $8,000. C) $16,000. D) $12,000.
C) $16,000
53) Van pays the following medical expenses this year: • $1,500 for doctor bills for Van's son who is claimed as a dependent by Van's former spouse. • $300 for Van's eyeglasses. • $900 for Van's dental work. • $3,800 for Van's face lift. Van, a newscaster, is worried about the wrinkles around his eyes. How much can Van include on his return as qualified medical expenses before limitation? A) $6,500 B) $2,400 C) $2,700 D) $1,200
C) $2,700
13) Sacha purchased land in 2010 for $35,000 that she held as a capital asset. This year, she contributed the land to the Boy Scouts of America (a charitable organization) for use as a site for a summer camp. The market value of the land at the date of contribution is $40,000. Sacha's adjusted gross income is $90,000. Assuming no special elections, Sacha's maximum deductible contribution this year is A) $13,000. B) $35,000. C) $27,000. D) $40,000.
C) $27,000.
5) For non-cash charitable donations, an appraisal will be required for donations valued at more than A) $500. B) $250. C) $5,000. D) $50,000.
C) $5,000
22) Takesha paid $13,000 of investment interest expense in a year in which she earned $4,500 in dividends, $5,400 in interest income, and had a short-term capital gain of $1,000 and a long-term capital gain of $2,200. The capital gains resulted from the sale of stock held as an investment. She has no other investment-related expenses. What is her maximum deduction for investment interest expense, assuming Takesha does not make any elections? A) $5,400 B) $13,100 C) $6,400 D) $13,000
C) $6,400
25) Claudia refinances her home mortgage on June 1 of the current year. She obtains a 30-year mortgage at 5%. As part of the refinancing, she pays points of $3,600 (a customary practice in her location). What amount, if any, of the points are deductible? A) $0 B) $120 C) $70 D) $3,600
C) $70
9) Investment interest expense is deductible A) as an offset to net investment income. B) as a deduction for AGI. C) as an itemized deduction. D) as a capital loss.
C) as an itemized deduction.
39) A review of the 2018 tax file of Gregory, a single taxpayer who is age 40, provides the following information regarding Gregory's 2018 tax status: Adjusted gross income $40,000 Medical expenses (before percentage limit) 5,000 Itemized deductions other than medical 10,200 2018 potential standard deduction 12,000 In 2019, Gregory receives a reimbursement for last year's medical expenses of $1,200. As a result, Gregory must A) amend the 2018 return. B) reduce 2018's medical expenses by $1,200. C) include $200 in gross income for 2019. D) include $1,200 in gross income for 2018.
C) include $200 in gross income for 2019
23) Christa has made a $25,000 pledge to the American Red Cross (a public charity). Christa expects AGI of $200,000 this year. Which of the following assets should she donate? A) stock purchased six months ago for $28,000 with a current FMV of $25,000 B) $25,000 of cash C) stock purchased three years ago for $18,000 with a current FMV of $25,000 D) Christa should be indifferent among the three choices.
C) stock purchased three years ago for $18,000 with a current FMV of $25,000
41) All of the following are deductible as medical expenses except A) payments for a vision exam and contact lenses. B) payments to a hospital for laboratory fees and X-rays for diagnosis of a medical problem. C) vitamins and health foods that improve a taxpayer's general health. D) cosmetic surgery necessary to correct a deformity arising from a congenital abnormality
C) vitamins and health foods that improve a taxpayer's general health
1) In February of the current year (assume a non-leap year), Ken and Kelsey received their property tax statement for last calendar-year taxes of $1,600, which they paid to the taxing authority on March 1 of the current year. They had purchased their home on May 1 last year. What amount of property tax on this statement may they claim as an itemized deduction this year? A) $800 B) $1,600 C) $0 D) $1,074
D) $1,074
20) In 2018, Carlos filed his 2017 state income tax return and paid taxes of $800. Also in 2018, Carlos's employer withheld state income tax of $750 from Carlos's salary. In 2019, Carlos filed his 2018 state income tax return and paid an additional $600 of state income tax due for 2018. How much state income tax can Carlos deduct on his 2018 federal income tax return for state income tax? A) $1,350 B) $2,150 C) $1,400 D) $1,550
D) $1,550
54) Westin paid the following taxes this year: Real estate taxes on rental property he owns $4,000 Real estate taxes on his own residence 3,600 Federal income taxes 18,000 State income taxes 5,400 Local city income taxes 1,500 What amount can Arun deduct as an itemized deduction on his tax return? A) $28,500 B) $10,500 C) $14,500 D) $10,000
D) $10,000
37) Alan, who is a security officer, is shot while on the job. As a result, Alan suffers from a chronic leg injury and must use a wheelchair and undergo therapy to regain and retain strength. Alan's physician recommends that he install a whirlpool bath in his home for therapy. During the year, Alan makes the following expenditures: Wheelchair $ 1,200 Whirlpool bath 2,000 Maintenance of the whirlpool 250 Increased utility bills associated with whirlpool 450 Entrance ramp, various home modifications 7,200 A professional appraiser tells Alan that the whirlpool has increased the value of his home by $1,000. Alan's deductible medical expenses (before considering limitations based on AGI) will be A) $7,000. B) $6,000. C) $7,700. D) $10,100.
D) $10,100.
19) Caleb's 2018 medical expenses before reimbursement for the year include the following: Medical premiums $11,000 Doctors, hospitals 3,500 Prescriptions 600 Caleb's AGI for the year is $50,000. He is single and age 58. Caleb also receives a reimbursement for medical expenses of $1,000. Caleb's deductible medical expenses that will be added to the other itemized deduction will be A) $9,100. B) $14,100. C) $10,100. D) $10,350.
D) $10,350.
15) Marcia, who is single, finished graduate school this year and began repaying her student loan. The proceeds of the loan were used to pay her qualified higher education expenses. She has not received any type of educational assistance or scholarships. The amount of interest paid during the year amounted to $3,000. What is the amount and classification of her student loan interest deduction if her AGI is $68,000? A) $500 for AGI B) $3,000 for AGI C) $2,500 for AGI D) $2,000 for AGI
D) $2,000 for AGI
28) Clayton contributes land to the American Red Cross for use as a future site for a new building. His AGI is $50,000. Clayton paid $20,000 for the land eight months ago but its market value at the date of contribution is $25,000. With no special elections, Clayton's deductible contribution this year is A) $25,000. B) $18,000. C) $7,000. D) $20,000.
D) $20,000.
35) Matt paid the following taxes this year: Real estate taxes on his own residence $3,600 State income taxes 900 Local city income taxes 300 State sales taxes 1,400 What is the maximum amount Matt can deduct as an itemized deduction on his tax return? A) $5,300 B) $6,200 C) $4,800 D) $5,000
D) $5,000
16) Leo spent $6,600 to construct an entrance ramp and to widen doorways in his personal residence to make the home accessible for his wife, who is disabled and confined to a wheelchair. The $6,600 expenditure increased the value of the residence by $2,000. How much of the $6,600 is a deductible medical expense (before considering limits based on AGI)? A) $4,600 B) $2,000 C) $0 D) $6,600
D) $6,600
12) Phuong has the following sources of investment income: Money market account interest $2,000 Interest on State of New York bond 1,000 Dividends from domestic stocks 3,000 Long-term capital gain 4,000 Short-term capital gain 5,000 Barring any special elections, how much of the investment income will be included in calculating net investment income for purposes of the investment interest expense limitation? A) $2,000 B) $5,000 C) $15,000 D) $7,000
D) $7,000
6) Arun paid the following taxes this year: Real estate taxes on rental property he owns $4,000 Real estate taxes on his own residence 3,600 Federal income taxes 8,000 State income taxes 3,400 Local city income taxes 500 What amount can Arun deduct as an itemized deduction on his tax return? A) $15,500 B) $19,500 C) $15,000 D) $7,500
D) $7,500
36) During the year Jason and Kristi, cash-basis taxpayers, paid the following taxes: State gift tax $1,000 Property tax on home in the United States 4,100 State income tax (withholdings) 3,000 Estimated federal income tax 4,500 Estimated state income tax (paid by check) 800 Special assessment by city for sidewalks and street lighting on their street 2,000 What amount can Kristi and Jason claim as an itemized deduction for taxes on their federal income tax return in the current year? A) $10,900 B) $15,400 C) $8,900 D) $7,900
D) $7,900
49) Special documentation rules apply to donation of A) boats. B) airplanes. C) motor vehicles. D) All of the above.
D) All of the above.
24) Which of the following is deductible as interest expense? A) bank service charges on personal account B) interest to purchase tax-exempt bonds C) personal credit card interest D) None of the above
D) None of the above.
51) Hui pays self-employment tax on her sole proprietorship income, supplemental Medicare surtaxes on excess wages and self-employment income (the .09% tax), and supplemental Medicare taxes on investment income (the 3.8% tax). Which of the following statements is correct regarding the deductibility of these taxes? A) One -half of the self-employment tax is deductible for AGI, and the .09% and 3.8% taxes are itemized deductions. B) All three of the taxes are deductible as itemized deductions. C) None of the taxes are allowed as a deduction. D) One -half of the self-employment tax is deductible for AGI, but the .09% and 3.8% taxes are not allowed as deductions.
D) One -half of the self-employment tax is deductible for AGI, but the .09% and 3.8% taxes are not allowed as deductions.
32) Peter is assessed $630 for street improvements in front of his house. Which of the following statements is correct? A) Peter must deduct the assessment as a tax. B) Peter can elect to deduct the $630 currently or increase the basis in the property. C) Peter must reduce the property basis by $630. D) Peter must increase the property basis by $630
D) Peter must increase the property basis by $630.
34) The following taxes are deductible as itemized deductions with the exception of A) foreign real property taxes. B) state income taxes. C) local personal property taxes. D) federal income taxes.
D) federal income taxes.
