Tax Prep Study (Part 2: Deductions)

Paula won $5000 in the lottery. She also won $200 playing bingo at her lodge hall. She is not a professional gambler. She kept meticulous records of the $6550 of gambling losses she sustained. How much may she deduct on her Schedule A as a miscellaneous deduction not subject to the 2% limitation? a. $0. b. $200. c. $5200. d. $6550.

c

The following entertainment activities are considered to have substantial distractions that generally prevent the active conduct of business, except: a. A meeting or discussion at a nightclub. b. A meeting or discussion at social gathering, such as a cocktail party. c. A meeting at a convention sponsored by a business or professional organization to further your trade or business. d. A meeting with a group that includes persons who are not business associates at places at an athletic club.

c

Which of the following statements concerning an employee's home office expenses is *false*? a. The area must be used regularly and exclusively for business. b. The area must be provided for the employer's convenience. c. The employee's home office deduction may exceed his related wages. d. The employee may claim depreciation on the home office area if he owns the home.

c

You work in Atlanta and take a business trip to New Orleans. On the way home, you stop in Mobile to visit your parents. You spend $1070 for the 9 days you are away. If you had not stopped in Mobile, it would have been $920 and 6 days. What is the total you can deduct without the 50% meal deduction? a. $1070. b. $117. c. $920. d. $713.

c

The gift expense limitation is: a. $25 total. b. $75 each gift. c. $25 each gift. d. $4 each gift.

c (Certain gifts that cost less than $4 do not contribute to the limit.)

All of the following are deductible except: a. Federal estate tax on income in respect of decedent. b. Gambling losses. c. Adoption expenses. d. Business expenses paid by a government official who is paid on a fee basis.

c Adoption expenses may qualify as a credit (not a deduction).

You paid an appraisal fee to determine the fair market value of a painting you've contributed to a college. The fee is: a. Not deductible. b. Deductible as a contribution. c. Deductible as a miscellaneous deduction. d. Added to the basis of the contributed property.

c FMQ. 2013 pub. 17 page 200: "You can deduct appraisal fees if you pay them to figure a casualty loss or the fair market value of donated property."

Single taxpayers with an AGI exceeding $250,000 are faced with a phaseout. Which of the following are limited? a. Exemptions. b. Itemized deductions. c. Exemptions and itemized deductions. d. None of the above.

c For 2013, the phaseout for both exemptions and itemized deduction starts at $150,000 (MFS) or $250,000 (S) or $275,000 (HoH) or $300,000 (MFJ/QW). The exemption amount is reduced by 1% for every $1250 over the limit; it becomes zero when the AGI is $125,000 above the limit ($62,500 if MFS). Subtract medical expenses, investment interest and casualty/theft losses before applying the itemized deduction phaseout. Then subtract 3% of the amount over the limit up to a maximum of 80%.

Which of the following is not a 50% limit charitable organization? a. Educational organizations. b. Hospitals and certain medical research organizations. c. Gifts of capital gain property. d. Publicly supported charities.

c Gifts of capital gain property to 30% organizations are subject to a 20% limit. (Gifts of capital gain property to 50% organizations *may* be subject to a 30% limit.)

Clara (age 65) donated $8000 during the year to cancer research. Her pension income was $13,160 and she received $1980 in interest and was paid $20 for jury duty during the year. How much can she deduct as an itemized deduction? a. $0. b. $4548. c. $7580. d. $8000.

c Her AGI is 13160+1980+20 = $15160. Her deduction is limited to 50% of AGI: (15160)(0.5) = $7580

Judith refinanced on July 1 and had the following expenses and interest: - $95 prepayment penalties on her prior primary home loan. - $6723 mortgage interest paid on her primary home. - $4067 mortgage interest paid on her beach house. - $1672 points paid to refinance her mortgage (used to pay off credit card bills). If she took out a 30 year loan, what is the allowable deduction for home mortgage interest on Schedule A? a. $10,790. b. $11,124. c. $10,913. d. $12,557.

c Points amortized over 30 years: 1672/360 = $4.64 per month. 95+6723+4067+(4.64)/(6) = $10,913.

At what amount is written substantiation from the donee required to claim charitable contributions on Schedule A? a. Any amount. b. $100. c. $250. d. $500.

c This includes both cash donations of $250 or more and non-cash donations of $250 or more.

Arthur lived and worked in Florida for 8 months and earned $30,000. He then worked in California at a seasonal job at a race track for the last 4 months of the year and earned $12,000 before returning to Florida. What is Arthur's tax home? a. Since he does not have a regular place of business, he is considered transient and his tax home is wherever he works. b. Since Arthur was working in California at the end of the year, that is is tax home. c. Since Arthur had significant earnings at two locations, it is impossible to determine his tax home. d. Since most of his time and income were from a job in Florida, it is considered his tax home.

d

Which of the following organizations qualify for deductible contributions (not dues)? a. A public city library. b. The Salvation Army. c. Churches. d. All of the above.

d

Which of the following taxes paid this year would *not* be included in your deduction for taxes on Schedule A? a. Additional New York City income tax resulting from an audit of a 2010 return. b. Oregon balance due from a 2012 return. c. Canadian real estate tax on your Banff cabin. d. California sales tax paid while on vacation in Disneyland.

d

What is the maximum allowable deduction for home mortgage interest on Schedule A if the taxpayer paid the following expenses? - $110 of late payment charges paid on the taxpayer's summer cabin. - $2956 of mortgage interest paid on the taxpayer's primary home. - $3492 of mortgage interest paid on the taxpayer's second home. - $1212 of mortgage interest paid on the taxpayer's summer cabin. a. $7660. b. $7770. c. $6558. d. $6448.

d 2956+3492 = $6448

Royalties from creative for-profit non-business activities are reported where? a. Form 1040, line 14. b. None of these. c. Schedule C. d. Schedule E.

d Example: Royalties from copyrights.

Joe and Angie bought their first home this year. Which of the following closing costs are *not* deductible on their tax return? a. Mortgage insurance premiums. b. Property taxes for the months they owned the house. c. Points paid by the seller (part of the offer the seller agreed to). d. All of the above are deductible.

d For 2013, there is an AGI phaseout for mortgage insurance premiums. The phaseout range is $100,000 to $110,000 ($50,000 to $60,000 if MFS). This deduction might be eliminated for tax year 2014. Regarding answer (c), the seller cannot take the deduction (he gives it to the buyer) however, he does include the amount as a cost of sale. This reduces his gain on the sale.

Some contributions may be limited to 50% of the taxpayer's adjusted gross income. Contributions to the following organizations are subject to this limitation: a. Churches (and conventions or associations of churches) and educational organizations (with regular faculty, curriculum and enrolled students). b. Hospitals and certain medical research organizations associated with these hospitals. c. Kiwanis, Rotary and Lions club that raise money for public causes. d. Both (a) and (b).

d Other 50% organizations include: publicly supported charities, private operating foundations, private non-operating foundations that fund public charities. The 30% limitation applies other organizations such as those listed in (c). In some cases, it also applies to gifts of capital gain property to 50% organizations. The 20% limitation applies to gifts of capital gain property to 30% organizations.

Contribution deductions may be limited to 20%, 30% or 50% of your AGI. Organizations that qualify for the 50% limit include: a. Churches. b. Educational organizations with regular faculty and curriculum and regularly enrolled students. c. Hospitals. d. All of the above.

d The 30% limit applies to: 1. A few organizations such as veterans' organizations, fraternal societies, nonprofit cemeteries, and certain private nonoperating foundations. 2. Contributions of capital gain property to 50% limit organizations. The two 30% limits are applied separately but together than cannot exceed 50% of AGI. The 20% limit applies to contributions of capital gain property to 30% limit organizations.

(T/F) A minister often receives wages and a housing allowance. The housing allowance is used to pay property taxes, mortgage payments, insurance and utilities. Since the church is paying for the taxes on the minister's home, he is not allowed to take a deduction for property taxes.

F

(T/F) Self-employed persons must use the actual cost of meals rather than the standard meal allowance.

F

(T/F) When self-employed, charitable contributions can be deducted on either Schedule A or Schedule C.

F

(T/F) You can deduct membership fees to a country club as long as the membership purpose is to entertain business associates and clients.

F

(T/F) You repair electronic equipment for XYZ store. To keep up with the latest changes, you take special courses related to electronics servicing. These courses do NOT meet the requirements of maintaining your job skills and therefore are not deductible on Schedule A.

F

(T/F) You sometimes use your cell phone to make business calls while commuting to and from work. Additionally, you sometimes have business associates ride with you during your commute to discuss business. These activities change your trip from personal commuting to business travel, making your trip deductible.

F

(T/F) When using the per diem method for meal expenses, you deduct the whole amount.

F 50%

(T/F) Your employer would reimburse you for all education expense if you submitted substantiation. You may elect to pay them yourself and claim them on your tax return.

F FMQ.

(T/F) Patty paid for her daughter Sonja's braces and then lost the right to deduct it on Schedule A when she gave up Sonja's dependency exemption to her ex-husband.

F Generally, for the purposes of the medical and dental expenses deduction, a child of divorced or separated parents can be treated as a dependent of both parents. Each parent can include the medical expenses he or she pays for the child, even if the other parent claims the child's dependency exemption.

(T/F) Daniel refinanced his mortgage in 2002 and paid $1800 in points that he had to spread out over the life of the mortgage. He had deducted $300 through the last tax year. This year, Dan is refinancing again with the same lender. He can deduct the remaining $1500 this year.

F If you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan.

(T/F) If you are subject to Dept. of Transportation rules, the allowable percentage of business related expenses eligible for deduction is 70%.

F It is 80%.

(T/F) Jim Pike's dependent daughter Sarah got married and will be filing a joint return with her husband this year. Mr. Pike incurred medical expenses of $2000 for Sarah before her marriage. Sarah can't deduct them as she did not pay them and Jim cannot deduct them because Sarah is no longer his dependent.

F She was his dependent when the expenses were paid or incurred. Also, you can include medical expenses you paid for an individual that would have been your dependent except that: 1. He or she received gross income of $3,900 or more in 2013, 2. He or she filed a joint return for 2013, or 3. You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return.

(T/F) You are a truck driver. You leave your terminal and return to it later the same day. You get an hour off at your turn-around point to eat. You are traveling away from home.

F You are traveling away from home if *both* of the following are true: 1) Your duties require you to be away from your tax home for substantially longer than a standard work day; and 2) You need to sleep or rest in order to meet the demands of your work away from home. (This question fails #2).

(T/F) Sonny has a son and a daughter. Sonny's mother can claim him as a dependent but elects not to. Sonny can clam the dependency for his son and daughter.

F You cannot claim any dependents if you (or your spouse if MFJ) *could* be claimed as dependent by another taxpayer.

(T/F) You are a French language teacher. While on sabbatical leave granted for travel, you travel through France to improve your knowledge of the French language. You chose your itinerary and most of your activities to improve you French language skills. You can deduct your travel expenses on Schedule A subject to the 2% AGI limitation.

F You cannot deduct the cost of travel as a form of education.

(T/F) Molly runs daycare out of her home. For purposes of the home office deduction, the exclusive use rule does not apply to the portion of the her residence that she uses for day care. The same rules apply for the closet she uses for storage of toys and extra snacks.

T

(T/F) The spouse of a member of the military who is in a combat zone may sign for the taxpayer on a joint return.

T

(T/F) You are blind. You must use a reader to do your work. You pay a reader for his services at work. You can deduct those expenses as business expenses.

T

(T/F) You can elect to deduct state and local general sales taxes instead of state and local income taxes on Schedule A. Generally, you can use either the actual expenses or the state and local sales tax table to figure the sales tax deduction.

T

(T/F) You can include in medical expenses the cost of medical care in a nursing home, including meals if the principal reason for being there is to get medical care.

T

(T/F) You can include medical expenses that you paid for a child before adoption if the child qualified as your dependent when the medical services were provided or when the expense were paid.

T

(T/F) You live in Cincinnati where you have a seasonal job for 8 months each year and earn $40,000. You work the other 4 months in Miami, also at a seasonal job, and earn $15,000. Cincinnati is your main place of work because you spend most of your time there and earn most of your income there.

T

(T/F) Joe enrolls full time for college classes in September and pays tuition and fees of $1800 in October. Joe withdraws from college. The college refunds $800 of the tuition and fees. Joe can deduct $1000 using the tuition and fees deduction.

T FMQ.

(T/F) A full time student, age 23, may have to pay taxes at her parent's rate.

T FMQ. The "kiddie tax" applies to full-time college students under age 24. Both Form 8815 and Form 8814 may result in a child's unearned income being at the parent's tax rate.

(T/F) If your itemized deductions are subject to the limit, the total of all your itemized deductions is reduced by the smaller of: 1) 80% of the deductions that are affected by the limit; 2) 3% of the amount by which your AGI exceeds $250K/$275K/$300K/$150K (S/HoH/MFJ/MFS).

T The items that are not affected by the limit are: 1) medical and dental; 2) investment interest expense; 3) casualty and theft losses; 4) gambling losses.

(T/F) For points to be fully deductible in the year paid, the point must be secured by the tax payer's main home and be paid solely for the use of the money.

T There are several other restrictions, too. For example, the amount of points paid must be "normal" for the area. Also, points paid during refinancing must be amortized.

Betty sued her ex-husband for back alimony. In the settlement, she got $2000. Betty paid $1000 in legal fees and spent $1000 on a private eye to watch her ex. Betty should report: a. $2000 as alimony and $1000 on Schedule A as a misc. itemized deduction. b. $1000 as alimony and $1000 on Schedule A as a misc. itemized deduction. c. $2000 on Schedule A as a misc. itemized deduction. d. Zero as it was back alimony.

a

How can a statutory employee deduct expenses related to his/her W-2 income? a. Deduct on Schedule C. b. Deduct on Schedule A line 28 (not subject to the 2% AGI limitation). c. Deduct using Form 2106 and enter as an adjustment on Form 1040 line 24. d. Deduct on Schedule A line 21 (subject to the 2% AGI limitation).

a

Which of the following is not a deductible tax on Schedule A? a. Sewer assessment. b. State income tax withheld. c. Real estate tax. d. Local income tax.

a

You are covered by your employers health insurance policy. The annual premium is $1200. Your employer pays $300 and the balance of $900 is deducted from your wages (post tax). You also paid $250 for a personal policy. During the year, your paid $3600 in medical expenses. In the same year, you were reimbursed $2400 under your employer's policy and $1600 under your personal policy. You have received excess reimbursements. The amount of excess attributable to your employer's contributions is: a. $60. b. $240. c. $3600. d. $4000.

a Excess = (2400+1600)-3600 = $400. Excess employer policy portion: 400(2400/4000) = $240 But only part of the excess is due to the employer contribributions: 240(300/1200) = $60.

What is the allowable deduction for charitable contributions on Schedule A if a taxpayer made the following donations? - $155 to a local school. - $150 to attend a charitable dinner and performance worth $200. - $1080 for food and expenses related to a foreign exchange student living with the taxpayer all year. - $750 to a church to help pay the medical expenses of a sick child who is a member of the church. - 300 miles driven for Meals-on-Wheels, a qualified organization. a. $797. b. $1430. c. $868. d. $1477

a 155+(12)(50)+300(0.14) = $797 $50/month is allowed for hosting a foreign exchange student. The church payment is not allowed because charitable contributions may not be set aside for use by a specific person.

What is the allowable deduction for taxes paid on Schedule A if a taxpayer paid the following expenses? - $275 personal property taxes paid on a boat trailer. - $1518 real estate taxes paid on a vacation home. - $78 of wheel tax paid on a vehicle because it has two axles. - $2471 of state income tax. - $25 license fee paid annually on a vehicle. a. $4264. b. $4014. c. $3989 c. $2746

a 275+1518+2471 = $4264

Bill has the following medical and dental expenses. If his AGI is $32,105, what is the amount of deduction allowed on line 4 of Schedule A? - $600 of dental exams paid by insurance. - $4000 for cosmetic surgery to fix facial damage from a car wreck. - $1010 for laser eye surgery paid with a distribution from an HSA. - $450 health club membership. a. $790. b. $2652. c. $1042. d. $5060.

a 4000-(32105)(0.10)= $790

Ms. Hazelnut works in sales. None of her expenditures are reimbursed by her employer. Her AGI is $100,000. She has the following expenditures: - $500 computer class needed for her job. - $250 business liability insurance. - $250 dues to the Chamber of Commerce where she obtains leads for her business. - $1000 airfare to visit her mother. - $500 cost of 2 new business suits. Compute her miscellaneous itemized deductions *after* limitations. a. $0. b. $500. c. $1000. d. $2500.

a Deductions = 500+250+250 = $1000. 2% limitation = (100000)(0.02) = $2000.

Which of the following itemized deductions is *not* subject to the overall AGI limit? a. Investment interest expense. b. Taxes. c. Interest. d. Gifts to charitable organizations.

a The other ones are: medical and dental expenses; casualty and theft losses; gambling losses. For 2013, the overall AGI limit is $250K/$275K/$300K/$150K (S/HoH/MFJ/MFS). This is the same as the AGI limit for the exemption amount.

(T/F) A taxpayer doing volunteer work my deduct 14 cents per mile in 2013 (plus parking and tolls).

T

(T/F) Hobby income is reported as "other income" on Form 1040 and hobby expenses are deductible on Schedule A to the extent of income (subject to the 2% AGI limitation).

T

(T/F) If you are a federal employee participating in a federal crime investigation or prosecution, you are not subject to the one year rule regarding temporary job assignments.

T

(T/F) If you are filing MFS and your spouse is itemizing, your standard deduction is $0.

T

(T/F) Medicare B is deductible on Schedule A as a medical expense.

T

Which of the following is *not* deductible on Schedule A Form 1040? a. A personal home in OR and a vacation home in MT. b. The real estate tax on his elderly mother's home. c. Hunting cabin in CO. d. A condo in FL.

b

Which of the following is NOT a miscellaneous itemized deduction subject to the 2% rule? a. Professional dues and subscriptions. b. Armed forces reservist travel expenses. c. Union dues. d. Tools used in your work.

b

Mr. H, an employee of XZ Inc., flew to Seattle to meet with a client. He incurred the following expenses directly related to business: - $450 plane fare. - $300 lodging expenses. - $50 meals. - $200 theater tickets, face value $50 each for H and his client. Mr. H's employer reimbursed him $450 for the plane fare, $300 for lodging, and $150 for meals and entertainment. The reimbursement was not included on Mr. H's W-2. What is the amount of deduction Mr. H may claim (before the 2%-of-AGI limitation)? a. $0. b. $25. c. $50. d. $120.

b ? $100 of the $200 spent on tickets is not an entertainment expense. Treat it as a gift, subject to the $25 rule ?

On June 1, David and Helen Brown refinanced their personal residence for $105,000. The Browns are using the money from their qualified residence as security for a loan to purchase a duplex. They paid points of $1050 to refinance. The Browns may deduct as interest paid on which of the following amounts? a. $0. b. $100,000. c. $150,000. d. $106,500.

b Because the funds are not being used to buy, build or improve a main or vacation home, there is a $100,000 limit. (Also, the mortgage amount can't exceed the FMV of the home that it is based on.)