CHAPTER 5 TAX

12. Stanley donates a hotel to a university for use as a conference center. The building cost $1,500,000 3 months ago and has a fair market value of $1,900,000 on the date the contribution is made. If Stanley had sold the building, the $400,000 difference between the sales price and cost would have been a STCG. What is the amount of Stanley's deduction for this contribution, before considering any limitations based on AGI?

B. $1,500,000

21. Which of the following is correct for Qualified Tuition Programs?

B. Contributions are not deductible, and qualified educational expense distributions are tax free

9. Carrie finished her undergraduate degree using money from a student loan. She earned $36,000 her first year and paid $2,600 in interest. She can take a deduction for student loan interest in the amount of:

B. Limited to $2,500

25. During 2014, Carl (a single taxpayer) has a salary of $90,500 and interest income of $15,500. Calculate the maximum contribution Carl is allowed for an educational savings account.

C. $533

16. Which of the following is not a miscellaneous itemized deduction:

C. Investment interest expense

26. George receives a $1,500 distribution from his educational savings account. He uses $1,200 to pay for qualified higher education expenses. Immediately prior to the distribution, George's account balance is $5,000, $3,000 of which is his contributions. What is George's tax-free return of capital from the distribution?

C. $900

7. Mary paid $2,000 of state income taxes in 2014. The total sales tax she paid during 2014 was $5,500, which included $3,000 for the cost of a new car. How should Mary treat the taxes paid on her 2014 tax return?

Mary can deduct the greater of the $5,500 of regular sales taxes paid or the $2,000 of state income taxes paid, assuming she itemizes deductions. In this case, since her sales taxes are higher than her state income taxes, she should deduct $5,500 in sales tax on her 2013 Schedule A.

14. Barbara donates a painting that cost $5,000 3 years ago to a university for display in the president's office. The fair market value of the painting on the date of the gift is $7,000. If Barbara had sold the painting, the difference between the sales price and her cost would have been a LTCG. a. How much is Barbara's charitable deduction for this donation? b. Explain

a. $5,000 $7,000-2,000 The $2,000 is the amount of the LTCG that would have resulted from sale of the property b. Since the painting was not put to a use directly related to the organization;s primary purpose, the deduction is reduced by the amount of the potential LTCG.

29. Steve and Sue are married with three dependent children. Their 2014 joint income tax return shows $390,000 of AGI and $60,000 of itemized deductions made up of $30,000 of state income taxes and $30,000 of charitable contributions. a. Itemized deduction or standard deduction amount b. Number of exemptions and total deduction amount c. Taxable income

a. $57,300 $60,000-3%($390,000-300,000) which is less than 80%($60,000) b. $5,450 5 exemptions at $1,092 each calculated as: ($390,000-300,000)/2,500=36 x 2% = 72% reduction (100-72)=28% * $3,900 = $1,092 c. $327, 240 $390,000-57,300-5,460

20. Gina receives a $2,000 distribution from her educational savings account. She uses $1,600 to pay for qualified higher education expenses and $400 on a vacation. Immediately prior to the distribution, Gina's account balance is $5,000, $2,500 of which is her contributions. What is Gina's taxable income (after any exclusion) from the distribution?

D. $200

27. Ramon, a single taxpayer, has AGI for 2014 of $350,000. His itemized deductions total $50,000 consisting of $30,000 of state income taxes and $20,000 of chartitable contributions. What is the amount of itemized deductions Ramon can claim after reduction for the itemized deduction phase-out for high-income taxpayers?

D. $47,126

13. In March of 2014, Thomas makes a $5,000 cash contribution to a public university. In that month, he also donates $20,000 to an organization subject to the 30% limitation. Thomas has AGI for 2014 of $35,000. What is the amount of Thomas's 2014 charitable contribution deduction?

D. 15,500 (5,000+30%*35,000)

14. Which of the following gifts is a deductible contribution:

D. A $200 contribution to the federal government to pay down the national debt

11. Which of the following donations are not deductible as a charitable contribution?

D. A contribution to a labor union

3. Which of the following is not considered a deductible medical expense?

D. Diet foods

6. Which of the following taxes are not deductible as an itemized deduction?

D. Federal income taxes

24. Which of the following is not true with respect to education incentives:

D. Married taxpayers must have income less than $100,000 to contribute to a qualified tuition program (Section 529 plans)

23. For married taxpayers filing a joint return in 2014, at what AGI level does the phase-out limit for contributions to Qualified Tuition Programs start?

D. There is no phase out limit on QTP contributions

18. Which of the following statements is true with regard to the classification of employment-related expenses?

D. Unreimbursed employee business expenses are deductible as deductions from AGI

7. Ramon, a single taxpayer, has AGI for 2014 of $164,000 and his itemized deductions total $19,000. The itemized deductions consist of $11,000 in income state taxes and $8,000 of charitable contributions. What amount of itemized deductions will Ramon be allowed to deduct in 2014?

E. $19,000

17. Which of the following items is not deductible as a miscellaneous deduction on Schedule A?

E. Charitable Contribution

19. What form does an employee use to report expenses that are fully reimbursed by an employer under an accountable plan?

E. NO form; the expenses are not reported as income to the employee, so they are not deducted on a IRS form in the employee's tax return

11. Janet and James purchased their personal residence 15 years ago for $300,000. For he current year, they have an $80,000 first mortgage on their home, on which they paid $5,600 in interest. They also have a home equity loan secured by their home with a balance throughout the year of $150,000. They paid interest on the home equity loan of $12,000 for the year. Calculate the amount of their deduction for interest paid on qualified residence acquisition debt and qualified home equity debt for 2014.

a. Qualified residence acquisition debt interest: $5,600 b. Qualified home equity debt interest: $8,000 (100,000/150,000)*12,000

28. In 2014, Van receives $20,000 (of which $4,000 is earnings) from a qualified tuition program. He uses the funds to pay for his college tuition and other qualified higher education expenses. How much of the $20,000 is taxable to Van?

$0 All distributions are used for qualifying expenses

4. Lyndon's employer withheld $1,800 in state income taxes from Lyndon's wages. Lyndon obtained a refund of $200 this year for over payment of state income taxes for last year. State income taxes were an itemized deduction on his 2013 return. His liability for this year's state income tax is $1,400. Indicate the amount of Lyndon's deduction for state income taxes on his federal tax return assuming he elects to deduct state income taxes for 2014.

$1,800 The $200 refund is picked up in gross income on the tax return.

27. Jose paid the following amounts for his son to attend Big State University in 2014. Tuition: $6,000 Room and Board: $$5,000 Books: $500 A car to use at school: $2,000 Student football tickets: $200 Spending money: $4,000 How much of the above is a qualified higher education expense for purposes of his Qualified Tuition Program?

$11,500 Tution, Room and Board, and Books

18. On January 3, 2014, Carey discovers his diamond bracelet has been stolen. The bracelet had a fair market value and adjusted basis of $8,000. Assuming Carey had no insurance coverage on the bracelet and his adjusted gross income for 2014 is $52,000, calculate the amount of his theft loss deduction.

$2,700 $8,000-100(floor)-5,200(10% of $52,000, AGI)

15. Which of the following is not a qualified casualty loss?

A. Damage to an automobile from rust

4. Which of the following taxes may be deducted as itemized deductions for 2014?

E. Local income taxes

1. The cost of which of the following expenses is NOT deductible as a medical expense on Schedule A, before the 10% of AGI limitation?

C. Acupuncture

10. Which of the following interest expense amounts is not deductible in the current year:

C. Investment income expense of $10,000, assuming the taxpayer has no investment income

8. Which of the following is deductible as interest on Schedule A?

C. Investment income expense, subject to the net investment income limitation

25. George is employed as a sales manager for a computer manufacturer. His employer does not have an accountable expense reimbursement plan. George is reimbursed by his employer for $3,000 of travel expenses. How will the travel expenses and reimbursement be treated in George's tax return?

George will be able to deduct the expenses only if he itemizes deductions and only as miscellaneous itemized deductions subject to the 2% of AGI limitation.

26. Josh is a judge employed by the county. He must purchase and maintain his judicial robes. The total cost of purchasing a new robe and dry cleaning for the current year is $750, which is not reimbursed by his employer. How much may he deduct on his tax return? Why? Where does he deduct this on his tax return?

Josh may deduct the full $750. His judicial robes meet the requirement that they be a condition of employment and not suitable for everyday use. The deduction will be taken as a miscellaneous itemized deduction subject to the 2% of AGI floor since Josh is an employee

22. Dan has a 20-year old vintage car behind his residence. He has rarely used it. This year he discovers that it has been completely destroyed by rent. The car originally cost $5,000 and had a fair market value of that amount before the rust destroyed it. Dan has $25,000 of AGI. What is his casualty loss? Explain.

There is no casualty loss. The destruction of property through progressive deterioration such as rust is not considered a casualty

12. Helen paid the following amounts of interest during the 2014 tax year: Mortgage interest on Dallas residence (loan balance $50,000): $2,025 Automobile loan interest (personal use only): $440 Mortgage interest on Vail residence (loan balance $50,000): $3,050 Visa and Mastercard interest: $165 Calculate the amount of Helen's itemized deduction for interest (after limitations) for 2014.

$5,075 Only the mortgage interest on a primary or second residence is deductible

22. In 2014, Amy receives $15,000 (of which $4,000 is earnings) from a qualified tuition program. She does not use the funds to pay for tuition or other qualified higher education expenses. What amount is taxable to Amy?

B. $4,000

2. The cost of which of the following is deductible as a medical expense?

B. Birth control pills

3. Janet needs an elevator seat attached to her stairs since she has a medical condition that makes her unable to climb the stairs in her house. The $10,000 spent on the elevator seat does not increase the value of her house according to a local appraiser. How much of the capital asset is deductible in Janet's tax return as a medical expense?

$10,000 The medical deduction for the elevator is the amount by which the $10,000 expenditure exceeds the increase in value of the property. Therefore, $10,000 is deductible in the current year as an expense before the 10% AGI limitation. For medical purposes such capital expenses are not required to be depreciated.

1. Linda installed a special pool for the hydro therapeutic treatment of severe arthritis, as prescribed by her doctor. The cost of installing the pool was $20,000, and her insurance company paid $5,000 toward its cost. The pool increased house by $7,000, and it has a useful life of 10 years. How much of a deduction is Linda entitled to in the year of installation of the pool? Explain.

8,000 = 20,000-7,000-5,000 Since the pool was prescribed, it qualified as a medical expense. The increase in value of $7,000 on the house and reimbursement of $5,000 from the insurance company must be deducted from total expenditures. Although the expenditure is for a capital asset, it can be deducted in full in the year paid, subject to the deduction of 10% of AGI

28. Jim and Martha are married taxpayers with $400,000 of AGI in 2014. They are allowed two personal exemptions. What is the amount of each of their $3.950 exemption deductions after applying the phase-out for high-income taxpayers?

A. $0

5. Wilma had $3,100 in state income taxes withheld from her paycheck a during 2014. In April of 2014, Wilma paid the $300 due for her 2013 state tax return. Wilma's total tax liability on her state tax return for 2014 is $2,850. How much should Wilma deduct as an itemized deduction for state income taxes on her 2014 federal income tax return?

A. $3,400 (3,100+300)

21. Kerry's car is totaled in an auto accident. The car originally cost $18,000, but is worth $7,500 at the time of the accident. Kerry's insurance company gives her a check for $7,500. Kerry has $30,000 of AGI. How much ca Kerry claim as a casualty loss on her tax return? Please explain.

Kerry can not claim a deduction for a casualty loss related to the totaled automobile. The decrease in the value of the property of $7,500 would be considered the full amount of the casualty loss since the automobile is a personal asset. Since the total amount has been reimbursed by insurance, there is no loss to claim.

17. In June of 2014, Maureen's house is vandalized during a long-term power failure after a hurricane hit the cit. The president of the US declares Maureen's cit a disaster area as a result of the wide scale vandalism. In which tax year may Maureen take her casualty loss deduction? Explain

Maureen may take the deduction on her 2012 or her 2013 tax return. For disaster area losses, taxpayers may elect to treat the losses as a deduction in the year prior to the year of occurence

5. Mike sells his home to Jane on April 2, 2014. Jane pays the property taxes covering the full calendar year in October, which amount to $2,500. How much may Mike and Jane each deduct for property taxes in 2014?

Mike: $2,500*91/365=$623 Jane: $2,500*274/365=$1,877

16. Richard donates publicly traded Hold Company stock with a basis of $1,000 and a fair market value of $15,000 to the college he attended, which is considered a public charity. Richard has owned the shares for 10 years. How is this contribution treated on Richard's tax return?

Richard is allowed to deduct $15,000 on his Schedule A, even though his purchase price for the stock was only $1,000. His AGI must be at least $50,000 in order to deduct the full $15,000 in the current year since the contribution deduction for LTCG property is limited to 30% of AGI. Richard would have the option to elect to deduct only the basis of the stock, or $1,000, and then use the 50% AGI limitation, but would lose $14,000 of his potential charitable contribution deduction. This option is a less advantageous treatment. If his AGI was less than $50,000, any amount which is not allowed due to the AGI limitation is carried forward for as long as 5 years until there is sufficient income to take the deduction.

13. Mark owns his home and has a $250,000 mortgage related to his purchase of the residence. When his daughter went to college in the fall of 2014, he borrowed $20,000 through a home equity loan on his house to help pay for her education. The interest expense on the main mortgage is $15,000, and the interest expense on the home equity loan is $1,500. How much of the interest is deductible as an itemized deduction and why?

The acquisition debt interest is fully deductible since it is related to deb used to purchase the residence that is less than $1 million in total. The home equity interest is deductible since up to $100,000 of home equity debt may be borrowed and used for anything, including college expenses or vacations, and the interest will still be deductible. Therefore, Mark can deduct $16,500 on his Schedule A for mortgage interest expense.

23. Jim is fired from his job as a waiter and decides to take an extended trip to Europe. After touring Europe for 3 months, Jim returns to look for a new hob as a waiter. Are his job-hunting expenses deductible for 2014?

Yes. Jim is seeking employment in the same trade or business in which he was most recently employed. The lack of continuity between jobs is not great enough to cause the job hunting expenses to be nondeductible.

8. Mary's mother defaults on a home loan and Mary pays $600 in loan payments, including $175 in interest. Mary is not legally obligated on the loan and has no ownership interest in her mother's home. a. What amount, if any, may Mary claim as an itemized deduction for 2014? b. Why?

a. $0 b. Mary is not entitled to deduct the interest since she is not legally liable for the obligation.

9. Matthew borrows $250,000 to invest in bonds. During 2014, his interest on the loan is $30,000. Matthew's interest income from the bonds is $10,000. This is Matthew's only investment income. a. Calculate Matthew's itemized deduction for investment interest expense for this year. b. Is Matthew entitled to a deduction in future years? Explain.

a. $10,000, limited to Matthew's net investment income b. Yes. The unused deduction $20,000 ($30,000-10,000) may be carried forward as an investment interest deduction in future years, subject to the investment interest expense limitation.