tax final chapter 10

A taxpayer's choice of qualified residence is irrevocable. True False

False Feedback: A taxpayer who has more than one second residence can choose the qualified second residence each year.

Miscellaneous itemized deductions may be deductible only if, in total, they exceed 2 percent of the taxpayer's AGI, in which case the entire amount is eligible as a deduction. True False

False Feedback: Correct. Only the amount in excess of the 2 percent-of-AGI floor is allowed as a deduction.

Individuals can elect to deduct their state income taxes, their local income taxes, and their sales/use taxes paid as an itemized deduction. True False

False Feedback: Individuals can elect to deduct either their stateand local income taxes or their sales/use taxes paid as an itemized deduction.

Weight reduction programs are considered deductible medical expenses so long as they provide a significant improvement to one's general health. True False

False Feedback: Programs for the improvement of general health are nondeductible.

Crystal's sole source of income is from a restaurant that she owns and operates as a proprietorship. Any state income tax Crystal pays on the business net income must be deducted as a business expense rather than as an itemized deduction. True False

False Feedback: State and local income taxes imposed on an individual are deductible only as an itemized deduction even if the taxpayer's sole source of income is from a business.

Gambling losses are deductible up to the amount of gambling winnings to the extent they exceed 2 percent of the taxpayer's AGI. True False

False Feedback: Such losses are not subject to the 2 percent-of-AGI floor.

Taxes assessed for local benefits, such as a new sidewalk, may be deductible as real property taxes. True False

False Feedback: Such taxes must be capitalized (added to the adjusted basis of the taxpayer's property).

In April 2018, Ellis, a calendar year cash basis taxpayer, paid the state of Kansas additional income tax for 2017. Since it relates to 2017, for Federal income tax purposes the payment qualifies as a tax deduction for tax year 2017. True False

False Feedback: The amount is deductible in 2018 because Ellis is a cash basis taxpayer who paid the tax in 2018.

The deduction for real estate taxes was created to relieve the burden of multiple taxes on the same source of revenue. True False

False Feedback: The deduction for real estate taxes was created to encourage home ownership.

Obtaining a tax benefit by shifting itemized deductions from one year to another is not allowed. True False

False Feedback: The individual could, for example, prepay a church pledge for a particular year to shift the deduction to the current year so itemized deductions exceed the standard deduction.

The maximum charitable contribution deduction may not exceed 20 percent of AGI for the tax year. True False

False Feedback: The limit is 50 percent.

Ordinary income property is any property that would have resulted in the recognition of long-term capital gain or § 1231 gain if the property had been sold by the donor. True False

False Feedback: This is the definition of capital gain property. Ordinary income property is any property that, if sold, will result in the recognition of ordinary income.

Employee business expenses for travel do not qualify as itemized deductions subject to the 2 percent floor if they are reimbursed. True False

True Feedback: Nonreimbursed employee expenses qualify as itemized deductions subject to the 2 percent floor.

For purposes of computing the deduction for qualified residence interest, a qualified residence includes only the taxpayer's principal residence and one other residence. True False

True Feedback: A qualified residence includes the taxpayer's principal residence and one other residence of the taxpayer or spouse.

Personal expenses not specifically allowed as itemized deductions by the tax law are nondeductible. True False

True Feedback: Although certain exceptions exist (e.g., alimony and traditional IRA contributions are deductible for AGI), personal expenses not specifically allowed as itemized deductions by the tax law are nondeductible.

Medical expenses are generally rare because the threshold percentage is significant. True False

True Feedback: Only medical expenses in excess of the "10 percent-of-AGI floor" are deductible.

Gambling losses are not subject to the 2 percent-of-AGI floor. True False

True Feedback: Such losses are not subject to the 2 percent-of-AGI floor.

Deloris paid an appraiser to determine how much a capital improvement made for medical reasons increased the value of her personal residence. The appraisal fee is deductible, but not as a medical expense. True False

True Feedback: The appraisal fee does not qualify as a medical expense, but it qualifies under § 212 (related to the determination of tax liability) as a miscellaneous itemized deduction.

The maximum charitable contribution deduction may not exceed 50 percent of AGI for the tax year. True False

True Feedback: The limit is 50 percent.

In most cases, interest paid on a home mortgage is fully deductible. True False

True Feedback: The only exception is interest paid or accrued during the tax year on aggregate acquisition indebtedness of more than $1 million.

The election to itemize is not appropriate when the taxpayer's allowable itemized deductions are less than the allowable standard deduction. True False

True Feedback: The taxpayer benefits from itemizing when itemized deductions exceed the standard deduction.

The taxpayer benefits from itemizing when itemized deductions exceed the standard deduction. True False

True Feedback: The taxpayer benefits from itemizing when itemized deductions exceed the standard deduction.

Jeremy and Alison, married taxpayers, took out a mortgage on their home for $350,000 in 1994. In May of this year, when the home had a fair market value of $450,000 and they owed $250,000 on the mortgage, they took out a home equity loan for $220,000. They used the funds to purchase a single engine airplane to be used for recreational travel purposes. What is the maximum amount of debt on which they can deduct home equity interest? a. $100,000 b. $220,000 c. $230,000 d. $50,000 e. None of these choices are correct.

a. $100,000 Feedback: Interest is deductible only on the portion of the $220,000 home equity loan that does not exceed the lesser of: • The fair market value of the residence, reduced by the acquisition indebtedness ($450,000 FMV − $250,000 acquisition indebtedness = $200,000). • $100,000 ($50,000 for married persons filing separate returns). Of the $220,000 home equity loan, interest on $100,000 is deductible as home equity interest.

Juan was permanently disabled in a car accident and was unable to climb the stairs to reach his second-floor bedroom. His physician advised him to add a first-floor bedroom to his home. The cost of constructing the room was $28,000. The increase in the value of the residence as a result of the room addition was determined to be $12,000. In addition, Juan paid the contractor $5,000 to construct an entrance ramp to his home and $7,000 to widen the hallways to accommodate his wheelchair. Juan's AGI for the year was $80,000. How much of these expenditures can Juan deduct as a medical expense? a. $20,000 b. $16,000 c. $40,000 d. $10,000 e. None of these choices are correct.

a. $20,000 Feedback: A capital improvement that ordinarily would not have a medical purpose qualifies as a medical expense if it is directly related to prescribed medical care and is deductible to the extent that the expenditure exceeds the increase in value of the related property. Examples of such improvements include dust elimination systems, elevators, and a car specially designed for a wheelchair-bound taxpayer. Juan's medical expense related to the room addition is $16,000 ($28,000 − $12,000). The full cost of home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. Qualifying costs include expenditures for constructing entrance and exit ramps to the residence, widening hallways and doorways to accommodate wheelchairs, installing support bars and railings in bathrooms and other rooms, and adjusting electrical outlets and fixtures. These expenditures are subject to the 10 percent floor only, and the increase in the home's value is deemed to be zero. Juan's medical expense related to the ramp and hallways is $12,000 ($5,000 + $7,000). Therefore, Juan's medical expense deduction is as follows: Qualifying medical expenses ($16,000 + $12,000) $28,000 Less: 10% × $80,000 (8,000) Deductible medical expenses $20,000

Matthew pays $8,000 this year to become a charter member of Central University's Athletic Council. The membership ensures that Matthew will receive choice seating at all of Central's home basketball games. In addition, Matthew pays $2,200 (the regular retail price) for season tickets for himself and his wife. For these items, how much qualifies as a charitable contribution? a. $6,400 b. $8,000 c. $10,200 d. $6,200 e. None of these choices are correct.

a. $6,400 Feedback: Under the exception to the tangible-benefit-received rule, Matthew can deduct $6,400 (80% of $8,000) of the charter membership fee to Central University's Athletic Council. The amount Matthew pays ($2,200) to purchase tickets at the regular price is not deductible as a charitable contribution.

During 2017, Bradley, a self-employed individual, paid the following amounts: Real estate tax on residence $3,900 State income tax 1,400 Real estate taxes on land in Canada (held as an investment) 900 State sales taxes 1,950 State occupational license fee 250 Personal property tax on value of his automobile 200 What amount can Bradley claim as taxes in itemizing deductions from AGI? a. $6,950 b. $7,200 c. $8,600 d. $6,600 e. None of these choices are correct.

a. $6,950 Feedback: State sales taxes ($1,950) are more than the state income tax ($1,400) so Bradley will choose to deduct the sales tax rather than the state income tax. The state occupational license fee ($250) is deductible for AGI as a business expense. The state sales taxes ($1,950), the personal property tax on the auto ($200), and the real estate taxes ($3,900 + $900) are deductible as itemized deductions. The total itemized deductions are $6,950.

Riley had an accident while rock climbing on vacation. She sustained facial injuries that required cosmetic surgery. While having the surgery done to restore her appearance, she had additional surgery done to reshape her nose, which was not injured in the accident. The surgery to restore her appearance cost $12,000, and the surgery to reshape her nose cost $5,000. How much of Riley's surgical fees will qualify as a deductible medical expense (before application of the 10 percent limitation)? a. $5,000 b. $12,000 c. $17,000 d. $0 e. None of these choices are correct.

b. $12,000 Feedback: Cosmetic surgery is necessary (and therefore deductible) when it ameliorates (1) a deformity arising from a congenital abnormality, (2) a personal injury, or (3) a disfiguring disease. The $12,000 cost incurred in connection with the restorative surgery (required as a result of the accident) is deductible because the surgery was necessary. Amounts paid for the unnecessary cosmetic surgery ($5,000 for reshaping the nose) are not deductible as a medical expense.

In 2017, Penelope makes the following donations to qualified charitable organizations: Basis Fair Market Value Inventory held for resale in Penelope's business (a sole proprietorship) $ 4,000 $ 3,600 Stock in Sparrow, Inc. held as an investment (acquired two years ago) 8,000 20,000 Comic book collection held as an investment (acquired six years ago) 2,000 10,000 The Sparrow stock and the inventory were given to Penelope's church, and the comic book collection was given to the United Way. Both donees promptly sold the property for the stated fair market value. Disregarding percentage limitations, Penelope's charitable contribution deduction for 2017 is: a. $26,000. b. $25,600. c. $33,600. d. $14,000. e. None of these choices are correct.

b. $25,600. Feedback: Inventory is ordinary income property, but the fair market value ($3,600) must be used if lower than the basis ($4,000). Stock is intangible property and is not subject to the tangible personalty rules. Since a sale of the Sparrow stock would have yielded a long-term capital gain, the full fair market value qualifies for the deduction ($20,000). The comic book collection comes under the exception relating to tangible property put to an unrelated use, and the adjusted basis ($2,000) must be used. Thus, $3,600 + $20,000 + $2,000 = $25,600.

Sonia paid the following taxes during the year: Taxes on residence (for the period from March 1 through August 31) $5,250 State motor vehicle tax (based on the value of the personal use automobile) 430 State income tax 3,050 State and local sales taxes 3,500 Sonia sold her personal residence on June 30, under an agreement in which the real estate taxes were not prorated between the buyer and the seller. What amount qualifies as a deduction from AGI for Sonia? a. $9,130 b. $7,382 c. $5,382 d. $9,180 e. None of these choices are correct.

b. $7,382 Feedback: [(121 days/184 days × $5,250) + $430 + $3,500] = $7,382. State and local sales taxes ($3,500) are more than the state income tax ($3,050). Therefore, assuming that Sonia may choose to deduct the higher of her state and local sales taxes or her state income tax, her deduction will include $3,500 rather than $3,050.

Yasuke donates $150 to a local theater company. His intent in making the donation is purely altruistic, so he's surprised when the company sends him a free ticket to its next performance, normally worth $50. Which of the following statements is correct? a. Yasuke can deduct the full $150 as long as he doesn't use the ticket. b. If Yasuke attends the play, he forfeits the right to deduct anything as a charitable donation. c. In order to deduct the full $150, Yasuke would need to send the ticket back to the theater company. d. Because Yasuke didn't make the donation with the intent of obtaining a free ticket, he can attend the performance and still deduct the full $150. e. None of these choices are correct.

c. In order to deduct the full $150, Yasuke would need to send the ticket back to the theater company. Feedback: When a donor derives a tangible benefit from a contribution, he or she cannot deduct the value of the benefit. Yasuke's two options are as follows: keep the ticket and deduct $100 ($150 - $50), or return the ticket and deduct $150.

Which of the following types of interest is not deductible? a. Investment interest b. Interest paid to related parties c. Interest on car loans d. Qualified student loan interest e. Home mortgage interest

c. Interest on car loans Feedback: Personal (consumer) interest is not deductible.

Cartman and Kenny are equal owners in Mountain Corporation. On July 1, 2017, each loans the corporation $20,000 at annual interest of 10 percent. Cartman and Kenny are brothers. Both shareholders are on the cash method of accounting, while Mountain Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2018, Mountain repays the loans of $40,000 together with the specified interest of $4,000. How much of the interest can Mountain Corporation deduct in 2017? a. $1,000 b. $2,000 c. $4,000 d. $0 e. None of these choices are correct.

d. $0 Feedback: Mountain Corporation can deduct interest expense of $4,000 in 2018 and $0 in 2017. Under § 267, Cartman and Kenny are regarded as related to the corporation. Consequently, the deductibility must await actual payment (in 2018).

Reza's parents claim him as a dependent. This does not stop him from making a qualified student loan interest deduction. True False

false Feedback: The deduction is not allowed for taxpayers who are claimed as dependents.

Is a deduction allowed for the contribution of one's services to a charitable organization? a. Yes, but the deduction is subject to a 10 percent-of-AGI threshold b. No c. Yes, as long as the organization is a qualified charitable organization d. Yes, as long as the services provided are not within one's usual line of work e. Yes, as long as the services provided are within one's usual line of work

no Feedback: No deduction is allowed for a contribution of one's services to a qualified charitable organization.

Fees are not deductible unless incurred as a business expense or as an expense in the production of income. True False

true Feedback: For this reason, it's important to understand the difference between a tax and a fee.

Excise taxes are nondeductible. True False

true Feedback: Only property, income, and sales taxes can be deductible.

Beatrice pays FICA (employer's share) on the wages she pays her maid to clean and maintain Beatrice's personal residence. The FICA payment is not deductible as an itemized deduction. True False

true Feedback: The payment is a nondeductible personal expense.

The purchaser of a principal residence can deduct qualifying points in the year of payment. True False

true Feedback: This is an exception to the general rule that points are capitalized and are amortized and deductible ratably over the life of the loan.

Nonreimbursed employee expenses qualify as itemized deductions subject to the 2 percent floor. True False

true Feedback: Nonreimbursed employee expenses qualify as itemized deductions subject to the 2 percent floor.