chapter 8
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) $10,000 B) $14,000 C) $15,000 D) $25,000
A) $10,000 Because the machine is ordinary income property (if sold, the machine would have resulted in section 1245 ordinary income), the amount of the contribution is adjusted basis of $10,000.
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) $10,000 B) $28,500 C) $10,500 D) $14,500
A) $10,000 State and local income taxes and the property taxes on his home are allowed as itemized deductions, but limited in total to $10,000.
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) $10,000. B) $25,000. C) $12,000. D) $20,000.
A) $10,000.
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) $10,500 B) $10,900 C) $14,300 D) $14,700
A) $10,500 Explanation: Home mortgage interest $ 8,500 Investment interest limited to net investment income 2,000 Total as itemized deduction $ 10,500
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) $2,500 from AGI C) $3,800 for AGI D) $3,800 from AGI
A) $2,500 for AGI
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) $7,500 B) $19,500 C) $15,500 D) $15,000
A) $7,500
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) $7,900 B) $8,900 C) $10,900 D) $15,400
A) $7,900
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) $850. B) $1,100. C) $2,950. D) $3,200.
A) $850. Only the investment interest expense, to the extent of net investment income of $850 is deductible.
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) $850. B) $1,100. C) $2,950. D) $3,200.
A) $850. Explanation: Only the investment interest expense, to the extent of net investment income of $850 is deductible.
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) include $200 in gross income for 2019. B) include $1,200 in gross income for 2018. C) reduce 2018's medical expenses by $1,200. D) amend the 2018 return.
A) include $200 in gross income for 2019.
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) personal expenditures. B) trade or business expenditures. C) investment expenditures. D) passive activity expenditures in real estate.
A) personal expenditures. Explanation: When the taxpayer repays the debt, the tax law requires that the allocation of the repayment to the expenditures made with the borrowed funds occur in the following order: (1) personal expenditures, (2) investment expenditures and passive activity expenditures other than rental real estate, (3) passive activity expenditures in rental real estate, and (4) trade or business expenditures.
All of the following are deductible as medical expenses except A) vitamins and health foods that improve a taxpayer's general health. B) payments for a vision exam and contact lenses. C) payments to a hospital for laboratory fees and X-rays for diagnosis of a medical problem. D) cosmetic surgery necessary to correct a deformity arising from a congenital abnormality.
A) vitamins and health foods that improve a taxpayer's general health
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) $6,000. B) $10,100. C) $7,000. D) $7,700.
B) $10,100.
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) $0. B) $112. C) $11,700. D) $11,812.
B) $112.
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) $12,900. B) $13,850. C) $14,675. D) $16,325.
B) $13,850. Explanation: [$10,850 + $2,000 + $3,350 + $600 + $350] = $17,150 total expenses - ($33,000 × 0..10) = $13,850. The general purpose vitamins do not qualify.
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) $10,500. B) $16,000. C) $17,500. D) $22,000.
B) $16,000. To avoid the 30% of AGI ceiling ($10,500), he can elect to use the adjusted basis rather than FMV and instead apply the 50% of AGI ceiling.
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) $7,000. B) $18,000. C) $22,000. D) $25,000.
B) $18,000. The potential deduction is $25,000, the FMV as of the contribution, but it is limited by the percentage of AGI ceiling.
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) $2,000 for AGI C) $2,500 for AGI D) $3,000 for AGI
B) $2,000 for AGI Explanation: The limit for student loan interest deduction is $2,500, and it is a deduction for AGI. The limit is phased-out ratably between $65,000 and $80,000 of AGI for a single person. [($68,000 - $65,000)/($80,000 - $65,000)] = 20% phase-out. $2,500 limit × (100% - 20%)= $2,000 maximum due to excess AGI.
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) $9,000 D) $13,000
B) $4,000 Explanation: $13,000 - ($181,000 - $172,000) = $4,000.
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) $6,200 B) $5,000 C) $5,300 D) $4,800
B) $5,000
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) $6,400 C) $13,100 D) $13,000
B) $6,400 Explanation: Her investment income ceiling will only include the interest income and the short-term capital gain so the deduction for investment interest expense is limited to $6,400. The dividend income and long-term capital gain will not be included in her investment income ceiling without a special election.
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) $7,000 C) $5,000 D) $15,000
B) $7,000 Explanation: Only the money market account interest and the short-term capital gain will be included.
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) $70 C) $120 D) $3,600
B) $70
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) $0 B) $700 C) $800 D) $1,500
B) $700 Personal property taxes are deductible to the extent that they are ad valorem or based on value.
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) $8,300 C) $9,550 D) $13,300
B) $8,300
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) $10,350. B) $9,100. C) $14,100. D) $10,100.
B) $9,100. Explanation: ($11,000 + $3,500 + $600 - $1,000) - $5,000 ($50,000 × 0.10) = $9,100
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) it will all 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 personal expense. D) 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 Explanation: If borrowed and personal funds are mingled in the same account, expenditures from that account are treated as coming first from borrowed funds. Therefore, the $6,000 vacation payment is considered as coming from borrowed funds, and only $4,000 of the business supply bill is treated as coming from borrowed funds. Accordingly, the interest expense will be allocated 60% to personal use and 40% to business use.
The following taxes are deductible as itemized deductions with the exception of A) state income taxes. B) federal income taxes. C) foreign real property taxes. D) local personal property taxes.
B) federal income taxes.
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) $25,000 of cash B) stock purchased three years ago for $18,000 with a current FMV of $25,000 C) stock purchased six months ago for $28,000 with a current FMV of $25,000 D) Christa should be indifferent among the three choices.
B) stock purchased three years ago for $18,000 with a current FMV of $25,000
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) $1,400 C) $1,550 D) $2,150
C) $1,550 Explanation: Carlos will deduct all of the state taxes paid in 2018 (through withholding and payments made with the state return) on his federal income tax return. filed for 2018. $800 + $750 = $1,550.
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) $10,500 B) $11,500 C) $12,500 D) $13,500
C) $12,500 FMV Stock $5,000 Value of professional services 0 Cash 7,500 Total $12,500
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) $1,600. B) $2,080. C) $2,500. D) $2,680.
C) $2,500. Explanation: $300 [($50 maximum × 2) for 3 nights ] + $180 mileage (1,000 × 18 cents per mile) + $1,600 doctors = $2,080.
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) $1,200 B) $2,400 C) $2,700 D) $6,500
C) $2,700
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) $7,000. B) $18,000. C) $20,000. D) $25,000.
C) $20,000. Since the property was held by Clayton for less than one year, the contribution amount is the adjusted basis of $20,000. The $20,000 does not exceed the 50% of AGI ceiling.
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) $10,000 C) $7,000 D) $0
C) $7,000 Explanation: Mario has $7,000 of potentially deductible investment interest expense—the $2,000 paid in 2018 and the $5,000 carryover from 2017. The investment interest expense can be deducted up to a ceiling of net investment income which is $10,000. The entire $7,000 investment interest expense available can be deducted in 2018.
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) $10,000 C) $7,000 D) $0
C) $7,000 Explanation: Mario has $7,000 of potentially deductible investment interest expense—the $2,000 paid in 2018 and the $5,000 carryover from 2017. The investment interest expense can be deducted up to a ceiling of net investment income which is $10,000. The entire $7,000 investment interest expense available can be deducted in 2018.
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) $1.5 million. B) $1.0 million. C) $750,000. D) $500,000.
C) $750,000.
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) $0 B) $3,000 deductible this year; $11,000 carried forward to next year C) $9,000 deductible this year; $5,000 carried forward to next year D) $14,000 deductible this year; nothing to be carried forward to next year
C) $9,000 deductible this year; $5,000 carried forward to next year
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) $0 B) $3,000 deductible this year; $11,000 carried forward to next year C) $9,000 deductible this year; $5,000 carried forward to next year D) $14,000 deductible this year; nothing to be carried forward to next year
C) $9,000 deductible this year; $5,000 carried forward to next year Explanation: Investment interest expense is deductible to the extent of net investment income. The remainder is carried over to the next tax year.
Investment interest expense is deductible A) as an offset to net investment income. B) as a capital loss. C) as an itemized deduction. D) as a deduction for AGI.
C) as an itemized deduction. Explanation: Investment interest expense, after the net investment income ceiling is applied, is an itemized deduction.
All of the following statements are true except A) investment interest expense is deductible to the extent of a taxpayer's net investment income. B) short-term capital gains meet the definition of net investment income. C) investment interest expense includes interest expense to purchase or carry tax-exempt securities. D) net investment income is the taxpayer's investment income in excess of investment expenses.
C) investment interest expense includes interest expense to purchase or carry tax-exempt securities. Explanation: Investment interest does not include interest expense incurred to purchase or carry tax-exempt securities.
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) $7,200 D) $11,600
D) $11,600
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) $5,400 B) $9,900 C) $13,100 D) $13,000
D) $13,000 Explanation: If she makes the appropriate election on her return to include the dividends and long-term capital gain in her ceiling, she can deduct the investment interest expense to the extent of net investment income including the dividends and long-term capital gain. $4,500 + $5,400 + $1,000 + $2,200 = $13,100 limited to $13,000 of investment interest expense.
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) $12,000. C) $8,000. D) $16,000.
D) $16,000.
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) $0. B) $1,000. C) $4,000. D) $5,000.
D) $5,000. Explanation: Both 2018 and 2019 have AGI ceilings of $36,000 (60% of AGI) resulting in a $4,000 carryover from 2018 and a $1,000 carryover from 2019.
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) $0 B) $2,000 C) $4,600 D) $6,600
D) $6,600 Explanation: Expenditures to remove structural barriers in the home of a physically handicapped individual such as costs of constructing entrance ramps, widening doorways and halls, etc. are deductible in full.
Which of the following is deductible as interest expense? A) personal credit card interest B) interest to purchase tax-exempt bonds C) bank service charges on personal account D) None of the above.
D) None of the above.
All of the following payments for medical items are deductible with the exception of the payment for A) insulin. B) general appointment for teeth cleaning. C) acupuncture for specific medical purposes. D) nonprescription medicine for treatment of a specific medical condition.
D) nonprescription medicine for treatment of a specific medical condition.
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) $27,000. C) $35,000. D) $40,000.
Explanation: The potential deduction is the $40,000 FMV. Ceiling on current year contribution: $90,000 AGI × .30 Limit on capital gain property $ 27,000 Maximum current year deduction $ 13,000 Carryover
Medical expenses incurred on behalf of children of divorced parents are deductible by the parent who pays the expenses but only if that parent also is entitled to the dependency exemption.
FALSE Explanation: As long as one divorced parent qualifies to claim the dependency exemption under Sec. 152(e), the parent who pays medical expenses on behalf of the children may deduct the expenses.
Foreign real property taxes and foreign income taxes are not deductible as itemized deductions.
FALSE Explanation: Both are deductible as itemized deductions.
Jeffrey, a T.V. news anchor, is concerned about the wrinkles around his eyes. Because it is job-related, the cost of a face lift to eliminate these wrinkles is a deductible medical expense.
FALSE Explanation: Cosmetic surgery is not deductible unless such surgery is necessary to correct a deformity arising from a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease.
A personal property tax based on the weight of the property is deductible.
FALSE Explanation: In order to be deductible, a personal property tax must be ad valorem (based on value).
Self-employed individuals may deduct the full self-employment taxes paid as a for AGI deduction.
FALSE Explanation: One-half of the self-employment tax is a deduction for AGI.
Expenditures incurred in removing structural barriers in the home of a physically handicapped individual are deductible only to the extent the costs exceed the increase in fair market value to the property attributable to the capital expenditure.
FALSE Explanation: Such expenses are fully deductible subject to the 10% limitation on all medical expenses.
In order for a taxpayer to deduct a medical expense, the amount must be paid to a licensed physician.
FALSE Explanation: Taxpayers may deduct payments to a wide range of medical, dental, and other diagnostic and healing services.
Medical expenses are deductible as a from AGI deduction to the extent that they exceed 2 percent of the taxpayer's AGI in 2018.
FALSE Explanation: The floor for medical expenses is 10% of AGI.
If a medical expense reimbursement is received in a year after a deduction has been taken on a previous year's return, the previous year's return must be amended to eliminate the reimbursed expense.
FALSE Explanation: The reimbursement should be included in gross income in the year received to the extent the taxpayer received a tax benefit in the year of payment.
Due to stress on the job, taxpayer Fiona began to experience anxiety attacks. Her doctor advised her to engage in some relaxation activities. Fiona enrolled in yoga lessons. The cost of the yoga lessons to alleviate this medical condition is tax deductible.
FALSE Explanation: Unless expenditures are for routine preventive care, expenditures must be incurred to treat a specific ailment, rather than for general health.
Assessments or fees imposed by the government for specific privileges or services are not deductible as taxes.
TRUE Explanation: Assessments or fees for specific privileges or services do not meet the definition of a tax.
Capital expenditures incurred for medical purposes which permanently improve or better the taxpayer's property are deductible, but only to the extent the cost exceeds the increase in fair market value to the property attributable to the capital expenditure.
TRUE Explanation: Capital improvements needed for medical care are only allowed to the extent they exceed the increase in the FMV of the property.
If the principal reason for a taxpayer's presence in an institution (e.g., a nursing home) is the need and availability of medical care, the entire cost of lodging and meals is considered qualified medical expenditures.
TRUE Explanation: Costs of institutional care (including meals and lodging) are only allowed if the principal reason is for access to needed medical care.
Medical expenses paid on behalf of an individual who could be the taxpayer's dependent except for the gross income or joint return tests are deductible as itemized deductions.
TRUE Explanation: Generally a taxpayer can only deduct his own qualifying expenses, but a limited exception applies for payment of another's medical expenses.
If a prepayment is a requirement for the receipt of the medical care, the payment is deductible in the year paid rather than the year in which the care is rendered.
TRUE Explanation: Generally, prepayments are deferred. An exception applies if the prepayment is required for the medical treatment.
Expenditures for long-term care insurance premiums qualify as a medical expense deduction subject to an annual limit based upon the age of an individual.
TRUE Explanation: Premiums for long-term care will qualify for medical expense treatment, but the deduction amounts are limited by the taxpayer's age.
Assessments made against real estate for the purpose of funding new street lights are not deductible in the year paid but rather should be added to the cost basis of the property.
TRUE Explanation: Such assessments are not taxes; they are improvements.
The definition of medical care includes preventive measures such as routine physical examinations.
TRUE Explanation: The definition of medical care does include preventive medical care.
A medical expense is generally deductible only in the year in which the expense is actually paid.
TRUE Explanation: This cash-basis rule supercedes the accounting method of the taxpayer and the timing of the event causing the expenditure.
Expenditures for a weight reduction program are deductible if recommended by a physician to treat a specific medical condition such as hypertension caused by excess weight.
TRUE Explanation: Unless expenditures are for routine preventive care, expenditures must be incurred to treat a specific ailment, rather than for general health. A weight loss program must be prescribed by a doctor to treat a specific condition.
