Fed Income Tax 5

During the current year, Cary and Bill incurred acquisition debt on their residence of $1,300,000 and a home equity loan of $200,000. On a joint tax return, what is the amount of their qualified acquisition debt and qualified home equity debt, respectively?

$1,000,000 and $100,000

Peter is a plumber employed by a major contracting firm. During 2014, he paid the following miscellaneous expenses: Unreimbursed employee business expenses $450 Union dues $600 Tax return preparation fee $100 Safe deposit box rental fee (used only for personal effects) $ 20 If Peter were to itemize his deductions for 2014, what amount could he claim as miscellaneous itemized deductions (before applying the 2 percent of adjusted gross income limitation)?

$1,150 Feedback: $450 + $600 + $100

During 2014, Mary paid the following expenses: Prescription drugs $490 Aspirin and over the counter cold capsules $130 Hospital and doctors $700 Health insurance $260 What is the total amount of medical expenses (before considering the limitation based on adjusted gross income) that would enter into the calculation of itemized deductions on Mary's 2014 income tax return?

$1,450 Feedback: $490 + $700 + $260

Weber resides in a state that imposes a tax on income. The following information relating to Weber's state income taxes is available: State income taxes withheld in 2014 $3,000 Refund received in 2014 of 2013 tax $ 300 Assessment paid in 2014 of 2012 tax $ 500 Assuming he elects to deduct state and local income taxes, what amount should Weber use as state and local income taxes in calculating itemized deductions for his 2014 Federal income tax return?

$3,500 Feedback: $3,000 + $500

If the taxpayer fails to locate a job, job hunting expenses are not deductible.

False Feedback: Job hunting expenses are allowed even if the taxpayer is unsuccessful at obtaining a job.

The cost of over-the-counter aspirin and decongestants is a deductible medical expense even though they are non-prescription drugs.

False Feedback: Nonprescription medicines, even if recommended by a physician, are not deductible as a medical expense.

Premiums paid for life insurance policies are deductible as medical expenses.

False Feedback: Premiums paid for life insurance policies are not deductible.

All personal casualty losses incurred during the year are added together and only one $100 floor amount is used to reduce the casualty deduction.

False Feedback: The $100 floor is applied to each casualty or theft loss.

The expense of a review course for a state real estate agent's exam is deductible as a miscellaneous itemized deduction by a taxpayer attempting to become an agent.

False Feedback: To be considered an employee business expense, the expense must be incurred in performing services for an employer. (This question requires an understanding of the tax rules for business expense deductions covered in Chapter 3).

What income tax form does an employee use to report business expenses that are not reimbursed by an employer under an accountable plan?

Form 2106, Employee Business Expenses

Which of the following is not deductible as a medical expense on Schedule A?

Payments for marriage counseling

An accountable expense reimbursement plan:

Requires the employee to substantiate expenses with receipts and to return any excess reimbursement.

Damage resulting from which of the following would probably not give rise to a casualty loss deduction?

Rust

Christine saw a television advertisement asking for donations of used vehicles to a charitable foundation and decided to donate her old car. Which of the following statements is correct?

She can claim an estimated value for the auto if the charity uses it rather than selling it.

Carla is a high school teacher who is required by her school district to take continuing education courses which are offered at the local college. She is also in the process of taking classes at a different university where she is pursuing her Ph.D. to become a research specialist. She pays the tuition for both schools. Which of the following is true?

She may deduct the continuing education tuition from the local college because it meets her employer's requirement to maintain her current job skills.

A theft loss is deductible in the year the theft is discovered, even if the theft occurred in a prior year.

True

Casualty and theft losses must be reduced by amounts recovered from insurance coverage.

True

For 2014, the investment interest expense deduction is limited to the taxpayer's net investment income.

True

In 2014, state income taxes may be deducted as an itemized deduction on Schedule A.

True

The amount of a special assessment charged to residents for the installation of sidewalks on their street is not deductible on Schedule A as property taxes.

True

The cost of a chiropractor's services qualifies as a medical deduction.

True

Which of the following miscellaneous deductions is subject to the 2 percent of adjusted gross income limitation?

Unreimbursed employee business expenses

Jon, age 45, had adjusted gross income of $26,000 in 2014. During the year, he incurred and paid the following medical expenses: Drugs and medicines prescribed by doctors $ 300 Health insurance premiums $ 750 Doctors' fees $2,250 Eyeglasses $ 75 Jon received $900 in 2014 as a reimbursement for a portion of the doctors' fees. If Jon were to itemize his deductions, what would be his allowable medical expense deduction after the adjusted gross income limitation is taken into account?

$0 Feedback: ($300 + $750 + $2,250 + $75 -$900) - (10% × $26,000)

What is the maximum amount of home equity debt (not acquisition debt) on which interest is fully deductible?

$100,000

Charlie is a single taxpayer with income of $106,000 which includes $22,500 of interest income. Contributions to educational savings accounts are phased out between $95,000 and $110,000. What is the maximum contribution Charlie can make to an educational savings account?

$533 Feedback: ($110,000 - $106,000) / ($110,000 - $95,000) × $2,000

Catherine is a CPA employed by a large accounting firm in San Francisco. In 2014, she paid the following amounts: CPA Society dues $ 200 One year tax service $ 700 "Wiley Accountant" magazine $ 75 "Modern Sailing" magazine $ 70 How much may she deduct on Schedule A as a miscellaneous deduction, before considering the 2 percent of adjusted gross income limitation?

$975 Feedback: $200 + $700 + $75

Harvey itemized deductions on his 2013 income tax return. Harvey plans to itemize deductions again in 2014 and the following information is available regarding state and local income taxes: Taxes withheld in 2014 $2,500 Refund received in 2014 of 2013 tax $ 500 Assessment paid in 2014 of 2012 tax $ 300 Assuming he elects to deduct state and local income taxes, the above information should be reported by Harvey in his 2014 tax return as:

Itemized deduction for state and local income taxes of $2,800 and income from state and local tax refund of $500

Which of the following is a miscellaneous itemized deduction?

Job hunting expenses

Which of the following is not deductible as interest expense on Schedule A?

Loan fee charged for appraisal service

Which of the following is true with respect to an education incentive?

Married taxpayers at any income level may contribute to a Qualified Tuition Program (Section 529 plan).

Jean's employer has an accountable plan for reimbursing employee expenses. Jean is reimbursed for $1,500 of business travel and $500 for various business subscriptions and professional dues. The $2,000 reimbursement should be treated as follows:

No taxable income should be reported to Jean

Pat has a dependent daughter and files as head of household. She has AGI of $375,000. What percentage of the $3,950 personal exemption and $3,950 dependency exemption may she deduct on her 2014 income tax return?

22 percent Feedback: ($375,000-$279,650) / $2,500 = 39 × 2% = 78% reduction, thus a 22% deduction.

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

A face lift

Which of the following employees may deduct the cost of a uniform?

A police officer who must wear a uniform while on duty

Which one of the following is not considered a casualty or theft loss for tax purposes?

A taxpayer's car is destroyed by rust.

Which of the following is deductible as a miscellaneous itemized deduction?

All of the above are miscellaneous deductions

Which one of the following is not tax deductible?

All of the above are tax deductible

Which of the following is not deductible as an itemized deduction?

All of the above may be deductible as itemized deductions

Which of the following is correct for Qualified Tuition Programs for 2014?

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

Which of the following types of interest is not deductible in 2014?

Credit card interest

Which of the following taxes is not deductible as an itemized deduction?

Federal income tax

Mortgage interest on a taxpayer's personal residence is not deductible on Schedule A.

False Feedback: Mortgage interest on a taxpayer's personal residence is deductible on Schedule A.

Roberto, age 50, has AGI of $112,000 for 2014. He has medical expenses of $12,800. How much of the medical expenses can Roberto deduct on his Schedule A for 2014?

$1,600 Feedback: $12,800 - 10% × $112,000

Amy paid the following interest expense during 2014: Qualified home mortgage interest $12,300 Credit card interest $ 1,000 Personal bank loan interest $ 3,000 What is the amount of Amy's interest deduction for 2014?

$12,300

In 2014, Jennie receives $12,000 (of which $3,000 is earnings) from a Qualified Tuition Program. She uses the funds to pay for new furniture for her apartment. What amount is taxable to Jennie?

$3,000

Jerry and Ann paid the following amounts during 2014: Interest on automobile loan $1,500 Interest on bank loan (proceeds were used to purchase municipal bonds) $5,000 Qualified home mortgage interest $3,000 What is the maximum amount they can use as interest expense in calculating itemized deductions for 2014?

$3,000

If a taxpayer contributes a painting to a museum but reserves the right to use the painting for parties, he may not be allowed a deduction for the charitable contribution.

True

Taxpayers must itemize their deductions to be allowed a charitable contribution deduction.

True

The cost of an appraisal of a painting may be deducted if the purpose of the appraisal is related to the preparation of an income tax return.

True

The interest paid on a loan used to acquire municipal bonds is not deductible.

True

To deduct interest paid with respect to indebtedness, the taxpayer must be legally liable for the debt.

True

Unreimbursed employee business expenses are miscellaneous itemized deductions, subject to the 2 percent of adjusted gross income limitation.

True

An employee may deduct the cost of welder's safety goggles used at work as a miscellaneous itemized deduction.

True Feedback: (This question requires an understanding of the tax rules for business expense deductions covered in Chapter 3).

For 2014, Eugene and Linda had adjusted gross income of $30,000. Additional information for 2014 is as follows: Cash contribution to church $1,500 Tuition paid to a parochial school $1,200 Contribution to a qualified charity $ 400 Cash contribution to a needy family $ 75 What is the maximum amount that they can use as a deduction for charitable contributions for 2014?

$1,900 Feedback: $1,500 + $400

Stewart had adjusted gross income of $24,000 in 2014. During the year, he made the following contributions to qualified charities: ​ $8,000 cash ​ 1,000 shares of Able Corporation common stock, acquired in 1979 (cost and fair market value of $7,000) ​ Considering the charitable contribution deduction limitation, what amount can Stewart claim as a deduction for charitable contributions in 2014?

$12,000 Feedback: $24,000 x 50%

During 2014, Mr. and Mrs. West paid the following taxes: Property taxes on residence $1,800 Special assessment for installation of a sewer system in their neighborhood $1,000 State personal property tax on their automobile (based on value) $ 800 Property taxes on land held for long-term appreciation $ 500 What amount can the Wests deduct as property taxes in calculating itemized deductions for 2014?

$3,100 Feedback: $1,800 + $800 + $500

April and Wilson are married and file a joint tax return. Wilson is a police officer, and in the current tax year he spends $375 on uniforms and $150 for dry cleaning the uniforms. April is in the National Guard and military regulations restrict her from wearing her uniforms when she is off duty. The cost of uniforms for the year was $225 and the cost of dry cleaning them amounted to $75. April was granted a uniform allowance of $200 for the year. She also purchased a pair of standard black shoes to wear while on duty that cost $45. How much may they deduct on Schedule A for special clothing and uniforms, before considering the 2 percent of adjusted gross income limitation?

$625 Feedback: ($375 + $150 + $225 + $75 - $200)

Mary Lou took an $8,000 distribution from her educational savings account and used $6,500 to pay for qualified higher education expenses. The remaining balance of $1,500 was used to purchase clothes. On the date of the distribution, her educational savings account had a $28,000 balance including the $21,000 she had contributed. How much of the $8,000 distribution is tax-free?

$7,625 Feedback: $6,500 + [$1,500 × ($21,000 / $28,000)]

Alicia is a single taxpayer with AGI of $350,000 and itemized deductions of $100,000 which are made up of $30,000 of mortgage interest, $30,000 of state income taxes and property taxes, and $40,000 of contributions to her temple. What is the amount of itemized deductions that Alicia may deduct on her 2014 income tax return after the phase-out for high-income taxpayers?

$97,126 Feedback: $97,126 = $100,000 - [3% × ($350,000-$254,200)]

Individual taxpayers may carry forward indefinitely charitable contributions that are not allowed as a deduction in the current year due to the adjusted gross income limitation.

False Feedback: Charitable contributions not allowed due to the adjusted gross income limitations may be carried forward 5 years.

A taxpayer may donate the free use of property to a charitable organization and deduct the value as an itemized deduction.

False Feedback: Contributions of the use of property are not deductible.

Educational expenses are deductible as a miscellaneous itemized deduction even if the education is required to meet the minimum requirements for the taxpayer's current job.

False Feedback: Educational expenses are not deductible if the education is required to meet the minimum requirements for the taxpayer's current job. (This question requires an understanding of the tax rules for business expense deductions covered in Chapter 3).

The cost of uniforms is deductible only by self-employed taxpayers.

False Feedback: Employees and self-employed individuals are allowed a deduction for the cost of special work clothing or uniforms. (This question requires an understanding of the tax rules for business expense deductions covered in Chapter 3).

If business property is fully destroyed as a result of a casualty, the loss is equal to the decrease in the fair market value of the property.

False Feedback: If a business property is fully destroyed as a result of a casualty, the loss is based on the adjusted basis of the property.

To calculate the amount of state and local income taxes which may be deducted as an itemized deduction, state income taxes paid during the year must be reduced by state income tax refunds received during the year.

False Feedback: If a taxpayer receives a refund of state income taxes deducted in a previous year, then the refund must generally be included in income in the year in which the refund is received.

If an employee receives a reimbursement for employee business expenses, the amount of the reimbursement is always excluded from gross income and the expenses are deductible as deductions for adjusted gross income.

False Feedback: If an employee receives a reimbursement for employee business expenses under an accountable plan, then the reimbursement is not included in gross income and the expenses are not deductible on the taxpayer's tax return.

Expenses of education to improve or maintain existing skills are deductible as a miscellaneous itemized deduction even if the education incidentally leads to qualification in a new job or business.

False Feedback: If education expense leads to qualification in a new trade or business, then the expense is not deductible (This question requires an understanding of the tax rules for business expense deductions covered in Chapter 3).

The cost of a fishing license is considered a personal property tax and is deductible as an itemized deduction.

False Feedback: To be deductible as an itemized deduction, property taxes must be levied based on the value of the property.

If a ballet dancer seeks work as a ditch digger, the expenses of job hunting may be deductible.

False Feedback: To deduct job-hunting expenses, the taxpayer must be seeking employment in a trade or business in which he or she is currently employed.

The adjusted gross income (AGI) limitation on medical expenses is 15 percent.

False, Medical expenses can be deducted to the extent that they exceed 10 percent of the taxpayer's AGI. If the taxpayer is age 65 or older, the 7.5 percent limit applies.

Which of the following miscellaneous deductions are not subject to the 2 percent of adjusted gross income limitation?

None of the above

If personal property is completely destroyed, the casualty loss deduction is still reduced by a floor amount.

True

If real property is sold during the year, the property taxes must be allocated between the buyer and seller based on the number of days the property was held by each party.

True

Which of the following charitable contributions is not tax deductible?

Time donated to a qualified veterans' organization.

Bill has a mortgage loan on his personal residence. He decides to pay 24 months of interest in advance on July 1, 2014. The total advanced interest payment is $60,000. How much of the advance interest payment can he deduct in 2014?

$15,000. Feedback: $60,000 / 24 months × 6 months

Margo has $2,100 withheld from her wages for state income taxes during 2014. In March of 2014, she paid $400 in additional taxes for her 2013 state tax return. Her state income tax liability for 2014 is $2,600 and she pays the additional $500 when she files her 2014 state tax return in April of 2015. What amount should Margo deduct as an itemized deduction for state income taxes on her 2014 federal income tax return, assuming she elects to deduct state and local income taxes?

$2,500 Feedback: $2,100 + $400

For the year ended December 31, 2014, David, a married taxpayer filing a joint return, reported the following: Investment income from interest $24,000 Investment expenses other than interest $ 4,000 Interest expense on funds borrowed in 2006 to purchase investment property $70,000 What is the maximum amount that David can deduct in 2014 as investment interest expense?

$20,000 Feedback: ​The deduction for investment interest is limited to net investment income ($24,000 - $4,000).

Which of the following interest expense amounts is not deductible in 2014?

Education loan interest of $2,000, assuming the taxpayer is single and has income of $150,000.

Which of the following is not an itemized deduction?

IRA contribution deduction

Shellie, a single individual, received her Bachelor's degree in 2013, and took a job with a salary of $45,000 per year. In 2014, she began paying interest on qualified education loans. She was able to pay $1,500 in 2014. Which of the following statements is not correct?

Taxpayers are not allowed a deduction for education loan interest in 2014.

Matthew purchases a new principal residence in 2014 and pays points of $2,000 to obtain a mortgage loan. What is the proper tax treatment for the points paid?

The points are fully deductible in 2014.

For married taxpayers filing a joint return in 2014, at what AGI level does the phase-out limit for contributions to Qualified Tuition Programs (Section 529 plans) start?

There is no phase-out limit on Qualified Tuition Program contributions.

In 2014, David, age 65, had adjusted gross income of $31,000. During the year he paid the following medical expenses: Prescription medicines $ 200 Doctors $2,500 Medical care insurance $ 400 Crutches for a broken leg $ 100 What amount can David deduct as medical expenses (after the adjusted gross income limitation) in calculating his itemized deductions for 2014?

$875 Feedback: ($200 + $2,500 + $400 + $100) - (7.5% × $31,000)

Charles, a corporate executive, incurred business related, unreimbursed expenses in 2014 as follows: Entertainment $ 1,100 Transportation $ 700 Education $ 400 Assuming that Charles itemizes his deductions, how much of these expenses should he deduct on his 2014 Schedule A, before considering the 2 percent of adjusted gross income limitation?

$1,650 Feedback: (50% × $1,100) + $700 + $400

During 2014, George, a salaried taxpayer, paid the following taxes which were not incurred in connection with a trade or business: Federal income tax (withheld by employer) $1,500 State income tax (withheld by employer) $1,100 FICA tax (withheld by employer) $ 700 Real property taxes $ 900 Federal auto gasoline taxes $ 300 Federal excise tax on telephone bills $ 50 What amount can George claim for 2014 as an itemized deduction for the taxes paid, assuming he elects to deduct state and local income taxes?

$2,000 Feedback: $1,100 + $900

Randy is advised by his physician to install an elevator in his residence, since he is afflicted with heart disease. The cost of installing the elevator is $10,000 and it has an estimated useful life of 10 years. He installs the elevator in January of 2014, and it increases the value of his residence by $8,000. Disregarding the limitation based on adjusted gross income, how much of the cost of the elevator may Randy take into account in determining his medical expense deduction for 2014?

$2,000 Feedback: ($10,000 - $8,000)

Frank is a resident of a state that imposes a tax on income. The following information pertaining to Frank's state income taxes is available: State income taxes withheld in 2014 $3,500 Refund of 2012 tax received in 2014 $ 400 Deficiency assessed and paid in 2014 for 2012: Tax $ 600 Interest $ 100 What amount should Frank use as state and local income taxes in calculating itemized deductions for his 2014 Federal tax return, assuming he elects to deduct state and local income taxes?

$4,100 Feedback: $3,500 + $600

Harris had adjusted gross income in 2014 of $128,000. During the year his personal summer home was almost completely destroyed by a cyclone. Pertinent data with respect to the home follows: Cost basis $135,000 Value before casualty $147,000 Value after casualty $ 17,000 Harris was partially insured for his loss and in 2014 he received a $113,000 insurance settlement. What is Harris' allowable casualty loss deduction for 2014?

$4,100 Feedback: ($147,000 - $17,000) -$113,000 - $100 - (10% × $128,000)

During 2014, Seth, a self-employed individual, paid the following taxes: Federal income tax $5,000 State income tax $2,400 Real estate taxes on land in South America (held as an investment) $ 900 Personal property taxes based upon value $ 900 Federal self-employment tax $ 800 What amount can Seth claim as an itemized deduction for taxes paid during 2014, assuming he elects to deduct state and local income taxes?

$4,200 Feedback: $2,400 + $900 + $900

Itemized deductions are subject to a phase-out based on AGI for certain high-income taxpayers.

True