Chapter 5: Itemized Deductions and Other Incentives
Jon, age 45, had adjusted gross income of $26,000 in 2015. 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 2015 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 ($300 + $750 + $2,250 + $75 - $900) - (10% × $26,000)
Polly is a telephone service person employed by a telephone repair firm. During 2015, she paid the following miscellaneous expenses: Unreimbursed employee business expenses $210 Union dues $600 Steel-toed safety shoes $65 Tax return preparation fee $150 Safe deposit box rental fee (used only for personal effects) $45 If Polly were to itemize her deductions in 2015, what amount could she claim as miscellaneous itemized deductions (before applying the 2 percent of adjusted gross income limitation)?
$1,025
Peter is a plumber employed by a major contracting firm. During the current year, 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 the current year, what amount could he claim as miscellaneous itemized deductions (before applying the 2 percent of adjusted gross income limitation)?
$1,150 $450 + $600 + $100
For 2015, Till and Larry had adjusted gross income of $30,000. Additional information for 2015 is as follows: Cash contribution to church $1,250 Tuition paid to a parochial school $2,400 Contribution to a qualified charity $250 Cash contribution to a needy family $100 Value of time donated to relief organization $500 What is the maximum amount that they can use as a deduction for charitable contributions for 2015?
$1,500
Dorothy is a CPA employed by a large accounting firm in San Francisco. In 2015, she paid the following amounts: CPA Society dues $200; one year tax service $800; subscription to the Journal of Taxation $70; subscription to Wine Enthusiast magazine $60; unreimbursed client meals and entertainment $300; and financial advisor fees $300. What is the total of deductible expenses before applying the 2 percent of AGI limitation?
$1,520 $200 + $800 + $70 + $150 + $300 = $1,520. Client meals and entertainment must be reduced by 50 percent and the subscription to Wine Enthusiast magazine is not deductible.
Dr. Doolittle finally finishes medical school, his internship, and takes a job in the wilds of Alaska where he earns $70,000. He has no other income. Since there is no place for him to spend his earnings, he starts to pay down his student loans and pays $5,000 in interest in 2015. How much is Dr. Doolittle's deduction for education loan interest and where does he report it?
$1,667 as a deduction for AGI The deduction for education loan interest is a maximum of $2,500 and for a single person is phased out between AGI of $65,000 to $80,000. Dr. Doolittle's deduction is calculated as follows: ($80,000 - $70,000)/$15,000 x $2,500 = $1,667. The deduction is taken on Page 1 of the Form 1040 as a deduction for AGI.
Robert lives in California and suffers from diabetes and painful leg ulcers. He spends the following amounts on drugs and medications during the year: insulin and insulin supplies $1,200; prescription medications obtained in California $560; prescription medicines obtained in Mexico $350; over-the-counter medications and remedies $295; and medical marijuana obtained legally in California $500. What is Robert's deduction for medicine and drugs before considering other deductions and limitations?
$1,760 Robert may deduct the cost of insulin and insulin supplies and the cost of the prescription medications obtained in California ($1,200 + $560 = $1,760). The medicines obtained in Mexico and the over-the-counter medicines are not deductible. While the medical use of marijuana is legal in California, the cost is not deductible as a medical expense.
Janet and Andrew paid the following amounts during 2015: Interest on automobile loan $1,200 Interest on bank loan (proceeds were used to purchase municipal bonds) $2,000 Qualified home mortgage interest $9,000 Points on the acquisition of their home $1,000 Loan appraisal fee $500 What is the maximum amount they can use as interest expense in calculating itemized deductions for 2015?
$10,000
John is a sole proprietor of a business located on Main Street, Smalltown, U.S.A. His AGI before considering casualty or theft loss is $50,000. This year burglars broke into John's place of business and stole all of his electronic equipment. The equipment had a value of $20,000 and adjusted basis of $15,000. He received insurance reimbursement of $5,000. What is John's theft loss deduction?
$10,000 as a business loss deduction for AGI Since the equipment stolen is business property, the amount of the loss is measured by the adjusted basis of the property. John's loss is the adjusted basis of $15,000 reduced by the insurance reimbursement of $5,000 or $10,000. The loss is fully deductible for AGI. It is not reduced by a floor amount or by an AGI limitation.
Scott is a salesperson for a company which does not have an accountable plan and does not reimburse its employees for out-of-pocket expenses. During 2015, he incurred the following business expenses: business mileage on his personal car 10,000 miles; client meals and entertainment $4,000; airfare $2,100; and lodging $600. His personal expenses include: tax return preparation $400; and investment expense $2,000. Using lessons learned in Chapter Three, and assuming Scott's AGI is $100,000, what is his miscellaneous itemized deduction for 2015?
$10,850 Scott's business miles deduction is 10,000 miles x $.575 $5,750 The meals and entertainment deduction is $4,000 x 50% $2,000 The airfare and lodging are fully deductible $2,700 Total business expense deduction $10,450 His personal deductible miscellaneous expenses are $ 2,400 Total expenses $12,850 Less 2 percent of AGI (.02 x $100,000) 2,000 Miscellaneous deduction $10,850
What is the maximum amount of home equity debt (not acquisition debt) on which interest is fully deductible?
$100,000
Stewart had adjusted gross income of $22,000 in 2015. During the year, he made the following contributions to qualified charities: $7,000 cash 1,000 shares of Able Corporation common stock, acquired in 1980 (cost and fair market value of $5,000) Considering the charitable contribution deduction limitation, what amount can Stewart claim as a deduction for charitable contributions in 2015?
$11,000 $22,000 x 50%
Raymond pays the following taxes during 2015: state income taxes $6,000; state and local sales tax, including tax on purchase of a new boat, $3,588; real estate tax on his personal residence $1,526; real estate taxes on a commercial property he rents out $10,000; and personal property tax on his vehicle of $100, which includes a $25 registration fee and $75 based on the value. What is Raymond's deduction for taxes on his Schedule A?
$11,214 Raymond elects to deduct state income tax because it is higher than the sales tax paid (only relevant if the sales tax deduction is extended in 2015). The real estate tax on the commercial rental property is reported on Schedule E. The personal property tax must be reduced by the amount of the registration fee as fees are not deductible. Raymond's deduction is $6,000 + $1,526 + ($100 - $25) = $7,601
On January 1, 2015, James took out a home equity loan of $100,000, half of which he used to remodel his home and the other half to purchase a new Porsche. His total interest paid on the first mortgage was $9,000 and on the home equity loan $4,000. James also had an investment account with Fidelity where he carried a $50,000 loan to purchase income-producing equities and paid interest of $3,000 on this loan. His account had taxable interest and dividends of $3,000. What is James' interest deduction on Schedule A?
$16,000 James' home mortgage is fully deductible as is the interest on the home equity loan. The investment interest is limited to the net investment income. James' deduction is $9,000 + $4,000 + $3,000 = $16,000.
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 the current year, 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 the current year?
$2,000 ($10,000 - $8,000)
Margo has $2,200 withheld from her wages for state income taxes during 2015. In March of 2015, she paid $400 in additional taxes for her 2014 state tax return. Her state income tax liability for 2015 is $2,700 and she pays the additional $500 when she files her 2015 state tax return in April of 2016. What amount should Margo deduct as an itemized deduction for state income taxes on her 2015 federal income tax return, assuming she elects to deduct state and local income taxes?
$2,600 $2,200 + $400
Mark Zuckerbucks is single with no dependents. His 2015 AGI is $294,500. What is the amount of his deductible personal exemption?
$2,800
Hortense had adjusted gross income in 2015 of $140,000. During the year, her personal yacht was almost completely destroyed in a boating accident. The yacht had: Cost basis, equal to fair market value $99,000 Value after casualt $12,000 Hortense was partially insured for her loss and in 2015 she received a $70,000 insurance settlement. What is Hortense's allowable casualty loss deduction for 2015?
$2,900
For the current tax year, David, a married taxpayer filing a joint return, reported the following: Investment income from interest $24,000 Investment expenses other than interest $3,000 Interest expense on funds borrowed 10 years ago to purchase investment property $70,000 What is the maximum amount that David can deduct in the current year as investment interest expense?
$21,000 The deduction for investment interest is limited to net investment income ($24,000 - $3,000).
John is an employee of ABC Corporation. John travels out of town to negotiate with a supplier and incurs the following expenses: airfare $500; lodging $200; meals and entertainment $200; and incidental expenses $50. ABC Corporation does not have an accountable plan. John's AGI is $30,000. What is his deduction for unreimbursed business expense?
$250 John's airfare, lodging, and incidental expenses are fully deductible. 50 percent of the meals and entertainment expense is deductible. $500 + $200 + $100 + $50 = $850. This total is reduced by 2 percent of AGI, $600, for a miscellaneous deduction of $250.
Barney is single with AGI of $400,000 and itemized deductions of $60,000. His itemized deductions are made up of $30,000 of state income and property taxes, and $30,000 of mortgage interest. What are Barney's total itemized deductions after the phaseout for high-income taxpayers?
$55,747
Lauren had a bad year. Her house was burglarized and the thieves took jewelry with a current value and cost basis of $15,000. Then a hurricane uprooted her neighbor's tree which fell on her car and caused damage of $10,000. Finally, it was discovered that termites had destroyed most of her front porch which was replaced at a cost of $8,000. She received reimbursement for her losses from her insurance company of $5,000, $9,000, and zero respectively. Assuming that Lauren's AGI for the year is $40,000, what is her casualty loss deduction?
$6,800 The stolen jewelry is a loss of $15,000 - $5,000 - $100 = $9,900 The damaged car is a loss of $10,000 - $9,000 - $100 = $ 900 Total loss $10,800 Reduced by 10 percent of AGI 600 Mileage (217 x $.23) $4,000 Casualty loss deduction $ 6,800 The termite destruction of the porch is not considered a casualty loss because it is not sudden or unusual.
Jackie took a $7,000 distribution from her educational savings account and used $6,500 to pay for qualified higher education expenses. The $500 balance was used to purchase new clothes. On the date of the distribution, her educational savings account had a $28,000 balance including $21,000 she had contributed. How much of the $7,000 distribution is tax free?
$6,875 The $6,500 used to pay qualified higher education expenses is tax free. The $500 not used for that is treated partly as return of capital and partly as taxable earnings. $6,500 + ($21,000/$28,000 x $500) = $6,875
Jim and Judy live in Corvallis, Oregon. During the current year, they built a specially designed therapeutic pool in their back yard as prescribed by their physician for Judy's severe arthritis. The pool cost $10,000 and increased the value of their home by $2,000. In addition, Jim and Judy took their motorhome to Arizona during the wet Oregon winters because of Judy's arthritis and to spend time with their grandchildren. The cost of renting a space at The Slabs was $3,000. What is Jim and Judy's medical deduction for these expenditures before considering the AGI limitation?
$8,000
Pat has a dependent daughter and files as head of household. She has AGI of $375,000. What percentage of the $4,000 personal exemption and $4,000 dependency exemption may she deduct on her 2014 income tax return?
26 percent ($375,000-$284,050) / $2,500 = 37 (round up) × 2% = 74% reduction, thus a 26% deduction.
Which of the following is not considered proper substantiation for a charitable contribution?
A Kelley Blue Book estimate of the value of a donated automobile. A taxpayer donating a car to a qualified non-profit organization may not deduct more than what the organization receives on sale of the vehicle. The organization is required to provide the donor with Form 1098-C which states the resale information. The taxpayer is then required to attach the form to his return to claim the deduction.
Which of the following taxes are deductible on Schedule A?
Arizona State income taxes paid in 2015 for the 2014 tax year
Which of the following is true of a Qualified Tuition Program (Section 529 Plan)?
Earnings on the plan assets are not taxable if the money distributed from the plan is used for qualified education expenses.
Which of the following is not deductible as an itemized deduction?
Expenses for moving household goods
Which of the following is not a feature of a Coverdell Education Savings Account?
Contributions cannot be made by an individual with no earned income. There is no requirement that the contributor have earned income. If the parent has AGI which exceeds the limits, he or she may make a gift to the child who is the beneficiary of the educational account, and the child can make the contribution.
Which of the following taxes is not deductible as an itemized deduction?
Federal income tax
Jack and Jill are married and file a joint return. They have AGI of $55,000. During 2015, they paid the following taxes: federal income tax withholding $13,000; state income tax withholding $4,000; Social Security and Medicare tax withholding $3,825; real estate tax on their personal residence $3,000; personal property tax on their automobiles based on value $100; real estate tax on a cottage they own in New England $4,000; and sales tax of $1,875. What is their deduction for taxes on their 2015 federal return?
Federal income tax and Social Security and Medicare taxes are not deductible on the federal return. Their state income tax of $4,000 is higher than their sales tax of $1,875 (relevant only if the sales tax deduction is extended in 2015), so they would elect to deduct state income tax. Their deductible taxes are: State income tax $4,000 Real estate tax on personal residence 3,000 Real estate tax on the cottage 4,000 Personal property tax on their automobiles 100 11,100
Which of the following would not be a deductible charitable contribution?
Free use of a storefront location for a YWCA function - equivalent rent $1,000. Contributions must be in cash or property to be deductible. The value of free use by the charity of the donor's property does not qualify.
Which of the following miscellaneous itemized deductions is not subject to the 2 percent of adjusted gross income limitation?
Gambling losses to the extent of gambling winnings
Which of the following is not an itemized deduction?
IRA contribution deduction
Harvey itemized deductions on his 2014 income tax return. Harvey plans to itemize deductions again in 2015 and the following information is available regarding state and local income taxes: Taxes withheld in 2015 $2,500 Refund received in 2015 of 2014 tax $500 Assessment paid in 2015 of 2013 tax $300 Assuming he elects to deduct state and local income taxes, the above information should be reported by Harvey in his 2015 tax return as:
Itemized deduction for state and local income taxes of $2,800 and income from state and local tax refund of $500
Mary, age 70, has AGI of $45,000. During the year, she incurred the following medical expenses: health insurance $4,200; doctors and dentists $180; glasses $350; prescription drugs $600; and she drove her car 217 miles for medical purposes. Mary suffers from heart disease and during this year had a stair chair lift installed on her doctor's orders. The chair lift cost $6,000 to install and does not increase the value of her home. It has a guaranteed life of 10 years. What is Mary's 2015 medical deduction after the AGI limitation?
Mary's medical expense deduction is computed as follows: Insurance $4,200 Doctors and dentists 180 Glasses 350 Prescription drugs 600 Mileage (217 x $.23) 50 Chair lift 6,000 $11,380 Less .075 x $45,000 -3,375 Deduction $8,005
Roger paid the following interest in 2015. Which is deductible on Schedule A?
Mortgage interest on a second residence.
Which of the following is deductible as a medical expense?
Motorized wheel chair
Which of the following is not a true statement about itemized deductions?
Personal casualty losses are only allowed as itemized deductions if they exceed 20 percent of the taxpayer's AGI. Personal casualty losses are allowed as an itemized deduction if they exceed 10 percent of the taxpayer's AGI and $100 per occurrence.
A difference between a Section 529 Plan and an Educational Savings Account is that:
The maximum annual contribution to an Educational Savings Account is $2,000 which is phased out for high-income individuals. The contributions to a Section 529 Plan may be larger than $2,000 and are not phased out for high-income individuals.
Matthew purchases a new principal residence in the current year 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 the current year.
Which of the following is not a feature of the 2014 higher education expenses deduction (this question considers 2014 information since the deduction had not been extended in 2015 when we went to press) ?
There is no deduction available for married filing jointly taxpayers with modified AGI of $150,000
Which of the following expenses would not be deductible on Schedule A as an employee business expense?
Travel expense to a conference which was repaid by the employer under an accountable plan
Richard is an employee of Bigprofit Corporation which does not have a plan for reimbursing employee expenses. He incurred the following expenses: airfare $600; lodging $300; incidental travel expenses $75; business related meals and entertainment $1,000; and he drove his personal car 4,826 miles for business. Richard has AGI of $50,000. What is Richard's final deduction for business expense and which forms does he use?
$3,250; Form 2106 and Schedule A. Richard's deduction is: Airfare $600 Lodging 300 Incidentals 75 50 percent of meals and entertainment 500 4,826 miles x $.575 2,775 $4,250 Less 2 percent of AGI (.02 x $50,000) -1,000 Final deduction $3,250 The computation to arrive at the $4,250 is made on Form 2106 and the 2 percent of AGI limitation is applied on Schedule A.
Georgina had state income tax withholding during 2015 of $3,907. In July 2015, she received a state income tax refund of $250 for 2014, a year in which she also itemized deductions. Georgina had investments which paid foreign income tax of $370 on dividends she earned. She elected to take the foreign tax credit. Georgina bought her personal residence on March 1, 2015, and in July she paid the property taxes for the entire year (January 1 through December 31, 2015), of $1,000. She drives many miles for her work commute and paid $3,000 in gasoline tax and $200 personal property tax on the value of her vehicle. What is Georgina's deduction for taxes on her 2015 Schedule A?
$4,945 The state income tax refund is reported as income on Page 1 of the Form 1040 and does not reduce state income tax deductible. The foreign tax paid on investment income may be deducted or taken as a credit, but not both. Georgina elected the credit, so the $370 is not deductible on Schedule A. The gasoline tax is not deductible. The real estate tax on the new residence must be allocated to the buyer and seller based on the number of days the property was held. Therefore, Georgina's deduction is 306/365 x $1,000 = $838. She would have received a credit on the settlement for the days she did not own the house which would net against the $1,000 paid. Georgina's deduction is $3,907 + $838 + $200 = $4,945
Elaine is an executive for a large pharmaceutical company and is required to travel to England frequently for business. On January 1, 2015, she bought a residence in North Carolina and a cottage in England. Her acquisition indebtedness is $900,000 for both residences and during 2015 she paid interest of $36,000. In addition, she placed a home equity loan of $150,000 on her North Carolina residence, which she used to buy furniture, a new car, clothing, and travel. The interest relative to the home equity loan was $6,000. Elaine had credit card interest of $3,000 and paid service fees on several accounts of $400. What is Elaine's deduction for interest in 2015?
$40,000 Elaine may deduct the full amount of the mortgage interest on both residences since the total acquisition indebtedness is less than $1,000,000. She may only deduct interest on a home equity loan up to $100,000. The portion of the interest relating to the excess home equity loan of $50,000 is considered consumer interest and not deductible. Elaine's deduction is: $36,000 + ($100,000/$150,000 x $6,000) = $40,000
Louise is a cashier at a supermarket and incurs the following expenses: union dues $100; job-hunting expenses before taking this job $350; safe deposit box for her investments $50; and gambling losses $500. Assuming that Louise's AGI is $30,000, including $400 of gambling winnings, and that she itemizes, what is her miscellaneous deduction?
$400 The items subject to the 2 percent of AGI limitation are union dues, job-hunting expense, and safe deposit box for a total of $500. The 2 percent of AGI limitation is $600, so none of the above items are deductible. However, gambling losses to the extent of gambling winnings $400, may be deducted without applying the 2 percent limitation. Thus, the total miscellaneous deduction is $400.
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.