EA SEE Part I Itemized/Standard Deduction

On which form is mortgage interest paid reported to a taxpayer by the mortgage holder? A. Form W-2 B. Form W-4 C. Form 1098 D. Form 1099

If taxpayer paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, the mortgage holder will send a Form 1098 or similar statement to the taxpayer. The statement for each year should be sent by January 31 of the following year. A copy of this form is also sent to the IRS. Correct Answer: C

Which of the following is generally not deductible as an itemized deduction on Schedule A? A. Home mortgage interest B. Points paid to buy or build a main home C. Mortgage insurance premiums D. Homeowner's insurance premiums

In most cases, a taxpayer can deduct all of his home mortgage interest. Taxpayers treat amounts paid for qualified mortgage insurance as home mortgage interest. Points are certain charges paid by a borrower to obtain a home mortgage. Points are generally deducted ratably over the life of the mortgage, although there are conditions under which points may be deducted fully in the year paid. Homeowner's insurance premiums are not deductible. Correct Answer: D

Mike and Carol have total wages of $74,600 plus interest income of $3,000 and dividends of $2,000. They paid mortgage interest of $7,000, car loan interest of $2,000, mobile home interest of $4,000, personal loan interest of $1,000 and margin interest of $6,000. The amount of interest Mike and Carol deduct on Schedule A is: A. $16,000 B. $13,000 C. $20,000 D. $12,000

Interest for the home mortgage and second (mobile) home is deductible. In addition, $5,000 of the $6,000 investment interest is deductible. $4,000 mobile home + $7,000 mortgage + $5,000 investment interest = $16,000. The investment interest deduction is limited to the amount of investment income ($3,000 + $2,000). Interest on personal or car loans is not deductible. Correct Answer: A

Carla borrowed $100,000 to buy land for investment. Her income sources for the year include: $3,000 interest, $1,000 dividends, and $4,000 royalties. How much of the $5,000 interest expense paid on the land loan can she deduct this year? A. $8,000 B. $4,000 C. $3,000 D. $5,000

Interest on loans to buy property held for investment is investment interest. The deduction for investment interest is limited to the taxpayer's net investment income. If not used, carry the amount forward into the next year. Interest incurred to produce tax-exempt income is not deductible. Net investment income is $8,000; therefore, all of the $5,000 interest expense is deductible. Correct Answer: D

Mike owns a house in the country but for all of 2013 lived with his daughter in an apartment in the city. He let his son Greg live in the country house. Greg made the payments on the mortgage his father owes on the house. Who is entitled to the tax deductions for the 2013 mortgage interest paid? A. Greg because he made the payments B. Mike because he still owns the property and is liable for the payments C. Neither because Mike did not make the payments and Greg does not own the house D. Both take a deduction with each using one-half of the interest paid

Mike still owns the property and is responsible for the mortgage debt. Greg is not. Therefore, Mike is the only person entitled to the deduction. Greg's payments of Mike's mortgage is income constructively received by Mike. The payments are rental income for Mike to report on Schedule E. He may deduct rental expenses, including interest on Schedule E. Greg is not entitled to take the deduction because he is not a beneficial owner of the property, nor legally liable to make payments. Additional comment: If Greg is a part owner (but not on the mortgage) he may claim a deduction for interest as a beneficial owner under the rules established in 26 C.F.R. 1.163-1(b). Under these rules, interest paid by a taxpayer on a mortgage is deductible if the taxpayer is a legal or equitable owner, even if the taxpayer is not directly liable for the mortgage. Correct Answer: B

Bill and Jane sold their home on June 16th. Through May 31, they made home mortgage interest payments of $1,250. The settlement sheet for the sale of the home showed $100 interest for the 15 days from June 1-15. How much can Bill and Jane deduct for home mortgage interest, assuming they meet all other qualifications? A. $1,150 B. $1,250 C. $1,300 D. $1,350

Taxpayers who sell their home can deduct the home mortgage interest (subject to any limits that apply) paid up to, but not including the date of sale. Therefore, Bill and Jane can deduct $1,350 ($1,250 + $100). Correct Answer: D

When Jack paid off his mortgage early, he was required to pay a prepayment penalty. Is the penalty deductible as mortgage interest? A. Yes B. Yes, if the penalty was not for a specific service performed or cost incurred in connection with the mortgage. C. Yes, if the total value of the mortgage is $1 million or less D. No

A taxpayer can deduct a prepayment penalty as home mortgage interest if the penalty is not for a specific service performed or cost incurred in connection with the mortgage loan. Correct Answer: B

Are late payment charges on mortgage payments deductible as mortgage interest? A. Yes B. Yes, if it was not for a specific service performed in connection with the mortgage. C. Yes, if the total value of the mortgage is $1 million or less D. No

A taxpayer can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with the mortgage loan. Correct Answer: B

How much of the following interest expense is deductible on Schedule A? The taxpayer is reporting $1,500 in investment income. $1,200 interest paid on a loan used to purchase a vacant lot held for investment. $750 interest paid on a qualifying student loan. $2,700 credit card interest on an advance used to make a down payment on a new home. $625 interest on a loan used to invest in tax-free bonds. A. $1,200 B. $1,950 C. $4,650 D. $3,900

A taxpayer may claim a deduction for investment interest paid on money borrowed for investment. This deduction is limited to the amount of investment income. Interest on a loan to purchase tax-free bonds is not deductible, as the income when earned is tax-free. None of the other items are deductible. Correct Answer: A

Chester and Mary, a married couple, have interest and dividends (investment income) of $14,000. They have margin interest of $16,000, home mortgage interest of $12,000, equity loan interest of $3,000 on a $50,000 loan, credit card interest of $4,500 and automobile loan interest of $2,000. They have no tax-exempt investments. What amount can they take as interest deductions after limitations? A. $29,000. B. $52,500. C. $31,000. D. $37,500.

Home mortgage and equity loan interest are fully deductible. $14,000 of the $16,000 margin interest is deductible (investment interest deductible up to the amount of taxable income received from investments) per Pub 529. Interest is not deductible when paid for credit cards or an auto loan. Correct Answer: A

Brad and Angelina are both employed by Universal Corporation. Her salary is $65,000 and his is $25,000. During the year they made the following interest payments: $18,000 for the mortgage on their home, $3,000 for Brad's car loan, $5,000 for a home equity loan, and $14,000 on the margin account at their securities brokerage. In addition to their salaries, they had interest income of $5,500 and dividend income of $1,000. What is the amount of interest that Brad and Angelina deduct on Schedule A? A. $27,000 B. $29,500 C. $34,500 D. $24,500

Home mortgage and home equity interest are fully deductible. Interest on the car loan is NOT deductible. The deduction for the margin interest is limited to investment income. The total amount of deductible interest is: $18,000 mortgage $5,000 home equity loan $6,500 margin interest (limited to the amount of investment income)$29,500 Correct Answer: B

Jean and Robert have total wages of $95,000 plus interest income of $3,000 and dividends of $2,000. They paid mortgage interest of $7,000, car loan interest of $2,000, mobile home interest of $4,000, personal loan interest of $1,000 and margin interest of $6,000. How much interest can Jean and Robert deduct on Schedule A? A. $16,000 B. $20,000 C. $12,000 D. $13,000

Home mortgage and second (mobile) home mortgage interest are deductible, as is $5,000 of the $6,000 investment interest (investment interest deductible up to the amount of taxable income received from the investment) per Pub 529. Interest on a personal or car loan is not deductible. Correct Answer: A

Donald has been divorced for several years. He failed to pay his alimony and child support payments to Marla. The court ordered him to pay $1,500 as interest on the back alimony and support payments. In the same year, he paid interest of $1,500 on a personal loan, $2,500 on his credit card balance, $3,000 on a home equity loan, $10,000 on his mortgage, and $2,500 on a loan for a new piano. Donald's deductible interest on his tax return is: A. $15,500 B. $13,000 C. $18,000 D. $19,500

Home mortgage interest and home equity interest are deductible (Schedule A). All other interest items are personal debt interest and are not deductible anywhere on Form 1040 or any attachment to Form 1040. $10,000 mortgage $3,000 home equity loan$13,000 deductible interest Correct Answer: B

Johnny has been divorced for four years. He failed to make his alimony and support payments. The court ordered him to pay $1,500 as interest on the back alimony and support payments. He paid interest of $1,000 on a car loan, $2,500 on his outstanding credit card balance, $6,000 on a home equity loan and $10,000 on his mortgage. Other interest payments amounted to $2,500 on various appliance loan payments. How much is Johnny's deductible interest? A. $18,500 B. $16,000 C. $23,500 D. $17,500

Home mortgage interest and home equity interest are deductible (Schedule A). All other interest items are personal debt interest and are not deductible anywhere on Form 1040 or any attachment to Form 1040. Correct Answer: B

What is the AGI limit for deducting qualified mortgage insurance premiums as an itemized deduction on Schedule A? A. $100,000 B. The deduction phases out for AGI between $100,000 and $109,000 C. $169,000 D. There is no AGI limit for this deduction

If a taxpayer's adjusted gross income (AGI) is more than $100,000, the amount of mortgage insurance premiums that are otherwise deductible is reduced. The amount of premiums which are deductible phases out until AGI reaches $109,000. If the taxpayer's AGI is more than $109,000, the mortgage insurance premiums cannot be deducted. Correct Answer: B

For which of the following mortgages is mortgage interest not fully deductible? A. A mortgage taken out on or before October 13, 1987. B. A mortgage for $1,200,000 taken out to buy a new home, after October 13, 1987. C. A mortgage for $400,000 taken out to improve a home. D. A home equity mortgage for $100,000.

If all of the taxpayer's mortgages fit into one or more of the following three categories at all time during the year, he can deduct all of the interest on those mortgages: Mortgages taken out on or before October 13, 1987 Mortgages taken out after October 13, 1987, to buy, build or improve a home, but only if these mortgages plus any in the first category totaled $1 million or less. Mortgages taken out after October 13, 1987, other than to buy, build or improve a home, totaling $100,000 or less. Correct Answer: B

Which of the following is not a condition for deducting home mortgage interest? A. The taxpayer must have an ownership interest in the home that secures the interest. B. The taxpayer must own and use the home in 2 of the 5 years prior to taking the deduction. C. The taxpayer must be legally liable for the mortgage loan. D. There must be a true debtor-creditor relationship between the taxpayer and the lender.

Mortgage interest is deductible if all of the following conditions exist: The taxpayer files Form 1040 and itemizes deductions on Schedule A The taxpayer is legally liable for the loan There is a true debtor-creditor relationship between the taxpayer and the lender The taxpayer has an ownership interest in the qualified home that secures the mortgage The ownership and use tests are requirements for the exclusion of gain from the sale of a home, not the mortgage interest deduction. Correct Answer: B

George had the following income and expenses: Interest and dividend income of $8,000 Gross wages of $100,000 Margin interest of $10,000 Mortgage interest of $6,000 Interest on a mobile home used as a second home $3,000. Credit card interest of $2,000. How much interest can George deduct on Schedule A? A. $21,000. B. $18,000. C. $17,000. D. $19,000.

Mortgage interest on a main or second home is deductible. Interest on loans to buy property held for investment is investment interest. The deduction for investment interest (margin) is limited to the taxpayer's net investment income. Carry forward unused investment interest into the next year. Interest incurred to produce tax-exempt income is not deductible. Credit card interest is personal interest, and not deductible. $6,000 Mortgage $3,000 Second Home $8,000 Margin Interest (limited to interest income)$17,000 Total Deductible Interest Correct Answer: C

Matt paid interest as follows: $100 on his personal credit card. $200 on funds borrowed in order to purchase $6,000 in tax-exempt securities. $500 interest on his personal car loan. He does not use his car for business. $10,000 on his home mortgage. What is the amount of Matt's deductible interest? A. $17,400 B. $10,600 C. $10,000 D. $10,800

Only the home mortgage interest is deductible. The remainder is personal interest, and is not deductible Correct Answer: C

If a taxpayer sells his home during the tax year, which home mortgage interest can he deduct (assuming he meets all other qualifications)? A. Interest paid up to the last regularly scheduled mortgage payment B. Interest paid up to, but not including, the date of sale C. Interest paid up to and including the date of sale D. All interest paid during the year by both seller and buyer

Taxpayers who sell their home can deduct the home mortgage interest (subject to any limits that apply) paid up to, but not including the date of sale. If the sale occurs in the middle of a month, the amount of interest paid in that month is usually shown on the settlement sheet for the sale of the home. Correct Answer: B

Warren had investment income of $15,000 in 2013. He paid interest of $12,000 on a loan to purchase 10 acres of land he holds for investment, $6,575 on a personal loan, $2,700 for a cash advance on a credit card to make improvements to his primary residence, and $625 for a loan used to invest in tax-free bonds. How much interest expense does Warren deduct on Schedule A before limitations? A. $12,000 B. $18,575 C. $14,700 D. $12,625

The Tax Relief Act of 1986 made several significant changes to the Code. One of the more notable changes was the elimination of all personal interest deductions. A person who uses their credit card for business purposes may exclude the business portion but all other credit card charges and interest are considered personal, even if the taxpayer can prove that the fund were used for home improvements. This question asks how much interest expense can Warren deduct on Schedule A before limitations. The amount of investment interest Warren may deduct is limited to his investment income. He had investment income of $15,000, therefore he is able to deduct the $12,000 he paid on the loan to purchase 10 acres of land. The interest of $6,575 he paid on a personal loan is not deductible. He also is unable to deduct the credit card interest paid for a cash advance to make improvements to his residence. Interest paid on a loan where the proceeds were used to buy tax free bonds is not deductible. Correct Answer: A

Which of the following is not a factor in determining the amount of deductible home mortgage interest? A. The date of the mortgage B. The amount of the mortgage C. The size of the home which secures the mortgage D. How the taxpayer uses the mortgage proceeds

The amount a taxpayer can deduct depends on the date of the mortgage, the amount of the mortgage, and how he uses the mortgage proceeds. The size of the home which secures the mortgage is not a factor. If all of the mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages: Mortgages taken out on or before October 13, 1987 Mortgages taken out after October 13, 1987, to buy, build or improve a home, but only if these mortgages plus any in the first category totaled $1 million or less. Mortgages taken out after October 13, 1987, other than to buy, build or improve a home, totaling $100,000 or less. Correct Answer: C

Earl took out a mortgage for $250,000 to purchase his home in 2003. He filed as single for 2013. In April 2013, when the home had a fair market value of $430,000, Earl took out a home equity loan for $140,000. He used the proceeds as follows: 1. $90,000 for home improvements 2. $30,000 for payment of credit card debt 3. $20,000 for purchase of securities which produce tax-free income. How much of the $140,000 loan would produce deductible mortgage interest in 2013? A. $- 0 - B. $90,000 C. $120,000 D. $140,000

This is a mixed-use mortgage. The $90,000 for home improvements produces deductible interest as it is considered home acquisition debt. A taxpayer may deduct interest paid on home acquisition debt to buy, build, or improve a qualified home (main home or second home). To receive a full deduction the mortgages must total $1,000,000 or less. Interest on home equity debt (mortgages taken other than to buy, build, or improve a home) is also deductible, but only on amounts of up to $100,000. The $30,000 payment for credit card debt is considered home equity debt; however, $20,000 for the purchase of tax-free securities is not. You cannot deduct the home mortgage interest if using the proceeds of the mortgage to buy securities that produce tax-free income. Correct Answer: C

Which of the following would disqualify points from being fully deductible in the year paid? A. The points were computed as a percentage of the amount of the mortgage B. The loan proceeds were used to purchase a second home C. The payment of points is common in your area D. The points are clearly stated on the settlement statement

To receive a current deduction for points they must be used to buy or build a main home. Amortize points on a second home (or to refinance an existing loan) over the life of the loan Correct Answer: B

Elroy paid points to obtain a mortgage when he purchased his home in 2013. Under which circumstance are the points not fully deductible? A. The points are not clearly stated on the settlement statement. B. Paying points is an established business practice in the area where the loan was made. C. The mortgage is for the purchase of a primary residence. D. The points are computed as a percentage of the amount of the mortgage.

To receive a current deduction for points they must be used to buy or build a main home. The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's. Correct Answer: A

Which of the following is considered a qualified home for purposes of the home mortgage interest deduction? A. A second home B. A condominium C. A home you in which you live for half the year and rent to others for the other half D. All of the above

To take the home mortgage interest deduction, the mortgage must be secured by a main home or second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat or similar property that has sleeping, cooking and toilet facilities. Correct Answer: D