Income Tax Preparation Chapter 5 Itemized Deductions

Raquel, who works in medical sales, drives her own vehicle to various locations for client sales meetings. Her employer reimburses her $400 each month for various business expenses and does not expect Raquel to provide proof of her expenses. Her employer included this $4,800 reimbursement in Raquel's 2021 W-2 as part of her wages. In 2021, Raquel incurred $3,000 in transportation expense, $1,000 in parking and tolls expense, $1,800 in car repair expense, and $600 for expenses while attending a professional association convention. Assume that Raquel uses the vehicle for business purposes only and that she maintains adequate documentation to support all of these expenditures. What amount is Raquel entitled to deduct on her Schedule A for other itemized deductions?

$0 because employee expenses are no longer deductible as an itemized deduction. (Under the Tax Cuts and Jobs Act of 2017, employee expenses are no longer deductible as an itemized deduction.)

True or false: Health insurance premiums are always 100% deductible as a medical expense.

False

True or false: No drugs obtained from outside the US (with or without a prescription) can be deductible on the US Federal Tax Return.

False

True or false: Self-employment tax is deductible as an itemized deduction along with real estate taxes and state income tax.

False

True or false: A taxpayer may take a combination of the deduction and tax credit for foreign taxes.

False (Reason: A taxpayer must choose between the deduction or the tax credit for foreign taxes.)

In 2021, Amelia's pleasure boat that she purchased in 2014 for $49,200 was destroyed by a hurricane in a part of Florida that was declared a Federal Disaster Area. Her loss was not totally covered by her insurance. On what form(s) will Amelia report this loss?

Form 4684, Casualties and Thefts and Schedule A, Itemized Deductions.

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

Interest on credit cards used to purchase furnishing for a personal residence

Which of the following statements related to investment interest expense is incorrect?

Interest on loans to purchase land held for investment is NOT deductible.

In 2021, the president of the United States declared a federal disaster due to brush fires in the Southwest. Lisa lives in that area and lost her home in the fires. What choice does she have regarding when she can claim the loss on her tax return?

It may be claimed in 2020 or 2021. (The presidential declaration of a federal disaster area enables the taxpayer to deduct the loss as well as allowing her to deduct either in the previous year, to provide a more immediate benefit, or in the current year.)

Lance paid $21,000 for seven acres of land six years ago. During the current year, Lance donated the land to his church. An appraisal of the land determined that the fair market value of the land is $30,000. Which of the following statements is true concerning the donation of land?

Lance will be able to deduct $30,000 as a charitable contribution.

Which of the following donations will qualify as a deductible charitable contribution?

Land donated to a public university (Reasons: The donation must be made to a qualified charitable organization, The value of one's time is not deductible, Political and campaign contributions are not deductible.)

During 2021, Raul incurred and paid the following expenses: Prescription drugs $ 470 Vitamins and over-the-counter cold remedies 130 Doctor and dentist visits 700 Health club fee 250 Hair Transplant Surgery 2,400 What is the total amount of medical expenses (before considering the limitation based on AGI) that would enter into the calculation of itemized deductions for Raul's 2021 income tax return?

$1,170 ($470 + $700 = $1,170, Deductible medical expenses are those that are doctor-directed and do not include optional treatments for the maintenance of general health and appearance. Personal expenditures that are not prescribed, such as health club memberships, are not deductible.)

The total loss from each separate casualty from Federally Declared Disaster Areas during the year is reduced by a $___ floor and the combined losses from all casualties for the year is reduced by %___ of AGI.

$100, 10%

Jinhee purchased a ticket to a concert to raise money for the local university. The ticket cost $375, but the normal cost of a ticket to this concert is $105. How much is deductible as a charitable contribution?

$270 (Only $270 is deductible - the excess of the amount over the FMV of the goods or services received ($375 − $105 value of ticket). The rationale for only $270 being deductible is that the $105 value of the ticket represents a consumed item and therefore has no element of a gift.)

Leslie and Jason, who are married filing jointly, paid the following expenses during 2021: Interest on a car loan $ 400 Interest on lending institution loan (used to purchase municipal bonds) 4,500 Interest on home mortgage (home mortgage principal is less than $750,000) 3,200 : What is the maximum amount that they can use in calculating itemized deductions for 2021?

$3,200 (The $4,500 interest on the loan to purchase municipal bonds is not deductible because the interest earned from the bonds is not taxable. Investment interest expense is deductible only to the extent of (taxable) investment income. This is an illustration of the "Tax Benefit Rule".)

April had an adjusted gross income of $50,000 last year. During the year, a flood damaged her home in a federally declared disaster area. Since she didn't live in a flood plain, she did not have flood insurance on her home. She sustained damage to her house and furnishings in the amount of $8,500. In a separate event, she discovered that a pair of gold earrings were stolen when she was on a business trip. The earrings were valued at $600. What is the total amount of April's deductible loss after all limitations have been applied?

$3,400 (8,500 - 5,000 (10% of 50,000) = 3,500 - 100 = 3,400)

Homeowners may deduct interest on up to $___ of acquisition indebtedness on up to two personal residences.

$750,000

How, if at all, may a taxpayer report foreign taxes on a tax return? (check all that may apply)

-Deduct on schedule A -Take a credit on Form 1116

Which of the following types of taxes may be deducted from AGI as itemized deductions? (Check all that apply.)

-Personal property tax on the value of a boat -Real estate taxes on property held for investment -State and local income taxes -Real estate taxes on a primary residence -Personal property tax on the value of a car

Which of the following are deductible? (Check all that apply.)

-Prescription birth control pills -Prescription nicotine patches

Taxpayers traveling for the primary purpose of receiving essential and deductible medical care may deduct some or all of the costs of ___ and ___.

-lodging -transportation

The only types of personal interest still available as a deduction are ___ interest and ___ interest.

-mortgage -investment

Randy had an adjusted gross income of $70,000 in the current year. His car was destroyed in a hurricane that was in a Federally Declared Disaster Area during the year. His basis in the car was $25,000, but its fair market value prior to the accident was only $18,000. The car was a total loss. He did not have collision coverage, so he did not receive any insurance reimbursement for the accident. Randy's deductible tax loss for the casualty after all applicable floor limitations is $___.

10,900 (18,000 - 7,000 (10% of 70,000) = 11,000 - 100 = 10,900)

How much of the cost of long-term care (nursing home) is deductible if an individual's stay is primarily related to medical reasons?

100% deductible

Gary incurred $4,200 in qualified medical expenses. His AGI was $50,000. Gary will be able to deduct $___ as an itemized deduction for medical expenses.

450 (50,000 x 7.5% = 3,750, 4,200 - 3,750 = 450)

Which of the following statements is not true regarding documentation requirements for charitable contributions? -A noncash contribution of less than $250 must be supported by a receipt or other written acknowledgment from the charitable organization. -A deduction of more than $5,000 for one property item generally requires that a written appraisal be obtained and attached to the return. -If the total deduction for all noncash contributions for the year is more than $500, Section A of Form 8283, Noncash Charitable Contributions, must be completed. -A contribution charged to a credit card is a noncash contribution for purposes of documentation requirements.

A contribution charged to a credit card is considered a cash contribution.

During 2021, Raul incurred and paid the following expenses: Prescription drugs $ 450 Vitamins and over-the-counter cold remedies 130 Doctor and dentist visits 630 Health club fee 240 Hair Transplant Surgery 2,420 What is the total amount of medical expenses (before considering the limitation based on AGI) that would enter into the calculation of itemized deductions for Raul's 2021 income tax return?

$1,080 ($450 + $630 = $1,080, Deductible medical expenses are those that are doctor-directed and do not include optional treatments for the maintenance of general health and appearance. Personal expenditures that are not prescribed, such as health club memberships, are not deductible.)

Beth pays $500 of real estate taxes during the year related to her personal residence. Where will she report this cost, if anywhere, on her tax return?

Schedule A

Beth pays $500 of real estate taxes during the year related to her rental property. Where will she report this cost, if anywhere, on her tax return?

Schedule E

Which of the following statements is incorrect regarding travel for medical reasons?

The cost of meals is deductible if required to be away from home overnight.

Which of the following is true concerning the deduction for qualified medical expenses?

The expenses must be reduced by 7.5% of AGI

Certain contributions of capital gain property do not qualify for a fair market value deduction. Which of the following characteristics of the contribution will cause the asset to not qualify for a fair market value deduction?

The tangible personal property donated is unrelated to the charity's operations.

Which of the following terms does not describe a casualty that could be deductible for tax purposes?

Weakened

In general, when contributing property to charity, taxpayers are allowed to deduct the fair market value of appreciated ___ ___ property on the date of the donation.

capital gains

A(n) ___ ___ is defined as a loss from a sudden, unexpected, or unusual event such as a fire, storm, or shipwreck.

casualty loss

For 2021, the deduction by a taxpayer for investment interest expense is:

limited to the taxpayer's net investment income for 2021. (Net investment interest income is gross investment interest income less deductible investment expenses.)

The deduction of investment interest is limited to a taxpayer's ___ ___ ___.

net investment income

The majority of itemized deductions are:

personal living expenses. (These relate to such items as medical expenses, state and local taxes, charitable deductions and allowable personal casualty losses.)

Donations to ______ organizations are not deductible for federal income tax purposes.

political

Taxpayers are allowed to deduct charitable contributions of cash and ___ to qualified domestic charitable organizations.

property

If the state tax payments that were deducted resulted in the taxpayer receiving a refund in the following year, the state tax refund must be included as taxable income according to the ___ ___ rule.

tax benefit

When determining the amount of the tax loss from any specific casualty from a Federally Declared Disaster Area, the loss is the lesser of the decline in value of the property or the

taxpayer's tax basis in the damaged asset. (Reason: When determining the amount of the tax loss from any specific casualty event or theft, the loss is the lesser of the decline in value of the property or the taxpayer's tax basis in the damaged or stolen asset.)

Itemized deductions are taken when:

they are higher than the standard deduction.

If a taxpayer uses a standard deduction and receives a tax refund, the taxpayer

will not have to include any of the refund in their taxable income for the next year.

For 2021, Perla, who is single and 55 years of age, had AGI of $51,000. During the year, she incurred and paid the following medical costs: Use Insurance for Medical Care or Long-Term Care Doctor and dentist fees $ 3,200 Prescription medicines 600 Medical care insurance premiums (paid for with after-tax funds) 400 Long-term care insurance premiums 2,080 Hearing aid 100 What amount can Perla take as a medical expense deduction (after the AGI limitation) for her 2021 tax return?

$2,165 ($3,200 + $600 + $400 + $1,690 (2021 amount for more than 50 but less than 60 yrs old, look this up) + $100 = $5,990 − $3,825 (51,000 x 7.5%, this is the tax deduction for medical expenses) = $2,165. All the expenses listed above are deductible; however, the deduction for the long-term care insurance premiums is limited by Perla's age.)

Isabella pays $500 each month in after tax dollars for health insurance premiums. She is not self-employed. During the current year, she also incurred $200 in doctor bills and $50 in over-the-counter medications. Her AGI is $45,000. What amount will she be able to deduct as an itemized deduction after the AGI floor is applied?

$2,825 (Reason: [($500 x 12) + $200] = $6200; $6200 - ($45,000 x 0.075) = $2,825.)

Jenny and Jerry have a home with a fair market value of $625,000. They borrowed $400,000 ten years ago to purchase the home. They currently owe $250,000 on the acquisition loan. They recently borrowed $110,000 on a home-equity loan. The proceeds were used to purchase a car, take a vacation, and redecorate their home. What is the maximum amount of their indebtedness that can generate deductible interest in the current year?

$250,000

Nancy donated an antique desk to her church. Nancy paid $800 for the desk six years ago. An appraisal of the desk reported the fair market value to be $1,000. The church officers decided to donate the desk to a family whose home had been destroyed in a fire. Nancy will be able to deduct $___ for her contribution.

$800

Assume the taxpayer does NOT wish to contribute to the Presidential Election Fund, unless otherwise stated in the problem. In addition, the taxpayers did NOT receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency during the year. Elise Dubois is single, has no dependents, and lives at 55855 Ridge Drive in Lafayette, LA 70593. Her social security number is 412-34-5670 (date of birth 3/15/1981). Her W-2 contained the following information: Wages (box 1) =$ 48,965.25 Federal W/H (box 2) =$ 5,024.38 Social security wages (box 3) =$ 48,965.25 Social security W/H (box 4) =$ 3,035.85 Medicare wages (box 5) =$ 48,965.25 Medicare W/H (box 6) =$ 710.00 She has gambling winnings of $1,050 and the following expenses: State income taxes $ 3,200 Real estate property taxes 1,150 Medical expenses 6,400 Charitable cash contributions(no single contribution was more than $250) 450 Mortgage interest expense 5,605 Personal property taxes 720 Gambling losses 1,235 Prepare a Form 1040 with a Schedule 1 and Schedule A for Elise using any appropriate worksheets. Use the appropriate Tax Tables. Note: Input all the values as positive numbers. Round your final answers to the nearest whole dollar amount. Instructions can be found on certain cells within the forms.

*Fill out basic info Line 1. 48,965 8. 1,050 (Total other income in this case gambling income, on Schedule 1 line 10) 9. 50,015 (48,965 + 1,050) 11. 50,015 12a. 14,824 (Total itemized deductions from Schedule A line 17) 12c. 14,824 14. 14,824 15. 35,191 (50,015 - 14,824) 16. 4,022 (2021 Tax Table amount for 35,191) 18. 4,022 22. 4,022 24. 4,022 25a. 5,024 (Federal W/H) 25d. 5,024 33. 5,024 34. 1,002 (5,024 - 4,022) 35a. 1,002 Schedule 1: 8b. 1,050 (Gambling Income) 9. 1,050 10. 1,050 Schedule A: 1. 6,400 2. 50,015 3. 3,751 (50,015 x 7.5%) 4. 2,649 (6,400 - 3,751) 5a. 3,200 5b. 1,150 5c. 720 5d. 5,070 (add 5a - 5c) 5e. 5,070 7. 5,070 8a. 5,605 10. 5,605 11. 450 14. 450 16. Gambling Losses: 1,050 17. 14,824 (add lines 4, 7, 10, 14, 16, everything on the right column) *Everything else left blank or zero

Maya, who had significant itemized deductions for 2021 and therefore was eligible to use Schedule A, purchased a new vehicle in 2021 for $50,000 with a state sales tax of 10%. The allocated deduction amount for other purchases made by Maya throughout the year, using the IRS state and local sales tax tables, would be $750. She also paid state income taxes of $4,500 for 2021. Maya's best option to legally maximize her tax savings in 2021, assuming she was under the $10,000 limit for state and local taxes, would be to:

deduct her total amount of allowable state sales tax deduction on Schedule A. (When taxpayers elect to use the sales tax tables to determine the amount of their sales tax deduction, they are permitted to add to that amount the actual amount of sales tax on motor vehicles, boats, and homes, with certain limitations.)

After determining the loss on each of the assets affected by the casualty, the taxpayer must further reduce the loss by any ___ ___ the individual is eligible to receive.

insurance reimbursement