Tax II Ch 10 Study Tools

Cartman and Kenny are equal owners in Mountain Corporation. On July 1, 2017, each loans the corporation $20,000 at annual interest of 10 percent. Cartman and Kenny are brothers. Both shareholders are on the cash method of accounting, while Mountain Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2018, Mountain repays the loans of $40,000 together with the specified interest of $4,000. How much of the interest can Mountain Corporation deduct in 2017?

0 Mountain Corporation can deduct interest expense of $4,000 in 2018 and $0 in 2017. Under § 267, Cartman and Kenny are regarded as related to the corporation. Consequently, the deductibility must await actual payment (in 2018).

Jeremy and Alison, married taxpayers, took out a mortgage on their home for $350,000 in 1994. In May of this year, when the home had a fair market value of $450,000 and they owed $250,000 on the mortgage, they took out a home equity loan for $220,000. They used the funds to purchase a single engine airplane to be used for recreational travel purposes. What is the maximum amount of debt on which they can deduct home equity interest?

100,000 . Interest is deductible only on the portion of the $220,000 home equity loan that does not exceed the lesser of: The fair market value of the residence, reduced by the acquisition indebtedness ($450,000 FMV - $250,000 acquisition indebtedness = $200,000). $100,000 ($50,000 for married persons filing separate returns). Of the $220,000 home equity loan, interest on $100,000 is deductible as home equity interest.

Riley had an accident while rock climbing on vacation. She sustained facial injuries that required cosmetic surgery. While having the surgery done to restore her appearance, she had additional surgery done to reshape her nose, which was not injured in the accident. The surgery to restore her appearance cost $12,000, and the surgery to reshape her nose cost $5,000. How much of Riley's surgical fees will qualify as a deductible medical expense (before application of the 10 percent limitation)?

12,000 Cosmetic surgery is necessary (and therefore deductible) when it ameliorates (1) a deformity arising from a congenital abnormality, (2) a personal injury, or (3) a disfiguring disease. The $12,000 cost incurred in connection with the restorative surgery (required as a result of the accident) is deductible because the surgery was necessary. Amounts paid for the unnecessary cosmetic surgery ($5,000 for reshaping the nose) are not deductible as a medical expense.

In Adelaide County, the real property tax year is the calendar year. The real property tax becomes a personal liability of the owner of real property on January 1 in the current real property tax year, 2017. The tax is payable on June 1, 2017. On April 30, 2017, Julio sells his house to Victoria for $230,000. On June 1, 2017, Victoria pays the entire real estate tax of $7,300 for the year ending December 31, 2017. How much of the property taxes may Julio deduct?

2,380 $2,380. Under § 164(d), 119/365 (January 1-April 29, 2017) × $7,300 = $2,380 is apportioned to Julio.

Juan was permanently disabled in a car accident and was unable to climb the stairs to reach his second-floor bedroom. His physician advised him to add a first-floor bedroom to his home. The cost of constructing the room was $28,000. The increase in the value of the residence as a result of the room addition was determined to be $12,000. In addition, Juan paid the contractor $5,000 to construct an entrance ramp to his home and $7,000 to widen the hallways to accommodate his wheelchair. Juan's AGI for the year was $80,000. How much of these expenditures can Juan deduct as a medical expense?

20,000 A capital improvement that ordinarily would not have a medical purpose qualifies as a medical expense if it is directly related to prescribed medical care and is deductible to the extent that the expenditure exceeds the increase in value of the related property. Examples of such improvements include dust elimination systems, elevators, and a car specially designed for a wheelchair-bound taxpayer. Juan's medical expense related to the room addition is $16,000 ($28,000 - $12,000). The full cost of home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. Qualifying costs include expenditures for constructing entrance and exit ramps to the residence, widening hallways and doorways to accommodate wheelchairs, installing support bars and railings in bathrooms and other rooms, and adjusting electrical outlets and fixtures. These expenditures are subject to the 10 percent floor only, and the increase in the home's value is deemed to be zero. Juan's medical expense related to the ramp and hallways is $12,000 ($5,000 + $7,000). Therefore, Juan's medical expense deduction is as follows: Qualifying medical expenses ($16,000 + $12,000) $28,000 Less: 10% × $80,000 (8,000) Deductible medical expenses $20,000

In 2017, Penelope makes the following donations to qualified charitable organizations: Basis Fair Market Value Inventory held for resale in Penelope's business (a sole proprietorship) $4,000 $ 3,600 Stock in Sparrow, Inc. held as an investment (acquired two years ago) 8,000 20,000 Comic book collection held as an investment (acquired six years ago) 2,000 10,000 The Sparrow stock and the inventory were given to Penelope's church, and the comic book collection was given to the United Way. Both donees promptly sold the property for the stated fair market value. Disregarding percentage limitations, Penelope's charitable contribution deduction for 2017 is:

25,600 Inventory is ordinary income property, but the fair market value ($3,600) must be used if lower than the basis ($4,000). Stock is intangible property and is not subject to the tangible personalty rules. Since a sale of the Sparrow stock would have yielded a long-term capital gain, the full fair market value qualifies for the deduction ($20,000). The comic book collection comes under the exception relating to tangible property put to an unrelated use, and the adjusted basis ($2,000) must be used. Thus, $3,600 + $20,000 + $2,000 = $25,600.

Lorraine, James's daughter who would otherwise qualify as his dependent, filed a joint return with her husband Larry. James, who is age 66 and had AGI of $100,000, paid the following medical expenses: Laser surgery to correct Lorraine's vision problem $ 2,600 Lorraine's prescribed medicines 800 James's doctor and dentist bills 7,400 Prescription drugs for James 1,200 Contact lenses for James 500 Total $12,500 James has a medical expense deduction of:

5,000 James may claim the medical expenses he paid on behalf of Lorraine, even though Lorraine cannot be claimed as his dependent. This exception applies if the gross income and/or joint return tests are the only reasons why a person cannot be otherwise claimed as a dependent. The contact lenses qualify. His deduction is $5,000 [$12,500 - ($100,000 × 7.5%)].

Matthew pays $8,000 this year to become a charter member of Central University's Athletic Council. The membership ensures that Matthew will receive choice seating at all of Central's home basketball games. In addition, Matthew pays $2,200 (the regular retail price) for season tickets for himself and his wife. For these items, how much qualifies as a charitable contribution?

6,400 Under the exception to the tangible-benefit-received rule, Matthew can deduct $6,400 (80% of $8,000) of the charter membership fee to Central University's Athletic Council. The amount Matthew pays ($2,200) to purchase tickets at the regular price is not deductible as a charitable contribution.

During 2017, Bradley, a self-employed individual, paid the following amounts: Real estate tax on residence $3,900 State income tax 1,400 Real estate taxes on land in Canada (held as an investment) 900 State sales taxes 1,950 State occupational license fee 250 Personal property tax on value of his automobile 200 What amount can Bradley claim as taxes in itemizing deductions from AGI?

6,950 State sales taxes ($1,950) are more than the state income tax ($1,400) so Bradley will choose to deduct the sales tax rather than the state income tax. The state occupational license fee ($250) is deductible for AGI as a business expense. The state sales taxes ($1,950), the personal property tax on the auto ($200), and the real estate taxes ($3,900 + $900) are deductible as itemized deductions. The total itemized deductions are $6,950.

Sonia paid the following taxes during the year: Taxes on residence (for the period from March 1 through August 31) $5,250 State motor vehicle tax (based on the value of the personal use automobile) 430 State income tax 3,050 State and local sales taxes 3,500 Sonia sold her personal residence on June 30, under an agreement in which the real estate taxes were not prorated between the buyer and the seller. What amount qualifies as a deduction from AGI for Sonia?

7,382 [(121 days/184 days × $5,250) + $430 + $3,500] = $7,382. State and local sales taxes ($3,500) are more than the state income tax ($3,050). Therefore, assuming that Sonia may choose to deduct the higher of her state and local sales taxes or her state income tax, her deduction will include $3,500 rather than $3,050.

Jillian is employed as a systems analyst. For calendar year 2017, she had AGI of $120,000 and paid the following medical expenses: Medical insurance premiums $3,900 Doctor and dentist bills for Carl and Penny (Jillian's parents) 8,250 Doctor and dentist bills for Jillian 6,750 Prescribed medicines for Jillian 300 Nonprescribed insulin for Jillian 825 Carl and Penny would qualify as Jillian's dependents except that they file a joint return. Jillian's medical insurance policy does not cover them. Jillian filed a claim for $3,150 of her own expenses with her insurance company in December 2017 and received the reimbursement in January 2018. What is Jillian's maximum allowable medical expense deduction for 2017?

8,025 Jillian's medical expense deduction is $8,025, determined as follows: Medical insurance premiums $ 3,900 Doctor and dentist bills for Carl and Penny 8,250 Doctor and dentist bills for Jillian 6,750 Prescribed medicines for Jillian 300 Nonprescribed insulin for Jillian 825 Total medical expenses $ 20,025 Less: 10% of $120,000 (AGI) (12,000) Deductible portion of medical expenses $ 8,025

A taxpayer's choice of qualified residence is irrevocable.

False A taxpayer who has more than one second residence can choose the qualified second residence each year.

Individuals can elect to deduct their state income taxes, their local income taxes, and their sales/use taxes paid as an itemized deduction.

False Individuals can elect to deduct either their state and local income taxes or their sales/use taxes paid as an itemized deduction.

Gambling losses are deductible up to the amount of gambling winnings to the extent they exceed 2 percent of the taxpayer's AGI.

False Such losses are not subject to the 2 percent-of-AGI floor.

Obtaining a tax benefit by shifting itemized deductions from one year to another is not allowed.

False The individual could, for example, prepay a church pledge for a particular year to shift the deduction to the current year so itemized deductions exceed the standard deduction.

When making noncash donations, the type of property contributed does not make a difference in the amount, if any, of the deduction.

False For example, contribution of capital gain property will provide a deduction equal to fair market value rather than the adjusted basis.

Weight reduction programs are considered deductible medical expenses so long as they provide a significant improvement to one's general health.

False Programs for the improvement of general health are nondeductible.

In April 2018, Ellis, a calendar year cash basis taxpayer, paid the state of Kansas additional income tax for 2017. Since it relates to 2017, for Federal income tax purposes the payment qualifies as a tax deduction for tax year 2017.

False The amount is deductible in 2018 because Ellis is a cash basis taxpayer who paid the tax in 2018.

Reza's parents claim him as a dependent. This does not stop him from making a qualified student loan interest deduction.

False The deduction is not allowed for taxpayers who are claimed as dependents.

Ordinary income property is any property that would have resulted in the recognition of long-term capital gain or § 1231 gain if the property had been sold by the donor.

False This is the definition of capital gain property. Ordinary income property is any property that, if sold, will result in the recognition of ordinary income.

Taxes assessed for local benefits, such as a new sidewalk, may be deductible as real property taxes.

False Such taxes must be capitalized (added to the adjusted basis of the taxpayer's property).

The deduction for real estate taxes was created to relieve the burden of multiple taxes on the same source of revenue.

False The deduction for real estate taxes was created to encourage home ownership.

The maximum charitable contribution deduction may not exceed 20 percent of AGI for the tax year.

False The limit is 50 percent.

Yasuke donates $150 to a local theater company. His intent in making the donation is purely altruistic, so he's surprised when the company sends him a free ticket to its next performance, normally worth $50. Which of the following statements is correct?

In order to deduct the full $150, Yasuke would need to send the ticket back to the theater company. When a donor derives a tangible benefit from a contribution, he or she cannot deduct the value of the benefit. Yasuke's two options are as follows: keep the ticket and deduct $100 ($150 - $50), or return the ticket and deduct $150.

Which of the following types of interest is not deductible?

Interest on a car loans Personal (consumer) interest is not deductible.

Employee business expenses for travel do not qualify as itemized deductions subject to the 2 percent floor if they are reimbursed.

True Nonreimbursed employee expenses qualify as itemized deductions subject to the 2 percent floor.

Cash basis taxpayers are entitled to deduct state income taxes in the year payment is made.

True This includes taxes withheld by the employer, amounts paid with the state income tax return when filed, and estimated state income tax payments.

Landon resides in a nursing home primarily for medical reasons rather than personal reasons. Costs for meals and lodging can be included in determining his deductible medical expenses.

True If the primary reason for being in a nursing home is medical, the cost of meals and lodging can be included in medical expenses, along with the costs for medical or nursing care.

Medical expenses are generally rare because the threshold percentage is significant.

True Only medical expenses in excess of the "10 percent-of-AGI floor" are deductible.

Excise taxes are nondeductible.

True Only property, income, and sales taxes can be deductible.

Gambling losses are not subject to the 2 percent-of-AGI floor.

True Such losses are not subject to the 2 percent-of-AGI floor.

The deduction for real estate taxes was created to encourage home ownership.

True The deduction for real estate taxes was created to encourage home ownership.

The maximum charitable contribution deduction may not exceed 50 percent of AGI for the tax year.

True The limit is 50 percent.

In most cases, interest paid on a home mortgage is fully deductible

True The only exception is interest paid or accrued during the tax year on aggregate acquisition indebtedness of more than $1 million.

Beatrice pays FICA (employer's share) on the wages she pays her maid to clean and maintain Beatrice's personal residence. The FICA payment is not deductible as an itemized deduction.

True The payment is a nondeductible personal expense.

The taxpayer benefits from itemizing when itemized deductions exceed the standard deduction.

True The taxpayer benefits from itemizing when itemized deductions exceed the standard deduction.

The impairment-related work expenses of a handicapped person are not subject to the 2 percent-of-AGI floor.

True These fall under the category of Other Miscellaneous Deductions on line 28 of Schedule A.

The purchaser of a principal residence can deduct qualifying points in the year of payment.

True This is an exception to the general rule that points are capitalized and are amortized and deductible ratably over the life of the loan.

Deloris paid an appraiser to determine how much a capital improvement made for medical reasons increased the value of her personal residence. The appraisal fee is deductible, but not as a medical expense.

True The appraisal fee does not qualify as a medical expense, but it qualifies under § 212 (related to the determination of tax liability) as a miscellaneous itemized deduction.

The election to itemize is not appropriate when the taxpayer's allowable itemized deductions are less than the allowable standard deduction.

True The taxpayer benefits from itemizing when itemized deductions exceed the standard deduction.