PrenticeHall'sFederalTaxation2012:Individuals,25e(Pope/Anderson/Kramer)
ChapterI7ItemizedDeductions
1)Forindividuals,alldeductibleexpensesmustbeclassifiedasdeductionsforAGIordeductionsfromAGI.
Answer:TRUE
PageRef.:I:72
2)In2011,medicalexpensesaredeductibleasafromAGIdeductiontotheextentthattheyexceed7.5percentof
thetaxpayer'sAGI.
Answer:TRUE
PageRef.:I:72
3)Medicalexpensespaidonbehalfofanindividualwhocouldbethetaxpayer'sdependentexceptforthegross
incomeorjointreturntestsaredeductibleasitemizeddeductions.
Answer:TRUE
PageRef.:I:72
4)Medicalexpensesincurredonbehalfofchildrenofdivorcedparentsaredeductiblebytheparentwhopaysthe
expensesbutonlyifthatparentalsoisentitledtothedependencyexemption.
Answer:FALSE
Explanation:AslongasonedivorcedparentqualifiestoclaimthedependencyexemptionunderSec.152(e),the
parentwhopaysmedicalexpensesonbehalfofthechildrenmaydeducttheexpenses.
PageRef.:I:72
5)Thedefinitionofmedicalcareincludespreventativemeasuressuchasroutinephysicalexaminations.
Answer:TRUE
PageRef.:I:73
6)Duetostressonthejob,taxpayerCharliebegantoexperiencechestpains.Inordertorelaxandrelievethepains,
heandhisspousewentonanoceancruise.Thecostofthecruisetoalleviatethismedicalconditionistax
deductible.
Answer:FALSE
PageRef.:I:73;ExampleI:72
7)Expendituresforaweightreductionprogramaredeductibleifrecommendedbyaphysiciantotreataspecific
medicalconditionsuchashypertensioncausedbyexcessweight.
Answer:TRUE
PageRef.:I:73;ExampleI:73
8)Inorderforataxpayertodeductamedicalexpense,theamountmustbepaidtoacertifiedmedicaldoctor
(M.D.).
Answer:FALSE
Explanation:Taxpayersmaydeductpaymentstoawiderangeofmedical,dental,andotherdiagnosticandhealing
services.
PageRef.:I:73andI:74
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9)Jeffrey,aT.V.newsanchor,isconcernedaboutthewrinklesaroundhiseyes.Becauseitisjobrelated,thecostof
afacelifttoeliminatethesewrinklesisadeductiblemedicalexpense.
Answer:FALSE
Explanation:Cosmeticsurgeryisnotdeductibleunlesssuchsurgeryisnecessarytocorrectadeformityarising
fromacongenitalabnormality,apersonalinjuryresultingfromanaccidentortrauma,oradisfiguringdisease.
PageRef.:I:74
10)Expendituresforlongtermcareinsurancepremiumsqualifyasamedicalexpensedeductionsubjecttoan
annuallimitbasedupontheageofanindividual.
Answer:TRUE
PageRef.:I:75
11)Capitalexpendituresformedicalcarewhichpermanentlyimproveorbetterthetaxpayer'spropertyare
deductibletotheextentthecostexceedstheincreaseinfairmarketvaluetothepropertyattributabletothecapital
expenditure.
Answer:TRUE
PageRef.:I:75
12)Expendituresincurredinremovingstructuralbarriersinthehomeofaphysicallyhandicappedindividualare
deductibleonlytotheextentthecostexceedstheincreaseinfairmarketvaluetothepropertyattributabletothe
capitalexpenditure.
Answer:FALSE
Explanation:Suchexpensesarefullydeductiblesubjecttothe7.5%limitationonallmedicalexpenses.
PageRef.:I:75
13)Iftheprincipalreasonforataxpayer'spresenceinaninstitutionistheneedandavailabilityofmedicalcare,the
entirecostoflodgingandmealsisconsideredqualifiedmedicalexpenditures.
Answer:TRUE
PageRef.:I:76
14)Amedicalexpenseisgenerallydeductibleonlyintheyearinwhichtheexpenseisactuallypaid.
Answer:TRUE
PageRef.:I:76
15)Ifaprepaymentisarequirementforthereceiptofthemedicalcare,thepaymentisdeductibleintheyearpaid
ratherthantheyearinwhichthecareisrendered.
Answer:TRUE
PageRef.:I:77
16)Ifamedicalexpensereimbursementisreceivedinayearafteradeductionhasbeentakenonapreviousyear's
return,thepreviousyear'sreturnmustbeamendedtoeliminatethereimbursedexpense.
Answer:FALSE
Explanation:Thereimbursementshouldbeincludedingrossincomeintheyearreceivedtotheextentthetaxpayer
receivedataxbenefitintheyearofpayment.
PageRef.:I:77
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17)Assessmentsorfeesimposedforspecificprivilegesorservicesarenotdeductibleastaxes.
Answer:TRUE
PageRef.:I:79
18)Neitherforeignrealpropertytaxesnorforeignincometaxesaredeductibleasitemizeddeductions.
Answer:FALSE
Explanation:Botharedeductibleasitemizeddeductions.
PageRef.:I:79
19)Apersonalpropertytaxbasedontheweightofthepropertyisdeductible.
Answer:FALSE
Explanation:Inordertobedeductible,apersonalpropertytaxmustbeadvalorem(basedonvalue).
PageRef.:I:710
20)Assessmentsmadeagainstrealestateforthepurposeoffundinglocalimprovementsarenotdeductibleinthe
yearpaidbutrathershouldbeaddedtothecostbasisoftheproperty.
Answer:TRUE
PageRef.:I:711
21)SelfemployedindividualsmaydeductthefullselfemploymenttaxespaidasaforAGIdeduction.
Answer:FALSE
Explanation:GenerallyonehalfoftheselfemploymenttaxisadeductionforAGI.However,for2011,the
deductioniscomprisedof59.6percentoftheSocialSecuritycomponentofthetaxplus50percentoftheMedicare
component.
PageRef.:I:712
22)Financechargesonpersonalcreditcardsareconsideredinterestandare,therefore,deductible.
Answer:FALSE
Explanation:Thechargeisanondeductiblepersonalexpense.
PageRef.:I:712
23)Ingeneral,thedeductibilityofinterestdependsonthepurposeforwhichtheindebtednessisincurred.
Answer:TRUE
PageRef.:I:713
24)Interestexpenseincurredinthetaxpayer'stradeorbusinessisdeductibleasaforAGIdeductionwithout
limitationifthetaxpayermateriallyparticipatesinthebusiness.
Answer:TRUE
PageRef.:I:713
25)Investmentinterestexpensewhichisdisallowedbecauseitexceedsthetaxpayer'snetinvestmentincomemaybe
carriedoverandtreatedasincurredinsubsequentyears.
Answer:TRUE
PageRef.:I:714
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26)Investmentinterestincludesinterestexpenseincurredtopurchasetaxexemptsecurities.
Answer:FALSE
PageRef.:I:715
27)Taxpayersmayelecttoincludenetcapitalgainaspartofinvestmentincome.
Answer:TRUE
PageRef.:I:715
28)Taxpayersmaynotdeductinterestexpenseonpersonaldebtincludingcreditcarddebt,carloans,andother
consumerdebt.
Answer:TRUE
PageRef.:I:716
29)Qualifiedresidenceinterestconsistsofbothacquisitionindebtednessandhomeequityinterest.
Answer:TRUE
PageRef.:I:716
30)Acquisitionindebtednessforapersonalresidenceincludesdebtincurredtosubstantiallyimprovetheresidence.
Answer:TRUE
PageRef.:I:716
31)Homeequityindebtednessislimitedtothelesserof$100,000orthehomeequity(FMVoftheresidencelessthe
acquisitionindebtedness).
Answer:TRUE
PageRef.:I:717
32)Whilepointspaidtopurchasearesidencearedeductibleasinterestintheperiodpaid,pointsassociatedwiththe
refinancingofaresidencemustbeamortizedanddeductedoverthelifeoftheloan.
Answer:TRUE
PageRef.:I:717andI:718
33)Christopher,acashbasistaxpayer,borrows$1,000fromABCBankbyissuinga3monthnoteonDecember1,
2011.Christopherreceives$940butmustrepay$1,000ontheduedate.Theamountofinterestexpensedeductible
in2011is$20.
Answer:FALSE
Explanation:Heiscashbasisanddoesnotpaytheinterestuntilthefollowingyear.
PageRef.:I:720;ExampleI:722
34)Charitablecontributionsmadetoindividualsaredeductibleiftheindividualscanshowextremefinancialneed.
Answer:FALSE
Explanation:Charitablecontributionsmadedirectlytoindividualsaregenerallynotdeductible.
PageRef.:I:722
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35)Forcharitablecontributionpurposes,capitalgainpropertyincludespropertywhich,ifsold,wouldproducea
longtermcapitalgain.
Answer:TRUE
PageRef.:I:723
36)AcharitablecontributiondeductionisallowedfortheFMVofservicesrenderedtoaqualifiedcharitable
organization.
Answer:FALSE
Explanation:Thetaxpayermaydeductonlytheunreimbursedexpensesincurredincidenttorenderingtheservices.
PageRef.:I:724
37)Acharitablecontributioninexcessofthedeductionlimitforonetaxableyearcanbecarriedforwardfiveyears.
Answer:TRUE
PageRef.:I:725
38)Ifataxpayermakesacharitablecontributiontoauniversityandinreturnreceivestherighttopurchaseticketsto
athleticevents,thetaxpayermaydeductonly80%ofthepayment.
Answer:TRUE
PageRef.:I:725
39)Corporatecharitabledeductionsarelimitedto10%ofthecorporation'staxableincomefortheyear.
Answer:TRUE
PageRef.:I:726
40)Legalfeesfordraftingawillaregenerallydeductible.
Answer:FALSE
Explanation:Tobedeductible,suchfeesmustdealwithtaxrelateditems.
PageRef.:I:729
41)Vanpaysthefollowingmedicalexpensesthisyear:
$1,500fordoctorbillsforVan'ssonwhoisclaimedasadependentbyVan'sformerspouse.
$300forVan'seyeglasses.
$900forVan'sdentalwork.
$3,800forVan'sfacelift.Van,anewscaster,isworriedaboutthewrinklesaroundhiseyes.
HowmuchcanVanincludeonhisreturnasqualifiedmedicalexpensesbeforelimitation?
A)$1,200
B)$2,400
C)$2,700
D)$6,500
Answer:C
Explanation:C)($1,500+$300+$900)=$2,700.
PageRef.:I:72throughI:74
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42)Allofthefollowingaredeductibleasmedicalexpensesexcept
A)vitaminsandhealthfoodsthatimproveataxpayer'sgeneralhealth.
B)paymentsforavisionexamandcontactlenses.
C)paymentstoahospitalforlaboratoryfeesandXraysfordiagnosisofamedicalproblem.
D)cosmeticsurgerynecessarytocorrectadeformityarisingfromacongenitalabnormality.
Answer:A
Explanation:A)Nonprescriptiondrugs,exceptforinsulin,arenotdeductibleasmedicalexpenses.
PageRef.:I:74
43)Allofthefollowingpaymentsformedicalitemsaredeductiblewiththeexceptionofthepaymentfor
A)insulin.
B)generalappointmentforteethcleaning.
C)acupunctureforspecificmedicalpurposes.
D)nonprescriptionmedicinefortreatmentofaspecificmedicalcondition.
Answer:D
Explanation:D)Onlyprescriptiondrugsandinsulinaredeductible.
PageRef.:I:74
44)In2011SelatraveledfromherhomeinFlagstafftoSanFranciscotoseekmedicalcare.Becauseshewasunable
totravelalone,hermotheraccompaniedher.Totalexpensesincluded:
Hotelroomenroute($1502rooms3nights)
Mileage,1,000miles
DoctorsbillsinSanFrancisco
$900
1,600
Thetotalmedicalexpensesdeductiblebeforethe7.5%limitationare
A)$1,600.
B)$2,090.
C)$2,500.
D)$2,690.
Answer:B
Explanation:B)$300[($50maximum2)for3nights]+$190mileage(1,00019centspermile)+$1,600
doctors=$2,090.
PageRef.:I:74
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45)Leospent$6,600toconstructanentrancerampandtowidendoorwaysinhispersonalresidencetomakethe
homeaccessibleforhiswife,whoisdisabledandconfinedtoawheelchair.The$6,600expenditureincreasedthe
valueoftheresidenceby$2,000.Howmuchofthe$6,600isadeductiblemedicalexpense?
A)$0
B)$2,000
C)$4,600
D)$6,600
Answer:D
Explanation:D)Expenditurestoremovestructuralbarriersinthehomeofaphysicallyhandicappedindividualsuch
ascostsofconstructingentranceramps,wideningdoorwaysandhalls,etc.aredeductibleinfull.
PageRef.:I:75
46)Lindahadaswimmingpoolconstructedatherhouse.Herphysicianadvisedandprescribedtoherthatthepool
wouldslowtheeffectsofherdegenerativedisease.Thepoolwasnotsuitableforrecreationaluse.Priortothe
constructionofthepool,thefairmarketvalueofherhousewas$172,000.Aftertheconstructionofthepool,the
appraisedfairmarketvalueofthehousewas$181,000.Thecostofthepoolwas$13,000.Whatistheamountof
Linda'squalifiedmedicalexpense(beforeconsideringlimitsbasedonAGI)?
A)$0
B)$4,000
C)$9,000
D)$13,000
Answer:B
Explanation:B)Thedeductionislimitedtotheportionofthecostwhichexceedstheincreaseinthehouse'sFMV
or$13,000($181,000$172,000)=$4,000.
PageRef.:I:75;ExampleI:74
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47)Alan,whoisasecurityofficer,isshotwhileonthejob.Asaresult,Alansuffersfromaleginjuryandmust
spendmostofhistimeinawheelchairuntilhisrecovery.Alan'sphysicianrecommendsthatheinstallawhirlpool
bathinhishomefortherapy.Duringtheyear,Alanmakesthefollowingexpenditures:
Wheelchair
Whirlpoolbath
Maintenanceofthewhirlpool
Increasedutilitybillsassociatedwithwhirlpool
Entranceramp,varioushomemodifications
$1,200
2,000
250
450
7,200
AprofessionalappraisertellsAlanthatthewhirlpoolhasincreasedthevalueofhishomeby$1,000.Alan's
deductiblemedicalexpenses(beforeconsideringlimitationsbasedonAGI)willbe
A)$6,000.
B)$10,100.
C)$7,000.
D)$7,700.
Answer:B
Explanation:B)($1,200+$2,000+$250+$450+$7,200$1,000=$10,100.)
PageRef.:I:76;ExampleI:74
48)Mitzi'smedicalexpensesincludethefollowing:
Medicalpremiums
Doctorsfees
Hospitalfees
Prescriptiondrugs
Eyeglasses
Generalpurposevitamins
$10,850
2,000
3,350
600
350
100
Mitzi'sAGIfortheyearis$33,000.Noneofthemedicalcostsarereimbursedbyinsurance.Afterconsideringthe
AGIfloor,Mitzi'smedicalexpensestotal
A)$13,725.
B)$14,675.
C)$13,850.
D)$17,150.
Answer:B
Explanation:B)[$10,850+$2,000+$3,350+$600+$350]=$17,150totalexpenses($33,0000.075)=
$14,675.
PageRef.:I:75throughI:77;ExampleI:76
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49)Caleb'smedicalexpensesbeforereimbursementfortheyearincludethefollowing:
Medicalpremiums
Doctors,hospitals
Prescriptions
$11,000
3,500
600
Caleb'sAGIfortheyearis$50,000.Calebalsoreceivesareimbursementformedicalexpensesof$1,000.Caleb's
deductiblemedicalexpensesthatwillbeaddedtotheotheritemizeddeductionwillbe
A)$10,350.
B)$11,350.
C)$14,500.
D)$15,100.
Answer:A
Explanation:A)($11,000+$3,500+$600$1,000)3,750($50,0000.075)=$10,350.
PageRef.:I:77
50)Areviewofthe2010taxfileofGregory,asingletaxpayerwhoisage40,providesthefollowinginformation
regardingGregory's2010taxstatus:
Adjustedgrossincome
Medicalexpenses(beforepercentagelimit)
Itemizeddeductionsotherthanmedical
2010potentialstandarddeduction
$40,000
5,000
4,000
5,700
In2011,Gregoryreceivesareimbursementforlastyear'smedicalexpensesof$1,200.Asaresult,Gregorymust
A)include$300ingrossincomefor2011.
B)include$1,200ingrossincomefor2011.
C)reduce2011'smedicalexpensesby$1,200.
D)amendthe2010return.
Answer:A
Explanation:A)Includein2011'sincomethelesserofthereimbursementortotheextentthetaxbenefitreceivedin
2010.
MedicalExpenses
Limit(7.5%$40,000)
$5,000
($3,000)
$2,000
$4,000
$6,000
(5,700)
$300
Otheritemized
Total2010ItemizedDeductionAllowed
2010StandardDeduction
TaxBenefitincludedonthe2010return
PageRef.:I:77;ExampleI:77
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51)Mr.andMrs.Thibodeaux,whoarefilingajointreturn,haveadjustedgrossincomeof$100,000.Duringthetax
year,theypaidthefollowingmedicalexpensesforthemselvesandforMrs.Thibodeaux'smother,Mrs.Watson.
Mrs.Watsonprovidedoveronehalfofherownsupport.
PrescriptiondrugsforMr.Thibodeaux
GeneralvitaminsforMrs.Thibodeaux
HospitalbillforMrs.Watson
DoctorbillforMrs.Thibodeaux
DoctorbillforMr.Thibodeaux
$3,600
$100
$2,200
$4,000
$1,800
Mr.andMrs.Thibodeauxreceivednoreimbursementfortheaboveexpenditures.Whatistheamountoftheir
deductibleitemizedmedicalexpenses?
A)$1,900
B)$2,000
C)$4,100
D)$9,400
Answer:A
Explanation:A)
PrescriptiondrugsforMr.Thibodeaux
$3,600
DoctorbillforMrs.Thibodeaux
4,000
DoctorbillforMr.Thibodeaux
1,800
Totalexpenses
$9,400
Minus:7.5%ofAGI($100,0000.075)
(7,500)
Deduction
$1,900
PageRef.:I:72throughI:77
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52)Mr.andMrs.Gere,whoarefilingajointreturn,haveadjustedgrossincomeof$50,000.Duringthetaxyear,
theypaidthefollowingmedicalexpensesforthemselvesandforMrs.Gere'smother,Mrs.Williams.TheGere's
couldclaimMrs.Williamsastheirdependent,butshehastoomuchgrossincome.
InsulinforMr.Gere
HealthinsurancepremiumsforMrs.Gere
HospitalbillforMrs.Williams
DoctorbillforMrs.Gere
$1,000
$3,100
$5,200
$4,000
Mr.andMrs.Gerereceivednoreimbursementfortheaboveexpenditures.Whatistheamountoftheirdeductible
itemizedmedicalexpenses?
A)$6,450
B)$9,550
C)$5,550
D)$13,300
Answer:B
Explanation:B)
InsulinforMr.Gere
$1,000
HealthinsurancepremiumsforMrs.Gere
$1,000
HospitalbillforMrs.Williams
$5,200
DoctorbillforMrs.Gere
$4,000
Totalexpenses
13,300
Minus:7.5%ofAGI($50,0000.075)
(3,750)
Deduction
$9,550
PageRef.:I:72throughI:77
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53)Thefollowingtaxesaredeductibleasitemizeddeductionswiththeexceptionof
A)stateincometaxes.
B)federalincometaxes.
C)foreignrealpropertytaxes.
D)localpersonalpropertytaxes.
Answer:B
Explanation:B)Federalincometaxesarenotdeductible.
PageRef.:I:79
54)Mattpaidthefollowingtaxes:
Realestatetaxesonrentalpropertyheowns
Realestatetaxesonhisownresidence
Federalincometaxes
Stateincometaxes
Localcityincometaxes
Statesalestaxes
$4,000
3,600
8,000
3,400
500
700
WhatamountcanMattdeductasanitemizeddeductiononhistaxreturn?
A)$7,500
B)$11,500
C)$15,500
D)$19,500
Answer:A
Explanation:A)
Realestatetaxesonhisownresidence
$3,600
Stateincometaxes
3,400
Localcityincometaxes
500
Totalitemizeddeduction
$7,500
PageRef.:I:79,I:712andI:710
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55)In2011,Carlosfiledhis2010stateincometaxreturnandpaidtaxesof$800.Alsoin2011,Carlos'semployer
withheldstateincometaxof$750fromCarlos'ssalary.In2012,Carlosfiledhis2011stateincometaxreturnand
paidanadditional$600ofstateincometax.HowmuchstateincometaxcanCarlosdeductonhis2011federal
incometaxreturnforstateincometax?
A)$1,350
B)$1,400
C)$1,550
D)$2,150
Answer:C
Explanation:C)
Stateincometaxwithheldin2011
$750
2010stateincometaxpaidin201
800
TotalDeduction
$1,550
PageRef.:I:710;ExampleI:78
56)Dougpaysacountypersonalpropertytaxonhisautomobileof$1,500.The$1,500includes$800basedonthe
weightofthecarand$700basedonthevalueofthecar.HowmuchofthetaxcanDougdeductonhistaxreturn?
A)$0
B)$700
C)$800
D)$1,500
Answer:B
Explanation:B)Personalpropertytaxesaredeductibletotheextentthattheyareadvaloremorbasedonvalue.
PageRef.:I:710;ExampleI:79
57)DuringtheyearJasonandKristi,cashbasistaxpayers,paidthefollowingtaxes:
Stategifttax
PropertytaxonhomeintheUnitedStates
Stateincometax(withholdings)
Estimatedfederalincometax
Estimatedstateincometax(paidbycheck)
Specialassessmentbycityforsidewalksandstreetlighting
ontheirstreet
$1,000
4,100
3,000
4,500
800
2,000
WhatamountcanKristiandJasonclaimasanitemizeddeductionfortaxesontheirfederalincometaxreturninthe
currentyear?
A)$7,900
B)$8,900
C)$10,900
D)$15,400
Answer:A
Explanation:A)$4,100+3,000+800=7,900.
PageRef.:I:710
58)InFebruaryofthecurrentyear(anonleapyear),KenandKelseyreceivedtheirpropertytaxstatementforlast
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calendaryeartaxesof$1,600,whichtheypaidtothetaxingauthorityonMarch1ofthecurrentyear.Theyhad
purchasedtheirhomeonMay1lastyear.Whatamountofpropertytaxonthisstatementmaytheyclaimasan
itemizeddeductionthisyear?
A)$0
B)$1,069
C)$1,074
D)$1,600
Answer:C
Explanation:C)(245/365$1,600=$1,074)
PageRef.:I:711
59)OnSeptember1,ofthecurrentyear,James,acashbasistaxpayer,sellshisfarmtoBill,alsoacashbasis
taxpayer,for$100,000.James'basisinthefarmis$65,000.Therealpropertytaxyearisthecalendaryear.Real
estatetaxesonthepropertyfortheyearare$3,650andarepayableinNovemberofthecurrentyear.Thesales
agreementdoesnotprovideforapportionmentofrealestatetaxesbetweenthebuyerandseller.AssumeBillpays
alloftherealestatetaxesinthecurrentyear.Theeffectsofthissalesstructurewillbe:
A)
TaxesallocatedtoJames
TaxesallocatedtoBill
EffectonJames'Gain
$0
$3,650
noeffectongain
B)
TaxesallocatedtoJames
$3,650
TaxesallocatedtoBill
$0
EffectonJames'Gain
decreasegainby$1,220
C)
TaxesallocatedtoJames
$2,430
TaxesallocatedtoBill
$1,220
EffectonJames'Gain
increasegainby$2,430
D)
TaxesallocatedtoJames
$1,220
TaxesallocatedtoBill
$2,430
EffectonJames'Gain
increasegainby$1,220
Answer:C
Explanation:C)TaxesallocatedtoBill:
(122/365days)$3,650=$1,220.
TaxesallocatedtoJames=$3,650$1,220=$2,430.
IncreaseJames'gainby$2,430.
PageRef.:I:711;ExampleI:710
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60)OnSeptember1,ofthecurrentyear,Samuel,acashbasistaxpayer,sellshisfarmtoEdward,alsoacashbasis
taxpayerfor$100,000.Samuel'sbasisinthefarmis$65,000.Therealpropertytaxyearisthecalendaryear.Real
estatetaxesonthepropertyfortheyearare$3,650andarepayableonApril1ofthefollowingyear.Thesales
agreementdoesnotprovideforapportionmentofrealestatetaxesbetweenthebuyerandseller.AssumeSamuel
paysalloftherealestatetaxespriortothesale.Theeffectsofthissalesstructurewillbe:
A)
TaxesallocatedtoSamuel
TaxesallocatedtoEdward EffectonSamuel'sGain
$1,220
$2,430
increasegainby$1,220
B)
TaxesallocatedtoSamuel
$2,430
TaxesallocatedtoEdward
$1,220
EffectonSamuel'sGain
increasegainby$2,430
C)
TaxesallocatedtoSamuel
$2,430
TaxesallocatedtoEdward
$1,220
EffectonSamuel'sGain
decreasegainby$2,430
D)
TaxesallocatedtoSamuel
$1,220
TaxesallocatedtoEdward
$2,430
EffectonSamuel'sGain
decreasegainby$1,220
Answer:C
Explanation:C)TaxesallocatedtoEdward:
(122/365days)$3,650=$1,220rounded.
DecreaseSamuel'sgainby$1,220.
TaxesallocatedtoSamuel=$3,650$1,220=$2,430.
PageRef.:I:711;ExampleI:710
61)Peterisassessed$630forstreetimprovementsinfrontofhishouse.Whichofthefollowingstatementsis
correct?
A)Petermustdeducttheassessmentasatax.
B)Petermustreducethepropertybasisby$630.
C)Petermustincreasethepropertybasisby$630.
D)Petercanelecttodeductthe$630currentlyorincreasethebasisintheproperty.
Answer:C
Explanation:C)Taxlawrequirescapitalizationofassessmentsaspartoftheproperty'sadjustedbasis.
PageRef.:I:711
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62)Inthecurrentyear,Drewpaid$6,500forapieceofequipmenttobeusedinhisbusiness.Inaddition,hehadto
payastatesalestaxof$500onthepurchase.HowshouldDrewhandlethesalestax?
A)asanitemizeddeductiononScheduleA
B)asataxexpensedeductiononScheduleC
C)Addthetaxtothebasisoftheequipment.
D)Disregardsalestaxasitisnolongerdeductible.
Answer:C
Explanation:C)Thesalestaxshouldbeaddedtothecostoftheasset.
PageRef.:I:711
63)Whichofthefollowingisdeductibleasinterestexpense?
A)personalcreditcardinterest
B)interesttopurchasetaxexemptbonds
C)bankservicechargesonpersonalaccount
D)interestonhomeequityloan
Answer:D
Explanation:D)Interestonhomeequityloansisdeductible.
PageRef.:I:712
64)Whenbothborrowedandownedfundsaremingledinthesameaccount,forpurposesofcategorizinginterest
expense,arepaymentofthedebtisallocatedfirstto
A)personalexpenditures.
B)tradeorbusinessexpenditures.
C)investmentexpenditures.
D)passiveactivityexpendituresinrealestate.
Answer:A
Explanation:A)Whenthetaxpayerrepaysthedebt,thetaxlawrequiresthattheallocationoftherepaymenttothe
expendituresmadewiththeborrowedfundsoccurinthefollowingorder:(1)personalexpenditures,(2)investment
expendituresandpassiveactivityexpendituresotherthanrentalrealestate,(3)passiveactivityexpendituresin
rentalrealestate,and(4)tradeorbusinessexpenditures.
PageRef.:I:713andI:714
65)Allofthefollowingstatementsaretrueexcept
A)investmentinterestexpenseisdeductibletotheextentofataxpayer'snetinvestmentincome.
B)shorttermcapitalgainsmeetthedefinitionofnetinvestmentincome.
C)investmentinterestexpenseincludesinterestexpensetopurchaseorcarrytaxexemptsecurities.
D)netinvestmentincomeisthetaxpayer'sinvestmentincomeinexcessofinvestmentexpenses.
Answer:C
Explanation:C)Investmentinterestdoesnotincludeinterestexpenseincurredtopurchaseorcarrytaxexempt
securities.
PageRef.:I:714throughI:716
16
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
66)Inthecurrentyear,Juliaearns$9,000innetinvestmentincomeandincurs$14,000ofinvestmentinterest
expense.Whatistheamountofinvestmentinterestexpensedeductiblethisyear?
A)$0
B)$3,000deductiblethisyear;$11,000carriedforwardtonextyear
C)$9,000deductiblethisyear;$5,000carriedforwardtonextyear
D)$14,000deductiblethisyear;nothingtobecarriedforwardtonextyear
Answer:C
Explanation:C)Investmentinterestexpenseisdeductibletotheextentofnetinvestmentincome.Theremainderis
carriedovertothenexttaxyear.
PageRef.:I:714;ExampleI:714
67)Tedincurs$2,100interestonhisautomobileloan,$120interestonaloantopurchaseacomputerforpersonal
use,$630interestoncreditcards,and$1,100investmentinterestexpense.Tedhasnetinvestmentincomeof$850.
Ted'sdeductibleinterestis
A)$850.
B)$1,100.
C)$2,950.
D)$3,200.
Answer:A
Explanation:A)Onlytheinvestmentinterestexpense,totheextentofnetinvestmentincomeof$850isdeductible.
PageRef.:I:714
68)Duringtheyear,Danaincurred$13,000ofinvestmentinterestexpenseinayearinwhichsheearned$4,500in
dividends,$5,400ininterestincome,andhadashorttermcapitalgainof$1,000andalongtermcapitalgainof
$2,200.Thecapitalgainsresultedfromthesaleofstockheldasaninvestment.Whatishermaximumdeductionfor
investmentinterestexpenseifDanamakestheproperelections?
A)$5,400
B)$9,900
C)$12,100
D)$13,000
Answer:D
Explanation:D)Deducttotheextentofnetinvestmentincomeincludingthedividendsandlongtermcapitalgain.
$4,500+$5,400+1,000+$2,200=$13,100limitedto$13,000ofinvestmentinterestexpense.
PageRef.:I:715;ExampleI:715
17
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
69)Teripaysthefollowinginterestexpensesduringtheyear:
Homemortgageinterestonpersonalresidence
Creditcardinterestonpersonalpurchases
Interestonloansusedtopurchaseinvestments(Netinvestment
incomeis$2,000)
Interestonloansusedforabusinessconductedasasoleproprietorship
Interestonacreditcardusedexclusivelyinthebusiness
$8,500
550
2,400
3,800
470
Whatistheamountofinterestexpensethatcanbedeductedasanitemizeddeduction?
A)$10,500
B)$10,900
C)$14,300
D)$14,700
Answer:A
Explanation:A)
Homemortgageinterest
$8,500
Investmentinterestlimitedtonetinvestmentincome
2,000
Totalasitemizeddeduction
$10,500
Personalinterestisnotdeductible.InterestforthebusinessisdeductedasaforAGIdeductionontheScheduleC.
PageRef.:I:714throughI:716
70)OnJuly31ofthecurrentyear,Marjorieborrows$120,000topurchaseanewfishingboat.Theloanissecured
byherpersonalresidence.Onthedateoftheloan,theoutstandingbalanceontheoriginaldebtincurredtopurchase
theresidenceis$300,000andtheFMVofthehomeis$450,000.Whatisthetotalamountofdebtonwhich
Marjoriecandeductinterestinthecurrentyear?
A)$300,000
B)$400,000
C)$420,000
D)$450,000
Answer:B
Explanation:B)Intereston$300,000ofacquisitionindebtednessand$100,000ofhomeequityindebtedness.The
homeequityindebtednessisthelesserofhomeequityof$150,000or$100,000.
PageRef.:I:717;ExampleI:718
18
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
71)WayneandMariapurchaseahomeonApril1ofthecurrentyear.Inordertoobtainathirtyyearmortgage,
theyarerequiredtopay$7,200inpointsatclosing.Chargingpointsisacustomarybusinesspracticeinthearea.In
addition,theypay$4,400ofinterestduringtheyear.Whatistheircurrentyeardeductionrelatedtotheirhome?
A)$4,400
B)$4,580
C)$7,200
D)$11,600
Answer:D
Explanation:D)Pointsonthepurchaseofahomearedeductibleintheyearpaid.
PageRef.:I:718;ExampleI:719
72)ClaudiarefinancesherhomemortgageonJune1ofthecurrentyear.Sheobtainsa30yearmortgageat5%.As
partoftherefinancing,shepayspointsof$3,600(acustomarypracticeinherlocation).Whatamount,ifany,ofthe
pointsaredeductible?
A)$0
B)$70
C)$120
D)$3,600
Answer:B
Explanation:B)$3,600/(3012)=$10monthlyamortization.$107months=$70
PageRef.:I:718
73)In2011,Leslie,whoissingle,finishedgraduateschoolandbeganrepayingherstudentloan.Theproceedsof
theloanwereusedtopayherqualifiedhighereducationexpenses,andsheneverhadanytypeofeducational
assistanceorscholarshipsexcludedfromherincomeinthepast.Theamountofinterestpaidduringtheyear
amountedto$3,800.Whatistheamountandclassificationofherstudentloaninteresteducationdeductionifher
modifiedAGIis$40,000?
A)$2,500forAGI
B)$2,500fromAGI
C)$3,800forAGI
D)$3,800fromAGI
Answer:A
Explanation:A)Thelimitforthe2011studentloaninterestdeductionis$2,500,anditisadeductionforAGI.
PageRef.:I:719
19
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
74)In2011,Marcia,whoissingle,finishedgraduateschoolandbeganrepayingherstudentloan.Theproceedsof
theloanwereusedtopayherqualifiedhighereducationexpenses,andsheneverhadanytypeofeducational
assistanceorscholarshipsexcludedfromherincomeinthepast.Theamountofinterestpaidduringtheyear
amountedto$3,000.WhatistheamountandclassificationofherstudentloaninterestdeductionifherAGIis
$63,000?
A)$500forAGI
B)$2,000forAGI
C)$2,500forAGI
D)$3,000forAGI
Answer:B
Explanation:B)Thelimitfor2011studentloaninterestdeductionis$2,500,anditisadeductionforAGI.The
limitisphasedoutratablybetween$60,000and$75,000ofAGIforasingleperson.[($63,000$60,000)/($75,000
$60,000)]=20%phaseout.$2,500limit(100%20%)=$2,000maximumduetoexcessAGI.
PageRef.:I:719;ExampleI:721
75)Don'srecordscontainthefollowinginformation:
1. Donatedstockhavingafairmarketvalueof$3,600toaqualifiedcharitableorganization.Heacquiredthestock
fivemonthspreviouslyatacostof$2,400.
2. Paid$700toachurchschoolasarequirementfortheenrollmentofhisdaughter.
3. Paid$200forannualhomeowner'sassociationdues.
4. Drove400milesinhispersonalautoat14centspermile.Thetravelwasdirectlyrelatedtoserviceshe
performedforhischurch(actualcostswerenotavailable).
WhatisDon'scharitablecontributiondeduction?
A)$2,456
B)$3,156
C)$3,356
D)$3,656
Answer:A
Explanation:A)[$2,400+(400$.14/Mile)]=$2,456.
PageRef.:I:722throughI:725
20
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
76)Erin'srecordsreflectthefollowinginformation:
Paid$200duestoafraternalorganization(suchastheElksClub)
Donatedstockhavingafairmarketvalueof$3,500toaqualifiedcharitableorganization.Shepurchasedthestock2
yearsearlierfor$3,000.
Paid$1,600cashtoqualifiedpubliccharitableorganizations
Erin'sadjustedgrossincomeforthisyearwas$20,000.Whatistheamountofhercharitablecontributiondeduction
fortheyear?
A)$4,600
B)$4,800
C)$5,100
D)$5,300
Answer:C
Explanation:C)
Cash
$1,600
FMVStock
3,500
TotalCharitableContributions
$5,100
PageRef.:I:722throughI:725
77)Sidneypurchasedlandin2003for$35,000thatsheheldasacapitalasset.Thisyear,shecontributedthelandto
theBoyScoutsofAmericaforuseasasiteforasummercamp.Themarketvalueofthelandatthedateof
contributionis$40,000.Sidney'sadjustedgrossincomeis$90,000.Assumingnospecialelections,Sidney's
maximumdeductiblecontributionthisyearis
A)$13,000.
B)$27,000.
C)$35,000.
D)$40,000.
Answer:B
Explanation:B)
$90,000 AGI
.30 Limitoncapitalgainproperty
$27,000 Maximumdeduction
$13,000 Carryover
PageRef.:I:723;ExampleI:724
21
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
78)ClaytoncontributeslandtotheAmericanRedCrossforuseasafuturesiteforanewbuilding.HisAGIis
$50,000.Claytonpaid$20,000forthelandeightmonthsagobutitsmarketvalueatthedateofcontributionis
$25,000.Withnospecialelections,Clayton'sdeductiblecontributionthisyearis
A)$7,000.
B)$18,000.
C)$20,000.
D)$25,000.
Answer:C
Explanation:C)SincethepropertywasheldbyClaytonforlessthanoneyear,thecontributionamountisthe
adjustedbasisof$20,000.
PageRef.:I:724;ExampleI:726
79)Carlpurchasedamachineforuseinhistradeorbusinesstwoyearsagofor$30,000.Duringthecurrentyear,
Carldonatesthemachinetothelocalcommunitycollege.Atthetimeofthecontribution,themachine'sadjusted
basisis$10,000anditsFMVis$15,000.Carl'sAGIfortheyearis$48,000.Whatistheamountofhischaritable
contributiondeduction?
A)$10,000
B)$14,000
C)$15,000
D)$25,000
Answer:A
Explanation:A)Becausethemachineisordinaryincomeproperty(ifsoldthemachinewouldhaveresultedin
section1245ordinaryincome),theamountofthecontributionisadjustedbasisof$10,000.
PageRef.:I:724;ExampleI:728
80)Duringthecurrentyear,Janespendsapproximately90hoursofhertimeindevelopingcomputersoftwarefora
church.Asaprogrammeranddataanalyst,Janenormallybillsherclientsat$130perhourforhertime.Janealso
driveshercaratotalof800milesinperforminghervoluntarywork.Jane'sdeductiblecontributionis
A)$0.
B)$112.
C)$11,700.
D)$11,812.
Answer:B
Explanation:B)(800miles$.14/mile)=$112.Thevalueofserviceprovidedisnotdeductible.
PageRef.:I:725;ExampleI:729
22
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
81)Carolcontributesapaintingtoalocalmuseumfordisplay.HerAGIis$60,000.Carolpaid$22,000forthe
paintingin2006,butitsmarketvalueatthedateofthecontributionis$25,000.Withnospecialelections,Carol's
deductiblecontributionthisyearis
A)$7,000.
B)$18,000.
C)$22,000.
D)$25,000.
Answer:B
Explanation:B)
$60,000 AGI
.30 Limitationoncapitalgainpropertytopubliccharities
$18,000 CharitableContributionallowedforthisyear
$7,000 Carryover
PageRef.:I:725;ExampleI:730
82)Hughcontributesapaintingtoalocalmuseumfordisplay.HisAGIis$35,000.Hughpaid$16,000forthe
paintingin2000,butitsmarketvalueatthedateofthecontributionis$22,000.IfHughmakestheelectiontoreduce
thecontributionbycertaingains,hisdeductiblecontributionforthisyearwillbe
A)$10,500.
B)$16,000.
C)$17,500.
D)$22,000.
Answer:B
Explanation:B)UseadjustedbasisratherthanFMVand30%limitation.
PageRef.:I:725
83)Patrick'srecordsforthecurrentyearcontainthefollowinginformation.Hedonatedstockhavingafairmarket
valueof$5,000toaqualifiedcharitableorganization.Patrickacquiredthestocktwoyearsagoatacostof$3,000.
Hepaid$1,000formembershipinanathleticscholarshipprogrammaintainedbytheuniversity.Theonlybenefitof
themembershipisthatPatrickisentitledtopurchaseaseasontickettotheuniversity'shomefootballgames.Healso
donated$7,500cashtoaqualifiedcharitableorganization.Patrick'sadjustedgrossincomefortheyearis$100,000.
Whatistheamountofhischaritablecontributiondeduction?
A)$11,300
B)$11,500
C)$13,300
D)$13,500
Answer:C
Explanation:C)
FMVStock
$5,000
AthleticProgram($1,0000.80)
800
Cash
7,500
Total
$13,300
PageRef.:I:725
23
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
84)GracehasAGIof$60,000in2010and2011.Shemakescashcontributionstopubliccharitiesof$34,000in
2010and$31,000in2011.Grace'scharitablecontributioncarryoverto2012is
A)$0.
B)$1,000.
C)$4,000.
D)$5,000.
Answer:D
Explanation:D)$60,000AGI50%=$30,000limiteachyear.Thus,fromlastyeartothisyear,$4,000was
carriedover.Thisyearthetotalcontributionswere$31,000+$4,000carryover=$35,000.$30,000isdeductible
with$5,000carriedovertonextyear.
PageRef.:I:725andI:726;ExampleI:732
85)Danielhadadjustedgrossincomeof$60,000,whichconsistedof$55,000inwagesand$5,000individend
incomefromtaxabledomesticcorporations.Hisexpensesinclude:
Investmentcounselingfee
Attorneyfeeforpreparingawill
Uniondues
Taxreturnpreparationfee
$800
200
350
450
WhatistheamountdeductiblebyDanielfortheaboveitems?
A)$400
B)$600
C)$1,000
D)$1,600
Answer:A
Explanation:A)
Investmentcounselingfee
$800
Uniondues
350
Taxreturnpreparationfee
450
Total
1,600
Minus:2%ofAGI(60,0002%)
(1,200)
NetDeduction
$400
PageRef.:I:728andI:729
24
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
86)Wang,anemployeeofSkyeArchitects,incurredthefollowingunreimbursedexpensesthisyear:
Subscriptiontoarchitecturaljournals
DuestoProfessionalArchitectureSociety
Taxreturnpreparation
Investmentadvice
$800
400
600
500
Wang'sAGIis$75,000.Whatishisdeductionformiscellaneousitemizeddeductions?
A)$0
B)$1,900
C)$800
D)$1,500
Answer:C
Explanation:C)($800+400+600+500(.0275,000)=$800.
PageRef.:I:728
87)Whichofthefollowingisnotrequiredsubstantiationforanoncashcharitablecontribution?
A)nameandaddressofcharitableorganization
B)methodusedtodeterminethedonatedproperty'sfairmarketvalue
C)dateandlocationofpropertydonated
D)useofdonationbycharitableorganization
Answer:D
PageRef.:I:733
88)Duringthecurrentyear,DeborahBaronne,asingleindividual,paidthefollowingamounts:
Federalincometax
Stateincometax
RealestatetaxesonlandinFrance
RealestatetaxesonlandinU.S.
Statesalestaxes
Stateoccupationallicensefee
$10,000
$4,000
$1,500
$1,700
$2,000
$600
HowmuchcanDeborahdeductintaxesasitemizeddeductions?
Answer:$4,000+1,500+1,700=$7,200.
PageRef.:I:79,I:712andI:710
25
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
89)Phoebe'sAGIforthecurrentyearis$120,000.IncludedinthisAGIis$100,000salaryand$20,000of
investmentincome.Inearningtheinvestmentincome,Phoebepaidinvestmentincomeexpenseof$30,000.Shealso
incurredthefollowingexpendituressubjecttothe2%ofAGIlimitation:
Investmentexpenses:
Subscriptionstoinvestmentjournals
Investmentcounseling
Safedepositboxrentalforstockcertificates
Noninvestmentexpenses:
Unreimbursedemployeebusinessexpenses
Taxreturnpreparationfees(nonbusinessrelated)
$500
1,500
100
$1,800
500
WhatisPhoebe'sinvestmentinterestexpensedeductionfortheyear?
Answer:Investmentexpenses:
Subscriptionstoinvestmentjournals
Investmentcounseling
Safedepositboxrental
Total
Disallowedbythe2%limitation:
.02$120,000
$2,400
Unreimbursedemployeeexpenses
(1,800)
Taxreturnpreparationfees
(500)
Investmentexpenses
(remainderof2%limitallocatedtoinvestmentexp)
Deductibleinvestmentexpenses
(100)
$2,000
Netinvestmentincome($20,0002,000)
$18,000
$500
1,500
100
$2,100
$18,000iscurrentlydeductible;$12,000iscarriedoveranddeductedinasubsequentyear.
PageRef.:I:715andI:716;ExampleI:716
90)OnDecember1,2010,Delilahborrows$2,000fromhercredituniontouseinherbusiness.Underthetermsof
thecontract,Delilahactuallyreceives$1,940butisrequiredtorepay$2,000inthreemonths.
a. WhatamountmayDelilahdeductasinterestexpensein2010ifsheisacashbasistaxpayer?
b. WhatamountmayDelilahdeductasinterestexpensein2010ifsheisanaccrualbasistaxpayer?
Answer:
a. Acashbasistaxpayermaydeductthefullamount,$60,whentheloanisrepaidin2011butcannotdeductany
in2010.
b. Anaccrualbasistaxpayermaydeduct1/3$60or$20in2010and$40in2011.
PageRef.:I:720;ExampleI:722
26
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
91)Duringthecurrentyear,AlohaCorporation,apharmaceuticalmanufacturer,donatessomeofitsinventorytothe
AmericanRedCrosswhointendstousethemedicationforthecareoftheneedyandill.Atthetimeofthe
contribution,theFMVoftheinventoryis$75,000.Aloha'sbasisintheinventoryis$50,000.Whatistheamountof
Aloha'scontributiontotheAmericanRedCross?
Answer:$62,500.Becausethistransactionqualifiesundertheexceptiontotherulelimitingthedeductionfor
inventorytoadjustedbasisbecausethecontributionisfortheneedyandill,theamountofthecontributionis
$62,500whichis$75,000FMVreducedby$12,500(halfofthegainthatthetaxpayerwouldrecognizeisitsoldthe
propertyatFMV[($75,000$50,000)appreciation.50)]butlimitedtotwicethebasisoftheproperty($100,000).
PageRef.:I:724;ExampleI:728
27
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
92)During2011RichardandDenisa,whoaremarriedandhavetwodependentchildren,havethefollowingincome
andlosses:
Totalsalaries
Bankaccountinterest
Shorttermcapitalgains
Shorttermcapitallosses
$150,000
25,000
4,000
(1,500)
Theyalsoincurredthefollowingexpenses:
Qualifiedmedicalexpenses
Stateincometaxespaid
Propertytaxesonhome
Qualifiedresidenceinterest
Investmentinterestexpense
Cashcharitablecontributions
Taxreturnpreparationfees
Unreimbursedemployeebusinessexpenses
$8,000
12,000
2,300
9,000
7,500
15,000
3,600
4,000
ComputeRichardandDenisa'staxableincomefortheyear.(Showallcalculationsingoodform.)
Answer:Salaries
$150,000
Interestincome
25,000
NetSTCG
2,500
AGI
$177,500
Itemizeddeductions
Exemptions($3,7004=$14,000)
Taxableincome
(49,850)
(14,800)
$112,850
Itemizeddeductions:
Medicalexpenses[$8,000($177,5007.5%)]=
Stateincometaxes
Propertytaxes
Interestonresidence
Investmentinterestdeductionlimitedtonetinvestmentincome
($27,500interestincome.Noneedtomakeelections)
Contributionslimitedto50%AGIof$177,500=
Misc.2%deductions:
Unreimbursedemployeebusinessexpenses
$4,000
Taxreturnpreparationfee
3,600
Subtotal7,600
Less:2%$177,500AGI=
(3,550)
Allowable2%deductions
Itemizeddeductions
$0
12,000
2,300
9,000
7,500
15,000
4,050
$49,850
PageRef.:Thisisacomprehensiveproblem.Seetextandexamplesthroughoutchapter.
28
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
93)Explainunderwhatcircumstancesmealsandlodgingenroutetoamedicalfacilitymaybedeductible.
Answer:Certaincourtshaveheldthatthecostofmealsisdeductiblewhileenrouteifthetriptothemedicalfacility
islongenoughtowarrantameal.Thelodgingisonlydeductibleifthefollowingthreecriteriaaremet:(1)thetravel
tothemedicalfacilitywasprimarilyforandessentialtothemedicalcare,(2)therewasnosignificantpersonal
pleasureorrecreationinthetravel,and(3)theindividualreceivestreatmentinalicensedhospitaloritsequivalent.
PageRef.:I:74
94)Explainwhenthecostoflivinginaninstitutionotherthanahospitalmaybedeductible.
Answer:Ifanindividualislivinginaninstitutionotherthanahospital,suchasanursinghome,thedeductibilityof
therelatedcostsdependsontheindividualfactsandcircumstances.Iftheprincipalreasonthetaxpayerisinthe
institutionistheneedforandavailabilityofmedicalcarefurnishedbytheinstitution,allcostsofmeals,lodging,
andotherservicesnecessaryforfurnishingthemedicalcarearequalifiedmedicalexpendituresandmaybe
deductible.However,iftheindividualisintheinstitutionprimarilyforconsiderationsotherthanthefurnishingof
medicalcare,onlycostsdirectlyassociatedwiththefurnishingofmedicalcarearedeductible.Thecostsofmeals,
lodging,andotherservicesarenotqualifiedmedicalexpenditures.
PageRef.:I:76
95)Discussthetimingoftheallowablemedicalexpensededuction.
Answer:Generally,adeductionformedicalexpensesisallowedonlyintheyearinwhichtheexpensesareactually
paid,regardlessofthetaxpayer'smethodofaccountingorwhentheeventthatcausedtheexpenditureoccurs.For
example,ifmedicalcareisreceivedduringtheyearbutremainsunpaidasoftheendoftheyear,thedeductionfor
thatcareisdeferreduntiltheyearinwhichpaymentoccurs.Ifmedicalcareisprepaid,nodeductionisalloweduntil
theyearthecareisactuallyrenderedunlessthereisalegalobligationtopayorunlesstheprepaymentisa
prerequisitetoreceiptofthemedicalcare.Iftheobligationischargedonacreditcard,paymentisdeemedtohave
beenmadeonthedateofthecharge,notonthelaterdatewhenthecreditcardbalanceispaid.
PageRef.:I:76andI:77
96)Discusswhatcircumstancesmustbemetforpersonalpropertytaxestobedeductible.
Answer:Twobasictestsmustbemetinorderforapersonalpropertytaxtobedeductible.Thefirstisthatthetax
mustbeanadvaloremtaxonpersonalproperty.Thismeansataxisimposedbasedonthevalueoftheproperty.
Thesecondrequirementisthatthetaxmustbeimposedonanannualbasis,evenifthetaxisnotpaidannually.
PageRef.:I:710
97).Explainwhyinterestexpenseoninvestmentsislimitedtonetinvestmentincome.
Answer:Withnolimitation,highincometaxpayerscouldrealizesignificanttaxsavingsbyborrowinglarge
amountsofmoneyforinvestmentsthatappreciateinvaluebutthatproducenocurrentincome.Thiswouldallowthe
taxpayertohavealargeinterestexpensedeductioninthecurrentyeartooffsetcurrenthighordinaryincomeandto
deferthecapitalgainontheinvestmentsuntiltheyaresold.
PageRef.:I:714
29
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
98)Whenarepointspaidonaloandeductibleasinterestexpense?
Answer:Pointspaidforthepurchase,construction,orsubstantialimprovementofataxpayer'sprincipalresidence
aredeductibleiftheloanissecuredbytheresidenceandthepaymentofpointsisanestablishedbusinesspracticein
thatparticulararea.Pointspaidonaloantopurchasepropertyotherthanaprincipalresidenceortorefinancea
mortgageonaprincipalresidencemustbecapitalizedandamortizedoverthelifeoftheloan.
PageRef.:I:717andI:718;ExampleI:719
99)Mayanindividualdeductacharitablecontributionforservicesrenderedtoacharitableorganization?
Answer:Notforthevalueoftheservicesprovided.Theunreimbursedexpensesincurredinperformingtheservices
aredeductible.Forexample,actualoutofpockettransportationexpenses(or14centsamile),thecostoflodging
and50%ofthecostofmealswhileawayfromhome,andthecostofauniformwithoutgeneralutilitythatis
requiredtobeworninperformingthedonatedservicesaredeductible.Nodeductionisallowedfortraveling
expensewhileawayfromhomeunlessthereisnosignificantelementofpersonalpleasure,recreation,orvacationin
suchtravel.
PageRef.:I:724andI:725
100)Whatistheresultifataxpayermakesacontributiontoacollegeoruniversityandinreturnreceivestheright
topurchaseticketstoathleticevents?
Answer:Thetaxpayermayonlydeduct80%ofthepaymenttothecollegeoruniversityasacharitablecontribution.
PageRef.:I:725
101)Whatisthetreatmentofcharitablecontributionsinexcessoftheapplicablelimitsforthecurrentyear?
Answer:Thecharitablecontributioninexcessofthelimitsiscarriedforwardtothesubsequentfivetaxyears.
Thesecarryoversaresubjecttothesamelimitationsthatapplyinthesubsequentyears.Thatis,acontribution
carryoversubjecttothe30%limitremainssubjecttothe30%limitinthecarryoveryears.Carryoversmayonlybe
deductedtotheextentthatthelimitinthesubsequentyearexceedsthecontributionsmadeduringthatyear.
PageRef.:I:725andI:726
102)Explainhowtaxplanningmayallowadeductionofqualifiedmedicalexpenses.
Answer:Medicalexpensesmaybepushedintooneyearsothatthetotalexceeds7.5%ofthetaxpayer'sAGI(10%
beginningin2013).Neweyeglasses,contactlenses,orotherelectivetreatmentsareexamples.
Ifmedicaltreatmenthasalreadybeenreceived,themedicalexpensesmaybepushedintooneyearbyborrowing
cashtopaytheexpensesorbyusingacreditcard.
PageRef.:I:730
30
Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
103)Explainwhattypesoftaxplanningareavailablefortaxpayersmakingcharitablecontributions.
Answer:
1. Ataxpayerwhoplanstosellsubstantiallyappreciatedlongtermcapitalassetandcontributethecashproceeds
tocharityshouldinsteaddonatethepropertydirectlytocharity.Adirectdonationwillgivethetaxpayeradeduction
equaltoFMVofthepropertyandwillavoidagainontheproperty'sdisposition.Ontheotherhand,ifataxpayeris
planningtocontributeacapitalassetthathasdeclinedinthevalue,thetaxpayershouldselltheproperty,recognize
thelossandcontributethecash.
2. Taxpayerswhodon'thaveanyotherlargeitemizeddeductionsmaywanttobunchtheircharitablecontributions
intooneyearandthentakethestandarddeductioninayearwhentheydon'tmakesubstantialcharitable
contributions.
3. Acontributionoflongtermcapitalgainpropertytoapubliccharityissubjecttoa30%ofAGIlimit.An
electioncanbemadetohavethepropertysubjecttoa50%ofAGIlimit.Thiselectionreducestheamountof
contributionoftheproperty'sFMVbythegainthatwouldhavebeenrealizedhadthepropertybeensold.Thus,this
electionshouldonlybemadeinspecialcircumstances(e.g.the30%limitappliesandthereislittledifference
betweentheproperty'sFMVanditsbasis).
PageRef.:I:731andI:732
104)Jillisconsideringmakingadonationtoherchurch.Shewantstogive$50,000forthenewchurchbuilding.
ShehassomestockwithaFMVof$50,000andanadjustedbasisof$10,000thatshehasheldfor3years.Sheis
planningtosellthestockanddonatethe$50,000proceedstothechurch.Whatshouldsheconsiderbeforetaking
thataction?
Answer:IfJillsellsthestock,shewillrealizealongtermcapitalgainof$40,000onwhichshewillpay15%tax
($6,000)ifshehasnolossesagainstwhichtooffsetthegain.Heraftertaxproceedswillbe$44,000andshewill
needanadditional$6,000todonate$50,000tothechurch.However,whenataxpayerdonateslongtermcapital
gainproperty,theamountofthecontributionistheFMVoftheproperty.Thus,Jillgetsataxdeductionof$50,000
(subjecttothecharitablecontributionlimits).
PageRef.:I:731toI:732;ExampleI:736
105)PatrickandBelindahaveatwelveyearoldson,Aidan,whoisautistic.PatrickandBelindapaytuitionof
$20,000annuallyforAidantoattendaschoolforautisticchildren.Whattaxissuesshouldbeconsidered?What
additionalinformationwouldyouneed?
Answer:Willthetuitionqualifyasadeductiblemedicalexpense?
Otherinformationneededis:
Doestheschoolprovideanymedicalservices?
DoesAidangototheschoolonlyduringtheday,orisitaboardingschool?
DoPatrickandBelindareceiveanyreimbursementforthetuitionpaidtotheschool?
PageRef.:I:77
106)Phil'sdaughter,Megan,wantstotraveltoAfricaonamissiontripwithherchurch.Thechurchgroupneedsto
raise$3,000perpersonforthetripandisseekingcontributions.Philisconsideringdonating$3,000tothechurch
sothatMegancangoonthetrip.Whattaxissuesarepresentinthesefacts?
Answer:WillPhilbeabletodeductthe$3,000asacharitablecontributionsinceafamilymemberwillreceivea
benefitfromthedonation?
PageRef.:I:722andI:723
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Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall
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Copyright2012PearsonEducation,Inc.PublishingasPrenticeHall