Deductions
Solutions 11
Itemized to Tax Research Problems
11-41 Shirley should be able to deduct some, if not all of the interest that she pays to Sam in each of the next 10 years. In John L. Seymour, 109 T.C. 279 (1997) the Tax Court determined that interest paid in such a situation that is attributable to debt on the taxpayer's principal residence is deductible if the debt is secured by the residence. Also, the Court determined that any interest paid on debt associated with investments should qualify as investment interest and is deductible subject to the investment interest expense limitation. Thus, Shirley must first allocate the debt between her residence, stock, and other real estate. If the debt is secured by her residence, that much of the interest is deductible residence interest. Assuming that the stock and other real estate is being held for investment, the interest from debt allocated to these items is deductible investment interest. The Seymour case was cited and followed in Ronald R. Armacost, T.C. Memo 1998-150, 75 TCM 2177 (1998).
11-1
11
Itemized Deductions
Test Bank
True or False
1. H and W have been divorced for two years. H paid for W's dental bills. W is otherwise self-supported. H may deduct W's dental bills as a medical expense. 2. The medical expenses of a child of divorced parents are deductible only by the custodial parent. 3. Medical expenses incurred during 2011 but not paid until 2012 can be deducted in either year, but not both. 4. If a doctor prescribes a swimming pool for a patient for medical reasons, the entire cost of the swimming pool is a deductible medical expense. 5. Under certain circumstances, the medical insurance premiums of a sole proprietor may be deducted either for A.G.I. or from A.G.I. 6. Assuming the taxpayer itemizes deductions, medical expenses are deductible only to the extent that they exceed 7.5 percent of the taxpayer's adjusted gross income. 7. No deduction is allowed for the cost of cosmetic surgery unless it is necessary to ameliorate a congenital deformity, a personal injury arising from an accident or trauma, or a disfiguring disease. 8. The prepayment of medical expenses qualifies as a current deduction only if the taxpayer is required to make the payment as a condition of receiving the medical services. 9. If the principal reason an individual is in a nursing home is the availability of needed medical care, the entire cost of the medical care qualifies as a medical deduction. 10. A taxpayer who uses his or her personal automobile for medical transportation and does not want to calculate actual expenses is allowed a deduction of 50 cents a mile. The cost of meals and lodging while en route to a medical facility is allowed as a medical expense deduction.
11-3
11.
11-4
Chapter 11
Itemized Deductions
12.
Deductible medical expenses include all medical care insurance premiums paid by the taxpayer with after-tax dollars. A taxpayer who deducted $900 of medical expenses last year must include in gross income no more than $900 of any medical expense reimbursement received this year. Federal income taxes related solely to the taxpayer's trade or business income are allowed as a deduction in arriving at adjusted gross income. On a sale of real property, if the buyer pays the real estate taxes for the entire year, the seller's amount realized must be increased to reflect that portion of the taxes attributable to the seller. On a sale of real property, if the buyer pays the real estate taxes for the entire year, the seller will be denied any deduction for these property taxes. Even though the seller of real property pays the real estate taxes for the entire year, the buyer will be allowed to deduct his or her share of these property taxes. The buyer's basis of real property purchased will include any portion of the real estate taxes paid by the buyer that is attributable to the portion of the year the property was owned by the seller. Foreign income taxes paid by an individual may either be deducted as an itemized deduction or claimed as a credit against the taxpayer's U.S. income tax. State and local sales taxes do not qualify as deductible taxes. A taxpayer must always include his or her state income tax refund in income. Personal property taxes are deductible as an itemized deduction only if they are based on the value of the property. A special assessment for paving a street is a deductible tax. No deduction is allowed for interest paid on loans to purchase personal items such as clothes and household furniture. Norm is employed as an auditor by a large public accounting firm. He uses his car entirely for business. Interest on the loan used to purchase his car is entirely deductible. Ed Entry owns and operates his own public accounting firm as a sole proprietor. He uses his car entirely for business. Interest on the loan used to purchase his car is entirely deductible. Interest expense attributable to a student loan is completely deductible assuming the proceeds are used to pay tuition and other related fees. All interest incurred on a mortgage loan secured by the taxpayer's principal residence is deductible. Interest expense attributable to a loan on a life insurance policy may be deducted as long as the proceeds are used to purchase a new residence. T purchased his home for $100,000 five years ago. Although he has made no improvements to the home, it has appreciated considerably and is currently worth $175,000. Assuming T obtains a $30,000 second mortgage on his home and uses the proceeds to purchase a personal auto, the interest on such debt is deductible as long as he itemizes his deductions.
13.
14.
15.
16.
17.
18.
19.
20. 21. 22.
23. 24.
25.
26.
27.
28. 29.
30.
Test Bank
11-5
31.
K purchased her residence several years ago for $80,000. The current balance of her mortgage loan is $60,000. During the year, she borrowed $125,000 from a savings and loan, and secured the loan with a second mortgage on her home, now worth $240,000. She may deduct the interest on the entire amount of debt related to her home if she uses the proceeds of the new loan to make permanent home improvements. A taxpayer who makes direct gifts to the children of a needy family will not be allowed a charitable contribution deduction. A deduction for charitable contributions is available only if a taxpayer itemizes his or her deductions. Like capital losses, an individual taxpayer's excess charitable contributions may be carried forward indefinitely. On the condition that the city rezone the area to allow its commercial development, T donated a piece of property to the city to be used for the site of a new public school. T will be allowed a charitable contribution deduction for this gift. The taxpayer's charitable deduction for any gift of capital gain property to a public charity is limited to the property's adjusted basis. Charitable contributions of capital gain property subject to the 30 percent limitation can be converted to the 50 percent category if the taxpayer elects to reduce his or her claimed deduction by the property's unrealized appreciation. Any contributions in excess of the 50 percent limitation can be carried back three years and carried over five years. Unlike excess contributions subject to the 50 percent limitation, excess contributions subject to either the 20 or 30 percent limitations cannot be carried forward. An employee's unreimbursed business expenses are treated as miscellaneous itemized deductions subject to a 2 percent of adjusted gross income floor.
32.
33. 34.
35.
36.
37.
38.
39.
40.
Multiple Choice
41.
Which one of the following expenses does not qualify as a deductible medical expense? a. b. c. d. e. Tuition to a special school for a deaf child to learn lip reading Cost of contact lenses Cost and care of guide dog used by a blind person Fees paid to attend a weight-loss program Cost of motorized wheelchair and its maintenance
42.
A medical expense deduction is allowed for all of the following items except a. b. c. d. e. Treatment affecting any function of the body Expenditures for prescription medicines or drugs Expenses paid for transportation essential to the rendition of medical care Expenses for health club membership Medical care insurance premiums for taxpayer and dependents
11-6
Chapter 11
Itemized Deductions
43.
Because of her doctor's prepayment policy, P used a bank credit card to pay for prenatal care in 2011, even though she will not have the baby until June, 2012. These medical expenses can be deducted a. b. c. d. e. In 2011 even though she may pay the credit card account off in 2011 or later In 2011 only if she pays off the bank card account in that year In 2012 because that is the year the baby is born In 2012 because it is assumed that this is the year the credit card account will be paid Never, since prenatal care is not an allowable deductible medical expense
44.
T's A.G.I. for the current year is $20,000. Her medical expenses during the year were: Aspirin, cold medicine, etc. Prescription drugs Medical insurance premiums Doctors, dentists, etc. $ 125 260 1,000 3,200
Assuming she is not reimbursed for any medical expenditures during the current year, T's medical expense deduction is a. b. c. d. e. 45. $2,700 $2,960 $3,085 $4,460 $4,585
P, a single taxpayer, had $12,000 of deductible medical expenses in 2011. His 2010 A.G.I. was $24,000. His insurer reimbursed P for $11,000 of the expenses in 2012, and did not reimburse P for any expenses during 2011. If P deducted all of his allowable medical expenses on his 2011 return, how much of the reimbursement must be included in gross income for 2012 (P's itemized deductions for 2011 exceeded his standard deduction by $15,000.) a. b. c. d. e. $0 $900 $10,000 $10,200 $11,000
46.
Taxpayers are allowed to deduct several types of taxes for Federal income tax purposes. These include a. b. c. d. e. State, local, and foreign income taxes State, local, and foreign real property taxes State and local personal property taxes All of the above Both a. and b.
47.
Which of the following taxes qualifies as an itemized deduction for Federal income tax purposes? a. b. c. d. e. State and local sales taxes Tax assessments for sewer lines State and local taxes on gasoline State taxes on cigarettes None of the above
Test Bank
11-7
48.
Z is a cash basis single taxpayer who itemizes her deductions. During 2011, Z had $4,000 in state income taxes withheld from her paycheck by her employer. She also paid the following estimated state income taxes for 2011: 4/15/2011 6/15/2011 9/15/2011 1/15/2012 $600 600 600 600
What is Z's deduction for state income taxes on her 2011 Federal income tax return? a. b. c. d. e. 49. $5,200 $5,600 $5,800 $6,000 $6,400
During 2011, D paid the following taxes which were not incurred in connection with a trade or business: Federal income taxes (withheld by employer) FICA taxes (withheld by employer) State income taxes (withheld by employer) Federal gasoline taxes Federal excise taxes on telephone bills $4,500 2,800 3,000 350 90
Assuming D itemized her deductions for Federal income tax purposes, the amount of deductible taxes are a. b. c. d. e. 50. $3,000 $4,200 $4,640 $7,440 $11,940
R paid the following state taxes during 2011: State income taxes due with his 2010 tax return State income taxes withheld by his employer Real estate taxes paid on personal residence Personal property taxes based on value State auto license tax based on weight $ 700 2,500 2,000 150 50
What amount should R deduct as taxes in calculating itemized deductions on his 2011 Federal income tax return? a. b. c. d. e. 51. $2,500 $3,200 $5,200 $5,350 $5,900
The real property taxes on R's house are computed on a calendar year basis and are due November 1st of each year. The realty taxes on R's house were $2,400 for 2011. R sold his house on June 1, 2011, before the property tax payment was due. How much of these real property taxes are apportioned to and deductible by R as an itemized deduction on R's 2011 Federal income tax return? a. b. c. d. e. $0 $993 $1,407 $1,999 $2,400
11-8
Chapter 11
Itemized Deductions
52.
D made the following payments during 2011: Interest on revolving charge accounts Interest on original $140,000 home mortgage Interest on bank loan (proceeds of loan were used to purchase state of New York tax-exempted bonds) Interest on credit union loan (proceeds of loan were used for a family vacation) $ 400 6,800
3,100
1,600
How much of the above amounts may D deduct as an itemized deduction for interest expense on his Federal income tax return? a. b. c. d. e. 53. $6,800 $7,200 $8,800 $9,900 $11,900
Which of the following types of interest expense generally is not deductible to any extent? a. b. c. d. e. Interest expense attributable to a $25,000 second mortgage on the taxpayer's principal residence. (The proceeds of the loan were used to purchase an automobile used solely for personal purposes.) Interest expenses attributable to a $60,000 debt secured by a principal residence. (The proceeds of the debt, which exceed the original cost of the home, were used to pay for a vacation.) Interest expense attributable to a $19,500 debt incurred to finance the purchase of an automobile. (The car was used by a self-employed person solely for business.) Interest expense attributable to debt incurred to finance the purchase of tax-exempt securities. Interest expense attributable to a $75,000 debt. (The proceeds of the loan were used to purchase Ford Motor Co. stock, and the taxpayer's interest income and dividends received from the stock exceed the interest expense on this loan.)
54.
Mr. and Mrs. K purchased their current residence in 1998 for $100,000. Since that time they have added a room and made additional improvements costing $20,000. The current balance on the mortgage loan is $40,000 and the house is worth $200,000. The couple now wishes to obtain a new mortgage on their home and use the proceeds for a second honeymoon. The maximum mortgage loan that they could obtain for which all of the interest would be deductible is a. b. c. d. e. $20,000 $60,000 $80,000 $100,000 $140,000
55.
T borrows $10,000 from his bank on April 1, primarily for expenses involved in starting a lawn-care business. T deposits the $10,000 in a money-market account with which he can write checks. T leaves the $10,000 untouched for the remainder of the year. The interest expense on T's loan will be classified as a. b. c. d. e. Nondeductible interest Qualified residence interest Tax deferred interest expense Investment interest expense Personal interest expense
Test Bank
11-9
56.
On February 1, T borrowed $20,000. Of this amount, $9,000 is used to invest in a business on February 10 and $11,000 is used on February 15 to buy a Rolex watch. On April 30, he repaid $15,000. Of the repayment amount, how much reduces the portion allocated to investment? a. b. c. d. e. $4,000 $5,000 $9,000 $11,000 None of the above amounts
57.
To deduct a contribution to a charitable organization, the organization could be any one of the following except a. b. c. d. e. A war veterans' organization A corporation operated for scientific purposes A nonprofit volunteer fire company A needy family A state-supported university
58.
Which of the following contributions is allowed as a charitable contribution deduction? a. b. c. d. e. Lost income associated with rent-free use of a taxpayer's property by a qualifying charity Unreimbursed expenses incurred by the taxpayer in rendering services to a qualifying charity The value of time or services rendered to a charitable organization All of the above None of the above
59.
F's 2011 adjusted gross income is $42,000. F made the following charitable contributions in 2011: Cash contribution to church Tickets to a public charity dinner (the fair market value of the two dinners was $100) Donation of used household goods to the Salvation Army (cost was $400, fair market value was $150) $4,500
2,000
What is F's 2011 charitable contribution deduction (assuming he attended the charity dinner and itemizes his deductions)? a. b. c. d. e. 60. $4,750 $5,000 $6,550 $6,650 $6,900
Which one of the following would not be an allowable charitable deduction? a. b. c. d. e. Costs of gasoline and parking incurred by a taxpayer using his or her own vehicle in connection with the charitable services Cost and upkeep of a uniform used in rendering charitable services if it is not suitable for everyday use Insurance and depreciation on an automobile used in connection with a charitable service The standard mileage rate of 14 cents per mile for using an automobile in charitable activities All of the above would be allowable charitable Chapter deductions.
11-10 11
Itemized Deductions
61.
D started a small business to make and sell Christmas tree ornaments. She imported most of the materials from Europe, used real gold, and used some very highly paid workers to assemble the ornaments. Her cost for each ornament was $500. She marketed them at $1,000 apiece and sold none. After Christmas, she marked them down to $475 and sold one. She donated the remaining twenty ornaments to her church. Disregarding any percentage limitation, how much may she deduct for this contribution? a. b. c. d. e. $9,000 $9,500 $10,000 $20,000 None of the above
62.
Which of the following is not deductible as a charitable contribution? a. b. c. d. e. Unreimbursed auto expenses on church business Reasonable lodging costs while away from home overnight on business for a qualified charitable organization Fair market value of appreciated stock held for five months and given to a church Fair market value of used clothing given to the Salvation Army Fair market value of land held as an investment for 10 years and given to a church
63.
All of the following items are miscellaneous itemized deductions except a. b. c. d. e. Home office expenses Reimbursed travel expenses Union dues Tax advice Fees for investment advice
11
Itemized Deductions
Solutions to Test Bank
True or False
1. False. The status of a person as the taxpayer's spouse or dependent must exist either at the time the medical services are rendered or at the time the expenses are paid. Since neither of these conditions are met, H cannot deduct the payment. (See p. 11-2.) 2. False. Medical expenses of children of divorced parents are deductible by the parent who pays them. (See p. 11-3.) 3. False. Medical expenses qualify for deduction only in the year paid. [See p. 11-3 and Reg. 1.213-1(a)(1).] 4. False. Expenditures for special items and equipment may qualify as deductible medical expenses only if the items were purchased primarily for the prevention or alleviation of a physical or mental defect or illness. Even if the capital expenditure qualifies for deduction, only the excess of the cost over the increase in the fair market value of the taxpayer's home due to the improvement can be deducted. (See Example 4 and pp. 11-5 and 11-6.) 5. True. Self-employed individuals are allowed a deduction for A.G.I. of any amount paid for health insurance on behalf of the self-employed person, his or her spouse, and dependents. This same amount may be considered for deduction from A.G.I. (subject to the 7.5% floor) if the taxpayer itemizes his or her deductions. (See Example 12 and pp. 11-12 and 11-13.) 6. True. Only that portion of the total medical expenses in excess of 7.5 percent of the taxpayer's A.G.I. is allowed as an itemized deduction. (See Example 3 on p. 11-5.) 7. True. Until 1991, the cost of cosmetic surgery was deductible regardless of the reason it was done. Today, only such surgery necessary to ameliorate a congenital deformity, a personal injury arising from an accident or trauma, or a disfiguring disease qualifies as a deductible medical treatment. (See p. 11-3.) 8. True. [See the Tax Court's decision in Robert S. Basset, 26 T.C. 19 (1956), the IRS requirement of Rev. Rul. 75-303, 1975-2 C.B. 87, and p. 11-4.] 9. False. [See Examples 5 and 6, pp. 11-6 and 11-7, and Reg. 1.213-1(e)(1)(v)(b).]
11-11
11-12 Chapter 11
Itemized Deductions
10.
False. The IRS allows a deduction of only 19 cents a mile for use of a personal vehicle. However, the taxpayer is also allowed to add parking fees and tolls paid while traveling for medical treatment. (See pp. 11-7 and 11-8). False. Only transportation expenses and the cost of lodging qualify as medical expenses. Meal costs are deductible only if provided by a hospital or similar institution as a necessary part of medical care. [See pp. 11-7 and 11-8, 213(d)(2), and Reg. 1.213-1(e)(1)(iv).] True. Medical insurance premiums are deductible medical expenses if paid by the taxpayer with after-tax dollars and for coverage for the taxpayer, his or her spouse, and dependents. However, if the taxpayer's employer uses some of the employee's pretax salary to pay for the premiums, none of the payment qualifies for deduction. [See p. 11-8 and Reg. 1.231-1(e)(4).] True. The reimbursement must be included in gross income to the extent of the lesser of: (1) the previous medical expense deduction, or (2) the excess of the taxpayer's itemized deductions over his or her standard deduction. (See Examples 8 and 9, and pp. 11-8 and 11-9.) False. Federal income taxes are considered personal in nature even though they relate solely to the taxpayer's business income. Therefore, these taxes are not deductible. (See p. 11-14 and 164.) True. The portion of the real estate taxes paid by the buyer that are allocated to the fraction of the year the property was owned by the seller is treated as a liability of the seller. When a buyer of property pays a liability of the seller, the seller must treat the debt relief as money received on the sale. [See Example 20, p. 11-19, 164(d), and Reg. 1.164-6(b).] False. The real estate taxes must be apportioned between the buyer and the seller. The seller is allowed to deduct his or her share of the taxes--but must increase the amount realized on the sale by the same amount. The buyer is allowed to deduct his or her share of the taxes--but must increase basis of the purchased property by the seller's portion of the property taxes. [See Example 20, p. 11-19, 164(d), and Reg. 1.164-6(b).] True. The real estate taxes must be apportioned between the buyer and the seller in the year of sale. The buyer is allowed to deduct his or her share of the taxes. [See Example 21, p. 11-19, 164(d), and Reg. 1.164-6(b).] True. The buyer will be allowed to deduct only the portion of the taxes paid that are attributable to the fraction of the year he or she actually owned the property. The remaining taxes paid are treated as being paid on behalf of the seller. Consequently, the buyer must add this amount to the basis of the real property purchased. [See Example 20, p. 11-19, 164(d), and Reg. 1.164-6(b).] True. The taxpayer should consider which option will reap the greater tax benefit. (See p. 11-15.) False. State and local sales taxes may be deducted in lieu of any other state income taxes paid by the taxpayer. False. The refund must be included in gross income only if the taxpayer received a tax benefit (i.e., a deduction) in a prior year. (See Example 15, p. 11-16, and 111.) True. Only ad valorem (based on value) taxes on personal property are deductible. [See Examples 17 and 18, p. 11-18, 164(b)(1), and Reg. 1.164-3(c).] False. Tax assessments for street paving tend to increase the value of the property assessed and are not deductible. Instead, these taxes are added to the cost basis of the property. [See p. 11-19, 164(c)(1), and Reg. 1.164-2(g) and 1.164-4(a).] True. Consumer interest is not deductible. (See pp. 11-20 and 11-21.) False. Interest incurred by an employee in connection with his or her trade or business is considered personal interest. (See Examples 22 and 24 and p. 11-21.)
11.
12.
13.
14. 15.
16.
17.
18.
19. 20. 21. 22. 23.
24. 25.
Solutions to Test Bank
11-13
26.
True. Although interest incurred by an employee in connection with his or her trade or business is considered personal interest and is not deductible, interest incurred by a self-employed person in connection with his or her trade or business is deductible. (See Example 23 on p. 11-21.) False. Prior to 2002, interest on a student loan was considered nondeductible personal interest. Today, student loan interest up to a limit of $2,500 is deductible for adjusted gross income. (See p. 11-28.) False. Only the interest attributable to $1 million of acquisition indebtedness and $100,000 of home equity indebtedness is deductible. (See Examples 28 and 29 and p. 11-23.) False. Interest on a loan against a life insurance policy is considered nondeductible personal interest. The fact that it is used to purchase a residence is irrelevant. Only interest on debt secured by the residence is deductible. (See Example 25, p. 11-22.) True. Interest on the $30,000 home equity loan is deductible regardless of how the taxpayer uses the loan proceeds. (See Example 30 and p. 11-24.) True. Because the proceeds were used for home improvements, the loan is not considered a home-equity loan. Instead, this mortgage will be treated as acquisition indebtedness. Since the total debt associated with the residence does not exceed $1 million, all of the interest is deductible. (See p. 11-24.) True. To be deductible, the contribution must be made to a qualifying charitable organization. (See Example 48 and p. 11-36.) True. Prior to 1987, non-itemizers were allowed a partial deduction for charitable contributions. (See p. 11-37 and 170.) False. The carryover period is limited to five years. [See p. 11-45 and 170(d)(1)(A).]. False. Because T's contribution to the city was motivated by his expectation of the city's favorable act of rezoning the area, the transfer will not qualify for deduction. (See Example 49 on p. 11-37.) False. The measure of the contribution deduction of capital gain property is generally its fair market value rather than its adjusted basis. If the capital gain property is tangible personalty, however, the charity must be able to use the property in its charitable activities. If not, the deduction is limited to the property's adjusted basis. (See Examples 55 and 56, and pp. 11-40 and 11-41.) True. This may result in a larger deduction in the current year since the reduced amount will be subject to the higher (i.e., 50%) ceiling limitation. [See Example 63, p. 11-44, and 170(b)(1)(C)(iii).] False. Excess contribution deductions can be carried forward only. The carryover period is five years. (See Examples 65 and 66 and pp. 11-45 and 11-46.) False. Excess contributions from any of the three limitations can be carried forward five years. It is important to note, however, that current year contributions are deducted first. (See Examples 65 and 66 and pp. 11-45 and 11-46.) True. Prior to 1987, an employee's unreimbursed travel and transportation expenses were allowed as deductions in arriving at adjusted gross income. [See p. 11-46 and 62(a)(2)(A).]
27. 28. 29.
30. 31.
32. 33. 34. 35. 36.
37. 38. 39.
40.
Multiple Choice
41.
d. The fees paid for a weight-loss program will not qualify as a deductible medical expense even if a doctor recommends that the taxpayer attend such a program. (See pp. 11-3 and 11-4, Exhibit 11-2 on p. 11-4, and pp. 11-5 through 11-8.) d. Health club membership expenses are not eligible for tax deduction. (See Exhibit 11-2 on p. 11-4.)
42.
11-14 Chapter 11
Itemized Deductions
43.
a. If prepayment is required, prepaid medical expenses are deductible. Also, the IRS has ruled that the use of a bank credit card to pay for medical expenses qualifies as payment in the year of the credit card charge even though the taxpayer may not repay the bank during that year. (See p. 11-4 and Rev. Rul. 78-39, 1978-1 C.B. 73.) b. Expenditures for over-the-counter medicines are not deductible. Prescription drugs Medical insurance premiums Doctors, dentists, etc. Less: 7.5% of A.G.I. Medical expense deduction (See Example 3 and pp. 11-4 and 11-5.) $ 260 1,000 3,200 $4,460 (1,500) $2,960
44.
45.
d. P could deduct $10,200 in 2011 for medical expenses. Medical expenses Less: 7.5% of $24,000 (A.G.I.) 2011 medical expense deduction $12,000 (1,800) $10,200
The reimbursement of $11,000 must be included in P's 2012 gross income to the extent of the lesser of (1) the 2011 medical expense deduction ($10,200), or (2) the excess of itemized deductions over P's standard deduction ($15,000). Therefore, $10,200 of the $11,000 reimbursement must be included in P's 2012 gross income. (See Example 8 and pp. 11-8 and 11-9.) 46. 47. d. These items, and generation-skipping transfer taxes, are allowable deductions. [See p. 11-14 and 164(a).] a. State and local sales taxes are deductible for Federal income tax purposes. Tax assessments for sewer lines should be capitalized as part of the cost basis of the property subject to the assessment. State and local taxes on gasoline and cigarettes are not deductible. [See pp. 11-13 through 11-19 and 164(a).] c. The 1/15/12 payment would be deductible on her 2012 Federal income tax return. (See Example 13 and p. 11-15.) a. Only the state income taxes qualify as an itemized deduction for Federal income tax purposes. (See pp. 11-13 through 11-19 and Exhibit 11-4.) d. The auto license fee is not deductible. (See pp. 11-13 through 11-19, and Exhibit 11-4.) b. R may deduct the amount of property tax allocated to his period of ownership. This amount increases the buyer's basis, and R's amount realized.
48. 49. 50. 51.
151 days $2,400 $993 365 days
(See Examples 20 and 21, and p. 11-19.) 52. a. The interest on the bank loan made to purchase the state of New York (tax-exempt) bonds is not deductible. The entire amount of the interest paid on the home mortgage (since it is the original mortgage) is deductible. None of the interest paid on revolving accounts and the interest on the credit union loan is deductible. Thus, only $6,800 is deductible. [See pp. 11-20 through 11-29, and 265(2).] d. Answers a. and b. are qualified residence interest and fully deductible. Answer c is interest on a business expense, also fully deductible. Answer e is investment interest expense and deductible to the extent of net investment income. (See pp. 11-20 through 11-29.) e. Mr. and Mrs. K. can deduct interest on the refinancing of the existing $40,000 mortgage loan plus the interest on home equity indebtedness of $100,000 or less. (See Examples 29 through 32, and pp. 11-23 and 11-24.)
53.
54.
Solutions to Test Bank
11-15
55.
d. Temporary Regulation 1.163-8T classifies interest according to how the loan proceeds are spent. In the case of loan proceeds that are not spent, but rather invested in a money market fund, the interest expense on the loan is classified as investment interest expense regardless of whether the account bears interest. (See Example 36 and p. 11-29.) a. Of the $15,000 repayment, $11,000 reduces the portion of the loan allocated to personal expenditures and the remaining $4,000 reduces the portion allocated to investment. (See Example 42 and p. 11-32.) d. A needy family does not qualify as a charitable organization for purposes of deducting charitable contributions. If a taxpayer wishes to provide help to a needy family and claim a deduction, he or she should make the contribution to an organization such as a church and encourage the organization to provide the needed help. (See pp. 11-35 and 11-36.) b. Unreimbursed expenses incurred by the taxpayer in rendering services to a charitable institution qualify as charitable contributions. Expenses attributable to the rent-free use of property by such an organization qualifies as a charitable contribution as well. [See Example 50, p. 11-38, and Reg. 1.170A-1(g).] c. $6,550, computed as follows: Cash contribution to church Tickets (cost $2,000 FMV $100) FMV of household goods Total (See pp. 11-37 through 11-41.) $4,500 1,900 150 $6,550
56. 57.
58.
59.
60.
c. A person who carefully records all expenses for gasoline, oil, parking, and tolls may deduct the amount, or he may use the standard mileage rate of 14 cents per mile to calculate the cost of using an automobile in charitable activities. No deduction is allowed for insurance, depreciation, or the costs of general repairs and maintenance. [See pp. 11-37 and 11-38, and 170(j).] b. The ornaments represent ordinary income property to D. The usual rule is that the donor is limited in her deduction to the property's FMV reduced by the amount of ordinary income that would have been realized if the property would have sold at its FMV. However, when the adjusted basis ($500) is greater than the FMV ($475), the deduction is limited to the FMV. Therefore, D's deduction may not exceed 20 $475 = $9,500. (See pp. 11-38 and 11-39.) c. Since the stock has not been held long enough to be classified as a long-term capital gain asset, the deduction is limited to the property's basis. (See pp. 11-38 through 11-41.) b. Prior to 1987, an employee's unreimbursed travel and transportation expenses were allowed as deductions in arriving at adjusted gross income. Today, all unreimbursed employee business expenses are grouped with the miscellaneous itemized deductions and are deductible only to the extent the total amount exceeds 2 percent of adjusted gross income. (See Exhibit 11-5, and pp. 11-46 and 11-47.)
61.
62. 63.