10
DEDUCTIONS CHAPTER AND LOSSES: CERTAIN ITEMIZED DEDUCTIONS
SOLUTIONS TO PROBLEM MATERIALS
Question/ Learning
Problem
Objective
1
LO 1, 2
2
3
4
5
LO 2
LO 2
LO 2
LO 2
6
LO 2
7
LO 2
8
LO 2
9
10
LO 2
LO 2
11
12
13
14
LO 3
LO 5, 8
LO 5, 8
LO 5
15
16
LO 5
LO 5
17
LO 6
18
LO 6
Topic
Effect of changes in AGI on medical
expense deduction
Definition of a medical expense
Cosmetic surgery as a medical expense
Nursing home expenses
Capital expenditure as a medical
expense
Medical expenses of noncustodial
parent
Self-employed versus employee
medical insurance
Medical and casualty loss
reimbursement
Health savings account (HSA)
Free medical care; medical expenses
and divorce
Apportionment of real estate tax
Mortgage interest expense
Home equity loan
Home equity loans and personal
expenditures
When points are deductible
Deduction of interest on debt between
related parties
Contribution to an individual and
church
Value received for contribution
Status:
Present
Edition
Q/P
in Prior
Edition
New
New
Unchanged
New
Unchanged
3
Unchanged
6
Unchanged
7
Unchanged
8
New
Unchanged
10
5
Unchanged
Unchanged
New
Unchanged
11
13
Unchanged
Unchanged
15
17
Unchanged
18
Unchanged
19
16
Instructor: For difficulty, timing, and assessment information about each item, see p. 10-4.
10-1
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in whole or in part.
10-2
2011 Comprehensive Volume/Solutions Manual
Question/ Learning
Problem
Objective
19
20
21
22
LO 6
LO 6
LO 6
LO 6
23
*24
LO 6, 8
LO 2
*25
LO 2
26
LO 2
27
*28
LO 2
LO 2
29
LO 2
30
31
LO 2
LO 3
32
LO 4
*33
LO 5
34
LO 5
35
LO 6
36
37
LO 6
LO 6, 8
38
LO 6
39
LO 6
40
LO 6
41
*42
*43
44
LO 6, 8
LO 2, 3, 4,
5, 7, 8
Topic
Charitable contribution: benefit received
Contribution of services
Charitable contribution: various
Relevant issues in supporting a
charitable contribution deduction
Timing of contribution
Medical expense deduction and
reimbursement
Medical expenses: deduction and tax
benefit rule
Capital expenditures as medical
expense deduction
Self-employed health insurance
Medical expense deduction: taxpayer
and dependents
Medical expenses: dependent and
capital expenditures
Health savings accounts
Apportionment of real estate taxes:
effect on basis and amount realized
State income tax deduction: estimated
payments and overpayment of prior
years liability
Home equity loan: calculation of
interest expense deduction
Related party loans: interest deduction
and income inclusion
Charitable contribution deduction:
exception to tangible-benefitreceived rule
Stock donation: value of contribution
Charitable contribution: reduced
deduction election
Application of percentage limitations
to contribution of capital gain
property
Charitable contribution: reduced
deduction election
Tangible benefit derived, year of
charitable contribution deduction
Choice of property for contribution
Itemized deductions: joint vs. separate
returns
Cumulative
Cumulative
Status:
Present
Edition
Q/P
in Prior
Edition
Unchanged
Unchanged
Unchanged
New
20
21
22
Unchanged
New
23
New
Unchanged
26
Unchanged
Unchanged
27
28
Unchanged
29
Unchanged
New
30
Unchanged
32
Modified
33
Unchanged
34
Modified
35
Modified
Unchanged
36
37
Unchanged
38
New
Unchanged
40
Unchanged
Modified
41
42
Modified
Unchanged
47
48
*The solution to this problem is available on a transparency master.
Instructor: For difficulty, timing, and assessment information about each item, see p. 10-4.
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
Deductions and Losses: Certain Itemized Deductions
Research
Problem
1
2
3
Topic
Interest deduction
Charitable contribution
Internet activity
Status:
Present
Edition
Unchanged
New
Unchanged
10-3
Q/P
in Prior
Edition
1
3
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
10-4
Question/
Problem
2011 Comprehensive Volume/Solutions Manual
Difficulty
Est'd
completion
time
1
Easy
10
2
Easy
10
3
Easy
5
4
Medium
5
Easy
5
6
Easy
5
7
Easy
5
8
Easy
5
9
Medium
10
10
Medium
15
11
Medium
15
12
Medium
10
13
Medium
10
14
Hard
15
15
Easy
5
16
Easy
5
17
Easy
5
18
Easy
5
19
20
Easy
Hard
5
15
21
Easy
5
22
Hard
15
23
Hard
10
10
Assessment Information
AICPA*
AACSB*
Core Comp
Core Comp
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement
FN-Measurement | FNReporting
FN-Measurement
FN-Measurement | FNReporting
FN-Measurement | FNReporting
Analytic | Reflective
Thinking
Analytic
Analytic
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic
Analytic
Analytic
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic
Analytic
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
*Instructor: See the Introduction to this supplement for a discussion of using AICPA and
AACSB core competencies in assessment.
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
Deductions and Losses: Certain Itemized Deductions
Question/
Problem
Difficulty
Est'd
completion
time
24
Medium
15
25
Easy
10
26
Easy
10
27
Easy
5
28
Medium
15
29
Hard
15
30
Easy
10
31
32
Medium
Easy
10
5
33
Easy
5
34
Easy
5
35
Easy
5
36
37
Medium
Medium
10
20
38
Medium
10
39
Medium
15
40
Easy
10
41
Medium
20
42
Hard
25
43
Hard
25
44
Hard
25
10-5
Assessment Information
AICPA*
AACSB*
Core Comp
Core Comp
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement
FN-Measurement | FNReporting
FN-Measurement
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement
FN-Measurement
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
Communication |
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic | Reflective
Thinking
Analytic
Analytic
Analytic
Communication |
Analytic
Analytic
Analytic
Analytic
Communication |
Analytic
Analytic
Analytic | Reflective
Thinking
Analytic
Communication |
Analytic
Communication |
Analytic
Analytic | Reflective
Thinking
Analytic
*Instructor: See the Introduction to this supplement for a discussion of using AICPA and
AACSB core competencies in assessment.
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
10-6
2011 Comprehensive Volume/Solutions Manual
CHECK FIGURES
24.
25.a.
25.b.
25.c.
26.
27.
28.
30.
31.a.
31.b.
31.c.
31.d.
32.
33.
34.a.
34.b.
35.a.
35.b.
36.a.
36.b.
36.c.
37.
38.a.
38.b.
39.a.
39.b.
39.c.
39.d.
40.a.
40.b.
41.
42.
43.
44.
$12,600.
$4,400.
$2,600.
$1,300.
$14,250.
$7,000 for AGI; $0 from AGI.
$39,370.
$2,400.
$296,370.
$296,370.
$3,630.
$4,400.
$6,500.
$100,000.
$0 in 2010; $6,000 in 2011.
$3,000 each in 2011.
$6,000.
$4,720.
$9,000.
$16,000.
$5,000.
No.
$210,000.
Carryover for 5 years as 30% property.
$54,000.
$84,000.
Do a present value analysis.
Make reduced deduction election.
$660.
No.
Sell Gold Corporation stock and contribute the sales proceeds.
Tax savings filing separate returns $230.
Refund due for 2009, $1,199.
Refund due for 2010, $871.
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
Deductions and Losses: Certain Itemized Deductions
10-7
DISCUSSION QUESTIONS
1.
a.
Yes. Any IRA deduction will decrease adjusted gross income, which is the base for
determining the medical expense deduction (i.e., 7.5% AGI).
b.
Increase. A lower AGI will result in a smaller nondeductible amount of medical
expenses and a larger medical expense deduction.
p. 10-3
2.
Roberta may include as medical expenses the medical insurance premiums, fees for the
alcohol rehabilitation program, contact lenses, and the travel expenses to obtain treatment at
Mayo Clinic in Minnesota. p. 10-3 and Exhibit 10.1
3.
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.
Expenses incurred in connection with the restorative surgery (required as a result of the
accident) are deductible because the surgery was necessary. Amounts paid for the
unnecessary cosmetic surgery (reshaping the chin) are not deductible as a medical expense.
Examples 2 and 3
4.
Helen may include the entire amount paid to the nursing home ($3,000 per month) if the
primary reason for being in the nursing home is to get medical care. If the primary reason for
being in the nursing home is personal, Helen may include only the $1,400 cost of medical
care in calculating her medical expense deduction. p. 10-4
5.
The full cost of certain 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 7.5% floor only, and the increase in the
homes value is deemed to be zero. pp. 10-5 and 10-6
6.
Bob may be able to include the payments related to Harriets injury with his own medical
expenses. For divorced parents with children, the noncustodial parent may claim any
medical expenses he or she pays even though the custodial parent claims the children as
dependents. This rule applies if the dependency exemption could have been shifted to the
noncustodial parent by the custodial parents waiver (see Chapter 3). p. 10-6
7.
David, who is self-employed, may deduct 100% of the premium of $7,500 as a deduction for
AGI. Joan, who is an employee, may include the premiums of $8,000 she paid in computing
her itemized deduction for medical expenses (subject to the 7.5% floor). Example 10
8.
Arturo, a calendar year taxpayer, paid $16,000 in medical expenses in 2010. Even if he
expects $12,000 of these expenses to be reimbursed by an insurance company in 2011, he
can include all $16,000 of the expenses in determining his medical expense deduction for
2010. He is not required to consider the potential reimbursement in computing his medical
expense deduction for 2010.
Casualty losses must be reduced if there is an expectation of reimbursement. Therefore,
Arturos starting point in computing the casualty loss deduction is $6,000 ($20,000 loss
$14,000 expected reimbursement). Further reductions are required for the $100 ($500 in
2009) floor and the 10%-of-AGI floor.
pp. 10-8 and 10-9
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in whole or in part.
10-8
9.
10.
2011 Comprehensive Volume/Solutions Manual
A Health Savings Account (HSA) plan requires a high-deductible medical insurance policy,
which means that the premiums on the policy will be less than for a low-deductible policy.
The contributions to the HSA are deductible for AGI, which reduces the nondeductible
amount of itemized deductions subject to certain limitations, and the taxpayer does not have
to itemize to obtain the deduction. The HSA distributions pay for the deductible medical
expenses and they are not included in gross income. Also, the income earned on the HSA is
not included in gross income if it is used to pay medical expenses not covered by the highdeductible plan. pp. 10-9 and 10-10
Ahmad should be concerned with the following tax issues:
Is the value of the certificate includible in gross income in 2009, even though it appeared
at that time that Ahmad would not have any need for the operation?
If Ahmad uses the certificate for his daughter, is the prize includible in gross income in
2010?
If Ahmad pays for the prescription glasses for his daughter, can he take a medical
expense deduction?
If Ahmad uses the certificate for an operation for his daughter, can he take a medical
expense deduction? If so, what is his basis in the certificate and what is the amount of his
medical expense deduction?
Chapter 4 and pp. 10-3 to 10-7
11.
a.
Even though Diego paid all the real property taxes for 2010, they must be prorated for
deduction purposes between the buyer and the seller. Diego can deduct property taxes
for the period he owned the property (January 1 through June 30).
b.
Dinah can deduct property taxes related to the period she owned the property (July 1
through December 31), even though she did not actually pay the taxes.
c.
Diego will treat the taxes he paid on Dinahs behalf as a reduction of the amount
realized on the sale. Dinah must treat this amount as a reduction in her basis for the
property.
pp. 10-12, 10-13, and Example 19
12.
Julia can deduct mortgage interest on her principal residence and one of the two other
residences. She should choose the one that will result in the highest interest deduction. Her
deduction is limited to interest on up to (1) $1,000,000 of acquisition indebtedness and (2)
$100,000 of home equity indebtedness. Julia should consider consolidating the three
mortgages into two if possible. p. 10-15
13.
Yes. Home equity loans utilize a qualified residence of the taxpayer as security. The
proceeds from these loans can be used for personal purposes such as purchasing an
automobile. The interest paid on the qualified residence loan is deductible as an itemized
deduction on Schedule A while the interest paid on consumer loans is not deductible. p. 1015
14.
Home equity loans utilize a qualified residence of the taxpayer as security. The proceeds
from these loans can be used for personal purposes. By making use of home equity loans,
therefore, what would have been nondeductible consumer interest becomes deductible
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
Deductions and Losses: Certain Itemized Deductions
10-9
qualified residence interest. Ed apparently obtained a home equity loan, and Jack did not.
p. 10-15 and Example 22
15.
Points paid by a seller are treated as an adjustment to the selling price of the residence. The
buyer is treated as having used cash to pay the points that were paid by the seller. The buyer
may deduct the points if several conditions are met. These conditions are specified in Rev.
Proc. 94-27, which is cited in Footnote 31. p. 10-16
16.
Because of the irregular patterns of interest payments, it does not appear that the $50,000
received is a bona fide loan. Interest paid was $3,200 in 2008, $0 in 2009, and $9,000 in
2010. Additionally, the interest would not represent deductible qualified residence interest
unless the loan was secured by the new home. pp. 10-15 to 10-17
17.
Contributions are deductible only if made to a qualified charitable organization. The family
would not qualify as a charitable organization, so Bettys contribution will not be deductible.
The church probably would be a qualified charitable organization. If so, Jacks contribution
will be deductible. p. 10-21
18.
A taxpayer cannot take a deduction to the extent he/she receives a personal benefit.
Therefore, Andy is not entitled to a deduction because his payment is for tuition that enabled
his daughter to attend the parochial school. p. 10-19
19.
Nancy should consider the following tax issues if she acquires the notebook computer under
the conditions specified:
Can she take a charitable contribution deduction for the $1,000 donation to the
university? To the extent the taxpayer receives a benefit from a contribution, the
charitable contribution deduction is not allowed. Nancy would be the sole user of the
computer and would receive a personal benefit from the contribution.
Will she be allowed to take a depreciation deduction for the business use of the
computer? If Nancy contributes $1,000 to the university, the university owns the
computer. Therefore, she is not entitled to a depreciation deduction.
Is Nancy required to report income as a result of her personal use of the computer? Nancy should
report income to the extent of the value of the computer usage for personal use. It does not appear
that the de minimis fringe benefit rule would allow an exclusion from gross income.
What could Nancy do to avoid the negative tax consequences discussed above? Nancy could
purchase a computer for $2,500. She could take a depreciation deduction for the business use
(limited by the listed property rules), and would not be required to report income from
personal use of the computer.
pp. 10-21 and 10-22
20.
Jean cannot deduct the lost wages of $1,000 for her contributed services. However, she can
deduct out-of-pocket costs of $1,850 ($300 for transportation, $1,300 for lodging, and $250
for meals). p. 10-20
21.
The following issues relate to the assets Zina sold:
Should the $500 sales receipts be reported on her tax return?
What was her basis for the assets she sold?
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in whole or in part.
10-10
2011 Comprehensive Volume/Solutions Manual
Did she have a gain or loss on the sales?
Were the assets held for personal use, trade or business, or production of income?
Were the assets capital assets or ordinary income assets?
If she sold capital assets, were they held short term or long term?
The following issues relate to the assets Zina donated:
Does she plan to itemize deductions?
Which organizations were recipients of the donated items?
Were the organizations qualified charitable organizations?
What types of assets did she donate, ordinary income assets or capital gain assets?
What was her basis for the assets she donated?
What was the fair market value of the assets she donated?
How did she determine the fair market value of the items?
Does she have adequate documentation to qualify for a deduction?
Were the household items and used clothing in good used condition or better?
pp. 10-18 to 10-26
22.
Factors that are relevant in determining whether Sheila can deduct the gift include the
following:
Is Sheilas church a qualified charity?
What is the value of Blue Corporation stock on the date of the gift and how is its value
determined? If Blue Corporation is a publicly traded corporation, valuing the gift would
likely be more straightforward than if Blue is a closely held corporation.
What is Sheilas basis in the 100 shares of Blue Corporation stock?
Has Sheila gathered the required substantiation from the church to support the charitable
contribution deduction?
How long has Sheila owned the Blue Corporation stock (i.e., what is its holding period)?
Did Sheila receive a benefit (other than intangible religious benefits) in return (e.g., is the
transfer of Blue stock in reality payment of preschool tuition for her young son who
attends the churchs preschool)?
Does the value of this gift, when added to Sheilas other expenditures that qualify as
itemized deductions, exceed the standard deduction amount? She will receive an explicit
benefit only if she itemizes her deductions.
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
Deductions and Losses: Certain Itemized Deductions
10-11
Is the level of Sheilas charitable giving high enough in the current year to be subject to
AGI limitations (e.g., 30%, 50% limits)?
pp. 10-18 to 10-26
23.
Harry is attempting to accelerate his charitable contribution deduction into 2010. There are
several potential advantages to accelerating the deduction by donating the land in 2010.
His contribution will be deducted in a tax year when his combined Federal/state marginal
tax rate is 40% (2010) rather than 30% (2011).
He might avoid disallowance of part of the deduction due to AGI percentage limitations
because his income base will be higher in 2010 than in 2011.
He can deduct the fair market value of the land without recognizing the $80,000
appreciation as income.
He can step up his basis in the land from $20,000 to $100,000 when he reacquires it in
2011.
Harrys plan will generate many favorable outcomes if he does not run afoul of the IRS.
While it does not appear that Harry has done anything that violates the tax law, the IRS might
collapse the transaction; that is, focus on the outcome and ignore the steps involved. The
ultimate outcome is that Harry has transferred $100,000 cash to his church. The IRS might
disallow the deduction for the land contribution in 2010 and treat the transaction as a cash
contribution in 2011. In this case, Harrys basis for the purchased land would be $20,000
and his deduction would benefit him based on the lower 2011 marginal tax rate.
pp. 10-18 to 10-26
PROBLEMS
24.
TAX FILE MEMORANDUM
February 25, 2011
FROM:
George Luce
SUBJECT:
Rita Smiths medical expense deduction
Rita Smiths medical expense deduction is $12,600, determined as follows:
Medical insurance premiums
Doctor and dentist bills for Larry and Shirley
Doctor and dentist bills for Rita
Prescription medicines for Rita
Nonprescription insulin for Rita
Total medical expenses
Less: 7.5% of $200,000 AGI
Deductible portion of medial expenses
$ 7,400
7,700
10,500
1,450
550
$27,600
(15,000)
$12,600
Although Larry and Shirley cannot be claimed as Ritas dependents, they could have been
had they not filed a joint return. Therefore, they qualify for the medical expense deduction.
Insulin is an exception to the rule that nonprescribed drugs do not qualify as medical
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
10-12
2011 Comprehensive Volume/Solutions Manual
expenses. The insurance recovery was not received until 2011. Therefore, it has no effect on
the medical expense deduction for 2010.
pp. 10-3 to 10-9 and Exhibit 10.1
25.
a.
Andy can claim medical expenses he paid for his child, Jodi, even though his former
wife is the custodial parent. His deduction for medical expenses in 2010 is computed
as follows:
Hospitalization
Bills for doctors services
Medical expenses for Jodi
Total
Less: 7.5% of $80,000 AGI
Medical expense deduction (assuming Andy itemizes
his deductions)
$ 5,200
2,800
2,400
$10,400
(6,000)
$ 4,400
b.
If the reimbursement for medical care had occurred in 2010, the medical expense
deduction would have been only $1,800 [$10,400 (total medical expenses) $2,600
(reimbursement) $6,000 (floor)], and Andy would have paid more income tax.
Since the reimbursement was made in a subsequent year, Andy would include $2,600
in gross income for 2011. If Andy had not itemized in 2010, he would not include the
$2,600 reimbursement in 2011 gross income because he would have received no tax
benefit in 2010.
c.
Andys deduction for medical expenses in 2010 would have been $4,400 (see
computation in a. above). He would include the reimbursement in gross income to
the extent of his $1,300 tax benefit, as computed below:
Other itemized deductions
Medical expenses in excess of 7.5% floor
Total itemized deductions
Standard deduction for head of household in 2010
Tax benefit from medical expense deduction
$5,300
4,400
$9,700
(8,400)
$1,300
pp. 10-6 to 10-9
26.
Only $13,500 of the cost and installation of the elevator qualifies since $2,000 of the $15,500
total cost increased the value of Jungs residence. The total current medical expense is
$14,250 ($13,500 + $750 additional operating costs). The $500 appraisal fee is deductible as
a miscellaneous itemized deduction subject to the 2%-of-AGI limitation, and not as a medical
expense. Example 6
27.
Self-employed persons can deduct 100% of their medical insurance premiums as a deduction
for AGI in 2010. Thus, Jean may deduct $7,000 as a deduction for AGI. None of the amount
is deductible as an itemized deduction. p. 10-7
28.
The charges for tuition, room, and board paid to Red River Academy qualify because Beth
receives specialized psychiatric treatment. p. 10-5 and Example 5
Although Ed does not qualify as Susans dependent for purposes of claiming a dependency
exemption, he qualifies as a dependent for medical expense purposes. All of the costs paid
for Ed at Heartland Nursing Home are deductible because the primary reason he is there is to
receive medical care. pp. 10-4 and 10-6
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
Deductions and Losses: Certain Itemized Deductions
10-13
Prescription drugs and insulin are deductible, but nonprescription drugs are not. Exhibit 10.1
Only $4,300 of the filtration system qualifies since $2,200 of the cost $6,500 increased the
value of Susans residence. The $700 increase in utility bills also is a medical expense. The
appraisal fee of $360 is a miscellaneous itemized deduction, but is not deductible as a
medical expense. Example 6
Deductible medical expenses are summarized below:
Surgery for Beth
$ 4,200
Red River Academy charges for Beth:
Tuition
Room, board, and other expenses
Psychiatric treatment
Doctor bills for Ed
Prescription drugs for Susan, Beth, and Ed
Insulin for Ed
Charges at Heartland Nursing Home for Ed:
Medical care
Lodging
Meals
Deductible cost for filtration system ($6,500 $2,200)
Increase in utility bills due to the system
Total medical expenses (prior to the 7.5% floor)
29.
5,600
4,800
5,100
2,200
780
540
4,800
3,700
2,650
4,300
700
$39,370
The following tax issues are suggested by the facts presented:
Can Rebecca claim Susan as a dependent?
Can Rebecca take a medical expense deduction for the remodeling expenditures?
Can Rebecca take a medical expense deduction for the swimming pool expenditures?
Can Rebecca take a medical expense deduction for the cost of Susans operation?
Can Susan take a medical expense deduction for the specially equipped van and the costs
of operating it?
Can Rebecca take a medical expense deduction for the traveling expenses (transportation,
highway tolls, meals, and lodging)?
Can Rebecca deduct the medical expenses incurred for Susan if Susan does not qualify as
her dependent?
The following questions should be asked to resolve some of the issues listed above:
Did Rebecca provide more than half of Susans support? This will determine whether
Rebecca can deduct Susans medical expenses. In addition, Rebecca may be able to claim
head of household filing status if Susan lived with her for more than half the year.
Are the remodeling expenses necessary in order to enable Susan to live independently? If
so, the expenses are included in medical expenses subject to the 7.5% floor.
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2011 Comprehensive Volume/Solutions Manual
Is the travel to Denver necessary in order for Susan to receive proper medical treatment?
If it is, the travel expenses are included in medical expenses subject to the 7.5% floor.
How much expense did Rebecca incur for lodging? The deduction is limited to $50 per
night per person.
pp. 10-3 to 10-7 and Chapter 3
30.
Because Felicia is self-employed, she can deduct $2,400 ($200 per month 12 months) of
the amount paid for the high-deductible policy as a deduction for AGI (refer to Example 10).
In addition, she may deduct the $3,600 ($300 per month 12 months) paid to the HSA as a
deduction for AGI. Thus, Felicia may deduct $6,000 ($2,400 + $3,600) for AGI. pp. 10-9
and 10-10
31.
General discussion. For Federal income tax purposes, real estate taxes must be apportioned
between the buyer and the seller. The taxes paid by the seller that are apportioned to the
buyer affect both the basis of the buyers property and the amount realized by the seller.
a.
Keiths basis in the residence is $296,370 [$300,000 (purchase price) $3,630
(property taxes allocated to Keith but paid by Heather)].
b.
Heathers amount realized is $296,370 [$300,000 (sales price) $3,630 (property
taxes allocated to Keith but paid by Heather)].
c.
Keith can deduct the $3,630 apportioned to him, even though the tax was paid by
Heather.
d.
Heather can deduct only the tax apportioned to her of $4,400, even though she paid
the entire amount.
pp. 10-12, 10-13, and Example 19
32.
The itemized deduction is $6,500 ($1,200 + $1,500 + $1,500 + $1,500 + $800). The
deduction includes the four payments made in 2010 and the $800 overpayment credited to
2010s tax. p. 10-13 and Example 20
33.
Hoffman, Maloney, and Raabe, CPAs
5191 Natorp Boulevard
Mason, OH 45040
June 4, 2010
Mr. Stephen Upchurch
4401 Montgomery Road
Kensington, OH 44427
Dear Mr. Upchurch:
As you requested, I have determined the maximum amount of home equity line debt on
which you can deduct interest this year based on the following facts. You own a personal
residence currently valued at $640,000; the current outstanding mortgage balance on the
home is $220,000. In May of the current year, you took out a $260,000 home equity loan to
enable you to purchase a recreational vehicle that you plan to use 100% for personal use.
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in whole or in part.
Deductions and Losses: Certain Itemized Deductions
10-15
Under current law, interest is deductible only on the portion of a home equity loan that does
not exceed the lesser of:
The fair market value of the residence, reduced by the acquisition indebtedness ($640,000
FMV $220,000 acquisition indebtedness = $420,000).
$100,000 ($50,000 for married persons filing separate returns).
Therefore, you can deduct all of the interest on the first mortgage since it is acquisition
indebtedness. Of the $260,000 home equity loan, interest on $100,000 is deductible as home
equity interest.
I will be pleased to discuss any of this information in further detail if you wish. Please call
me at [phone] if you have any further questions. Thank you for consulting my firm
on this matter. We look forward to serving you in the future.
Sincerely,
Roger Blair, CPA
Partner
Examples 22 and 23
34.
a.
Robin Corporation can deduct interest expense of $6,000 in 2011. In this situation,
no interest deduction is permitted in 2010. Under 267, Ron and Tom are regarded
as related to the corporation. Consequently, the deductibility must await actual
payment in 2011.
b.
All of the interest of $6,000 is included in Ron and Toms gross income in 2011.
Because they use the cash method of accounting, income is not taxed until received in
2011.
p. 10-17 and Chapter 6
35.
Generally, when a donor derives a tangible benefit from a contribution, he or she cannot
deduct the value of the benefit. An exception to this benefit rule provides for the deduction of
80% of the amount paid for the right to purchase athletic tickets from colleges and
universities. Example 27
a.
b.
36.
Under the exception to the benefit rule, Francine is allowed a $6,000 (80% of $7,500)
charitable contribution deduction for the taxable year. None of the $1,600 paid for
game tickets can be deducted.
Francine cannot deduct the $1,600 portion of the $7,500 that applies to the tickets
($400 4). She is allowed a charitable contribution deduction of $4,720, which is
equal to 80% of the $5,900 remainder.
General discussion. The deduction for a contribution of capital gain property is based on the
fair market value, while the deduction for a contribution of ordinary income property is equal
to the lesser of the adjusted basis or the fair market value.
a.
Because Rachel did not hold the stock for the long-term holding period (December 4,
2009, until July 5, 2010), it is short-term capital gain property that is subject to the
rules for ordinary income property. Therefore, her deduction is limited to $9,000.
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10-16
2011 Comprehensive Volume/Solutions Manual
b.
Rachel held the stock for the long-term holding period (July 1, 2007 until July 5,
2010); so it is capital gain property. Therefore, her deduction is equal to the fair
market value of the stock, $16,000.
c.
The deduction for a contribution of loss property (FMV is less than adjusted basis) is
limited to the fair market value. Therefore, Rachels deduction is $5,000. Example 29
and related discussion
pp. 10-23 to 10-26
37.
Hoffman, Raabe, and Willis, CPAs
5191 Natorp Boulevard
Mason, OH 45040
December 7, 2010
Mr. Pedro Valdez
1289 Greenway Avenue
Foster City, CA 94404
Dear Mr. Valdez:
I have evaluated the two alternatives for your charitable contribution deduction. Your
potential deduction is $130,000, the fair market value of the painting. It is not reduced by the
unrealized appreciation since the painting was assumed to be put to a related use by the
museum and the holding period is long term. Your current charitable contribution deduction
is limited to $75,000 (30% $250,000 AGI) if you do not make the reduced deduction
election. The remaining $55,000 ($130,000 FMV $75,000 current deduction) can be carried
forward for five years.
If you make the reduced deduction election, you can deduct $90,000 (adjusted basis of the
painting) in the current year because the amount is less than the maximum potential
deduction of $125,000 (50% $250,000 AGI). However, if you make the election, you must
forgo deducting the $40,000 appreciation on the painting ($130,000 FMV $90,000 adjusted
basis). Based on the facts presented, it does not appear that you should make the reduced
deduction election. You would be forgoing an additional deduction of $40,000 in order to
increase your current charitable contribution deduction from $75,000 to $90,000. You should
plan your contributions carefully over the next five years so that you do not lose any of the
$55,000 carryover.
I will be pleased to discuss my recommendation in further detail if you wish. Please call me
at [phone] if you have any questions. Thank you for consulting my firm on this
matter. We look forward to serving you in the future.
Sincerely,
Carol Eckert, CPA
Partner
pp. 10-22 to 10-26
38.
a.
No reduction for the appreciation on the Seagull, Inc. stock is necessary because, if
sold, it would yield a long-term capital gain. Thus, Ricardos potential charitable
contribution deduction is $250,000 [$110,000 (cash) + $140,000 (fair market value of
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in whole or in part.
Deductions and Losses: Certain Itemized Deductions
10-17
Seagull, Inc. stock)], but his allowable charitable contribution deduction for the year
is limited to $210,000 (50% of $420,000 AGI).
Although the 30% of AGI limitation applies to capital gain property, which would
result in a current deduction for the Seagull, Inc. stock of $126,000 (30% of $420,000
AGI), the overall 50% of AGI limitation applies to limit the deduction to $100,000.
When the contributions for the tax year involve both 50% property (the cash of
$110,000 in this case) and 30% property (the Seagull, Inc. stock), the allowable
deduction comes first from the 50% property. Therefore, Ricardos allowable
deduction of $210,000 for the current year consists of:
Cash
Seagull stock [overall limitation of $210,000 (50% of AGI)
$110,000 (cash)]
$110,000
100,000
$210,000
pp. 10-23 to 10-26 and Example 32
b.
The unused portion of the Seagull stock contribution of $40,000 [$140,000 (fair
market value) $100,000 (portion used)] may be carried over for five years. The
carryover continues to be classified as 30% property in the carryover years. pp. 10-25
and 10-26
If Ricardo plans his charitable deductions wisely, sooner or later he will be able to
deduct the full $140,000 fair market value of the stock.
39.
General discussion. The stock is appreciated capital gain property. The general rule limits
the deduction for the contribution of such property to 30% of AGI. However, under the
reduced deduction election, a taxpayer may choose to forgo a deduction of the appreciation
on capital gain property. This enables the taxpayer to move from the 30% limitation to a
50% limitation.
a.
Ramons value for the contribution is $105,000, the fair market value of the stock.
The deduction for 2010 is limited to $54,000 (30% of $180,000 AGI). The remaining
$51,000 ($105,000 $54,000) can be carried forward and deducted in the future,
subject to the same percentage limitations.
b.
If Ramon makes the reduced deduction election, he can deduct $84,000 in 2010, but
he will forgo a deduction for the $21,000 appreciation ($105,000 FMV $84,000
adjusted basis).
c.
Although the reduced deduction election appears attractive, it should be considered
carefully. The election sacrifices a deduction for the appreciation on capital gain
property that might eventually be allowed. Ramon should do a present value analysis
to compare the value of a deduction of $84,000 in 2010 versus the value of a $54,000
deduction in 2010 plus $51,000 of deductions to be carried over to future years.
d.
If Ramon dies in December 2010, his executor should make the reduced deduction
election, which would yield a charitable contribution deduction of $84,000. If the
election is not made, the deduction will be $54,000 (30% of $180,000) and the
$51,000 carryover will be lost because the 2010 return will be the final return for
Ramon.
pp. 10-22 to 10-26 and Examples 32 and 33
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10-18
40.
2011 Comprehensive Volume/Solutions Manual
a.
Based on these facts, Roberta can deduct $660 as a charitable contribution for 2010.
The deduction is based on the difference between the purchase price of the four
tickets (4 $200) and their fair market value (4 $35). Giving the tickets to the
minister is of no tax consequence because the minister is not a qualified charity. pp.
10-19 and 10-20
b.
The pledge to the building fund of the church yields no deduction for 2010. In this
regard, it makes no difference whether Roberta uses the cash or the accrual method of
accounting for tax purposes. Except for limited exceptions involving accrual basis
corporations and fiduciary entities, charitable donations are deductible only in the
year in which they are paid. Had the check that satisfied the pledge been mailed on
December 31, 2010, Roberta could have claimed a deduction for 2010. As the
situation is described, however, the $4,000 deduction relates to 2011. p. 10-21
41.
Hoffman, Raabe, and Maloney, CPAs
5191 Natorp Boulevard
Mason, OH 45040
December 3, 2010
Ms. Alice Young
2622 Bayshore Drive
Berkeley, CA 94709
Dear Ms. Young:
I have evaluated the proposed alternatives for your current year-end contribution to the
United Way. I recommend that you sell the Gold Corporation stock and donate the proceeds
to the United Way. The four alternatives are discussed below.
Donation of cash, the unimproved land, or the Gold stock will each result in a $21,000
charitable contribution deduction. Donation of the Blue Corporation stock will result only in
a $3,000 charitable contribution deduction.
A direct contribution of the Gold Corporation stock will be a bad move taxwise in that the
decline in value of $5,000 ($21,000 $26,000) is not deductible and the amount of the
charitable contribution would be $21,000. However, you will benefit in two ways if you sell
the Gold stock and give the $21,000 in proceeds to the United Way. Donation of the proceeds
will result in a $21,000 charitable contribution deduction. In addition, sale of the stock will
result in a $5,000 long-term capital loss. If you have capital gains of $2,000 or more this
year, you could use the entire loss in computing your current taxable income. If you have no
capital gains this year, you can deduct $3,000 of the capital loss this year and carry the
remaining $2,000 over to future years.
You should make the donation in time for ownership to change hands before the end of the
year. Therefore, I recommend that you notify your broker immediately so there will be no
problem in completing the donation on a timely basis.
I will be pleased to discuss my recommendation in further detail if you wish. Please call me
at [phone] if you have questions. Thank you for consulting my firm on this matter.
We look forward to serving you in the future.
Sincerely,
Nora Oldham, CPA
Partner
Example 42
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in whole or in part.
Deductions and Losses: Certain Itemized Deductions
42.
10-19
Hoffman, Raabe, and Maloney, CPAs
5191 Natorp Boulevard
Mason, OH 45040
January 20, 2011
Mr. and Mrs. Manuel Garcia
2003 Highland Drive
Durham, NC 27707
Dear Mr. and Mrs. Garcia:
I have reviewed the tax information you provided and have determined that you will save
$230 in Federal income tax if you file separate returns for 2010. A detailed computation that
supports my conclusion is enclosed.
I will be pleased to discuss my recommendation in further detail if you wish. Please call me
at 555-9999 if you have questions. Thank you for consulting my firm on this matter. We look
forward to serving you in the future.
Sincerely,
Rodney Rodriguez, CPA
Partner
Manuel and Rosa Garcia
Comparison of Joint and Separate Tax Liabilities
Tax Year 2010
Separate and joint tax liabilities for 2010 are computed as shown below. These computations
are based on all information provided by Manuel and Rosa Garcia.
Manuel
Rosa
Joint
Salary
$40,000
$ 40,000
Business net income
$100,000
100,000
Interest income*
2,600
3,400
6,000
Gross income
$42,600
$103,400
$146,000
Deductions for AGI
(3,000)
(14,000)
(17,000)
AGI
$39,600
$ 89,400
$129,000
Medical expenses after 7.5% floor
$ 7,030
$ 0
$
925
State income tax
800
2,000
2,800
Real estate tax
1,700
1,700
3,400
Mortgage interest
2,600
2,600
5,200
Unreimbursed employee expenses
after 2% floor
308
0
0
Total itemized deductions
$12,438
$ 6,300
$ 12,325
Exemptions
3,650
3,650
7,300
Total deductions from AGI
($16,088)
($ 9,950)
($ 19,625)
Taxable income
$23,512
$79,450
$109,375
Tax
Savings filing separately:
Tax filing jointly
Tax filing separately ($3,108 + $16,368)
Savings
$ 3,108
$16,368
$ 19,706
$ 19,706
(19,476)
$
230
*Interest income:
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10-20
2011 Comprehensive Volume/Solutions Manual
Manuels interest
Rosas interest
Their joint interest
Manuel
$1,500
1,100
$2,600
Rosa
$2,300
1,100
$3,400
pp. 10-30 and 10-31
CUMULATIVE PROBLEMS
43.
Part 1 Tax Computation
Bruces salary
Alices salary
Interest income
Adjusted gross income
Less: Itemized deductions (Note 1)
Less: Personal and dependency exemptions
(Bruce, Alice, John, and Bruces father) (Note 2)
Taxable income
$ 60,100
54,000
2,700
$116,800
(36,810)
Tax from Tax Table*
Less: Prepayments and credits
Income tax withheld ($5,990 + $4,180)
Net tax payable (or refund due) for 2009
$
(14,600)
$ 65,390
($
8,971
(10,170)
1,199)**
*The taxpayer is not subject to the AMT. For a complete discussion of the AMT, see
Chapter 15.
**The solution does not take into account the Making Work Pay credit. This credit is not
discussed until Chapter 12 of the text. With the credit of $800 the refund would be
$1,999.
See the tax return solution beginning on page 10-24 of the Solutions Manual.
Notes
(1)
Itemized deductions are summarized below:
Medical expenses:
Medical insurance premiums
Doctor bill for Sam paid in 2009 for
services in 2008
Operation for Sam
Prescription medicines for Sam
Hospital expenses for Sam
Total medical expenses
Less: Reimbursement received in 2009
Less: 7.5% of $116,800 AGI
Medical expenses deductible in 2009
Taxes:
State income taxes ($2,940 + $2,330 + $800)
Property taxes on residence
$ 4,240
7,545
7,450
1,075
3,350
$23,660
(3,500)
(8,760)
$ 6,070
4,870
$11,400
10,940
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in whole or in part.
Deductions and Losses: Certain Itemized Deductions
Qualified interest on home mortgage
Charitable contributions:
Church contribution
$ 4,900
Tickets to charity dinner dance
(Only the excess of the ticket price of $300
over the cost of comparable entertainment
of $60 is deductible)
240
Used clothing donated (limited to fair
market value)
350
Miscellaneous itemized deductions:
Uniforms ($447 cost + $206 laundry)
$ 653
Professional journals
360
Total of deductible items
$ 1,013
Less: 2% of $116,800 AGI
(2,336)
Miscellaneous itemized deductions deductible in 2009
Total itemized deductions
(2)
10-21
8,980
5,490
0
$36,810
Alice and Bruce would elect to itemize their deductions because the total exceeds the
standard deduction of $11,400 for 2009 for married persons filing a joint return.
In addition to the Byrds son John, Bruces father, Sam, qualifies as a dependent.
Therefore, the deduction is $14,600 ($3,650 4). Cynthia cannot be claimed as a
dependent because she is not under age 24.
Part 2 Tax Planning
Bruces salary
Interest income ($30,000 + $2,700)
Adjusted gross income
Less: Itemized deductions (Note 1)
Less: Personal and dependency exemptions
(Bruce and Alice)(2 $3,650)
Taxable income
$ 88,000
32,700
$120,700
(31,967)
Tax from tax rate schedule for 2010
$ 12,721
Notes
(1)
Itemized deductions are summarized below:
Medical expenses:
Medical insurance premiums
Estimated costs for Alice ($15,200 $4,700
reimbursement)
Less: 7.5% of $120,700 AGI
Taxes:
State income taxes ($2,940 + $4,000)
Property taxes on residence
Qualified interest on home mortgage
Charitable contributions
Miscellaneous itemized deductions:
Professional journals
Less: 2% of $120,700 AGI
Miscellaneous itemized deductions deductible
in 2010
(7,300)
$ 81,433
$ 4,240
10,500
(9,053)
$ 6,940
4,870
$ 5,687
11,810
8,980
5,490
$ 360
(2,414)
0
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10-22
2011 Comprehensive Volume/Solutions Manual
Total itemized deductions
44.
$31,967
Pauls salary
Donnas salary
Dividends
State income tax refund
Long-term capital gain (Note 1)
Adjusted gross income
Less: Itemized deductions (Note 2)
Less: Personal and dependency exemptions
(Paul, Donna, Larry, Jane, Hannah)(Note 3)
Taxable income
$ 60,000
61,000
800
1,600
6,000
$129,400
(24,565)
(18,250)
$ 86,585
Tax (Note 5)
Less: Tax withheld ($7,000 + $7,200)
Net tax payable (or refund due) for 2010
$ 13,329
(14,200)
($
871)*
*The solution does not take into account the Making Work Pay credit. This credit is not
discussed until Chapter 12 of the text.
Notes
(1)
Sale price of 300 shares Acme Corp. stock (300 $50)
Cost of stock (300 $30)
Recognized gain on sale (LTCG)
(2)
$ 15,000
(9,000)
$ 6,000
Itemized deductions:
Medical expenses:
Doctor and hospital bills ($9,000 $2,100)
Prescription drugs and medicine
Insurance premiums
Total medical
Less: 7.5% of $129,400 AGI
Deductible medical
Taxes:
State income taxes paid ($950 + $1,000)
Real estate taxes
Home mortgage interest
Contributions:
Church
Books
Casualty loss:
Fair market value
Less: Nondeductible floor
Less: 10% of $129,400 AGI
Miscellaneous itemized deductions:
Airfare
Hotel
Meals (50% $125)
Registration fee
Total deductible items
Less: 2% of $129,400 AGI
Deductible miscellaneous itemized deductions
$ 6,900
700
2,810
$10,410
(9,705)
$ 1,950*
3,700
$
705
5,650
8,000
$ 4,500
750
5,250
$18,000
(100)
(12,940)
4,960
$
840
270
63
340
$ 1,513
(2,588)
0
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in whole or in part.
Deductions and Losses: Certain Itemized Deductions
Total itemized deductions
10-23
$ 24,565
*The Deckers will deduct the state income taxes paid because they exceeded the sales
taxes paid (per table).
(3)
Since Donna is the custodial parent, the Deckers qualify for the dependency
deduction for both Larry and Jane. Since they provide over 50% of the support of
Hannah, they also qualify for a dependency deduction for her. Thus, the personal and
dependency exemptions are $18,250 ($3,650 5).
(4)
Consumer interest is not deductible. Therefore, neither the interest on the auto loan of
$1,490 nor the credit card interest of $870 is deductible.
(5)
Tax on
$ 6,800* 15% =
68,000
=
11,785 25% =
$86,585
$ 1,020
9,363
2,946
$13,329
*$800 dividend + $6,000 LTCG = $6,800
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10-24
2011 Comprehensive Volume/Solutions Manual
The answers to the Research Problems are incorporated into the Instructors Guide with Lecture
Notes to accompany the 2011 Annual Edition of SOUTH-WESTERN FEDERAL TAXATION:
COMPREHENSIVE VOLUME.
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in whole or in part.
Deductions and Losses: Certain Itemized Deductions
10-25
43.
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in whole or in part.
10-26
2011 Comprehensive Volume/Solutions Manual
43. continued
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in whole or in part.
Deductions and Losses: Certain Itemized Deductions
10-27
43. continued
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in whole or in part.
10-28
2011 Comprehensive Volume/Solutions Manual
43. continued
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in whole or in part.
Deductions and Losses: Certain Itemized Deductions
10-29
43. continued
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in whole or in part.
10-30
2011 Comprehensive Volume/Solutions Manual
43. continued
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
Deductions and Losses: Certain Itemized Deductions
10-31
NOTES
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