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of University Maryland BMGT 323 Examination I Workbook Chapter 6 Spring 2013 Professor Cantor Chapter 6 Individual Deductions Chapter 6 in a Nutshell: Deductions for AGI Trade or business expenses Rent and royalty expenses Recognized losses on business assets Flow-through entities Moving expenses Health insurance deduction for self-employed individuals Self-employment employer-portion payroll tax deductions Interest on qualified education loans Qualified education expenses Phase-out concepts Deductions from AGI Medical Taxes Interest secured by mortgage on home Charitable contributions Miscellaneous itemized deductions subject to 2% floor o Employee business expenses o Investment expenses o Tax preparation fees o Hobby losses Miscellaneous itemized deductions not subject to 2% floor o Gambling losses (only to extent of gambling winnings) o Casualty and theft losses o Unrecovered cost of a life annuity Standard deduction Basic standard deduction Additional standard deduction for age and/or blindness Sample Examination Questions 1. Which of the following is a true statement? (A) All business expenses are deducted for AGI. (B) Investment expenses are typically deducted for AGI. (C) Tax preparation fees are deducted for AGI. (D) Rental and royalty expenses are deducted for AGI. (E) All of the above Register to View Answerinvestment expenses are typically deducted from AGI 2. Which of the following is a true statement? (A) The deduction for interest on educational loans is subject to a phase-out limitation. (B) The deduction for moving expenses is subject to a phase-out limitation. (C) Self-employed taxpayers are allowed to deduct health care premiums even if the taxpayer is eligible to participate in an employer-provided health plan. (D) Taxpayers are not allowed to receive a moving allowance from their employers. (E) All of the above are false. Register to View AnswerSelf-employed taxpayers are not allowed to deduct health care premiums if they are eligible to participate in an employer-provided health plan. 3. This year Jong paid $3,000 of interest on a qualified education loan. Jong files married joint and reports modified AGI of $132,000. What is Jongs deduction for interest expense on an educational loan? (A) $2,500 (B) $3,000 (C) $1,500 (D) $1,000 (E) None of the above. Register to View Answer2010 maximum = [132,000 120,000] / 30,000 = 40% = $2,500 *60% = $1,500 4. Han is a self-employed carpenter and his wife, Christine, works full-time as a grade school teacher. Han incurred $525 for carpentry tools and supplies, and Christine paid $3,600 as her share of health insurance premiums for herself and Han in a qualified plan provided by the school district. Which of the following is a true statement? (A) The tools and supplies are deductible for AGI while the health insurance is an itemized deduction. (B) Both expenditures are deductible for AGI. (C) The tools and supplies are an itemized deduction but the health insurance is deductible for AGI. (D) Both expenditures are itemized deductions. (E) Neither of the expenditures is deductible. 2 Register to View AnswerBusiness expenses for self employed are Schedule C deductions but health insurance can only be itemized if the taxpayers are eligible under a qualified plan. 5. Which of the following are expenses can be deducted as moving expenses? 1. The cost of a trip to purchase a new residence 2. The cost of moving personal belongings 3. Lodging (one night) while en route 4. The cost of gasoline when traveling to the new residence 5. One-half of the cost of meals while en route to the new residence (A) Numbers 1, 2, and 4 only. (B) Numbers 1 through 3 only. (C) Numbers 2 through 4 only. (D) Numbers 2 through 5 only. (E) All of the above are deductible as moving expenses. Register to View Answerhouse hunting trips and meals while en route are not deductible as moving expenses. 6. Lewis is an unmarried law student at State University, a qualified educational institution. Last year Lewis borrowed $30,000 and used the proceeds to pay his university tuition. This year Lewis paid $1,500 of interest on the loan. Which of the following is a true statement if Lewis reports $40,000 of salary and no other items of income or expense? (A) Lewis can deduct all the interest on his student loan for AGI. (B) Lewis can deduct all the interest on his student loan as an itemized deduction. (C) Lewis can only deduct $1,000 of the interest on his student loan for AGI. (D) Lewis can only deduct $1,000 of the interest on his student loan as an itemized deduction. (E) All of the above are false. Register to View AnswerUp to $2,500 of interest on student loans is deductible for AGI. The interest deduction is phased-out for single taxpayers with AGI exceeding $60,000. 7. Ned is a head of household with a dependent son, Todd, who is a full-time student. This year Ned made the following expenditures related to Todds support: Auto insurance 1,700 Room premiums $ and board at Todds school 2,200 Health insurance premiums 600 Travel (to and from school) 350 What amount can Ned include in his itemized deductions? (A) $1,700 included in Neds miscellaneous itemized deductions (B) $2,050 included in Neds miscellaneous itemized deductions (C) $950 included in Neds miscellaneous itemized deductions (D) $600 included in Neds medical expenses (E) None of the above. Register to View AnswerThe premiums paid for health and medical insurance for dependents are included in the taxpayers medical expenses when determining itemized deductions. 3 8. Opal fell on the ice and injured her hip this winter. As a result she paid $3,000 for a visit to the hospital emergency room and $750 for follow-up visits with her doctor. While she recuperated, Opal paid $500 for prescription medicine and $600 to a therapist for rehabilitation. Insurance reimbursed Opal $1,200 for these expenses. What is the amount of Opals deductible medical expense? (A) $3,000 (B) $3,750 (C) $3,650 (D) $4,850 (E) All of the above Register to View AnswerThe deductible expenses are calculated as follows Emergency room and doctor visits $ 3,750 Prescription medication 500 Physical therapy 600 Total qualifying medical expenses $ 4,850 Less insurance reimbursement - 1,200 Qualifying medical expenses from the accident $ 3,650 9. Carly donated inventory (ordinary income property) to a church. She purchased the inventory last month for $100,000, and on the date of the gift, it had a fair market value of $92,000. What is her maximum charitable contribution deduction for the year if her AGI is $200,000? (A) $100,000 (B) $92,000 (C) $60,000 (D) $46,000 if the church sells the inventory (E) None of the above Register to View AnswerFeedback: The charitable deduction for ordinary income property is the lesser of FMV or basis limited to 50% of AGI 10. Glenn is an accountant who races stock cars as a hobby. This year Glenn was paid a salary of $80,000 from his employer and won $2,000 in various races. What is the effect of the racing activities on Glenns taxable income if Glenn has also incurred $4,200 of hobby expenses this year? Assume that Glenn itemizes his deductions but has no other miscellaneous itemized deductions. (A) increase in taxable income of $2,000 (B) increase in taxable income of $1,640 (C) no change in taxable income (D) decrease in taxable income of $560 (E) decrease in taxable income of $2,200 Register to View AnswerHobby expenses are deductible to the extent of hobby revenues. Hence, Glenn will include $2,000 in gross income and deduct $2,000 as miscellaneous itemized 4 deductions. After application of the 2% floor, this will result in a net increase of $1,640 in taxable income [$2,000 ($2,000 (2%*$82,000))] = $2,000 ($2,000-$1,640) = $1,640 5 For each item below, determine how the item will be treated on an individuals Form 1040 and, where appropriate, determine the amount of the adjustment or deduction. If the item is neither an adjustment nor a deduction, enter $-0- in the amount column. Unless otherwise indicated, each item is independent of the others. Option choices for Treatment Column: 1 = Adjustment to arrive at AGI 2 = itemized deduction not subject to the 2% limitation 3 = Itemized deduction subject to the 2% limitation 4 = Neither an adjustment nor a deduction Item 1. A saleswoman (employee) gives $200 in football tickets to a customer who does significant business with her. 2. Peter lost $430,000 in Atlantic city one night, after winning $20,000 on the previous night. 3. Tim buys an airplane ticket on Continental for $900 to travel from Newark to Los Angeles and back on business. He was not reimbursed by his employer. 4. After his trip, Tim moves from New Jersey to Los Angeles. He spends $125,000 to move his household belongings, $5,000 for travel and lodging during the move for him and his family, and $40,000 for temporary living expenses in Los Angeles before buying a house from a washed-up movie star in Hollywood for $8,000,000. His employer did not reimburse him for his expenses. 5. Peter pays $15,000 in medical insurance premiums for him and his family. Peter is a self-employed attorney who is not otherwise covered by a health insurance plan. 6. Peter files a Schedule C as a self-employed individual. His accountant calculates that the employer portion of his Social Security/Medicare tax is $7,000. 7. Martin sells his car for $10,000. He paid $19,000 for the car, and he used it to commute to work every day. 8. Frank, an employee, paid $1,000 tuition for a seminar in Chicago. Frank lives and works in Tampa. He spent $250 in airfare to attend the seminar and $300 in lodging and meal expenses. Frank received a reimbursement for the tuition, lodging and meal expenses under his employers accountable plan. 6 Treatment Amount 3 $250 2 $20,000 3 $900 1 $130,000 1 $15,000 1 $7,000 4 $-0- 3 $250 ... View Full Document

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