midterm1ans - Midterm 1 Answer Key BA 128 Professor Alan...

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Midterm 1 Prepared by: Celia Poon Answer Key BA 128 Professor Alan Cerf 1. Ans. B - All medical expenses are deductible as from AGI itemized deduction to the extent that it exceeds 7.5% of AGI. Sum = $3110. Allowable deduction is 7.5% of AGI (0.075*3200 = $2400) i.e. 3110-2400 = $710. 2. Ans. D – Interest on money borrowed to buy stock is considered as investment interest. Investment interest is deductible to the extent of investment income and the excess is allowed to carry forward. Interest on a personal car loan and credit cards are not deductible. Interest on a personal residence mortgage is deductible up to $1million of acquisition indebtedness and $100,000 of home equity loan. 3. Ans. B - Investment interest is deductible to the extent of investment income. Therefore only $1800 is deductible out of the $2190. Credit card interest is not deductible from AGI. Interest on loans used for a business and interest on a credit card used for business are both for AGI deductions. The total amount deductible for itemized is $8900+$1800 = $10700. 4. Ans. A – Real estate taxes on rental property is considered as passive activity expenses (for AGI deductions), federal income taxes and social security taxes for household help are not deductible. Therefore, the total amount of itemized deductions is $4500+$1500+$500 = $6500. 5. Ans. C – Hobby expenses are deductible to the extent of hobby income. In this problem, interest on home equity loan is also part of hobby expenses and is considered as tier 1 expenses. The rest of the expenses $8500 is considered as tier 2 expenses and will be deducted up to $4500 as miscellaneous deduction subject to the 2% AGI limitation. Therefore Paul’s taxable income is calculated as follows: AGI: Salary $95000 Hobby Income $ 5000 Total AGI $100000 Itemized deduction Interest on loan to purchase home $ 8000 Taxes on home $ 2500 Interest on home equity loan to hobby assets $ 500 Expenses on hobby (4500- 2%*100,000)
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This note was uploaded on 07/16/2011 for the course ACCOUNTING 203 taught by Professor Jones during the Spring '11 term at Kaplan University.

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midterm1ans - Midterm 1 Answer Key BA 128 Professor Alan...

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