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Unformatted text preview: Solutions to Problem Materials 1 SOLUTIONS TO PROBLEM MATERIALS 11-27 a. Prescription medicine and drugs $ 300 Hospitalization insurance 600 Doctors and dentists 1,100 $2,000 Less 7.5% of $20,000 (A.G.I.) (1,500 ) Medical expense deduction $ 500 b. The insurance reimbursement received in 2012 does not affect the medical expense deduction for 2011. Only $500 of the $1,200 reimbursement should be included in Rs gross income in 2012. c. R is required to include only $400 of the $1,200 in gross income in 2012the lesser of the amount of his itemized deductions in excess of his standard deduction for 2011 or the medical expense deduction. 11-31 As a general rule, the only interest that is deductible is interest on a first or second home, investment interest, and interest incurred in a trade or business (other than the business of being an employee). a. No deduction is allowed because the interest is personal interest. b. No deduction is allowed because the interest is normally treated as personal interest. But if it can be shown that the proceeds of the loan are used for investment purposes, the interest would be deductible to the extent of any investment income. c. The interest on Ds house in Newark and the interest on either the summer home in Martha's Vineyard or the condominium at Aspen will be treated as qualified residence interest and allowed as a deduction. Since the Vineyard second home interest is larger than the Aspen interest, D would deduct $28,000 ($18,000 plus $10,000). If D rents the condominium he may be able to deduct the interest on this mortgage under the vacation home rules (Ch. 12). d. The interest paid on both the first mortgage and the second mortgage is deductible because the second mortgage (i.e., the home equity loan) did not exceed $100,000. e. M may deduct $2,400 of the interest expense and carry over the remaining $2,800. Ms investment interest expense deduction is limited to his $2,400 of investment income. f. Despite the fact that the interest is business-related, there is no deduction for interest incurred by an employee in connection with his or her trade or business. Note, however, that such interest would be deductible if the taxpayer was self-employed. This is yet another distinction between self-employed and employees that seems unwarranted. 2...
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This note was uploaded on 04/03/2012 for the course TAX 802 taught by Professor Angelini during the Spring '12 term at Suffolk.
- Spring '12