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Exam 10: Deductions and Losses: Certain Itemized Deductions

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Question 41

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Emily, who lives in Indiana, volunteered to travel to Louisiana in March to work on a home-building project for Habitat for Humanity (a qualified charitable organization) . She was in Louisiana for three weeks. She normally makes $500 per week as a carpenter's assistant and plans to deduct $1,500 as a charitable contribution. In addition, she incurred the following costs in connection with the trip: $600 for transportation, $1,200 for lodging, and $400 for meals. What is Emily's deduction associated with this charitable activity?

A) $600.
B) $1,200.
C) $1,800.
D) $2,200.
E) $3,700.

F) B) and E)
G) A) and C)

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Question 42

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The reduced deduction election enables a taxpayer to move from the 30%-of-AGI limitation to the 50%-of-AGI limitation.

A) True
B) False

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Question 43

Multiple Choice

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Joseph and Sandra, married taxpayers, took out a mortgage on their home for $350,000 15 years ago. In May of this year, when the home had a fair market value of $450,000 and they owed $250,000 on the mortgage, they took out a home equity loan for $220,000. They used the funds to purchase a single engine airplane to be used for recreational travel purposes. What is the maximum amount of debt on which they can deduct home equity interest?

Brad, who uses the cash method of accounting, lives in a state that imposes an income tax (including withholding from wages) . On April 14, 2014, he files his state return for 2013, paying an additional $600 in state income taxes. During 2014, his withholdings for state income tax purposes amount to $3,550. On April 13, 2015, he files his state return for 2014 claiming a refund of $800. Brad receives the refund on June 3, 2015. If he itemizes deductions, how much may Brad claim as a deduction for state income taxes on his Federal income tax return for calendar year 2014 (filed in April 2015) ?

Jack sold a personal residence to Steven and paid points of $3,500 on the loan to help Steven finance the purchase. Jack can deduct the points as interest.

Points paid by the owner of a personal residence to refinance an existing mortgage must be capitalized and amortized over the life of the new mortgage.

Linda, who has AGI of $120,000 in the current year, contributes stock in Mauve Corporation (a publicly traded corporation) to the Salvation Army, a qualified charitable organization. The stock is worth $65,000, and Linda acquired it as an investment four years ago at a cost of $50,000. a. What is the total amount that Linda can deduct as a charitable contribution, assuming she carries over any disallowed contribution from the current year to future years? b. What is the maximum amount that Linda can deduct as a charitable contribution in the current year? c. What factors should Linda consider in deciding how to treat the contribution for Federal income tax purposes? d. Assume Linda dies in December of this year. What advice would you give the executor of her estate with regard to possible elections that can be made relative to the contribution?

In Lawrence County, the real property tax year is the calendar year. The real property tax becomes a personal liability of the owner of real property on January 1 in the current real property tax year (assume this year is not a leap year) . The tax is payable on June 1. On May 1, Reggie sells his house to Dana for $350,000. On June 1, Dana pays the entire real estate tax of $7,950 for the year ending December 31. How much of the property taxes may Reggie deduct?

Matt, a calendar year taxpayer, pays $11,000 in medical expenses in 2014. He expects $5,000 of these expenses to be reimbursed by an insurance company in 2015. In determining his medical expense deduction for 2014, Matt must reduce his 2014 medical expenses by the amount of the reimbursement he expects in 2015.

Phillip, age 66, developed hip problems and was unable to climb the stairs to reach his second-floor bedroom. His physician advised him to add a first-floor bedroom to his home. The cost of constructing the room was $32,000. The increase in the value of the residence as a result of the room addition was determined to be $17,000. In addition, Phillip paid the contractor $5,500 to construct an entrance ramp to his home and $8,500 to widen the hallways to accommodate his wheelchair. Phillip's AGI for 2014 was $100,000. How much of these expenditures can Phillip deduct as a medical expense in 2014?

Trent sells his personal residence to Chester on July 1, 2014. He had paid $7,000 in real property taxes on March 1, 2014, the due date for property taxes for 2014. Trent may not deduct the portion of the taxes he paid for the period the property was owned by Chester.

Harry and Sally were divorced three years ago. In July of the current year, their son, Joe, broke his arm falling out of a tree. Joe lives with Sally and Sally claims him as a dependent on her tax return. Harry paid for the medical expenses related to Joe's injury. Can Harry claim the medical expenses he paid for Joe on his tax return?

Adrienne sustained serious facial injuries in a motorcycle accident. To restore her physical appearance, Adrienne had cosmetic surgery. She cannot deduct the cost of this procedure as a medical expense.

Sergio was required by the city to pay $2,000 for the cost of new curbing installed by the city in front of his personal residence. The new curbing was installed throughout Sergio's neighborhood as part of a street upgrade project. Sergio may not deduct $2,000 as a tax, but he may add the $2,000 to the basis of his property.

Gambling losses may be deducted to the extent of the taxpayer's gambling winnings. Such losses are subject to the 2% floor for miscellaneous itemized deductions.

Joe, a cash basis taxpayer, took out a 12-month business loan on December 1, 2014. He prepaid all $3,600 of the interest on the loan on December 1, 2014. Joe can deduct only $300 of the prepaid interest in 2014.

During the current year, Ralph made the following contributions to the University of Oregon (a qualified charitable organization) : Cash $63,000 Stock in Raptor, Inc. (a publicly traded corporation) 94,500 Ralph acquired the stock in Raptor, Inc., as an investment fourteen months ago at a cost of $42,000. Ralph's AGI for the year is $189,000. What is Ralph's charitable contribution deduction for the current year?

Paul and Patty Black (both are age 66) are married and together have AGI of $140,000 in 2014. They have two dependents and file a joint return. During the year, they paid $8,000 for medical insurance, $15,000 in doctor bills and hospital expenses, and $1,000 for prescribed medicine and drugs. a. In December 2014, the Blacks received an insurance reimbursement of $3,500 for hospitalization expenses. Determine the deduction allowable for medical expenses paid during the year. b. Assume instead that the Blacks received the $3,500 insurance reimbursement in February 2015. Determine the deduction allowable for medical expenses incurred in 2014. c. Assume that the Blacks received the $3,500 insurance reimbursement in February 2015. Discuss whether the reimbursement will be included in their gross income for 2015.

In 2014, Dena traveled 600 miles for specialized medical treatment that was not available in her hometown. She paid $90 for meals during the trip, $145 for a hotel room on Tuesday night, and $15 in parking fees. She did not keep records of other out-of-pocket costs for transportation. Dena can include $206 in computing her medical expenses.

Excess charitable contributions that come under the 30%-of-AGI ceiling are always subject to the 30%-of-AGI ceiling in the carryover year.