Chapter 5 Flashcards
In Year 1, Farb, a cash-basis individual taxpayer, received an $8,000 invoice for personal property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and immediately started legal action to recover the overstatement. In November Year 2, the matter was resolved in Farb’s favor, and he received a $5,000 refund. Farb itemizes deductions on his tax returns. Which of the following statements is true regarding the deductibility of the property taxes?
A. Farb should not deduct any amount in his Year 1 income tax return when originally filed, and he should file an amended Year 1 income tax return in Year 2.
B. Farb should deduct $3,000 in his Year 1 income tax return.
C. Farb should deduct $3,000 in his Year 2 income tax return.
D. Farb should deduct $8,000 in his Year 1 income tax return and report the $5,000 refund as income in his Year 2 income tax return
D. Farb should deduct $8,000 in his Year 1 income tax return and report the $5,000 refund as income in his Year 2 income tax return.
Answer (D) is correct.
Property taxes are deductible when paid by a cash-basis taxpayer. Because Farb itemizes deductions, the taxes deducted reduce Year 1 tax liability. A taxpayer may exclude recovered items only to the extent that deduction of the item in a prior year did not produce a tax benefit. Thus, Farb should report as income that portion of the $5,000 recovered, the deduction of which resulted in lower Year 1 tax liability.
Author’s note: This is intended as an example of a question that will appear on the exam that you have not prepared for. Do your best. Expect the unexpected and maximize your score.
Hall paid the following expenses in 2014 pertaining to her home: realty taxes, $3,400; mortgage interest, $7,000; casualty insurance, $490; assessment by city for construction of a sewer system, $910; interest of $1,000 on a personal, unsecured bank loan, the proceeds of which were used for home improvements. Hall does not rent out any portion of the home. The casualty insurance premium of $490 is
A. Allowed as an itemized deduction subject to the $100 floor and the 10%-of-adjusted-gross-income floor.
B. Allowed as an itemized deduction subject to the 2%-of-gross-income floor.
C. Not deductible.
D. Deductible in arriving at adjusted gross income
C. Not deductible.
Answer (C) is correct.
The cost of insurance on personal use assets is a personal expenditure. Deduction of personal, family, and living expenses is not allowed. Also, special assessments are not deductible as tax expenses; they are treated as additions to the basis of the property
In 2014, Alex Burgos, who is 24 years old, paid $600 to Rita, his ex-wife, for child support. Under the terms of his 2014 divorce decree, Alex claims the exemption for his 3-year-old son, William, who lived with Rita for the entire year. Alex’s only income in 2014 was from wages of $17,000, resulting in an income tax of $290. How much is Alex’s Earned Income Credit for 2014?
A. $496
B. $3,305
C. $5,460
D. $0
D. $0
Answer (D) is correct.
Alex does not have a qualifying child since his son does not live with him for more than one-half of the tax year. An individual eligible for the Earned Income Credit without a qualifying child is one who meets three qualifications: (1) The individual has a principal place of abode in the United States for more than one-half of the tax year; (2) the individual is at least 25 years old and not more than 64 at the end of the tax year; and (3) the individual cannot be claimed as a dependent of another taxpayer for the year the credit is being claimed. Since Alex is only 24, he does not meet the qualifications.
Don Wolf became a general partner in Gata Associates on January 1, 2014, with a 5% interest in Gata’s profits, losses, and capital. Gata is a distributor of auto parts. Wolf does not materially participate in the partnership business. For the year ended December 31, 2014, Gata had an operating loss of $100,000. In addition, Gata earned interest of $20,000 on a temporary investment while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Wolf’s passive loss for 2014 is
A. $4,000
B. $5,000
C. $6,000
D. $0
B. $5,000
Answer (B) is correct.
In general, losses arising from one passive activity may be used to offset income from other passive activities but may not be used to offset active or portfolio income. Wolf’s $5,000 operating loss ($100,000 × 5%) may not be used to offset his $1,000 portfolio income ($20,000 × 5%); i.e., interest and dividends are portfolio income. Therefore, his passive loss for 2014 is his $5,000 operating loss. The losses may be carried forward indefinitely or until the entire interest is disposed of.
Jimet, an unmarried taxpayer, qualified to itemize 2014 deductions. Jimet’s 2014 adjusted gross income was $30,000, and he made a $2,000 cash donation directly to a needy family. In 2014, Jimet also donated stock, valued at $3,000, to his church. Jimet had purchased the stock 4 months earlier for $1,500. What was the maximum amount of the charitable contribution allowable as an itemized deduction on Jimet’s 2014 income tax return?
A. $2,000
B. $5,000
C. $0
D. $1,500
D. $1,500
Answer (D) is correct.
A deduction is allowed for contributions to a qualified organization. Therefore, no deduction is allowed for the contribution to the family. However, a deduction is available for the donation of stock in the amount of $1,500. Since the stock has not been held long term, it is ordinary income property, and the deduction is equal to the lesser of FMV or AB.
Carmella is divorced and has two children, ages 3 and 9. For 2014, her adjusted gross income is $30,000, all of which is earned income. Carmella’s younger child stays at her employer’s on-site child-care center while she works. The benefits from this child-care center qualify to be excluded from her income. Carmella’s employer reports the value of this service as $3,000 for the year. This amount is shown in box 10 of Carmella’s Form W-2, but is not included in taxable wages in box 1. A neighbor cares for Carmella’s older child after school, on holidays, and during the summer. Carmella pays her neighbor $2,400 for this care. What is Carmella’s Child Care Credit for 2014?
A. $480
B. $648
C. $720
D. $600
B. $648
Answer (B) is correct.
A credit equal to the applicable percentage of employment-related expenses is allowed. The applicable percentage is 35%, reduced (but not below 20%) by one percentage point for each $2,000 (or fraction thereof) by which adjusted gross income exceeds $15,000. Carmella’s adjusted gross income of $30,000 exceeded $15,000 by $15,000. The amount by which to reduce the applicable percentage is calculated by dividing 15,000 by 2,000, which is equal to 7.5, and must be rounded up to 8. Thus, the applicable percentage is 27% (35% – 8%).
Because Carmella has two qualifying children, she may apply the credit up to $5,400 (the expenses paid) of her child care expenses less the excludable employer dependent-related expenses of $3,000. Therefore, Carmella’s maximum credit is $648 [($5,400 – $3,000) × 27%].
Kent qualified for the Earned Income Credit in 2014. This credit could result in a
A. Subtraction from adjusted gross income to arrive at taxable income.
B. Refund only if Kent had tax withheld from wages.
C. Refund even if Kent had no tax withheld from wages.
D. Carryback or carry-forward for any unused portion.
C. Refund even if Kent had no tax withheld from wages.
Answer (C) is correct.
The Earned Income Credit is a refundable credit for low-income taxpayers. Having taxes withheld from wages is not a requirement for using the Earned Income Credit.
Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an S corporation in which Lane does not materially participate, and a $35,000 passive loss from a real estate rental activity in which Lane materially participated. Lane’s modified adjusted gross income was $165,000. What amount of the real estate rental activity loss was deductible?
A. $25,000
B. $15,000
C. $35,000
D. $0
B. $15,000
Answer (B) is correct.
The amount of a loss attributable to a person’s passive activities is allowable as a deduction or credit only against, and to the extent of, gross income or tax attributable to those passive activities. All rental activity is passive, but a person who actively participates in a rental real estate activity is entitled to deduct up to $25,000 of losses from the passive activity from other than passive income. However, this exception of the general passive activity loss limitation rule is completely phased out when the taxpayer has modified adjusted gross income of at least $150,000. Although Lane actively participated in the rental real estate activity, Lane’s modified adjusted gross income exceeded $150,000, so she can only deduct passive activity losses against passive activity income. Lane had passive activity income from an S corporation of $15,000 and can therefore only deduct $15,000 of the real estate rental activity loss.
Mr. and Mrs. Bucknell had adjusted gross income of $166,000 in 2014. Their daughter’s eligible education expenses for her first year of college were $5,000 in 2014. What is the amount of American Opportunity Credit that Mr. and Mrs. Bucknell may use in 2014?
A. $1,750
B. $0
C. $2,500
D. $750
A. $1,750
Answer (A) is correct.
The American Opportunity Credit allows taxpayers a 100% credit for the first $2,000 of tuition and fees incurred and a 25% credit for the second $2,000 of tuition and fees incurred. However, the credit is phased out when modified AGI exceeds $160,000 for joint filers. The credit phaseout is complete when modified AGI exceeds $180,000. Therefore, the allowable credit for 2014 is reduced by $750 [$2,500 × ($166,000 – $160,000) ÷ $20,000]. The credit that can be claimed is $1,750.
Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their 2014 adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A for 2014. The following unreimbursed cash expenditures were among those made by the Burgs during 2014:
Repair and maintenance of motorized wheelchair for
physically handicapped dependent child $ 300
Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 4,000
Without regard to the adjusted gross income percentage threshold, what amount may the Burgs claim in their 2014 return as qualifying medical expenses?
A. $4,300
B. $0
C. $4,000
D. $300
A. $4,300
Answer (A) is correct.
Medical care expenses of a taxpayer, a spouse, or a dependent are deductible only to the extent they exceed 10% of AGI. Supplies purchased to alleviate a physical defect or provide relief from an ailment qualify as medical expense. Capital expenditures for qualified medical costs are also deductible. If so, the cost of repair and maintenance is also deductible. If the principal reason an individual is in an institution other than a hospital, such as a special school for the handicapped, is the need for, and availability of, the medical care furnished by the institution, the full costs of meals, lodging, and other services necessary for furnishing the medical care are all qualified medical expenditures.
On their joint tax return, Sam and Joann, both age 70, had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions:
Interest of $15,000 on a $100,000 home equity loan to purchase a motor home
Real estate tax and state income taxes of $18,000
Unreimbursed medical expenses of $15,000 (prior to AGI limitation)
Miscellaneous itemized deductions of $5,000 (prior to AGI limitation).
Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income?
A. $38,750
B. $21,750
C. $23,750
D. $35,000
A. $38,750
Answer (A) is correct.
Certain adjustments must be made to regular taxable income to arrive at AMT taxable income. These adjustments include adding back home equity interest not applied to the acquisition of the home. Sam and Joann used the loan to purchase a motor home. Other adjustments include all miscellaneous itemized deductions (i.e., the gross amount in excess of the 2%-of-AGI floor), state income and real property taxes, and medical expense between 10% of AGI and the 7.5% (age 65 and over) AGI floor for regular tax. Sam and Joann’s total adjustments are $38,750:
Home equity interest $15,000
Real estate and state income taxes 18,000
Medical expenses 3,750
= [$15,000 – ($150,000 × 7.5%)]
Miscellaneous itemized deductions 2,000
= [$5,000 – ($150,000 × 2%)]
Total adjustments $38,750
Phil and Joan Crawley made the following payments during 2014:
Interest on bank loan (loan proceeds used to purchase U.S. Series HH savings bonds) $4,000
Interest on installment charge accounts $500
Interest on home mortgage for period April 1 to December 31, 2014 $2,700
Points paid to obtain conventional mortgage loan on April 1, 2014 $900
The Crawleys had net investment income of $3,000 for the year. What is the maximum amount that the Crawleys can deduct as interest expense in calculating itemized deductions for 2014?
A. $6,600
B. $7,100
C. $7,600
D. $3,600
A. $6,600
Answer (A) is correct.
The interest on U.S. savings bonds is taxable, and interest is deductible on the loan to purchase them. Investment interest expense is deductible only to the extent of net investment income. The interest on the installment charge accounts is personal interest, none of which is deductible. The home mortgage interest is deductible assuming it is qualified residence interest. The points on a conventional mortgage loan are deductible even though the points represent prepaid interest. The Crawleys’ maximum interest deduction is
Interest on bank loan $3,000
Interest on home mortgage 2,700
Points 900
Interest deduction $6,600
Farr, an unmarried taxpayer, had $70,000 of adjusted gross income and the following deductions for regular income tax purposes:
Home mortgage interest on a loan to acquire a principal residence $11,000
Miscellaneous itemized deductions above the threshold limitation $2,000
What are Farr’s total allowable itemized deductions for computing alternative minimum taxable income?
A. $0
B. $11,000
C. $2,000
D. $13,000
B. $11,000
Answer (B) is correct.
Only certain itemized deductions are allowed in calculating the AMT. Miscellaneous itemized deductions are not allowed, so the only allowable itemized deduction for computing Farr’s AMT is the $11,000 home mortgage interest on a loan to acquire a principal residence.
An individual taxpayer reports the following information:
U.S. Treasury bond income $ 100
Municipal bond income 200
Rental income 500
Investment interest expense 1,000
What amount of investment interest can the taxpayer deduct in the current year?
A. $100
B. $800
C. $1,000
D. $300
A. $100
Answer (A) is correct.
Investment interest expense is only deductible to the extent of taxable investment income. Taxable investment income does not include tax-exempt municipal bond interest or rental income (which is accounted for separately). Because the $100 from U.S. Treasury bond income is the only taxable investment income, only $100 of the investment interest expense may be deducted in the current year.
Which items are subject to the phase-out of the amount of certain itemized deductions that may be claimed by high-income individuals?
A. Medical costs.
B. Nonbusiness casualty losses.
C. Investment interest deductions.
D. Charitable contributions.
D. Charitable contributions.
Answer (D) is correct.
Itemized deductions are subject to the phaseout for high income taxpayers. The phaseout applies to all deductions with certain exceptions including medical expenses, casualty losses, and investment interest expenses.
Which of the following is not a deduction to arrive at adjusted gross income?
A. Trade or business expenses.
B. Unreimbursed employee business expenses.
C. Capital losses in excess of capital gains.
D. Alimony payments.
B. Unreimbursed employee business expenses.
Answer (B) is correct.
Unreimbursed employee expenses are a deduction from AGI, as an itemized deduction (below-the-line).
In 2014, Wood’s residence had an adjusted basis of $150,000, and it was destroyed by a tornado. An appraiser valued the decline in market value at $175,000. Later that same year, Wood received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Wood’s 2014 adjusted gross income was $60,000, and he did not have any casualty gains. What total amount can Wood deduct as a 2014 itemized deduction for the casualty loss, after the application of the threshold limitations?
A. $13,900
B. $38,900
C. $19,900
D. $39,000
A. $13,900
Answer (A) is correct.
The amount of a personal casualty loss is equal to the lesser of adjusted basis or the decline in FMV due to the casualty. Therefore, Wood’s loss is equal to $150,000. Additionally, several limits apply. First, the loss must be reduced by any insurance recovery. Additionally, the loss must be reduced by $100 per casualty and is only deductible to the extent that it exceeds 10% of AGI. Therefore, Wood’s deductible loss is
Adjusted basis $150,000
Less: Insurance (130,000)
$100 floor (100)
10% of AGI (6,000)
Deductible loss $ 13,900
Which of the following is a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor?
A. Real estate tax.
B. Medical expenses.
C. Employee business expenses.
D. Gambling losses up to the amount of gambling winnings.
Answer (C) is correct.
Miscellaneous itemized deductions are subject to a 2%-of-AGI exclusion. Only that portion of the aggregate amount of allowable second-tier itemized deductions that exceeds the threshold amount of 2% of AGI may be deducted from AGI. Any surplus cannot be carried forward to a succeeding year. The three categories of miscellaneous itemized deductions are employee expenses, tax determination expenses, and other expenses.
Dietz is a passive investor in three activities which have been profitable in previous years. The profit and losses for the current year are as follows:
Gain (Loss) Activity X $(30,000) Activity Y (50,000) Activity Z 20,000 Total $(60,000)
What amount of suspended loss should Dietz allocate to Activity X?
A. $30,000
B. $20,000
C. $22,500
D. $18,000
C. $22,500
Answer (C) is correct.
The passive activity income is allocated pro rata between the two activities with passive losses. As Activity X accounts for 37.5% ($30,000 ÷ $80,000 total loss) of the passive losses, it is allocated $7,500 ($20,000 × 37.5%) of the passive activity income. This results in a net $22,500 ($30,000 – $7,500) passive activity loss allocable to Activity X.
D. $18,000
What is the tax treatment of net losses in excess of the at-risk amount for an activity?
A. Any loss in excess of the at-risk amount is suspended and is deductible in the year in which the activity is disposed of in full.
B. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
C. Any losses in excess of the at-risk amount are carried back 2 years against activities with income and then carried forward for 20 years.
D. Any losses in excess of the at-risk amount are deducted currently against income from other activities; the remaining loss, if any, is carried forward without expiration.
Answer (B) is correct.
The losses are carried forward without expiration and are deductible against income in future years from that activity.
Mr. Klein is 67 years old, single, and retired. During 2014, he received a taxable pension from his former employer in the amount of $4,000. His adjusted gross income is $12,450, and he received $500 of nontaxable Social Security benefits. His tax before credits is $75. What is Mr. Klein’s credit for the elderly?
A. $379
B. $304
C. $0
D. $75
D. $75
Answer (D) is correct.
An individual who has attained age 65 is allowed a credit equal to 15% of the individual’s reduced base amount. For a single individual, the initial base amount is $5,000, reduced by any amounts received as Social Security benefits or otherwise excluded from gross income. The base amount is also reduced by one-half of the excess of AGI over $7,500 (for a single individual).
Initial base amount $5,000
Less AGI limitation
[($12,450 – $7,500) × 50%] (2,475)
Less Social Security benefits (500)
Reduced base amount $2,025
× .15
Klein’s credit for the elderly $ 304
Since the taxpayer’s tax before credits is $75, only $75 of the credit can be claimed.
Rachael, a single filer, has taxable income of $89,000. She has tax preferences and adjustments totaling $39,800. Assume her regular income tax liability is $18,213. What is the amount of Rachael’s alternative minimum tax liability?
A. $15,275
B. $0
C. $1,547
D. $2,295
D. $2,295
Answer (D) is correct.
The AMT exemption for a single filer is $52,800. This exemption is phased out by 25% of the amount of AMTI over $117,300 for single filers. AMTI is $128,800 ($89,000 + $39,800). The phase-out amount is $2,875 [($128,800 – 117,300) × 25%]. The exemption is $49,925 ($52,800 – $2,875). The tentative minimum tax is $20,508 ($78,875 × 26%). The AMT is $2,295 ($20,508 tentative minimum tax – $18,213 regular tax liability).
The following information pertains to Cole’s personal residence, which sustained casualty fire damage in 2014:
Adjusted basis $150,000
Fair market value immediately before the fire 200,000
Fair market value immediately after the fire 180,000
Fire damage repairs paid for by Cole in 2014 10,000
The house was uninsured. Before consideration of any “floor” or other limitation on tax deductibility, the amount of this 2014 casualty loss was
A. $0
B. $20,000
C. $10,000
D. $30,000
B. $20,000
Answer (B) is correct.
The amount of a personal casualty loss is the lesser of the decrease in the fair market value of the property resulting from the casualty or the taxpayer’s adjusted basis in the property. The decrease in the fair market value of Cole’s residence is $20,000 ($200,000 – $180,000). This is less than the adjusted basis, so the casualty loss is $20,000.
All of the following child and dependent care expenses may qualify as work-related for purposes of the Child and Dependent Care Credit except
A. The cost of sending a child to school if the child is in a grade below the first grade and the cost is incident to and cannot be separated from the cost of care.
B. The cost of household services that are partly for the well-being of a qualifying person.
C. The cost of care provided to a qualifying person outside the home.
D. The cost of getting a qualifying person from the home to the care location and back.
D. The cost of getting a qualifying person from the home to the care location and back.
Answer (D) is correct.
Employment-related expenses are paid for household services and for the care of a qualifying individual. Expenses are only classified as work-related if they are incurred to enable the taxpayer to be gainfully employed. The cost of transporting a qualifying individual to a place where care is provided is not considered to be incurred for the individual’s care.
Mary files as head of household and has three dependent children, ages 15, 16, and 19. Mary and the children are U.S. citizens. Her only income is a salary of $77,500. Her tax is $13,121. How much Child Tax Credit is she allowed in 2014?
A. $150
B. $1,850
C. $2,000
D. $3,000
B. $1,850
Answer (B) is correct.
For purposes of eligibility for the Child Tax Credit, a qualifying child is a child, descendant, stepchild, or eligible foster child. The child must also be under the age of 17 and be claimed as a dependent by the taxpayer. The credit is for $1,000 per qualifying child. However, the credit begins to phase out when modified AGI reaches $75,000 for single filers. The credit is reduced by $50 for each $1,000, or fraction thereof, of modified AGI above the thresholds. Accordingly, Mary is allowed a Child Tax Credit of $2,000 before the credit is reduced by the threshold, because only two of her children are qualified dependents. Her credit is reduced by $150 [($77,500 – $75,000) ÷ $1,000 = 2.5 (rounded to 3) × $50], thus allowing Mary a credit of $1,850 ($2,000 – $150).
Hall, a divorced person and custodian of her 12-year-old child, filed her 2014 federal income tax return as head of household. She submitted the following information to the CPA who prepared her 2014 return:
•The divorce agreement, executed in 2003, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to continue until remarriage or death. However, for 2014, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2014 in a suit to collect the alimony owed.
The $2,000 legal fee that Hall paid to collect alimony should be treated as a(n)
A. Deduction in arriving at AGI.
B. Nondeductible personal expense.
C. Itemized deduction subject to the 2%-of-AGI floor.
D. Itemized deduction not subject to the 2%-of-AGI floor
C. Itemized deduction subject to the 2%-of-AGI floor.
Answer (C) is correct.
Fees to collect alimony are considered expenditures for the production of income, deductible as a miscellaneous itemized deduction subject to the 2%-of-AGI exclusion.
Mr. and Mrs. Baker, who file a joint tax return, have an adjusted gross income (AGI) of $100,000 for 2014. Their son, Tony, began his first year of graduate school on July 15, 2013. The Bakers’ expenses incurred in 2014 were $6,000 for tuition. What is the amount of Lifetime Learning Credit the Bakers may claim in 2014?
A. $1,200
B. $2,000
C. $6,000
D. $2,500
A. $1,200
Answer (A) is correct.
A Lifetime Learning Credit is limited to the amount of 20% of the first $10,000 of tuition paid. The Lifetime Learning Credit is available in years the American Opportunity Credit is not claimed. The Bakers’ credit for 2014 will be $1,200 ($6,000 × 20%). There is no phaseout of the Lifetime Learning Credit for the Bakers since the credit phaseout for married taxpayers filing jointly commences when modified AGI is $108,000 and ends at $128,000.
Ruth Lewis has adjusted gross income of $100,000 for 2014 and itemizes her deductions. On September 1, 2014, she made a contribution to a private nonoperating foundation (not a 50% charity) of stock held for investment for 2 years that cost $25,000 and had a fair market value of $70,000. The foundation sold the stock for $70,000 on the same date. Assume that Lewis made no other contributions during 2014. How much should Lewis claim as a charitable contribution deduction for 2014?
A. $25,000
B. $50,000
C. $20,000
D. $30,000
C. $20,000
Answer (C) is correct.
Generally, contributions to private operating foundations are limited to 30% of the taxpayer’s AGI. But contributions of long-term capital gain property to private nonoperating foundations are limited to 20% of the taxpayer’s AGI. Lewis’s charitable contribution deduction should be limited to $20,000 ($100,000 × 20%). The total charitable contribution is equal to $25,000 (lower of FMV or AB) because it is being made to a private nonoperating foundation. $20,000 can be deducted in 2014 because of the 20% limit. The remaining $5,000 can be carried forward for up to 5 years.
D. $30,000
In 2014, Joan Frazer’s residence was totally destroyed by fire. The property had an adjusted basis and a fair market value of $130,000 before the fire. During 2014, Frazer received insurance reimbursement of $120,000 for the destruction of her home. Frazer’s 2014 adjusted gross income was $70,000. Frazer had no casualty gains during the year. What amount of the fire loss was Frazer entitled to claim as an itemized deduction on her 2014 tax return?
A. $10,000
B. $9,900
C. $3,000
D. $2,900
D. $2,900
Answer (D) is correct.
A personal casualty loss is limited to the amount of the loss exceeding 10% of AGI and a $100 nondeductible floor. The casualty loss is $10,000 ($130,000 FMV – $120,000 reimbursement). The itemized deduction is $2,900 ($10,000 loss – $7,000 10% of AGI limit – $100 floor).
Which of the following statements about the Child and Dependent Care Credit is correct?
A. The maximum credit is $600.
B. The child must be a direct descendant of the taxpayer.
C. The credit is nonrefundable.
D. The child must be under the age of 18 years.
C. The credit is nonrefundable.
Answer (C) is correct.
A nonrefundable tax credit is allowed for child and dependent care expenses incurred to enable the taxpayer to be gainfully employed. To qualify, the taxpayer must provide more than half the cost of maintaining a household for a dependent under age 13 or an incapacitated spouse or dependent. The maximum credit is equal to 35% of up to $3,000 of child and dependent care expenses for one qualifying individual ($6,000 for two or more individuals).
D. The child must be under the age of 18 years.
