Chapter 8

Question 1

Personal expenses versus expenses incurred in the course of conducting business.

Answer 1

Generally expenses incurred in the course of conducting business are all deductible, most expenses incurred personally are not (unless otherwise stated by the IRS).

Question 2

Medical & Dental Personal Deduction

Answer 2

Medical & Dental - Medical expenses can be deducted only to the extent that unreimbursed medical expenses exceed 10 percent of adjusted gross income for the year.

Question 3

If a taxpayer travels away from home primarily to receive essential medical care, a deduction for the taxpayer’s lodging while away from home is allowable up to a limit of $50 per night?

Answer 3

True

Question 4

The following expenses have been accepted by the Internal Revenue Service as qualifying for the medical expense deduction:

Answer 4

• the cost of dentures and orthodontic treatment,
• premiums for part B of Medicare (and also part A for taxpayers not covered by Social Security),
• the cost of guide animals, including hearing aid and seeing eye animals,
• the cost of treatment for alcohol or drug addiction,
• fees for psychiatric care,
• the cost of legal abortions,
• fees of chiropractors, osteopaths, and psychotherapists,
• fees of Christian Science practitioners and for acupuncture for a specific medical treatment,
• medical conference fees,
• the cost of special schools specializing in learning disorders, and
• the cost of eyeglasses, contact lenses, and hearing aids.

Question 5

The tax law requirements for a qualified long-term care insurance contract currently issued are as follows:

Answer 5

• It must not have a cash value.
• It must be guaranteed renewable.
• It must include a nonforfeiture provision.

Question 6

Benefits from a LTC Contract are excludable from gross income up to?

Answer 6

For 2018, the per diem limitation is $360/day.

Question 7

The following types of taxes not incurred in the course of a business or income-producing activity are deductible on Schedule A by individual taxpayers:

Answer 7

• state and local real property taxes,
• state and local personal property taxes,
• state and local income taxes,
• state and local general sales taxes in lieu of state and local income taxes,
• the generation-skipping transfer tax imposed on income distributions, and
• the environmental tax imposed by IRC Sec. 59A.

Question 8

The Internal Revenue Code provides several categories of interest payments and imposes rules for the deductibility or nondeductibility of each category. The most significant basic categories of interest payments for purposes of this text are as follows:

Answer 8

• interest on indebtedness incurred in the course of a trade or business (“business interest”),
• interest on indebtedness incurred in the course of an activity entered into for profit that is not a business activity (“investment interest”),
• interest on indebtedness incurred in connection with a passive activity (“passive activity interest”),
• certain interest on indebtedness secured by the taxpayer’s residence (“qualified resi- dence interest”), and
• personal interest.

Question 9

Investment interest income example

Answer 9

Muriel wanted to purchase bonds of the Laramie Corporation, a publicly-traded company that sells western-style fashions. She borrowed $250,000 from her bank last year and used all of the loan proceeds to fund the purchase. This year, Muriel paid $17,500 in interest on the loan. She also received $12,500 of interest income from the Laramie bonds. In addition, Muriel received $3,000 of interest income this year from a money market account. Muriel has no other investment income or investment expenses this year. Muriel’s deduction for investment interest on this year’s tax return would be limited to $15,500, the total of her net investment income ($12,500 + $3,000).

Question 10

Acquisition indebtedness

Answer 10

The term “acquisition indebtedness” means any indebtedness that: is incurred in acquiring, constructing, or substantially improving a qualified residence, and is secured by such residence.

Question 11

The maximum amount of acquisition indebtedness for any one taxpayer (including a married couple filing jointly) is $750,000 ($1 million for mortgages entered prior to December 16, 2017).

Answer 11

True

Question 12

Student Loan Deduction

Answer 12

Deductible interest on qualified education loans, also referred to as the “student loan interest deduction,” includes interest payments of up to $2,500 per year per taxpayer for certain loans borrowed for the funding of higher education. The deduction is currently phased out completely for married taxpayers filing jointly with adjusted gross income (subject to certain modifications) in excess of $165,000 and for other taxpayers with AGI in excess of $80,000.

Question 13

Charitable Deductions

Answer 13

A charitable contribution deduction is allowed for contributions to certain charitable, religious, scientific, educational, and other specified organizations. Deductions may be taken by either individuals or corporations. The deduction by individual taxpayers is allowed only from adjusted gross income. Therefore it may be wise from a tax standpoint for individuals to make charitable contributions only in years in which they have itemized deductions in excess of the standard deduction amount.

Question 14

Charitable deduction example (rollover of deductions for future years)

Answer 14

Phil Anthropist donates stock worth $25,000 to the Gotham Library. The stock cost Phil $13,000 when he purchased it 4 years ago. Phil’s adjusted gross income is $30,000. His maximum contribution deduction would be $9,000 (30 percent of $30,000). He would be able to carry over the $16,000 balance of the contribution ($25,000 – $9,000) and apply that as a deduction against future income for up to 5 years.

Question 15

Charitable deductions (AGI RULE)

Answer 15

In general, a contribution of a capital asset to a public charity is deductible up up to 50% of your AGI. To a private charity its only 30% of your AGI. Cash and cash equivalents are deductible up to 60% of AGI for public donations, 30% for private still.

Question 16

Tangible property donation example (Reduction of cost basis rule)

Answer 16

Denise Donor has an adjusted gross income of $10,000. She contributes a collection
of whaling harpoons for display purposes to the Cape May County Historical Museum (a public charity). The collection cost Denise $6,000, but it was worth $10,000 on the date of contribution. The type of property contributed is tangible personal property. The donee is a public charity, and the gift is use-related to the exempt purposes of the museum. Therefore, Denise can deduct up to 30 percent of her contribution base (AGI), $10,000, or $3,000. She gets credit for the full $10,000 contribution, enabling her to carry over the excess contribution, $7,000, for up to 5 years (subject to the 30 percent rule each year). Alternatively, Denise may elect to reduce the value of her gift by 100 percent of the potential gain, or $4,000 ($10,000–$6,000). Under the election, Denise would have a current deduction of $5,000 (50 percent of adjusted gross income), and the remaining $1,000 ($6,000–$5,000) could be deducted in a later year.

Question 17

Gifts in Trust

Answer 17

Gifts of a remainder interest either in real property or in trust are deductible only if made in
one of three ways: (1) an annuity trust, (2) a unitrust, or (3) a pooled-income fund.

Question 18

charitable remainder annuity trust

Answer 18

A charitable remainder annuity trust is a trust designed to permit payment of a fixed amount annually to a noncharitable (income) beneficiary with the remainder going to charity.
If all the necessary tests are met, the donor of a charitable remainder annuity trust will be entitled to an income tax deduction limited to the present value of the remainder interest.

Question 19

Unitrust

Answer 19

A charitable remainder unitrust, like a charitable remainder annuity trust, is basically designed to permit payment of a periodic sum to a noncharitable beneficiary with a remainder to charity. In addition to allowing additional contributions beyond the initial contribution, the key distinction is in how the periodic sum is computed.
If all the necessary tests are met, the donor of a charitable remainder annuity trust will be entitled to an income tax deduction limited to the present value of the remainder interest.

Question 20

Pooled-Income Fund

Answer 20

A pooled-income fund is a trust created and maintained by a public charity rather than a private donor.
• The donor must contribute an irrevocable, vested remainder interest to the charitable organization that maintains it.
• The property transferred by each donor must be commingled with the property trans- ferred by other donors.
• The fund cannot invest in tax-exempt securities.
• No donor or income beneficiary can be a trustee.
• The donor must retain a life-income interest for himself or herself or one or more named income beneficiaries.
• Each income beneficiary must be entitled to and receive a pro rata share of the income (annually) based on the rate of return earned by the fund.

Question 21

Annuity Trust vs Unitrust payout computation

Answer 21

Annuity Trust - A fixed amount or fixed percentage of the INITIAL VALUE of the trust must be payable to the noncharitable beneficiary.

Unitrust - A fixed percentage of the NET FAIR MARKET VALUE of the principal, as revalued annually, must be payable to the noncharitable beneficiary. Therefore, the amount payable to the income beneficiary may fluctuate from year to year.

Question 22

A taxpayer may deduct his or her $25 contribution for a church dinner that is worth $15.

Answer 22

False
A taxpayer may only deduct as a charitable contribution the amount contributed in excess of the value received. Therefore if the dinner was worth $15 and the taxpayer made a contribution of $25, $10 would be deductible.

Question 23

Investment interest in excess of the taxpayer’s net investment income can be carried forward and deducted in future years only to the extent of future net investment income.

Answer 23

True

Question 24

Subject to certain exceptions, gifts of a remainder interest in property are not deductible unless the gift consists of the donor’s entire interest in the property.

Answer 24

True

Question 25

Assessments for street, sidewalk, and other improvements levied against a personal residence are deductible as taxes.

Answer 25

False
Taxes assessed for local benefits that tend to increase the value of the property assessed are not deductible. Assessments for streets, sidewalks, and other improvements would fall within this category. These expenses must be treated as capital expenditures that are added to the cost of the property.

Question 26

Gifts of tangible personal property are deductible at their fair market value, whether or not they are use-related for the organization’s exempt purpose.

Answer 26

False
A use-related property is deductible at its fair market value on the date of the gift. However, if the gift is use-unrelated, the deduction is limited to the donor’s basis in the property.

Question 27

Long-term care insurance cannot be offered through an employer’s cafeteria plan.

Answer 27

True

Question 28

A corporation’s charitable contributions are deductible in amounts up to 10 percent of corporate taxable income.

Answer 28

True

Question 29

A major benefit of a gift of life insurance to a charity is that the death benefit to the charity will be guaranteed, unless the policy lapses for nonpayment of premium.

Answer 29

True

Question 30

Gifts made to foreign charities are deductible by the taxpayer provided that the taxpayer is a United States citizen.

Answer 30

False

No deductions are allowed for gifts made to foreign charities, except where allowed by treaty.

Question 31

The cost of prescription drugs may be deducted as a medical expense.

Answer 31

True

Question 32

Until 2025, the deduction for state and local taxes is limited to $10,000 annually.

Answer 32

True

Question 33

Medical expense deductions cannot exceed 50 percent of the taxpayer’s medical care expenses for the year.

Answer 33

False
A medical expense deduction is allowed for the entire portion of deductible medical expenses (including medical expense insurance) that exceeds the applicable floor of the taxpayer’s adjusted gross income (10% of AGI for 2019, 7.% of AGI for 2018).

Question 34

Expenses for qualified long-term care services are deductible in generally the same manner as medical expenses.

Answer 34

True

Question 35

Charitable contributions are allowed for gifts of property but not for gifts of services to the charity.

Answer 35

True

Question 36

An individual taxpayer may generally deduct cash contributions to public charities in an amount up to 60 percent of adjusted gross income in the year of contribution.

Answer 36

True

Question 37

If tax-exempt bonds are purchased with an investment loan, a deduction is not available for interest payments on the loan.

Answer 37

True

Question 38

The total cost of a capital expenditure is deductible in full the year it is incurred.

Answer 38

False
Generally, a capital expenditure must be capitalized rather than expensed. However, any applicable cost recovery deduction may be taken in the year of acquisition.

Question 39

Premium payments on life insurance policies are generally deductible if paid by the policyowner-insured.

Answer 39

False

Premiums paid by the policyowner-insured for personal life insurance are generally not deductible.

Question 40

Individual taxpayers may not deduct interest on credit card charges for the purchase of personal items.

Answer 40

True

Question 41

A medical expense deduction is allowed for the cost of a weight-loss program for someone who is diagnosed with obesity.

Answer 41

True

Question 42

The value of a charitable deduction for a gift of a premium-paying life insurance policy is the single premium that the insurer would charge for a policy of the same amount at the insured’s attained age.

Answer 42

A charitable contribution deduction for a premium-paying policy is limited to the lower of the cost of the contract (net premiums paid) or the value of the policy.

Question 43

When long-term capital-gain property is donated to a qualified public charity, the taxpayer’s deduction may generally not exceed 30 percent of the taxpayer’s adjusted gross income.

Answer 43

True

Question 44

An individual making a charitable contribution to a qualified public charity may deduct contributions in an amount up to 100 percent of earned income.

Answer 44

False
Individuals may deduct contributions annually in amounts up to 60 percent of their contribution base (adjusted gross income) for gifts to qualified public charities.

Question 45

A taxpayer may deduct all interest payments on loans secured by a personal residence regardless of whether the proceeds were actually used for a purpose related to improving or acquiring the residence.

Answer 45

False
“Acquisition indebtedness” may still be deductible up to certain amounts, but “home equity indebtedness” is not deductible between 2018 and 2025.

Question 46

Capital expenditures include those made in acquiring or improving property that has a useful life of more than one year.

Answer 46

True

Question 47

A charitable gift of a remainder interest is deductible when the gift is made in the form of an annuity trust, a unitrust, or a pooled-income fund.

Answer 47

True

Question 48

Qualified long-term care insurance premiums are deductible in full as medical expenses regardless of their amounts.

Answer 48

False
Qualified long-term care insurance premiums are eligible for treatment as medical expenses. However, deductibility of these premiums is subject to annual dollar amount limitations based on the covered individual’s age.

Question 49

Personal expenses, such as heat, electricity, and water, are deductible.

Answer 49

False
Subject to certain limited exceptions, personal expenses are nondeductible. Most expenditures that are normal in the course of maintaining a household are considered nondeductible personal expenses.

Question 50

A charity’s rent-free occupancy of an office is deductible by the contributor at the fair market value of the occupancy.

Answer 50

False

A contribution of a rent-free occupancy or the right to use property is not deductible as a charitable contribution.

Question 51

Any joint owner of property who actually pays a deductible tax on the property may take the deduction for the payment.

Answer 51

True

Question 52

Although civic associations, social clubs, chambers of commerce, and other business leagues are considered tax-exempt organizations, they are not considered qualified organizations under the charitable contribution rules and therefore gifts to these organizations are not deductible as charitable contributions.

Answer 52

True