Chapter 9 T/F

Question 1

Capital expenditures include those made in acquiring or improving property that has a useful life of more than one1 year

Answer 1

True

Question 2

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

Answer 2

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 3

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

Answer 3

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 4

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

Answer 4

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

Question 5

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

Answer 5

False. A medical expense deduction is allowed for the entire portion of deductible medical expenses (including medical expense insurance) that exceeds 7.5 percent of the taxpayer’s adjusted gross income.

Question 6

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

Answer 6

True

Question 7

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

Answer 7

True

Question 8

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

Answer 8

True

Question 9

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

Answer 9

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 10

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

Answer 10

True

Question 11

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

Answer 11

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 12

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

Answer 12

True

Question 13

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 13

True

Question 14

A taxpayer may not deduct interest payments on loans secured by a personal residence to the extent that the principal amount of such loans exceeds the taxpayer’s cost for the home.

Answer 14

False. A combination of “acquisition indebtedness” and “home equity indebtedness” can produce fully deductible interest payments even though the total indebtedness on the taxpayer’s principal residence exceeds the taxpayer’s cost (but not the fair market value) of the residence.

Question 15

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

Answer 15

True

Question 16

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

Answer 16

True

Question 17

An individual taxpayer may generally deduct contributions to public charities in an amount up to 50 percent of adjusted gross income in the year of contribution.

Answer 17

True

Question 18

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 18

True

Question 19

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

Answer 19

True

Question 20

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

Answer 20

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 21

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

Answer 21

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

Question 22

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

Answer 22

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

Question 23

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 23

True

Question 24

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

Answer 24

True

Question 25

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 25

False. Individuals may deduct contributions annually in amounts up to 50 percent of their contribution base (adjusted gross income) for gifts to qualified public charities.

Question 26

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 26

True

Question 27

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 27

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 28

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 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

he 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 30

False. 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.