FAR 31 - Deductions 2 - Itemized Medical/Taxes/Interest Flashcards
Matthews was a cash basis taxpayer whose records showed the following:
2015 state and local income taxes withheld $1,500
2015 state estimated income taxes paid December 30, 2015 $400
2015 federal income taxes withheld $2,500
2014 state and local income taxes paid April 15, 2016 $300
What total amount was Matthews entitled to claim for taxes on her 2015 Schedule A of Form 1040? A. $4,700 B. $2,200 C. $1,900 D. $1,500
C. Certain state and local taxes are deductible as an itemized expense during the year in which the taxes were actually paid. Deductible taxes include income and real property. State and local fees are not deductible. Federal income taxes also are not deductible.
During 2015, Matthews paid $1,500 in state and local income taxes withholding and $400 in state estimated income taxes. Thus, she is entitled to claim $1,900 for taxes on her 2015 Schedule A of Form 1040. Matthew’s 2015 state and local income taxes paid on April 15, 2016 will be deductible on her 2016 tax return because these taxes were not actually paid in 2015.
Carroll, an unmarried taxpayer with an adjusted gross income of $100,000, incurred and paid the following unreimbursed medical expenses for the year:
Doctor bills resulting from a serious fall $ 5,000
Cosmetic surgery that was necessary to correct a congenital deformity $15,000
Carroll had no medical insurance and is 60 years old. For regular income tax purposes, what was Carroll’s maximum allowable medical expense deduction, after the applicable threshold limitation, for the year?
$10,000
Total allowable medical expenses is $20,000. Only medical expenses in excess of 10% of AGI are allowable as a deduction. Carrol’s AGI is $100,000 x .010 = $10,000. Total expenses of $20,000 - $10,000 = $10,000 deductible expenses.
The 2015 deduction by an individual taxpayer for interest on investment indebtedness is
A. Limited to the investment interest paid in 2015.
B. Limited to the taxpayer’s 2015 interest income.
C. Limited to the taxpayer’s 2015 net investment income.
D. Not limited.
C. A noncorporate taxpayer’s deduction for interest on investment indebtedness is limited to the taxpayer’s net investment income. Interest on investment indebtedness is interest paid or accrued that is allocable to property held for investment.
An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current-year’s tax return for investment interest expenses?
$2,000
Investment interest expense is deductible to the extent of net investment income. Net investment income is defined as investment income ($10,000) less noninterest investment expenses ($8,000), or $2,000. So, $2,000 of the $5,000 of investment interest expense is deductible as an itemized deduction. The remaining $3,000 is carried over, indefinitely, and deducted in a year that has sufficient net investment income.
T/F: Taxpayer pays a property tax based on the value of her vehicle. This tax is deductible as an itemized deduction.
True
Hall, a divorced person and custodian of her 12-year old child, filed her 2015 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her 2015 return:
•The divorce agreement, executed in 2013, 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 be continued until remarriage or death. However, for the year 2015, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2015 in a suit to collect the alimony owed.
The $2,000 legal fee that Hall paid to collect alimony should be treated as
A. A deduction in arriving at adjusted gross income.
B. An itemized deduction subject to the 2% of adjusted gross income floor.
C. An itemized deduction not subject to the 2% of adjusted gross income floor.
D. A nondeductible personal expense.
B. Most legal expenses incurred in attempts to produce or collect taxable income or paid in the association with the determination, collection, or refund of any tax are usually deductible as an itemized deduction subject to the 2 percent of adjusted gross income floor.
Legal expenses attributable to the collection of alimony or tax advice related to the divorce and to either doing or keeping a taxpayer’s job also are deductible as an itemized deduction subject to the 2 percent of adjusted gross income floor.
Thus, the $2,000 legal fee that Hall paid to collect alimony may be deducted as an itemized deduction subject to the 2 percent of adjusted gross income floor.
Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year.
Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed.
What is the amount of charitable contributions deductible on Stein’s current year income tax return?
A. $17,000
B. $21,000
C. $24,000
D. $25,000
C. $24,000 is correct. Although Stein can deduct the fair market value (FMV) of $25,000 for the stock contributed, the deduction is limited to 30% of his AGI, $80,000.
Which of the following is not a miscellaneous itemized deduction?
A. An individual’s tax return preparation fee.
B. Education expense to meet minimum entry level education requirements at an individual’s place of employment.
C. An individual’s subscription to professional journals.
D. Custodial fees for a brokerage account.
B. Numerous expenses are deductible as miscellaneous itemized deductions. These expenses only may be deducted if they exceed two percent of the taxpayer’s adjusted gross income. Miscellaneous itemized deductions include: an individual’s tax return preparation fee; investment expenses deductible under Code Section 212, including custodial fees for a brokerage account; job related educational expenses, including subscription to professional journals; and unreimbursed employee expenses. Job related educational expenses only may be deducted if incurred to improve or maintain skills required in the taxpayer’s business or employment. Thus, education expense to meet minimum entry level education requirements at an individual’s place of employment are not deductible.
T/F: Total itemized deductions are reduced for single taxpayers with AGI above a certain level.
True
