Itemized Deductions and Qualified Business Income Deduction Flashcards
Jill divorced her husband James in 2018. Their son Harry lived with Jill for all of 2019 and qualified as her dependent. However, the divorce decree indicates James can take the exemption. Jill paid $1,200 in medical expenses for Harry, and James paid $2,000. Jill entered into a multiple support agreement with her 3 brothers to assist with their mother’s care and took the exemption. Jill provided one-fourth of her mother’s support and paid $1,500 in medical expenses, which was her quarter share. Without regard to adjusted gross income limitations, compute Jill’s medical expense deduction for 2019. A. $0 B. $1,200 C. $2,700 D. $1,500
$2,700
Answer (C) is correct.
To qualify for a deduction, an expense must be paid during the taxable year for the taxpayer, the taxpayer’s spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year. The deduction is allowed for a person who was either a spouse or a dependent at the time the medical services were rendered or at the time the expenses were actually paid. To qualify as a dependent, the dependent person must have over half of his or her support for the year paid by the taxpayer; must fall within a family relationship with the taxpayer; and must be a citizen, national, or resident of the U.S., Canada, or Mexico during a portion of the tax year. However, the individual need not satisfy the gross income test or the joint return test, and a child of divorced parents is treated as a dependent of both parents. Under a multiple support agreement, Jill is considered to have given more than 50% of the support of her mother and is able to deduct all the medical expenses that she paid on behalf of her mother (Publication 502). A multiple support agreement occurs when two or more people provide 50% of the support of an individual, but nobody on their own provides 50% or more of the support of the individual. Jill can also deduct the medical expenses that she paid for her son, since a child of divorced parents is a dependent for both parents with regard to medical expense deductions. Thus, Jill’s total deductions for medical expenses, before any limitations, is $2,700 ($1,200 for her son + $1,500 for her mother). See Study Unit 1 for multiple support.
Generally, the taxpayer may deduct the cost of medical expenses on Schedule A for which of the following?
A. Doctor-prescribed birth control pills.
B. Marriage counseling.
C. Trips for general health improvement.
D. Controlled substances like marijuana that are in violation of federal law.
Doctor-prescribed birth control pills.
Answer (A) is correct.
Medical expenses include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of a disease or for the purpose of affecting any structure or function of the body; transportation and lodging costs incurred on trips primarily for and essential to medical care; qualified long-term care service; and medical insurance. Thus, a prescription of birth control pills qualifies as a medical expense (Publication 502).
Mr. E, a single, 35-year-old taxpayer, had an adjusted gross income of $10,000 for the current year. In addition, he paid the following expenses: Surgeon’s fee (outpatient) $600 Psychiatrist’s fee 700 Hospital bill as follows: Medical services 300 Meals in hospital 200 Hospital room charge 500 Transportation to/from doctor’s office and hospital 50 Contact lenses 200 Prescription drugs 80 Vitamins for general health 60 Weight-loss program 300 Chiropractor’s fee 400 Mr. E also paid $900 for medical insurance premiums and received reimbursement of $850 from the insurance company on claims for the above expenses. Compute Mr. E’s current-year medical deduction for Schedule A. A. $3,080 B. $2,690 C. $2,330 D. $3,180
$2,330 Answer (C) is correct. Section 213 allows a deduction for medical care expenses to the extent that they exceed 7.5% of adjusted gross income. Medicine and drugs are limited to prescription drugs and insulin. Vitamins and the weight-loss program are not deductible because they are for the purpose of improving the taxpayer’s general health and not for a specific ailment. The total amount of expenses paid during the year must be reduced by the amount of insurance reimbursements received (Publication 502). Surgeon’s fee $ 600 Psychiatrist’s fee 700 Hospital bills ($300 + $200 + $500) 1,000 Transportation 50 Contact lenses 200 Prescription drugs 80 Chiropractor’s fee 400 Medical insurance premium 900
$3,930
Less: Insurance reimbursement
(850)
$3,080 Less: 7.5% of AGI (750) Medical expense deduction $2,330
Of the following medical expenses paid by Bill during 2019, how much can he deduct (before limitations)?
$1,000 for his wife Mary’s hospitalization in 2018; they were married in 2019.
$1,000 for Mary’s daughter’s braces; she is Bill and Mary’s dependent in 2019.
$2,000 for Bill’s son’s 2018 medical treatment; he was Bill’s dependent in 2018 but does not qualify for 2019.
A. $0
B. $4,000
C. $1,000
D. $2,000
$4,000
Answer (B) is correct.
To qualify for a deduction, an expense must be paid during the taxable year for the taxpayer, the taxpayer’s spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year. The deduction is allowed for a person who was either a spouse or a dependent at the time medical services were rendered or at the time the expenses were actually paid. Deductible medical expenses include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body (Publication 502).
Mr. Green must use a wheelchair. Upon advice from his doctor, in 2019, he installed an elevator and widened the front entrance of his house, incurring $10,000 and $3,000 in respective costs. Mr. Green had purchased his house for $146,000. An appraisal showed the fair market value of Mr. Green’s house immediately after these modifications at $154,000. Also in 2019, Mr. Green decided to join a health club primarily to improve business contacts and for recreational purposes. He paid a $1,250 annual membership fee to make use of this facility.
Compute Mr. Green’s currently deductible medical expenses.
A. $13,000
B. $6,250
C. $5,000
D. $14,250
$5,000
Answer (C) is correct.
Expenditures for new building construction or for permanent improvements to existing structures primarily for medical care may be deductible in part as a medical expense. The excess of the cost of a permanent improvement over the increase in value of the property is a deductible medical expense (Publication 502). Mr. Green incurred $13,000 in costs to make improvements to his house. The increase in value of his home was $8,000 ($154,000 – $146,000). Thus, Mr. Green may deduct $5,000 ($13,000 – $8,000).
Which of the following statements are true about health insurance deductions?
A taxpayer is allowed a medical expense deduction for health insurance premiums.
The deduction is subject to the 7.5%-of-AGI floor.
Self-employed persons may deduct up to 75% of health insurance premiums paid from gross income.
A. I only.
B. I and II.
C. III only.
D. I, II, and III.
I and II.
Answer (B) is correct.
A taxpayer is allowed a medical expense deduction (subject to the 7.5%-of-AGI floor) for amounts paid for health insurance premiums. Self-employed persons may deduct 100% of health insurance premiums paid from gross income.
Which of the following qualify as deductible medical expenses?
Payments to physician
Payments for elective cosmetic face-lifting operation
Medical portion of your auto insurance premium (although not separately stated)
Payments for acupuncture service
Domestic help
A. 1, 2, and 4.
B. 1, 3, and 5.
C. 1 and 4.
D. 1 and 5.
1 and 4.
Answer (C) is correct.
Payments to a physician and payments for acupuncture service are both expenditures made for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. Accordingly, they fall within the definition of medical care under Sec. 213 and are deductible expenses. Expenditure 2 is not a deductible expense under Sec. 213, unless the procedure was necessary to “ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.” Expenditures 3 and 5 are also not deductible medical expenses. Although insurance covering medical care is a deductible medical expense, if the insurance contract covers losses other than medical care and the charge for the medical insurance is not separately stated, no portion of the premium may be deducted as a medical expense. Domestic help does not fall within the definition of medical care under Sec. 213(d) and is not deductible (Publication 502).
To qualify for a medical expense deduction as your dependent, a person must be your dependent either at the time the medical services were provided or at the time you paid the expenses. A person generally qualifies as your dependent for purposes of the medical expense deduction if
A. The person was a foreign student staying briefly at your home.
B. The person is the unrelated caregiver for your elderly parents.
C. The person would qualify as a dependent except for the amount of gross income.
D. The person is your sibling’s unmarried adult child.
The person would qualify as a dependent except for the amount of gross income.
Answer (C) is correct.
For the purpose of a medical deduction, a person qualifies as a “dependent” if (s)he meets the requirements in Sec. 152 except for the following two criteria:
The amount of the individual’s gross income is not considered [Reg. Sec. 1.213-1(a)(3)].
A child with divorced parents is treated as a dependent by both parents [Sec. 213(d)(5)].
(Publication 502.)
Alan is a cash-basis taxpayer. During the year, he paid the following medical expenses for himself and his daughter, Johanna, whom he claims as a dependent on his tax return.
$310 for glasses for Johanna and $290 for glasses for himself
$650 for a dental root canal procedure for him
$900 for hospital emergency services of which $700 was paid by insurance in the same year
$1,250 for Johanna’s braces which he charged to his credit card in December and paid in January of the next year
$500 for prescriptions for allergies
$2,200 for cosmetic plastic surgery
The taxpayer’s medical expense deduction before limitations is
A. $3,200
B. $6,100
C. $4,150
D. $5,400
$3,200
Answer (A) is correct.
Medical expenses include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease or for the purpose of affecting any structure or function of the body; transportation and lodging costs incurred primarily for and essential to medical care; qualified long-term care service; and medical insurance. However, these costs are only deductible if they are not reimbursed. The deductible medical expenses include
$600 for eyeglasses for the taxpayer and his dependent,
$650 for a root canal,
$200 for emergency services that were not reimbursed,
$1,250 for the dependent’s braces, and
$500 for prescriptions for allergies.
Thus, the total medical expense deduction before limitations is $3,200 (Publication 502).
All of the following capital improvements may be itemized and deducted as medical expenses EXCEPT
A. Cost of modifying a car with special hand controls.
B. Cost of constructing wheelchair accessible ramps for your home.
C. An elevator costing $8,000 that adds $8,000 to the appraised value of your home.
D. Lowering or modifying kitchen cabinets and equipment.
An elevator costing $8,000 that adds $8,000 to the appraised value of your home.
Answer (C) is correct.
Capital expenditures for obtaining items such as eyeglasses, a seeing eye dog, wheelchair, crutches, or artificial limbs are included as deductible medical expenses. The costs of special beds, air conditioning, and dehumidifying equipment are also included as deductible medical expenses. Expenditures for new building construction or for permanent improvements to existing structures primarily for medical care may be deductible in part as a medical expense. The excess of the cost of a permanent improvement over the increase in value of the property is a deductible medical expense (Publication 502).
Insurance premiums for which of the following policies qualify as a medical expense?
A. Membership in an association that gives cooperative (free choice) medical service.
B. Both replacement of lost or damaged contact lenses and membership in an association that gives cooperative (free choice) medical service.
C. None of the answers are correct.
D. Replacement of lost or damaged contact lenses.
Both replacement of lost or damaged contact lenses and membership in an association that gives cooperative (free choice) medical service.
Answer (B) is correct.
A medical expense deduction is allowed for premiums paid for medical insurance, subject to a 7.5%-of-AGI limitation. This provision includes premiums made for contact lens insurance and membership in associations that give cooperative medical service (Publication 17).
James and his two brothers each provided one-third of their mother’s total support. Under a multiple support agreement, James is allowed to claim his mother as a dependent for the current year. Medical expenses paid by James for his mother amounted to $6,000, and his brothers reimbursed him two-thirds of these expenses. What is the amount James can consider as part of medical expenses in the preparation of his individual tax return? A. $0 B. $1,850 C. $6,000 D. $2,000
$2,000
Answer (D) is correct.
Section 213(a) allows a deduction for expenses paid for medical care of the taxpayer, his or her spouse, or a dependent. “Dependent” is defined in Sec. 152 to include the mother of the taxpayer. The medical expenses paid, however, must be reduced by the amount of reimbursement to calculate the deduction (Publication 502). Thus, James can consider $2,000 as part of the medical expenses ($6,000 paid – $4,000 reimbursement from the other brothers).
Which one of the following expenses does NOT qualify as a deductible medical expense?
A. Cost of long-term care for a person who is intellectually and developmentally disabled in a relative’s home.
B. Cost and care of guide dogs used by a blind person in his business.
C. Special school for a deaf child to learn lip reading.
D. Cost of elevator installed for individual who had heart bypass surgery (in excess of increase in value of individual’s home).
Cost of long-term care for a person who is intellectually and developmentally disabled in a relative’s home.
Answer (A) is correct.
Section 213 allows a deduction for expenses paid for medical care of the taxpayer, spouse, and dependents to the extent such expenses exceed 7.5% of adjusted gross income. The term medical care includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of a disease or physical handicap, or for the purpose of affecting any structure or function of the body [Sec. 213(d)]. The cost of keeping a person who is intellectually and developmentally disabled in a relative’s home is an expenditure for the support of the person and does not fall within the definition of medical care. The cost of institutional care could be deductible as a medical expense (Publication 502).
During 2019, Mr. and Mrs. Duhon paid the following expenses for their son, Joel: Medical insurance premiums $1,500 Contact lenses 210 Household help recommended by a doctor 2,200 For 2019, Joel had gross income of $9,850. Because Joel had gross income of $9,850, the Duhons did not claim him as a dependent. How much of Joel’s medical expenses can Mr. and Mrs. Duhon include with their deductible medical expenses? A. $1,500 B. $3,910 C. $1,710 D. $0
$1,710
Answer (C) is correct.
An individual is entitled to an itemized deduction for expenses paid during the tax year for the medical care of the individual, the individual’s spouse, or a dependent to the extent that such expenses exceed 7.5% of adjusted gross income. For purposes of this deduction, “dependent” is defined in Publication 502. The household help does not qualify as a medical expense. Therefore, $1,710 qualifies as deductible medical expenses. Even though Joel is not a dependent, the parents may claim the amount of qualified medical expenses.
Josef had to have the following improvements made to his home because he was handicapped: Cost of ramps 1/2/19 $ 300 Increase in value of home due to ramps 0 Cost of decorative lattice work over ramp area 1/2/19 100 Increase in value of home due to lattice work 50 Cost of chair lift on stairs 1/2/19 2,500 Increase in value of home due to chair lift 1,500 Cost of repairing ramps 12/1/19 50 Cost of repairing chair lift 12/1/19 200 None of the expenses were covered by insurance. How much would qualify as a deductible medical expense in 2019 (before any limitations)? A. $3,050 B. $2,800 C. $1,550 D. $1,430
$1,550
Answer (C) is correct.
Home-related capital expenditures incurred by a physically handicapped individual are deductible. An example of such an expenditure is an elevator needed for someone with a heart condition. However, the amount of any increase in value of the existing property cannot be deducted. Once a capital expense qualifies as a medical expense, amounts paid for the operation and upkeep also qualify as medical expenses. This is true even if the original capital expenditure was not entirely deductible (because it may have increased the fair market value of the residence). Therefore, the cost of the ramps ($300), the cost of the chair lift not attributed to an increase in the value of the property ($2,500 – $1,500 = $1,000), the cost of repairing the ramps ($50), and the cost of repairing the chair lift ($200) are deductible. These expenses total $1,550. The cost of the decorative work is not deductible (Publication 502).
Mr. Cedar broke his hip and must now use a wheelchair. He modified his home to accommodate the wheelchair. He had his home appraised for refinancing just before the improvements to his home. The value of his home was $200,000. After he made the modifications and improvements listed below, the value was $202,000. Mr. Cedar incurred the following expenses during the year. Without consideration of adjusted gross income limitations, compute the amount Mr. Cedar may claim on his 2019 tax return as a medical expense:
$3,000 to construct a ramp in the entrance of his home to accommodate his wheelchair
$4,000 for installation of a lift to transport the wheelchair from the first to the second floor of his house
$1,000 for adding handrails around his tub
$200 to repair his chimney
A. $6,000
B. $8,200
C. $6,200
D. $8,000
$6,000
Answer (A) is correct.
Expenditures for new building construction or for permanent improvements to existing structures primarily for medical care may be deductible in part as a medical expense. The excess of the cost of a permanent improvement over the increase in value of the property is a deductible medical expense. Construction of handicapped entrance or exit ramps, installation of elevators, widening of doorways, or lowering of kitchen cabinets or equipment may each qualify. Mr. Cedar’s total expenses to make his house more handicapped-accessible is $8,000. However, this must be reduced by the increase in value of his home of $2,000 ($202,000 – $200,000). Thus, Mr. Cedar may deduct $6,000 for medical expenses (Publication 502).
Jim and Nancy Walton, both age 55, had adjusted gross income of $25,000 in 2019. During the year, they paid the following medical-related expenses: Over-the-counter medicines $400 Prescription drugs 300 Doctor fees 830 Health club membership (recommended by the family doctor for general health care) 800 Medical care insurance 280 How much may the Waltons use as medical expenses in calculating itemized deductions for 2019? A. $735 B. $1,410 C. $465 D. $0
$0 Answer (D) is correct. The cost of the health club membership is not included in the computation of the medical expense deduction since the cost is incurred for the purpose of improving the taxpayers’ general health, not for curing a specific ailment or disease. Only prescription drugs and insulin are deductible, so the over-the-counter medicines are not included. Medical care insurance $ 280 Doctor fees 830 Prescription drugs 300 Total expenses $1,410 Less: 7.5% of AGI (1,875) Allowable medical expense deduction $ 0
Which of the following will NOT usually be 100% deductible as a medical expense?
A. Modifying the hardware on doors.
B. Lowering the kitchen cabinets.
C. Building entrance and exit ramps.
D. Adding an elevator to your home to allow access to a second-floor bedroom.
Adding an elevator to your home to allow access to a second-floor bedroom.
Answer (D) is correct.
Home-related capital expenditures incurred by a physically handicapped individual are deductible. An example of such an expenditure is an elevator needed for someone with a heart condition. However, the amount of any increase in value of the existing property cannot be deducted. Since the addition of an elevator to a home would normally increase the value of the home, the entire cost would not be deductible as a medical expense (Publication 502).
Ruth and Mark Cline are married and will file a joint 2019 income tax return. Among their expenditures during 2019 were the following discretionary costs that they incurred for the sole purpose of improving their physical appearance and self-esteem:
Face lift for Ruth, performed by a licensed surgeon
$5,000
Hair transplant for Mark, performed by a licensed surgeon
3,600
Disregarding the adjusted gross income percentage threshold, what total amount of the aforementioned doctors’ bills may be claimed by the Clines in their 2019 return as qualifying medical expenses?
A. $0
B. $5,000
C. $3,600
D. $8,600
$0
Answer (A) is correct.
To be a medical deduction, expenses must be primarily to alleviate or prevent a physical or mental disability or illness. Cosmetic surgery is defined as any procedure that is “directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease.” The cost of cosmetic surgery is not deductible unless it is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.
Scott is an 8-year-old with a rare lung problem. His doctor wants him to be examined by a specialist at the Mayo Clinic. Scott and his mother travel to Rochester, Minnesota. Scott is not sick enough to be admitted to the hospital, so he stays in a nearby hotel from which he can go to the hospital daily for the specialist to monitor his reaction to a new drug. Scott and his mother have separate rooms so that Scott can rest properly. They remain for 10 nights, and the rooms each cost $60 per night. How much of the hotel expense is allowable as a medical expense? A. $1,000 B. $1,200 C. $600 D. $500
$1,000
Answer (A) is correct.
The amounts paid for lodging will be considered paid-for medical care if the medical care is provided by a physician in a licensed hospital and if there is no significant element of personal pleasure, recreation, or vacation in the travel away from home. The amount for lodging is limited to $50 for each night for each individual (including a parent with his or her child). Therefore, Scott and his mother are limited to $100 per night for 10 nights, or $1,000 (Publication 17).
Chris flew to Chicago for surgery. He incurred the following costs in connection with the trip: Round-trip airfare $ 350 Lodging ($100/night × 2 nights) 200 Restaurant meals 80 Hospital and surgeon 5,000 What is Chris’s medical expense? A. $5,000 B. $5,450 C. $5,490 D. $5,630
$5,450
Answer (B) is correct.
Medical expenses include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease or for the purpose of affecting any structure or function of the body; transportation cost of a trip primarily for and essential to medical care; qualified long-term care service; and medical insurance. A medical expense deduction is allowed for lodging, but not meals, while away from home on a trip primarily for and essential to medical care. This lodging deduction is limited to amounts that are not lavish or extravagant and cannot exceed $50 per night for each individual. The deduction may also be claimed for a person who must accompany the individual seeking medical care (Publication 17).
Thus, Chris can deduct $350 for airfare, $100 for lodging, and $5,000 for the surgery.
Which one of the following expenditures qualifies as a deductible medical expense for tax purposes?
A. Vitamins for general health not prescribed by a physician.
B. Transportation to physician’s office for required medical care.
C. Health club dues.
D. Mandatory employment taxes for basic coverage under Medicare A. Taxpayer is covered by Social Security.
Transportation to physician’s office for required medical care.
Answer (B) is correct.
Section 213(d) defines medical care as including transportation for needed medical care (Publication 17).
During 2019, the Pack family incurred the following medical expenses: Doctor fees $2,400 Prescription medicine 900 Health club dues (advised by doctor for general health purposes) 4,000 Medical insurance premiums 3,200 The Packs’ AGI for 2019 was $60,000. They received insurance reimbursements of $1,000 for their 2019 expenses. What is the amount the Packs would be able to deduct as an itemized deduction on their tax return after any limitation? A. $1,000 B. $2,000 C. $5,500 D. $4,500
$1,000 Answer (A) is correct. The cost of the health club membership is not included in the computation of the medical expense deduction since the cost is incurred for the purpose of improving the taxpayers’ general health, not for curing a specific ailment or disease. Prescription drugs and insulin and medical insurance premiums are deductible (Publication 502). Medical care insurance $3,200 Doctor fees 2,400 Prescription drugs 900 Insurance reimbursement (1,000) Total expenses $5,500 Less: 7.5% of AGI (4,500) Allowable medical expense deduction $1,000
John has a heart ailment. On his doctor’s advice, he installed an elevator in his home so that he would not have to climb stairs. The cost of the elevator was $7,000. An appraisal shows that the elevator increased the value of his home by $5,000. John can claim a medical deduction of A. $5,000. B. $2,000. C. $7,000. D. None of the answers are correct.
$2,000.
Answer (B) is correct.
Home-related capital expenditures incurred by a physically handicapped individual are deductible. An example of such an expenditure is an elevator needed for someone with a heart condition. However, the amount of any increase in value of the existing property cannot be deducted. Once a capital expense qualifies as a medical expense, amounts paid for the operation and upkeep also qualify as medical expenses. This is true even if the original capital expenditure was not entirely deductible (because it may have increased the fair market value of the residence). Therefore, $2,000 of the cost of the elevator is deductible as a medical expense ($7,000 cost – $5,000 increase in value of home). The maintenance and repair expense of the elevator is deductible, even though a portion of the cost of the elevator was not deductible (Publication 502).
Which of the following may NOT be deducted as medical expenses? (Disregard any limitations that may apply.)
A. $3,000 to a family physician for medical care.
B. $1,000 long-term care insurance.
C. $600 for eyeglasses.
D. $300 for maternity clothes.
$300 for maternity clothes.
Answer (D) is correct.
Deductible medical expenses are amounts paid for
Diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body
Transportation primarily for and essential to medical care
Medical insurance
Qualified long-term care premiums and services
Smoking cessation programs and prescribed drugs designed to alleviate nicotine withdrawal
Eyeglasses used for medical purposes
The cost of maternity clothes is not a qualified medical expense because it does not fall into any of the categories for deductible medical expenses (Publication 502).
Which of the following is deductible as medical insurance?
A. None of the answers are correct.
B. Medicare Part B.
C. Medical portion of auto insurance policy that provides coverage for all persons injured in or by the taxpayer’s car.
D. Insurance policy that pays you $50 a day if you are unable to work due to illness or injury.
Medicare Part B.
Answer (B) is correct.
To qualify for a deduction, a medical expense must be paid during the taxable year for the taxpayer, the taxpayer’s spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year. The basic cost of Medicare insurance (Medicare Part A) is not deductible unless voluntarily paid by the taxpayer for coverage. However, the extra cost of Medicare (Medicare Part B) is deductible (Publication 17).
Smith paid the following unreimbursed medical expenses:
Dentist and eye doctor fees
$ 5,000
Contact lenses
500
Facial cosmetic surgery to improve Smith’s personal appearance (surgery is unrelated to personal injury or congenital deformity)
10,000
Premium on disability insurance policy to pay him if he is injured and unable to work
2,000
What is the total amount of Smith’s tax-deductible medical expenses before the adjusted gross income limitation?
A. $5,500
B. $7,500
C. $15,500
D. $17,500
$5,500
Answer (A) is correct.
Medical expenses are deductible to the extent they exceed 7.5% of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. Therefore, $5,500 ($5,000 dentist and eye doctor fees + $500 contact lenses) qualifies for the deduction before the AGI limitation.
During the year, the Ship family incurred the following medical expenses: Doctor fees $1,450 Prescription medicine 650 Health club dues (advised by doctor for general health purposes) 2,000 Medical insurance premiums 1,900 Medical insurance reimbursements 500 The Ships’ AGI for the year was $40,000. What is the amount the Ships would be able to deduct on their tax return after any limitation? A. $500 B. $3,000 C. $3,500 D. $1,000
$500 Answer (A) is correct. The cost of the health club membership is not included in the computation of the medical expense deduction since the cost is incurred for the purpose of improving the taxpayers’ general health, not for curing a specific ailment or disease [Reg. 1.213-1(e)]. Only prescription drugs and insulin are deductible, so any over-the-counter medicines are not included (Publication 502). Doctor fees $ 1,450 Prescription drugs 650 Medical insurance premiums 1,900 Insurance reimbursement (500) Total expenses $ 3,500 Less: 7.5% of AGI (3,000) Allowable medical expense deduction $ 500
Gail and Jeff Payne are married and filed a joint return for the current year. During the year, they paid the following doctors’ bills:
For Gail’s mother, who received over half of her support from Gail and Jeff but who does not live in the Payne household, and who earned $2,000 in the current year for baby-sitting.
$700
For their unmarried 26-year-old son, who earned $4,000 in the current year but was fully supported by his parents. He is not a full-time student.
500
Disregarding the adjusted gross income percentage test, how much of these doctors’ bills may be included on the Paynes’ joint return in the current year as qualifying medical expenses?
A. $700
B. $500
C. $0
D. $1,200
$1,200
Answer (D) is correct.
Section 213(a) allows a deduction for expenses paid for medical care of the taxpayer, his or her spouse, or a dependent. Dependent is defined in Publication 502 and Sec. 152 to include the mother of the taxpayer and the son of the taxpayer if each received over half of his or her support from the taxpayer. Gail’s mother and son are thus considered dependents for purposes of the medical deductions, regardless of their gross income or filing status (these other factors do affect the availability of the dependency exemption). Therefore, all the medical expenses incurred by Gail and Jeff ($1,200) for their son and Gail’s mother are considered qualifying medical expenses.
Billy had bypass heart surgery in February Year 1. At the advice of his doctor, he had an elevator installed in his home so that he would not have to climb stairs. The costs associated with this capital improvement are as follows:
Cost of elevator installed 6/30/Yr 1
$5,000
Increase in value of home due to elevator
2,500
Cost of decorative lattice work over elevator 6/30/Yr 1
500
Increase in value of home due to lattice work
0
Maintenance and repair of elevator 9/30/Yr 1
500
None of the expenses were covered by insurance. How much would qualify as a deductible medical expense in Year 1, before any limitation?
A. $3,000
B. $2,500
C. $5,500
D. $3,500
$3,000
Answer (A) is correct.
Home-related capital expenditures incurred by a physically handicapped individual are deductible. An example of such an expenditure is an elevator needed for someone with a heart condition. However, the amount of any increase in value of the existing property cannot be deducted. Once a capital expense qualifies as a medical expense, amounts paid for the operation and upkeep also qualify as medical expenses. This is true even if the original capital expenditure was not entirely deductible (because it may have increased the fair market value of the residence). Therefore, $2,500 of the cost of the elevator is deductible as a medical expense ($5,000 cost – $2,500 increase in value of home). The cost of the lattice work over the elevator, on the other hand, is not deductible since it is not a medical necessity. The maintenance and repair expense of the elevator is deductible, even though a portion of the cost of the elevator was not (Publication 502).
Thus, Billy can deduct the increase in value of his home due to the elevator ($2,500) and the cost of the maintenance ($500) for a total deduction of $3,000.
Which of the following is a medical deduction?
A. Maternity clothing.
B. None of the answers are correct.
C. Health club dues advised by your doctor.
D. Legal abortion.
Legal abortion.
Answer (D) is correct.
The amount paid for a legal abortion is allowed as a deduction for a medical expense (Publication 502).
John is a cash-basis taxpayer. During the year, he incurred the following expenses for himself and his son, Michael, whom he claims as a dependent on his return.
$800 for braces;
$100 for babysitting so he could visit the chiropractor;
$900 for emergency room services for Michael;
$875 was covered by insurance;
John paid the remaining $25 in the next year.
John’s medical expense deduction before limitations is
A. $825
B. $800
C. $925
D. $900
$800
Answer (B) is correct.
Deductible medical expenses are amounts paid for
Diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body
Transportation primarily for and essential to medical care
Medical insurance
Qualified long-term care premiums and services
Smoking cessation programs and prescribed drugs designed to alleviate nicotine withdrawal
Expenses for unnecessary cosmetic surgery are not deductible. Cosmetic surgery includes any procedure directed at improving the patient’s appearance that does not meaningfully promote the proper function of the body or prevent or treat illness or disease [Sec. 213(d)(9)]. Braces meaningfully promote the proper function of the mouth, and hence are deductible. The babysitting is not deductible. The emergency room services are reduced by the insurance received. However, the $25 is paid in the following year and therefore is not deductible in the current year. John’s medical expense deduction before limitations is therefore $800 (Publication 502).
The taxpayer may deduct the cost of medical expenses for the following items EXCEPT
A. Guide dogs for the visually impaired and the cost of the dogs’ care.
B. Controlled substances in violation of federal law.
C. Doctor-prescribed drugs including birth control pills.
D. Laser eye surgery, contacts, eyeglasses, and hearing aids.
Controlled substances in violation of federal law.
Answer (B) is correct.
Only medicines and drugs that require a prescription are qualified medical expenses. Capital expenditures for obtaining items such as eyeglasses, a seeing eye dog, wheelchair, crutches, or artificial limbs are deductible medical expenses (Publication 502).
Which of the following expenses are NOT deductible as medical expenses?
A. Swimming lessons, recommended by a doctor for improvement of general health.
B. Insulin used for diabetes.
C. Acupuncture used for migraines.
D. Wig, purchased upon the advice of a physician for the mental health of a patient who has lost all of his or her hair from disease.
Swimming lessons, recommended by a doctor for improvement of general health.
Answer (A) is correct.
Amounts paid for qualified medical expenses that exceed 7.5% of AGI may be deducted. To qualify for a deduction, an expense must be paid during the taxable year for the taxpayer, the taxpayer’s spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year. Amounts paid to improve general health, such as health club membership dues and fees paid for swimming lessons, are not deductible (Publication 502).
All of the following taxes are deductible on Schedule A (Form 1040) EXCEPT
A. State real estate tax on a personal residence.
B. State or local inheritance tax.
C. State income tax.
D. Foreign income tax.
State or local inheritance tax.
Answer (B) is correct.
No deduction is allowed for state or local inheritance taxes. On the federal estate tax return, a credit may be allowed. But for income tax purposes, no deduction is available (Publication 17).
Which of the following taxes may be deducted on Form 1040, Schedule A?
A. Homeowners’ association charges.
B. Assessments for sewer lines.
C. State income taxes on municipal bond interest.
D. State and local taxes on gasoline.
State income taxes on municipal bond interest. Answer (C) is correct. Section 164(a) allows a deduction for state income taxes (even if the income is exempt from federal tax). Since this is not allowed as a deduction in arriving at adjusted gross income as defined in Sec. 62, it is an itemized deduction as defined in Sec. 63(d) and is reported on Schedule A.
During the year, Mark paid his first quarter county real estate taxes of $1,400 on his personal home. Mark paid real estate taxes on his unemployed brother-in-law’s home of $800. During the year, Mark was assessed a tax for trash pick-up of $165. He also paid a tax of $250 for improvements made by the town in his development, which increased the value of his property. Mark also withdrew the entire amount of $10,400 from his traditional IRA of which $2,400 was interest earned. Mark, in previous years, had taken deductions for his IRA contributions. Mark is 48 years old. What is deductible on his Form 1040 for real estate taxes and what is the tax penalty, if any, on the early withdrawal from his IRA?
Deductible Real Estate
Tax on Schedule A Tax on IRA
A. $1,400 $0 B. $1,815 $1,040 C. $1,400 $1,040 D. $1,400 $240
$1,400
$1,040
Answer (C) is correct.
State and local taxes on real property levied for the general public welfare may be deductible as real estate taxes on Form 1040, Schedule A. The taxes must be for general community or governmental purposes and assessed uniformly against all property under the jurisdiction of the taxing authority. Taxes charged for a special privilege granted, services rendered for the taxpayer, or local benefits and improvements that increase the value of the taxpayer’s property are not deductible. Additionally, itemized charges assessed against specific property or certain people are not deductible. This includes services, such as trash collection, even when paid to the taxing authority. Therefore, Mark can only deduct the $1,400 of real estate taxes paid on his personal home.
A taxpayer must include early distributions of taxable amounts from a traditional IRA in gross income. Early distributions are amounts distributed from a traditional IRA account or annuity before the taxpayer is age 59 1/2 and are subject to an additional 10% tax. The additional tax on Mark’s early distribution is $1,040 ($10,400 IRA withdrawal × 10%).
In the current year, Smith paid $6,000 to the tax collector of Big City for realty taxes on a two-family house owned by Smith’s mother. Of this amount, $2,800 covered back taxes for the previous year, and $3,200 covered the current-year taxes. Smith resides on the second floor of the house, and his mother resides on the first floor. In Smith’s itemized deductions on his current-year return, what amount was Smith entitled to claim for realty taxes? A. $3,000 B. $6,000 C. $3,200 D. $0
$0
Answer (D) is correct.
Taxes may be deducted only by the person on whom they are legally levied. Since Smith does not own the house, none of the taxes paid by Smith can be deducted by Smith. Smith’s mother is entitled to the deduction only if she pays the taxes.
During the current year, Anthony paid the following taxes: County real estate taxes on rental property he owns $3,000 County real estate taxes on his own residence 2,500 Federal income taxes 7,000 State income taxes 2,700 Local city income taxes 500 Social Security taxes for household help 500 Anthony did not use the rental property for personal purposes. What amount is deductible as an itemized deduction on Anthony’s current-year income tax return? A. $5,700 B. $8,700 C. $5,200 D. $14,000
$5,700
Answer (A) is correct.
Publication 17 and Sec. 164(a) list the taxes that are deductible from adjusted gross income. The county real estate taxes on the personal residence, the state income taxes, and the local city income taxes are deductible as itemized deductions. The county real estate taxes on the rental property and the Social Security taxes for household help may be deductible but not as itemized deductions. Federal income taxes are not deductible.
During the current year, Luca paid the following taxes: State and local real estate taxes on rental property he owns $ 4,500 State and local real estate taxes on his own residence 3,750 Federal income taxes 10,500 State income taxes 4,050 Local city income taxes 750 Social Security taxes for household help 750 Luca did not use the rental property for personal purposes. What amount is deductible as an itemized deduction on Luca’s current-year income tax return? A. $21,000 B. $7,800 C. $13,050 D. $8,550
$8,550
Answer (D) is correct.
Section 164(a) lists the taxes that are deductible from adjusted gross income. The real estate taxes on the personal residence, the state income taxes, and the local city income taxes are deductible as itemized deductions. The real estate taxes on the rental property are deductible on Schedule E and the Social Security taxes for household help may qualify for the dependent care credit. Federal income taxes are not deductible (Publication 17).
In the current year, Maria paid the following taxes:
Special assessment to provide local benefits
$2,500
County real estate taxes paid on her vacation home
1,250
Sales taxes paid when she purchased a new auto
900
Personal property taxes paid to her local government
350
What amount is allowable as an itemized deduction for the current year?
A. $3,750
B. $5,000
C. $2,500
D. $1,250
$2,500
Answer (C) is correct.
Publication 17 and Sec. 164(a) list the taxes that are deductible from adjusted gross income. The state and local general sales tax (in lieu of state and local income taxes), the county real estate taxes paid on her vacation home, and the personal property taxes are deductible as itemized deductions.
Jeremy decided to itemize on his Year 1 return. He has the following receipts:
State income tax, $3,000
Federal income tax, $12,000
County real estate tax, $2,000
Fee for inspection of car that he uses only personally, $50
Homeowners’ association fees on his personal home, $500
Self-employment tax of $1,000
Compute the amount of tax deductions he can take on his Schedule A, Itemized Deductions.
A. $6,000
B. $18,550
C. $5,000
D. $5,500
$5,000
Answer (C) is correct.
State and local real property taxes are deductible by the person on whom they are imposed in the year in which they were paid or accrued. Ad valorem and personal property taxes are deductible, but only if the tax is substantially in proportion to the value of the property, imposed on an annual basis, and actually imposed. State income taxes paid are deductible, and foreign income taxes paid are deductible unless a foreign tax credit is claimed. The following taxes are not deductible:
Federal taxes on income, estates, gifts, inheritances, legacies, and successions
State taxes on sales, cigarettes and tobacco, alcoholic beverages, gasoline, and registration
Licensing fees of highway motor vehicles
Jeremy is able to deduct the state income taxes ($3,000) and the county real estate taxes ($2,000) on Schedule A, Itemized Deductions. Fifty percent of self-employment taxes are deductible, but they are deductible from gross income to arrive at AGI, not on Schedule A (Publication 17).
Lonnie and Judy Landers bought a home July 1, 2019. Real estate taxes are assessed in their state on April 1, 2019, for property owned in 2018. The 2018 tax is due October 1, 2019. When the Landers bought the house they agreed to pay all taxes due after the date of purchase. Taxes of $1,200 for 2018 were due October 1, 2019, and the Landers paid this amount on October 1, 2019. In 2020, the Landers received a property tax bill for $1,500 for 2019. Payment is due October 1, 2020. What amount can the Landers deduct on their 2019 return as real property tax? A. $0 B. $1,200 C. $750 D. $600
$0
Answer (A) is correct.
Real property taxes are generally deductible only by the person against whom the tax is imposed in the year in which they were paid or accrued. Since no tax paid in 2019 was imposed on the Landers ($1,200 imposed on the sellers for 2018), the Landers have a $0 deduction on their 2019 return. Section 164(d) requires real estate taxes to be apportioned between the buyer and the seller based on the number of days in the real property tax year that the property was held by each (Publication 17). Since the Landers paid $1,200 for 2018 taxes, they are capitalized as an additional cost of the property. For 2019 taxes, the total tax of $1,500 is apportioned based on the amount of time each party held the property for the year. Thus, the Landers are deemed to own the property for 50% of the year (183 days ÷ 365 days) and are permitted to deduct $750 ($1,500 × 50%) in 2020.
Mr. and Mrs. Smith’s real property tax year is the calendar year. Real estate taxes for the previous year are assessed in their state on January 2 and become due on May 1 and October 1. The tax becomes a lien on May 1. The Smiths bought a home on July 1 of the current year. The real estate taxes on the home for the previous year, which became due in the current year, were $1,000. The Smiths agreed to pay the $1,000 after the sale. They paid $500 in late taxes on August 1 and $500 on October 1. How should the Smiths treat the tax payments for federal income tax purposes for the current year?
A. The entire $1,000 is deductible.
B. They may deduct only the $500 payment made on October 1.
C. They may deduct only the $500 payment made on August 1 as a settlement fee or closing cost.
D. They may not deduct any amount but must add the $1,000 to the cost of their home.
They may not deduct any amount but must add the $1,000 to the cost of their home.
Answer (D) is correct.
Real property taxes are generally deductible only by the person against whom the tax is imposed. Section 164(d) requires real estate taxes to be apportioned between the buyer and the seller based on the number of days in the real property tax year that the property was held by each. If the buyer pays the seller’s taxes, they are capitalized as an additional cost of the property. The Smiths paid $1,000 in real estate taxes for the previous year after they purchased the property in the current year. They have, in effect, paid taxes owed by the seller and will not be able to deduct any of the amount and instead must add the $1,000 to the basis of the property.
Which of the following taxes is NOT deductible?
A. One-half of the self-employment tax paid.
B. Personal property tax.
C. Special assessment to provide local benefits.
D. State and local real estate tax.
Special assessment to provide local benefits.
Answer (C) is correct.
An assessment for a local benefit is a payment tending to increase the value of the property and is not deductible under Sec. 164. It may, however, be capitalized (Publication 17).
Which of these taxes is deductible on Schedule A?
A. Current-year property taxes paid for real property purchased on December 31 of the current year.
B. A special assessment paid to improve the taxpayer’s neighborhood.
C. Current-year property taxes paid on land owned in Canada.
D. Personal property tax paid annually on a luxury car based on its value.
Personal property tax paid annually on a luxury car based on its value.
Answer (D) is correct.
State and local personal property taxes are deductible if the tax is actually imposed, imposed on an annual basis, and substantially in proportion to the value of the property.
During the current year, Paul and Mary Davis, cash-basis taxpayers, paid the following taxes: State income taxes withheld $ 300 Estimated federal income tax 250 Estimated state income tax 1,500 Sales tax on new auto used 60% for business 1,400 State gift tax 1,050 State and local property tax, including $50 for trash pickup 2,600 Property tax on their vacation home in Canada 1,000 What amount can Mary and Paul claim as an itemized deduction on their current-year federal income tax return? A. $5,450 B. $4,350 C. $5,400 D. $5,350
$4,350 Answer (B) is correct. Section 164(a) allows a deduction for state and local real property taxes. The deduction for foreign real property tax ended in 2017. Thus, the $2,550 of other property taxes ($2,600 – $50 trash pickup fee) may be deducted, but not the Canadian tax. A deduction is also allowed for state income taxes or state sales taxes. The taxpayers would select the greater deduction; therefore, the $300 of state income taxes withheld and the $1,500 of estimated state income taxes paid may be deducted. Section 164 does not allow a deduction for federal income taxes in any case. The business portion of the sales tax paid on the automobile would be deducted as a business expense on the taxpayer’s Schedule C through the claiming of a depreciation deduction, not as an itemized deduction on Schedule A. Section 164 does not allow a deduction for gift taxes. The $50 fee paid for trash pickup would not be allowed as an itemized deduction. State income taxes withheld $ 300 Estimated state income tax 1,500 State and local property tax ($2,600 – $50 trash pickup) 2,550 $4,350
Which of the following types of taxes can be deducted on Schedule A?
A. A tax on a motor vehicle based on vehicle weight.
B. Transfer taxes on the sale of a residence.
C. A tax on a motor vehicle based on engine horsepower.
D. None of the answers are correct.
None of the answers are correct.
Answer (D) is correct.
To deduct a personal property tax on Schedule A, the tax imposed must be determined solely on the value of the property. Transfer taxes incurred on the sale of a residence are not allowed as Schedule A deductions. They are added to the buyer’s cost basis of the residence if paid by them. If paid by the seller, transfer taxes serve to lower the realized amount of the sale as sale expenses (Publication 17).
Taxes deductible as an itemized deduction up to $10,000 include all of the following EXCEPT
A. State and local income taxes.
B. Personal property taxes based on the value of the personal property.
C. Taxes that the taxpayer paid on property owned by his or her parents or children.
D. State and local real estate taxes based on the assessed value of the property and charged uniformly against all property.
Taxes that the taxpayer paid on property owned by his or her parents or children.
Answer (C) is correct.
The taxes that are deductible from adjusted gross income include state and local income taxes withheld, state and local real estate taxes paid, and personal property taxes, all of which are deductible as itemized deductions (Publication 17). However, taxes paid on another person’s property are not deductible because the tax liability is the liability of the other person.
Humberto purchased a new home on March 15, 2018, in a county that assesses real estate property taxes in the succeeding year (i.e., 2018 taxes assessed in 2019). At the closing on his new home, Humberto received the following credits against the purchase price of the home:
2017 real estate property taxes
$2,000
2018 real estate property taxes prorated
420
In 2018, when the real estate property tax bill for 2017 came in, Humberto had to pay $2,200 total. The real estate property tax bill for 2018 rose to a total of $2,350, which he paid when he received it in 2019. What is the amount of Humberto’s deduction for real estate property taxes on his 2018 and 2019 income tax returns?
2018
2019
A. $200 $1,930 B. $2,200 $2,350 C. $0 $1,930 D. $0 $1,880
$0
$1,880
Answer (D) is correct.
State and local real property taxes are generally deductible only by the person against whom the tax is imposed. Even though Humberto received credits for the seller’s portion of the real estate taxes, Sec. 164(d) requires real estate taxes to be apportioned between the buyer and the seller based on the number of days in the real property tax year that the property was held by each (Publication 17). Since Humberto paid an additional $200 for 2017 taxes, they are capitalized as an additional cost of the property. For 2018 taxes, the total tax of $2,350 is apportioned based on the amount of time each party held the property for the year. Thus, Humberto is deemed to own the property for 80% of the year (292 days ÷ 365 days) and is permitted to deduct $1,880 ($2,350 × 80%) in 2019.
Mr. Jones filed an amended federal income tax return during the current year for an earlier tax year. This amended return resulted in an additional tax payment of $400, a penalty of $100, and an interest payment of $40. How much of these payments will be deductible on the current-year tax return? A. $0 B. $40 C. $440 D. $8
$0
Answer (A) is correct.
Federal income taxes and penalties imposed by the IRS are never deductible, and there is no deduction for personal interest. None of the payments made by Jones is deductible in the current year (Publication 17).
All of the following taxes could be deductible as itemized deductions EXCEPT
A. Ad valorem personal property tax.
B. Service charges for police protection.
C. Tobacco tax.
D. Local property tax.
Tobacco tax.
Answer (C) is correct.
State taxes on sales of cigarettes and tobacco, alcoholic beverages, gasoline, and licensing/registration (based on weight of the vehicle and not the value) are not deductible (Publication 17).
Ms. L, a cash-basis taxpayer, lives in a county where the real estate tax year runs from July 1 to June 30. The tax bills are due in two installments--July 1 and January 1. Ms. L purchased her first house on September 1 of the current year. As part of her purchase price, she reimbursed the sellers $700 for her share of the current-year real estate taxes. At the date of purchase, she also paid her mortgage company $450, which was credited to her tax escrow account. From her monthly mortgage payments in the current year, a total of $600 was credited to her tax escrow account. On January 4 of the following year, the bank paid the escrow balance to the county tax office. L’s real estate tax deduction for the current year is A. $1,150 B. $450 C. $700 D. $1,750
$700
Answer (C) is correct.
Section 164(d) provides for the apportionment of taxes on real property between sellers and purchasers. Ms. L paid her share of the real estate taxes ($700) in the current year. The amounts credited to her account by the mortgage company and held in escrow are not deductible as taxes until the tax is actually paid (Publication 17). The $1,050 ($450 + $600) held by the mortgage company in escrow will be deductible by Ms. L in the following year, the year paid.
During the current year, Ms. Gonzales paid $2,000 for local real estate taxes on property she rents to others and $3,425 real estate taxes on her residence. In addition, she paid gift taxes of $650 and $1,250 for state income taxes to New Jersey. What amount can Ms. Gonzales deduct as an itemized deduction on her tax return for the current year? A. $5,325 B. $7,325 C. $6,675 D. $4,675
$4,675
Answer (D) is correct.
Section 164(a) lists the taxes that are deductible from adjusted gross income. The local real estate taxes on the personal residence ($3,425) and the state income taxes ($1,250) are deductible as itemized deductions for a total of $4,675. The real estate taxes on the rental property may be deductible, but not as an itemized deduction. Gift taxes are not deductible (Publication 17).
Which of the following costs are deductible on Form 1040, Schedule A, as taxes for 2019?
Personal property tax on an airplane
Garbage pickup itemized on the real estate bill
Real estate tax on property owned in Canada
Sales tax paid on the purchase of your personal car
A. All of the answers are correct.
B. None of the answers are correct.
C. 1 and 4.
D. 2, 3, and 4.
1 and 4.
Answer (C) is correct.
Taxes not directly connected with a trade or business or with property held for the production of rents or royalties may only be deducted as an itemized deduction on Schedule A of Form 1040. Publication 17 and Sec. 164(a) list the taxes that are included as
State or local real property tax
State or local personal property tax
State, local, or foreign income; war profits or excess tax profits
Generation-skipping tax imposed on income distributions
State and local general sales taxes (in lieu of state and local income taxes)
State and local taxes on personal property are only deductible if they meet all three of the following criteria:
The tax is in proportion to the property,
The tax is imposed annually, and
The tax is imposed with respect to personal property.
Foreign real property taxes are not deductible by individuals during tax years 2018-2025.
During the current year, Marlena paid $4,000 for county real estate taxes on property she rents to others and $6,850 county real estate taxes on her residence. In addition, she paid Social Security taxes of $1,300 for household help and $2,500 for state income taxes to New Jersey. What amount can Marlena deduct as an itemized deduction on her tax return for the current year? A. $14,650 B. $13,350 C. $10,650 D. $9,350
$9,350
Answer (D) is correct.
Section 164(a) lists the taxes that are deductible from adjusted gross income. The county real estate taxes on the personal residence ($6,850) and the state income taxes ($2,500) are deductible as itemized deductions for a total of $9,350 ($6,850 + $2,500). The real estate taxes on the rental property and the Social Security taxes for household help may be deductible, but not as itemized deductions (Publication 17).
During the current year, Jack and Mary Bronson paid the following taxes:
County taxes on residence (for period January 1
to September 30 of the current year)
$2,700
State motor vehicle tax on value of the car
360
The Bronsons sold their house on June 30 of the current year under an agreement in which the real estate taxes were not prorated between the buyer and sellers. What amount should the Bronsons deduct as taxes in calculating itemized deductions for the current year?
A. $1,800
B. $2,700
C. $3,060
D. $2,160
$2,160
Answer (D) is correct.
Section 164(a) allows a deduction for state and local real property taxes, and for state and local personal property taxes. Real estate taxes must be apportioned between the buyer and the seller on the basis of the number of days the property was held by each in the year of sale, regardless of an agreement not to prorate them [Sec. 164(d)]. The taxpayers held the property for 6 months of the 9-month period the taxes covered. The amount of the taxes apportioned to the Bronsons is $1,800 ($2,700 × 6 ÷ 9). The state motor vehicle tax on the value of the car is a tax on the value of personal property, so the $360 may also be deducted (Publication 17). The taxpayers may deduct a total of $2,160 as taxes in calculating their itemized deductions.
Which of the following interest expenses incurred by Leila is treated as a personal interest?
A. Ordinary bank loan used to pay for her son’s medical care.
B. Interest incurred by a partnership in which Leila is a limited partner.
C. Interest on a $200,000 home mortgage she took out in 2009.
D. Bonds purchased with accrued interest.
Ordinary bank loan used to pay for her son’s medical care.
Answer (A) is correct.
Personal interest is defined in Sec. 163(h)(2) as any interest other than qualified residence interest, investment interest, interest taken into account in computing income or loss from a passive activity, interest in connection with a business, certain student loan interest, and interest during certain extensions of time to pay the estate tax. Interest on an ordinary bank loan incurred for medical care is personal interest. Personal interest is not deductible (Publication 17).
Which of the following is treated as personal interest of Individual A?
A. Interest incurred to purchase bonds as an investment.
B. Interest incurred on refinancing A’s home if the funds are used for a vacation.
C. Interest incurred on an ordinary bank loan if the funds are used to provide medical care for a dependent of A.
D. Interest incurred by a limited partnership in which A is a limited partner.
Interest incurred on an ordinary bank loan if the funds are used to provide medical care for a dependent of A.
Answer (C) is correct.
Personal interest is defined in Sec. 163 as any interest other than qualified residence interest, investment interest, interest taken into account in computing income or loss from a passive activity, interest in connection with a business, student loan interest, and interest during certain extensions of time to pay the estate tax. Interest on an ordinary bank loan incurred for medical care is personal interest. Personal interest is not deductible (Publication 17).
How much of the following interest expense is deductible on Schedule A before limitations? The taxpayer is reporting $1,500 in investment income.
$1,200 interest paid on a loan used to purchase a vacant lot held for investment
$750 interest paid on a qualifying student loan
$2,700 credit card interest on an advance used to make a down payment on a new home
$625 interest on a loan used to invest in tax-free bonds
A. $1,200
B. $3,900
C. $1,950
D. $4,650
$1,200
Answer (A) is correct.
The general rule is that no personal interest may be deducted. Personal interest includes interest on credit card debt, revolving charge accounts and lines of credit, car loans, medical fees and premiums, etc. Investment interest is interest paid or incurred (on debt) to purchase or carry property held for investment and is allowed within limits. Student loan interest is deductible on line 20 of Form 1040 Schedule 1 as an above-the-line deduction. No deduction is permitted for interest on debt incurred to purchase or carry tax-exempt bonds. Therefore, the interest expense deductible on Schedule A, before limitations, is $1,200 (Publication 17).
On June 30, Jeff, who uses the cash method of accounting, borrowed $25,000 from a bank for use in his business. Jeff was to repay the loan in one payment with interest on December 30 of the same year. On December 30, he renewed that loan plus the interest due. The new loan was for $27,000. What amount of interest expense can Jeff deduct for the current year? A. $1,000 B. $0 C. $2,000 D. $333
$0
Answer (B) is correct.
Under the cash method of accounting, expenses are deductible when they are actually paid. Paying interest with another debt instrument is only substitution of debt. Since Jeff paid no interest on the loan in the current year, no interest expense is deductible for the current year (Publication 535).
Luke took out a mortgage on his home for $250,000 10 years ago. He filed as single for Year 1. In April Year 1 when the home had a fair market value of $430,000 and he owed $180,000 on the mortgage, he took out a home equity loan for $140,000. Luke used the proceeds as follows:
$90,000 was for substantial home improvements.
$30,000 was for credit card debt.
$20,000 was used to purchase securities that produce tax-free income.
How much of the $140,000 loan would produce deductible mortgage interest in Year 1?
A. $140,000
B. $0
C. $90,000
D. $120,000
$90,000
Answer (C) is correct.
Luke’s first mortgage is acquisition indebtedness, which has fully deductible interest. Of the second mortgage, $90,000 is acquisition indebtedness because it was used to improve the residence. The $20,000 used to produce tax-free income cannot also be permitted a mortgage interest deduction. For 2019, the prior deduction for interest on home equity loans used for personal expenses such as as credit card debt, is disallowed. Thus, the total amount of the loan that produces deductible mortgage interest is only the $90,000 for home improvements.
