Lecture 2

Question 1

Charitable contribution

Short term capital gain property vs long term

Answer 1

This question is asking for the actual deduction and requires the candidate to determine which items are deductible charitable contributions. The $5,000 donation to the church is allowable. The artwork donated to the local art museum is deductible to its basis, $2,000. Although it is appreciated property, Smith held the property for only four months, making it short-term capital gain property. Donations of short-term capital gain property are deductible to the donor to the extent of his/her adjusted basis. The contribution to a needy family is not a deductible contribution, as it was not made to a qualifying organization.

Question 2

Medical deductions

Answer 2

limited to 10% of AGI

Question 3

Charitible donations, long term cap example

Answer 3

Individual taxpayers may deduct the FMV of property donated to charity. The limit is 30% of the taxpayer’s AGI (30% × $90,000 = $27,000). The FMV of the property is $25,000 and is within the allowable amount.

Question 4

Charitible donations deduction

Answer 4

limint of 50% of AGI for cash and 30% for capital

Question 5

Non accountable plan

Answer 5

Rule: Under a nonaccountable plan (i.e., expenses are not reported to the employer), any amounts received by an employee from the employer must be reported by the employer as part of wages on the employee’s W-2 for the year (and subject to income tax withholding requirements). The gross amount received is reported as income.

Question 6

charitible contributions

Answer 6

Rule: For 50%-type charities only (which include tax-exempt educational organizations), the taxpayer has the option to deduct long-term (i.e., held longer then 12 months) capital gain appreciated property at the higher fair market value (higher than cost basis) without paying capital gains tax on the appreciated portion. This deduction is limited to 30% of adjusted gross income (AGI). A 5-year carryforward period applies.

Question 7

Interest deductibilit

Answer 7

For a personal residence that is not used for rental purposes, no deduction is allowed for utilities costs or insurance, thus the only deductible amount here is for the mortgage interest. Note that property taxes (not present in this problem) are deductible. In this problem we are not told whether the interest relates to acquisition indebtedness or home equity indebtedness. The deduction for interest on home equity indebtedness is limited to interest on $100,000 of indebtedness, but this is unlikely to be a problem here even if the interest relates solely to home equity indebtedness. This is because of the amount of interest and the fact that there is no debt associated with Jackson’s other residence. The deduction for personal residence interest is an itemized deduction.

Question 8

Casualty losses

Answer 8

asualty losses are generally computed as the decline in fair market value, except that the fair market value is limited to the property’s basis, here $150,000. Casualty losses are reduced by the amount of any insurance recovery, reducing this loss to $20,000. Next, each individual loss is reduced by $100, bringing this loss to $19,900. Finally, the remaining total amount of all casualty losses (here there is only one) are deductible only to the extent that the amount exceeds 10% of AGI, or $6,000 here. ($150,000 - $130,000 = $20,000; $20,000 - $100 - $6,000 = $13,900.)

Question 9

State and local income taxes cash basis

Answer 9

state and local income taxes withheld from a cash-basis taxpayer are deductible in the year withheld

Question 10

Medical expenses

Answer 10

Repair and maintenance of medical devices for a disabled dependent child ($600) are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care ($8,000) is also a deductible medical expense.

Question 11

Self employment tax

Answer 11

One-half deductible from gross income in arriving at adjusted gross income.

Question 12

IRA

Answer 12

n 2016, taxpayers can contribute and deduct up to $5,500 per year to an IRA, and alimony is considered earned income for IRA purposes. For couples filing a joint return where at least one spouse is an active participant in a retirement plan, the deductible portion of the contribution is phased out. For a spouse who is an active participant, the phase-out range in 2016 begins at AGI of $98,000 and is complete at $118,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range begins at $184,000 and is complete at $194,000 (2016). The earned income for IRA purposes here is $40,000 ($35,000 + $5,000), which is below both phase-out ranges, so each spouse receives a deduction of the $5,000 contribution actually made.

Question 13

Interest expense

Answer 13

he deduction for interest expense on investment indebtedness is limited to net investment income (investment income less investment expenses).

Question 14

2% floor

Answer 14

Employee business expenses, including unreimbursed car expense, are deductible as itemized deductions subject to the 2% floor.

Question 15

Interest

Answer 15

Interest paid on a debt secured by a home mortgage is classified as deductible qualified residence interest. The Browns would be able to deduct the interest paid as an itemized deduction. The limit is $100,000 of mortgage interest since the loan was not to buy, build, or improve the home.

Question 16

Mortgage interest

Answer 16

Mortgages of up to $1,000,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible.

Question 17

Medical expenses

Answer 17

Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Prescription drugs are considered medical care. Insurance against loss of income is not payment for medical care and therefore is not deductible. Qualified medical expenses must be reduced by insurance reimbursement ($2,000 + $500 - $1,500 = $1,000).

Question 18

Adjustments to AGI vs itemized deductions

Answer 18

Alimony payments are deductible to arrive at adjusted gross income (AGI). Charitable contributions, personal casualty losses, and unreimbursed business expenses of outside salespersons are all deductible from AGI as itemized deductions.

Question 19

Keogh plans

Answer 19

For Keogh plans, earned income is defined as net self-employment earnings reduced by the amount of the allowable Keogh deduction and ½ the self-employment tax.

Question 20

2% AGI floor

Answer 20

Tax return preparation fee is a miscellaneous itemized deduction subject to the 2% adjusted gross income (AGI) floor.

Question 21

charitible contributions

Answer 21

Relative to the purchase of the art object at the church bazaar, only the excess paid over fair market value ($1,200 - $800 = $400) is deductible. The used clothing donation to the Salvation Army is deductible at its fair market value of $600.

Question 22

Random rules carry backs and forwards

Answer 22

Choice “b” is correct. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward five years.
Choice “a” is incorrect. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward.
Choice “c” is incorrect. Net operating losses, not charitable contributions, are carried back 2 years and forward 20 years.
Choice “d” is incorrect. Individual capital losses, not charitable contributions, are carried forward indefinitely until used up (or taxpayer’s death).

Question 23

itemized deduction vs adjustment above the line

Answer 23

There is no itemized deduction for temporary living expenses, and the direct moving expenses (such as the costs to move the goods and the costs to move the taxpayer’s family from the old to the new location) are deductible before adjusted gross income, not as an itemized deduction.

Question 24

Additional standard deduction

Answer 24

n order to qualify for the additional standard deduction, an individual must be age 65 or older or blind by the end of the tax year. He or she does not have to support a dependent child or aged parent.

Question 25

Medical expense

Answer 25

capital expenditure for the improvement of a home qualifies as a medical expense if it is directly related to the prescribed medical care. However, it is deductible to the extent that the expenditure exceeds the increase in value of the home. Thus, Drake may only deduct $75,000, the difference between the cost of improvement ($100,000) and the increase in market value ($25,000) of the home. In addition, the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. The widening of hallways qualifies as this type of expense and, therefore, the entire $10,000 is deductible.

Question 26

Medical expenses

Answer 26

The doctor fees ($5,000) and the contact lenses ($500) are deductible medical expenses. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses.

Question 27

Ad valorem, income taxes and real estate taxes

Answer 27

In any case, for cash-basis taxpayers, deductible taxes are generally deductible in the year paid, and real estate taxes, income taxes, and personal property taxes (e.g., ad valorem taxes on personal automobile) are allowable deductions. The total amount of deductions for tax expense is calculated as follows:

Question 28

Education adjustment

Answer 28

ule: The adjustment for education loan interest (an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment. The adjustment is phased-out for single taxpayers with modified AGI between $65,000 and $80,000 (2016) and married filing jointly between $130,000 and $160,000 (2016)

Question 29

Alimony payments

Answer 29

RULE: Alimony payments to a former spouse are adjustments to arrive at AGI. Child support payments are NOT alimony and are NOT deductible. Property settlements are NOT alimony and are NOT deductible.

Question 30

IRA

Answer 30

For IRAs, the adjustment is allowed for a year ONLY if the contribution is made by the due date of the tax return for individuals (April 15). The due date for filing the tax return under a filing extension is NOT allowed (i.e., filing extensions are NOT considered).

Question 31

Interest income

Answer 31

The computer-generated investment interest expense deduction will be limited to the net investment income of the taxpayer. Any excess amount will be carried forward indefinitely. For example, assume the taxpayer had $5,000 of investment interest for a year but had investment income of only $3,000. The tax preparer would enter the $5,000 paid as investment interest, and the computer would then allow only a $3,000 deduction for investment interest in the year. The remaining $2,000 of expense would be carried forward indefinitely to be applied to investment income in future years. Qualified residence interest is NOT investment interest and would not affect investment interest income in any manner.

Question 32

Gross income

Answer 32

Gross income includes salary, but it excludes inheritance and proceeds from a lawsuit for physical injuries. Alimony paid is an adjustment from gross income to arrive at Adjusted Gross Income, as follows

Question 33

Charitible contribution

Answer 33

The charitable contribution deduction for contributions of property is normally the lesser of the property’s basis or the fair market value of the property, on the date of the donation, or the lesser of $14,000 or $25,000 in this question. However, contributions of appreciated property, as in this question, are deducted at fair market value, provided the taxpayer held the property for over one year. That deduction might be limited to 50% of AGI ($45,000) or 30% of AGI for long-term appreciated property ($27,000), but the $25,000 is the maximum deduction in this case. The “lesser of” rule really applies to depreciated property and keeps a taxpayer from taking a fair market value deduction for such property.

Question 34

Employee business expenses

Answer 34

Employee business expenses are a miscellaneous itemized deduction subject to the 2% of adjusted gross income (AGI) floor.

Question 35

Adjusted gross income

Answer 35

Adjusted gross income is gross income plus or minus certain other amounts. Half of the $8,000 self-employment tax is an adjustment for AGI, as is the $6,000 self-employed health insurance, the $5,000 alimony, and the $2,000 contribution to a traditional IRA. All of these amounts (total of $17,000) are subtracted from the $57,000 gross income to arrive at AGI. The AGI is thus $40,000.

Question 36

remember for medical expenses you have to subtract the total costs from the threshold amount which is 10% of AGI

Answer 36

Deductible medical expenses are limited to the amount that exceeds 10% of the taxpayer’s adjusted gross income. Deductible medical expenses are those expenses that are “necessary” (such as doctors, prescriptions, required surgery, etc.) Non-deductible expenses are such things as elective surgeries, health club memberships and unnecessary medical expenditures. The Andradis’ AGI is $65,000; 10% of that is $6,500. Qualified medical expenses are $2,300 for their daughter’s prescriptions and $3,000 for physical therapy for their son. Total allowable gross expenditures of $5,300 are less than the threshold of $6,500. So the answer is zero.

Question 37

itemized deductions vs gross income dedu

Answer 37

Interest on a home mortgage, state taxes paid, and medical expenses in excess of 10% AGI are itemized deductions reported on Schedule A. Contributions to IRAs and alimony paid are adjustments to gross income to arrive at AGI. Child support is neither an adjustment nor an itemized deduction.