REG 2 - Adjustments and Itemized Deductions Flashcards
Smith, a single individual, made the following charitable contributions during the current year. Smith’s adjusted gross income is $60,000.
Donation to Smith’s church: $5,000
Art work donated to the local art museum
(Smith purchased it for $2,000 four months ago and a local art dealer appraised it for): $3,000
Contribution to a needy family: $1,000
What amount should Smith deduct as a charitable contribution?
a. $7,000
b. $8,000
c. $5,000
d. $9,000
Choice “a” is correct. 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.
Carroll, a 35 year old 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. For regular income tax purposes, what was Carroll’s maximum allowable medical expense deduction, after the applicable threshold limitation, for the year?
a. $20,000 b. $10,000 c. $15,000 d. $0
Choice "b" is correct. Both medical expenses are deductible. The cosmetic surgery is not elective, since it was necessary to correct a congenital deformity. Doctor Bills $ 5,000 Surgery $ 15,000 $ 20,000 AGI Limitation ($100,000 × 10%) (10,000) Deduction $ 10,000
Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for the current year. During the current year, Taylor donated land to a church and made no other contributions. Taylor purchased the land 15 years ago as an investment for $14,000. The land’s fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for the current year?
a. $11,000 b. $14,000 c. $25,000 d. $0
c. $25,000
Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amount should be reported in Mel’s gross income for the year?
a. $4,800 b. $0 c. $1,200 d. $3,600
Choice “a” is correct. Under a nonaccountable plan, $4,800 ($400 per month x 12 months) must be reported as part of Mel’s gross income for the year (in fact, the $4,800 will be included as part of Mel’s taxable wages on Mel’s W-2).
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.
Rule: Any expenses taken against the gross amount received in a nonaccountable plan (e.g., the car mileage expenses and the reimbursement to the company) are considered miscellaneous itemized deductions and are subject to the 2% AGI limitation.
Note: The examiners have attempted to trick the candidate into thinking that this is in some way an accountable plan because they provided for a return of excess funds received to the employer. However, remember that the question specifically states that the plan is nonaccountable.
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
Choice “c” is correct. Stein may deduct $24,000 on Stein’s current year income tax return.
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.
Jackson owns two residences. The second residence, which has never been used for rental purposes, is the only residence that is subject to a mortgage. The following expenses were incurred for the second residence in the current year:
Mortgage interest: $5,000
Utilities: $1,200
Hazard insurance: $6,000
For regular income tax purposes, what is the maximum amount allowable as a deduction for Jackson’s second residence in the current year?
a. $12,200 as an itemized deduction.
b. $5,000 as an itemized deduction.
c. $6,200 in determining adjusted gross income.
d. $11,000 in determining adjusted gross income.
Choice “b” is correct. 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.
During the current year, Wood’s residence had an adjusted basis of $150,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $175,000. Later in the current year, Wood received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Wood’s current year adjusted gross income was $60,000 and he did not have any casualty gains.
What total amount can Wood deduct as a current year itemized deduction for casualty loss, after the application of the threshold limitations?
a. $25,000
b. $13,900
c. $20,000
d. $19,900
b. $13,900
Casualty 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.)
Deet, an unmarried taxpayer, qualified to itemize current year deductions. Deet’s adjusted gross income was $40,000 and he made a $1,500 substantiated cash donation directly to a needy family. Deet also donated art, valued at $11,000, to a local art museum. Deet had purchased the art work two years earlier for $2,000. What was the maximum amount of the charitable contribution allowable as an itemized deduction on Deet’s current year income tax return?
a. $11,000 b. $3,500 c. $12,500 d. $2,000
a. $11,000
Grey, a calendar-year taxpayer, was employed and resided in New York. On February 2, of the current year, Grey was permanently transferred to Florida by his employer. Grey worked full-time for the entire year. In the current year, Grey incurred and paid the following unreimbursed expenses in relocating:
Lodging and travel expenses while moving: $ 1,000
Pre-move househunting costs: $1,200
Costs of moving household furnishings and personal effects: $1,800
What amount was deductible as moving expense on Grey’s current year tax return?
a. $2,800
b. $1,800
c. $1,000
d. $4,000
a. $2,800
Moore, a single taxpayer, had $50,000 in adjusted gross income for the year. During the year she contributed $18,000 to her church. She had a $10,000 charitable contribution carryover from her prior year church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for the current year?
a. $28,000 b. $18,000 c. $10,000 d. $25,000
d. $25,000
Matthews was a cash basis taxpayer whose current year records showed the following:
State and local income taxes withheld: $ 1,500
State estimated income taxes paid December 30 of the current year: $400
Federal income taxes withheld: $2,500
State and local income taxes paid April 17 of the following year: $300
What total amount was Matthews entitled to claim for taxes on her current year Schedule A of Form 1040?
a. $2,200
b. $1,500
c. $1,900
d. $4,700
c. $1,900
In the current year, Joan Frazer’s residence was totally destroyed by fire. The property had an adjusted basis and a fair market value of $130,000 before the fire. During the year, Frazer received insurance reimbursement of $120,000 for the destruction of her home. Frazer’s current year adjusted gross income was $70,000. Frazer had no casualty gains during the year. What amount of the fire loss was Frazer entitled to claim as an itemized deduction on her current year tax return?
a. $8,600 b. $8,500 c. $10,000 d. $2,900
Choice “d” is correct $2,900. The casualty loss is measured by the difference in the property’s value before ($130,000) and after (zero) the casualty, in other words, $130,000. The casualty loss must be reduced by the $120,000 insurance recovery to $10,000. This loss is reduced by $100 per casualty to $9,900. The sum of all such casualty losses (there is only one in this case) is further reduced by 10% of the taxpayer’s adjusted gross income for the year. That is 10% x $70,000 = $7,000. The amount of the casualty loss that is deductible on Frazer’s tax return is $9,900 - $7,000 = $2,900.
Tom and Sally White, married and filing joint income tax returns, derive their entire income from the operation of their retail stationery shop. Their current year adjusted gross income was $100,000, and the Whites itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Whites during the year:
Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 600
Tuition, meals, and lodging at special school for physically handicapped dependent child in an institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care $8,000
Without regard to the adjusted gross income percentage threshold, what amount may the Whites claim in their current year return as qualifying medical expenses?
a. $600
b. $0
c. $8,000
d. $8,600
d. $8,600
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.
The self-employment tax is:
a. One-half deductible from gross income in arriving at adjusted gross income. b. Fully deductible in determining net income from self-employment. c. Fully deductible as an itemized deduction. d. Not deductible.
a. One-half of the self-employment tax is deductible to arrive at adjusted gross income.
For the current year, Val and Pat White filed a joint return. Val earned $35,000 in wages and was covered by his employer’s qualified pension plan. Pat was unemployed and received $5,000 in alimony payments for the first 4 months of the year before remarrying. The couple had no other income. Each contributed $5,000 to an IRA account. The allowable IRA deduction on their current year joint tax return is:
a. $2,000 b. $0 c. $10,000 d. $5,000
c. $10,000
The deduction by an individual taxpayer for interest on investment indebtedness is:
a. Limited to the investment interest paid during the year. b. Limited to the taxpayer's net investment income for the year. c. Limited to the taxpayer's interest income for the year. d. Not limited.
Choice “b” Limited to the taxpayer’s net investment income for the year. The deduction for interest expense on investment indebtedness is limited to net investment income (investment income less investment expenses).
Which expense, both incurred and paid in the same year, can be claimed as an itemized deduction subject to the two percent-of-adjusted-gross-income floor?
a. Employee's unreimbursed moving expense. b. Self-employed health insurance. c. One-half of the self-employment tax. d. Employee's unreimbursed business car expense.
Choice “d” is correct: Employee’s unreimbursed business car expense.. Employee business expenses, including unreimbursed car expense, are deductible as itemized deductions subject to the 2% floor.
The Browns borrowed $20,000, secured by their home, to pay their son’s college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as:
a. Investment interest expense. b. Nondeductible interest. c. Deductible qualified residence interest. d. Deductible personal interest.
Choice “c” is correct: Deductible qualified residence interest.. 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.
On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In Year 4 they borrowed $15,000 secured by their home, and used the cash to add a new room to their residence. That same year they took out a $5,000 auto loan.
The following information pertains to interest paid in Year 4:
Mortgage interest: $17,000
Interest on room construction loan: $1,500
Auto loan interest: $500
For Year 4, how much interest is deductible, prior to any itemized deduction limitations?
a. $19,000
b. $17,500
c. $17,000
d. $18,500
Choice “d” is correct: $18,500. 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.
Wells paid the following expenses during the year:
Premiums on an insurance policy against loss of earnings due to sickness or accident $ 3,000
Physical therapy after spinal surgery $2,000
Premium on an insurance policy that covers reimbursement for the cost of prescription drugs $500
In the current year, Wells recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Wells’ current year income tax return for medical expenses?
a. $500 b. $1,000 c. $3,500 d. $4,000
Choice “b” is correct: $1,000. 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).
Which allowable deduction can be claimed in arriving at an individual’s adjusted gross income?
a. Charitable contribution. b. Alimony payment. c. Unreimbursed business expense of an outside salesperson. d. Personal casualty loss.
Choice “b” is correct. 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.
Charitable contributions subject to the 50-percent limit that are not fully deductible in the year made may be:
a. Carried back two years or carried forward twenty years. b. Carried forward indefinitely until fully deducted. c. Carried forward five years. d. Neither carried back nor carried forward.
Choice “c” is correct. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward five years.
Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute and deduct 25% of his annual earned income. For this purpose, “earned income” is defined as net self-employment earnings reduced by the:
a. Deductible Keogh contribution and one-half of the self-employment tax. b. Deductible Keogh contribution. c. Self-employment tax. d. Self-employment tax and one-half of the deductible Keogh contribution.
Choice “a” is correct. 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.
Which itemized deduction is included in the category of unreimbursed expenses that are deductible only to the extent that the aggregate amount of such expenses exceeds 2% of the taxpayer’s adjusted gross income?
a. Medical expense. b. Charitable contributions. c. Interest expense. d. Tax return preparation fee.
Choice “d” is correct. Tax return preparation fee is a miscellaneous itemized deduction subject to the 2% adjusted gross income (AGI) floor.