STUDY UNIT FIVE DEDUCTIONS FROM AGI, CREDITS, AMT, AND LIMITATIONS Flashcards
Jim and Nancy Walton, both age 55, had adjusted gross income of $25,000 in 2014. 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 2014? A $0 B $1,090 C $110 D $1,410
A $0 This answer 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 10% of AGI (2,500)
Allowable medical expense deduction $ 0
Which of the following is not a deduction to arrive at adjusted gross income?
A Capital losses in excess of capital gains.
B Unreimbursed employee business expenses.
C Trade or business expenses.
D Alimony payments.
B Unreimbursed employee business expenses.
This answer is correct.
Unreimbursed employee expenses are a deduction from AGI, as an itemized deduction (below-the-line)
Matthews was a cash-basis taxpayer whose records showed the following:
2014 state and local income taxes withheld $1,500
2014 state estimated income taxes paid December 30, 2014 400
2014 federal income taxes withheld 2,500
2014 state and local income taxes paid April 15, 2016 300
What total amount was Matthews entitled to claim for taxes on her 2014 Schedule A of Form 1040?
A $1,900
B $2,200
C $4,700
D $1,500
A $1,900
This answer is correct.
For a cash-basis, calendar-year taxpayer, state and local income taxes paid or withheld during the year are fully deductible as itemized deductions not subject to the 2%-of-AGI floor. Federal income taxes are not deductible. State and local income taxes paid in the next calendar year are deductible in the next year.
Which items are subject to the phaseout of the amount of certain itemized deductions that may be claimed by high-income individuals? A Medical costs. B Nonbusiness casualty losses. C Investment interest deductions. D Charitable contributions.
D Charitable contributions.
This answer is correct.
Itemized deductions are subject to the phaseout for high income taxpayers. The phaseout applies to all deductions with certain exceptions including medical expenses, casualty losses, and investment interest expenses
Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their 2014 adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A for 2014. The following unreimbursed cash expenditures were among those made by the Burgs during 2014:
Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 300
Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 4,000
Without regard to the adjusted gross income percentage threshold, what amount may the Burgs claim in their 2014 return as qualifying medical expenses?
A $0
B $4,000
C $300
D $4,300
D $4,300
This answer is correct.
Medical care expenses of a taxpayer, a spouse, or a dependent are deductible only to the extent they exceed 10% of AGI. Supplies purchased to alleviate a physical defect or provide relief from an ailment qualify as medical expense. Capital expenditures for qualified medical costs are also deductible. If so, the cost of repair and maintenance is also deductible. If the principal reason an individual is in an institution other than a hospital, such as a special school for the handicapped, is the need for, and availability of, the medical care furnished by the institution, the full costs of meals, lodging, and other services necessary for furnishing the medical care are all qualified medical expenditures.
During 2014, Jack and Mary Bronson paid the following taxes:
Taxes on residence (for period January 1 to September 30, 2014) $2,700
State motor vehicle tax on value of the car 360
The Bronsons sold their house on June 30, 2014, 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 2014?
A $3,060
B $2,160
C $1,800
D $2,700
B $2,160
This answer is correct.
A deduction is allowed for state, local, and foreign real property taxes, and for state and local personal property taxes. Real estate taxes must be apportioned between the buyer and 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. 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 months ÷ 9 months)]. 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. The taxpayers may deduct a total of $2,160 as taxes in calculating their itemized deductions.
Justin Peter earned a salary of $30,000 during 2014. During the year, he was required by his employer to take several overnight business trips, and he received an expense allowance of $1,500 for travel and lodging. In the course of these trips, he incurred the following expenses which were either adjustments to income or deductions from adjusted gross income. Travel $1,100 Lodging 500 Entertainment of customers 400 What is Justin’s adjusted gross income if he does not account to his employer for the expenses? A $30,000 B $29,900 C $29,500 D $31,500
D $31,500
This answer is correct.
An employee’s business expenses do not need to be included in and deducted from gross income in arriving at AGI if the employee accounts to his or her employer for the expenses and the expenses equal the reimbursement. All other business expenses incurred by employees (except those incurred by a qualified performing artist) are deducted from adjusted gross income. Justin’s gross income was $31,500 ($30,000 salary + $1,500 expense allowance). When the employee receives an allowance and does not account to the employer for the expenses, the expense allowance is included in gross income and the expenses are deducted as an itemized deduction. Therefore, Justin’s adjusted gross income is $31,500, and his travel, lodging, and entertainment expenses are deductible from adjusted gross income.
On January 2, 2009, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In 2014, 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 pertains to interest paid in 2014:
Mortgage interest $17,000
Interest on room construction loan 1,500
Auto loan interest 500
For 2014, how much interest is deductible prior to any itemized deduction limitations?
A $18,500
B $17,500
C $19,000
D $17,000
A $18,500
This answer is correct.
The $500 of personal interest paid on the auto loan is not deductible. Qualified residence interest is deductible and includes home acquisition or equity indebtedness. The full amount of mortgaged interest is deductible since there is no more than $1 million of acquisition indebtedness and $100,000 of home equity indebtedness. Home equity indebtedness is debt other than acquisition debt, secured by a qualified residence to the extent it does not exceed the fair market value of the residence reduced by any acquisition indebtedness. Thus, the interest on the room construction loan is deductible as home equity indebtedness. This is based on the assumption that the fair market value of the home is at least $215,000.
The General Business Credit is limited to net income tax minus the greater of the alternative minimum tax or 25% of net regular tax over $25,000.
True. False.
False.
Your answer is correct.
The General Business Credit (GBC) is a set of several credits commonly available to businesses. The GBC is limited to net income tax minus the greater of the tentative minimum tax or 25% of net regular tax over $25,000. Net income tax is the sum of regular income tax and minimum tax liability, reduced by nonrefundable credits other than those that comprise the GBC. Tentative minimum tax is an amount used in computing the alternative minimum tax. Net regular tax is the taxpayer’s regular income tax liability (i.e., without alternative minimum tax) reduced by nonrefundable credits.
As long as an individual participates in rental activity for more than 500 hours, they will not be subject to passive activity loss limitations.
True. False.
False.
Your answer is correct.
A passive activity is either a rental activity or trade or business in which the person does not materially participate. A taxpayer materially participates in an activity during a tax year if (s)he satisfies any one of six tests, including participating more than 500 hours.
If a taxpayer disposes of a passive activity interest, any suspended and current-year losses are lost.
True. False.
False.
Your answer is correct.
Suspended (and current-year) losses from a passive activity become deductible in full in the year the taxpayer completely disposes of all interest in the passive activity. The loss is deductible first against net income or gain from the taxpayer’s other passive activities. The remainder of the loss, if any, is then treated as nonpassive.
Sam was involved in a car crash in 2015. Damage to his automobile was estimated at $10,000. Original cost was $20,000. His insurance company reimbursed him $9,000. His adjusted gross income was $70,000. What amount can be deducted as a casualty loss on his 2015 return?
A. $0
B. $1,000
C. $10,000
D. $3,000
Answer (A) is correct.
Personal casualty losses are allowed only to the extent that each loss exceeds $100 and aggregate losses exceed 10% of AGI. Furthermore, losses must be reduced by insurance reimbursements. Sam’s deduction is computed as follows:
Loss
$10,000
Less:
Insurance proceeds
(9,000)
$100 per casualty
(100)
10% of AGI
(7,000)
Deductible casualty loss
$ 0
(5.1.45)
In 2014, Ada lived with her son, Robert, and his wife, Barbara. Ada’s only source of income was a $1,500 fully taxable pension, which she spent on clothes and recreation. Robert and Barbara paid Ada’s medical and drug expenses of $600 for the year. Robert and Barbara’s total food expense for the household was $6,000. The fair rental value of the lodging provided Ada was $1,200 for the year, based on the cost of similar room facilities. What was Ada’s total support for the year for purposes of determining whether Robert and Barbara can claim Ada as a dependent?
A. $1,800
B. $3,300
C. None of the answers are correct.
D. $5,300
D. $5,300
Answer (D) is correct.
A taxpayer must furnish more than one-half of the total support provided during the calendar year before claiming an exemption for a dependent (Reg. 1.152-1). Total support is determined on a yearly basis and is the sum of
The fair rental value of lodging, The costs of all items of expense paid out directly by or for the benefit of the dependent, and A proportionate share of expenses incurred in supporting the whole household.
Ada’s total support for the year is $5,300 [$600 medical expenses + $1,200 lodging + 1/3 ($6,000) + $1,500 clothes/recreation].
For 2015, Mr. Gill, a construction worker, had adjusted gross income of $20,000. He incurred the following employment-related and investment-related miscellaneous expenses:
Safety shoes $ 100
Union initiation fees 2,000
Union dues 300
Life insurance 800
Jeans & flannel shirts used for work 200
Management fees on taxable income-
producing investments 1,200
Legal expenses for drafting a will 100
He was not reimbursed for any of the employment-related expenses. What is the amount of his miscellaneous expense deduction after any limitations?
A. $4,000
B. $3,600
C. $3,200
D. $3,400
Answer (C) is correct.
Dues and initiation fees paid for union membership and the cost of safety shoes are unreimbursed employee business expenses and are deductible subject to the 2%-of-AGI exclusion. Management fees on investments producing taxable income are other expenses also deductible subject to the 2%-of-AGI exclusion. The cost of life insurance, clothing suitable for normal wear (jeans and flannel shirts), and legal expenses for drafting a will are all personal expenditures and may not be included in itemized deductions. Mr. Gill’s deduction is calculated as follows:
Safety shoes
$ 100
Union initiation fees
2,000
Union dues
300
Management fees on investments
1,200
$3,600
Less AGI limitation ($20,000 × .02)
(400)
Misc. expense deduction after limitation
$3,200
(5.2.66)
For the year ending December 31, 2015, David Roth, a married taxpayer filing a joint return, reported the following:
Investment income from dividends and interest $24,000
Long-term capital gains on stock held for investment 25,000
Investment expenses 4,000
Interest expense on funds borrowed in 2015
to purchase investment property 70,000
What amount can Roth deduct in 2015 as investment interest expense if he elects to pay his capital gains on stock at an ordinary tax rate?
A. $20,000
B. $70,000
C. $45,000
D. $49,000
C. $45,000
Answer (C) is correct.
The deduction for investment interest is limited to the amount of net investment income. Investment income includes gross income from property held for investment and any net gain attributable to the disposition of property held for investment, to the extent that such amounts are not derived from the conduct of a trade or business. Capital gain from disposition of investment property is generally not considered investment income. However, individuals may elect to treat the gain as investment income by paying taxes at the ordinary rate. Roth had investment income of $49,000 ($24,000 + $25,000) and investment expenses of $4,000, or net investment income of $45,000. His investment interest deduction is limited to $45,000. The $25,000 of disallowed investment interest ($70,000 – $45,000) may be carried over and treated as investment interest paid or accrued in the succeeding taxable year.
(5.1.36)
Luis and Rosa, citizens of Costa Rica, moved to the United States in Year 1 where they both lived and worked. In Year 3, they provided the total support for their four young children (all under the age of 10). Two children lived with Luis and Rosa in the U.S., one child lived with his aunt in Mexico, and one child lived with her grandmother in Costa Rica. None of the children earned any income. All of the children were citizens of Costa Rica. The child in Mexico was a resident of Mexico, and the child in Costa Rica was a resident of Costa Rica. How many total exemptions (personal exemptions plus exemptions for dependents) may Luis and Rosa claim on their Year 3 joint income tax return?
A. 4
B. 6
C. 2
D. 5
D. 5
Answer (D) is correct.
In order to qualify as a dependent, an individual must be a citizen, national, or resident of the United States or a resident of Canada or Mexico at some time during the calendar year in which the tax year of the taxpayer begins. Therefore, Luis and Rosa may claim themselves, the two children living in the United States, and the child living in Mexico as dependents for a total of five exemptions.
(5.1.53)
