Question 1

Which of the following is not a tax incentive for individuals to purchase a home instead of renting?

Accepted Answer

Premiums paid on homeowner's insurance are not deductible as a tax incentive for purchasing a home.

Question 2

Which of the following events could result in a deductible casualty loss?

Accepted Answer

The answer of Which of the following events could result...

Question 3

Mr.and Mrs.Darwin sold their principal residence on September 12,2018,and purchased and moved into a new residence three weeks later.They excluded their $353,000 gain realized on this sale from gross income.On October 2,2019,the Darwins realized a gain on sale of the new residence.Which of the following statements about this second gain is true?

Accepted Answer

The answer of Mr.and Mrs.Darwin sold their principal residence on...

Question 4

Mr.and Mrs.Blake suffered two casualty losses this year.Mr.Blake's wallet containing $1,300 cash was stolen,and their uninsured sailboat (basis $67,000; FMV $50,000)was destroyed by a tsunami (federally declared disaster).Compute the Blakes' itemized deduction for casualty losses if their AGI was $112,200.

Accepted Answer

The deductible casualty loss is calculated as the lesser of the adjusted basis or the decrease in FMV, minus insurance, minus $100 per event, and then reduced by 10% of AGI. The sailboat loss is $50,000 (FMV), minus $100, minus 10% of AGI ($11,220), resulting in a deductible loss of $38,680. The stolen cash is not deductible.

Question 5

On February 1,Alan,a single individual,purchased his first personal residence for $400,000.On July 1,Alan sold this residence for $460,000 because he decided to move in with his girlfriend.Consequently,Alan occupied the home for only 150 days.How much gain must Alan recognize?

Accepted Answer

Alan must recognize a gain of $60,000, which is the difference between the selling price ($460,000) and the purchase price ($400,000). The fact that he lived in the home for only 150 days does not qualify him for any exclusion of gain on the sale of a personal residence, as the IRS requires a minimum of 2 years of ownership and use during the 5-year period ending on the date of the sale to qualify for the exclusion.

Question 6

Gary is an architect who also sings at weddings.This year,he received $5,400 in fees for his singing and spent $6,250 on voice lessons,sheet music,and travel to the weddings.Which of the following statements is true?

Accepted Answer

If Gary can prove that his singing activity is a business and not just a hobby, he can deduct an $850 above-the-line loss. The fact that he incurred expenses exceeding his income indicates that he may have a loss, but he needs to demonstrate that he is engaged in the activity with a profit motive. A hobby loss cannot be deducted as an itemized deduction.

Question 7

A flood (federally declared disaster)destroyed an antique Persian rug owned by Mr.and Mrs.McConnell.The couple purchased the rug for $13,000 fifteen years ago,but its appraised FMV before the flood was $42,500.Unfortunately,their homeowners' insurance policy does not cover flood damage.Compute the McConnells' casualty loss (before the 10% AGI threshold).

Accepted Answer

The answer of A flood (federally declared disaster)destroyed an antique...

Question 8

Sue,a single taxpayer,purchased a principal residence in 2001 for $415,000.In 2005,she paid $18,000 to add a sunroom.This year,Sue sold the residence for $686,000.Her selling expenses were $5,000.How much gain must Sue recognize on the sale?

Accepted Answer

Sue's adjusted basis in the home is $433,000 ($415,000 + $18,000). Her amount realized from the sale is $681,000 ($686,000 - $5,000). The gain on the sale is $248,000 ($681,000 - $433,000). As a single taxpayer, she can exclude up to $250,000 of gain on the sale of her principal residence, so she recognizes $0 gain.

Question 9

Which of the following statements about tax subsidies for higher education is false?

Accepted Answer

All the statements A, B, and C accurately describe tax subsidies available for higher education, so none of them is false.

Question 10

Ms.Ruang,a single taxpayer,purchased her principal residence on August 19,2018 and financed the purchase with a mortgage secured by the residence.In 2018,the average balance of the mortgage was $817,000,and Ms Ruang paid $35,000 of mortgage interest.How much of this interest is an itemized deduction?

Accepted Answer

To calculate the deductible mortgage interest, we need to determine the portion of the interest paid that is allocated to the period during which the mortgage loan existed.

In this case, Ms. Ruang purchased her residence on August 19th, 2018, and therefore the mortgage loan existed only for a partial year in 2018. To determine the deductible mortgage interest, we need to use the IRS-provided allocation chart for mortgages issued after October 13, 1987.

Based on this chart, for a mortgage issued in August, we can allocate 44.79% of the total interest paid in 2018 to the period during which the mortgage loan existed. Applying this percentage to the $35,000 of interest paid, we get:

$35,000 x 44.79% = $15,703.

Therefore, the amount of Ms. Ruang's mortgage interest that is deductible as an itemized deduction is $15,703, which is choice C.

Question 11

Mr.and Mrs.King had only one casualty loss this year when a tornado (a federally declared disaster)damaged their home,decreasing its value by $70,000.The couple received a $48,000 reimbursement from their insurance company.Compute the Kings' itemized deduction for casualty losses if their AGI was $98,200.

Accepted Answer

To calculate the itemized deduction for casualty losses, we need to follow these steps:
1) Subtract $100 (the per-casualty floor) from the loss of $70,000 = $69,900.
2) Subtract 10% of the AGI ($98,200 x 10% = $9,820) from $69,900 = $60,080.
3) Subtract the $48,000 reimbursement from $60,080 = $12,080.
Since the final result is a positive number, the couple can deduct $12,080 for their casualty loss. Therefore, the correct answer is C) $12,080.

Question 12

Mr.and Mrs.Perry own three homes,each of which is subject to a mortgage incurred to purchase the home.The mortgage on their principal residence is $290,000,the mortgage on the second home is $100,000,and the mortgage on the third home is $317,000.Which of the following statements is true?

Accepted Answer

Under U.S. tax law, taxpayers can generally deduct mortgage interest on up to two homes, not three. Therefore, none of the statements accurately describe the deduction limits for the Perrys.

Question 13

On February 1,Alan,a single individual,purchased his first personal residence for $400,000.On July 1,Alan sold this residence for $460,000 because he accepted a new job in another state.Consequently,Alan occupied the home for only 150 days.How much gain must Alan recognize?

Accepted Answer

To determine the gain, we need to calculate the adjusted basis of the property, which includes the original purchase price plus any improvements and closing costs. Since this is Alan's first personal residence, we can assume there are no improvements or closing costs, so the adjusted basis is $400,000.

To calculate the gain, we subtract the adjusted basis from the selling price:

$460,000 - $400,000 = $60,000

However, since Alan occupied the home for only 150 days, he is not eligible for the full capital gains exclusion of $250,000 for single individuals. Instead, we need to prorate the exclusion based on the amount of time he lived in the home.

150 days / 365 days = 0.41

$250,000 x 0.41 = $102,500

So, Alan is eligible for a capital gains exclusion of $102,500. To determine his taxable gain, we subtract the exclusion from the gain:

$60,000 - $102,500 = -$42,500

Since the result is negative, Alan does not have a taxable gain and must recognize $0. However, he will still need to report the sale of the home on his tax return.

Therefore, the best choice is B.

Question 14

Gary is an architect who also sings at weddings.This year,he received $5,400 in fees from his singing and spent $6,250 on singing lessons,sheet music,and travel to the weddings.If Gary considers this activity as a hobby for federal tax purposes,which of the following statements is true?

Accepted Answer

If Gary considers his singing at weddings as a hobby for federal tax purposes, he is not allowed to deduct any of his hobby expenses. The expenses incurred in a hobby cannot exceed the income generated from that activity, and any excess cannot be used to offset other income or taxes. Therefore, since Gary spent more than he earned, he cannot claim any deductions for his hobby expenses on his tax return.

Question 15

Jenna Leigh is employed as a receptionist for a CPA firm,but on evenings and weekends,she bakes wedding cakes.In each of the past four years,Jenna's baking activity resulted in a net profit.This year,the activity generated a $720 net loss.Which of the following statements is true?

Accepted Answer

The legal presumption is that Jenna's $720 loss is a business loss because she has shown a profit in her baking activity in three out of the past five years, which typically meets the IRS guideline for being considered a business rather than a hobby.

Question 16

Mr.and Mrs.Frazier recognized a $723,000 gain on sale of a home that had been their principal residence for 29 years.They moved into a rented condominium in Naples,Florida.What are the tax consequences of the sale to the Fraziers?

Accepted Answer

The Fraziers can exclude up to $500,000 of the gain from their income because they are married and the home was their principal residence for at least 2 of the last 5 years. Therefore, they would recognize a $223,000 long-term capital gain ($723,000 gain - $500,000 exclusion).

Question 17

Over the course of the year,Mr.Soo won $8,200 and lost $5,900 gambling in the local casino.Mr.Soo does not itemize deductions on his federal tax return.What is the net effect of his gambling on Mr.Soo's taxable income?

Accepted Answer

Gambling winnings are fully taxable and must be reported as income. Since Mr. Soo does not itemize deductions, he cannot deduct his gambling losses, resulting in an $8,200 increase in taxable income.

Question 18

Which of the following statements about the tax consequences of gambling is true?

Accepted Answer

Gambling winnings are indeed taxable income and must be reported on the taxpayer's income tax return. However, gambling losses can only be deducted as itemized deductions to the extent of gambling winnings. So if a taxpayer has $5,000 in gambling winnings but $7,000 in gambling losses, they can only deduct $5,000 of the losses on their tax return. If their total itemized deductions (including the gambling loss deduction) do not exceed the standard deduction, they will not receive any tax benefit from the gambling losses.

Question 19

This year,Mr.and Mrs.Franklin paid $93,000 interest on a mortgage incurred in 2008 to build their home in Santa Fe.The average principal balance of the mortgage was $1.43 million.The home has an appraised FMV of only $1.2 million.Compute the Franklins' itemized deduction for their home mortgage interest.

Accepted Answer

The Franklins can only deduct interest on the mortgage up to the fair market value of the home, which is $1.2 million. The deductible interest is calculated as ($1.2 million / $1.43 million) * $93,000 = $65,035.

Question 20

Twelve years ago,Mr.Drake incurred a $790,000 mortgage to purchase his principal residence.Last year,he took out a $32,000 loan secured by his considerable equity in the residence and used the proceeds to send his daughter to Stanford University.Which of the following statements is true?

Accepted Answer

According to current tax laws, taxpayers can only deduct the interest paid on their first mortgage as an itemized deduction. The interest paid on the second mortgage, in this case, the loan used to send the daughter to Stanford, is not deductible. Therefore, option C is the correct answer.

Quiz 17: Tax Consequences of Personal Activities