Question 1

Interest paid or accrued during the tax year on aggregate acquisition indebtedness of $2 million or less ($1 million or less for married persons filing separate returns) is deductible as qualified residence interest.

Accepted Answer

The answer of Interest paid or accrued during the tax...

Question 2

Letha incurred a $1,600 prepayment penalty to a lending institution because she paid off the mortgage on her home early.The $1,600 is deductible as interest expense.

Accepted Answer

Prepayment penalties on mortgages are generally considered interest expenses and can be deducted on tax returns.

Question 3

If certain conditions are met, a buyer may deduct seller-paid points in the tax year in which they are paid.

Accepted Answer

According to IRS rules, if the certain conditions are met such as they must be paid by the buyer, the points are a percentage of the loan amount, and they're used to buy down the buyer's interest rate, then the buyer can deduct seller-paid points in the tax year in which they are paid.

Question 4

In April 2012, Bertie, a calendar year cash basis taxpayer, had to pay the state of Michigan additional income tax for 2011.Even though it relates to 2011, for Federal income tax purposes the payment qualifies as a tax deduction for tax year 2012.

Accepted Answer

The payment made by Bertie for state income tax in April 2012, even though it relates to the tax year 2011, is deductible on his Federal income tax return for tax year 2012. This is because Bertie is a cash basis taxpayer and the payment was made in the year 2012, which is when the deduction is allowed.

Question 5

In 2012 Michelle, single, paid $2,500 interest on a qualified student loan.Her MAGI was $70,000.She may deduct the $2,500 of interest as a deduction for AGI.

Accepted Answer

In 2012, the student loan interest deduction was phased out for single filers with a MAGI between $60,000 and $75,000. With a MAGI of $70,000, Michelle would not be able to deduct the full $2,500.

Question 6

Warren sold his personal residence to Alicia on July 1, 2012.He had paid $4,200 in real property taxes on March 1, 2012, the due date for property taxes for 2012.Warren must increase the amount realized for his property by the portion of the $4,200 allocable to Alicia.

Accepted Answer

The answer of Warren sold his personal residence to Alicia...

Question 7

Grace's sole source of income is from a restaurant that she owns and operates as a proprietorship.Any state income tax Grace pays on the business net income must be deducted as a business expense rather than as an itemized deduction.

Accepted Answer

State income tax paid by a sole proprietorship is not deductible as a business expense, but rather as an itemized deduction on the proprietor's personal income tax return.

Question 8

Phyllis, a calendar year cash basis taxpayer who itemized deductions, overpaid her 2011 state income tax and is entitled to a refund of $400. Phyllis chooses to apply the $400 overpayment toward her state income taxes for 2012. She is required to recognize that amount as income in 2012.

Accepted Answer

Since Phyllis itemized deductions in 2011 and received a tax benefit from the state tax deduction, the $400 refund applied to her 2012 taxes must be recognized as income in 2012 under the tax benefit rule.

Question 9

For purposes of computing the deduction for qualified residence interest, a qualified residence includes the taxpayer's principal residence and two other residences of the taxpayer or spouse.

Accepted Answer

A qualified residence for the purpose of computing the deduction for qualified residence interest includes the taxpayer's principal residence and only one other residence of the taxpayer or spouse, not two.

Question 10

For purposes of computing the deduction for qualified residence interest, a qualified residence includes only the taxpayer's principal residence.

Accepted Answer

A qualified residence includes both the taxpayer's principal residence and one other residence selected by the taxpayer that is used for personal purposes for a certain minimum amount of time during the taxable year.

Question 11

On December 31, 2012, Lynette used her credit card to make a $500 contribution to the United Way, a qualified charitable organization. She will pay her credit card balance in January 2013. If Lynette itemizes, she can deduct the $500 in 2012.

Accepted Answer

Lynette made a $500 contribution to a qualified charitable organization before the end of the tax year (December 31, 2012) and will pay her credit card balance in January 2013. If Lynette itemizes her deductions, she can deduct the $500 contribution on her 2012 tax return even though she won't pay her credit card bill until the next year.

Question 12

Joe, a cash basis taxpayer, took out a 12-month business loan on December 1, 2012. He prepaid all $3,600 of the interest on the loan on December 1, 2012. Joe can deduct all $3,600 of the prepaid interest in 2012.

Accepted Answer

Under the cash basis method, prepaid interest must be capitalized and can only be deducted in the period to which it applies, not when it is paid. Therefore, Joe cannot deduct the entire $3,600 in 2012.

Question 13

A taxpayer pays points to obtain financing to purchase a personal residence.At the election of the taxpayer, the points can be deducted as interest expense for the year paid.

Accepted Answer

The answer of A taxpayer pays points to obtain financing...

Question 14

Jack sold a personal residence to Steven and paid points of $3,500 on the loan to help Steven finance the purchase.Jack can deduct the points as interest.

Accepted Answer

Points paid by a seller on a loan for the purchase of a personal residence are considered a selling expense and cannot be deducted as interest by the seller. They may, however, reduce the seller's capital gain on the sale.

Question 15

In January 2013, Pam, a calendar year cash basis taxpayer, made an estimated state income tax payment for 2012. The payment is deductible in 2012.

Accepted Answer

Since Pam is a cash basis taxpayer, the estimated state income tax payment made in January 2013 would be considered a payment for the 2013 tax year, not the 2012 tax year. Therefore, it would not be deductible in 2012.

Question 16

Judy paid $40 for Girl Scout cookies and $40 for Boy Scout popcorn.Judy may claim an $80 charitable contribution deduction.

Accepted Answer

The answer of Judy paid $40 for Girl Scout cookies...

Question 17

Leona borrows $100,000 from First National Bank and uses the proceeds to purchase City of Houston bonds.The interest Leona pays on this loan is deductible as investment interest subject to the investment interest limits.

Accepted Answer

The answer of Leona borrows $100,000 from First National Bank...

Question 18

Herbert is the sole proprietor of a furniture store. He can deduct real property taxes on his store building but he cannot deduct state income taxes related to his net income from the furniture store as a business deduction.

Accepted Answer

Real property taxes on the store building are deductible as a business expense, while state income taxes related to net income from the furniture store are not deductible as a business expense.

Question 19

Sadie mailed a check for $2,200 to a qualified charitable organization on December 31, 2012.The $2,200 contribution is deductible on Sadie's 2012 tax return.

Accepted Answer

According to IRS rules, as long as the check was mailed by December 31, 2012, it can be claimed as a deduction on Sadie's 2012 tax return.

Question 20

For all of 2012, Aaron (a calendar year taxpayer) allowed the City Men's Shelter, a qualified charitable organization, to use a building he owns rent-free.The building normally rents for $12,000 a year.Aaron must report $12,000 of rent income and will be allowed a charitable contribution deduction for 2012 of $12,000.

Accepted Answer

Allowing a charitable organization to use property rent-free does not result in taxable income or a charitable contribution deduction for the property owner.

Quiz 10: Deductions and Losses: Certain Itemized Deductions