Question 1

Phillip, age 66, developed hip problems and was unable to climb the stairs to reach his second-floor bedroom. His physician advised him to add a first-floor bedroom to his home. The cost of constructing the room was $32,000. The increase in the value of the residence as a result of the room addition was determined to be $17,000. In addition, Phillip paid the contractor $5,500 to construct an entrance ramp to his home and $8,500 to widen the hallways to accommodate his wheelchair. Phillip's AGI for 2018 was $75,000. How much of these expenditures can Phillip deduct as a medical expense in 2018?

Accepted Answer

To calculate the deductible amount, we need to follow these steps:

Step 1: Determine the Medical Expense Threshold
For 2018, the medical expense threshold is 7.5% of AGI. 
7.5% of $75,000 = $5,625

Step 2: Calculate the Total Medical Expenses
The total medical expenses are the sum of the costs of the room addition, entrance ramp, and hallway widening: 
$32,000 + $5,500 + $8,500 = $46,000

Step 3: Calculate the Deductible Amount
The deductible amount is the amount by which the total medical expenses exceed the medical expense threshold. 
$46,000 - $5,625 = $40,375

However, there is a further limitation. The increase in the value of the residence due to the room addition ($17,000) must be subtracted from the deductible amount. 
$40,375 - $17,000 = $23,375

Therefore, Phillip can deduct $23,375 as a medical expense in 2018 (Choice C).

Question 2

Barry and Larry, who are brothers, are equal owners in Chickadee Corporation. On July 1, 2018, each loans the corporation $10,000 at an annual interest rate of 10%. Both shareholders are on the cash method of accounting, while Chickadee Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2019, Chickadee repays the loans of $20,000 together with the specified interest of $2,000. How much of the interest can Chickadee Corporation deduct in 2018?

Accepted Answer

Chickadee Corporation, using the accrual method, can only deduct interest that has accrued by the end of 2018. Since the loan was made on July 1, 2018, only 6 months of interest accrues by December 31, 2018. However, since the interest is paid in 2019, and the shareholders are on the cash method, Chickadee cannot deduct any interest in 2018.

Question 3

Byron owned stock in Blossom Corporation that he donated to a museum (a qualified charitable organization) on June 8 this year. What is the amount of Byron's deduction assuming that he had purchased the stock for $10,500 last year on August 7, and the stock had a fair market value of $13,800 when he made the donation?

Accepted Answer

The answer of Byron owned stock in Blossom Corporation that...

Question 4

Nancy paid the following taxes during the year: 
Nancy sold her personal residence on June 30 of this year under an agreement in which the real estate taxes were not prorated between the buyer and the seller. What amount qualifies as a deduction from AGI for Nancy?

Accepted Answer

Since the real estate taxes were not prorated between the buyer and the seller, Nancy is only able to deduct the portion of the taxes she paid for the portion of the year during which she owned the property. As she sold the property on June 30, she owned the property for 181 days. To calculate the deduction, we need to divide the total taxes paid during the year by the total number of days in the year and multiply by the number of days Nancy owned the property:

($11,310 + $870) ÷ 365 days/year = $32.66/day

$32.66/day x 181 days = $5,923.46

Therefore, $5,923.46 is the amount that qualifies as a deduction for Nancy. However, since this is a question asking for a deduction from AGI, we also need to consider whether Nancy itemizes her deductions or takes the standard deduction. If she takes the standard deduction, then she would not be able to deduct the real estate taxes.

Question 5

Hannah makes the following charitable donations in the current year: 
The HBM stock and the inventory were given to Hannah's church, and the baseball card collection was given to the United Way. Both donees promptly sold the property for the stated fair market value. Disregarding percentage limitations, Hannah's current charitable contribution deduction is:

Accepted Answer

The answer of Hannah makes the following charitable donations in...

Question 6

Quinn, who is single and lives alone, is physically handicapped as a result of a diving accident. In order to live independently, he modifies his personal residence at a cost of $30,000. The modifications included widening halls and doorways for a wheelchair, installing support bars in the bathroom and kitchen, installing a stairway lift, and rewiring so he could reach electrical outlets and appliances. Quinn pays $200 for an appraisal that places the value of the residence at $129,000 before the improvements and $140,000 after. As a result of the operation of the stairway lift, Quinn experienced an increase of $680 in his utility bills for the current year. Disregarding the AGI floor for medical expenses, how much of the above expenditures qualify as medical expense deductions?

Accepted Answer

The answer of Quinn, who is single and lives alone,...

Question 7

In 2018, Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family. In addition, he contributes $3,400 to a Health Savings Account. Which of the following statements is true?

Accepted Answer

If Boris is self-employed, he may deduct $7,200 as a deduction for AGI because both the premium and the HSA contribution are deductible for self-employed individuals.

Question 8

During the current year, Ralph made the following contributions to the University of Oregon (a qualified charitable organization): 
Ralph acquired the stock in Raptor, Inc., as an investment fourteen months ago at a cost of $42,000. Ralph's AGI for the year is $189,000. What is Ralph's charitable contribution deduction for the current year?

Accepted Answer

The answer of During the current year, Ralph made the...

Question 9

Barry and Larry, who are brothers, are equal owners in Chickadee Corporation. On July 1, 2018, each loans the corporation $10,000 at an annual interest rate of 10%. Both shareholders are on the cash method of accounting, while Chickadee Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2019, Chickadee repays the loans of $20,000 together with the specified interest of $2,000. How much of the interest can Chickadee Corporation deduct in 2018?

Accepted Answer

Chickadee Corporation, using the accrual method, can only deduct interest that has accrued by the end of 2018. Since the loan was made on July 1, 2018, only half a year's interest ($1,000 per loan, totaling $2,000) would have accrued by December 31, 2018. However, since the interest is paid in 2019, it cannot be deducted in 2018.

Question 10

Your friend Scotty informs you that he received a "tax-free" reimbursement in 2018 of some medical expenses he paid in 2017. Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income?

Accepted Answer

If Scotty did not itemize deductions in 2017, then he did not deduct the medical expenses he paid that year. As a result, the reimbursement of those medical expenses is not taxable income. If Scotty had itemized deductions in 2017, he would have received a tax benefit for the medical expenses he paid and would have to include the reimbursement in gross income. Scotty's itemization in 2018 is irrelevant to the tax treatment of the reimbursement.

Question 11

Zeke made the following donations to qualified charitable organizations during the year: 
The used clothing was donated to the Salvation Army? the other items of property were donated to Eastern State University. Both are qualified charitable organizations. Disregarding percentage limitations, Zeke's charitable contribution deduction for the year is:

Accepted Answer

The answer of Zeke made the following donations to qualified...

Question 12

In the current year, Jerry pays $8,000 to become a charter member of Mammoth University's Athletic Council. The membership ensures that Jerry will receive choice seating at all of Mammoth's home basketball games. Also this year, Jerry pays $2,200 (the regular retail price) for season tickets for himself and his wife. For these items, how much qualifies as a charitable contribution?

Accepted Answer

The $8,000 payment for the membership is not a charitable contribution because it provides a benefit (choice seating) to Jerry. The $2,200 for season tickets is also not a charitable contribution as it is the regular retail price for the tickets.

Question 13

Emily, who lives in Indiana, volunteered to travel to Louisiana in March to work on a home-building project for Habitat for Humanity (a qualified charitable organization). She was in Louisiana for three weeks. She normally makes $500 per week as a carpenter's assistant and plans to deduct $1,500 as a charitable contribution. In addition, she incurred the following costs in connection with the trip: $600 for transportation, $1,200 for lodging, and $400 for meals. What is Emily's deduction associated with this charitable activity?

Accepted Answer

Emily can deduct the following expenses associated with her charitable activity:

1. Transportation: $600
2. Lodging: $1,200
3. Meals: $400 (in excess of what she would normally spend on meals at home)

Total deductible expenses: $2,200

She cannot deduct the $1,500 as a charitable contribution because she did not donate money to Habitat for Humanity - she donated her time and talent.

Question 14

Pedro's child attends a school operated by the church the family attends. Pedro made a donation of $1,000 to the church in lieu of the normal registration fee of $200. In addition, Pedro paid the regular tuition of $6,000 to the school. Based on this information, what is Pedro's charitable contribution?

Accepted Answer

Pedro's charitable contribution is $800, which is the amount of the donation ($1,000) minus the normal registration fee ($200) that the donation was intended to cover. The tuition payment is not considered a charitable contribution.

Question 15

Karen, a calendar year taxpayer, made the following donations to qualified charitable organizations during the year: 
The land had been held as an investment and was acquired 4 years ago. Shortly after receipt, the City of Terre Haute sold the land for $210,000. Karen's AGI is $450,000. The allowable charitable contribution deduction this year is:

Accepted Answer

The answer of Karen, a calendar year taxpayer, made the...

Question 16

Brad, who uses the cash method of accounting, lives in a state that imposes an income tax (including withholding from wages). On April 14, 2018, he files his state return for 2017, paying an additional $600 in state income taxes. During 2018, his withholdings for state income tax purposes amount to $3,550. On April 13, 2019, he files his state return for 2018 claiming a refund of $800. Brad receives the refund on June 3, 2019. If he itemizes deductions, how much may Brad claim as a deduction for state income taxes on his Federal income tax return for calendar year 2018 (filed in April 2019)?

Accepted Answer

Under the cash method of accounting, income is recognized when received and expenses are recognized when paid.

In 2018, Brad paid additional state income taxes of $600 when he filed his state return for 2017. This amount can be included as a deduction for 2018, since it was paid within that tax year.

In addition, Brad had state income tax withholdings for 2018 totaling $3,550. This amount can also be included as a deduction for 2018.

Therefore, the total amount of state income tax deduction that Brad can claim on his federal income tax return for 2018 is $4,150 ($600 + $3,550).

Question 17

Brad, who would otherwise qualify as Faye's dependent, had gross income of $9,000 during the year. Faye, who had AGI of $120,000, paid the following medical expenses this year: 
Faye has a medical expense deduction of:

Accepted Answer

The answer of Brad, who would otherwise qualify as Faye's...

Question 18

Hugh, a self-employed individual, paid the following amounts during the year: 
What is the maximum amount Hugh can claim as taxes in itemizing deductions from AGI?

Accepted Answer

The answer of Hugh, a self-employed individual, paid the following...

Question 19

In Lawrence County, the real property tax year is the calendar year. The real property tax becomes a personal liability of the owner of real property on January 1 in the current real property tax year (assume this year is not a leap year). The tax is payable on June 1. On May 1, Reggie sells his house to Dana for $350,000. On June 1, Dana pays the entire real estate tax of $7,950 for the year ending December 31. Assuming that Reggie itemizes his deductions and the $10,000 limit on state and local taxes does not apply, how much of the property taxes may Reggie deduct?

Accepted Answer

Reggie is only liable for the real property tax for the portion of the year in which he owned the property. Since he sold the property on May 1, he is liable for the tax for the first four months of the year (January 1 to April 30). The tax for the first four months of the year is calculated as follows: 
($7,950 ÷ 12 months) x 4 months = $2,640
Therefore, Reggie may deduct $2,640 for real property taxes on his tax return.

Question 20

Tom, age 48, is advised by his family physician that he needs back surgery to correct a problem from his last back surgery. Since Tom is in a wheel chair, he needs his wife, Jean, to accompany him on his trip to Rochester, Minnesota, for in-patient treatment at the Mayo Clinic, which specializes in this type of surgery. Tom incurred the following costs in 2018: 
Compute Tom's allowable medical expenses for the trip (before application of the AGI floor).

Accepted Answer

The answer of Tom, age 48, is advised by his...

Quiz 10: Deductions and Losses: Certain Itemized Deductions

Nancy paid the following taxes during the year: Nancy sold her personal residence on June 30 of this year under an agreement in which the real estate taxes were not prorated between the buyer and the seller. What amount qualifies as a deduction from AGI for Nancy?

In 2018, Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family. In addition, he contributes $3,400 to a Health Savings Account. Which of the following statements is true?

Your friend Scotty informs you that he received a "tax-free" reimbursement in 2018 of some medical expenses he paid in 2017. Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income?

Brad, who would otherwise qualify as Faye's dependent, had gross income of $9,000 during the year. Faye, who had AGI of $120,000, paid the following medical expenses this year: Faye has a medical expense deduction of:

Hugh, a self-employed individual, paid the following amounts during the year: What is the maximum amount Hugh can claim as taxes in itemizing deductions from AGI?