Fundamentals of Taxation 2018 Edition 11Th Edition By Ana Cruz - Test Bank

Fundamentals of Taxation 2018 Edition 11Th Edition By Ana Cruz – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Fundamentals of Taxation 2018 Edition, 11e (Cruz)

Chapter 5  Itemized Deductions

 

1) For 2017, medical expenses in excess of 7.5 percent of adjusted gross income are deductible.

 

Answer:  True

Explanation:  For 2017, the AGI threshold for the deduction of medical expenses is 7.5%.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

2) In 2016, Roxanne’s nephew was her dependent. For 2017, he no longer qualifies as her dependent. However, she paid $650 in 2017 for medical expenses she incurred in 2016 when he was her dependent. Roxanne can include the $650 in figuring her medical expense deduction in 2017.

 

Answer:  TRUE

Explanation:  A deduction for medical expenses is dependent on the timing of the payment, not when the services were provided.

Difficulty: 3 Hard

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

3) The cost of aspirin and over-the-counter cough medicine is a deductible medical expense even though they are nonprescription drugs.

 

Answer:  FALSE

Difficulty: 1 Hard

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

4) Prescription drugs obtained outside the United States, such as from Canada, are never deductible on a U.S. tax return.

 

Answer:  FALSE

Explanation:  Prescription drugs from outside the US are deductible if approved for import by the FDA and prescribed by a physician.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

5) Premiums paid for long-term care insurance policies may be deductible as medical expenses.

 

Answer:  TRUE

Explanation:  The amount of the premium that may be deductible is dependent on the taxpayer’s age.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

6) A taxpayer generally has the option of deducting foreign taxes paid on Schedule A or taking a foreign tax credit.

 

Answer:  TRUE

Difficulty: 1 Hard

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

7) Sales taxes are deductible as an itemized deduction based only on the actual amount of sales taxes paid.

 

Answer:  FALSE

Explanation:  The 2015 PATH Tax Act made this a permanent deduction.

Difficulty: 3 Hard

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

8) Personal property taxes paid on personal-use assets, such as the family car, are deductible on Schedule A.

 

Answer:  TRUE

Explanation:  Only those taxes based on the value of the item are deductible.

Difficulty: 1 Hard

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

9) Taxpayers can deduct qualified residence interest on their principal residence and on a second residence selected by the taxpayer.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

10) Loan fees that are not “points”, or prepaid interest, are deductible as interest on Schedule A.

 

Answer:  FALSE

Explanation:  Loan fees that are not interest are not deductible, but are added to the basis of the asset.

Difficulty: 1 Hard

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

11) For 2017, the investment interest expense deduction is limited to the taxpayer’s gross investment income.

 

Answer:  FALSE

Explanation:  The investment interest expense deduction is limited to the taxpayer’s net investment income.

Difficulty: 1 Hard

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

12) Rick and Claudia live in an apartment and have purchased land where they plan to build their home. They have a mortgage on the lot and have received a Form 1098 from the lender showing the interest paid on the note. Interest paid on this loan is deductible as home mortgage interest on their Schedule A.

 

Answer:  FALSE

Explanation:  To be deductible as home mortgage interest, the loan must be secured by a qualified residence.

Difficulty: 3 Hard

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

13) In order to deduct a charitable contribution, taxpayers must itemize on their return.

 

Answer:  TRUE

Difficulty: 1 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

14) Sid makes weekly cash contributions of $30 to his church. He pays by check. Since his annual contributions to the church are more than $250, he must obtain a written acknowledgment from the church to support his contribution deduction.

 

Answer:  FALSE

Explanation:  The $250 limitation applies to single contribution and not an aggregate of contributions.

Difficulty: 2 Medium

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

15) Individual taxpayers may carry forward for five years charitable contributions that are not allowed as a deduction in the current year due to the adjusted gross income limitation.

 

Answer:  TRUE

Difficulty: 1 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

16) If donated appreciated capital gain property is put to a use that is unrelated to the purpose or function of a charity’s tax-exempt status, the contribution must be reduced by the amount of any long-term capital gain that would have been realized if the property had been sold at its fair market value at the time of the contribution.

 

Answer:  TRUE

Explanation:  The donation of appreciated long term capital gain property that is put to an unrelated use is required to be valued at the donor’s adjusted basis in the item for charitable contribution purposes.

Difficulty: 3 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

17) A taxpayer receives a deduction for services rendered to a charitable organization.

 

Answer:  FALSE

Explanation:  Services are not deductible as they do generate any taxable income; however, the taxpayer may deduct mileage incurred in generating the service.

Difficulty: 2 Medium

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

18) Theft losses are deducted in the tax year in which the theft was discovered, rather than the year of theft, if the discovery comes later.

 

Answer:  TRUE

Difficulty: 1 Hard

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

19) Personal casualty losses resulting from termite damage are deductible.

 

Answer:  FALSE

Explanation:  Termite losses are not normally considered to meet the sudden, unexpected, or unusual standard for a loss event.

Difficulty: 1 Hard

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

20) For determination of deductibility, all personal casualty losses incurred during the year are added together and only one $100 floor amount is used to reduce the casualty deduction.

 

Answer:  FALSE

Explanation:  The $100 floor applies to each individual casualty loss event. However, if the events are closely related, they are considered a single casualty.

Difficulty: 2 Medium

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

21) In 2017, Sheena was required by her employer to use her car for work. Her employer’s mileage reimbursement was $0.25 per mile. If Sheena’s actual expenses are more than the reimbursement, she can deduct the excess amount on Schedule C.

 

Answer:  FALSE

Explanation:  This is a potentially miscellaneous itemized deduction to be reported on Schedule A.

Difficulty: 2 Medium

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

Accessibility:  Keyboard Navigation

 

22) If an accountant in public accounting seeks work as a controller in private industry, the expenses of job hunting may be deductible.

 

Answer:  TRUE

Explanation:  A taxpayer who is looking for a new job in the same business or profession in which he or she is already employed may deduct the costs of the job search.

Difficulty: 2 Medium

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

Accessibility:  Keyboard Navigation

23) For 2017, high-income taxpayers do not have to forfeit part of their itemized deductions.

 

Answer:  FALSE

Explanation:  Under the Pease limitations, itemized deductions cap or phase out for high-income taxpayers.

Difficulty: 1 Hard

Topic:  Itemized Deductions

Learning Objective:  05-07 Apply the tax rules for limitations on total itemized deductions for high-income taxpayers in 2016.

EA:  Yes

Accessibility:  Keyboard Navigation

24) In the past, high-income taxpayers’ itemized deductions have been reduced, called the Pease limitations, by the lower of 3% of the excess of AGI over the applicable amount or 80% of the itemized deductions otherwise allowable for the tax year. For 2017, this limitation on the amount of itemized deductions for high-income taxpayers is still in effect.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Itemized Deductions

Learning Objective:  05-07 Apply the tax rules for limitations on total itemized deductions for high-income taxpayers in 2016.

EA:  Yes

Accessibility:  Keyboard Navigation

 

25) Sales taxes paid may be deducted as an itemized deduction on Schedule A.

 

Answer:  TRUE

Explanation:  In lieu of deducting state income taxes paid, the taxpayer can elect to deduct sales tax paid.

Difficulty: 1 Hard

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

26) The interest paid on a loan used to acquire municipal bonds is deductible as investment interest expense.

 

Answer:  FALSE

Explanation:  This is an example of the “cost/benefit” rule as it applies to taxation. If the benefit is not taxable, then the cost of generating that benefit is not deductible.

Difficulty: 2 Medium

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

27) Taxpayers must itemize their deductions to be allowed a charitable contribution deduction.

 

Answer:  TRUE

Difficulty: 1 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

28) The adjusted gross income limitation on casualty losses is 7.5 percent.

 

Answer:  FALSE

Explanation:  The AGI limitation for casualty losses is 10%.

Difficulty: 1 Hard

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

29) The standard business mileage rate for automobiles for 2017 is 53.5 cents per mile.

 

Answer:  TRUE

Explanation:  The business standard mileage rate may change from year to year.

Difficulty: 1 Hard

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

Accessibility:  Keyboard Navigation

 

30) The cost of a chiropractor’s services does not qualify as a medical deduction.

 

Answer:  FALSE

Explanation:  Other medical services such as chiropractic and acupuncture are deductible as medical expenses.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

31) Premiums paid for long-term care insurance are not deductible as medical expenses.

 

Answer:  FALSE

Explanation:  Long-term care insurance are partially or totally deductible depending amount and age of the taxpayer.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

32) In 2017, federal income taxes may not be deducted as an itemized deduction on Schedule A.

 

Answer:  TRUE

Explanation:  Federal taxes are never deductible on a federal return.

Difficulty: 1 Hard

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

33) Taxes assessed for local benefits, such as a new sidewalk, are deductible as real property taxes.

 

Answer:  FALSE

Explanation:  Improvement assessments, which increase the value of the property, are not deductible.

Difficulty: 1 Hard

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

34) Taxes assessed for local benefits, such as repair of an existing sidewalk, are deductible as real property taxes.

 

Answer:  FALSE

Explanation:  Maintenance assessments, to repair an existing public facility, are deductible.

Difficulty: 1 Hard

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

35) For purposes of computing the deduction for qualified residence interest, a qualified residence includes the taxpayer’s principal residence and one other residence of the taxpayer or spouse.

 

Answer:  TRUE

Explanation:  Taxpayers can deduct qualified residence interest on their principal residence and on a second residence selected by the taxpayer. The aggregate amount treated as acquisition indebtedness for any period cannot exceed $1,000,000 for MFJ ($500,000 for married individuals filing separate returns). However, in the case of unmarried co-owners of a property, that limitation is extended to $1,000,000 per person. The $1,000,000 limitation refers to the amount of principal on the debt, not the interest paid.

Difficulty: 2 Medium

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

36) Ming earned net investment income of $11,000 during 2017 and incurred investment interest expense of $3,000 during the year related to a stock purchase. She incurred other investment interest expenses of $7,000 during the year. Ming is limited to a deduction of $3,000 of investment interest expense in 2017.

 

Answer:  FALSE

Explanation:  A taxpayer is allowed to deduct investment interest expense up to the amount of net investment income for the year.

Difficulty: 1 Hard

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

37) On December 31, 2017, Roger charged a $1,800 contribution to a qualified charitable organization to his credit card. He will not pay the credit card bill until January 2018. The $1,800 contribution is deductible on Roger’s 2017 tax return.

 

Answer:  TRUE

Explanation:  A credit charge is deemed as a cash expenditure in the year it is charged.

Difficulty: 2 Medium

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

38) Moesha paid $60 for Girl Scout cookies and $50 for Cub Scout cracker jacks. Moesha may claim the full $110 as a charitable contribution deduction.

 

Answer:  FALSE

Explanation:  If a taxpayer receives a benefit for the contribution, the deduction is reduced by the value of the benefit received.

Difficulty: 1 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

39) If a taxpayer’s personal property is completely destroyed, the casualty loss deduction is still reduced by a required floor amount.

 

Answer:  TRUE

Explanation:  All casualty losses are subject to reduction by the required floor amounts.

Difficulty: 2 Medium

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

40) Unreimbursed employee business expenses for travel qualify as itemized deductions subject to the 2% floor.

 

Answer:  TRUE

Explanation:  Unreimbursed employee business expenses are usually the largest and are most likely to cause the total miscellaneous deductions to exceed the 2% floor.

Difficulty: 1 Hard

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

41) Which of the following may not be deducted either totally or partially as medical expenses? (Disregard any limitations which may apply.)

1. A) $3,000 to a family physician for medical care.
2. B) $1,000 long-term care insurance.
3. C) $600 for eyeglasses.
4. D) $300 for maternity clothes.

 

Answer:  D

Explanation:  Taxpayers may not deduct expenditures that are merely for the benefit of the general health or comfort of an individual.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

42) During 2017 Yoko paid the following expenses:

 

Prescription medicines	$	525
Doctors and dentists		1,050
Vitamins and ibuprofen		275
Health club membership fee		450

 

 

What is the total amount of medical expenses (before application of the adjusted gross income limitation) that would enter into the calculation of itemized deductions on Yoko’s 2017 income tax return?

525. A) $525.
526. B) $1,325.
527. C) $1,500.
528. D) $1,575.

 

Answer:  D

Explanation:  $525 + 1,050 = $1,575.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

43) Mr. Mugabi must use a wheelchair. Upon advice from his physician, he installed an elevator and widened the front entrance of his house in 2017, incurring $15,000 and $4,000 in costs, respectively. Mr. Mugabi originally purchased his house for $202,000. An appraisal showed the fair market value of Mrs. Hampton’ house immediately after these modifications at $212,000. Compute his currently deductible medical expense in regards to these improvements before AGI limitations.

1. A) $19,000.
2. B) $15,000.
3. C) $9,000.
4. D) $4,000.

 

Answer:  C

Explanation:  $212,000 (FMV after) – 202,000 (FMV before) = $10,000 of non-deductible expense. $19,000 – 10,000 = $9,000 potential deduction.

Difficulty: 3 Hard

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

44) Which of the following expenses is not deductible as medical expense?

1. A) Insulin used for diabetes.
2. B) Wig purchased upon the advice of a physician for the mental health of a patient who has lost all of his/her hair from disease.
3. C) Joining a tennis club to become more active upon recommendation of a doctor.
4. D) Acupuncture used to treat migraines.

 

Answer:  C

Difficulty: 1 Hard

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

45) Reggie is divorced and 45 years old. In 2017, he had AGI of $55,000. During the year, he incurred and paid the following medical costs:

 

Doctor and dentist fees	$	1,950
Prescription medicines		275
Medical care insurance premiums		340
Health club fee		600
Crutches for a sprained ankle		50

 

 

What is Reggie’s medical expense deduction (after application of the adjusted gross income limitation) for his 2017 tax return?

1. A) $0.
2. B) $2,615.
3. C) $3,215.
4. D) $4,125.

 

Answer:  A

Explanation:  7.5% of $55,000 = $4,125. $1,950 + 275 + 340 + 50 = $2,615. $2,615 < $4,125, so $0 is deductible.

Difficulty: 3 Hard

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

46) Which of the following costs are deductible on Form 1040, Schedule A, as taxes?

 

1. Real estate taxes on property owned in Mexico.
2. Property tax portion of vehicle registration, based on the value of the auto.
3. Fine for speeding.
4. Personal property tax on a pleasure boat.

 

4. A) 1, 2, and 4.
5. B) 3 and 4.
6. C) None of the items are deductible.
7. D) All of the items are deductible.

 

Answer:  A

Explanation:  Fines, penalties, or bribes are not deductible.

Difficulty: 1 Hard

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

47) During 2017, Belen paid the following taxes:

 

Property taxes on residence (paid from escrow account)	$	1,550
Property tax portion of car registration (based on value)		400
Property taxes on land held for long-term appreciation		350

 

 

What amount can Belen deduct as property taxes in calculating her itemized deductions for 2017?

750. A) $750.
751. B) $350.
752. C) $1,950.
753. D) $2,300.

 

Answer:  D

Explanation:  $1,550 + 400 + 350 = $2,300.

Difficulty: 2 Medium

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

48) Taxes deductible as an itemized deduction include all of the following except:

1. A) Personal property taxes based on the value of the property.
2. B) Taxes that the taxpayer paid on property owned by his/her parents or children.
3. C) State and local income taxes.
4. D) Real estate property taxes based on the assessed value of the property.

 

Answer:  B

Explanation:  The deduction for personal property taxes is contingent on ownership of the property.

Difficulty: 3 Hard

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

49) Karin lives in California, a state that imposes a tax on income. The following information relates to Karin’s state income taxes for 2017:

 

Taxes withheld in 2017	$	3,000
State refund received in 2017 from the 2016 tax return		300
Additional assessment paid in 2017 on the 2015 tax return		800

 

 

Assuming she elects to deduct state and local income taxes, what amount should Karin use as an itemized deduction for state and local income taxes for her 2017 federal income tax return?

100. A) $1,100.
101. B) $2,700.
102. C) $3,800.
103. D) $4,100.

 

Answer:  C

Explanation:  $3,000 + 800 = $3,800. The refund for the 2016 return would be included in income for 2017.

Difficulty: 2 Medium

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

50) For investment interest expense in 2017, the deduction by a taxpayer is:

2017. A) Limited to the investment interest expense paid in 2017.
2018. B) Limited to the taxpayer’s net investment income for 2017.
2019. C) Not limited.
2020. D) Limited to the taxpayer’s gross investment income for 2017.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

51) For 2017, Miram, a single mother, reported the following amounts relating to her investments:

 

Net investment income from interest	$	7,000
Interest expense on a loan to purchase stocks		2,000
Interest expense on funds borrowed in 2016 to purchase land for investment		6,000

 

 

What is the maximum amount that Miriam can deduct in 2017 as investment interest expense?

1. A) $8,000.
2. B) $2,000.
3. C) $6,000.
4. D) $7,000.

 

Answer:  A

Explanation:  Deductible investment interest expense is limited to net investment income for the tax year.

Difficulty: 2 Medium

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

52) Which of the following interest expenses incurred by Trent is treated as personal interest expense and, therefore, not deductible as an itemized deduction?

1. A) Interest expense on personal credit cards.
2. B) Bonds purchased with accrued interest.
3. C) Interest on a home mortgage acquired in 2012.
4. D) Interest expense incurred by a partnership in which Trent is a limited partner.

 

Answer:  A

Difficulty: 1 Hard

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

53) Some charitable contributions are limited to 50% of the taxpayer’s AGI, others may be limited to a lower % of AGI. Deductions to which of the following organizations are subject to the 50% limitation on deductible contributions?

1. A) Churches and conventions of organizations of churches and educational organizations.
2. B) Hospitals and certain medical research organizations associated with these hospitals.
3. C) Rotary, Elks, and Lions Clubs who raise money for public causes.
4. D) Both churches and conventions of organizations of churches and educational organizations and hospitals and certain medical research organizations associated with these hospitals.

 

Answer:  D

Explanation:  The 30% limitation applies to any contribution (cash or property) to charities that are not 50% limitation charities such as war veterans’ organizations, fraternal orders, cemetery companies, and certain nonoperating private foundations.

Difficulty: 2 Medium

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

54) Which of the following organizations do not qualify for deductible charitable contributions?

1. A) The Salvation Army.
2. B) A political party.
3. C) Religious organizations.
4. D) All of these.

 

Answer:  B

Difficulty: 1 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

55) For the current year, Gina Hestopolis had adjusted gross income of $100,000. During the year, she contributed $6,000 to her church and an additional $3,000 to qualified charities. She also contributed religious artwork with a fair market value of $60,000 and a basis of $20,000 to her church. The church intends to display the religious artwork in the church foyer. If Gina chooses to itemize her deductions, what is the amount of her deductible charitable contribution in the current year?

1. A) $9,000.
2. B) $20,000.
3. C) $39,000.
4. D) $49,000.

 

Answer:  C

Explanation:  100K of AGI × .30 = 30K limitation on the contribution of appreciated capital gain property. 100K of AGI × .50 = 50K overall limitation on charitable contributions; actual deduction is 30K + 6K + 3K = 39K.

Difficulty: 3 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

56) For the current year, Gina Hestopolis had adjusted gross income of $100,000. During the year, she contributed $6,000 to her church and an additional $3,000 to qualified charities. She also contributed religious artwork with a fair market value of $60,000 and a basis of $20,000 to her church. The church intends to display the religious artwork in the church foyer. What is the amount of the charitable contribution carry forward beyond the current year for Gina Hestopolis?

1. A) $30,000.
2. B) $20,000.
3. C) $10,000.
4. D) $0.

 

Answer:  A

Explanation:  60K FMV – 30K deduction in 2017 = 30K carryover related to the capital gain property, that can be carried over for up to 5 years.

Difficulty: 3 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

57) If one or more non-cash gifts has a fair market value over $500, the taxpayer must:

1040. A) Attach a written explanation to the Form 1040.
1041. B) Complete Schedule D.
1042. C) File Form 8283.
1043. D) Attach a letter from the recipient organization.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

58) Sonia’s car was completely destroyed in an accident that was her fault. Her loss was $8,500 and her insurance company reimbursed her $6,500. What amount of casualty loss can Sonia claim on her return (before deduction limitations)?

1. A) $0
2. B) $2,000
3. C) $6,500
4. D) $8,500

 

Answer:  B

Explanation:  (8,500 – 6,500) = $2,000 of non-reimbursed loss related to the accident.

Difficulty: 2 Medium

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

59) In 2017, the Jurics’ pleasure boat was severely damaged by a hurricane in an area that was declared a federal disaster area. They had AGI of $110,000 in 2017. The following information relates to the craft:

 

Cost Basis	$	95,000
FMV before casualty		145,000
FMV after casualty		25,000

 

 

The Jurics had insurance and received an $80,000 insurance settlement.

What is the allowable casualty loss deduction for the Jurics in 2017?

1. A) $50,000.
2. B) $15,000.
3. C) $3,900.
4. D) $3,000.

 

Answer:  C

Explanation:  Lesser of Cost Basis or Decline in FMV = $95,000 – $80,000 (insurance proceeds) – $100 (per event deduction) – $11,000 (10% of AGI) = $3,900 (allowable deduction).

Difficulty: 3 Hard

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

60) In 2017, the U.S. President declared a federal disaster in Arizona due to wild fires. Hamed lives in the affected area and lost his home in the fires. What choice does he have regarding when he can claim the loss on his tax return?

1. A) It must be claimed in 2016 if the return has not been filed by the date of the loss.
2. B) It must be claimed in 2017 if the loss is greater than Hamed’s modified adjusted gross income.
3. C) It may be claimed in 2018 if an election is filed with Hamed’s 2017 return.
4. D) It may be claimed in either 2016 or 2017.

 

Answer:  D

Explanation:  If the casualty loss occurred as the result of a major event (usually a natural disaster), and the President of the United States declares the area a national disaster area, the taxpayer can elect to deduct the casualty loss against the preceding year’s taxable income or take the deduction in the current, whichever is more advantageous to the taxpayer.

Difficulty: 3 Hard

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

61) In 2017, Rachelle’s house boat was destroyed by a storm. She had purchased the boat in 2014 for $45,000. On what form(s) will Rachelle report this loss?

1. A) Form 4684, Casualties and Thefts, and Schedule A, Itemized Deductions.
2. B) Form 4684, Casualties and Theft, and Schedule D, Capital Gains and Losses.
3. C) Form 4797, Sales of Business Property and Involuntary Conversions, and Schedule D, Capital Gains and Losses.
4. D) On the first page of Form 1040.

 

Answer:  A

Difficulty: 1 Hard

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

62) Which of the following miscellaneous deductions are subject to the 2% of adjusted gross income limitation?

1. A) Unreimbursed employee business expenses.
2. B) Investment counsel and advisory fees.
3. C) Safe deposit box fees.
4. D) All of these.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

Accessibility:  Keyboard Navigation

 

63) Which of the following expenses is deductible, but subject to the 2% limitation on Form 1040, Schedule A, Job Expenses and Most Other Miscellaneous Itemized Deductions?

1. A) A blue suit for an accountant.
2. B) Appraisal fees on the sale of a personal residence.
3. C) Uniforms for a UPS delivery person.
4. D) The cost of hauling tools to work in the trunk of a car.

 

Answer:  C

Difficulty: 1 Hard

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

64) Which of the following miscellaneous itemized deductions is not subject to the 2% of adjusted gross income limitation?

1. A) Unreimbursed employee business expenses.
2. B) Gambling losses up to the amount of gambling winnings.
3. C) Union or professional dues and subscriptions.
4. D) Tax return preparation fees.

 

Answer:  B

Explanation:  Gambling losses are one of several miscellaneous deductions that are not subject to the 2% floor; instead they are limited to gambling income, which essentially serves as a built in limitation.

Difficulty: 2 Medium

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

Accessibility:  Keyboard Navigation

65) Generally, the taxpayer may deduct the cost of medical expenses on Schedule A for which of the following?

1. A) Doctor prescribed birth control pills.
2. B) Controlled substances like marijuana that are in violation of federal law.
3. C) Trips for general health improvement.
4. D) Marriage counseling.

 

Answer:  A

Explanation:  Taxpayers may not deduct expenditures that are merely for the benefit of the general health or comfort of an individual.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

66) In 2017, Maria who is 66, had adjusted gross income of $27,000, paid the following medical expenses:

 

Prescription medicines	$	275
Dentist and doctor expenses		1,350
Health insurance premiums		400
Two pair of eyeglasses		185

 

 

What amount can Maria deduct as medical expenses (after the adjusted gross income limitation) in calculating her itemized deductions for 2017?

710. A) $2,710.
711. B) $2,025.
712. C) $185.
713. D) $0.

 

Answer:  C

Explanation:  $27,000 × 7.5% = $2,025. Deductible medical expenses = $275 + 1,350 + 400 + 185 = $2,210. $2,210 – 2,025 = 185.

Difficulty: 3 Hard

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

67) The threshold amount for the deductibility of allowable medical expenses in 2017 is:

1. A) 10% of AGI.
2. B) 10% of taxable income.
3. C) 7.5% of AGI.
4. D) 7.5% of taxable income.

 

Answer:  C

Explanation: For 2017, the AGI threshold for the deductibility of medical expenses for everyone is 7.5%.

Difficulty: 1 Hard

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

68) Which of the following costs are potentially deductible on Form 1040, Schedule A as taxes for 2017?

 

1. Property tax on principal residence.
2. Garbage pickup itemized on the real estate bill.
3. Real estate tax on property owned as an investment.
4. Sales tax paid on the purchase of a personal car.

 

1. A) None of the items.
2. B) 2 and 4.
3. C) 1, 3, & 4.
4. D) All of the items.

 

Answer:  C

Explanation:  Garbage pickup is not a tax.

Difficulty: 2 Medium

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

69) Shanika lives in Oregon which imposes a state tax on income. For 2017, Shanika had the following transactions related to her state income taxes:

 

State taxes withheld in 2017	$	3,500
State refund received in 2017 of 2016 tax		600
Additional assessment paid in 2017 of 2015 tax		750

 

 

Shanika plans to itemize on her 2017 return.  What amount of state and local taxes should Shanika deduct in calculating itemized deductions for her 2017 federal income tax return?

750. A) $750.
751. B) $3,500.
752. C) $4,250.
753. D) $4,850.

 

Answer:  C

Explanation:  $3,500 + 750 = $4,250. The refund for overpayment of 2016 state taxes will be included in income for 2017.

Difficulty: 2 Medium

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

70) Akule paid the following amounts of interest in 2017:

 

$150 on his personal credit card

$9,500 on his home mortgage

$750 on a personal car loan, which was not used for business

$350 on funds borrowed to purchase tax-exempt securities

 

What is his deductible interest for 2017?

350. A) $350.
351. B) $1,250.
352. C) $9,500.
353. D) $9,850.

 

Answer:  C

Explanation:  Personal interest is not deductible and the muni bond interest is not deductible as well.

Difficulty: 2 Medium

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

71) What is the maximum amount of personal residence acquisition debt on which interest is fully deductible?

1. A) $1,000,000.
2. B) $500,000.
3. C) $250,000.
4. D) $0.

 

Answer:  A

Explanation:  The aggregate amount treated as qualified acquisition indebtedness for any period cannot exceed $1,000,000.

Difficulty: 2 Medium

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

72) Ignacio and Perla are married and both are government employees. They contribute money to various organizations each year and file a joint return. Their adjusted gross income for 2017 is $100,000. They contributed to the following organizations in 2017:

 

• $3,500 to the World Wildlife Foundation
• $10,000 to the Salvation Army
• $2,000 to a local city council candidate
• $11,000 to a breast cancer research hospital
• Donated clothing to Goodwill. (Ignacio purchased the items for $375, but the thrift shop value of the same items at a local second-hand store is equal to $60.)

 

 

How much can Ignacio and Perla deduct as charitable contributions for the year 2017?

560. A) $26,560.
561. B) $26,500.
562. C) $25,710.
563. D) $24,560.

 

Answer:  D

Explanation:  $100K × 50% = $50K. $3,500 + 10,000 + 11,000 + 60 = $24,560.

Difficulty: 3 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

73) Which of the following organizations generally qualify for deductible charitable contributions?

1. A) Churches.
2. B) Political parties.
3. C) A political action committee.
4. D) None of these.

 

Answer:  A

Difficulty: 2 Medium

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

74) Which of the following statements is true regarding documentation requirements for charitable contributions?

1. A) If the total deduction for all noncash contributions for the year is more than $500, Section A of Form 8283, Noncash Charitable Contributions, must be completed.
2. B) A noncash contribution of less than $250 must be supported by a cancelled check, or a receipt, or other written acknowledgement from the charitable organization.
3. C) A contribution charged to a credit card is considered a cash contribution for purposes of documentation requirements.
4. D) All of these are true.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

75) In 2017, the U.S. President declared a federal disaster due to the flooding in Louisiana. Danielle lives in that area and lost her home in the flood. What choice does she have regarding when she can claim the loss on her tax return?

1. A) It must be claimed in 2016 if the return has not been filed by the date of the loss.
2. B) It must be claimed in 2017 if the loss is greater than the modified adjusted gross income.
3. C) It may be claimed in 2018 if an election is filed with the 2017 return.
4. D) It may be claimed in 2016 or 2017.

 

Answer:  D

Explanation:  If the casualty loss occurred as the result of a major event (usually a natural disaster), and the President of the United States declares the area a national disaster area, the taxpayer can elect to deduct the casualty loss against the preceding year’s taxable income.

Difficulty: 2 Medium

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

76) Malika and Henry’s vacation home was completely destroyed by fire. They had no insurance to cover the loss. On which of the following forms would they report their loss?

1. A) Form 4684, Casualties and Thefts, and Form 1040, U.S. Individual Income Tax Return, as an adjustment to gross income.
2. B) Schedule A, Itemized Deductions, only.
3. C) Form 4684, Casualties and Thefts, and Schedule A, Itemized Deductions.
4. D) Form 4684, Casualties and Thefts, only.

 

Answer:  C

Difficulty: 1 Hard

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

77) The Kaplans, who live in Boise, Idaho, had adjusted gross income of $140,000 in 2017. During the year, their principal residence was severely damaged by a house fire. The pertinent financial information is as follows:

 

Cost basis =	$	134,000
Value before casualty =	$	156,000
Value after casualty =	$	20,000

 

 

The Kaplans had some insurance and in 2017 reached a settlement with the insurance company for $110,000 insurance settlement. What is their allowable casualty loss deduction for 2017?

900. A) $9,900.
901. B) $23,900.
902. C) $36,000.
903. D) None of these.

 

Answer:  A

Explanation:  $140K × 10% = 14K. $134K – 110K = $24,000. $24,000 – 100 – 14,000 = $9,900.

Difficulty: 3 Hard

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

78) Which of the following is deductible as a miscellaneous itemized deduction?

1. A) Job-hunting expenses.
2. B) Union dues.
3. C) Professional dues and subscriptions.
4. D) All of these are considered miscellaneous deductions.

 

Answer:  D

Difficulty: 1 Hard

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

Accessibility:  Keyboard Navigation

 

79) Which of the following miscellaneous itemized deductions is not subject to the 2% of AGI threshold?

1. A) Tax preparation fees.
2. B) Gambling losses.
3. C) Unreimbursed employee expenses.
4. D) Investment expenses.

 

Answer:  B

Explanation:  Gambling losses are deductible up to gambling winnings – that is the threshold for gambling losses.

Difficulty: 1 Hard

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

Accessibility:  Keyboard Navigation

 

80) Itemized deductions are first reported on:

1040. A) Form 1040.
1041. B) Schedule B.
1042. C) Form 2106.
1043. D) Schedule A.

 

Answer:  D

Difficulty: 1 Hard

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

81) To qualify for a medical expense deduction as a taxpayer’s dependent, a person must be a dependent either at the time the medical services were provided or at the time the expenses were paid. A person generally qualifies as a dependent for purposes of the medical expense deduction if the person:

1. A) Would qualify as a dependent except for the amount of gross income.
2. B) Was a foreign student staying briefly at taxpayer’s home.
3. C) Is an unmarried adult child of taxpayer’s sibling.
4. D) Is the unrelated caregiver for taxpayer’s elderly parents.

 

Answer:  A

Explanation:  Two special rules apply for determining whether an individual qualifies as a dependent for purposes of the medical expense deduction. One is that the gross income and the joint return tests for the dependency exemption are waived.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

82) Tyrell, who is 65, had adjusted gross income of $35,000 in 2017. During the year, he incurred and paid the following medical expenses:

 

Drugs and medicines prescribed by doctors:	$	1570
Health insurance premiums:		825
Doctor and dentist fees:		1,850
Hearing aid:		275

 

 

Tyrell received $600 in 2017 as a reimbursement for a portion of the doctors’ fees. If he were to itemize his deductions, what would be his allowable medical expense deduction after the adjusted gross income limitation is taken into account?

600. A) $600.
601. B) $1,295.
602. C) $2,625.
603. D) $3,920.

 

Answer:  B

Explanation:  $35,000 × 7.5% = $2,625; $1,570 + 825 + 1,850 + 275 = $4,520; $4,520 – 600 = $3,920; $3,920 – 2,625 = $1,295.

Difficulty: 3 Hard

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

83) During 2017, Remy paid the following expenses:

 

Prescription medicines	$	640
Aspirin, vitamins, and cold medicine		165
Hospital and treatment fees		1,050
Health insurance premiums		250

 

 

What is the total amount of medical expenses (before considering the limitation based on adjusted gross income) that would enter into the calculation of itemized deductions on Remy’s 2017 income tax return?

105. A) $2,105.
106. B) $1,940.
107. C) $1,885.
108. D) $0.

 

Answer:  B

Explanation:  $640 + 1,050 + 250 = $1,940.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

84) Isaiah an NBA point guard, is advised by his physician to install a Jacuzzi in his residence since he is afflicted with a back problem incurred after years of running up and down the court. The cost of installing the Jacuzzi is $6,500. He installs the Jacuzzi in January of 2017, and it increases the value of his residence by $3,500. Disregarding the limitation based on adjusted gross income, how much of the cost of the Jacuzzi may Isaiah take into account in determining his medical expense deduction for 2017?

1. A) $3,000.
2. B) $3,500.
3. C) $6,500.
4. D) $10,000.

 

Answer:  A

Explanation:  For medical capital expenditures that improve the taxpayer’s property, the deduction is available only to the extent that the medical expenditure exceeds the increase in the fair market value (FMV) of the residence. $6,500 – 3,500 = $3,000.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

85) Which of the following types of taxes are deductible on Schedule A in 2017?

1. A) Personal property taxes.
2. B) Local real estate property taxes.
3. C) FICA taxes.
4. D) Both personal property taxes and local real estate taxes.

 

Answer:  D

Difficulty: 1 Hard

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

86) Shinobu resides in a state that imposes a tax on income. The following information relates to Shinobu’s state income tax situation for 2017:

 

Taxes withheld in 2017	$	4,300
State refund received in 2017 of 2016 tax		700
Additional assessment paid in 2017 of 2015 tax		950

 

 

Assuming she elects to deduct state and local income taxes, what amount should Shinobu use to calculate itemized deductions for her 2017 federal income tax return?

1. A) $0.
2. B) $3,600.
3. C) $5,250.
4. D) $5,950.

 

Answer:  C

Explanation:  $4,300 + 950 = $5,250. The refund for overpayment of 2016 state taxes will be included in income for 2017.

Difficulty: 2 Medium

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

87) For the year ended December 31, 2017, Terrance, a single professional, reported the following:

 

Net investment income from interest, $14,000

Other expenses unrelated to the generation of interest, $6,000

Investment interest expense on funds borrowed in 2016 to purchase stocks and bonds, $15,000

 

What is the maximum amount that Terrance can deduct in 2017 as investment interest expense?

1. A) $6,000.
2. B) $8,000.
3. C) $14,000.
4. D) $15,000.

 

Answer:  C

Explanation:  $14,000 – 15,000 = <$1,000>. The limit of the amount of deductible investment interest expense for the year is $14K; the remaining $1K is carried forward.

Difficulty: 2 Medium

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

88) What is the maximum amount of home equity indebtedness on which interest is fully deductible?

1. A) $0.
2. B) $50,000.
3. C) $100,000.
4. D) $200,000.

 

Answer:  C

Explanation:  The aggregate amount treated as home equity indebtedness for any period cannot exceed $100,000.

Difficulty: 1 Hard

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

89) During 2017, Manuel and Gloria, who are not married and live in Beverly Hills, incurred acquisition debt on their new residence of $2,150,000. On their individual tax returns, what is the amount of qualified acquisition debt on which they can each deduct interest?

1. A) $900,000.
2. B) $1,000,000.
3. C) $1,050,000.
4. D) $1,150,000.

 

Answer:  B

Explanation:  The aggregate amount treated as acquisition indebtedness for any period cannot exceed $1,000,000 for MFJ ($500,000 for married individuals filing separate returns). However, in the case of unmarried co-owners of a property, that limitation is extended to $1,000,000 per person. The $1,000,000 limitation refers to the amount of principal on the debt, not the interest paid.

Difficulty: 2 Medium

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

90) Robert and Becky (husband and wife) are both lawyers and they contribute money to various organizations each year. They file a joint return and their adjusted gross income for 2017 is $100,000. They contributed to the following organizations in 2017:

 

 

• $5,000 to Shangri La country club
• $10,000 to the ASPCA
• $2,000 to State Bar Association Political Action Committee
• $12,000 to a juvenile diabetes research foundation
• Donated clothing to Goodwill. (Robert originally purchased the items for $400, but the fair market value of the same items at a thrift store is equal to $50.)

 

 

How much can Robert and Becky deduct as charitable contributions for the year 2017?

50. A) $29,050.
51. B) $25,000.
52. C) $24,000.
53. D) $22,050.

 

Answer:  D

Explanation:  $100K × 50% = $50,000. $10,000 + 12,000 + 50 = $22,050, < $50K.

Difficulty: 2 Medium

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

91) Raheem and Niseema (husband and wife) contributed $15,000 in cash to their mosque during 2017. They also donated $3,000 to a private foundation which is a nonprofit cemetery organization. They knew a 30% limit applies to contributions to such foundations. Their adjusted gross income for the year 2017 was $30,000. Raheem and Niseema’s deductible contribution for the year 2017 and any carryover to next year is:

1. A) $18,000 with $0 carryover to next year.
2. B) $15,000 with $2,100 carryover to next year.
3. C) $7,500 with $2,100 carryover to next year.
4. D) $15,000 with $3,000 carryover to next year.

 

Answer:  D

Explanation:  A contribution in excess of the limitation is carried forward for the next five tax years, subject to the overall 50% limitation in those years.

Difficulty: 3 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

92) For 2017, Lydia had adjusted gross income of $60,000 and made the following charitable contributions:

 

Cash contribution to her synagogue:	$	1,500
Tuition to a private school paid directly to her niece:	$	1,200
Contribution to the Salvation Army:	$	350
Cash contribution to a man begging on a freeway off ramp:	$	150

 

 

What is the maximum amount that she can deduct as a charitable contribution for 2017?

200. A) $3,200.
201. B) $3,050.
202. C) $1,850.
203. D) $1,650.

 

Answer:  C

Explanation:  $60K × 50% = $30K. $1,500 + 350 = $1,850, <$30K.

Difficulty: 3 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

93) During the year, Greta’s mountain cabin was almost completely destroyed by a fire started in the kitchen. She had adjusted gross income of $110,000 in 2017 and related data with respect to the cabin follows:

 

Cost basis:	$	121,000
Value before casualty:	$	155,000
Value after casualty:	$	15,000

 

 

Greta was partially insured for the loss and in 2017 she received a $100,000 insurance settlement. What is Greta’s allowable casualty loss deduction for 2017?

900. A) $9,900.
901. B) $20,000.
902. C) $35,900.
903. D) $55,000.

 

Answer:  A

Explanation:  $110,000 × .10 = $11,000; $121,000 – 100,000 = $21,000; $21,000 – 100 – 11,000 = $9,900.

Difficulty: 2 Medium

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

94) For 2017, the AGI threshold for the deductibility of personal casualty losses generally is:

1. A) 2%.
2. B) 5%.
3. C) 7.5%.
4. D) 10%.

 

Answer:  D

Difficulty: 1 Hard

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

95) Which of the following miscellaneous itemized deductions are not subject to the 2% adjusted gross income limitation?

1. A) Investment publications expense.
2. B) Tax preparation fees.
3. C) Gambling losses.
4. D) Job-hunting expenses.

 

Answer:  C

Explanation:  Gambling losses are deductible up to gambling winnings – that is the limitation for gambling losses.

Difficulty: 1 Hard

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

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96) Flo and Artis (wife and husband) are itemizing their Schedule A expenses on their tax year 2016 return. Artis traveled to Japan for his employer, but was not reimbursed. His meal expenses totaled $500. How much can Artis deduct for meals before applying the 2% of AGI limitation?

500. A) $500.
501. B) $250.
502. C) $150.
503. D) $0.

 

Answer:  B

Explanation:  Allowable meals and entertainment expenses are deductible at a 50% rate.

Difficulty: 2 Medium

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

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97) Which of the following items would be an itemized deduction on Schedule A of Form 1040 subject to the 2% of AGI floor?

1. A) Professional dues to membership organizations.
2. B) Work uniforms that cannot be used for normal wear.
3. C) Job-hunting costs.
4. D) All of these.

 

Answer:  D

Difficulty: 1 Hard

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

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98) Which of the deductions listed below is subject to the phase-out of the total dollar amount of certain itemized deductions that may be claimed by high-income individuals?

1. A) Charitable contributions.
2. B) Investment interest expense.
3. C) Medical costs.
4. D) Personal casualty losses.

 

Answer:  A

Explanation:  The phase-out rules do not apply to medical expenses, investment interest, casualty or theft losses, or gambling losses. That is because most of these exempted deductions are somewhat uncommon or have high AGI qualifying hurdles.

Difficulty: 2 Medium

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

99) Tyrone, who is single and under age 65, had the following income in 2017:

 

 

• $59,800 in wages
• $200 in interest
• $10,000 in gambling winnings
• $5,000 in short-term capital gains.

 

 

Tyrone filed a Schedule A, Itemized Deductions, for 2017. While preparing that schedule, Tyrone, who had no above-the-line deductions, listed the following below-the-line deduction items he had incurred during the year:

 

 

• $2,500 in medical expenses
• $8,000 of mortgage interest paid
• $2,000 in real estate taxes
• $1,600 in state taxes
• $12,000 in gambling losses
• $3,400 in unreimbursed employee business expenses.

 

 

What is the total amount of Schedule A itemized deductions that Tyrone can report in 2017?

500. A) $27,500.
501. B) $25,000.
502. C) $23,500.
503. D) $20,100.

 

Answer:  C

Explanation:  AGI = $75,000. $8,000 + 2,000 + $1,600 + 10,000 + 1,900 = $23,500.

(Note: the medical expenses were not deductible due to AGI limitations and the unreimbursed employee business expenses were reduced by the 2% of AGI miscellaneous itemized deduction limitation).

Difficulty: 3 Hard

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

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100) How is the medical expense deduction calculated? How is it limited?

 

Answer:  Medical expenses are allowed as itemized deductions to the extent that the expenses exceed 7.5% of adjusted gross income. No deduction is allowed for expenditures that are merely for the benefit of the general health of an individual. Generally, deductible medical costs do not include cosmetic surgery unless the surgery is necessary to correct a deformity arising from a congenital abnormality, personal injury, or disfiguring disease.

Difficulty: 3 Hard

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

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101) Describe the concept of a 7.5% floor for medical deductions.

 

Answer:  The 7.5% floor means that medical expense deductions are not allowed until the total medical deductions exceed 7.5% of AGI. Thus, medical expenditures, net of insurance reimbursements, must be substantial in order to gain any tax benefit.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

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102) When are travel costs deductible as medical costs? How are medical travel costs calculated?

 

Answer:  Travel costs are deductible when incurred for transportation primarily for and essential to medical care. Transportation costs could include such items as cab, bus, or train fares, as well as expenses for a personal auto. The amount of the deduction for the use of a personal auto for transportation for medical care can be calculated using the actual cost of operating the car for medical purposes or the optional standard mileage allowance.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

103) What is the proper treatment for prescription drugs obtained from sources outside the United States, such as Canada, that have been prescribed by a physician for the treatment of a medical condition and the FDA has approved that they can be legally imported?

 

Answer:  Prescription drugs obtained from sources outside the United States, such as Canada, are deductible if prescribed by a physician for the treatment of a medical condition and the FDA has approved that they can be legally imported.

Difficulty: 2 Medium

Topic:  Medical Expenses

Learning Objective:  05-01 Describe the deductibility and reporting of medical expenses.

EA:  Yes

Accessibility:  Keyboard Navigation

 

104) What are four major categories of deductible taxes for individual returns?

 

Answer:

1. Personal property taxes;
2. Local real estate taxes;
3. Other state, and local taxes (including sales taxes);
4. Foreign taxes.

Difficulty: 2 Medium

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

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105) In order for a personal property tax to be deductible as an itemized deduction, what three tests are required?

 

Answer:  State or local property taxes must meet the following three tests in order to be deductible. The tax must be levied on personal property, the tax must be an “ad valorem tax,” and the tax must be imposed, at a minimum, on an annual basis with respect to personal property.

Difficulty: 3 Hard

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

106) For 2017, describe the treatment that taxpayers can elect to take for the amount of either (1) state and local income taxes or (2) state and local general sales taxes paid during the tax year.

 

Answer:  For 2017, taxpayers can elect to take an itemized deduction for the amount of either (1) state and local income taxes or (2) state and local general sales taxes paid during the tax year. Taxpayers cannot deduct both. For the deduction of state income taxes, the amount of taxes paid, whether through withholding, estimated taxes, or filing the prior year’s state tax return are allowed. For the deduction of state sales taxes, the taxpayer may either deduct the actual amount of sales taxes paid, or elect to use the sales tax tables provided by the IRS in the Schedule A instructions as well as using the IRS on-line sales tax deduction calculator tool at http://apps.irs.gov/app/stdc/. If taxpayers purchase an aircraft, boat, or in most cases a home or an addition to a home, the taxpayer can add the amount of sales tax paid on those items to the amount of sales tax determined with reference to the IRS tables.

Difficulty: 3 Hard

Topic:  State and Local Tax Deductions

Learning Objective:  05-02 Be able to explain the state and local tax deductions.

EA:  Yes

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107) What is qualified residence interest? Are there any limits to the deductibility of qualified residence interest?

 

Answer:  Qualified residence interest is any interest that is paid or accrued during the taxable year on acquisition indebtedness or home equity indebtedness secured by a qualified residence of the taxpayer. The aggregate amount treated as qualified residence indebtedness, on which interest is fully deductible for any period, cannot exceed in total $1,100,000 for MFJ ($550,000 for married individuals filing separate returns). However, in the case of unmarried co-owners of a property, that limitation is extended to $1,100,000 per person. The total represents the combined limits for acquisition indebtedness and home equity indebtedness. The $1,100,000 limitation refers to the amount of principal of the debt, not the interest paid.

Difficulty: 2 Medium

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

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108) What is home equity indebtedness and how does it differ from acquisition indebtedness? Are there any limits to the deductibility of home equity loan interest?

 

Answer:  Home equity indebtedness is a loan that is secured by a qualified residence in an amount that does not exceed the fair market value (FMV) of the residence less the acquisition debt. The aggregate amount treated as home equity indebtedness, on which interest is fully deductible for any period, cannot exceed $100,000 for MFJ ($50,000 for married filing separately). However, in the case of unmarried co-owners of a property, that limitation is extended to $100,000 per person. The $100,000 limitation refers to the amount of principal of the debt, not the interest paid.

Difficulty: 2 Medium

Topic:  Interest Deductions

Learning Objective:  05-03 Apply the tax rules associated with the interest deduction.

EA:  Yes

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109) When performing services for a charitable organization, is any charitable deduction allowed? If so, explain.

 

Answer:  No deduction is permitted for services rendered to a charitable organization. The reason for this restriction is that the services do not give rise to taxable income to the taxpayers, so no deduction is permitted. In order to be deductible, the donation must be cash or other property of value.

Difficulty: 2 Medium

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

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110) Donations to what types of organizations are tax deductible?

 

Answer:  Subject to certain limitations, deductions are allowed for donations to public charities, private foundations, and organizations such as war veterans’ organizations, fraternal orders, cemetery companies, and certain nonoperating private foundations.

Difficulty: 1 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

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111) If the donation is greater than $250, what kind of written acknowledgment must the taxpayer obtain from the recipient organization?

 

Answer:  The taxpayer must have written acknowledgment from the recipient organization stating (1) the date and amount of the contribution, (2) whether the taxpayer received any goods or services from the charity as a result of the contribution, and (3) a description and good faith estimate of the value of any goods and/or services that the taxpayer received.

Difficulty: 3 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

112) Explain the key exception to the general rule concerning the charitable deduction for the contribution of tangible personal property.

 

Answer:  The key exception to the general rule concerning the contribution of tangible personal property is that if the donated property is put to a use that is unrelated to the purpose or function of the charity’s tax-exempt status, the contribution must be reduced by the amount of any long-term capital gain that would have been realized had the property been sold at its fair market value at the time of the contribution.

Difficulty: 3 Hard

Topic:  Charitable Contributions

Learning Objective:  05-04 Explain the deductibility and reporting of charitable contributions.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

113) Define a personal casualty loss.

 

Answer:  A personal casualty loss includes losses of personal property, such as a personal residence, personal auto, or vacation home. It is an identifiable event of a sudden, unexpected, or unusual nature.

Difficulty: 1 Hard

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

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114) What are the general limits or floors placed on deductible personal casualty losses?

 

Answer:  First, each separate casualty is reduced by $100. It is important to note that this is $100 per casualty and not $100 per item of property. The second and more substantial limitation is the 10% of AGI limitation. In order to obtain any benefit from a casualty loss, the loss must be in excess of 10% of AGI. Because of the 10% limitation, most taxpayers generally do not benefit from casualty losses unless the loss was substantial.

Difficulty: 3 Hard

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

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115) How does the declaration of a federally declared disaster area benefit the taxpayer concerning a casualty loss?

 

Answer:  A taxpayer can elect to amend the prior year’s tax return and get an immediate refund against the prior year’s taxes, or the taxpayer can deduct the loss on the current year’s return.

Difficulty: 2 Medium

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

Accessibility:  Keyboard Navigation

 

 

 

116) On April 3rd, Gila discovers that her diamond broach has been stolen. The broach had a fair market value and adjusted basis of $15,000. The broach was not covered by Gila’s insurance policy and her adjusted gross income for the year was $65,000. What would be her casualty loss deduction for the year?

 

Answer:  $8,400

Explanation:  The first step in determining her casualty loss deduction would be to determine her total loss which would be $15,000 as she had no insurance on the item. The second step would be to determine the AGI limitation on the loss which would be 10% of $65,000 or $6,500. This amount would be deducted from the total amount of the loss. Lastly, the $100 per event limitation would be deducted resulting in a deductible loss of $8,400.

Difficulty: 3 Hard

Topic:  Casualty Loss Deductions

Learning Objective:  05-05 Discuss the casualty loss deduction.

EA:  Yes

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117) What is usually the largest miscellaneous itemized deduction category? Does it require any special treatment?

 

Answer:  Unreimbursed employee business expenses are usually the largest and thus, the most likely to cause total miscellaneous deductions to exceed the 2% floor. These expenses are costs incurred by the taxpayer as a part of his or her employment (as opposed to being self-employed) but which are not reimbursed. If any travel, transportation, meals, or entertainment expenses are incurred or if some expenses are reimbursed, then the taxpayer must complete Form 2106.

Difficulty: 2 Medium

Topic:  Miscellaneous Itemized Deductions

Learning Objective:  05-06 Know how to report miscellaneous expenditures.

EA:  Yes

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118) Explain the tax treatment regarding the limitation of itemized deductions for high-income taxpayers.

 

Answer:  For 2017, there is a limitation in effect on the amount of itemized deductions for high-income taxpayers. On what has become known as the Pease rule, high-income taxpayers’ itemized deductions will be reduced by the lower of 3% of the excess of AGI over the applicable amount or 80% of the itemized deductions otherwise allowable for the tax year.

Difficulty: 2 Medium

Topic:  Itemized Deductions

Learning Objective:  05-07 Apply the tax rules for limitations on total itemized deductions for high-income taxpayers in 2016.

EA:  Yes

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