Taxation of Individuals Brian Spilker 11e - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Taxation of Individuals, 11e (Spilker) Chapter 6 Individual Deductions 1) The profit motive distinguishes "business" activities from "personal" activities. Answer: TRUE Difficulty: 1 Easy Topic: Deductions for …
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Taxation of Individuals Brian Spilker 11e – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Taxation of Individuals, 11e (Spilker)
Chapter 6 Individual Deductions
1) The profit motive distinguishes “business” activities from “personal” activities.
Answer: TRUE
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
2) All business expense deductions are claimed as “below the line” deductions.
Answer: FALSE
Explanation: Most business expenses are claimed as for AGI deductions.
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
3) All investment expenses are itemized deductions.
Answer: FALSE
Explanation: Rental/royalty deductions are “above the line” deductions.
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
4) Rental or royalty expenses are deductible “for” AGI.
Answer: TRUE
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
5) To be deductible, business expenses must be directly related to a business activity.
Answer: TRUE
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
6) The phrase “ordinary and necessary” means that an expense must be appropriate and helpful for generating a profit.
Answer: TRUE
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
7) All reasonable moving expenses are deductible by employees.
Answer: FALSE
Explanation: Moving expenses are generally not deductible.
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
8) Self-employed taxpayers can deduct the cost of health insurance as a “for” AGI deduction as long as they do not actually participate in their spouses’ employer-provided health plans.
Answer: FALSE
Explanation: A self-employed individual cannot be eligible to participate in a plan.
Difficulty: 3 Hard
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
9) Self-employed taxpayers can choose between claiming a deduction or a credit for the employer portion of self-employment taxes paid.
Answer: FALSE
Explanation: An above-the-line deduction for the employer portion of the SE tax is available.
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
10) An individual who forfeits a penalty for prematurely withdrawing a certificate of deposit (CD) is allowed to net the penalty against the interest income from the CD.
Answer: FALSE
Explanation: The early withdrawal penalty is treated as an above-the-line deduction.
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
11) Excess business losses are carried back and then forward as net operating losses.
Answer: FALSE
Explanation: Excess business losses are carried forward as net operating loss carryforward.
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
12) For married taxpayers filing separately, excess business losses are defined as aggregate business deductions over the sum of aggregate business gross income or gain of the taxpayer plus $255,000.
Answer: TRUE
Explanation: The threshold amount for all taxpayers other than those married filing jointly is $255,000.
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
13) Qualified education expenses for purposes of the deduction of interest on educational loans are expenses paid for the education of the taxpayer, the taxpayer’s spouse, or a taxpayer’s dependent to attend a postsecondary institution of higher education.
Answer: TRUE
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
14) The medical expense deduction is designed to provide relief for doctors and medical practitioners.
Answer: FALSE
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
15) Deductible medical expenses include payments to medical care providers such as doctors, dentists, and nurses and medical care facilities such as hospitals.
Answer: TRUE
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
16) Taxpayers traveling for the primary purpose of receiving essential and deductible medical care may deduct the cost of travel.
Answer: TRUE
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
17) The deduction for medical expenses is limited to the amount of unreimbursed qualifying medical expenses paid during the year reduced by 2 percent of the taxpayer’s AGI.
Answer: FALSE
Explanation: 10 percent of AGI is the floor limit.
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
18) The itemized deduction for taxes includes all types of state, local, and foreign taxes.
Answer: FALSE
Explanation: The deduction is limited to state, local, and foreign income (or sales taxes); state or local property taxes; and state or local personal property taxes, based on value.
Difficulty: 3 Hard
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
19) Taxpayers may elect to deduct state and local sales taxes instead of deducting state and local income taxes.
Answer: TRUE
Explanation: Taxpayers may elect to deduct state and local sales taxes in lieu of deducting state and local income taxes.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
20) Taxpayers are allowed to deduct mortgage interest on up to $1,000,000 of acquisition debt for their qualified residence if the acquisition debt is incurred after December 15, 2017.
Answer: FALSE
Explanation: The limit is $750,000 for acquisition debt incurred after December 15, 2017.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
21) The deduction for investment interest in excess of the net investment income carries forward to the subsequent year.
Answer: TRUE
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
22) To qualify as a charitable deduction the donation must be made by cash or by check.
Answer: FALSE
Explanation: Donations of property also qualify.
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
23) In general, taxpayers are allowed to deduct the fair market value of long-term capital gain property on the date of the donation to a qualified charitable organization.
Answer: TRUE
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
24) The deduction to individual taxpayers for charitable contributions paid in cash to public charities is limited to 10 percent of the taxpayer’s AGI.
Answer: FALSE
Explanation: 60 percent of AGI is the ceiling for donations of cash to public charities.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
25) Unreimbursed employee business expenses and hobby expenses are not deductible.
Answer: TRUE
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
26) Bunching itemized deductions is one form of tax evasion.
Answer: FALSE
Difficulty: 1 Easy
Topic: The Standard Deduction
Learning Objective: 06-03 Determine the standard deduction available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
27) Taxpayers generally deduct the lesser of their standard deduction or their itemized deductions.
Answer: FALSE
Explanation: Taxpayers generally deduct the greater of their standard deduction or their itemized deductions.
Difficulty: 1 Easy
Topic: The Standard Deduction
Learning Objective: 06-03 Determine the standard deduction available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
28) Taxpayers filing single and taxpayers filing married separate have the same basic standard deduction amount.
Answer: TRUE
Difficulty: 2 Medium
Topic: The Standard Deduction
Learning Objective: 06-03 Determine the standard deduction available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
29) An individual who is eligible to be claimed as a dependent on another’s return and has $1,000 of earned income may claim a standard deduction of $1,350.
Answer: TRUE
Explanation: The dependent may claim a standard deduction for the greater of (1) $1,100 or (2) $350 plus her $1,000 earned income = $1,350.
Difficulty: 2 Medium
Topic: The Standard Deduction
Learning Objective: 06-03 Determine the standard deduction available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
30) Generally, service businesses are considered qualified trade or businesses for purposes of the deduction for qualified business income.
Answer: FALSE
Explanation: Service businesses are generally excluded from the definition of qualified trade or businesses for purposes of the deduction.
Difficulty: 2 Medium
Topic: Deduction for qualified business income
Learning Objective: 06-04 Calculate the deduction for qualified business income.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
31) Congress allows self-employed taxpayers to deduct the cost of health insurance above the line (for AGI) because:
Answer: C
Explanation: Employers are allowed to deduct the premium as a compensation expense and employees are allowed to exclude from taxable income the value of the premiums paid on their behalf.
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
32) Which of the following is a true statement?
Answer: A
Explanation: See discussion of the self-employment deduction in the text.
Difficulty: 3 Hard
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
33) Which of the following is a true statement?
Answer: E
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
34) Which of the following is a true statement?
Answer: D
Explanation: Investment expenses are typically deducted from AGI.
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
35) Which of the following is a true statement?
Answer: D
Explanation: Moving expenses are not deductible except for members of the Armed Forces.
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
36) Which of the following is a true statement?
Answer: A
Explanation: Self-employed taxpayers are not allowed to deduct health care premiums if they are eligible to participate in an employer-provided health plan.
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
37) Which of the following is a true statement?
Answer: C
Explanation: Simply being eligible to participate in a spouse’s employer-provided health plan precludes the deduction for health care premiums for self-employed taxpayers.
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
38) Which of the following is a true statement?
Answer: B
Explanation: Penalties for early withdrawal are deductible for AGI.
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
39) This year, Jong paid $3,000 of interest on a qualified education loan. Jong files married filing jointly and reports modified AGI of $152,000. What is Jong’s deduction for interest expense on an educational loan?
Answer: C
Explanation: 2019 phase-out percentage = [$152,000 – $140,000] ÷ $30,000 = 40%; maximum = $2,500 × (1 − 40%) = $1,500.
Difficulty: 3 Hard
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
40) Mason paid $4,100 of interest on a loan that paid tuition for him to attend a private university this year. How much of this payment can Mason deduct as interest expense on an educational loan if he files single and reports modified AGI of $90,000?
Answer: E
Explanation: The deduction is eliminated for single taxpayers with modified AGI over $85,000 (2019).
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
41) This year Riley files single and reports modified AGI of $76,000. Riley paid $1,200 of interest on a qualified education loan. What amounts can Riley deduct for qualifying education interest?
Answer: C
Explanation: Riley may deduct the amount paid ($1,200) up to $2,500, reduced by the phase-out amount. The phase-out amount is the amount paid up to $2,500 ($1,200 for Riley) multiplied by 40 percent [(76,000 – 70,000) ÷ 15,000 = 40%]. Hence, Riley may deduct $720 [$1,200 – ($1,200 × 40%) = $720].
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
42) Max, a single taxpayer, has a $270,000 loss from his sole proprietorship. How much of this loss is deductible after considering the excess business loss rules?
Answer: B
Explanation: The nondeductible excess business loss is $15,000 (the taxpayer’s aggregate business deductions ($270,000) over the sum of his business gross income, $0 and $255,000).
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
43) Max, a single taxpayer, has a $270,000 loss from his sole proprietorship. How much of this loss is not deductible after considering the excess business loss rules?
Answer: C
Explanation: The nondeductible excess business loss is $15,000 (the taxpayer’s aggregate business deductions ($270,000) over the sum of his business gross income, $0 and $255,000).
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
44) Han is a self-employed carpenter and his wife, Christine, works full time as a grade school teacher. Han paid $525 for carpentry tools and supplies, and Christine paid $3,600 as her share of health insurance premiums (not with pretax dollars) for Han and herself in a qualified plan provided by the school district (not through an exchange). Which of the following is a true statement?
Answer: A
Explanation: Business expenses for self-employed individuals are Schedule C deductions but health insurance premiums are itemized deductions if the taxpayers are eligible to participate in an employer-provided health plan.
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
45) Bruce is employed as an executive and his wife, Marie, is a self-employed realtor. Besides Bruce’s salary, Bruce and Marie own a warehouse that they rent to a local business for storage. This year they paid $1,250 for electric service in the warehouse. Marie also paid self-employment tax of $6,200 and Bruce had $7,000 of Social Security taxes withheld from his pay. Marie paid a $45 fee to rent a safe-deposit box to store records associated with her realty operation. Which of the following is a true statement?
Answer: D
Explanation: The safe-deposit fee is a business expense and the electric bill is a rental expense. The employer portion of the self-employment taxes is deductible for AGI.
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
46) Brice is a single, self-employed electrician who earns $60,000 per year in self-employment income. Brice paid the following expenses this year. Which of the expenses are deductible for AGI?
Answer: E
Explanation: All of these expenditures are deductible for AGI.
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
47) Hector is a married, self-employed taxpayer, and this year he paid $3,000 for his health insurance premiums (not through an exchange). Under which of the following alternative conditions can Hector deduct the cost of the premiums for AGI?
Answer: B
Explanation: Health insurance premiums for the self-employed are deductible for AGI if the taxpayer is not eligible to participate in an employer-provided plan.
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
48) Lewis is an unmarried law student at State University, a qualified educational institution. Last year Lewis borrowed $30,000 and used the proceeds to pay his university tuition. This year Lewis paid $1,500 of interest on the loan. Which of the following is a true statement if Lewis reports $40,000 of salary and no other items of income or expense?
Answer: A
Explanation: Up to $2,500 of interest on student loans is deductible for AGI. The interest deduction is phased out for single taxpayers with AGI exceeding $70,000.
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
49) This fall Millie finally repaid her student loan. She originally borrowed the money to pay tuition several years ago, when she attended State University (a qualified educational institution). This year Millie paid a total of $2,400 of interest on the loan. If Millie files single and reports $75,000 of income and no other items of income or expense, how much of the interest can she deduct?
Answer: B
Explanation: Millie may deduct the amount of interest paid ($2,400) reduced by the phase-out amount ($2,400 × [($75,000 – $70,000) ÷ $15,000] = $800). Thus, Millie may deduct $1,600 ($2,400 − $800 = $1,600).
Difficulty: 3 Hard
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
50) Ned is a head of household with a dependent son, Todd, who is a full-time student. This year Ned made the following expenditures related to Todd’s support:
| Auto insurance premiums | $1,700 |
| Room and board at Todd’s school | 2,200 |
| Health insurance premiums (not through an exchange) | 600 |
| Travel (to and from school) | 350 |
What amount can Ned include in his itemized deductions?
Answer: D
Explanation: The premiums paid for health and medical insurance for dependents are included in the taxpayer’s medical expenses when determining itemized deductions.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
51) Which of the following is a true statement?
Answer: E
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
52) Which of the following costs are deductible as an itemized medical expense?
Answer: B
Explanation: Medical expenses include any payments that health care does not reimburse for the care, prevention, diagnosis, or cure of injury, disease, or bodily function.
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
53) Which of the following costs is NOT deductible as an itemized medical expense?
Answer: E
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
54) Opal fell on the ice and injured her hip this winter. As a result she paid $3,000 for a visit to the hospital emergency room and $750 for follow-up visits with her doctor. While she recuperated, Opal paid $500 for prescription medicine and $600 to a therapist for rehabilitation. Insurance reimbursed Opal $1,200 for these expenses. What is the amount of Opal’s qualifying medical expense?
Answer: C
Explanation: The qualifying expenses are calculated as follows:
| Emergency room and doctor visits | $ | 3,750 | |
| Prescription medication | 500 | ||
| Physical therapy | 600 | ||
| Total qualifying medical expenses | $ | 4,850 | |
| Less insurance reimbursement | (1,200 | ) | |
| Qualifying medical expenses from the accident | $ | 3,650 | |
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Remember; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
55) Which of the following taxes will not qualify as an itemized deduction?
Answer: D
Explanation: Gasoline taxes on personal travel are not deductible.
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Remember; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
56) This year Amanda paid $749 in federal gift taxes on a gratuitous transfer to her nephew. Amanda lives in Texas and does not pay any state or local income taxes. Which of the following is a true statement?
Answer: A
Explanation: Federal gift and estate taxes are not deductible.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
57) This year Norma, a single taxpayer, paid $11,200 of real estate taxes on her personal residence and $9,500 of state income taxes. Which of the following is true?
Answer: C
Explanation: The itemized deduction for taxes is limited to $10,000 for single taxpayers.
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Remember; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
58) Madeoff donated stock (capital gain property) to a public charity. He purchased the stock three years ago for $100,000, and on the date of the gift, it had a fair market value of $200,000. What is his maximum charitable contribution deduction for the year related to this stock if his AGI is $500,000?
Answer: C
Explanation: The stock is appreciated capital gain property limited to 30 percent of AGI.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
59) Carly donated inventory (ordinary income property) to a church. She purchased the inventory last month for $100,000, and on the date of the gift, it had a fair market value of $92,000. What is her maximum charitable contribution deduction for the year related to this inventory if her AGI is $200,000?
Answer: B
Explanation: The charitable deduction for ordinary income property is the lesser of FMV or basis, limited to 50 percent of AGI.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
60) Simone donated a landscape painting (tangible capital gain property) to a library, a public charity. She purchased the painting five years ago for $50,000, and on the date of the gift, it had a fair market value of $200,000. What is her maximum charitable contribution deduction for the year if her AGI is $300,000?
Answer: C
Explanation: The painting is appreciated capital gain property given to a public charity. However, because it is also tangible personal property, the donation is FMV only if it is related to the charitable use or purpose. If so, the deduction is limited to 30 percent of AGI. If not, the deduction is basis limited to 50 percent of AGI.
Difficulty: 3 Hard
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
61) Larry recorded the following donations this year:
$500 cash to a family in need
$2,400 to a church
$500 cash to a political campaign
To the Salvation Army household items that originally cost $1,200 but are worth $300.
What is Larry’s maximum allowable charitable contribution if his AGI is $60,000?
Answer: C
Explanation: $2,400 to church + $300 FMV of household items.
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Remember; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
62) Which of the following is a true statement?
Answer: D
Explanation: The deduction of cash contributions to public charities is limited to 60 percent of AGI, the deduction of capital gain property to private nonoperating foundations is limited to 20 percent of AGI, and the deduction of capital gain property to public charities is limited to 30 percent of AGI.
Difficulty: 3 Hard
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
63) When taxpayers donate cash and capital gain property to a public charity, the AGI percentage limitation is applied in the following order:
Answer: D
Explanation: Capital gain property is subject to lower AGI limits, but the aggregate donation cannot exceed 50 percent of AGI.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
64) Which of the following is a true statement?
Answer: D
Explanation: The $750,000 limit applies to acquisition indebtedness incurred after December 15, 2017.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
65) Margaret Lindley paid $15,000 of interest on her $300,000 acquisition debt for her home (fair market value of $500,000), $4,000 of interest on her $30,000 home-equity loan, $1,000 of credit card interest, and $3,000 of margin interest for the purchase of stock. Assume that Margaret Lindley has $10,000 of interest income this year and no investment expenses. How much of the interest expense may she deduct this year?
Answer: D
Explanation: The credit card interest is nondeductible personal interest and the home-equity interest is not deductible. The remaining interest is deductible as qualified residence interest ($15,000) and investment interest ($3,000). The $3,000 investment interest is not restricted by her net investment income ($10,000).
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
66) Which of the following is a true statement?
Answer: A
Explanation: Casualty losses on personal-use assets are generally nondeductible.
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
67) Glenn is an accountant who races stock cars as a hobby. This year Glenn was paid a salary of $80,000 from his employer and won $2,000 in various races. What is the effect of the racing activities on Glenn’s taxable income if Glenn has also incurred $4,200 of hobby expenses this year? Assume that Glenn itemizes his deductions but has no other miscellaneous itemized deductions.
Answer: A
Explanation: Hobby expenses are not deductible, whereas hobby revenue is included in gross income.
Difficulty: 3 Hard
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
68) Which of the following is a deductible miscellaneous itemized deduction?
Answer: A
Explanation: Employee business expenses, tax preparation fees, investment expenses, and hobby expenses are not deductible.
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
69) Frieda is 67 years old and deaf. If Frieda files as a head of household, what amount of standard deduction can she claim in 2019?
Answer: E
Explanation: $20,000 = $18,350 + $1,650. The regular standard deduction is increased if the taxpayer is age 65 or older or blind.
Difficulty: 2 Medium
Topic: The Standard Deduction
Learning Objective: 06-03 Determine the standard deduction available to individuals.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
70) Andres and Lakeisha are married and file jointly. Andres is 72 years old and in good health. Lakeisha is 62 years old and blind. What amount of standard deduction can Andres and Lakeisha claim in 2019?
Answer: A
Explanation: $27,000 = $24,400 + ($1,300 × 2). The married filing jointly standard deduction is increased $1,300 for each blind taxpayer and/or each taxpayer at or over age 65 by year-end.
Difficulty: 3 Hard
Topic: The Standard Deduction
Learning Objective: 06-03 Determine the standard deduction available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
71) Which of the following is a true statement?
Answer: C
Explanation: Bunching is perfectly legal.
Difficulty: 1 Easy
Topic: The Standard Deduction
Learning Objective: 06-03 Determine the standard deduction available to individuals.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
72) Campbell, a single taxpayer, has $95,000 of profits from her general store, which she operates as a sole proprietorship. She has no employees, $40,000 of qualified property, and $50,000 of taxable income before the deduction for qualified business income. How much is Campbell’s deduction for qualified business income?
Answer: C
Explanation: Her deduction for qualified business income is limited to 20 percent of her taxable income before the deduction. She is not subject to the wage limit because her income falls below the $160,700 threshold.
Difficulty: 2 Medium
Topic: Deduction for qualified business income
Learning Objective: 06-04 Calculate the deduction for qualified business income.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
73) Campbell, a single taxpayer, has $400,000 of profits from her general store, which she operates as a sole proprietorship. She has no employees, $40,000 of qualified property, and $500,000 of taxable income before the deduction for qualified business income. How much is Campbell’s deduction for qualified business income?
Answer: D
Explanation: Her deduction for qualified business income is limited to 25 percent of her wages ($0) plus 2.5 percent of her qualified property (2.5% × $40,000 = $1,000).
Difficulty: 2 Medium
Topic: Deduction for qualified business income
Learning Objective: 06-04 Calculate the deduction for qualified business income.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
74) Campbell, a single taxpayer, has $400,000 of profits from her general store, which she operates as a sole proprietorship. She has $100,000 of employee wages, $40,000 of qualified property, and $500,000 of taxable income before the deduction for qualified business income. How much is Campbell’s deduction for qualified business income?
Answer: C
Explanation: Her deduction for qualified business income is limited to 50 percent of her wages ($100,000 × 50% = $50,000).
Difficulty: 2 Medium
Topic: Deduction for qualified business income
Learning Objective: 06-04 Calculate the deduction for qualified business income.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
75) Scott is a self-employed plumber and his wife, Emily, is a full-time employee for a university. Emily has health insurance from a qualified plan provided by the university, but Scott has chosen to purchase his own health insurance rather than participate in Emily’s plan. Besides paying $5,400 for his health insurance premiums, Scott also pays the following expenses associated with his plumbing business:
| Plumbing tools and supplies | $1,300 |
| Rent on Scott’s plumbing shop | 6,250 |
| Transportation between Scott’s shop and various jobsites | 500 |
| Plumber’s uniform | 50 |
| Plumbing truck rental | 7,200 |
| Self-employment tax (half is employer share) | 400 |
What is the amount of deductions for AGI that Scott can claim this year (2019)?
Answer: $15,500.
$15,500 = $1,300 + $6,250 + $500 + $50 + $7,200 + ($400 × 0.50). All of the expenses are deductible for AGI except for Scott’s health insurance and 50 percent of the self-employment tax.
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
76) Alexandra operates a garage as a sole proprietorship. Alexandra also owns a half interest in a partnership that operates a gas station. This year Alexandra paid or reported the following expenses related to her garage and other property. Determine Alexandra’s AGI for 2019.
| Revenue from auto repairs | $143,930 |
| Salaries paid to mechanics | 72,210 |
| Supplies and tools | 18,500 |
| Revenues from gas station partnership (Alexandra’s share) | 125,000 |
| Expenses from gas station partnership (Alexandra’s share) | 95,200 |
| Self-employment tax (half is employer’s share) | 12,702 |
Answer: $76,669
All of the expenses are deductible, but only 50 percent of the self-employment tax is deductible ($6,351).
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
77) Tita, a married taxpayer filing jointly, has a $700,000 business loss from her S corporation. Assume the $700,000 loss satisfies the basis, at-risk, and passive loss rules. Assume also that neither she nor her husband has any other business losses or business income. How much of the $700,000 loss may she deduct this year?
Answer: $510,000.
She has a nondeductible excess business loss of $190,000, defined as her $700,000 over the sum of her other business income, $0 and $510,000.
Difficulty: 1 Easy
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Remember; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
78) Last year Henry borrowed $15,000 to help pay for his dependent daughter’s college tuition. This year Henry paid $2,800 of interest on the loan. How much, if any, interest can Henry deduct if he files single with AGI of $77,500?
Answer: $1,250.
The deduction for student loan interest is reduced for single taxpayers with AGI above $70,000 but below $85,000. The deduction is the amount paid up to $2,500, reduced by the phase-out percentage. The percentage is equal to $77,500 less $70,000, divided by $15,000. In this problem, there is a phase-out of 50 percent ($7,500 / $15,000), thereby reducing the amount paid up to $2,500 (in this case, $2,500) to a deduction of $1,250 [$2,500 – ($2,500 × ($7,500 / $15,000)) = $1,250].
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
79) Kaylee is a self-employed investment counselor who also owns a rental property. This year, she collected $85,000 in fees and paid the following expenses:
| Health insurance premiums (not through an exchange) | $ | 4,200 | |
| Life insurance premiums (whole life) | 1,900 | ||
| Books on investing | 200 | ||
| Repairs of the rental property | 450 | ||
| Advertising for investment clients | 1,770 | ||
| State income taxes | 4,300 | ||
| Self-employment tax (half is employer share) | 11,732 | ||
Kaylee files single. Calculate her adjusted gross income.
Answer: $72,514 = $85,000 − $12,486.
The books on investing, advertising for investment clients, repairs for the rental property, 50 percent of the self-employment taxes, and health insurance premiums are deductible for AGI. The whole life insurance premiums are not deductible, and the state income taxes are only deductible from AGI.
Difficulty: 2 Medium
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
80) This year Tiffanie files as a single taxpayer. Tiffanie received $67,700 of salary and paid $3,200 of qualified educational interest. This year Tiffanie paid moving expenses of $5,000 and received $9,800 of alimony (from her ex-husband, whom she divorced in 2012). What is Tiffanie’s AGI?
Answer: $76,250 ($67,700 + $9,800 − $1,250 = $76,250).
The alimony and salary are income, the moving expense is not deductible, and part of the educational interest is deductible for AGI. Tiffanie’s maximum educational interest deduction (amount paid up to $2,500) is limited to $1,250. The deduction for educational interest ($2,500) is subject to phase-out because Tiffanie’s modified AGI exceeds $70,000. The phase-out is calculated by subtracting $70,000 from Tiffanie’s modified AGI ($67,700 + $9,800 = $77,500) and dividing by $15,000 as follows: $2,500 × [($77,500 − $70,000) ÷ $15,000] = $1,250. Thus, the amount deductible is $1,250 [$2,500 − $1,250 = $1,250].
Difficulty: 3 Hard
Topic: Deductions for AGI
Learning Objective: 06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
81) Detmer is a successful doctor who earned $204,800 in fees this year, but he also competes in weekend golf tournaments. Detmer reported the following expenses associated with competing in almost a dozen tournaments:
| Transportation to various tournaments | $3,450 |
| Lodging | 1,890 |
| Entry fees | 920 |
| Golf supplies (balls, tees, etc.) | 75 |
This year Detmer won $5,200 from competing in various golf tournaments. Assuming that Detmer itemizes his deductions and that he did not have any other miscellaneous itemized deductions, what amount of the golfing expenses are deductible after considering all limitations if the tournament golfing is treated as a hobby activity?
Answer: $0
Hobby expenses are not deductible.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
82) Jenna (age 50) files single and reports AGI of $40,000. This year she has incurred the following medical expenses:
| Dentist charges | $ | 90 |
| Physicians’ fees | 2,800 | |
| Cosmetic surgery | 400 | |
| Cost of eyeglasses | 250 | |
| Hospital charges | 1,330 | |
| Prescription drugs | 240 | |
| Over-the-counter drugs | 75 | |
| Medical insurance premiums (not through an exchange) | 1,200 |
Calculate the amount of medical expenses that will be included with Jenna’s other itemized deductions.
Answer: $1,910.
All expenses are qualified medical expenses except for the cosmetic surgery and over-the-counter drugs. Hence, the medical expense deduction is $5,910 less $4,000 (10 percent × 40,000) = $1,910, and this amount is included with other itemized deductions.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
83) Chuck has AGI of $70,000 and has made the following payments:
| State income tax withholding | $1,900 |
| State income tax estimated payments | 850 |
| Federal income tax withholding | 7,100 |
| Social Security tax withheld from wages | 4,800 |
| State excise tax on liquor | 400 |
| State inheritance tax | 1,200 |
| County real estate tax | 790 |
| School district tax on realty | 510 |
Calculate the amount of taxes that Chuck can include with his itemized deductions.
Answer: $4,050 = $1,900 + $850 + $790 + $510.
The deductible taxes include county real estate and school district tax on real estate. State income taxes paid and withheld are also deductible.
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Remember; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
84) This year, Benjamin Hassell paid $20,000 of interest on a mortgage on his home (Benjamin borrowed $600,000 in 2015 to buy the residence and it is currently worth $1,000,000), $12,000 on a $150,000 home-equity loan on his home, and $10,000 of interest on a mortgage on his vacation home (loan of $300,000; home purchased for $400,000 in 2016; home is not rented out at any time). How much interest expense can Benjamin deduct as an itemized deduction?
Answer: $30,000.
Benjamin’s acquisition debt incurred before December 16, 2017, on his home and vacation home does not exceed $1,000,000. Thus, he can deduct the $20,000 mortgage interest on his home and the $10,000 of mortgage interest on his vacation home. The home-equity interest is not deductible.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
85) This year Darcy made the following charitable contributions:
| Donee | Property | Cost | FMV |
| State University | IBM stock | $15,000 | $10,500 |
| Salvation Army | Clothes | 2,500 | 500 |
| State Art Museum | Painting | 5,000 | 45,000 |
| City Hospital | Cash | 8,000 |
Determine the maximum amount of charitable deduction for Darcy’s contribution of the painting if her AGI is $80,000 this year. You may assume that both the stock and painting have been owned for 10 years and that the painting was used by the State Art Museum in a manner consistent with the museum’s charitable purpose.
Answer: The charitable deduction is $21,000 for the painting and $40,000 overall.
| Description | Amount | Explanation | ||||
| (1) | AGI | $ | 80,000 | |||
| (2) | 60 percent contributions | 8,000 | Cash contribution | |||
| (3) | 60 percent AGI contribution limit | 48,000 | (1) × 60% | |||
| (4) | Allowable 60 percent deductions | 8,000 | Lesser of (2) or (3) | |||
| (5) | 50 percent contributions | 11,000 | IBM stock and clothes | |||
| (6) | 50 percent AGI contribution limit | 32,000 | [(1) × 50%] − (4) | |||
| (7) | Allowable 50 percent deductions | 11,000 | Least of (5) or (6) | |||
| (8) | 30 percent contributions | 45,000 | Painting | |||
| (9) | 30 percent AGI contribution limit | 24,000 | (1) × 30% | |||
| (10) | Remaining 50 percent AGI contribution limit | 21,000 | (6) − (7) | |||
| (11) | Allowable 30 percent deductions | 21,000 | Least of (8), (9), or (10) | |||
| Deductible charitable contributions | $ | 40,000 | (4) + (7) + (11) | |||
The stock and clothes are not subject to the 30 percent AGI limit because these are ordinary income properties (basis exceeds its value so neither is capital gain property). The painting is long-term tangible personal property apparently related to the purpose of the charity. The deduction this year is $40,000, consisting of cash of $8,000, IBM stock of $10,500, clothes of $500, and the painting of $21,000. The remaining value of the painting, $24,000 ($45,000 − $21,000), is carried over to next year, subject to the 30 percent of AGI limit.
Difficulty: 3 Hard
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
86) This year Latrell made the following charitable contributions:
| Donee | Property | Cost | FMV |
| Jones Foundation | IBM stock | $15,000 | $25,000 |
| Salvation Army | Clothes | 2,500 | 500 |
| City Hospital | Cash | 20,000 |
Determine the maximum amount of Latrell’s charitable deduction assuming the Jones Foundation is a private nonoperating foundation and Latrell’s AGI is $100,000 this year. You may assume that the stock and painting have been owned for 10 years.
Answer: The charitable deduction is $40,500 overall.
| Description | Amount | Explanation | ||
| (1) | AGI | $ | 100,000 | |
| (2) | 60 percent contributions | 20,000 | Cash contribution | |
| (3) | 60 percent AGI contribution limit | 60,000 | (1) × 60% | |
| (4) | Allowable 60 percent deductions | 20,000 | Lesser of (2) or (3) | |
| (5) | 50 percent contributions | 5,00 | Clothes | |
| (6) | 50 percent AGI contribution limit | 30,000 | [(1) × 50%] − (4) | |
| (7) | Allowable 50 percent deductions | 5,00 | Least of (5) or (6) | |
| (8) | 20 percent contributions | 25,000 | IBM stock | |
| (9) | 20 percent AGI contribution limit | 20,000 | (1) × 20% | |
| (10) | Remaining 50 percent AGI contribution limit | 29,500 | (6) – (7) | |
| (11) | Allowable 30 percent deductions | 20,000 | Least of (8), (9), or (10) | |
| Deductible charitable contributions | $ | 40,500 | (4) + (7) + (11) | |
The clothes are not subject to the 30 percent AGI limit because they are ordinary income property (basis exceeds their value so they are not capital gain property). The IBM stock is long-term capital gain property, but because the donee is a private nonoperating foundation, the deduction for the value of the stock is subject to a 20 percent of AGI limitation. The deduction this year is $40,500, consisting of cash of $20,000, clothes of $500, and IBM stock of $20,000. The remaining value of the stock, $5,000 ($25,000 − $20,000), is carried over to next year, subject to the 20 percent of AGI limit.
Difficulty: 3 Hard
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
87) Claire donated 200 publicly traded shares of stock (held for five years) to her father’s nonoperating private foundation this year. The stock was worth $15,000 but Claire’s basis was only $4,000. Determine the maximum amount of charitable deduction for the donation if Claire’s AGI is $60,000 this year.
Answer: $12,000
The stock is long-term capital gain property donated to a nonoperating private foundation, so the maximum donation is limited to 20 percent of AGI. The remaining deduction of $3,000 will carry over to next year.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
88) Erika (age 62) was hospitalized with injuries from an auto accident this year. She incurred the following expenses from the accident:
| Hospital charges | $3,280 |
| Prescription medicine | 510 |
| Doctors’ fees | 1,240 |
In addition, Erika’s auto was completely destroyed in the accident. She bought the car several years ago for $18,000 and it was worth $4,700 at the time of the accident. What are Erika’s itemized deductions this year if she was uninsured and her AGI is $40,000?
Answer: $1,030 of medical expenses.
The medical expenses of $5,030 are reduced by 10 percent of AGI ($4,000), and the casualty loss is not deductible.
Difficulty: 2 Medium
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
89) Karin and Chad (ages 30 and 31, respectively) are married and together have $110,000 of AGI. This year they have recorded the following expenses:
| Home mortgage interest (acquisition debt of $300,000) | $16,640 |
| Real estate taxes | 5,400 |
| State income taxes paid | 6,300 |
| Medical expenses (unreimbursed) | 1,800 |
| Employee business expenses (unreimbursed) | 450 |
| Charitable contributions (cash to their church) | 760 |
Karin and Chad will file married jointly. Calculate their taxable income.
Answer: $82,600 = $110,000 – ($16,640 mortgage interest + 10,000 taxes + $760 charitable contributions).
Karin and Chad will choose to itemize their deductions. The medical expenses will not generate any addition to the itemized deductions because they are subject to a 10 percent of AGI floor limit. The taxes are limited to $10,000, and the unreimbursed business expenses are not deductible.
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Remember; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
90) Misti purchased a residence this year. Misti, age 32, is a single parent and lives with her 1-year-old daughter. This year, Misti received a salary of $160,000 and made the following payments:
| Home mortgage interest ($500,000 acquisition debt) | $15,000 |
| Real estate taxes | 1,525 |
| State income taxes paid | 1,340 |
| Income tax preparation fee | 2,250 |
| Charitable contributions (cash to their church) | 120 |
Misti files as a head of household. Calculate her taxable income this year.
Answer: $141,650 = $160,000 − $18,350.
Misti’s itemized deductions total $17,985 ($15,000 + $1,525 + $1,340 + $120). Thus, Misti will elect the standard deduction of $18,350. The income tax preparation fee is nondeductible.
Difficulty: 2 Medium
Topic: The Standard Deduction
Learning Objective: 06-03 Determine the standard deduction available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
91) Jon and Holly are married and live in a retirement community. This year Jon celebrated his 65th birthday and Holly turned 68 years old. For their ages, both Jon and Holly are in good health. What is the amount of their standard deduction this year?
Answer: $27,000.
The married filing jointly standard deduction is $24,400, increased by $2,600 because both taxpayers are age 65 by year-end ($1,300 each).
Difficulty: 1 Easy
Topic: The Standard Deduction
Learning Objective: 06-03 Determine the standard deduction available to individuals.
Bloom’s: Remember; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
92) This year Kelly bought a new auto for $20,000 plus $1,650 in state and local sales taxes. Besides this sales tax, Kelly also paid $8,260 in state income taxes and had mortgage interest of $5,500 ($400,000 acquisition indebtedness on her residence). If Kelly files single with AGI of $56,000, what amount of itemized deductions will she be eligible to claim?
Answer: $13,760 = $8,260 + $5,500.
State income taxes, but not sales taxes, are included with other itemized deductions when determining total itemized deductions. A taxpayer could elect to deduct state sales taxes instead of state income taxes. Nonetheless, Kelly would not make this election because her state income taxes ($8,260) exceed her state sales taxes.
Difficulty: 1 Easy
Topic: Deductions from AGI: Itemized Deductions
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.
Bloom’s: Remember; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
93) Toshiomi works as a sales representative and travels extensively for his employer’s business. This year Toshiomi was paid $75,000 in salary and made the following expenditures:
| State income taxes withheld | $6,300 |
| Employee business expenses (unreimbursed portion) | 1,450 |
| Charitable cash contributions | 200 |
| Investment counseling fees | 780 |
| Tax preparation fee | 310 |
Toshiomi also made a number of trips to Las Vegas for gambling. This year Toshiomi won $12,000 in a poker tournament, and this amount was almost enough to offset his other gambling losses ($13,420). Calculate Toshiomi’s 2019 taxable income if he files single.
Answer: $68,500.
$68,500 = ($75,000 salary + $12,000 gambling winnings) – ($6,300 state taxes + $12,000 gambling losses + $200 charitable contributions). The employee expenses, investment fees, and tax preparation fee are nondeductible. The gambling losses (up to gambling winnings) are a miscellaneous itemized deduction, and the state income taxes and charitable contributions are also itemized deductions.
Difficulty: 3 Hard
Topic: Deductions from AGI: Itemized Deductions; The Standard Deduction
Learning Objective: 06-02 Describe the different types of itemized deductions available to individuals.; 06-03 Determine the standard deduction available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
94) Cesare is 16 years old and works throughout the year at a local coffee shop. This year, he made $9,200 at the coffee shop and earned $2,000 in interest income from his savings account. Assume that Cesare is claimed as a dependent on his parents’ tax return. What is Cesare’s standard deduction for the year?
Answer: $9,550.
Since Cesare is claimed as a dependent on another’s tax return, his standard deduction ($12,200) is limited to his earned income ($9,200) plus $350.
Difficulty: 3 Hard
Topic: The Standard Deduction
Learning Objective: 06-03 Determine the standard deduction available to individuals.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
95) Rachel is an accountant who practices as a sole proprietor. This year, Rachel had net business income of $270,000 from her practice. Assume that Rachel pays $50,000 wages to her employees, she has $20,000 of property (unadjusted basis of equipment she purchased last year), she has no capital gains, and her taxable income before the deduction for qualified business income is $225,000. Calculate Rachel’s deduction for qualified business income.
Answer: $0.
Since Rachel has taxable income of $225,000 (before the deduction for qualified business income) and above $210,700, her accounting would be considered a specified service or trade business. Thus, she would not be eligible for the deduction for qualified business income.
Difficulty: 2 Medium
Topic: Deduction for qualified business income
Learning Objective: 06-04 Calculate the deduction for qualified business income.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
96) Rachel is an accountant who practices as a sole proprietor. This year, Rachel had net business income of $200,000 from her practice. Assume that Rachel pays $50,000 wages to her employees, she has $20,000 of property (unadjusted basis of equipment she purchased last year), she has no capital gains, and her taxable income before the deduction for qualified business income is $140,000. Calculate Rachel’s deduction for qualified business income.
Answer: $28,000.
Since Rachel has taxable income of $140,000 (before the deduction for qualified business income) and below $160,700, her accounting would not be considered a specified service or trade business. Thus, she is eligible for the deduction for qualified business income. Because her taxable income is below $160,700, the wage limitation would not apply. Thus, her deduction is $28,000, the lesser of (a) $40,000 (20 percent of her qualified business income, 20% × $200,000) or (b) $28,000 (20 percent of her taxable income before the deduction, 20% × $140,000).
Difficulty: 2 Medium
Topic: Deduction for qualified business income
Learning Objective: 06-04 Calculate the deduction for qualified business income.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
97) Rachel is an engineer who practices as a sole proprietor. This year, Rachel had net business income of $400,000 from her business. Assume that Rachel pays $150,000 wages to her employees, she has $20,000 of property (unadjusted basis of equipment she purchased last year), she has no capital gains, and her taxable income before the deduction for qualified business income is $380,000. Calculate Rachel’s deduction for qualified business income.
Answer: $75,000.
Engineering is a qualified trade or business. So, Rachel is eligible for the deduction for qualified business income. Rachel is limited by the wage-based limitation because her taxable income is above $160,700. Her deduction of 20 percent of her qualified business income ($400,000 × 20% = $80,000) is limited to the greater of (a) 50 percent of her wages paid ($150,000 × 50% = $75,000) or (b) 25 percent of her allocable wages ($150,000 × 25% = $37,500) plus 2.5 percent of the unadjusted basis of qualified property ($20,000 × 2.5% = $500). Thus, the wage limit reduces her potential deduction for qualified business income to $75,000. Rachel is not limited by the taxable income limitation because 20 percent of her qualified business income ($400,000 × 20% = $80,000, limited to $75,000 by the wage limit) is less than 20 percent of her taxable income before the deduction ($380,000 × 20% = $76,000). Thus, she may deduct $75,000 as a deduction for qualified business income.
Difficulty: 2 Medium
Topic: Deduction for qualified business income
Learning Objective: 06-04 Calculate the deduction for qualified business income.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
98) Rachel is an engineer who practices as a sole proprietor. This year, Rachel had net business income of $500,000 from her business. Assume that Rachel pays $20,000 wages to her employees, she has $500,000 of property (unadjusted basis of equipment she purchased last year), she has no capital gains, and her taxable income before the deduction for qualified business income is $380,000. Calculate Rachel’s deduction for qualified business income.
Answer: $17,500.
Engineering is a qualified trade or business. So, Rachel is eligible for the deduction for qualified business income. Rachel is limited by the wage-based limitation because her taxable income is above $160,700. Her deduction of 20 percent of her qualified business income ($500,000 × 20% = $100,000) is limited to the greater of (a) 50 percent of her wages paid ($20,000 × 50% = $10,000) or (b) 25 percent of her allocable wages ($20,000 × 25% = $5,000) plus 2.5 percent of the unadjusted basis of qualified property ($500,000 × 2.5% = $12,500). Thus, the wage limit reduces her potential deduction for qualified business income to $17,500. Rachel is not limited by the taxable income limitation because 20 percent of her qualified business income ($500,000 × 20% = $100,000, limited to $17,500 by the wage limit) is less than 20 percent of her taxable income before the deduction ($380,000 × 20% = $76,000). Thus, she may deduct $17,500 as a deduction for qualified business income.
Difficulty: 2 Medium
Topic: Deduction for qualified business income
Learning Objective: 06-04 Calculate the deduction for qualified business income.
Bloom’s: Understand; Analyze
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking
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