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Chapter 06. Itemized Deductions
LO 1
Identify the common deductions necessary for calculating adjusted gross income (AGI).
LO 2
Describe the different types of itemized deductions available to individuals and compute itemized
deductions.
LO 3
Explain the operation of the standard deduction, determine the deduction for personal and
dependency exemptions, and compute taxable income.
1.
[§213] Patricia paid the following medical expenses in the current tax year (2014):
Surgeon’s fees
$1,200
Medical insurance premiums
600
Hospital fees
800
Prescription drugs
310
Vitamins, not prescribed by doctor
200
Her adjusted gross income for the year is $20,000. She receives a $500 reimbursement from his
health insurance company. Determine the amount of her medical expense deduction for the current year.
a.
$ – 0 –
$ 610
c.
$910
d.
$410
e.
$1,110
D
2.
[§165] Jim’s home was totally destroyed by fire in 2014.
The structure had an adjusted basis of $150,000 and a FMV of $160,000 before the fire.
Jim received insurance reimbursement of $120,000 for the destruction of the home.
Jim’s adjusted gross income was $100,000, before considering this loss.
Jim had no casualty gains during the year.
What amount of the fire loss was Jim entitled to claim on his tax return? (Ignore furniture etc. inside.)
a.
$ 30,000
b.
$ 19,900
c.
$ 4,500
d.
$24,900
e.
Other
B
3.
[§111] Juan (who is single, age 30, no dependent).
He had $1,000 of state income taxes withheld from his salary during 2014.
Juan properly deducted $1,000 for state income taxes on his Federal Form 1040 for 2014.
His total federal itemized deductions were $6,000 for 2014.
His state income tax return for 2014 showed a refund of $800, which he received on May 25, 2015.
Juan should:
a.
Ignore the state income tax refund – do not report it to the IRS
E
b.
Amend federal income return for 2014. Report corrected amount of state income tax for 2014
c.
Include $1,000 in income (related to the state tax refund) on the 2015 federal income tax return
d.
Include $800 in income (related to the state tax refund) on the 2015 federal income tax return
e.
Include $200 in income (related to the state tax refund) on the 2015 federal income tax return
4.
[§170(b)(1)(A), ( C)] David purchased investment realty in 2002 for $49,000.
During the current year (2014) he contributed it to the United Way to use as the site for its new local
headquarters. The realty has a value of $52,000 on the contribution date, and David’s AGI is $100,000.
He will retire immediately and he expects to have dramatically less income in future years.
David’s maximum current year contribution deduction is:
a.
$50,000
b.
$ 15,000
c.
$ 30,000
d.
$ 49,000
e.
$ 52,000
D
5.
[§213] Dan Daniels has AGI of $90,000 in 2014. This year he paid state income taxes of $10,000.
He incurred $14,000 of medical expenses and received a reimbursement of $3,000 from his health insurance
company for these medical expenses.
What is his allowable medical expense deduction for 2014 if he itemizes?
a.
$2,000
b.
$7,240
c.
$11,000
d.
$14,000
A
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6.
[§164, 111] Sue Graduate provided this information about to her state income taxes:
State income taxes withheld in 2014
$3,500
Refund of 2013 state income tax, received in 2014
400
Deficiency paid in 2014 after audit of her 2012 state income tax return:
State income tax
600
Interest
100
A state income tax refund of $200 for 2014 will be claimed on the 2014 state income tax return filed on April
15, 2015. What is her deduction for state income taxes on her 2014 federal tax return?
a.
$3,500
b.
$3,700
c.
$4,100
d.
$4,300
e.
Other
C
7.
[§164] What is Jeremy’s total itemized deduction for taxes on Form 1040-Schedule A for 2014?
State income tax
$3,000
Federal income tax
12,000
County real estate tax
2,000
Fee for his car inspection that he uses only personally
50
Homeowners’ association fees on his personal home
500
Gift Tax
2,000
Self-employment tax
1,000
a.
$18,550
b.
$6,000
c.
$5,000
d.
$5,500
C
8.
[§213] Sam incurs the following medical expenses for the current year:
Face-lift for cosmetic purposes
$800
Dentist fees
500
Doctors’ fees for Samantha’s daughter
400
How much may Samantha include as qualified medical expenses on her current tax return before any limit?
a.
$ 400
$ 500
c.
$ 900
d.
$1,300
e.
$1,700
C
9.
[§213] Phil incurs the following medical expenses during the current tax year:
Surgeon’s fees
$2,200
Medical insurance premiums
600
Hospital fees
800
Prescription drugs
310
Wheel chair
200
Phil’s adjusted gross income for the year is $32,000. He receives a $500 reimbursement from his insurance
company. Determine the amount of his medical expense deduction for the current year.
a.
$ – 0 –
b.
$ 410
c.
$2,360
d.
$2,400
e.
$2,610
B
10.
[§163] What is Bobby Boston’s deductible interest for the current year?
Mortgage interest expense
$5,000
Interest on credit cards
1,000
Interest on a loan used to purchase municipal bonds
1,000
a.
0
b.
$5,000
c.
$6,000
d.
$7,000
e.
Other
B
11.
[§163(h)] Wayne bought a home, borrowing $725,000 from National Bank to finance the purchase.
Mortgage interest expense
$71,000
Points paid
7,250
Loan origination fee
4,500
What is Wayne’s allowable interest deduction?
a.
$ – 0 –
b.
$ 7,250
c.
$71,000
d.
$78,250
e.
$82,750
D
12.
[§170] Jill (who is single) has AGI of $100,000. She made the following gifts:
(1) $10,000 to her church,
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(2) $2,000 to United Way,
(3) $1,000 to the Republican Party and
(4) $400 to a needy family whose house had burned and they had no insurance on the house.
What is her charitable contribution deduction?
a.
0
b.
$10,000
c.
$12,000
d.
$13,000
e.
$13,400
C
13.
[§67] Which one of these types of itemized deductions is included in the category of expenses deductible
only if the aggregate of such expenses exceeds 2% of the taxpayer’s adjusted gross income?
a.
Union dues
b.
Interest expense
A
c.
Employee moving expenses
d.
Medical expenses
14.
[§170] Alex has AGI of $41,500, and makes the following donations in the current year:
•
$1,000 cash to the United Way.
•
100 hours contributed to Red Cross to help flood victims
(Alex’s normal billing rate is $40 per hour in his consulting business).
•
15 old dress shirts to Good Will Industries Foundation, (original cost $300; FMV $45).
•
$1,000 cash to an old friend, Sam, to help cover his medical bills
What is Alex’s charitable contribution deduction for the current year?
a.
$1,000
b.
$1,045
c.
$2,045
d.
$6,045
e.
$6,300
B
15.
[§165] Jane’s residence was totally destroyed by fire. The property had an adjusted basis of $150,000 and a
FMV of $130,000 before the fire. Jane received insurance reimbursement of $120,000 for the destruction of
her home. Jane’s adjusted gross income was $70,000. Jane had no casualty gains during the year.
What amount of the fire loss was Jane entitled to claim as an itemized deduction on her tax return?
a.
$ 2,900
b.
$ 8,500
c.
$ 8,600
d.
$10,000
A
16.
[§267(a)] Georgia sells stock she purchased for $20,000 to her brother Billy for $12,000. Two years later,
Billy sells the stock to Allie, an unrelated individual, for $22,000. What is Billy’s recognized gain or loss?
a.
$ 0
b.
$ 2,000 gain
c.
$10,000 gain
d.
$ 8,000 loss
e.
$ 6,000 loss
B
17.
[§165( c)] During the year, Daniel sells both of his personal vehicles. On January 10, he realizes a $9,000
loss on the sale of the first car. On April 5, he realizes a $1,000 gain on the sale of the second car. Assume
Daniel’s salary for the year is $50,000, and he has no other income. What is Daniel’s Adjusted Gross Income?
a.
$ 1,000
b.
$41,000
c.
$42,000
d.
$50,000
e.
$51,000
E
18.
[§62] Which of the following is a true statement?
a.
All business expenses are deducted for AGI.
D
b.
Investment expenses are typically deducted for AGI.
c.
Tax preparation fees are deducted for AGI.
d.
Rental and royalty expenses are deducted for AGI.
e.
All of the above
19.
[§217] Which of the following is a true statement?
a.
Individuals qualify for the moving expense deduction only if they change employers
B
b.
To satisfy the distance test, the distance from the taxpayer’s old residence to the new place of work
must be at least 50 miles more than the distance from the old residence to the old place of work.
c.
To satisfy the business test, the taxpayer must be employed full-time for 50 of the first 52 weeks
after the move.
d.
The moving expense deduction is restricted to expenses associated with moving personal
possessions to the new residence.
e.
All of the above are true.
Reasonable moving expenses include travel to the new residence.
20.
[§221] Which of the following is a true statement?
a.
The deduction for interest on educational loans is subject to a phase-out limitation.
A
b.
The deduction for moving expenses is subject to a phase-out limitation.
c.
Self-employed taxpayers are allowed to deduct health care premiums even if the taxpayer is eligible
to participate in an employer-provided health plan.
d.
Taxpayers are not allowed to receive a moving allowance from their employers.
e.
All of the above are false.
Self-employed taxpayers are not allowed to deduct health care premiums if they are eligible to participate in
an employer-provided health plan.
21.
[§221]In 2013, Jong paid $3,000 of interest on a qualified education loan. Jong files married joint and
reports modified AGI of $132,000. What is Jong’s deduction for interest expense on an educational loan?
a.
$2,500
b.
$3,000
c.
$1,500
d.
$1,000
e.
Other
C
22.
[§221] In 2013, 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 a qualifying education expense if he files
single and reports modified AGI of $90,000?
a.
$4,100
b.
$4,000
c.
$2,667
d.
$2,000
e.
No deduction is allowed.
E
23.
[§62] Han is a self-employed carpenter and his wife, Christine, works full-time as a grade school teacher.
Han paid $525 for carpentry tools supplies, and Christine paid $3,600 as her share of health insurance
premiums for Han and herself in a qualified plan provided by the school district. Which of the following is a
true statement?
a.
The supplies are deductible for AGI while the health insurance is an itemized deduction.
A
b.
Both expenditures are deductible for AGI.
c.
The tools and supplies are an itemized deduction but the health insurance is deductible for AGI.
d.
Both expenditures are itemized deductions.
e.
Neither of the expenditures is deductible.
Business expenses for self employed are Schedule C deductions but health insurance premiums are itemized
deductions if the taxpayers are eligible to participate in an employer-provided health plan.
a.
One-half of the social security tax is deductible for AGI.
D
b.
Only the electric bill is deductible for AGI.
c.
The self-employment tax is not deductible.
d.
The safe deposit fee and the electric bill are deductible for AGI.
e.
None of the above is true.
a.
Casey can deduct moving expenses if the distance between his current residence
C
and his new assignment is at least 50 miles.
while en route to his new residence.
would need to be a minimum of 85 miles.
while en route to his new residence.