11
Itemized Deductions
Solutions to Tax Research Problems
11-41 Shirley should be able to deduct some, if not all of the interest that she pays to
Sam in each of the next 10 years. In John L. Seymour, 109 T.C. 279 (1997) the
Tax Court determined that interest paid in such a situation that is attributable to
debt on the taxpayer’s principal residence is deductible if the debt is secured by
the residence. Also, the Court determined that any interest paid on debt associated
with investments should qualify as investment interest and is deductible subject to
the investment interest expense limitation. Thus, Shirley must first allocate the
debt between her residence, stock, and other real estate. If the debt is secured by
her residence, that much of the interest is deductible residence interest. Assuming
that the stock and other real estate is being held for investment, the interest from
debt allocated to these items is deductible investment interest.
The Seymour case was cited and followed in Ronald R. Armacost, T.C. Memo
1998-150, 75 TCM 2177 (1998).
11
Itemized Deductions
Test Bank
True or False
________ 1. H and W have been divorced for two years. H paid for W’s dental bills.
W is otherwise self-supported. H may deduct W’s dental bills as a
medical expense.
________ 2. The medical expenses of a child of divorced parents are deductible only
by the custodial parent.
________ 3. Medical expenses incurred during 2012 but not paid until 2013 can be
deducted in either year, but not both.
________ 4. If a doctor prescribes a swimming pool for a patient for medical reasons,
the entire cost of the swimming pool is a deductible medical expense.
________ 5. Under certain circumstances, the medical insurance premiums of a sole
proprietor may be deducted either for A.G.I. or from A.G.I.
________ 6. Assuming the taxpayer itemizes deductions, medical expenses are
deductible only to the extent that they exceed 7.5 percent of the
taxpayer’s adjusted gross income.
________ 7. No deduction is allowed for the cost of cosmetic surgery unless it is
necessary to ameliorate a congenital deformity, a personal injury arising
from an accident or trauma, or a disfiguring disease.
________ 8. The prepayment of medical expenses qualifies as a current deduction
only if the taxpayer is required to make the payment as a condition of
receiving the medical services.
________ 9. If the principal reason an individual is in a nursing home is the
availability of needed medical care, the entire cost of the medical care
qualifies as a medical deduction.
________ 10. A taxpayer who uses his or her personal automobile for medical
transportation and does not want to calculate actual expenses is allowed
a deduction of 55.5 cents a mile in 2012.
________ 11. The cost of meals and lodging while en route to a medical facility is
allowed as a medical expense deduction.
________ 12. Deductible medical expenses include all medical care insurance
premiums paid by the taxpayer with after-tax dollars.
________ 13. A taxpayer who deducted $900 of medical expenses last year must
include in gross income no more than $900 of any medical expense
reimbursement received this year.
________ 14. Federal income taxes related solely to the taxpayer’s trade or business
income are allowed as a deduction in arriving at adjusted gross income.
________ 15. On a sale of real property, if the buyer pays the real estate taxes for the
entire year, the seller’s amount realized must be increased to reflect that
portion of the taxes attributable to the seller.
________ 16. On a sale of real property, if the buyer pays the real estate taxes for the
entire year, the seller will be denied any deduction for these property
taxes.
________ 17. Even though the seller of real property pays the real estate taxes for the
entire year, the buyer will be allowed to deduct his or her share of these
property taxes.
________ 18. The buyer’s basis of real property purchased will include any portion of
the real estate taxes paid by the buyer that is attributable to the portion of
the year the property was owned by the seller.
________ 19. Foreign income taxes paid by an individual may either be deducted as an
itemized deduction or claimed as a credit against the taxpayer’s U.S.
income tax.
________ 20. State and local sales taxes do not qualify as deductible taxes.
________ 21. A taxpayer must always include his or her state income tax refund in
income.
________ 22. Personal property taxes are deductible as an itemized deduction only if
they are based on the value of the property.
________ 23. A special assessment for paving a street is a deductible tax.
________ 24. No deduction is allowed for interest paid on loans to purchase personal
items such as clothes and household furniture.
________ 25. Norm is employed as an auditor by a large public accounting firm. He
uses his car entirely for business. Interest on the loan used to purchase
his car is entirely deductible.
________ 26. Ed Entry owns and operates his own public accounting firm as a sole
proprietor. He uses his car entirely for business. Interest on the loan used
to purchase his car is entirely deductible.
________ 27. Interest expense attributable to a student loan is completely deductible
assuming the proceeds are used to pay tuition and other related fees.
________ 28. All interest incurred on a mortgage loan secured by the taxpayer’s
principal residence is deductible.
________ 29. Interest expense attributable to a loan on a life insurance policy may be
deducted as long as the proceeds are used to purchase a new residence.
________ 30. T purchased his home for $100,000 five years ago. Although he has
made no improvements to the home, it has appreciated considerably and
is currently worth $175,000. Assuming T obtains a $30,000 second
mortgage on his home and uses the proceeds to purchase a personal auto,
the interest on such debt is deductible as long as he itemizes his
deductions.
________ 31. K purchased her residence several years ago for $80,000. The current
balance of her mortgage loan is $60,000. During the year, she borrowed
$125,000 from a savings and loan, and secured the loan with a second
mortgage on her home, now worth $240,000. She may deduct the
interest on the entire amount of debt related to her home if she uses the
proceeds of the new loan to make permanent home improvements.
________ 32. A taxpayer who makes direct gifts to the children of a needy family will
not be allowed a charitable contribution deduction.
________ 33. A deduction for charitable contributions is available only if a taxpayer
itemizes his or her deductions.
________ 34. Like capital losses, an individual taxpayer’s excess charitable
contributions may be carried forward indefinitely.
________ 35. On the condition that the city rezone the area to allow its commercial
development, T donated a piece of property to the city to be used for the
site of a new public school. T will be allowed a charitable contribution
deduction for this gift.
________ 36. The taxpayer’s charitable deduction for any gift of capital gain property
to a public charity is limited to the property’s adjusted basis.
________ 37. Charitable contributions of capital gain property subject to the 30 percent
limitation can be converted to the 50 percent category if the taxpayer
elects to reduce his or her claimed deduction by the property’s unrealized
appreciation.
________ 38. Any contributions in excess of the 50 percent limitation can be carried
back three years and carried over five years.
________ 39. Unlike excess contributions subject to the 50 percent limitation, excess
contributions subject to either the 20 or 30 percent limitations cannot be
carried forward.
________ 40. An employee’s unreimbursed business expenses are treated as
miscellaneous itemized deductions subject to a 2 percent of adjusted
gross income floor.
Multiple Choice
________ 41. Which one of the following expenses does not qualify as a deductible
medical expense?
a. Tuition to a special school for a deaf child to learn lip reading
b. Cost of contact lenses
c. Cost and care of guide dog used by a blind person
d. Fees paid to attend a weight-loss program
e. Cost of motorized wheelchair and its maintenance
________ 42. A medical expense deduction is allowed for all of the following items
except
a. Treatment affecting any function of the body
b. Expenditures for prescription medicines or drugs
c. Expenses paid for transportation essential to the rendition of medical
care
d. Expenses for health club membership
e. Medical care insurance premiums for taxpayer and dependents
________ 43. Because of her doctor’s prepayment policy, P used a bank credit card to
pay for prenatal care in 2012, even though she will not have the baby
until June, 2013. These medical expenses can be deducted
a. In 2012 even though she may pay the credit card account off in 2012
or later
b. In 2012 only if she pays off the bank card account in that year
c. In 2013 because that is the year the baby is born
d. In 2013 because it is assumed that this is the year the credit card
account will be paid
e. Never, since prenatal care is not an allowable deductible medical
expense
________ 44. T’s A.G.I. for the current year is $20,000. Her medical expenses during
the year were:
Aspirin, cold medicine, etc. $ 125
Prescription drugs 260
Medical insurance premiums 1,000
Doctors, dentists, etc. 3,200
Assuming she is not reimbursed for any medical expenditures during the
current year, T’s medical expense deduction is
a. $2,700
b. $2,960
c. $3,085
d. $4,460
e. $4,585
________ 45. P, a single taxpayer, had $12,000 of deductible medical expenses in
2012. His 2011 A.G.I. was $24,000. His insurer reimbursed P for
$11,000 of the expenses in 2013, and did not reimburse P for any
expenses during 2012. If P deducted all of his allowable medical
expenses on his 2012 return, how much of the reimbursement must be
included in gross income for 2013 (P’s itemized deductions for 2012
exceeded his standard deduction by $15,000.)
a. $0
b. $900
c. $10,000
d. $10,200
e. $11,000
________ 46. Taxpayers are allowed to deduct several types of taxes for Federal
income tax purposes. These include
a. State, local, and foreign income taxes
b. State, local, and foreign real property taxes
c. State and local personal property taxes
d. All of the above
e. Both a. and b.
________ 47. Which of the following taxes qualifies as an itemized deduction for
Federal income tax purposes?
a. State and local sales taxes
b. Tax assessments for sewer lines
c. State and local taxes on gasoline
d. State taxes on cigarettes
e. None of the above
________ 48. Z is a cash basis single taxpayer who itemizes her deductions. During
2012, Z had $4,000 in state income taxes withheld from her paycheck by
her employer. She also paid the following estimated state income taxes
for 2012:
4/15/2012 $600
6/15/2012 600
9/15/2012 600
1/15/2013 600
What is Z’s deduction for state income taxes on her 2012 Federal income
tax return?
a. $5,200
b. $5,600
c. $5,800
d. $6,000
e. $6,400
________ 49. During 2012, D paid the following taxes which were not incurred in
connection with a trade or business:
Federal income taxes (withheld by employer) $4,500
FICA taxes (withheld by employer) 2,800
State income taxes (withheld by employer) 3,000
Federal gasoline taxes 350
Federal excise taxes on telephone bills 90
Assuming D itemized her deductions for Federal income tax purposes,
the amount of deductible taxes are
a. $3,000
b. $4,200
c. $4,640
d. $7,440
e. $11,940
________ 50. R paid the following state taxes during 2012:
State income taxes due with his 2011 tax return $ 700
State income taxes withheld by his employer 2,500
Real estate taxes paid on personal residence 2,000
Personal property taxes based on value 150
State auto license tax based on weight 50
What amount should R deduct as taxes in calculating itemized
deductions on his 2012 Federal income tax return?
a. $2,500
b. $3,200
c. $5,200
d. $5,350
e. $5,900
________ 51. The real property taxes on R’s house are computed on a calendar year
basis and are due November 1st of each year. The realty taxes on R’s
house were $2,400 for 2012. R sold his house on June 1, 2012, before
the property tax payment was due. How much of these real property
taxes are apportioned to and deductible by R as an itemized deduction on
R’s 2012 Federal income tax return?
a. $0
b. $993
c. $1,407
d. $1,999
e. $2,400
________ 52. D made the following payments during 2012:
Interest on revolving charge accounts $ 400
Interest on original $140,000 home mortgage 6,800
Interest on bank loan (proceeds of loan
were used to purchase state of New York
tax-exempted bonds) 3,100
Interest on credit union loan (proceeds
of loan were used for a family
vacation) 1,600
How much of the above amounts may D deduct as an itemized deduction
for interest expense on his Federal income tax return?
a. $6,800
b. $7,200
c. $8,800
d. $9,900
e. $11,900
________ 53. Which of the following types of interest expense generally is not
deductible to any extent?
a. Interest expense attributable to a $25,000 second mortgage on the
taxpayer’s principal residence. (The proceeds of the loan were used
to purchase an automobile used solely for personal purposes.)
b. Interest expenses attributable to a $60,000 debt secured by a
principal residence. (The proceeds of the debt, which exceed the
original cost of the home, were used to pay for a vacation.)
c. Interest expense attributable to a $19,500 debt incurred to finance the
purchase of an automobile. (The car was used by a self-employed
person solely for business.)
d. Interest expense attributable to debt incurred to finance the purchase
of tax-exempt securities.
e. Interest expense attributable to a $75,000 debt. (The proceeds of the
loan were used to purchase Ford Motor Co. stock, and the taxpayer’s
interest income and dividends received from the stock exceed the
interest expense on this loan.)
________ 54. Mr. and Mrs. K purchased their current residence in 1998 for $100,000.
Since that time they have added a room and made additional
improvements costing $20,000. The current balance on the mortgage
loan is $40,000 and the house is worth $200,000. The couple now wishes
to obtain a new mortgage on their home and use the proceeds for a
second honeymoon. The maximum mortgage loan that they could obtain
for which all of the interest would be deductible is
a. $20,000
b. $60,000
c. $80,000
d. $100,000
e. $140,000
________ 55. T borrows $10,000 from his bank on April 1, primarily for expenses
involved in starting a lawn-care business. T deposits the $10,000 in a
money-market account with which he can write checks. T leaves the
$10,000 untouched for the remainder of the year. The interest expense
on T’s loan will be classified as
a. Nondeductible interest
b. Qualified residence interest
c. Tax deferred interest expense
d. Investment interest expense
e. Personal interest expense
________ 56. On February 1, T borrowed $20,000. Of this amount, $9,000 is used to
invest in a business on February 10 and $11,000 is used on February 15
to buy a Rolex watch. On April 30, he repaid $15,000. Of the repayment
amount, how much reduces the portion allocated to investment?
a. $4,000
b. $5,000
c. $9,000
d. $11,000
e. None of the above amounts
________ 57. To deduct a contribution to a charitable organization, the organization
could be any one of the following except
a. A war veterans’ organization
b. A corporation operated for scientific purposes
c. A nonprofit volunteer fire company
d. A needy family
e. A state-supported university
________ 58. Which of the following contributions is allowed as a charitable
contribution deduction?
a. Lost income associated with rent-free use of a taxpayer’s property by
a qualifying charity
b. Unreimbursed expenses incurred by the taxpayer in rendering
services to a qualifying charity
c. The value of time or services rendered to a charitable organization
d. All of the above
e. None of the above
________ 59. F’s 2012 adjusted gross income is $42,000. F made the following
charitable contributions in 2012:
Cash contribution to church $4,500
Tickets to a public charity dinner
(the fair market value of the two
dinners was $100) 2,000
Donation of used household goods
to the Salvation Army (cost was $400,
fair market value was $150)
What is F’s 2012 charitable contribution deduction (assuming he
attended the charity dinner and itemizes his deductions)?
a. $4,750
b. $5,000
c. $6,550
d. $6,650
e. $6,900
________ 60. Which one of the following would not be an allowable charitable
deduction?
a. Costs of gasoline and parking incurred by a taxpayer using his or her
own vehicle in connection with the charitable services
b. Cost and upkeep of a uniform used in rendering charitable services if
it is not suitable for everyday use
c. Insurance and depreciation on an automobile used in connection with
a charitable service
d. The standard mileage rate of 14 cents per mile for using an
automobile in charitable activities
e. All of the above would be allowable charitable deductions.
________ 61. D started a small business to make and sell Christmas tree ornaments.
She imported most of the materials from Europe, used real gold, and
used some very highly paid workers to assemble the ornaments. Her cost
for each ornament was $500. She marketed them at $1,000 apiece and
sold none. After Christmas, she marked them down to $475 and sold
one. She donated the remaining twenty ornaments to her church.
Disregarding any percentage limitation, how much may she deduct for
this contribution?
a. $9,000
b. $9,500
c. $10,000
d. $20,000
e. None of the above
________ 62. Which of the following is not deductible as a charitable contribution?
a. Unreimbursed auto expenses on church business
b. Reasonable lodging costs while away from home overnight on
business for a qualified charitable organization
c. Fair market value of appreciated stock held for five months and
given to a church
d. Fair market value of used clothing given to the Salvation Army
e. Fair market value of land held as an investment for 10 years and
given to a church
________ 63. All of the following items are miscellaneous itemized deductions except
a. Home office expenses
b. Reimbursed travel expenses
c. Union dues
d. Tax advice
e. Fees for investment advice
11
Itemized Deductions
Solutions to Test Bank
True or False
Multiple Choice
