TAX Accounting 1-7

Examples of income which are constructively received include all of the following except

1. a check received after banking hours.
2. interest credited to a savings account.
3. dividends available on December 31; unclaimed dividends will be mailed out.
4. a paycheck received from employer, when employer does not have funds in the bank to cover the check.

4. a paycheck received from employer, when employer does not have funds in the bank to cover the check.

Since the funds are not available to the employee, they are not considered constructively received.

1-3

All of the following items are included in gross income except

1. alimony received.
2. child support payments received.
3. interest earned on a bank account.
4. rent income.

2. child support payments received.

Child support is not taxable.

1-3

Alimony is

1. deductible by the payor and included in income by the payee.
2. included in income by the payor and deducted by the payee.
3. deductible by both the payor and the payee.
4. an item which does not affect the payor’s or the payee’s tax reporting.

1. deductible by the payor and included in income by the payee.

The Code includes alimony in the definition of gross income of the payee and specifically allows a “for AGI deduction” for alimony paid by the payor.

1-3

Taxable income for an individual is defined as

1. AGI reduced by personal and dependency exemptions.
2. AGI reduced by itemized deductions.
3. AGI reduced by deductions from AGI and personal and dependency exemptions.
4. total income reduced by the standard deduction.

3. AGI reduced by deductions from AGI and personal and dependency exemptions.

Taxable income is AGI reduced by either the standard deduction or itemized deductions and reduced by personal and dependency exemptions.

1-3

Which of the following dependent relatives does not have to live in the same household as the taxpayer who is claiming head of household filing status?

1. uncle
2. father
3. brother
4. nephew

2. father

A taxpayer with a dependent parent qualifies as head of household even if the parent does not live with the taxpayer.

1-3

Which one of the following items is not considered gross income for tax purposes?

1. gambling winnings
2. cash dividends
3. face amount of life insurance received due to the death of the insured
4. illegal income

3. face amount of life insurance received due to the death of the insured

Life insurance proceeds are an exclusion item.

1-3

Cheryl is claimed as a dependent on her parents’ tax return. She had a part-time job during 2015 and earned $4,900 during the year, in addition to $600 of interest income. What is her standard deduction?

1. $5,250
2. $1,050
3. $4,900
4. $6,300

1. $5,250

1-3

If an individual with a marginal tax rate of 15% has a long-term capital gain, it is taxed at

1. 0%.
2. 20%.
3. 10%.
4. 15%.

1. 0%

Taxpayers with a marginal tax rate of 15% or lower will have a 0% tax rate on long-term capital gains.

1-3

John supports Kevin, his cousin, who lived with him throughout 2015. John also supports three other individuals who do not live with him:

Donna, who is John’s mother
Melissa, who John’s stepsister
Morris, who is Kevin’s brother

Assume that Donna, Melissa, Morris and Kevin each earn less than $4,000. How many personal and dependency exemptions may John claim?

1. 2
2. 3
3. 4
4. 5

3. 4

John may claim one personal exemption and three dependency exemptions for Kevin, Donna, and Melissa. Morris is John’s cousin and does not qualify as a dependent since he doesn’t live in John’s home. A cousin is not related for tax purposes and would have to live in the taxpayer’s home to be claimed as a dependent.

1-3

Ms. Marple’s books and records for 2015 reflect the following information:

Salary earned this year——–$65,000
Interest on savings account (credited to her account
in 2015, withdrawn in 2016)——–1,000
Interest on county bonds earned and collected in 2015———2,000

What is the amount Ms. Marple should include in her gross income in 2015?

1. $68,000
2. $66,000
3. $67,000
4. $65,000

2. $66,000

$65,000 + $1,000 = $66,000. The interest on the county bond is excluded.

1-3

Which of the following steps, related to a tax bill, occurs first?

1. consideration by the House Ways and Means Committee
2. consideration by the Senate
3. signature or veto by the President of the United States
4. consideration by the Joint Conference Committee

1. consideration by the House Ways and Means Committee

Most tax legislation originates in the House of Representatives and is then referred to the House Ways and Means Committee

1-3

David, age 62, retires and receives $1,000 per month annuity from his employer’s qualified pension plan. David made $65,000 of after-tax contributions to the plan prior to his retirement. Under the simplified method, David’s number of anticipated payments is 260. What is the amount includible in income in the first year of withdrawals assuming 12 monthly payments?

1. $3,000
2. $12,000
3. $9,000
4. $2,600

3. $9,000

$65,000/($1,000 × 260) × $12,000 = $3,000 excludable; $12,000 – $3,000 = $9,000 includible.

1-3

All of the following items are deductions for adjusted gross income except

1. trade or business expenses.
2. rent and royalty expenses.
3. state and local income taxes.
4. alimony paid.

3. state and local income taxes.

State and local income taxes are itemized deductions.

1-3

Charlotte pays $16,000 in tax deductible property taxes. Charlotte’s marginal tax rate is 28%, effective tax rate is 22% and average rate is 25%. Charlotte’s tax savings from paying the property tax is

1. $4,000.
2. $11,520.
3. $3,520.
4. $4,480.

4. $4,480.

$16,000 × 0.28 = $4,480

1-3

Thomas and Sally were divorced last year. As a result, Thomas must pay Sally alimony of $100,000 per year starting this year and relinquish the house and car with a combined value of $170,000 and a combined cost basis of $155,000. The house and car are given as a property settlement. As a result of these transactions Thomas has a deduction of

1. $155,000.
2. $270,000.
3. $100,000.
4. $170,000.

3. $100,000.

Only the $100,000 alimony is a “for AGI” deduction for Thomas.

1-3

Lester, a widower qualifying as a surviving spouse, has $209,000 of salary, five personal and dependency exemptions and itemizes deductions. Lester must use which form to report his taxable income?

1. Form 1040EZ
2. Form 1040A
3. Form 1040ES
4. Form 1040

4. Form 1040

1-3

The largest source of revenues for the federal government comes from

1. individual income taxes.
2. corporate income taxes.
3. Social Security and Medicare taxes (FICA).
4. estate and gift taxes.

1. individual income taxes.

The individual income tax has provided the largest source of revenues for many years.

1-3

Mr. & Mrs. Bronson are both over 65 years of age and are filing a joint return. Their income this year consisted of the following:

Taxable interest——$ 6,000
Taxable dividends——9,000
Social Security payments (combined)——20,000
Tax-exempt interest——-5,000
Taxable pension—–11,000

They did not have any adjustments to income. What amount of Mr. & Mrs. Bronson’s social security benefits is taxable this year?

1.$10,000
2. $20,000
3. $4,500
4. $0

3. $4,500

1-3

In 2015 the standard deduction for a married taxpayer filing a joint return and who is 67 years old with a spouse who is 65 years old is

1. $13,850.
2. $15,100.
3. $12,600.
4. $15,700.

2. $15,100

$75,000 + $25,000 + $8,000 + $30,000 + $35,000 = $173,000. All of the income is subject to tax, including the illegally derived income and the flow though income from the partnership.

1-3

A single taxpayer provided the following information for 2015:

Salary——$80,000
Interest on local government bonds
(qualifies as a tax exclusion)——4,000
Allowable itemized deductions——13,000

What is taxable income?

1. $67,400
2. $63,000
3. $63,400
4. $67,000

2. $63,000

($63,000 = $80,000 – $13,000 itemized deductions – $4,000 personal exemption)

1-3

Lily had the following income and losses during the current year:

Salary——$75,000
Prize from quiz show——25,000
Unemployment compensation——8,000
Embezzled funds——30,000
Partnership Income——35,000

What is Lily’s adjusted gross income?

$173,000
$143,000
$135,000
$165,000

1. $173,000

$75,000 + $25,000 + $8,000 + $30,000 + $35,000 = $173,000. All of the income is subject to tax, including the illegally derived income and the flow though income from the partnership.

1-3

Dustin purchased 50 shares of Short Corporation for $500. During the current year, Short declared a nontaxable 10% stock dividend. What is the basis per share before and after the stock dividend is distributed?

1.Before After
$10 $11
2.Before After
$9.09 $10
3.Before After
$10 $9.09
4.Before After
$10 $10

3.Before After
$10 $9.09

500 original basis/ (50 original shares + 5 new shares) = $9.09

4-5

Kathleen received land as a gift from her grandfather. At the time of the gift, the land had a FMV of $105,000 and an adjusted basis of $85,000 to Kathleen’s grandfather. The grandfather did not have any gift taxes due. One year later, Kathleen sold the land for $110,000. What was her gain or (loss) on this transaction?

1. $25,000
2. $20,000
3. no gain or loss
4. ($ 5,000)

1. $25,000

The donee normally assumes the donor’s basis in gifted property. $110,000 amount realized – $85,000 gift basis = $25,000 gain.

4-5

David gave property with a basis of $133,000 to Hannah when the property had a FMV of $100,000 and paid gift taxes of $8,000. If Hannah later sells the property for $140,000, Hannah’s basis (to determine gain) in the property immediately before the sale is

1. $108,000.
2. $100,000.
3. $141,000.
4. $133,000.

4. $133,000.

There is a dual basis when the FMV is below the adjusted basis as of the date of gift. Because the property is sold at a gain, the adjusted basis as of the gift date is used, but there is no addition for gift taxes paid since the property has not appreciated at the date of gift.

4-5

Which of the following benefits provided by an employer is subject to withholding and must be reported on the employee’s W-2?

1.$400 cash award for long-term service, awarded at a special employee awards event.
2. Payment of an employee’s professional dues
3. Meals provided on the premises for the employer’s convenience
4. None of the above.

1. $400 cash award for long-term service, awarded at a special employee awards event.

Nontaxable benefits do not require withholding and are generally not reportable. The cash service award is taxable.

4-5

Nate sold two securities in 2015:

Purchased Sold Sales Price Basis
MASH 1-1-2014 5-10-2015 $12,000 $10,000
KMZ 12-2-2014 9-22-2015 $4,000 $5,000
Nate has a 25% marginal tax rate. What is the additional tax resulting from the above sales?

1. $400
2. $150
3. $300
4. $200

2. $150

NLTCG is $2,000; NSTCL is ($1,000). ANCG is $1,000 taxed at 15%, resulting in a tax of $150.

4-5

Sanjay is single and has taxable income of $13,000 without considering the sale of a capital asset in November of 2015 for $15,000. That asset was purchased six years earlier and has a tax basis of $5,000. The tax liability applicable to only the capital gain is

1. $500.
2. $0.
3. $1,500.
4. $1,000.

2. $0

Amount realized——$15,000
Tax basis——5,000
ANCG——$10,000
Tax rate for ANCG——-× 0%
Tax liability for ANCG——-$ 0

The top tax rate for this adjusted net capital gain (ANCG) is zero since the taxpayer’s regular tax rate is 15% or lower (total taxable income is $28,000, still in the 15% tax bracket).

4-5

Brad suffers from congestive heart failure and has been admitted to a nursing home where he is expected to spend the remainder of his life. His doctor has certified him as chronically ill. Brad receives $320 per day from his life insurance policy for 100 days ($32,000) as accelerated death benefits. Brad’s nursing home care costs $300 per day ($30,000 for the 100 days of care). Brad will be allowed to exclude

1. $32,000.
2. $2,000.
3. $30,000.
4. $0.

1. $32,000.

The taxpayer can exclude the greater of a maximum daily amount provided by law ($330 in 2015) or the actual cost of care. The daily amount paid from the insurance policy is lower than the legal maximum so the entire $32,000 is excluded.

4-5

Britney is beneficiary of a $150,000 insurance policy on her father’s life. Upon his death, she may elect to receive the proceeds in five yearly installments of $32,000 or may take the $150,000 lump sum. She elects to take the lump sum payment. What are the tax consequences in year one?

1. The lump sum payment is taxable.
2. There is no taxable income.
3. $10,000 interest is taxable in the first year.
4. All $32,000 each year is taxable.

2. There is no taxable income.

Life insurance proceeds paid by reason of death are not taxable.

4-5

Darla sold an antique clock in 2015 for $3,000. She had purchased the clock in 2009 for $2,000. If she is otherwise in the 33% marginal tax bracket, what is the maximum tax rate on the capital gain on the sale of the clock?

1. 20%
2. 28%
3. 33%
4. 15%

2. 28%

Collectibles gains do not qualify as ANCG and are not eligible for the lowest capital gains rates. Collectibles are taxed at 28% for taxpayers in the 28% or higher marginal tax brackets.

4-5

Tina purchases a personal residence for $278,000, but subsequently converts the property to rental property when its FMV is $275,000. Assume depreciation of $65,000 has been deducted after conversion to rental use. If Tina sells the property for $200,000, her realized gain or loss will be

1. ($78,000) loss.
2. ($75,000) loss.
3. ($10,000) loss.
4. ($13,000) loss.

3. ($10,000) loss.

Lower of original basis of residence or FMV—— $275,000
Minus: Depreciation claimed——(65,000)
Adjusted basis for loss——$210,000
Selling Price——200,000
Loss ——($10,000)

4-5

How long must a capital asset be held to qualify for long-term treatment?

1.same trade date one year from purchase
2. one year and one day
3. one year
4. 6 months

2. one year and one day

The holding period is greater than one year.

4-5

Miranda is not a key employee of AB Corporation. AB provides Miranda with group term life insurance coverage of $140,000. The premiums attributable to the excess coverage are $1,300. The uniform one-month group-term premium is one dollar per $1,000 of coverage. How much must Miranda include in income?

1. $1,680
2. $0
3. $1,300
4. $1,080

4. $1,080

4-5

Cafeteria plans are valuable to employers because

1. they allow employees to eat their meals quickly and stay on the premises to be available for work.
2. they allow employers to provide benefits for higher income employees only.
3. they allow employers to avoid paying for benefits that are not needed or desired by employees.
4. None of the above.

3. they allow employers to avoid paying for benefits that are not needed or desired by employees.

4-5

Amanda, who lost her modeling job, sued her employer for age discrimination. She was awarded $75,000 in lost wages, $25,000 for emotional distress, and $150,000 punitive damages. The amount taxable is

1. $0.
2. $250,000.
3. $150,000.
4. $225,000.

2. $250,000.

$75,000 + $25,000 + $150,000 = $250,000. Only compensatory damages related to physical injury can be excluded.

4-5

Rita died on January 1, 2015 owning an asset with a FMV of $730,000 that she purchased in 2010 for $600,000. Bert inherited the asset from Rita. When Bert sells the asset for $800,000 on August 20, 2015, he must recognize a

1. LTCG of $200,000.
2. STCG of $200,000.
3. LTCG of $70,000.
4. STCG of $70,000

3. LTCG of $70,000.

$800,000 – $730,000 (FMV basis upon inheritance) = $70,000. The holding period for inherited property is automatically long term.

4-5

Andrea died with an unused capital loss carryover of $3,300. The carryover

1. expires with death.
2. may be carried back three years.
3. will be fully used on Andrea’s final income tax return.
4. will be inherited by Andrea’s heirs.

1. expires with death.

If a taxpayer dies with an unused capital loss carryover, it expires.

4-5

Which of the following items will result in an inclusion in gross income?

1. Receipt of a $10,000 check from the bank. The check is for a student loan.
2. Preparing a mechanic’s tax return in exchange for the mechanic replacing the muffler on your car.
3. Receiving a $10,000 award from a university for high grades and high SAT scores. The award is used to pay tuition.
4. None of the above will be included in gross income.

2. Preparing a mechanic’s tax return in exchange for the mechanic replacing the muffler on your car.

This is a taxable exchange of services, and both parties will realize income equal to the value of services received.

4-5

Dennis purchased a machine for use in his business. Mr. Dennis’ costs in connection with this purchase were as follows:

Note to seller——$33,000
Cash paid to seller——5,000
State sales tax——2,400
Freight to place of business——1,500
Wages paid to workers to install machine ——-4,200

What is the amount of Mr. Dennis’ basis in the machine?

1. $40,400
2. $41,900
3. $33,000
4. $46,100

4. $46,100

Basis includes all costs associated with acquiring an asset and placing it in service. $33,000 + $5,000 + $2,400 + $1,500 + $4,200 = $46,100

4-5

Coretta sold the following securities during 2015:

Date Acquired Date Sold Sales Price Basis
A 6-15-2011 3-30-2015 $ 6,500 $12,500
B 7-12-2015 10-1-2015 $ 2,000 $ 9,000
C 1-15-2015 6-21-2015 $14,000 $13,000
D 4-2-2012 12-29-2015 $36,000 $15,000

What is Coretta’s net capital gain or loss result for the year?

1. $0
2. $12,000 ANCG
3. $9,000 ANCG
4. NSTCL of $3,000 and NLTCG of $15,000

3. $9,000 ANCG

Sale of Security A results in a $6,000 LTCL.
Sale of Security B results in a $7,000 STCL.
Sale of Security C results in a $1,000 STCG.
Sale of Security D results in a $21,000 LTCG.
NSTCL of $6,000 and NLTCG of $15,000 net to attain $9,000 adjusted net capital gain.

4-5

In 2014 Betty loaned her son, Juan, $10,000 to help him buy a car. In 2015, before he repaid the $10,000, Betty told Juan that she was “tearing up” the $10,000 note as a graduation present. How should Juan treat the amount forgiven?

1.taxable income in year of forgiveness
2. taxable income in year of loan
3. excludable gift in year of loan
4. excludable gift in year of forgiveness

4. excludable gift in year of forgiveness

The amount forgiven is an excludable gift in the year of forgiveness.

4-5

Which one of the following is a capital asset?

1. automobile held by car dealer for sale
2. automobile used for personal purposes
3. automobile used in taxpayer’s trade or business
4. B and C only

2. automobile used for personal purposes

4-5

Linda had a swimming pool constructed at her house. Her physician advised and prescribed to her that the pool would slow the effects of her degenerative disease. The pool was not suitable for recreational use. Prior to the construction of the pool, the fair market value of her house was $172,000. After the construction of the pool, the appraised fair market value of the house was $181,000. The cost of the pool was $13,000. What is the amount of Linda’s qualified medical expense (before considering limits based on AGI)?

1. $4,000
2. $13,000
3. $9,000
4. $0

1. $4,000

6-7

Troy incurs the following expenses in his business, an illegal gambling establishment:

Salaries to employees—–$200,000
Insurance expense—–60,000
Utilities expense—–70,000
Bribes to police—–50,000
His deductible expenses are:

1. $330,000.
2. $0.
3. $200,000.
4. $380,000.

1. $330,000

6-7

All of the following payments for medical items are deductible with the exception of the payment for

1. acupuncture for specific medical purposes.
2. nonprescription medicine for treatment of a specific medical condition.
3. general appointment for teeth cleaning.
4. insulin.

2. nonprescription medicine for treatment of a specific medical condition.

6-7

Brent must substantiate his travel and entertainment expenses. Which of the following is not required for documentation?

1. company expense report
2. time and place of the travel or entertainment
3. purpose of the expenditure
4. business relationship to the taxpayer of individuals entertained

1. company expense report

6-7

Don’s records contain the following information:
1. Donated stock having a fair market value of $3,600 to a qualified charitable organization. He acquired the stock five months previously at a cost of $2,400.
2. Paid $700 to a church school as a requirement for the enrollment of his daughter.
3. Paid $200 for annual homeowner’s association dues.
4. Drove 400 miles in his personal auto. The travel was directly related to volunteer services he performed for his church (actual costs were not available).

1. $2,456
2. $3,356
3. $3,656
4. $3,156

1. $2,456

6-7

For the years 2011 through 2015 (inclusive) Mary, a best-selling author, has been involved in operating an antique store. In 2011, 2012 and 2013 her revenue exceeded the expenses from the activity. In 2014 and 2015, the antique store generated a loss. Which statement is correct?

1. The activity is presumed to be a business. However, the IRS may prove it is a hobby.
2. The activity is a business. The IRS cannot prove it is a hobby.
3. The activity is presumed to be a hobby. However, Mary may prove it is a business.
4. The activity is a hobby. Mary cannot prove it is a business.

1. The activity is presumed to be a business. However, the IRS may prove it is a hobby.

Under the presumption rule, if an activity results in income in 3 of 5 years, the burden of proof falls to the IRS to prove that the activity is a hobby rather than a trade or business.

6-7

Abigail’s hobby is sculpting. During the current year, Abigail sold three of her sculptures for a total of $3,200. Her related expenses include $1,500 in utilities, $1,200 in supplies and $900 in depreciation. Of the total expenses incurred, Abigail may deduct

1. $1,500 in utilities, $1,200 in supplies and $900 in depreciation.
2. $1,500 in utilities, $1,200 in supplies, and $500 in depreciation.
3. $1,500 in utilities and $1,200 in supplies.
4. $0.

2. $1,500 in utilities, $1,200 in supplies, and $500 in depreciation.

Since the activity is classified as a hobby, hobby expenses are deductible to the extent of hobby income of $3,200. Further, they are deducted in a specific order—those that are otherwise allowable such as property taxes and interest; those related to the activity other than those that decrease basis; and those that reduce basis (depreciation).

6-7

Mark and his brother, Rick, each own farms. Rick is experiencing severe financial difficulties and cannot afford to buy feed for his cattle. Mark purchases $2,000 of feed and gives Rick one-half of the feed. Mark tells Rick that there is no need to repay him and to consider the feed a gift. Which of the following statements is true?

1. Mark can deduct $1,000 for the feed.
2. Rick must report $1,000 as income.
3. Mark can deduct $2,000 for the feed.
4. None of the above is true.

1. Mark can deduct $1,000 for the feed.

6-7

Pat, an insurance executive, contributed $1,000,000 to the re-election campaign of Governor Stephens, in hopes that Stephens will appoint her to a coveted position on the State Board of Insurance. How much of the contribution can Pat deduct?

$0
$100,000
$500,000
$1,000,000

$0

6-7

Matt paid the following taxes in 2015:

Real estate taxes on rental property he owns—–$4,000
Real estate taxes on his own residence—–3,600
Federal income taxes—–8,000
State income taxes—–3,400
Local city income taxes—–500
State sales taxes—–700

What amount can Matt deduct as an itemized deduction on his tax return?

1. $7,500
2. $8,200
3. $11,500
4. $15,500

1. $7,500

Real estate taxes on his own residence—–$3,600
State income taxes—–3,400
Local city income taxes—–500
Total itemized deduction—–$7,500

Sales taxes are not deductible in 2015.

6-7

Wang, a licensed architect employed by Skye Architects, incurred the following unreimbursed expenses this year:

Subscription to architectural journals $800
Dues to Professional Architecture Society 400
Tax return preparation 600
Investment advice 500

Wang’s AGI is $75,000. What is his net deduction for miscellaneous itemized deductions?

1. $800
2. $1,900
3. $1,500
4. $0

1. $800

Only the investment interest expense, to the extent of net investment income of $850 is deductible.

6-7

Alan, who is a security officer, is shot while on the job. As a result, Alan suffers from a chronic leg injury and must use a wheelchair and undergo therapy to regain and retain strength. Alan’s physician recommends that he install a whirlpool bath in his home for therapy. During the year, Alan makes the following expenditures:

Wheelchair—–$ 1,200
Whirlpool bath—–2,000
Maintenance of the whirlpool—–250
Increased utility bills associated with whirlpool—–450
Entrance ramp, various home modifications—–7,200

A professional appraiser tells Alan that the whirlpool has increased the value of his home by $1,000. Alan’s deductible medical expenses (before considering limitations based on AGI) will be

1. $7,000.
2. $7,700.
3. $10,100.
4. $6,000.

3. $10,100.

Wheelchair—–$ 1,200
Whirlpool bath – increase in home value—–1,000
Maintenance of the whirlpool—–250
Increased utility bills associated with whirlpool—–450
Entrance ramp, various home modifications—–7,200
Total qualifying expenses—–$10,100

6-7

Wayne and Maria purchase a home on April 1 of the current year. In order to obtain a thirty-year mortgage, they are required to pay $7,200 in points at closing. Charging points is a customary business practice in the area. In addition, they pay $4,400 of interest during the year. What is their current year deduction related to their home?

1. $11,600
2. $4,400
3. $7,200
4. $4,580

1. $11,600

6-7

During the year Jason and Kristi, cash basis taxpayers, paid the following taxes:

State gift tax—–$1,000
Property tax on home in the United States—–4,100
State income tax (withholdings)—–3,000
Estimated federal income tax—–4,500
Estimated state income tax (paid by check)——800
Special assessment by city for sidewalks and street lighting on their street—–2,000

What amount can Kristi and Jason claim as an itemized deduction for taxes on their federal income tax return in the current year?

1. $7,900
2. $15,400
3. $10,900
4. $8,900

1. $7,900

$4,100 + 3,000 + 800 = 7,900. Gift taxes, federal income taxes and assessments are not allowed as deduction by the IRC.

6-7

Carol contributes a painting to a local museum for display. Her AGI is $60,000. Carol paid $22,000 for the painting in 2006, but its market value at the date of the contribution is $25,000. With no special elections, Carol’s deductible contribution this year is

1. $25,000.
2. $22,000.
3. $7,000.
4. $18,000.

4. $18,000.

The potential deduction is $25,000, the FMV as of the contribution, but it is limited by the percentage of AGI ceiling.
$60,000 AGI
× .30 Limitation on capital gain property to public charities
$18,000 Charitable Contribution allowed for this year
$ 7,000 Carryover

6-7

Liz, who is single, lives in a single family home and owns a second single family home that she rented for the entire year at a fair rental rate. Liz had the following items of income and expense during the current year.

Income:
Gross salary and commissions from Ace Corporation—–$50,000
Rent received from tenant in Liz’s rental house—–13,000
Dividends received on her portfolio of stocks—–5,000

Expenses:
Unreimbursed professional dues—–200
Subscriptions to newsletters recommending stocks —–900
Taxes, interest and repair expenses on rental house—–3,500
Depreciation expense on rental house—–2,300

What is her adjusted gross income for the year?

1. $61,100
2. $52,700
3. $62,200
4. $68,000

3. $62,200

6-7

For non-cash charitable donations, an appraisal will be required for donations valued at more than:

1. $250.
2. $5,000.
3. $500.
4. $50,000.

2. $5,000.

6-7

Leigh pays the following legal and accounting fees during the year:

Legal fees in connection with a contract dispute in her trade or business—–$8,800
Legal fees related to resolving a tax deficiency related to business—–4,000
Tax return preparation fees:
Allocable to Schedules A and B—–1,000
Tax return preparation fees:
Allocable to Schedule C—–1,200
Legal fees incident to a divorce—–5,000

What is the total amount of her for AGI deduction for these fees?

1. $15,000
2. $14,000
3. $10,800
4. $20,000

2. $14,000

6-7

Mr. and Mrs. Gere, who are filing a joint return, have adjusted gross income of $50,000. During the tax year, they paid the following medical expenses for themselves and for Mrs. Gere’s mother, Mrs. Williams. The Gere’s could claim Mrs. Williams as their dependent, but she has too much gross income.

Insulin for Mr. Gere—–$1,000
Health insurance premiums for Mrs. Gere—–$3,100
Hospital bill for Mrs. Williams—–$5,200
Doctor bill for Mrs. Gere—–$4,000

Mr. and Mrs. Gere received no reimbursement for the above expenditures. What is the amount of their deductible itemized medical expenses?

1. $13,300
2. $5,200
3. $8,300
4. $4,300

3. $8,300

Insulin for Mr. Gere—–$1,000
Health insurance premiums for Mrs. Gere—–3,100
Hospital bill for Mrs. Williams—–5,200
Doctor bill for Mrs. Gere—–4,000
Total expenses—–$13,300
Minus: 10% of AGI ($50,000 × 0.10) ( 5,000)
Deduction——$8,300

6-7

American Healthcare (AH), an insurance company, is trying to persuade Congress to enact nationwide anti-smoking legislation. As part of this effort, AH paid $500,000 to hire a lobbying firm to discuss its concerns with members of Congress. AH also contributed $100,000 to candidates for political office who support limiting public smoking. What amount of these expenditures can AH deduct?

1. $100,000
2. $500,000
3. $600,000
4. $0

4. $0

Lobbying expenses are only deductible if incurred for local issues; political contributions are not deductible.

6-7

Ted pays $2,100 interest on his automobile loan, $120 interest on a loan to purchase a computer for personal use, $630 interest on credit cards, and $1,100 investment interest expense. Ted has net investment income of $850. Ted’s deductible interest is

1. $2,950.
2. $1,100.
3. $850.
4. $3,200.

3. $850.

Only the investment interest expense, to the extent of net investment income of $850 is deductible.

6-7

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