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Chapter 05 - Itemized Deductions

CHAPTER 5 ITEMIZED DEDUCTIONS


DISCUSSION QUESTIONS AND PROBLEMS

Discussion Questions 1. What is the difference between deductions from AGI and deductions for AGI? Answer: For AGI expenditures are outflows made for the production of income or for a trade or business and are included in the calculation of adjusted gross income. From AGI deductions are primarily personal expenditures that are allowed to reduce taxable income. 2. What are the six types of personal expenses that can be classified as itemized deductions on Schedule A, Form 1040? Answer: Personal expenses allowed as itemized deductions include medical expenses, state and local taxes, interest, charitable gifts, casualty losses, and miscellaneous deductions. 3. Describe the concept of a 7.5% floor for medical deductions. Answer: The 7.5% floor means that medical expense deductions are not allowed until the total medical deductions exceed 7.5% of AGI. Thus, medical expenditures, net of insurance reimbursements, must be substantial in order to gain any tax benefit. 4. Can an individual get a medical deduction for a capital improvement to their personal residence? If so, how is it calculated? Answer: For medical capital expenditures that improve the taxpayer's property, the deduction is available only to the extent that the medical expenditure exceeds the increase in the FMV of the residence.

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Chapter 05 - Itemized Deductions

5. What are the general requirements for a medical expense to be considered deductible? Answer: Medical expenses are allowed as itemized deductions to the extent the expenses exceed 7.5% of adjusted gross income and are not be reimbursed. Qualified medical care expenses include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease or for the purpose of affecting any structure or function of the body, for transportation primarily for and essential to medical care, for qualified long-care services, and for insurance covering medical care. 6. When are travel costs deductible as medical costs? How are the medical travel costs calculated? Answer: Travel costs are deductible when incurred for transportation primarily for and essential to medical care. There is no deduction allowed for travel expenses unless there is no significant element of personal pleasure, recreation, or vacation in the travel away from home. Transportation costs could include such items as cab, bus, or train fares, as well as expenses for a personal auto. The cost of the transportation must be primarily for, and essential to, deductible medical care. The amount of the deduction for the use of a personal auto for transportation for medical care can be calculated using the actual cost of operating the car for medical purposes or the optional standard mileage allowance. 7. What is the proper tax treatment for prescription drugs obtained outside the United States, such as Canada? Answer: Prescription drugs obtained from sources outside the United States, such as Canada, are deductible if prescribed by a physician for the treatment of a medical condition and the FDA has approved that they can be legally imported.

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Chapter 05 - Itemized Deductions

8. How do reimbursements from health insurance policies affect the amount of the medical deduction? Does a taxpayer get a deduction for premiums paid for health insurance? What happens if an insurance reimbursement for medical expenses is received in a subsequent tax year? Answer: Any insurance reimbursements or partial reimbursements must be subtracted from the gross medical expenses to give the net medical expenses that are subject to the 7.5% AGI limitation. The insurance reimbursement would be included in income to the extent that benefit was received in the prior year. Health insurance premiums are only deductible if the premiums are paid with after-tax funds (not in an employer pre-tax plan). 9. What are the four major categories of deductible taxes on individual returns? Answer: The four major categories of deductible taxes are personal property taxes, local real estate taxes, other state, and local taxes, and foreign taxes. 10. For a tax to be deductible as an itemized deduction, what three tests are required? Answer: State or local property taxes must meet the three tests in order to be deductible. The tax must be levied on personal property, the tax must be an "ad valorem tax, and the tax must be imposed at a minimum on an annual basis with respect of personal property. 11. If state or local income taxes are deducted on the current years tax return, what is required if the taxpayer gets a refund in the next year? Answer: If a refund was received, the tax preparer must include the refund in income for the current year (assuming the taxpayer itemized his/her return and deducted state taxes in the previous year).

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Chapter 05 - Itemized Deductions

12. For 2007, how is the amount of the sales tax deduction determined? Answer: The amount of the sales tax deduction is determined by calculating actual sales taxes paid during the year. From a practical perspective, most taxpayers would find it difficult to determine and document actual sales tax payments. Thus, a deduction is permitted using sales tax tables provided by the IRS in Publication 600. 13 What options does the taxpayer who paid foreign taxes have when considering his or her tax treatment? Which option is usually more tax beneficial? Answer: The tax code allows the option of either taking a credit for foreign taxes or deducting the taxes. Typically, it is more beneficial for individual taxpayers to utilize the credit rather than the deduction because the credit is a dollar for dollar reduction in taxes. The deduction just reduces taxable income and the net tax effect is dependent on the taxpayers tax rate. 14. What is qualified residence interest? Are there any limits to the deductibility of qualified residence interest? Answer: Qualified residence interest is any interest that is paid or accrued during the taxable year on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. Taxpayers are allowed a deduction for qualified residence interest on their principle residence and a second residence selected by the taxpayer. The aggregate amount treated as acquisition indebtedness for any period cannot exceed $1,000,000 ($500,000 for married individuals filing separate returns). The $1,000,000 limitation refers to the amount of principle of the debt and not the interest paid.

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Chapter 05 - Itemized Deductions

15. What is a home equity loan? Is the interest tax deductible? Are there any limits to the deductibility of home equity loan interest? Answer: Home equity loans are loans that are secured by a qualified residence and in an amount that does not exceed the fair market value of the residence less the acquisition debt. The aggregate amount treated as home equity indebtedness for any period cannot exceed $100,000 ($50,000 for married filing separately). 16. What is investment interest? What are the limits to the deductibility of investment interest? Answer: Typical items that comprise investment income are interest income, dividends, royalties, and capital gains. The deduction of investment interest expense is limited to the net investment income for the year. 17. Donations to what type of organizations are tax deductible? Answer: Deductions subject to limitations are allowed for donations to public charities, private foundations, and organizations such as war veterans' organizations, fraternal orders, cemetery companies, and certain nonoperating private foundations. 18. Distinguish between the tax treatment for donations to charitable organizations of cash, ordinary income property, and capital gain property. Answer: Generally, if capital gain property is donated to a public charity, the donation is the FMV of the property, with certain exceptions. Cash given to a private foundation would be limited to 30% of AGI, whereas capital gain property given to the same organization would be limited to 20% of AGI. The 30% limitation also applies to any contribution (cash or property) to charities that are not 50% limitation charities such as war veterans' organizations, fraternal orders, cemetery companies, and certain nonoperating private foundations.

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Chapter 05 - Itemized Deductions

19. What happens to a charitable contribution that is in excess of the AGI limits? Answer: The excess charitable contribution can be carried forward for 5 years. In carryover years, current contributions are deducted first. The carryover is considered even when using the standard deduction. 20. Define a personal casualty loss. Include in your discussion the concepts of sudden, unexpected or unusual. Answer: A personal casualty loss includes losses of personal property, such as personal residence, personal auto, and vacation home. A sudden event is noted as an event that is swift, not gradual or progressive. An unexpected event is defined as an event that is ordinarily unanticipated and occurs without the intent of the taxpayers. An unusual event is one that is extraordinary and nonrecurring. 21. How is a personal casualty loss calculated? Include in your discussion how the determination of the loss is made and limits or floors placed on personal casualties. Answer: In general, the casualty loss is the lesser of the FMV immediately before the casualty reduced by the FMV immediately after the casualty, or the amount of the adjusted basis for determining the loss from the sale or other disposition of the property involved. There are two limitations on personal casualty deductions. First, each separate casualty is reduced by $100 ($100 per casualty, not $100 per item of property). The second and more substantial limitation is the 10% of AGI limitation. In order to obtain any benefit from a casualty loss, the loss must be in excess of 10% of AGI. Because of the 10% limitation, most taxpayers do not benefit from casualty losses unless the loss was substantial.

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Chapter 05 - Itemized Deductions

22. Give three examples of miscellaneous itemized deductions. Why are deductions of miscellaneous itemized deductions often limited? Answer: Three examples of miscellaneous itemized deductions include unreimbursed employee business expenses, tax return preparation fees, and gambling losses (to extent of gambling income.) 23. What is usually the largest miscellaneous deduction for individual taxpayers and are there any special reporting issues associated with it? Answer: Usually the largest miscellaneous deduction for individual taxpayers is unreimbursed employee business expenses and are the most likely to cause the total miscellaneous deduction to exceed the 2% floor. If any travel, transportation, meals, or entertainment expenses were incurred or some expenses were reimbursed, then the taxpayer must complete Form 2106. 24. Explain the 3%/80% limitation for high-income taxpayers. Answer: Itemized deductions are reduced by the lesser of 3% of the excess of AGI over the applicable amount, or 80% of the itemized deductions otherwise allowable for the tax year. For the tax years 2006 and 2007, the limit will be reduced by one-third. So for 2007, after the regular limitation is determined, the taxpayer must take this amount and multiply it by two-thirds. This effectively reduces the 3% limitation to 2%. The 3%/80% rule does not apply to medical expenses, investment interest, casualty or theft losses, or gambling losses.

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Chapter 05 - Itemized Deductions

Multiple Choice 25. Itemized deductions are taken when: a. The taxpayer wants to. b. When they are less than the standard deduction. c. When they are greater than the standard deduction. d. When the standard deduction is limited by high AGI. Answer: b 26. The majority of itemized deductions are: a. Business expenses b. Tax credits c. Personal living expenses d. None of the above Answer: c. These relate to such items as medical expenses, state and local taxes, personal casualty losses, and unreimbursed business expenses. 27. Generally, a taxpayer may deduct the cost of medical expenses for which of the following: a. Marriage counseling b. Health club dues c. Doctor prescribed birth control pills d. Trips for general health improvement Answer: c 28. The threshold amount for the deductibility of allowable medical expenses is: a. 2.5% of AGI b. 7.5% of AGI c. 10% of taxable income d. 15% of taxable income Answer: b

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Chapter 05 - Itemized Deductions

29. During 2007 Sheniqua incurred and paid the following expenses: Prescription drugs Vitamins and over the counter cold remedies Doctors and Dentist visits Health club fee Cosmetic surgery $ 470 130 700 250 2,400

What is the total amount of medical expenses (before taking into account the limitation based on adjusted gross income) that would enter into the calculation of itemized deductions for Sheniquas 2007 income tax return? a. $1,170 b. $1,300 c. $1,550 d. $3,950 Answer: a. Deductible medical expenses are those that are doctor directed and do not include optional treatments for the maintenance of general health and appearance. 30. Prescription drugs obtained from sources outside the United States, such as Canada, are: a. Always deductible no matter how they were obtained. b. Only deductible for citizens of Canada living in the United States. c. Are deductible if prescribed by a physician and approved by the FDA for legal importation. d. Never deductible. Answer: c

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Chapter 05 - Itemized Deductions

31. For 2007, Miguel, who is single and 45 years of age had calculated adjusted gross income of $40,000. During the year he incurred and paid the following medical costs: Doctor and Dentist fess Prescription medicines Medical care insurance premiums Long term care insurance premiums Hearing aid $2,350 325 380 600 150

What amount can Miguel take as a medical expense deduction (after the adjusted gross income limitation) for his 2007 tax return? a. $3,805 b. $3,755 c. $805 d. $735 Answer: b. All the expenses listed above are deductible; however, the deduction for the long term care insurance premiums is limited by Miguels age. 32. For 2007, the amount of the sales tax deduction is calculated by: a. Determining the actual sales tax paid during the year. b. Adding the calculated sales tax to the assessed state income tax. c. Using the sales tax tables provided by the IRS in Publication 600. d. Either a or c. Answer: d

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Chapter 05 - Itemized Deductions

33. During 2007, Yvonne paid the following taxes related to her home: Property taxes on residence (paid from escrow account) State personal property tax on their automobile (based on value) Property taxes on land held for long-term appreciation $1,800 600 300

What amount can the Yvonne deduct as property taxes in calculating itemized deductions for 2007? a. $2,100 b. $2,700 c. $3,100 d. $3,700 Answer: b 34. What is the maximum amount of personal residence acquisition debt on which interest is fully deductible? a. $1,000,000 b. $500,000 c. $250,000 d. $0 Answer: a 35. For 2007, the deduction by a taxpayer for investment interest is: a. Not limited b. Limited to the taxpayers net investment income for 2007 c. Limited to the investment interest paid in 2007 d. Limited to the taxpayers gross investment income for 2007 Answer: b

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Chapter 05 - Itemized Deductions

36. For 2007, Elizabeth, a single mother, reported the following amounts relating to her investments: Investment income from interest $7,000 Interest expense on a loan to purchase stocks 2,000 Interest expense on funds borrowed in 2005 to purchase land for investment 6,000 What is the maximum amount that Elizabeth can deduct in 2007 as investment interest expense? a. $1,000 b. $5,000 c. $6,000 d. $7,000 Answer: d 37. Referring to previous question, what is the treatment for the interest expense that Elizabeth could not deduct in 2007? a. It is lost b. It can not be used except as a carry back to previous years. c. Can be carried forward and deducted in succeeding years d. None of the above Answer: c 38. Which of the following organizations qualify for deductible charitable contributions? a. The local public library. b. Salvation Army. c. Churches. d. All of the above. Answer: d

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Chapter 05 - Itemized Deductions

39. Which of the following statements is not true regarding documentation requirements for charitable contributions? a. If the total deduction for all noncash contributions for the year is more than $500, Section A of Form 8283, Noncash Charitable Contributions, must be completed. b. A noncash contribution of less than $250 must be supported by a receipt or other written acknowledgement from the charitable organization. c. A contribution charged to a credit card is a noncash contribution for purposes of documentation requirements. d. A deduction of more than $5,000 for one property item generally requires that a written appraisal be obtained and attached to the return Answer: c 40. In 2007, the president of the United States declared a federal disaster due to brush fires in the Southwest. Lisa lives in that area and lost her home in the fires. What choice does she have regarding when she can claim the loss on her tax return? a. It may be claimed in 2006 or 2007 b. It must be claimed in 2006 if the loss is greater than the modified adjusted gross income c. It may be claimed in 2008 if an election is filed with the 2007 return d. It must be claimed in 2006 if the return has not been filed by the date of the loss Answer: a 41. In 2007, the Bells vacation cottage was severely damaged by an earthquake. They had AGI of $110,000 in 2007 and following information related to the cottage: Cost basis $95,000 FMV before casualty 135,000 FMV after casualty 25,000 The Bells had insurance and received a $80,000 insurance settlement. What is the amount of allowable casualty loss deduction for the Bells 2007? a. $3,900 b. $8,900 c. $18,900 d. $30,000 Answer: a.

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Chapter 05 - Itemized Deductions

42. Which expense, incurred and paid in 2007, can be claimed as an itemized deduction subject to the 2% of AGI floor? a. Self-employed health insurance b. Unreimbursed moving expenses c. Employees unreinbursed business car expense d. Self-employment taxes Answer: c 43. Raquel, who works in medical sales, drives her own vehicle to various locations for client sales meetings. Her employer reimburses her $400 each month for various business expenses and does not expect Raquel to provide proof of her expenses. Her employer included this $4,800 reimbursement in Raquels 2007 W-2 as part of her wages. In 2007, Raquel incurred $3,000 in transportation expense, $1,000 in parking and tolls expense, $1,800 in car repairs expense, and $600 for expenses while attending a professional association convention. Assume Raquel uses the vehicle for business purposes only and that she maintains adequate documentation to support all of her above expenditures. What amount is Raquel entitled to deduct on her Schedule A for Itemized Deductions? a. $6,400 of expenses subject to the 2% of adjusted gross income limitation b. $1,600, the difference between her expenditures c. $0 since her employer follows nonaccountable plan d. $4,800 since her employer follows nonaccountable plan Answer: a 44. Individuals who are high-income forfeit part of their itemized deductions. This effectively: a. Reduces their overall tax rate b. Does not affect their overall tax rate c. Increases their overall tax rate d. Non of the above Answer: c.

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Chapter 05 - Itemized Deductions

45. The high-income limitation on itemized deductions is being phased out from 2006 through 2009. For 2007, after the regular limitation is determined, the taxpayer must multiply this amount by: a. 3/4 b. 2/3 c. 1/2 d. 1/3 Answer: b.

Problems 46. Mickey is a 12-year old dialysis patient. Three times a week he and his mother, Sue, drive 20 miles one-way to Mickeys dialysis clinic. On the way home they go 10 miles out of their way in order to stop at Mickeys favorite restaurant. Their total round trip is 50 miles per day. How many of those miles, if any, can Sue use to calculate an itemized deduction for transportation? Explain your answer. Answer: 40 miles round-trip * 3/week = 120 miles/week * 52 weeks 6,240 miles *20 cents/mile $1248.00 mileage deduction

The extra ten miles is not for medical purposes.

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Chapter 05 - Itemized Deductions

47. Thomas had adjusted gross income of $32,000 in 2007. During the year, he paid the following medical expenses: Drugs (prescribed by physicians) Marijuana (prescribed by physicians) Health insurance premiums after taxes Doctors fees Eyeglasses Over-the-counter drugs $200 $1,400 $850 $1,250 $375 $200

Tom received $500 in 2007 for a portion of the doctors fees from his insurance. What would be Toms medical expense deduction? Answer: Medical expense deduction = $2,675 Allowable medical expense <500> - Insurance reimbursement 2,175 <2,400> 7.5% of AGI $0 - Amount of deduction

48. Joe and Flo are married and have a combined AGI of $45,000 in the year 2007. Due to certain medical problems, Joe has been prescribed Viagra by a physician. For the year 2007, Joe spent a total of $3,100 on the medication and $750 on doctors bills. Can Joe deduct the medical costs as an itemized deduction? Explain your answer. Answer: Yes. The expenses are either payments to doctors or are prescribed medications. Cost of Drugs Doctor $3,100 750 3,850 $45,000 * .075 (3,375) Medical Deduction $475

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Chapter 05 - Itemized Deductions

49. Leslie and Jason paid the following expenses during 2007: Interest on a car loan Interest on bank loan (used to purchase municipal bonds) Interest on home mortgage $ 100 3,000 2,100

What is the maximum amount that they can use in calculating itemized deductions for 2007? Answer: Car Loan No deduction Interest on Home Mortgage 2,100 Deductible as an itemized deduction $2,100 The $3,000 loan to purchase municipal bonds is not deductible because the interest from the bonds is not taxable. Investment interest expense is deductible only to the extent of (taxable) investment income. 50. On April 1, 2007, Paul sold a house to Amy. The property tax on the house was due September 1, 2007. Amy paid the full amount of property tax of $2,500. Calculate both Paul and Amys allowable deductions for the property tax. Answer: The tax must be prorated. Paul: $2,500 * (91/365) = $ 623.29 Amy: $2,500 * (274/365) = $1,876.71 $2,500.00 51. In 2006, Sherri had $3,600 in state tax withheld from her paycheck. She properly deducted that amount on her 2006 tax return, thus reducing her tax liability. After filing her 2006 tax return, Sherri discovered that she overpaid her state tax by $316. She received her refund in July 2007. What must Sherri do with the $316 refund? Explain your answer. Answer: Because Sherri deducted the taxes from her taxable income, the refund must be included in income in the year received. Thus, when Sherri files her 2007 federal return, the $316 would be included in taxable income.

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Chapter 05 - Itemized Deductions

52. Steve purchased a personal residence from Adam. In order to sell the residence, Adam agreed to pay $4,500 in points related to Steves mortgage. Discuss the tax consequences from both Steves and Adams perspectives. Answer: Mortgage points paid on a personal residence are deductible if paid by the taxpayer. If the seller pays the points (as is the case here), the buyer is still treated as paying the points if the amount is subtracted from the purchase price of the residence. 53. Shelby has net investment interest income of $18,450 and other income of $76,000. She paid investment interest expense of $19,000. What is Shelbys deduction for investment interest expense and explain your answer. Answer: Investment interest expense (limited to investment income): $18,450 The remaining $550 of expense can be carried forward to future years. 54. Tyrone and Akira incurred and paid the following amounts of interest during 2007: Acquisition debt interest $15,000 Credit card interest 5,000 Home equity loan interest 6,500 Investment interest 10,000 With 2007 investment interest expense of $2,000, calculate the amount of their allowable deduction for investment interest and their total deduction for allowable interest. Answer: a. Investment interest expense (limited to investment income): $2,000 b. Allowable deduction for interest: Investment interest $2,000 Acquisition debt interest 15,000 Home equity loan interest 6,500 $23,500 before phase-out limits

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Chapter 05 - Itemized Deductions

55. Marlene purchased a ticket to a concert to raise money for the local university. The ticket cost $350, and the normal cost of a ticket to this concert is $100. How much is deductible as a charitable contribution? Answer: Only $250 is deductible the excess of the amount over the FMV of the goods in services received ($350 100 value of amount). 56. Tom made charitable contributions to his church in the current year. He donated common stock valued at $33,000 (acquired as an investment in 1996 for $14,000). Toms AGI in the current year is $75,000. What is Toms allowable charitable contribution deduction? How are any excess amounts treated? Answer: Charitable Gift FMV 30% limit * $75,000 AGI Carry-over $33,000 (22,500) deduction $10,500

The $10,500 charitable carry-over is carried forward for up to 5 years. 57. Adrian contributed an antique vase to a museum. She had owned the vase for 25 years. At the time of the donation, the vase had a value of $35,000. The museum displayed this vase in the art gallery. a. Assume Adrians AGI is $80,000, and her basis in the vase is $15,000. How much may Adrian deduct? b. Assume Adrians AGI is $80,000, and her basis in the vase is $40,000. How much may Adrian deduct? c. How would your answer change if the museum sold the vase to an antique dealer? Answer: a. Used for related use; 50% limitation applies $80,000 50% = $40,000 limitation of $35,000 deductible FMV of vase b. Same as (a) c. 30% limitation applies; $80,000 * 30% = $24,000; deduction limited to $24,000 11,000 carried over for 5 years

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Chapter 05 - Itemized Deductions

58. In 2007, Arturos pleasure boat that he had purchased in 2005 for $40,000 was destroyed by a hurricane. His insurance policy had lapsed at the time of the flood. On what form(s) will Arturo report this loss? Answer: On Schedule A, Itemized Deductions, and Form 4684, Casualties and Thefts. 59. Reynaldo and Sonya, a married couple, had flood damage in their home during 2007 which ruined the furniture in their garage. The following items were completely destroyed and not salvageable. Damaged Items: Antique poster Pool table Large screen TV Fair market value just prior to damage: $6,000 $7,000 $700 Original Item cost: $5,000 $11,000 $2,500

Their homeowners insurance policy had a $10,000 deductible for the personal property, which was deducted from their insurance reimbursement of $12,700. Their adjusted gross income for 2007 was $30,000. What is the amount of casualty loss that Reynaldo and Sonya can claim on their joint return for 2007? Answer: Casualty loss deduction = $12,700 <2,700> 10,000 <100> 9,900 <3,000> $6,900 - Allowable casualty expense - Insurance reimbursement - Per casualty event - 10% of AGI - Amount of deduction

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Chapter 05 - Itemized Deductions

60. During the year 2007, Ricky drives her car 5,000 miles to visit clients, 10,000 miles to get to her office, and 500 miles to attend business-related seminars. She spent $300 for airfare to another business seminar and $200 for parking at her office. Using the care expense rate of 48.5 cents per mile, what is her deductible transportation expense? Answer: 5,500 business miles *48.5 cents/mile $2,668 mileage expense + 300 airfare for business seminar $2,968 deductible transportation expense 61. Louis is employed as an accountant for a large firm in San Diego. During 2007 he paid the following miscellaneous expenses: Unreimbursed employee business expenses Union dues Tax return preparation fee Job hunting expenses $520 400 175 200

Louis plans to itemize his deductions in 2007; what amount could he claim as miscellaneous itemized deductions before applying the 2% limit? Answer: Unreimbursed employee business expenses Union dues Tax return preparation fee Job hunting expenses Total deductible expenses $520 400 175 200 $1,295

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Chapter 05 - Itemized Deductions

Tax Return Problems Use your tax software to complete the following problems. If you are manually preparing the tax returns, you will need a Form 1040 and other necessary forms and schedules for each problem.
Tax Return Problem #1

Jonathan is single, has no dependents, has $55,000 in AGI and lives at 55855 Ridge Dr. in Santa Fe, New Mexico. He had gambling winnings of $500 and had the following expenses. His social security number is 333-33-3333 and he had wages of $54,500. State income taxes $2,200 Property taxes 1,000 Medical expenses 500 Charitable contributions 450 Mortgage interest expense 5,500 Gambling losses 650 Job hunting expenses 275 (he did not get the new position) Prepare a Form 1040 for Jonathon using the appropriate worksheets and forms.

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Chapter 05 - Itemized Deductions Tax Return Problem #2

In 2007, John and Shannon OBanion, who live at 3222 Pinon Drive, Mesa, Colorado, and file married filing jointly, had an AGI of $85,000. In that same year, they had the following medical costs: Shannons Prescribed Diabetes Medication Johns hospital charges Shannons regular physician visits Shannons eye-care physician Shannons diabetes blood testing supplies Insurance Reimbursements In addition, they had the following other expenses: State income taxes Property taxes Car loan interest Charitable Contributions Mortgage Interest Expense Union dues for John $2,200 1,000 500 450 4,500 685 $3,150 $2,500 $700 $75 $65 $1,000

Prepare a Form 1040 and Schedule A for the OBanions using the appropriate worksheets and forms.

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Chapter 05 - Itemized Deductions Tax Return Problem #3

Keisha Sanders, a single taxpayer, lives at 9551 Oak Leaf Lane in Pine Cove, AZ. She reports AGI of $83,400 and provides the following information for Schedule A, Itemized Deductions: Interest expense Home mortgage (Qualified residence interest) 8,100 Master Card 425 Car loan 600 The Master Card is used exclusively for personal expenses and purchases. Taxes State income tax withheld 2,950 State income tax deficiency (for 2005) 350 Real estate taxes - principal residence 1,700 Personal property taxes - car 150 Registration fee - car 50 Medical expenses Doctors fees Prescription drugs Vitamins and over-the-counter drugs Dental implant to correct a bite problem Health club fee 500 200 250 1,600 400

Charitable contributions (all required documentation is maintained) Cash Church 3,100 United Way 100 PBS Annual Campaign 200 Property Goodwill - used clothing and household items FMV at date of donation 350 Adjusted tax basis at date of donation 1,300 Other Investment publications Tax return preparation fee Business dues and subscriptions Safe deposit box 150 275 350 75

Prepare a Form 1040 and Schedule A for Keisha using the appropriate worksheets and forms.

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Chapter 05 - Itemized Deductions Comprehensive Problem

Jamie and Cecilia Reyes are husband and wife and file a joint return. They live at 5677 Apple Cove Rd., Spokane, Washington. Both are under 65 years of age. They provide more than half of the support of their daughter, Carmen (age 23), who is a full-time veterinarian school student. Carmen receives a $3,200 scholarship covering her room and board at college. They furnish all of the support of (Jamies grandmother, who is age 70 and lives in a nursing home. They also have a son, Gustavo (age 4). During 2007, Elton had the following transactions: Salary Dividends Other receipts for the couple were as follows: Interest Income: Union Bank State of Washington - Interest on tax refund City of Alto Loma School Bonds Interest from U.S. Savings Bonds 2006 Federal Income tax refund received in 2007 2006 State Income tax refund received in 2007 Washington Lottery Winnings Pechanga casino Slot Machine Winnings Gambling losses at Pechanga casino $175, 625 2, 500

$220 22 1,250 410 2,007 218 1,100 2,250 6,500

Other information that the Reyess provided for the 2007 tax year. Mortgage interest on personal residence Interest on Motor Home Doctors fee for a face lift for Mrs. Reyes Dentists fee for new dental bridge for Mr. Reyes Prescribed vitamins for the entire family Property taxes paid DMV fees on Motor Home (tax portion) DMV fees on family autos (tax portion) Doctors bills for Grandmother Nursing home for Grandmother Wheel chair for Grandmother Property taxes on boat Interest on personal MasterCard Interest on loan to buy school bonds Cash contributions to Church Cash contribution to man at bottom of freeway off ramp Contribution of furniture to Goodwill Cost basis Contribution of furniture to Goodwill Fair Market Value $15,081 5,010 6,800 2,500 110 7,025 1,044 436 3,960 12,200 1,030 134 550 270 5,100 10 4,000 410

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Chapter 05 - Itemized Deductions

Tax return preparation for 2006 taxes

525

Prepare a Form 1040, Schedule A, and other required forms and schedules necessary for the completion of the Reyess tax return. Answers for the Tax Return Problems and the Comprehensive problem are shown on the following four Forms 1040, Schedule As, and related worksheets.

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