Chap005 - Download as DOC by wanghonghx

VIEWS: 421 PAGES: 26

									Chapter 05 - Itemized Deductions

                            CHAPTER 5
                       ITEMIZED DEDUCTIONS

Discussion Questions

1. What is the difference between deductions from AGI and deductions for AGI?

Ans wer:
      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?

Ans wer:
      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.

Ans wer:
      The 7.5% floor means that medical expense deductions are not allowed until
      the total me dical deductions exceed 7.5% of AGI. Thus, medical
      expenditures, net of insurance reimbursements, must be substantial in orde r
      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?

Ans wer:
      For medical capital expe nditures that improve the taxpayer's prope rty, the
      deduction is available only to the extent that the medical expenditure exceeds
      the increase in the FMV of the residence.

Chapter 05 - Itemized Deductions

5. What are the general requirements for a medical expense to be considered deductible?

Ans wer:
      Medical expenses are allowed as ite mized 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

Ans wer:
      Travel costs are deductible when incurre d for trans portation 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 ite ms 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 me dical 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?

Ans wer:
      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

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?

Ans wer:
      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 ins urance reimbursement
      would be included in income to the extent that benefit was received in the
      prior year. Health ins urance premiums are only deductible if the premiums
      are paid with afte r-tax funds (not in an e mployer pre-tax plan).

9. What are the four major categories of deductible taxes on individual returns?

Ans wer:
      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?

Ans wer:
      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 valore m 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 year’s tax return, what is
required if the taxpayer gets a refund in the next year?

Ans wer:
      If a refund was received, the tax prepare r must include the refund in income
      for the current year (assuming the taxpayer itemize d his/he r return and
      deducted state taxes in the previous year).

Chapter 05 - Itemized Deductions

12. For 2007, how is the amount of the sales tax deduction determined?

Ans wer:
      The amount of the sales tax deduction is determined by calculating actual
      sales taxes paid during the year. From a practical pe rspective, 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?

Ans wer:
      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 taxpayer’s tax rate.

14. What is qualified residence interest? Are there any limits to the deductibility of
qualified residence interest?

Ans wer:
      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. Taxpaye rs are allowe d 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.

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?
Ans wer:
       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

16. What is investment interest? What are the limits to the deductibility of investment

Ans wer:
      Typical ite ms that comprise investment income are inte rest 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?

Ans wer:
      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 ce rtain non-
      operating private foundations.

18. Distinguish between the tax treatment for donations to charitable organizations of
cash, ordinary income property, and capital gain property.

Ans wer:
      Generally, if capital gain property is donated to a public charity, the
      donation is the FMV of the property, with ce rtain exceptions. Cash given to
      a private foundation would be limited to 30% of AGI, whe reas 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 prope rty) to
      charities that are not 50% limitation charities such as war veterans'
      organizations, fraternal orders, cemetery companies, and ce rtain non-
      operating private foundations.

Chapter 05 - Itemized Deductions

19. What happens to a charitable contribution that is in excess of the AGI limits?

Ans wer:
      The excess charitable contribution can be carried forward for 5 years. In
      carryove r 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.

Ans wer:
      A pe rsonal cas ualty loss includes losses of personal prope rty, 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 unexpe cted
      event is defined as an event that is ordinarily unanticipated and occurs
      without the intent of the taxpayers. An unus ual 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.

Ans wer:
      In general, the casualty loss is the lesser of the FMV imme diately before the
      casualty reduced by the FMV imme diately after the casualty, or the amount
      of the adjusted basis for determining the loss from the sale or other
      disposition of the prope rty involved. The re are two limitations on personal
      casualty deductions. First, each separate casualty is reduce d by $100 ($100
      per casualty, not $100 pe r ite m 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 cas ualty
      losses unless the loss was substantial.

Chapter 05 - Itemized Deductions

22. Give three examples of miscellaneous itemized deductions. Why are deductions of
miscellaneous itemized deductions often limited?

Ans wer:
      Three examples of miscellaneous ite mized 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?

Ans wer:
      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 taxpaye r must complete Form 2106.

24. Explain the 3%/80% limitation for high- income taxpayers.

Ans wer:
      Itemize d 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.

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.

Ans wer: b

26. The majority of itemized deductions are:
a. Business expenses
b. Tax credits
c. Personal living expenses
d. None of the above

Ans wer: c. These relate to such ite ms 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
a. Marriage counseling
b. Health club dues
c. Doctor prescribed birth control pills
d. Trips for general health improvement

Ans wer: 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

Ans wer: b

Chapter 05 - Itemized Deductions

29. During 2007 Sheniqua incurred and paid the following expenses:

Prescription drugs                                  $ 470
Vitamins and over the counter cold remedies           130
Doctors and Dentist visits                            700
Health club fee                                       250
Cosmetic surgery                                    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 Sheniqua’s 2007 income tax return?
a. $1,170
b. $1,300
c. $1,550
d. $3,950

Ans wer: a. Deductible medical expenses are those that are doctor directed and do
not include optional treatments for the maintenance of general health and

30. Prescription drugs obtained from sources outside the United States, such as Canada,
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
d. Never deductible.

Ans wer: c

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                      $2,350
Prescription medicines                          325
Medical care insurance premiums                 380
Long term care insurance premiums               600
Hearing aid                                     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

Ans wer: b. All the expenses listed above are deductible; however, the deduction for
the long term care insurance premiums is limited by Miguel’s 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.

Ans wer: d

Chapter 05 - Itemized Deductions

33. During 2007, Yvonne paid the following taxes related to her home:

Property taxes on residence (paid from escrow account)                         $1,800
State personal property tax on their automobile (based on value)                  600
Property taxes on land held for long-term appreciation                            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

Ans wer: 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

Ans wer: a

35. For 2007, the deduction by a taxpayer for investment interest is:
a. Not limited
b. Limited to the taxpayer’s net investment income for 2007
c. Limited to the investment interest paid in 2007
d. Limited to the taxpayer’s gross investment income for 2007

Ans wer: b

Chapter 05 - Itemized Deductions

36. For 2007, Elizabeth, a single mother, reported the following amounts relating to her
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
a. $1,000
b. $5,000
c. $6,000
d. $7,000

Ans wer: 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

Ans wer: 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.

Ans wer: d

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

Ans wer: 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
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

Ans wer: a

41. In 2007, the Bell’s 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 Bell’s 2007?
a. $3,900
b. $8,900
c. $18,900
d. $30,000

Ans wer: a.

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. Employee’s unreinbursed business car expense
d. Self-employment taxes

Ans wer: 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 Raquel’s 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
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

Ans wer: a

44. Individuals who are “high- income” forfeit part of their itemized deductions. This
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

Ans wer: c.

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

Ans wer: b.


46. Mickey is a 12-year old dialysis patient. Three times a week he and his mother, Sue,
drive 20 miles one-way to Mickey’s dialysis clinic. On the way home they go 10 miles
out of their way in order to stop at Mickey’s 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.

Ans wer:

        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.

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)                                            $200
        Marijuana (prescribed by physicians)                                      $1,400
        Health insurance premiums –after taxes                                      $850
        Doctors’ fees                                                             $1,250
        Eyeglasses                                                                  $375
        Over-the-counter drugs                                                      $200

Tom received $500 in 2007 for a portion of the doctors’ fees from his insurance. What
would be Tom’s medical expense deduction?

Ans wer:

        Medical expense deduction =         $2,675 – Allowable medical expense
                                            <500> - Insurance reimbursement
                                            <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 doctor’s bills. Can
Joe deduct the medical costs as an itemized deduction? Explain your answer.

Ans wer:
Yes. The expenses are either payme nts to doctors or are prescribed me dications.

                         Cost of Drugs     $3,100
                         Doctor                750
                         $45,000 * .075     (3,375)
                         Medical Deduction    $475

Chapter 05 - Itemized Deductions

49. Leslie and Jason paid the following expenses during 2007:

        Interest on a car loan                                              $ 100
        Interest on bank loan (used to purchase municipal bonds)             3,000
        Interest on home mortgage                                            2,100

What is the maximum amount that they can use in calculating itemized deductions for

Ans wer:
                         Car Loan                          No deduction
                         Inte rest 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 inte rest 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 Amy’s allowable deductions for the property tax.

Ans wer:
      The tax must be prorated.
                          Paul: $2,500 * (91/365) = $ 623.29
                          Amy: $2,500 * (274/365) = $1,876.71

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.

Ans wer:
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.

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 Steve’s mortgage. Discuss the tax
consequences from both Steve’s and Adam’s perspectives.

Ans wer:
      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 Shelby’s deduction for
investment interest expense and explain your answer.

Ans wer:
      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 o f their allowable
deduction for investment interest and their total deduction for allowable interest.

Ans wer:
                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

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?

Ans wer:
      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).
Tom’s AGI in the current year is $75,000. What is Tom’s allowable charitable
contribution deduction? How are any excess amounts treated?

Ans wer:
                                   Charitable Gift FMV       $33,000
                                   30% limit * $75,000 AGI   (22,500) deduction
                                   Carry-over                $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 Adrian’s AGI is $80,000, and her basis in the vase is $15,000. How much
may Adrian deduct?
b. Assume Adrian’s 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?

Ans wer:
      a. Used for related use; 50% limitation applies
             $80,000 × 50% = $40,000 limitation of $35,000 deductible FMV of

        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

Chapter 05 - Itemized Deductions

58. In 2007, Arturo’s 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?

Ans wer:
       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:        Fair market        Original
                       value just prior   Item cost:
                       to damage:
 Antique poster        $6,000             $5,000

 Pool table            $7,000             $11,000

 Large screen TV       $700               $2,500

Their homeowner’s 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?

Ans wer:

        Casualty loss deduction =               $12,700    - Allowable casualty expense
                                                 <2,700>   - Insurance reimbursement
                                                   <100>   - Pe r casualty event
                                                 <3,000>    - 10% of AGI
                                                  $6,900    - Amount of deduction

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?

Ans wer:

        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                     $520
Union dues                                                   400
Tax return preparation fee                                   175
Job hunting expenses                                         200

Louis plans to itemize his deductions in 2007; what amount could he claim as
miscellaneous itemized deductions before applying the 2% limit?

Ans wer:

        Unreimbursed employee business expenses                      $520
        Union dues                                                    400
        Tax return preparation fee                                    175
        Job hunting expenses                                          200
               Total deductible expenses                           $1,295

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.

Chapter 05 - Itemized Deductions

Tax Return Problem #2

In 2007, John and Shannon O’Banion, 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:

                Shannon’s Prescribed Diabetes Medication                           $3,150
                John’s hospital charges                                            $2,500
                Shannon’s regular physician visits                                   $700
                Shannon’s eye-care physician                                          $75
                Shannon’s diabetes blood testing supplies                             $65
                Insurance Reimbursements                                           $1,000

In addition, they had the following other expenses:

                State income taxes            $2,200
                Property taxes                 1,000
                Car loan interest                500
                Charitable Contributions         450
                Mortgage Interest Expense      4,500
                Union dues for John              685

Prepare a Form 1040 and Schedule A for the O’Banion’s using the appropriate
worksheets and forms.

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

Inte rest 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.

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                                        500
Prescription drugs                                  200
Vitamins and over-the-counter drugs                 250
Dental implant to correct a bite problem           1,600
Health club fee                                     400

Charitable contributions (all required documentation is maintained)
Church                                       3,100
United Way                                     100
PBS Annual Campaign                            200
Goodwill - used clothing and household items
FMV at date of donation                        350
Adjusted tax basis at date of donation       1,300

Investment publications                             150
Tax return preparation fee                          275
Business dues and subscriptions                     350
Safe deposit box                                     75

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

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 (Jamie’s 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                                               $175, 625
       Dividends                                               2, 500

Other receipts for the couple were as follows:
Interest Income:
        Union Bank                                               $220
        State of Washington - Interest on tax refund               22
        City of Alto Loma School Bonds                          1,250
        Interest from U.S. Savings Bonds                          410
        2006 Federal Income tax refund received in 2007         2,007
        2006 State Income tax refund received in 2007             218

Washington Lottery Winnings                                     1,100
Pechanga casino Slot Machine Winnings                           2,250
Gambling losses at Pechanga casino                              6,500

Other information that the Reyes’s provided for the 2007 tax year.

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

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 Reyes’s tax return.

Ans wers for the Tax Return Proble ms and the Comprehensive proble m are shown
on the following four Forms 1040, Schedule A’s, and related worksheets.


To top