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Exam 10: Income, Deductions, and Credits

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Question 1

True/False

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A phaseout of certain itemized deductions applies for all taxpayers who choose to itemize their deductions.

A) True
B) False

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Question 2

Multiple Choice

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In the current year, Jerry pays $8,000 to become a charter member of Mammoth University's Athletic Council. The membership ensures that Jerry will receive choice seating at all of Mammoth's home basketball games. Also this year, Jerry pays $2,200 (the regular retail price) for season tickets for himself and his wife. For these items, how much qualifies as a charitable contribution?

A) $6,200
B) $6,400
C) $8,000
D) $10,200
E) None of the above

F) A) and B)
G) C) and D)

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Question 3

Multiple Choice

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Paul, a calendar year married taxpayer, files a joint return for 2016. Information for 2016 includes the following: Paul's allowable itemized deductions for 2016 are:

Ted earned $150,000 during the current year. He paid Alice, his former wife, $75,000 in alimony. Under these facts, the tax is paid by the person who benefits from the income rather than the person who earned the income.

Barry and Larry, who are brothers, are equal owners in Chickadee Corporation. On July 1, 2016, each loans the corporation $10,000 at an annual interest rate of 10%. Both shareholders are on the cash method of accounting, while Chickadee Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2017, Chickadee repays the loans of $20,000 together with the specified interest of $2,000. How much of the interest can Chickadee Corporation deduct in 2016?

Christie sued her former employer for a back injury she suffered on the job in 2016. As a result of the injury, she was partially disabled. In 2017, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2016 return, reducing her taxable income by $12,000. Christie's 2017 gross income from the above is:

Child and dependent care expenses include amounts paid for general household services.

Brad, who uses the cash method of accounting, lives in a state that imposes an income tax (including withholding from wages) . On April 14, 2016, he files his state return for 2015, paying an additional $600 in state income taxes. During 2016, his withholdings for state income tax purposes amount to $3,550. On April 13, 2017, he files his state return for 2016 claiming a refund of $800. Brad receives the refund on June 3, 2017. If he itemizes deductions, how much may Brad claim as a deduction for state income taxes on his Federal income tax return for calendar year 2016 (filed in April 2017) ?

Jena is a full-time undergraduate student at State University and is claimed by her parents as a dependent. Her only source of income is a $10,000 athletic scholarship ($1,000 for books, $5,500 tuition, $500 student activity fee, and $3,000 room and board) . Jena's gross income for the year is:

Joseph and Sandra, married taxpayers, took out a mortgage on their home for $350,000 15 years ago. In May of this year, when the home had a fair market value of $450,000 and they owed $250,000 on the mortgage, they took out a home equity loan for $220,000. They used the funds to purchase a single engine airplane to be used for recreational travel purposes. What is the maximum amount of debt on which they can deduct home equity interest?

Which of the following statements regarding the adoption expenses credit is not true?

Fred and Lucy are married, ages 33 and 32, and together have AGI of $120,000 in 2016. They have four dependents and file a joint return. They pay $5,000 for a high deductible health insurance policy and contribute $2,600 to a qualified Health Savings Account. During the year, they paid the following amounts for medical care: $9,200 in doctor and dentist bills and hospital expenses, and $3,000 for prescribed medicine and drugs. In October 2016, they received an insurance reimbursement of $4,400 for the hospitalization. They expect to receive an additional reimbursement of $1,000 in January 2017. Determine the maximum itemized deduction allowable for medical expenses in 2016.

Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income:

Upon the recommendation of a physician, Ed has a swimming pool installed at his residence because of a heart condition. If he is allowed to deduct all or part of the cost of the pool, Ed's increase in utility bills due to the operation of the pool qualifies as a medical expense.

Points paid by the owner of a personal residence to refinance an existing mortgage must be capitalized and amortized over the life of the new mortgage.

As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children. The scholarships are paid by the company on behalf of the children of key employees directly to each child's educational institution and are payable only if the student maintains a B average.

Barbara was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: ​ The defendant's insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages amount. Instead, the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses. Assuming Barbara is in the 35% marginal tax bracket, will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)?

Sergio was required by the city to pay $2,000 for the cost of new curbing installed by the city in front of his personal residence. The new curbing was installed throughout Sergio's neighborhood as part of a street upgrade project. Sergio may not deduct $2,000 as a tax, but he may add the $2,000 to the basis of his property.

Jermaine and Kesha are married, file a joint tax return, have AGI of $82,500, and have two children. Devona is beginning her freshman year at State University during Fall 2016, and Arethia is beginning her senior year at Northeast University during Fall 2016 after having completed her junior year during the spring of that year. Both Devona and Arethia are claimed as dependents on their parents' tax return. ​ Devona's qualifying tuition expenses and fees total $4,000 for the fall semester, while Arethia's qualifying tuition expenses and fees total $6,200 for each semester during 2016. Full payment is made for the tuition and related expenses for both children during each semester. The American Opportunity credit available to Jermaine and Kesha for 2016 is:

Dan contributed stock worth $16,000 to his college alma mater, a qualified charity. He acquired the stock 11 months ago for $4,000. He may deduct $16,000 as a charitable contribution deduction (subject to percentage limitations).