Tax Exam 3 Kaitlin paid several legal expenses during the current tax year. She paid $1,000 to have a will prepared, $500 related to a divorce, $300 for tax advice, and $400 for legal work related to a business that she operates as a sole proprietorship. What are her total deductions allowed for these expenditures? $400 $700 $1,400 $2,200 Which of the following expenses is deductible for federal tax purposes? A fine paid due to violation of federal safety standards. Contributions made to a political organization. Pest control expenses for a warehouse where inventory is stored. Expenses made to a lobbyist representing your company on a bill under consideration by the United States Senate. Sanjay took out a loan on November 1, Year 1, for $100,000 to purchase inventory for his clothing store, which he operates as a cash basis sole proprietorship. His annual interest rate is 6%. On December 31, Year 1, he pays the $1,000 of interest due for Year 1 and also prepays $3,000 of interest for the first six months of Year 2. What is his deduction on his Year 1 tax return for interest expense? $0 $1,000 $3,000 $4,000 Which of the following expenses is NOT a deduction FOR adjusted gross income? Charitable contributions Interest on student loans, subject to certain limitations. One-half of self-employment taxes paid. Attorney's fees for discrimination lawsuits. Bronnie moved from San Francisco to Dallas, Texas in hopes of finding a new job. During his first 12 months in Dallas, his only work was as a full-time researcher at a marketing firm for 5 months. His moving expenses included: • • • $2,500 for moving his personal possession. $500 for an airline ticket for him to fly to Dallas. $1,200 of temporary living expenses before he found an apartment in Dallas. What is his moving expense deduction? $0 $2,500 $3,000 $4,200 Which of the following is not deductible? Assume that the deductions are not phased-out because of high income. Interest paid of $2,200 on student loans. Qualified higher education expenses for one's spouse of $3,500. A high school teacher spends $250 buying supplies to decorate his classroom. Child support payments paid to a former spouse. Felicia, age 42, incurred the following medical expenses for 2013: Physician charges $ 2,000 Hospital charges $10,000 Prescription medicine $ 1,000 Non-prescription medicine $ 500 Eyeglasses $ 300 Health club membership $ 1,200 Her adjusted gross income is $50,000. Her health insurance company reimbursed her $8,000 for the above expenses. What is her medical expense deduction? $ 300 $ 1,550 $13,300 $15,000 Tiffany is a cash basis taxpayer whose records show the following: Year 4 federal income taxes withheld $3,500 Year 4 state and local income taxes withheld 1,200 Year 4 state estimated income taxes paid during Year 4 1,000 Year 4 state and local income taxes paid on April 10, Year 5 400 Year 2 state and local income taxes paid on February 25, Year 4 500 How much can Tiffany deduct for taxes on her Schedule A (Itemized Deductions) of Form 1040 for Year 4? $2,200 $2,700 $3,100 $6,600 Which of the following taxes is not deductible as an itemized deduction? Property taxes paid to the local government based on the value of an automobile. Real estate taxes paid on a principal residence to the state government. Fees paid to the local government for sidewalks to be installed in one's neighborhood. State income taxes paid. Jerry and Elaine own a home that has a fair market value of $250,000 on which they have a mortgage of $190,000. They took out an $80,000 home equity loan and used the proceeds to buy a new boat. Interest paid on the home equity loan in the current tax year is $2,200. What amount of the home equity loan is eligible for the interest paid on it to be deductible as an itemized deduction? $0 $40,000 $60,000 $80,000 Which of the following types of interest expense is not deductible as an itemized deduction? Interest expense on a principal residence. Investment interest expense, subject to certain limitations. Student loan interest. Interest on a home equity loan. Rodney is single and has adjusted gross income of $100,000. He qualifies to itemize deductions for the current tax year. Rodney's only charitable contribution this year is an antique car that he had owned for 30 years that had a fair market value of $50,000 and adjusted basis of $15,000. What is the amount of charitable contributions deductible on Rodney's current year income tax return? $0 $15,000 $30,000 $50,000 Ron and Willie's home was damaged by a flood this year. The fair market value of the home before the flood was $300,000 and was $180,000 after the flood. Their flood insurance on the property reimbursed them $50,000 for this damage since this was the maximum allowed under the policy. Ron and Willie had purchased the home 10 years ago for $200,000. Their adjusted gross income for the year is $ 150,000. What is their casualty loss deduction after all reductions are considered? $54,900 $55,000 $120,000 $200,000 Which of the following statements is true with regard to the deduction for charitable contributions? Charitable contributions disallowed due to the 50% of AGI limitation can be carried forward indefinitely. A canceled check is sufficient documentation for a cash contribution of $500 to a charity. An attorney who provides free legal advice to a qualified charitable organization can deduct the fair market value of his services. Taxpayers may be able to deduct the fair market value of stock given to a qualified charitable organization. Which of the following expenses does not qualify as a deductible 2% miscellaneous itemized deduction? Tax return preparation fees of $300. Gambling losses to the extent of gambling winnings. Fees paid to an investment advisor to manage one's stock portfolio. Employee business expenses of $500 not reimbursed by the employer. Tobias owns a bowling alley which was completely destroyed this year by a tornado. The fair market value of the bowling alley was $230,000 before the tornado and its adjusted basis was $100,000. Tobias received $220,000 from his insurance company but he decided to not rebuild the alley. What is Tobias' recognized gain or loss from this transaction? $0 Loss of $230,000 Gain of $120,000 Gain of $220,000 Churyk is an attorney (sole proprietor) who is attending a legal seminar in Los Angeles. The seminar is three days, and he will be staying an extra two days for vacation. His airfare for the trip was $700. He spent $50 on food and $120 for his hotel for each of the five days. The cost of the seminar was $750. What amount of educational expenses can Churyk deduct on his Schedule C? $ 750 $1,450 $1,885 $2,300 Kathy owns her own marketing firm and incurred the following expenses this year related to meetings with clients and potential clients. Assume that all entertainment expenses were directly associated with a business discussion. Dues to Golf & Country Club $3,000 Green fees for playing golf with clients $2,000 Meals and drinks with clients after golf $1,200 Tickets to NCAA Basketball Tournament (face value = $400) $2,000 How much of these expenses are deductible for the current year? $1,800 $2,600 $3,600 $8,200 Which of the following statements with regard to accountable plans is not true? Reimbursements of employee business expenses under an accountable plan have no impact on the employee's adjusted gross income. Reimbursements of employee business expenses under an accountable plan always increase the employee's adjusted gross income. Employee business expenses that are not reimbursed by the employer are deductible as 2% miscellaneous itemized deductions. Employee business expenses that are reimbursed but not under an accountable plan are deductible as 2% miscellaneous itemized deductions. Which of the following expenses would be deductible as education expenses on Schedule C for a self-employed individual? Raymond pays $8,000 tuition expenses towards completing his undergraduate degree in education, the minimum requirements needed for the job he will begin after graduation. Anthony pays $500 to take the bar exam so that he can practice law in his state. Leigh currently works as a nurse and pays $5,000 in tuition while earning a graduate degree in business. Natalia is a CPA and pays $1,000 to attend a four-day update on accounting and auditing. In which of the following situations would Travis be able to deduct meal expenses incurred while engaged in activity related to his job? Travis is an information technology consultant who works for IT, Inc. and his business home is in Charlotte, North Carolina. IT assigns Travis to a job in Chicago on an indefinite basis. IT assigns Travis to a job in Chicago which will last for six months. IT assigns Travis to a job in Chicago which will last for 18 months. Travis drives to Raleigh, North Carolina for a business meeting and returns to Charlotte later that evening. Which of the following statements is true with regard to the deduction for losses? Trent loaned $2,000 to his friend to pay his tuition. If Trent discovers that the debt is partially worthless he can take a deduction for the partial bad debt. Trent loaned $2,000 to his friend to pay his tuition. If Trent discovers that the debt is completely worthless he can take an ordinary deduction for the loss. Trent owns stock in LOSER Corporation which he has not sold. To take a deduction for a loss this year related to LOSER the stock must be completely worthless. Trent owns stock in LOSER Corporation which he has not sold. If the stock is completely worthless it is treated as if it was sold on the day it became worthless. Which of the following expenses is not deductible or depreciable for a self-employed country-music singer on his Schedule C for his sole proprietorship? Denim jeans, t-shirt, and boots that he only wears when he sings on stage. $2,000 for a new guitar that he uses to perform and write songs. $200,000 for a bus that is used to travel to concerts. Salary expenses to his manager of $150,000. Cole has a net operating loss for the current year, 20x5, of $80,000. His taxable income for prior years, computed without regard to the net operating loss, were as follows: 20x2 $50,000 20x3 $40,000 20x4 $30,000 Which of the following statements is true with regard to this net operating loss? Cole cannot carryback any of the NOL since it is less than $100,000. If Cole carries the NOL back for two years his carryforward to the future will be $10,000. Cole cannot elect to use the NOL only as a carrforward. He must carry it back to previous years first. If Cole's itemized deductions had been greater for the year his NOL definitely would have been larger. Bruce is single and has adjusted gross income for the current year of $90,000 before any deduction for passive activity losses. He owns a duplex that he uses as rental property and this year his rental loss was $13,000. Bruce has no income from passive activities. Which of the following statements is true? If Bruce actively participates in managing the rental property, he can deduct the $13,000 loss against his other income. Bruce will not be able to deduct the $13,000 loss against his other income unless he materially participates in managing the property. Since Bruce's income does not exceed $150,000, he can deduct the loss against his other income regardless of his role in managing the property. In no circumstance will Bruce be able to deduct the loss this year since he does not have any passive income. Martin is a 20% limited partner in the BBC limited partnership. His share of the current year's ordinary loss is $30,000. Martin also works as an attorney and has taxable wages this year of $200,000. He has investment income of $15,000 and his only deduction for AGI is alimony of $40,000. Which of the following statements is true? Martin can deduct the alimony payments of $40,000 but cannot reduce AGI for the partnership loss of $30,000. Martin can deduct the alimony payments of $40,000 and can reduce AGI for the partnership loss of $30,000. Martin can deduct the partnership loss but only to the extent of his investment income, or $15,000. Martin can deduct the partnership loss of $30,000 but cannot deduct the alimony payments. Jordan owns a beach house that she used 60 days for personal use this year. She also rented the beach house to others for 50 days this year. Her rental income collected was $8,000 and expenses allocated to the rental use were $10,000. How much net income or loss must Jordan report on her income tax return for the rental use of this property? $8,000 income. No income or loss. $2,000 loss. $2,000 income. Charles is a CPA who owns his own accounting firm. He has developed a very successful practice and this year his firm had net income of $500,000. For many years he has enjoyed NASCAR car racing and began to race his own car on the weekends five years ago. During the current tax year he had winnings from races of $40,000. This was the first year that he had earned any revenue from racing. His racing expenses totaled $100,000 for the year. Charles competed in three races during the current tax year. Which of the following statements is false with regard to his race car activities? Since Charles has never had any net income from car racing, the presumption is that this activity is a hobby. Since the car racing activity is a hobby, Charles can deduct expenses only to the extent of his winnings of $40,000. If Charles wants to increase the likelihood that his car racing will not be classified as a hobby in future years, he will need to increase the number of races in which he competes. Since the car racing activity is a hobby, Charles cannot deduct any expenses related to this hobby but must report all winnings of $40,000. Which of the following taxpayers will qualify for a deduction for her home office expenses? Sheila is a college professor who maintains an office at home that she uses on the weekends to grade papers and prepare course lectures. Tonya is a real estate appraiser who runs her business completely from her home. She uses her home office 60% of the time for business purposes and 40% for personal activities. Chao is self-employed and provides dance lessons and classes to children. She rents space at a local shopping center for her dance studio but does not have an office there. She uses a room in her house exclusively to complete the administrative tasks for her business. Tanya is a salesperson for a clothing manufacturer and uses her home office often during the week so she does not have to drive to her office at the company's headquarters which is 20 miles from her home. Benjamin is an active investor in stocks and bonds. During the current tax year he earned interest and dividend income totaling $18,000. He frequently borrows money to purchase his investments and this year Benjamin paid investment interest of $14,000. His only other investment expense during the year was $5,000 paid to a professional investment advisor. How much of the investment interest expense can be deducted on Benjamin's tax return this year as an itemized deduction? $0 $ 9,000 $13,000 $14,000