Whittenburg Gerald E., Altus-Buller Martha. Income Tax Fundamentals
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Qualified higher education expenses include tuition, fees, books, supplies, and equipment
required for the enrollment or attendance at an eligible educational institution. In addition,
taxpayers are allowed reasonable room and board costs, subject to certain limitations.
The maximum amount a taxpayer can contribute annually to an educational savings
account for a beneficiary is $2,000. The contribution is not deductible, and if the account is
used for qualified education, the earnings are not taxable.
QUESTIONS and PROBLEMS
GROUP 1:
MULTIPLE CHOICE QUESTIONS
.............................................. .............................................. .
LO 5.1
1. The cost of which of the following expenses is not deductible as a medical expense on
Schedule A, before the 7.5 percent of adjusted gross income limitation ?
a. Dentures
b. Birth control prescriptions
c. Marriage counseling
d. A psychiatrist
LO 5.1
2. The cost of which of the following is deductible as a medical expense?
a. Travel to a warm climate
b. Birth control pills
c. A disability insurance policy that pays $200 for each day the taxpayer is in the
hospital
d. Liposuction to reduce waist size
LO 5.1
3. Which of the following is not considered a deductible medical expense?
a. Dental work
b. Eyeglasses
c. Acupuncture
d. Diet foods
LO 5.2
4. Which of the following taxes may be deducted as itemized deductions for 2010?
a. State gasoline taxes
b. Fishing license fee
c. Federal income taxes
d. Social Security taxes
e. Local income taxes
Questions and Problems 5-31
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LO 5.2
5. Wilma had $3,100 in state income taxes withheld from her paychecks during 2010. In
April of 2010, Wilma paid $300 due for her 2009 state tax return. Wilma’s total tax
liability on her state tax return for 2010 is $2,850. How much should Wilma deduct
as an itemized deduction for state income taxes on her 2010 federal income tax return?
a. $3,400
b. $3,150
c. $3,100
d. $2,850
e. None of the above
LO 5.2
6. Which of the following taxes are not deductible as an itemized deduction:
a. Property tax on land held for investment
b. State income taxes
c. Auto registration fees based on the value of the auto
d. Federal income taxes
LO 5.3
7. Which of the following is deductible as interest on Schedule A?
a. Loan fees that are not ‘‘points’’
b. Service charges
c. Investment interest expense, subject to the net investment income limitation
d. Interest on loans to finance tax-exempt bonds
e. None of the above are deductible as interest
LO 5.4
8. Which of the following items is not deductible as a miscellaneous deduction on Schedule A?
a. Investment expenses
b. Gambling losses to the extent of gambling winnings
c. Unreimbursed business expenses
d. Subscriptions to professional publications
e. Charitable contributions
LO 5.3
9. Carrie finished her undergraduate degree using money from a student loan. She earned
$36,000 her first year and paid $2,600 in interest. She can take a deduction for student
loan interest in the amount of:
a. $2,600
b. $2,500
c. $1,500
d. $0
e. None of the above
LO 5.3
10. Which of the following interest expense amounts is not deductible in the current year:
a. Education loan interest of $2,000, assuming the taxpayer has income of $30,000.
b. Home equity loan interest of $6,000, on a loan of $90,000, the proceeds of which
were used to purchase a sports car and designer clothes.
c. Invest ment interest expense of $ 10,000, assum ing the taxpayer has no investment
income.
d. Qualified residence interest of $70,000 on a $1 million loan used to purchase a lux-
ury apartment in downtown San Diego.
LO 5.4
11. Which of the following contributions is not deductible as a charitable deduction?
a. A donation of clothing to Goodwill Industries
b. A contribution to a church
c. A contribution to a public university
5-32 Chapter 5
Itemized Deductions and Other Incentives
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d. A contribution to a labor union
e. A contribution to a museum
LO 5.4
12. Stanley donates a hotel to a university for use as a conference center. The building cost
$1,500,000 3 months ago and has a fair market value of $1,900,000 on t he date the
contribution is made. If Stanley had sold the building, the $400,000 difference between
the sales price and cost would have been a short-term capital gain. What is the amount
of Stanley’s deduction for this contribution, before considering any limitation based on
adjusted gross income?
a. $2,300,000
b. $1,500,000
c. $1,900,000
d. $0
e. The amount cannot be determined from the information given
LO 5.4
13. In March of 2010, Thomas makes a $5,000 cash contribution to a public university. In
that month he also donates $20,000 to an organization subject to the 30 percent lim-
itation. Thomas has adjusted gross income for 2010 of $35,000. What is the amount of
Thomas’s 2010 charitable contribution deduction?
a. $5,000
b. $23,000
c. $10,500
d. $15,500
e. None of the above
LO 5.5
14. Which of the following is not a qualified casualty loss?
a. Damage to an automobile from rust
b. An automobile accident
c. A fire loss
d. A tornado loss
e. A flood loss
LO 5.4
15. Which of the following gifts is a deductible contribution:
a. A gift of $100 to a homeless person
b. A $500 gift to the Democratic National Committee
c. $1,000 spent on church bingo games
d. A $200 contribution to the federal government to pay down the national debt
LO 5.6
16. Which of the following is not a miscellaneous itemized deduction:
a. Tax preparation fees
b. Professional dues
c. Investment interest expense
d. Job-hunting expenses
LO 5.7
17. Ramon, a single taxpayer, has adjusted gross income for 2010 of $164,000 and his
itemized deductions total $19,000. The itemized deductions consist of $11,000 in
state income taxes and $8,000 of charitable contributions. What amount of itemized
deductions will Ramon be allowed to deduct in 2010?
a. $40
b. $10,133
c. $5,450
d. $18,959
e. $19,000
Questions and Problems 5-33
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LO 5.8
18. During 2010, Car l (a single taxpayer) has a salary of $90,500 and interest income of
$15,500. Calculate the maximum contribution Carl is allowed for an educational sav-
ings account.
a. $2,000
b. $1,467
c. $533
d. $0
e. Some other amount
LO 5.8
19. George receives a $1,500 distribution from his educational savings account. He uses
$1,200 to pay for qualified higher education expenses. On the date of the distribution,
George’s account balance is $5,000, $3,000 of which is his contributions. What is
George’s tax-free return of capital from the distribution?
a. $1,500
b. $1,200
c. $900
d. $750
e. $600
LO 5.8
20. Gina receives a $2,000 distribution from her educational savings account. She uses
$1,600 to pay for qualified higher education expenses and $400 on a vacation. On
the date of the distribution, Gina’s account balance is $5,000, $2,500 o f which is
her contributions. What is Gina’s taxable income (after any exclusion) from the
distribution?
a. $1,600
b. $1,000
c. $800
d. $200
e. Some other amount
LO 5.8
21. Which of the following is correct for Qualified Tuition Programs?
a. Contributions are deductible, and qualified educational expense distributions are
tax free.
b. Contributions are not de ductible, and qualifie d educa tional expense distributions
are tax free.
c. Contributions are deductible, and qualified educational expense distributions are
taxable.
d. Contributions are not de ductible, and qualifie d educa tional expense distributions
are taxable.
LO 5.8
22. In 2010, Amy receives $15,000 (of which $4,000 is earnings) from a qualified tuition
program. She does not use the funds to pay for tuition or other qualified higher edu-
cation expenses. What amount is taxable to Amy?
a. $0
b. $4,000
c. $11,000
d. $15,000
LO 5.8
23. For married taxpayers filing a joint return in 2010, at what AGI level does the phase-
out limit for contributions to Qualified Tuition Programs start?
a. $110,000
b. $190,000
5-34 Chapter 5
Itemized Deductions and Other Incentives
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c. $220,000
d. There is no phase-out limit on QTP contributions
LO 5.8
24. Which of the following is not true with respect to education incentives:
a. The contributions to qualified tuition programs (Section 529 plans) are not
deductible.
b. The contributions to educational savings accounts (Coverdell ESA) are not
deductible.
c. Tuition paid by a taxpayer earning $300,000 of income is not deductible.
d. Married taxpayers must have income less than $100,000 to contribute to a qualified
tuition program (Section 529 plan).
GROUP 2:
PROBLEMS
.............................................. .............................................. .
LO 5.1 1. Linda installed a special pool for the hydrotherapeutic treatment of severe arthritis, as
prescribed by her doctor. The cost of installing the pool was $20,000, and her insur-
ance company paid $5,000 towards its cost. The pool increased the value of Linda’s
house by $7,000, and it has a useful life of 10 years. How much of a deduction is
Linda entitled to in the year of installation of the pool?
$ ____________
Explain ________________________________________________________________
___ ___________ ___________ _______________________________________________
_________________________________________________ ________________________
LO 5.1 2. In 2010, Margaret and John Murphy are married taxpayers who file a joint tax return
with AGl of $25,000. During the year they incurred the following expenses:
Hospitalization insurance premiums $1,050
Premiums on an insurance policy that pays
$100 per day for each day Margaret is hospitalized
300
Medical care lodging (two people, one night) 65
Hospital bills 2,200
Doctor bills 850
Dentist bills 175
Prescription drugs and medicines 340
Psychiatric care 300
In addition, during the year, they drove 109 miles for medical transportation, and
their insurance company reimbursed them $900 for the above expenses. On the follow-
ing segment of Schedule A of Form 1040, calculate the Murphy’s medical expense
deduction.
LO 5.1 3. Janet needs an elevator seat attached to her stairs since she has a medical condition that
makes her unable to climb the stairs in her house. The $10,000 spent on the elevator
Questions and Problems 5-35
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
seat does not increase the value of her house according to a local appraiser. How much
of the capital asset is deductible in Janet’s tax return as a medical expense?
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 5.2 4. Lyndon’s employer withheld $1,800 in state i ncome taxes from Lyndon’s wages.
Lyndon obtained a refund of $200 in this year for overpayment of state income
taxes for last year. State income taxes were an itemized deduction on his 2009 return.
His liability for this year’s state income tax is $1,400. Indicate the amount of Lyndon’s
deduction for state income taxes on his federal tax return assuming he elects to deduct
state income taxes for 2010.
$ ____________
LO 5.2 5. Mike sells his home to Jane on April 2, 2010. Jane pays the property taxes covering the
full calendar year in October, which amount to $2,500. How much may Mike and Jane
each deduct for property taxes in 2010?
Mike’s deduction $ ____________
Jane’s deduction $ ____________
LO 5.2 6. Laura is a single taxpayer living in New Jersey with adjusted gross income for the 2010
tax year of $35,550. Laura’s employer withheld $3,300 in state income tax from her sal-
ary. In April of 2010, she pays $850 in add itiona l state taxes for her prior year’s tax
return. The real estate taxes on her home are $1,600 for 2010, and her personal property
taxes, based on the value of the property, amount to $380. Also, she paid $75 for state
gasoline taxes for the year. Complete the taxes section of Schedule A below to report
Laura’s deduction assuming she elects to deduct state and local income taxes.
LO 5.2 7. Mary paid $2,000 of state income taxes in 2010. The total sales tax she paid during
2010 was $5,500, which included $3,000 for the cost of a new car. How should
Mary treat the taxes paid on her 2010 tax return?
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 5.3 8. Mary’s mother defaults on a home loan and Mary pays $600 in loan payments, includ-
ing $175 in interest. Mary is not legally obligated on the loan and has no owners hip
interest in her mother’s home.
a. What amount, if any, may Mary claim as an itemized deduction for 2010?
$ ____________
b. Why? _______________ _________________________________________________
_______________________________________________________________________
5-36 Chapter 5
Itemized Deductions and Other Incentives
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
LO 5.3 9. Matthew borrows $250,000 to invest in bonds. During 2010, his interest on the loan is
$30,000. Matthew’s interest income from the bonds is $10,000. This is Matthew’s only
investment income.
a. Calculate Matthew’s itemized deduction for investment interest for this year.
$ ____________
b. Is Matthew entitled to a deduction in future years? __________________________
Explain ________________________________________________________________
_______________________________________________________________________
LO 5.3 10. Ken paid the following amounts for interest during 2010:
Qualified interest on home mortgage $4,700
Auto loan interest 850
‘‘Points’’ on the mortgage for acquisition of his
personal residence
300
Service charges on his checking account 40
Mastercard interest 300
Calculate Ken’s itemized deduction for interest on the following portion of
Schedule A.
LO 5.3 11. Janet and James purchased their personal residence 15 years ago for $150,000. Their
home has a fair market value today of $425,000. For the current year, they have an
$80,000 first m ortgage on their home, on which they paid $5,600 in interest. They
also have a home equity loan secured by their home with a balance throughout the
year of $150,000. They paid interest on the home equity loan of $12,000 for the
year. Calculate the amount of their deduction for interest paid on qualified residence
acquisition debt and qualified home equity debt for 2010.
Qualified residence acquisition debt interest $ ____________
Qualified home equity debt interest $ ____________
LO 5.3 12. Helen paid the following amounts of interest during the 2010 tax year:
Mortgage interest on Dallas residence (loan balance $50,000) $2,025
Automobile loan interest (personal use only) 440
Mortgage interest on Vail residence (loan balance $50,000) 3,050
Visa and Mastercard interest 165
Calculate the amount of Helen’s itemized deduction for interest (after limitations)
for 2010.
$ ____________
LO 5.3 13. Mark owns his home and has a $250,000 mortgage related to his purchase of the res-
idence. When his daughte r went to college in the fall of 2010, he borrowed $20,000
through a home equity loan on his house to help pay for her education. The interest
expense on the main mortgage is $15,000, and the interest expense on the home equity
Questions and Problems 5-37
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
loan is $1,500. How much of the interest is deductible as an itemized deduction
and why?
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 5.4 14. Barbara donates a painting that cost $5,000 3 years ago to a university for display in the
president’s office. The fair market value of the painting on the date of the gift is
$7,000. If Barbara had sold the p ainting, the difference between the sales price and
her cost would have been a long-term capital gain.
a. How much is Barbara’s charitable contribution deduction for this donation?
$ ____________
b. Explain ________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
LO 5.4 15. Jerry made the following contributions during 2010:
His synagogue (by check) $680
The Democratic Party (by check) 180
The American Red Cross (by check) 150
His lodge for a holiday party 100
In addition, Jerry donated used furniture to the Salvation Army costing $2,000 with
a fair market value of $400. Assuming Jerry has adjusted gross income of $45,000, has
the necessary written acknowledgments, and itemizes deductions, complete the Gifts
to Charity section of Schedule A below to show Jerry’s deduction for 2010.
LO 5.4 16. Richard donates publicly traded Microsoft stock with a basis of $1,000 and a fair mar-
ket value of $15,000 to the college he attended , which is considered a public charity.
Richard has owned the shares for 10 years. How is this contribution treated on
Richard’s tax return?
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 5.5 17. In June of 2010, Maureen’s house is vandalized during a long-term power failure after
a hurricane hit the city. The President of the United States declares Maureen’s city a
disaster area as a result of the wide-sca le vandalism. In which tax year may Maureen
take her casualty loss deduction?
____________
Explain: ________________________________________________________________
________________________________________________ _________________________
_________________________________________________ ________________________
LO 5.5 18. On January 3, 2010, Carey discovers his diamond bracelet has been stolen. The brace-
let had a fair market value and adjusted basis of $8,000. Assuming Carey had no
5-38 Chapter 5
Itemized Deductions and Other Incentives
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
The 2010 version of the form has not been issued as we go to press.
Questions and Problems 5-39
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
5-40 Chapter 5
Itemized Deductions and Other Incentives
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.