CHAPTER FOUR

Deductions from Adjusted Gross

Income

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 Chapter Four

Deductions from Adjusted Gross Income

STANDARD VS. ITEMIZED DEDUCTIONS ………………………………… 66

1. MEDICAL EXPENSES …………………….………………………………..…67

General
Reimbursements
Capital Expenditure
Nursing Home and Special Schools
Transportation and Lodging

2. TAXES ………………………………………………………………….………..69
State & Local Income Taxes
Real Estate Taxes
Personal Property Taxes
Foreign Taxes

3. INTEREST DEUCTION ………………………………………..….……….…..71

Qualified Residence Interest
Investment Interest Expense

4. CHARITABLE CONTRIBUTIONS ……………………………….………..…74

5. CASUALTY LOSSES …………………………..…………………………...…..76
6. MISCELLANEOUS 2% DEDUCTIONS ……………...…………………....…76
7. OTHER MISCELLANEOUS DEDUCTIONS ………………………………...77
8. LIMITATION ON DEDUCTIONS ………….……………………………..…..77

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 Chapter Four

Deductions from Adjusted Gross Income

STADARD VS. ITEMIZED DEDUCTIONS

Rather than claiming the standard deduction, a taxpayer may elect to itemize his/her

deductions instead. The election to itemize is made by attaching Schedule A to form

1040 when the taxpayer files the return. This decision needs to be based upon the total

amount of allowable itemized deductions as compared to the standard deduction for

that taxpayer. (See Chapter 1 for the various standard deductions by filing

status). The following example highlights the election process:

Example 1: T is single and has no dependents. His only source of income is a

salary of $50.000. During 2006 he paid state income taxes of $3.000, qualified
mortgage interest of $7.000 and made allowable contributions of $2.000. In preparing
his return, T is unsure as whether to claim the standard deduction or itemize his
deductions.

Answer: As a single (unmarried) taxpayer who is not a head of household or

qualifying widower, T is allowed a standard deduction of $5.350. His allowable
itemized deductions are :
State income taxes $3.000
Mortgage interest 7.000
Charitable contributions 2.000
Total $12.000
Since T's itemized whether deductions of $12.000 exceed the standard deduction of
$5.350, he would obtain a large deduction by electing to itemize his deductions.

In deciding whether or not to make the election, it is important to understand what

transactions qualify as allowable itemized deductions. That is the focus of this

chapter.

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1. MEDICAL EXPENSES
1-1 General

A taxpayer may deduct medical expenses paid for the diagnosis, cure, mitigation,

treatment, or prevention of disease, or for the purpose of affecting any structure or

function of the body. In order for the expenditures to be deductible, they must be:

 Paid for the care of the taxpayer , spouse or dependents (not just the taxpayer's
child)
 The deductible portion must exceed 7.5% of adjusted gross income.

Typical qualifying expenses include, but are not limited to medical insurance

payments, doctor and hospital bills, prescription drugs, dental and eye care expenses

(including contact lenses). Cost of maintaining special equipment needed for the care

of the dependent, such as wheelchairs, ramps, and elevators, are allowable as well.

Payments for long-term care services and insurance premiums for long-term care will

be classified as medical expenses subject to the 7.5% AGI threshold. The maximum

allowed for the premium deduction ranges from $200 to $2.500 based upon the age of

the taxpayer.

Expenditures for the overall general health of the taxpayer, such as vitamins or health

clubs, and cosmetics surgery are not deductible.

1-2 Reimbursements

The deductible medical expenses must be reduced by any insurance reimbursements

received during the year. If the reimbursement is received in the following year, then

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it must be reported in the following year as gross income, up to the extent of the tax

benefit received by the taxpayer in the year of the deduction.

Example 2: T pays medical insurance premiums of $4.000 and doctors and

hospitals bills of $3.000 in 2006. His adjusted gross income of $40.000, He is
reimbursed $1.000 in 2006 from the insurance company. His medical deduction is :
Medical insurance $4.000
Doctors and hospitals 3.000
Total payments 7.000
Less: reimbursements -1.000
Expenses before limitation 6.000
Less : AGI threshold limitation :
7.5% of $40.000 -3.000
Allowable deductions $3.000

Example 3: If T was not reimbursed the $1.000 until 2007, his 2006 deduction
would increase to $4.000 and he would have to recognize the $1.000 insurance
reimbursement as gross income in 2007.

1-3 Capital Expenditures

When it is necessary to make medical expenditures of a capital nature, they are

deductible only to the extent that there is not a corresponding increase in the fair

market value of the property. For the purpose of installing wheelchair ramps and

widening hallways, etc, there is deemed to be no increase in value of the property and

the expenditure is fully deductible.

Example 4: S installs an elevator for his dependent mother at a cost of $17.000 at

the advice of the physician due to her ailing heart. The fair value of S's house
increases by $13.000 as a result. S may deduct the excess cost over the increase in
value ($4.000) as a medical expense.

1-4 Nursing Home & Special Schools

Nursing home costs are deductible medical expenses when the condition of the patient

requires medical or nursing attention. The deductible costs may also include the cost

of staying at that facility.

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In addition, expenses related to tuition, room and board, as well as the cost of medical

care may be deductible if the principal reason for sending a dependent to a special

school is that school's special resources for treating that specific sickness or disease.

1-5 Transportation and Lodging

The cost of transportation for medical treatment, which includes a parent's cost if they

are accompanying a child, is allowed as a deduction. In lieu of computing the out-of-

pocket costs of using your own vehicle, taxpayers are allowed to deduct 15 cents per

mile, plus parking and tolls. A deduction for overnight lodging is allowed provided:

 The lodging is primarily for and essential to medical care.

 Medical care is provided by a doctor in a licensed hospital.
 The amount of the deduction cannot exceed $50 per night.

2. TAXES

A deduction is allowed for state, local and foreign taxes paid during the year. There

are no itemized deductions for any federal income tax paid except for rare situations

such as the environmental tax and the allocable share of a decedent's estate tax. In

order for the taxes to be deductible, they must be the taxpayer's own tax obligation.

Contrast this with medical expenses where the payments of dependent's medical

expenses were deductible. The deductible taxes are:

2-1 STATE & LOCAL INCOME TAXES

Payments for state and local income taxes made are deductible in the year paid,

regardless of the tax period the tax pertains to. Likewise, late payments of balances

due from prior years are deductible in the year of payment.

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2-2 REAL ESTATE TAXES

Taxes paid on the ownership of real property, wherever situated, are allowed as a

deduction. This would include the tax on the taxpayer's residence(s), land, and

vacation homes, both domestic and foreign. Should the real property be rental or even

part rental, the real estate taxes allocable to that portion must be shown as a rental

expense, not an itemized deduction.

Real estate tax payments are usually periodic, such as semi-annually or quarterly. If a

taxpayer purchases or sells real property during the year, the deduction must be

apportioned based upon the number of days of ownership.

Example 5: On March 15th, P paid $ 1.800 in real estate taxes on his residence,
which covered the period from January 1st until June 30th. On May 1st he sold his
residence to R. Since P held the property for four months, he may only deduct two
thirds (four months of the six months) of real estate taxes paid.

2-3 PERSONAL PROPERTY TAXES

A tax on personal property is deductible if the tax is based upon the value of the

property and is assessed on an annual basis. Typically, once a year a city or town will

assess a personal property tax on a taxpayer's motor vehicle or boat based upon its

assessed or fair market value.

Example 6: State A charges a vehicle licensing fee that is based on the type of
vehicle and its weight. State B's vehicle licensing fee is $25 plus 1 percent of the fair
market value of the vehicle. Is either fee deductible as a tax?

Answer: State A's fee is not based on the value of the vehicle and is not a deductible
personal property tax. State B's fee is partially based on the value of the vehicle.

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Therefore, the fee in excess of the $25 fixed charge is deductible as a personal
property tax.

2-4 FOREIGN TAXES

When a taxpayer has income from foreign sources, there is frequently a tax paid to

that foreign country. Very often that tax is withheld at its source, such as on interest or

dividends. In computing one's tax, the taxpayer has an option of treating the taxes

paid to that foreign country as either a credit against his U.S. taxes, or a deduction.

Since the value of a tax credit is greater than that of a deduction, the credit is more

frequently elected, but a deduction is allowable.

3. INTEREST DEDUCTION

A taxpayer is allowed an itemized deduction for payments of qualified residence

interest and investment interest. Similar to state taxes, it must be on the taxpayer's

indebtedness. Interest on personal indebtedness (e.g., credit cards and auto loans) is

no longer allowable as a deduction.

3-1 QUALIFIED RESIDENCE INTEREST

Interest paid on loans for the acquisition of a qualified residence or home equity loan

generally qualify for the deduction. A qualified residence represents the taxpayer's

principal residence plus any other one. This second residence may be a vacation

home, yacht or mobile home. The taxpayer may have more than two residences, and

each year select which one is his second residence for tax purposes.

A) Acquisition indebtedness includes the cost of acquiring, constructing and

substantially improving the residence of the taxpayer. In computing the interest

deduction, the aggregate of indebtedness for both residences cannot exceed:

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 $1.000,000 if married filing jointly, or single
$500.000 if married filing separately
To determine the allowable deduction on borrowings in excess of this amount , the

interest expense must be prorated.

Example 7: K purchased her first personal residence for $1.500.000 and borrowed
$1.200.000. During the year, she paid $90.000 in interest on the mortgage. She may
deduct only $75.000 as qualified residence interest. The balance of $15.000 is non-
deductible personal interest.

$90.000 × 1.000.000 = $75.000 deductible

1.200.000

B) Home equity indebtedness (borrowing) is usually used for personal, or non-

deductible reasons such as college tuition, vacations, etc. In order to be deductible, the

borrowings against a taxpayer's residence that are not classified as acquisition

indebtedness must be:

 Limited to the fair market value of the residence less any acquisition
indebtedness , or
 $100.000 , whichever is less , and
 Be secured by the residence.

C) Points are prepaid interest amounts that must be paid to acquire financing and are

fully deductible in the payment year. They are expressed as a percentage of the value

of the loans and paid at loan acquisition. Points represent an adjustment to the interest

rate, and not a service charge or a finders' fee. For example, a bank may charge an

interest rate of 10% with no points being paid by the borrower, or offer a rate of

9.75% with the borrower paying one point.

Points paid to refinance an existing mortgage are not immediately deductible in full.

They must be capitalized and amortized on a straight-line basis over the life of the

new loan.

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A penalty for the late payment or pre-payment of mortgage is generally deductible.

Example 8: Nadeen purchases a new home, borrowing $80.000 from Local Bank to
finance the purchase. She also pays $1.600 in points. Interest paid on the $80.000
mortgage totals $8.400. What is Nadeen's allowable deduction?

Answer: Assuming that the $80.000 debt is secured by the property, Nadeen can
deduct the $8.400 in mortgage interest and the $1.600 in points paid to obtain the
mortgage-$10.000 in all.

Example 9: Karim's home is worth $250.000. He purchased the home 20 years ago
using a $100.000 mortgage. During the current year, Karim pays $5.400 in interest on
the original mortgage, which has a balance of $45.000. he also borrows $110.000 on a
home equity loan and uses the proceeds to pay off personal debts, buy a new sports
car, and take a trip around the world. Karim pays $11.000 in interest (i.e., 10%
interest rate) on the home equity home. How much is his allowable interest
deduction?

Answer: The $5.400 paid on the original mortgage is qualified home mortgage
interest. Although the total debt ($45.000+$110.000) is less than the fair market value
of the home, only $100.000 of the home equity is considered qualified debt. The
deduction for the home equity loan would be $10.000 (10%X 100.000), for a total
allowable interest deduction of $15.400. The excess home equity debt ($10.000) is
considered personal debt, and the $1.000 in interest is non-deductible.
Note: The $100.000 home equity loan is considered qualified debt, regardless of the
use of the proceeds. In this case, even though Karim uses the proceeds for purely
personal purposes, the interest is deductible.

3-2 INVESTMENT INTEREST EXPENSE

When a taxpayer borrows money to acquire investments, the interest expense is

classified as investment interest expense. The general rule is that the investment

interest expense is allowed only to the extent of the net investment income. Any

unused investment interest expense is carried over to future years. There is no

limitation on the carryforward. Investment income includes interest, dividends, and

royalties, but usually not capital gains unless the taxpayer makes special elections.

From investment income, you then subtract the allowable investment expense,

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excluding the interest expense. These expenses are subject to a 2% threshold and are

described later in this chapter.

Example 10: Late in 1999, K borrowed $30.000 to invest in securities. During the
year 1999 he paid $400 in interest expense on the loan. There was no investment
income. K cannot deduct the interest expense for 1999.

Example 11: During 2000, K earned $4.000 in dividends on his investment; paid
$2.500 in interest expense on the loan; and had allowable investment expenses of
$100. His allowable interest expense is $2.900, comprised of the $400 carryforward
from 1999 and the $2.500 current year interest expense. The $2.900 does not exceed
the current year's net investment interest income of $3.900 ($4.000 less $100), and is
fully deductible.

Note: Interests on borrowing to acquire tax-exempt securities are non-

deductible.

4. CHARITABLE CONTRIBUTIONS

A deduction is allowed for a charitable contribution or gift paid during the year to a

qualified organization. Qualified organizations include churches, or other religious

organizations, educational organizations, medical or research organizations, and

literary organizations. Federal, state and local organizations qualify as well if the gift

is made solely for public purposes. A taxpayer is considered to have paid a charitable

contribution if it was charged to his credit card account during the taxable year.

In determining the allowable deduction, there are limitations based upon the

taxpayer's adjusted gross income and the type of gift:

 In general, contributions cannot exceed 50% of the taxpayer's adjusted gross

income for the year.
 Contributions of long-term capital gain property deducted at fair market value
cannot exceed 30% of adjusted gross income. If the taxpayer elects to deduct
the contribution using cost instead of fair market value, the limitation rises
back to 50%. Short-term capital gain property is limited to cost.

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  Unreimbursed out-of-pocket costs are allowed as deductions. This includes
travel at an optional 14 cents per mile, plus parking and tolls.
 Unused charitable contributions due to the 50%, 30% and 20% limitations are
carried over for a maximum of 5 years. In determining the allowable
deduction for the current year, you first must consider the current year
contributions, then the carryovers. Carryovers may expire if the taxpayer
ignores the ordering of deduction.
Example 12: Q made a cash contribution of $5.000 to his church which was
substantiated in writing and his wife contributed stock with a fair market value of
$12.000 and an adjusted basis of $2.000 to her college. The contributions are to
qualified 50% organizations. Their adjusted gross income for the year was $30.000.

In determining the current year's allowable contribution it is important to heed the

limitations. The overall limitation is 50% of their $30.000 AGI or $15.000, but the
components and carryforwards are complicated.

Step 1. Determine the overall 50% limitation :

Adjusted gross income $30.000
Overall contribution limitation 50%

Maximum allowed this year $ 15.000

Step 2. Determine what is used up by qualifying 50% contributions. The residual is
available for the 30% contributions :

Maximum allowable $15.000

Less : Contributions qualifying
under 50% rule -5.000
Available for 30% limitation $10.000
Step 3. Determine the deductibility of the stock contribution with a $12.000 FMV.
The maximum allowable on the stock is 30% of their adjusted gross income, or
$9.000.

Adjusted gross income $30.000

Contribution limitation for FMV 30%
Maximum allowed this year $9.000

Even though the stock had a fair market value of $12.000, and there was still $10.000
available in under the 50% limitation test in Step 2, we determined that the 30%
limitation was the true limiting factor because only $9.000 of the property
contribution was allowed. Therefore :
Total allowable contributions:
Cash contributions $5.000
Stock –FMV ( limited ) 9.000
Total $14.000

The $3.000 carryover ($12.000 less the $9.000 allowed) arises from the long-term
capital property and will be subject to the 30% test each year until it is utilized or
expires in five years.

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5. CASUALTY LOSSES

A taxpayer may deduct a loss for a personal casualty loss. A casualty loss is sudden

and unexpected, and may include a theft loss as well. To determine the allowable loss:

1. Determine the lessor of the decrease in the fair market value of the asset destroyed,
or its adjusted basis.
2. Subtract from that event, a floor of $100.
3. Combine all personal casualties for the year together.
4. The allowable deduction is the amount that exceeds 10% of the taxpayer's adjusted
gross income.

Example 13: John is single and has adjusted gross income of $30.000 for the year.
During the year, his boat was totally destroyed during a storm. The boat had a fair
market value of $17.000 at the time of the storm. Its adjusted basis was $14.000. The
insurance company reimbursed John $10.000 for the loss.

Answer:
Lessor of adjusted basis or decrease in FMV $ 14.000
Less : insurance reimbursement (10.000)
4.000
Less : statutory floor (100)
3.900

Threshold limitation of
10% of adjusted gross income (3.000)
Allowable deduction $ 900

6. MISCELLANEOUS 2% DEDUCTIONS

There are a number of employee related expenses which, if unreimbursed by the

employer, are allowed as itemized deductions. In addition, there are a number of

deductible expenses related to investments, tax determination and trade or businesses.

These expenses are grouped together as what is referred to as miscellaneous itemized

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deductions, and they are deductible, only to the extent that they exceed 2% of adjusted

gross income.

A brief summary of these deductions follows:

 Tax preparation fees and other fees for the determination of tax (audit
representation, appraisals, etc.).
 Job hunting expenses.
 Professional dues, including union dues.
 Uniforms, safety clothing, etc.
 Investment expenses such as safety deposit boxes, investment publications and
fees.
 Unreimbursed employee expenses (mileage, 50% of business meals &
entertainment, etc).

7. OTHER MISELLANEOUS DEDUCTIONS

Apart from the categories of allowable expenses already described, there are some

other miscellaneous deductions allowed that are not subject to threshold of 2% of

adjusted gross income.

1. Gambling losses: Deductible up to the extent of gambling winnings.

2. Impairment related work expenses of a disable person.
3. Unrecovered investment in annuity contracts because of death.

8. LIMITATION ON DEDUCTIONS

If a taxpayer's adjusted gross income exceeds a specified threshold, there is a

reduction or cutback on the amount of the allowable itemized deductions. The

thresholds for 2005 are:

Single $145.950
Head of Household 182.450
Married, filing jointly 218.950
Married, filing separately 109.475
Surviving spouse 218.950

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The cutback is the lessor of 3% of the excess AGI over the threshold amounts, or 80%

of the itemized deductions, excluding medical costs, personal casualty, investment

interest expense and allowable gambling losses.

Example 14: T and B are married and file a joint return. For 2005, their adjusted
gross income was $718,950. Their allowable itemized deductions after the various
limitations were as follows :
Medical $ 15.000
Taxes 80.000
Mortgage interest 50.000
Charitable contributions 10.000
Total $ 155.000
The cutback is the lessor of :

3% Rule Adjusted gross income $718,950

Threshold amount -218.950
Excess amount 500.000
Cutback percentage 3%
Reduction amount $ 15.000

80% Rule Cutback deductions

Taxes $80.000
Mortgage interest 50.000
Charitable contributions 10.000
Total $140.000
Cutback percentage 80%
Reduction amount $ 112.000
Therefore , the allowable itemized deductions on T and B's 2005 Schedule A would
be :
Original itemized deductions $ 155.000
Less : cutback amount ( 3% Rule ) -15.000
Allowable itemized deductions $ 140.000

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 Chapter Four –Questions

Deductions from Adjusted

1. Mr. and Mrs. Sloan incurred the following expenses Gross
3. Jim and Income
Nancy Walton had adjusted gross income of
on December 19, 1999, when they adopted a child: $35.000. During the year they paid the following
medical related expenses:
Medical
Child's medical Deductions
expenses $5.000
Legal expenses 8.000 Medical and drugs $300
Agency fee 2.000 Doctors 2.700
Health Club membership (recommended
Before consideration of any "floor" or other limitation by the family doctor for
on deductibility, what amount of the above expenses general health care ) 400
may the Sloans deduct on their 1999 joint income tax Medical care insurance 280
return?
a. $15.000 How much may the Waltons utilize as medical expenses
b. $13.000 in calculating itemized deductions?
c. $10.000 a. $1.930
d. $5.000 b. $1.530
c. $655
2. Tom and Sally White married and filing joint income d. $0
tax returns derive their entire income from the operation
of their retail stationary shop. Their 1999 adjusted gross 4. In 1999 Wells paid the following expenses:
income was $100.000. The Whites itemized their Premiums on an insurance policy against
deductions on Schedule A for 1999. The following loss of earnings due to sickness or accident $3.000
unreimbursed cash expenditures were among those made Physically therapy after spinal surgery 2.000
by the Whites during 1999: Premiums on an insurance policy that covers
Repair and maintenance of reimbursement for the cost of prescription
Motorized wheelchair for drugs 500
Physically handicapped
Dependent $600 In 1999 Wells recovered $1.500 of the $2.000 that she
paid for physically therapy through insurance
Tuition, meals, and lodging at reimbursement from a group medical policy paid for by
special school for physically her employer. Disregarding the adjusted gross income
handicapped dependent child percentage threshold, what amount could be claimed on
in an institution primarily for Well's 1999 income tax return for medical expenses?
the availability of medical care , a. $4.000
with meals and lodging furnished b. $3.500
as necessary incidents to that care 8.000 c. $1.000
d. $500
Without regard to the adjusted gross income percentage
threshold, what amount may the Whites claim in their 5. Ruth and Mark Cline are married and will file a joint
1999 return as qualifying medical expenses? 1999 income tax return. Among their expenditures
a. $8.600 during 1999 were the following discretionary costs that
b. $8.000 they incurred for the sole purpose of improving their
c. $600 physical appearance and self-esteem:
d. $0

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 Face lift for Ruth, performed by a a. $0
licensed surgeon $5.000 b. $2.800
Hair transplant for Mark, performed c. $4.000
by a licensed surgeon $3.600 d.$6.800

Disregarding the adjusted gross income percentage Taxes as a Deduction

threshold , what total amount of the aforementioned 9. Seth Parker, a self-employed individual, paid the
doctors' bill may be claimed by the Clines in their 1999 following taxes this year:
return as qualifying medical expenses ?
a. $0 Federal income tax $5.000
b. $3.600 State income tax 2.000
c. $5.000 Real estate taxes on land in
d. $8.600 South America 900
State sales taxes 500
6. Which one of the following expenditures qualifies as Federal self-employment tax 800
a deductible medical expense for tax purpose? State unincorporated business tax 200
a. Vitamins for general health not prescribed medical
care . What amount can Parker claim as an itemized deduction
b. Health club dues. for taxes paid?
c. Transportation to physician's office for required a. $7.500
medical care. b. $4.400
d. Mandatory employment taxes for basic coverage c. $3.600
under Medicare A . d. $2.900
7. John Stenger , a cash basis taxpayer , had adjusted 10. In 1999 Lyons paid $3.000 to the tax collector of
gross income of $35.000 in 1999 . During the year he Maple Township for really taxes on a two-family house
incurred and paid the following medical expenses: owned by Lyon's mother. Of this amount, $1.400
covered back taxes for 1998 and $1.600 was in payment
Drugs and medical prescribed of 1999 taxes. Lyons resides on the second floor of the
by doctors $300 house, and his mother resides on the first floor . In
Health insurance premiums 750 Lyons' itemized deductions on his 1999 return , what
Doctors' fees 2.550 amount may Lyons claim for realty taxes ?
Eyeglasses 75 a. $0
b. $1.500
$3.675 c. $1.600
d. $3.000
Stenger received $900 in 1999 as reimbursement for a
portion of the doctors' fees. If Stenger were to itemize 11. Mr. and Mrs. Donald Curry's real property tax year
his deductions, what amount be his allowable net is on a calendar-year basis, with payment due annually
medical expense deduction ? on August 1. The realty taxes on their home amounted to
a. $0 $1.200 in 1999, but the Curry's did not pay any portion
b. $150 of that amount since they sold the house on April 1 ,
c. $1.050 1999 , four months before payment was due . However,
d. $2.475 realty taxes were prorated on the closing statement.
Assuming that they owned on other real property during
8. During 1999 Scott charged $4.000 on his credit card the year, how much can Curry's deduct on Schedule A of
for his dependent son's medical expenses. Payment to Form 1040 for real estate taxes in 1999?
the credit card company had not been made by the time a. $0
Scott filed his income tax return in 2000. However, in b. $296
1999, Scott paid a physician $2.800 for the medical c. $697
expenses of his wife, who died in 1998. Disregarding the d. $1.200 80
adjusted gross income percentage threshold, what
amount could Scott claim in his 1999 income tax return
for medical expenses?
 12. During 1999 jack and Mary Bronson paid the 15. Mathews was a cash taxpayer whose records
following taxes: showed the following:

Taxes on residence ( for period 1999 state and local income taxes withheld $1.500
January 1 to September 30 , 1998 ) $2.700 1999 state estimated income taxes paid
State motor vehicle tax on value of December 30, 1999 400
the car 360 1999 federal income taxes withheld 2.500
1999 state and local income taxes paid
The Bronson's sold their house on June 30, 1999 under April 17 , 2000 300
an agreement in which the real estate taxes were not
prorated between the buyer and sellers. What amount What total amount was Mathews entitled to claim
should the Bronson's deduct as taxes in calculating for taxes on her 1999 Schedule A of Form 1040 ?
itemized deductions for 1999? a. $4.700
a. $1.800 b. $2.200
b. $2.160 c. $1.900
c. $2.700 d. $1.500
d. $3.060
16. In 1999, Farb , a cash basis individual taxpayer ,
13. George Granger sold a plot of land to Albert King on received an $8.000 invoice for personal property
July 1 , 1999 . Granger had not paid any realty taxes on taxes . Believing the amount to be overstated by
the land since 1997. Delinquent 1998 taxes amounted to $5.000 , Farb paid the invoiced amount under
$600, and 1999 taxes amounted to $700. King paid the protest and immediately started legal action to
1998 and 1999 taxes in full in 1999, when he bought the recover the overstatement . In June , 2000 , the
land. What portion of the $1.300 is deductible by King matter was resolved in Farb's favor , and he
in 1999? received a $5.000 refund . Farb itemizes his
a. $353 deductions on his tax returns. Which of the
b. $700 following statements is correct regarding the
c. $953 deductibility of the property taxes?
d. $1.300 a. Farb should deduct $8.000 in his 1999 income tax
return and should report the $5.000 refund as
14. Sara Harding is a cash basis taxpayer who itemizes income in his 2000 income tax return.
her deductions. The following information pertains to b. Farb should not deduct any amount in his 1999
Sara's state income taxes for the taxable year 1999: income tax return and should deduct $3.000 in his
1999 income tax return.
Withheld by employer in 1999 $2.000 c. Farb should deduct $3.000 in his 1999 income tax
Payments on 1999 estimate return.
4/15/99 $300 d. Farb should not deduct any amount in his 1999
6/15/99 300 income tax return when originally filed , and should
9/15/99 300 file an amended 1999 income tax return in 2000 .
1/15/99 300 1.200
Total paid and withheld $3.200 Interest Deduction
Actual tax , per state return 3.000
17. For regular tax purposes , with regard to the
Overpayment $200
itemized deduction for qualified residence interest ,
home equity indebtedness incurred this year
There was no balance of tax or refund due on Sara's
a. Includes acquisition indebtedness secured by a
1998 state tax return. How much is deductible for state
qualified residence.
income taxes on Sara's 1999 federal income tax return?
b. May exceed the fair market value of the residence
a. $2.800
c. Must exceed the taxpayer's net equity in the
b. $2.900
residence.
c. $3.000
d. Is itemized to $100.000 on a joint income tax
d. $3.200
return .
81
 18. The Browns borrowed $20.000, secured by their 21. The 1999 deduction by an individual taxpayer
home, to pay their son's college tuition. At the time of for interest on investment indebtedness is
the loan, the fair market value of their home was a. Limited to investment interest paid in 1999.
$400.000, and it was unencumbered by other debt. The b. Limited to the taxpayer's 1999 interest income .
interest on the loan qualifies as c. Limited to the taxpayer's 1999 net investment
a. Deductible personal interest. income
b. Deductible qualified residence interest. d. Not limited .
c. Nondeductible interest.
d. Investment interest expense. 22. During the taxable year , Carmine Gross
purchased the following long-term investment at
par:
19. On January 2 , 1990 , the Philips paid $50.000 cash $5.000 general obligation bonds of Lane City
and obtained a $200.000 mortgage to purchase a home . (Wholly tax exempt)
In 1999 they borrowed $5.000 secured by their home, $5.000 debentures of Rigor Corporation on which
and used the cash to add a new room to their residence. Carmine received $500 interest income.
That same year they took out a $5.000 auto loan.
The following information pertains to interest paid in He financed these purchases by obtaining a loan
1999: from the National Bank for $10.000. For the year he
Mortgage interest $17.000 paid the following amounts as interest expense :
Interest on room construction loan 1.500 National Bank. $800
Auto loan interest 500 Interest on mortgage . 2.000
Interest on installment purchases . 200
For 1999 , how much interest is deductible , prior to any $3.000
itemized deduction limitations ?
a. $17.000 What should be the amount that Gross can deduct as
b. $17.500 interest expense?
c. $18.500 a. $ 2.200
d. $19.000 b. $ 2.400
c. $ 2.800
20. Robert and Judy Parker made the following d. $ 3.000
payments during this taxable year :
Interest on a life insurance policy loan 23. Phil and Joan Crawley made the following
(the related policy on Robert's life payments during 1999:
Was purchased in 1950) . $1.200
Interest on home mortgage. 3.600 Interest on bank loan ( loan proceeds
Penalty payment for prepayment of were used to purchase United States
home mortgage on October 4 , of this savings bonds Series H ) . $4.000
taxable year . 900 Interest on home mortgage for period
April 1 to December 31, 1999 . 2.700
How much can the Parker's utilize as interest expense in Points paid to obtain conventional
calculating itemized deductions ? mortgage loan on April 1 , 1999 . 900
a. $5.700
b. $4.980 Income of $4.500 was received on savings bonds in
c. $4.500 1999. What is the maximum amount that the
d. $3.600 Crawley's can utilize as interest expense in
calculating itemized deductions for 1999?
a. $3.600
b. $4.900
c. $6.700
d. $7.600
82
 What is the maximum amount of the above that they
Charitable Contributions can utilize in calculating itemized deductions for
24.Judy Bishop had adjusted gross income of $35.000
this year ?
and itemizes her deductions . Additional information is
a. $1.500
available as follows for this year :
b. $1.750
c. $2.700
Cash contribution to church . $2.500
d. $3.050
Purchase of an art object at her church
bazaar ( with a fair market value of
27. Moore, a single taxpayer, had $50.000 in
$500 on date of purchase ) . 800
adjusted gross income for 1999. During 1999 she
Donation of used clothes to Goodwill
contributed $18.000 to her church. She had a
Charities ( fair value evidenced by
$10.000 charitable contribution carryover from her
receipt received ) . 400
1998 church contribution. What was the maximum
amount of properly claim as an itemized deduction
What is the maximum amount Bishop can claim as a
for 1999?
deduction for charitable contributions?
a. $10.000
a. $2.800
b. $18.000
b. $3.200
c. $25.000
c. $3.300
d. $28.000
d. $3.400
28. Y's adjusted gross income this year is $30.000 .
25. Spencer, who itemizes deductions, had adjusted
He made cash contribution to the following
gross income of $60.000 in 1999. The following
organizations: Church $15.000; United Fund $5.000
additional information is available for 1999:
and Salvation Army $3.000. Y's maximum
contribution deduction this year is :
Cash contribution to church . $4.000
a. $6.000
Purchase of art object at church
b. $9.000
bazaar ( with a fair market value of
c. $15.000
$800 on the date of purchase ). 1.200
d. $2.000
Donation of used clothing to
salvation Army ( fair value
29. Charitable contributions subject to the 50-
evidence by receipt received ) . 600
percent limit that are not fully deductible in the year
made may be
What is the maximum amount Spencer can claim as a
a. Neither carried back nor carried forward .
deduction for charitable contributions in 1999 ?
b. Carried back three years or carried forward
a. $5.400
fifteen years .
b. $5.200
c. Carried forward five years .
c. $5.000
d. Carried forward indefinitely until fully deductible
d. $4.400
30. Ruth Lewis has adjusted gross income of
26. Eugene and Linda O'Brien had adjusted gross
$100.000 for this year and itemizes her deductions.
income of $30.000 . Additional information is available
On September 1 , she made a contribution to her
as follows for this year :
church of stock held for investment for two years
which cost $10.000 and had a fair market value of
Cash contribution to church . $1.500
$70.000 . The church sold the stock for $70.000on
Tuition paid to parochial school . 1.200
the same date. Assume that Lewis made no other
Contribution to a qualified charity
contributions during the year and made no special
made by a bank credit card charge
election in regard to this contribution on her tax
on December 14 . The credit card
return. How much should Lewis claim as a
obligation was paid in January
charitable contribution deduction?
of the next year . 250
Cash contribution to needy family. 100
a. $50.000 83
b. $30.000
c. $20.000
d. $10.000
31. Stewart Samaritan had adjusted gross income of Miscellaneous 2% Deductions
$22.000 this year . During the year he made the
following contributions to recognize charitable 34. Which of the following is not a miscellaneous
organizations: itemized deduction?
* $5.000 cash a. An individual's tax return preparation fee .
* 1.000 shares of Able Corporation common stock b. Education expense to meet minimum entry level
(acquired in 1972 at a cost of $1.600) with a fair market education requirements at an individual's place of
value of $7.000 on the date of the contribution. employment.
c. An individual's subscription to professional
What amount can Samaritan claim as a deduction for journals .
charitable contributions for the year ? d. Custodial fees for a brokerage account.
a. $6.600
b. $11.000 35. Which expense, both incurred and paid during
c. $11.600 the year, can be claimed as an itemized deduction
d. $12.000 subject to the two-percent- of –adjusted –gross -
income floor ?
32. Don and Cynthia Wallace filed a joint return in a. Employee's unreimbursement business car
which they reported adjusted gross income of $35.000 . expense.
During the year they made the following contributions to b. One-half of the self-employment tax .
qualified organizations: c. Employee's unreimbursed moving expense.
Land (stated at its current fair market d. Self-employed health insurance.
value ) donated to church for new
building site $22.000 36. Cathy Glover , an employee of Lawrence Inc .,
Cash contributions to church 300 incurs $4.000 of unreimbursed business related
Cash contributions to the local meals and entertainment expenses . She also had
community college 200 unreimbursed auto expenses of $750 with respect to
her employment this year. In addition, she incurred
Assuming that the Wallaces did elect to reduce the $600 of qualifying expenses looking for a new job.
deductible amount of the land contribution by the Her AGI for the year is $80.000. Her allowable
property's appreciation in value , how much can they miscellaneous itemized deductions are :
claim as a deduction for charitable contributions on their a. $4.550
tax return ? b. $3.350
a. $10.800 c. $2.950
b. $11.000 d. $1.750
c. $17.500
d. $22.500 37. Harold Brodsky is an electrician employed by a
contracting firm . His adjusted gross income is
33. On December 15 , 1999 , Donald Calder made a $25.000. During the current year he incurred and
contribution of $ 500 to a qualified charitable paid the following expenses:
organization , by charging the contribution on his bank
credit card . Calder paid the $500 on January 20 , 2000 Use of personal auto for company business
upon receipt of the bill from the bank . In addition, (reimbursed by employer for $200 ) $300
Calder issued and delivered a promissory note for Specialized work clothes 550
$1.000 to another qualified charitable organization on Union dues 600
November 1 , 1999 , which hw paid upon maturity six Cost of income tax preparation 150
months later . If Calder itemizes his deductions, what Preparation of will 100
portion of these contributions is deductible in 1999?
a. $0 If Brodsky were to itemize his personal
b. $500 deductions , what amount should he claim as
c. $1.000 miscellaneous deductible expenses ?
d. $1.500 a. $800 84
b. $900
c. $1.500
d. $1.700
Casualty Losses 41. The following information pertains to Cole's
personal residence , which sustained casualty fire
38. In 1999 , Joan Frazer's residence was totally damage in 1999 :
destroyed by fire . The property had an adjusted basis
and a fair market value of $130.000 before the fire . Adjusted basis $150.000
During 1999 , Frazer received insurance reimbursement Fair market value immediately before the fire $ 200.000
of $120.000 for the destruction of her home . Frazer's Fair market value immediately after the fire $180.000
1998 adjusted gross income was $70.000 . Frazer had no Fire damage repairs paid for Cole in 1999 $10.000
casualty gains during the year . What amount of the fire
loss was Frazer entitled to claim as an itemized The house was uninsured . Before consideration of any
deduction on her 1999 tax return ? "floor" or other limitation on tax deductibility , the
a. $2.900 amount of this 1999 casualty loss was
b. $8.500 a. $30.000
c. $8.600 b. $20.000
d. $10.000 c. $10.000
d. $0

Items 39 and 40 are based on the following selected 42. Nelson Harris had an adjusted gross income of
1999 information pertaining to Sam and Ann Hoyt , who $60.000. During the year his personal summer home was
filed a joint federal income tax return for the calendar completely destroyed by a Cyclone. Pertinent data with
year 1999 . The Hoyts had adjusted gross income of respect to the home follows :
$34.000 and itemized their deduction for 1999 . Among Cost basis $39.000
the Hoyt's cash expenditures during 1999 were the Value before casualty $45.000
following : Value after casualty $3.000

$2.500 repairs in connection with 1999 fire damage to Harris was partially insured for his loss and he received
the Hoyt residence. This property has a basis of $50.000. a $15.000 insurance settlement. What is Harris'
Fair market value was $60.000 before the fire and allowable casualty loss deduction?
$55.000 after the fire. Insurance on the property had a. $23.900
lapsed prior to the fire for nonpayment of premium. b. $17.900
c. $26.900
$800 appraisal fee to determine amount of fire loss. d. $27.000

39. What amount of fire loss were the Hoyts entitled to Limitations
deduct as an itemized deduction on their 1999 return?
a. $5.000 43. Which items are subject to the phase out of the
b. $2.500 amount of certain itemized deductions that may be
c. $1.600 claimed by high-income individuals?
d. $1.500 a. Charitable contributions.
b. Medical costs.
40. The appraisal fee to determine the amount of Hoyts' c. Nonbusiness casualty losses.
fire loss was d. Investment interest deductions.
a. Deductible from gross income in arriving at adjusted
gross income .
b. Subject to the 2% of adjusted gross income floor for
miscellaneous itemized deductions .
c. Deductible after reducing the amount by $100.
d. Not deductible.

85
 44. For 1999 , Dole's adjusted gross income exceeds 45.How much could Roger deduct for the contribution
$500.000 . After the application of any other limitation , to his individual retirement account in arriving at his
itemized deductions are reduced by adjusted gross income ?
a. The leeser of 3% of the excess of adjusted gross a. $0
income over the applicable amount or 80% of certain b. $1.500
itemized deductions . c. $1.800
b. The lesser of 3% of the excess of adjusted gross d. $2.000
income over the applicable amount or 80% of all
itemized deductions . 46. How much could Roger deduct for medical and
c. The greater of 3% of the excess of adjusted gross dental expenses ?
income over the applicable amount or 80% of certain a. $0
itemized deductions . b. $150
d. The greater of 3% of the excess of adjusted gross c. $700
income over the applicable amount of 80% of all d. $1.200
itemized deductions .
47. How much could Roger deduct for taxes ?
a. $4.000
b. $4.010
Review Questions c. $4.080
d. $4.090
Items 45 through 50 are based on the following data :
48. How much could Roger deduct for miscellaneous
Roger Efron , who is single and has no dependents , deductions ?
earned a salary of $50.000 in 1999 , and had an adjusted a. $0
gross income of $60.000 . Roger has been an active b. $200
participant in a qualified noncontributory pension plan c. $600
since 1972 . Roger itemized his deductions on his 1999 d. $800
income tax return . Among Roger's 1999 cash
expenditures were the following: 49. How much could Roger deduct for the casualty
loss ?
Real estate taxes on a. $0
Roger's condominium $4.000 b. $100
Contribution to an c. $300
individual retirement d. $400
account ( $200 interest
was earned on this 50. How much of a credit could Roger offset against his
IRA in 1999) 2.000 income tax, for his contribution to a candidate for public
Dental expenses 700 office?
Premium on Roger's a. $0
life insurance policy 600 b. $50
Medical insurance premiums 500 c. $100
Contribution to candidate d. $150.
for public office 300
Legal fee for preparation
of Roger's will 200
Customs duties 80
City dog license fee 10

In addition , Roger suffered : casualty loss of $400 in

1999 due to storm damage .
86
Items 51 through 55 based on the following : 54. Without regard to the $100 "floor" and the adjusted
gross income percentage threshold , what amount should
Alex and Myra Burg , married and filing joint income the Burgs deduct for the casualty loss in their itemized
tax return , derive their entire income from the operation deductions on Schedule A ?
of their retail candy shop . Their 1999 adjusted gross a. $0
income was $50.000 . The Burgs itemized their b. $90
deductions on Schedule A for 1999 . The following c. $300
unreimbursed cash expenditures were among those d. $400
made by the Burgs during 1999:
55. What amount should the Burgs deduct for moving
Repair and maintenance of motorized expenses in their itemized deductions on Schedule A?
wheelchair for physically handicapped a. $0
dependent child $300 b. $500
Tuition , meals , and lodging at special school c. $900
for physically handicapped dependent child d. $1.400
in the institution primarily for the availability
of medical care , with meals and lodging furnished
as necessary incidents to that care 4.000 Released and Author Constructed
State income tax 1.200
Self-employment tax 7.650 Questions
Four tickets to a theatre party sponsored by a
qualified charitable organization ; not considered R 98
a business expense ; similar tickets would cost 56. Jackson owns two residences. The second residence,
$25 each at the box office 160 which has never been used for rental purposes , is the
Repair of glass vase accidentally broken in home only residence that is subject to a mortgage . The
by dog ; vase cost $500 in 1989 ; fair value $600 following expenses were incurred for the second
before accident and $200 after accident 90 residence in 1997.
Fee for breaking lease on prior apartment residence
located 20 miles from new residence 500 Mortgage interest $5.000
Security deposit placed on apartment at Utilities 1.200
new location 900 Insurance 6.000

51. What amount should the Burgs deduct for taxes in For regular income tax purposes , what is the maximum
their itemized deductions on Schedule A ? amount allowable as a deduction for Jackson's second
a. $1.200 residence in 1997 ?
b. $3.825 a. $6.200 in determining adjusted gross income .
c. $5.025 b. $11.000 in determining adjusted gross income .
d. $7.650 c. $5.000 as an itemized deduction .
d. $12.200 as an itemized deduction .
53. What amount should the Burgs deduct for gifts to
charity in their itemized deductions on Schedule A? R97
a. $160 57. Jimet, an unmarried taxpayer, qualified to itemize
b. $100 1996 deductions. Jimet's 1996 adjusted gross income
c. $60 was $30.000 and he made a $2.000 cash donation
d. $0 directly to a needy family. In 1996, Jimet also donated
stock, valued at $3.000, to his church. Jimet had
purchased the stock four months earlier for $1.500 .
What was the maximum amount of the charitable
contribution allowable as an itemized deduction on
Jimet's 1996 income tax return?
a. $0 87
b. $1.500
c. $2.000
d. $5.000
 R 97
58. In 1996, Wood's residence had an adjusted basis of
$150.000 and it was destroyed by a tornado. An
appraiser valued the decline in market value at
$175.000. Later that same year, Wood received
$130.000 from his insurance company for the property
loss and did not elect to deduct the casualty loss in an
earlier year . Wood's 1996 adjusted gross income was
$60.000 and he did not have any casualty gains .

What total amount can Wood deduct as a 1996 itemized

deduction for the casualty loss, after the application of
the threshold limitations?
a. $39.900
b. $38.900
c. $19.900
d. $13.900

R97
59. Deet, an unmarried taxpayer, qualified to itemize
1996 deductions. Deet's 1996 adjusted gross income was
$40.000 and he made a $1.500 substained cash donation
directly to a needy family. Deet also donated art , valued
at $11.000 , to a local art museum . Deet had purchased
the art work two years earlier for $2.000. What was the
maximum amount of the charitable contribution
allowable as an itemized deduction on Deet's 1996
income tax return?
a. $12.500
b. $11.000
c. $3.500
d. $2.000

AC
60. Kristen uses her personal automobile for volunteer
work for her church. During 1999, she drove 1.000 miles
on behalf of her church. In addition, Kristen made a
$3.000 cash contribution to the church. Assuming her
AGI is $40.000, her allowable charitable contribution is:
a. $3.000
b. $3.120
c. $3.140
d. $3.315

88