Essentials of Federal Taxation 3rd

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Chapter 07

Individual from AGI Deductions

True / False Questions

1. The medical expense deduction is designed to provide relief for doctors and medical
practitioners.

True False

2. Deductible medical expenses include payments to medical care providers such as doctors,
dentists, and nurses and medical care facilities such as hospitals.

True False

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3. Taxpayers traveling for the primary purpose of receiving essential and deductible medical
care may deduct the cost of travel.

True False

4. The deduction for medical expenses is limited to the amount of unreimbursed qualifying
medical expenses paid during the year reduced by five percent of the taxpayer's AGI.

True False

5. The itemized deduction for taxes includes all types of state, local, and foreign taxes.

True False

6. In 2013, taxpayers may elect to deduct state and local sales taxes instead of deducting state
and local income taxes.

True False

7. Taxpayers are allowed to deduct mortgage interest on up to $1,000,000 of acquisition debt for
their qualified residence and on up to $500,000 of home-equity debt.

True False

8. The deduction for investment interest in excess of the net investment income carries forward
to the subsequent year.

True False

9. To qualify as a charitable deduction the donation must be made by cash or by check.

True False

10. In general, taxpayers are allowed to deduct the fair market value of capital gain property on
the date of the donation to a qualified charitable organization.

True False

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11. The deduction for charitable contributions is limited to ten percent of the taxpayer's AGI
whereas casualty losses on personal assets are only deductible to the extent the losses
exceed ten percent of the taxpayer's AGI.

True False

12. Unreimbursed employee business expenses, investment expenses, hobby expenses, and
certain other expenses are classified as miscellaneous itemized deductions and are
deductible only to the extent that their sum exceeds 2% of the taxpayer's AGI.

True False

13. Taxpayers are allowed to deduct all ordinary and necessary expenses incurred in connection
with determining their tax obligations imposed by federal, state, municipal, or foreign
authorities.

True False

14. Bunching itemized deductions is one form of tax evasion.

True False

15. Taxpayers generally deduct the lesser of their standard deduction or their itemized
deductions.

True False

16. Taxpayers filing single and taxpayers filing married separate have the same basic standard
deduction amount.

True False

17. An individual who is eligible to be claimed as a dependent on another's return and has $1,000
of earned income may claim a standard deduction of $1,350.

True False

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18. In 2014, personal and dependency exemptions are $6,200 for single taxpayers.

True False

Multiple Choice Questions

19. Ned is a head of household with a dependent son, Todd, who is a full-time student. This year
Ned made the following expenditures related to Todd's support:

What amount can Ned include in his itemized deductions?

A. $1,700 included in Ned's miscellaneous itemized deductions

B. $2,050 included in Ned's miscellaneous itemized deductions
C. $950 included in Ned's miscellaneous itemized deductions
D. $600 included in Ned's medical expenses
E. None of these.

20. Which of the following is a true statement?

A. A taxpayer can deduct medical expenses incurred for members of his family who are
dependents.
B. A taxpayer can deduct medical expenses incurred for a qualified relative even if the
relative does not meet the gross income test.
C. A divorced taxpayer can deduct medical expenses incurred for a child even if the child is
claimed as a dependent by the former spouse.
D. Deductible medical expenses include long-term care services for disabled spouses and
dependents.
E. All of these are true.

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21. Which of the following costs are deductible as an itemized medical expense?

A. The cost of prescription medicine and over-the-counter drugs.

B. Medical expenses incurred to prevent disease.
C. The cost of elective cosmetic surgery.
D. Medical expenses reimbursed by health insurance.
E. None of these costs is deductible.

22. Which of the following costs are NOT deductible as an itemized medical expense?

A. The cost of eyeglasses.

B. Payments to a hospital.
C. Transportation for medical purposes.
D. The cost of insurance for long-term care services.
E. All of these are deductible as medical expenses.

23. Opal fell on the ice and injured her hip this winter. As a result she paid $3,000 for a visit to
the hospital emergency room and $750 for follow-up visits with her doctor. While she
recuperated, Opal paid $500 for prescription medicine and $600 to a therapist for
rehabilitation. Insurance reimbursed Opal $1,200 for these expenses. What is the amount of
Opal's deductible medical expense before considering any AGI limitations?

A. $3,000
B. $3,750
C. $3,650
D. $4,850
E. All of these

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24. Which of the following taxes will not qualify as an itemized deduction?

A. personal property taxes assessed on the value of specific property.

B. state, local, and foreign income taxes.
C. real estate taxes on a residence.
D. gasoline taxes on personal travel.
E. None of these qualifies as an itemized deduction.

25. This year Amanda paid $749 in Federal gift taxes on a gratuitous transfer to her nephew.
Amanda lives in Texas and does not pay any state or local income taxes. Which of the
following is a true statement?

A. Amanda cannot deduct Federal gift taxes.

B. Amanda can deduct Federal gift taxes for AGI.
C. Amanda can deduct Federal gift taxes paid as an itemized deduction.
D. Amanda must include Federal gift taxes with other miscellaneous itemized deductions.
E. None of these is true.

26. This year Norma paid $1,200 of real estate taxes on her personal residence. Norma's other
itemized deductions (state income taxes) only amount to $3,100. Which of the following is a
true statement if Norma files single with one personal exemption?

A. Norma can deduct 4,300 for AGI.

B. Norma can deduct $1,200 even if her standard deduction is $5,950.
C. Norma should deduct $4,300 even if her standard deduction is $5,950.
D. Norma can deduct $3,100 even if her standard deduction is $5,950.
E. Norma should claim the standard deduction.

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27. Madeoff donated stock (capital gain property) to a public charity. He purchased the stock 3
years ago for $100,000, and on the date of the gift, it had a fair market value of $200,000.
What is his maximum charitable contribution deduction for the year if his AGI is $500,000
(before considering the itemized deduction phase-out)?

A. $100,000
B. $200,000
C. $150,000
D. $250,000
E. None of these

28. Carly donated inventory (ordinary income property) to a church. She purchased the inventory
last month for $100,000, and on the date of the gift, it had a fair market value of $92,000.
What is her maximum charitable contribution deduction for the year if her AGI is $200,000?

A. $100,000
B. $92,000
C. $60,000
D. $46,000 if the church sells the inventory
E. None of these

29. Simone donated a landscape painting (tangible capital gain property) to a library, a public
charity. She purchased the painting five years ago for $50,000, and on the date of the gift, it
had a fair market value of $200,000. What is her maximum charitable contribution deduction
for the year if her AGI is $300,000 (before considering the itemized deduction phase-out)?

A. $100,000
B. $200,000
C. $90,000 if the library uses the painting for its charitable purpose
D. $150,000
E. None of these

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30. Larry recorded the following donations this year:

$500 cash to a family in need

$2,400 to a church
$500 cash to a political campaign

To the Salvation Army household items that originally cost $1,200 but are worth $300.

What is Larry's maximum allowable charitable contribution if his AGI is $60,000?

A. $2,900
B. $1,000
C. $2,700
D. $4,600
E. None of these

31. Which of the following is a true statement?

A. the deduction of cash contributions to public charities is limited to 30 percent of AGI.

B. the deduction of capital gain property to private nonoperating foundations is limited to 50
percent of AGI.
C. the deduction of capital gain property to public charities is limited to 20 percent of AGI.
D. the deduction of cash contributions to private nonoperating foundations is limited to 30
percent of AGI.
E. None of these is true.

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32. When taxpayers donate cash and capital gain property to a public charity, the AGI percentage
limitation is applied in the following order:

A. a 30 percent of AGI limitation is applied to the aggregate donation.

B. a 50 percent of AGI limitation is applied to the cash donation and a 20 percent of AGI
limitation is applied to the fair market value of the capital gain donation.
C. a 30 percent of AGI limitation is applied to the cash donation and a 20 percent of AGI
limitation is applied to the fair market value of the capital gain donation.
D. a 50 percent of AGI limitation is applied to the cash donation and the fair market value of
the capital gain donation is subject to the lesser of a 30 percent of AGI limitation or a 50
percent of AGI limitation after subtracting the cash contributions.
E. donations to public charities are not subject to AGI limitations.

33. Which of the following is a true statement?

A. Taxpayers may only deduct interest on up to $1,500,000 of acquisition indebtedness.

B. Taxpayers may deduct interest on up to $1,000,000 of home-equity debt.
C. The deduction for investment interest expense is not subject to limitation.
D. Interest on home-equity debt up to $100,000 is deductible, even if the loan proceeds are
used to buy a new car.
E. None of these is true.

34. Margaret Lindley paid $15,000 of interest on her $300,000 acquisition debt for her home (fair
market value of $500,000), $4,000 of interest on her $30,000 home-equity loan, $1,000 of
credit card interest, and $3,000 of margin interest for the purchase of stock. Assume that
Margaret Lindley has $10,000 of interest income this year and no investment expenses. How
much of the interest expense may she deduct this year?

A. $23,000.
B. $22,000.
C. $19,000.
D. $18,000.
E. None of these.

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35. Which of the following is a true statement?

A. A casualty loss can only occur from storm damage.

B. Personal casualty losses are subject to a per casualty floor limitation and an aggregate
floor limitation of 10 percent of AGI.
C. Individual casualty losses are only deductible if each individual loss exceeds $5,000.
D. Uninsured thefts of personal assets are not included with casualty losses.
E. All of these are true.

36. Jim was in an auto accident this year. Jim paid $2,450 to repair his car after the accident and
his insurance only reimbursed him $400. Jim bought his car several years ago for $1,500.
What is the amount of casualty loss from this accident before Jim applies any casualty loss
floor limitations?

A. $2,450
B. $2,050
C. $1,500
D. $1,100
E. None of these is correct.

37. Which of the following is a true statement?

A. Employees cannot claim business expense deductions.

B. Employees can claim business expense deductions for AGI.
C. Employees can claim business expense deductions as miscellaneous itemized deductions
not subject to the 2 percent of AGI limitation.
D. Employees can claim business expense deductions as miscellaneous itemized deductions
subject to the 2 percent of AGI limitation.
E. None of these is true.

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38. Which of the following is a true statement?

A. Traveling from a personal residence to a place of business is deducted for AGI as a moving
expense.
B. Traveling from a personal residence to a place of business is a miscellaneous itemized
deduction subject to the 2 percent of AGI limitation.
C. The standard mileage rate can be used to calculate the deduction for traveling from a
personal residence to a place of business.
D. Traveling from a personal residence to a place of business is deductible if reimbursed by
an employer.
E. Traveling from a personal residence to a place of business is nondeductible.

39. Which of the following is a true statement?

A. Fees for investment advice are included in miscellaneous itemized deductions subject to
the 2 percent of AGI limitation.
B. Unreimbursed employee business expenses are included in miscellaneous itemized
deductions subject to the 2 percent of AGI limitation.
C. Fees for tax preparation are included in miscellaneous itemized deductions subject to the
2 percent of AGI limitation.
D. Reimbursed employee business expenses are included in miscellaneous itemized
deductions subject to the 2 percent of AGI limitation unless the employer's reimbursement
plan qualifies as an accountable plan.
E. All of these are true.

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40. Fred's employer dispatched him on a business trip from the Dallas headquarters to New York
this year. During the trip Fred incurred the following expenses:

What is the amount of Fred's deduction before the application of any AGI limitations?

A. $2,870
B. $2,570
C. $2,050
D. $1,300
E. $0 - the expenses cannot be deducted unless Fred is reimbursed.

41. Which of the following is a true statement?

A. Expenses associated with a "hobby" are never deductible.

B. The deductibility of an activity's expenses in excess of revenues depends upon whether
the activity is primarily profit-motivated or a hobby as determined by facts and
circumstances.
C. Taxpayers engaged in a "hobby" are always presumed to be motivated by profit.
D. The regulations do not provide any guidance for determining whether an activity is profit
motivated.
E. All of these are true.

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42. Glenn is an accountant who races stock cars as a hobby. This year Glenn was paid a salary of
$80,000 from his employer and won $2,000 in various races. What is the effect of the racing
activities on Glenn's taxable income if Glenn has also incurred $4,200 of hobby expenses this
year? Assume that Glenn itemizes his deductions but has no other miscellaneous itemized
deductions.

A. increase in taxable income of $2,000

B. increase in taxable income of $1,640
C. no change in taxable income
D. decrease in taxable income of $560
E. decrease in taxable income of $2,200

43. Grace is employed as the manager of a sandwich shop. This year she earned a salary of
$45,000 and incurred the following expenses associated with her employment:

What amount of miscellaneous itemized deductions can Grace deduct after any applicable
limitations?

A. $150
B. $1,050
C. $550
D. $200 if Grace was reimbursed $50 for her cooking class
E. None of these.

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44. Which of the following is a miscellaneous itemized deduction that is not subject to the 2
percent of AGI floor?

A. gambling losses to the extent of gambling winnings

B. fees for investment advice
C. employee business expenses
D. tax preparation fees
E. All of these are subject to the 2 percent of AGI floor limit.

45. Frieda is 67 years old and deaf. If Frieda files as a head of household, what amount of
standard deduction can she claim in 2014?

A. $10,650
B. $9,100
C. $10,300
D. $12,200
E. $1,550

46. Andres and Lakeisha are married and file joint. Andres is 72 years old and in good health.
Lakeisha is 62 years old and blind. What amount of standard deduction can Andres and
Lakeisha claim this year?

A. $14,800
B. $13,600
C. $9,100
D. $12,400
E. None of these.

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47. Which of the following is a true statement?

A. The standard deduction is increased for taxpayers who are blind or deaf at year end.
B. A married couple is only entitled to one addition to their standard deduction even if both
spouses are both over age 65.
C. Bunching itemized deductions is an illegal method of tax avoidance.
D. The deduction for personal and dependency exemptions is $3,950 times the number of
exemptions.
E. All of these are true.

48. Which of the following is a true statement?

A. Personal exemptions, but not dependency exemptions, are subject to phase-out.

B. A married filing joint taxpayer with AGI of $500,000 would not be able to deduct personal
and dependency exemptions.
C. At most, only 80% of exemptions are subject to phase-out.
D. Itemized deductions, but not exemptions, are subject to phase-out.
E. None of these is true.

Essay Questions

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49. Detmer is a successful doctor who earned $204,800 in fees this year, but he also competes in
weekend golf tournaments. Detmer reported the following expenses associated with
competing in almost a dozen tournaments:

This year Detmer won $5,200 from competing in various golf tournaments. Assuming that
Detmer itemizes his deductions, what amount of the golfing expenses are deductible after
considering all limitations if the tournament golfing is treated as a hobby activity?

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50. Jenna (age 50) files single and reports AGI of $40,000. This year she has incurred the
following medical expenses:

Calculate the amount of medical expenses that will be included with Jenna's other itemized
deductions.

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51. Chuck has AGI of $70,000 and has made the following payments:

Calculate the amount of taxes that Chuck can include with his itemized deductions.

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52. Homer is an executive who is paid a salary of $80,000. Homer also paints landscapes as a
hobby. This year Homer expects to sell paintings for a total of $750 and incur the following
expenses associated with his painting activities:

What is the effect of Homer's hobby on his taxable income? Assume his AGI does not reflect
his painting activities and that he itemizes deductions but has no other miscellaneous
itemized deductions.

53. This year, Benjamin Hassell paid $20,000 of interest on a mortgage on his home (Benjamin
borrowed $600,000 to buy the residence and it is currently worth $1,000,000), $12,000 on a
$150,000 home equity loan on his home, and $10,000 of interest on a mortgage on his
vacation home (loan of $300,000; home purchased for $400,000). How much interest expense
can Benjamin deduct as an itemized deduction?

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54. This year Darcy made the following charitable contributions:

Determine the maximum amount of charitable deduction for Darcy's contribution of the
painting if her AGI is $80,000 this year. You may assume that both the stock and painting
have been owned for 10 years.

55. Claire donated 200 shares of stock (held for 5 years) to her father's nonoperating private
foundation this year. The stock was worth $15,000 but Claire's basis was only $4,000.
Determine the maximum amount of charitable deduction for the donation if Claire's AGI is
$60,000 this year.

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56. Erika (age 67) was hospitalized with injuries from an auto accident this year. She incurred the
following expenses from the accident:

In addition, Erika's auto was completely destroyed in the accident. She bought the car several
years ago for $18,000 and it was worth $4,700 at the time of the accident. What are Erika's
itemized deductions this year if she was uninsured and her AGI is $40,000?

57. Don's personal auto was damaged in a wind storm this year. Don purchased the auto several
years ago for $32,000 and it was worth $18,000 at the time of the storm. The damage was
superficial, so Don decided not to repair the car. Although Don collected $750 from his
insurance company, the value of the car dropped after the storm to $15,000. What is the
amount of casualty loss from the storm damage before Don applies any floor limitations?

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58. Colby is employed full-time as a food technician for a local restaurant chain. This year he has
incurred the following expenses associated with his employment:

Colby was reimbursed $125 of the expenses from his employer's accountable plan. What
amount can he include with his remaining itemized deductions if his AGI this year is
$32,000?

59. Clark is a registered nurse and full-time employee of the Hays Hospital. To maintain his
nursing license Clark has incurred the following expenses:

Clark was reimbursed $1,250 of his expenses from his Hays Hospital accountable
reimbursement plan. What amount can he include with his remaining itemized deductions if
his AGI this year is $52,000?

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60. Karin and Chad (ages 30 and 31, respectively) are married and together have $110,000 of
AGI. This year they have recorded the following expenses:

Karin and Chad will file married joint with two personal exemptions. Calculate their taxable
income.

61. Bryan is 67 years old and lives alone. This year he has received $25,000 in taxable interest
and pension payments, and he has paid the following expenses:

If Bryan files single with one personal exemption, calculate his taxable income.

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62. Misti purchased a residence this year. Misti is a single parent and lives with her 1-year old
daughter. This year, Misti received a salary of $63,000 and made the following payments:

Misti files as a head of household and claims two exemptions. Calculate her taxable income
this year.

63. Jon and Holly are married and live in a retirement community. This year Jon celebrated his
65th birthday and Holly turned 68 years old. For their ages, both Jon and Holly are in good
health. This year the only significant expense that they incurred was an unreimbursed
medical expense of $3,200. If Jon and Holly together have AGI of $42,000, what is the amount
of their standard deduction this year?

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64. This year Kelly bought a new auto for $20,000 plus $1,650 in state and local sales taxes.
Besides this sales tax, Kelly also paid $5,260 in state income taxes and had other itemized
deductions (e.g., mortgage interest) of $3,500. If Kelly files single with AGI of $56,000, what
amount of itemized deductions will she be eligible to claim?

65. Toshiomi works as a sales representative and travels extensively for his employer's business.
This year Toshiomi was paid $75,000 in salary and made the following expenditures:

Toshiomi also made a number of trips to Las Vegas for gambling. This year Toshiomi won
$12,000 in a poker tournament and this amount was almost enough to offset his other
gambling losses ($13,420). Calculate Toshiomi's taxable income if he files single with one
personal exemption.

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66. Justin and Georgia file married jointly with one dependent. This year, their AGI is $319,050.
What dollar amount of personal and dependency exemptions would they be allowed to
deduct this year?

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 Chapter 07 Individual from AGI Deductions Answer Key

True / False Questions

1. The medical expense deduction is designed to provide relief for doctors and medical
practitioners.

FALSE

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

2. Deductible medical expenses include payments to medical care providers such as doctors,
dentists, and nurses and medical care facilities such as hospitals.

TRUE

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

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3. Taxpayers traveling for the primary purpose of receiving essential and deductible medical
care may deduct the cost of travel.

TRUE

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

4. The deduction for medical expenses is limited to the amount of unreimbursed qualifying
medical expenses paid during the year reduced by five percent of the taxpayer's AGI.

FALSE

10% (7.5% for taxpayer or spouse age 65 or older) of AGI is the floor limit.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

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5. The itemized deduction for taxes includes all types of state, local, and foreign taxes.

FALSE

The deduction is limited to state income (or sales taxes), property taxes and personal
property taxes based on value.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 3 Hard
Topic: Itemized deductions

6. In 2013, taxpayers may elect to deduct state and local sales taxes instead of deducting
state and local income taxes.

TRUE

Taxpayers may elect to deduct state and local sales taxes in lieu of deducting state and
local income taxes. At press time, this provision is set to expire after 2013.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

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7. Taxpayers are allowed to deduct mortgage interest on up to $1,000,000 of acquisition debt
for their qualified residence and on up to $500,000 of home-equity debt.

FALSE

Interest is deductible on up to $100,000 of home-equity debt.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

8. The deduction for investment interest in excess of the net investment income carries
forward to the subsequent year.

TRUE

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-30
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9. To qualify as a charitable deduction the donation must be made by cash or by check.

FALSE

Donations of property also qualify.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

10. In general, taxpayers are allowed to deduct the fair market value of capital gain property
on the date of the donation to a qualified charitable organization.

TRUE

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-31
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11. The deduction for charitable contributions is limited to ten percent of the taxpayer's AGI
whereas casualty losses on personal assets are only deductible to the extent the losses
exceed ten percent of the taxpayer's AGI.

FALSE

50% of AGI is the ceiling for donations.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

12. Unreimbursed employee business expenses, investment expenses, hobby expenses, and
certain other expenses are classified as miscellaneous itemized deductions and are
deductible only to the extent that their sum exceeds 2% of the taxpayer's AGI.

TRUE

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-32
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13. Taxpayers are allowed to deduct all ordinary and necessary expenses incurred in
connection with determining their tax obligations imposed by federal, state, municipal, or
foreign authorities.

TRUE

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

14. Bunching itemized deductions is one form of tax evasion.

FALSE

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 1 Easy
Topic: Standard deduction and exemptions

15. Taxpayers generally deduct the lesser of their standard deduction or their itemized
deductions.

FALSE

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 1 Easy
Topic: Standard deduction and exemptions

7-33
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16. Taxpayers filing single and taxpayers filing married separate have the same basic standard
deduction amount.

TRUE

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 2 Medium
Topic: Standard deduction and exemptions

17. An individual who is eligible to be claimed as a dependent on another's return and has
$1,000 of earned income may claim a standard deduction of $1,350.

TRUE

The dependent may claim a standard deduction for the greater of (1) $1,000 or (2) $350
plus her $1,000 earned income = $1,350.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 2 Medium
Topic: Standard deduction and exemptions

7-34
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McGraw-Hill Education.
18. In 2014, personal and dependency exemptions are $6,200 for single taxpayers.

FALSE

The 2014 personal and dependency exemption amount is $3,950.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 2 Medium
Topic: Standard deduction and exemptions

Multiple Choice Questions

7-35
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19. Ned is a head of household with a dependent son, Todd, who is a full-time student. This
year Ned made the following expenditures related to Todd's support:

What amount can Ned include in his itemized deductions?

A. $1,700 included in Ned's miscellaneous itemized deductions

B. $2,050 included in Ned's miscellaneous itemized deductions
C. $950 included in Ned's miscellaneous itemized deductions
D. $600 included in Ned's medical expenses
E. None of these.

The premiums paid for health and medical insurance for dependents is included in the
taxpayer's medical expenses when determining itemized deductions.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-36
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McGraw-Hill Education.
20. Which of the following is a true statement?

A. A taxpayer can deduct medical expenses incurred for members of his family who are
dependents.
B. A taxpayer can deduct medical expenses incurred for a qualified relative even if the
relative does not meet the gross income test.
C. A divorced taxpayer can deduct medical expenses incurred for a child even if the child
is claimed as a dependent by the former spouse.
D. Deductible medical expenses include long-term care services for disabled spouses and
dependents.
E. All of these are true.

All are true.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-37
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21. Which of the following costs are deductible as an itemized medical expense?

A. The cost of prescription medicine and over-the-counter drugs.

B. Medical expenses incurred to prevent disease.
C. The cost of elective cosmetic surgery.
D. Medical expenses reimbursed by health insurance.
E. None of these costs is deductible.

Medical expenses include any payments for the care, prevention, diagnosis, or cure of
injury, disease, or bodily function that are not reimbursed by health insurance.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

22. Which of the following costs are NOT deductible as an itemized medical expense?

A. The cost of eyeglasses.

B. Payments to a hospital.
C. Transportation for medical purposes.
D. The cost of insurance for long-term care services.
E. All of these are deductible as medical expenses.

All of these are deductible.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-38
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23. Opal fell on the ice and injured her hip this winter. As a result she paid $3,000 for a visit to
the hospital emergency room and $750 for follow-up visits with her doctor. While she
recuperated, Opal paid $500 for prescription medicine and $600 to a therapist for
rehabilitation. Insurance reimbursed Opal $1,200 for these expenses. What is the amount
of Opal's deductible medical expense before considering any AGI limitations?

A. $3,000
B. $3,750
C. $3,650
D. $4,850
E. All of these

The deductible expenses are calculated as follows

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Blooms: Remember
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-39
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McGraw-Hill Education.
24. Which of the following taxes will not qualify as an itemized deduction?

A. personal property taxes assessed on the value of specific property.

B. state, local, and foreign income taxes.
C. real estate taxes on a residence.
D. gasoline taxes on personal travel.
E. None of these qualifies as an itemized deduction.

Gasoline taxes on personal travel are not deductible.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Blooms: Remember
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-40
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McGraw-Hill Education.
25. This year Amanda paid $749 in Federal gift taxes on a gratuitous transfer to her nephew.
Amanda lives in Texas and does not pay any state or local income taxes. Which of the
following is a true statement?

A. Amanda cannot deduct Federal gift taxes.

B. Amanda can deduct Federal gift taxes for AGI.
C. Amanda can deduct Federal gift taxes paid as an itemized deduction.
D. Amanda must include Federal gift taxes with other miscellaneous itemized deductions.
E. None of these is true.

Federal gift and estate taxes are not deductible.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-41
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26. This year Norma paid $1,200 of real estate taxes on her personal residence. Norma's other
itemized deductions (state income taxes) only amount to $3,100. Which of the following is
a true statement if Norma files single with one personal exemption?

A. Norma can deduct 4,300 for AGI.

B. Norma can deduct $1,200 even if her standard deduction is $5,950.
C. Norma should deduct $4,300 even if her standard deduction is $5,950.
D. Norma can deduct $3,100 even if her standard deduction is $5,950.
E. Norma should claim the standard deduction.

Taxpayers should generally claim the standard deduction if it exceeds their total itemized
deductions.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-42
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McGraw-Hill Education.
27. Madeoff donated stock (capital gain property) to a public charity. He purchased the stock
3 years ago for $100,000, and on the date of the gift, it had a fair market value of $200,000.
What is his maximum charitable contribution deduction for the year if his AGI is $500,000
(before considering the itemized deduction phase-out)?

A. $100,000
B. $200,000
C. $150,000
D. $250,000
E. None of these

The stock is appreciated capital gain property limited to 30% of AGI.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-43
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McGraw-Hill Education.
28. Carly donated inventory (ordinary income property) to a church. She purchased the
inventory last month for $100,000, and on the date of the gift, it had a fair market value of
$92,000. What is her maximum charitable contribution deduction for the year if her AGI is
$200,000?

A. $100,000
B. $92,000
C. $60,000
D. $46,000 if the church sells the inventory
E. None of these

The charitable deduction for ordinary income property is the lesser of FMV or basis limited
to 50% of AGI.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-44
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29. Simone donated a landscape painting (tangible capital gain property) to a library, a public
charity. She purchased the painting five years ago for $50,000, and on the date of the gift,
it had a fair market value of $200,000. What is her maximum charitable contribution
deduction for the year if her AGI is $300,000 (before considering the itemized deduction
phase-out)?

A. $100,000
B. $200,000
C. $90,000 if the library uses the painting for its charitable purpose
D. $150,000
E. None of these

The painting is appreciated capital gain property given to a public charity. However,
because it is also tangible personal property the donation is FMV only if it is related to the
charitable use or purpose. If so, the deduction is limited to 30% of AGI. If not, the
deduction is basis limited to 50% of AGI.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 3 Hard
Topic: Itemized deductions

7-45
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McGraw-Hill Education.
30. Larry recorded the following donations this year:

$500 cash to a family in need

$2,400 to a church
$500 cash to a political campaign

To the Salvation Army household items that originally cost $1,200 but are worth $300.

What is Larry's maximum allowable charitable contribution if his AGI is $60,000?

A. $2,900
B. $1,000
C. $2,700
D. $4,600
E. None of these

$2,400 to church + $300 FMV of clothing.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-46
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McGraw-Hill Education.
31. Which of the following is a true statement?

A. the deduction of cash contributions to public charities is limited to 30 percent of AGI.

B. the deduction of capital gain property to private nonoperating foundations is limited to
50 percent of AGI.
C. the deduction of capital gain property to public charities is limited to 20 percent of AGI.
D. the deduction of cash contributions to private nonoperating foundations is limited to 30
percent of AGI.
E. None of these is true.

The deduction of cash contributions to public charities is limited to 50 percent of AGI, the
deduction of capital gain property to private nonoperating foundations is limited to 20
percent of AGI, and the deduction of capital gain property to public charities is limited to
30 percent of AGI.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 3 Hard
Topic: Itemized deductions

7-47
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McGraw-Hill Education.
32. When taxpayers donate cash and capital gain property to a public charity, the AGI
percentage limitation is applied in the following order:

A. a 30 percent of AGI limitation is applied to the aggregate donation.

B. a 50 percent of AGI limitation is applied to the cash donation and a 20 percent of AGI
limitation is applied to the fair market value of the capital gain donation.
C. a 30 percent of AGI limitation is applied to the cash donation and a 20 percent of AGI
limitation is applied to the fair market value of the capital gain donation.
D. a 50 percent of AGI limitation is applied to the cash donation and the fair market value
of the capital gain donation is subject to the lesser of a 30 percent of AGI limitation or
a 50 percent of AGI limitation after subtracting the cash contributions.
E. donations to public charities are not subject to AGI limitations.

Capital gain property is subject to lower AGI limits but the aggregate donation cannot
exceed 50 percent of AGI.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-48
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33. Which of the following is a true statement?

A. Taxpayers may only deduct interest on up to $1,500,000 of acquisition indebtedness.

B. Taxpayers may deduct interest on up to $1,000,000 of home-equity debt.
C. The deduction for investment interest expense is not subject to limitation.
D. Interest on home-equity debt up to $100,000 is deductible, even if the loan proceeds
are used to buy a new car.
E. None of these is true.

The qualified residence interest deduction rules do not restrict the use of home-equity
debt proceeds.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-49
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34. Margaret Lindley paid $15,000 of interest on her $300,000 acquisition debt for her home
(fair market value of $500,000), $4,000 of interest on her $30,000 home-equity loan,
$1,000 of credit card interest, and $3,000 of margin interest for the purchase of stock.
Assume that Margaret Lindley has $10,000 of interest income this year and no investment
expenses. How much of the interest expense may she deduct this year?

A. $23,000.
B. $22,000.
C. $19,000.
D. $18,000.
E. None of these.

The credit card interest is nondeductible personal interest. The remaining interest is
deductible as qualified residence interest ($15,000 + $4,000) and investment interest
($3,000). The $3,000 investment interest is not restricted by her net investment income
($10,000).

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-50
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35. Which of the following is a true statement?

A. A casualty loss can only occur from storm damage.

B. Personal casualty losses are subject to a per casualty floor limitation and an aggregate
floor limitation of 10 percent of AGI.
C. Individual casualty losses are only deductible if each individual loss exceeds $5,000.
D. Uninsured thefts of personal assets are not included with casualty losses.
E. All of these are true.

Casualties are thefts and any sudden unexpected events such as storms, fires, or
shipwrecks and individual casualty losses are subject to a per casualty floor in addition to
an aggregate floor limitation of 10 percent of AGI.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-51
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36. Jim was in an auto accident this year. Jim paid $2,450 to repair his car after the accident
and his insurance only reimbursed him $400. Jim bought his car several years ago for
$1,500. What is the amount of casualty loss from this accident before Jim applies any
casualty loss floor limitations?

A. $2,450
B. $2,050
C. $1,500
D. $1,100
E. None of these is correct.

The loss is the lesser of the adjusted basis of the asset ($1,500) or the decline in value
(here the amount of repairs - $2,450). Before the loss is compared to the per casualty floor
limit, the amount of the loss ($1,500) must be reduced by insurance reimbursements
($400).

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-52
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McGraw-Hill Education.
37. Which of the following is a true statement?

A. Employees cannot claim business expense deductions.

B. Employees can claim business expense deductions for AGI.
C. Employees can claim business expense deductions as miscellaneous itemized
deductions not subject to the 2 percent of AGI limitation.
D. Employees can claim business expense deductions as miscellaneous itemized
deductions subject to the 2 percent of AGI limitation.
E. None of these is true.

Employee business expense deductions are miscellaneous itemized deductions subject to

the 2 percent of AGI limitation.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-53
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38. Which of the following is a true statement?

A. Traveling from a personal residence to a place of business is deducted for AGI as a

moving expense.
B. Traveling from a personal residence to a place of business is a miscellaneous itemized
deduction subject to the 2 percent of AGI limitation.
C. The standard mileage rate can be used to calculate the deduction for traveling from a
personal residence to a place of business.
D. Traveling from a personal residence to a place of business is deductible if reimbursed
by an employer.
E. Traveling from a personal residence to a place of business is nondeductible.

Traveling from a personal residence to a place of business is a personal nondeductible

expense even if reimbursed by an employer.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-54
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McGraw-Hill Education.
39. Which of the following is a true statement?

A. Fees for investment advice are included in miscellaneous itemized deductions subject
to the 2 percent of AGI limitation.
B. Unreimbursed employee business expenses are included in miscellaneous itemized
deductions subject to the 2 percent of AGI limitation.
C. Fees for tax preparation are included in miscellaneous itemized deductions subject to
the 2 percent of AGI limitation.
D. Reimbursed employee business expenses are included in miscellaneous itemized
deductions subject to the 2 percent of AGI limitation unless the employer's
reimbursement plan qualifies as an accountable plan.
E. All of these are true.

Employee business expenses reimbursed via an accountable plan are not deducted and
the reimbursement is excluded from gross income.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-55
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McGraw-Hill Education.
40. Fred's employer dispatched him on a business trip from the Dallas headquarters to New
York this year. During the trip Fred incurred the following expenses:

What is the amount of Fred's deduction before the application of any AGI limitations?

A. $2,870
B. $2,570
C. $2,050
D. $1,300
E. $0 - the expenses cannot be deducted unless Fred is reimbursed.

The meals are limited to 50% of the cost.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-56
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41. Which of the following is a true statement?

A. Expenses associated with a "hobby" are never deductible.

B. The deductibility of an activity's expenses in excess of revenues depends upon
whether the activity is primarily profit-motivated or a hobby as determined by facts and
circumstances.
C. Taxpayers engaged in a "hobby" are always presumed to be motivated by profit.
D. The regulations do not provide any guidance for determining whether an activity is
profit motivated.
E. All of these are true.

The regulations provide a list of factors for determining whether an activity is profit
motivated. The presumption that a hobby is profit motivated depends upon whether the
activity generates a profit in three of five consecutive years.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-57
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42. Glenn is an accountant who races stock cars as a hobby. This year Glenn was paid a
salary of $80,000 from his employer and won $2,000 in various races. What is the effect of
the racing activities on Glenn's taxable income if Glenn has also incurred $4,200 of hobby
expenses this year? Assume that Glenn itemizes his deductions but has no other
miscellaneous itemized deductions.

A. increase in taxable income of $2,000

B. increase in taxable income of $1,640
C. no change in taxable income
D. decrease in taxable income of $560
E. decrease in taxable income of $2,200

Hobby expenses are deductible to the extent of hobby revenues. Hence, Glenn will include
$2,000 in gross income and deduct $2,000 as miscellaneous itemized deductions. After
application of the 2% floor, this will result in a net increase of $1,640 in taxable income
[$2,000 - ($2,000 - (2% * $82,000))] = $2,000 - ($2,000 - $1,640) = $1,640.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 3 Hard
Topic: Itemized deductions

7-58
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43. Grace is employed as the manager of a sandwich shop. This year she earned a salary of
$45,000 and incurred the following expenses associated with her employment:

What amount of miscellaneous itemized deductions can Grace deduct after any applicable
limitations?

A. $150
B. $1,050
C. $550
D. $200 if Grace was reimbursed $50 for her cooking class
E. None of these.

The subscriptions and cooking class ($550) are deductible but this sum is reduced to zero
by the 2 percent of AGI limitation ($900).

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-59
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44. Which of the following is a miscellaneous itemized deduction that is not subject to the 2
percent of AGI floor?

A. gambling losses to the extent of gambling winnings

B. fees for investment advice
C. employee business expenses
D. tax preparation fees
E. All of these are subject to the 2 percent of AGI floor limit.

All of the other alternatives are subject to the 2 percent of AGI floor.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-60
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45. Frieda is 67 years old and deaf. If Frieda files as a head of household, what amount of
standard deduction can she claim in 2014?

A. $10,650
B. $9,100
C. $10,300
D. $12,200
E. $1,550

$10,650 = $9,100 + $1,550 the regular standard deduction increased for age 65 and
blindness.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 2 Medium
Topic: Standard deduction and exemptions

7-61
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46. Andres and Lakeisha are married and file joint. Andres is 72 years old and in good health.
Lakeisha is 62 years old and blind. What amount of standard deduction can Andres and
Lakeisha claim this year?

A. $14,800
B. $13,600
C. $9,100
D. $12,400
E. None of these.

$14,800 = $12,400 + ($1,200 × 2). The married joint standard deduction is increased for
$1,200 for each blind and/or taxpayer age 65 by year end.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 3 Hard
Topic: Itemized deductions

7-62
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47. Which of the following is a true statement?

A. The standard deduction is increased for taxpayers who are blind or deaf at year end.
B. A married couple is only entitled to one addition to their standard deduction even if
both spouses are both over age 65.
C. Bunching itemized deductions is an illegal method of tax avoidance.
D. The deduction for personal and dependency exemptions is $3,950 times the number of
exemptions.
E. All of these are true.

For 2014, each exemption is worth $3,950.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-63
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48. Which of the following is a true statement?

A. Personal exemptions, but not dependency exemptions, are subject to phase-out.

B. A married filing joint taxpayer with AGI of $500,000 would not be able to deduct
personal and dependency exemptions.
C. At most, only 80% of exemptions are subject to phase-out.
D. Itemized deductions, but not exemptions, are subject to phase-out.
E. None of these is true.

Married filing joint taxpayers with AGI of $427,551 or greater receive no exemption
deductions.

AACSB: Reflective Thinking

AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 1 Easy
Topic: Standard deduction and exemptions

Essay Questions

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49. Detmer is a successful doctor who earned $204,800 in fees this year, but he also
competes in weekend golf tournaments. Detmer reported the following expenses
associated with competing in almost a dozen tournaments:

This year Detmer won $5,200 from competing in various golf tournaments. Assuming that
Detmer itemizes his deductions, what amount of the golfing expenses are deductible after
considering all limitations if the tournament golfing is treated as a hobby activity?

$1,000 = $5,200 - [2% × ($204,800 + $5,200)]

Feedback: Detmer's hobby expenses of $6,335 are limited to his revenues ($5,200) and
further reduced by $4,200 (2 percent of AGI which is $204,800 + $5,200).

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-65
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50. Jenna (age 50) files single and reports AGI of $40,000. This year she has incurred the
following medical expenses:

Calculate the amount of medical expenses that will be included with Jenna's other
itemized deductions.

$1,910

Feedback: All expenses are qualified medical expenses except for the cosmetic surgery
and over-the-counter drugs. Hence, the medical expense deduction is $5,910 less $4,000
(10 percent * 40,000) = $1,910 and this amount is included with other itemized
deductions.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-66
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51. Chuck has AGI of $70,000 and has made the following payments:

Calculate the amount of taxes that Chuck can include with his itemized deductions.

$4,050 = $1,900 + $850 + $790 + $510

Feedback: The deductible taxes include county real estate, school district tax on real
estate, and state income taxes paid and withheld.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

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52. Homer is an executive who is paid a salary of $80,000. Homer also paints landscapes as a
hobby. This year Homer expects to sell paintings for a total of $750 and incur the following
expenses associated with his painting activities:

What is the effect of Homer's hobby on his taxable income? Assume his AGI does not
reflect his painting activities and that he itemizes deductions but has no other
miscellaneous itemized deductions.

Homer's hobby will increase his taxable income by $750.

Feedback: Homer will not receive any deduction for the hobby expenses, but the hobby
income will increase taxable income. The deduction for hobby expenses ($2,320) is limited
to hobby revenues ($750) and further reduced by $1,615 (2 percent of AGI which is
$80,000 + $750).

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-68
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53. This year, Benjamin Hassell paid $20,000 of interest on a mortgage on his home
(Benjamin borrowed $600,000 to buy the residence and it is currently worth $1,000,000),
$12,000 on a $150,000 home equity loan on his home, and $10,000 of interest on a
mortgage on his vacation home (loan of $300,000; home purchased for $400,000). How
much interest expense can Benjamin deduct as an itemized deduction?

$38,000.

Feedback: Benjamin's acquisition debt on his home and vacation home does not exceed
$1,000,000. Thus, he can deduct the $20,000 mortgage interest on his home and $10,000
of mortgage interest on his vacation home. Because his home equity debt exceeds
$100,000, he can only deduct a portion of the interest on the $150,000 home equity debt
(i.e., the portion attributable to $100,000 of debt). Thus, Benjamin can also deduct $8,000
of home equity interest ($12,000 interest expense × ($100,000 home equity debt
limit/$150,000 home equity debt amount) = $8,000).

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

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54. This year Darcy made the following charitable contributions:

Determine the maximum amount of charitable deduction for Darcy's contribution of the
painting if her AGI is $80,000 this year. You may assume that both the stock and painting
have been owned for 10 years.

The charitable deduction is $21,000 for the painting and $40,000 overall.

Feedback: All of the contributions are to public charities, and the overall limit is 50 percent
of AGI ($40,000). The cash, stock, and clothes are subject to the 50 percent of AGI limit.
The stock and clothes are not subject to the 30 percent AGI limit because these are
ordinary income properties (basis exceeds its value so neither is capital gain property).
Thus, $19,000 is the deduction in the first step of the calculation. The painting is long-
term tangible personal property apparently related to the purpose of the charity. Hence,
the maximum deduction is the lesser of (1) the value up to the 30 percent AGI limit
($24,000) or (2) the remaining amount of deduction to reach the 50 percent limit
($21,000). Hence, the maximum deduction this year is $40,000 consisting of cash of
$8,000, IBM stock of $10,500, clothes of $500, and the painting of $21,000. The remaining
value of the painting $24,000 ($45,000 - $21,000) is carried over to next year subject to the
30 percent of AGI limit.

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 AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 3 Hard
Topic: Itemized deductions

55. Claire donated 200 shares of stock (held for 5 years) to her father's nonoperating private
foundation this year. The stock was worth $15,000 but Claire's basis was only $4,000.
Determine the maximum amount of charitable deduction for the donation if Claire's AGI is
$60,000 this year.

$12,000

Feedback: The stock is long-term capital gain property donated to a nonoperating private
foundation so the maximum donation is limited to 20% of AGI. The remaining deduction of
$3,000 will carry over to next year.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-71
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56. Erika (age 67) was hospitalized with injuries from an auto accident this year. She incurred
the following expenses from the accident:

In addition, Erika's auto was completely destroyed in the accident. She bought the car
several years ago for $18,000 and it was worth $4,700 at the time of the accident. What
are Erika's itemized deductions this year if she was uninsured and her AGI is $40,000?

$2,630 consisting of $2,030 of medical expenses and $600 of casualty losses.

Feedback: The medical expenses of $5,030 are reduced by 7.5% of AGI ($3,000) and the
casualty loss of $4,700 is reduced by $100 and 10% of AGI ($4,000).

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 2 Medium
Topic: Itemized deductions

7-72
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57. Don's personal auto was damaged in a wind storm this year. Don purchased the auto
several years ago for $32,000 and it was worth $18,000 at the time of the storm. The
damage was superficial, so Don decided not to repair the car. Although Don collected $750
from his insurance company, the value of the car dropped after the storm to $15,000. What
is the amount of casualty loss from the storm damage before Don applies any floor
limitations?

$2,250

Feedback: The loss is the lesser of the basis of the auto or the decline in value from the
casualty reduced by insurance proceeds of $750. $2,250 = $3,000 - $750.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-73
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McGraw-Hill Education.
58. Colby is employed full-time as a food technician for a local restaurant chain. This year he
has incurred the following expenses associated with his employment:

Colby was reimbursed $125 of the expenses from his employer's accountable plan. What
amount can he include with his remaining itemized deductions if his AGI this year is
$32,000?

$1,025 = [($280 + $310 + $1,200) - $125] - (2% × $32,000)

Feedback: All of the expenses are deductible but the deduction is reduced by the
reimbursement and 2% of AGI.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-74
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59. Clark is a registered nurse and full-time employee of the Hays Hospital. To maintain his
nursing license Clark has incurred the following expenses:

Clark was reimbursed $1,250 of his expenses from his Hays Hospital accountable
reimbursement plan. What amount can he include with his remaining itemized deductions
if his AGI this year is $52,000?

$1,010 = [($1,650 + $400 + $800 + $450) - $1,250] - (2% × $52,000)

Feedback: All of the expenses are deductible but the deduction is reduced by the
reimbursement and 2% of AGI.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-01 Describe the different types of itemized deductions available to individuals and compute
itemized deductions.
Level of Difficulty: 1 Easy
Topic: Itemized deductions

7-75
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60. Karin and Chad (ages 30 and 31, respectively) are married and together have $110,000 of
AGI. This year they have recorded the following expenses:

Karin and Chad will file married joint with two personal exemptions. Calculate their
taxable income.

$83,000 = $110,000 - ($6,640 + $5,400 + $6,300 + $760) - ($3,950 × 2)

Feedback: Karin and Chad will choose to itemize their deductions. The medical expenses
and employee business expenses will not generate any addition to the itemized
deductions because they are subject to a 10% and 2% of AGI floor limits, respectively.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 1 Easy
Topic: Standard deduction and exemptions

7-76
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61. Bryan is 67 years old and lives alone. This year he has received $25,000 in taxable interest
and pension payments, and he has paid the following expenses:

If Bryan files single with one personal exemption, calculate his taxable income.

$13,300 = $25,000 - $7,750 - $3,950

Feedback: Bryan's itemized deductions only total $2,100 (the unreimbursed medical
expenses are eliminated by the 7.5% of AGI floor limit), so Bryan will elect the standard
deduction. Bryan's standard deduction is increased by $1,550 for his age.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 3 Hard
Topic: Standard deduction and exemptions

7-77
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62. Misti purchased a residence this year. Misti is a single parent and lives with her 1-year old
daughter. This year, Misti received a salary of $63,000 and made the following payments:

Misti files as a head of household and claims two exemptions. Calculate her taxable
income this year.

$46,000 = $63,000 - $9,100 - ($3,950 × 2)

Feedback: Misti's itemized deductions total $5,320 (the income tax preparation fee is
eliminated by the 2% of AGI floor limit). Hence, Misti will elect the standard deduction of
$9,100.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 2 Medium
Topic: Standard deduction and exemptions

7-78
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63. Jon and Holly are married and live in a retirement community. This year Jon celebrated his
65th birthday and Holly turned 68 years old. For their ages, both Jon and Holly are in good
health. This year the only significant expense that they incurred was an unreimbursed
medical expense of $3,200. If Jon and Holly together have AGI of $42,000, what is the
amount of their standard deduction this year?

$14,800

Feedback: The married joint standard deduction is $12,400 increased by $2,400 because
both taxpayers are age 65 by year end ($1,200 each).

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 1 Easy
Topic: Standard deduction and exemptions

7-79
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64. This year Kelly bought a new auto for $20,000 plus $1,650 in state and local sales taxes.
Besides this sales tax, Kelly also paid $5,260 in state income taxes and had other itemized
deductions (e.g., mortgage interest) of $3,500. If Kelly files single with AGI of $56,000,
what amount of itemized deductions will she be eligible to claim?

$8,760 = $5,260 + $3,500

Feedback: State income taxes, but not sales taxes, are included with other itemized
deductions when determining total itemized deductions. A taxpayer could elect to deduct
state sales taxes instead of state income taxes (at press time, this provision is set to
expire after 2013).

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 1 Easy
Topic: Standard deduction and exemptions

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65. Toshiomi works as a sales representative and travels extensively for his employer's
business. This year Toshiomi was paid $75,000 in salary and made the following
expenditures:

Toshiomi also made a number of trips to Las Vegas for gambling. This year Toshiomi won
$12,000 in a poker tournament and this amount was almost enough to offset his other
gambling losses ($13,420). Calculate Toshiomi's taxable income if he files single with one
personal exemption.

$63,750 = 67,700 - 3,950 (personal exemption)

$67,700 = ($75,000 salary + $12,000 gambling winnings) - ($6,300 state taxes + $12,000
gambling losses) - [($1,450 unreimbursed employee business expenses + $780
investment fees + $310 tax preparation fees) - ($87,000 × 2%)] - 200 charitable
contributions

Feedback: The employee expenses, investment fees, and tax preparation fee are all
miscellaneous itemized deductions subject to a 2% of AGI limit. The gambling losses (up
to gambling winnings) are a miscellaneous itemized deduction not subject to the 2% of
AGI limit, and the state income taxes are also itemized deductions.

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 3 Hard
Topic: Standard deduction and exemptions

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66. Justin and Georgia file married jointly with one dependent. This year, their AGI is $319,050.
What dollar amount of personal and dependency exemptions would they be allowed to
deduct this year?

$10,428

Feedback:

AACSB: Analytic
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 07-02 Explain the operation of the standard deduction; determine the deduction for personal and
dependency exemptions; and compute taxable income.
Level of Difficulty: 3 Hard
Topic: Standard deduction and exemptions

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