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Chapter 10 Deductions And Losses: Certain Itemized Deductions
Discussion Questions
1. LO.1, 2 Dan, a self-employed individual taxpayer, prepared his own income tax return for the past year and has asked you to check it for accuracy. Your review indicates that Dan failed to claim certain business entertainment expenses.
a. Will the correction of this omission affect the amount of medical expenses Dan can deduct? Explain.
b. Would it matter if Dan were employed rather than self-employed? Explain.
2. LO.2 Joe was in an accident and required cosmetic surgery for injuries to his nose.
He also had the doctor do additional surgery to reshape his chin, which had not been injured. Will the cosmetic surgery to Joe’s nose qualify as a medical expense?
Will the cosmetic surgery to Joe’s chin qualify as a medical expense? Explain.
3. LO.2, 9 Jerry and Ernie are comparing their tax situations. Both are paying all of the nursing home expenses of their parents. Jerry can include the expenses in computing his medical expense deduction, but Ernie cannot. What explanation can you offer for the difference?
4. LO.2 Cheryl incurred $8,700 of medical expenses in November 2016. On December
5, the clinic where she was treated mailed her the insurance claim form it had prepared for her with a suggestion that she sign and return the form immediately to receive her reimbursement from the insurance company by December 31.
What tax issues should Cheryl consider in deciding whether to sign and return the form in December 2016 or January 2017?
5. LO.2 David, a sole proprietor of a bookstore, pays a $7,500 premium for medical insurance for him and his family. Joan, an employee of a small firm that doesn’t provide her with medical insurance, pays medical insurance premiums of $8,000 for herself. How does the tax treatment differ for David and Joan?
6. LO.2 Jayden, a calendar year taxpayer, paid $16,000 in medical expenses and sustained a $20,000 casualty loss in 2016. He expects $12,000 of the medical expenses and $14,000 of the casualty loss to be reimbursed by insurance companies in 2017. Before considering any limitations on these deductions, how much can Jayden include in determining his itemized deductions for 2016?
7. LO.2 Jacob, a self-employed taxpayer, is married and has two children. He has asked you to explain the tax and nontax advantages of creating a Health Savings
Account (HSA) for him and his family.
8. LO.5, 9 Diane owns a principal residence in Georgia, a townhouse in San Francisco, and a yacht in Cape Cod. All of the properties have mortgages on which
Diane pays interest. What are the limitations on Diane’s mortgage interest deduction?
What strategy should Diane consider to maximize her mortgage interest deduction?
9. LO.5, 9 Mason Gregg’s car was destroyed by a flood. Unfortunately, his insurance had lapsed two days before he incurred the loss. Mason uses his car for both business and personal use. Mason, who is self-employed, does not have adequate savings to replace the car and must borrow money to purchase a new car.
He is considering taking out a home equity loan, at a 5% interest rate, to obtain funds for the purchase. Margaret, his wife, would prefer not to do so because they paid off their mortgage recently and she does not want to incur any obligations related to their home. She would prefer to sell some of their stock in Bluebird, Inc., to raise funds to purchase the new car. Mason does not want to sell the stock because it has declined in value since they purchased it and he is convinced that its price will increase in the next two years. Mason has suggested that they obtain conventional financing for the purchase from their bank, which charges 7% interest on car loans. Identify the tax issues related to each of the three alternatives Mason and
Margaret are considering.
10. LO.5 Commercial Bank has initiated an advertising campaign that encourages customers to take out home equity loans to pay for purchases of automobiles.
Are there any tax advantages related to this type of borrowing? Explain.
11. LO.5 Thomas purchased a personal residence from Rachel. To sell the residence,
Rachel agreed to pay $5,500 in points related to Thomas’s mortgage. Discuss the deductibility of the points.
12. LO.6 The city of Lawrence recently was hit by a tornado, leaving many families in need of food, clothing, shelter, and other necessities. Betty contributed $500 to a family whose home was completely destroyed by the tornado. Jack contributed $700 to the family’s church, which gave the money to the family. Discuss the deductibility of these contributions.
13. LO.6 Mike purchased four $100 tickets to a fund-raising dinner and dance sponsored by the public library, a qualified charitable organization. In its advertising for the event, the library indicated that the cost of the tickets would be deductible for Federal income tax purposes. Comment on the library’s assertion.
14. LO.6, 9 William, a high school teacher, earns about $50,000 each year. In December
2016, he won $1 million in the state lottery. William plans to donate $100,000 to his church. He has asked you, his tax adviser, whether he should donate the $100,000 in 2016 or 2017. Identify the tax issues related to William’s decision.