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Chapter 10 Deductions And Losses: Certain Itemized Deductions
Problems
24. LO.2 Emma Doyle, age 55, is employed as a corporate attorney. For calendar year
2016, she had AGI of $100,000 and paid the following medical expenses:
Medical insurance premiums $3,700
Doctor and dentist bills for Bob and April (Emma’s parents) 6,800
Doctor and dentist bills for Emma 5,200
Prescription medicines for Emma 400
Nonprescription insulin for Emma 350
Bob and April would qualify as Emma’s dependents except that they file a joint return. Emma’s medical insurance policy does not cover them. Emma filed a claim for reimbursement of $2,800 of her own expenses with her insurance company in
December 2016 and received the reimbursement in January 2017. What is Emma’s maximum allowable medical expense deduction for 2016? Prepare a memo for your firm’s tax files in which you document your conclusions.
25. LO.2 Reba, who is single and age 45, does a lot of business entertaining at home.
Lawrence, Reba’s 84-year-old dependent grandfather, lived with Reba until this year, when he moved to Lakeside Nursing Home because he needs medical and nursing care. During the year, Reba made the following payments on behalf of
Lawrence:
Room at Lakeside $11,000
Meals for Lawrence at Lakeside 2,200
Doctor and nurse fees at Lakeside 1,700
Cable TV service for Lawrence’s room at Lakeside 380
Total $15,280
Lakeside has medical staff in residence. Disregarding the 10%-of-AGI floor, how much, if any, of these expenses qualifies for a medical expense deduction by Reba?
26. LO.2 Paul, age 62, suffers from emphysema and severe allergies and, upon the recommendation of his physician, has a dust elimination system installed in his personal residence. In connection with the system, Paul incurs and pays the following amounts during 2016:
Doctor and hospital bills $ 2,500
Dust elimination system 10,000
Increase in utility bills due to the system 450
Cost of certified appraisal 300
In addition, Paul pays $750 for prescribed medicines.
The system has an estimated useful life of 20 years. The appraisal was to determine the value of Paul’s residence with and without the system. The appraisal states that his residence was worth $350,000 before the system was installed and $356,000 after the installation. Paul’s AGI for the year was $50,000. How much of the medical expenses qualify for the medical expense deduction in 2016?
27. LO.2 For calendar year 2016, Jean was a self-employed consultant with no employees.
She had $80,000 of net profit from consulting and paid $7,000 in medical insurance premiums on a policy covering 2016. How much of these premiums may
Jean deduct as a deduction for AGI? How much may she deduct as an itemized deduction (subject to the AGI floor)?
28. LO.2 During 2016, Susan, age 49, incurred and paid the following expenses for
Beth (her daughter), Ed (her father), and herself:
Surgery for Beth $4,500
Red River Academy charges for Beth:
Tuition 5,100
Room, board, and other expenses 4,800
Psychiatric treatment 5,100
Doctor bills for Ed 2,200
Prescription drugs for Susan, Beth, and Ed 780
Insulin for Ed 540
Nonprescription drugs for Susan, Beth, and Ed 570
Charges at Heartland Nursing Home for Ed:
Medical care 5,000
Lodging 2,700
Meals 2,650
Beth qualifies as Susan’s dependent, and Ed would also qualify except that he receives $7,400 of taxable retirement benefits from his former employer. Beth’s psychiatrist recommended Red River Academy because of its small classes and specialized psychiatric treatment program that is needed to treat Beth’s illness. Ed, who is a paraplegic and diabetic, entered Heartland in October. Heartland offers the type of care that he requires.
Upon the recommendation of a physician, Susan has an air filtration system installed in her personal residence. She suffers from severe allergies. In connection with this equipment, Susan incurs and pays the following amounts during the year:
Filtration system and cost of installation $6,500
Increase in utility bills due to the system 700
Cost of certified appraisal 360
The system has an estimated useful life of 10 years. The appraisal was to determine the value of Susan’s residence with and without the system. The appraisal states that the system increased the value of Susan’s residence by $2,200. Ignoring the 10%-of-
AGI floor, what is the total of Susan’s expenses that qualifies for the medical expense deduction?
29. LO.2 In May, Rebecca’s daughter, Isabella, sustained a serious injury that made it impossible for her to continue living alone. Isabella, who is a novelist, moved back into Rebecca’s home after the accident. Isabella has begun writing a novel based on her recent experiences. To accommodate Isabella, Rebecca incurred significant remodeling expenses (widening hallways, building a separate bedroom and bathroom, and making kitchen appliances accessible to Isabella). In addition,
Rebecca had an indoor swimming pool constructed so that Isabella could do rehabilitation exercises prescribed by her physician.
In September, Isabella underwent major reconstructive surgery in Denver. The surgery was performed by Dr. Rama Patel, who specializes in treating injuries of the type sustained by Isabella. Rebecca drove Isabella from Champaign, Illinois, to Denver, a total of 1,100 miles, in Isabella’s specially equipped van. They left Champaign on Tuesday morning and arrived in Denver on Thursday afternoon. Rebecca incurred expenses for gasoline, highway tolls, meals, and lodging while traveling to
Denver. Rebecca stayed in a motel near the clinic for eight days while Isabella was hospitalized. Identify the relevant tax issues based on this information, and prepare a list of questions you would need to ask Rebecca and Isabella to advise them as to the resolution of any issues you have identified.
30. LO.2 In the current year, Roger pays a $3,000 premium for high-deductible medical insurance for him and his family. In addition, he contributed $2,600 to a
Health Savings Account.
a. How much may Roger deduct if he is self-employed? Is the deduction for AGI or from AGI?
b. How much may Roger deduct if he is an employee? Is the deduction for AGI or from AGI?
31. LO.3 Alicia sold her personal residence to Rick on June 30 for $300,000. Before the sale, Alicia paid the real estate tax of $4,380 for the calendar year. For income tax purposes, the deduction is apportioned as follows: $2,160 to Alicia and $2,220 to
Rick. What is Rick’s basis in the residence?
32. LO.4 Norma, who is single and uses the cash method of accounting, lives in a state that imposes an income tax. In April 2016, she files her state income tax return for 2015 and pays an additional $1,000 in state income taxes. During
2016, her withholdings for state income tax purposes amount to $7,400, and she pays estimated state income tax of $700. In April 2017, she files her state income tax return for 2016, claiming a refund of $1,800. Norma receives the refund in
August 2017.
a. Assuming that Norma itemized deductions in 2016, how much may she claim as a deduction for state income taxes on her Federal return for calendar year 2016 (filed April 2017)?
b. Assuming that Norma itemized deductions in 2016 (which totaled $20,000), how will the refund of $1,800 that she received in 2017 be treated for Federal income tax purposes?
c. Assume that Norma itemized deductions in 2016 (which totaled $20,000) and that she elects to have the $1,800 refund applied toward her 2017 state income tax liability. How will the $1,800 be treated for Federal income tax purposes?
d. Assuming that Norma did not itemize deductions in 2016, how will the refund of $1,800 received in 2017 be treated for Federal income tax purposes?
33. LO.5 Ten years ago, Liam, who is single, purchased a personal residence for $340,000 and took out a mortgage of $200,000 on the property. In May of the current year, when the residence had a fair market value of $440,000 and Liam owed $140,000 on the mortgage, he took out a home equity loan for $220,000. He used the funds to purchase a recreational vehicle, which he uses 100% for personal use. What is the maximum amount on which Liam can deduct home equity interest?
34. LO.5 Malcolm owns 60% and Buddy owns 40% of Magpie Corporation. On July 1, 2016, each lends the corporation $30,000 at an annual interest rate of 10%.
Malcolm and Buddy are not related. Both shareholders are on the cash method of accounting, and Magpie Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2017, Magpie repays the loans of $60,000 together with the specified interest of $6,000.
a. How much of the interest can Magpie Corporation deduct in 2016? In 2017?
b. When is the interest included in Malcolm and Buddy’s gross income?
35. LO.6 Nadia donates $4,000 to Eastern University’s athletic department. The payment guarantees that Nadia will have preferred seating near the 50-yard line.
a. Assume that Nadia subsequently buys four $100 game tickets. How much can she deduct as a charitable contribution to the university’s athletic department?
b. Assume that Nadia’s $4,000 donation includes four $100 tickets. How much can she deduct as a charitable contribution to the university’s athletic department?
36. LO.6 Liz had AGI of $130,000 in 2016. She donated Bluebird Corporation stock with a basis of $10,000 to a qualified charitable organization on July 5, 2016.
a. What is the amount of Liz’s deduction assuming that she purchased the stock on December 3, 2015, and the stock had a fair market value of $17,000 when she made the donation?
b. Assume the same facts as in (a), except that Liz purchased the stock on July 1, 2013.
c. Assume the same facts as in (a), except that the stock had a fair market value of $7,500 (rather than $17,000) when Liz donated it to the charity.
37. LO.6 During the year, Ricardo made the following contributions to a qualified public charity:
Cash $220,000
Stock in Seagull, Inc. (a publicly traded corporation) 280,000
Ricardo acquired the stock in Seagull, Inc., as an investment five years ago at a cost of $120,000. Ricardo’s AGI is $840,000.
a. What is Ricardo’s charitable contribution deduction?
b. How are excess amounts, if any, treated?
c. Ricardo expects his taxable income to vacillate over the next several years, and his ability to claim the remaining charitable contribution deduction in those years is uncertain. Calculate the present value of the tax savings from the charitable contribution if the excess contribution deduction is taken in the third year following the actual contribution or is taken in the fifth year following the contribution.
Assume that Ricardo is in the 39.6%, 25%, and 15% tax brackets in the year of contribution, the third year following the contribution, and the fifth year following the contribution, respectively. See Appendix G for the present value factors, and assume a 6% discount rate.
38. LO.6 Ramon had AGI of $180,000 in 2016. He is considering making a charitable contribution this year to the American Heart Association, a qualified charitable organization. Determine the current allowable charitable contribution deduction in each of the following independent situations, and indicate the treatment for any amount that is not deductible currently.
a. A cash gift of $95,000.
b. A gift of OakCo stock worth $95,000 on the contribution date. Ramon had acquired the stock as an investment two years ago at a cost of $84,000.
c. A gift of a painting worth $95,000 that Ramon purchased three years ago for $60,000. The charity has indicated that it would sell the painting to generate cash to fund medical research.
39. LO.6 On December 27, 2016, Roberta purchased four tickets to a charity ball sponsored by the city of San Diego for the benefit of underprivileged children.
Each ticket cost $200 and had a fair market value of $35. On the same day as the purchase, Roberta gave the tickets to the minister of her church for personal use by his family. At the time of the gift of the tickets, Roberta pledged $4,000 to the building fund of her church. The pledge was satisfied by a check dated December 31, 2016, but not mailed until January 3, 2017.
a. Presuming that Roberta is a cash basis and calendar year taxpayer, how much can she deduct as a charitable contribution for 2016?
b. Would the amount of the deduction be any different if Roberta was an accrual basis taxpayer? Explain.
40. LO.6, 9 In December of each year, Eleanor Young contributes 10% of her gross income to the United Way (a 50% organization). Eleanor, who is in the
28% marginal tax bracket, is considering the following alternatives for satisfying the contribution.
Fair Market Value
(1) Cash donation $23,000
(2) Unimproved land held for six years ($3,000 basis) 23,000
(3) Blue Corporation stock held for eight months ($3,000 basis) 23,000
(4) Gold Corporation stock held for two years ($28,000 basis) 23,000
Eleanor has asked you to help her decide which of the potential contributions listed above will be most advantageous taxwise. Evaluate the four alternatives, and write a letter to Eleanor to communicate your advice to her. Her address is 2622 Bayshore
Drive, Berkeley, CA 94709.