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Chapter 10 Deductions And Losses: Certain Itemized Deductions
Research Problems
Research Problem 1. Jane suffers from a degenerative spinal disorder. Her physician said that swimming could help prevent the onset of permanent paralysis and recommended the installation of a swimming pool at her residence for her use. Jane’s residence had a market value of approximately $500,000 before the swimming pool was installed. The swimming pool was built, and an appraiser estimated that the value of
Jane’s home increased by $98,000 because of the addition.
The pool cost $194,000, and Jane claimed a medical expense deduction of $96,000 ($194,000 _ $98,000) on her tax return. Upon audit of the return, the IRS determined that an adequate pool should have cost $70,000 and would increase the value of her home by only $31,000. Thus, the IRS claims that Jane is entitled to a deduction of only $39,000 ($70,000 _ $31,000).
a. Is there any ceiling limitation on the amount deductible as a medical expense?
Explain.
b. Can capital expenditures be deductible as medical expenses? Explain.
c. What is the significance of a “minimum adequate facility”? Should aesthetic or architectural qualities be considered in the determination? Why or why not?
Research Problem 2. Ken and Mary Jane Blough, your neighbors, have asked you for advice after receiving correspondence in the mail from the IRS. You learn that the
IRS is asking for documentation in support of the itemized deductions the Bloughs claimed on a recent tax return. The Bloughs tell you that their income in the year of question was $75,000. Because their record-keeping habits are poor, they felt justified in claiming itemized deductions equal to the amounts that represent the average claimed by other taxpayers in their income bracket. These averages are calculated and reported by the IRS annually based on actual returns filed in an earlier year.
Accordingly, they claimed medical expenses of $7,102, taxes of $6,050, interest of $10,659, and charitable contributions of $2,693. What advice do you give the Boughs?
Research Problem 3. Marcia, a shareholder in a corporation with stores in five states, donated stock with a basis of $10,000 to a qualified charitable organization in 2015.
Although the stock of the corporation was not traded on a public stock exchange, many shares had been sold over the past several years. Based on the average selling price for the stock in 2015, Marcia deducted $95,000 on her 2015 tax return. Marcia received a notice from the IRS that the $95,000 deduction had been reduced to $10,000 because she had not obtained a qualified appraisal or attached a summary of her appraisal to her tax return. Marcia has asked you to advise her on this matter.
Write a letter containing your conclusions to Ms. Marcia Meyer, 1311 Santos Court,
San Bruno, CA 94066.
Research Problem 4. The cutback adjustment that limits the amount of itemized deductions for some taxpayers is otherwise known as the Pease limitation. This limitation is named after former Congressman Donald Pease and was first in effect for tax years after December 31, 1990. The purpose of this limitation is to raise additional tax revenue by limiting some popular and common itemized deductions incurred by high-income taxpayers. One such deduction is the charitable contribution deduction.
Search Google or a business press database to see what tax law analysts speculated the consequences would be of limiting charitable contribution deductions. Also determine whether such speculation has materialized.
Research Problem 5. Use the IRS’s website to determine whether taxpayers who are not
U.S. residents can claimitemized deductions when calculating their taxable income.
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Internet
Activity
Roger CPA Review Questions
1. Kellye, a teacher, volunteers for eight hours per week at a school for high-risk children, a qualified charitable organization. Kellye’s normal rate for teaching is $30 per hour. Kellye’s out-of-pocket costs in 2016 were $250 for supplies, and she spent $20 each week in transportation getting to and from the school. Kellye had no cash contributions to charity in 2016. If Kellye volunteered every week in 2016, what is her charitable contributions deduction?
a. $0
b. $250
c. $1,290
d. $13,770
2. Aaron, age 55, has an adjusted gross income in 2016 of $30,000. His expenses are as follows:
Non-prescription medicine $ 100
Prescription medicine 500
Doctor visits 500
Weekly meal preparation for a diet plan 2,000
Removal of a benign facial mole 400
Contact lenses 500
Eyeglasses 200
Dental services 300
What is Aaron’s itemized deduction for medical expenses?
a. $0
b. $1,500
c. $2,000
d. $4,500
3. Which of the following deductions for taxes paid may be taken in the same year?
a. Real estate taxes, state income taxes, state sales taxes.
b. Real estate taxes, property taxes, state income taxes.
c. Property taxes, state income taxes, state sales taxes.
d. Real estate taxes, property taxes, state income taxes, state sales taxes.
4. Zunilda is 77-year-old individual with an AGI of $25,000 in 2015. She began living in a nursing home in 2015 upon the recommendation of her primary care physician in order to receive medical care for a specific condition. She had the following unreimbursed expenses in 2015:
Expense Amount
Nursing home health care costs $5,000
Nursing home meal and lodging costs 8,000
Prescription drugs 1,500
As a result of these unreimbursed expenses, how much may Zunilda deduct from
AGI on her 2015 tax return? Assume Zunilda elects to itemize deductions.
a. $12,000
b. $4,000
c. $12,625
d. $4,625