Chapter 10 Deductions And Losses: Certain Itemized Deductions

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41. LO.2, 3, 4, 5, 7, 9 Bart and Elizabeth Forrest, both age 47, are married and have no dependents. They have asked you to advise them whether they should file jointly or separately in 2016. They present you with the following information:
Bart Elizabeth Joint
Salary $38,000
Business net income $110,000
Interest income 400 1,200 $2,200
Deductions for AGI 2,400 14,000
Medical expenses 10,427 3,358
State income tax 800 1,800
Real estate tax 3,800
Mortgage interest 4,200
Unreimbursed employee expenses 1,200
If they file separately, Bart and Elizabeth will split the real estate tax and mortgage interest deductions equally. Write Bart and Elizabeth a letter in which you make and explain a recommendation on filing status for 2016. Bart and Elizabeth reside at
2003 Highland Drive, Durham, NC 27707.
42. LO.2, 3, 4, 5, 6, 7, 8 Evan, age 61, is single and has AGI of $277,300 in 2016. His potential itemized deductions before any limitations for the year total $52,300 and consist of the following:
Medical expenses (before the 10%-of-AGI limitation) $28,000
Interest on home mortgage 8,700
State income taxes 9,500
Real estate taxes 3,600
Charitable contributions 2,500
After all necessary adjustments are made, what is the amount of itemized deductions
Evan may claim?
43. LO.2, 3, 4, 5, 6, 7, 8 Linda, age 37, who files as a single taxpayer, had AGI of $280,000 for 2016. She incurred the following expenses and losses during the year:
Medical expenses (before the 10%-of-AGI limitation) $33,000
State and local income taxes 4,500
State sales tax 1,300
Real estate taxes 4,000
Home mortgage interest 5,000
Automobile loan interest 750
Credit card interest 1,000
Charitable contributions 7,000
Casualty loss (before 10% limitation but after $100 floor) 34,000
Unreimbursed employee expenses subject to the
2%-of-AGI limitation 7,600
Calculate Linda’s allowable itemized deductions for the year.
44. LO.2, 3, 4, 5, 6, 7, 8 For calendar year 2016, Stuart and Pamela Gibson file a joint return reflecting AGI of $350,000. Their itemized deductions are as follows:
Casualty loss after $100 floor (not covered by insurance) $48,600
Home mortgage interest 19,000
Credit card interest 800
Property taxes on home 16,300
Charitable contributions 28,700
State income tax 18,000
Tax return preparation fees 1,200
Calculate the amount of itemized deductions the Gibsons may claim for the year.
Cumulative Problems
45. Alice J. and Bruce M. Byrd are married taxpayers who file a joint return. Their Social Security numbers are 123-45-6789 and 111-11-1112, respectively. Alice’s birthday is September
21, 1968, and Bruce’s is June 27, 1967. They live at 473 Revere Avenue, Lowell,
MA 01850. Alice is the office manager for Lowell Dental Clinic, 433 Broad Street, Lowell,
MA 01850 (employer identification number 98-7654321). Bruce is the manager of a
Super Burgers fast-food outlet owned and operated by Plymouth Corporation, 1247
Central Avenue, Hauppauge, NY 11788 (employer identification number 11-1111111).
The following information is shown on their Wage and Tax Statements (Form
W–2) for 2015.
Line Description Alice Bruce
1 Wages, tips, other compensation $58,000 $62,100
2 Federal income tax withheld 4,500 6,300
3 Social Security wages 58,000 62,100
4 Social Security tax withheld 3,596 3,850
5 Medicare wages and tips 58,000 62,100
6 Medicare tax withheld 841 900
15 State Massachusetts Massachusetts
16 State wages, tips, etc. 58,000 62,100
17 State income tax withheld 2,950 3,100
The Byrds provide over half of the support of their two children, Cynthia (born January
25, 1991, Social Security number 123-45-6788) and John (born February 7, 1995, Social Security number 123-45-6786). Both children are full-time students and
Tax Return Problem live with the Byrds except when they are away at college. Cynthia earned $4,200 from a summer internship in 2015, and John earned $3,800 from a part-time job.
During 2015, the Byrds provided 60% of the total support of Bruce’s widower father,
Sam Byrd (born March 6, 1939, Social Security number 123-45-6787). Sam lived alone and covered the rest of his support with his Social Security benefits. Sam died in November, and Bruce, the beneficiary of a policy on Sam’s life, received life insurance proceeds of $1,600,000 on December 28.
The Byrds had the following expenses relating to their personal residence during
2015:
Property taxes $5,000
Qualified interest on home mortgage 8,700
Repairs to roof 5,750
Utilities 4,100
Fire and theft insurance 1,900
The Byrds had the following medical expenses for 2015:
Medical insurance premiums $4,500
Doctor bill for Sam incurred in 2014 and not paid until 2015 7,600
Operation for Sam 8,500
Prescription medicines for Sam 900
Hospital expenses for Sam 3,500
Reimbursement from insurance company, received in 2015 3,600
The medical expenses for Sam represent most of the 60% that Bruce contributed toward his father’s support.
Other relevant information follows:
• When they filed their 2014 state return in 2015, the Byrds paid additional state income tax of $900.
• During 2015, Alice and Bruce attended a dinner dance sponsored by the Lowell
Police Disability Association (a qualified charitable organization). The Byrds paid $300 for the tickets. The cost of comparable entertainment would normally be $50.
• The Byrds contributed $5,000 to Lowell Presbyterian Church and gave used clothing (cost of $1,200 and fair market value of $350) to the Salvation Army. All donations are supported by receipts, and the clothing is in very good condition.
• In 2015, the Byrds received interest income of $2,750, which was reported on a
Form 1099–INT from Second National Bank.
• Alice’s employer requires that all employees wear uniforms to work. During
2015, Alice spent $850 on new uniforms and $566 on laundry charges.
• Bruce paid $400 for an annual subscription to the Journal of Franchise Management and $741 for annual membership dues to his professional association.
• Neither Alice’s nor Bruce’s employer reimburses for employee expenses.
• The Byrds do not keep the receipts for the sales taxes they paid and had no major purchases subject to sales tax.
• All members of the Byrd family had health insurance coverage for all of 2015.
• Alice and Bruce paid no estimated Federal income tax. Neither Alice nor Bruce wants to designate $3 to the Presidential Election Campaign Fund.
Part 1—Tax Computation
Compute net tax payable or refund due for Alice and Bruce Byrd for 2015. If they have overpaid, they want the amount to be refunded to them. If you use tax forms for your computations, you will need Forms 1040 and 2106 and Schedules A and B.
Suggested software: H&R BLOCK At Home.
Part 2—Tax Planning
Alice and Bruce are planning some significant changes for 2016. They have provided you with the following information and asked you to project their taxable income and tax liability for 2016.
The Byrds will invest the $1,600,000 of life insurance proceeds in short-term certificates of deposit (CDs) and use the interest for living expenses during 2016. They expect to earn total interest of $32,000 on the CDs.
Bruce has been promoted to regional manager, and his salary for 2016 will be $88,000. He estimates that state income tax withheld will increase by $4,000 and the
Social Security tax withheld will be $5,456.
Alice, who has been diagnosed with a serious illness, will take a leave of absence from work during 2016. The estimated cost for her medical treatment is $15,400, of which $6,400 will be reimbursed by their insurance company in 2016. Their medical insurance premiums will increase to $9,769. Property taxes on their residence are expected to increase to $5,100. The Byrds’ home mortgage interest expense and charitable contributions are expected to be unchanged from 2015.
John will graduate from college in December 2015 and will take a job in New
York City in January 2016. His starting salary will be $46,000.
Assume that all of the information reported in 2015 will be the same in 2016 unless other information has been presented above.
46. Paul and Donna Decker are married taxpayers, ages 44 and 42, respectively, who file a joint return for 2016. The Deckers live at 1121 College Avenue, Carmel, IN
46032. Paul is an assistant manager at Carmel Motor Inn, and Donna is a teacher at
Carmel Elementary School. They present you with W–2 forms that reflect the following information:
Paul Donna
Salary $68,000 $56,000
Federal tax withheld 6,770 6,630
State income tax withheld 900 800
FICA (Social Security and
Medicare) withheld 5,202 4,284
Social Security numbers 111-11-1112 123-45-6789
Donna is the custodial parent of two children from a previous marriage who reside with the Deckers through the school year. The children, Larry and Jane Parker, reside with their father, Bob, during the summer. Relevant information for the children follows:
Larry Jane
Age 17 18
Social Security numbers 123-45-6788 123-45-6787
Months spent with Deckers 9 9
Under the divorce decree, Bob pays child support of $150 per month per child during the nine months the children live with the Deckers. Bob says that he spends $200 per month per child during the three summer months they reside with him. Donna and
Paul can document that they provide $2,000 support per child per year. The divorce decree is silent as to which parent can claim the exemptions for the children.
In August, Paul and Donna added a suite to their home to provide more comfortable accommodations for Hannah Snyder (123-45-6786), Donna’s mother, who had moved in with them in February 2015 after the death of Donna’s father. Not wanting to borrow money for this addition, Paul sold 300 shares of Acme Corporation stock for $50 per
Tax Computation Problem share on May 3, 2016, and used the proceeds of $15,000 to cover construction costs.
The Deckers had purchased the stock on April 29, 2011, for $25 per share. They received dividends of $750 on the jointly owned stock amonth before the sale.
Hannah, who is 66 years old, received $7,500 in Social Security benefits during the year, of which she gave the Deckers $2,000 to use toward household expenses and deposited the remainder in her personal savings account. The Deckers determine that they have spent $2,500 of their own money for food, clothing, medical expenses, and other items for Hannah. They do not know what the rental value of
Hannah’s suite would be, but they estimate it would be at least $300 per month.
Interest paid during the year included the following:
Home mortgage interest (paid to Carmel Federal Savings & Loan) $7,890
Interest on an automobile loan (paid to Carmel National Bank) 1,660
Interest on Citibank Visa card 620
In July, Paul hit a submerged rock while boating. Fortunately, he was uninjured after being thrown from the boat and landing in deep water. However, the boat, which was uninsured, was destroyed. Paul had paid $25,000 for the boat in June 2015, and its value was appraised at $18,000 on the date of the accident.
The Deckers paid doctor and hospital bills of $10,700 and were reimbursed $2,000 by their insurance company. They spent $640 for prescription drugs and medicines and $5,904 for premiums on their health insurance policy. They have filed additional claims of $1,200 with their insurance company and have been told they will receive payment for that amount in January 2017. Included in the amounts paid for doctor and hospital bills were payments of $380 for Hannah and $850 for the children. All members of the Decker family had health insurance coverage for all of 2016.
Additional information of potential tax consequence follows:
Real estate taxes paid $3,850
Sales taxes paid (per table) 1,379
Contributions to church 1,950
Appraised value of books donated to public library 740
Paul’s unreimbursed employee expenses to attend hotel management convention:
Airfare 340
Hotel 170
Meals 95
Registration fee 340
Refund of state income tax for 2015 (the Deckers itemized on their 2015 Federal tax return) 1,520
Compute net tax payable or refund due for the Deckers for 2016. Ignore the child tax credit in your computations. If the Deckers have overpaid, the amount is to be credited toward their taxes for 2017.