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South-Western Federal Taxation 2014 chapter 10




Question;Ch10 DISCUSSION QUESTIONS1. 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 thatDan 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 Barbara incurred the following expenses during the year: $840 dues at a health club she joined at the suggestion of her physician to improve her general physical condition, $240 for multiple vitamins and antioxidant vitamins, $500 for a smoking cessation program, $240 for nonprescription nicotine gum, $600 for insulin, and $7,200 for funeral expenses for her mother who passed away in June. Which of these expenses may be included in computing the medical expense deduction?3. 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.4. 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?5. LO.2 During the current year, Pauline and her three dependent children had annual physical exams, which cost $750, and dental checkups for all four of them, which cost $420. In addition, Pauline paid $800 for medically supervised treatments to enable her to stop smoking. After she stopped smoking, she began to gain weight and incurred $1,200 in costs for a medically supervised weight loss program. Which of these expenses qualify for the medical expense deduction?6. LO.2 Caroyl incurred $8,700 of medical expenses in November 2013. 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 Caroyl consider in deciding whether to sign and return the form in December 2013 or January 2014?7. 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?8. LO.2 Arturo, a calendar year taxpayer, paid $16,000 in medical expenses and sustained a $20,000 casualty loss in 2013. He expects $12,000 of the medical expenses and $14,000 of the casualty loss to be reimbursed by insurance companies in 2014. Before considering any limitations on these deductions, how much can Arturo include in determining his itemized deductions for 2013?9. LO.2 Hubert, 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.10. LO.2 A local ophthalmologist?s advertising campaign included a certificate for freeLASIK eye surgery for the lucky winner of a drawing. Ahmad held the winning ticket, which was drawn in December 2012. Ahmad had no vision problems and was uncertain what he should do with the prize. In February 2013, Ahmad?s daughter, who lives with his former wife, was diagnosed with a vision problem that could be treated with either prescription glasses or LASIK surgery. The divorce decree requires that Ahmad pay for all medical expenses incurred for his daughter. Identify the relevant tax issues forAhmad.11. LO.3 In 2013, a state issued checks to homeowners as a rebate of property taxes. Funds for the rebate were available because of unexpectedly high state tax revenues due to a new law that legalized gambling in the state. In December 2013, Edward received a $290 rebate check from the state. In January 2014, he returned the check to the governor because he thought it was improper for the state to spend the money in this manner.Edward, a dedicated opponent of gambling and other ?games of chance,? attached a letter to the governor indicating his desire to have the $290 spent on a campaign to educate youth about the financial and nonfinancial dangers of gambling. List some of the tax issues relevant to Edward?s situation.12. 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?13. 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 alternativesMason and Margaret are considering.14. 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.15. 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.16. LO.5 Ellen borrowed $50,000 from her parents for a down payment on the purchase of a new home. She paid interest of $3,200 in 2011, $0 in 2012, and $9,000 in 2013. TheIRS disallowed the deduction. What explanation can you offer for the disallowance?17. LO.6 The city of Lawrence was hit by a tornado in April 2013, 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.18. 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.19. LO.6 Nancy, who is a professor at State University, does some of her writing and class preparation at home at night. Her department provides faculty members with a $1,500 allowance for a desktop computer for use at school, but does not ordinarily provide computers for use at home. To have a computer for use at school and at home, Nancy has asked the department to provide her with a notebook computer that costs $2,500.The head of her department is willing to provide the standard $1,500 allowance and will permit Nancy to purchase the $2,500 notebook computer if she makes a donation of $1,000 to the department. If she acquires the notebook computer, Nancy?s home use of the computer will be approximately 60% for business and 40% for personal use not related to her job. Discuss the tax issues that Nancy should consider in deciding whether to acquire the notebook computer under these conditions.20. LO.6 Susan traveled to rural Tennessee during the year to do volunteer work for one week for Habitat for Humanity. She normally receives $2,000 salary per week at her job and is planning to deduct the $2,000 as a charitable contribution. In addition, Susan incurred the following costs in connection with the trip: $300 for transportation, $700 for lodging, and $250 for meals. What is Susan?s deduction associated with this charitable activity?21. LO.6, 9 William, a high school teacher, earns about $50,000 each year. In December 2013, 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 2013 or 2014. Identify the tax issues related to William?s decision.22. LO.6, 9 Nate, whose combined Federal and state income tax rates total 40% in 2013, expects to retire in 2014 and have a combined tax rate of 30%. He plans to donate $100,000 to his church. Because he will not have the cash available until 2014, Nate donates land (long-term capital gain property) with a basis of $20,000 and fair market value of $100,000 to the church in December 2013. He reacquires the land from the church for $100,000 in February 2014. Discuss Nate?s tax objectives and all tax issues related to his actions.23. LO.6, 9 Megan decided to have a garage sale to get rid of a number of items she no longer needed, including books, old computer equipment, clothing, bicycles, and furniture.She scheduled the sale for Friday and Saturday, but was forced to close at noon onFriday because of a torrential downpour. She had collected $500 for the items she sold before closing. The heavy rains continued through the weekend, and Megan was unable to continue the sale. She had not enjoyed dealing with the people who came to the sale on Friday morning, so she donated the remaining items to several local organizations.Megan has asked your advice on how she should treat these events on her tax return.List some of the tax issues you would discuss with her.P R O B L E M S24. LO.2 Emma Doyle, age 55, is employed as a corporate attorney. For calendar year 2013, she had AGI of $100,000 and paid the following medical expenses:Medical insurance premiums $3,700Doctor and dentist bills for Bob and April (Emma?s parents) 6,800Doctor and dentist bills for Emma 5,200Prescription medicines for Emma 400Nonprescription insulin for Emma 350Bob 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 2013 and received the reimbursement in January 2014. What is Emma?s maximum allowable medical expense deduction for 2013? 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 $11,000Meals for Lawrence at Lakeside 2,200Doctor and nurse fees at Lakeside 1,700Cable TV service for Lawrence?s room at Lakeside 380Total $15,280Lakeside 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 in 2013:Doctor and hospital bills $ 2,500Dust elimination system 10,000Increase in utility bills due to the system 450Cost of certified appraisal 300In 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 2013?27. LO.2 For calendar year 2013, 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 2013. 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 2013, Susan, age 49, incurred and paid the following expenses for Beth (her daughter), Ed (her father), and herself:Surgery for Beth $4,500Red River Academy charges for Beth:Tuition 5,100Room, board, and other expenses 4,800Psychiatric treatment 5,100Doctor bills for Ed 2,200Prescription drugs for Susan, Beth, and Ed 780Insulin for Ed 540Nonprescription drugs for Susan, Beth, and Ed 570Charges at Heartland Nursing Home for Ed:Medical care 5,000Lodging 2,700Meals 2,650Beth 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 recommendedRed 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, enteredHeartland inOctober.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 $6,500Increase in utility bills due to the system 700Cost of certified appraisal 360The 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% floor, what is the total of Susan?s expenses that qualifies for the medical expense deduction?29. LO.2 In May, Rebecca?s daughter, Susan, sustained a serious injury that made it impossible for her to continue living alone. Susan, who is a novelist, moved back into Rebecca?s home after the accident. Susan has begun writing a novel based on her recent experiences.To accommodate Susan, Rebecca incurred significant remodeling expenses (widening hallways, building a separate bedroom and bathroom, and making kitchen appliances accessible to Susan). In addition, Rebecca had an indoor swimming pool constructed so thatSusan could do rehabilitation exercises prescribed by her physician.In September, Susan underwent major reconstructive surgery in Denver. The surgery was performed by Dr. Rama Patel, who specializes in treating injuries of the type sustained by Susan. Rebecca drove Susan from Champaign, Illinois, to Denver, a total of 1,100 miles, in Susan?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 Susan was hospitalized. Identify the relevant tax issues based on thisIssue IDCHAPTER 10 Deductions and Losses: Certain Itemized Deductions 10-41 information and prepare a list of questions you would need to ask Rebecca and Susan to advise them as to the resolution of any issues you have identified.30. LO.2 In 2013, 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 fromAGI?b. How much may Roger deduct if he is an employee? Is the deduction for AGI or fromAGI?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 uses the cash method of accounting, lives in a state that imposes an income tax. In April 2013, she files her state income tax return for 2012 and pays an additional $1,000 in state income taxes. During 2013, her withholdings for state income tax purposes amount to $7,400, and she pays estimated state income tax of $700. In April 2014, she files her state income tax return for 2013, claiming a refund of $1,800. Norma receives the refund in August 2014.a. Assuming that Norma itemized deductions in 2013, how much may she claim as a deduction for state income taxes on her Federal return for calendar year 2013 (filedApril 2014)?b. Assuming that Norma itemized deductions in 2013, how will the refund of $1,800 that she received in 2014 be treated for Federal income tax purposes?c. Assume that Norma itemized deductions in 2013 and that she elects to have the $1,800 refund applied toward her 2014 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 2013, how will the refund of $1,800 received in 2014 be treated for Federal income tax purposes?33. LO.5 In 2004, Roland, 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 Roland 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 Roland can deduct home equity interest?34. LO.5 Malcolm owns 60% and Buddy owns 40% of Magpie Corporation. On July 1, 2013, 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, 2014, 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 2013? In 2014?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 2013. She donated Bluebird Corporation stock with a basis of $10,000 to a qualified charitable organization on July 5, 2013.a. What is the amount of Liz?s deduction assuming that she purchased the stock on December3, 2012, 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, 2010.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, 9 Pedro contributes a painting to an art museum in October of this year. He has owned the painting for 12 years, and it is worth $130,000 at the time of the donation.Pedro?s adjusted basis for the painting is $90,000, and his AGI for the year is $250,000.Pedro has asked you whether he should make the reduced deduction election for this contribution. Write a letter to Pedro Valdez at 1289 Greenway Avenue, Foster City, CA94404 and advise him on this matter.38. LO.6 During the year, Ricardo made the following contributions to a qualified public charity:Cash $220,000Stock in Seagull, Inc. (a publicly traded corporation) 280,000Ricardo 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?39. LO.6, 8 Ramon had AGI of $180,000 in 2013. He contributed stock in Charlton, Inc. (a publicly traded corporation), to the American Heart Association, a qualified charitable organization. The stock was worth $105,000 on the date it was contributed. Ramon had acquired it as an investment two years ago at a cost of $84,000.a. Assuming that Ramon carries over any disallowed contribution from 2013 to future years, what is the total amount he can deduct as a charitable contribution?b. What is the maximum amount Ramon can deduct as a charitable contribution in 2013?c. What factors should Ramon consider in deciding how to treat the contribution forFederal income tax purposes?d. Assume that Ramon dies in December 2013. What advice would you give the executor of his estate with regard to possible elections that can be made relative to the contribution?40. LO.6 On December 27, 2013, 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, 2013, but not mailed until January 3, 2014.a. Presuming that Roberta is a cash basis and calendar year taxpayer, how much can she deduct as a charitable contribution for 2013?b. Would the amount of the deduction be any different if Roberta was an accrual basis taxpayer? Explain.41. LO.6, 9 In December 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) 23,000Eleanor 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 94709.42. LO.2, 3, 4, 5, 7, 9 Bart and Susan 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 2013. They present you with the following information:Decision MakingDecision MakingCHAPTER 10 Deductions and Losses: Certain Itemized Deductions 10-43Bart Susan JointSalary $38,000Business net income $110,000Interest income 400 1,200 $2,200Deductions for AGI 2,400 14,000Medical expenses 10,427 3,358State income tax 800 1,800Real estate tax 3,800Mortgage interest 4,200Unreimbursed employee expenses 1,200If they file separately, Bart and Susan will split the real estate tax and mortgage interest deductions equally. Write Bart and Susan a letter in which you make and explain a recommendation on filing status for 2013. Bart and Susan reside at 2003 Highland Drive,Durham, NC 27707.43. LO.2, 3, 4, 5, 6, 7, 8 Linda, age 37, who files as a single taxpayer, had AGI of $280,000 for 2013. She incurred the following expenses and losses during the year:Medical expenses before the 10%-of-AGI limitation $33,000State and local income taxes 4,500State sales tax 1,300Real estate taxes 4,000Home mortgage interest 5,000Automobile loan interest 750Credit card interest 1,000Charitable contributions 7,000Casualty loss before 10% limitation (after $100 floor) 34,000Unreimbursed employee expenses subject to the 2%-of-AGI limitation 7,600Calculate Linda?s allowable itemized deductions for the year.44. LO.2, 3, 4, 5, 6, 7, 8 For calendar year 2013, 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) $48,600Home mortgage interest 19,000Credit card interest 800Property taxes on home 16,300Charitable contributions 28,700State income tax 18,000Tax return preparation fees 1,200Calculate the amount of itemized deductions the Gibsons may claim for the year.


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