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Exam 10: Income, Deductions and Credits

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Question 71

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The earned income credit, a form of a negative income tax, is a refundable credit.

A) True
B) False

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Question 72

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Excess charitable contributions that come under the 30%-of-AGI ceiling are always subject to the 30%-of-AGI ceiling in the carryover year.

A) True
B) False

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Question 73

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The education tax credits (i.e., the American Opportunity credit and the lifetime learning credit) are available to help defray the cost of higher education regardless of the income level of the taxpayer.

Jena is a full-time undergraduate student at State University and is claimed by her parents as a dependent.Her only source of income is a $10,000 athletic scholarship ($1,000 for books, $5,500 tuition, $500 student activity fee, and $3,000 room and board) .Jena's gross income for the year is:

Sergio was required by the city to pay $2,000 for the cost of new curbing installed by the city in front of his personal residence.The new curbing was installed throughout Sergio's neighborhood as part of a street upgrade project.Sergio may not deduct $2,000 as a tax, but he may add the $2,000 to the basis of his property.

Ted earned $150,000 during the current year.He paid Alice, his former wife, $75,000 in alimony.Under these facts, the tax is paid by the person who benefits from the income rather than the person who earned the income.

Marilyn, age 38, is employed as an architect.For calendar year 2017, she had AGI of $204,000 and paid the following medical expenses: $\begin{array} { l r } \text { Medical insurance premiums } & \$ 7,800 \\\text { Doctor bills for Peter and Esther (Marilyn's parents) } & 7,300 \\\text { Doctor and dentist bills for Marilyn } & 11,100 \\\text { Prescription medicines for Marilyn } & 750 \\\text { Nonprescription insulin for Marilyn } & 950\end{array}$ ​ Peter and Esther would qualify as Marilyn's dependents except that they file a joint return.Marilyn's medical insurance policy does not cover them.Marilyn filed a claim for reimbursement of $6,000 of her own expenses with her insurance company in December 2017 and received the reimbursement in January 2018.What is Marilyn's maximum allowable medical expense deduction for 2017?

Mindy paid an appraiser to determine how much a capital improvement made for medical reasons increased the value of her personal residence.The appraisal fee qualifies as a deductible medical expense.

On December 31, 2017, Lynette used her credit card to make a $500 contribution to the United Way, a qualified charitable organization.She will pay her credit card balance in January 2018.If Lynette itemizes, she can deduct the $500 in 2017.

Which of the following is not a requirement for an alimony deduction?

Julie was suffering from a viral infection that caused her to miss work for 90 days.During the first 30 days of her absence, she received her regular salary of $8,000 from her employer.For the next 60 days, she received $12,000 under an accident and health insurance policy purchased by her employer.The premiums on the health insurance policy were excluded from her gross income.During the last 30 days, Julie received $6,000 on an income replacement policy she had purchased.Of the $26,000 she received, Julie must include in gross income:

Chad pays the medical expenses of his son, James.James would qualify as Chad's dependent except that he earns $7,500 during the year.Chad may claim James' medical expenses even if he is not a dependent.

After the divorce, Jeff was required to pay $18,000 per year to his former spouse, Darlene, who had custody of their child.Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21.During the year, Jeff paid the $18,000 required under the divorce agreement.Darlene must include the $12,000 in gross income.

In 2017, Dena traveled 600 miles for specialized medical treatment that was not available in her hometown.She paid $90 for meals during the trip, $145 for a hotel room for one night, and $15 in parking fees.She did not keep records of other out-of-pocket costs for transportation.Dena can include $167 in computing her medical expenses.

Travis and Andrea were divorced.Their only marital property consisted of a personal residence (fair market value of $400,000, cost of $200,000) , and publicly-traded stocks (fair market value of $800,000, cost basis of $500,000) .Under the terms of the divorce agreement, Andrea received the personal residence and Travis received the stocks.In addition, Andrea was to receive $50,000 for eight years. I. If the $50,000 annual payments are to be made to Andrea or her estate (if she dies before the end of the eight years) , the payments will qualify as alimony. II. Andrea has a taxable gain from an exchange of her one-half interest in the stocks for Travis' one-half interest in the house and cash. III. If Travis sells the stocks for $900,000, he must recognize a $400,000 gain.

Thelma and Mitch were divorced.The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000.Under the terms of the divorce agreement, Mitch would receive the stocks and Mitch would pay Thelma $100,000 each year for 6 years, or until Thelma's death, whichever should occur first.Thelma and Mitch lived apart when the payments were made by Mitch.Mitch paid the $600,000 to Thelma over the six-year period.The divorce agreement did not contain the word "alimony." Then, Mitch sold the stocks for $1,300,000.Mitch's recognized gain from the sale is:

During the current year, Khalid was in an automobile accident and suffered physical injuries.The accident was caused by Rashad's negligence.Khalid threatened to file a lawsuit against Amber Trucking Company, Rashad's employer, claiming $50,000 for pain and suffering, $90,000 for loss of income, and $70,000 in punitive damages.Amber's insurance company will not pay punitive damages; therefore, Amber has offered to settle the case for $100,000 for pain and suffering, $90,000 for loss of income, and nothing for punitive damages.Khalid is in the 35% marginal tax bracket.What is the after-tax difference to Khalid between Khalid's original claim and Amber's offer?

Hannah makes the following charitable donations in the current year: $\begin{array} { l r r } & \text { Basis } & \begin{array} { r } \text { Fair Market } \\\text { Value }\end{array} \\\begin{array} { l } \text { Inventory held for resale in Hannah's business (a } \\\text { sole proprietorship) }\end{array} & \$ 8,000 & \$ 7,200 \\\begin{array} { l } \text { Stock in HBM, Inc., held as an investment } \\\text { (acquired four years ago) }\end{array} & 16,000 & 40,000 \\\text { Baseball card collection held as an } & 4,000 & 20,000\\\text { investment (acquired six years ago) }\end{array}$ ? The HBM stock and the inventory were given to Hannah's church, and the baseball card collection was given to the United Way.Both donees promptly sold the property for the stated fair market value.Disregarding percentage limitations, Hannah's current charitable contribution deduction is:

For calendar year 2017, Jon and Betty Hansen (ages 59 and 60) file a joint return reflecting AGI of $280,000.They incur the following expenditures: $\begin{array} { l r } \text { Medical expenses before 10\%-of-AGI floor } & \$ 30,000 \\\text { Casualty loss (not covered by insurance) before statutory floors } & 30,000 \\\text { Interest on home mortgage } & 10,000 \\\text { Interest on credit cards } & 800 \\\text { Property taxes on home } & 13,000 \\\text { Charitable contributions } & 17,000 \\\text { State income tax } & 15,000 \\\text { Tax return preparation fees } & 1,200\end{array}$ What is the amount of itemized deductions the Hansens may claim?

During the current year, Ralph made the following contributions to the University of Oregon (a qualified charitable organization) : $\begin{array} { l r } \text { Cash } & \$ 63,000 \\\text { Stock in Raptor, Inc. (a publicly traded corporation) } & 94,500\end{array}$ Ralph acquired the stock in Raptor, Inc., as an investment fourteen months ago at a cost of $42,000.Ralph's AGI for the year is $189,000.What is Ralph's charitable contribution deduction for the current year?