Essentials of Federal Taxation 3rd Edition Spilker Solutions Manual Download

Solutions Manual – McGraw-Hill’s Taxation, by Spilker et al.
Essentials of Federal Taxation 3rd

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Chapter 7
Individual from AGI Deductions
SOLUTIONS MANUAL
Discussion Questions
1. [LO 1] Explain why the medical expense and casualty loss provisions are sometimes referred to as
“wherewithal” deductions and how this rationale is reflected in the limits on these deductions.
These deductions are designed to reduce the tax burden on taxpayers whose circumstances have
involuntarily reduced their ability to pay. Both deductions are restricted to expenses that exceed
insurance reimbursements and a floor limit based upon AGI. These limits ensure that taxpayers
claiming the deduction have exceedingly large involuntary expenditures as measured by their
ability to pay.
2. [LO 1] Describe the type of medical expenditures that qualify for the medical expense deduction.
Do the cost of meals consumed while hospitalized qualify for the deduction? Do over-the-counter
drugs and medicines qualify for the deduction?
Medical expenses include any payments for the care, prevention, diagnosis, or cure of injury,
disease, or bodily function that are not reimbursed by health insurance. Included are the costs of
prescription medicine, insulin, and payments to doctors, dentists, and the like incurred by the
taxpayer, taxpayer’s spouse, and dependents. Over-the-counter drugs and medicines do not
qualify for the deduction. Besides direct medical expenses, the deduction includes the cost of health
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Education.
insurance (if not already deducted above the line by self-employed taxpayers). Medical expenses
also include long-term care services for disabled spouses and dependents to the extent the costs
(including meals and lodging) are attributable to medical care. The cost of elective cosmetic
surgery and over-the-counter drugs is not deductible. The cost of meals and lodging qualify if
incurred at a medical-care facility or hospital and are incident to the care of the patient, but the
cost of lodging is limited to $50 per eligible person per night. The cost of travel for and essential
to medical care, including lodging (still limited to $50 per eligible person per night) is also
deductible if the expense is not extravagant and the travel has no significant element of personal
pleasure.
3. [LO 1] Under what circumstances can a taxpayer deduct medical expenses paid for a member of
his family? Does it matter if the family member reports significant amounts of gross income and
cannot be claimed as a dependent?
A taxpayer can deduct medical expenses incurred for members of his family if they are dependents
(i.e., either qualified children or qualified relatives). For purposes of deducting medical expenses,
a dependent need not meet the gross income test (§213(a)).
4. [LO 1] What types of taxes qualify to be deducted as itemized deductions? Would a vehicle
registration fee qualify as a deductible tax?
Taxes qualifying for this deduction include state, local, and foreign income taxes, real estate taxes,
and personal property taxes. State and local sales taxes may also be deducted but only in lieu of
state and local income taxes. The deduction for sales tax can be based upon either the amount
paid or the amount published in the IRS tables (IRS Publication 600). At press time, the deduction
for state and local sales taxes is set to expire after 2013. Vehicle registration fees are not
deductible (unless calculated based on the value of the vehicle rather than its weight).
5. [LO 1] Compare and contrast the limits on the deduction of interest on home acquisition
indebtedness versus home equity loans. Are these limits consistent with horizontal equity?
Explain.
Taxpayers can deduct qualified residence interest defined as either (1) interest paid on a loan to
purchase or improve a residence (acquisition indebtedness) or (2) interest paid on a loan secured
by the residence but not used to purchase or improve the residence (home equity loan). Interest
paid can be deducted on $1 million of acquisition indebtedness and $100,000 of home equity debt
regardless of the rate of interest on the loan. These limits are consistent with horizontal equity
inasmuch as the limits treat taxpayers consistently across loan amounts. However, the deduction
for interest on home equity loans is definitely not consistent with providing horizontal equity across
homeowners and non-homeowners.
6. [LO 1] Explain the argument that the deductions for charitable contributions and home mortgage
interest represent indirect subsidies for these activities.
In each case, the deduction reduces the after-tax cost of the activity, making it more likely that
taxpayers will engage in the activity. For example, contributions to charity reduce the cost of
giving thereby indirectly encouraging donations to charitable organizations.
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7. [LO 1] {Research} Cash donations to charity are subject to a number of very specific
substantiation requirements. Describe these requirements and how charitable gifts can be
substantiated. Describe the substantiation requirements for property donations.
Charitable contributions are only deductible if substantiated with written records such as a
cancelled check, bank record, or a written communication from the charity showing the name of
the charity and the date and amount of the contribution. § 170(a)(1) and Reg § 1.170A-13(a)(1).
Additional substantiation is required for: contributions of $250 or more (§ 170(f)(8)), non-cash
contributions exceeding $500 (§170(f)(11)(B)), and contributions of cars, boats and planes (§
170(f)(12)). For donations of property, including clothing and household items, taxpayers should
keep a written record of the donation that includes a description of the property and its condition.
Deductions are not allowed for used property unless the property is in good condition. Taxpayers
must keep a contemporaneous, written acknowledgement from a charity for each deductible
donation (either money or property) of $250 or more. For contributions of property in excess of
$500, a description of the property must be attached to the tax return. A qualified appraisal of the
property must be attached with the return for donations of property with a value in excess of
$5,000.
8. [LO 1] Describe the conditions in which a donation of property to a charity will result in a
charitable contribution deduction of fair market value and when it will result in a deduction of the
tax basis of the property.
Taxpayers deduct the fair market value of property (noncash) donations when they donate:
(1) a capital asset that has appreciated in value (the value is greater than the basis of the
property) and the taxpayer has owned the asset for more than a year before donating it (but
see exceptions below), or
(2) appreciated business assets (value greater than basis) the taxpayer owned for more than a
year before donating but only to the extent that the gain on the asset would not be treated as
ordinary income if it had been sold.
However, the deduction for an appreciated capital asset that is tangible, personal property is
limited to the adjusted basis of the property if the charity uses the property for a purpose unrelated
to its charitable purpose.
Taxpayers donating ordinary income property (or capital loss property) deduct the lesser of (1) the
fair market value of the property and (2) the adjusted basis of the property. Thus when the value of
ordinary income property (or capital loss property) is less than the basis, taxpayers deduct the
value.
Thus, taxpayers deduct the basis of the property when they contribute:
ordinary income property that has appreciated in value.
capital gain property donated to private nonoperating foundations (other than stock).
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capital gain property consisting of tangible personal property and the charity uses the
property (and the taxpayer should have reasonably expected that) for a purpose unrelated to
the reason it is a charity.
appreciated business assets held more than a year to the extent that the gain would be
recaptured as ordinary income under the depreciation recapture rules.
9. [LO 1] Describe the type of event that qualifies as a casualty for tax purposes.
A casualty is defined as an unexpected, unforeseen event, or unusual event such as a “fire, storm,
or shipwreck” or loss from theft.
10. [LO 1] A casualty loss from the complete destruction of a personal asset is limited to the lesser of
fair market value or the property’s adjusted basis. Explain the rationale for this rule as opposed to
just allowing a deduction for the basis of the asset.
The loss from any specific event is limited to the lesser of the economic loss or the tax basis (cost)
of the asset to prevent the deduction of otherwise nondeductible personal losses. If the basis (cost)
of the asset was always allowed for a personal casualty loss deduction, then this would have the
effect of allowing a deduction for the decline in the value of the asset prior to the casualty
(assuming that original cost exceeds the value of the asset).
11. [LO 1] {Research} This week Jim’s residence was heavily damaged by a storm system that spread
destruction throughout the region. While Jim’s property insurance covers some of the damage,
there is a significant amount of uninsured loss. The governor of Jim’s state has requested that the
president declare the region a federal disaster area and provide federal disaster assistance. Explain
to Jim the income tax implications of such a declaration and any associated tax planning
possibilities.
Under IRC §165(i), individuals who incur a disaster loss are subject to the regular casualty loss
floor limits ($100/10 percent of AGI), but they may elect to claim a disaster loss for the tax year
before the loss occurred. This deduction could accelerate the tax benefit of the loss (and any
attendant refund), but also allow the taxpayer to choose the year with the most attractive tax
outcome (in terms of AGI limits, other casualty losses (or gains), and marginal tax rate).
12. [LO 1] Describe the types of expenses that constitute miscellaneous itemized deductions and
explain why these expenses rarely produce any tax benefits.
Miscellaneous itemized deductions consist of employee business expenses (not reimbursed under
an accountable plan), investment expenses (not related to rental or royalty activities), and tax
preparation fees. These deductions must be reduced by two percent of AGI before the deductions
can be combined with other itemized deductions. This floor limit makes it unlikely these itemized
deductions will generate any tax benefit.
13. [LO 1] Explain why the cost of commuting from home to work is not deductible as a business
expense.
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The cost of commuting is almost entirely dictated by the location of an individual’s residence. This
is a personal (rather than business decision), and Congress likely did not want to be seen as
subsidizing individuals who wished to live a substantial distance from their business location.
14. [LO 1] When is the cost of education deductible as an employee business expense?
The cost of education is deductible as an employee business expense if the education maintains or
improves the employee’s skill in the business, but not if the education is required to qualify a
taxpayer for a new business or profession. For example, an IRS agent could not deduct the cost of
a legal education even though the education would maintain or improve his skill as a tax auditor.
This is because a law degree would also qualify the agent for a new profession (lawyer).
15. [LO2] How might the reimbursement of a portion of an employee expense influence the
deductibility of the expense for the employee?
Employee expenses are deducted as miscellaneous itemized deductions subject to the 2% of AGI
floor limit. A reimbursement of a portion of an employee business expense would normally be
included in the employee’s gross income and would have no effect on the deductibility of the
expense. An important exception to this rule is for employee expenses reimbursed under an
“accountable” plan. Among other things, an accountable plan requires that employees provide
substantiation for reimbursement and that employers only reimburse legitimate deductible
expenses. Reimbursements from an accountable plan are not required to be included in income,
but the reimbursed expenses are not deductible, either. In essence, the reimbursements and
expenses offset each other, and both are ignored for tax purposes. If the expense exceeds the
reimbursement, the excess (unreimbursed) portion of each expense can be deducted as a
miscellaneous itemized deduction subject to the 2% of AGI floor limit.
16. [LO 1] Explain why an employee should be concerned about whether his employer reimburses
business expenses using an “accountable” plan?
The employee should be concerned because absent an accountable plan, reimbursements are
reported as income to the employee and the expense is reported as a miscellaneous itemized
deduction subject to the 2% AGI floor. Thus, the reimbursements would be treated as “wages” for
purposes of withholding and employment taxes, and the deduction would be unlikely to generate
any reduction in taxable income (e.g., because of the 2% AGI floor). On the other hand, if the plan
qualifies as an accountable plan, reimbursements from the plan are not required to be included in
income, but the reimbursed expenses are not deductible, either. If, however, the expense exceeds
the reimbursement, the excess (unreimbursed) portion of each expense can be deducted as a
miscellaneous itemized deduction subject to the 2% of AGI floor limit.
17. [LO 1] Jake is a retired jockey who takes monthly trips to Las Vegas to gamble on horse races.
Jake also trains race horses part time at his Louisville ranch. So far this year, Jake has won almost
$47,500 during his trips to Las Vegas while spending $27,250 on travel expenses and incurring
$62,400 of gambling losses. Jake also received $60,000 in revenue from his training activities and
he incurred $72,000 of associated costs. Explain how Jake’s gambling winnings and related costs
will be treated for tax purposes. Describe the factors that will influence how Jake’s ranch expenses
are treated for tax purposes.
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Jake’s $47,500 of gambling winnings is included in his gross income. The gambling losses are
(total of $62,400) are only deductible as miscellaneous itemized deductions (not subject to the 2%
of AGI floor) to the extent of the gambling winnings (thus, only $47,500 will be deductible). His
travel costs are personal expenditures and are nondeductible. Likewise, the $60,000 revenues
from Jake’s training activities are included in Jake’s gross income. The expenses associated with
the ranch (assuming the expenses are ordinary and necessary and not capitalized) should be
deductible as itemized deductions (mortgage interest, real estate taxes, and as miscellaneous
itemized deductions subject to the 2% floor) to the extent of the related gross income if this activity
is treated as a hobby. The factors in the regulations would likely dictate whether the activity is a
hobby or a business. For example, how much time does Jake spend at the ranch—a few hours each
week or does he work full time? It is unclear if he operates the ranch in a professional manner,
takes the advice of professionals, or whether his success as a jockey would lead to success in
training horses. Of course, his financial status (retired) and personal pleasure would likely count
against business treatment.
18. [LO 1] {Research} Frank paid $3,700 in fees for an accountant to tabulate business information
(Frank operates as a self-employed contractor and files a Schedule C). The accountant also spent
time tabulating Frank’s income from his investments and determining Frank’s personal itemized
deductions. Explain to Frank whether or not he can deduct the $3,700 as a business expense or as
an itemized deduction, and provide a citation to an authority that supports your conclusion.
Under Reg §1.67-1T(c), expenditures that relate to both a business activity (not subject to the 2%
floor) and the production of income or tax preparation (both subject to the 2% floor) must be
allocated between the activities on a reasonable basis. It would seem that billable hours would
provide just such a basis.
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19. [LO 1] Contrast ceiling and floor limitations, and give an example of each.
A ceiling is a maximum amount for an exclusion or deduction. In contrast to a ceiling, a floor
limitation eliminates any deduction for amounts below the minimum amount (i.e., the floor).
Ceiling limitations may provide that amounts above the ceiling limit are lost (disallowed) or could
be used in other years (carryover). Like a ceiling, a floor can be structured as either a fixed
amount or a floating constraint based upon some intermediate number. Unlike ceilings, floor
limits eliminate any amounts below the minimum thereby limiting the number of taxpayers who
qualify for any adjustment to income. While there are many examples of ceiling and floor limits,
two common examples are the personal casualty loss deduction (which contains two floors) and the
charitable contribution deduction (which contains several ceilings). The $100 per casualty limit
on personal casualty loss deductions is a floor limit placed on each casualty, and the 10 percent of
AGI limit is an aggregate floor limit placed on the sum of all casualty losses in a particular year. If
the casualty loss does not exceed both floors, then no deduction can be claimed. In contrast, the
charitable contribution deduction contains ceiling limits –such as, cash deductions cannot exceed
50 percent of AGI. To the extent that contributions exceed the ceiling, the deductions carryover
into the subsequent year.
20. [LO 1] Identify which itemized deductions are subject to floor limitations, ceiling limitations, or
some combination of these limits.
Charitable contributions and home mortgage interest are subject to ceiling limits (based on a
percentage of AGI and on the amount of debt, respectively) whereas aggregate casualty losses,
medical expenses, and miscellaneous deductions are subject to separate floor limits (based upon
percentages of AGI) and each casualty loss is subject to a $100 flat floor limit. All itemized
deductions are subject to the standard deduction which is a flat floor limitation.
21. [LO 2] Describe the tax benefits from “bunching” itemized deductions in one year. Describe the
characteristics of the taxpayers who are most likely to benefit from using bunching and explain
why this is so.
The strategy of bunching itemized deductions (a cash-basis taxpayer paying two years’ worth of
deductible expenses in one year to the extent possible) makes it more likely that deductions will
exceed a floor limit. This strategy can be effective for generating some incremental tax benefits
from total itemized deductions and miscellaneous itemized deductions. Taxpayers are likely to
benefit from bunching if (1) they are unlikely to have sufficient itemized deductions in any one year
to easily exceed the standard deduction, but can easily exceed the standard deduction by summing
itemized deductions for two consecutive years, (2) report on the cash-basis and (3) are able to time
payments around year-end (to minimize the loss of present value). Charitable deductions and real
estate taxes (due at year-end) can often be easily bunched into one year or another.
22. [LO 2] Explain how the standard deduction is rationalized and why the standard deduction might
be viewed as a floor limit on itemized deductions.
From the government’s standpoint, the standard deduction serves two purposes. First, to help
taxpayers with lower income, it automatically provides a minimum amount of income that is not
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subject to taxation. Second, it eliminates the need for the IRS to verify and audit itemized
deductions for those taxpayers who chose to deduct the standard deduction. From the taxpayers’
perspective, the standard deduction allows them to avoid taxation on a portion of their income, and
for those not planning to itemize deductions, it eliminates the need to substantiate and collect -
information about them. The standard deduction essentially eliminates the tax benefits of itemized
deductions up to the amount of the standard deduction and thus may be viewed as a floor limit on
itemized deductions because most taxpayers will not elect to itemize if the standard deduction
exceeds itemized deductions.
23. [LO 2] Explain how the calculation of the standard deduction limits the ability to shift income to a
dependent.
The standard deduction for a taxpayer who is claimed as a dependent on another’s tax return (such
as a child) is limited to the greater of (1) $1,000 or (2) $350 plus the dependent’s earned income
(not to exceed the dependent’s normal standard deduction of $6,200). This limits the amount that
can be shifted without being taxed because it does not allow the dependent child to offset unearned
income with the full standard deduction amount.
24. [LO 2] Explain why the overall phase-out of itemized deductions has been described as a “haircut”
of itemized deductions. Explain whether it is possible for a taxpayer to lose all their itemized
deductions under the phase-out rules.
The itemized deduction phase-out provision provides that when an individual’s AGI exceeds a
threshold amount, itemized deductions are reduced by 3% of the excess AGI above the threshold.
The phase-out of itemized deductions is sometimes referred to as a cutback, or haircut, because
itemized deductions can only be reduced, but not completely eliminated. This is because the
maximum amount of the cutback is 80 percent of certain itemized deductions. Medical expenses,
casualty losses, investment interest expense, and gambling losses are not subject to the phase-out.
25. [LO 2] Describe the mechanism for phasing out exemptions. Can a taxpayer lose the benefit of all
of her personal and dependency exemptions?
The phase-out is triggered at relatively high levels of adjusted gross income, and it is done in
increments. The process of determining the amount of the phase-out involves the following five
steps:
Step 1: Subtract the taxpayer’s AGI from the AGI threshold based on the taxpayer’s filing status.
If the threshold equals or exceeds the taxpayer’s AGI, the taxpayer deducts her full
personal and dependency exemption.
Step 2: Divide the excess AGI (the amount from Step 1) by 2,500. If the result is not a whole
number (i.e., the excess AGI is not evenly divisible by 2,500), round up to the next whole
number. [For married filing separate taxpayers, replace the 2,500 amount with 1,250).
Step 3: Multiply the outcome of Step 2 by 2 percent, but limit the product to 100 percent.
Step 4: Multiply the percentage determined in Step 3 by the taxpayer’s total personal and
dependency exemptions (i.e., number of personal and dependency exemptions times
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$3,950 in 2014). The product is the amount of personal and dependency exemption that is
phased-out (i.e., the taxpayer is not allowed to deduct this amount).
Step 5: Subtract the Step 4 result from the taxpayer’s total personal and dependency exemptions
that would be deductible without any phase-out (i.e., number of personal and dependency
exemptions times $3,950 in 2014).
26. [LO 2] {Research} Determine if a taxpayer can change his election to itemize deductions once a
return is filed. (Hint: Read about itemization under Reg. §1.63-1.)
The election to itemize is made on the return and, Reg.§1.63-1 specifies that the election can be
changed by filing an amended return any time within the statute of limitations (except for taxpayers
filing married-separately both of whom must file consistently).
27. [LO 2] {Research} Determine whether a taxpayer who is claimed as a dependent on another
return is entitled to an addition to the standard deduction for age or blindness. (Hint: Read the
calculation of the standard deduction under IRC §63.)
Under §63(c), standard deduction is defined as the “basic” standard deduction plus an
“additional” standard deduction for age and sight. However, §63(c)(2) only limits the “basic”
standard deduction for a taxpayer claimed as a dependent on another’s return to $1,000 or $350
plus the individual's earned income, whichever is greater. Hence, it would appear that a taxpayer
claimed as a dependent on another’s return could claim an addition to the standard deduction for
age and sight.
Problems
28. [LO 1] In each of the following independent cases, indicate the amount (1) deductible for AGI, (2)
deductible from AGI, and (3) neither deductible for nor deductible from AGI before considering
income limitations or the standard deduction.
a. Ted paid $8 rent on a safety deposit box at the bank. In this box he kept the few
shares of stock that he owned.
b. Tyler paid $85 for minor repairs to the fence at a rental house he owned.
c. Timmy paid $545 for health insurance premiums this year (not through an
exchange). Timmy is employed full-time and his employer paid the remaining
premiums as a qualified fringe benefit.
d. Tess paid $1,150 of state income taxes on her consulting income.
a. Deduction from AGI – investment expense deducted as a miscellaneous itemized
deduction
b. Deduction for AGI – rental/royalty expense
c. The health insurance is from AGI – medical itemized deduction but subject to an AGI
floor limitation.
d. The state income taxes are deductible from AGI (an itemized deduction).
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29. [LO 1] In each of the following independent cases, indicate the amount (1) deductible for AGI, (2)
deductible from AGI, and (3) neither deductible for nor deductible from AGI before considering
income limitations or the standard deduction.
a. Fran spent $90 for uniforms for use on her job. Her employer reimbursed her for
$75 of this amount under an accountable plan.
b. Timothy, a plumber employed by ACE Plumbing, spent $65 for small tools to be
used on his job, but he was not reimbursed by ACE.
c. Jake is a perfume salesperson. Because of his high pay, he receives no allowance or
reimbursement from his employer for advertising expenses even though his position
requires him to advertise frequently. During the year, he spent $2,200 on legitimate
business advertisements.
d. Trey is a self-employed special-duty nurse. He spent $120 for uniforms.
e. Mary, a professor at a community college, spent $340 for magazine subscriptions.
The magazines were helpful for her research activities but she was not reimbursed
for the expenditures.
f. Wayne lost $325 on the bets he made at the race track, but he won $57 playing slot
machines.
a. $0 for AGI. $15 from AGI (miscellaneous itemized deduction as unreimbursed

employee business expense). Income and expenses associated with the $75
reimbursement completely offset each other and are ignored. Note that the
accountable plan only reimburses deductible expenses.
b. from - miscellaneous itemized deduction as employee business expense
c. from - miscellaneous itemized deduction as employee business expense
d. for - trade expense assuming that the special duty uniforms cannot be adapted to
normal use.
e. $340 from AGI as miscellaneous itemized deduction as employee business expenses
f. $57 from AGI as a miscellaneous itemized deduction not subject to 2% floor.
Wayne’s gambling loss deduction is limited to his winnings.
30. [LO 1] Ted is a successful attorney, but when he turned 50 years old he decided to retire from his
law practice and become a professional golfer. Ted has been a very successful amateur golfer, so
beginning this year Ted began competing in professional golf tournaments. At year-end, Ted
reported the following expenses associated with competing in 15 professional events:
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Transportation from his home to various tournaments $ 25,000

Lodging for the 15 weeks on the road 18,200
Meals while traveling and during golf tournaments 5,200
Entry fees 7,500
Lessons from various golf teachers 12,500
Golf supplies (balls, tees, etc.) 783
Total expenses $ 69,183
a. Suppose that Ted reports $175,000 in gross income from his pension and various
investments. Describe the various considerations that will dictate the extent to which
Ted can deduct the expenses associated with professional golf.
b. Calculate Ted’s deduction for golf expenses assuming that the IRS and the courts are
convinced that Ted engages in competitive golf primarily for enjoyment rather than
the expectation of making a profit. Assume Ted wins $10,000 this year and his AGI
is $185,000 (including the golf revenues).
a. The factors in the regulation would likely be whether Ted competes in a professional
manner, takes the advice of professionals (lessons), works full time (versus 15
weeks), success in similar activities (amateur golf?), financial status (he has a
significant amount of income from other sources), and personal pleasure (some
enjoy playing golf).
b. Ted must include the $10,000 of hobby revenue in gross income but hobby expenses
are deductible only as miscellaneous itemized deductions subject to the 2% of AGI
floor. Assuming that the meals have not already been reduced by 50 percent, Ted’s
hobby expenses are $66,583 ($69,183 – 2,600 for the nondeductible portion of the
meals). However, Ted’s deductible expenses are further limited to his hobby revenue
and by the 2% of AGI floor. Since his revenues are only $10,000, Ted’s maximum
deduction for his hobby is $6,300, calculated as the expenses deductible up to the
hobby revenue ($10,000), reduced by the 2% of AGI floor for miscellaneous itemized
deductions as follows: $10,000 – (2%*$185,000).
31. [LO 1] Penny, a full-time biochemist, loves stock car racing. To feed her passion, she bought a
used dirt track car and has started entering some local dirt track races. The prize money is pretty
small ($1,000 for the winner), but she really is not in it for the money. This, Penny reported the
following income and expenses from her nights at the track:
Prize Money $2,500
Expenses:
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Transportation from her home to the races 1,000

Depreciation on the dirt track car 4,000
Entry fees 3,500
Oil, gas, supplies, repairs for the dirt track car 2,050
Calculate Penny’s deduction for the racing expenses assuming that the racing activity is a hobby,
and Penny’s AGI is $97,500 before considering the prize money.
Penny must include the $2,500 of hobby revenue in gross income, but hobby expenses are
deductible only as miscellaneous itemized deductions subject to the 2% of AGI floor. Penny’s
hobby expenses are $10,550. However, Penny’s deductible expenses are limited to her hobby
revenue and by the 2% of AGI floor. Since her revenues are only $2,500, Penny’s maximum
deduction for his hobby is $500, calculated as the expenses deductible up to the hobby revenue
($2,500), reduced by the 2% of AGI floor for miscellaneous itemized deductions as follows: $2,500
– (2%*($97,500 AGI before the hobby revenue + $2,500 hobby revenue)).
32. [LO 1] Simpson is a single individual who is employed full-time by Duff Corporation. This year
Simpson reports AGI of $50,000 and has incurred the following medical expenses:
Dentist charges $ 900
Physician's charges 1,800
Optical charges 500
Cost of eyeglasses 300
Hospital charges 2,100
Prescription drugs 250
Over-the-counter drugs 450
Medical insurance premiums (not through an exchange) 775
a. Calculate the amount of medical expenses that will be included with Simpson’s itemized
deductions after any applicable limitations.
b. Suppose that Simpson was reimbursed for $250 of the physician's charges and $1,200 for the
hospital costs. Calculate the amount of medical expenses that will be included with
Simpson’s itemized deductions after any applicable limitations.
a. All expenses are qualified medical expenses except for the over-the-counter drugs. Hence,
Simpson’s medical expense deduction is $6,625 less $5,000 (10 percent * 50,000) = $1,625
and this amount is included with Simpson’s other itemized deductions.
b. Same as a. except Simpson’s medical expenses are first reduced by reimbursements $6,625
less $1,450 then reduced by the floor limit $5,000 (10 percent* 50,000) = $175 and this
amount is included with Simpson’s other itemized deductions.
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33. [LO 1] {Research} This year Tim is age 45 and is considering enrolling in an insurance program
that provides for long-term care insurance. He is curious about whether the insurance premiums
are deductible as a medical expense and, if so, what is the maximum amount that can be deducted
in any year.
§213(d)(10)(A) limits the deduction depending upon the age of the insured. The amounts listed are
indexed for inflation under §213(d)(10), so reference needs to be made to the inflation adjusted
amounts listed in a current Revenue Procedure. For 2014, Rev Proc 2013-35, provides that for
taxpayers over age 40 but not yet over age 50, the maximum deduction is $700.
34. [LO 1] {Research} Doctor Bones prescribed physical therapy in a pool to treat Jack’s broken
back. In response to this advice (and for no other reason), Jack built a swimming pool in his
backyard and strictly limited use of the pool to physical therapy. Jack paid $25,000 to build the
pool, but he wondered if this amount could be deducted as a medical expenses? Determine if a
capital expenditure such as the cost of a swimming pool qualifies for the medical expense
deduction.
Under Reg 1.213-1(e)(1)(iii) capital expenditures that are medical necessities are deductible to the
extent the expenditure exceeds the increase in the value of the underlying property. No deduction
is allowed for the cost of making the architectural changes for aesthetic purposes. Hence, the
taxpayer could likely deduct some part of the $25,000 expenditure depending upon the extent of
any increase in the value of the residence. The IRS will not issue advance rulings on this issue
(Rev Proc 87-3, 1987-1 CB 523), so the taxpayer should expect some interaction with the service if
the deduction is large. Rev Rul 87-106, 1987-2 CB 67, lists other types of capital expenditures that
may be acceptable as medical expenses.
35. [LO 1] Charles has AGI of $50,000 and has made the following payments related to (1) land he
inherited from his deceased aunt and (2) a personal vacation taken last year. Calculate the amount
of taxes Charles may include in his itemized deductions for the year under the following
circumstances:
State inheritance tax on the land $ 1,200
County real estate tax on the land 1,500
School district tax on the land 690
City special assessment on the land (new curbs and gutters) 700
State tax on airline tickets (paid on vacation) 125
Local hotel tax (paid during vacation) 195
a. Suppose that Charles holds the land for appreciation.
b. Suppose that Charles holds the land for rent.
c. Suppose that the vacation was actually a business trip.
a. Deductible taxes = $2,190. The inheritance tax, the airline tax, and the hotel tax are
nondeductible personal expenses. The special assessment is also not deductible
because it is capitalized to the value of the property.
b. The $2,190 of taxes are deductions for AGI associated with rental property.
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Education.
c. The inheritance tax and the special assessment are still not deductible (as in a.
above). However, now the airline tax and the hotel tax are deductible unreimbursed
business expenses (miscellaneous itemized deduction subject to 2% AGI floor).
36. [LO 1] Dan has AGI of $50,000 and paid the following taxes during this tax year. Calculate the
amount of taxes Dan may include in his itemized deductions for the year.
State income tax withholding $ 1,400
State income tax estimated payments 750
Federal income tax withholding 3,000
Social Security tax withheld from wages 2,100
State excise tax on liquor 400
Automobile license (based on the car’s weight) 300
State sales tax paid 475
Deductible taxes = $2,150 (only the state income taxes paid and withheld will be deductible) The
$300 fee for the auto license is not deductible as property tax since the fee is based on weight, not
value. Dan could opt to deduct state sales tax in lieu of state income taxes. However, at press time,
the state sales tax deduction is set to expire after 2013.
37. [LO 1] Tim is a single, cash-method taxpayer with one personal exemption and an AGI of
$50,000. In April of this year Tim paid $1,020 with his state income tax return for the previous
year. During the year, Tim had $5,400 of state income tax and $18,250 of federal income tax
withheld from his salary. In addition, Tim made estimated payments of $1,360 and $1,900 of state
and federal income taxes, respectively. Finally, Tim expects to receive a refund of $500 for state
income taxes when he files his state tax return for this year in April next year. What is the amount
of taxes that Tim can deduct as an itemized deduction?
Tim can deduct the state taxes paid with last year’s return, state tax withheld during the year, and
estimated payments of state tax, a total of $7,780. The expected refund next year will not affect the
deductions for this year, but may be taxable next year under the tax benefit rule.
38. [LO 1] This year Randy paid $28,000 of interest (Randy borrowed $450,000 to buy his residence,
and it is currently worth $500,000). Randy also paid $2,500 of interest on his car loan and $4,200
of margin interest to his stockbroker (investment interest expense). How much of this interest
expense can Randy deduct as an itemized deduction under the following circumstances?
a. Randy received $2,200 of interest this year and no other investment income or expenses. His
AGI is $75,000.
b. Randy had no investment income this year, and his AGI is $75,000.
a. Randy can deduct $30,200. The interest on the car loan is nondeductible personal interest
but Randy may deduct all $28,000 of his interest on the home loan as an itemized deduction.
The $4,200 of margin interest is likely investment interest, and this itemized deduction is
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limited to net investment income. Because the $2,200 of interest income qualifies as
investment income and Randy apparently has no other investment expenses, the investment
interest expense would be limited to his $2,200 in net investment income.
b. Randy may deduct all $28,000 of his interest on the home loan as an itemized deduction.
Randy apparently has no net investment income. Hence, the investment interest would not
be deductible this year and would carry forward to next year.
39. [LO 1] This year, Major Healy paid $40,000 of interest on a mortgage on his home (Major Healy
borrowed $800,000 to buy the residence; $900,000 purchase price and value at purchase;
$1,000,000 current worth), $6,000 on a $120,000 home equity loan on his home (loan proceeds
were used to buy antique cars), and $10,000 of interest on a mortgage on his vacation home (loan
of $200,000; home purchased for $500,000). Major Healy’s AGI is $220,000.
a. How much interest expense can Major Healy deduct as an itemized deduction?
b. Assume the original facts, except that Major Healy’s home had a fair market value of
$1,000,000 when he purchased the home and took out the home equity debt, but now
the home is worth $500,000. How much interest expense can Major Healy deduct as
an itemized deduction?
a. $55,000. Major Healy’s acquisition debt on his home and vacation home does not exceed
$1,000,000. Thus, he can deduct the $40,000 mortgage interest on his home and $10,000 of
mortgage interest on his vacation home. Because his home equity debt exceeds $100,000, he
can only deduct a portion of the interest on the $120,000 home equity debt (i.e., the portion
attributable to $100,000 of debt). Thus, Major Healy can also deduct $5,000 of home equity
interest ($6,000 interest expense x ($100,000 home equity debt limit/ $120,000 home equity
debt amount) = $5,000).
b. $55,000. Same as in a. The fair market value limitation for home equity debt is
determined at the date the debt is executed. Thus, the lower fair market value does
not impact Major Healy’s interest deduction
40. [LO 1] Ray Ray made the following contributions this year.
Charity Property Cost FMV
Athens Academy School cash $ 5,000 $5,000
United Way cash 4,000 4,000
American Heart Association Antique painting 15,000 75,000
First Methodist Church Coca Cola stock 12,000 20,000
Determine the maximum amount of charitable deduction for each of these contributions
ignoring the AGI ceiling on charitable contributions and assuming that the American Heart
Association plans to sell the antique painting to fund its operations. Ray Ray has owned
the painting and Coca-Cola stock since 1990.
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Education.
The maximum amount is $9,000 for the cash contributions and $35,000 for the property
donations. Because Ray Ray has reason to expect that the American Heart Association
will sell the antique painting, the antique is used for a purpose unrelated to the American
Heart Association’s charitable purpose. Thus, Ray Ray’s deduction for the painting is
limited to his basis in the painting ($15,000). The amount of the deduction for the Coca
Cola stock is its fair market value ($20,000) because the stock is considered intangible,
appreciated long-term capital gain property.
41. [LO 1] Calvin reviewed his cancelled checks and receipts this year for charitable contributions.
He has owned the IBM stock and painting since 2005. Calculate Calvin’s charitable contribution
deduction and carryover (if any) under the following circumstances.
Donee Item Cost FMV
Hobbs Medical Center IBM stock $ 5,000 $ 22,000
State Museum painting 5,000 3,000
A needy family food and clothes 400 250
United Way cash 8,000 8,000
a. Calvin’s AGI is $100,000.

b. Calvin’s AGI is $100,000 but the State Museum told Calvin that it plans to sell the
painting.
c. Calvin’s AGI is $50,000.
d. Calvin’s AGI is $100,000 and Hobbs is a nonoperating private foundation.
e. Calvin’s AGI is $100,000 but the painting is worth $10,000.
a. Calvin can deduct $33,000. All the contributions are deductible except the donation
to the needy family. This donation will not qualify for a charitable deduction
because the family is not a qualified charity (in contrast, a donation of food and
clothes to a qualifying organization, such as the Red Cross, would qualify). The IBM
stock is long-term capital gain property, so Calvin can deduct the FMV of the stock
($22,000) subject to a 30 percent of AGI ($30,000) ceiling. The painting is not
capital gain property because it has not appreciated in value. Hence, Calvin can
only deduct the value of the painting subject to the 50 percent of AGI ceiling
($50,000). Calvin’s cumulative donations are $33,000, which does not approach the
50 percent limit, calculated as follows:
50 percent AGI limit $ 50,000
50 percent Contributions - cash $ 8,000
50 percent Contributions – painting + 3,000
Total 50 percent contributions - 11,000
Maximum remaining contribution to reach 50 percent $ 39,000
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b. No difference with a. because the painting is not capital gain property.

c. The IBM stock is long-term capital gain property and the painting is not capital
gain property. Hence, Calvin can only deduct the value of the stock subject to the
lesser of (1) the value of the stock up to the 30 percent AGI limit ($15,000) or (2) the
remaining amount of deduction to reach the 50 percent limit ($14,000 calculated
below). Hence, Calvin can deduct $25,000 this year consisting of cash of $8,000,
painting of $3,000, and the stock of $14,000. The remaining value of the stock
$8,000 ($22,000 - $14,000) is carried over to next year subject to the 30 percent of
AGI limit.
50 percent Contributions – painting + 3,000
d. The IBM stock is long-term capital gain property but because the donee is a private
nonoperating foundation, the deduction for the value of the stock is subject to a 20
percent of AGI limitation. Hence, Calvin can deduct the lesser of (1) the value of the
stock up to the 20 percent AGI limit ($20,000) or (2) the remaining amount of
deduction to reach the 50 percent limit ($39,000 calculated in a. above). Hence,
Calvin can deduct $31,000 this year consisting of cash of $8,000, painting of $3,000,
and the stock of $20,000. The remaining value of the stock $2,000 ($22,000 -
$20,000) is carried over to next year subject to the 20 percent of AGI limit.
e. Now both the IBM stock and the painting are capital gain properties. Hence, Calvin
can only deduct the aggregate value of the stock and painting ($22,000 plus
$10,000) subject to the 30 percent AGI limit ($30,000). This assumes that the
painting will be used for the state museum’s charitable purposes. The $30,000 limit
is less than the remaining amount of deduction to reach the 50 percent limit $42,000
($50,000 less $8,000). Hence, Calvin can deduct $38,000 this year consisting of
cash of $8,000, and the $30,000 of combined value of the painting and the stock
($32,000). The remaining value of the capital gain property $2,000 ($32,000 -
$30,000) is carried over to next year subject to the 30 percent of AGI limit.
42. [LO 1] In addition to cash contributions to charity, Dean decided to donate shares of stock
and a portrait painted during the earlier part of the last century. Dean purchased the stock
and portrait many years ago as investments. Dean reported the following recipients:
Charity Property Cost FMV
State University cash $ 15,000 $15,000
Red Cross cash 14,500 14,500
State History Museum Antique painting 5,000 82,000
City Medical Center Dell stock 28,000 17,000
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Education.
a. Determine the maximum amount of charitable deduction for each of these

contributions ignoring the AGI ceiling on charitable contributions.
b. Assume that Dean’s AGI this year is $150,000. Determine Dean’s itemized
deduction for his charitable contributions this year and any carryover.
c. Assume that Dean’s AGI this year is $240,000. Determine Dean’s itemized
deduction for his charitable contributions this year and any carryover.
d. Suppose Dean is a dealer in antique paintings, and he held the painting for sale
before the contribution. What is Dean’s charitable contribution deduction for the
paintings in this situation (ignoring AGI limitations)?
e. Suppose that Dean’s objective with the donation to the museum was to finance
expansion of the historical collection. Hence, Dean was not surprised when the
museum announced the sale of the portrait because of its limited historical value.
What is Dean’s charitable contribution deduction for the painting in this situation
(ignoring AGI limitations)?
a. The maximum amount is $29,500 for the cash contributions and $99,000 for the property
donations. The amount of the deduction for property is fair market value if the property is
long-term capital gain property and either intangible (the stock) or related to the charity’s
exempt function (the antique to a museum). Hence, the value of the antique is deductible.
Because the stock has declined in value it is not considered to be capital gain property so,
the deduction for this donation is the lesser of fair market value or basis. In this case, the
deductible amount is the $17,000 fair market value.
b. In this situation, Dean has contributed to public charities and he can deduct all of his cash
contributions and the value of the stock because the total does not exceed the 50 percent AGI
limit. Note that the stock is subject to the 50 percent of AGI limit and not the 30 percent AGI
limit because it is ordinary income due to the fact its basis exceeds its value (it is not capital
gain property). Thus, Dean can deduct the lesser of (1) the value of the antique up to the 30
percent AGI limit ($45,000) or (2) the remaining amount of deduction to reach the 50
percent limit ($28,500 calculated below). Hence, Dean can deduct $75,000 this year
consisting of cash of $29,500, stock of $17,000, and the antique of $28,500. The remaining
value of the antique $53,500 ($82,000 - $28,500) is carried over to next year subject to the
30 percent of AGI limit.
50 percent Contributions – stock + 17,000
c. Again, Dean can deduct all of his cash contributions and the value of the stock because the
total does not exceed the 50 percent AGI limit. Dean can deduct the lesser of (1) the value
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of the antique up to the 30 percent AGI limit ($72,000) or (2) the remaining amount of
deduction to reach the 50 percent limit ($73,500 calculated below). Hence, Dean can
deduct $118,500 this year consisting of cash of $29,500, stock of $17,000, and the antique of
$72,000. The remaining value of the antique $10,000 ($82,000 - $72,000) is carried over to
next year subject to the 30 percent of AGI limit.
50 percent Contributions – stock + 17,000
d. Because Dean is an antique dealer, the antique painting is ordinary income property, not
capital gain property. Thus, Dean may deduct only the basis of the painting, $5,000, and
this deduction is subject to the 50 percent AGI limit, not the 30 percent AGI limit.
e. Because Dean had reason to expect the Museum would sell the antique, the antique is used
for a purpose unrelated to the museum’s charitable purposes. Thus, Dean may deduct only
the basis of the antique, $5,000, but this deduction is subject to the 50 percent AGI limit, not
the 30 percent AGI limit.
43. [LO 1] Tim suffered greatly this year. In January a freak storm damaged his sailboat and in July
Tim’s motorcycle was stolen from his vacation home. Tim originally paid $27,000 for the boat,
but he was able to repair the damage for $6,200. Tim paid $15,500 for the motorcycle, but it was
worth $17,000 before it was stolen. Insurance reimbursed $1,000 for the boat repairs and the cycle
was uninsured.
a. Calculate Tim’s deductible casualty loss if his AGI is $50,000.
b. Calculate Tim’s deductible casualty loss if his AGI is $150,000.
c. How would you answer a. if Tim received an additional $65,000 in interest from
municipal bonds this year?
a. The aggregate loss is $20,500 calculated as the sum of the losses from the boat and
cycle as follows:
Boat Cycle
Decline in value $ 6,200 $ 17,000
Adjusted basis 27,000 15,500
Lesser of basis or value $ 6,200 $ 15,500
less insurance proceeds - 1,000
uninsured loss $ 5,200 $ 15,500
Per casualty floor - 100 - 100
Casualty Loss $ 5,100 $ 15,400
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Education.
Tim must reduce this by 10 percent of his AGI which is $5,000. Hence, Tim can
claim a $15,500casualty loss deduction this year ($20,500-$5,000).
b. Tim must reduce his $20,500 loss by 10 percent of his AGI which is $15,000. Hence,
Tim can claim a $5,500 casualty loss deduction this year.
c. The interest on municipal bonds is excluded from gross income so this income would
not affect Tim’s AGI and would not, therefore, have any effect on the casualty loss
deduction. Tim’s deductible casualty loss deduction would still be $15,500.
44. [LO 1]{Planning} Trevor is a single individual who is a cash method, calendar-year
taxpayer. For each of the next two years (year 1 and year 2), Trevor expects to report AGI
of $80,000, contribute $3,500 to charity, and pay $2,500 in state income taxes.
a. Estimate Trevor’s taxable income for year 1 and year 2 using 2014 amounts for the
standard deduction and personal exemption for both years.
b. Now assume that Trevor combines his anticipated charitable contributions for the
next two years and makes the combined contribution in December of year 1.
Estimate Trevor’s taxable income for each of the next two years using the 2014
amounts for the standard deduction and personal exemption. Reconcile the total
taxable income to your solution to a. above.
c. Trevor plans to purchase a residence next year, and he estimates that property taxes
and residential interest will each cost $4,000 annually ($8,000 in total annually).
Estimate Trevor’s taxable income for each of the next two years (year 1 and year 2)
using the 2014 amounts for the standard deduction and personal exemption and also
assuming Trevor makes the charitable contribution of $3,500 and state tax payments
of $2,500 in each year.
d. Assume that Trevor makes the charitable contribution for year 2 and pays the real
estate taxes for year 2 in December of year 1. Estimate Trevor’s taxable income for
year 1 and year 2 using the 2014 amounts for the standard deduction and personal
exemption. Reconcile the total taxable income to your solution to c. above.
e. Explain the conditions in which the bunching strategy in part d. will generate tax
savings for Trevor.
a. Trevor will elect the standard deduction of $6,200 (rather than itemized deductions
of $6,000) and after deducting his personal exemption of $3,950 report taxable
income of $69,850. His total taxable income for the two years will be $139,700
($69,850 + $69,850) calculated as follows.
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Education.
Year 1 Year 2
AGI $ 80,000 $ 80,000
Standard deduction - 6,200 - 6,200
Personal exemption - 3,950 - 3,950
Taxable income $ 69,850 $ 69,850
b. Trevor can now itemize his deductions in year 1, because the total $9,500 itemized
deductions ($3,500 + $3,500 +$2,500) now exceed the standard deduction. He will
report lower total taxable income ($136,400 calculated below) over the two years
because $3,300 of his itemized deduction now reduce taxable income.
Year 1 Year 2
AGI $ 80,000 $ 80,000
Itemized deductions - 9,500
Standard deduction - 6,200
c. Now Trevor can itemize his deductions so he reports taxable income of $62,050
($80,000-14,000-3,950 for both years).
Year 1 Year 2
AGI $ 80,000 $ 80,000
Itemized deductions - 14,000 - 14,000
d. Itemized deductions in year 1 will be $8,000 (real estate taxes) + $4,000 (residential
interest) + $7,000 (charitable contribution) + $2,500 (state tax deduction) =
$21,500. Itemized deductions in year 2 are $4,000 (residential interest) + $2,500
(state tax deduction) = $6,500. Trevor reports the same total of taxable income,
$124,100 for the two years, but the timing of the taxable income differs as follows:
Year 1 Year 2
AGI $ 80,000 $ 80,000
Itemized deductions - 21,500 - 6,500
e. By bunching his deductions in part d. Trevor will not reduce his taxable income
because he is already itemizing in both years. However, Trevor can save the time
value of taxes as he has deferred $7,500 of his taxable income into year 2
(accelerated real property taxes of $4,000 and charitable contribution of $3,500 into
year 1). Also Trevor may save taxes using this strategy if his tax rate is higher in
year 1 than year 2.
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Education.
45. [LO 1] Baker paid $775 for the preparation of his tax return and incurred $375 of employee
business expenses of which $60 was reimbursed by his employer through an accountable plan.
Baker also paid a $100 fee for investment advice. Calculate the amount of these expenses that
Baker is able to deduct assuming he itemizes his deductions in each of the following situations:
a. Baker’s AGI is $50,000.
b. Baker’s AGI is $100,000.
a. All $1,190 of expenses are miscellaneous itemized deductions subject to the 2% of AGI floor
($775+$315+$100=$1,190).
The deductible amount in excess of the 2% floor is $190 {1,190-(2%*50,000)}
b. All $1,190 of expenses are miscellaneous itemized deductions subject to the 2% AGI floor.
However because 2% of AGI is $2,000 ($100,000 x 2%), Baker won’t be allowed to deduct
any of the expenses.
46. [LO2] Simon lost $5,000 gambling this year on a trip to Las Vegas. In addition, he paid $2,000 to
his broker for managing his $200,000 portfolio, and $1,500 to his accountant for preparing his tax
return. In addition, Simon incurred $2,500 in transportation costs commuting back and forth from
his home to his employer’s office, which were not reimbursed. Calculate the amount of these
expenses that Simon is able to deduct assuming he itemizes his deductions in each of the following
situations:
a. Simon’s AGI is $40,000.
b. Simon’s AGI is $200,000.
a. $ 2,700. Gambling losses are only deductible to the extent of gambling winnings. Thus, Simon
cannot deduct any of the $5,000 gambling losses. The $2,500 commuting expenses are also
nondeductible as they are deemed to be personal expenses. The $2,000 broker management fees
are deductible as investment fees (miscellaneous itemized deductions subject to the 2% AGI floor),
and the $1,500 tax return fees are also deductible as miscellaneous itemized deductions subject to
the 2% AGI floor. Thus, Simon may deduct $2,700 of these expenses ($2,000 + $1,500 – (2% x
$40,000 AGI) = $2,700).
b. $0. Gambling losses are only deductible to the extent of gambling winnings. Thus, Simon
cannot deduct any of the $5,000 gambling losses. The $2,500 commuting expenses are also
nondeductible as they are deemed to be personal expenses. The $2,000 broker management fees
are deductible as investment fees (miscellaneous itemized deductions subject to the 2% AGI floor),
and the $1,500 tax return fees are also deductible as miscellaneous itemized deductions subject to
the 2% AGI floor. However, because the 2% AGI floor (2% x $200,000 AGI = $4,000) exceeds the
sum of the broker management fees ($2,000) and the tax return fees ($1,500), Simon will not be
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Education.
able to deduct either expense.
47. [LO 1] Zack is employed as a full-time airport security guard. This year Zack’s employer
transferred him from Dallas to Houston. At year-end, Zack discovered a number of unreimbursed
expenses related to his employment in Dallas prior to his move to Houston. Identify which
expenses are deductible and whether the deductions are for or from AGI.
Cost of bus transportation from his home to the airport $ 150
Subscription to Journal of Security Guards 52
Lunch with colleagues 195
Cost of self-defense course at local community center 500
Cost of lunch with supervisor during evaluations 383
Total $ 1,280
The cost of bus transportation is a nondeductible personal expense, but the cost of the subscription
and half the cost of the supervisor lunches (assuming Zack has sufficient substantiation) will be
deductible as miscellaneous itemized deductions subject to the 2% floor (from AGI). The cost of
the course is also deductible as a miscellaneous itemized deduction subject to the 2% of AGI floor,
because it appears to maintain or improve Zack’s skills in the business.
48. [LO 2] Stephanie is a twelve-year old who often assists neighbors on weekends by babysitting their
children. Calculate the 2014 standard deduction Stephanie will claim under the following
independent circumstances (assume that Stephanie’s parents will claim her as a dependent).
a. Stephanie reported $850 of earnings from her babysitting.
b. Stephanie reported $1,500 of earnings from her babysitting.
c. Stephanie reported $8,000 of earnings from her babysitting.
a. Stephanie can claim a standard deduction of $1,200, the greater of the minimum
standard deduction ($1,000) or $350 plus her earned income ($850).
b. Stephanie can claim a standard deduction of $1,850, the greater of the minimum
standard deduction ($1,000) or $350 plus her earned income ($1,500).
c. Stephanie can claim a standard deduction of $6,200, the greater of the minimum
standard deduction ($1,000) or $350 plus her earned income but limited to the
maximum standard deduction for her filing status, (single is $6,200 for 2014)..
49. [LO 1 LO 2] {Research} Tammy teaches elementary school history for the Metro School District.
In 2014 she has incurred the following expenses associated with her job:
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Education.
Noncredit correspondence course on history $ 900

Teaching publications 1,800
Tuition for university graduate course in physics 1,200
Transportation between school and home 750
Photocopying class materials 100
Transportation from school to extracurricular activities 110
Cost of lunches eaten during study halls 540
Tammy’s base salary is $45,000, and she receives a $200 salary supplement to help her cover
expenses associated with her school extracurricular activities.
a. Identify the amount and type (for AGI or from AGI) of deductible expenses (assume
the 2013 rules apply for purposes of the qualified education expense deduction and
the educator expense deduction).
.
b. Calculate Tammy’s AGI and taxable income for 2014 assuming she files single with
one personal exemption (assume the 2013 rules apply for purposes of the qualified
education expense deduction and the educator expense deduction).
a. The commuting expense and lunches are personal and not deductible. The tuition for the
university graduate course is eligible for the qualified education expense deduction (IRC
Sec. 222(d) and IRC Sec. 25A(f)), but the correspondence course is not likely to qualify as a
qualified education deduction, because it is not for credit. $250 of the publications would
qualify for the educator’s deduction (IRC Sec. 62(d)). The remaining expenses are
deductible as unreimbursed employee business expenses under miscellaneous itemized
deductions.
Noncredit correspondence course $ 900 From

Teaching cases for classroom use 1,550 From
250 For
Tuition for university graduate course in physics 1,200 For
Transportation between school and home 750 Not
Photocopying class materials 100 From
Transportation to extracurricular activities 110 From
Cost of lunches eaten during study halls 540 Not
b. Tammy’s taxable income is $33,600. Tammy would elect the standard deduction in lieu of
itemizing.
Salary and supplement $ 45,200
Qualified education expense (graduate tuition) - 1,200
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Education.
Educator’s Deduction 250

AGI $ 43,750
Standard deduction - 6,200
Personal exemption - 3,950
Taxable income $ 33,600
50. [LO 2] In 2014, Jeff, who is single, is entitled to the following deductions before
phase-outs:
State income taxes $7,850
Real estate taxes 1,900
Home mortgage interest 8,200
Charitable contributions 1,700
a. Assume that Jeff’s AGI is $280,000. Calculate Jeff’s itemized deductions after
considering the overall phase-out of itemized deductions.
b. Suppose that Jeff’s AGI increases to $1,280,000. Calculate Jeff’s itemized
deductions after considering the overall phase-out of itemized deductions.
a. Jeff’s itemized deductions are $18,876 calculated as follows:
Description Amount
Taxes(state income and real estate) $9,750
Interest on loans secured by residence 8,200
Total itemized deductions subject to phase-out $19,650
Less phase-out of itemized deductions (See below) −774
Total itemized deductions $18,876
Calculation of the phase-out:
Lesser of :
(1) 3 percent × (AGI minus $254,200) = 3 percent × ($280,000 - $254,200) = $774 or
(2) 80 percent of the total itemized deductions subject to phase-out ($19,650) = $15,720
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Education.
b. Jeff’s itemized deductions are $3,930 calculated as follows:
Description Amount
Taxes $9,750
Interest on loans secured by residence 8,200
Total itemized deductions subject to phase-out $19,650
Less phase-out of itemized deductions (See below) −15,720
Total itemized deductions $3,930
Calculation of the phase-out:
Lesser of :
(1) 3 percent × (AGI minus $254,200) = 3 percent × ($1,280,000 - $254,200) = $30,774

or
(2) 80 percent of the total itemized deductions subject to phase-out ($19,650) = $15,720
51. [LO 2] Jim is single and has three dependent children. Calculate his deductible total
personal and dependency exemptions under the following independent conditions:
a. Jim has AGI of $150,000.
b. Jim has AGI of $303,000.
c. Jim has AGI of $450,000.
a. Jim’s AGI is below the exemption phase-out threshold ($254,200 for single
taxpayers). Thus, he will be able to deduct $15,800 of personal and dependent
exemptions (4 × 3,950).
b. $9,480, computed as follows:
7-26
Education.
Amount Explanation
Step 1: $48,800 $303,000 – 254,200 (Excess AGI).
Step 2: 20 Divide $48,800 by 2,500 and round up to nearest

whole number $48,800/2,500 = 19.52 → 20.
Step 3: 40% Multiply the amount in Step 2 by 2% (i.e., 20 × 2%).
Step 4: $6,320 Multiply the Step 3 result by the total exemption

amount (i.e., $15,800 × 40%). This is the amount of the
phase-out.
Step 5: $9,480 Subtract the Step 4 result from the total exemption
amount (i.e., $15,800 − $6,320). This is the deductible
exemption amount.
c. Jim’s AGI exceeds the point at which exemptions are completely phased-out for
single taxpayers ($376,701). Thus, he will not be able to deduct any personal or
dependency exemption this year.
Comprehensive Problems
52. Read the following letter and help Shady Slim with his tax situation. Please assume that gross
income is $172,900 for purposes of this problem.
December 31, 2014
To the friendly student tax preparer:
Hi, it’s Shady Slim again. I just got back from my 55th birthday party, and I’m told that you need some
more information from me in order to complete my tax return. I’m an open book! I’ll tell you whatever I
think you need to know.
Let me tell you a few more things about my life. As you may recall, I am divorced from my wife, Alice. I
know that it’s unusual, but I have custody of my son, Shady, Jr. The judge owed me a few favors and I
really love the kid. He lives with me full-time and my wife gets him every other weekend. I pay the vast
majority of my son’s expenses. I think Alice should have to pay some child support, but she doesn’t have
to pay a dime. The judge didn’t owe me that much, I guess.
Remember when I told you about that guy that hit me with his car? I had a bunch of medical expenses
that were not reimbursed to me by the lawsuit or by my insurance. I incurred a total of $20,000 in medical
expenses, and I was only reimbursed for $11,000. Good thing I can write off medical expenses, right?
7-27
Education.
I contributed a lot of money to charity this year (and have receipt documentation for all contributions).
I’m such a nice guy! I gave $1,000 in cash to the March of Dimes. I contributed some of my old furniture
to the church. It was some good stuff! I contributed a red velvet couch and my old recliner. The furniture
is considered vintage and is worth $5,000 today (the appraiser surprised me!), even though I only paid
$1,000 for it back in the day. When I contributed the furniture, the pastor said he didn’t like the fabric and
was going to sell the furniture to pay for some more pews in the church. Some people just have no taste,
right? Roca Cola had a charity drive this year and I contributed $90. Turns out, I don’t even miss it,
because Roca Cola takes it right off my paycheck every month…$15 a month starting in July. Oh, one
other bit of charity from me this year. An old buddy of mine was down on his luck. He lost his job and his
house. I gave him $500 to help him out.
I paid a lot of money in interest this year. I paid a total of $950 in personal credit card interest. I also paid
$13,000 in interest on my home mortgage. I also paid $2,000 in real estate taxes for my new house.
A few other things I want to tell you about last year. Someone broke into my house and stole my kid’s
brand new bicycle and my set of golf clubs. The total loss from theft was $900. I paid $100 in union dues
this year. I had to pay $1,000 for new suits for my job. Roca Cola requires its managers to wear suits
every day on the job. I spent a total of $1,300 to pay for gas to commute to my job this year.
Oh, this is pretty cool. I’ve always wanted to be a firefighter. I spent $1,000 in tuition to go to the local
firefighter’s school. I did this because someone told me that I can deduct the tuition as an itemized
deduction, so the money would be coming back to me.
That should be all the information you need right now. Please calculate my taxable income and complete
pages 1 and 2 of Form 1040 (through taxable income, line 43) and Schedule A. You’re still doing this for
free, right?
Taxable income is $147,910, computed as follows:
Gross Income $ 172,900
AGI $ 172,900
Itemized Deductions:
Medical Expenses 0
Mortgage Interest 13,000
Real Estate Taxes 2,000
Charitable Contributions 2,090
Misc. Itemized Deductions 0 - 17,090
Taxable income before exemptions $ 155,810
Personal & Dependency exemptions - 7,900
Taxable Income $ 147,910
Notes:
7-28
Education.
1. Medical expenses do not exceed the floor limitation of 10 percent of AGI so are non-deductible.
2 Personal credit card interest is not deductible.
3 Slim can deduct the $1,000 cash donation, the $90 payroll deduction and the basis of the
furniture he contributed (capital gain property put to unrelated use).
4 Casualty losses do not exceed floor limitations ($100 and 10 percent of AGI) thus, they are not
deductible.
5 Miscellaneous itemized deductions: union dues of $100 don't exceed the 2% threshold.
6 Other non-deductible items: clothing for work, commuting expenses, firefighter education
expenses.
7-29
Education.
7-30
Education.
7-31
Education.
7-32
Education.
53. Shauna Coleman is single. She works as an architectural designer for Streamline Design (SD).
Shauna wanted to determine her taxable income. She correctly calculated her AGI. However, she
wasn’t sure how to compute the rest of her taxable income. She provided the following
information with hopes that you could use it to determine her taxable income.
a. Shauna paid $4,675 for medical expenses and Blake, Shauna’s boyfriend, drove Shauna (in
her car) a total of 115 miles so that she could receive care for a broken ankle she sustained in
a biking accident.
b. Shauna paid a total of $3,400 in health insurance premiums during the year (not through an
exchange). SD did not reimburse any of this expense. Besides the health insurance
premiums and the medical expenses for her broken ankle, Shauna had Lasik eye surgery last
year and she paid $3,000 for the surgery (she received no insurance reimbursement). She
also incurred $450 of other medical expenses for the year.
c. SD withheld $1,800 of state income tax, $7,495 of Social Security tax, and $14,500 of
federal income tax from Shauna’s paychecks throughout the year.
d. In 2014, Shauna was due a refund of $250 for overpaying her 2013 state taxes. On her 2013
state tax return that she filed in April of 2014, she applied the overpayment towards her 2014
state tax liability. She estimated that her state tax liability for 2014 will be $2,300.
e. Shauna paid $3,200 of property taxes on her personal residence. She also paid $500 to the
developer of her subdivision, because he had to replace the sidewalk in certain areas of the
subdivision.
f. Shauna paid a $200 property tax based on the state’s estimate of the value of her car.
g. Shauna has a home mortgage loan in the amount of $220,000 that she secured when she
purchased the home. The home is worth about $400,000. Shauna paid interest of $12,300 in
interest on the loan this year.
h. Shauna made several charitable contributions throughout the year. She contributed stock in
ZYX Corp. to the Red Cross. On the date of the contribution, the FMV of the donated
shares was $1,000 and her basis in the shares was $400. Shauna originally bought the ZYX
Corp. stock in 2008. Shauna also contributed $300 cash to State University and religious
artifacts she has held for several years to her church. The artifacts were valued at $500 and
Shauna’s basis in the items was $300. Shauna had every reason to believe the church would
keep them on display indefinitely. Shauna also drove 200 miles doing church-related
errands for her minister. Finally, Shauna contributed $1,200 of services to her church last
year.
i. Shauna’s car was totaled in a wreck in January. The car was worth $14,000 and her cost
basis in the car was $16,000. The car was a complete loss. Shauna received $2,000 in
insurance reimbursements for the loss.
7-33
Education.
j. Shauna paid $300 for architectural design publications, $100 for continuing education
courses to keep her up to date on the latest design technology, and $200 for professional
dues to maintain her status in a professional designer’s organization.
k. Shauna paid $250 in investment advisory fees and another $150 to have her tax return
prepared (that is, she paid $150 in 2014 to have her 2013 tax return prepared).
l. Shauna is involved in horse racing as a hobby. During the year, she won $2,500 in prize
money and incurred $10,000 in expenses. She has never had a profitable year with her horse
racing activities, so she acknowledges that this is a hobby for federal income tax purposes.
m. Shauna sustained $2,000 in gambling losses over the year (mostly horse-racing bets) and
only had $200 in winnings.
Required:
A. Determine Shauna’s taxable income and complete page 2 of Form 1040 (through taxable income,
line 43) and Schedule A assuming her AGI is $107,000.
B. Determine Shauna’s taxable income and complete page 2 of Form 1040 (through taxable income,
line 43) and Schedule A assuming her AGI is $207,000
Part A: $79,860, computed as follows:

Description Amount Explanation
(1) AGI $107,000
From AGI deductions:
a) and b) Medical expenses $ 852 Medical expenses in excess of 10 percent of
AGI are deductible. See Note A below.
c) and d) State taxes 2,050 State income taxes paid are deductible $1,800
withheld and 250 overpayment applied on last
year’s return treated as paid last year).
e) Real property taxes 3,200 Real property taxes deductible from AGI.
Payment to developer is not a tax.
f) Personal property taxes 200 Property tax on personal property based on
value deductible from AGI
g) Interest on loans secured 12,300 Primary home loan interest deductible from
by her home AGI
h) Charitable contributions 1,828 See Note B below
i) Casualty loss 1,200 See Note C below
j) – l) Itemized deductions 1,360 See Note D below
subject to 2% AGI floor
m) Gambling losses 200 Gambling losses are limited to earnings from
gambling deductible as a miscellaneous
itemized deduction but not subject to 2% of
AGI floor.
(2) Total itemized 23,190
deductions
(3) Standard deduction 6,200 Single taxpayer
(4) Greater of Itemized 23,190 Greater of (2) or (3). Shauna should choose to
deductions or standard itemize deductions.
deduction
7-34
Education.
(5) Personal exemption 3,950 One exemption

amount
(6) Total From AGI 27,140 (4) + (5)
deductions
Taxable income $79,860 (1) - (6)
Note A: $852. Medical expenses = $4,675 (medical expenses for broken ankle), + $27 (115
miles x 23.5¢ per mile) + 3,400 (unreimbursed health insurance premiums) + 3,000 (Lasik eye
surgery) + 450 (other medical expenses) - $10,700 (AGI of 107,000 x 10 percent) = $852.
Note B: $1,828. Capital gain property generally in the form of stock deductible at FMV; Thus,
Shauna can deduct $1,000 for her ZYX stock donation to the Red Cross. Cash contributions of
$300 are fully deductible. Religious artifacts are used by church in its normal function as a non-
profit organization and thus are deductible at FMV of $500. Finally, Shauna may deduct $28
(as a cash donation) expense for her charitable mileage (200 miles x 14¢ per mile). Note that
the value of services donated is not deductible. Accordingly, Shauna’s charitable contribution
deduction is $1,828 (1,000 + 300 + 500 + 28) = $1,828. Shauna need not be concerned about
the AGI-based limitations on her contributions because her AGI is relatively high and her
contributions are relatively low.
Note C: $1,200. The amount of the loss is the lesser of (1) the reduction in value of the car
($14,000) or (2) the taxpayer’s basis in the car ($16,000). This $14,000 loss is reduced by the
$2,000 insurance proceeds. Thus, before applying limitations, the amount of her loss is $12,000
($14,000 – 2,000). To determine the deductible amount, the loss must be reduced by $100 and
then by 10 percent of AGI ($10,700). So, her deductible loss is $1,200 ($12,000 – 100 – 10,700).
Note D:
j) Employee business $600 300 + 100 + 200. All items deductible as
expenses miscellaneous itemized deductions subject to the
2% of AGI floor.
k) Investment expense 400 250 + 150. Both items deductible as miscellaneous
and tax preparation fees itemized deductions subject to the 2% of AGI floor
l) Hobby losses 2,500 Hobby losses limited to income generated from the
activity. In this case $2,500. These are
miscellaneous itemized deductions subject to the
2% of AGI floor.
(1) Total Itemized 3,500
deductions subject to 2%
floor
(2) 2% x AGI floor -2,140 $107,000 AGI x 2%
Amount in excess of floor 1,360 (1) - (2)
7-35
Education.
7-36
Education.
7-37
Education.
Part B: $183,272 computed as follows:

Description Amount Explanation
(1) AGI $207,000
From AGI deductions:
a) and b) Medical expenses 0 Medical expenses in excess of 10 percent of
AGI are deductible. See note A below.
c and d State taxes 2,050 State income taxes paid last year are
deductible ($1,800 withheld and 250
overpayment applied on last year’s return
treated as paid last year.
e Real property taxes 3,200 Real property taxes deductible from AGI.
Payment to developer is not a tax.
f Personal property taxes 200 Property tax on personal property based on
value deductible from AGI
g Interest on loans secured by her 12,300 Primary home loan and home equity loan
home deductible from AGI
h Charitable contributions 1,828 See note B below
i Casualty loss - See note C below
j – l Itemized deductions subject - See note D below
to 2% AGI floor
m) Gambling losses 200 Gambling losses are limited to earnings from
gambling deductible as a miscellaneous
itemized deduction but not subject to 2% of
AGI floor or phase out.
(4) Total itemized deductions 19,778
(5) Standard deduction 6,200 Single taxpayer
(6) Greater of Itemized 19,778 Greater of (4) or (5). Shauna should choose to
deductions or standard deduction itemize deductions.
(7) Personal exemption amount 3,950 One exemption.
(8) Total From AGI deductions 23,728 (6) + (7)
Taxable income $183,272 (1) - (8)
Note A: $0. Medical expenses = $4,675 (medical expenses for broken ankle), + $27 (115 miles x 23.5¢
per mile) + 3,400 (unreimbursed health insurance premiums) + 3,000 (Lasik eye surgery) + 450 (other
medical expenses) - $20,700 (AGI of 207,000 x 10 percent) < $0. Because 10 percent of Shauna’s AGI
exceeds her total medical expenses, Shauna is unable to deduct any medical expenses.
Note B: $1,828. Capital gain property generally in the form of stock is deductible at FMV; Thus, Shauna
can deduct $1,000 for her ZYX stock donation to the Red Cross. Cash contributions of $300 are fully
deductible. Religious artifacts are used by church in its normal function as a non-profit organization and
thus are deductible at FMV of $500. Finally Shauna may deduct $28 (as a cash donation) expense for
her charitable mileage (200 miles x 14¢ per mile). Note that the value of services donated is not
deductible. Accordingly, Shauna’s charitable contribution deduction is $1,828 (1,000 + 300 + 500 + 28)
7-38
Education.
= $1,828. Shauna need not be concerned about the AGI-based limitations on her contributions because
her AGI is relatively high and her contributions are relatively low.
Note C: $0. The amount of the loss is the lesser of (1) the reduction in value of the car ($14,000) or (2)
the taxpayer’s basis in the car ($16,000). This $14,000 loss is reduced by the $2,000 insurance proceeds.
Thus, before applying limitations, the amount of her loss is $12,000 ($14,000 – 2,000). To determine the
deductible amount, the loss must be reduced by $100 and then by 10 percent of AGI ($20,700). So, her
deductible loss is $0 (12,000 – 100 – 20,700).
Note D:
j) Employee business $600 300 + 100 + 200. All items deductible as miscellaneous
expenses itemized deductions subject to the 2% of AGI floor.
k) Investment expense and 400 250 + 150. Both items deductible as miscellaneous
tax preparation fees itemized deductions subject to the 2% of AGI floor
l) Hobby losses 2,500 Hobby losses limited to income generated from the
activity. In this case $2,500. These are miscellaneous
itemized deductions subject to the 2% of AGI floor.
(1) Total Itemized 3,500
deductions subject to 2%
floor
(2) 2% x AGI floor (4,140) $207,000 AGI x 2%
Amount in excess of floor 0 (1) + (2), limited to $0.
7-39
Education.
7-40
Education.
7-41
Education.
54. Joe and Jessie are married and have one dependent child, Lizzie. Lizzie is currently in college at
State University. Joe works as a design engineer for a manufacturing firm while Jessie runs a craft
business from their home. Jessie’s craft business consists of making craft items for sale at craft
shows that are held periodically at various locations. Jessie spends considerable time and effort on
her craft business and it has been consistently profitable over the years. Joe and Jessie own a home
and pay interest on their home loan (balance of $220,000) and a personal loan to pay for Lizzie’s
college expenses (balance of $35,000).
Neither Joe nor Jessie is blind or over age 65, and they plan to file as married-joint. Based on their
estimates, determine Joe and Jessie’s AGI and taxable income for the year and complete pages 1
and 2 of Form 1040 (through taxable income, line 43) and Schedule A. Assume the 2013 rules
apply for purposes of the qualified education expense deduction and that the employer portion of
the self-employment tax on Jessie’s income is $808. Joe and Jessie have summarized the income
and expenses they expect to report this year as follows:
Income:
Joe’s salary $ 119,100
Jessie’s craft sales 18,400
Interest from certificate of deposit 1,650
Interest from Treasury bond funds 727
Interest from municipal bond funds 920
Expenditures:
Federal income tax withheld from Joe’s wages $ 13,700
State income tax withheld from Joe’s wages 6,400
Social Security tax withheld from Joe’s wages 7,482
Real estate taxes on residence 6,200
Automobile licenses (based on weight) 310
State sales tax paid 1,150
Home mortgage interest 14,000
Interest on Masterdebt credit card 2,300
Medical expenses (unreimbursed) 1,690
Joe’s employee expenses (unreimbursed) 2,400
Cost of Jessie’s craft supplies 4,260
Postage for mailing crafts 145
Travel and lodging for craft shows 2,230
Meals during craft shows 670
Self-employment tax on Jessie’s craft income 1,615
College tuition paid for Lizzie 5,780
Interest on loans to pay Lizzie’s tuition 3,200
Lizzie’s room and board at college 12,620
Cash contributions to Red Cross 525
7-42
Education.
Salary $ 119,100
Interest (taxable) + 2,377
Craft revenue $ 18,400
less cost of goods - 4,260
less travel & postage - 2,375
less 50 percent of meals - 335
Income from craft business + 11,430
Total Income $ 132,907
Less Employer portion of SE taxes - 808
Modified AGI (for student loan interest deduction) $ 132,099
Student loan interest deduction - 2,325
Modified AGI (for qualified education expenses) $129,774
Tuition deduction - 4,000
AGI $ 125,774
Joe and Jessie’s maximum deduction for the educational interest deduction before the
phase-out is $2,500 (the amount of interest paid ($3,200) up to $2,500). Joe and Jessie’s
modified AGI of $132,099 (for the student loan interest deduction) is above the phase-out
trigger for student loan interest in 2014, $130,000 for MJ. Hence, the maximum
deduction for the educational loan interest ($2,500) is reduced by the excess AGI over
the threshold ($132,099-$130,000) divided by the phase-out range ($2,099/30,000) or 7
percent. Thus, their deduction for student loan interest is $2,325 ($2,500 – $175 [7
percent of $2,500]). Their modified AGI of $129,774 (for the qualified education expense
deduction) is less than the $130,000 phase-out trigger. Thus, they may deduct the lesser
of the $5,780 tuition they paid for Lizzie or $4,000 (the maximum deduction allowed)
7-43
Education.
Itemized deductions:
Medical expenses $ 1,690
less 10 percent AGI Floor - 12,577 $ 0
Taxes: State income tax $ 6,400
Real estate taxes + 6,200 + 12,600
Interest – QRI + 14,000
Charitable contributions + 525
Miscellaneous itemized:
Employee business expenses $ 2,400
less 2% AGI floor - 2,515 + 0
Total itemized deductions $ 27,125
AGI $ 125,774
Standard Deduction $ 12,400
Itemized deductions - 27,125
Exemptions (3*$3,950) - 11,850
Taxable Income $ 86,799
7-44
Education.
7-45
Education.
7-46
Education.
7-47
Education.

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Solutions Manual – McGraw-Hill’s Taxation, by Spilker et al.

Essentials of Federal Taxation 3rd

Test Bank: https://testbankpack.com/p/test-bank-for-essentials-of-

Solution Manual: https://testbankpack.com/p/solution-manual-for-

a. $0 for AGI. $15 from AGI (miscellaneous itemized deduction as unreimbursed

Transportation from his home to various tournaments $ 25,000

Transportation from her home to the races 1,000

a. Calvin’s AGI is $100,000.

b. No difference with a. because the painting is not capital gain property.

a. Determine the maximum amount of charitable deduction for each of these

able to deduct either expense.

Noncredit correspondence course on history $ 900

Noncredit correspondence course $ 900 From

Educator’s Deduction 250

a. Jeff’s itemized deductions are $18,876 calculated as follows:

Taxes(state income and real estate) $9,750

Interest on loans secured by residence 8,200

Charitable contributions 1,700

Total itemized deductions subject to phase-out $19,650

Less phase-out of itemized deductions (See below) −774

Total itemized deductions $18,876

Calculation of the phase-out:

(1) 3 percent × (AGI minus $254,200) = 3 percent × ($280,000 - $254,200) = $774 or

b. Jeff’s itemized deductions are $3,930 calculated as follows:

Interest on loans secured by residence 8,200

Charitable contributions 1,700

Total itemized deductions subject to phase-out $19,650

Less phase-out of itemized deductions (See below) −15,720

Total itemized deductions $3,930

Calculation of the phase-out:

(1) 3 percent × (AGI minus $254,200) = 3 percent × ($1,280,000 - $254,200) = $30,774

Step 1: $48,800 $303,000 – 254,200 (Excess AGI).

Step 2: 20 Divide $48,800 by 2,500 and round up to nearest

Step 3: 40% Multiply the amount in Step 2 by 2% (i.e., 20 × 2%).

Step 4: $6,320 Multiply the Step 3 result by the total exemption

To the friendly student tax preparer:

Taxable income is $147,910, computed as follows:

Gross Income $ 172,900

Part A: $79,860, computed as follows:

(5) Personal exemption 3,950 One exemption

Part B: $183,272 computed as follows:

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