Exam 17: Tax Consequences of Personal Activities

William took out a $740,000 mortgage to purchase his personal residence. The residence is worth over $1.4 million, and William wants to take out a $200,000 second mortgage and use the proceeds to consolidate his credit card debt. William can deduct 50% of the interest he will pay on the second mortgage.

Ms. Bjorn's only contribution this year was a donation of marketable securities (FMV $600,000; tax basis $273,000) to a public charity. Her AGI was $814,000. Which of the following statements is true?

Helen makes quilts and sells them at the regional county fairs. This year, she earned $950 from quilt sales and spent $3,300 on supplies and travel relating to her quilting activity. If the IRS determines that this activity is a hobby instead of a business, Helen can't deduct her $2,350 net loss.

Alimony payments are included in the recipient's gross income.

For federal income tax purposes, a taxpayer may deduct state and federal employment taxes as an itemized deduction.

Mr. and Mrs. Perry own three personal residences, all of which are subject to an acquisition mortgage. The mortgage on the first residence is $290,000, the mortgage on the second residence is $400,000, and the mortgage on the third residence is $357,000. Which of the following statements is true?

Real estate taxes deducted for regular tax purposes must be added back in computing alternative minimum taxable income (AMTI).

James Dean received the following this year. Compute James' gross income.

Spencer paid the following taxes this year. Compute Spencer's itemized deduction for taxes.

Ted and Alice divorced this year. Pursuant to the divorce agreement, Ted pays $5,000 alimony and $7,500 child support to Alice every month. Which of the following statements is true?

Gains realized on the sale of personal use assets are taxable.

Gary is a successful architect who also sings at weddings. This year, he received $5,400 of fees for his singing and spent $6,250 on voice lessons, sheet music, and travel to the weddings. Which of the following statements is true?

Mr. Jain paid the following taxes this year. Compute Mr. Jain's itemized deduction for taxes.

A taxpayer must purchase a new personal residence in order to exclude any gain from the sale of the old residence.

Three years ago, Suzanne bought a new personal automobile for $26,900. This year, she sold it for $19,000. What is the amount and character of Suzanne's gain or loss?

Gifts are not included in the recipient's gross income.

Mr. Haugh owns a sporting goods store as a sole proprietorship. This year, he donated baseball equipment (bats, gloves, balls) to the local YMCA to use in their community sports programs. His cost basis in the inventory items was $45,700, and their retail value was $68,200. Which of the following statements about this donation is true?

For federal income tax purposes, property transfers pursuant to a divorce are nontaxable events.

For federal income tax purposes, a taxpayer may elect to deduct state and local sales taxes as an itemized deduction.

A taxpayer must have owned and lived in a personal residence at least two of the last five years in order to qualify for the maximum exclusion of gain on sale of that residence.