Exam 17: Tax Consequences of Personal Activities

Dotty, age 45, incurred the following medical expenses this year. Dotty's insurance company reimbursed her for $8,800 of these expenses. If Dotty's AGI is $35,400, compute her medical expense deduction.

Under the terms of a divorce decree, Harold transferred his one-half interest in the marital residence to his former wife Francine. Francine must include the value of the interest in gross income.

Congress provides an indirect subsidy to charities by allowing a deduction for charitable contributions.

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?

Twelve years ago, Mr. Drake incurred a $790,000 mortgage to purchase his principal residence. Last year, he took out a $32,000 loan secured by his considerable equity in the residence and used the proceeds to send his daughter to Stanford University. Which of the following statements is true?

Mr. and Mrs. Blake suffered two casualty losses this year. Mr. Blake's wallet containing $1,300 cash was stolen, and their uninsured sailboat (basis $67,000; FMV $50,000) sank after colliding with a reef. Compute the Blakes' itemized deduction for casualty losses if their AGI was $112,200.

Interest paid on home equity debt is not deductible in computing alternative minimum taxable income (AMTI).

A child of divorced parents is considered a dependent of the parent with custody unless that parent agrees to allow the noncustodial parent to claim the dependency exemption.

Mr. and Mrs. Frazier recognized a $723,000 gain on sale of a home that had been their principal residence for 29 years. They moved into a rented condominium in Naples, Florida. What are the tax consequences of the sale to the Fraziers?

A flood destroyed an antique Persian rug owned by Mr. and Mrs. McConnell. The couple purchased the rug for $13,000 fifteen years ago, but its appraised FMV before the flood was $42,500. Unfortunately, their homeowners' insurance policy does not cover flood damage. Compute the McConnells' casualty loss resulting from the flood.

This year, David paid his physician $6,200 for routine examinations and received a $3,000 reimbursement from his medical insurance company. David is allowed a $3,200 medical expense as an above-the-line deduction.

Sue, a single taxpayer, purchased a principal residence in 2001 for $415,000. In 2005, she paid $18,000 to add a sunroom. This year, Sue sold the residence for $686,000. Her selling expenses were $5,000. How much gain must Sue recognize on the sale?

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

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?

Over the course of the year, Mr. Soo won $8,200 and lost $5,900 gambling in the local casino. Mr. Soo does not itemize deductions on his federal tax return. What is the net effect of his gambling on Mr. Soo's taxable income?

Which of the following donations does not qualify as a charitable contribution for federal tax purposes?

Violet took out a $900,000 mortgage to purchase her personal residence. She can deduct the mortgage interest payments as an itemized deduction.

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

Mrs. Hanson's financial support this year consisted of: $14,650 Social Security benefits; $9,600 pension from her former employer's qualified retirement plan, and $15,000 cash gifts from her children. Compute Mrs. Hanson's AGI.

Chad won a car valued at $25,000 from a game show. Because he immediately donated the car to the Red Cross, Chad can exclude $25,000 from gross income.