I7-36 AGI $30,000
Medical Expenses $24,000
Minus: Reimbursement (18,000)
7.5% of AGI ( 2,250)
Excess medical expenses $3,750
Plus: Other itemized deductions 1,500
Total itemized deductions ($5,250)
Minus: Larger of itemized deductions ($5,250)
or standard deduction ($4,150) ( 5,250)
Personal exemption ( 2,650)
Taxable income $22,100
p. I73.
I7-37 The amount of tax benefit
from the medical expense deduction for the prior year must be
computed. The actual taxable income for 1997 must be compared
with what the 1997 taxable income would have been if the $6,000
reimbursement had been received in 1997.
AGI $30,000
Medical Expenses $24,000
Minus: Reimbursement (24,000)
Excess Medical Expenses -0-
Plus: Other itemized deductions 1,500
Total itemized deductions ($ 1,500)
Minus: Larger of itemized deductions ($1,500)
or standard deduction ($4,150) ( 4,150)
Personal exemption ( 2,650)
Taxable income (Assuming reimbursement
was received in 1997) $23,200
Actual 1997 taxable income (22,100)
Tax benefit $ 1,100
Thus, Liz must include $1,100 in her
gross income in 1998 because of the reimbursement. p. I79.
I7-38
Mileage (12 trips x 400 miles x .10 per mile) $ 480
Lodging (12 trips x $85 per night limited
to $50 per night) 600
Meals ($100 en route x 0.50) 50*
Dan's qualified medical expense for
the year $1,130
* Note that the IRS's position is
that the meals en route are not deductible but the Tax Court and
the Sixth Circuit Court of Appeals have ruled that the meals are
deductible.
p. I73.
I7-39 Orthodontic work for Diana $2,000
Broken leg for Mike 1,500
Health insurance premium for Kelly, Mike, Diana 900
Prescription drugs for Kelly 400
Doctor bills for Kelly 600
$5,400
Minus: 7.5% of $35,000 AGI (2,625)
Medical expense deduction $2,775
p. I73.
I7-40 a. Russ has the following
qualified medical expenses in 1997:
Hospital expenses $ 7,000
Excess cost of jacuzzi over increase in
value of the property 3,000
Maintenance of the jacuzzi 300
Medical premiums 1,000
$11,300
Minus: 7.5% of AGI (0.075 x $25,000) ( 1,875)
Qualified medical expense deduction
for 1997 $ 9,425
b. In 1998, Russ must include the entire $5,000 reimbursement in income. This is the lesser of
(1) the amount of the $5,000 reimbursement
(2) the excess of his 1997 itemized deductions over the 1997 standard deduction ($9,425 - $4,150 = $5,275) or
(3) the total of the 1997 medical expenses in excess of the 7.5% limit for 1997 ($9,425). Thus, his 1998 AGI is $29,000 [$24,000 + $5,000].
Russ's 1998 medical expense deduction
is as follows:
Wheelchair paid for in 1998 $ 500
Fees paid to therapist 4,000
Health insurance premiums 1,000
Maintenance of the jacuzzi 500
$6,000
Minus: 7.5% of AGI ($29,000 x .075) (2,175)
Qualified medical expense deduction
for 1998 $3,825
p. I7-3.
I7-41 Cash-method taxpayers can deduct all state or local income taxes paid or withheld during the year. The amount of the deduction for state income taxes for 1997 is $1,300.
Taxes withheld during 1997 $1,100
Taxes paid on April 15, 1997 for prior year 200
Total taxes $1,300
Wendy's total itemized deductions are
$2,600. Thus, she will use the $4,150 standard deduction instead
of itemizing her deductions. p. I712.
I7-42 The refund of state income
taxes deducted in a prior year must be taken into income in the
year of the refund to the extent the taxpayer received a tax benefit
from the prior deduction. In this situation, there was no tax
benefit from the deduction in the prior year so none of the $600
needs to be included in income for 1998. The total itemized deductions
for 1997 were $2,600 ($1,300 other itemized + $1,300 state income
taxes). $2,600 is less than the standard deduction of $4,150
so the taxpayer would have used the standard deduction and received
no tax benefit from the deduction for state income taxes. p. 713.
I7-43 a. Dawn's 1997 deduction
for her taxes is as follows:
State income taxes $2,000
Ad valorem property taxes on the car
(10,000 x 0.02) 200
Her portion of the property taxes
on the house (104/365 x $1,850) 527
Itemized deduction for taxes $2,727
b. Dawn will report this deduction on
Form 1040 Schedule A. p. I7-12.
I7-44 July 1, of the prior year
through April 30, of the current year equals 304 days. Thus,
$2,499 ($3,000 x 304/365) of the taxes are apportioned to Tanya.
The remainder of the taxes of $501 ($3,000 $2,499) are
apportioned to Brian.
a. Brian may deduct $501 in the current year
b. Tanya may deduct $2,499 in the current year
c. The total selling price of the building
and the cost basis to the buyer (Brian) is $102,499 ($100,000
+ $2,499). p. I713.
I7-46 a. Dividend Income $20,000
Net STCG 5,000
Total $25,000
Minus: Investment expenses (3,000)a
Net investment income $22,000
a $5,000 - (0.02 x $100,000). Investment expenses must be initially reduced by 2% of AGI before the limitation on investment interest is applied. David's deduction for investment interest expense is $22,000.
b. The $28,000 of disallowed interest may be carried over and deducted in a subsequent year. This carryover amount is treated as paid or accrued in the subsequent year and is subject to the disallowance rules for the subsequent year.
c. By making this election, David may
include the net capital gain in the computation of net investment
income. Thus, the investment income is increased by $8,000 to
$30,000. The deduction for investment interest expense is $30,000
and $20,000 is carried over to subsequent years. pp. I7-18 and
I7-19.
I7-47 Tina is limited to interest
expense deductions on a total of $1,000,000 acquisition indebtedness
incurred on October 13, 1987 or thereafter. Thus, Tina may deduct
interest paid on the $700,000 acquisition debt secured by the
principal residence, and $300,000 of the acquisition debt secured
by the condominium. In addition, since Tina's equity in the condominium
is in excess of $100,000 ($600,000 - $450,000), $100,000 of the
debt qualifies as home equity indebtedness. Thus, Tina may deduct
interest on a total indebtedness of $1,100,000. p. I721.
I7-48 The JR Partnership and King Corporation are related parties under Sec. 267. Since Jr is a cash-method taxpayer and King Corporation is an accrual method taxpayer, the interest expense payable to Jr that is accrued during the current year is not deductible by King Corporation until Jr actually takes the amount into income.
a. 0 The interest expense accrued by King Corporation is not deductible until Jr reports the interest as income. Since Jr is a cash method taxpayer, the partners will not report the interest income until the following year and King is entitled to an interest deduction in the following year.
b. All of the interest expense accrued
by King Corporation during the current year ($100,000 x 0.09 x
364/365 = $8,975) is deductible by King Corporation in the following
year if the loan is not repaid until the following year. In addition,
any interest accrued and paid up to the date the loan is paid
off is also deductible. However, if the loan (principal and interest)
is actually repaid in the current year, King Corporation should
be entitled to a deduction for the interest in the current year
because the JR Partnership must report the interest income in
the year of receipt. p. I7-24.
I7-49 a. Since Henry is a cash method taxpayer, he must deduct the interest expense as the loan is repaid. Thus, the total amount of the interest expense of $1,800 ($12,000 $10,200) is deductible as the loan is repaid. Four payments are to be made. Henry makes two payments in the current year (on July 1 and October 1). Thus, $900 (0.50 x $1,800) of the interest expense is deductible in the current year.
b. Since none of the loan is repaid during the current year, none of the interest is deductible during the current year. It will all be deductible by Henry when the loan is paid off in subsequent years.
c. Since Henry is an accrual method
taxpayer, he may deduct the interest as it accrues. The loan
is to be outstanding for one year. Threefourths of the
year occurs during the current year. Thus, $1,350 (0.75 x $1,800)
of the interest expense is deductible during the current year.
p. I7-23.
I7-50 When services are rendered
to a qualified charitable organization only the unreimbursed expenses
incurred while performing the services are deductible. Pauline's
charitable contribution for the year is $600. p. I729.
I7-51
| AGI
Itemized Deductions: Medical expenses Minus: 7.5% of AGI State income taxes Local property taxes Charitable contributions Total itemized deductions Minus: Greater of itemized deductions ($2,700) or standard deduction ($4,150) Personal exemption Taxable income | $ 800 (2,250) | $ -0- 1,000 1,200 500 $2,700 | $30,000 ( 4,150) ( 2,650) $23,200 |
pp. I72 through I7-34.
I7-52
| Income:
Salary Interest and dividends Net capital gain ($23,000 - $15,000)
AGI Deductions: Medical Minus: ($98,000 x 0.075) Taxes ($7,000 + $4,000) Qualified residence interest Investment interest (limited to net investment income of $13,000 ($28,000 - $15,000)
Charitable contributions Miscellaneous: Investment expenses
Tax return preparation and consulting fees Minus: 2% of AGI ($98,000 x 0.02) Personal exemption Taxable income | $ 8,000
( 7,350) 15,000 5,000 20,000 ( 1,960) | $ 650 11,000
12,000 13,000
3,000 18,040 | $70,000 20,000 8,000
$98,000 (57,690) ( 2,650) $37,660 |
(The 2% of AGI reduction first reduces
the tax preparation fee, leaving all of the investment expenses
to be deducted.) The excess investment interest of $3,000 ($16,000
- $13,000) is carried over to the next year.
pp. I7-2 through I7-34.
I7-53
| Income:
Salary Interest and dividends Net capital gain ($23,000 - $15,000)
AGI Deductions: Medical Minus: 7.5% AGI ($128,000 x 0.075) Taxes ($7,000 + $4,000) Qualified residence Investment interest (limited to net investment income of $5,000 ($20,000 - $15,000)
Charitable contributions Miscellaneous: Investment expenses
Tax return preparation
Minus: 2% of AGI ($128,000 x 0.02) 3% Reduction: AGI
Threshold Times 3% Personal exemption Taxable income | $ 8,000
( 9,600) 15,000 5,000 20,000
( 2,560) $128,000 (121,200) $ 6,800 x 0.03 | $ -0- 11,000
12,000 5,000
3,000
17,440 ($ 204) | $100,000 20,000 8,000
$128,000 ($48,236) ( 2,491) $ 77,273 |
NOTE: The 3% reduction cannot exceed
80% of the qualified residence, charitable contributions, investment
expenses, and tax return preparation fees.
(The 2% of AGI reduction first reduces
the tax preparation fee, leaving all of the investment expenses
to be deducted.) The excess investment interest of $11,000 ($16,000
- $5,000) is carried over to next year. pp. I7-2 through I7-34.
* The personal exemption is reduced as follows:
$128,000 - $121,200 = $6,800
$6,800 ¸ $2,500 = 2.72
3 x .02 = 6%
0.06 x $2,650 = $159
$2,650 - $159 = $2,491
I7-54 a. The charitable contribution is $40,000, subject to a limitation of 30% of AGI.
b. The charitable contribution is $10,000, subject to a limitation of 50% of AGI.
c. The charitable contribution is $100,000, subject to a limitation of 30% of AGI.
d. The charitable contribution is $50,000, subject to a limitation of 50% of AGI.
e. The charitable contribution is $500,
subject to a limitation of 50% of AGI.
p. I729.
I7-55 a. The charitable contribution is $10,000 limited to the lesser of (1) 20% of the taxpayer's AGI, or (2) 30% of AGI, reduced by any contributions of capital gain property donated to a public charity.
b. The charitable contribution is still $10,000 subject to a limitation of 30% of AGI.
c. The charitable contribution is $50,000 limited to the lesser of (1) 20% of AGI, or (2) 30% of AGI, reduced by capital gain property donated to a public charity.
d. Same as (c) above.
e. The charitable contribution is $500
limited to 30% of AGI. p. I727.
I7-56 If the stock is donated directly, the contribution deduction would be the $30,000 FMV of the stock. The tax benefit would be $8,400 (0.28 x $30,000).
If the stock is sold and the $30,000
proceeds are donated, the following would result:
| Selling price
Minus: Basis Gain Times: rate Increase in taxes | $30,000
10,000 $20,000 x 0.28 $ 5,600 | Contribution deduction
Times: rate Tax savings | $30,000
x 0.28 $ 8,400 |
| Net tax reduction $8,400 - $5,600 = $2,800 | |||
The direct contribution would result
in a tax reduction of $8,400. If the stock is sold and the proceeds
donated to the college, the tax reduction is only $2,800. This
is due to the fact that Dean must report the gain on the sale
of the stock in his income tax return. p. I737.
I7-57 The maximum charitable contribution
deduction Helen can take for this year is $40,000. Under the
regular rules, the charitable contribution is $50,000, subject
to an overall 30% of AGI limit. Therefore, the charitable contribution
would be $30,000 (0.30 x $100,000 AGI). Helen would have a $20,000
carryover of excess contributions under the general rule. If
she elects to reduce the amount of the contribution by the longterm
capital gain, the charitable contribution is $40,000 [$50,000
($50,000 $40,000)] subject to an overall 50% of
AGI limit. The amount of the charitable contribution deduction
would be $40,000 for this year (50% of AGI limit is $50,000).
If the election is made, there will be no carryover of unused
contributions since all of the contribution is deductible in the
current year. p. I729.
I7-59
| 1994 | 1995 | 1996 | 1997 | |
| Amount of deduction
Amount of carryover from 1993 from 1994 | $25,000 15,000 | $27,500 15,000 1,500 | $29,000 11,000 1,500 | $22,500 -0- -0- |
pp. I7-30 and I7-31.