Chapter 2 simulations

Question 1

Louis and Sandy Roman were married with two children, Eddie, age 13, and Nancy, age 20. On July 7 of the current year, Louis died. Nancy is a full-time student at the state university. The Romans own their home and live in Denver. Louis had been disabled for four years. Sandy is an insurance adjuster and sings in her church choir.

Using the following table, characterize each of the following items or events as deductible for AGI, deductible from AGI, or nondeductible, checking the appropriate box next to each item. Disregard any AGI limitations. Be sure a box is selected for each of the items or events.

Note: The column labeled IRC § gives the basis for the correct answers.

Answer 1

1. Sandy made a $1,800 contribution to a Roth IRA = NON DEDUCTIBLE. Contributions to a Roth IRA are not deductible but earnings and distributions are tax free.
2. Had repair costs of $1,500 for a rotting bathroom floor = NON DEDUCTIBLE. This does not qualify as a casualty or theft, which would result in an itemized (from AGI) deduction, because it is not unexpected or sudden.
3. Medical insurance premiums of $820 (Deducted from Louie’s disability check) = Deductible from AGI. Medical insurance premiums qualify as an itemized deduction.
4. $450 of over the counter cold remedies = NON DEDUCTIBLE. Over the counter cold remedies to not qualify as prescription drugs which qualify as a deductible expense as an itemized deduction.
5. $540 of homeowner insurance premiums = NON DEDUCTIBLE. Homeowner insurance premiums are a personal expense that do not qualify as a deductible expense. However, homeowners insurance premiums on rental property may be deductible.
6. $750 of life insurance premiums for Louis = ON DEDUCTIBLE. Life insurance premiums are a personal expense that do not qualify as a deductible expense.
7. Alimony payment from lois to former spouse = Deductible FOR AGI. Alimony payments are always and above the line deduction.
8. $1,200 sales tax on purchase of car = Deductible FROM AGI. The higher of state/local income taxes and sales tax payments qualify as an itemized deduction.
9. $600 paid interest expense on Sandy’s margin balance in her brokerage account = Deductible FROM AGI. Investment interest expense qualifies as an itemized deduction up to net investment income. Investment interest expense is interest paid on money borrowed to invest in income producing property. A margin loan is used to buy securities and is considered investment interest expense.

Question 2

Louis and Sandy Roman are married with two children, Eddie (age 13) and Nancy (age 20). Nancy is a full-time student at the state university. The Romans own their own home and live in Denver. Louis has been disabled for the past four years. Sandy is an insurance adjuster and sings in her church choir.

For the current tax year, the Roman family had various items of income and expenditures, as listed below. Determine either the amount of income, or the adjustment to income, that should be included or deducted on the Romans’ Form 1040 - Individual Income Tax Return.

• The Romans received a $200 state income tax refund of the prior year’s tax. The Romans had deducted $2,000 of state income taxes in the prior year, all of which resulted in federal tax savings.
• The Romans received a $1,000 federal tax refund of the prior year’s tax. The Romans had paid $4,000 of federal income tax in the prior year.
• Louis received $5,000 of qualified cash dividends from a corporation listed on the New York stock exchange; and received $500 of interest from a bank savings account.
• Sandy received $4,000 of tax-exempt interest.
• Sandy’s federal taxable wages reported on Form W- 2 amounted to $50,000.
• Sandy contributed $3,000 to a traditional IRA account.
• Louis paid a $25 penalty on a premature withdrawal of a certificate of deposit.
• Sandy paid $500 of self-employment tax on her choir net income.
• Sandy is the sole owner of rental real estate on which current-year income exceeded expenses by $6,000 as reported on Schedule E. The Romans had no other income or losses from passive activities. Sandy actively participates in managing the property.
• The Romans paid $6,500 of real estate taxes on their personal residence.
• Eddie and Nancy each received a $5,000 gift from their wealthy uncle.

Answer 2

Gross income :
1. Taxable wages = $50,000

2. Taxable interest = $500 ($500 of interest from a bank savings account is taxable, $4,000 of tax-exempt interest. is not included in gross income)
3. Tax exempt interest = $4,000 of tax-exempt interest.
4. Ordinary dividends = $5,000 ($5,000 qualified cash dividends are included in gross income as ordinary dividends)
5. Qualified dividends = $5,000 ($5,000 qualified cash dividends are subject to a special tax rate based upon the taxpayer’s income.
6. Long term Capital gains = $0, no facts given on LTCG.
7. Taxable refunds of state and local income taxes = $200. The $200 refund of state and local income taxes should be included in gross income. Refunds of state income tax are includable in gross income if during the prior year the taxpayer itemized deductions. The Romans itemized their deductions in the prior year, deducting $2,000 in state and local taxes. Because the Romans received a benefit from the entire $2,000 deduction, the entire $200 refund received during the current year will be included in their gross income. A federal income tax refund is not includable in gross income as there is no allowed deduction for federal income taxes paid.
8. Income from rental real estate, partnerships and S corporations = $6,000. The $6,000 from a rental real estate activity is included in her gross income. Note that if this activity had produced a loss, you would need to apply the passive activity rules to determine whether the loss would be deductible. In this circumstance the loss would be deductible (hypothetically) under the “mom and pop” exception because the taxpayer actively participated and gross income is under $100,000. The $6,500 in real estate taxes paid is a deduction from AGI and is deductible on Schedule A. Therefore, it is not deductible on the first page of the 1040.

Adjustments (For AGI):
1. IRA deduction= $3,000. $3,000
Contributions to a regular IRA are deductible unless the taxpayer’s income is above the statutory amount and the taxpayer is a member of a qualified plan. It is unclear as to whether Sandy is a member of a qualified plan but that is irrelevant because she is below the required income amount. She also has earned income well in excess of $3,000. Consequently, she may deduct the entire $3,000 contribution.

2. One half of self employment tax= $250.
   One half of self­ employment taxes, $250 out of the $500, are deductible as one ­half of self­ employment tax.
   Note, however, that the simulation appears to have a slight flaw in the fact pattern: Sandy pays self­ employment tax of $500, yet the income that generated the tax is not provided as part of the situation (it should be an amount of $3,268 earned in choir [$250/.0765]). In fact, the official answer excludes any self­ employment income! The simulation is provided to you using the exact information that was released by the AICPA. What this tells us is that even the CPA exam can have errors in it. There is little we can do about it, but we know it is out there!
3. Penalty for early withdrawal of savings = $25.
   The $25 penalty on the premature withdrawal from a savings account is deductible.

Question 3

Samson and Delilah currently reside in Farmers Branch, Texas. They have considerable income from owning and operating a chain of hair treatment salons throughout the southwestern U.S. and are in a position to be very generous to others. Their Year 1 AGI is $5,000,000.

Determine the amounts of the following items that are deductible as a charitable contribution on their Year 1 Schedule A, or answer the question as appropriate.

Answer 3

1. Being a life-long Republican, Samson contributed $10,000 to the Year 1 senatorial campaign of Barry McBush, his fraternity brother at Southern Methodist University.
   = $0 deductible. Political contributions are not charitable donations and are not deductible.
2. Delilah contributed $10,000 to a homeless person, Joe O’Kennedy, who she met at a meeting of the McBush for Senate campaign committee, so that Joe could pay for an operation for one of his children.
   = $0 deductible. Contributions to individuals are not deductible, regardless of the circumstances.
3. Samson contributed $12,000 in cash to the Save-the-Trees Committee, an organization committed to wildlife conservation in the Big Thicket in east Texas. The Save-the-Trees Committee is a qualified organization under Section 170(c) of the Internal Revenue Code.
   =$12,000 deductible. This is assuming no other contributions. The Committee is a qualified charitable organization.
4. Samson and Delilah attended a charity ball hosted by their favorite church, St. Patrick’s Cathedral in New York City. The tickets cost $2,000 each, and the “value” of attending the ball was $500 each.
   = $3,000 deductible. The excess of the amount contributed ($2,000) over the fair value of the services provided ($500) is deductible. The total contribution is $3,000 because there were 2 tickets.
   - Amount contributed $4,000 - $1,000 FMV = $3,000 amount deductible.
5. Samson donated a Claude Monet painting worth $12,000,000 to his local church, Our Lady of the Lake Catholic Church. Samson had bought the painting several years ago when it was worth only $2,000,000. The painting was Samson’s only contribution for the year.
   = $1,500,000 deductible. Contributions of appreciated capital gain property to public charities are deducted at fair market value ($12,000,000), normally subject to a limitation of 30% of AGI ($5,000,000 × 0.30 = $1,500,000). The basis of the property is irrelevant when the property is appreciated.
6. Assume that Samson had contributed $3,000,000 in cash to the American Diabetes Association in addition to the Claude Monet painting in Item 5. How much is the total amount allowable for contributions for the year?
   =$2,500,000 deductible. Contributions of appreciated capital gain property are deducted at its fair market value ($12,000,000), normally subject to a limitation of 30% of AGI ($5,000,000 AGI × 0.30 = $1,500,000). In addition, there is a 50% of AGI limitation ($5,000,000 AGI × 0.50 = $2,500,000) for non appreciated property so that $1,000,000 ($2,500,000 deductible - $1,500,000 deductible for appreciated painting = $1,000,000 deductible of the cash can be deducted also).

Question 4

For each item, determine how the item will be treated on an individual’s Form 1040 and, where appropriate, determine the amount of the adjustment or deduction. If the item is neither an adjustment nor a deduction, enter $0 in the amount column. Unless otherwise indicated, each item is independent of the others.

Answer 4

1. A saleswoman (employee) gives $200 in football tickets to a customer who does significant business with her.
   = Itemized deduction subject to the 2% limitation
   Treatment: Itemized deduction subject to the 2% limitation; business gifts are a miscellaneous itemized deduction up to $25 per recipient per year. The remainder is not deductible at all.
   Amount: $25
2. Peter lost $30,000 in Atlantic City one night, after winning $20,000 on the previous night.
   = Itemized deduction not subject to the 2% limitation
   Treatment: Itemized deduction not subject to the 2% limitation; gambling losses are deductible up to gambling winnings.
   Amount: $20,000
3. Tim buys an airplane ticket on Continental for $900 to travel from Newark to Los Angeles and back on business. He was not reimbursed by his employer.
   = Itemized deduction subject to the 2% limitation
   Treatment: Itemized deduction subject to the 2% limitation; unreimbursed business expenses are a miscellaneous itemized deduction for an employee (a self­ employed individual has different rules).
   Amount: $900
4. After his trip, Tim moves from New Jersey to Los Angeles. He spends $125,000 to move his household belongings, $5,000 for travel and lodging during the move for him and his family, and $40,000 for temporary living expenses in Los Angeles before buying a house from a washed-up movie star in Hollywood for $8,000,000. His employer does not reimburse him for his expenses.
   = Adjustment to arrive at AGI
   Treatment: Adjustment to arrive at AGI; certain direct moving expenses are an adjustment. The $125,000 cost of the move and the $5,000 for travel and lodging during the move are allowed; the $40,000 of temporary living expenses is not.
   Amount: $130,000 ($125,000 + $5,000)
5. Peter pays $15,000 in medical insurance premiums for him and his family. Peter is a self-employed attorney who is not otherwise covered by a health insurance plan.
   =Adjustment to arrive at AGI
   Treatment: Adjustment to arrive at AGI; health/medical insurance premiums paid by a self ­employed individual are 100% “deductible” as an adjustment, up to earnings.
   Amount: $15,000
6. Peter files a Schedule C as a self-employed individual. His accountant calculates that the “employer” portion of his Social Security/Medicare tax is $7,000.
   = Adjustment to arrive at AGI
   Treatment: Adjustment to arrive at AGI; the employer’s portion (50%) of the Social Security/Medicare tax is an above the line adjustment.
   Amount: $7,000; both the employer and employee portion of the tax are paid by Peter, and he has an adjustment for the employer part.
7. Tim is having a hard time getting a mortgage to pay for his new house. He withdraws $8,000,000 from a non-negotiable jumbo bank certificate of deposit in Newark State Bank that is not due until the following year. In doing this, he forfeits $250,000 of interest.
   = Adjustment to arrive at AGI
   Treatment: Adjustment to arrive at AGI; penalties on early withdrawals of savings are an above the line adjustment. Amount: $250,000
8. On January 1, John obtains a divorce and is ordered by the court to pay $10,000 per month in combined alimony and child support. The child support is stated in the divorce decree as $70,000 and the alimony is $50,000. John pays $50,000 before he catches a plane to Algeria, which does not have an extradition treaty with the U.S.
   = Neither an adjustment nor a deduction
   Treatment: Neither an adjustment nor a deduction; when the full amount of child support and alimony is not paid, the amount that is paid is first allocated to the child support. In this question, the full amount is $120,000, and the entire $50,000 that is paid is considered child support. The alimony is $0.
   Amount: $0; the child support of $50,000 is not taxable to the payee spouse or deductible to John (assuming that John is still even filing a US income tax return) only alimony is taken as a deduction for AGI.
9. In addition to the alimony and child support, John is ordered by the court to pay $10,000,000 in cash as a property settlement. He made the payment before he went to Algeria.
   = Neither an adjustment nor a deduction
   Treatment: Neither an adjustment nor a deduction.
   Amount: $0; property settlements are not taxable to the payee spouse or deductible to John.

Question 5

Max and Mindy, both aged 66, were married in 1970 and have resided in Cut and Shoot, Texas since then. Max has mostly retired from his career as a roustabout on drilling rigs and Mindy works as an accountant at the local Dairy Queen. Their 19-year old son, Jim Bob, lives with them and is a full-time student at Southeast Texas State Veterinary College. Jim earned $1,000 during the year as a teacher’s aide. Max suffered several on-the-job injuries during his career. Max and Mindy’s combined gross income is $50,000 and their AGI is $30,000. They itemize their deductions.

For each item below, indicate the amount which is a “qualifying medical expense.”

For the last question, assuming that their qualifying medical expenses are $8,000, what is the actual amount of Max and Mindy’s medical expenses deduction on their Year 1 Schedule A?

Answer 5

1. Max is covered by the group medical insurance policy of his employer, the Gougem Good Drilling Services Company. His after-tax contribution for the premiums was $1,000 per month for family coverage; Gougem contributed $15,000.
   =$12,000 ($1,000 x 12 months) is a qualifying medical expense deduction.
   The after ­tax medical insurance premiums paid by Max are qualifying medical expenses. Insurance premiums paid by the employer are normally not qualifying expenses.
2. Mindy charged a $200 payment to her chiropractor (which was not covered by the Gougem Good policy) on December 29, Year 1, on her platinum American Express card. She did not pay the balance on her card until January 15, Year 2.
   =$200 is a qualifying medical expense deduction.
   Medical expenses are qualifying medical expenses in the year charged, not the year paid. Chiropractors are considered doctors, which are qualified medical expenses.
3. During Year 1, Jim Bob spent June at a drug treatment center in Los Angeles. The total payments were $15,000 for lodging at the center, $5,000 for the actual treatment, and $2,000 for meals.
   =$22,000 is a qualifying medical expense deduction.
   Qualifying medical expenses include inpatient treatment at a center for drug addiction. Treatment, lodging, and meals are all covered. Jim Bob is considered a dependent.
4. Since Max is not as young as he used to be and can’t see all that well any more, he spent $500 for special contact lenses and $100 to the doctor who prescribed the contacts. In addition, he spent $4,000 for physical therapy to address the effects of the on-the-job injuries.
   =$4,600 is a qualifying medical expense deduction.
   Glasses and contacts “for medical reasons” are qualifying medical expenses. So are the expenditures for the physical therapy.
5. Max spent $20,000 during the year for an elevator in his house. The elevator was recommended by Max’s cardiologist so that Max would not have to climb the stairs. The value of Max’s home was $120,000 before the elevator was installed and $125,000 after the elevator was installed. He paid $1,200 during the year for operation and upkeep of the elevator.
   =$16,200 is a qualifying medical expense deduction.
   Max’s house increased in value by $5,000. The excess of the $20,000 he spent over the increase in value of the house is a qualifying medical expense. The $1,200 spent for operation and upkeep is also a qualifying medical expense. Value oh home after the elevator - value of home before the elevator = increase in value
   amount spent on increased value - increased value = deductible expense
6. Mindy spent $6,000 at a local hospital for a face lift and tummy tuck that she considered necessary for her to compete with younger employees at her job.
   = $0 is a qualifying medical expense.
   Elective surgery and cosmetic surgery are not qualifying medical expenses. There is nothing to indicate that the surgery was medically necessary.
7. Mindy received $1,500 from the health insurance company that is a reimbursement of a qualifying medical expense from the previous year. Last year, Max and Mindy itemized deductions and deducted medical expenses of $8,000 in that year.
   $0 is a qualifying medical expense deduction.
   Since a tax benefit was received from the deduction of the medical expenses in the prior year, the reimbursement in the current year is included in income for the year and does not affect the medical expense deduction in the current year.
8. assuming that their qualifying medical expenses are $8,000, What is the amount of the medical expenses deduction on Schedule A.
   $5,750 is a qualifying medical expense deduction.
   The amount of the medical expenses deduction is the excess of the qualifying medical expenses ($8,000) over 7.5% of AGI (0.075 × $30,000 = $2,250), or $5,750 ($8,000 - $2,250) what is over 7.5% of AGI. (Note: In 2013, the 7.5% AGI limit changed to 10% except for those age 65 and over. For taxpayers age 65 and older, the AGI limit remains at 7.5%.)

Question 6

The Internal Revenue Service (IRS) is auditing Form 1040, U.S. Individual Income Tax Return, for the following individual clients for year 2 and the audits are focused on medical expenses claimed. Calculate the allowable year 2 medical expense deduction for each tax payer, if any, before the adjusted gross income (AGI) limitation. Assume that there are no insurance reimbursements of medical expenses, unless otherwise noted.

For each of the taxpayers, enter the correct amount in the associated shaded cell in the “Allowable deduction” column. Enter a zero (0), if the taxpayer is not entitled to a year 2 medical expense deduction. Enter all amounts as positive values.

Answer 6

Taxpayer A -
Medical costs reported in Year 2 include the following:
● Prescription drugs: $450
● Herbal weight-loss supplements and vitamins recommended by physician: $1,200
● Eye examinations and eyeglasses: $650
● Removal of appendix: $2,800

Prescription drugs $450
Eye examinations and glasses $650
Removal of appendix $2,800
Total Deductible $3,900

Herbal loss supplements and vitamins are not deductible, even if recommended by a physician. Only prescription medication is deductible.

Taxpayer B
Medical costs reported in Year 2 include the following:
● Medical insurance premiums paid from after tax income: $1,500
● Tooth extraction: $900
● Surgery to remove facial wrinkles: $3,500
● Nonprescription drugs: $200
● Hearing aid: $2,600
● Received medical insurance reimbursements of $500 in year 2 and $200 in January of Year 3 for these expenses.

Medical insurance premium $1,500
Tooth extraction $900
Hearing aid $2,600
Reimbursements from insurance ($500)
Total Deductible $4,500

Cosmetic surgery to remove wrinkles and nonprescription drugs are not deductible. Only the reimbursements received in Year 2 are subtracted from the deductible amount. The $200 reimbursements received in Year 3 might be included in Year 3 taxable income under the tax benefit rule.

Taxpayer C
Medical costs reported in Year 2 include the following:
● Drug rehabilitation expenses: $4,400
● Wheelchair purchase: $800
● Health club membership fee: $700
● Plastic surgery to correct injuries sustained in an auto accident: $7,500

Drug rehabilitation expenses $4,400
Wheelchair $800
Plastic surgery for injuries $7,500
Total Deductible $12,700

The plastic surgery is deductible because it is required to correct injuries sustained in an accident. The health club membership fee is not deductible.

Taxpayer D
Medical costs reported in Year 2 include the following:
● Emergency room fees: $2,800
● Cost of crutches: $150
● Dental insurance premium: $700
● Cost of wigs relating to hair loss resulting from chemotherapy treatments: $2,000
● Received medical insurance reimbursement of $1,000 in Year 2.

Emergency room fees $2,800
Cost of crutches $150
Dental insurance premium $700
Cost of wigs $2,000
Reimbursements from insurance ($1,000)
Total Deductible $4,650

All of the items here affect the deduction. The wigs are deductible because they relate to a medical condition as a result of the chemotherapy.

Taxpayer E
Medical costs reported in Year 2 include the following:
● Prescription drugs: $2,600
● Annual physical exam: $750
● Cost of liposuction: $1,800
● Foot surgery: $1,600

Prescription drugs $2,600
Annual physical exam $ 750
Foot surgery $1,600
Total Deductible $4,950

The liposuction is a nondeductible cosmetic surgery expense.

Taxpayer F
Medical costs reported in Year 2 include the following:
● Transportation costs for medical and dental examinations: $125
● Physical therapy expenses: $6,200
● Dental implants: $6,500
● Hearing aid batteries: $25
● Nonprescription drugs recommended by physician to aid sleep: $250
● Received medical insurance reimbursement of $750 in Year 3 for these expenses

Transportation costs for medical purposes $125
Physical therapy $6,200
Dental implants $6,500
Hearing aid batteries $25
Total Deductible $12,850

Nonprescription drugs are not deductible. The reimbursement was received in Year 3 and might be included in Year 3 taxable income under the tax benefit rule.

Question 7

Sam and Sara are dependent of their parents. Sam is 24 and and a student with $20,000 tuition payments. Sara is 20 and goes to college with $12,000 tuition. Coverdell education savings account in Saras name earned $125 in interest. Purchased laptop for $4,000 that Sara uses to take class notes. AGI = $118,485. What can they include in income and take as deductions?

Answer 7

Pop­up 1: Coverdell Education Savings Account:
They should not report the $125 in Coverdell education savings account earnings as taxable interest income because Coverdell earnings accumulate tax-free.
Earnings on a Coverdell education savings account are not taxable. Additionally, if the income represented a type of income that is taxable, it would not be reported on the tax return for John and Susan Adams because it is reported under the Social Security number of Sara.

Pop­up 2: Tuition and Fees Deduction (Adjustments for AGI)
We have no tuition and fees deduction.
An amount can only be deducted as a qualified education expense if it represents tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Furthermore, a deduction for qualified education expenses cannot be taken if the American opportunity or lifetime learning credit has been claimed for that same student in the same year.

Pop­up 3: Personal and Dependency Exemptions
We can claim a total of four personal and dependency exemptions at $4,050 each, or $16,200.
John and Susan may each claim a personal exemption and a dependency exemption for both Sam and Sara for a total of $16,200 ($4,050 each). Because Sam is age 24, he is not a qualifying child. However, he satisfies all of the tests for a qualifying relative, so the Adamses can claim him as a dependent. Sara appears to meet the requirements of a qualifying child.

Pop­up 4: American Opportunity Tax Credit
We can claim the full American opportunity tax credit of $2,500.
Sam is a graduate student and, as such, qualifies for the lifetime learning credit, but not the American opportunity tax credit. Sara, however, as an undergraduate and a junior does qualify (presumably) and her maximum credit is $2,500 (10 percent of $1,000 plus 25 percent of the next $1,000) after reducing the expenses for the scholarship and the Coverdell distribution. Higher AGI limits apply in the case of the AOTC, so her credit is not phased out.

Pop­up 5: Lifetime Learning Credit
The lifetime learning credit that we can take must be reduced based on our adjusted gross income for the year.
The lifetime learning credit is equal to 20 percent of qualifying expenses (per taxpayer) for qualifying students, including graduate students, such as Sam. Unlike the more generous American opportunity tax credit, this is a limit per taxpayer and cannot be used for a student for whom the AOTC is also claimed. Because Sam is not eligible for the AOTC, his parents’ credit is limited based on their AGI, which exceeds the base limit provided of $110,000, and their credit will be limited.

Question 8

The sandersons AGI is $100,000. What are their deductions/ what is included in gross income?

Physician and hospital fees associated with hair replacement surgery to coverup Barney’s thinning hair - $8,500

Physician and hospital fees associated with hip replacement surgery for Betty Sanderson, required as a result of the deterioration of Betty’s hip - $22,500

Less: amount reimbursed by insurance for hip replacement surgery - ($7,000)

Amount due - $24,000

Cab fare - $250

Taxable value of property - $248,000

Taxing Authority Tax City - $7,290

Sanitation - $2,498

Library - $58

Community college - $375

Total real estate taxes assessed - $10,221

Special assessment for sidewalks on Omaha Street - $550

Total taxes and assessments due on 1487 Omaha - $10,771

Ski home taxes:
Taxing Authority Tax City - $12,050

Sanitation - $4,220

Library - $120

Community college - $150

Total real estate taxes assessed - $16,548

Cash gift on July 18th - $4,500

Purchase of two tickets to annual dinner/dance fundraiser - $1,000
(Have-A-Heart is required to report to you that the fair value of the dinner/dance was $100 per ticket, or $200 for both tickets)

Land donated on October 24th - $78,000
Originally purchased the land seven years ago for $45,000, but an independent appraisal of the land done on October 26th indicated that the land was worth $78,000

Basis of the property was $22,000 and insurance recovery was $11,000
F.V. prior to storm was $28,000
Insurance plan pays 50% of original cost of damaged property

Answer 8

Regulation 02 ­ Individual Taxation Schedule A:

Schedule A, line 1: Medical and dental expenses:

Physician and hospital fees associated with hair replacement surgery to coverup Barney’s thinning hair - $8,500

Physician and hospital fees associated with hip replacement surgery for Betty Sanderson, required as a result of the deterioration of Betty’s hip - $22,500

Less: amount reimbursed by insurance for hip replacement surgery - ($7,000)

Amount due - $24,000

Cab fare - $250

The correct amount to be reported on line 1 is $15,750, which is the cost of the hip replacement surgery minus the insurance reimbursement plus the $250 cost of transportation to the health care facilities. The hair replacement surgery is not deductible because it is cosmetic in nature.

Schedule A, line 6: Real estate taxes:
Taxable value of property - $248,000

Taxing Authority Tax City - $7,290

Sanitation - $2,498

Library - $58

Community college - $375

Total real estate taxes assessed - $10,221

Special assessment for sidewalks on Omaha Street - $550

Total taxes and assessments due on 1487 Omaha - $10,771

Ski home taxes:
Taxing Authority Tax City - $12,050

Sanitation - $4,220

Library - $120

Community college - $150

Total real estate taxes assessed - $16,548

The correct amount to be reported on line 6 is $26,769. That includes the $10,221 of real estate taxes assessed on 1487 Omaha (excluding the special assessments for the sidewalks) plus the $16,548 on the Sandersons’ ski chalet in Telluride.
Note that the special assessments on 1487 Omaha are not deductible. Instead, special assessments are added to a property’s tax basis. Also, the property taxes on the ski chalet are deductible—unlike the mortgage interest deduction, there are no limits on the number of properties on which the property tax deduction may be taken. However, the property taxes on the rental property (the second property in Telluride) are not deductible as itemized deductions because they would instead by deducted before adjusted gross income on Schedule E (which reports income and losses from rental properties).

Schedule A, line 16: Gifts by cash or check
Cash gift on July 18th $4,500

Purchase of two tickets to annual dinner/dance fundraiser $1,000
(Have-A-Heart is required to report to you that the fair value of the dinner/dance was $100 per ticket, or $200 for both tickets)

The correct amount to be reported on line 16 is $5,300. This includes the cash gift of $4,500 plus the $800 excess of the cost of the tickets paid for the annual dinner/dance over the value of the $200 received in services in return. The $100 in cash donations made throughout the year is not deductible because the Sandersons are unable to substantiate those donations.

Schedule A, line 17: Gifts other than by cash or check
Land donated on October 24th $78,000
Originally purchased the land seven years ago for $45,000, but an independent appraisal of the land done on October 26th indicated that the land was worth $78,000

The correct amount to be reported on line 17 is $30,000, which is 30 percent of the Sandersons’ AGI of $100,000. Note that since this land is long­term capital gain property, the value of the deduction is determined by its fair value, not by its original cost. However, the deduction for such property donated to a public charity (which “Have­A­Heart” is) is limited to the lesser of A) 30 percent of AGI ($30,000); or B) 50 percent of AGI less the amount of cash donated ($50,000 – $5,300 = $44,700). In this case, the lesser amount is $30,000. Finally, note that the value of contributed services (e.g., volunteering at the telethon) is not deductible.

Schedule A, line 20: Casualty or theft loss(es)

Basis of the property was $22,000 and insurance recovery was $11,000
F.V. prior to storm was $28,000
Insurance plan pays 50% of original cost of damaged property
10% of AGI = 10% x $100,000 AGI = $10,000

The correct amount to be reported on line 20 is $900, as follows:

Lesser of basis or F.V. before the loss: $22,000
Less insurance reimbursement: ($11,000)
Economic loss: = $11,000
Less: $100 reduction (applies to all casualty/theft losses individually) ($100)
Less: 10% of AGI (applies to all losses in total) ($10,000)
Deductible loss = $900

Question 9

A self-employed taxpayer who itemized deductions owns a home, of which 10% is used as the taxpayer’s primary place of business.

In the table below, enter in the shaded cells in column C the amount to allocate to the taxpayer’s Schedule C, Profit or Loss from Business. Then, in column D, enter the associated amount to be included on the taxpayer’s Schedule A, Itemized Deductions. Enter income as positive value and losses and expenses as negative values. If a response is zero, enter a zero (0).

Answer 9

Schedule C- Profit or Loss From Business (Sole Proprietorship/Self Employed)
Schedule C has five parts. In Part I, you list all the income of your business and calculate your gross profit. In Part II, you subtract all your business expenses and calculate your net profit or net loss. This is the figure you report on your income tax return. You only need to complete Parts III through V if your business requires you to purchase inventory, you need to claim deductions for car expenses or if you have any other expense not listed in Part II.

Schedule A -required in any year you choose to itemize your deductions. The schedule has seven categories of expenses: medical and dental expenses, taxes, interest, gifts to charity, casualty and theft losses, job expenses and certain miscellaneous. Each of these categories has different requirements and limitations on the amount you can deduct.

Income and Expenses:

1. Gross Receipts - $50,000 - all reported on schedule C
   - All business gross receipts of a self­ employed individual are reported on Schedule C.
2. Secretarial expenses - ($24,000) - all reported on schedule C
   - Secretarial expenses are ordinary and necessary business expenses that are always reported on Schedule C.
3. Supplies - ($200) - all reported on schedule C
   - Supplies are ordinary and necessary business expenses that are always reported on Schedule C.
4. Other - ($18,000) - all reported on schedule C
   - Other business expenses are ordinary and necessary business expenses that are always reported on Schedule C.

Expenses Related to the home:

5. Property insurance - $5,000 - ($500) reported on schedule C, $0 reported on schedule A
   - Property insurance is a personal expense for the home. Because the home is used 10% as the taxpayer’s primary place of business, 10% (500) may be deducted on Schedule C. The remainder is a nondeductible personal expense.
6. Mortgage interest - $26,000 - ($2,400) reported on schedule C, ($21,600) reported on schedule A
   Mortgage interest is a personal expense for the home. Because the home is used 10% as the taxpayer’s primary place of business, 10% (2,400) may be deducted on Schedule C. The remainder (21,600) is an allowable interest deduction on Schedule A.
7. Real estate taxes - $10,000 - ($1,000) reported on schedule C, ($9,000) reported on schedule A
   - Real estate taxes are a personal expense for the home. Because the home is used 10% as the taxpayer’s primary place of business, 10% (1,000) may be deducted on Schedule C. The remainder (9,000) is an allowable tax deduction on Schedule A.
8. Furnace Repair - $2,000 - ($200) reported on schedule C, ($0) reported on schedule A
   - Furnace repair is a personal expense for the home. Because the home is used 10% as the taxpayer’s primary place of business, 10% (200) may be deducted on Schedule C. The remainder is a nondeductible personal expense.
9. Kitchen remodeling - $12,000 - ($0) reported on schedule C, ($0) reported on schedule A
   - Kitchen remodeling is a personal capital expenditure for the home. It is not an expense of operating the home. Therefore, none of this expenditure is deductible at all. It will, however, add to the adjusted basis of the home.
10. Utilities - $6,000 - ($600) reported on schedule C, ($0) reported on schedule A
    - Utilities are a personal expense for the home. Because the home is used 10% as the taxpayer’s primary place of business, 10% (600) may be deducted on Schedule C. The remainder is a nondeductible personal expense.
11. Cleaning Services - $1,000 - ($100) reported on schedule C, ($0) reported on schedule A
    - Cleaning services are a personal expense for the home. Because the home is used 10% as the taxpayer’s primary place of business, 10% (100) may be deducted on Schedule C. The remainder is a non­deductible personal expense.
12. Depreciation (tax method for office portion only) - $4,000 - ($3,000) reported on schedule C, ($0) reported on schedule A
    - Depreciation of the office portion of a home used as a principal place of business is deductible on Schedule C. This amount is given here as 4,000. However home office deductions may not create a loss on Schedule C. There is 3,000 income remaining after deducting all of the expenses in column C from the gross receipts of 50,000. Therefore, only 3,000 of the depreciation is deductible. The additional 1,000 (of the 4,000 allocated to the home office) may be carried forward to the next year.

Net income/loss = $0

Question 10

Itemized deductions

Answer 10

Medical Expenses:
Medical expenses are generally deductible to the extent that they exceed 10% of your AGI or 7.5% of your AGI if you are over the age of 65. (100% can be deducted if self employed) 
Some common medical expenses:
□ Doctor/Dentist Fees
□ Drug/Alcohol Treatment
□ Cost of Guide Dogs
□ Handicap Access Devices for
Disabled
□ Hospital Fees
□ Insurance Premiums
□ Prescriptions
□ Laser Eye Surgery
□ Lead Based Paint
Removal Cost
□ Life-Care Fees for Medical
Treatment
□ Long-term Care Insurance
Premiums
□ Meals/Lodging Related to
Hospital Stays
□ Medical Devices
□ Operations
□ Organ Donation
□ Physician Diet/Health
Programs
□ Psychiatric Care
□ School and/or Home for
Disabled
□ Smoking Cessation Program
Cost
□ Special Life Items (glasses,
limbs, dentures, wheelchairs,
hearing aids, contacts, etc.)
□ Transportation (Medical
related)
□ Weight Loss Program Costs

Taxes Paid:
The following taxes are generally 100% deductible:
□ State/Local income Taxes or Sales Taxes 
□ Personal Property Taxes
□ Foreign Income Taxes
□ Real Estate Taxes
□ Value Based Auto License Fee
□ General State/Local Sales Tax

Interest Paid (Expense):
Most personal interest is non-deductible and educational loan interest is an adjustment not an itemized deduction here; the following is a list of deductible interest expenses:
- Qualified residence interest on principle and second residence is subdivided into:
□ Acquisition indebtedness ($1,000,000 limitation)
□ Home equity indebtedness ($100,000 limitation)
□ 1st Home Mortgage Interest principle residence
□ 2nd Home Mortgage Interest second residence
□“Points” Paid on principle residence mortgage loan are fully deductible
□ Points paid to refinance a home or for a home equity loan must be capitalize and deducted spread out over the life of the loan
□ Mortgage Loan Interest Premiums Covering Mortgages Purchased in 2007 & beyond

Other deductible interest expenses:
□ Interest on Special Assessments (as real estate tax)
□ Business Interest
□ Prepaid interest (use accrual method for deductible amount, amount deductible is amount relevant to that period)
□ Investment Interest on loans, limited to net investment income

Charitable Contributions:
Overall limit = 50% of AGI
General property = lesser of FMV or basis
charity ticket = price paid - value
Cash = may be all 50% of AGI, but must be substantiated by a bank record
Long-term capital gain property (deduct FMV) is limited to the lessor of:
- 30% of AGI
- 50% of AGI - cash contributed
Appreciated property (property having a value over its basis) can be deducted at FMV if it was held for over a year.
Cannot deduct services but can deduct travel costs to and from the servies provided
Can be carried forward 5 years
Cash and property are generally deductible if donated to qualified organizations. These include:
□ Churches
□ Non-Profit Schools
□ Non-Profit Hospitals
□ Public Parks
□ Boy & Girl Scouts
□ War/Veterans Groups
□ Agencies such as: Red Cross, Salvation Army,
Goodwill, United Way, & etc.
□ YMCA
□ Some Environmental/Conservation Groups

Casualty & Theft Losses
Casualty and theft losses if partial loss, the deduction is based on decrease in FMV not to exceed adjusted basis it total loss the deduction is the adjusted basis. Casualty and theft losses in the aggregate are reduced by insurance recovery, $100 per event and 10% of your adjusted gross income. Each event must exceed $500.
□ Fire
□ Theft
□ Natural Loss: Tornado, Hurricane, Flood, etc.
□ Car Accident
□ Vandalism
□ Other Accidents

Miscellaneous Deductions subject to the 2% floor
Most of the following miscellaneous deductions are only deductible to the extent they exceed 2% of your adjusted gross income in the aggregate.
□ Job expenses
□ Investment expenses (expenses of investors) 
□ Tax preparation
□ unreimbursed business expenses
□ Business gifts ($25 per recipient)
□ business use of home
□ subscriptions to professional journals 
□ educational expenses not deducted above AGI 
□ Employment agency fees 
□ Handicapped Job Related
Expenses
□ Work Uniforms
□ Un-recovered Annuity Costs
□ Job Hunting Expenses
□ Safe Deposit Box Cost
□ Employee Business Expenses
□ Hobby Expense to Offset
Gains
□ 50% of Business Related
Meals; Entertainment
□ Classroom Material Expense
for Teachers
□ Repayments of Income
□ Repayments of Social
Security
□ Investment Related Expense
□ In-Home Office Expenses
□ IRA/KEOGH Administration
Fees
□ Business Use Depreciation
□ Certain Legal Fees
□ Trust Administration Fees
□ Job Required Medical Exams
□ Job Required Education
Expenses

Miscellaneous deduction not subject to the 2% floor:
□ Gambling Losses to Offset
Gains

Question 11

Miller, age 38, is a single taxpayer and is the sales manager of Standard Co., an auto stereo dealer. Miller’s adjusted gross income (AGI) for the year is $67,000, which includes $4,000 of gambling winnings.

Miller’s job is to oversee the sales operations of Standard Co. Miller has a private office at the dealership and is responsible for attracting new customers and retaining current customers. As the sales manager, Miller has the authority to hire and discharge sales personnel.

During the year, Miller attended several trade shows. While at these shows, Miller entertained clients, met with manufacturers, and spent some time gambling. During the year, Miller incurred and can properly document $5,000 of gambling losses.

Miller’s mother incurred unreimbursed medical expenses during the year totaling $4,200. Because she was unable to pay these medical expenses herself, Miller paid them on her behalf. Miller cannot claim the mother as a dependent solely because her gross income is $10,000.

During the year, Miller paid the business expenses shown in the following table. Miller’s employer did not reimburse any of these expenses. In column C of the table, enter the amounts that are reportable unreimbursed business expense deductions, subject to a statutory percentage limitation, if any. If none of a particular unreimbursed expense is a reportable business expense deduction, enter a zero for that expense in column C. The total amount deductible on Schedule A, Itemized Deductions, of Form 1040, U.S. Individual Income Tax Return, as unreimbursed employee business expenses will automatically calculate.

Note: Disregard all AGI limitations, if any, in completing the first section of this table. Then follow the instructions in the table in completing the second section.

Answer 11

Business Expenses

1. Unreimbursed airfares - $2,200
   - $2,200 is deductible on schedule A
   - Unreimbursed employee business travel expenses for airfare are fully deductible. [Note: Travel expenses include transportation expenses and meals and lodging while away from home in the pursuit of a trade or business; however, meals are 50% deductible.] Thus, the amount that is deductible in this case is the full $2,200.
2. Dry cleaning costs for business suits worn at dealership - $440
   - $0 is deductible on schedule A
   - Dry cleaning costs for business suits worn at the dealership are considered personal expenses and are not deductible. If the costs had been incurred while traveling away from the dealership on business, they would have been deductible as incidental travel expenses.
3. Cost of meals during which business was discussed with potential customers - $820
   - $410 is deductible on schedule A
   - The cost of meals during which business was discussed with potential customers is 50% deductible. The expenses must be directly related to or associated with the active conduct of a trade or business and must not be lavish or extravagant under the circumstances. Further, the employee must be present at the meal. A business meal is not deductible unless business is discussed before, during (this question), or after the meal. Business meals are considered the same category as entertainment expenses. Thus, the amount that is deductible in this case is 50% of $820, or $410.
4. Entertainment for clients, immediately after a business discussion - $770
   - $385 is deductible on schedule A
   Entertainment for clients immediately after a business discussion is 50% deductible (directly related to or associated with the active conduct of a trade or business, the same rule as for business meals). Therefore, the amount that is deductible in this case is 50% of $770, or $385.
5. Purchase of tuxedo to wear to trade show functions - $400
   - $0 is deductible on schedule A
   - The purchase of a tuxedo to wear to trade show functions is considered a personal expense and is not deductible. A tuxedo is not a “uniform.”
6. Cost of a business gift to a client - $50
   - $25 is deductible on schedule A
   - The cost of a business gift to a client is deductible up to $25 per recipient per year. Thus, the amount that is deductible in this case is $25 (the question implies that one client received a gift).

Total = $3,020

In the following section, indicate the dollar amount of the limitations, if any, that apply to the expenses above. Enter any limitation as a negative number.

7. Other miscellaneous deduction - gambling losses - $4,000 is deductible on schedule A
   - Gambling losses are deductible as a miscellaneous itemized deduction up to the amount of gambling winnings (stated in the facts of the question as $4,000).
8. AGI limitation (in dollars) - $1,340
   - Miscellaneous itemized deductions are deductible after a 2% of AGI limitation. AGI is $67,000, so the limitation is 2% × $67,000 = $1,340.
9. Total amount deductible on Schedule A = $5,680 [$3,020 + $4,000 - $1,340].

Question 12

Miller, age 38, is a single taxpayer and is the sales manager of Standard Co., an auto stereo dealer. Miller’s adjusted gross income (AGI) for the year is $67,000, which includes $4,000 of gambling winnings.

Miller’s job is to oversee the sales operations of Standard Co. Miller has a private office at the dealership and is responsible for attracting new customers and retaining current customers. As the sales manager, Miller has the authority to hire and discharge sales personnel.

During the year, Miller attended several trade shows. While at these shows, Miller entertained clients, met with manufacturers, and spent some time gambling. During the year, Miller incurred and can properly document $5,000 of gambling losses.

Miller’s mother incurred unreimbursed medical expenses during the year totaling $4,200. Because she was unable to pay these medical expenses herself, Miller paid them on her behalf. Miller cannot claim the mother as a dependent solely because her gross income is $10,000.

During the year, Miller paid the expenses shown in the following table. The amount of each expense shown in the table is net of any insurance reimbursements received. In column C of the table, enter the amounts that are reportable unreimbursed medical expense deductions, subject to a statutory percentage limitation, if any. If none of a particular unreimbursed expense is a reportable medical expense deduction, enter a zero for that expense in column C. The total amount deductible on Schedule A, Itemized Deductions, of Form 1040, U.S. Individual Income Tax Return, as medical expense will automatically calculate.

Note: Disregard all AGI limitations, if any, in completing the first section of this table. Then follow the instructions in the table in completing the second section.

Answer 12

Medical expenses:

1. Medical insurance premiums paid with after-tax dollars of $2,650
   - $2,650 is deductible on schedule A
   - Medical (and hospital) insurance premiums paid by a taxpayer (not by the employer) with after ­tax dollars are fully deductible as a medical expense. Therefore, the amount that is deductible in this case is the full $2,650.
2. Disability insurance premiums of $720
   - $0 is deductible on schedule A
   - Personal disability insurance premiums are not deductible [but they are also generally not taxable when received—if the premiums are paid by the taxpayer with post ­tax dollars]. Only medical and hospital insurance premiums are deductible as medical expenses.
3. Vision correction surgery of $2,400
   - $2,400 is deductible on schedule A
   - The cost of vision correction surgery is fully deductible. It is considered a necessary or required surgery. Therefore, the amount that is deductible in this case is the full $2,400.
4. Hair transplant procedure of $900
   - $0 is deductible on schedule A
   - The cost of hair transplant surgery is not deductible. It is considered optional or elective (“unnecessary”) surgery.
5. Chin enhancement surgery to improve appearance of $3,100
   - $0 is deductible on schedule A
   - The cost of chin enhancement surgery to improve appearance is not deductible. It is considered optional or elective or “unnecessary” surgery. Note that if the cosmetic surgery were deemed necessary in the event of an injury and not merely to improve appearance, the cost would be deductible.
6. Mother’s medical expenses paid by Miller during the year of $4,200
   - $4,200 is deductible on schedule A
   - Medical expenses for the mother who would have been a dependent when the only reason for lack of dependency is the gross income limitation (or the joint return requirement) are deductible. Therefore, the amount that is deductible in this case is the full $4,200.

Total = $9,250

In the following section, indicate the dollar amount of the limitations, if any, that apply to the expenses above. Enter any limitation as a negative number.

7. AGI limitation (in dollars) = $6,700
   Medical expenses are deductible after a 10% of AGI limitation. AGI is $67,000 so the limitation is 10% × $67,000 = $6,700 (inserted as a negative number).
8. The total amount deductible on Schedule A for medical expenses = $2,550 [$9,250 ­ $6,700].

Question 13

Miller, age 38, is a single taxpayer and is the sales manager of Standard Co., an auto stereo dealer. Miller’s adjusted gross income (AGI) for the year is $67,000, which includes $4,000 of gambling winnings.

Miller’s job is to oversee the sales operations of Standard Co. Miller has a private office at the dealership and is responsible for attracting new customers and retaining current customers. As the sales manager, Miller has the authority to hire and discharge sales personnel.

During the year, Miller attended several trade shows. While at these shows, Miller entertained clients, met with manufacturers, and spent some time gambling. During the year, Miller incurred and can properly document $5,000 of gambling losses.

Miller’s mother incurred unreimbursed medical expenses during the year totaling $4,200. Because she was unable to pay these medical expenses herself, Miller paid them on her behalf. Miller cannot claim the mother as a dependent solely because her gross income is $10,000.

During the year, Miller made the interest payments shown in the following table. In column C of the table, enter the amounts that are reportable interest expense deductions, subject to a statutory percentage limitation, if any. If none of a particular payment is a reportable interest expense deduction, enter a zero for that expense in column C. The total amount deductible on Schedule A, Itemized Deductions, of Form 1040, U.S. Individual Income Tax Return, as interest expense will automatically calculate.

Note: Disregard all AGI limitations, if any, in completing the first section of this table. Then follow the instructions in the table in completing the second section.

Answer 13

Interest Expenses:
1. Mortgage interest paid on principal residence of $11,400
- $11,400 is deductible on schedule A
Mortgage interest paid on a principal (and one other secondary) residence is fully deductible as qualified residence interest. There are limitations but none of them seem to apply here. Therefore, the amount that is deductible in this case is the full $11,400.

2. Points on 30-year mortgage for the purchase of the principal residence paid on June 30 of the current year of $4,200
   - $4,200 is deductible on schedule A
   - Points on a 30­ year mortgage on the purchase of a personal residence are fully deductible. Points on a home mortgage loan to purchase a principal residence are deductible in the year paid to the extent that the payment of points is an established practice in the area and the amount paid does not exceed the points generally charged in the area for a home loan. Other than that, the points are capitalized and amortized over the life of the loan (this is the normal treatment). Therefore, the amount that is deductible in this case is the full $4,200.
3. Mortgage interest paid on commercial rental property of $2,150
   - $0 is deductible on schedule A
   - Mortgage interest paid on commercial rental property is not deductible as an itemized deduction for an individual taxpayer. Depending on how the rental property is accounted for on the tax return, the interest expense may be reported on Miller’s Schedule C or on Schedule E.
4. Interest paid on personal credit cards of $470
   - $0 is deductible on schedule A
   - Interest paid on personal credit cards is considered a personal expense and is not deductible.
5. Interest paid to IRS for late filing of income tax return of $25
   - $0 is deductible on schedule A
   - Interest paid to the IRS for late filing of an income tax return is not deductible. It is considered a fine or penalty and is also personal in nature.
6. Interest paid on a $50,000 home equity loan; the FMV of the home exceeds the acquisition indebtedness by $70,000 of $475
   - $475 is deductible on schedule A
   - Interest paid on a home equity loan is deductible up to the lesser of $100,000 or the fair market value of the property reduced by the amount of acquisition indebtedness (in this question, the FMV of the property exceeds the acquisition indebtedness by $70,000, so the interest paid would be deductible up to $70,000). Therefore, the amount that is deductible in this case is the full $475.

Total = $16,075

In the following section, indicate the dollar amount of the limitations, if any, that apply to the expenses above. Enter any limitation as a negative number.

7. AGI limitation (in dollars) = $0
   - There is no AGI limitation on the deductibility of qualified interest.
8. • The total amount deductible on Schedule A for interest is $16,075 (no AGI limitation).

Question 14

Miller, age 38, is a single taxpayer and is the sales manager of Standard Co., an auto stereo dealer. Miller’s adjusted gross income (AGI) for the year is $67,000, which includes $4,000 of gambling winnings.

Miller’s job is to oversee the sales operations of Standard Co. Miller has a private office at the dealership and is responsible for attracting new customers and retaining current customers. As the sales manager, Miller has the authority to hire and discharge sales personnel.

During the year, Miller attended several trade shows. While at these shows, Miller entertained clients, met with manufacturers, and spent some time gambling. During the year, Miller incurred and can properly document $5,000 of gambling losses.

Miller’s mother incurred unreimbursed medical expenses during the year totaling $4,200. Because she was unable to pay these medical expenses herself, Miller paid them on her behalf. Miller cannot claim the mother as a dependent solely because her gross income is $10,000.

During the year, Miller suffered the losses shown in the following table. In column D of the table, enter the amounts that are reportable casualty losses, subject to a statutory percentage limitation, if any. If none of a loss suffered is a reportable casualty loss deduction, enter a zero for that expense in column D. The total amount deductible on Schedule A, Itemized Deductions, of Form 1040, U.S. Individual Income Tax Return, as a casualty loss will automatically calculate.

Note: Disregard all AGI limitations, if any, in completing the first section of this table. Then follow the instructions in the table in completing the second section.

Answer 14

Casualty and theft losses:

1. Damage to articles stored in basement due to water heater explosion
   Amount of loss: $8,200
   insurance reimbursement: $1,000
   Amount deductible on schedule A: $7,200
   -Damage to articles stored in a basement due to a water heater explosion is deductible, net of insurance reimbursements. The casualty must be sudden and unexpected. Therefore, the amount that is deductible in this case is $7,200 [$8,200 loss less the $1,000 insurance reimbursement].

2.Repair costs to prevent further roof deterioration from water damage
Amount of loss: $1,200
insurance reimbursement: $0
Amount deductible on schedule A: $0
- Repair costs to prevent further roof deterioration from water damages are not a casualty loss and are not deductible.

3.Cost to rebuild detached garage due to damage from termites
Amount of loss: $5,500
insurance reimbursement: $2,100
Amount deductible on schedule A: $0
-The cost to rebuild a detached garage due to damage from termites is not deductible. Termite damage is generally not considered to be “sudden and unexpected.”

Total deductible Casualty and theft losses = $7,200

In the following section, indicate the dollar amount of the limitations, if any, that apply to the expenses above. Enter any limitation as a negative number.

4. Casualty non percentage floor (in dollars) = $100
   - Total casualty losses are first reduced by an amount of $100 per loss. In this question, there is only one deductible loss, so there is only one $100 reduction.
5. AGI limitation (in dollars) = ($6,700)
   - Casualty losses are deductible after a 10.0% of AGI limitation. AGI is $67,000, so the limitation is 10.0% × $67,000 = $6,700 (inserted as negative number).
6. The total amount deductible on Schedule A for casualty losses - $400 [$7,200 ­- $100 -­ $6,700].