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Chapter 5

Personal Itemized Deductions


Chapter 5

Solutions to Questions and Problems


1.

503.
a. Prescription drugs $3,400
Doctors and insurance premiums
2,170 Other medical expenses ($525 + $130)
655
$6,225
Less: 10% AGI ($60,000 10%)
(6,000 )
Medical and
dental expense deduction
$ 225
b. The AGI floor would change to 7.5% of AGI, thereby making the Browns' medical and dental
expense deduction $1,725 ($6,225 ($60,000 7.5%)). On a joint tax return, only one spouse
needs to be age 65 or older to use the 7.5% AGI floor.

2.

a.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.

Item
Health insurance premium Yes
Life insurance premium
No
Accident insurance No
0
Acne cream No
0
Prescription drugs Yes 300
Over-the-counter vitamins No
Cosmetics No
0
Dr. Wall, DDS
Yes 120
Health spa dues
No
0
X-ray examination Yes 60
City Hospital
Yes 375
Eyeglasses Yes 125
Cemetery plot
No
0
Medical: 1,000 miles $.235
Illegal drugs
No
0
Vacation
No
0
Dr. Root
Yes 350
Wheelchair Yes 275
Dr. Spencer Yes 580

Deductible?

Deductible
Amount

$386
0

Yes

235

$2,806

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Essentials of Federal Income Taxation

Total
b. 503.

3.

Unreimbursed medical and dental expenses


Less: 10% AGI ($24,290 10%)

$2,806
(2,429 )

Medical and dental expense deduction

$ 377

a. The $455 would offset the expenses paid in the current year. 503.04.
b. The $455 is not taxable and would not be reported. 503.04.
c. The $455 must be included in gross income since the medical expenses deduction of $840 taken
in the prior year exceeds the reimbursement. 503.04.
d. $350 of the reimbursement would be included in gross income since that amount was deducted
in the prior year. The remaining $105 is not taxable. 503.04.
e. $380 ($455 $75) of the reimbursement would be subtracted by the employee from the medical
expenses paid in the current year. Since the taxpayer had paid the total cost of the medical
insurance premium, the excess reimbursement of $75 is not taxable and, therefore, would not
be reported. 503.04.
f. $380 ($455 $75) would be subtracted by the employee from the medical expenses paid. Since
the employer had paid the total cost of the medical insurance plan and the cost of the premium
was not included in the gross income of the taxpayer, the excess reimbursement of $75 would
be included in the gross income of the taxpayer. 503.04.

4.

Yes. The amount paid by an employee for a periodic medical checkup required by an employer is
deductible as an employee business expense, subject to the 2% AGI floor. The AGI floor for
medical expenses (7.5% or 10%) does not apply. 503.03.

5.

$4,500 ($7,500 $3,000). Since the purchase of the hot tub was prescribed by his doctor, Tracey
can deduct the excess of the hot tub's cost over the amount by which his home increased in value.
503.03.

6.

a. $3,550. Jose can deduct the state and local income taxes he paid during the year. This would be
the $450 he paid to the state with his 2013 tax return and the $3,100 of state income taxes withheld
from his paycheck during the year. Federal income taxes are not deductible. 504.01.
b. Jose will include $120 in gross income in 2015. Since Jose's total itemized deductions of $6,700
exceed his standard deduction amount of $6,200, he will itemize deductions on his 2014 tax
return. When he receives a $120 from the state government in 2015, he will be required to
include that amount in gross income on his 2015 tax return. The federal refund is not taxable.
Because federal income taxes are not deductible, no tax benefit was ever received. 504.01.

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Textbook Solutions

c. None of the refund is taxable. Since Jose's total itemized deductions of $4,550 do not exceed
his standard deduction amount of $6,200, he will deduct the standard deduction on his 2014 tax
return. Because no tax benefit was derived from the additional $210 of state income taxes paid
in 2014, when he receives the refund from the state government in 2015, it is not included in
his gross income. As with Part b., the federal refund is never taxable. 504.01.
7.

$1,125. Ivy deducts on Schedule A all state and local income taxes paid during 2014. This includes
estimated payments totaling $1,125 ($250 + $300 + $300 + $275). The $300 refund from the state
government that she received in 2014 is included in her 2014 gross income to the extent she
received a benefit from deducting state income taxes on her 2013 tax return. The $650
paid to the state government in 2015, as well as the 4th installment for her 2014 estimated tax
payment that she paid on January 15, 2015, will be deductible on her 2015 tax return. 504.01.

8.

Ad valorem property taxes are deductible as itemized deductions. Jan will be allowed to deduct
$405 ($430 $25). Karl will not be allowed to deduct any of the $55 he pays to renew his license
tags. 504.03.

9.

a. $31,773. The tax laws allow the Hemphills to deduct the interest associated with up to $1 million
of acquisition debt on their main home and one other home. They will deduct the $8,330 plus the
$23,443 interest on the Tampa home. 505.01.
b. $23,443. The Hemphills would only be allowed to deduct the interest paid on the debt of one
of their vacation homes. Each year they should the one that has the highest interest expense.
505.01.

10.

a. All of the interest will be deductible. The tax laws allow the Stephens to deduct the interest
associated with up to $1 million of acquisition debt on their main home and one other home. Their
total acquisition debt includes the $800,000 on their main home and $295,000 on their second
home. Since this amount exceeds $1 million, they will be able to deduct the interest on the first $1
million of this debt. The $95,000 excess qualifies as home equity debt. Thus, the Stephens will be
allowed to deduct the interest associated with the entire amount of debt. 505.01.
b. The interest on $40,000 of the financing will not be deductible. The rest will be deducted as
home mortgage interest on Schedule A. Because the additional $140,000 of financing was not
used to buy or improve their main or second home, it cannot count as acquisition debt. The
Stephen's acquisition debt equals $955,000 ($660,000 + $295,000). Their total debt of
$1,095,000 exceeds this amount by $140,000. Since the interest on home equity debt is limited
to $100,000 of debt, the interest associated with $40,000 of the total debt will be disallowed.
505.01.

11.

a. Lee must allocate the points on the bank loan to buy the land over the life of the loan. Therefore,
during 2014, interest is deductible in the amount of $4.50 per month ($540 120 mo.) for 10
months for a total of $45. An exception to the general rule of spreading points over the life of the
loan applies to Lee's loan for her main home. The exception will allow Lee to deduct the entire
$480 in 2014 as qualified residence interest, which she paid in points on the loan for her main
home. Thus, Lee may deduct a total of $525 ($45 + $480) during 2014 as interest in the form of
points paid. 505.02.

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Essentials of Federal Income Taxation

b. The remaining $495 ($540 $45) of points paid on the bank loan will be deductible at the rate
of $4.50 per month over the remaining 9 years and 2 months of the loan as investment interest
expense. 505.02.
12.

$878. The Devons have been amortizing the $24,000 of points they paid on the purchase of their
vacation home over the life of the loan. They have been deducting $66.67 each month ($24,000/360
month loan). In the current year, they will amortize $533.33 ($66.67 8 months). As of the time
of the refinancing, $18,000 of the points is still unamortized. They add this amount to the points
they paid as part of the refinancing. Thus, after the refinancing, the Devon's total unamortized
points equal $31,000 ($18,000 + $13,000). They will amortize these points over the life of the new
loan. For the current year, the Devons will deduct points totaling $878 ($533.33 from the original
loan + $344.44 from the new loan ($31,000/360 + 4 months)). 505.02.

13.

The Edlins have two choices. First, they can elect to include the qualified dividends and net capital
gains in the calculation of net investment income and forgo the lower tax rates associated with
these items. These amounts would then be taxed at the Edlins' normal (ordinary) tax rates. This
option will make their net investment income equal to $10,700 ($5,000 + $2,400 + $3,300) and
allow them to deduct $10,700 of their investment interest expense in 2014. They would carry over
the $1,200 excess to 2015. If they choose not to include their qualified dividends and net capital
gain in the calculation of net investment income, they will pay a lower tax rate on the $8,300.
However, they will only be allowed to deduct $2,400 of their investment interest (limited to $2,400
of net investment income) in 2014. They would carry over the $9,500 excess to 2015. 505.04.

14.

505505.04.
Item
a. Al's home equity loan interest, $1,750 X
b. Betty's credit card interest
X
c. Charles' interest on loan to buy muni bonds
d. David's mortgage interest
X
e. Ed's interest on state tax deficiency
f.
Freds lender fees
X
g. Gabe's investment interest
X

15.

Deductible

Nondeductible

X
X

505.01, 505.02, 505.04.


Home mortgage interest ($6,300 + $7,200 + $13,080)
months 8 months during the year) 380
Investment interest expense
Total interest deduction on Schedule A

$26,580

Points

($5,700/120
543
$27,503

Although the refinancing was for more than the original loan balance, the excess qualifies as home
equity indebtedness. Only the interest paid on a loan where the proceeds are used to buy or hold
taxable investments is deductible. Since there is sufficient net investment income ($620 > $543),
the deduction for investment interest expense is not limited.
16. 506.
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Textbook Solutions

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
1
2
3

17.

Gift or Expenditure
Cash to Red Cross
X
Pledge to church
Auto expenses (employee)
Cash to Girl Scouts
X
Land to American Legion
Political contribution
Cash to public library X
Clothing to Salvation Army
Stock to church X
Cash to university
X
Bonds to hospital
X
Services rendered
Auto expenses (volunteer)

Deductible
Contribution

Deductible,
Not as a
Contribution

Not
Deductible

X1
X2
X
X
X

X
X3

Deductible when made (i.e., when it is paid).


Deductible as an employee business expense on Schedule A.
Deductible at the standard rate of $.14 per mile.

506.02.
a. Clark may not deduct any amount as a charitable contribution on his income tax return. The
fair market value of the admission charge is $32, which is what he paid per ticket.
b. The answer to (a) would be the same. To be deductible, there must be a gift.
c. The contribution would be the difference between the payment of $32 and the fair market value
of $20 for each ticket.

18.

$5,600. First, the taxpayer adds all the cash contributions. The noncash contributions are deducted
at their lower FMV. Political contributions are never deductible. The gift given directly to a
homeless person is not a qualified (charitable) gift. 506.
Cash contributions
$5,200 Noncash contributions:
Clothing
$100
Camping equipment
300
400
Charitable contribution deduction
$5,600

19.

a. The taxpayer can deduct the full $190,000 FMV of the land and apply the 30% AGI limit

($389,200 30% = $116,760). The $73,240 excess ($190,000 $116,760) can be carried over for
5 years (subject to the 30% AGI limit in those years). The taxpayer could elect to deduct only the
$72,000 adjusted basis in the land and use the 50% AGI limit. However, this would result in a
lower deduction. 506.04.
b. $72,000. Since tangible, personal property would be put to unrelated use, the taxpayer's deduction
would be limited to its $72,000 basis. 506.02.
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Chapter 5

20.

Essentials of Federal Income Taxation

a. $14,700. Because the stock had been held for more than one year and was contributed to a
qualified charitable organization, the taxpayer may treat $15,000 (FMV) as a contribution.
However, only $14,700 (30% $49,000) may be claimed as an itemized deduction in the current
year. The remaining $300 may be carried forward for up to five years. 506.04.

b. $3,575. The deduction for property held short-term is its adjusted basis. 506.02.
21.

$176. Toni can deduct her out-of-pocket expenses, which includes the $160 for supplies and $16.10
for mileage (115 miles $.14). No deduction is allowed for the value of services rendered to
qualified charitable organizations. 506.02.

22.

a. $700. 507.
Cost or other basis

$73,000

FMV before casualty


Less: FMV after casualty
Change in FMV

$97,000
(79,000)
$18,000

Lesser of $18,000 or $73,000


Less: Insurance reimbursement
Casualty loss
Less: $100 floor

$18,000
(15,000)
$ 3,000
(100)
$ 2,900
(2,200)
$ 700

Less: 10% of AGI


Casualty loss deduction

b. $900. Of the $5,700 (3 $1,900) received as a reimbursement for living expenses, the Wildes may
exclude the amount that represents a temporary increase in living expenses. This increase is
$1,600 [($2,000 + $500) $900] each month. Thus, the Wildes may exclude $4,800 ($1,600
3). The remaining $900 ($5,700 $4,800) is taxable. 507.
23.

a. Theft losses are deductible in the year in which they are discovered. For the Tavels, this would
be 2014. 507.03.
b. Their theft loss deduction would be $3,100. 507.
Theft loss on TV (lesser of $4,000 FMV or $5,600 adjusted basis) $ 4,000 Theft loss on artwork
(lesser of $22,500 FMV or $8,400 adjusted basis) 8,400
Less: $100 floor
(100)
Less: 10% AGI
(9,200)
Theft loss deduction
$ 3,100
c. The theft loss would be $0. 507.
Theft loss on TV (lesser of $4,000 FMV or $5,600 adjusted basis) $ 4,000 Theft loss on artwork
(lesser of $22,500 FMV or $8,400 adjusted basis) 8,400
Less: Insurance reimbursement
(7,500)

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Textbook Solutions

Less: $100 floor (100) Less: 10% AGI (9,200)


Theft loss deduction
24.

$0

$1,075. 507.

Adjusted
Change
Item
Basis
in FMV
Television $ 595 $ 375 $ 375 Microwave oven 575 400 400
DVR
850
700
Jewelry
2,200
2,500
Lesser of FMV or cost basis
Less: Insurance proceeds
Less: $100 floor
Less: 10% $20,000 (AGI)
(2,000 ) Theft loss deduction
25.

700
2,200
$3,675
(500 )
(100)
$1,075

503, 504.
Item
a. Home-for-the-aged payments:
(1) Meals
(2) Lodging
(3) Nursing care
b. Interest paid to purchase municipal bonds
c. Supplemental Medicare insurance premiums
d. Interest on credit card
e. Interest on student loan (deductible for AGI)
f. Foreign income taxes paid
g. Interest on delinquent state income tax
h. Long-term care insurance premiums

26.

Lesser of
Change
in FMV
or AB

a. See filled-in Schedule A for Brian Pido (Part a.). 502.


Unreimbursed medical
Less: 10% AGI
State and local income taxes withheld from wages
Amount paid to the state with 2013 tax return
Real estate taxes
Mortgage interest
Investment interest expense (not limited by NII)
Charitable contributions
Miscellaneous itemized deductions
Less: 2% AGI
Total itemized deductions

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Yes

No
X
X
X
X

X
X
X
X
X
X

$ 3,200
(17,255)
$ 3,583
425

$ 2,749
(3,451 )

$0
4,008
6,898
11,880
12,000
5,000
0
$39,786

Chapter 5

b.

Essentials of Federal Income Taxation

See filled-in Schedule A for Brian Pido (Part b.). Brian's total itemized deductions would be
reduced by $551 (3% ($272,552 $254,200)) to $39,235 ($39,786 $551). 502, 508.

c.

d.

See filled-in Schedule A for the Moores (Part c.). 502.


Unreimbursed medical
Less: 10% AGI
State and local income taxes withheld from wages
Amount paid to the state with 2013 tax return
Real estate taxes
Mortgage interest
Investment interest expense (limited to NII)
Charitable contributions
Miscellaneous itemized deductions
Less: 2% AGI
Total itemized deductions

$20,414
(18,458)
$ 6,682
888

$ 3,950
(3,692)

$ 1,956
7,570
4,582
17,559
1,800
13,540
258
$47,265

See filled-in Schedule A for the Moores (Part d.). Because Randy is age 65 or older, the Moores
use a 7.5% AGI floor to compute their medical expense deduction. Using the 7.5% AGI floor, their
medical expense deduction will increase from $1,956 to $6,570 ($20,414 ($184,583 7.5%
AGI)). This increase in the medical expense deduction will increase the Moores total itemized
deductions to $51,879 ($47,265 + ($6,570 $1,956)). 502, 503.01.

Chapter 5

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Textbook Solutions

Schedule A for Brian Pido, part a.

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Chapter 5

10

Essentials of Federal Income Taxation

Schedule A for the Brian Pido, part b.

Chapter 5

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Textbook Solutions

11

Schedule A for the Moores, part c.

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Essentials of Federal Income Taxation

Schedule A for the Moores, part d.

e.

See filled-in Schedule A for the Moores (Part e.). The Moores' medical expenses will no longer
exceed 10% of their AGI, and their miscellaneous itemized deductions will no longer exceed 2%

Chapter 5

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Textbook Solutions

13

of their AGI. Furthermore, the Moores will be required to reduce their total itemized deductions
by 3% of the amount by which their AGI exceeds the $305,050 threshold for MFJ taxpayers (from
Figure 5-2). 502, 508.
State and local income tax deduction
$ 7,570
Real estate taxes
4,582 Mortgage interest expense 17,559 Investment interest
expense
1,800 Charitable contributions
13,540
Itemized deduction before reduction
$45,051
Less: Reduction for excess AGI *
(2,386)
Total itemized deductions
$42,665
* The lesser of (i) $2,386 (3% ($384,583 $305,050)), or (ii) $34,601 (80% ($45,051
total itemized deductions $1,800 investment interest $0 for medical, casualty and theft
loss, and gambling losses)).
27.

a. If the taxpayer's itemized deductions are close in amount to his or her standard deduction, a
control of the timing of the payments of certain itemized deductions can help maximize the total
standard deduction and itemized deductions in alternate tax years. By timing the payment of
expenses eligible as itemized deductions, the taxpayer can minimize the tax liability by bunching
itemized deductions in one year so that the total is at a higher level than the standard deduction.
Then, in the next year, when expenses eligible as itemized deductions are lower in total than the
standard deduction, the taxpayer can use the higher standard deduction.

b.

Certain itemized deductions are flexible as to the year in which they are paid. These deductions
include medical expenses incurred near year-end, state income taxes paid on a quarterly basis,
certain real estate taxes, and charitable contributions.
If these payments are bunched in December 2014, for example, the taxpayer can deduct a
higher amount of itemized deductions than the eligible standard deduction amount. In 2015,
the standard deduction would be used, and the taxpayer would postpone paying certain
medical expenses, charitable contributions, and fourth-quarter state income taxes until January
2016. In this way, the taxpayer would have higher itemized deductions in 2014 and maximize
the use of itemized deductions and the standard deduction over a series of years. This will
work only if the amounts of both deductions are similar and the timing of the payments can
be controlled.

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Chapter 5

14

Essentials of Federal Income Taxation

Schedule A for the Moores, part e.

28.

According to page 2 of the Instructions to Form 4684, if the loss can be reasonably estimated, three
options may be available for recognizing the loss:

Chapter 5

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Textbook Solutions

15

(1)

Treat the loss as a casualty loss to personal property on Form 4684.

(2)

Treat the loss as an ordinary loss (miscellaneous itemized deduction) on Schedule A (Form
1040), line 23. The maximum amount than can be claimed is $20,000 ($10,000 for married
couples who file MFS). The reduction is reduced by any expected state insurance proceeds
and is subject to the 2% limit.

(3)

Wait until the year of final determination of the actual loss and treat the amount as a
nonbusiness bad debt. A nonbusiness bad debt is deducted as a short-term capital loss.

However, if the taxpayer is an officer of the financial institution or owns 1% or more of the
institution, or is related to such an owner or officer, the loss cannot be deducted as either a casualty
loss or as an ordinary loss. If any part of the deposits related to the loss is federally insured, the
taxpayer cannot choose the ordinary loss deduction.
If, in a later year, some of the loss is recovered, the recovered amount is income to the extent a tax
benefit resulted from the loss deduction.
29.

See Form 8283 for the Tylers.

30.

a. The company may deduct $35,000 (10% $350,000) currently and carry the remaining $15,000
forward for five years. 1402.06.

b.

If the company uses the cash basis of accounting, the donation must take place before the end of
the tax year. If the company uses the accrual basis of accounting, it may accrue and deduct the
contribution in the current year as long as payment is made within 2 months after its year ends.
1402.06.

c.

An S corporation receives no deduction for charitable contributions when calculating ordinary


income. Instead, the deduction passes through to the shareholders who deduct it on their tax returns.
1603.02.

d.

The tax implications for a partnership are the same as those for the S corporation discussed in "c.
above. The deduction passes through to the partners. 1502.04.

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16

Essentials of Federal Income Taxation

Form 8283 for the Tylers

31.

a.

Chapter 5

See filled-in Schedule A for the Crosses. 502.


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Textbook Solutions

Home mortgage interest ($18,330 + $19,044)


State income taxes paid
Real estate taxes ($2,400 + $2,800 + $3,400)
Charitable contributionscash
Charitable contributionsnoncash 1
Total itemized deductions
1

b.

$37,374
4,240
8,600
$12,000
3,300

15,300
$65,514

(100 shares held long-term $24 FMV) + (50 shares held short-term $18 basis)

See filled-in Schedule A for Maurice Prior. 502, 508.


State income taxes paid ($3,967 + $800 + ($1,200 3))
Real estate taxes
Personal property taxes
296 Home mortgage interest
contributions
1,500
Total itemized deductions before reduction
Less: 3% ($166,417 $152,525)

c.

17

16,940

$ 8,367
3,290
Charitable
$30,393

(417) Total itemized deductions $29,976

See filled-in Schedule A for the Saads. 502.


Medical expenses [$27,743 (10% $167,900)]
$10,953
Taxes [$4,400 + $4,800] 9,200 Mortgage interest
15,200 Investment interest
(limited to net investment income) 3,700
Charitable contributions
6,400 Total itemized deductions $45,453

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18

Essentials of Federal Income Taxation

Schedule A for the Crosses

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Textbook Solutions

19

Schedule A for Maurice Prior

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20

Essentials of Federal Income Taxation

Schedule A for the Saads

Chapter 5

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