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Exam 17: Tax Consequences of Personal Activities

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Question 1

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

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Question 2

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Unemployment benefits are excluded from gross income.

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Question 3

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On February 1, Alan, a single individual, purchased his first personal residence for $400,000. On July 1, Alan sold this residence for $460,000 because he accepted a new job in another state. Consequently, Alan occupied the home for only 150 days. How much gain must Alan recognize?

Under the terms of a 2014 divorce decree, Harold transferred his one-half interest in the marital residence to his former wife Francine. Francine must include the value of the interest in gross income.

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

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

Tax return preparation fees are itemized deductions.

Six years ago, Milo Lenz, an amateur artist, sculpted a garden gnome as a gift for his mother. This year, his mother sold the gnome on eBay for $1,200. What is the amount and character of the mother's gain?

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

Which of the following government transfer payments is included in the recipient's gross income?

If alimony is paid under a 2015 divorce decree, the payments are included in the recipient's gross income.

Josh donated a painting to the local art museum. He purchased the painting twenty years ago for $34,000, and its appraised FMV at date of gift was $115,000. Which of the following statements about this donation is true?

Mr and Mrs Shohler received $25,200 Social Security benefits this year. Their only other source of income was Mrs Shohler's $10,479 taxable pension from her former employer. How much of their Social Security is included in gross income?

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

Mr and Mrs Hunt have the following allowable itemized deductions this year. Medical expenses $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 3,200 State and local taxes $\quad$$\quad$$\quad$$\quad$$\quad$ $ 7,000 Casualty loss $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 4,000 Charitable contributions $\quad$$\quad$$\quad$ $ 3,500 Determine the effect on the amount of each deduction if the Hunts engage in a transaction generating $10,000 additional AGI this year.

A drunk driver seriously injured Leah. The court awarded her $200,000 for her physical injuries and $300,000 as punitive damages. Leah must include $300,000 in gross income.

Mr and Mrs Trent divorced last year. Pursuant to the divorce, Mr Trent transferred marketable securities (FMV $100,000; basis $67,000) to Mrs Trent. This year, Mrs Trent sold the securities for $112,000. Which of the following statements is true?

Mr and Mrs Allen made the following interest payments. Determine their deduction for each payment. a. $28,000 on a $400,000 acquisition mortgage secured by their personal residence b. $5,000 on a $60,000 second mortgage secured by their personal residence. The Allens used the proceeds to pay off credit card debt and take a second honeymoon. c. $2,400 on credit card debt d. $1,500 on a bank loan incurred to purchase a new family car e. $1,890 on an unsecured bank loan incurred to pay for a new roof on their personal residence

Which of the following items is not included in the recipient's gross income?

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