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Exam 17: Tax Consequences of Personal Activities

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Question 21

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Which of the following expenditures is not a medical expense for federal tax purposes?

A) Payment for eyeglasses
B) Health insurance premiums
C) Payment for prescription antibiotics
D) All of the above are deductible medical expenses

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Question 22

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Ms. Ruang owns a principal residence subject to an $817,000 acquisition mortgage. The home has an $875,000 appraised FMV. What is the maximum home equity debt that Ms. Ruang could incur for federal tax purposes?

A) $183,000
B) $100,000
C) $58,000
D) $0

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Question 23

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Which of the following items is included in the recipient's gross income?

Unemployment benefits are excluded from gross income.

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

Which of the following statements about the tax consequences of gambling is true?

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

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

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

Which of the following statements about tax subsidies for higher education is false?

Interest paid on debt incurred to acquire, build, or improve a personal residence is a preference item for computing the alternative minimum tax.

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

Which of the following tax payments is allowed as an itemized income tax deduction?

Mr. Haugh owns a sporting goods store as a sole proprietorship. This year, he donated baseball equipment (bats, gloves, balls) to the local YMCA to use in their community sports programs. His cost basis in the inventory items was $45,700, and their retail value was $68,200. Which of the following statements about this donation is true?

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

William took out a $740,000 mortgage to purchase his personal residence. The residence is worth over $1.4 million, and William wants to take out a $200,000 second mortgage and use the proceeds to consolidate his credit card debt. William can deduct 50% of the interest he will pay on the second mortgage.

Jenna Leigh is employed as a receptionist for a CPA firm, but on evenings and weekends, she bakes wedding cakes. In each of the past four years, Jenna's baking activity resulted in a net profit. This year, the activity generated a $720 net loss. Which of the following statements is true?

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

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

An activity will be classified as a hobby if the taxpayer fails to make a profit from the activity.