Acct 323 7980 Income Tax I Spring 2016 Week 3 Homework 1

Acct 323 7980 Income Tax I Spring 2016week 3 Homework1

On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In Year 4 they borrowed $15,000 secured by their home, and used the cash to add a new room to their residence. That same year they took out a $5,000 auto loan. The following information pertains to interest paid in Year 4: Mortgage interest $17,000 Interest on room construction loan 1,500 Auto loan interest 500 For Year 4, how much interest is deductible, prior to any itemized deduction limitations?

Spencer, who itemizes deductions, had adjusted gross income of $60,000 for the current year. The following additional information is available for the year: Cash contribution to church $ 4,000 Purchase of art object at church bazaar 1,200 (with a fair market value of $800 on the date of purchase) Donation of used clothing to Salvation Army 600 (fair value evidenced by receipt received) What is the maximum amount Spencer can claim as a deduction for charitable contributions in the current year?

For regular tax purposes, with regard to the itemized deduction for qualified residence interest, home equity indebtedness incurred during a year: a. Includes acquisition indebtedness secured by a qualified residence. b. May exceed the fair market value of the residence. c. Must exceed the taxpayer's net equity in the residence. d. Is limited to $100,000 on a joint income tax return.

Winston, a calendar-year taxpayer, was employed and resided in Boston. On February 4, 2015, Winston was permanently transferred to Florida by his employer. Winston worked full-time for the entire year. In 2015, Winston incurred and paid the following unreimbursed expenses in relocating: Lodging and travel expenses while moving $1,000 Meals while in route to Florida 300 Cost of insuring household goods and personal effects during move 200 Cost of shipping household pets to new home 100 Costs of moving household furnishings and personal effects 3,000 What amount of the above expenses is deductible as moving expenses on Winston’s 2015 federal tax return? Which expenses are included in the deductible amount and which expenses are excluded from the deductible amount and why?

For 2015, Travis and Bonnie White (both age 40) filed a joint return. Travis earned $55,000 in wages and was covered by his employer's qualified pension plan. Bonnie was unemployed and received $4,000 in alimony payments for the first four months of the year before remarrying. The couple had no other income. Each contributed $5,000 to an IRA account. What is the maximum allowable IRA deduction on their 2015 joint tax return?

Which one of the following statements concerning the deduction for interest on qualified education loans is not correct? (a) The deduction is available even if the taxpayer does not itemize deductions. (b) The deduction only applies to the first sixty months of interest payments. (c) Qualified education expenses include tuition fees, room, and board. (d) The educational expenses must relate to a period when the student was enrolled on at least a half-time basis.

Which of the following types of costs are required to be capitalized under the Uniform Capitalization Rules of Code Sec. 263A? a. Marketing. b. Distribution. c. Warehousing. d. Office maintenance.

On March 1 of the previous year, a parent sold stock with a cost of $8,000 to her child, for $6,000, its fair market value. On September 30 of the current year, the child sold the same stock for $7,000 to Smith, who is unrelated to the parent and child. What is the proper treatment for these transactions? a. Parent has a $2,000 recognized loss and child has $1,000 recognized gain. b. Parent has $2,000 recognized loss and child has $0 recognized gain. c. Parent has $0 recognized loss and child has $1,000 recognized gain. d. Parent has $0 recognized loss and child has $0 recognized gain.

Lorenzo, a single taxpayer, has adjusted gross income of $40,000 in the current year. During the year, a hurricane causes $4,100 damage to Lorenzo’s personal use car on which he has no insurance. Lorenzo purchased the car for $20,000. Immediately before the hurricane, the car's fair market value was $11,000 and immediately after the hurricane its fair market value was $6,900. What amount should Lorenzo deduct as a casualty loss for the current year after all threshold limitations are applied?

Cindy, a cash basis taxpayer, borrowed money from a bank and signed a 10-year interest-bearing note on business property on January 1 of the current year. The cash flow from Cindy's business enabled her to prepay the first three years of interest attributable to the note on December 31 of the current year. How should Cindy treat the prepayment of interest for tax purposes? a. Deduct the entire amount as a current expense. b. Deduct the current year's interest and amortize the balance over the next two years. c. Capitalize the interest and amortize the balance over the 10-year loan period. d. Capitalize the interest as part of the basis of the business property.

Paper For Above instruction

Introduction

The intricacies of income tax deductions and credits are vital for taxpayers aiming to maximize their allowable deductions while complying with the Internal Revenue Code (IRC). This paper explores several key aspects of individual taxation, focusing on interest deductions, charitable contributions, residence-related interest, moving expenses, IRA deductions, education loan interest, capitalized costs, and transaction treatments. Through comprehensive analysis, this discussion elucidates the rules and limitations shaping tax benefits in various scenarios, providing clarity on compliance and strategic planning for taxpayers in different circumstances.

Interest Deductibility and Home Mortgage Implications

The deductible interest in Year 4 includes mortgage interest of $17,000 and interest on the room construction loan of $1,500, totaling $18,500. Auto loan interest of $500 is also deductible but subject to limitations. However, initial mortgages of $50,000 and subsequent loans must meet specific criteria: mortgage interest is deductible if it is on acquisition indebtedness secured by the taxpayer’s home, limited to $750,000 of debt under current law (IRC Sec. 163(h)). Conversely, interest on home equity loans may be deductible if they meet the requirements of agnostic for primary and secondary homes, but their deductibility depends on the use of the proceeds and whether they qualify as acquisition indebtedness. Therefore, the total deductible interest is primarily constrained by the applicable limits and purpose of each loan.

Charitable Contributions and Limitations

Spencer’s total charitable contributions include $4,000 to the church, $1,200 for art with a fair market value of $800, and $600 for clothing donations, totaling $5,800 in contributions. Federal regulations cap the deduction for cash contributions at 60% of adjusted gross income (AGI), while donations of property are deductible at the fair market value, subject to limitations based on the type of property and organization. Spencer’s AGI of $60,000 allows him to claim the full $4,000 contribution to the church and deductible FMV of $800 for art, totaling $4,800. Clothing donations are generally deductible at fair value, so net of possible limits, Spencer can claim the entire $600. The overall deductible amount is therefore limited by the AGI basis and specific IRS rules on valuation and organization.

Residence Interest and Home Equity Debt

Regulations stipulate that home equity indebtedness incurred during a year can include acquisition indebtedness secured by a qualified residence, which may exceed the fair market value if properly secured. However, for the deduction, the total home equity debt is limited to $100,000 on a joint return per IRC Sec. 163(h). This restriction means taxpayers cannot deduct interest on debt exceeding this threshold, emphasizing the importance of tracking debt levels accurately.

Relocation Expenses Deduction

Winston’s deductible moving expenses are limited to lodging, travel, and relocating household goods, totaling $1,000 + $300 + $200 + $100, summing to $1,600. Costs associated with insuring household goods, shipping pets, and non-portable personal effects are non-deductible. The IRS restricts moving expense deductions to expenses directly related to relocating for employment, excluding routine or personal costs. The moving costs must also meet the distance and time tests to qualify for deduction.

IRA Contributions and Income Limits

Travis and Bonnie’s allowable IRA deduction depends on their combined AGI, filing status, and participation in employer plans. For 2015, the contribution limit was $5,500 per individual (or $6,500 if over 50). Since Travis is covered by a qualified plan, his deduction is phased out at AGI levels between $61,000 and $71,000. Bonnie, being unemployed, can deduct her full contribution unless her AGI exceeds the phase-out limits. The joint AGI of $59,000 suggests both can claim the full $5,000 deduction each, totaling $10,000, assuming the phase-out thresholds are respected.

Interest Deduction on Education Loans

One statement is incorrect: “The deduction only applies to the first sixty months of interest payments” is wrong because the educational loan interest deduction has no such limitation—it is available for all eligible interest paid during the repayment period. Eligible expenses include tuition, fees, room, and board only if they are part of qualified education expenses (IRC Sec. 221). The student must be enrolled at least half-time to qualify for the deduction, as per IRS regulations.

Capitalization under Section 263A

Costs required to be capitalized under Code Sec. 263A include warehousing costs, as they facilitate inventory storage necessary for production. Marketing and distribution costs are generally expensed unless directly tied to inventory production or acquisition. Office maintenance is typically a current expense, not capitalized, highlighting the importance of distinguishing between direct costs of inventory and operational expenses.

Stock Transactions and Recognition

The parent’s sale of stock at a loss and subsequent sale by the child can be complex due to prohibited and related-party transactions. The correct treatment aligns with IRC rules: if the parent sold stock at a loss to her child, the loss is disallowed due to related-party rules (IRC Sec. 267). The child’s sale gains are recognized based on their basis, which is the purchase price, but the initial loss may not be deductible. The proper answer reflects these rules, with the parent’s loss being disallowed and the child recognizing the gain based on the basis established at purchase from the parent.

Casualty Loss Deduction

Lorenzo’s casualty loss is based on the decrease in fair market value minus any insurance reimbursements. The deductible loss equals the lesser of the decrease in fair value or the cost basis, after applying a $100 floor and 10% AGI threshold. Here, the loss would be calculated as the difference in pre- and post-hurricane FMV ($11,000 - $6,900 = $4,100), with the allowable deduction being $4,000 after apply the threshold limits.

Prepaid Interest Treatment

Cindy’s prepayment of interest should be capitalized and amortized over the period of the loan, as per IRS regulations. Deducting only the current year’s portion would be incorrect because interest prepayment for a capital asset or a loan must be spread over the benefit period, typically over the life of the loan, to comply with the matching principle and IRS rules.

References

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• IRS. (2022). Publication 535, Business Expenses. IRS.
• U.S. Congress. (2017). Internal Revenue Code (IRC) Sec. 163, 221, 267, 263A. U.S. Government Printing Office.
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