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Exam 10: Individuals: Income, Deductions, and Credits

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Question 21

True/False

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The education tax credits i.e., the American Opportunity credit and the lifetime learning credit) are available to help defray the cost of higher education regardless of the income level of the taxpayer.

A) True
B) False

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Question 22

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Roger is considering making a $6,000 investment in a venture that its promoter promises will generate immediate tax benefits for him.Roger, who does not anticipate itemizing his deductions, is in the 30% marginal income tax bracket.If the investment is of a type that produces a tax credit of 40% of the amount of the expenditure, by how much will Roger's tax liability decline because of the investment?

A) $0
B) $1,800
C) $2,200
D) $2,400
E) None of the above

F) D) and E)
G) None of the above

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Question 23

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The tax benefit received from a tax credit is never affected by the tax rate of the taxpayer.

Jena is a full-time undergraduate student at State University and qualifies as a dependent of her parents.Her only source of income is a $10,000 athletic scholarship $1,000 for books, $5,500 tuition, $500 student activity fee, and $3,000 room and board) .Jena's gross income for the year is:

Chad pays the medical expenses of his son, James.James would qualify as Chad's dependent except that he earns $7,500 during the year.Chad may claim James' medical expenses even if he is not a dependent.

The election to itemize is appropriate when total itemized deductions are less than the standard deduction based on the taxpayer's filing status.

Zeke made the following donations to qualified charitable organizations during the year: The used clothing was donated to the Salvation Army; the other items of property were donated to Eastern State University.Both are qualified charitable organizations.Disregarding percentage limitations, Zeke's charitable contribution deduction for the year is:

Fred and Lucy are married, ages 33 and 32, and together have AGI of $120,000 in 2018.They have four dependents and file a joint return.They pay $5,000 for a high deductible health insurance policy and contribute $2,600 to a qualified Health Savings Account.During the year, they paid the following amounts for medical care: $9,200 in doctor and dentist bills and hospital expenses, and $3,000 for prescribed medicine and drugs.In October 2018, they received an insurance reimbursement of $4,400 for the hospitalization.They expect to receive an additional reimbursement of $1,000 in January 2019.Determine the maximum itemized deduction allowable for medical expenses in 2018.

Capital assets donated to a public charity that would result in long-term capital gain if sold, are subject to the 30%-of- AGI ceiling limitation on charitable contributions for individuals.

Personal expenditures that are deductible as itemized deductions include medical expenses, Federal income taxes, state income taxes, property taxes on a personal residence, mortgage interest, and charitable contributions.

Ahmad is considering making a $10,000 investment in a venture which its promoter promises will generate immediate tax benefits for him.Ahmad, who normally itemizes his deductions, is in the 28% marginal tax bracket.If the investment is of a type where the taxpayer may claim either a tax credit of 25% of the amount of the expenditure or an itemized deduction for the amount of the investment, what treatment normally would be most beneficial to Ahmad and by how much will Ahmad's tax liability decline because of the investment?

After the divorce in 2015, Jeff was required to pay $18,000 per year to his former spouse, Darlene, who had custody of their child.Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21.During the year, Jeff paid the $18,000 required under the divorce agreement.Darlene must include the $12,000 in gross income.

Tom, whose MAGI is $40,000, paid $3,500 of interest on a qualified student loan in 2018.Tom is single.He may deduct the $3,500 interest as an itemized deduction.

Under the alimony rules:

During the year, Victor spent $300 on bingo games sponsored by his church.If all profits went to the church, Victor has a charitable contribution deduction of $300.

Jack sold a personal residence to Steven and paid points of $3,500 on the loan to help Steven finance the purchase.Jack can deduct the points as interest.

Workers' compensation benefits are included in gross income if the employer also pays the employee while the employee is recovering from his or her injury.

Upon the recommendation of a physician, Ed has a swimming pool installed at his residence because of a heart condition.If he is allowed to deduct all or part of the cost of the pool, Ed's increase in utility bills due to the operation of the pool qualifies as a medical expense.

For purposes of computing the deduction for qualified residence interest, a qualified residence includes only the taxpayer's principal residence.

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for: