Ch 6 HW Solutions

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Chapter 6 27. a. $4,125. The tools and supplies and the health insurance are deductible for AGI. b. $2,030. The utilities and depreciation are deductible for AGI (rental activity). c. $7,650. The employer portion of the self-employment tax is deductible for AGI but the Social Security tax is not deductible. d. $0. The safety deposit box fee is a nondeductible investment expense as it appears that Clem is investing in rare coins rather than a dealer in coins – a business. 34. a. The maximum interest deduction is the amount paid up to $2,500. The deduction is phased out as AGI exceeds $75,000 (before applying the interest deduction). Consequently, because his AGI is below the trigger amount for the phase-out, Lionel can deduct $1,440, which is the lesser of (1) $2,500 or (2) $1,440 (the amount of interest expense he paid). b. Lionel can deduct $576 of qualified educational interest expense computed as follows: Description Amount Explanation (1) Modified AGI $84,000 (2) Amount of interest paid up to $2,500 1,440 Lesser of amount paid or $2,500 (3) Phase-out 40% [90,000 − 84,000]/15,000 Deductible interest expense $576 40% x 1,440 c. Lionel is not allowed to deduct any qualified educational interest expense computed as follows: Description Amount Explanation (1) Modified AGI $95,000 (2) Amount of interest paid up to $2,500 1,440 Lesser of amount paid or $2,500 Deductible interest expense $0 Lionel’s AGI is above the upper end of the phaseout (above $90,000)

38. a. All expenses are qualified medical expenses except for the over-the-counter drugs. Hence, Simpson’s medical expense deduction is $6,625 less $3,750 (7.5 percent × 50,000) $2,875 = and this amount is included with Simpson’s other itemized deductions. b. Same as (a) except Simpson’s medical expenses ($6,625) are first reduced by reimbursements ($1,450) then reduced by the floor limit $3,750 (7.5 percent × 50,000) $1,425 = and this amount is included with Simpson’s other itemized deductions 42. Deductible taxes = $2,150 (only the $750 state income tax estimated tax payments and $1,400 state income tax withholding will be deductible) The $300 fee for the auto license is not deductible as property tax since the fee is based on weight, not value. Dan could opt to deduct state sales tax in lieu of state income taxes. 45. All of the above taxes are deductible ($7,200 + $600 + $800 + $1,900 = $10,500) but they are limited to a maximum deduction of $10,000. 48. The maximum amount is $9,000 for the cash contributions and $35,000 for the property donations. Because Ray Ray has reason to expect that the American Heart Association will sell the antique painting, the painting is used for a purpose unrelated to the American Heart Association’s charitable purpose. Thus, Ray Ray’s deduction for the painting is limited to his basis in the painting ($15,000). The amount of the deduction for the Coca Cola stock is its fair market value ($20,000) because the stock is considered intangible, appreciated long-term capital gain property.

52. a. Trevor will elect the standard deduction of $13,850 (rather than itemized deductions of $10,800) and report taxable income of $66,150 in 2023 and $66,150 in 2024. His total taxable income for the two years will be $132,300 ($66,150 $66,150) + calculated as follows. 2023 2024 Salary $ 80,000 $ 80,000 Standard deduction − 13,850 − 13,850 Taxable income $ 66,150 $ 66,150 b. Trevor can now itemize his deductions in 2023, because the total $18,800 itemized deductions ($8,000 + $8,000 +$2,800) now exceed the standard deduction. He will report lower total taxable income ($127,350 calculated below) over the two years than in part a because $4,950 of his itemized deductions now reduce taxable income. 2023 2024 Salary $ 80,000 $ 80,000 Itemized deductions − 18,800 Standard deduction ________ − 13,850 Taxable income $ 61,200 $ 66,150 c. Now Trevor can itemize his deductions so he reports taxable income of $57,200 ($80,000 22,800 for both years) − . 2023 2024 Salary $ 80,000 $ 80,000 Itemized deductions − 22,800 − 22,800 Taxable income $ 57,200 $ 57,200

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d. Itemized deductions in 2023 will be $2,000 (real estate taxes) + $10,000 (residential interest) + $16,000 (charitable contribution) + $2,800 (state tax deduction) = $30,800. Itemized deductions in 2024 are $2,000 (real estate taxes) + $10,000 (residential interest) + $2,800 (state tax deduction) = $14,800. Trevor reports the same total of taxable income, $114,400 for the two years as in part c, but the timing of the taxable income differs as follows: 2023 2024 Salary $ 80,000 $ 80,000 Itemized deductions − 30,800 − 14,800 Taxable income $ 49,200 $ 65,200 e. By bunching his deductions in part (d) Trevor will not reduce his taxable income because he is already itemizing in both years. Trevor may save taxes using this strategy if his tax rate is higher in 2023 than 2024. 53. $0. Gambling losses are only deductible to the extent of gambling winnings. Thus, Simon cannot deduct any of the $5,000 gambling losses. Unfortunately, the investment expenses, tax return fees, and commuting expenses are also nondeductible. 55. a. Stephanie can claim a standard deduction of $1,350, the greater of the minimum standard deduction ($1,250) or $400 plus her earned income ($950). b. Stephanie can claim a standard deduction of $1,900, the greater of the minimum standard deduction ($1,250) or $400 plus her earned income ($1,500). c. Stephanie can claim a standard deduction of $13,850, the greater of the minimum standard deduction ($1,250) or $400 plus her earned income but limited to the maximum standard deduction for her filing status, (single is $13,850 for 2023).