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    Deductible Medical Expense Accounting

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    101. Nancy had an accident while skiing on vacation. She sustained facial injuries that required cosmetic surgery. While having the surgery done to restore her appearance, she had additional surgery done to reshape her nose, which was not injured in the accident. The surgery to restore her appearance cost $12,000 and the surgery to reshape her nose cost $5,000. How much of Nancy's surgical fees will qualify as a deductible medical expense (before application of the 7.5% limitation)?
    a. $0.
    b. $5,000.
    c. $12,000.
    d. $17,000.
    e. None of the above.

    ____ 102. Patrick and Leah are married and together have AGI of $100,000 in 2006. They have three dependents and file a joint return. They pay $3,000 for a high deductible health insurance policy and contribute $2,400 to a qualified Health Savings Account. During the year, they paid the following amounts for medical care: $8,200 in doctor and dentist bills and hospital expenses, and $2,500 for prescribed medicine and drugs. In December 2006, they received an insurance reimbursement of $3,400 for hospitalization. They expect to receive an additional reimbursement of $1,700 in January 2007. Determine the maximum deduction allowable for medical expenses in 2006.
    a. $1,100.
    b. $2,800.
    c. $5,200.
    d. $10,300.
    e. None of the above.

    ____ 103. Wayne developed heart problems and was unable to climb the stairs to reach his second-floor bedroom. His physician advised him to add a first-floor bedroom to his home. The cost of constructing the room was $42,000. The increase in the value of the residence as a result of the room addition was determined to be $18,000. In addition, Wayne paid the contractor $7,500 to construct an entrance ramp to his home and $10,500 to widen the hallways to accommodate his wheelchair. Wayne's AGI for the year was $120,000. How much of these expenditures can Wayne deduct as a medical expense?
    a. $15,000.
    b. $24,000.
    c. $33,000.
    d. $60,000.
    e. None of the above.

    ____ 104. Tom is advised by his family physician that he needs back surgery to correct a problem from his last back surgery. Since Tom is in a wheel chair, he needs his wife, Jean, to accompany him on his trip to Rochester, Minnesota, for in-patient treatment at the Mayo Clinic which specializes in this type of surgery. Tom incurred the following costs:

    Round-trip airfare ($350 each) $ 700
    Jean's hotel in Rochester for four nights ($95 per night) 380
    Jean's meals while in Rochester 105
    Tom's medical treatment 3,500
    Tom's prescription medicine 600

    Compute Tom's medical expenses for the trip (subject to the 7.5% floor).
    a. $4,000.
    b. $5,000.
    c. $5,180.
    d. $5,285.
    e. None of the above.

    ____ 105. Your friend Scotty informs you that he received a "tax-free" reimbursement in 2006 of some medical expenses he paid in 2005. Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income?
    a. Scotty itemized deductions in 2005.
    b. Scotty did not itemize deductions in 2005.
    c. Scotty itemized deductions in 2006.
    d. Scotty did not itemize deductions in 2006.
    e. Scotty itemized deductions in 2006 but not in 2005.

    ____ 106. In 2006, Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family. In addition, he contributes $3,400 to a Health Savings Account. Which of the following statements is true?
    a. If Boris is self-employed, he may deduct $7,200 as a deduction for AGI.
    b. If Boris is self-employed, he may deduct $3,400 as a deduction for AGI and may include the $3,800 premium when calculating his medical expense deduction.
    c. If Boris is an employee, he may deduct $7,200 as a deduction for AGI.
    d. If Boris is an employee, he may include $7,200 when calculating his medical expense deduction.
    e. None of the above.

    ____ 107. During 2006, Ellen paid the following taxes:

    Taxes on residence (for the period from March 1 through August 31, 2006) $8,832
    State motor vehicle tax (based on the value of the personal use automobile) 330
    State sales tax 3,800
    State income tax 3,450

    Ellen sold her personal residence on May 30, 2006, under an agreement in which the real estate taxes were not prorated between the buyer and the seller. What amount qualifies as a deduction from AGI for 2006 for Ellen?
    a. $12,962.
    b. $11,900.
    c. $8,450.
    d. $4,650.
    e. None of the above.

    ____ 108. Ron and Tom are equal owners in Robin Corporation. On July 1, 2006, each loans the corporation $20,000 at annual interest of 10%. Ron and Tom are brothers. Both shareholders are on the cash method of accounting, while Robin Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2007, Robin repays the loans of $40,000 together with the specified interest of $4,000. How much of the interest can Robin Corporation deduct in 2006?
    a. $0.
    b. $1,000.
    c. $2,000.
    d. $4,000.
    e. None of the above.

    ____ 109. Tony is married and files a joint tax return for 2006. He has investment interest expense of $95,000 for a loan made to him in 2006 to purchase a parcel of unimproved land. His income from investments [dividends (not qualified) and interest] totaled $18,000. After reducing his miscellaneous deductions by the applicable 2% floor, the deductible portion amounted to $2,800. In addition to $1,400 of investment expenses included in miscellaneous deductions, Tony paid $3,600 of real estate taxes on the unimproved land. Tony also has a $4,500 net long-term capital gain from the sale of another parcel of unimproved land. Calculate Tony's maximum investment interest deduction for 2006.
    a. $95,000.
    b. $18,000.
    c. $17,500.
    d. $13,000.
    e. None of the above.

    ____ 110. In 2006, Terry pays $10,000 to become a charter member of Mammoth University's Athletic Council. The membership ensures that Terry will receive choice seating at all of Mammoth's home basketball games. Also in 2006, Terry pays $1,200 (the regular retail price) for season tickets for himself and his wife. For these items, how much qualifies as a charitable contribution?
    a. $6,000.
    b. $6,800.
    c. $8,000.
    d. $10,000.
    e. None of the above.

    ____ 111. Andrea, who lives in Ohio, volunteered to travel to Arizona in February to work on a home-building project for Habitat for Humanity (a qualified charitable organization). She was in Arizona for three weeks. She normally makes $600 per week as a carpenter's assistant and plans to deduct $1,800 as a charitable contribution. In addition, she incurred the following costs in connection with the trip: $700 for transportation, $820 for lodging, and $340 for meals. What is Andrea's deduction associated with this charitable activity?
    a. $700.
    b. $1,040.
    c. $1,520.
    d. $1,860.
    e. $3,660.

    ____ 112. Rosie owned stock in Acme Corporation that she donated to a university (a qualified charitable organization) on September 6, 2006. What is the amount of Rosie's charitable contribution deduction assuming that she had purchased the stock for $20,100 on October 22, 2005, and the stock had a value of $28,200 when she made the donation?
    a. $8,100.
    b. $20,100.
    c. $24,150.
    d. $28,200.
    e. None of the above.

    ____ 113. Jennifer, a calendar year taxpayer, made the following donations to qualified charitable organizations in 2006:

    Basis Fair Market Value
    Cash donation to Ohio State University $40,000 $ 40,000
    Unimproved land to the city of Columbus, Ohio 80,000 240,000

    The land had been held as an investment and was acquired 3 years ago. Shortly after receipt, the city of Columbus sold the land for $240,000. Jennifer's AGI is $400,000. The allowable charitable contribution deduction is:
    a. $84,000 if the reduced deduction election is not made.
    b. $112,000 if the reduced deduction election is not made.
    c. $160,000 if the reduced deduction election is not made.
    d. $200,000 if the reduced deduction election is made.
    e. None of the above.

    ____ 114. During 2006, Ralph made the following contributions to the University of Oregon (a qualified charitable organization):

    Cash $63,000
    Stock in Raptor, Inc. (a publicly traded corporation) 94,500

    Ralph acquired the stock in Raptor, Inc., as an investment fourteen months ago at a cost of $42,000. Ralph's AGI for 2006 is $189,000. What is Ralph's charitable contribution deduction for 2006?
    a. $56,700.
    b. $63,000.
    c. $94,500.
    d. $157,500.
    e. None of the above.

    ____ 115. In 2006, Kipp invested $65,000 for a 30% interest in a partnership conducting a passive activity. The partnership reported losses of $200,000 in 2006 and $100,000 in 2007, Kipp's share being $60,000 in 2006 and $30,000 in 2007. How much of the losses from the partnership can Kipp deduct assuming he owns no other investments?
    a. $0 in 2006, $30,000 in 2007.
    b. $60,000 in 2006, $30,000 in 2007.
    c. $60,000 in 2006, $5,000 in 2007.
    d. $60,000 in 2006, $0 in 2007.
    e. None of the above.

    ____ 116. Carl, a physician, earns $200,000 from his medical practice in the current year. He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity. In addition, he incurs a loss of $50,000 from an investment in a passive activity. What is Carl's AGI for the current year after considering the passive investment?
    a. $195,000.
    b. $200,000.
    c. $240,000.
    d. $245,000.
    e. None of the above.

    ____ 117. Nell sells a passive activity with an adjusted basis of $45,000 for $105,000. Suspended losses attributable to this property total $45,000. The total gain and the taxable gain are:
    a. $60,000 total gain; $105,000 taxable gain.
    b. $10,000 total gain; $15,000 taxable gain.
    c. $60,000 total gain; $0 taxable gain.
    d. $60,000 total gain; $15,000 taxable gain.
    e. None of the above.

    ____ 118. Matt has three passive activities and has at-risk amounts in excess of $100,000 for each. During the year, the activities produced the following income (losses).

    Activity A ($30,000)
    Activity B (20,000)
    Activity C 25,000
    Net passive loss ($25,000)

    Matt's suspended losses are as follows:
    a. $25,000 is allocated to C; $0 to A and B.
    b. $12,500 is allocated to A; $12,500 to B.
    c. $15,000 is allocated to A; $10,000 to B.
    d. $8,333 is allocated to A, B, and C.
    e. None of the above.

    ____ 119. In the current year, Crow Corporation, a closely held C corporation that is not a personal service corporation, has $100,000 of passive losses, $80,000 of active business income, and $20,000 of portfolio income. How much of the passive loss may Crow deduct in the current year?
    a. $0
    b. $20,000.
    c. $80,000.
    d. $100,000.
    e. None of the above.

    ____ 120. White Corporation, a personal service corporation, has $150,000 of passive losses, $120,000 of active business income, and $30,000 of portfolio income. How much of the passive loss may White Corporation deduct?
    a. $0.
    b. $30,000.
    c. $120,000.
    d. $150,000.
    e. None of the above.

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    Solution Preview

    Multiple Choice Answers: Please note that the Word attachment contains a properly formatted version of the answer that would be ideal for printing.

    101. ANS: C
    Cosmetic surgery is deductible when instigated from the following circumstances (1) a deformity evolving from a congenital abnormality, (2) a personal injury, or (3) a disfiguring disease. So, the cost of the $12,000 restorative surgery is deductible under the extenuating circumstance #2. However, amounts paid for voluntary cosmetic surgeries ($5,000 for reshaping the nose) are not deductible as a medical expense.

    102. ANS: B
    Patrick and Leah can claim a medical expense deduction for the current year of $2,800, determined as follows:

    Physician bills, dentist bills, and hospital expenses $ 8,200
    Less: Reimbursement (3,400)
    Unreimbursed expenses $ 4,800

    Health insurance premiums 3,000
    Prescribed medicines and drugs 2,500
    Total medical expenses $10,300

    Less: 7.5% of $100,000 (AGI) (7,500)

    Deductible medical expenses $ 2,800

    The contribution of $2,400 to the HSA is a deduction for AGI so is not included in the medical expense calculation.

    103. ANS: C
    A capital improvement that normally would not have a medical purpose qualifies as a medical expense if it is directly related to prescribed medical care. It is deductible to the extent that the expenditure exceeds the related property's increased value. Wayne's medical expense related to the room addition is $24,000 ($42,000 - $18,000).

    The entire cost of home-related capital expenditures incurred to assist a physically handicapped individual to live independently and productively qualifies as a medical expense. These expenditures are subject to the 7.5% floor only, and the increase in the home's value is deemed to be zero. Wayne's medical expense related to the ramp and hallway is $18,000 ($7,500 + $10,500) and is deductible as follows:

    Qualifying medical expenses ($24,000 + $18,000) $42,000
    Less: 7.5% x $120,000 (9,000)

    Deductible medical expenses $33,000 ...

    Solution Summary

    This solution provides answers to various multiple choice questions.