Solutions

10-4 CHAPTER 10
DISCUSSION QUESTIONS
1. a. Yes. Any IRA deduction will decrease adjusted gross income, which is the base
for determining the medical expense deduction (i.e., 7.5% X AGI).
b. Increase. A lower AGI will result in a smaller nondeductible amount of medical

expenses and a larger medical expense deduction.
p. 10-3
2. Roberta may include as medical expenses the medical insurance premiums, fees for the
alcohol rehabilitation program, contact lenses, and the travel expenses to obtain treatment
at Mayo Clinic in Minnesota. p. 10-4 and Exhibit 10-1
3. Cosmetic surgery is necessary (and therefore deductible) when it ameliorates (1) a

deformity arising from a congenital abnormality, (2) a personal injury, or (3) a
disfiguring disease. Expenses incurred in connection with the restorative surgery
(required as a result of the accident) are deductible because the surgery was necessary.
Amounts paid for the unnecessary cosmetic surgery (reshaping the chin) are not
deductible as a medical expense. Examples 2 and 3
4. Helen may include the entire amount paid to the nursing home ($3,000 per month) if the
primary reason for being in the nursing home is to get medical care. If the primary reason
for being in the nursing home is personal, Helen may include only the $1,400 cost of
medical care in calculating her medical expense deduction. p. 10-4
5. The full cost of certain home-related capital expenditures incurred to enable a physically
handicapped individual to live independently and productively qualifies as a medical
expense. Qualifying costs include expenditures for constructing entrance and exit ramps
to the residence, widening hallways and doorways to accommodate wheelchairs,
installing support bars and railings in bathrooms and other rooms, and adjusting electrical
outlets and fixtures. These expenditures are subject to the 7.5% floor only, and the
increase in the home’s value is deemed to be zero. pp. 10-5 and 10-6
6. Bob may be able to include the payments related to Harriett’s injury with his own
medical expenses. For divorced parents with children, the noncustodial parent may claim
any medical expenses he or she pays even though the custodial parent claims the children
as dependents. This rule applies if the dependency exemption could have been shifted to
the noncustodial parent by the custodial parent’s waiver (see Chapter 3). pp. 10-6 and
10-7
7. David, who is self-employed, may deduct 100% of the premium of $7,500 as a deduction
for AGI. Joan, who is an employee, may include the premiums of $8,000 she paid in
computing her itemized deduction for medical expenses (subject to the 7.5% floor).
Example 10
8. Arturo, a calendar year taxpayer, paid $16,000 in medical expenses in 2005. Even if he
expects $12,000 of these expenses to be reimbursed by an insurance company in 2006, he
can include all $16,000 of the expenses in determining his medical expense deduction for
2005. He is not required to consider the potential reimbursement in computing his
medical expense deduction for 2005.
Casualty losses must be reduced if there is an expectation of reimbursement. Therefore,

Arturo’s starting point in computing the casualty loss deduction is $6,000 ($20,000 loss –
Deductions and Losses: Certain Itemized Deductions 10-5
$14,000 expected reimbursement). Further reductions are required for the $100 floor and
the 10% of AGI floor.
p. 10-9
9. A Health Savings Account (HSA) plan requires a high-deductible medical insurance

policy which means that the premiums on the policy will be less. The contributions to
the HSA are deductible for AGI which reduces the nondeductible amount of itemized
deductions subject to certain limitations, and the taxpayer does not have to itemize to
obtain the deduction. The HSA distributions pay for the deductible medical expenses and
are not included in gross income. Also, the interest earned on the HSA is not included in
gross income if it is used to pay medical expenses not covered by the high-deductible
plan.
pp. 10-9 to 10-11
10. Ahmad should be concerned with the following tax issues:
• Is the value of the certificate includible in gross income in 2004, even though it
appeared at that time that Ahmad would not have any need for the operation?
• If Ahmad uses the certificate for his daughter, is the prize includible in gross income
in 2005?
• If Ahmad pays for the prescription glasses for his daughter, can he take a medical
expense deduction?
• If Ahmad uses the certificate for an operation for his daughter, can he take a medical
expense deduction? If so, what is his basis in the certificate and what is the amount
of his medical expense deduction?
Chapter 4 and pp. 10-2 to 10-7
11. Even though Antonio paid all the real property taxes for 2005, they must be prorated for
deduction purposes. Antonio can deduct property taxes for the period he owned the
property (January 1 through June 30). Mina can deduct property taxes related to the
period she owned the property (July 1 through December 31), even though she did not
actually pay the taxes. Antonio will treat the taxes he paid on Mina’s behalf as a
reduction of the amount realized on the sale, and Mina must treat this amount as a
reduction in her basis for the property. pp. 10-12, 10-13, and Example 19
12. Julia can deduct mortgage interest on her principal residence and one of the two other
residences. She should choose the one that will result in the highest interest deduction.
Her deduction is limited to interest on up to (1) $1,000,000 of acquisition indebtedness,
and (2) $100,000 of home equity indebtedness. Julia should consider consolidating the
three mortgages into two if possible. p. 10-16
13. Yes. Home equity loans utilize a qualified residence of the taxpayer as security. The
proceeds from these loans can be used for personal purposes such as purchasing an
automobile. The interest paid on the qualified residence loan is deductible as an itemized
deduction on Schedule A while the interest paid on consumer loans is not deductible.
p. 10-16
10-6 2006 Comprehensive Volume/Solutions
14. Points paid by a seller are treated as an adjustment to the selling price of the residence.
The buyer is treated as having used cash to pay the points that were paid by the seller.
The buyer may deduct the points if several conditions are met. These conditions are
specified in Rev. Proc. 94-27, which is cited in footnote 31. p. 10-17
15. Because of the irregular patterns of interest payments, it does not appear that this is a
bona fide loan. Interest paid was $3,200 in 2003, $0 in 2004, and $9,000 in 2005.
Additionally, the interest would not represent deductible qualified residence interest
unless the loan was secured by the condominium. pp. 10-16 to 10-18
16. Contributions are deductible only if made to a qualified charitable organization. The
family would not qualify as a charitable organization, so Betty’s contribution will not be
deductible. The church probably would be a qualified charitable organization. If so,
Jack’s contribution will be deductible. p. 10-21
17. A taxpayer cannot take a deduction to the extent he/she receives a personal benefit.
Therefore, Andy is not entitled to a deduction because his contribution enabled his
daughter to attend the parochial school. p. 10-20
18. Nancy should consider the following tax issues if she acquires the notebook computer
under the conditions specified:
• Can she take a charitable contribution deduction for the $1,000 donation to the
university? To the extent the taxpayer receives a benefit from a contribution, the
charitable contribution deduction is not allowed. Nancy would be the sole user of the
computer and would receive a personal benefit from the contribution.
• Will she be allowed to take a depreciation deduction for the business use of the
computer? If Nancy contributes $1,000 to the university, the university owns the
computer. Therefore, she is not entitled to a depreciation deduction.
• Is Nancy required to report income as a result of her personal use of the computer?
Nancy should report income to the extent of the value of the computer usage for
personal use. It does not appear that the de minimis fringe benefit rule would allow an
exclusion from gross income.
• What could Nancy do to avoid the negative tax consequences discussed above?
Nancy could purchase a computer for $2,500. She could take a depreciation deduction
for the business use (limited by the listed property rules), and would not be required
to report income from personal use of the computer.
pp. 10-19 to 10-22
19. Harry is attempting to accelerate his charitable contribution deduction into 2005. There
are several potential advantages to accelerating the deduction by donating the land in
2005.
• His contribution will be deducted in a tax year when his combined Federal/state
marginal tax rate is 40% (2005) rather than 30% (2006).
• He might avoid disallowance of part of the deduction due to AGI percentage

limitations because his contribution base will be higher in 2005 than in 2006.
• He can deduct the fair market value of the land without recognizing the $80,000
appreciation as income.
• He can step up his basis in the land from $20,000 to $100,000 when he reacquires it
in 2006.
Harry’s plan will generate many favorable outcomes if he does not run afoul of the IRS.
While it does not appear that Harry has done anything that does not comply with the tax
law, the IRS might collapse the transaction; that is, focus on the outcome and ignore the
steps involved. The outcome is that Harry has transferred $100,000 cash to his church.
The IRS might disallow the deduction for the land contribution in 2005 and treat the
transaction as a cash contribution in 2006. In this case, Harry’s basis for the purchased
land would be $20,000 and his deduction would be at the lower 2006 marginal tax rate.
pp. 10-22 to 10-27
20. The following issues relate to the assets Zina sold:
• Should the $500 sales receipts be reported on her tax return?
• What was her basis for the assets she sold?
• Did she have a gain or loss on the sale?
• Were the assets used for personal use, trade or business, or production of income?
• Were the assets capital assets or ordinary income assets?
• If she sold capital assets, were they held short-term or long-term?
The following issues relate to the assets Zina donated:
• Does she plan to itemize deductions?
• Which organizations were recipients of the donated items?
• Were the organizations qualified charitable organizations?
• What types of assets did she donate, ordinary income assets or capital gain assets?
• What was her basis for the assets she donated?
• What was the fair market value of the assets she donated?
• How did she determine the fair market value of the items?
pp. 10-19 to 10-27
21. William should donate the $100,000 in the year he receives the $1 million won in the
state lottery. Donations to a qualified public charity (his church) are limited to 50% of
adjusted gross income (AGI). His AGI in the year of receipt would be ample to take the
entire contribution as a deduction in that year. If he donates the $100,000 in a tax year
when he only has his $40,000 salary plus or minus other income and adjustments on page
one of Form 1040, his donation will be limited to $20,000 (50% X $40,000) plus or
minus 50% of other income and adjustments on page one of Form 1040. William would
be allowed to carry forward for five years the excess contribution not taken in the
contributing year subject to the limitations. pp. 10-26 and 10-27
22. The following tax issues relate to prizes won in the Skins Game:
• Are the prizes won (monetary and nonmonetary) included in gross income?
• Should the players report only 80% of the total amount of money winnings as income
and claim no deduction for the amount that goes to charity?
• Should the players report the total amount of money winnings as income and deduct
the 20% that goes to charity as a charitable contribution? If so, is the deduction a
business expense or an itemized deduction?
• What amount should be reported as income for the automobile won by the leading
money winner—the sticker price, the average selling price, or some other amount?
• If the average selling price is the appropriate amount to report as income, how should
it be determined?
Chapter 4 and pp. 10-19 to 10-23

The following questions relate to material covered in later chapters:
• If the leading money winner already has an automobile and doesn’t need the new one,
what will be the tax result when he sells the automobile he won as a prize? What is
his basis in the automobile won as a prize? What kind of gain (loss) would result? If
a loss results, is it deductible? Chapters 13 and 14
• If the leading money winner keeps the automobile he won as a prize and sells the
automobile he had been using previously, what will be the tax result when he sells his
old automobile? What kind of gain (loss) would result? If a loss results, is it
deductible? Chapters 13 and 14
• What will be the tax result if the leading money winner gives the new automobile to a
friend or relative? Chapter 13
• What will be the tax result if the leading money winner gives the new automobile to a
charity? Chapter 13
• What will be the tax result if the leading money winner gives the new automobile to
his caddy, who is an employee? Chapter 13
23. General discussion. The stock is appreciated long-term capital gain property. The
general rule limits the deduction for the contribution of such property to 30% of AGI.
However, under the reduced deduction election, a taxpayer may choose to forgo a
deduction of the appreciation on capital gain property. This enables the taxpayer to move
from the 30% limitation to a 50% limitation.
a. Colin can deduct a total of $105,000, the fair market value of the stock. The
deduction for 2005 is limited to $54,000 (30% of $180,000 AGI). The remaining
$51,000 ($105,000 – $54,000) can be carried forward and deducted in the future,
subject to the same percentage limitations.
b. If Colin makes the reduced deduction election, he can deduct $84,000 (adjusted
basis) in 2005, but he will forgo a deduction for the $21,000 appreciation
($105,000 FMV – $84,000 adjusted basis).
c. Although the reduced deduction election appears attractive, it should be

considered carefully. The election sacrifices a deduction for the appreciation on
long-term capital gain property that might eventually be allowed. Colin should do
a time value analysis to compare the value of a deduction of $84,000 in 2005
versus the value of a $54,000 deduction in 2005 plus $51,000 of deductions to be
carried over to future years.
d. If Colin dies in December 2005, his executor should make the reduced deduction
election, which would yield a charitable contribution deduction of $84,000. If the
election is not made, the deduction will be $54,000 (30% of $180,000) and the
$51,000 carryover will be lost because the 2005 return will be the final return for
Colin.
pp. 10-23 to 10-27 and Example 36
PROBLEMS
24. Rita’s medical expense deduction is $12,600, determined as follows:
Medical insurance premiums $ 7,400

Doctor and dentist bills for Larry and Shirley 7,700
Doctor and dentist bills for Rita 10,500
Prescribed medicines for Rita 1,450
Nonprescribed insulin for Rita 550
Total medical expenses $27,600
Less: 7.5% of $200,000 (AGI) (15,000)
Deductible portion of medial expenses $12,600
Although Larry and Shirley cannot be claimed as Rita’s dependents, they could have
been had they not filed a joint return. Therefore, they qualify for the medical expense
deduction. Insulin is an exception to the rule that nonprescribed drugs do not qualify as
medical expenses. The insurance recovery was not received until 2006. Therefore, it has
no effect on the medical expense deduction for 2005.
pp. 10-2 to 10-9 and Exhibit 10-1
25. a. Andy can claim medical expenses he paid for his child, Jodi, even though his
former wife is the custodial parent. His deduction for medical expenses in 2005 is
computed as follows:
Hospitalization $ 5,200
Bills for doctor’s services 2,800
Medical expenses for Jodi 2,400
Total $10,400
Less: 7.5% of $80,000 AGI (6,000)
Medical expense deduction (assuming Andy itemizes
his deductions) $ 4,400
b. If the reimbursement for medical care had occurred in 2005, the medical expense
deduction would have been only $1,800 [$10,400 (total medical expenses) –
$2,600 (reimbursement) – $6,000 (floor)], and Andy would have paid more
income tax. Since the reimbursement was made in a subsequent year, Andy
would include $2,600 in gross income for 2006. If Andy had not itemized in
2005, he would not include the $2,600 reimbursement in 2006 gross income
because he would have received no tax benefit in 2005.
c. Andy’s deduction for medical expenses in 2005 would have been $4,400 (see
computation in Part a.). He would include the reimbursement in gross income to
the extent of his $2,400 tax benefit, as computed below:
Other itemized deductions $5,300

Medical expenses in excess of 7.5% floor 4,400
Total itemized deductions $9,700
Standard deduction for head of household in 2005 (7,300)
Tax benefit from medical expense deduction $2,400
pp. 10-7 to 10-9
26. Only $13,500 qualifies since $2,000 of the $15,500 cost of the elevator increased the
value of Jung’s residence. The total medical expense is $14,250 ($13,500 + $750
additional operating costs). The $500 appraisal fee is deductible as a miscellaneous
itemized deduction, but not as a medical expense. Example 6
27. Self-employed persons can deduct 100% of their medical insurance premiums as a
deduction for AGI in 2005. Thus, Jean may deduct $7,000 as a deduction for AGI.
p. 10-7
28. The charges for tuition, room, and board paid to Red River Academy qualify because
Beth receives specialized psychiatric treatment. Example 5
Although Ed does not qualify as Susan’s dependent, he qualifies as a dependent for

medical expense purposes. All of the costs paid for Ed at Heartland Nursing Home are
deductible because the primary reason he is there is to receive medical care. p. 10-4 and
Exhibit 10-1
Prescription drugs and insulin are deductible, but nonprescription drugs are not.
Only $4,300 of the filtration system qualifies since $2,200 of the $6,500 cost increased
the value of Susan’s residence. The $700 increase in utility bills also is a medical
expense. The appraisal fee of $360 is an itemized deduction, but is not deductible as a
medical expense. Example 6
Deductible medical expenses are summarized below:
Surgery for Beth $ 4,200

Red River Academy charges for Beth:
Tuition 5,600
Room, board, and other expenses 4,800
Psychiatric treatment 5,100
Doctor bills for Ed 2,200
Prescription drugs for Susan, Beth, and Ed 780
Insulin for Ed 540
Charges at Heartland Nursing Home for Ed:

Medical care 4,800
Lodging 3,700
Meals 2,650
Deductible cost for filtration system ($6,500 – $2,200) 4,300
Increase in utility bills due to the system 700
Total medical expenses (prior to the 7.5% floor) $39,370
29. The following tax issues are suggested by the facts presented:
• Can Rebecca claim Susan as a dependent?
• Can Rebecca take a medical expense deduction for the remodeling expenditures?
• Can Rebecca take a medical expense deduction for the swimming pool expenditures?
• Can Rebecca take a medical expense deduction for the cost of Susan’s operation?
• Can Susan take a medical expense deduction for the specially equipped van and the
costs of operating it?
• Can Rebecca take a medical expense deduction for the traveling expenses
(transportation, highway tolls, meals, and lodging)?
• Can Rebecca deduct the medical expenses incurred for Susan if Susan does not
qualify as her dependent?
The following questions should be asked to resolve some of the issues listed above:
• Did Rebecca provide more than half of Susan’s support? This will determine whether
Rebecca can deduct Susan’s medical expenses. In addition, Rebecca may be able to
claim head of household filing status if Susan lived with her for more than half the
year.
• Are the remodeling expenses necessary in order to enable Susan to live

independently? If so, the expenses are included in medical expenses subject to the
7.5% floor.
• Is the travel to Denver necessary in order for Susan to receive proper medical
treatment? If it is, the travel expenses are included in medical expenses subject to the
7.5% floor.
• How much expense did Rebecca incur for lodging? The deduction is limited to $50
per night per person.
pp. 10-4 to 10-8 and Chapter 3
30. Because Felicia is self-employed, she can deduct $2,400 ($200 per month X 12 months)
of the amount paid for the high-deductible policy as a deduction for AGI (refer to
Example 10). In addition, she may deduct the $3,600 paid to the HSA as a deduction for
AGI. Thus, Felicia may deduct $6,000 ($2,400 + $3,600) for AGI. pp. 10-9 to 10-11
31. General discussion. For Federal income tax purposes, real estate taxes must be
apportioned between the buyer and the seller. The taxes paid by the seller that are
and the amount

realized by the seller.
a. Keith’s basis in the residence is $296,370 [$300,000 (purchase price) – $3,630

(property taxes allocated to Keith but paid by Heather)].
b. Heather’s amount realized is $296,370 [$300,000 (sales price) – $3,630 (property

taxes allocated to Keith but paid by Heather)].
c. Keith can deduct the $3,630 apportioned to him, even though the tax was paid by
Heather.
d. Heather can deduct only the tax apportioned to her of $4,400, even though she
paid the entire amount.
pp. 10-12, 10-13, and Example 19
32. The itemized deduction is $6,500 ($1,200 + $1,500 + $1,500 + $1,500 + $800). The
deduction includes the four payments made in 2005 and the $800 overpayment credited
to 2005’s tax. p. 10-14
33. Willis, Hoffman, Maloney, and Raabe, CPAs

5191 Natorp Boulevard
Mason, OH 45040
February 20, 2006
Ms. Carol Sharp

208 Lone Tree Circle
Napa, CA 94558
Dear Ms. Sharp:
In our recent meeting, you asked me to determine the amount of your investment interest
deduction for 2005. The amount of your deduction will depend on choices that you make
with regard to the treatment of the $12,750 net capital gain on the sale of securities.
The deduction for investment interest is limited to the amount of investment income that
you report. If you choose not to treat the net capital gain as investment income for
purposes of computing the investment interest expense limitation, your deduction will be
$12,500 ($7,000 interest + $5,500 dividends).
However, if you elect to treat the net capital gain as investment income for purposes of
computing the investment interest expense limitation, your deduction will be $25,250
($7,000 interest + $5,500 dividends + $12,750 net capital gain).
If you elect to include the capital gains as investment income, your $12,750 net capital
gain will not qualify for beneficial tax rate treatment. Therefore, you must decide
between the tax benefit of an additional deduction of $12,750 versus the benefit of the
reduced rates applicable to net capital gain.
Due to the complexities of the capital gain provisions, I will need to meet with you again
to obtain additional information in order to advise you about the election that is available.
Please call me at (510) 555-1234 to schedule an appointment. Thank you for consulting
my firm on this matter. We look forward to serving you in the future.
Sincerely,
Julie Morgan, CPA

Partner
pp. 10-14 and 10-15
34. a. Helena’s investment interest deduction is limited to net investment income, which
is computed as follows:
Income from investments $21,150

Less: Investment expenses* (750)
Net investment income $20,400
*Because Helena has no other miscellaneous itemized deductions, the deductible

investment expenses are the smaller of (1) $2,250, the amount of investment
expenses included in the total of miscellaneous itemized deductions subject to the
2% of AGI floor, or (2) $750, the amount of miscellaneous expenses deductible
after the 2% of AGI floor is applied [$2,250 – $1,500 (2% of $75,000)].
Helena’s investment interest expense deduction in 2005 would be limited to

$20,400, the amount of net investment income. The balance of $9,600 would be
disallowed in 2005.
Total investment interest expense $30,000

Less: Net investment income (20,400)
Investment interest disallowed in 2005 $ 9,600
b. The $9,600 of investment interest disallowed may be carried over and becomes
investment interest expense in the subsequent year subject to the net investment
income limitation in 2006.
c. Helena could increase her investment interest deduction by $8,250 by electing to

treat the LTCG of $8,250 as investment income. The amount so elected would
not be available for beneficial alternative tax rate treatment for net capital gain,
however.
pp. 10-14 to 10-16
35. Interest is deductible only on the portion of a home equity loan that does not exceed the
lesser of:
• The fair market value of the residence, reduced by the acquisition indebtedness
($220,000 FMV – $70,000 acquisition indebtedness = $150,000).
• $100,000 ($50,000 for married persons filing separate returns).
Huseyin can deduct all of the interest on the first mortgage since it is acquisition
indebtedness. Of the $110,000 home equity loan, interest on $100,000 is deductible as
home equity interest. Examples 24 and 25
36. a. Robin Corporation can deduct interest expense of $6,000 in 2006. No interest
deduction is permitted in 2005. Under § 267, Ron and Tom are regarded as
related to the corporation. Consequently, the deductibility must await actual
payment in 2006.
b. All of the interest of $6,000 is included in the gross income of Ron and Tom in
2006. Because they use the cash method of accounting, income is not taxed until
received in 2006.
p. 10-18 and Chapter 6
37. Generally, when a donor derives a tangible benefit from a contribution, he or she cannot
deduct the value of the benefit. An exception to this benefit rule provides for the
deduction of 80% of the amount paid for the right to purchase athletic tickets from
colleges and universities. Example 30
a. Under the exception to the benefit rule, Nadia is allowed a $3,200 (80% of
$4,000) charitable contribution deduction for the taxable year. None of the $400
paid for game tickets can be deducted.
b. Nadia cannot deduct the $400 portion of the $4,000 that applies to the tickets
($100 X 4). She is allowed a charitable contribution deduction of $2,880, which
is equal to 80% of the $3,600 remainder.
38. General discussion. The deduction for a contribution of long-term capital gain property
is based on the fair market value, while the deduction for a contribution of ordinary
income property is equal to the lesser of the adjusted basis or the fair market value.
a. Because Virginia did not hold the stock for the long-term holding period
(December 4, 2004, until July 5, 2005), it is short-term capital gain property that
is subject to the rules for ordinary income property. Therefore, her deduction is
limited to $9,000.
b. Virginia held the stock for the long-term holding period (July 1, 2002, until July
5, 2005); so it is long-term capital gain property. Therefore, her deduction is
equal to the fair market value of the stock, $16,000.
c. The deduction for a contribution of loss property (FMV is less than adjusted
basis) is limited to the fair market value. Therefore, Virginia’s deduction is
$5,000. Example 32 and related discussion
pp. 10-24 and 10-25
39. Willis, Hoffman, Maloney, and Raabe, CPA’s

Mason, OH 45040
December 5, 2005
Mr. Pedro Valdez

1289 Greenway Avenue
Foster City, CA 94404
Dear Mr. Valdez:

I have evaluated the two alternatives for your charitable contribution deduction. Your
potential deduction is $130,000, the fair market value of the painting. It is not reduced by
the unrealized appreciation since the painting was assumed to be put to a related use by
the museum and the holding period is long-term. Your 2005 charitable contribution
deduction is limited to $75,000 (30% X $250,000 AGI) if you do not make the reduced
deduction election. The remaining $55,000 ($130,000 FMV – $75,000 deduction) can be
carried forward for five years.
If you make the reduced deduction election, you can deduct $90,000 (adjusted basis of
the painting) in 2005, because the amount is less than the maximum potential deduction
of $125,000 (50% X $250,000 AGI). However, if you make the election, you must forgo
deducting the $40,000 appreciation on the painting ($130,000 FMV – $90,000 adjusted
basis). Based on the facts presented, it does not appear that you should make the reduced
deduction election. You would be forgoing an additional deduction of $40,000 in order
to increase your 2005 deduction from $75,000 to $90,000. You should plan your
contributions carefully over the next five years so that you do not lose any of the $55,000
carryover.
I will be pleased to discuss my recommendation in further detail if you wish. Please call
me at (510) 555-1234 if you have any questions. Thank you for consulting my firm on
this matter. We look forward to serving you in the future.
Sincerely,
Carol Eckert, CPA

Partner
pp. 10-23 to 10-27
40. a. No reduction for the appreciation on the Goshawk, Inc. stock is necessary
because, if sold, it would yield a long-term capital gain. Thus, Alvin’s potential
charitable deduction is $250,000 [$110,000 (cash) + $140,000 (fair market value
of Goshawk, Inc. stock)], but his allowable contribution deduction for the year is
limited to $210,000 (50% of $420,000 AGI).
Although the 30% of AGI limitation applies to long-term capital gain property,
which would result in a current deduction for the Goshawk, Inc. stock of
$126,000 (30% of $420,000 AGI), the overall 50% of AGI limitation applies to
limit the deduction to $100,000. When the contributions for the tax year involve
both 50% property (the cash of $110,000 in this case) and 30% property (the
Goshawk, Inc. stock), the allowable deduction comes first from the 50% property.
Therefore, Alvin’s allowable deduction of $210,000 for the current year consists
of:
Cash $110,000
Goshawk stock [overall limitation of $210,000 (50% of AGI)
– $110,000 (cash)] 100,000
$210,000
b. The unused portion of the Goshawk stock contribution of $40,000 [$140,000 (fair
market value) – $100,000 (portion used)] may be carried over for five years. The
carryover continues to be classified as 30% property in the carryover years.

p. 10-26
If Alvin plans his charitable deductions wisely, sooner or later he will be able to
deduct the full $140,000 fair market value of the stock.
41. General discussion. The stock is appreciated long-term capital gain property. The
general rule limits the deduction for the contribution of such property to 30% of AGI.
However, under the reduced deduction election, a taxpayer may choose to forgo a
deduction of the appreciation on capital gain property. This enables the taxpayer to move
from the 30% limitation to a 50% limitation.
a. Ramon’s value for the contribution is $105,000, the fair market value of the stock.
The deduction for 2005 is limited to $54,000 (30% of $180,000 AGI). The
remaining $51,000 ($105,000 – $54,000) can be carried forward and deducted in
the future, subject to the same percentage limitations.
b. If Ramon makes the reduced deduction election, he can deduct $84,000 in 2005,
but he will forgo a deduction for the $21,000 appreciation ($105,000 FMV –
$84,000 adjusted basis).
c. Although the reduced deduction election appears attractive, it should be

considered carefully. The election sacrifices a deduction for the appreciation on
long-term capital gain property that might eventually be allowed. Ramon should
do a time value analysis to compare the value of a deduction of $84,000 in 2005
versus the value of a $54,000 deduction in 2005 plus $51,000 of deductions to be
carried over to future years.
d. If Ramon dies in December 2005, his executor should make the reduced
deduction election, which would yield a charitable contribution deduction of
$84,000. If the election is not made, the deduction will be $54,000 (30% of
$180,000) and the $51,000 carryover will be lost because the 2005 return will be
the final return for Ramon.
42. a. Based on these facts, Roberta can deduct $660 as a charitable contribution for
2005. The deduction is based on the difference between the purchase price of the
four tickets (4 X $200) and their fair market value (4 X $35). Giving the tickets
to the minister is of no consequence, because the minister is not a qualified
charity. pp. 10-20 to 10-22
b. The pledge to the building fund of the church yields no deduction for 2005. In
this regard, it makes no difference whether Roberta uses the cash or the accrual
method of accounting for tax purposes. Except for limited exceptions involving
accrual basis corporations and fiduciary entities, charitable donations are
deductible only in the year in which they are paid. Had the check that satisfied
the pledge been mailed on December 31, 2005, Roberta could have claimed a
deduction for 2005. As the situation is described, however, the $4,000 deduction
relates to 2006. p. 10-22

Mason, OH 45040
December 5, 2005
Ms. Alice Young

2622 Bayshore Drive
Berkeley, CA 94709
Dear Ms. Young:
I have evaluated the proposed alternatives for your 2005 year-end contribution to the
United Way. I recommend that you sell the Gold Corporation stock and donate the
proceeds to the United Way. The four alternatives are discussed below.
Donation of cash, the unimproved land, or the Gold stock will each result in a $21,000
charitable contribution deduction. Donation of the Blue Corporation stock will result
only in a $3,000 charitable contribution deduction.
A direct contribution of the Gold Corporation stock will be a bad move taxwise in that
the decline in value of $5,000 ($21,000 – $26,000) is not deductible and the amount of
the charitable contribution would be $21,000. However, you will benefit in two ways if
you sell the Gold stock and give the $21,000 in proceeds to the United Way. Donation of
the proceeds will result in a $21,000 charitable contribution deduction. In addition, sale
of the stock would result in a $5,000 long-term capital loss. If you have capital gains of
$2,000 or more in 2005, you could use the entire loss in computing taxable income for
2005. If you have no capital gains in 2005, you can deduct $3,000 of the capital loss in
2005 and carry the remaining $2,000 over to 2006.
You should make the donation in time for ownership to change hands before the end of
the year. Therefore, I recommend that you notify your broker immediately so there will
be no problem in completing the donation on a timely basis.
me at (510) 555-1234 if you have questions. Thank you for consulting my firm on this
matter. We look forward to serving you in the future.
Sincerely,
Nora Oldham, CPA

Partner
Example 44

Mason, OH 45040
January 20, 2005
Mr. and Mrs. Manuel Garcia

5904 Stevens Avenue
Durham, NC 27707
Dear Mr. and Mrs. Garcia:
I have reviewed the tax information you provided and have determined that you will save
$353 in Federal income tax if you file separate returns for 2004. While it is usually
advantageous to file jointly, that is not the case for you this year because of Manuel’s
high medical expenses and his unreimbursed employee expenses. A detailed computation
that supports my recommendation is enclosed.
me at 555-9999 if you have questions. Thank you for consulting my firm on this matter.
We look forward to serving you in the future.
Sincerely,
Rodney Rodriguez, CPA

Partner
Manuel and Rosa Garcia

Comparison of Joint and Separate Tax Liabilities
Tax Year 2004
Separate and joint tax liabilities for 2004 are computed as shown below. These
computations are based on all information provided by Manuel and Rosa Garcia.
Manuel Rosa Joint

Salary $40,000 $ 40,000
Business net income $100,000 100,000
Interest income** 1,500 2,300 3,800
Gross income $41,500 $102,300 $143,800
Deductions for AGI (2,000) (13,000) (15,000)
AGI $39,500 $ 89,300 $128,800
Medical expenses after 7.5% floor $ 6,538 $ -0- $ 440

State income tax 800 2,000 2,800
Real estate tax 1,700 1,700 3,400
Mortgage interest 2,600 2,600 5,200
Unreimbursed employee expenses after 2% 310 -0- -0-
floor
Total itemized deductions $11,948 $ 6,300 $ 11,840
Limited to 5,761*
Exemptions 3,100 3,100 6,200
Total deductions from AGI (15,048) (8,861) (18,040)
Taxable income $24,452 $ 80,439 $110,760
Tax $ 3,310 $ 17,502 $ 21,165
Savings filing separately:

Tax filing jointly $ 21,165
Tax filing separately ($3,310 + $17,502) (20,812)
Savings $ 353
*Itemized deduction limitation:

AGI $89,300
Minus threshold (71,350)
$17,950
X .03
Reduction $ 539
Total itemized deductions $ 6,300

Reduction (539)
$ 5,761
**Interest income:
Manuel Rosa
Manuel’s interest $ 400
Rosa’s interest $1,200
Their joint interest 1,100 1,100
$1,500 $2,300
pp. 10-29 and 10-30
45. For the medical expenses, the taxpayers are allowed $5,000 [$23,000 – (7.5% X
$240,000)]. The casualty loss must first be reduced by $100 and then by $24,000 (10%
X $240,000). Thus, only $1,900 [$26,000 – $24,100 ($100 + $24,000)] can be deducted.
Note that neither the medical expenses nor the casualty loss is subject to the overall
limitation on itemized deductions.
Regarding the overall limitation, the cutback adjustment is $2,822 [3% X ($240,000 –
$145,950)]. Because the covered itemized deductions total $55,000 ($10,000 + $13,000
+ $17,000 + $15,000) and 80% of $55,000 is $44,000, the 80% rule does not apply (use
the lesser of $2,822 or $44,000).
Consequently, the taxpayer’s allowable itemized deductions for 2005 are $5,000
(medical) + $1,900 (casualty) + $52,178 ($55,000 – $2,822), or $59,078.
Example 38
46. Charles’s itemized deductions before the overall limitations are computed below:
Medical expenses [$39,500 – (7.5% X $400,000)] $ 9,500

State and local income taxes 5,200
Real estate taxes 4,400
Home mortgage interest 5,400
Charitable contributions 4,800
Casualty loss [$47,000 – (10% X $400,000)] 7,000
Unreimbursed employee expenses [($8,900 – (2% X $400,000)] 900
Gambling losses ($9,800 loss limited to $7,400 of gambling income) 7,400
Total itemized deductions before overall limitation $44,600
Charles’s itemized deductions after application of the overall limitation are computed
below:
Itemized deductions subject to overall limitation:

State and local income taxes $ 5,200
Unreimbursed employee expenses 900
Total $20,700
Reduction equals the smaller of the following:
3% X ($400,000 AGI – $145,950) $ 7,622
80% of itemized deductions subject to limitation 16,560
($20,700 X 80%)
Amount of reduction (7,622)
Deductible itemized deductions subject to overall limitation $13,078
Itemized deductions not subject to overall limitation:
Medical expenses 9,500
Gambling losses 7,400
Casualty loss 7,000
pp. 10-29, 10-31, and Example 38
47. Gary and Carolyn have AGI of $252,600 for 2005, which will trigger the 3% floor
(cutback adjustment) that applies to high income taxpayers. Their itemized deductions
before applying the 3% floor are computed below:

Their itemized deductions after application of the overall limitation are computed below:
Itemized deductions subject to overall limitations

[$36,800 – $5,300 gambling losses (from above)]: $31,500
Reduction equals the smaller of the following:
3% X ($252,600 AGI – $145,950) $ 3,200
($31,500 X 80%)
Amount of reduction (3,200)
Total allowable itemized deductions $33,600
p. 10-29 and Example 38
48. Thomas’s itemized deductions before the overall limitation are computed as follows:
Medical expenses [$24,000 – (7.5% X $300,000)] $ 1,500

State and local income taxes 4,500

Casualty loss [$35,000 – (10% X $300,000)] 5,000
Unreimbursed employee expenses [$7,600 – (2% X $300,000)] 1,600
Thomas’s itemized deductions subject to the overall limitation are as follows:
Itemized deductions subject to overall limitation:

Unreimbursed employee expenses 1,600
Total $17,600
Thomas must reduce this amount by the smaller of the following:
3%($300,000 AGI – $145,950) $ 4,622

($17,600 X 80%)
Therefore, the amount of the reduction is $4,622 and Thomas has $25,278 of deductible
itemized deductions, computed as follows:

($17,600 – $4,622)
Medical expenses 1,500
Casualty losses 5,000
Deductible itemized deductions $25,278
Example 38
CUMULATIVE PROBLEMS
49. Tax Computation
Bruce’s salary $ 58,300

Alice’s salary 46,200
Interest income 2,695
Adjusted gross income $107,195
Less: Itemized deductions (Note 1) (35,645)
Less: Personal and dependency exemptions
(Bruce, Alice, 2 children, and Bruce’s father) (Note 2) (15,500)
Taxable income $ 56,050
Tax from Tax Table $ 7,696
Less: Prepayments and credits
Income tax withheld ($4,180 + $6,390) (10,570)
Net tax payable (or refund due) for 2004 ($ 2,874)
See the tax return solution beginning on page 10-25 of the Solutions Manual.
Notes
(1) Itemized deductions are summarized below:
Medical expenses:
Medical insurance premiums $ 7,810
Doctor bill for Sam paid in 2004
for services in 2003 3,080
Operation for Sam (a dependent under a
multiple support agreement) 6,710
Total medical expenses $17,600
Less: 7.5% of $107,195 AGI (8,040)
Medical expenses deductible in 2004 $ 9,560
Taxes:
State income taxes ($4,870 + $880) $ 5,750
Property taxes on residence 6,840 12,590
Interest on home mortgage 8,580
Charitable contributions:
Church contribution $ 4,290
Tickets to charity dinner dance
(Only the excess of the ticket price of $220
over the cost of comparable entertainment
of $90 is deductible) 130
Used clothing donated (limited to fair
market value) 495 4,915
Miscellaneous itemized deductions:
Uniforms ($407 cost + $189 upkeep) $ 596
Professional journals 275
Total of deductible items $ 871
Less: 2% of $107,195 AGI (2,144)
Miscellaneous itemized deductions deductible in 2004 -0-
Alice and Bruce would elect to itemize their deductions because the total exceeds
the standard deduction of $9,700 for 2004 for married persons filing a joint return.
(2) In addition to the Byrd’s two children, Cynthia and John, Bruce’s father, Sam,
qualifies as a dependency exemption under a multiple support agreement.
Therefore, the deduction is $15,500 ($3,100 X 5).
Part 2—Tax Planning
Bruce’s salary ($58,300 X 1.1) $64,130

Interest income ($16,000 + $2,695) 18,695
Less: Personal and dependency exemptions
(Bruce, Alice, 2 children) (4 X $3,200) (12,800)
Taxable income $53,493
Tax from tax rate schedule for 2005 $ 7,294

Less: Prepayments and credits
Income tax withheld ($6,390 X 1.1) (7,029)
Net tax payable (or refund due) for 2005 $ 265
Notes
(1) Itemized deductions are summarized below:
Medical expenses:
Medical insurance premiums $7,810
Less: 7.5% of $82,825 AGI (6,212) $ 1,598
Taxes:
State income taxes ($2,890 X 1.1) $3,179
Property taxes on residence 6,840 10,019

Professional journals $ 275
Less: 2% of $82,825 AGI (1,657)
Miscellaneous itemized deductions deductible -0-
in 2005
50. Paul’s salary $ 58,000

Donna’s salary 56,000
Dividends 750
State income tax refund 1,520
Long-term capital gain (Note 1) 7,500
Less: Personal and dependency exemptions (16,000)
(Paul, Donna, Larry, Jane, Hannah) (Note 3)
Taxable income $ 85,250
Tax (Note 5) $ 13,818
Less: Tax withheld ($10,300 + $9,700) (20,000)
Net tax payable (or refund due) for 2005 ($ 6,182)
Notes
(1) Sale price of 300 shares Acme Corp. stock (300 X $50) $ 15,000
Cost of stock (300 X $25) (7,500)
Recognized gain on sale (LTCG) $ 7,500
(2) Itemized deductions:

Medical expenses:
Doctor & hospital bills ($8,700 – $2,000) $ 6,700
Prescription drugs & medicine 640
Insurance premiums 2,810
Total medical 10,150

Less: 7.5% of $123,770 AGI (9,283)
Deductible medical $ 867
Taxes:
State income taxes paid ($900 + $800) $ 1,700
Real estate taxes 3,700 5,400
Contributions:
Church $ 2,100
Books 740 2,840
Casualty loss:
Fair market value $18,000
Less: Nondeductible floor (100)
Less: 10% of $123,770 AGI (12,377) 5,523

Air fare $ 340
Hotel 170
Meals (50% X $95) 48
Registration fee 340
Total deductible items $ 898
Less: 2% of $123,770 AGI (2,475)
Deductible miscellaneous itemized deductions -0-
(3) Since Donna is the custodial parent, the Decker’s qualify for the dependency
deduction for both Larry and Jane. Since they provide over 50% of the support of
Hannah, they also qualify for a dependency deduction for her. Thus, the personal
exemption and dependency deduction is $16,000 ($3,200 X 5).
(4) Consumer interest is not deductible. Therefore, neither the interest on the auto
loan of $1,490 nor the credit card interest of $870 is deductible.
(5) Tax on $ 8,250 X 15% = $ 1,238

59,400 = 8,180
17,600 X 25% = 4,400
$85,250 $13,818
49.
49. continued
49. continued
49. continued

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10-4 CHAPTER 10

b. Increase. A lower AGI will result in a smaller nondeductible amount of medical

3. Cosmetic surgery is necessary (and therefore deductible) when it ameliorates (1) a

Casualty losses must be reduced if there is an expectation of reimbursement. Therefore,

9. A Health Savings Account (HSA) plan requires a high-deductible medical insurance

pp. 10-9 to 10-11

10. Ahmad should be concerned with the following tax issues:

Chapter 4 and pp. 10-2 to 10-7

pp. 10-19 to 10-22

• He might avoid disallowance of part of the deduction due to AGI percentage

20. The following issues relate to the assets Zina sold:

• Should the $500 sales receipts be reported on her tax return?

• What was her basis for the assets she sold?

• Did she have a gain or loss on the sale?

• Were the assets capital assets or ordinary income assets?

• If she sold capital assets, were they held short-term or long-term?

The following issues relate to the assets Zina donated:

• Does she plan to itemize deductions?

• Which organizations were recipients of the donated items?

• Were the organizations qualified charitable organizations?

• What was her basis for the assets she donated?

pp. 10-19 to 10-27

Chapter 4 and pp. 10-19 to 10-23

c. Although the reduced deduction election appears attractive, it should be

pp. 10-23 to 10-27 and Example 36

24. Rita’s medical expense deduction is $12,600, determined as follows:

Medical insurance premiums $ 7,400

pp. 10-2 to 10-9 and Exhibit 10-1

Other itemized deductions $5,300

pp. 10-7 to 10-9

Although Ed does not qualify as Susan’s dependent, he qualifies as a dependent for

Deductible medical expenses are summarized below:

Surgery for Beth $ 4,200

Charges at Heartland Nursing Home for Ed:

• Can Rebecca claim Susan as a dependent?

• Are the remodeling expenses necessary in order to enable Susan to live

pp. 10-4 to 10-8 and Chapter 3

and the amount

a. Keith’s basis in the residence is $296,370 [$300,000 (purchase price) – $3,630

b. Heather’s amount realized is $296,370 [$300,000 (sales price) – $3,630 (property

pp. 10-12, 10-13, and Example 19

33. Willis, Hoffman, Maloney, and Raabe, CPAs

February 20, 2006

Ms. Carol Sharp

Dear Ms. Sharp:

Julie Morgan, CPA

pp. 10-14 and 10-15

Income from investments $21,150

*Because Helena has no other miscellaneous itemized deductions, the deductible

Helena’s investment interest expense deduction in 2005 would be limited to

Total investment interest expense $30,000

c. Helena could increase her investment interest deduction by $8,250 by electing to

pp. 10-14 to 10-16

• $100,000 ($50,000 for married persons filing separate returns).

p. 10-18 and Chapter 6

pp. 10-24 and 10-25

39. Willis, Hoffman, Maloney, and Raabe, CPA’s

Mr. Pedro Valdez

Dear Mr. Valdez:

Carol Eckert, CPA