Instructions : Please provide 2-3 sentence brief explanation and choose the best
ID: 2564272 • Letter: I
Question
Instructions : Please provide 2-3 sentence brief explanation and choose the best multiple choice answer. All sources must be noted. SHOW ALL WORK.
PART A
____ 17. Sally pursued a hobby of knitting seweater. Her AGI before considering the hobby is $50,000. During the year she sold the bedspreads for $12,000. She incurred expenses as follows:
Supplies
$6,000
Interest on loan to get business started
400
Advertising
7,600
Assuming that the activity is deemed a hobby, how should she report these items on her tax return?
a.
Include $12,000 in income and deduct $13,000 for AGI.
b.
Ignore both income and expenses since hobby losses are disallowed.
c.
Include $12,000 in income, deduct nothing for AGI, and claim $14,000 of the expenses as itemized deductions.
d.
Include $12,000 in income and deduct interest of $13,000 from AGI.
e.
None of the above.
PART B
____ 18. Karl paid the following expenses:
Tax return preparation fee
$ 700
Moving expenses
2,500
Alimony paid
1,000
State income taxes
2,000
Investment expenses
600
Expenses associated with rental property
1,400
Interest expense associated with loan to finance tax-exempt bonds
600
Calculate the amount that Karl can deduct from AGI (before any percentage limitations).
a.
$5,600.
b.
$3,300.
c.
$4,800.
d.
$5,400.
e.
None of the above.
PART C
19. Judy divorced. Judy’s attorney fee of $5,000 is allocated as follows:
General representation in obtaining the divorce
$2,200
Services in obtaining custody of the child
800
Services in settlement of martial property
900
Determining the tax consequences of:
Dependency deduction for child
600
Property settlement
500
Of the $4,000 Judy pays to her attorney, the amount she may deduct as an itemized deduction is:
a.
$0.
b.
$1,100.
c.
$2,800.
d.
$4,000.
e.
None of the above.
Supplies
$6,000
Interest on loan to get business started
400
Advertising
7,600
Explanation / Answer
PART A
option C. Include $12,000 in income, deduct nothing for AGI, and claim $14,000 of the expenses as itemized deductions.
Include income from hobby in the taxable income and then claim (6000+400+7600) = 14000 as itemized deduction.
PART B
option E none of the above
All of the expenses are deductible either as deductionsfor(2500+1000+1400) or as deductionsfrom(700+2000+600) except for the expenses associated with the tax-exempt bonds ($600). thus it should be 8200
Part C
option B $1100 (600+500)
Judy may deduct only the legal fees that relate solely to tax advice inthe divorce proceedings.