Quiz Of The Week: Itemized Deductions

The correct answer is A, statement I is correct. State and local property tax on business property belongs on Schedule C of Form 1040. (Publication 535).

The correct answer is B, $6,950. State or local sales or use taxes paid or incurred in connection with the acquisition or disposition of property could be deducted only through 2013. However, a taxpayer must choose between deductions of sales tax or state income tax. In this instance, the state income tax exceeds the sales tax by a substantial amount. A cash-basis taxpayer may deduct an advance payment of tax in the year of payment as long as it is an actual good faith payment and not a mere deposit (estimated and prepaid taxes). Deductible state, local, and foreign taxes include state, local, and foreign real estate taxes. Estate, inheritance, legacy, succession, and gift taxes, whether state, federal, or foreign, are not deductible, with some special exceptions when income distributions are involved. Federal income taxes, including amounts withheld from wages are not deductible. The sum of the $1,000 state income tax, the $2,400 estimated state income tax, the $2,450 property tax, and the $1,100 foreign real estate tax is $6,950. (Publication 17).

The correct answer is C, $900. The real estate tax bill is for 20X1. The seller of the home already reimbursed the taxpayer/buyer of the home for half of the real estate taxes at the June 30, 20X1 settlement. The $1,800 paid is for the entire calendar year of 20X1. Therefore, the taxpayer is entitled to six months out of the 12 months of real estate tax paid (half, or $900). (Publication 523).

The correct answer is B, $550. The life insurance premiums and the subscription to Golf Magazine are not deductible. Professionals can deduct expenses specific to their professions, such as dues to professional associations. A taxpayer may deduct a wide variety of expenses related to his investments if they are ordinary and necessary for the production or collection of income or for the management, conservation, or maintenance of property held for the production of income (IRC Section 212). Individuals may also deduct all the ordinary and necessary expenses incurred in connection with the determination, collection, or refund of any tax. Miscellaneous itemized deductions are allowed only if they, in the aggregate, exceed two percent of AGI. Costs incurred for entertainment that are otherwise allowable are reduced by 50 percent. Add the deductions of $300 for dues, $200 for tax advice, $300 for investment advice, and $250 for entertainment (50 percent times the $500 spent) for a total of $1,050, minus the two percent of the $25,000 AGI floor of $500, leaving the $550 deduction. (Publication 529).