Federal Income Taxation

True or False

1) A deduction will be allowed for an expenditure unless the Internal Revenue Code specifically disallows it.

2) According to the tax formula, individuals can deduct the greater of for AGI deductions or from AGI deductions.

3) Expenses incurred in a trade or business generally are deductions for AGI.

4) Fees paid to prepare a taxpayer's Schedule C of the tax return (Profit or Loss from Business) are for AGI deductions.

5) In order for an expense to be ordinary, it must be reasonable in amount and it must bear a reasonable and proximate relationship to the income-producing activity or property.

6) Interest expense on debt incurred to purchase or carry tax-exempt securities is not tax deductible.

7) Kickbacks and bribes paid to federal officials are deductible only if related to the taxpayer's trade or business.

8) Taxpayers may deduct lobbying expenses incurred to influence legislation at any governmental level if the legislation is of direct interest to the taxpayer's trade or business.

9) Business investigation expenses incurred by a taxpayer who is already involved in a similar business and who enters the new business are deductible currently.

10) Fines and penalties are tax deductible if related to the taxpayer's trade or business.

11) During the current year, Elizabeth, a single taxpayer, reports the following items income of income and expenses:

Income:

Salary $86,000

Municipal bond interest from City of Dallas 1,300

Bank account interest 2,300

Alimony received 24,000

Capital gain on an asset held less than one year 3,000

Rental income from residential rental house 12,500

Expenses/losses:

Interest on principal residence 8,000

Real estate taxes on principal residence 1,000

Capital loss on an asset held less than one year 7,000

Expenses related to rental property

Mortgage interest 6,000

Repairs 2,400

Taxes 700

Depreciation 1,200

Compute Elizabeth's taxable income. (Show all calculations in good form.)