31a) Marcus (ssn 397-73-8399) and Debra Cross own three homes. Information regar

Question

31a) Marcus (ssn 397-73-8399) and Debra Cross own three homes. Information regarding the amount of acquisition indebtedness, as well as interest and taxes paid on each home during the year is as follows.

Acquisition Interest. Taxes

Indebtedness. Paid. Paid

Principal residence. $240,000. $18,330. $2,400

Vacation home #1. $300,000. $18,583. $2,800

Vacation home # 2. $350,000. $19,044. $3,400

During 2012 the crosses made cash gifts totaling $12,000 to various qualified public charities. The Crosses gifted 150 shares of stock to their church during 2012. They purchased 100 shares of the stock for $10 a share in 2008. The other 50 shares were purchased earlier in 2012 for $18 a share. At the times the shares were donated to the church, their fair market value was $24 a share. The Crosses only other itemized deductions for 2012 were $4,240 that their employers withheld from their paychecks for state income taxes. The Crosses AGI for 2012 is $214,540. Compute the Crosses total itemized deductions and prepare their schedule A.

Explanation / Answer

Itemized deductions from adjusted gross income are allowed for specific activities, catastrophic losses, or other taxes paid under the federal individual income tax system (Internal Revenue Code, Section 63). Taxpayers compute their total itemized deductions, compare this total to the standard deduction allowed for their filing status, and subtract the greater amount from adjusted gross income. While the standard deduction simply provides a threshold for taxation, itemized deductions are targeted at individual circumstances or specific policies (Goode 1976: 147). Itemized deductions have been allowed under the federal income tax law for many years. However, they have been altered over time; some have been disallowed, some have been added, the computations have changed, and so forth. Taxpayers with income over a threshold amount are subject to a limitation on their total itemized deductions. In 1997, the threshold was $121,200 ($60,600 for married filing separately). For taxpayers with adjusted gross income over the threshold, allowable itemized deductions (other than medical, investment interest, casualty, theft, or wagering losses) are reduced by 3 percent of the excess, to a maximum reduction of 80 percent of total allowable deductions (excluding medical, investment interest, casualty, theft, or wagering losses) (Commerce Clearing House 1996: 281). Taxpayers must use tax form 1040 if they itemize their deductions. In 1993, approximately 28 percent of all federal individual income tax returns filed used itemized rather than standard deductions. Of the 43 states and the District of Columbia that have an income tax, 38 allow some itemized deductions in the calculation of taxable income (Advisory Commission on Intergovernmental Relations 1994: 68

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