During the year, Addison is involved in the following transactions. What are the possible Federal income tax effects of these transactions? a. Lost money gambling on a trip to a casino. b. Helped pay for her neighbor Howie’s dental bills. Howie is a good friend who is unemployed. c. Received from the IRS a tax refund due to Addison’s overpayment of last year’s Federal income taxes. d. Paid a traffic ticket received while double parking to attend a business meeting. e. Contributed to the mayor’s reelection campaign. The mayor had promised Addison to rezone some of her land. f. Borrowed money from a bank to make a down payment on an automobile. g. Sold a houseboat and a camper on eBay. Both were personal use items, and the gain from one offset the loss from the other. h. Her dependent Aunt Katherine died on June 3 of the year. i. Paid for Katherine’s funeral expenses. j. Paid premiums on her dependent son’s life insurance policy.
a) The money lost in gambling are deductible only to the extent of gambling gains.
b) Barring an exception for claim as a dependents, no deduction is permitted for payment of some other person’s expenses.
c) A Federal income tax refund due to Addison’s overpayment of last year’s Federal income taxes is not income because it is a previous adjustment of a prior expenditure that was not deductible.
d) The penalties and fine are not deductible for any reason. It does not matter whether they stem from personal or business activities.
e) Political contributions are not deductible for any reason. It does not matter that the contribution resulted as a gain to Addison.
f) Borrowing money from a bank to make a down payment on an automobile does not result in income thus there would be not tax effects.
g) Sold a houseboat and a camper on eBay. Because both are personal use items, and the gain from one offset the loss from the other, however the loss cannot offset a gain. Gains are taxable, and the losses are not deductible
h) A dependency exemption is available for the aunt Katherine who died on June 3 of the year. The full amount is exempted because she lived during the year
i) No exemption can be claimed for income tax purposes for the funeral expenses for any reason.
j) Premiums on personal life insurance policies are not deductible for any reason even when the amount is paid on behalf of a dependent