Question

O.1, 5, 8, 9 During the year, Addison is involved in the following transactions:

Lost money gambling on a recent trip to a casino.

Helped pay for her neighbor’s dental bills. The neighbor is a good friend who is unemployed.

Received from the IRS a tax refund due to Addison’s overpayment of last year’s Federal income taxes.

Paid a traffic ticket received while double parking to attend a business meeting.

Contributed to the mayor’s reelection campaign. The mayor had promised Addison to have some of her land rezoned. The mayor was reelected and got Addison’s land rezoned.

Borrowed money from a bank to make a down payment on an automobile.

Sold a houseboat and a camper on eBay. Both were personal use items, and the gain from one offset the loss from the other.

Paid for dependent grandfather’s funeral expenses.

Paid premiums on her dependent son’s life insurance policy.

What are the possible income tax ramifications of these transactions?

Answer 1

Answer :

1. Gambling losses are deductible expense under the federal income tax Act. However, gambling losses are deductible to the extent of gambling income. Therefore, Addison is allowed gambling losses as a deduction but to the extent of gambling income.

2. As per federal income tax Act, expense paid to dependents is allowed as a deductible amount. However, any amount paid to any person is not allowed as a deductible amount under the said Act. Therefore, the amount paid to neighbor's dental bills is not allowed as a deduction to Addison.

3. As per federal income tax Act, IRS tax refund amount is not an income because it is tax amount which is paid in last year and such overpayment of last year's tax amount is the only adjustment of prior period expenditure not allowed earlier.

4. As per federal income tax Act, penalty and fines are not allowed as a deductible amount. The payment of traffic ticket is in nature of penalty or fines which was levied by the authority because of the violation of traffic rules. Therefore, traffic ticket paid by Addison is not allowed as a deduction under the said Act.

5. As per federal income tax Act, contribution to the political party is not a deductible amount. In the given case, Addison made a contribution to the mayor's reelection campaign which came under the nature of the political contribution and therefore not allowed as a deduction under the said Act.

6. As per federal income tax Act, the loan amount is not deductible amount unless the loan amount is forgive by the lender or lender grant borrower a reprieve on paying back the debt owed.

7. As per federal income tax Act, gain or loss arising from the sale of personal use assets are not allowed to be setoff against each other. However, any gain arising from the sale of personal use assets is taxed as income but loss due to personal use assets are not allowed as a deduction under the said Act and accordingly the same tax ramification apply to the Addison as well.

8. As per federal income tax Act, expenses paid on the funeral of dependent grant-father is not allowed as a deduction. Therefore, Addison is not allowed the funeral expense paid by him for his dependent grant-father.

9. As per federal income tax Act, the premium paid on the life of dependent son's is not allowed as a deduction and therefore Addison is not said premium paid for his dependent child as a deduction.