Natalie and her husband James have been married for 25 years. They have three children.

Chloe, age 18, John, age 16, and Brianna, age 8. Natalie and James claim all three children as
dependents. Natalie and James have a combined salary of $150,000. During the year, the
family had the following expenses:

- Brianna attends a private boarding school for gifted children. She has an extremely high IQ.
The cost of the school is $40,000 and includes lodging and meals.
- John had an illegal drug problem during the year. He attended a drug rehabilitation program
which cost $5,000.
- Chloe gave birth to a baby, named Nathan after Chloe's grandfather. The cost of the birth was
$9,000. The father of the baby has not been involved; Natalie and James provide all of the
support for the new baby.
- After Nathan was born, the family spent $600 in bottled water to mix with formula, $2,000 on a
diaper service and $200 on nonprescription drugs.

What is Natalie and James' taxable income for 2016?

A. $111,800
B. $113,100
C. $113,400
D. $117,400
Answer: C

This question is complicated because you must determine whether they can itemize or use the
standard deduction., and you must determine the number of personal and dependency
exemptions that are available. If they select the standard deduction, their taxable income would
be $150,000 - $12,600 - ($4050 X 6) = $113,100. note that they have 4 dependency exemptions
(don't forget to include Nathan) and two personal exemptions.

Jason was injured in an accident. He is now a quadriplegic. He installed an elevator in

his home so he could reach the second floor. The cost of the elevator was $10,000 and
the increase in value attributable to the elevator was $4,000. He also had exit ramps
built, the hallways widened and bathroom fixutres lowered at a cost of $20,000. The
increase in value to the home was $1,000. Jason's income for the year is $25,000. What
is Jason's available deduction for medical expenses?

A. $0
B. $22,475
C. $23,500
D. $27,500
Answer: C

Capital improvements can be deducted as a medical expense. The general rule is that
the expense less the increase in value to the home is an eligible deduction. However,
certain expenses that allow a physically handicapped person live independently are not
reduced by the increase in the home's value. This includes exit ramps, widening of
hallways, and lowering of bathroom fixtures but not elevators. This the medical
deduction is : ($10,000 - $4,000 + $20,000) - (10% X 25,000) = $23,500
Which of the following taxes paid can be deducted as an itemized deduction?

A. FICA tax withheld by the employer

B. Gift tax paid
C. State excise tax
D. State Use tax
Answer: D

State use tax can be deducted as an itemized deduction. The rest cannot be deducted. An example of a
state excise tax is gasoline tax.