Basic Income Tax (Lesson 2) Flashcards
Taxpayers are either
- Cash basis
- Accrual basis
Cash basis taxpayers recognize income when
- it is received or set aside
Accrual basis taxpayers recognize income when
- it is earned
- must report an amount in their gross income on the earliest of the following dates
- when payment is received
- when the income amount is due to the taxpayer
- when the taxpayer earns the income
When is a cash basis taxpayer deemed to receive income
- when it is credited to the taxpayers account
- set apart for the taxpayer
- made available to be taken into the taxpayers possession
What does the constructive receipt doctrine state
- When income is readily available to the taxpayer and that income is not subject to substantial limitations or restrictions that income is deemed to be constructively received and should be taxed
What is substantial limitations under the constructive receipt doctrine
- any substantial limitation or restriction on either the time or manner of payment and
- the financial condition of the debtor makes payment of the income in question impossible
What is a fiscal year
- a 12 month period ending on the last day of a month other than December
When can a fiscal year be elected
- adequate records are maintained
How can an individual change their tax year
- must file form 1128 to get IRS approval either under the automatic approval procedures or the ruling request procedures
What are the 5 filing statuses for taxpayers
- Single
- MFJ
- MFS
- Head of Household
- Qualifying widower with qualified child
When can a person file as MFJ
- married on the last day of the year
- Spouse dies in the tax year and taxpayer did not remarry (May file one year as MFJ)
When can an individual file as head of household
- considered unmarried on the last day of the year
- taxpayer must have paid more than half the cost of keeping up a home during the tax year
- qualifying person must have lived with the taxpayer for more than half of the year
A qualifying child is a qualifying person if
- if they are single
- they are married and you can claim an exemption for them
A qualifying relative who is your father or mother is a qualifying person if
- can claim an exemption for them
A qualifying relative other than your father or mother is a qualifying period if
- person lived with the taxpayer more than half the year and you can claim an exemption for them
When can a taxpayer file as a qualifying widower with qualified child
- can file under this for two years following the year in which the taxpayers spouse died if the following apply:
- taxpayer was eligible to file a joint return with his or her spouse in the year in which the taxpayers spouse died
- taxpayer has not remarried
- taxpayer has a child or stepchild for whom the taxpayer can claim as qualified
- child lived in the taxpayers home all year
- taxpayer paid more than half the cost of keeping up a home during the year
If one spouse itemizes and files as MFS what must the other spouse do
- Also itemize
Can a nonresident alien use the standard deduction
no
Can an individual filing return less than 12 months use the standard deduction
no
What is the standard deduction that a taxpayer who is claimed as a dependent of another taxpayer
equal to the greater of:
- $1,100 or
- $350 plus earned income (not exceeding the regular standard deduction)
What four tests must a qualifying child meet
- Relationship test
- Adobe test
- Age test
- Support test
What does a qualifying child have to do to meet the relationship test
Must be:
- is a descendant of the taxpayer, taxpayers sibling, or a descendant of the taxpayers sibling
- Cousin is not a qualifying child
What is the abode test for a qualifying child
- qualifying child must live with the taxpayer for more than half the year
- taxpayer and dependent are considered to occupy the household even during temporary absences due to special circumstances such as illness, education, business, vacation, or military service
What is the age test for a qualifying child
- must be either under 19 as of the end of the calendar year or
- a student under the age of 24 as of the end of the calendar year
Are amounts received as scholarships considered to be support for the support test
No
What is the support test for a qualifying child
- qualifying child must not provide more than one half of their own support during the year
(Tie Breaker Rules for more than one person being eligible to claim another person)
Eligible taxpayer of the qualifying child is:
Both Parents
- The parent with whom the child lived longer
(Tie Breaker Rules for more than one person being eligible to claim another person)
Eligible taxpayer of the qualifying child is:
Both parents and the child lives with each for the same amount of time
- the parent with the higher adjusted gross income
(Tie Breaker Rules for more than one person being eligible to claim another person)
Eligible taxpayer of the qualifying child is:
Only one is a parent
- the parent
(Tie Breaker Rules for more than one person being eligible to claim another person)
Eligible taxpayer of the qualifying child is:
Neither is a parent
- taxpayer with the higher adjusted gross income
(Children of Divorce)
All four of the following requirements must be met if the child will be treated as the qualifying child of the noncustodial parent
- Parents are divorced, are separated under a written separation agreement, or they lived apart at all times during the last six months of the year
- child receives over half of their support for the year from their parents
- child is in the custody of the parents for more than half the year and
- custodial parent signs a statement that she will not claim the child for the year and the noncustodial parent attaches the statement to the return (Form 8332)
What four tests does a qualifying relative must meet
- relationship test
- gross income test
- support test
- not a qualifying child test
(Also has to meet the joint return test and the citizenship or residency test)
What is the relationship test for a qualifying relative
- taxpayers child or descendant of child (etc. grandchild)
- taxpayers brother, sister, stepbrother, stepsister
- taxpayers father, mother, or ancestor (Grandparent etc.)
- taxpayers stepfather or stepmother
- son (nephew) or daughter (niece) of a brother or sister of the taxpayer
- brother (uncle) or sister (aunt) of the father or mother of the taxpayer
- son in law, daughter in law, father in law, mother in law, brother in law, or sister in law of the taxpayer or
- any unrelated person who for the taxable year of the taxpayer has the same principal place of abode as the taxpayer and is a member of the taxpayers household
Can a child of the taxpayer meet the requirements to be a qualifying relative if they do not meet the qualifying child tests
Yes
What is the gross income test for qualifying relative
- dependents gross income must be less than the personal exemption amount for the year
- $4,300 for 2021
What is the support test for a qualifying relative
- taxpayer must provide more than one half of the support of a dependent
- support must be for providing housing, food, clothing, education, and medical treatment
- if money supplied is not used for support it does not count towards it
What is the not a qualifying child test for a qualifying relative
- in order to be claimed as a qualifying relative, a person cannot be a qualifying child of any taxpayer for the tax year
What is the joint return test for a qualifying relative
- a married dependent must not file a joint return with a spouse unless a tax return is filed only to claim a refund for tax withheld if neither spouse is otherwise required to file a tax return and if no tax liability would exist for either taxpayer on separate returns
What is the citizenship or residency test for a qualifying relative
- must be a citizen or national of the united states or a resident of the united states, Canada, or Mexico during some part of the year
What dates are quarterly estimates due for individuals
- April 15th
- June 15th
- September 15th
- January 15th
In order to avoid penalties taxpayers must pay estimated tax for 2021 if what two things apply
- taxpayer expects to owe at least $1,000 in tax for 2021 after subtracting withholding and credits
- taxpayer expects his withholding and credits to be less than the smaller of:
- 90% of the tax to be shown on your 2021 tax return or
- 100% of the tax shown on your prior years tax return (must be a full year return)
What is gross income
- all income from whatever source derived
When is alimony deductible and included in gross income
- Finalized before 12/31/18
What is the formula for the exclusion ratio to determine the nontaxable portion of an annuity
ER = Investment in Contract/ Expected Total Return
What does the exclusion ratio tell you
- the portion of each payment that is excluded from taxation
How long is the exclusion ratio applied to annuity payments
- for the whole term
- if the annuity is based on life expectancy and the annuitant outlives life expectancy the full payment becomes taxable
When will a participant have an adjusted basis in distributions received from a qualified plan
- participant made after tax contributions to a contributory qualified plan or
- participant was taxed on the premiums for life insurance held in the qualified plan
What is the formula to determine the adjusted basis in a traditional IRA distribution
- Ratio of AB = AB before withdrawal/ FMV of account at withdraw
What is the maximum amount of SS benefit that is taxable
85%
If the MAGI plus one half of SS benefits exceeds the first hurdle but not the second the taxable amount of SS benefits is the lessor of
- 50% SS benefits or
- 50% [MAGI + 0.50(SS Benefits) - Hurdle 1]
What is the first hurdle for SS
- MFJ = $32,000
- All other tax payers = $25,000
What is the second hurdle for SS
- MFJ = $44,000
- All other tax payers = $34,000
If the MAGI plus one half of SS benefits exceeds the second the taxable amount of SS benefits is the lessor of
- 85% SS benefits or
- 85% [MAGI + 0.50(SS Benefit) - Hurdle 2] plus the lessor of:
- $6,000 for MFJ or $4,500 for all other taxpayers or
- taxable amount calculated under the 50% formula and only considering hurdle 1
(Imputed Interest)
Loan Amount: 0 <= 10,000
$0
(Imputed Interest)
Loan Amount: 10,001 <= 100,000
The lesser of
- net investment income or
- interest calculated using AFR less interest calculated using stated rate of the loan If borrowers net investment income <= 1,000, 0 imputed interest
(Imputed Interest)
Loan Amount: > 100,000
- interest calculated using AFR less interest calculated using stated rate of the loan
How are below market loans by a corporation to a shareholder treated
- as a dividend to shareholder
- as the shareholder makes loan payments the payments are treated by the corporation as interest income
How are below market loans from an employer to an employee are treated
- as paid compensation for the employee and are subject to employment taxes
- as the employee makes loan payments the employer must treat the payments as taxable interest income
What is the definition of a gift
- gratuitous transfer of property
- donor acted out of a detached and disinterested generosity made out of affection, respect, admiration, charity, or like impulses
Property received by gift or bequest is
not taxable
Are life insurance proceeds paid on account of the death of the insured included in gross income or not
- not included in gross income
- interest portion of any payment is taxable though
What happens if the insured cashes in life insurance before the insureds death
- owner of the policy must recognize any cash received in excess of what the owner paid in premiums
- losses are not deductible
How is a life insurance policy that is transferred for valuable consideration taxed
- the amount received is includable in the owners gross income to the extent that amount exceeds the owners basis in the policy
- death proceeds will be taxable to the new owner
- the owners basis in the policy is defined as the amount that the owner paid for the policy
The proceeds of a life insurance policy can be excluded from gross income even if the policy is transferred for valuable consideration if
- policy is transferred to the insured
- policy is transferred to a partner of the insured
- policy is transferred to a partnership in which the insured is a partner
- policy is transferred to a corporation in which the insured is a shareholder or officer or
- policy is transferred by tax free exchange or gift
What is a viatical settlement
- the sale of a life insurance policy by a terminally or chronically ill policy owner
What is a terminally ill individual for a viatical settlement
- illness that will result in death in 24 months or less after the date of certification
What is a chronically ill individual for a viatical settlement
- a person who is unable to perform at least 2 ADLs for a period of at least 90 days
What test must a MEC meet in order to not be classified as a MEC
- 7 pay test
What is the 7 pay test for a MEC
- if the accumulated amount paid under the contract at any time during the first 7 contract years exceeds the sum of the net level premiums
How are withdrawals from a MEC treated
- on a LIFO method
- basis comes out last
What is considered a qualified expense for a scholarship or grant
- does not include room and board
- amounts used for room and board are taxable
What much of a gain can be excluded from gross income for the sale of a personal residence
- $250,000 single
- $500,000 MFJ
What do MJF taxpayers have to do in order to qualify for the exclusion of personal residence
- either spouse meets the ownership requirement with respect to the property
- both spouses meet the use requirement with respect to such property and
- neither spouse is ineligible for the exclusion as a result of having used the exclusion in the prior two years
A reduced exclusion may be available even if they do not meet the other requirements if the sale is due too
- change in employment
- change of health or
- unforeseen circumstances
- amount excluded is based on the period of ownership between the last sale and the current sale
How long is the exclusion of the personal residence available to a surviving spouse
- sale occurs no later than two years after the date of death of the deceased spouse
How is appreciation treated during a nonqualified use period for the personal residence exemption
- not subject to the exclusion
What is a qualified Roth IRA distribution
- account has been held for 5 years and
- the distribution must be made on account of disability, death, or on/after attainment of 59 1/2
How are distributions for a Roth 401(k) treated
- on a pro rata basis
What types of compensation for injuries and sickness are excluded from gross income
- Workers compensation for personal physical injury or sickness
- any damages received on account of personal physical injuries or sickness and
- payments from accident or health insurance that is personally owned by the taxpayer
How are punitive damages taxed
- are not excludable from income