Book 4 page 1-60 Flashcards
1
Q
this doctrine stipulates that a transaction will not be effective for income tax purposes unless it is intended to achieve a genuine business purpose other than tax avoidance
A
business purpose doctrine
2
Q
prohibits an individual to form an entity just to potentially receive favorable tax treatment ; requires actual business purpose to be present
A
business purpose doctrine
3
Q
this doctrine allows the IRS to look through the legal formalities of a transaction to determine its actual economic substance
A
substance-over-form doctrine
4
Q
give an example of when the substance-over-form doctrine becomes relevant
A
a corporate executive who is in need of income decides to have the corp lend her money from the business, the IRS could declare that this loan should be reclassified as salary
- IAS 17 Leases requires the preparers of financial statements to consider the substance of lease arrangements when determining the type of lease for accounting purposes.
- For example, an asset may be leased to a lessee without the transfer of legal title at the end of the lease term. Such a lease may, in substance, be considered as a finance lease if for instance the lease term is substantially for entire useful life of the asset or the lease agreement entitles the lessee to purchase the asset at the end of the lease term at a very nominal price and it is very likely that such option will be exercised by the lessee in the given circumstances.
- IAS 18 Revenue requires accountants to consider the economic substance of the sale agreements while determining whether a sale has occurred or not.
- For example, an entity may agree to sell inventory to someone and buy back the same inventory after a specified time at an inflated price that is planned to compensate the seller for the time value of money. On paper, the sale and buy back may be deemed as two different transactions which should be dealt with as such for accounting purposes i.e. recording the sale and (subsequently) purchase. However, the economic reality of the transactions is that no sale has in fact occurred. The sale and buy back, when considered in the context of both transactions, is actually a financing arrangement in which the seller has obtained a loan which is to be repaid with interest (via inflated price). Inventory acts as the security for the loan which will be returned to the ‘seller’ upon repayment. So instead of recognizing sale, the entity should recognize a liability for loan obtained which shall be reversed when the loan is repaid. The excess of loan received and the amount that is to be paid (i.e. inflated price) is recognized as finance cost in the income statement.
5
Q
this doctrine states that the person who earns the income cannot assign the income to someone else just for tax purposes ; also known as the fruit and the tree doctrine
A
assignment-of-income doctrine
6
Q
this doctrine converts otherwise nontaxable income into taxable income
A
tax benefit rule/doctrine
7
Q
give an example of the tax benefit doctrine
A
a taxpayer is reimbursed in a subsequent year for medical expenses paid and deducted in a previous year
8
Q
states that if there is no substantial limitation or restriction on a taxpayer’s right to bring the funds under personal control, the income will be taxed as if already received
A
constructive receipt doctrine
9
Q
if a taxpayer sells stock after a dividend has been declared but before the record date, who will pay tax on the dividend?
A
the purchaser
10
Q
taxable income that has not yet been received in cash
A
phantom income
11
Q
true or false? A client is in the 28% bracket. Because of this the client instructed the tenant of his rental property to make payments to his (the CFP client) daughter. The daughter is in the 15% bracket so the client wants the rental income to be taxed at lower rates. This is a valid strategy to use
A
false, this will be classified as assignment of income. Because the client owns the rental property he is the one that is required to recognize income
12
Q
true or false? income from partnerships is taxed at the partners’ own individual rates
A
true
13
Q
what return must a partnership file?
A
Form 1065
14
Q
which form indicates each partner’s share of the partnership income?
A
K-1
15
Q
true or false? income from a general partnership on the K-1 is usually self employment income
A
true
Unlike a general partner, who has unlimited liability for partnership debts, a limited partner is generally only liable up to the amount of his investment.
- A general partner pays self-employment tax on earnings from self-employment.
- A limited partner does not pay self-employment tax on his share of partnership income. However, if a limited partner receives guaranteed payments for services performed, such payments are subject to self-employment tax.
LLC Members:
- LLC members owe self-employment tax when they-
- Provide services for their business,
- Participate in the management, and
- Are not passive investors.
16
Q
true or false? income from a limited partnership is passive activity income for the limited partner
A
true
17
Q
who pays the tax on a S corps income?
A
the shareholders
18
Q
what form does a S corp file?
A
1120S
19
Q
true or false? each shareholder of a S corp will receive a K-1
A
true
20
Q
true or false? the income from the S corp is considered passive activity income
A
true
21
Q
income generated by assets of an estate that is distributed from the estate to the beneficiaries
A
income in respect of a decedent (IRD)
22
Q
true or false? IRD income is usually not taxable
A
false, it is taxable
23
Q
when the taxpayer obtains possession of the income but is not legally entitled to the receipt of the income because the taxpayer is required to turn over the income to its rightful owner
A
Conduit for others
24
Q
true or false? gift loans may only occur between individuals
A
true
25
On January 1, Richie loaned his daughter, Beth, $90k to purchase a new home. There were no other loans outstanding between the two. Beth's only income was $30k salary and $4k interest income. Richie had investment income of $200k. Richie did not charge Beth interest. The relevant federal rate was 9%. How much imputed interest must Richie recognize and how much imputed interest expense must Beth recognize?
$4,000 the $100k exemption applies and thus Richie's imputed interest income and Beth's imputed interest expense is limited to Beth's net investment income.
26
employee achievement awards of less than $\_\_\_\_\_ per year and based on length of service are excluded from an employee's gross income
$400
27
true or false? cash and the FMV of prizes and awards are included in gross income
true
28
true or false? if an annuitant dies before life expectancy and has not completely recovered the basis, the un-recovered basis is deductible on the annuitant's final income tax return as a miscellaneous itemized deduction not subject to the 2% of AGI floor
true
29
true or false? annuity payments beyond projected life expectancy are fully taxable if the annuity was issued after 1986
true
30
Wendy a 55 year old taxpayer has begun receiving an annuity over her life expectancy of 25.5 years. She receives $1,500 per month. Her contributions to the annuity were after tax and amounted to $91,800. Payments began April 1 of this year. How much of the payments can she exclude this year?
$2,700 ($1,500 x 9) = $13,500 exclusion ratio = $91,800 / $459,000 = 20% $13,500 x 20% = $2,700
31
employees can exclude premiums paid by their employers on the first $\_\_\_\_\_ of group term life coverage
$50k
32
Tom is 51 years old and works for Employer A. Tom's life insurance coverage with employer A is $80,000. Tom pays a premium of $50 per year for the coverage, how much should Tom include in his gross income?
$32.80 excess coverage = $30,000 excess coverage / $1,000 = 30 30 x .23 cents = $6.90 (.23 cents comes from a table) $6.90 x 12 = $82.80 $82.80 - $50 = $32.80
33
includes AGI from all sources plus 50% of SSI benefits, foreign income previously excluded, and any tax exempt interest income
provisional income
34
FICA is made up of ____ and \_\_\_\_
OASDI and HI (social security and medicare)
35
what is the tax rate for OASDI? Is it for employers or employees?
it is 6.2% and it is for both
36
at what point does OASDI stop getting applied to your wages?
$127,200 for 2017
37
true or false? the medicare tax has no ceiling for taxable earnings
true
38
what is the HI (medicare tax) rate? Is it for employers or employees?
1.45% and its for both
39
what is the medicare tax rate for self employed individuals?
2.9%
An individual is liable for Additional Medicare Tax if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:
1. MFJ = $250,000
2. Single = $200,000
3. MFS = $125,000
40
self employment tax rates are \_\_\_\_%
15.3%
41
when calculating self employment tax, the taxpayer reduces net earnings by \_\_\_\_\_%
7.65%
42
the additional medicare tax of \_\_\_\_% also applies to self employed individuals who have a combined income greater than $\_\_\_\_\_ if single and $\_\_\_\_\_\_\_ if MFJ
.9% ; $200k ; $250k
43
true or false? amounts paid by an employer upon an employee's death to the employee's beneficiaries are fully includable in the beneficiaries income
true
44
true or false? a death benefit from an employer is taxable income to the beneficiaries
true
45
true or false? social security benefits are taxable to the parent if the child is receiving the benefits
false
46
true or false? if you choose an annuity payout option after winning the lottery you are not required to recognize income right away assuming there is no qualified prize option
false
47
allows you to declare annuity payments as income in the year they are received from winning a prize rather than immediately
qualified prize option
48
act that allows payments from a personal injury lawsuit to be paid out periodically most often in an annuity form for the remainder of the injured party's life
Periodic Payment Settlement Act
Personal Physical Injuries or Physical Sickness
1. If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do not include the settlement proceeds in your income.
2. BUT
1. If you receive a settlement for personal physical injuries or physical sickness, you must include in income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to the extent the deduction(s) provided a tax benefit. If part of the proceeds is for medical expenses you paid in more than one year, you must allocate on a pro rata basis the part of the proceeds for medical expenses to each of the years you paid medical expenses. See Recoveries in Publication 525 for details on how to calculate the amount to report. The tax benefit amount should be reported as “Other Income” on line 21 of Form 1040.
49
damages arising out of the personal injury lawsuit considered to only make the injured party whole
compensatory damages
50
true or false? compensatory damages are taxable to the injured party
false, they are tax free
51
true or false? damages received in age, sex, or racial cases are generally taxable
true
52
damages arising out of a personal injury intended to punish the offender for their acts
punitive damages
53
are punitive damages taxable?
yes, generally
54
when does scholarship money in excess of the qualified education expenses have to be realized on a tax return?
not until all expenses are paid, could be more than one year after receipt of scholarship
55
true or false? you can exclude scholarship money that is used for room and board from your tax return
false
56
true or false? you can exclude scholarship money that is used for books from your tax return
true
A scholarship or fellowship grant is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution.
A scholarship or fellowship grant is tax free only to the extent:
1. It _doesn't exceed your qualified education expenses_;
2. It isn't designated or earmarked for other purposes (such as room and board), and doesn't require (by its terms) _that it can't be used for qualified education expenses_; and
3. It doesn't represent payment for teaching, research, or other services required as a condition for receiving the scholarship.
**Qualified education expenses.**
1. For purposes of tax-free scholarships and fellowship grants, these are expenses for:
2. Tuition and fees required to enroll at or attend an eligible educational institution; and
3. Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.
**Expenses that don't qualify.**
1. Room and board,
2. Travel,
3. Research,
4. Clerical help, or
5. Equipment and other expenses that aren't required for enrollment in or attendance at an eligible educational institution.
57
true or false? if you choose to receive installment payments as a death benefit option to a life insurance policy, you must pay tax on the interest that you receive each year
true
58
when do dividends received from a life insurance policy become taxable?
when the aggregate of the dividends exceeds your basis in the contract
59
can businesses deduct life insurance premiums for their employees or officers if the business is listed as a beneficiary under the policy?
no
60
true or false? if you are terminally ill you can use a viatical agreement and receive some of your death benefit tax free while living
true
61
true or false? if you are chronically ill you can use a viatical agreement and receive your death benefit tax free regardless of what you use the proceeds for
false, proceeds must be used for LTC and any that are not are subject to taxation
62
Jack surrendered to the insurer a whole life insurance policy with a cash value of $80k (there was no policy loans or distributions prior to the surrender). Jack made $70k in aggregate premium payments. The original cost of the insurance was $11k. How much will Jack include as ordinary income on his tax return?
$10k (80 - 70) the cost of insurance does not affect this
63
Jack sold his whole life insurance policy to Martin. Martin is unrelated to Jack and will not suffer an economic lost upon Jack's death. Jack sold the policy for $95k and the policy had a $80k cash surrender value at the time. Jack had paid $70k in aggregate premium payments. The cost of insurance was $11k. what is the total gain and what is the long term capital gain that Jack must realize?
total gain = $95k - $70k - $11k = $36k long term cap gain = $36k - ($80k - $70k) = $26k
64
true or false? if selling a term life insurance policy all the gain is considered capital gain instead of some of it being ordinary income
true
If the policyholder **surrenders a cash value** life insurance policy on his life for the cash surrender value, the excess of the cash surrender value of the policy over the tax basis (which equals what the policyholder has paid in premiums for the policy) **equals ordinary income** to the policyholder because the policy is not considered a capital asset. For these transactions, the insured’s tax basis is the full amount of the premiums he has paid on the policy up to the time of the surrender, reduced by any untaxed amounts that he had withdrawn from the policy.
The treatment of sale transactions is different.
1. First, the IRS said that the insured’s basis in the policy must also be reduced by the portion of the premiums paid that is attributable to the “cost of insurance” under the policy. Many tax experts believe this position on the part of the IRS is not correct. The portion of the insured’s gain that does not exceed the cash surrender value of the policy at the time of sale is taxed as ordinary income. Any gain above that amount is treated as long term capital gain.
2. The insured had paid total premiums of $64,000 on the policy, out of which the cost of insurance was $10,000.
3. He had not received any distributions. The cash surrender value was $78,000 and he sold the policy for $80,000.
4. The IRS said his tax basis was the premiums paid of $64,000 reduced by the cost of insurance of $10,000 leaving a tax basis of $54,000. This resulted in tax gain of $26,000.
1. Of this amount, $14,000 was ordinary income, determined as the difference between the cash surrender value of $78,000 and the total premiums paid of $64,000.
2. The remaining gain of $12,000 was capital gain.
65
a contract where if the premiums paid during the first seven years of the contract exceed the total of the net level premiums that would have been paid if the policy provided for paid up benefits after the seventh year
modified endowment contract
66
do modified endowment contracts use LIFO or FIFO on their withdrawals and loans?
LIFO
* Historically, life insurance withdrawals (with the exception of certain withdrawals during a policy’s first 15 years), were taxed on a first-in first-out, or FIFO, basis, which meant that all premiums paid into the contract were returned free of tax before any income was recognized
* This simply means that interest income will be recognized first and the recovery of premiums paid (basis) will occur last.
A modified endowment contract (MEC) is a tax qualification of a life insurance policy whose cumulative premiums exceed federal tax law limits. The taxation structure and IRS policy classification changes after a life insurance policy has morphed into a modified endowment contract.
Qualification as MEC results in LIFO and _***potentially** a 10% additional tax*_.
* Distributions from modified endowments will suffer an additional 10% tax unless the taxpayer is over age 59-1/2, disabled or the distribution is taken as a life annuity
Specifically, a life insurance policy is considered a MEC by the IRS if it meets three criteria:
1. The policy is entered into on or after June 20, 1988.
2. It must meet the statutory definition of a life insurance policy.
3. The policy must fail to meet the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) 7-pay test.
7-Pay Test:
1. The 7-pay test must be passed every year.
2. Once the test is failed, modified endowment treatment applies for the remaining life of the contract. Reformation of the policy is not possible.
3. EXAMPLE
1. For example, Tom Sisney, a 45-year old male nonsmoker, wants to purchase a $1 million policy and pay a premium that does not violate the 7-year test since he wishes to make withdrawals to help finance his child’s education in ten years.
2. We have identified the maximum rate as $41.016 per thousand.
3. Cumulative Modified Endowment Limit
1. Year 1 = $41,016
2. Year 2 = $82,032
3. Year 3 = $123,048
4. Year 4 = $164,064
5. Year 5 = $205,080
6. Year 6 = $246,096
7. Year 7 = $287,112
67
is there any penalty and if so how much, on withdrawals or loans under MEC if under age 59.5?
10% penalty on any taxable portion
68
true or false? the death benefit under a MEC is taxable
false
69
true or false? health insurance premiums paid by the employer are deductible for the employer but taxable to the employee
false, they are deductible and excludable
70
true or false? disability premiums paid by the employer are deductible for the employer and tax excludable for the employee
true
71
true or false? if the employer pays the disability premiums for the employee and then the employee collects disability benefits, the benefits will not be taxable
false, the benefits are taxable to the employee
In the case of disability pay, whether it is taxed or not usually depends on who paid for the disability insurance coverage.
1. Individual disability income insurance
1. The rules surrounding taxation of individual disability income insurance benefits are generally simple. Because you pay the premiums with _after-tax dollars_, the benefits you receive are tax free.
2. Sometimes, your employer pays for an individual disability insurance policy on you. This may be the case if you are considered to be a key employee of the business. If so, different rules may apply. If the employer gets the benefit, then the premium is not deductible to the company, and the benefit is not taxable when received by the company.
2. Employer-sponsored group disability insurance
1. If you are enrolled in a group disability insurance plan sponsored by your employer, the taxability of your benefits depends on who pays the premium. If you pay the total premium using after-tax income, then your benefits will be tax-free. On the other hand, if your employer pays the total premium and does not include the cost of coverage in your gross income, then your benefits will be taxable.
3. Benefits under a cafeteria plan
1. An employer-sponsored cafeteria plan allows you to select among certain employee benefits, including health, life, and disability insurance. You normally pay for these benefits on a pretax basis. Sometimes, however, your employer pays the premium for the benefits you choose (up to a certain amount), and if you choose additional benefits, you pay for extra coverage using either pretax or after-tax dollars.
2. If you pay your share of the premium with after-tax dollars, that portion of your disability benefits will be considered tax-free income; you'll be taxed only on the portion of the benefit related to your employer's contribution. However, if you pay your share with pretax dollars, that portion of your disability benefits will be considered taxable income, and you'll have to pay income tax on all of your benefit.
4. Group association disability insurance
1. Disability policies purchased through an association are called group policies because members of the association are offered special terms, conditions, and rates based on the characteristics of that group. Association policies function much like individual policies and have similar tax consequences. If you pay the premiums for an association policy, the benefits you receive are tax free, but you cannot deduct the cost of the premiums.
5. Government Disability Insurance
1. All, part, or none of the disability benefits you receive through government disability insurance programs may be taxable. How much of the benefit is taxable (and under what circumstances) depends on the type of government disability benefit you are receiving:
1. ***Social Security benefits***: If the only income you had during the year was Social Security disability income, your benefit usually isn't taxable. However, if your total income exceeds a certain base amount and you earned other income during the year (or had substantial investment income), then you might have to pay tax on part of your benefit. More specifically, your Social Security benefit is taxable if your modified adjusted gross income plus one-half of your Social Security benefit exceeds the base amount for your filing status.
2. ***Medicare benefits:*** When you are disabled, you may be eligible to enroll in Medicare. If you pay premiums for the medical insurance portion of Medicare, you may deduct these premiums as a medical expense (provided, of course, that your medical expenses exceed 7.5 percent of your adjusted gross income). In addition, Medicare benefits you receive are not taxable.
3. Workers Comp: Generally, if you receive a disability benefit from workers' compensation, that benefit won't be taxable. Any benefits paid to your survivors would also be tax exempt. However, in certain cases, you may be able to return to work and continue to receive payments. If this is the case, then your workers' compensation benefit would be taxable. Note, though, that if part of your workers' compensation benefit offsets (reduces) your Social Security benefit, then that part is considered to be a Social Security benefit. It may then be taxable according to the rules governing Social Security.
72
true or false? contributions made by an employer to a medical savings account or health savings account are not taxable to the employee
What are the differences between HSA and FSA?
true
In this sense, the HSA resembles a Roth IRA, in that it grows tax-free, but you also get the benefit of a current deduction. We advise clients to keep growing the HSA as long as possible as a hedge against the risk of rising health care costs,"
1. Its first advantage is that contributions are tax-deductible, or if made through a payroll deduction, they are pretax
2. Second, the interest earned is tax-free
3. Third, account owners may make tax-free withdrawals for qualified medical expenses
**_HSA vs. FSA_**
1.
73
how much of child and dependent care services paid by the employer can an employee exclude from income?
REDUCED DOLLAR LIMIT
1. George is a widower with one child and earns $24,000 a year. He pays work-related expenses of $2,900 for the care of his 4-year-old child and qualifies to claim the credit for child and dependent care expenses. His employer pays an additional $1,000 under a qualified dependent care benefit plan. This $1,000 is excluded from George's income.
REDUCED DOLLAR LIMIT #2
1. Randall is married and both he and his wife are employed. Each has earned income in excess of $6,000. They have two children, Anne and Andy, ages 2 and 4, who attend a daycare facility licensed and regulated by the state. Randall's work-related expenses are $6,000 for the year. Randall's employer has a dependent care assistance program as part of its cafeteria plan, which allows employees to make pre-tax contributions to a dependent care flexible spending arrangement. Randall has elected to take the maximum $5,000 exclusion from his salary to cover dependent care expenses through this program.
$5,000
The amount you can exclude or deduct is limited to the smallest of:
1. The total amount of dependent care benefits you received during the year,
2. The total amount of qualified expenses you incurred during the year,
3. Your earned income,
4. Your spouse's earned income; or
5. 5,000 ($2,500 if married filing separately).
**Effect of exclusion on credit.**
* If you exclude dependent care benefits from your income, the amount of the excluded benefits: 1. Isn't included in your work-related expenses; and 2. Reduces the dollar limit, discussed later.
If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Your employer can tell you whether your benefit plan qualifies. To claim the exclusion, you must complete Part III of Form 2441.
If you are self-employed and receive benefits from a qualified dependent care benefit plan, you are treated as both employer and employee. Therefore, you wouldn't get an exclusion from wages. Instead, you would get a deduction on Schedule C (Form 1040), line 14; Schedule E (Form 1040), line 19 or 28; or Schedule F, line 15. To claim the deduction, you must use Form 2441.
REDUCED DOLLAR LIMIT
1. Although the dollar limit for his work-related expenses is $3,000 (one qualifying person), George figures his credit on only $2,000 of the $2,900 work-related expenses he paid. This is because his dollar limit is reduced as shown next. ($3,000 - $1,000 = $2,000)
REDUCED DOLLAR LIMIT #2
1. Although the dollar limit for his work-related expenses is $6,000 (two or more qualifying persons), Randall figures his credit on only $1,000 of the $6,000 work-related expense paid. This is because his dollar limit is reduced as shown next ($6,000 - $5,000 = $1,000)
74
true or false? the value of a health facility or gymnasium provided by the employer on the premises solely for the use of employees and the employee's dependents is excluded from the employee's gross income
true
75
true or false? employer paid health club dues (public gyms or health facility) for an employee are taxable
true
Athletic Facilities
1. You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, has not attained the age of 25.
2. **On-Premises Facility**
1. The athletic facility must be located on premises you own or lease. It does not have to be located on your business premises. **However, the exclusion _does not apply_ to an athletic facility for residential use, such as athletic facilities that are part of a resort**.
3. Employee -
1. A current employee.
2. A former employee who retired or left on disability.
3. A widow or widower of an individual who died while an employee.
4. A widow or widower of a former employee who retired or left on disability.
5. A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.
6. A partner who performs services for a partnership.
76
how much of qualified educational assistance provided by an employer can an employee exclude from income?
$5,250
77
does the qualified educational assistance provided by an employer cover undergrad, grad, or both?
both
**Amount** = $5,250
* Reimbursements in excess of $5,250 will be considered taxable income to the employee, unless the reimbursement represents a working condition fringe benefit.
**Eligible Expenses** = Tuition, Fees, Course Materials
* Eligible expenses do not include the cost of a computer or other supplies that can be retained by the employee after completing the course of instruction
* Eligible expenses also do **_not_** include the cost of meals, lodging or transportation
**Eligible Students** = No restrictions
* The courses do not need to be provided by an accredited college or a college that is eligible for Title IV federal student aid. Undergraduate and graduate classes are eligible. Students are eligible even if they have a felony drug conviction, unlike the American Opportunity Tax Credit.
**Number of Years** = Unlimited
* There are no income phase-outs and the exclusion from income for employer-paid tuition assistance does not expire. The exclusion from income is available for an unlimited number of years.
78
when can an employee exclude from income an employee discount?
when the property is not real property or investment property the property or services are offered in the same line of business in which the employee works
79
the benefits are so small that account for them is impractical
de minimis fringes
80
when an employer offers goods or services to an employee at a discount and they can be excluded from income
qualified employee discounts
Sec. 132(a)(2) allows employers to provide a qualified employee discount that is excludable from an employee's taxable income. A qualified employee discount is defined under Sec. 132(c) as a discount with respect to qualified property or services that:
1. In the case of property, does not exceed the gross profit percentage of the price at which the property is offered to customers; or
2. In the case of services, does not exceed 20% of the price at which the services are offered to customers.
81
when an employer provides property or services to an employee that an employee could have deducted had they paid for the expense themselves
working condition fringes
82
true or false? personal use of an employer-provided car is usually a taxable fringe benefit
true
83
qualified employee discounts for services can be excluded but the exclusion is limited to \_\_\_\_% of the customer's cost
20%
84
adoption assistance can be excluded up to $\_\_\_\_\_ for 2017 per child with an AGI phaseout of $\_\_\_\_ to $\_\_\_\_
$13,570 ; $203,540 - $243,540
85
noncorporate investors can exclude \_\_\_\_% of the gain they realize on qualified small business stock. Any remaining gain is taxed at the \_\_\_\_% cap gains rate
50% ; 28%
86
section 1202 stock must be held for ____ years to qualify for the exclusion
EXAMPLE
1. Consider a taxpayer who is single and has $410,000 in ordinary taxable income. This income places them in the highest tax bracket. They sell qualified small business stock acquired on September 30, 2010, and have a realized profit of $50,000.
5
Example
1. The taxpayer may exclude 100% of their capital gains, meaning the federal tax due on the gains is $0.
2. Assume the taxpayer purchased the stock on February 10, 2009, and after five years sells it for a $50,000 profit. Federal tax due on capital gains would be 28% x (50% x 50,000) = $7,000
87
if 1202 stock was required after 9/27/2010 then \_\_\_\_% of the gain is excluded from a noncorporate taxpayer's income
100
Section 1202, also called the Small Business Stock Gains Exclusion, is a portion of the Internal Revenue Code (IRC) that allows capital gains from select small business stock to be excluded from federal tax. Section 1202 of the IRS Code only applies to qualified small business stock acquired after September 27, 2010, that is held for more than five years.
**Max Limit**
1. The amount of gain that any investor can exclude under Section 1202 is limited to a maximum of the greater of $10 million or 10 times the adjusted basis of the stock. The taxable portion of a gain from selling a small business stock has an assessment at the maximum tax rate of 28%.
**Before February 18, 2009** =
1. Before February 18, 2009, this provision of Section 1202 excluded 50% of capital gains from gross income.
**Between Feb 18, 2009 - Sept 27, 2010** =
1. To stimulate the small business sector, the American Recovery and Reinvestment Act increased the exclusion rate from 50% to 75%
2. a portion of the excluded gain is taxed as a preference item that incurs an additional 7% tax called Alternative Minimum Tax (AMT).
**After Sept 27, 2010** =
1. Also, the treatment of no portion of the excluded gain is a preference item for AMT purposes.
2. The capital gains that are exempt from tax under this section are also exempt from the 3.8% net investment income (NII) tax applied to most investment income.
88
true or false? generally if a lender forgives a borrower's debt. the borrower does not report the forgiven debt as income
false, they do report the forgiven debt as income
89
how much of foreign income can a taxpayer exclude from US gross income for 2017? Are there any requirements to meet this exclusion, if so what are they?
$102,100 yes, must be a bona fide resident of the foreign country or be present in a foreign country for at least 330 days during and 12 consecutive months
90
how much can you contribute to a Coverdell Education Savings Account per beneficiary?
$2,000
91
true or false? distributions from Coverdell Education Savings Account are excluded from income if used for room and board and the student attends less than half time
false, must be half time
92
when must the funds in a Coverdell Education Savings Account be distributed by?
age 30
93
what if the funds in a Coverdell Education Savings Account aren't distributed by the required date?
they must be distributed and the accumulated earnings are taxable and they are subject to a 10% penalty
94
are unreimbursed business expenses deductible as above the line deductions or below the line (itemized) deductions?
itemized
95
can self employed individuals deduct self employment tax paid for OASDI and Medicare?
Example
1. Let's take two examples. In the simplest one, say you make $30,000 from self-employment income and have no other work.
yes
Schedule SE =
1. Take the Net Profit or Loss
2. Multiply the Net Profit by 92.35% (this this is less than $400 no SE Tax owed)
3. You then pay FULL Self Employment Tax on the 92.35% Net Profit
1. Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment.
4. You then get above the line deduction for 1/2 of the SE Tax applied to 92.35% of the self-employment income
Example
1. The calculator takes your gross income and then reduces it by 7.65%, coming up with taxable self-employment earnings of $27,705. It then takes 15.3% of that amount, which works out to $4,239. You're allowed to deduct half that, or $2,119, against your income tax liability.
96
Paul has net Schedule C income of $40k. what is his self employment tax and deductible portion of self employment tax?
self employment tax = ($40k x (100%-7.65%) x 15.3% =$5,651.82 deductible portion = ($40k x (100%-7.65%) x (6.2% + 1.45%) = $2,825.91
97
true or false? alimony paid to an ex spouse is an itemized deduction for the person who is paying the alimony
false, it is an above the line deduction for the person who is paying the alimony
98
the distance between the new job and the old residence must be at least _____ miles greater than the old job and the old residence
50 miles
99
to qualify for the moving expense deduction you must work ______ weeks out of the next _______ weeks
39 ; 52
For tax years 2018 through 2025, the deduction of certain moving expenses is suspended for nonmilitary taxpayers. In order to deduct certain moving expenses, you must be an active member of the military and moving due to a permanent change of duty station. For more information, see Who Can Deduct Moving Expenses , later.
100
to qualify for the moving expense deduction and are self employed you must work _______ weeks out of the next ________ weeks
78 ; 104
Moving Expenses
1. Suspension of moving expense deductions. **For tax years 2018 through 2025, the deduction of certain moving expenses is suspended for nonmilitary taxpayers**. In order to deduct certain moving expenses, you must be an active member of the military and moving due to a permanent change of duty station. For more information, see Who Can Deduct Moving Expenses , later.
101
are qualified unreimbursed moving expenditures treated as above the line deductions or itemized deductions?
above the line
102
true or false? any forfeited interest on withdrawals from a CD is deductible for AGI
true
103
true or false? if a person dies with a capital loss carry forward on their last tax return the beneficiaries can continue to use the loss carry forward in following years
false, they capital loss carry forward goes away
104
distributions under an Archer Medical Savings Account and a HSA that are not used for medical expenses are subject to tax and a \_\_\_\_\_% penalty unless made after age ____ or upon ____ or \_\_\_\_\_\_\_\_
20% ; 65 ; death ; disability
105
is student loan interest an above the line or an itemized deduction?
above the line
* Student loan interest deduction is available to all qualifying taxpayers, regardless of whether they choose to itemize deductions or not. Technically, this is an "adjustment to income," which is also known as an **above-the-line deduction**.
**_How much student loan interest can you deduct?_**
If you have qualifying student loan debt, you can deduct the interest you paid on the loan during the tax year. This is capped at $2,500 in total interest per return, not per person, each year. In other words, if you're single, you can deduct as much as $2,500 of student loan interest. However, if you're married and file a joint return, you and your spouse can only deduct a total of $2,500, even if both spouses have student loan debt.
2019 Phase-Outs / Elimination
1. Single - $70,000 / $85,000
2. MFJ - $140,000 / $170,000
Finally, "**_qualified education expenses_**" is a broad term, and refers to
1. tuition and fees,
2. room and board (with certain limitations),
3. books,
4. supplies,
5. equipment, and
6. other necessary expenses associated with attending and completing the coursework.
106
true or false? the taxpayer claiming a student loan interest deduction can claim the deduction even if someone else claims them as a dependent
false, they cannot be claimed a dependent
107
what is the maximum student loan interest deduction allowed?
$2,500
If you have qualifying student loan debt, you can deduct the interest you paid on the loan during the tax year. This is capped at $2,500 in total interest per return, not per person, each year. In other words, if you're single, you can deduct as much as $2,500 of student loan interest. However, if you're married and file a joint return, you and your spouse can only deduct a total of $2,500, even if both spouses have student loan debt
The student for whom the loan was taken out must have been enrolled at least halftime in a program that leads to a degree, certificate, or other credential. And the loan cannot have been from someone related to you.
Finally, "qualified education expenses" is a broad term, and refers to tuition and fees, room and board (with certain limitations), books, supplies, equipment, and other necessary expenses associated with attending and completing the coursework.
Phase Out / Elimination
1. Single = 70,000 / 85,000
2. MFJ = 140,000 / 170,000
108
charitable gifts are limited to \_\_\_\_\_% of AGI and are itemized deductions
50%
109
medical expenses that exceed \_\_\_\_% of AGI are deductible
10%
110
casualty losses must exceed \_\_\_\_\_% of AGI to be deductible
10%
This deduction used to cover a pretty wide-ranging set of circumstances, but that changed with the passage of the Tax Cuts and Jobs Act (TCJA) in December 2017. Beginning with tax year 2018 and through tax year 2025, you can only deduct casualty and theft losses if they're brought about due to an event that's been declared a disaster by the U.S. president.
111
miscellaneous itemized deductions such as unreimbursed job expenses must exceed \_\_\_\_\_% of AGI to be deductible
2%
112
true or false? a corporation can only use capital losses as an offset against capital gains
true
113
a corporations capital losses may be carried forward for ____ years or carried back to each of the preceding ____ tax years
5 years ; 3 tax years
114
true or false? alimony received is included in gross income
true
You can't deduct alimony or separate maintenance payments made under a divorce or separation agreement (1) executed after 2018, or (2) executed before 2019 but later modified if the modification expressly states the repeal of the deduction for alimony payments applies to the modification. Alimony and separate maintenance payments you receive under such an agreement are not included in your gross income.
115
if there is more than a $\_\_\_\_ decrease in alimony payments between any of the first _______ years, there may be alimony recapture
$15,000 ; 3
116
in order for a property transfer as a result of a divorce to have no tax consequences, the transfer must be made within _____ year(s) after the marriage ceases
1 year
117
true or false? child support is taxable to the receiver
false
118
true or false? child support is tax deductible to the payor
false
119
who does the Kiddie tax apply to?
any child who has not attained age 19 by end of tax year or a full time student who has not attained age 24 by end of tax year
120
Ann is age 14 and earned $5,600 from babysitting in 2017. She also had interest of $2,200 from her savings account. What is Ann's net unearned income and how much of her income will be taxed at her parent's marginal rate and her own rate?
net unearned income = $100 taxed at parent's rate = $100 taxed at her own rate = $1,750 $1,750 = gross income of $7,800 - earned income plus $350 of $5,950 - income taxed at parent's rate of $100
121
allows deductions for expenses incurred in a trade or business
section 162
122
allows deductions for expenses incurred in connection with investment activities
section 212
123
true or false? most expenses incurred in a trade or business are below the line (itemized) deductions
false, they are above the line
124
true or false? investment expenses are itemized (below the line) deductions
true
125
deductions from AGI are also known as _______ deductions
itemized
126
deducions for AGI are also known as ____ deductions
above the line
127
deductions from AGI (itemized) are reported on schedule \_\_\_\_
A
128
True or false? if a distribution from a C corp is classified as a dividend the distribution will be double taxed. Once by the corporation as earnings and once as a dividend to shareholders
true
129
a distribution to a shareholder is generally treated as a tax-free return in regards to S-corps
true
130
a(n) ____ taxpayer generally receives a deduction when the expense has been paid
cash basis
131
a(n) ____ taxpayer generally receives a deduction when the expense is incurred
accrual basis
132
which items are deductible for Fred if he pays them for his son? principal payment on automobile payment of interest on loan payment for medical expenses payment for son's property taxes
medical expenses only
133
if income is tax exempt, can the tax payer deduct expenses and interest related to that income?
no
134
if a taxpayer investigates a business that is a new line of business and acquires the business, up to $\_\_\_\_\_ of expenses can be deducted immediately Any expenses over $50,000 reduce the $5,000 deduction by what amount?
$5,000 dollar for dollar
135
true or false? if a taxpayer investigates a business that is similar to the one he is already in, the expenses are deductible whether or not he acquires the business
true
136
true or false? if a taxpayer investigates a business that is *_not_* already similar to the business he is in, the expenses are deductible whether or not he acquires the business
false, they are *_not_* deductible if he does not acquire the business that is not similar to his already existing business
137
when can a taxpayer deduct his expenses related to investigating a similar business regardless if he acquires it or not?
the expenses are currently deductible
138
true or false? if an activity is deemed to be a hobby, then losses incurred are always fully deductible
false, they may not be fully deductible
139
hobby expenses are reported as ____ deductions
itemized
140
which type of itemized deduction do hobby expenses fall under?
miscellaneous
141
hobby income is reduced by ____ and ____ first then by ____ and then by\_\_\_\_\_\_\_
taxes and interest other non capital related expenses expenses that affect basis
For tax years after 2017, the IRS doesn't allow you to deduct hobby expenses from hobby income. you must claim all hobby income and are not permitted to reduce that income by any expenses
For tax years prior to 2018, you can deduct expenses as an itemized deduction subject to 2% of your adjusted gross income. Also, the amount that you claim as an expense cannot be greater than your income from the hobby. In other words, your hobby cannot generate a loss. For example, if you're a knitter and spent $300 on yarn and other supplies, and sold one sweater for $150, you can use only up to $150 in expenses ($300-$150 = $150). But, if you spent $300 on your knitting hobby and earned $300 from the sale of two sweaters, you can use the full amount of your expenses. The expenses you can deduct are called "ordinary expenses" and "necessary expenses."
Finally, this statement from the IRS: "The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses." Note that the 3 out of 5 statement is a guideline, not a rule and that all other factors must be taken into consideration.
142
Assume Sara earns $3,000 from a hobby of selling antique furniture and incurs the following expenses: cost of goods sold = $2,000 Supplies = $1,200 interest on loan to get business started = $800 advertising = $750 If Sara is unable to itemize her deductions how much of the hobby income should be included in her gross income for tax purposes?
all $3,000 should be included
143
if you rent out property for less than _____ days then you can exclude the income from your gross income, this is known as \_\_\_\_
15 ; primarily personal use
144
if you rent out a property for less than 15 day, what expenses are deductible?
mortgage interest taxes casualty losses
I.E. the normal homeowner deductions (i.e. mortgage interest)
1. Taxes = limited to 10,000
2. Casualty losses = limited in 2018 through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters.
1. However, there’s an important exception: If you have personal casualty gains because your insurance proceeds exceeded the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.
145
if the rental property is rented at least ____ days per year and is not used for personal use more than the greater of ____ days per year or \_\_\_\_% of rental days, then the property is classified as \_\_\_\_\_\_\_\_\_\_\_
15 ; 14 ; 10 ; primarily rental use
146
if a property is classified as a primary rental property then you can deduct losses up to $\_\_\_\_ with an AGI between $\_\_\_\_ and $\_\_\_\_\_
$25k ; $100k ; $150k
147
if the rental property is rented at least _____ days per year and is used for personal use for more than the greater of ____ days or \_\_\_\_^ of rental days, this is known as \_\_\_\_
15 ; 14 ; 10 ; mixed use
148
if property is classified as mixed use, can you deduct losses in the current tax year?
no, they can be carry forward though
**Vacation**
1. If the home is your main home and you rent it out for **fewer than 15 days** during the year, you don’t need to report income. However, you can’t deduct expenses associated with the rental. You can, however, claim the usual homeowner deductions
**Mixed Use by Owner and Tenant**
1. If you rent the home for 15 days or more, report the rental income on Schedule E. You can deduct expenses, but you must prorate them, and they might be limited.
2. **_Residence_** = If the home is considered a residence, **the expenses you deduct can’t be more than the rental income**.
3. **_Non-Residence_** = If the home isn’t a residence, the expenses you deduct can be more than rental income. However, your loss would be limited by the passive-activity rules.
4. Residence = Two Tests must both be passed:
1. It must provide basic living accommodations. So, it must have a sleeping space, bathroom facilities, and cooking facilities
2. It must pass the personal-use time test. A home is considered a residence if you use it for personal purposes for more than the greater of these:
1. 14 days
2. 10% of the total number of days you rent the home at fair rental value
149
true or false? legal fees incurred for personal purposes are nondeductible
true
150
are legal fees in connection with trade or business or for the production of rents and royalties tax deductible?
yes
151
true or false? legal fees in connection with trade or business or for the production of rents and royalties are an itemized deduction
false, they are an above the line deduction
152
what happens to legal fees that are incurred when acquiring a new asset?
the legal fees get added to the basis of the asset
153
section 1244 losses are limited to ____ for single filers and ______ for joint filers
$50,000 ; $100,000
154
net operating losses may be carried back ___ years preceding the loss year and carried forward ____ years following the loss year
2 ; 20
155
true or false? the election to forego net operating loss carry back is irrevocable
true
156
why would a taxpayer select to forego the option of net operating loss carry back?
taxpayer expects to be in a higher tax bracket moving forward than previous years
157
true or false? the oldest net operating loss must be used before using any of the more recent net operating losses
true
158
what type of deduction, above the line or itemized, do unreimbursed transportation expenses while on company business get classified as?
they are itemized deductions miscellaneous subject to 2% AGI floor
159
uses a fixed dollar amount of money per business mile plus tolls and parking
automatic mileage method
160
uses depreciation, gas, licenses, maintenance, and insurance costs to determine the amount of deduction you can receive for unreimbursed transportation expenses
actual operating cost method
161
a taxpayer's main location of work
tax home
162
meals while traveling are subject to a \_\_\_% limit on the deduction
50%
The Tax Cuts and Jobs Act (TCJA) eliminated all business deductions for "entertainment, amusement, or recreation." (IRC Sec. 274(a).) There was concern that this meant that all business-related meals with customers would no longer be deductible under the TCJA. **However, the IRS clarified that business-related meals are still 50% deductible as long as the meal and beverage costs are**:
1. “ordinary and necessary”
2. incurred in the course of your business, and
3. not lavish or extravagant under the circumstances. (IRS Notice 2018-76.)
The meal must be with current or potential customers, consultants, clients or similar business contacts and you (the business owner) or an employee must be present.
163
true or false? unreimbursed travel expenses are an itemized deduction
true
164
Allison took a trip from Alabama to England. She was away from home for 10 days. She spent two days vacationing and eight days on business (including two travel days). Her expenses are as follows: Airfare = $1,200 Lodging = $1,500 Meals = $900 how much is Allison allowed to deduct?
$1,200 + ($150 x 8) + ($90 x 8 x 50%) = $2,760
165
what are the general requirements for you to be able to deduct education expenses (not your child's but your own)?
1. to maintain or improve existing skills in the present job 2. To meet legally imposed or employer requirements to retain current job, such as continuing education requirements
166
true or false? taking education classes to meet the minimum requirements of your present job is a deductible expense
false
167
true or false? taking education classes to meet requirements for a new job is a deductible expense
false
You may be able to deduct work-related education expenses paid during the year. To be deductible, your expenses must be for education that
1. maintains or improves your job skills or
2. a law requires to keep your status or occupation.
However, even if the education meets either of these tests, **the education can't be part of a program that will qualify you for a new trade or business or that you need to meet the minimal educational requirements of your trade or business**.
168
Dawn who holds a bachelor's degree in art history, is a middle school teacher in New Orleans. She wants to further her education in art history, believing this will allow her to become a better teacher. Dawn spent her summer break attending the University of Hawaii taking art history classes. Her expenses are as follows: books and tuition = $2,000 Meals = $1,000 Lodging = $700 Laundry while in travel status = $200 Transportation = $700 Total = $4,600 What is Dawn's education expense deduction?
$4,100 she can only deduct 50% of meals but 100% of everything else
169
true or false? books are allowable education expenditures that can be deducted for a taxpayer
true prior to 2017
For tax years after 2017, neither the Tuition and Fees deduction nor the deduction for unreimbursed employee expenses, is available.
170
true or false? tuition expenses are deductible for a taxpayer trying to improve their job skills
true
171
true or false? transportation, lodging, and laundry while in travel status are deductible for a taxpayer trying to improve their job skills
true
172
business gifts are limited to $\_\_\_ per donee per year
$25
173
Kay entertains one of her clients and incurs the following expenses: Taxi = $30 Door Cover Fee = $25 Dinner = $128 Tips to server = $25 Total = $208 how much is Kay's allowable deduction?
$119 $30 + 50% ($25 + $128 + $25)
174
Elizabeth made the following gifts during the current year: To Candace, a key client ($4 of amount listed is for gift wrapping) = $104 To secretary = $24 To boss = $28 how much of these gifts are deductible to Elizabeth?
$53 ($25 limit per donee and gifts to superiors do no count) (the $4 wrapping fee can be deducted according to IRS rules)
