Book 4 Pages 61-120 Flashcards
true or false? self employed individuals can deduct expenses attributable to a home office as an itemized deduction
false, they can deduct it as an above the line deduction
true or false? regular employees can deduct expenses attributable to a home office as an itemized deduction
true, subject to 2% AGI floor
what is the simplified method option in regards to deducting home office expenses?
$5 per square foot for a maximum of 300 square feet or $1,500 of deductible expenses
does the simplified method under home office expense deductions allow you to deduct depreciation?
no
does the simplified method under home office expense deductions allow you to carry forward any expenses (loss) above your gross income from the business?
no
The simplified method, as announced in Revenue Procedure 2013-13, is an easier way than the method provided in the Internal Revenue Code (the “standard method”) to determine the amount of expenses you can deduct for a qualified business use of a home.
Can the simplified method be used for one taxable year and the standard method be used in a later taxable year?
- Yes. You may elect to use either the simplified method or the standard method for any taxable year. However, once you have elected a method for a taxable year, you cannot later change to the other method for that same year.
You determine the amount of deductible expenses by multiplying the allowable square footage by the prescribed rate. The allowable square footage is the smaller of the portion of a home used in a qualified business use of the home, or 300 square feet. The prescribed rate is $5.00.
true or false? seeking new employment in the same trade or business is deductible whether you get the job or not
true
Miscellaneous Deductions were taken out in 2017 Jobs Act.
true or false? seeking employment in a different trade or business is not deductible
true
true or false? no deduction is allowed if you are seeking employment for the first time
true
true or false? malpractice insurance is an available itemized deduction
true
true or false? medical expenses are an available itemized deduction
true
are casualty losses itemized or above the line deductions?
itemized
For tax years 2018 through 2025, the Act has suspended the itemized deduction for personal casualty and theft losses. Prior to this change in law, personal casualty or theft losses were only deductible to the extent they exceeded $100 per casualty or theft event. In addition, the aggregate net casualty and theft losses for the year were deductible by those who itemized their deductions but only to the extent that the loss exceeded 10% of an individual’s adjusted gross income (AGI).
The Act did, however, retain a deduction for qualified disaster-related personal casualty losses for years 2018 through 2025. A qualified disaster-related personal casualty loss is one that occurs in a presidentially declared disaster area and is a result of the disaster.
For example, if your home was destroyed by a hurricane within an area the president has declared to be a disaster area and you have a casualty loss, you are able to deduct the loss. However, if your home is destroyed by a fire that was not in a disaster area (say, due to a fire that started in your kitchen when cooking), you cannot claim a casualty loss, even though your loss would be as great as that of the individual residing in the disaster zone.
medical expenses are subject to a ___% AGI floor in order to be deductible
10%
true or false? self employed individuals can deduct health insurance premiums as above the line deductions
true
true or false? state and local sales tax is deductible
true
true or false? state, local, and foreign income taxes are deductible
true
The Tax Cut and Jobs Act limits the total state and local tax deduction to $10,000
As a general rule, you must choose to take either a credit or a deduction for all qualified foreign taxes.
If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. You cannot deduct any of them. Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. You cannot take a credit for any of them.
It is generally better to take a credit for qualified foreign taxes than to deduct them as an itemized deduction. This is because:
- A credit reduces your actual U.S. income tax on a dollar-for-dollar basis, while a deduction reduces only your income subject to tax;
- You can choose to take the foreign tax credit even if you do not itemize your deductions. You then are allowed the standard deduction in addition to the credit; and
- If you choose to take the foreign tax credit, and the taxes paid or accrued exceed the credit limit for the tax year, you may be able to carry over or carry back the excess to another tax year.
true or false? assessments (things that add value to a property) are deductible
false
in a real estate transfer, if the buyer pays all the tax what happens to the buyer’s basis in the property?
it increases by an equal value
in a real estate transfer, if the buyer pays all the tax what happens to the seller of the property?
the seller’s portion of tax paid is added to the amount realized by the seller
in a real estate transfer, if the seller pays all the tax what happens to the buyer’s basis in the property?
it decreases by an equal value
Real Estate Taxes
- If you pay real estate taxes the seller owed on real property you bought, and the seller didn’t reimburse you, treat those taxes as part of your basis. You can’t deduct them as taxes.
- If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. don’t include that amount in the basis of the property.
- If you didn’t reimburse the seller, you must reduce your basis by the amount of those taxes.
Closing Costs added to Basis:
- • Abstract fees (abstract of title fees).
- • Charges for installing utility services.
- • Legal fees (including title search and preparation of the sales contract and deed).
- • Recording fees.
- • Surveys.
- • Transfer taxes.
- • Owner’s title insurance.
- • Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions
in a real estate transfer, if the seller pays all the tax what happens to the seller of the property?
the buyer’s portion of tax paid is deducted from the amount realized by the seller
How much can Robin deduct for her 2017 taxes if she itemizes based on the following info? her 2016 state tax refund was $700 (she took standard deduction in 2016) her employer withheld $4,200 of state income tax for 2017 she also paid an additional $1,200 in state income tax estimated payments
if she itemizes she can deduct $5,400 the $700 tax refund does not offset against the itemized deductions because the refund is from a year where she took the standard deduction
how much of the following expenses can Sherry deduct for 2017? state taxes withheld $7,200 refund received from over payments of 2016 state tax liability $1,500 (she itemized in 2016) deficiency assessed and paid for 2015 as a result of audit by the state $3,000 Interest paid on the tax deficiency $500
she can deducted $10,200 the interest on the deficiency is personal interest and not deductible the refund is reported as income under the tax benefit rule and does not affect the deductible amount
true or false? you can deduct state and local sales tax, and state and local income tax in the same year
false, only can deduct one i.e. state and local income taxes = 1
true or false? qualified dividends are not included in investment income
true
true or false? capital gains are included in investment income
false, they are not
The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.
To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items taken into account in computing Net Investment Income:
- Gains from the sale of stocks, bonds, and mutual funds.
- Capital gain distributions from mutual funds.
- Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence).
- Gains from the sale of interests in partnerships and S corporations (to the extent the partner or shareholder was a passive owner). See section 1.1411-7 of the 2013 proposed regulations.
is investment income an itemized or an above the line deduction?
itemized
Mario had the following items of income and expense for the current year: interest income from bonds = $5,000 interest income from state bonds = $1,000 margin interest expense = $7,000 how much can Mario deduct if he itemizes?
he can only deduct $5,000 although the interest expense is $7,000 he can only deduct up to the amount of his investment income which is $5,000 since the state bonds are tax free
what is the maximum loan amount that you can deduct mortgage interest on?
$1 million
what is the maximum loan amount that you can deduct Home Equity Line of Credit interest on?
EXAMPLE 1
Example 1: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home.
$100k
For anyone considering taking out a mortgage, the new law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. These are down from the prior limits of $1 million, or $500,000 for a married taxpayer filing a separate return. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.
EXAMPLE 1
Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.
true or false? the borrower can deduct points up to funds provided plus the seller’s paid points
true
how much can Steph deduct given the following info and what happens to the basis of her home? What happens to Tim? she takes out a $100k mortgage she is charged 1 percentage point tim who sold her the home also paid one percentage point to help her get the mortgage steph only provides $750 as a down payment
steph can deduct $1,750 and her basis gets reduced by $1,000 (the amount Tim paid) Tim’s amount realized gets reduced by the $1,000
if interest is paid for a business use or the production of income is it deductible ___ AGI
for (above the line)
if interest is paid for personal use (investment interest and qualified residence interest) it is deductible ___ AGI
from (itemized)
true or false? credit card debt interest is deductible
false
true or false? auto loan interest is deductible
false
During the current year, Albert paid the following interest charges: mortgage $9,000 loan for household furniture $800 loan to purchase state bond $750 if Albert itemizes how much can he deduct?
$9,000 the furniture is nondeductible consumer interest the loan to purchase state bonds is not deductible
When are points on a home loan deductible?
in the current year that they were paid
true or false? is termite damage a casualty loss
no
true or false? a tornado is a casualty loss
true
true or false? earthquakes are a casualty loss
true
true or false? floods are not a casualty loss
false, they are
are theft losses considered deductible casualty losses?
yes
when are theft losses deductible?
in the year they are discovered
For tax years 2018 through 2025, the personal casualty and theft loss deduction isn’t available, except for casualty losses incurred in a federally declared disaster. This means a taxpayer who suffers a personal casualty loss from a disaster declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act will still be able to claim a personal casualty loss as an itemized deduction, subject to the $100-per-casualty and 10%-of-AGI limitations mentioned above.
the amount of the casualty loss is the lesser of the ______ or the _______
adjusted basis ; decline in FMV resulting from the event
true or false? casualty losses are reduced by any insurance recovery that would have been received, regardless if a claim was filed or not
true
in 2017, Larry had art worth $10,000 with a basis of $15,000 stolen from his apartment. During the year he had a salary of $30,000 and no other deductions. How much can Larry deduct from the theft?
use the less of the basis or FMV FMV = $10,000 subject to 10% agi floor (10% x $30,000) = $3,000 subject to $100 floor $10,000 - $3,000 - $100 = $6,900
true or false? full time military uniforms are usually not deductible
true
true or false? work uniforms are not a deductible item
false, they can be if it is a condition of employment and not suitable for everyday wear
true or false? the unrecovered investment in an annuity contract can be deducted when the taxpayer dies
false
The unrecovered basis in an annuity can be deducted by the estate but not the unrecovered investment
churches, educational institutions, hospitals, medical research organizations are known as ____ charities
public
True or false? American Red Cross or Goodwill are examples of public charities
true
true or false? cost of childcare while performing charitable activities is deductible
false, it is not
true or false? donating blood is nondeductible
true
true or false? rental value of property donated to and used by a qualified charity is deductible
false, it is not
noncash property between $____ and $_______ does not need an appraisal
$500 ; $5,000
true or false? the appraisal costs associated with charitable giving is also included in the charitable gift deduction
false
are the appraisal costs associated with charitable giving deductible at all?
yes, as miscellaneous itemized deductions
use related property can be deducted up to ____% of a taxpayer’s AGI
30%
true or false? with use related property you can deduct the fair market value
true
true or false? with use unrelated property a taxpayer is limited to a deduction of the lesser of the basis or the FMV
true
Karen is meeting with her client Jack who donated his collection of impressionist paintings to a private art museum. Jack’s original purchase price of the painting was $50,000 and the FMV today is $300,000. Jack’s gross income for the year was $1 million. How much of the donation can be deducted on his tax return?
$300,000 can be deducted because he donated the art to an art museum it is classified as use related property and therefor can deduct the FMV as long as it doesn’t exceed 30% of his AGI, which is $1 million
charitable cash gifts have a ____% of AGI deduction limit if made to public charities or private operating foundations and ____% of AGI deduction limit if made to most private nonoperating foundations
50% ; 30%
true or false? charitable cash gifts are deductible for an amount equal to the fair market value of the cash
true
ordinary income property and short-term capital gain property can be deducted for the lesser of _____ or _____ and up to ___% of AGI
adjusted basis ; fair market value ; 50%
real property donated to a charity can be deducted in which two ways?
fair market value subject to 30% of AGI Basis election subject to 50% of AGI
related use tangible property can be deducted in which two ways?
fair market value subject to 30% AGI basis election subject to 50% AGI
unrelated use tangible property can be deducted by the lesser of ______ or ______ and subject to a ____% of AGI
adjusted basis ; FMV ; 50%
intangibles can be deducted in which two ways?
fair market value subject to 30% of AGI Basis election subject to 50% of AGI
Gina graduated from Mumford University. She donated $2,000 to the athletic department of the university to guarantee priority to purchase two premium season tickets to home football games. In addition Gina purchased two season tickets for the regular price of $500 ($250 each). What is Gina’s charitable contribution for the year?
Because Gina is donating money for the right to buy season tickets only 80% of the donation is deductible $2,000 x 80% = $1,600
Previously, if you donated money to a college or university, and in exchange for your donation you got the right to purchase athletic tickets, the donation was 80% deductible. So, if you made a $1,000 donation to a university’s athletic department, you were allowed to treat $800 of that amount as a charitable deduction. Obviously, the cost of the athletic tickets themselves were never deductible, but this was still a big tax deduction for many Americans.
Under the new tax law, this deduction is gone. Beginning with the 2018 tax year (the return you’ll file in 2019), this type of charitable donation does not qualify for the deduction at all.
when a donor or seller transfers property to a charity in exchange for a sum that is less than the FMV of the property transferred
bargain sale to charity
Steve owns property with a basis of $60,000 and a current value of $120,000, which he sells to charity for $100,000. How much must Steve realize as gain and how much can he deduct as a charitable contribution?
First you have to allocate basis between the sale and the charitable gift. adjusted basis for entire property x (amount realized on sale / fmv of entire property) $60k x ($100k / $120k) = $50k Steve will realize $50k in capital gain calculated as follows: $100k - $50k ($100k is the sales price & $50k is the adjusted basis allocated to asset sale) Steve will also have a FMV for charitable income tax deduction purposes of $20,000 calculated as follows: $120,000 - $100,000 ($120k is the FMV and $100k is the sales price) Steve will also have an adjusted tax basis for charitable income tax deduction purposes of $10,000 calculated as follows: $60,000 - $50,000 ($60k is the adjusted basis & $50k is basis allocated to sale)
Clarence makes the following charitable donations: Inventory for resale from business with basis of $8k and FMV of $6k (assumed transferred to public school) Stock acquired 2 years ago with basis of $10k and FMV of $40k (assumed transferred to church) Coin collection held as an investment for 10 years with a basis of $1k and FMV $10k (assume transferred to boy scouts) what is Clarence’s charitable contribution for the year?
$6k (inventory is considered ordinary income property and requires the lesser of the adjusted basis or FMV to be used for charitable deductions) $40k (stock is intangible property so the FMV can be used) $1k (coin collection is tangible property and since it is going to boy scouts it is unrelated use property which means you have to use the lesser of the adjusted basis or FMV total = $47,000
the maximum charitable deduction a C-corp can take in a taxable year is limited to ____% of the corporation’s taxable income before certain deductions
10%
in the current year , XYZ corp had net income from operations of $60,000 and received a dividend of $4,000 which is eligible for the 70% dividends received deduction. During the year, the corporation donated $8,000 in cash to the University of New Jersey. What is the maximum charitable deduction the corporation can take? What is the corporation’s taxable income for the year? How much of the charitable gift can the corporation carry forward and for how long?
$6,400 is the maximum charitable deduction the 70% dividends received deduction on the $4,000 dividends do not get deducted until after the charitable deductions are determined i.e. total income subject to the 10% max charitable contribution for corporations is $64,000 ($60k + $4k) $54,800 is the corporation’s taxable income for the year ($64,000 - $6,400 - ($4,000 x 70%)) $1,600 can be carried forward for 5 years $8,000 - $6,400
true or false? usually a corporation can deduct the basis of ordinary income property if the property is gifted to charity
true
true or false? generally a corporation can deduct the FMV of capital gain property if donated to a charity
true
if the corporation donates use unrelated property then the deduction is limited to the _____
adjusted basis
in determining a corporations AGI for eligible charitable income tax deductions, which deductions are not accounted for?
dividend received deduction net operating loss carryback capital loss carryback
the maximum deductible loss for an activity is limited to ___________________________
the amount that the investor has at risk at the end of the current tax year
You must apply the at-risk rules before the passive activity rules discussed in the first part of this publication.
The at-risk rules limit your losses from most activities to your amount at risk in the activity. You treat any loss that’s disallowed because of the at-risk limits as a deduction from the same activity in the next tax year. If your losses from an at-risk activity are allowed, they’re subject to recapture in later years if your amount at risk is reduced below zero.
At-Risk Amounts
You’re at risk in any activity for:
- The money and adjusted basis of property you contribute to the activity, and
- Amounts you borrow for use in the activity if:
- You’re personally liable for repayment, or
- You pledge property (other than property used in the activity) as security for the loan.
the rule that states the maximum deductible loss for an activity is limited to the amount that the investor has at risk at the end of the current tax year
at risk rule
The at-risk rules limit your losses from most activities to your amount at risk in the activity. You treat any loss that’s disallowed because of the at-risk limits as a deduction from the same activity in the next tax year. If your losses from an at-risk activity are allowed, they’re subject to recapture in later years if your amount at risk is reduced below zero.
A loss is the excess of allowable deductions from the activity for the year (including depreciation or amortization allowed or allowable and disregarding the at-risk limits) over income received or accrued from the activity during the year. Income doesn’t include income from the recapture of previous losses (discussed later, under Recapture Rule ).
how do you determine the amount that is at risk?
total of cash/property invested - the debt the investor is personally liable for
a liability for which the partner has no risk of economic loss if the liability is not satisfied by the partnership
nonrecourse debt
true or false? if a loss is disallowed because of at-risk rules, the loss can be carried forward and taken in the first year the at-risk amount become positive
true
in year 1 Bob invested $50k for a 20% interest in a partnership in which he was a material participant during the year. The partnership incurred a loss and Bob’s share was $75,000 how much of the loss can Bob claim this year? How much can he carry forward?
$50k $25k
true or false? Passive losses may only be deducted against passive income
true
a corporation where the primary economic activity is the performance of personal services by the owners of the corporation
personal service corporation
closely held corporations may offset passive ____ against active ______ but not ________ income
losses ; income ; portfolio
what are the 3 classifications of income and losses?
active, passive, and portfolio
prevent the taxpayer from deducting any passive losses against active or portfolio income
passive loss limitations
Generally, passive activities include the following.
- Trade or business activities in which you did not materially participate for the tax year.
- Rental activities, regardless of your participation.
PALs not allowed in the current year are carried forward until they’re allowed either against passive activity income, against the special allowance, if applicable, or when you sell or exchange your entire interest in the activity in a fully taxable transaction to an unrelated party.
Generally, PALs are subject to other limitations (for example, basis and at-risk limitations) before they’re subject to the passive loss limitations. Once a loss becomes allowable under these other limitations, you must determine whether the loss is limited under the passive loss rules.
wages, salaries, and other employee compensation are examples of ____ income
active
interest, dividends, annuities, and royalties are examples of _____ income
portfolio
Passive activity income doesn’t include the following items:
- Portfolio income. This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. It includes gain or loss from the disposition of property that produces these types of income or that’s held for investment. The exclusion for portfolio income doesn’t apply to self-charged interest treated as passive activity income.
trade or business income when the taxpayer is a material participant is considered ____ income
active
if there is a passive loss from activity 1 equal to $15k, a $30k passive loss from activity 2, and $10,000 of passive income from activity 3 equal to $10,000 , what is the taxpayer’s net passive loss?
$35,000 - calculated as follows: ($15,000 / $45,000) x $35,000 = $11,666.67 to activity 1 ($30,000 / $45,000) x $35,000 = $23,333.33 to activity 2
which conditions create a passive activity?
a taxpayer does not materially participate the activity is rental activity
true or false? if a taxpayer completes more than 500 hours of participation during the year then the activity is not passive
true
true or false? if the individual’s participation in the activity constitutes substantially all of the participation in the activity of all individuals for the year then it is considered passive activity
false, it would be an active activity
if a taxpayer participates in the activity for more than 100 hours and their participation is equal to or more than any other individual, is it consider passive activity or active?
active
true or false? if a taxpayer materially participates in the activity in at least 5 out of the last 10 years then it is not considered a passive activity
true
true or false? losses from a publicly traded partnership can only be used to offset income for that same company
true
true or false? losses from a non publicly traded partnership can only be used to offset income for that same partnership
false, it can be used to offset income from other non publicly traded partnerships not just the same one that has the loss
true or false? losses from non publicly traded partnerships can only be used offset income from other non publicly traded partnerships
true
what is another term for publicly traded partnerships?
master limited partnerships
Dana purchased an interest in a non publicly traded partnership that had income in the current year of $15,000. She also purchased interest in a master limited partnership with $20,000 of losses for the year. What are the tax consequences to Dana for the current year?
Dana will recognize $15k of passive income from the non publicly traded partnership she will not be allowed to deduct the $20k this year because losses from a publicly traded partnership (master limited partnership) can’t be used to offset the income from the non publicly traded partnership. She will have a $20,000 carry forward however.
if real estate is greater than ____% of a taxpayer’s personal services in all trades or businesses for the year then it is not considered a passive activity
50%
if the taxpayer performs greater than ___ hours of service in real property trades or business in which the tax payer materially participates then it is not considered passive activity
500 hours
Material Participation
- A trade or business activity isn’t a passive activity if you materially participated in the activity.
TESTS:
- You participated in the activity for more than 500 hours.
- Your participation was substantial all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
- You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
- The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities , under Recharacterization of Passive Income, later.
- You materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
- The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
- Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.
- You didn’t materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Your participation in managing the activity doesn’t count in determining whether you materially participated under this test if:
- Any person other than you received compensation for managing the activity, or
- Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services).
- You didn’t materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Your participation in managing the activity doesn’t count in determining whether you materially participated under this test if:
individuals can deduct up to $_____ of rental real estate losses against active and portfolio income
$25,000
to be eligible for the $25,000 deduction associated with rental real estate losses an individual must meet what two tests?
active participation in the activity (make management decisions) own 10% or more of all interests in the activity during the year
the $25,000 rental real estate loss deduction is phased out between $____ and $____
$100k ; $150k
what if your AGI is $110,000 how much of a rental real estate loss can you deduct?
$20,000 $25k - ($110k - $100k x 50%)
what is Larry’s AGI based off the following info: Salary for managing an S corp = $50k Dividend income from stock = $1,000 loss from a 20% limited partnership interest = $4,000 loss from a 10% interest in an S corp, which he work full time managing one of the branches = $3,000
AGI = $48,000 the $3,000 loss from the limited partnership is a passive loss and cannot be deducted because limited partners aren’t materially participants
Reggie is a high-income wage earner currently earning $180k annually. Recently, he has invested $30k for a 15% interest in a RELP as limited partner. Operations of the activity resulted in a loss of $300k of which Reggie’s share was $45k. Reggie does not have any passive income in the year. Can Reggie claim a deduction/loss this year? If so how much?
No he cannot claim a loss or deduction because he did not have passive income $15,000 of Reggie’s loss is suspended due to the at risk rule ($45k - $30k) The other $30k is suspended under the passive activity loss rules
Mavis died owning an investment in a passive activity for which she had a basis of $50k. The FMV of her investment in the activity was $70k. She had suspended losses in the activity of $40k. What is the deduction allowed on Mavis’s final tax return?
$20k (FMV - basis)
true or false? the personal exemption increases if over 65
false - TCJA eliminated it
The personal exemption was available to all taxpayers, with a couple of notable exceptions. If someone else could claim you as a dependent, you couldn’t claim the personal exemption. Note that it doesn’t matter if someone else actually did claim you. What matters is whether or not someone could claim you.
You also may not be able to claim the entire personal exemption depending on your adjusted gross income (AGI). The personal exemption begins to phase out at a certain income threshold. For tax year 2017, the exemption reduced for single filers who had an AGI above $262,500. The exemption phased out entirely if your AGI was over $384,000. The exemption started to phase out for joint filers who had an AGI of $313,800. It phased out entirely if your AGI was above $436,300.
true or false? the standard deduction increases if over 65
true
what is the standard deduction for a 55 year old who is also blind, based on 2017?
$7,900 $6,350 + $1,550
what is the standard deduction for a 68 year old couple who are both blind, based on 2017?
$17,700 $12,700 + (4 x $1,250)
what is the age test for qualifying a child as a dependent?
To claim your child as your dependent, your child must meet either the qualifying child test or the qualifying relative test:
- To meet the qualifying child test, your child must be younger than you and either younger than 19 years old or be a “student” younger than 24 years old as of the end of the calendar year.
- There’s no age limit if your child is “permanently and totally disabled” or meets the qualifying relative test.
In addition to meeting the qualifying child or qualifying relative test, your child must also meet all of the other tests to be your dependent:
- Dependent taxpayer test
- Citizen or resident test, and
- Joint return test
what is the support test for qualifying a child or relative as a dependent?
must not provide 50% of own support
true or false? only one person can claim a dependency exemption for an individual
true
who gets to claim a child as a dependent if the child lives with both parents an equal amount of time?
the parent with the higher AGI
who gets to claim a child as a dependent if neither person is the child’s parent?
person with the higher AGI
Erin and Brian are both age 50 and file a joint return for the current year. They provided all the support for their 19 year old unmarried daughter, who had no income and lived with them for the entire year. Their 23 year old son, a full time student at a university had $5,000 in income and provided 70% of his own support. How many exemptions can they Erin and Brian claim?
3 one for each of them and one for their daughter no exemptions for son because he provided 70% of his own support
Dennis age 50, filed a joint return with his wife, Kelly, age 24. Their son Derek was born December 16 of the taxable year. Dennis provided 60% of the support for his 73 year old widowed mother until May 1 when she died. His mother’s only income was from SSI totaling $4k which she used $1k of for her own support. How many exemptions can Dennis and Kelly claim?
4
Andre provided more than one half of the support for his cousin, his niece, and his foster parent. None of them lived in Andre’s household. None of these relatives had any income nor did any of them file an individual or joint return. All of these relatives are US citizen . Which of the people is considered a qualifying relative to Andre?
only the niece
Four tests must be met for a person to be your qualifying relative. The four tests are:
-
Not a qualifying child test
- Unlike a qualifying child, a qualifying relative can be any age. There is no age test for a qualifying relative.
-
Member of household or relationship test - To meet this test, a person must either:
- Live with you all year as a member of your household, or
- Be related to you in one of the ways listed under Relatives who don’t have to live with you:
- Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). (A legally adopted child is considered your child.
- Your brother, sister, half brother, half sister, stepbrother, or stepsister.
- Your father, mother, grandparent, or other direct ancestor, but not foster parent.
- Your stepfather or stepmother.
- A son or daughter of your brother or sister.
- A son or daughter of your half brother or half sister.
- A brother or sister of your father or mother.
- Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
-
Gross income test
- To meet this test, a person’s gross income for the year must be less than $4,150.
-
Support test
- To meet this test, you generally must provide more than half of a person’s total support during the calendar year.
Claudia age 15 has lived with her older sister Nancy age 19 for the past two years . There are no parents living in the home. Nancy provides all of Claudia’s support. Can Nancy claim Claudia as a dependent?
yes
Gary and Lori are the parents of Neil, age 6. They provide 100% of Neil’s support. Under the divorce settlement entered into in 2009, Lori is the custodial parent. Gary is required by the same agreement to provide health insurance to Neil through his employer. Who can claim Neil as a dependent?
Only Lori Gary can claim Neil as a dependent child for medical insurance purposes
true or false? if you divorce your spouse you can never claim your former brother/sister in law as dependent
false, you can. Death/Divorce do not affect your ability to claim them as a dependent
for 2017 what is the standard deduction for people who can be claimed as a dependent by another in the same year?
the greater of $1,050 or earned income plus $350
Andrea is claimed as a dependent on her parents’ return. She earned $2,900 and received dividend income of $2,000. What is Andrea’s standard deduction for the year?
$3,250 $2,900 + $350
what are the five filing status categories?
single MFJ MFS Head of household qualifying widow(er) with dependent child also called surviving spouse
an unmarried, separated, or divorced individual who does not qualify for another status must file as a _____ taxpayer
single
true or false? if a married couple files as married filing separately they can still take the credit for child and dependent care expenses
fasle
true or false? if a married couple files as married filing separately they can still take the earned income credit
false
To qualify for EITC you must have earned income from working for someone or from running or owning a business or farm and meet basic rules. And, you must either meet additional rules for workers without a qualifying child or have a child that meets all the qualifying child rules for you.
For 2018, the maximum EITC amount available is $6,444 for taxpayers filing jointly who have 3 or more qualifying children
Income Limits During 2018:
- Your tax year investment income must be $3,500 or less for the year.
- Your total earned income must be at least $1.
- Both your earned income and adjusted gross income (AGI) must be no more than:
- Zero Qualifying Children
- Single = $15,270
- MFJ = $20,950
- One Qualifying Child
- Single = $40,320
- MFJ = $46,010
- Two Qualifying Children
- Single = $45,802
- MFJ = $51,492
- Three or More Qualifying Children
- Single = $49,194
- MFJ = $54,884
- Zero Qualifying Children
true or false? if a married couple files as married filing separately they can still take education credits
false
When you choose not to file jointly, you limit or altogether forgo several tax breaks and deductions including:
- The child and dependent care tax credit
- The adoption credit
- The Earned Income Credit
- Tax-free exclusion of U.S. bond interest
- Tax-free exclusion of Social Security benefits
- The credit for the elderly and disabled
- The deduction for college tuition expenses
- The student loan interest deduction
- The American Opportunity Credit and Lifetime Learning Credit for higher education expenses
- The deduction of net capital losses
- Traditional IRA deductions
- Roth IRA contributions
unmarried individuals who maintain a household for a qualifying person for more than one half of the tax year
Head of Household
- Generally, you may claim head of household filing status on your tax return only if you are unmarried and pay more than 50% of the costs of keeping up a home for yourself and your dependent(s) or other qualifying individuals.
Dependents explains the difference between a qualifying child and a qualifying relative. Other topics include the social security number requirement for dependents, the rules for multiple support agreements, and the rules for divorced or separated parents.
if filing as head of household does an unmarried child have to be claimed as a dependent to be a qualified person
no
if filing as head of household does a married child have to be claimed as a dependent to be a qualified person
yes
if filing as head of household does a parent have to be claimed as a dependent to be a qualified person?
yes
which of the following qualified persons does not have to live in the household for more that 50% of the year to still be a qualified person under head of household filing: single child married child other relative parents
parents only can live in another home for more than 50% of the year
John’s wife died in 2015. John has not remarried and for 2016 and 2017 he maintained a home for himself and his dependent child. Can John file a joint return for years 2016 and 2017? What about 2018?
yes because he is considered a qualifying widower with a dependent child For 2018 he could file as head of household because the qualifying widower with dependent child filing only lasts for two years
true or false? if you are single individual and your income does not exceed the exemption amount plus the applicable standard deduction then you do not have to file taxes
true
true or false? if you are head of household and your income does not exceed the exemption amount plus the applicable standard deduction then you do not have to file taxes
true
true or false? if you are surviving spouse and your income does not exceed the exemption amount plus the applicable standard deduction then you still have to file taxes
false, you do not have to file
true or false? if you are married and filing jointly and your income does not exceed the exemptions amount plus the applicable standard deduction then you do not have to file taxes
true
in 2017, a single individual who is claimed by a parent as a dependent has earned income of only $3,900. Would this person need to file a return?
no, because earned income would be less than the standard deduction amount of $4,250 ($3,900 + $350)
In 2017, a single, blind individual who is claimed as dependent by a parent has unearned income of $1,200. Does this individual need to file a return?
no, because gross income does not exceed the standard deduction of $2,600 ($1,050 + $1,550) $1,050 is being used because it is greater than the earned income which is $0. $1,550 is the additional standard deduction for being blind
In 2017, a single individual claimed as a dependent by a parent has earned income of $2,000 and unearned income of $1,800. Does this individual need to file a return?
Yes, because gross income is more than the applicable standard deduction gross income = $3,800 standard deduction = ($2,000 +$350) = $2,350
which form should a taxpayer use to file taxes if taxable income is less than $100k and no dependents or adjustments to income are claimed?
1040EZ
For Tax Year 2018, you will no longer use Form 1040-EZ, but instead use the redesigned Form 1040.
which form should a taxpayer use to file taxes if the only adjustments to income are for deductible IRA contributions and student loan interest?
1040A
what form allows a tax payer to file an extension?
4868
dollar for dollar reductions of the income tax liability of the taxpayer
tax credits
tax credits that are paid to the taxpayer even if the amount exceeds the taxpayer’s tax liability
refundable credits
tax credits that at best reduce a taxpayer’s tax liability to zero
nonrefundable tax credits
true or false? the credit for elderly or disabled is a nonrefundable credit
true
this credit applies to taxpayers 65 and older or those under 65 who are retired an permanently or totally disabled
credit for elderly or disabled
if the tax in the foreign jurisdiction is more than the US tax, then taking the tax credit is generally _______ advantageous
more
true or false? a taxpayer can take advantage of both the foreign tax credit and the foreign earned income exclusion
false
true or false? the adoption credit is a nonrefundable credit
true
the child tax credit is reduced $____ for every $________ above MAGI threshold
$50 ; $1,000
true or false? room and board are qualifying expenses under the american opportunity tax credit
false
____% of the american opportunity tax credit is refundable
40%
The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.
To be eligible for AOTC, the student must:
- Be pursuing a degree or other recognized education credential
- Be enrolled at least half time for at least one academic period* beginning in the tax year
- Not have finished the first four years of higher education at the beginning of the tax year
- Not have claimed the AOTC or the former Hope credit for more than four tax years
- Not have a felony drug conviction at the end of the tax year
- *Academic Period can be semesters, trimesters, quarters or any other period of study such as a summer school session. The schools determine the academic periods. For schools that use clock or credit hours and do not have academic terms, the payment period may be treated as an academic period.
the child tax credit is a _____ credit
refundable
under the lifetime learning credit a taxpayer may claim ____% of qualified expenses up to $_____
20% ; $10,000
Max Lifetime Learning Credit = $2,000
Who?
- You, your dependent or a third party pay qualified education expenses for higher education
- You, your dependent or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution
- The eligible student is yourself, your spouse or a dependent you listed on your tax return
Eligible Student
- Be enrolled or taking courses at an eligible educational institution
- An eligible educational institution is a school offering higher education beyond high school. It is any college, university, trade school, or other post-secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education.
- Be taking higher education course or courses to get a degree or other recognized education credential or to get or improve job skills
- Be enrolled for at least one academic period* beginning in the tax year
- *Academic Period can be semesters, trimesters, quarters or any other period of study such as a summer school session. Academic periods are determined by the school. For schools that use clock or credit hours and do not have academic terms, the payment period may be treated as an academic period.
Income Limits
- Single = $57,000 and $67,000
- MFJ = $114,000 and $134,000
The LLC is not refundable
true or false? both the lifetime learning credit and american opportunity tax credit can be claimed if married filing separately
false, neither can be claimed
In rare situations, filing separately may help you save on your tax return.
For example, if you or your spouse has a large amount of out-of-pocket medical expenses to claim and since the IRS only allows you to deduct the amount of these costs that exceeds 10% of your adjusted gross income (AGI) in 2017 and 2018, it can be difficult to claim most of your expenses if you and your spouse have a high AGI.
Filing separate returns in such a situation may be beneficial if it allows you to claim more of your available medical deductions by applying the threshold to only one of your incomes.
Beginning Jan. 1, 2019, all taxpayers may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of their adjusted gross income.
assumes that depreciation is uniform throughout the useful life of the assets
straight line depreciation
how to calculate straight line depreciation
(Cost - residual value) / useful life
Under MACRS depreciation residential real estate has a depreciation life of ____ years and non residential real estate has a depreciation life of ____ years
27.5 years ; 39 years
the maximum write-off under section 179 for tangible personal property used in a trade or business is $__________ for 2017
$510,000
In 2017 ABC corporation purchased and placed in service a piece of machinery costing $25,000. Assuming ABC corp had taxable income of $22,000 (without regard to section 179 expense) what would be the maximum section 179 expense that ABC could take for 2017?
$22,000 would be the maximum section 179 expense ABC could take because you can’t take more than your taxable income. ABC can carry forward $3,000
In 2017, Betty Corp purchased and placed in service a machine to be used in its manufacturing operations. This machine cost $2,040,000. What portion of the cost may Betty elect to treat as an expense rather than as a capital expenditure assuming net taxable income of $4million? What is the new basis of the purchased machinery?
$500,000 calculated as follows $510,000 is the normal maximum write off, but because the equipment was purchased for more than $2,030,000 the write off gets reduced by the excess between the purchase price and $2,030,000 $510,000 - ($2,040,000 - $2,030,000) new basis = $2,040,000 - $500k = $1,540,000
Certain intangible assets are amortized over ____ years (copyrights, trademarks, patents, etc.)
15 years
Maria acquired a business on July 1 of the current year. The purchase price included a copyright valued at $30k. How much can Maria claim as amortization this year and in following years?
This year = 6 months of having copyright or 50% of the year x $30k / 15 = $1k Following years = $30k / 15 = $2k
The IRS designates certain assets as intangible assets under Section 197 of the Internal Revenue Code.
For purposes of Section 197, intangible assets include:
- But the IRS says you cannot amortize assets in categories 1 through 8 if you created these assets, unless “you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business.”
- Goodwill
- Going concern value
- Workforce in place (that is, current employees, including their experience, education, and training)
- Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers
- A patent, copyright, formula, process, design, pattern, know-how, format, or similar item
- A customer-based intangible, including customer base and relationships with customers
- A supplier-based intangible (the value of future purchases due to relationships with vendors)
- Any item similar to items (3) through (7)
- A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals)
- An agreement or covenant not to compete or non-compete agreement entered into in connection with the acquisition of an interest in a trade or business; and
- A franchise, trademark, or trade name
- A contract for the use of, or a term interest in, any item in this list
Non-Applicable Intangible Assets:
- Certain intangible assets are NOT considered to be Section 197 intangibles, and thus may not be amortized over 15 years:
- Copyrights and patents, interests in films, sound recordings, videotapes, books, or other similar property. Exception: If any of these intangibles are acquired as part of a business purchase, they may be considered Section 197 intangibles.
- Interests in a corporation, partnership, trust, or estate; in land or in certain financial contracts
- Sports franchises
- Some computer software
- Some corporate transaction costs.
- Disclaimer: This article is provided for general information purposes only, and it is not intended to be tax or legal advice. Be sure to consult a tax professional before amortizing intangibles.
depletion method in which the asset basis is divided by the estimated total number of recoverable units of the asset and then multiplied by the number of units sold
cost depletion
depletion method a statutory percentage is applied to the gross income from the property limited to 50% of AGI
percentage depletion
Taxable income limit.
- The percentage depletion deduction generally cannot be more than 50% (100% for oil and gas property) of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction.
Percentage depletion is a tax deduction that assigns a set percentage of depletion to the gross income derived from extracting fossil fuels, minerals, or other nonrenewable resources from the earth. Percentage depletion is provided as an incentive for drillers and investors to develop domestic mineral and energy production.
Cole owns a sulfur mine that had 100,000 total estimated tons when he purchased it for $2million. In the current year 20,000 tons were extracted and 18,000 tons were sold. The statutory depletion % for sulfur is 22%. Gross income for the year was $1million. How much depletion deduction can Cole take?
under cost method he can take $360k calculated as follows: ($2million / 100k) x 18,000 = $360k under the percentage depletion method he can take $220k calculated as follows: $2million x 22% = $220k
Peggy a cash-basis taxpayer has the following items of income for the current year: salary = $40k bonus check issued and available at payroll office =$5k Borrowed $10k on home equity loan original issue discount bond accrual amount = $2k US Savings bond that increased in redemption value = $200 (last year she elected to include this redemption value increase in her income) what is Peggy’s gross income?
$47,200
true or false? for both cash basis and accrual basis tax payers an increase in redemption value of a original issue discount must be included in income in the year the increase occurs
true
requires reporting of expenses when incurred and income when earned for any single tax year
accrual method
method that states that expenses do not have to be paid to be deductible nor does income have to be received to be taxable
accrual method
In Year 1, ABC Corp entered into a contract to build a hotel that will be completed by December year 2. The contract price was $2million and the estimated cost of construction was $1million. During year 1, actual costs incurred were $600k. In year 2, the hotel was completed at a total cost of $1.1 million. What net income will ABC corp report for years 1 and 2?
Year 1 = $2 million x ($600k / $1 million) - $600k = $600k Year 2 = $2 million - $1.2 million - $500 = $300k
allows the taxpayer to defer revenue recognition until the contract is completed
completed contract method
This contrasts with the cash and accrual methods of accounting.
This accounting method is frequently used in the construction industry or other industries whose businesses involve long-term contracts.
The completed contract method is a unique accounting method that allows all revenue and expense recognition to be deferred until the completion of a contract. This type of accounting method has benefits and disadvantages for a firm’s balance sheet. On the one hand, because revenue recognition is postponed, tax liabilitiesare also postponed. Expense recognition, which can reduce taxes, is also delayed. However, since multiple contracts may finish at once and create a large surge of revenue and expense, this type of accounting method causes fluctuations in the balance sheet. These fluctuations can be seen as a sign of risk and business inconsistency by analysts if they are not aware of the accounting method being used.
if the total amount of property placed in service exceeds $_____ the $1,000,000 section 179 allowance is reduced dollar for dollar…which makes the maximium amount of dollar value of property placed in service at $______________.
$2,500,000 with maximum amount of $3,500,000
So what types of business property does Section 179 apply to? The IRS has two general requirements:
- The property (called “qualified property”) must be “tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business.” Vehicles, and (starting in 2018) land and buildings are included
- The property must be purchased and put into service in the year in which you claim the deduction. Putting an asset into service means that you have it set up and working and you are using it in your business. Buying a piece of property and then letting it sit and gather dust doesn’t count.
The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the Section 179 Deduction. Simply multiply the cost of the equipment, vehicle(s), and/or software by the percentage of business-use to arrive at the monetary amount eligible for Section 179.
