Chapter 1 Flashcards
What is the overall Individual Taxation formula?
Gross Income
(Adjustments)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Adjusted Gross Income - AGI
(Standard Deduction)
OR
(Itemized Deduction) - exp. Self, Spouse, Kids
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Taxable Income
Federal Income Tax (Tax Credits) Other Taxes (Payments) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Tax Due OR Tax Refund
What are the examples of Gross Income?
- Wages
- Interest
- Dividends
- State Tax Refunds
- Alimony Received
- Business Income
- Capital Gain/Loss
- IRA Income
- Pension and Annuity
- Rental Income/Loss
- K-1 Income/Loss
- Unemployment Compensation
- Social Security Benefits
- Other Income
What are examples of Adjustments (note that this is a “deduction to arrive at AGI”)?
- Educator Expenses
- IRA
- Student Loan Interest Expenses
- Tuition & Fee Deduction
- Health Savings Account
- Moving Expenses
- One-Half Self-Employment FICA
- Self-Employed Health Insurance
- Self-Employed Retirement
- Interest Withdrawal Penalty
- ALIMONY PAID
What are examples of Itemized Deductions?
- Medical (in excess of 10% AGI)
- Taxes, state/local (Income/Sales and Property)
- Interest Expense (Home and Investment)
- Charity (ONLY UP TO 50% AGI)
- Casualty/theft (in excess of 10% AGI)
- Miscellaneous (in excess of 2% AGI)
- Other Miscellaneous
What filing status would someone elect THE SAME YEAR that their spouse died?
Married Joint Return
What filing status would someone elect THE FOLLOWING 2 YEARS of a spouses death?
IF they have a dependent living with them FOR THE WHOLE YEAR, then they would file as Qualifying Widow/er (or Surviving Spouse)
What are the requirements for Head of Household filing status DEPENDENTS?
- A dependent son/daughter (must LIVE WITH taxpayer of more than HALF THE YEAR)
- Father/Mother (does NOT have to live with taxpayer AT ALL, contributes OVER HALF cost of person)
- Relative (must live with TAXPAYER for more than HALF THE YEAR, also note that cousins or foster parents do not count has to be RELATED
For EXEMPTIONS what is the CARES RULE?
Qualifying Child Close Relative Age Limit (19/24 college) Residency and Filing Requirements Eliminate Gross Income Test Support Test Changes
For EXEMPTIONS what is the SUPORT RULE?
Qualifying Relative
Support (over 50%) test
Under a specific amount of (taxable) gross income test
Precludes dependent filing a joint tax return test
Only citizens (residents of US/Canada/Mexico) test
OR
Taxpayer lives with individual for WHOLE YEAR test
The amount of exemption for 2016?
$4,050
If you are given something (for example) what is the basis for the taxable amount?
Fair Market Value becomes the basis
What is a Schedule B used for?
Interest Income and Ordinary Dividends
If someone files a Form 1040EZ, what kind of deduction did they take?
STANDARD Deduction, this means that any refund is NONtaxable
If someone uses ITEMIZED deduction, is a refund taxable?
Yes
What is a Schedule C or CZ?
(Company) Business Income SELF EMPLOYED
Gross Business Income
Business Expenses
___________________
Profit OR Loss
Net Taxable Loss is?
A business w/ a loss may deduct the loss AGAINST other sources of income (so you can only get down to 0)
It can be 2 years carryBACK or 20 years carryFORWARD
Examples of Business Expenses?
- Cost of goods (inventory is expensed when sold)
- Salaries and commissions paid to OTHER (not self)
- State and local business taxes paid ONLY
- Office expenses (supplies, rent, equipment)
- Actual automobile expenses (depreciation business portion only)
- Business meal/entertainment at 50%
- Depreciation of business assets
- Interest expense on business loans
- Employee benefits
- Legal/professional services
- Bad debts actually written off for an accrual basis taxpayer ONLY
What are examples of NONdeductible Business Expenses (note that cpa exam may try to trick you on these and make you think they are actually expenses, they are NOT)?
- Salaries paid to the SOLE PROPRIETOR/OWNER (they are considered ‘draw’)
- FEDERAL Income Tax
- Personal portion of automobile, travel, vacation expenses, meals, health insurance, etc
- Bad debt expense of CASH BASIS taxpayer
What are the TWO taxes on Net business income?
1) Income Tax
2) Federal self-employment tax
What is a Schedule SE (Form 1040)?
Social Security or Self Employment Tax
What is a Schedule F?
Profit or Loss From Farming
What is a Schedule E?
Supplemental Income and Loss
exp. Rental Income (Note this is a PASSIVE ACTIVITY)
Royalties
Partnerships/Limited Liability Companies (from sched K-1)
S Corporations (from sched K-1)
Estates (from sched K-1)
Trusts (from sched K-1)
If you have a vacation home that you rent out for LESS than 15 days, what is it treated as?
Personal Residence, Rental Income would NOT be included in income
If you have a vacation home that you rent out for MORE than 15 days, what is it treated as?
Rental residence, expenses are prorated between personal and rental
Note: Rental expenses are only deductible to the extent of rental income, i.e. NO RENTAL LOSS ALLOWED
Worker’s Compensation is?
Tax FREE (not income)
Unemployment Compensation is?
MUST be included in INCOME
Can Scholarships be spent on room and board?
NOPE, this portion of a scholarship is taxable
Life Insurance proceeds are?
NOT taxable, but the interest portion is
What are the requirements to be considered a widower?
1) Taxpayer spouse died in ONE of the TWO previous years and the taxpayer did NOT remarry
2) Taxpayer has kid to be claimed as dependent
3) Kid lives w/ taxpayer for WHOLE year
4) Taxpayer paid more than half cost of keeping up the home for the kid
Note: the YEAR that the spouse died the taxpayer can file JOINT RETURN
In order to file a joint tax return?
Parties must be MARRIED at the END OF THE YEAR
Note: if parties are legally separated (but still married) the may NOT file joint return
Filing status for a surviving spouse with NO dependent kids?
Would be Single for subsequent years, married filing jointly for year spouse died
Note: married filing joint rates apply for 2 years after death of spouse if surviving spouse does NOT remarry and has house for dependent
Qualifying children are?
either under the age of 19 or under age of 24 AND full time student
Dividends received on stock would be?
Included in gross income
Requirements for payments to be considered alimony (financial support for ex-spouse)?
1) Payments made in cash or cash equivalents
2) Payments cannot extend past death of payee-spouse
3) Payments legally required (by divorce/separation agreement)
4) Payment NOT made to members of the same household
5) Payments cannot be anything but for alimony
6) Spouses may not file joint tax return
Note: requirements are the same for payments to be alimony (deductions, like the spouse paying the ex alimony)
Costs to be capitalized to inventory?
Direct Material, Direct Labor, and Factory Overhead
Note: Research is NOT capitalized, it is an expense
Is workers compensation included in gross income?
NO
Scholarships are NONtaxable for degree seeking students to the extent that the scholarship money is used on?
Tuition, fees, books, and supplies
Note: does NOT include room and board
Under the Uniform Capitalization Rules applicable to property acquired for resale, what costs are capitalized or expenses for inventory?
Marking Cost - may be deducted as an EXPENSE
Off-site Storage - should be CAPITALIZED
Interest income on FEDERAL tax refund is?
Taxable (note that the refund itself is not taxed)
Inclusion of social security benefits in gross income?
Remember, either taxed at nothing if they barely make any, OR 85% of social security benefits is the MAXIMUM amount of benefits to be included in gross income
Estimated federal income tax payments?
Are NOT considered a business expense
What are charitable contributions considered?
ITEMIZED deduction on Schedule A, UNLESS there is an expectation of commensurate financial return (i.e. giving $100 to receive a $100 gift card)
Interest Income on State Government Obligations (meaning state and local government bonds, or municipal bonds)?
NOT taxable interest income
Prepaid Rent is considered?
Income when Recieved, even for accrual basis taxpayers
Funds qualify as child support if:
1) amount is fixed or contingent on kids status (ex. reaching a specific age)
2) paid solely for support of minor children
3) Payable by decree, instrument, or agreement
Ordinary income from S Corporation?
Considered taxable income on an individuals tax return
Ordinary income from a partnership may be subject to?
Self employment tax (if to a general partner)
Regular unemployment compensation is?
INCLUDED in gross income
Generally the fair market value of prizes and awards is?
Taxable Income
Exclusion from income for certain prizes or awards applies when:
1) Winner is selected for an award without entering into a contest (no action on their part)
2) Winner assigns the award directly to governmental unit or charitable organization
Accrual basis taxpayer?
Use SALES as taxable income, NOT cash collections
An accruable expense is one which?
Services have been performed/received but have NOT been paid for by the end of the reporting period
What is the MAXIMUM amount deductible for a capital loss?
$3,000
Uniform Capitalization rules apply to the following:
1) Real/tangible personal property produced by a taxpayer for use of trade/business
2) Real/tangible personal property produced by a taxpayer for sale to customers
3) Real/tangible personal property acquired by taxpayer for resale, provided taxpayers annual average gross receipts for preceding 3 years exceeds $10,000,000
Is rental loss allowed?
NO
Qualified higher education expenses are?
Tuition and fees required for the enrollment or attendance of the taxpayer, the taxpayer’s spouse, or any dependent for whom the taxpayer is allowed a dependency exemption, at an eligible educational institution
What is the Net Rental Income formula?
Gross Rental Income
+ Prepaid Rental income (NONrefundable deposits)
+ Rent Cancellation Payments
+ Improvements in lieu of Rent (instead of rent, use FMV)
- (Rental Expenses)
______________________________________________
Net Rental Income (Loss)
Property settlements are?
NOT taxable
Individual taxpayer who elected to amortize the premium on a bond that yields taxable interest?
The bonds basis is REDUCED by the amoritzation
For cash/accrual taxpayer, gain/loss on year end sale of listed stock arises on the?
Trade Date
Retirement money withdrawn before age 59 and 1/2 is?
Subject to 10% penalty AND + regular income tax (marginal tax rate)
PASSIVE ACTIVITY LOSSES
May only be used to offset passive activity income (in current and prior years) also note the exception in year passive activity is disposed (sold) if still unused passive activity losses fully deductible in year of disposal
Exceptions to premature distribution of retirement funds?
Home buyer (1st time) $10,000 max used toward 1st home
Insurance (medical)
Medical expenses in excess of 10% AGI (7.5% age 65yrs or older)
Disability
Education
And
Death
If a taxpayer claims standard deduction (1040EZ) then?
State tax refund from a prior year is NOT income
The first $50,000 of group term life insurance is?
A NON taxable fringe benefit
Mom and Pop Passive Loss Exception?
- Up to $25,000 Maximum
- Phased out over AGE $100,000 - $150,000
- .50cents to every dollar over phase out range
A limited partnership is?
A passive activity income (loss)
Solvency is based on?
FMV all assets - Value of all liabilities
The gain on sale of stock is not recognized until when?
The year that the sale occurs
An employee receiving a NON-QUALIFIED stock option must?
Recognize as ordinary income at value of option if traded on an established market
Employee Stock Purchase Plan?
1) Option exercise price cannot be less than the LESSER OF 85% of the FMV of stock when granted/exercised
2) Option cannot be exercised for more than 27 months after grant date
The rule limiting the allowability of passive activity losses/credits?
Applies to personal service corporations, various partners w/in a partnership (not the partnership itself) and various shareholders in S corporation (not S corporation itself)
A cash basis tax payer should report gross income?
For the year in which income is either actually or constructively received, whether in cash or property
