Chapter 1 - Individual Taxation

Question 1

What are the “for AGI” adjustments?

Answer 1

I-EMBRACED Health Farm Charity

Interest on student loans (2,500)

Employment tax

Moving expenses (military only)

Business expense (Sch C)

Rent/royalty and flow through entities (Sch E)

Alimony (grandfathered only)

Ccontributions to retirement (IRA/KEOGH)

Early withdrawal penalty

Jury Duty pay

Health savings account (HSA)

Farm income (Sch F)

Charity (300, 600 MFJ)

Question 2

When must an individual file?

Answer 2

If their income is greater than their standard deduction or if they have:

• Net self-employment of 400 or greater
• Are claimed as a dependent on someone’s return and have gross income greater than the standard deduction
  
  • 1,100 or earned income + 350 (choose greater)
• Are receiving advanced payments of the earned income credit (EIC)
• Are subject to kiddie tax

Question 3

When does Kiddie Tax apply?

Answer 3

If they meet ANY of the following conditions:

• Child has unearned income greater than the threshold
• Either parent is alive at end of taxable year
• Child does not file a joint tax return
• Child is either:
  
  • Under 18 at tax year end
  • 18 with earned income not over 50% of support
  • Student between 19-24 not over 50% of support

Question 4

How does the Kiddie Tax work?

Answer 4

1. Unearned income up to dependent’s standard deduction is NOT TAXED (0-1,100)
2. Unearned income above standard deduction to threshold (2,200) is taxed at the CHILD’S rate
3. Income over the threshold is taxed at the PARENT’S rate

Question 5

What equation is used to find how much Kiddie income is taxed at the parent’s rate?

Answer 5

Total income - earned income - threshold = Amount taxed at parent’s rate

Question 6

What entities are prohibited from using the cash basis for tax purposes?

Answer 6

1. C corps unless they have gross receipts less than 26 million
2. Partnerships that have a C corp as a partner unless they meet the 26 mil test
3. Tax shelters

Question 7

What does it mean when income is “constructively received?”

Answer 7

When payment has been made available to the taxpayer and has an unrestricted right to it

Question 8

When are scholarships taxable?

Answer 8

They are taxable if they are compensation for services

Question 9

When are Series EE bonds tax exempt?

Answer 9

If they are used for higher education for self, spouse, or dependent.

Redeem directly to the school and only for tuition and fees

Question 10

When are non-qualified and qualified stock options taxable?

Answer 10

Non-qualified: When exercised (excess FMV over exercise price is compensation)

Qualified (incentive stock option): When sold (difference between sales price and exercise price is a CAPITAL gain/loss)

Question 11

When are prizes and awards NOT taxable?

Answer 11

1. If no services required of recipient
2. Selected without any action from the recipient
3. Payment assigned by recipient to governmental unit or charity so that recipient never actually receives the award

Question 12

When is a state tax refund taxable on a federal return?

Answer 12

If the taxpayer took the deduction on their schedule A for the refund in a prior year, then it is taxable in the CURRENT year.

Question 13

What is NOT included in the calculation of taxable income when applying a net operating loss (NOL)?

Answer 13

• Capital losses over capital gains
• Nonbusiness deductions (ex: standard deduction) over nonbusiness income
• NOL carryforwards
• 199a qualified business income deduction

Question 14

What are the seven tests for material participation?

Answer 14

Only need to pass one to be material

1. Participates in activity more than 500 hours
2. Participation is substantially all the participation by all owners/non-owners
3. Participates over 100 hours and not less than any other person
4. Activity is a “significant participation activity” and taxpayer has participated in significant activities for over 500 hours
5. Materially participated for 5 of last 10 years
6. Materially participated in activity for any 3 years prior for personal service activities
7. Depending on facts and circumstances, participation is regular, continuous, and on a substantial basis

Question 15

What is the real estate professional exception for passive activity losses?

Answer 15

If the taxpayer is a real estate professional, then losses from real estate rental activity may be treated are ordinary business losses against ordinary income

Question 16

What is the active participation exception for passive activity losses?

Answer 16

If taxpayer only actively participates in rental and has at least 10% interest, they can deduct up to $25,000 of losses against ordinary income

Reduced by 50% if modified AGI is over $100,000 and there is no deduction if modified AGI is over $150,000

Question 17

What is the treatment for rental income if it is a vacation home?

Answer 17

If used as a home and rented for less than 15 days, rental income is EXCLUDED from gross income and expenses not deductible as rental expenses.

If rented for over 14 days:

• If personal use is greater than 14 days or 10% of days rented, then rental income and deductions (limited to rental income) are included. Can carryforward deductions.
• If personal use less than 14 days or 10% of days rented, then rental income is included and expenses are allocated to rental are allowed. Excess expenses are subject to passive activity loss limits.

Question 18

How are traditional IRAs and ROTH IRAs different?

Answer 18

Traditional IRA contributions are deductible when contributed into the plan, but taxable when withdrawn

ROTH IRA contributions are not deductible when contributed but are tax exempt when withdrawn.

Both have a contribution limit of 6,000, but a ROTH IRA reducces the limit if your AGI is over 140k (208 MFJ)

Question 19

What are the requiremets to be considered a qualifying child?

Answer 19

JARRS

No Joint return with spouse

Age: Must be under 19, or 24 if a full time student for at least 5 months of the year AND younger than the taxpayer and their spouse

Relationship: Child, stepchild, foster child, sibling, step sibling, half sibling, or a descendant of any such individual (ex: nephew or grandchild

Residency: Must live with the taxpayer more than half the year in the U.S.

Support: Must have NOT provided more the 50% of their own support (not including scholarships)

Question 20

What are the requirements for qualifying relative?

Answer 20

C-IRS-Jack you

Citizenship or resident: US citizen or resident of US, Mexico, or Canada

Income: Limited to $4,300 (don’t include social security)

Relative or unrelated household member for the ENTIRE year

• Relatives don’t have to live with taxpayer for the entire year. Does NOT include cousins.

Support: Taxpayer must have provided. over 50% of total annual support

No Joint return

Question 21

What are the two education credits and what are the differences between them?

Answer 21

American Opportunity Credit: Applies to the first 4 years of postsecondary school.

Lifetime Learning Credit: Applies to any year of education and include tuition paid to a qualified institution for education to improve job skills.