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Regulation > Chapter 1-Individual Taxation > Flashcards

Chapter 1-Individual Taxation Flashcards

1
Q

individual tax returns go on what form?

A

1040

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2
Q

what are the requirements for an individual to file a tax return?

A

income greater than the sum of their PERSONAL EXEMPTIONS for the TAXPAYER AND THEIR SPOUSE + their BASIC STANDARD DEDUCTION based on filing status and any additional standard deductions based on AGE

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3
Q

what are some additional criteria for an individual to file a tax return?

A
  • net self employment earnings of $400 or more
  • are individuals claimed as dependents on another tax payers return, have any unearned income and gross income of 1000 or more. (based on 2014 amounts)
  • receiving advanced payments of EIC
  • are subject to kiddie tax
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4
Q

avoiding taxes on investment income by transferring the investments into the names of their children who might not be subject to tax or if they are its at a significantly lower rate is called what?

A

invention of the kiddie tax to capture the wealthy from evading taxes.

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5
Q

the following conditions apply to what?

  1. either parent is alive as of the end of the taxable year
  2. the child does not file a joint tax return for the year
  3. the child is of the appropriate age, either:
    * **under 18 years old as of the end of the tax yr.
    * **    a student btwn the ages of 18 & 24 w/earned income that does not exceed 50% of the child support
A

Kiddie tax

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6
Q

Individuals subject to the kiddie tax are subject to a tax liability of what?

A

larger of:

  1. the tax that would be owed based on filing a return including the child’s earned and unearned income
  2. the total of the tax that would be owed based on filing a return including only the child’s earned income + the allocable parental tax.
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7
Q

how is the allocable tax computed:

A
  • calculate the parents tax on the basis of their earned and unearned income, not taking into account any of their childrens unearned income
  • then calculate the parents tax on the basis of their earned and unearned income and the net unearned income of all their children who qualify for the kiddie tax
  • subtract the amounts from each other & the difference is the allocable parental tax
  • each child w/be allocated a portion of the allocable parental tax on the basis of the ratio of their net unearned income to the total of all the net unearned income used to calculate the allocable parental tax.
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8
Q

when are tax returns due if you didn’t get an extension?

A

April 15th; after April 15th tax penalties start assessing each day until paid no matter if you received an extension.

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9
Q

if you received an extension on your tax return what is your extension date and what form is it filed on?

A

October 15; this is for filing ONLY.

Form 4868. 6 months after return due date

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10
Q

what form are amended tax returns filed on?

A

1040x

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11
Q

when are amended returns due?

A

the later of:

  • 3 yrs after the original return was filed
  • 2 yrs after actual tax was paid
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12
Q

what are the IRS statutes of limitations?

A
  • 3 yrs - simple negligence/error
  • 6 yrs - gross negligence or 25% or more income not included in tax return (understated income by 25% or more)
  • unlimited-fraud/lie or failure to file
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13
Q

when is an individual required to use the accrual method of accounting?

A

if purchases and sales of inventory are necessary for the determination of income.

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14
Q

what entities are prohibited from using the cash basis of accounting?

A
  • C corporations w/gross receipts exceeding $5M
  • Partnerships that have a C Corp as a partner exceeding $5M
  • Tax Shelters
  • Certain trusts
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15
Q

who can use the cash basis of accounting?

A

*most individuals
*S corps
*individually owned partnerships
*personal service corporations (ex. health, law, accounting, consulting)
*

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16
Q

under the cash basis of accounting, when are expenses and income recognized?

A
  • received and is recognized at FMV if its property
  • or when made available

expenses are reported:

  • when cash is disbursed; when payment is made
  • if on a credit card, when the charge is made NOT when paid
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17
Q

under the accrual basis of accounting, when are expenses and income recognized?

A
  • income recognized when earned (basically the right to receive the income)
  • book expenses when incurred regardless of when paid
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18
Q
  • salaries and wages
  • tips
  • jury duty fees
  • unemployment *compensation
  • FMV of stock or property
  • premiums on group term life insurance OVER 50K
  • life insurance proceeds that are purchased from a person other than the insurance co
  • gambling winnings
  • prizes awards that were not received for years of service or safety achievement and is more than $400 reported FMV.
  • illegal drug income (net of COGS)
A

all are considered earned income

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19
Q

if scholarships have no strings meaning (not compensation for service) AND money spent for tuition, books, or class supplies for degree-seeking student?

A

they are not taxable when those two criteria are met

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20
Q

what interest is not taxable

A

state and local MUNICIPAL BOND interest is not taxable.

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21
Q

itemized deductions are on what schedule?

A

Schedule A (“FROM” agi adjustment)

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22
Q

Interest and Ordinary Dividends are on what schedule?

A

Schedule B (“FOR” agi adjustment)

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23
Q

Profit or Loss From Business like if you get a form 1099-MISC Income

A

Schedule C (“FOR” agi adjustment). this is for the employer and receive a 1099 basically because you are self employed

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24
Q

Net Profit from Business

A

Schedule C-EZ

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25
Q

Capital Gains and losses

A

Schedule D (“FOR” agi adjustment)

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26
Q

Supplemental Income and Loss to report income or loss from rental real estate, royalties (copyrights, Oil/gas leases, Patents c.o.p.), partnerships (form 1065 is filed), S corporations (form 1120-S is filed), estates (form 1041 filed), trusts (form 1041 filed), and residual interests in REMICs

A

Schedule E
(“FOR” agi adjustment)

Information comes from K-1 and flows through to the schedule E then attaches to individual tax return 1040

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27
Q

Earned Income Tax Credit

A

Schedule EIC

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28
Q

Profit or Loss on Farming

A

Schedule F (“FOR” agi adjustment)

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29
Q

Household employment tax

A

Schedule H

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30
Q

Farm Income Averaging

A

Schedule J

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31
Q

Credit for the Elderly or Disabled

A

Schedule R

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32
Q

Self Employment Tax

A

Schedule SE IS WHERE YOU CAN DEDUCT YOUR PORTION OF THE SELF EMPLOYMENT TAX FOR PEOPLE WHO ARE SELF EMPLOYED WHICH IS 7.65%

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33
Q

Foreign Tax Credit - paid taxes overseas and you can deduct the lower of the taxes you paid in the foreign country OR the % of that income earned overseas (foriegn tax income divided by total income) X the tax liability that you owe and you would take the lower of the two amounts as the amount deducted on the tax return. it is not to exceed actual foreign taxes paid

A

Form 1116

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34
Q

medical expense deductions can be deducted at what percentage that they EXCEED AGI?

A

10% of adjusted gross income; (so you multiply your agi by 10% and you can deduct any amount over that) taxpayers that are 65 or older can still use 7.5% of AGI

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35
Q

If you have deductible expenses that qualify as miscellaneous itemized deductions, you can deduct certain of those expenses only to the extent that they exceed what % of your adjusted gross income

A

2% so you multiply your agi by 2% and any amount over that answer you can deduct.

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36
Q

the following go on what IRS schedule?

  • Charitable contributions
  • Other miscellaneous
  • Miscellaneous expenses 2% above AGI (which is business, investments, tax preparation)
  • Medical Expenses 10% above AGI)
  • Interest expenses
  • Taxes (state/local NOT Fed)
  • Theft or casualty

These are all deducted FROM AGI

A

Schedule A - Itemized Deductions (“FROM” AGI adjustment)

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37
Q

what is the first thing on form 1040?

A

filing status ex. single, married filing jointly, married filing separate, head of household; qualified widower (allowed for the first two years after spouses death and must have a qualifying dependent)

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38
Q

What is the flow of form 1040

A

-Gross Income
-+- adjustments (sched b,c,e,f)
=adjusted gross income
- less net exemptions (can claim if a citizen, don’t make much income,they lived w/you the entire year, are related to you, you support them and they are not filing a joint return)
=taxable income
x tax rate
=tax liability
-credits ($ for $ deduction like educational credit, child tax credit, earned income tax credit (a refundable tax credit meaning you can get back more than you paid in), elderly credit)
+Self Employment tax
+AMT (alternative minimum tax-like penalty tax)
-less withholdings (like W-4 when get a new job)
-less prepayments (like retired $$ in the bank earning 10% in the bank, have to pay tax on that through estimated payment of taxes on form 1040ES
=tax due

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39
Q

when are corporation taxes generally due

A

3/15/xxxx

Or 2&1/2 months after fiscal year end

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40
Q

when are exempt organizations information tax returns due

A

5/15/xxxx

Or 4&1/2 months after year end

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41
Q

questions that ask “for AGI” or “TO AGI”

A

means it gets you to AGI amount means that all adjustment happen before the AGI is calculated b/c those adjustments make up AGI. the mnemonic IEMBRACE represents adjustments FOR AGI

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42
Q

questions that ask “FROM AGI”

A

Means once you have calculated AGI these adjustments are subtracted from AGI amount or added to AGI amount. ex. start w/AGI and subtract deductions, subtract net exemptions, subtract credits, add self employment tax, add alternative minimum tax, subtract withholdings taxes from W-4, and subtract any prepayments on retirement income.

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43
Q

adjustments FOR/TO AGI’s mnemonic IEMBRACE JEHF means what? Means you CAN DEDUCT these items on the front of the form 1040.

A

ALL THESE ITEMS ARE DEDUCTIBLE ON THE FACE/FRONT OF THE 1040

  • Interest on student loans
  • Employment tax (self)
  • Moving expenses
  • Business expenses (sched c)
  • Rent/Royalty/Flowthruentity(sched-e; like when you get an S-K from a partnership or rent from rental property)
  • Alimony
  • Contributions to retirement (IRA, TRADITIONAL ONLY etc)
  • Early withdrawal penalty (like if you deduct money from a cd and had to pay a penalty, you can deduct the amount of the penalty)
  • Jury duty pay/fee (if you receive jury duty pay you add it to the face of the 1040 and if you pay a jury duty fee you deduct it on line 21 of the 1040 “other income” and you net the fee and the income which net to zero but you HAVE TO LIST IT)
  • Education (says that qualified educational expenses up to 4,000 is deductible however, if you deduct on the face of the 1040 you cannot take the credit like the HOPE or LIFETIME LEARNING CREDIT)
  • Health savings account basically you can put money aside and if you have a high deductible plan you can deduct certain amounts
  • Farm income you can do a schedule F & the accounting method can be cash, accrual or crop(where you expense it in the year the revenue comes in),
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44
Q

what is meant by passive income?

A

money that you did not have to work for like investing in a limited partnership.

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45
Q

april 15,xxxx is how many months after calendar year?

A

3.5 months

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46
Q

how long is the extension to FILE an individual tax return?

A

6 months

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47
Q

what does constructively received mean?

A

made available to you. when you receive it. also known as the unrestricted right to the money or property

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48
Q

what is not considered income?

A
  • group term life insurance UP TO a $50,000 policy
  • fringe benefits that primarily are incurred for the employer’s benefit, such as free housing given to an on-site hotel manager
  • immaterial fringe benefits, such as free photocopies made on the company machine
  • employer provided educational assistance
  • group term health insurance up to $50,000 is free and not considered income. anything over that is taxable for example if the employer pays $75,000 then $25,000 would be taxable but if you pay a $300 premium then 2/3 of that is not taxable and 1/3 is taxable. the % is calculated by 25/75 for the taxable portion or 50/75 for the non taxable portion (means it is excluded and not reported in taxes)
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49
Q

when are prizes not considered income?

A

when the prize or award are both tangible personal property up to a certain dollar amount; received by an employee for his/her years of service with the company employment or safety achievement.

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50
Q

when are scholarships and fellowships not considered income.

A

a scholarship or fellowship that is both:

  1. not a compensation for required service
  2. is spent by a degree candidate for tuition
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51
Q

when is interest not considered income?

A
  • interest on a state or municipal bond
  • interest earned on a qualified higher education bond
  • interest on a series EE U.S. Savings bond is not reported as income until the time that the bond is redeemed if it is not used for education
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52
Q

what type of dividends are not considered income?

A
  • stock dividends (because it just reduces your basis)
  • dividends rec’d from an S-corp
  • dividends rec’d on a life ins. policy
  • dividends rec’d from a mutual fund that invests in tax-exempt bonds
  • liquidating dividend
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53
Q

under rents and royalties whats not considered income?

A

refundable security deposits.

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54
Q

what special type of stock option is not considered income?

A

ISO (incentive stock option)

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55
Q

when is a withdrawal of a traditional IRA or pension not considered income?

A

withdrawal that represents the recovery of prior nondeductible contributions and all Roth IRA withdrawals

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56
Q

when are injury awards not considered income?

A

when they are damages for bodily injury, pain and suffering and lost wages or workers compensation benefits. emotional distress is considered a physical injury

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57
Q

when are social security benefits not considered as income?

A

if the taxpayer earns about $25,000 or less

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58
Q

what type of taxes do you include in income?

A

state tax refunds, if the state taxes paid were originally claimed as a deduction in an earlier year.

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59
Q

when is social security considered income?

A

if the tax payers earns about $60,000 or more; 85% of the social security benefits received are taxable income.

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60
Q

what is considered “earned income”

A
  • salaries and wages
  • tips
  • jury duty fees
  • unemployment compensation
  • payment in non-money form reported at FMV when received (stock, property)
  • life insurance proceeds are generally tax free, unless purchased from a person other than the insurance co. (as an investment) or if paid out in installments, then a pro rata part of the receipts are taxable as interest.
  • gambling winnings (losses (an itemized deduction) can be offset to the amount of winnings
  • prizes and awards that were not received for years of service or safety achievement
  • ILLEGAL DRUG TRADE INCOME LESS THE COST OF GOODS SOLD
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61
Q

what type of injury income is taxable?

A
  • age, race discrimination
  • punitive damages
  • lost business profits
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62
Q

what is adjusted provisional income?

A
  • includes - wages, interest income, tax exempt interest, 50% of social security;
  • if this is less than $25,000 generally not taxable. If you make over $60K in adjusted provisional income 85% of social security income is taxable 15% is non taxable.
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63
Q

what is the formula for % of each payment that is excluded from taxes for retirements paid as an annuity?

A

cost of annuity/expected total annuity payments?

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64
Q

how long do you have to roll over a retirement plan for it to not be taxable?

A

within 60 days to a traditional IRA account

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65
Q

when is income earned in a foreign country not taxed as income?

A

an individual meeting a bona fide residence test or physical presence test may elect to exclude up to 99,200 (the amount for 2014; 2015 amount may be diff.) income earned in a foreign country. appears to still be 99,200 for 2015

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66
Q

how does a person meet the bona fide residence test?

A

be a U.S. citizen who is a foreign resident for an uninterrupted period that includes an entire taxable year

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67
Q

how does a person meet the physical residence test?

A

US citizen or resident present in a foreign country for at least 330 full days in ANY 12 month period

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68
Q

state tax refunds are they taxable?

A

only if you itemized in the prior year.

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69
Q

are federal tax refund INTEREST taxable? means interest received

A

Yes

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70
Q

what is a capital asset?

A

anything that is not an ordinary asset (current assets of a business) or a business asset or 1231 assets (non current business assets).

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71
Q

is student loan interest for higher education deductible?

A

yes, up to $2,500 per year is deductible as long as u have the loan (repayment period) it is an adjustment to get to the AGI known as “adjustment FOR/TO agi”

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72
Q

is self employment tax deductible?

A

only the portion as the “employer” can be deducted 6.2% FICA (SOCIAL SECURITY) and 1.45% (MEDICARE TAX). it is an adjustment to get to the AGI known as “adjustment FOR/TO agi” for a total of 7.65

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73
Q

are moving expenses deductible?

A

yes, as long as the following conditions are met:

  • new work @ least 50 miles further from old home each way
  • direct cost of moving you and your stuff are deductible (u-haul rental, gas for the uhaul/car, shipping belongings, depreciation, hotel fees while moving on the way)
  • **meals, house hunting or temp living expenses don’t qualify to be deducted
  • must work at least 39 weeks (9 months)

**TEMPORARY LIVING IS NOT A DEDUCTIBLE MOVING EXPENSE; HOUSE HUNTING IS NOT A DEDUCTIBLE MOVING EXPENSE.

**NOTE: MOVING EXPENSES PAID BY THE EMPLOYEE THAT ARE REIMBURSED BY THE EMPLOYER ARE NOT REPORTED AS INCOME AS LONG AS YOU DON’T DEDUCT THE EXPENSES FOR MOVING ON THE TAX RETURN

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74
Q

what business expenses are deductible?

A

**CANNOT BE A HOBBY WHICH IS A BUSINESS THAT HAS A LOSS FOR 3 CONSECUTIVE YEARS. HOBBY LOSSES ARE NOT DEDUCTIBLE IN THE FIRST YEAR OF LOSS BUT YOU CAN CARRY THE LOSS FORWARD TO THE NEXT YEAR AND DEDUCT IT THEN.

  • all costs of running a business
  • all taxes paid by the business
  • bad debts recognized under direct write-off method (estimates are not allowed)
  • UNICAP rules (requires certain direct and indirect cost be capitalized)
  • **interest paid in advance is not deductible when paid, even by a cash basis taxpayer
  • gifts to customers up to $25 per recipient per year
  • 50% meals and entertainment
  • 100% of business related travel
  • $4 per promotional item

SCHEDULE C - GENERALLY ARE SOLE PROPRIETORS AND THEY HAVE UNLIMITED LIABILITY

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75
Q

when would a business be eligible to take the “hobby loss” deduction?

A

if there has been no profit in 3-5 years

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76
Q

what is passive activity?

A

-any business venture in which the taxpayer doesn’t materially participate for ex. all limited partnership interest; all rental activity (unless the tax payer is a real estate professional-sched c).

-What is ‘Passive Activity’
Passive activity is activity in which the taxpayer did not materially participate in during the tax year. Internal Revenue Service (IRS) defines two types of passive activity: trade or business activities not materially participated in, and rental activities even if the taxpayer materially participated in them (unless the taxpayer is a real estate professional). Material participation is defined by the IRS as involvement in the activity of the business on a regular, continuous and substantial basis.

The passive activity rules apply to individuals, estates, trusts (except grantor trusts), closely held corporations, and personal service corporations.

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77
Q

how are passive activity losses handled?

A
  • losses are deducted only to the extent of passive gains and any unused loss is carried forward until the passive activity is done with
  • active rental losses are partially deductible if income is under 100,000 at a flat rate of 25,000 & 100K-149K agi is @ 50% of that amount (which is 25,000 so you lose 50% of the 25K) and AGI over 150K is not deductible.

Passive activity losses may only be used to offset passive income.

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78
Q

how are vacation homes treated for tax purposes if you rented it out for less than 15 days?

A

rental income is not included in taxable income (you are not taxed on the income) & rental expenses are not deductible

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79
Q

if vacation homes are rented for more than 14 days and personal use is less than 14 days, for tax purposes how is this treated?

A

as a real rental and income and expenses can be deducted and falls under passive activity income rules.

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80
Q

with alimony what is deductible?

A

for the one who receives the money, it is added to their income for taxes, and for the one paying the money it is deductible from their income.

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81
Q

is child support included in taxes?

A

no, its not taxable to the person receiving it nor is it deductible for the person paying it because the kiddos gotta eat

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82
Q

is property settlement in a divorce deductible from taxes?

A

not deductible

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83
Q

if partial payments are received in a divorce, how is it handled?

A

partial payments must be applied to the child support due first

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84
Q

cash paid for a ex-spouse education is called what?

A

alimony!

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85
Q

what is the mneumonic for things considered as alimony when you get divorced?

A

cannot

  • cash only or its equivalent (not property) and even if cash is paid directly to the school it is OK and would still be considered alimony
  • have to live apart when payments are made
  • not child support
  • not designated as property of settlement (b/c that would mean that we are paying out money that has already been taxed in the settlement)
  • own return for payer and payee (no joint tax return)
  • TERMINATES on death of recipient.
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86
Q

what does earned income include for IRA contributions?

A
  • salaries and wages
  • net self employment income
  • alimony received (IS CONSIDERED AS EARNED INCOME)

-means that you can contribute to an IRA plan unless you are already covered by a plan AND you are making too much money. Limited to certain amounts like 5,500 (PER PERSON SO YOU AND YOUR SPOUSE CAN PUT IN 5,500 EACH FOR A TOTAL OF 11,000 IF YOU ARE UNDER 50) and if you are 50+ the it is limited to approximately 6,500 (EACH PERSON IF YOU ARE OVER 50 SO YOU AND YOUR SPOUSE IF YOU HAVE ONE CAN CONTRIBUTE A TOTAL OF 13,000 THAT CAN BE DEDUCTED ON THE TAX RETURN).

For 2015 and 2016, your total contributions to all of your traditional IRAs cannot be more than the $5,500 or $6,500 if you are 50+ or your taxable compensation for the year, if your compensation was less than this dollar limit.

ROTH IRA CONTRIBUTIONS (PAYMENTS TO YOUR PLAN) ARE NOT DEDUCTIBLE

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87
Q

what are the two types of IRA

A

traditional

roth

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88
Q

who cannot use ROTH IRA’s?

A

single taxpayers with income more than 131,000 of agi or married tax payers filing a joint return with AGI of more than 193,000.

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89
Q

can traditional ira’s deductions be used by all taxpayers?

A

yes; HOWEVER IT IS TAXED WHEN YOU WITHDRAW THE MONEY BECAUSE YOU RECEIVED A DEDUCTION ON YOUR TAXES THAT REDUCED YOUR TAXABLE INCOME.

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90
Q

are contributions made to roth ira’s deductible?

A

no, they are not deductible

BUT WHEN YOU WITHDRAW IT UP TO A CERTAIN AMOUNT IT IS TAX FREE SINCE YOU WERE NOT ABLE TO DEDUCT IT ON YOUR TAX RETURN

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91
Q

what is the marginal tax rate?

A

the rate at which your last and your next dollar of taxable income are taxed. Please note that everyone is taxed in steps. A person earning $100,000 is not taxed 28% on the entire amount. Instead, he is taxed 10% on the first $8,350 earned, 15% for the portion $8,351 to $33,950, 25% for $33,951 to $82,250, and 28% for the remainder:

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92
Q

Keogh plans, simplified employee pensions (up to lessor of 25% of compensation or $53,000), simple plans are all what?

A

other retirement CONTRIBUTIONS that can be deducted from gross income.

These plans are established by business owners. On their individual tax return, contributions on behalf of the OWNER (meaning the person who owns the company’s contributions) are deducted FROM GROSS INCOME in arriving AT AGI, and his/her employees who he/she contributes for are deductions in the computation of net business profit or loss. So employer paid contributions for employEE’S are ordinary business expenses but the owners own contributions are filed on his/her individual tax return as a deduction to their gross income on form 1040 line 32.

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93
Q

what are the criteria for deducting contributions made to health savings accounts by a self employed taxpayer or employee?

A
  • form 8889 must be filed
  • taxpayer must have high-deductible health plan; the deductible must be at least $1,350 for 2015 for 2015 for self only coverage and $2,600 for 2015 for family coverage.
  • contribution is limited to lessor of deductible or current year limit
  • taxpayers 55+ may increase their limit by 1000 so it is 2350 for singles and 3600 for family coverage
  • amounts included by the employer are excluded from w-2 gross income but reduce amounts that the employee can contribute
  • distributions from HSA tax free if used for qualified medical expenses (those that would have normally been deductible on Schedule A for itemizers, excluding premiums on the HDHP itself)
  • schedule A deductions cannot be claimed for expenses paid from the HSA
  • distributions that are not used for medical expenses are subject to taxation and 20% penalty. No penalty if distributions are made after the account beneficiary dies, becomes disabled or turns 65.
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94
Q

what are income items under farm income subject to self employment taxes?

A

SCHEDULE F

  • raised livestock, produce, and grains HELD FOR SALE
  • livestock and other items bought for RESALE

these are subject to self employment taxes.

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95
Q

what are income items under farm income not subject to self employment taxes?

A

FORM 4797 INCOME

  • animals not held primarily for sale
  • livestock held for draft, breeding, dairy or sporting purposes
  • gains from sales of farmland or depreciable farm equipment.
96
Q

what are farming expenses that can be deducted on the schedule F?

A
  • car/truck expenses
  • chemicals and pesticides
  • depreciation and 179 deductions
  • feed purchased
  • fertilizers
  • mortgage interest
  • seeds and plants
  • reasonable wages paid to children
  • meals to feed workers
  • veterinary expenses
  • breeding expenses
  • reasonable salaries to kids b/c kids are allowed to work on a farm
97
Q

what is a section 179 deduction?

A

includes tangible personal property such as machinery and equipment, mil tanks, livestock (horses, cattle, hogs, sheep, goats, mink and other fur bearing animals). also includes single-purpose agricultural and horticultural structures

98
Q

what are agricultural structures and horticultural structures?

A

agricultural structures-constructed house to raise and feed livestock
-horticultural structures are greenhouses for example.

99
Q

contributions which are deductions FROM agi on schedule A and the first letter in the mnuemonic COMMIT is called what?

A

charitable contributions is deductible FROM AGI and you can deduct up to 50% of AGI (adjusted gross income) and then carry the remaining amount forward for 5 years. remember gimme 5 hi 5 for carrying it forward 5 years

100
Q

charitable contributions are what?

A

donations made to QUALIFIED ORGANIZATIONS are deductible to the extent the taxpayer has provided cash or property that exceeds any value received from the charity. donated amounts above $250 must be substantiated from the organization that was donated to. you must get a receipt from them saying the amount you donated.

contributed/donated property basically if you have owned it for less than a year you can deduct the book value; if you have owned it for more than a year you can deduct the higher of the book value or the fair value & the maximum deduction for the property is limited to only 30% of AGI.

stock contributions are the lower of basis or fair value; long term capital gain property is up to 30% of AGI and the rest can be carried forward for 5 years.

NOTE: THE DEDUCTION IS REDUCED BY THE VALUE RECEIVED MEANING IF YOU DONATED A 100.00 AND RECEIVED A T-SHIRT WORTH 20.00 THEN YOU CAN ONLY DEDUCT THE DIFFERENCE ($100.00-$20.00 = $80.00) THE REMAINING BALANCE CAN BE DEDUCTED IN THE FOLLOWING 5 YEARS.

101
Q

what two rules are contribution of property normally subject to?

A
  • ordinary income rule

- long-term capital gain rule

102
Q

what is the ordinary income rule as it relates to donated property?

A

which means the property is ordinary income if its sale at fair market value on the date it was contributed would have resulted in ordinary income or in short-term capital gain ex. include inventory, self-created art and capital assets held for less than or equal to 1 year. the amount you can donate is its fair market value less the amount that would be ordinary income or a short term capital gain if you sold the property for its fair market value. generally this rule limits the deduction to the lower of the tax basis in the property or the FMV on the date of the contribution.

103
Q

what is the long term capital gain rule as it relates to donated property?

A

property is capital gain if its sale at fair value on the date of the contribution would have resulted in a long-term capital gain. capital gain property includes non-business (or inherited) capital assets held MORE THAN 1 year that have increased in value such as STOCKS, BONDS, PERSONAL ITEMS (CLOTHES, FURNITURE, AUTOS). this allows the taxpayer to claim the higher FMV of long-term capital gains property. The deduction of such property is limited to 30% of AGI in a tax year.

104
Q

what is the general limit for an INDIVIDUAL’S contribution to a qualified organization?

A

generally limited to 50% of AGI. contributions exceeding this amount may be carried forward up to 5 years. unless it is property or a capital asset it limited to 30% of AGI

105
Q

The “O” in the mnemonic COMMITT is for Other Misc Expenses on Schedule A includes what?

A

first its NOT subject to the 2% of AGI rule but it includes the following SO YOU CAN DEDUCT 100% OF THE EXPENSE:

  • gambling losses to the extent of gambling winnings and you can’t carry it over to the next year if you don’t use it all. Note: professional gamblers can now deduct non-wagering businesses expenses on schedule c
  • estate taxes on income in respect to a decedent.
106
Q

The “M” in the mnemonic COMMITT is for Misc Expenses 2% on Schedule A includes what?

A

Miscellaneous expenses! its subject to 2% of AGI so your expense must be greater than 2% of AGI before you can deduct them:

it includes BIT; business expenses, investment expenses, tax preparation and attorney fees. because its just a little BIT of AGI that you can deduct.

107
Q

what are included as “business expenses” on the schedule A listed under miscellaneous expenses?

A

These are expenses that the employee has incurred on behalf of the company they work for.

  • business mileage
  • job travel
  • AICPA and Union dues
  • Uniforms for like the pizza boy but if a tuxedo is required it ain’t deductible b/c you can wear it elsewhere
  • laptop
  • continuing professional education (you cant deduct expenses related to a new professional certification) only when you are CONTINUING A PROFESSION THAT YOU HAVE ALREADY RECEIVED CERTIFICATION IN
  • business use of your home is deductible
  • appraisal fees for charitable donations or casualty losses
  • compensation by the employer for an employees meals and entertainment expenses can be deducted as a business expense.
108
Q

what are included as “investment expenses” on the schedule A listed under miscellaneous expenses?

A
  • DON’T include fees to buy or sell stock (included in calculation of gain/loss on sale)
  • INCLUDES investment advisory fees and newsletters and IRA custodial fees
109
Q

what are included as “tax preparation and attorney fees” on the schedule A listed under miscellaneous expenses?

A
  • tax preparation and advice
  • costs incurred to collect money owed by others (ex. the hiring of an attorney to collect alimony or the hiring of an appraiser to collect on an insurance claim. )
110
Q

The second “M” in the mnemonic COMMITT is for Medical Expenses on Schedule A includes what?

A

Medical expenses which is subject to amounts that are 10% of AGI unless you are 65 or older it is 7.5% that is deductible on your schedule A.

111
Q

what are included as “medical expenses” on the schedule A itemized deductions.

A
  • includes medical expenses paid not reimbursed (hospitals, doctors,dentist,nurses, labs, hearing aid and batteries, eye exam and prescription glasses and x-rays)
  • no cosmetic services unless for disfigurement or birth defect correction
  • most medical goods/devices
  • health insurance premiums
  • long term care insurance premiums on qualified policies
  • mileage to doctor and transportation costs for medical and dental
  • must be for specific injury, illness or birth defect
  • only prescription drugs only for the amount not reimbursed
  • costs to install medically prescribed facilities in a home, such as a swimming pool for physical therapy to treat a specific medical condition or an elevator, are deductible to extent the costs exceed the increase in the value of the home resulting from the addition.
  • *cost must be paid by the taxpayer/or spouse during the tax year or an other person for whom the taxpayer provides over 50% of support even if they do not qualify as dependents because the income or joint return tests are not satisfied.
112
Q

what’s NOT included in “medical expenses” on the schedule A itemized deductions.

A

THESE ARE NOT DEDUCTIBLE ON THE SCHEDULE A UNDER MEDICAL EXPENSES:

  • NON-prescription drugs
  • cost of GENERAL health improvement that are NOT treatments for SPECIFIC medical conditions.
  • premiums on LIFE INSURANCE POLICIES to cover loss of earnings from injuries and illnesses basically its called disability insurance. so disability insurance is not deductible.
  • plastic surgery that is NOT because of a cure from a disfiguring illness, injuries, or birth defects
  • medicare portions of social security and self employment taxes the 1.45% is what this is talking about
113
Q

how are medical expenses for a deceased spouse or dependent handled?

A

-medical expenses paid for a deceased spouse or dependent are deductible as medical expenses in the year PAID if paid in cash, regardless of whether they were paid before or after the decedents death as long as they are a spouse or dependent at the time of death. if paid by a credit card its deductible when the charge hits the credit card NOT when the person pays the credit card bill.

114
Q

The “I” in the mnemonic COMMITT is for Interest paid on Schedule A includes what?

A

-interest paid on investments (it is deductible to the extent of investment INTEREST income that is on schedule b and it can be offset by the interest expense)
-INTEREST PAID on mortgage/acquisition loans (can be primary and secondary residence) and includes points, periodic interest on acquisition indebtedness up to 1 million and periodic interest payments on home equity loans up to 100,000 makes the interest paid on this 100% deductible. you deduct only the amount up to 100% of the net equity value in the home. it does not matter what you use the money for!
NOTE: interest on personal loans are NOT deductible meaning if you have a 120,000 home equity loan and the equity in the property is only 100,000 then the extra 20,000 is considered a personal loan and is NOT deductible.

115
Q

The “T” in the mnemonic COMMITT is for on Schedule A includes what?

A
  • personal PROPERTY taxes and REAL ESTATE TAXES
  • STATE & LOCAL SALES TAXES may be deducted based on the actual amount or an IRS table. This deduction may be taken INSTEAD OF STATE AND LOCAL INCOME TAXES. meaning you can’t take both the sate SALEs taxes and the state INCOME taxes
  • state, local, or foreign taxes (foreign may be claimed as credit instead, credit limited to portion of US tax on foreign income)
  • delinquent taxes
  • car registration taxes (the part that is on the property is deductible, the fee associated with it is not deductible)
  • sales taxes based on an IRS table

NOTE; THERE IS NO THRESHOLD LIMIT ON THE AMOUNT YOU CAN DEDUCT. THEY ARE 100% DEDUCTIBLE

116
Q

what type of taxes CANNOT be deducted?

A

-FEE’S
-FINES
-FEDERAL TAXES
-FICA TAX (social security taxes)
FORGET IT B/C YOU CANT DEDUCT IT.

117
Q

what is a THEFT OR CASUALTY loss?

A 
sudden event (theft or destruction like a fire or earthquake etc.) that causes a tax payer to lose an asset or for its value to seriously drop over the course of a time period not exceeding 30 days. 
Progressive deterioration is NOT included such as from termite, moth damage or droughts
  • the loss is measured by the DROP IN FAIR VALUE caused by the event (so FV before the event MINUS the FV after the event) AND the TAX BASIS of the ASSET minus the FAIR VALUE BEFORE the EVENT. and the LOSS is the LOWER of the TWO (drop in fmv or the tax basis or adjusted tax basis for repair cost incurred) Cost incurred by the taxpayer to repair the damaged property increases the tax basis (means the original tax basis + the cost of repairs = the new tax basis).
  • the drop in FMV loss measurement is not affected by
118
Q

when a loss is determined what are ALL the things it must be reduced by because the IRS sucks.

A
  • reimbursements from the government or insurance that a taxpayer is ENTITLED (WHICH MEANS IT DOES NOT HAVE TO BE IN THE TAXPAYERS HAND) to receive (if you get more money than you lost from the reimbursement you have to include that as involuntary conversion gain income)
  • $100 per event (look for an answer w/$900 because you may have forgot the 100 per event deduction.)
  • 10% of AGI per year
119
Q

what are the phase out rules for itemized deductions?

A

IF YOU MAKE OVER A CERTAIN AMOUNT OF MONEY YOU START TO LOSE PORTIONS OF THE ITEMIZED DEDUCTIONS.
the total of all itemized deductions is reduced by the SMALLER OF:
-3% of the amount by which AGI exceeds the annual limit or
-80% of the itemized deductions that are affected by the limit
SO THE ITEMS PHASED OUT ARE CHARITABLE CONTRIBUTIONS, BUSINESS EXPENSES GET PHASED OUT AND YOUR TAXES THAT YOU WERE ALLOWED TO DEDUCT WILL GET PHASED OUT.

**excludes gambling losses, investment interest COST, medical expenses and casualty/theft losses -GIMC you still can take these deductions, the rest gets phased out.

120
Q

what consist of a qualifying dependent/RELATIVE on the filing status of a tax return?

A

THESE MAKE THE PERSON A QUALIFYING RELATIVE:

  • citizen or resident of the united states/canada/mexico; they can qualify as a dependent
  • income has to be less than about the personal exemption (which is 4,000 all social security income is ignored) if it is a qualifying child under the age of 19 or a full time student (in school 5 months of the year) under the age of 24 they can still make income and it is ok. they can be any age if they are permanently and totally disabled.
  • relationship must be related to you or live with you the entire year (cousins are not related to you for this test unless they live w/you the entire year); relatives are you, your parents, brother, sister, nephew, uncle & nieces &) if it is a “qualifying child” like child, stepchild, grandchild, sibling, step sibling, half sibling or descendant of any such individual they must live with the taxpayer for more than 1/2 of the ear and if it is an eligible foster child they must live with you an entire year.
  • support of 50% of the persons annual support for a qualifying relative and includes tax exempt income like social security and AFDC. for a qualifying child you just have to prove that the child didn’t provide themselves over 50% of their own support. Note: for a multiple support agreement that no one person pays more than 50% then the exemption can be given to ANY ONE of them who paid at least 10% but only one of them can claim the exemption.
  • no joint tax return (unless you are filing only for a return for a refund
121
Q

what consist of a qualifying child on the filing status of a tax return (JARRS)?

A
  • must not file a joint return
  • must meet age restriction (under age 19 or a full-time student under 24) or any age if they are permanently and totally disabled
  • must meet residency requirements lives with you at least half the year
  • must meet the relationship and support test.

relationship test (taxpayers child, stepchild, sibling, step sibling, half sibling, or a descendant of any such individual ex. nephew as well as in-laws, and brother/sister in law

support test-must - the “qualifying child must NOT have provided more than 50% of their own support. this does not include scholarships. So in order to claim them, you don’t have to have provided over 50% support for them but they just cannot have provided more than 50% of their own support.

122
Q

do personal exemptions phase out?

A

yes, the exemption is subject to a phase-out that begins with adjusted gross incomes of $258,250 single ($309,900 for married couples filing jointly). It phases out completely at $380,750 single ($432,400 for married couples filing jointly.)

123
Q

what does filing status depend on?

A

what you are as December 31, meaning if you are single, or you get married on december 31 you are considered married for the entire year

124
Q

what is your filing status in the year your spouse dies?

A

YOU ARE CONSIDERED MARRIED FOR THAT YEAR (meaning in the year of death of the spouse) AND FOR the next two years you are considered widowed so it is surviving spouse qualified widowed.

125
Q

what qualifies you for the head of household filing status

A

you must be BOTH of these TO QUALIFY:

  • not married or a surviving spouse at the end of the year AND must maintain the home as the principal place of residence for over 50% of the year and provide more than 50% of costs of maintaining a household for a dependent “qualifying relative” living with the taxpayer which includes uncle, aunt, nephew, niece or certain step-relatives and in-laws.
  • or qualifying child WHICH INCLUDES A STEPCHILD OR GRANDCHILD LIVING WITH THE TAXPAYER (THEY MUST BE A QUALIFYING DEPENDENT CHILD) or parent (MUST BE A DEPENDENT BUT the parent doesn’t have to live w/you.
  • *OTHER RELATIVES and unrelated persons may be dependents if they live with the taxpayer for the ENTIRE YEAR, BUT IT DOES NOT QUALIFY THEM FOR HEAD OF HOUSEHOLD.
126
Q

what is a tax credit?

A

a dollar for dollar reduction of the amount that you might owe as a tax liability. it is a deduction FROM AGI. It reduces a person’s tax liability dollar for dollar.

127
Q

how do you qualify for the child tax credit

A

if you have a qualifying child under the age of 17 you can take the credit

128
Q

what is the hope tax credit also known as the american opportunity tax credit?

A
  • applies to the first 4 years of post-secondary school (after high school) education. the credit is equal to 100% of the 1st $2,000 and 25% of the next $2,000 in payments (500.00) which totals a maximum credit of 2,500 per STUDENT. the credit can be claimed for payments on behalf of each student in the family and 40% or 1000 of the credit is refundable.
  • the credit maybe claimed by the taxpayer for tuition, textbooks and fees of the taxpayer, spouse or dependent and may be claimed for payments on behalf of EACH STUDENT in the family.
129
Q

what is the lifetime learning credit

A

applies to all other years of education and can include tuition paid to a qualified institution for education to improve job skills. the credit is equal to 20% of the first 10,000 paid on behalf of all family members for a maximum credit of $2000 per FAMILY. so the maximum deduction is 2000.00 per tax return

130
Q

what are the restrictions placed on the lifetime and hope (american opportunity tax credit) learning credit?

A
  • applies only to TUITION AND FEES paid to QUALIFIED institutions and not other costs
  • the credit is not available to individual taxpayers w/modified AGI exceeding certain amounts (phased out)
  • the credit cannot be claimed on the tax return of the DEPENDENT
  • you cannot claim both a HOPE &; lifetime learning credit for the same student in the same year
131
Q

what is a savers credit?

A

available for low or moderate income workers to allow them to start a voluntary contribution to an IRA and 401k. the credit is up to 1,000 per person for making a contribution.
-the credit maybe claimed by mfj with income up to 61,000; head of household with income up to 45,750; single and married filing separately with income up to 30,500.

-the amount of the credit can range from 10% to 50% of the amount of IRA contribution made based on income and filing status (form 8880)

132
Q

what are the qualifications for the foreign tax credit?

A

available for payments of foreign income taxes that are not being claimed as itemized deductions. a special exception for the individual taxpayer is that they can claim a credit of up to $300 ($600 mfj) for foreign income taxes paid on investment income w/o being subject to any other limits. ex. a mutual fund had withholdings on foreign dividends to claim a credit for the taxes paid by the mutual fund.

133
Q

when is an individual subject to an UNDER PAYMENT PENALTY of income tax?

A

if the balance due on the tax return is greater than 1,000 by april 15.

NOTE: there is no penalty if your withholding &; estimated taxes exceeds 100% of prior year tax liability. if you had tax income over $150,000 in prior year then your prior year withholdings has to be over 110% of the amount. Or 90% of current year tax liability (the lower of either)

134
Q

what is the late FILING PENALTY based on?

A

the net amount of unpaid tax by the return filing due date (ex april 15). the penalty is 5% per month or part of a month that the return is late but is limited to a total of 25% of unpaid taxes

135
Q

what is an accuracy related penalty of 20%

A

the underpayment applies if the underpayment of tax is attributable to negligence or disregard of rules and regulations, any substantial understatement of income tax, any substantial valuation overstatement, any substantial overstatement of pension liabilities or any substantial gift or estate tax valuation understatement.

136
Q

what is the SOL (statue of limitation) that the IRS has to file a notice of deficiency?

A
  • 3 year (for normal errors or omissions)
  • 6 years if the IRS thinks an understatement of gross income that exceeds 25% of the gross income reported on the return. Considered gross negligence
  • there is NO statute of limitation by the IRS for fraudulent returns or when a return hasn’t been filed at all.
137
Q

how long do you have to claim a refund from a previously filed tax return 1040X?

A
  • 3 years after the original return was due (including extensions)
  • 2 years after the payment of the tax

Note: in the case where a taxpayer has had withholdings or made estimated payments, but whose income was too low to require a return, the only applicable limit is 2 years from the payment of tax since there is no due date for the return

138
Q

alternative minimum penalty tax is calculated how?

A

start with taxable income before the exemption amount:

regular taxable income
\+/- adjustments and preferences 
=AMTI before exemptions 
-minus exemption  
=AMTI
X Tax Rate
=Tentative minimum tax
-Regular Tax amount
=AMT

AMT is taxed at 26% of the first $185,400 for married filing jointly($92,700 for married filing separately) of the AMT Base & 28% of the AMT Base above $185,400.00

139
Q

when calculating the alternative minimum tax what are the adjustments?

A
  • add BACK THE Standard deduction
  • add BACK THE Interest expense on HOME EQUITY LOANS ONLY NOT MORTGAGE LOANS
  • add back Medical expenses claimed that were the difference in 7.5 % of AGI & 10% of AGI; IT IS BASED ON THE AGI SO IF IT IS NOT GIVEN THEN CALCULATE BY ADDING THINGS BACK TO THE TAXABLE INCOME
  • add back Personal and dependent exemptions

-add back Local and state Income taxes if you deducted them AND
-ADD BACK real estate taxes and personal property taxes, even though these are deductible on your regular return.
-add back Employee business expenses such as tax preparation fee’s and investment expenses if you deducted them that were subject to the 2% of AGI.
NOTE: no “other” miscellaneous expense because they are still allowed

S.I.M.P.L.E

140
Q

what things increase AMTI (alternative minimum tax)

A
  • private activity bond interest (used to finance non government activities such as industrial development, student loans and low income housing.)
  • incentive stock options (taxed when exercised for the difference between the exercise price and market price of the stock)
  • excess depreciation on personal property (over 150% declining balance when double-declining (200%) balance was used for regular tax purposes.

P.I.E.

141
Q

what are the carry over rules for charitable contributions that exceed the threshold?

A
  • carry back NONE;

- carry forward 5

142
Q

what are the carry over rules for NET OPERATING LOSSES that exceed the threshold?

A
  • back 2 yrs
  • forward 20 yrs

this applies to corporations also. so they have the same rules

143
Q

what are the carry over rules for NET CAPITAL LOSSES for CORPORATIONS (0 net capital loss) that exceed the threshold?

A
  • back 3 years
  • forward 5 years

so you go back 3 years and amend the return

144
Q

what are the carry over rules for NET CAPITAL LOSSES for INDIVIDUALS (3000 net capital loss) that exceed the threshold?

A
  • back nope!
  • forward forever!
  • can only deduct up to 3,000 per year
  • you CANNOT take it in the year of the loss only going forward
145
Q

what are the carry over rules for investment interest expense that exceed the threshold?

A
  • back nope
  • forward forever

this is where you offset your interest expense on schedule A with interest income on schedule B.

146
Q

what are the carry over rules for net passive losses that exceed the threshold?

A
  • back nope
  • forward indefinitely up to 25,000 then the phaseout occurs for amounts over 100,000 x 50% - 25,000 & phased out completely for amounts over 150,000 so you don’t get any of the 25,000 deduction; or may be claimed when the investment is sold
147
Q

what are the carry over rules for net gambling losses that exceed the threshold?

A

-back nope
-forward nope
YOU CANT CARRY OVER ANYTHING FROM GAMBLING YOU JUST LOSE

148
Q

a taxpayers deduction for losses passed through from an S corporation is limited to what?

A

the tax payers basis which means the beginning taxpayers basis less any distributions

149
Q

when a pension benefit is in the form of an annuity that has been paid for entirely by the employer what is excluded from income?

A

no portion is excluded from income. All of it is considered taxable income.

150
Q

can the early withdrawal penalty be assessed when funds are removed from a certificate of deposit prior to its maturity date be deducted from a tax return?

A

yes they are deductible in the period incurred.

151
Q

for qualifying small business stock (which is called code section 1244 stock) is sold at a loss, what deductions are allowed?

A

up to 50,000 may be treated as an ordinary loss, and the remaining amount can be treated as a capital loss.

152
Q

as it relates to rental losses, how much can be deducted when an individual actively participates in rental real estate activities?

A

25,000 for the 1st 100,000 of agi. if the agi is above 100,000 then the additional amount over the 100,000 is reduced by 1/2 the amount of overage. then that amount is subtracted from the original allowable deductible amount of 25,000

153
Q

when can a taxpayer deduct a contribution to a qualified retirement account?

A

if the payment was made before the original tax return due date. for a calendar year individual taxpayer, the deadline is april 15

154
Q

if a taxpayer is under the age of 18 how is their income taxed?

A

the first 800 of income is taxed at the rate for the type of income it was and then the remainder income is taxed at the parents maximum tax rate.

155
Q

is the child and dependent care credit refundable?

A

no, it is nonrefundable; the dependent care credit may be taken if the taxpayer requires care for a child or disabled dependent in order to be gainfully employed. the amount of the credit is the smaller of the actual dependent care expenses, earned income, or $3000 for a single dependent or $6000 for multiple dependents. the credit percentage is between 20% and 35% depending on the AGI of the taxpayer. Taxpayers with an AGI over 45,000 the % is 20%.

  • UP to 5,000 of benefits under an employer dependent care assistance plan can be excluded from an employee’s taxable wages
  • the credit can be claimed if all other requirements are met by a taxpayer who had a child live with them for more than half the year even if the taxpayer does not provide more than half the cost of maintaining the household.
156
Q

what is a long term capital gains property?

A

non business property that has been appreciated in valued and has been held for more than one year

157
Q

are compensation for injuries, rental value of parsonages (a place where a person lives) and tuition scholarships included in taxable income?

A

No, they are NOT included in taxable income

158
Q

what are the phase out rules for interest on student loan deductions?

A

AGI is above 75,000 or 155,000 if married filing jointly

159
Q

are property insurance premiums deductible on an individuals tax return for their main home?

A

No, unless it is in connection with business property.

160
Q

are attorney fees, legal expenses, and agency fees in connection to adopting a child deductible?

A

No

161
Q

what is the general business credit?

A

it is designed to combine several tax credits, including low income housing credit, the alcohol fuel credit, and the targeted jobs credit. the purpose of the combination is to provide uniformity related to the deduction of the credit for the current, carryback and carryover years.

162
Q

Which tax credits are refundable tax credits?

A
  • additional child tax credit
  • the american opportunity tax credit which is partially refundable
  • earned income credit
163
Q

what tax credits are not refundable? (nonrefundable credits)

A
  • child and dependent care credit
  • lifetime learning credit
  • foreign tax credit
164
Q

what is the rule for purchases made by employee’s at a discount?

A

it is limited to 20% of the amount normally charged to nonemployee customers. which means 20% of the FMV price of the services/goods will be able to be deducted from the amount PAID by the employee. The difference in the discount exclusion of 20% of the FMV price and the actual amount paid by the employee is the amount the would be included in taxable income.

165
Q

Under the uniform capitalization rules, what cost are required to be capitalized?

A
  • preproduction cost
  • design
  • bidding
  • purchasing expenses
  • production cost such as direct materials, direct labor, other direct production costs, and indirect production costs,
  • presale cost such as storage, handling and some excise taxes
166
Q

are freight charges paid for goods held for resale expensed or capitalized?

A

capitalized - cost incurred in getting an asset ready for its intended use are capitalized. freight charges paid for goods held for resale as the goods must be transported to the company in order for the company to be able to sell them.

167
Q

are in-transit insurance on goods held for resale purchased FOB shipping point expensed or capitalized?

A

capitalized - cost incurred in getting an asset ready for its intended use are capitalized. freight charges paid for goods held for resale as the goods must be transported to the company in order for the company to be able to sell them.

168
Q

is interest on note payable for goods held for resale expensed or capitalized

A

expensed - interest on notes payable for goods held for resale is not considered a cost incurred in getting the goods necessary for their intended use and would not be capitalized. goods held for resale are generally purchased with the expectation that they will be paid for on a short-term basis and the obligation, accounts payable, does not generally bear interest

169
Q

is installation of equipment expensed or capitalized

A

capitalized because equipment cannot be used until it is installed. as a result, costs of installation represents cost incurred in getting the asset ready for its intended use and would be capitalized.

170
Q

is testing of newly purchased equipment expensed or capitalized?

A

capitalized because testing of newly purchased equipment is necessary in preparing the equipment for use in that it allows the company to make certain that the equipment is not in need of adjustment. as a result, the cost of testing will be capitalized

171
Q

is cost of current year service contract on equipment expensed or capitalized?

A

expensed because the cost of a service contract on equipment is related to the use of the equipment and is not incurred in getting the equipment ready for use. as a result, it will be recognized as expense and would not be capitalized

172
Q

what is a type of municipal bond?

A

state highway construction general obligation bond interest income. this is deductible

173
Q

if a small business removes an access barrier at the place of employment can they claim a credit?

A

yes the business qualifies for the disabled access credit

174
Q

where are retainer fees received from a client reported?

A

schedule c as trade or business income

175
Q

where are oil royalties received reported

A

schedule e as supplemental income and loss

176
Q

where is interest income on general obligation state and local government bonds reported?

A

they are not reported because they are not taxable

177
Q

where is interest on refund from federal taxes reported?

A

reported in schedule b-interest and dividend

178
Q

where are death benefits from term life insurance policy on parent reported

A

it is not taxable and is not reported

179
Q

interest income on u.s. treasury/federal bonds are reported where?

A

reported in schedule b interest and dividend

180
Q

share of ordinary income from an investment in a limited partnership reported in form 1065, schedule k-1 is reported on what?

A

schedule e - supplemental income and loss

181
Q

taxable income from rental of a townhouse owned by green is reported on what?

A

schedule e-supplemental income and loss

182
Q

where are prizes won as a contestant on a tv quiz reported

A

taxable as other income on form 1040A

183
Q

where is jury duty income reported?

A

form 1040 as other income on the same line you can deduct jury duty expenses but the expenses cannot exceed the jury duty income

184
Q

are dividends received from mutual funds that invest in tax free government obligations reported?

A

no, they are not taxable

185
Q

where are qualifying medical expenses that are not reimbursed by insurance reported?

A

schedule a - itemized deductions deductibility is subject to threshold of 7.5% of adjusted gross income if u are over 65 & 10% of AGI for individuals under the age of 65

186
Q

where are expenses from business related meal where clients were present reported?

A

partially deductible in schedule c - profit or loss from business

187
Q

where is depreciation from a personal computer purchased for business use reported?

A

reported on form 4562 - depreciation and amortization and deductible in schedule c profit or loss

188
Q

where is business lodging expenses, while out of town reported?

A

fully deductible in schedule c-profit or loss from business

189
Q

subscriptions to professional journals used for business are reported where?

A

fully deductible in schedule c - profit or loss from business

190
Q

self employment taxes paid are reported where?

A

fifty percent deductible on form 1040 to arrive at agi

191
Q

qualifying contributions to a simplified employee pension plan is reported where?

A

fully deductible on form 1040 to arrive at agi

192
Q

election to expense business equipment purchased is reported where?

A

in form 4562 -depreciation and amortization and deductible in schedule c profit or loss from business

193
Q

qualifying alimony payments made by green

A

fully deductible on form 1040 to arrive at agi

194
Q

subscriptions for investment are reported where?

A

reported in schedule a - itemized deductions deductibility subject to threshold of 2% of agi under other miscellaneous

195
Q

interest expense on a home equity line of credit for an amount borrowed to finance greens business

A

fully deductible on schedule c - profit or loss from business

196
Q

interest expense on a loan for an auto used 75% for business

A

partially deductible on schedule c - profit or loss from business

197
Q

is a loss on personal residences deductible?

A

it is not deductible.

198
Q

life insurance dividends

A

generally are not taxed because it is considered a refund of your premium paid due to the fact that less people died that year

199
Q

gross income

A
  • W2 income
  • payment in non money form; valued at the fair market value of asset received
  • group term insurance over $50,000
  • scholarships for services performed
  • interest
  • dividends/capital gains
200
Q

inheritance tax

A

the deceased estate pays the tax; value of life is valued 6 months later and it is called the alternative valuation date (AVD) & also at the time of death. 3 months after that is when the estate tax return is due (so basically 9 months after death); the lower of the two amounts is the value of the estate. however; the first $5,250,000 is not taxable but after that amount it is taxed at about 40% on the amount DISTRIBUTED TO THE HEIRS. It is not taxable until distributed. All sales reported as long term regardless - that means if you get stock as an inheritance and then turn around and sell it, it is considered long term capital gain.

201
Q

gift tax

A

the giver pays the tax if it is applicable; the person receiving the gift is NOT taxed.

202
Q

capital assets

A

defined as ANY asset that is NOT an ordinary asset (which is a current business asset like inventory or receivables) or a 1231 asset (non current business asset like property, plant and equipment/truck for the business.

a capital asset is ANY NON BUSINESS ASSET; for an item to be a short term capital asset it has to be held for less than or equal to a year. for an item to be a long term capital asset it has to be held for LONGER than 1 year so like 1 year AND A DAY would do.

short term capital assets are taxed at the ordinary rate which means you are the 39.6% tax rate

long term capital assets are taxed at 0%, 15%, or 20%

When capital losses exceed capital gains, you can deduct a maximum of $3,000 against other types of income

203
Q

educational IRA (Coverdell Educational Account)

A

says that you can contribute up to $2,000 for ANYONE under the age of 18 and contributions are NOT deductible. whatever it grows to is tax free when withdrawn as long as it is used for education including elementary, middle, high school and college expenses. college expenses on this type of account include tuition, fee, books, and room and board of the beneficiary.

contributions can be made up to the due date of the tax return not including extensions

204
Q

529 plan also known as a Q-TP (qualified tuition program)

A

you can set money aside to be used for your child’s education and whatever they don’t use can be transferred to another relative. if you don’t use it for education or you withdraw it early you get a 10% penalty from the IRS and you have to pay federal, state, local taxes.

this plan can be “front-loaded” (means you can put the maximum amount at 5 years ex. 14,000(which is the gift tax amount) x 5yrs = 70,000) can be placed in the plan at inception and whatever it grows to can be used for the kids education tax free.

205
Q

when you donate your services, what part is tax deductible?

A

-THE SERVICES ARE NOT DEDUCTIBLE HOWEVER PARKING FEES CAN BE DEDUCTED AS A DONATION/CHARITABLE CONTRIBUTION AND MILEAGE CAN BE DEDUCTED AS A CHARITABLE CONTRIBUTION. JUST NOT THE SERVICES.

206
Q

cash awards

A

are excluded from gross income if no services are required or if the selection for the award was made without any action by the recipient AND the proceeds are assigned to a governmental unit or charitable organization.

207
Q

income passed through from an s-corp (which is a flow thru entity)

A

it is without regard to distributions made to the shareholder so all income from the s-corp would be reported on the individuals tax return based on their % of ownership in the s-corp

208
Q

short-term capital losses

A

may be used to offset long-term capital gains and would offset the gain taxed at the HIGHEST RATE FIRST.

209
Q

what is the taxable portion for a child under the age of 18 with interest income and NO EARNED INCOME?

A

the interest income will be reduced by the STANDARD DEDUCTION to arrive at the “taxable income”. the first $800 of the taxable income will be taxed at the rate by the type of income it is and the remaining unearned income would be taxed at his parents maximum tax rate.

210
Q

10% penalty tax on early withdrawal of retirement funds

A

there is a 10% penalty in addition to the marginal tax rate. so if the marginal tax rate is 35% you would add an additional 10% to it for a total of 45% tax on the amount withdrawn.

211
Q

general business tax credit

A

is designed to combine several tax credits, including the low-income housing credit, the alcohol fuel credit, and the targeted jobs credit. the purpose of the combination is to provide uniformity related to the deduction of the credit for the current, carryback, and carryover years

212
Q

excess social security tax withholding

A

can result from withholding by two or more employers when the combined income of the employee for the year from all employers exceeds the maximum wages subject to social security taxes. the excess is CLAIMED AS A CREDIT AGAINST TOTAL INCOME TAX LIABILITY, AND NEVER AS AN ITEMIZED DEDUCTION. if a tax withheld by a SINGLE employer erroneously exceeds the limitation, the employee must obtain reimbursement from the employer directly for the excess amount.

213
Q

qualifying widower filing status

A

to qualify ALL of these must be met!

  • must have a dependent child
  • death in the prior 2 years AND you qualified to file a joint tax return
  • must provide over 50% of cost of maintaining a principal residence of dependent child OR step child
  • not remarried as of the END OF CURRENT YEAR
  • you get the same standard deduction rate as married filing jointly
214
Q

what is the alternative minimum tax

A

it is a tentative tax tax that is computed and compared to the regular tax that has already been calculated. if the alternative minimum tax is higher, the excess is reported as the alternative minimum tax on the individual tax return.

215
Q

adoption credit

A
  • is available for costs incurred in adopting a child under the age of 18 and the credit is limited to $13,400
  • any unused adoption credit may be carried forward for up to 5 years and a phaseout does exist.
216
Q

IRA penalties

A

withdrawal of either type of IRA (traditional or Roth) prior to the age of 59 1/2 may result in a tax penalty of 10% of the amount withdrawn as well as including it in gross income.

the penalty is taxed at the marginal tax rate which is the rate at which your last and your next dollar of taxable income are taxed.

217
Q

Non-withdrawal penalties for early (either type of IRA roth or traditional) withdrawals

A

penalties do not apply when the withdrawal is a result of the following:

Payment of medical expenses in exceeding 7.5% of agi if you are older than 65

Payment of qualified higher education cost:

the withdrawal amount is however included in gross income on a traditional IRA but still excluded from gross income on a Roth IRA.

a 10% penalty is not assessed with the withdrawal is a result of death or disability of the participant OR a withdrawal up the the amount of 10,000 for the 1st time purchase of a home.

218
Q

effective tax rate

A

the average rate of taxation for all your dollars (total tax / total taxable income)

219
Q

contributions to traditional IRA’s

A

are deductible in arriving at AGI unless both of the following conditions apply:
–the individual is actively participating in another pension or profit sharing plan AND AGI on the tax return exceeds a threshold amount (71,000 single, 118,000 MFJ) for 2015

**for a married couple, if the individual is not actively participating in another plan BUT the individuals spouse IS a participant, contributions for the non-participating spouse cannot be deducted if the joint AGI exceeds 193,000 (2015 amount)

220
Q

deduction rules for a Keogh plans

A

DEDUCTIONS on form 1040 for contributions made to KEOGH plans are limited to 25% of NET self-employment income after the KEOGH deduction and 50% of self employment tax is claimed (it comes out to 20% of self-employment income before the KEOGH deduction).

The maximum contribution (money you can put towards a KEOGH) is the lesser of 53,000 or 100% of earned income for 2015.

221
Q

qualified higher education expenses

A

tuition for higher education of UP TO 4,000 may be deducted. Courses taken are those that are expressly REQUIRED by an employer, expressly REQUIRED by law or by government regulation or to maintain or improve skills REQUIRED in performing the PRESENT job which are miscellaneous itemized deductions on schedule A. a phaseout does exist

222
Q

itemized deduction phase-out limit

A

If your itemized deductions are subject to the limit, the total of all your itemized deductions is reduced by the SMALLER OF:

80% of your itemized deductions that are affected by the limit. ALL ARE AFFECTED EXCEPT THESE: GAMBLING LOSSES, MEDICAL EXPENSES, INVESTMENT INTEREST EXPENSE, CASUALTY/THEFT

3% of the amount by which your AGI exceeds $309,900 if married filing jointly or qualifying widow(er), $284,050 if head of household, $258,250 if single, or $154,950 if married filing separately.

Before you figure the overall limit on itemized deductions, you first must complete Schedule A (Form 1040), lines 1 through 28, including any related forms (such as Form 2106, Form 4684, etc.).

The overall limit on itemized deductions is figured after you have applied any other limit on the allowance of any itemized deduction. These other limits include charitable contribution limits (chapter 24), the limit on certain meal and entertainment expenses (chapter 26), and the 2%-of-adjusted-gross-income limit on certain miscellaneous deductions (chapter 28).

223
Q

personal exemption qualifiers

A

you get 2 personal exemptions if you are married filing JOINTLY (your spouse is not considered a dependency exemption, it is still a personal exemption)

**Note if the parent claims a DEPENDENT CHILD, the CHILD CANNOT CLAIM A PERSONAL EXEMPTION ON THEIR OWN RETURN. LIKE WHEN DASMINE FILES HER TAXES SHE IS NOT ABLE TO CLAIM A PERSONAL EXEMPTION OF I CLAIM HER.

224
Q

married filing jointly rules

A

when you can claim married filing jointly!!

  • if you get married on the last day of the year you are CONSIDERED MARRIED THE ENTIRE YEAR.
  • if you divorce during the year you CANNOT file married filing jointly; you are considered single UNLESS you fit the criteria in full for one of the other filing status
  • if the taxpayer gets divorced on the last day of the year, they are considered divorced for the entire year OR are legally separated under a divorce or LEGAL SEPARATE maintenance decree. so you are considered single UNLESS you fit the criteria in full for one of the other filing status’
225
Q

married filing separately rules

A

the couple is legally married or common law married and each files their own return. In community property states everything is split 50/50

226
Q

SINGLE FILING STATUS RULES

A

IF THE TAXPAYER DOES NOT SPECIFICALLY MEET THE OTHER FILING STATUS CRITERIA THEIR FILING STATUS IS SINGLE.

227
Q

tax credits

A

are a dollar for dollar reduction of taxes payable/ tax liability (meaning what the irs says you owe)

228
Q

earned income credit

A
  • if a taxpayer has some form of earned it come they will qualify for this refundable credit (meaning if the credit is greater than the tax liability they get a check for the difference). Earned income for the purpose of the credit ONLY INCLUDES TAXABLE INCOME.
  • if the taxpayer has a qualifying child, the child does NOT have to meet the support test. The qualifying child must have lived with the taxpayer in the united states for MORE than half the year and have a social security number that is valid for employment purposes in the United States.
  • If investment income is GREATER THAN 3,400 the credit is denied.
229
Q

refundable credits

A

a refundable credit is treated similarly to a payment of estimated tax or taxes withheld from a W-2 or 1099

230
Q

self-employment taxes

A

Schedule SE
it is double the individual tax rate because self employed individuals have to pay the employee portion and the employer portion
-the rates are 6.2% FICA which is Social Security tax so self employed people would pay 6.2% x 2=12.40% and the medicare rate is 1.45% so they would pay 1.45% x 2=2.90%. the total self employment taxes paid would then be 12.40% +2.90%=15.30%. but remember on form 1040 you can deduct the employer portion which is 7.65%

231
Q

what business income amounts are self employment taxes computed on

A

it is computed on NET SELF EMPLOYMENT INCOME.

this includes ALL business revenue reduced by all ORDINARY AND NECESSARY BUSINESS EXPENSES (except retirement plan contributions on behalf of the taxpayer))

**the MEDICARE PORTION (THE 1.45%) is based on the ENTIRE amount of NET self employment income. The remainder of the tax (6.2% the social security portion) is limited to certain income limit that changes each year.

**The social security portion (6.2%) is limited by income and is determined by reducing the maximum taxable amount by wages earned by the taxpayer on which social security taxes (FICA) were withheld. this will result in the amount subject to the FICA/social security portion of the tax

232
Q

Surtax on UNEARNED INCOME as a result of the patient protection and affordable act (PPACA)/ OBAMA Care

A

the surtax is 3.8% and is added to any other taxes the taxpayer is liable for. the tax is computed on the LESSER of the following 2 amounts:
-net investment income for the taxable year which includes the total of income from interest, dividends, annuities, royalties, and rents unless derived in ordinary course of business from a business that is neither a passive activity nor predominately involved in the trading of financial instruments or commodities. it also includes the net gain included in taxable income from the disposition of property other than that held in a business that is neither a passive activity nor predominately involved in the trading of financial instruments or commodities. net investment also includes gross income derived from a business that is either a passive activity or is predominantly involved in the trading of financial instruments or commodities.
-MAGI is agi + the excess of income excluded from gross income due to an election to exclude foreign earned income, over any deductions or exclusions disallowed because they applied to excluded foreign earned income. so it is AGI+excluded foreign income+excluded deductions or exclusions disallowed because they applied to excluded foreign earned income MINUS THE THRESHOLD AMOUNT.
**the threshold amounts are:
250,000 for taxpayers filing a joint return or a surviving spouse; 125,000 for a married filing separately person; 200,000 in all other cases.

**there is also a penalty that will be imposed on those individuals who do not have health insurance.

233
Q

Increased MEDICARE Tax Rate for Hospital Insurance (HI-rate) which is for HIGH INCOME EARNERS

A
  • The 1.45% MEDICARE RATE OF TAXABLE INCOME; is increased by .9% in individual taxpayers earning in EXCESS of 250,000 for married filing jointly and 200,000 for all other taxpayers which makes the new rate effectively 2.35% on amounts in EXCESS of the 250,000 & 200,000.
  • for self employed folks it increase the amount they pay of 2.9% (which 1.45% x2) to 2.9%+.9=3.8%. so you take the taxpayers earnings and then subtract their threshold amount. the difference is the amount that is taxed by 2.35% for non self employed taxpayers. for self employed people, the difference is multiplied by 3.8% to represent both portions of medicare tax that is paid + the .9% additional tax.
234
Q

Non-refundable personal credits

A
  • dependent/child care credit
  • credit for the elderly and disabled
  • adoption credit
  • the nonrefundable portion of the child tax credit
  • hope and lifetime learning credit

**all are allowed to offset both regular tax liability AND the alternative minimum tax.

235
Q

2015 Standard deduction rate

A
  • singles/married filing separately = $6300
  • married couples filing jointly = $12,600
  • head of household = $9250
  • qualified widower = $12,600
236
Q

2015 personal exemption rate

A

$4000.00

237
Q

alternative minimum tax exemption for 2015

A

everyone except married filing jointly = $53,600

married filing jointly = $83,400

Regulation (14 decks)

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