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Becker REG > Chapter 1 - Individual Taxation - Income > Flashcards

Chapter 1 - Individual Taxation - Income Flashcards

1
Q

When should a cash basis taxpayer report income?

A

A cash basis taxpayer should report income in the year in which income is either actually or constructively received, whether in cash or property.

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2
Q

State the basic tax formulas

A 
Gross Income 
-  deductions FOR AGI 
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
   Adjusted gross income 
- standard or itemized deductions
- exemptions
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Taxable income
X tax rate
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Gross Tax Liability
- Credits & Prepayment
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Tax due or refund
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3
Q

Identify the due date and extension for individuals

A 
April 15.     
October 15 (Form 4868)
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4
Q

Identify the filing status

A 
Single 
MFJ
MFS
HoH
Qualifying Widower with dependant
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5
Q

What are the criteria for filing single

A

Unmarried or legally separated from spouse on Dec 31

Does not qualify for any other status

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6
Q

What are the criteria for married filing joint?

A

Married & living together on dec31

Living together in a recognized common law marriage

Married and living apart but not legally separated or divorced.

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7
Q

What are the criteria for filing married filing separately?

A

At year-end of tax year:

  • Married; and
  • If one spouse wants to be responsible only for own tax; and
  • If both spouses do not agree to file joint return.
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8
Q

What are the criteria for filing head of household?

A
  • Individual is not married, legally separated, or is married and has lived apart from his/her spouse for the last six months of the year.
  • Individual is not a “qualifying widower”
  • Individual is not a nonresident alien
  • Individual maintained a home that, for more then half the taxable year, is the principle resident of a:
    • Son or Daughter who is a qualifying child or qualifies as the taxpayers dependent (qualifying relative)
    • A dependent relative who resides with the taxpayer or
    • A dependent father or mother, regardless of whether they live with the taxpayer
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9
Q

What are the criteria for filing qualifying widower (surviving spouse)

A
  • Unmarried at end of tax year
  • Surviving spouse must maintain a household, which for the entire taxable year was the principle place of abode of a son, stepson, daughter, stepdaughter;

and

-The surviving spouse is entitled to a dependency exemption for the son, daughter, etc.

The taxpayer qualifies for this status for two years after the death of the spouse.

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10
Q

Name the tests for claiming an exemption for a qualifying child

CARES

A

A taxpayer is entitled to an exemption for each qualifying child and/or qualifying relative

Close relative
Age limit (19/24) and younger then the taxpayer
Residency and filing requirements
Eliminate gross income test (exemption required)
Support test changes.

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11
Q

Name the tests for claiming exemption for a “qualifying relative”

SUPORT

A

A taxpayer is entitled to an exemption for each qualifying child and/or qualifying relative

QUALIFYING RELATIVE
Support (over 50%) test
Under the personal exemption amount of (taxable) gross income test
Precludes dependent filing a joint tax return
Only citizens (residents of US, Canada, or mexico) test
Relative test
Taxpayer lives with individual for the whole year test.

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12
Q

What are the requirements for a multiple support agreement

A
  • Two or more people together provide more than 50% of support, but no one contributes more then 50%
  • To claim the exemption, must provide more than 10% of support, and meet the other dependency tests.
  • A multiple support declaration, Form 2120, must be filed.
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13
Q

Define Gross Income

A

Includes all income from whatever source derived, unless specifically excluded.

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14
Q

What are the four categories of income?

A
  • Ordinary (wages, salaries)
  • Portfolio (dividends, interest)
  • Passive (real estate investment, and limited partnership income)
  • Capital.
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15
Q

Name some non taxable fringe benefits (exclusions)

A
  • De minimus fringe benefit
  • Qualified tuition reduction
  • Qualified employee discount
  • Employer paid accident, medical, and health insurance

Unless specifically excluded by law, the fringe is includible in gross income.

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16
Q

Are life insurance premiums paid by an employer taxable to employee?

A

Premiums on the first $50,000 (face amount) of group term life insurance are not includible in gross income. Premiums paid for coverage above $50,000 should be included in gross income.

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17
Q

Give some examples of exempt interest

A

Exempt interest examples:

  • State and local government bonds
  • Bonds of a US possession
  • Series EE (US Savings Bond) if used for higher education
  • Interest on Veterans Administration Insurance
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18
Q

What is the tax treatment of unearned income of a child who fails under the “kiddie tax” rules?

A

Net unearned income of a dependent child who falls under the “kiddie tax” rules is taxed at his parents’ higher rate

Net unearned income = Child’s total unearned income less the child’s standard deduction of $950 (in 2012) (or investment expense, if greater) less an additional $950 (which is generally taxes at the child’s rate of 10% or 15%

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19
Q

State the tax treatment of property settlements in a divorce

A

For a property settlement in a divorce, the transferring spouse gets no deduction for payments made (or property transferred) and the payments are not includible in the gross income of the spouse receiving the payment of the proerty

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20
Q

What are the requirements for alimony to be deductible by the former spouse and includible by the recipient?

A
  • payments must be legally required pursuant to a written decree
  • payments must be in cash
  • payments cannot extend beyond death of payee
  • payments cannot be made to members of same household
  • no joint tax return files

Before alimony is taxable by recipient, any child support due must be paid

21
Q

Describe self-emploment tax.

A
  • All net self-employment income is subject to the 2.9% Medicare tax, but only self-employment income up to $120,600 is subject to the 12.4% Social Security tax
  • An adjustment to income for one half of self employment tax paid (7.65%)
22
Q

On what property do the uniform capitalization rules applly

A
  • Real or tangible personal property produced by the taxpayer for use in his trade or business
  • Real or tangible personal property produced by the taxpayer for sale to customers (manufacturer’s inventory)
  • Real or tangible personal property purchased by the taxpayer for resale (retailers inventory)

exception: the uniform capitalization rules do not apply to retailers inventory property purchased for resale if the taxpayers gross receipts for the preceding three years do not exceed $10 million annually

23
Q

When are funds in a nondeductible IRA taxable?

A
  • Withdrawls from nondeductible IRA’s are partially taxable.
  • when withdrawing amount previously contributed principal are nontaxable any earnings on those contributions are taxable when withdrawn.
  • A pro rata allocation is generally applied to the distribution to determine the taxable amount.
24
Q

What is the formula to determine the excludable portion of an annuity?

A

Excludable amount in current year equals

Investment in contract/Age factor (in months)

25
Q

In premature distributions of an IRA, what are the exceptions to the penalty tax?

HIM DEAD

A

-Home buyer (first time): $10,000 max if used toward first home (within 120days)
-unemployed within 12 consecutive weeks of
unemployment compensation
-self-employed who are otherwise eligible
for unemployment compensation
-Insurance (medical)
-Medical expenses in excess of 7.5% of AGI
-Disability
-Education: College, tuition, books, fees, etc
-Death

26
Q

How is rental income from a vacation house treated?

A
  • If rented fewer than 15 days treat as personal residence
  • If rented 15 or more days and personal use is not more than 14 days or 10% of these rented, if greater: treat as rental property.
  • If rented more than 15 days and personal use is greater than 14 days or 10% of these rented allocate rental expenses to extent of rental income.
  • if treated as personal income is excluded and it deductions for mortgage interest or and taxes are reported on schedule A other expenses are not deductible
  • if the vacation property is treated as rental prop read the text The taxpayer reports income and deductions on schedule E.
27
Q

Define passive activity. give some examples of passive activity

A

A passive activity is any activity in which the tax payer does not materially participate.

rental activities, interests in limited partnerships and S corporations are examples of passive activities

28
Q

What is the tax treatment of nondeductible passive activity losses?

A
  • Nondeductible passive activity losses are unused passive activity losses that are held in suspension
  • used to offset passive income in future years indefinitely
  • fully tax-deductible in the year of the properties disposed of
29
Q

What are the rules to determine taxable Social Security benefits

A

Taxpayers are classified into five categories depending on the level a provisional income which is defined as AGI plus tax exempt interest +50% of Social Security benefits

low income - no benefits are taxable 
lower middle income - less than 50% 
middle income  -  50% 
upper middle income - 50 to 85% 
upper - 85%
30
Q

Are scholarships and fellowships includable in gross income?

A

For a degree seeking student scholarships and fellowships are excludable up to the amount spent on tuition fees books and supplies all remaining amounts are includable in gross income

for a non-degree seeking student all amounts are includable in gross income.

31
Q

What are the tests for foreign earned income exclusion?

A
  • Bona fide residence test (an entire year)

- physical presence - 330 full days out of 12 months

32
Q

List some nontaxable miscellaneous income items exclusions

A
  • Life insurance proceeds
  • gifts and inheritance
  • Medicare benefits
  • Worker’s Compensation
  • physical injury or illness of word
  • accident insurance premiums paid by taxpayer
  • foreign earned income exclusion
33
Q

What are the tax treatment of capital gains and losses

A

Net capital losses are deducted up to a maximum per year against non-capital income. any excess can be carried forward.

capital gains are fully at lower tax rates

34
Q

In general, how is the donee’s basis of a gift determined? How is the holding period determined?

A
  • the basis of a gift is the same as the donor’s basis
  • if the sale is greater then the basis, then the gain is the difference between the donor’s basis and the sales price
  • if the sale is less then FMV the loss is the difference between the FMV at the date of the gift and the sales price
  • if the sale is at less than basis but greater then FMV no gain or loss is recognized.
  • the holding period includes the donor’s holding period unless basis becomes FMV then holding period starts at date of gift
35
Q

How is the basis of inherited property determined? How is holding period determined?

A

The basis of inherited property is the lower of:

  1. FMV at date of death

OR

  1. FMV at alternate lower valuation date (if elected) which is:
    • six months from date of death, or
    • disposal date (if disposed of less than six months from date of death)

The holding period is automatically deemed long term for all inherited property, regardless of how long the deceased owned the property.

36
Q

When is a gain NOT taxed?

HIDE IT

A
  • Homeowner’s exclusion
  • Involuntary conversions
  • Divorced property settlement
  • Exchange of like-kind business/investment assets (tangible)
  • Installment sale
  • Treasury and capital stock transactions (by corporation)
37
Q

Identify the major tax provisions of involuntary conversions of property?

A

Gain may be deferred if insurance proceeds are reinvested in property that is similar or related in service or use within two years for personal property or three years for business property.

A realized gain exists when insurance proceeds are greater than the adjusted basis in the convert the property. Note the difference between realized gain vs. recognized gain:

  • Gain not recognized it proceeds reinvested in qualified replacement property.
  • basis is cost of replacement property less any gain not recognized.
  • losses recognized and basis is replacement cost

holding period Included period that original property was held.

38
Q

What is the exclusion amount on the recognition of gain on sale of personal residence, provided the criteria for exclusion are met?

A

250,000/500,000

39
Q

Identify the criteria for the exclusion provision on the sale of personal residence

A
  • Must have owned and used property as principal residence for two or more during the five year.
  • No age requirement
  • no roll over to another house is required
  • renewable can be utilized more than one time
40
Q

Name the criteria for classification as a like kind exchange

A
  • Tangible real or personal property -used in trade or business
  • held for investment (except inventory stock insecurities)
41
Q

In a like kind exchange what is the basis of the property received

A 
The basis of property received retains the basis of property given up.  
     Basis of property given up
\+   any boot paid 
-   any boot received (at FMV)
\+  any gain recognized 
= Basis of property received

recognize gain to the extent of the lower of the realized gain or the boot received

42
Q

Identify the nondeductible losses

WRAP

A

Wash sale loss
Related party transactions
And
Personal Loss

“Wrap” up those losses because they are not deductible

43
Q

What is the tax treatment given to wash sales?

A
  • Losses are disallowed if the same security is bought within 30 days before or after the sale.
  • the disallowed loss increases the basis of the property (security)
  • games are taxable
44
Q

What is the text treatment for sales to related parties?

A
  • No deduction is allowed for losses on sales to related parties
  • on a later resale any gain recognize is reduced (but not below zero) by the previous disallowed loss
45
Q

What are the corporate capital gain/loss rules for C corporations?

A

Net capital gains (long-term and short-term)

  • corporate net capital gains are added to ordinary income and taxed at the regular tax rate.
  • section 1231 gains are entitled to capital gain treatment

Net capital losses (long-term and short-term)

  • corporate net capital losses are carried back three years and forward five years a short term capital loss
  • they are deducted from capital or section 1231 games
46
Q

Describe the employee and employer taxation of non-qualified employee stock options

A

Employee taxation

  • if there is a readily ascertainable value the employee recognize ordinary income in that amount in the year granted.
  • if there’s no readily ascertainable value, the employee recognize as ordinary income based on the fair value of the stock purchased less any amount paid for the option to exercise date.

employer taxation
-the employer may deduct the value of the stock option as a business expense in the same year employee recognizes ordinary income

47
Q

Describe the employee and employer taxation of incentive stock options (ISOs)

A

Employee taxation
-generally ISOs are not taxed as compensation. basis of the stock is the exercise price plus any amount paid for the option. generally any gain or loss on the subsequent sale is capital

employer taxation
-generally employers do not receive a tax deduction for ISOs

48
Q

Describe the employee and employer taxation of employee stock purchase plans ESPP’s

A

Employee taxation

  • generally ESPP’s are not taxed as compensation. basis of the stock is the exercise plus price plus any amount paid for the option
  • generally any gain or loss on a subsequent sale is capital.

employer taxation
-generally employers do not receive a tax deduction for ESPP’s

Becker REG (8 decks)

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