EA Individuals Review - Part 1 Flashcards
3 Different Types of TINs
- SSN (Social Security Number
- Individaul Taxpayer Identification Number (ITIN)
- Adoption Taxpayer Identification Number (ATIN)
Qualifications of a 1040 EZ
- Taxable Income is below 100K
- Filing status is S or MFJ
- Taxpayer is under 65 and not blind
- Taxpayer not claiming any dependents
- Interest income is $1500 or less
- Claims no adjustments to income and no credits other than the Earned Income Credit
Qualifications of a Form 1040A
Two page form, taxable income less than 100K and no Self-employment. Can’t itemize deductions and limited to certain adjustments and credits
Qualifications of a Form 1040
“Long Form”
- Taxable income exceeds 100K
- Itemize Deductions
- Reporting Self Employment Income
- Reporting Income from the Sale of Property
Form 1040 NR
Used by nonresident aliens to report US source income.
Form 1040X
Amended US individual Income Tax Return
Tax Rates
10%, 15%, 25%, 28%, 33%, 35%, 39.6%; higher the income, higher the tax rate
Due Dates and Extensions
April 15, Form 4868 is filing extension extended to Oct 15
Filing Deadline Exceptions
- Federal Disaster Areas
- June 15 Deadlines (two month extension)
Nonresident aliens who have income that is not subject to US withholding
US Citizens or Legal US residents living outside the US or Puerto Rico and main place of business outside US or Puerto Rico
Taxpayers on active military duty - Taxpayers out of the Country can request an additional two month extension on top of six month extension
Combat Zones have extension from the day they started serving until 180 days after they leave combat area
Relief from Joint Tax Liability
Innocent Spouse Relief - erroneous items due to a spouse or former spouse
Separation of Liability Relief - Same applies but no longer married to, or separated from, widowed or lived apart for 12 months
Equitable Relief - Facts are reviewed and it is determined if it would be unfair to hold taxpayer accountable for understated tax
Injured Spouse Claims
Filed a joint return
Paid federal income tax or claimed a refundable tax credit
All or part of refund was or is expected to be applied to spouse’s past financial obligations
Not be responsible for debt
Claims for refunds
File Form 1040X Extended Statute for Claiming Refunds: - Bad debt from worthless security - Payment or accrual of foreign tax - A net operating loss carry back - A carry back of certain tax credits - Exceptions for military - In Federally declared disaster areas - Affected by terrorism or military action
Statute of Limitations for IRS Assessment and Collection
IRS required to assess tax or audit a return in 3 yrs after date of filed return, if return is filed late, IRS has 3 years from the later of the
Due date of the return
The date the return was filed
If never filed, there is not deadline for assessment
IRS has 6 yrs to assess tax on a return if understatement is identified by 25% or more, if fraudulent there is no deadline
Estimated Taxes
“Pay as you go”, self employment
Safe Harbor Rule - Making sure to make estimated tax payments, taxes are withheld from income, 150k or less, 75K if MFS
100% of tax liability of prior return
90% of tax liability on current year return
150K or more, 75K MFS or more (higher income)
110% on prior year
90% on current year
Estimated Taxes Due Dates
Apr 15 June 15 Sept 15 Jan 15 (of following year) Payments are not required if there is zero Tax liability
Estimated Taxes for Farmers and Fisherman
- Estimated tax does not have to be paid if files return and pays all tax owed by 1st day of 3rd month (March 1st)
- Does not have to pay estimated tax if his current year income tax withholding is 2/3 of total tax liability on current return or 100% of total tax liability of prior year return
- IF required to pay estimated tax, only one payment is required by the 15th day at end of tax year (Jan 15)
Backup Withholding
Backup withholding rate is 28%
- Individual did not provide payer with a TIN
- IRS notified payer that TIN/SSN is incorrect
- IRS notified payer to start withholding on interest and dividends bc the payee failed to report income in prior years
- Payee failed to certify that he was not subject to backup withholding for under-reporting of interest and dividends.
Recordkeeping
Suggested that you keep copies of tax return for at least 3 years Identify sources of income Keep track of expenses Keep track of the basis of property Support items reported on tax returns Prepare tax returns Keep records of: Income Expenses Home Investments
Penalties and Interest
Failure to File Penalty - Usually 5% of unpaid taxes for each month return is late. Will not exceed 25% of unpaid taxes.
Failure to Pay - Penalty of 1/2 of 1% of taxes for each month that taxes are not paid, can be as much as 25% of unpaid taxes. Increases to a full 1% per month for any tax that remains unpaid the day after a demand for payment is issued, or ten days after notice of intent to levy certain assets is issued.
If both apply in any month, the 5% file penalty is reduced by the pay penalty. If taxpayer files return more than 60 days after due date or extended due date, minimum penalty is the smaller of 135$ or 100% of unpaid tax.
Taxpayer Filing Status
Single Married Filing Jointly (MFJ) Married Filing Separately (MFS) Head of Household (HOH) Qualifying Widow (QW)
Changing Filing Status
Can’t change from a joint return to a separate return after due date of the return. To change from a separate to joint, must file an amended 1040X, up to 3 years from the due date of the separate returns
Same Sex
Must file as either MFJ or MFS. Can amend returns from before Sept 16, 2013 to MFJ or MFS but not required to do so, can file a claim for refund within three years return was due or two years from the date tax was paid whichever is later
Special Rules for Head of Household
Divorced or Noncustodial Parents - Release of dependency exemption
Death or Birth During the Year - Can still file HOH if child is born or dies during the year
Dependent Parents - Can claim HOH even if parent does not live with child, must pay more than half the cost of keeping up parent’s main home during past year
Non Resident Alien Spouses - Taxpayer married to nonresident alien spouse may elect to file HOH
Annulment
Marriage is declared null and void. Couple is considered unmarried even if they filed joint returns for earlier years. Amend returns filing Form 1040X
Qualifying Widow with a Dependent Child
Least common, receives same standard deduction as MFJ. If spouse dies during tax year must file as MFJ, the next year can file as QW for two years if he has a dependent and does not remarry. Then changes to HOH or S. If he does remarry before end of year must use MFS for decedent’s final return.
Filing Requirements
Sigle $10150; $11700 (65>) MFJ: $20300; $21500 (65> +1); $22700 (65> +2) MFS: $3950 HOH: $13050; $14600 (65>) QW: $16350; $17550 (65>)
Self Employed
Must file a return if earnings of $400 or more were made
Dependents
Must file a return if:
- Unearned income of more than $1000
- Earned income of more than $6200
- Gross income of more than the larger of $1000 or earned income (up to $8500) plus $350
Additional Filing Requirements
- Church employees have wages above 108.28
- Owes SS tax or Medicare Tax on tips not reported to employer
- Must pay Alternative Minimum Tax
- Owes additional tax in connection with a qualified plan, an IRA, health savings acct, or other tax-favored health plan
- Received a health savings acct distribution
- Owes nanny tax
- must recapture education credit, investment credit or other credit
- Received advance payments of Premium Tax Credit through the Health insurance Marketplace
Determining Residency
- Resident aliens taxed on worldwide income
- Nonresident aliens taxed on income from sources with in US
- Dual Status Aliens
Residency Tests: - Green Card Test
- Substantial Presence Test: 31 days during tax year, and 183 days during three years (including 1/3 days present in first year before current year, and 1/6 days present in second year before current year)
Students exempt for five years, - Tax Residency Through Marriage
- Students
- Dual Status Aliens
Tax Treaties
For nonresident aliens, income or gains from US Sources is generally subject to withholding at 30%
Head of Household
Must be single, divorced (considered unmarried) and have paid more than half the cost of keeping up a home for the year and a qualifying person living in his home for more than half of the year.
Personal and Dependency Exemptions
Personal Exemptions - Taxpayers claim for themselves
Dependency Exemptions - Taxpayers claim for their dependents
Married Couples - Allowed two personal exemptions, one for each spouse, a spouse is never a dependent, unless MFS and spouse had no gross income, is not filing a return, and can’t be claimed as a dependent by another taxpayer. Can claim an exemption for a deceased spouse of a MFJ. Can claim one dependency exemption for each qualified dependent.
Phase Out Exemptions
Exemptions are phased out for taxpayers with AGI above certain thresholds, an individual is subject to this limitations, the total exemption amount that can be claimed is reduced by 2% for each 2500$ increment by which AGI exceeds applicable threshold
Primary Tests for Dependency
- Dependent Taxpayer Test - dependent can’t take a personal exemption on his own tax return or claim another as a dependent.
- Joint Return Test - A dependent can’t file a joint return with his/her spouse if claimed as a dependent
- Citizenship or Residency Test - Must be a citizen of US/Canada/Mexico or a foreign born adopted child
Dependency Relationships
Qualifying Child
- Relationship (must be related by blood, marriage, adoption)
- Age (under 18, unless full time in college under 24)
- Residency (Live with taxpayer more than half the year)
- Support (Must support child by more than one-half)
- Tie Breaker (only one can claim a child):
Child’s parents, file MFJ
By blood parent (if only one is)
Parent with whom child lived with the most
Parent with highest AGI, if lived with separated parents equally
Taxpayer with highest AGI if neither parents can claim child
By a taxpayer with a higher AGI than either of the child’s parents who can also claim the child but does not
Qualifying Relative
- Not a qualifying child
- Member of Household or Relationship Test
- Gross Income Test (can’t earn more than $3, 950)
- Support Test
Divorced and Separated Parents
For most cases, the child is the qualifying child of the custodial parent.
Non custodial parent can have qualifying child if:
- Parents are divorced or lived apart at least 6 mo of yr
- Child received over half of support from the parents
- Child is in the custody of one or both parents
- Custodial parent signs a Form 8332 that he will not claim child as a dependent for the year
Multiple Support Agreements
When two or more people jointly provide for a person’s support, together must pay more than half of person’s total support, but no one member can pay more than half, and person who claims the dependent must pay more than 10% of the person’s support.
Rules for Alien Exemptions
- Can claim same exemptions US citizens
- resident alien, whether single or married, can claim only one personal exemption, as long as he can’t be claimed as a dependent on any other
US tax return. Can’t claim any dependency exemptions.
Exceptions to Rule:
Residents of Canada and Mexico can claim additional exemptions for spouse and dependents if - Spouse had no gross income
- Spouse was not the dependent of another US taxpayer
- The dependents otherwise qualify as dependents
Earned Income
Income received for service performed
Unearned Income
Includes interest, dividends, retirement income, alimony, and disability benefits
Constructive Receipt of Income
Cash-basis taxpayers be taxed on income when it becomes available, regardless of whether or not it is in physical possession. Funds must be available without substantial limitations.
Fair market value
Price at which a property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell.
Claim of Right Doctrine
Income received without restriction must be reported in year received, even if possibility exists that it may have to be repaid in a later year.
Worker Classification
- Employees: Business must withhold and remit income taxes, SS, medicare taxes and pay unemployment tax on salaries and wages to employee
- Independent Contractors: Self-employment income is earned by taxpayers who work for themselves. Income of 400$ or more must file a tax return and report earnings to IRS. Will receive 1099s and report on Sch C or F of 1040
Fica Tax (Federal Insurance Contributions Act)
SS tax and Medicare tax
SS - 6.2% for employer and employee = 12.4%
Medicare 1.45% for employer and employee = 2.9%
Total of 15.3%
Self Employment Tax
Self employed individuals are responsible for paying entire amount of SS and Medicare taxes applicable to their net earnings.
- Net earnings are reduced by 7.65%
- Taxpayer can deduct the employer-equivalent portion of his self-employment tax in determining his AGI
IRS Schedule SE
If a taxpayer owns more than one business, he must net the profit or loss form each to determine the total earnings subject to SE tax. Married tax payers can’t combine their income or loss from SE to determine their individual earnings subject to SE tax.
Employment Compensation
This is taxable income to the employee and a deductible expense to the employer. Employers required by Jan 31st to issue forms W2
Advance Wages
Must recognize the income in the year it was constructively received, regardless of whether he has earned the income.
Supplemental Wages
Compensation paid to employee in addition to his regular pay
- Bonuses
- Severance Pay
- Payment for nondeductible moving pay
Property in Lieu of Wages
An employee who receives property for services performed must recognize the FMV of the property when it is received as taxable income. If an employee receives stock or other property that is restricted, the property is not included in income until is is available to the employee without restriction
Garnished Wages
Wages garnished for various reasons - child support, back taxes, etc
Tip Income
Tips received for services provided an individual who receives 20$ or more per month must report tip income to employer, tips less than 20$ are exempt from SS and Medicare tax but not Federal Income Tax.
- Form 4137 if you do not report tips to employer
- Non cash tips must be reported and included in income at FMV but do not have to be reported to employer.
- Self employed must include tips in gross receipts
Taxable Fringe Benefits for Employees
Non taxable benefits, that may need to be reported on W2 and included in taxable income
- Off site athletic facilities and health clubs
- Employer provided life insurance over 50K
- Cash benefits from credit card or gift card
- Season tickets to sporting events/single tickets excluded
- Transportation benefits
- Employer provided vehicles, if used personally as well
Nontaxable Fringe Benefits
- reimbursement Plans, distributions from Retirement Plans
- Cafeteria Plans, allows employees opportunity to receive benefits on a pretax basis. One is a taxable benefit and one is a qulaified (nontaxable) benefit
Qualified Benefits
- Accidental, dental, vision, and medical benefits
- Health care flexible spending accts
- Adoption assistance
- Dependent care assistance
Highly Compensated Employee
Discourages companies from offering excellent tax free benefits to top executives, while ignoring needs of lower paid employees, IF a benefit plan favors HCSs, the value of their benefits become taxable.
Other Types of Employee Fringe Benefits
- Educational Assistance
- Tuition Reduction
- Meals and Lodging
- Transportation
- Cell phones
- No additional - cost services
- Group Term Life Insurance
- Moving expenses
- Employment Achievement Awards
- Employee Discounts
- DeMinimis Benefits (coke, coffee, etc)
Reimbursement of Business Expenses
Not taxable income if all requirements are met:
- Incurred expenses while performing services as employees
- Adequately account for travel, meal, entertainment, and lodging
- Provides evidence (receipts)
- Returns excess reimbursement within reasonable amount of time
- Travel Expenses
Life Insurance Payments
Not taxable/Interest income received is
Taxation of Clergy Members
Clergy salary reported on W2’s offering services; Self employment income on Sch C
Housing allowance
Combat Pay and Veteran Benefits
Wages earned are taxable except when in combat zone for any part of the month. Officers have pay excluded up to a certain amount depending on branch of service.
Disability Payments
Taxable if taxpayer retired on disability before reaching min age for retirement. Once taxpayer meets min age if its no longer taxable and taxed only as pension income. IS not the same as sick pay.
Interest Income
Interest is a form of income that may be earned from deposits, such as in bank and money market accts, notes receivable, and investments such as bonds. Some interest income is taxable, and some is not. Reported to taxpayer on Form 1099-INT by financial institution or other payer. If form 1099-INT is not received, he must still report all taxable interest income. If interest income exceeds $1500, taxpayer can’t file Form 1040EZ and must report the interest on Sch B, and file form 1040 or 1040 A.
Interest Income
Interest Income = Purchase Price - Amt Received
Taxpayers can report interest income from Series EE or 1 Savings bond when:
- Bond Matures or is redeemed (whatever happens 1st)
- Each yr as bond’s redemption value increases
Taxpayer must use same reporting method for all Series EE and 1 bonds he owns
Interest on Education Savings Bonds
Taxpayers may purchase and redeem certain Series EE or 1 bonds on a tax free basis to pay for higher education expenses. Must be for taxpayer, spouse, or dependents
- If modified AGI is $143,950 or more, no exclusion is allowed (MFJ or QW)
- MFS do not qualify
- S or HOH is $91K or more
Must be purchased by owner, can’t be a gift
Must be reduced by certain tax-free benefits
Total interest received may be excluded only if combined amounts of the principal and interest received do not exceed the taxpayer’s qualified higher education expenses.
Gift for Opening Bank Account
5000$ or , gifts valued at 20$ or more
Cash bonus or credit card acct is taxable interest
Reward points or airline miles (as gifts) are taxable
Cash back and reward points earned are not taxable interest income
Interest on a CD
Taxable when taxpayer receives it or is entitled to receive it without paying a substantial penalty. Interest paid can be deducted as investment interest,m up to the amount of net investment income
Tax Exempt Interest
Interest earned on debt obligations from state and local gov’t is generally exempt from Federal Income Tax but may be subjected to income taxes by state and local gov’ts.
Dividend Income
Dividend is a distribution of cash, stock, or other property from a corporation or a mutual fund. Will use Form 1099-DIV to report dividend income to taxpayers. Not subject to employment taxes, and if distribution is more than 1500 must be reported on 1040 or 1040A
Ordinary Dividends
Corporate distributions in cash that are paid to shareholders out of earnings and profits. Subject to regular tax rates, rather than the lower tax rates that apply to capital gains.
Non dividend Income
Distributions that are not paid out of earnings and profits. Considered a recovery or return of capital and are generally not taxable. But reduce a taxpayer’s basis.
Qualified Dividends
Ordinary Dividends that are given preferred tax treatment as capital gains if certain criteria are met.
- 0% at amount taxed 15% or less
- 15% at amount taxed greater than 15% but less than 39.6%
- 20% on amount that would be taxed at 39.6%
Dividends must have been paid buy a US corporation or a qualified foreign corp
Taxpayer generally must hold stock for more than 60 days during 121 day period that begins 60 days before ex dividend date (date following the declaration of dividend)
Count # of days he held stock and include day he disposed of stock when figuring holding period for qualified dividends.
Mutual Fund Distributions
Form 1099-DIV will identify types of distributions received. Based on character of the income source and may include ordinary and qualified dividends, capital gain distributions, exempt-interest dividends, and non-dividend distributions. Capital gain distributions always treated as long term.
Stock Dividend
Distributions of stock, rather than money from a corporation to its shareholders. Not a taxable event and does not affect the income in year of distribution b/c money is not actually received. If option to receive money instead of stock, the dividend is taxable in year distributed.
Dividend Reinvestment Plans (DRIP)
Allows taxpayer to use dividends to purchase more shares of stock in a corporation instead of receiving dividends in cash
Constrictive Distributions
Certain transactions between corporation and shareholders may be dividends or non dividend distributions and may be taxable
- Payment of personal expenses
- Unreasonable compensation
- Unreasonable rents
- Cancellations of Shareholders debt
- Property transfers for less than FMV
- Below market of interest free loans
Basis of Assets
Initial basis of an asset is usually its cost, but sometimes determined based upon FMV of asset when acquired, rather than its cost.
Taxable Gain or Loss
- Assert’s basis or Adjusted Basis
- Purchase Cost, including ancillary charges
- Adjusted basis includes the original basis plus any increases or decreases resulting from events that occur after the original purchase
- Assets holding period (short term in one yr or less, long term is more than one yr)
- Proceeds from the sale
Depreciation
Income tax deduction that allows a business to recover the cost of basis of property used in a business over time. Allowance for wear and tear of assets
Basis of Real Property (Real Estate)
Includes a number of costs in addition to the purchase price.
Settlement Costs
Generally must include for purchase of property in his basis. May include legal fees, etc.
Basis of Securities
Stocks or bonds. Usually the purchase price plus any additional costs.
Specific Identification
Specify which block or part of a block to sell. Shares sold are treated as coming from earliest block purchased. First in, first out (FIFO)
Stock Dividends
Additional shares a company grants to its shareholders in lieu of paying cash dividends. Additional shares increase the number of shares owned by an individual shareholder, so his original basis is spread over more shares, which decreases the basis per individual share. Usually not taxable events, only when option to receive cash.
Stock Split
Occurs when a company issues additional shares of stock for every existing share an investor holds . Way for a company to lower the market price of its stock;. Not usually a taxable event.
Stock Options
Taxpayer may purchase options to buy or sell property, such as stocks or commodities, through an exchange or in the open market.
Statutory Stock Options
Incentive stock Options (ISOs) allow employees to purchase stock at a pre-established price (exercise price) that may be below the actual market price on the date of exercise. Options granted under employee stock purchase plans (ESPPs).
Non statutory Stock Options (NSOs)
Also allows an employee to purchase stock at a pre-established exercise price. If option’s FMV is indeterminable at date of grant, the difference between exercise price and market value of stock on exercise date must be recognized as ordinary income in the year the option is exercised. Basis in stock is MV + amount paid
Property in Exchange for Services
Must include the property’s FMV in income, and this becomes his basis in the property. Or an agreed-upon cost may be used to establish the amount included as income and asset’s basis.
Basis after Casualty Loss
If a taxpayer has a casualty loss, he increases the basis in the property by amount spent on repairs to restore property to its pre-cash basis of property by any related insurance proceeds
Basis After Mortgage Assumption
IF a taxpayer buys property and assumes an existing mortgage on it, the taxpayer’s basis includes the amount paid for the property plus the amount owed on the mortgage. Includes settlement fees and closing costs paid to buy the property. Fees and costs for obtaining a loan on property are not included in basis.
Basis of Property Transferred from a Spouse
No gain or loss recognized on transfer of property between spouses.
Basis of Inherited Property
The FMV of property on the date of the decedent’s death, regardless of what the deceased paid for the property. Gain will be calculated based on change in value from the date of death. Special rule allows personal rep of estate to elect a different valuation date of 6 mo after date of death
Basis of Property Received as a Gift
Taxpayer must know the donor’s adjusted basis in the property when it was gifted, its FMV on date of gift, and amount of gift tax paid on it, if any, by donor. Equal to the donor’s adjusted basis. Also called “transferred basis.” If loss is reported on sale of gifted property, the basis is lower of the transferred basis or the FMV of gifted property on date of the gift. Sale can also result in no gain or loss.
