EA Part 1 Session 4 Flashcards
Alternative Minimum Tax “AMT” Form 6251
Prevent a higher income taxpayer to use deduction not to pay tax.
If you are not liable for AMT this year but paid in the previous year you can complete and attach Form 8801 to your individual return.
AMT does not increase a taxpayer’s refund.
Self-employment tax would not be a part of the computation of AMT. The AMT preference items include: a) Depletion b) Excess Intangible drilling costs c) Interest on private bonds
Kiddie Tax (Exam Know the rule)
Investment income earned by dependent children may be taxed at the parent’s rate.
the kiddie tax does not apply to earned income (such as wages) it applies only to certain unearned income, including investment income, such as Interest, dividends, and capital gains distributions (and unemployment). No schedule C.
- Investment income more than $2,500 (in 2023). The 1st $1,250 investment income is tax-free; the 2nd $1,250 is taxed at the child’s marginal rate.
There are two ways to report the kiddies tax
1- Child’s return on Form 8615: The child can file their own return and report the tax by attaching Form 8615. The must have unearned income in excess of the threshold $2,500.
2- Parents return on Form 8814:
Foreign Earned Income Form 2555. If it is a couple file 2 forms 2555 for each spouse.
Form 2350 Application for extension of time to file US Income tax return in order to qualified for foreign earned income.
This applies to earned income only ‘money you earned from working somewhere’ not passive income or dividend
Foreign Earned Income Exclusion for 2023 is $120,000 per person. This doesn’t affect filling status. you have to make the election to take the exclusion. There are 2 tests in order to claim Foreign Eanerd income:
1- Bona Fide Residence Test:
2-The Physical Presence Test: a US citizen or US resident alien must be present in foreign country (or multiple countries if applicable) for at least 330 full days during a year
All foreign income is specified passive category income and total foreign taxes paid do not exceed $300 ($600 MFJ).
Members of U.S. Armed Forces and U.S. government employees do not qualify for the foreign earned income exclusion.
A taxpayer’s tax home is his principal place of work, regardless of where he actually lives.
Foreign income taxes are deductible by individual taxpayers.
Traditional IRA distributions are fully taxable at ordinary income rates. Roth IRA distributions are generally tax-free, while Social Security benefits may be partially taxable depending on your other income. Life insurance proceeds are usually not taxable to the beneficiary of the policy.
Retirement Income
Almost any type of investment is permissible inside an IRA, including stocks, bonds, mutual funds, annuities, unit investment trusts (UITs), exchange-traded funds (ETFs), and even real estate (as long as the real estate is not for personal use).
IRA cannot invest in:
1- Collectibles: like art, antiques, gems, coins, alcoholic beverages, and certain precious metals (See IRC Section 590)
2- S-Corporation stock.
3- Or life Insurance contracts.
Distributions from an inherited Roth IRA to a surviving spouse are generally tax-free, just like they would have been for the original owner of the IRA. Surviving spouses can also treat the account as they would their own.
The rental and interest income are not considered for purposes of determining IRA contribution.
If you contribute more than the traditional IRA or Roth IRA contribution limit, tax law imposes a 6% excise tax per year on the excess contribution.
Supplemental Security Income (SSI) payments, which are NOT taxable.
A checkmark in the IRA/SEP/SIMPLE checkbox in box 7 of Form 1099-R indicates that the taxpayer received an IRA-type distribution. This doesn’t necessarily mean that the distribution is taxable (it could be a rollover), but the distribution must be reported on Rosa’s return.
The Roth IRA has many of the same advantages as a traditional IRA. However, withdrawals from a Roth IRA made during retirement are tax-free because you contribute after-tax dollars, meaning you’ve already paid taxes on the money going into the account.
If an owner of a traditional IRA does not claim a deduction for a regular contribution, the amount contributed is after-tax and is considered basis. Therefore, the IRA owner must file IRS Form 8606 for the year to inform the IRS that the contribution is nondeductible. A Form 8606 must be filed for EVERY YEAR a nondeductible contribution is made.
The Required Minimum Distribution ‘RMD’ rules require individuals to take withdrawals from their IRAs (including SIMPLE IRAs and SEP IRAs) every year once they reach age 73 in 2023 or later, even if they’re still employed.
A taxpayer can contribute to a traditional IRA even if they participate in another retirement plan through their employer or business. However, a taxpayer may not be able to deduct all of their traditional IRA contributions if they participate in another retirement plan at work. If a taxpayer is covered by a retirement plan at work and their income exceeds a certain threshold, they may not be able to deduct their traditional IRA contributions.
Note: Senior citizens whose only source of income is Social Security generally will not owe any federal taxes and therefore don’t need to file a return with the IRS. If a taxpayer has other income in addition to Social Security, the taxpayer may have to file a return, even if none of the Social Security benefits are taxable. See the IRS tutorial page on Social Security.
There are no required minimum distributions for Roth IRAs that are not inherited. Contributions to Roth IRAs are not tax-deductible for federal income tax purposes, and there is no age limit for making contributions. Generally, Roth IRA withdrawals are not taxable for federal income tax purposes, if the individual has had the retirement account for more than five years and has reached 59 ½ years of age.
Form 8606 is used to report:
1- Nondeductible contributions to traditional IRAs, and
2- Conversions from traditional IRA, SEP-IRA, or SIMPLE IRAs to a Roth IRA.
Failure to file Form 8606 could result in an individual paying income tax and/or an early distribution penalty on amounts that should be tax-free and penalty-free.
Amos is a tax return preparer. His client, Jolene, told him that she had made several gifts during 2023 and asked if she should file a gift tax return, and if so, how much tax she would owe. Jolene has never given a taxable gift before. Jolene’s gift transactions were as follows:
Paid her parents’ medical bills, $14,000 for her father and $18,000 for her mother
Bought a sports car for her grandson, cost was $32,000
Gave $19,000 in cash to her church
Prepared her last will leaving her vacation cabin, valued at $75,000, to her sister
Sent a wedding gift of $11,000 to her niece
What is Amos’ best answer to Jolene’s questions?
Must file a gift tax return but no tax will be owed because of the unified credit.
The annual gift exclusion amount is $17,000 in 2023. Only the gift of the car is a reportable gift, because it is over this limit. The direct payment for medical expenses, the charitable donation, and the other gifts are not taxable or reportable. The $75,000 cabin is not a gift, it is merely a bequest in Jolene’s will. Generally, the following gifts are not taxable or reportable gifts (i.e., a Form 709 does not have to be filed for these gifts).
Gifts that are not more than the annual exclusion for the calendar year (in 2023, this is $17,000 per person).
Tuition or medical expenses paid on behalf of another person (the educational and medical exclusions).
Gifts to a spouse.
Gifts to a charity or nonprofit group.
Gifts to a political organization for its use.
In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made. For additional information about reportable gifts, review Form 709 and its instructions.
Gift Taxes
The generation-skipping tax (GST) can be incurred when grandparents directly transfer money or give property to their grandchildren.
The annual gift exclusion is $17,000 (in 2023). Gifts under this threshold do not have to be reported. Generally, the following gifts are not taxable or reportable gifts (i.e., a Form 709 does not have to be filed for these gifts).
1- Gifts that are not more than the annual exclusion for the calendar year (in 2023, this is $17,000 per person).
2- Tuition or medical expenses paid on behalf of another person (the educational and medical exclusions).
3- Gifts to a spouse.
4- Gifts to a charity or nonprofit group.
5- Gifts to a political organization for its use.
The unified tax credit gives a set dollar amount that an individual can gift during their lifetime before any estate or gift taxes apply.
The gift tax does not apply to a transfer to a political organization for the use of the organization.
Marylou received a valuable set of gold coins as an inheritance from her father, who died on February 6, 2023. Her father’s adjusted basis in the coins was $9,750. The coins’ fair market value on the date of her father’s death was $76,200. The executor of the estate elects the alternate valuation date for valuing the gross estate. Six months later, on August 6, 2023, the coins’ fair market value had dropped to $73,100. Marylou finally received the coins on December 1, 2023, when its fair market value was $73,500. She sold the coins a week later for $73,450. What is Marylou’s basis in the inherited coins, in order to determine her taxable gain on the sale?
$73,100
Since the alternate valuation date was elected by the executor, Marylou’s basis is the fair market value on the alternate valuation date, or $73,100. This is the basis that she must use in order to calculate her gain or loss on the sale of the coins. The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death. However, an executor has the option of choosing an alternate valuation date, which is six months after the date of death for valuing the gross estate.
Sophia and Ralph are married and file jointly. Sophia gives her cousin, Elijah, $24,000 in cash as a Christmas present in 2023. Sophia elects to split the gift with her husband, Ralph. What is their filing requirement for this split gift?
The entire gift is tax free. However, a gift tax return is required.
Ralph is treated as if he gave Elijah half the amount ($24,000 / 2 = $12,000). Assuming Sophia and Ralph make no other gifts during the year, the entire $24,000 gift is tax-free, but a gift tax return is required. In 2023, the gift tax exemption is $17,000 per individual gift, meaning that a couple using gift-splitting could gift up to $34,000 to any individual before being taxed on the amount. The following gifts are NOT taxable or reportable:
1-Gifts that do not exceed the annual exclusion.
2- Tuition or medical expenses paid directly to the institution for someone else.
3- Unlimited gifts to a spouse, (as long as the spouse is a U.S. citizen).
4- Gifts to a political organization for its own use.
5- Gifts to a qualifying charity.
6- A parent’s support for a minor child. This may include support required as part of a legal obligation, such as by a divorce decree.
The donor (the person who gives the gift) is generally responsible for paying any gift tax.
If a person makes a qualified disclaimer of any interest in property, the property will be treated as if it had never been transferred to that person. Eric does not have any requirement to accept the gift. However, to be a qualified disclaimer, a refusal to accept an interest in property must be in writing.
Draven is single and a U.S. citizen who had $60,000 deposited in an Italian bank account at the end of the year. He planned to purchase a vacation home in Italy, but the sale was never completed. No interest was earned on the foreign bank account. Draven earned $92,000 in wages during the year and is required to file a U.S. tax return. Draven currently lives and works in the U.S., although he travels overseas quite frequently. What are his reporting requirements for the Italian bank account?
He must file an FBAR as well as a Form 8938.
Draven has two reporting requirements. He must file an FBAR as well as a Form 8938. Draven has a U.S. tax home and holds foreign financial assets with an aggregate value that exceeds $50,000 ($100,000 MFJ) on the last day of the tax year, so he is required to file a Form 8938. There is also an FBAR reporting mandate for taxpayers with foreign accounts of more than $10,000. These are considered separate filings. You should be familiar with the distinctions between FBAR and Form 8938 requirements for the exam (it is on the EA exam test specifications).
Lenny and Kristy, both age 65, are U.S. citizens but lived abroad for the entire tax year in Greece. They have not returned to the US in five years. They will file a joint income tax return. The total value of their combined specified foreign financial assets is $150,000, which is all cash in their Greek bank account. The account balance has never exceeded $150,000. What foreign reporting requirements do they have?
The FBAR only.
They only have to file the FBAR. Lenny and Kristy do not have to file Form 8938. Since they live overseas all year, their reporting threshold for foreign financial assets is higher than taxpayers who reside in the United States. The reporting threshold for married taxpayers that live overseas is (1) more than $400,000 on the last day of the tax year or (2) more than $600,000 at any time during the tax year. Since their foreign account holds only $150,000, they do not need to file a Form 8938.
Form 5471 For U.S. persons to report direct ownership in a foreign corporation.
U.S. citizens and U.S. residents who are officers or shareholders in certain foreign corporations must file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, as part of their annual tax return. In general, any US person who has at least 10% direct ownership of a foreign corporation is generally required to file Form 5471.
What is the filing requirement for an FBAR (Foreign Bank Account Report) for 2023?
An amount that exceeds $10,000, in aggregate, held in any foreign financial accounts.
A United States person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, must file an FBAR to report a financial interest in or signature or other authority over at least one financial account located outside the United States if the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
If foreign financial assets do exceed $50,000. U.S. taxpayers that live in the United States have to file a Form 8938 if the value of their foreign financial assets exceed $50,000 on the last day of the tax year (or more than $75,000 at any time during the tax year).
Foreign partnership interests reported on Form 8938 do not need to reported on FBAR.
Foreign partnership interests are not reported on the FBAR. Foreign partnership interests are reported on Form 8938
