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Income Taxes > Exclusions, Deductions & Taxable Income > Flashcards

Exclusions, Deductions & Taxable Income Flashcards

1
Q

Are gifts, bequests and inheritances taxable?

A

No

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2
Q

When is a bequest taxable?

A

When it is paid in more than 3 installments it is taxable to the extent that it is derived from the income of the estate.

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3
Q

What are the 5 elements of a gift?

A

Donor must be competent
Donor must intend to make a gift
Donee must receive the gift
Donee must be capable of receiving the gift.
Donor must actually give up control of gift

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4
Q

Are life insurance benefits taxed? When might they create taxable income?

What about when you cash out or sell a life insurance policy?

A

Life insurance benefits are generally not taxed. Note that when you get them in installments any interest they might be earning is taxable income.

When you cash out or sell an LI policy, anything you get beyond basis is taxable.

When you sell an LI policy, the death benefit is taxable income to the buyer.

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5
Q

When is the death benefit of a transferred LI policy not taxed?

A

When it’s transferred to the insured, a partner of the insured, or a partnership in which the insured is a partner.

When it’s transferred to a corporation in which the insured is an officer.

When it’s transferred via gift or tax free exchange.

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6
Q

What are viatical settlements? Are they taxable?

A

Viatical settlement = selling your LI for cash when you have a terminal or chronic illness.

Settlements are not taxed. Illness must be certified by a physician. Chronic illness = can’t do 2 of the six tasks of basic living.

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7
Q

What is a MEC?

How are loans/withdrawals from a MEC taxed?

A

A MEC is life insurance that doesn’t meet the 7 pay test; at any time in the first 7 years the sum of payments exceeds the net of level premiums.

MEC withdrawals are taxed LIFO, which means basis comes out last.

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8
Q

Are scholarships, grants, and tuition waivers taxable?

Can they cover room and board?

A

Generally not, especially if they’re used to pursue an undergrad degree.

They must be used for tuition, books, and fees; they can’t cover room and board.

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9
Q

What is the exclusion for gain on the sale of personal residence?

What about for surviving spouses?

What about unforeseen circumstances?

A

Exclude $250,000 for single, $500,000 for couple.

Must have lived there 2 out of the last 5 years; pro-rate if they weren’t there the whole five. Applies to each person in a couple. Can’t use this more than once every 2 years. Surviving spouses have 2 yrs past date of death to claim double deduction.

Can also claim if you had to move early due to (broadly interpreted) unforeseen circumstances.

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10
Q

When are distributions from a Roth IRA, Roth 401(k), or Roth 403(b) exempt from income?

A
  • Account open 5 years + age 59.5
    • 1st time home purchase
    • death or disability

Note: The first time home purchase doesn’t apply to a Roth 401(k) or 403(b).

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11
Q

Is worker’s comp or damages from injury and illness taxable?

What about payment from accident or health insurance that is owned by the taxpayer?

A

All not taxable.

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12
Q

Are punitive damages taxable?

What is the one exception?

A

The only time punitive damages are not taxable is in the case of “wrongful death”, in this case punitive damages are the only damages that can be legally awarded.

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13
Q

When are damages from emotional distress taxable?

A

When the emotional distress results from illness or injury, or when the damages are used to pay for medical treatments resulting from emotional distress.

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14
Q

When are meals and lodging provided for employee’s not included in employee’s gross income.

A

When they’re on employer’s premises and for the convenience of the employer.

For lodging—when it’s a condition of employment.

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15
Q

What are the exclusions for employer provided

  • dependent care
  • athletic facilities
  • education (student loans?)
A

Dependent care—$5,000
Athletic facilities must be on employer’s premises
Education $5,250, includes student loan repayment.

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16
Q

Are employer adoption assistance programs excludable?

A

Up to $14,440 is excludable, phase out at MAGI, $216k - 256k.

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17
Q

When are no-cost additional services excludable?

A

When they’re on the employer’s premises, in the employee’s line of work, non-discriminatory, and employer incurs no substantial additional cost.

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18
Q

When are employee discounts excludable?

A

The discount is not on realty or investment personalty.
The discounted item is in the line of where the employee works.
Discount is not more than gross profit for physical item purchases, or 20% for services.
Discount is non-discriminatory.

19
Q

What about transportation fringe benefits?

Hint: They’re intended to encourage employers to not discourage public transportation.

A

ER-no deduction
EE-can exclude
Benefit can be discrminatory
Unlike Cafeteria benefits, EE can choose b-t benefit and cash without loss of exclusion.

20
Q

What about moving expenses?

A

Only the military can deduct them.

21
Q

Who can claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction?

A

Must have foreign income, tax home must be in a foreign country, and one of:

  • US citizen, resident in a foreign country for an uninterrupted period that includes entire tax year.
  • US resident alien with which US has an income tax treaty, in-country for uninterrupted entire taxe year.
  • US citizen or resident present in country for 330 days out of 12 mos.
22
Q

When is discharge of indebtedness taxable?

A

To the extent that FMV of debtor’s assets exceeds liabilities immediately after discharge of debt.

23
Q

What is AGI used for? (4 things)

A
  • Floor for medical expenses
  • Ceiling for charitable deductions
  • Determines deductibility of IRA contributions
  • Determines phaseout of other tax benefits
24
Q

Is Alimony deductible, or include to the payee?

A

Only on divorces finalized prior to 2019.

25
Q

What defines alimony?

A

Paid in cash, pursuant to divorce, ends with death of payee.
Is not excess alimony.
Couple no longer files jointly or lives together.

26
Q

What defines excess alimony?

A
  • 3 yr. review period.
  • Look for decrease of $15,000 between years 1 and 2, or 2 and 3.
  • P1 + P2 - 2P3 - $37,500 = Recapture
27
Q

What is not alimony?

A

Child support
Rent free occupancy of a home
Payments that extend beyond death
Payment reduction when child reaches 18.

28
Q

What is deducted for AGI? 11 things!

A

Self employment related:

  • Trade or business expenses
  • 1/2 of self-employment tax paid
  • 100% of health insurance if self-employed
  • Deductions from loss on sale or exchange of property
  • Deductions from rental and royalty property

General

  • Alimony payments if finalized before 2019
  • Contributions to retirement accounts
  • Interest on student loans
  • Penalty on premature withdrawal
  • HSA contribution
  • Teacher expenses
29
Q

What is the charitable contribution if you don’t itemize?

A

$300

30
Q

What about unreimbursed employee business expenses?

Hint: it’s in the 2% floor category

A

No longer deductible at least until 2025 along with all other itemized deductions subject to 2% floor.

31
Q

Above the line deductions for self-employed individuals (4)

A

Education expense including tuition books, supplies, transportation, and travel.
Gifts up to $25 + wrapping
No deduction for entertainment, but meals are 50% (100% for 2021 and 2022).
Home office expenses only for the self-employed

32
Q

What are deductions FROM AGI?

A

Standard deduction and itemized deductions are from AGI. Itemized deductions include:
Medical expenses in excess of 7.5% AGI
SALT capped at $10k
Contributions to charity (cannot exceed 50% of AGI)

33
Q

What medical expenses are deductible from AGI? (Remember, must be at least 7.5% of AGI)

A
  • Perscriptions
  • Non-cosmetic surgeries
  • Some long-term care services
  • Insurance premiums, including LT care insurance
  • Tuition for special schools
  • Capital improvements on the advice of a physician
34
Q

What deduction can you claim for ordinary income property, ST gain property, and all loss property?

What is the ceiling of it for public and private charities?

A

For ordinary income, ST gain and loss property value at lesser of adjusted basis or FMV (FMV only for loss property).

Deduction ceiling is 50% for pub. Charities, 30% for private.

35
Q

What deductible expenses make the best cluster donations?

A

Charitable expenses
Medical expenses
Early payment of SALT
Early payment of mortgage interest.

36
Q

Charitable contribution direct from IRA’s? What’s the advantage?

A

No income or charitable deduction—it’s a way to take your RMD without being taxed on it.

37
Q

How long do excess charitable deductions carry over?

A

5 years.

38
Q

Casualty losses:

A
  • Deductible in the year sustained, or in year of settlement if full recovery expected.
  • For personal casualty, only deductible if president declares natural disaster
  • Event must be sudden, unexpected in nature (termites and disease don’t count)
  • For personal property, loss = lesser of a-basis or FMV
39
Q

Interest expense deduction: what is the usual limit and how do you maximize it?

A

Investment interest expense deduction is usually limited to investment income. However, LT capital gain can be declared OI to take a bigger deduction in any given year.

40
Q

Mortgage interest deduction?

A

Limited to 750K of indebtedness, though 1M prior to 12/15/17.

Limited to 2 houses.

No home equity interest.

41
Q

Qualified business income deduction (new in 2017, TCJA)

A

You can deduct 20% of QBI whether you itemize or not.
Pass-thru entities only.
Reduces taxable income, but not AGI.

42
Q

What is the deduction ceiling for cash donations to public and private charities?

A

60% of AGI for public charities,

30% of AGI for private ones.

43
Q

What is the valuation for charitable donations of LT capital gain property (including related use of tangible personalty)?

What is the deduction ceiling?

Is it different for donations to public or private charities?

A

For public charities the valuation is FMV or adj. basis.

The ceiling is 30% AGI if you use FMV and 50% AGI if you use adjusted basis.

For private charities you must use basis, and the deduction is 20% of AGI.

44
Q

What is the valuation for LT tangible personalty unrelated use?

What is the deduction ceiling for public and private charities?

A

The valuation is the lesser of FMV or basis.

The deduction ceiling is 50% of AGI for public, and 20% of AGI for private.

Income Taxes (6 decks)

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