Fed Income Tax

Question 1

Define gross income.

Answer 1

Gross income is all income from whatever source derived.

Question 2

What are the rules re: alimony before 2019? After 2019?

Answer 2

Before: alimony payments are deductible by the payor and are included as income to the recipient.

After: alimony payments are NOT deductible by the payor and are NOT included as income to the recipient.

Question 3

Are prizes and awards includible in income? What are the exceptions?

Answer 3

Yes, except:

(1) Recognition awards where:
(a) The award was made in recognition of religious, charitable, scientific, educational, artistic, literary, or civil achievement,
(b) The recipient was selected without any action on his part,
(c) The recipient is not required to render substantial future services, and
(d) The award is turned over by the payor, at the recipient’s direction, to a governmental or charitable organization.

(2) Employee achievement awards where:
(a) Tangible property worth less than $400,
(b) Is for length of service or safety achievement,
(c) Is presented as part of a meaningful presentation, and
(d) Is not presented under circumstances suggesting disguised compensation.
* **The award cannot be cash or a cash equivalent.

Question 4

Is a gain from cancellation or discharge of debt included in income?

Answer 4

Yes, unless

(1) The cancellation is a gift/bequest,
(2) The discharge was due to bankruptcy, or
(3) It was an adjustment in purchase price.

Question 5

Are distributions to shareholders included in gross income?

Answer 5

Yes.

Question 6

Are life insurance proceeds included in income?

Answer 6

Proceeds paid by reason of death of the insured are excluded from gross income of the beneficiary.

If they payment is in installments, the interest will be taxable.

Question 7

Is inheritance included in income?

Answer 7

No, but proceeds from inheritance are.

Question 8

Are gifts included in gross income?

Answer 8

If given with detached and disinterested generosity, no.

Question 9

Can transfers from employer to employee be considered a gift?

Answer 9

No.

Question 10

Is interest on state and local bonds includible in income?

Answer 10

No.

Question 11

Is interest on federal or corporate bonds includible in income?

Answer 11

Yes.

Question 12

Are damages recovered in a personal injury suit included in income?

Answer 12

Damages received as compensation for physical personal injury are excluded from gross income (even if a portion represents lost wages).

Punitive damages are included in income.

Question 13

Are payments for lost property included in income?

Answer 13

Payments received as reimbursement for property damage are not taxable if the payments do not exceed the adjusted basis of the property.

Question 14

Are payments received from health insurance included in income?

Answer 14

If the taxpayer paid all premiums for the insurance, all payments received are not included in income.

Question 15

What is the tax treatment of a sale of principal residence?

Answer 15

Every 2 years, a taxpayer can exclude up to $250,000 in gain from the sale or exchange of a principal residence IF the taxpayer owned and used the property as her principal residence for at least 2 of the 5 years preceding the sale date.

Question 16

Are improvements by a lessee included in the owner’s income?

Answer 16

The value of improvements by the lessee in lieu of rent is included in the owner’s income. However, if it is not in lieu of rent, improvements are NOT income to the owner.

Question 17

Does income include scholarships?

Answer 17

Income does not include any amount received as a qualified scholarship to cover tuition, fees, books, and supplies (NOT room and board).

The test is: is the primary purpose to further the education of the recipient?

Question 18

What is the tax treatment of an education savings account?

Answer 18

Individuals can contribute up to $2,000 annually. The contribution is NOT tax deductible, but any income generated is.

Question 19

When are meals and lodging not considered income?

Answer 19

When the meals and lodging are furnished to an employee for the convenience of the employer and on the employer’s premises.

The lodging must be a condition of employment.

Question 20

Are social security benefits considered income?

Answer 20

No, unless the taxpayer’s AGI exceed a specified amount.

Question 21

Are unemployment compensation benefits considered income?

Answer 21

Yes.

Question 22

What employee fringe benefits are not considered income?

Answer 22

(1) Qualified employee discounts,
(2) No-additional-cost services,
(3) Working condition fringes,
(4) De minimis fringes, and
(5) Qualified transportation fringes.

Question 23

Is rental income included in income?

Answer 23

Yes, and the taxpayer is entitled to deductions for the expenses incurred in connection with that property.

Question 24

Re: vacation home, when are income and expenses not taken into account?

Answer 24

When the vacation home is rented out for fewer than 15 days per year.

Question 25

How much may a taxpayer deduct for interest paid on a qualified education loan?

Answer 25

Up to $2,500 per year.

Question 26

Is mortgage interest deductible?

Answer 26

Mortgage interest incurred to purchase a first or second personal residence is deducible on loans up to $750,000.

Question 27

What taxes are deductible? What is the cap?

Answer 27

State and local income, real property, and personal property taxes are deductible up to $10,000.

Question 28

When are casualty losses deductible?

Answer 28

When attributable to a federally declared disaster.

Question 29

When are wagering losses deductible?

Answer 29

Wagering losses and other expenses incurred in gambling are deductible, but only to the extent of wagering gains for the year.

Question 30

What charitable contributions are deductible?

Answer 30

Cash to a qualifying organization, up to a max of 60% of AGI. All other charitable contributions have a max of 50% of AGI (10% for corporations).

Question 31

When are medical expenses deductible?

Answer 31

Only to the extent they exceed 10% of AGI.

Question 32

What is the current standard deduction?

Answer 32

$12,000 for an individual, $24,000 for a married couple.

Question 33

What is the cash accounting method?

Answer 33

A taxpayer reports items of income or deductions in the year when they are actually received or paid.

Question 34

What is the accrual method of accounting?

Answer 34

An item of income is includible in income when: (1) All events have occurred that fix the right to receive it, and (2) The amount can be determined with reasonable accuracy.

Question 35

When are gains and losses given tax effect?

Answer 35

Only upon realization.

Question 36

What is the basis of property?

Answer 36

Its cost to the taxpayer. Adjustments may be made upward for capital improvements and downward for depreciation.

Question 37

What is the basis of gifts?

Answer 37

Property acquired as a gift retains the same basis it had in the hands of the donor (but not above the FMV at the time of the gift), and is increased by the amount of any gift tax paid on the transfer.

Question 38

What is the basis for property acquired by bequest or inheritance?

Answer 38

The FMV at the date of the decedent's death.

Question 39

What are examples of nonrecognition transactions?

Answer 39

(1) Like kind exchanges (not including boot), and (2) Involuntary conversions (destruction, theft, condemnation; if the taxpayer does not reinvest all of the proceeds, he will have gain to the extent of the unreinvested amount).

Question 40

What are the four (4) pass-through entities?

Answer 40

(1) Sole proprietors, (2) Partnerships, (3) Limited liability companies, and (4) S corporations.

Question 41

What is a pass-through entity?

Answer 41

It does not pay tax. The individual owners of the pass-through entity report their pro rata share of the entity's profits or losses on their personal tax returns.

Question 42

What is the corporate tax rate?

Answer 42

21%.

Question 43

How are corporate distributions taxed?

Answer 43

(1) Dividends are included in gross income, (2) Any portion that is not a dividend reduces the distributee's basis in stock until it reaches zero, and (3) Any additional distribution is treated as a capital gain.

Question 44

Does gross income include stock dividends?

Answer 44

No, as long as the distribution in no way alters the % of ownership.

Question 45

What is the amount of the unified credit against the estate and gift tax?

Answer 45

$10M. A spouse may add any unused portion of her predeceasing spouse's credit, which can effectively exclude up to $20M in gifts.

Question 46

What is the annual exclusion of gifts?

Answer 46

The first $15,000 to each donee.

Question 47

Are payments of school tuition or medical payments regarded as gifts?

Answer 47

No.

Question 48

What is the generation-skipping transfer tax rate?

Answer 48

The max estate tax rate, which is 40%. GST can be avoided under the unified credit.

Question 49

Is there an Indiana inheritance tax?

Answer 49

No.

Question 50

Is there an Indiana gift tax?

Answer 50

No.