Federal Taxation Flashcards
The highest individual income tax rate after ATRA was enacted.
39.60%
The highest capital gains tax rate after ATRA.
20%
The estate tax exclusion after ATRA was enacted.
$5m (to be adjusted for inflation).
Income level at which highest tax bracket starts for married couples filing jointly.
$450,000 (to be adjusted for inflation).
What is the percentage of ACA’s Medicare surtax on unearned income?
3.8% (of lesser of NII or excess of AGI over AGI thresholds).
What is the ACA cut-off for “large employers” subject to employer mandate penalty?
50 FTEs.
What is the ACA Individual Mandate Penalty after 2016?
$695 per adult (which will be inflation adjusted).
What does the acronym PPACA mean?
The Patient Protection and Affordable Care Act, more commonly known as the ACA or Obamacare.
What is the threshold to begin deducting medical expenses under the PPACA?
10% of AGI (raised from expenses above 7.5% before the PPACA).
How does one determine the basis of gifts?
- Generally have a carryover basis; 2. A gift with adjusted basis > Fair Market Value (FMV) takes FMV basis if property is sold at a loss.
Define “capital assets.”
Assets other than inventory, accounts receivable, notes receivable, assets used in a trade or business owned for more than 1 year, or creative works (in the hands of the creator).
Define “return on capital.”
The cost of goods or property sold is recovered before any gain is realized.
Define “Section 1231 assets.”
Realty and depreciable property used in a trade or business owned more than one year.
How does one determine the basis of inheritances?
- Fair market value; 2. Always long-term holding period (except for 2010 when there was no estate tax).
Define “Long Term Holding Period.”
More than 1 year.
List the qualified small business stock exclusion of gain requirements.
- Stock held for more than five years after initial issuance; 2. Stock from active corporation with assets less than $50 million.
What is the ordinary loss deduction limit on the sale of a worthless small business stock?
$50,000 ($100,000 if married filing joint).
List the characteristics of ordinary loss deduction on sale of worthless small business stock.
- Corporation issued stock for less than $1 million; 2. Corporation must conduct an active business; 3. Taxpayer received stock from corporation in initial offering.
Describe the elements of the net capital loss deduction for individuals.
- Deductible up to $3,000 per year; 2. For AGI; 3. Also limited to taxable income; 4. Excess loss carries forward; no limit on carryforward period.
What is the maximum tax rate for capital gains from the sale of collectibles?
The maximum rate is 28%.
What is the net capital loss limit for individuals?
The loss limit is $3,000.
Define “long-term assets.”
Assets held over one year.
How can corporations use their capital loss deduction?
- Can only use capital losses to offset capital gain net income; no deduction for net capital losses; 2. Unused losses are carried back three years and forward five years.
What is the percentage of qualified small business exclusion of stock gain?
50% (increased to higher levels for certain temporary periods).
What depreciation is subject to recapture under Section 1250?
Excess depreciation (depreciation claimed over straight-line).
What is the maximum tax rate for gain attributable to depreciation claimed on real estate?
25% for straight line depreciation recapture.
What is the period of time that lookback rules apply to Section 1231 gains?
5 years.
What depreciation is subject to recapture under Section 1245?
All depreciation claimed.
Define “Section 1245 property.”
All property other than land and building.
Define “listed property.”
Assets, such as computers and vehicles (but not cell phones), that are commonly used for business and personal purposes.
List the alternatives to the Modified Accelerated Cost Recovery System (MACRS).
- Straight line for personalty; 2. AMT system - 150% declining balance; 3. Alternative depreciation system-straight line over extended life; 4. Units of production.
What is the depreciation method for realty under the Modified Accelerated Cost Recovery System (MACRS)?
The depreciation method is straight line.
What is the general convention for personalty under the Modified Accelerated Cost Recovery System (MACRS)?
The general convention is mid-year.
What is the general convention for realty under the Modified Accelerated Cost Recovery System (MACRS)?
The general convention is mid-month.
Under what circumstances can a convention other than the mid-year convention be used for all personalty?
A mid-quarter convention is used for all personalty if more than 40% of personalty is purchased in last quarter of the year.
What criteria should be considered in making a determination to expense an asset for income tax purposes?
- Tangible Personalty; 2. Lesser of business income or $500,000 in 2012; 3. Phased out dollar for dollar if tangible personalty asset purchases exceed $2,000,000 in 2012.
Describe the business use test for listed property.
- Business use must exceed 50% of total use; 2. Business use is limited to use in the trade or for the convenience of the employer; 3. Failure to meet business use means cost recovery limited to straight line; 4. But note that business and investment use can be depreciated.
What is the class life for realty?
39 years (27 1/2 years for “residential”).
What is the depreciation method for personalty under the Modified Accelerated Cost Recovery System (MACRS)?
The depreciation method is double declining balance.
Define “involuntary conversion.”
The result of a casualty (an unexpected, unavoidable outside influence like a storm, fire, shipwreck, a theft, or a condemnation).
What is the replacement period for involuntary conversions (except for condemned-business realty)?
The replacement must be made within two years from END of tax year in which the gain is realized.
What are the key differences between like-kind exchange and involuntary conversion rules?
Like-kind exchange rules are mandatory but involuntary conversion rules are elective. Like-kind exchange rules apply to gains and losses but involuntary conversion rules apply only to gains. Type of replacement property under involuntary conversion rules is narrower than like-kind property.
Is realty considered like-kind property?
All Realty is considered to be like-kind; so land is like-kind with a building.
List the requirements for deferral due to involuntary conversion.
- Disposition qualifies as involuntary conversion; 2. Must replace property with property similar or related in service or use; 3. Must be made within two years from end of tax year of conversion (three years in the case of condemnation or threat of condemnation of real property held for productive use in a trade or business or for investment); 4. Boot causes recognition of realized gain.
What is the adjusted basis of replacement property after involuntary conversion?
Cost reduced by any deferred gain.
List the qualifying property for like-kind exchanges.
- Business or investment property; 2. Not inventory or receivables; 3. Must be “like-kind;” 4. Cannot be across US borders; 5. Special rules when related taxpayers.
Describe the wash-sale rule.
Losses from the sale of securities are not recognized if similar securities are purchased 30 days before or after the sale.
Describe the principal residence-ownership test.
The taxpayer must have owned the residence for at least two of the preceding five years.
Describe the principal residence-frequency test.
The exclusion is available no more frequently than every two years; limited exceptions.
What are the requirements for the $250,000 exclusion on sale of a residence rule?
- Frequency test; 2. Ownership test; 3. Use test.
What is the gain on the sale of residence exclusion rule?
A taxpayer may exclude gains up to $250,000 ($500,000 joint return) on the sale of residence.
Describe the principal residence-use test.
The residence is used by taxpayer as a principal residence for at least two of the preceding five years.
Are losses on sales by related parties recognized?
Losses from sales of business/investment property to related parties are not recognized.
Describe the interest-exclusion rule.
Interest on state or local governmental obligations is excluded.
When can interest on Series EE savings bonds be excluded?
- Taxpayer incurs higher education expenses in year bonds are cashed in; 2. The exclusion is available only for bonds that are issued to individuals who are at least 24 years old.
Describe the claim-of-right rule.
Requires the taxpayer to include property in income in the period in which an apparent claim to the property materializes, even if it is possible that this income may have to be returned in the future.
How does one determine the amount of property dividend that should be included in income?
Value received to extent paid from earnings and profits.
Describe the tax-benefit rule.
Requires a taxpayer to include an expense reimbursement in income if the expense was deducted in a prior period and provided a tax benefit in that period.
What is the tax treatment of proportionate stock dividends and splits?
- Not a taxable event; 2. Taxpayer must adjust basis per share; 3. Option to receive cash instead triggers dividend income.
Describe the constructive receipt rule.
A cash-basis taxpayer must include property in income in the period in which the right to (or control of) the property is acquired, even if no actual cash receipt.
What is the tax treatment of child support?
Never taxable to the recipient, no deduction to payor.
Describe the personal injury exclusion rule.
Compensatory damages for physical injuries or sickness only are excluded from income.
What is the tax treatment of alimony?
- Taxed to the recipient; 2. Allowed as a “for AGI” deduction to payor.
Describe the alimony front-loading rules.
Require recapture of deductions and income if alimony payments decline more than $15,000 over the first 3 years after the divorce.
What are the requirements to qualify for alimony?
- Payment must be in cash or via expense payment; 2. Must be contingent on recipient still being alive; 3. Required by a written agreement or decree; 4. Not identified as “non-alimony.”
What is the tax treatment of gifts?
- Gifts are excluded from income; 2. Income accrued up to date of gift is taxable to donor; after, to donee.
Are scholarships taxable?
- Generally excluded up to amount of tuition and expenses; 2. No services can be required; 3. Student loans forgiven after a public service requirement are excluded from gross income of the student.
What is the treatment of life insurance proceeds?
Proceeds of life insurance received due to the death of the insured are excluded from income.
Are prizes and awards subject to taxation?
Generally taxed.
When are leasehold improvements recognized as income?
The fair value of leasehold improvements is income to the landlord if the improvements are made in lieu of rent.
What costing methodology is required for the production of goods for sale?
Full absorption costing.
Describe the cash method of accounting.
Recognizes income (and expenses) in the year in which payment is received (or paid.)
What entities are required to use the accrual method for Sales and Cost of Goods Sold?
Taxpayers for whom sales of inventory constitute a substantial source of income.
Describe the hybrid method of accounting.
Allows cash basis for all income and expenses except that sales and purchases of inventories must be accounted for under the accrual method.
Under what circumstances are health insurance proceeds excluded from income?
- Excluded if taxpayer paid premiums; 2. Excluded if employer paid premiums and reimbursement is for qualified medical expenses.
A tax payer can generally exclude the value of an employee discount that an employer provides an employee from the employee’s wages, up to what limits?
- 20% of value of services; 2. Average gross profit percentage for goods.
Define the “working condition benefit.”
A benefit provided by the employer that would be deductible if the employee had instead paid the expense, excluded from income if reimbursed by employer.
What insurance premiums paid for employees are excludible from the employer’s income?
- Group term life insurance up to $50,000 of coverage; 2. Health insurance premiums.
What types of fringe benefits are excluded from an employee’s income?
- Meals and lodging for convenience of employer; 2. Working condition expenses; 3. De minimus fringes; 4. No additional cost fringes; 5. Employee discounts; 6. Employee gifts (under $25) and safety/achievement awards.
What deductions are allowed for a Roth Individual Retirement Account (IRA)?
Zero. Deductions are never allowed for Roth IRA contributions.
What is the tax treatment of contributions of salary to “qualified” pension plans?
Deferred until distributions are made from the pension.
What is the maximum contribution that can be made to a 401(k) plan to reduce an employees taxable salary?
Allows voluntary employee contributions to reduce taxable salary up to a maximum of $17,500 for 2013.
What is the maximum contribution an individual can make to a Traditional or Roth Individual Retirement Account (IRA)?
Lower of $5,000 or earned income.
Lobbying expenses are not deductible if they are incurred to influence legislation at what levels of government?
No deduction for lobbying at the federal or state level.
List the requirements for business expense deductions.
- Must have bona fide profit motive; 2. Must be ordinary and necessary; 3. Must be reasonable in amount.
What deductions are allowed for illegal drug businesses?
Only the cost of goods sold is allowed as a deduction.
List the types of deductions that are prohibited.
- Personal expenses unless specifically allowed; 2. Expenditures benefiting more than 1 period must be capitalized; 3. Expenditures against public policy; 4. Expenses used to generate tax-exempt income.
What deductions are allowed “above the line” to arrive at adjusted gross income (AGI)?
- Alimony payments; 2. Trade or business; 3. Rent or royalty expenses; 4. Losses; 5. 50% of Self-employment tax; 6. 100% of medical insurance for self-employed; 7. Moving expenses; 8. IRA and Keogh contributions; 9. Student loan interest.
What requirements must be met to deduct moving expenses?
- New job must add 50 miles or more to commute; 2. Must be active in new job for 39 weeks during first 52 weeks after move; 3. Limited to reasonable amounts to move possessions, and transportation costs for taxpayer and others residing with taxpayer.
What is the limit on the student loan interest deduction?
Limited to $2,500 of interest on loans to finance the cost of higher education.
List the qualifying medical expenses that may be included in the computation of uninsured medical expense deduction.
- Doctors, eyeglasses, dentists, and health insurance; 2. Cost of prescribed drugs; 3. Medical transportation and travel up to $50/night/person; 4. Costs of altering home for handicapped person to the extent FMV is not increased.
How is the uninsured medical expense deduction calculated?
Total medical expenses for taxpayer, spouse, and dependents reduced by 10% or 7.5% of AGI.
Describe what is allowable for the deduction for home mortgage interest.
- Interest paid on debt relating to principal residence and second home is deductible; 2. Debt limited to $1 million on debt to purchase, construct, or improve residence; 3. Additionally, interest on $100,000 of home equity loans is deductible; 4. Points paid on loans can be deducted in a year of purchase or improvement;
What determines whether a taxpayer should take a standard deduction or an itemized deduction?
Taxpayer deducts greater of standard deduction or itemized deductions.
What is the investment interest deduction limit?
Limited to net investment income.
Describe the income tax deduction.
Personal income taxes imposed by state, local, or foreign governments are deductible; taxpayer can choose to deduct greater of state sales tax or state income tax.
Define “investment income.”
Interest, dividends, ordinary gains (not long-term capital gains unless elected by taxpayer) less investment expenses.
What type of property taxes may a taxpayer deduct as an itemized deduction?
Taxes imposed on property owned by taxpayer that is used for personal purposes.
List the characteristics of a charitable contribution.
- Must be made to qualifying organization (not political organizations); 2. Can include cash or property, but not services; 3. Written records of contribution are required; 4. Limited based on AGI.
What deductions are subject to a 2% floor?
- Employee expenses not reimbursed under an accountable plan; 2. Investment expenses; 3. Tax return preparation expenses; 4. Home office expenses of an employee; 5. Hobby expenses.
What entities make up Public “A” charities?
Government subdivisions, hospitals, churches, schools, and similar institutions operated for religious, scientific, educational, or charitable purposes.
How is the 2% of the AGI floor limit calculated?
Applied by subtracting 2% of AGI from subjected deductions.
What floor limits are applied to casualty losses on personal use property?
- $100 for each occurrence; 2. Total losses for the year are reduced by 10% of AGI.
Describe the limits on charitable contributions.
- 50% of AGI 2. Deduction for contributions of long-term capital gain property to “A” charities limited to 30% of AGI; 3. Deduction for contributions of long-term capital gain property to “B” charities limited to 20% of AGI; 4. Unused deductions carry forward 5 years.
How is casualty loss calculated for business property?
Insurance proceeds - adjusted basis of damaged property.
What entities make up Private “B” charities?
Fraternal orders, cemetery companies, and private foundations operated for religious, scientific, educational, or charitable purposes.
List the personal expenses that are deductible from AGI.
- Home Mortgage Interest; 2. Taxes; 3. Charitable contributions; 4. Casualty losses; 5. Medical expenses.
Define “casualty.”
A sudden, unexpected event damaging or destroying an asset.
What types of organizations qualify for charitable contributions?
- Public “A” Charities; 2. Private “B” Charities.
List the requirements for entertainment deductions.
- Activity must have a business purpose; 2. Substantial business discussion must occur; 3. Club dues not permitted; 4. Contemporaneous written records are required; 5. Reduced by 50%, unless compensation to employee.
What deductions are allowed for business travel?
- Limited to trips with business purpose; 2. Amount and purpose must be substantiated; 3. Meals and lodging when “away from home” overnight; 4. Meals are reduced by 50%.
List the requirements for deducting non-business bad debts.
- Must be a bona fide loan; 2. Deductible as short-term capital losses in year of complete worthlessness; 3. Partial worthlessness not deductible.
List the requirements for deducting losses for worthless assets.
- Asset must be totally worthless; 2. Treated as sold for no consideration on last day of taxable year.
List the requirements for deducting business bad debts.
- Only use direct write-off method; 2. Deducted to extent loan is partially worthless.
Define “passive activity.”
A profit-seeking activity in which the taxpayer does not materially participate in the management of the activity.
Describe the hobby deduction limitations.
- Limited to gross profit generated by hobby; 2. Can only be deducted as 2% miscellaneous itemized deductions (except for mortgage interest and property taxes); 3. Expenses must be deducted in a specific order.
Describe the exception to passive loss rules.
- Real estate professionals (minimum 750 hours employment/yr); 2. Active participation for management of rental realty.
List the requirements for home office deductions.
- Business use must be exclusive and regular; 2. Must be a principal place of business or for the convenience of the employer; 3. Must be allocated between residence and office; 4. Limited to income after non-office expenses.
What are the requirements for active participation in the management of realty?
- Taxpayer must own at least 10% of the property; 2. Taxpayer must significantly participate in decision making; 3. Maximum loss of $25,000; 4. Phased out at 50% rate for AGI exceeding $100,000.
List the order of hobby deductions that can be taken on a tax return.
- Mortgage Interest and Property Taxes; 2. Cash expenses; 3. Depreciation.
Describe the general treatment of passive activity gains/losses.
The expenses and revenues from “passive” activities are combined (netted) and the expenses in excess of revenue (the passive loss) is suspended.
When does the hobby/business burden of proof shift to the Internal Revenue Service?
When the activity generates a profit in three out of five consecutive years.
Describe the qualifying relative gross income test.
The gross income of the dependent cannot exceed the exemption amount for the year, unless one of the following exceptions is met: 1. child of the taxpayer less than 19; 2. full-time student and less than 24.
Describe the qualifying child residence test.
The child must have the same residence as the taxpayer for more than one half of the taxable year.
Describe the exemption phase-out.
Two percent of total exemptions are lost for each $2,500 increment (or portion) above the trigger AGI.
Describe the residency test.
A dependent must be a citizen, resident of U.S., or resident of Canada or Mexico.
When parents are divorced, which parent is able to claim the dependency exemption for the child?
- Parent with custody (over half the year) gets the exemption in the absence of any written agreement; 2. The custodial parent can waive the exemption to the other party (in writing by filing Form 8332).
Describe the qualifying child relationship test.
The child must be a natural, step, adopted, or foster child; a sibling or step-sibling; or a descendent of one of the above.
List the five tests for “qualifying relative.”
- Support test; 2. Gross income test; 3. Relationship test; 4. Marital test; 5. Residency test.
True or false: Phase-out of exemption applies to only personal exemptions.
False. It applies to both personal and dependency exemptions.
When does a taxpayer qualify for the head of household filing status?
The taxpayer must provide more than one-half of the cost of maintaining the home in which a qualifying child or other dependent relative lives for more than half the tax year.
Describe the qualifying child non self-supporting test.
The child must not have provided more than one-half of his or her own support.
Describe the qualifying relative support test.
The taxpayer must provide more than 50% of the dependent’s total support.
When do multiple support agreements apply?
- Applies if except for the support test, each individual would otherwise be eligible to claim dependent; 2. Each individual provides over 10% but less than half of support; 3. A written agreement allocates the dependency exemption to an individual providing more than 10% of support.
List the six tests for a child to qualify for the dependency exemption.
- Residence Test; 2. Age Requirement; 3. Relationship Test; 4. Marital Test; 5. Residency Test; 6. Not self-supporting test.
Describe the marital test for a dependent.
A dependent cannot file married joint, unless only to obtain a refund and there was no tax liability for the year.
What filing status is a surviving spouse allowed to use?
Can file married-filing-joint for two years after spouse’s death if taxpayer provides over half the cost of maintaining a home for a dependent child whose principal place of abode is with the taxpayer.
What are the requirements for selecting the head of household status?
Taxpayer must provide more than half of the cost of maintaining the household for a qualifying child or a qualifying relative (a non-relative living in the home for the entire tax year does not qualify). This home must be the qualifying child’s or qualifying relative’s principal residence for more than half of the tax year.
Define “abandoned spouse.”
- Spouse doesn’t live in house for last 6 months of year; 2. Maintain a household for at least 6 months for dependent child.
What factors can increase a taxpayer’s standard deduction?
- Taxpayer is blind at year-end; 2. Taxpayer reaches 65 by year-end.
Describe the concept of kiddie tax.
- Taxable income for child is divided into unearned and other income; 2. Net unearned income in excess of $2,000 (for 2013) for children less than age 18 and children between 19 and 23 who are full-time students is taxed at parents’ rate. However, children between 18 and 23 are included only if their earned income does not exceed 50% of their total support for the year.
Describe the Alternative Tax Adjustments.
- Difference between AMT cost recovery and regular tax; 2. No installment method allowed; 3. No standard deduction or personal/dependency exemption allowed; 4. Medical expenses only in excess of 10% of AGI; 5. Interest on home equity loans not allowed unless to improve residence; 6. No phase-out of itemized deductions.
When is the alternative minimum tax exemption phased out?
- Triggered by Alternative Minimum Tax Income over certain thresholds; 2. Phased-out at 25% of amount over trigger.
Describe the Alternative Minimum Tax Preference adjustments.
- Percentage depletion over adjusted basis; 2. Interest on “private activity” municipal bonds (except for bonds issued in 2009 and 2010); 3. Excess intangible drilling costs over 10-year straight line amortization; 4. Pre-1987 accelerated depreciation over straight line.
What are the requirements for filing a self-employment income tax return?
Must file a tax return if self-employment income is above $400.
