Federal Taxation of Individuals

Question 1

What type of tuition scholarships are nontaxable to the recipient?

Answer 1

Tuition, books, and class supplies.

Question 2

When are health and disability insurance proceeds included and excluded from taxpayer income?

Answer 2

If taxpayer paid the premiums, insurance proceeds are excluded.

If employer paid the premiums, insurance proceeds are included.

Health insurance proceeds may be excluded even if the taxpayer’s employer paid the premiums.

Question 3

What is the limitation on excluding qualified employee discounts?

Answer 3

Goods - discount can’t be greater than the average gross profit percentage for the employer’s goods.

Services - discount can’t be more than 20% off the retail price offered to customers.

Question 4

What types of interest income are not taxable?

Answer 4

State and local municipal bond interest

Series EE or Series I savings bonds, only if used for higher education expenses for self, spouse, or dependent, and must be for qualifying tuition and fees (i.e. not room and board)

Question 5

What types of dividend income are not taxable?

Answer 5

Life insurance dividend - return of premium

Dividends received from an S corporation

Stock splits on common stock

Liquidating dividend - return of capital

Question 6

How do you calculate the taxable portion of annuity income?

Answer 6

cost or investment in the annuity / expected total annuity payment = % of each payment excluded from income taxes

Question 7

What types of injury awards are taxable?

Answer 7

Punitive damages from physical injuries

Attorney’s fees and costs recovered as part of a judgment relating to nonphysical injuries

Question 8

How is adjusted basis determined in the purchase of an asset?

Answer 8

Cost + Capital Improvements - Cost Recovery Deductions

Question 9

How is adjusted basis determined in the conversion of an asset from personal use to business use?

Answer 9

If FMV > Basis, Basis = Adjusted Basis
If FMV < Basis, Basis = Lower of adjusted basis or FMV at date of conversion

Question 10

How is adjusted basis determined in a wash sale?

Answer 10

Adjusted basis of new securities = Cost + Deferred loss from wash sale

Question 11

How is adjusted basis determined in an inheritance?

Answer 11

FMV at date of death or alternative valuation date

Question 12

How is adjusted basis determined in a gift?

Answer 12

If FMV > Basis, Basis = Adjusted basis of donor
If FMV < Basis, Basis = Lower of adjusted basis or FMV at date of gift

Question 13

What is the limit on a net capital loss?

Answer 13

$3,000 per year. The rest is carried forward indefinitely.

Question 14

When there is a net gain on Section 1231 assets, how is the gain treated?

Answer 14

It is treated as a long term capital gain and netted with other capital gains and losses.

Question 15

When there is a net loss on Section 1231 assets, how is the loss treated?

Answer 15

It is treated as an ordinary loss.

Question 16

What is the tax rate on gains on collectibles?

Answer 16

28%

Question 17

What is the tax rate on unrecaptured Section 1250 gains?

Answer 17

25%

Question 18

What is the general tax rate on a capital gain?

Answer 18

15%

Question 19

How is bad debt always treated (STCL or LTCL)?

Answer 19

Short term capital loss (STCL)

Question 20

What are some exclusions to mitigate double taxation?

Answer 20

Gifts and inheritances

Life insurance proceeds, if paid for reason of death

Accelerated death benefits from a life insurance policy if the insured taxpayer is terminally ill and benefits are used to pay for long-term care.

Foreign earned income can be excluded from US tax return if individual is (1) a US citizen whose a foreign resident for an uninterrupted entire taxable year (bona fide residence test) or (2) a US citizen is present in foreign country for at least 330 full days in any 12-month period (physical presence test)

Roth retirement plans

Question 21

What is the gross income exclusion on social security benefits?

Answer 21

Single taxpayers - if modified AGI + 50% of social security benefits is less than or equal to $25,000, social security benefits are not taxable. Otherwise, taxed on 85% of benefits.

Married filing joint - if modified AGI + 50% of social security benefits is less than or equal to $32,000, social security benefits are not taxable. Otherwise, taxed on 85% of benefits.

Married filing separate - taxable social security benefits are lesser of (a) 85% of social security benefits or (b) 85% of taxpayers modified AGI + 50% of social security benefits

Question 22

Forgiveness of debt is generally taxable to the debtor, except for:

Answer 22

Amounts excludable from income such as gifts, bequests, and inheritances

Certain student loans in qualifying forgiveness programs

Debt cancelled in Title 11 bankruptcy

Debt cancelled when debtor is insolvent

Qualified real property business indebtedness

Forgiveness of debt on principal residence

Question 23

What is the requirement for exclusion of gain on sale of principal residence up to $250,000 ($500,000 MFJ)?

Answer 23

Owned and used property as residence for at least any 2 years during a 5-year period ending with date of sale.

Question 24

What exceptions are there for the exclusion of gain on sale of principal residence when the property was not owned for at least 2 years?

Answer 24

Exclusion is prorated using # of qualifying months divided by 24 months for the following:

Change in place of employment (over 50 miles away)

Health issues to obtain specialized care

Other unforeseen circumstances (war, casualty loss of residence, divorce, legal separation, death, birth of another child)

Question 25

What is a partners/shareholders deductible loss limited to?

Answer 25

The lesser of:
- Partner’s tax basis in partnership interest
- Partner’s amount at risk
- Passive activity loss limitations if applicable.

If loss exceeds basis (making basis fall below zero), the loss is disallowed and carried forward until it can offset sufficient basis.

Question 26

How is income/loss allocated to partners in a partnership?

Answer 26

Usually based on established percentages in a partnership agreement. However, individual partners can have special allocations (i.e. bonuses) or allowances (i.e. salary, interest), which are allocated first, and reduce the overall partnership net income/loss to be allocated.

Question 27

How is income/loss allocated to shareholders of an S-corp?

Answer 27

According to number of shares owned and number of days those shares were owned.

Question 28

What are the deductions for AGI (i.e. lowers AGI)? (I-EMBRACED, Health, and Farmers)

Answer 28

I - Interest on student loans
E - Self-employment deductions
M - Moving expenses (military taxpayers)
B - Business expenses (Sch C)
R - Rental, royalties, & flow-thru entities (Sch E)
A - Alimony paid (prior to 2019)
C - Contributions to retirement plans
E - Contributions to education savings accounts
D - Jury duty
Health - Contributions to health saving plans
Farm - Farming income (Sch F)

Question 29

How much student loan interest can be deducted from AGI?

Answer 29

The lesser of qualified student loan interest paid or $2,500. The deduction has a phase out range of $30,000 for married filing jointly (starting at $155,000 MAGI) and $15,000 phase out range for single taxpayers (starting at $75,000 MAGI).

Question 30

What is the self-employment deduction?

Answer 30

Self-employed taxpayers are required to pay 15.3% in self-employment tax (i.e. FICA). TO help offset the additional FICA, self-employed individuals are allowed a deduction for AGI of 50% of the self-employment taxes.

Question 31

What is included in itemized deductions (COmMITT)?

Answer 31

Charitable contributions
Other deductions
Medical expenses
Interest expense
Taxes
Theft and casualty losses

Question 32

What is the charitable contribution limitation per year?

Answer 32

Generally, 50% AGI and excess contributions can be carried forward 5 years.

Question 33

What is the ordinary income rule for contributions of property?

Answer 33

Property is ordinary income property if its sale at FMV on the date it was contributed would have resulted in ordinary income or ST capital gain.

Includes inventory, self-created works of art, and capital assets held <1 year.

Amount deductible is generally the lower of tax basis or FMV on date of contribution.

Limited to 50% AGI in a tax year.

Question 34

What is the long-term capital gain rule for contributions of property?

Answer 34

Property is capital gain property if its sale at FMV on the date of contribution would have resulted in a LT capital gain.

Includes nonbusiness capital assets held more than 1 year and inherited assets that have increased in value, such as stocks, bonds, and personal items (i.e. furniture).

Taxpayer can claim FMV.

Limited to 30% AGI in a tax year.

If property is tangible personal property and the charitable organization doesn’t use the property in a manner related to its exempt purpose, donor can only deduct the adjusted basis of the property (for deductions more than $5,000).

Question 35

What is the limitation on deducting medical expenses paid and not reimbursed?

Answer 35

7.5% AGI

Question 36

What is the limitation on mortgage interest expense deduction?

Answer 36

Limited to $750,000 indebtedness (only applies to debt incurred after 12/15/2017).

Interest prorated if in excess of limit.

Acquisition indebtedness means debt used to buy, build, or substantially improve the home that secures the loan.

May be claimed on both a primary and secondary residence.

Question 37

Is mortgage interest deductible on a home equity loan?

Answer 37

Generally no, unless the debt is used for capital improvements to the home.

Question 38

Is investment interest expense deductible (excludes interest from passive activities)?

Answer 38

Refers to interest paid on borrowings used to make personal investments, such as margin loans in the purchase of stock.

Limited to net investment income for the year.

Unused amount is carried forward indefinitely.

Question 39

What are the deduction rules for theft or casualty losses?

Answer 39

Must exceed 10% of AGI and $100 per event. (10% AGI AND $100 per event must be reduced from deductible loss)

Deductible loss is limited to the lower of the loss in FMV or the tax basis.

Must be reduced by any insurance or government reimbursements.

Limited to federally declared disasters 2018-2025.

Question 40

What is the limitation on state and local taxes and property taxes paid?

Answer 40

Individuals can deduct the greater of state and local income taxes paid or sales taxes paid.

2018-2025 limitation is $10,000 for all of the above.

Question 41

What is a qualified business for purposes of the qualified business income deduction (QBI)?

Answer 41

Any business other than a specified service trade or business (SSTB). SSTB’s are any business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any business where the principal asset of such business is the reputation or skill of one or more of its employees/owners.

QBI deduction is 20%.