Federal Taxation of Individuals Flashcards
What are the requirements of Qualified Child?
CARES
Close relative
Age limit (<19 yrs old or < 24 FT student for >5 mos.
Residency and filing requirements (more than 1/2)
Eliminate gross income test
Support test (more than 1/2)
What are the requirements of Qualifying Relative?
SUPORT
Support test (more than 1/2)
Under a specific amount of (taxable) gross income test - $5,050
Precludes dependent filing a joint tax return test
Only citizens (residents of US/Canada or Mexico) test
Relative test, or
Taxpayer lives with individual for whole year (for non-relative).
What is included in Individual Tax Return’s Gross Income?
W: Wages
I: Interest
D: Dividends
S: State tax refunds
A: Alimony received
B: Business income
C: Capital gains/loss
I: IRA income (I = Interesting)
P: Pension & Annuity
R: Rental income/loss
K: K-1 flow-through income/loss
U: Unemployment compensation
S: Social Security benefits
O: Other income
What is included in the Individual Tax Return’s Adjustments for AGI?
E: Educator Expenses
I: IRA Contributions
S: Student Loan Interest
H: Health Savings Account Contributions
M: Moving Expenses
I: Interest Withdrawal Penalty
S: Self-Employment Tax (one-half)
S: Self-Employment Health Insurance
S: Self-Employment Retirement Contributions
A: Alimony Paid
What is included in the Individual Tax Returns Itemized Deduction?
M: Medical expenses in excess of 7.5% of AGI
T: Taxes (State/Local) e.g. state income taxes, property taxes - maximum of $10,000
I: Interest expense
C: Charitable contributions
C: Casualty/Theft loss
G: Gambling losses
What is the exclusion from individual’s gross income on employer’s premium payment on employee’s life insurance?
up to $50,000
What is the exclusion from Individual’s gross income - Employer’s payment on behalf of employee’s educational expenses (undergraduate and graduate level education)?
up to $5,250
How do you treat the employer’s nonaccountable plan reimbursements?
taxable at 100% (reflected in taxpayer’s W-2
How do you treat the employer’s reimbursement of taxpayer’s moving expenses?
It is considered as fringe benefits and taxable to the employee.
What is the tax exemption requirement on the accumulated interest on the Series EE bonds?
The exceptions are the following:
- purchaser of the bonds must be the sole owner of the bonds or joint owner with his or her spouse
- post- 1989 bonds
- taxpayer is over 24 when issued
- used to pay for higher education
- reduced by tax-free scholarship, of the taxpayer, spouse, or dependents
If the taxpayer applied the itemized deduction in prior year, how do you treat the state tax refund received in the current year?
Taxable income would only either be the state tax refund received or the itemized deduction amount exceeded by the standard deduction.
State tax refund is includable in gross income only to the extent that the original deduction provided a tax benefit.
What is the exception to 10% penalty tax on early withdrawal of traditional IRA?
Generally, a premature distribution prior to age 59 1/2 from a traditional IRA is subject to a 10 percent penalty tax. Certain exceptions to this tax are available and are contained in the mnemonic “HIM DEAD TED.”
Homebuyer (first time): Distribution used toward the purchase of a first home within 120 days of distribution ($10,000 maximum exclusion)
Insurance (medical if unemployed and with 12 consecutive weeks of unemployment compensation)
Medical expenses in excess of percentage of AGI floor
Disability (permanent or indefinite disability, but not temporary disability)
Education (college tuition, fees, books, etc.)
Adoption or birth of child made within one year from the date of birth or adoption ($5,000 maximum exclusion)
Disaster: Qualified natural disaster ($22,000 maximum per disaster)
Terminal illness or death
Emergency expenses (for personal or family emergency, up to $1,000 per year)
Domestic abuse victims (lesser of $10,000 or 50 percent of retirement account)
Jackie is 21 years old and is a full-time student at the local community college. She is married to Bill and they have no children. Jackie and Bill live in Jackie’s parents’ basement while they both finish college. Bill is 25 years old and is also a full-time student. Jackie’s parents pay more than half of Jackie and Bill’s support. Jackie has no gross income and Bill has $2,000 from a part-time job. Bill and Jackie file a joint return and received a refund because their tax liability is zero. Can Jackie’s parents claim Jackie and Bill as dependents on their tax return?
Jackie qualifies as her parent’s qualifying child (CARES). Bill qualifies as Jackie’s parents’ qualifying relative (SUPORT). Even though Jackie and Bill file a joint return, they can still be considered dependents because they receive a refund and their tax liability is zero.
Jane is 20 years old and is a sophomore at Lake University. She is a full-time student and does not have any gross income. Jane spends the holidays and summers at home with her parents. Her total support for the current tax year is $30,000, including a scholarship for $5,000 to cover her tuition. Jane used $12,000 of her savings and her grandparents provided $13,000. Which of the following statements regarding the dependency rules for Jane is true?
Jane does not qualify as a dependent for her grandparents as a qualifying child or relative. With respect to her grandparents, Jane’s scholarship is treated as support and thus Jane provides more than half of her own support ($12,000 savings + $5,000 scholarship = $17,000; $17,000/$30,000 = 0.57 = 57%).
Jane does qualify as a dependent of her parents because she is under 24, a full-time student, and the scholarship does not count as support with respect to her parents. She also meets all other tests of qualifying child for her parents.
Sue is 49 years old and has $10,000 in U.S. Series EE Savings Bond interest this year and paid $10,000 of qualifying educational expenses for her dependent daughter. In which of the following conditions is Sue allowed to exclude the interest on the savings bond from her gross income?
Interest on Series EE Savings Bonds is tax-exempt when it is used to pay for higher education for the taxpayer, a spouse, or dependents. The amount paid for higher education is reduced by any tax free-scholarships received. Because Sue’s $40,000 AGI is under the single phase-out threshold, the interest may be excluded.
How do you treat the disability paid to the employee in their tax return?
If the insurance was paid by the employer as nontaxable fringe benefit, then the disability pay is taxable. If the employee paid the disability insurance premiums after tax, then the benefits received would not be included in gross income.
How are the 1/2 self-employment tax and self-employment earnings deducted on the taxpayer’s income tax return?
The deduction for one-half of self-employment tax and self-employment health insurance are adjustments from the total gross income and NOT deducted from the self-employment earnings.
How do you calculate the adjustment for self-employment tax paid?
(1) Calculate the self-employment income
(2) Calculate the Net earnings from self-employment by multiplying the Self-employment income by 92.35%
(3) Calculate the self-employment tax by multiplying the Net earnings from self-employment by fully 15.3% (12.4% Social Security and 2.9% Medicare)
(4) Calculate the adjustment for self-employment tax paid by multiplying the self-employment tax by 50%
How are the business meals, health insurance to self-employer and state income taxes for business treated in the self-employer’s tax return?
*Business meals are only 50% deductible.
*Health insurance to self-employer - not deducted on Sch C, 100% is an adjustment for AGI
*State income taxes for the business is not deducted on Sch C, an itemized deduction.
Note that while state and local business taxes are fully deductible on Schedule C, state and local income taxes are always a personal expense that can only be deducted on Schedule A.
What is the requirement for the residence to be treated as a personal/rental residence, for the expenses to be prorated between personal and rental use?
Step 1 - Rental days is more than 14 days, AND
Step 2 - Personal use for the greater of:
(a) more than 14 days, or
(b) 10% of the rental days.
What is the treatment of the payment to a taxpayer for services render (1) as shareholder in an S corporation, (2) as partner in general partnership?
*Shareholder in an S corporation
- classify payments as deductible wages reportable in W-2
*Partner in a general partnership
- classify payments to the partner as guaranteed payments reportable on Schedule K-1 as ordinary income.
- deductible expenses on US Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss)
What are the income received by the taxpayer considered self-employment income?
*unincorporated sole proprietorship (Schedule C)
*general partnership - guaranteed payments to partners for services provided to the partnership are self-employment income to the recipient. Guaranteed payments are therefore subject to self-employment (Social Security and Medicare) tax in addition to income tax.
Note: A shareholder in an S corporation receives a salary, rather than a guaranteed payment, for services provided to the corporation. The shareholder is employed by the corporation, not self-employed, so half of the Social Security and Medicare taxes are paid by the corporation and half are withheld form the shareholder’s salary.
What is a Retirement Savings Contributions Credit (Saver’s Credit)?
A nonrefundable tax credit is available for low- and moderate-income taxpayers for contributions to a qualified employer-sponsored retirement plan or IRA.
Eligible Taxpayers
- at least 18 years old by the close of the tax year
- Not a full-time student
- Not a dependent of another taxpayer
Allowable Credit
Tax credit is 10%, 20%, or 50% of the taxpayer’s contribution to a qualified retirement plan for the year. The credit rate depends on the taxpayer’s filing status and AGI. The maximum contribution eligible for the credit is $2,000 per taxpayer. NO carryover is allowed.
