For Nightly Review Flashcards
Kiddie Tax
Tax to discourage parents from shifting unearned income to the lower tax bracket of their children.
*A dependent is allowed at least $2,500 ($1,250 +$1,250) reduction in unearned income.
Earned and unearned income for children
Tax due dates and related extensions for individual’s and C corporations
A automatic 6-month extension is available by filling out Form 4868 for calendar-year tax payers.
Tax due dates and related extensions for S corporations, Partnerships, Individuals
S Corp & Partnerships: Form 7004 allows for an automatic 6-month extension for calendar-year tax payers.
Claim for refund Statute of Limitations:
3 years from the due date (April 15, plus the filing extension time) or 2 years after the tax was paid, which ever is later.
Review examples from REG TBS 2023 word doc pages 53-54
Assessment of deficiency Statute of Limitations:
3 years from the date the return was filed.
A return filed before the due date is treated as filed on the due date.
The IRS generally has 10 years following the assessment to begin collection of owed taxes through a levy or court proceeding.
Review examples from REG TBS 2023 word doc pages 46-51
If there is an omission of 25% or more of gross income then the statute of limitations is 6 years.
Types of income considered gross income:
Realization of investment income (realized gain):
Adjusted basis (AB) - amt of capital in property but not yet recovered by tax benefit:
Social Security Benefits (SSB)
Example taxable SSB
Review deck for subunits 1-4
Deductible warranty expense:
Costs of purchased merchandise:
LIFO and FIFO tips:
Percentage-of-completion method:
Installment method:
Self-Employment Income:
Deductible business travel & meal expenses:
Any time spent for business and time spent for pleasure are allocated. If majority of time was spent for business then transportation (airfare) is 100% deductible without an allocation.
Foreign travel:
Traveling expenses outside the US for business must be allocated between time spent for business and time spent for pleasure.
Deductible Business Interest:
Business gifts:
Deduction is limited to $25 per person for excludible items.
A husband and wife are treated as one taxpayer even if they file separate returns.
Employee Achievement Awards:
Up to $400 of the cost is deductible by an employer for all non-qualified plan awards.
Employee achievement awards are tangible personal property awarded as part of a meaningful presentation for safety achievement or length of service.
Start-up and Organizational Costs:
Can deduct up to $5,000, costs in excess of $5,000 are capitalized and amortized proportionally over 180 months beginning in the month business begins.
FICA - Federal Insurance Contribution Act
Employer must pay all household employees who are paid more than $2,600 during tax year 2023.
FUTA - Federal Unemployment Tax Act
Employers must pay 6% of the first $7,000 paid to each employee annually. The employee does not pay any portion of FUTA.
Self-Employment Tax
Paid through estimated payments, not withholding.
Net income not included:
A self-employed person is allowed to deduct the employer’s portion of FICA paid to arrive at their AGI (adjusted-gross income). For 2023, this equals?
FICA and FUTA Report Requirement Chart
Employee Discounts:
Certain employee discounts on the selling price of property or services from the the employer are excluded from gross income.
Qualified Transportation Fringe Benefits:
Up to $300 a month can be excluded for the value of employer-provided transit and transportation.
Additionally, up to $300 a month can be excluded for employer-provided parking.
Employees can use both exclusions.
Employer-Provided Educations Assistance:
Up to $5,250 may be excluded by an employee for employer-provided educational assistance.
The assistance does not exclude the cost of meals, lodging, transportation, tool or supplies that the employee will keep after the course.
Employer-Provided Life Insurance:
Proceeds of a life insurance policy where the employer paid the premiums is excluded from the employee’s gross income.
The cost of premiums paid by the employer up to a coverage amount of $50,000 is excluded from the employee’s gross income.
Premiums for excess coverage over $50,000 paid by the employer ARE included in the employee’s gross income.
Death Benefits:
All death benefits received by beneficiaries or the estate of an employee from or on behalf of the employer are included in gross income.
Employer paid death benefits, this does not include death benefits of a life insurance plan provided by the employer.
Adjustments to Gross Income includes calculations of above-the-line deductions. Those are?
2023 Income Tax Rates and Brackets
AGI
Self Employment Tax:
Self-employed people can deduct the employer portion of FICA taxes to compute AGI.
For 2023 the deduction =
6.2% of the first $160,200 of net earnings from self-employment plus
1.45% of net earnings from self employment (no cap).
The 0.9% additional Medicare tax on the employees portion of self-employment is NOT deductible.
Self-Employed SEP and Qualified Plans:
Specified amounts can be deducted for payments to a qualified retirement or profit-sharing plan.
Self-Employed Health Insurance Deduction:
100% of payments made for health insurance coverage for an individual, spouse, and dependents can be deducted for self-employed individuals.
The deduction is limited to the earned income from the business.
Penalty on Early Withdrawal of Savings:
Deductions are allowed for penalties from early withdrawal of funds from CD’s or other time savings accounts.
Deduction can only be taken in the year the penalty occurred.
IRA - Tradional IRA Contributions
For 2023, contributions are fully deductible up to the lesser of $6,500 ($7,500 age 50 and over) or 100% of includible compensation.
An additional $6,500 ($7,500 age 50 and over) may be contributed to the IRA of a nonworking spouse or a spouse earning less income filing a joint return.
Contributions of $6,500/$7,500 can still be made even if the taxpayer is not eligible to take the deduction.
IRA distributions made before the taxpayer is 59 1/2 are subject to taxation plus a 10% penalty tax except?
Roth IRAs and Roth 401ks
Roth IRAs are not deductible.
The allowable deduction for contributions to an IRA is limited to the lesser of $6,500 or compensation (wages).
Student Loan Interest Deduction:
Below-the-line deductions are all deductions that may be subtracted from AGI to arrive at taxable income:
Standard Deduction:
When a couple is filing married jointly and are over 65 they each get the additional $1,500 deduction added to the standard deduction.
Who cannot use the standard deduction?
Itemized Deductions:
Sec. 121 excludes the gain on the sale of a principal residence, up to $250,000 per taxpayer, subject to certain rules and limitations.
Baker, an unmarried individual, sold a personal residence, which has an adjusted basis of $70,000, for $165,000. Baker owned and lived in the residence for 7 years. Selling expenses were $10,000. Four weeks prior to the sale, Baker paid a handyman $1,000 to paint and fix-up the residence. What is the amount of Baker’s recognized gain?
A. $85,000
B. $95,000
C. $0
D. $84,000
C. $0
While the correct amount of realized gain is $85,000, Sec. 121 excludes the gain on the sale of a principal residence, up to $250,000 per taxpayer, subject to certain rules and limitations. As none of the facts would lead us to reduce this exclusion, no gain is recognized on the disposition of the home.
Charitable Donation Deduction Limitations:
Charitable Donation Example:
Qualified Business Income (QBI):
The intent of Congress was to incentivize small business owners to grow their core business rather than pursue side ventures unrelated to their main business objectives.
Computation of QBID:
Taxable Income Thresholds for QBID:
For 2023, the lower threshold is $364,200 for married filing jointly $182,100 for single filers. The higher threshold is $464,200 for married filing jointly $232,100 for single filers.
Specified Service Trades or Businesses (SSTBs) Limitation Phase-In Example:
Wage and Property Limitation Phase-In Example:
Wages and Property Limitations:
Filing Requirements:
An individual must file federal tax returns if their gross income is $400 or more if self-employed, or is a dependent that can be claimed on another’s tax return and the gross income is more than the standard deduction or with unearned income over $1,250.
Foreign Tax Credit
An alternative to deduction of the tax. Credit is equal to the lessor of
- Foreign taxes paid/accrued during the tax year or
- the portion of US tax liability (before credits) attributed to all foreign-earned income.
Child and Dependent Care Credit
Can only be used by a taxpayer if they meet 2 requirements:
- Care paid for in order to maintain employment or seek employment.
- Taxpayer pays more than half the cost of maintaining a household for a dependent aged 13 and younger or an incapacitated spouse or dependent.
Care expenses are limited to $3,000 for one child and $6,000 for two or more.
Child Tax Credit and Credit for Other Dependents
Child tax credit is $2,000 per qualified child until age 16.
Credit for other dependents is $500 per qualified relative. This includes children 17 or older that qualifies.
Lifetime Learning Credit
20% of qualified tuition paid by the taxpayer. Max allowed per year is $2,000 and is limited to 20% of the first $10,000 of expenses.
Retirement Savings Contribution Credit
This credit is in addition to the exclusion or deduction from gross income for qualified contributions.
Elderly or Disabled Credit
Eligible for people under 65 or retired before the close of the tax year due to total or permanent disability.
Work Opportunity Tax Credit (WOTC)
Employers may take credit equal to 40% of the first $6,000 paid to employees from certain target groups who work at least 400 hours.
It’s 25% for employment more than 120 hours but less than 400 hours.
$10,000 for LT Family Assistance and $3,000 for Qualified Summer Youth Employees.
Adoption Credit
Max credit of $15,950 per qualified child, including special-needs adoption.
Phased out for MAGI in excess of $239,230 and fully eliminated when MAGI reaches $279,230.
Refundable Credits
Earned Income Credit (EIC) Qualifications:
To Calculate EIC:
Additional Child Tax Credit
For certain taxpayer who get less than the full amount of the Child Tax Credit.
American Opportunity Credit
Max credit of $2,500 per student per year for the first 4 years of post-secondary education. Credit may be used for qualified tuition and expenses.
At-Risk Rules
Net Operating Loss (NOL)
Passive Activity Loss (PAL) Limitation Rules
Rental Real Estate in the context of PAL
PAL Limitation - Active Participation
Excess Business Loss
Basic tax formula for Gift Tax
Amount of gift in regards to transferred Property
