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Income Tax Flashcards

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1
Q

When does a self-employed individual need to file?

A

When his or her net earnings are at least $400.

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2
Q

How do you avoid a penalty for underpayment of estimated tax?

A

Pay the lesser of the following:

  1. 90% of the current year’s tax liability; or
  2. 100% of the prior year’s liability (or 110% of the prior year’s liability if AGI exceeded $150,000).
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3
Q

When does a hobby become a business, thereby allowing an individual to deduct expenses?

A

When there is a profit for 3 out of 5 years.

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4
Q

What factor is applied to self-employment tax paid, to arrive at the amount deducted from Gross Income to calculate AGI?

A

.07065 (1/2 of the employment tax paid)

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5
Q

How do you calculate a deductible property loss?

A
  1. Use the lesser of basis or FMV
  2. Subtract any insurance coverage
  3. Subtract $100 (floor)
  4. Subtract 10% of AGI
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6
Q

How do you calculate an unreimbursed deductible loss?

A
  1. Use the lesser of basis or FMV
  2. Subtract any insurance coverage
  3. Subtract $100 (floor)
  4. Subtract 10% of AGI
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7
Q

What is the rule for a self-employed individual to deduct home office expenses?

A

You must prove that you use the home area exclusively and on a regular basis for your business. There can be no other office location for that business. Deduction is taken after all other business-related deductions. An office in a home cannot create a loss.

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8
Q

What is the Medicare tax rate?

A

1.45% for wages up to $200k for single / $250k for MFJ
2.35% for wages over those thresholds (1.45% + .9%)
An additional 3.8% (in addition to standard capital gains rates) on investment income for taxpayers with annual income over $200k for single / $250k for MFJ

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9
Q

What is the calculation of the standard deduction for a child who has both earned and unearned income?

A

The greater of $1,100 unearned income or earned income plus $350 but no more than the single person standard deduction ($12,200).

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10
Q

Are distributions from an S corporation ever considered self-employment income?

A

No

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11
Q

For purposes of the test, self-employed income will never exceed what amount?

A

$132,900

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12
Q

What is the shortcut for calculating self-employment tax?

A
  1. Total the self-employment income

2. Multiply the total by .1413 and round up

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13
Q

What is the Child and Dependent Care Credit?

A

For expenses paid for care of child under age 13, or dependent. For purposes of exam, use 20% of expenses limited to $3,000 for one dependent or $6,000 for two or more.

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14
Q

What is the Child Tax Credit?

A

$2,000 for each child under 17. Up to $1,400 is refundable. Also can deduct $500 for each dependent that is not a qualifying child if you provide more than 50% of their support.

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15
Q

How much in gambling winnings is tax-free?

A

$5,000

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16
Q

What is the maximum Adoption Credit?

A

$14,080. In the first year you can get a refundable credit. Expenses thereafter can be written off / are deductible expenses.

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17
Q

What is the Earned Income Credit?

A

A tax credit for certain people who work and have earned income under certain amounts. It is refundable.

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18
Q

How is the gain on an installment sale taxed?

A

Recognized gain is spread over the life of the note with the following exceptions:

  1. If all payments received are in the year of sale
  2. If property is publicly traded securities
  3. If property is sold at a loss
  4. If property is sold to a related party who in turn sells the property within two years of the original purchase date.
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19
Q

What are the net Operating Loss Rules?

A
  1. NOL is not allowed to partnerships or S corporations (?)
  2. NOL sustained in one year may be used to reduce the taxable income for another year.
  3. A business can only use an NOL carryforward for up to 80% of taxable income.
  4. Carryback of losses are not permitted.
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20
Q

What is the tax rate on corporate profits?

A

21%

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21
Q

What is Section 1244 Qualified Small Business Stock?

A

A Section 1244 business is a corporation that was initially capitalized with no more than $1M. Loss of $100k/year on a joint return is considered ordinary loss, not capital loss.

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22
Q

What is the corporate accumulated earnings tax?

A

20% of earnings accumulated so as not to tax its shareholders. This is in addition to the regular corporate tax. Can generally accumulate $250k but over that need to show a business need.

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23
Q

When is the Fiduciary Income Tax Return (Form 1041) due?

A

The 15th day of the 4th month after the entity’s year ends.

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24
Q

Under what circumstances does an estate or tax need to file Form 1041?

A
  1. If there is any taxable income for the year
  2. If there is gross income of $600 or more
  3. If there is a beneficiary who is a nonresident alien
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25
Q

What is a defective grantor trust (a tainted trust)?

A

When a grantor of the trust is taxed on the income produced by the trust.

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26
Q

What is the tax treatment of a funded ILIT?

A

Investment income from the trust pays the premium, which is taxable to the grantor. Only the amount of the premium paid is taxable to the grantor. Remainder is taxed to the trust, if accumulated, or to the beneficiaries, if distributed. Trust is not subject to estate tax.

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27
Q

What are the three characteristics of a trust for it to be considered a complex trust and therefore a separate entity for income tax purposes?

A
  1. Irrevocable
  2. Grantor has not retained any “control”
  3. Income is accumulated, either because the trust document requires accumulation or the trustee has discretion to accumulate income
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28
Q

What are two characteristics of a Simple Trust?

A
  1. Normally the corpus is not distributed

2. It cannot make charitable gifts

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29
Q

True or False?
An irrevocable trust (non-grantor) trust can be taxed as either a simple trust or a complex trust depending on whether all income is or is not distributed in a specific tax year.

A

True

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30
Q

What are the Trusts and Estates exemptions?

A
  1. A complex trust required to distribute all of its income at dissolution has a $300 exemption.
  2. A complex trust not required to distribute income at dissolution has a $100 exemption.
  3. An estate has a $600 exemption.
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31
Q

What is amortization?

A

The way a business can recover the cost of an intangible asset. Intangibles are generally amortized under Section 197.

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32
Q

What is accretion?

A

Each year the portion of the discount on a bond (when purchased) that has been “earned’ is included as taxable interest income and the bond’s basis is increased. This is phantom income.

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33
Q

What is the basis in a gift received if the donor’s basis was more than the FMV on the date of the gift?

A

Upon sale of the received gift:
1. A loss is measure using the FMV on the date of the gift.
2. A gain is measured using the donor’s basis.
3. If the sale price of the gift is between the donor’s basis and the FMV on the date of the gift, no gain or loss is recognized.
(See diagram)

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34
Q

What is depreciation/cost recovery?

A

Deductions allowed for the wear and tear of property used in a trade or business or held for the production of income. When a business purchases equipment and takes depreciation (cost recovery deduction), the CRDs offset the business’s ordinary income.

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35
Q

What is the Modified Accelerated Cost Recovery System (MACRS)?

A

It applies to all recovery property (not land or intangibles) placed in service after 1986. Prior to 1986, ACRS was used. Straight line is an option under MACRS, but half-year convention must be used.

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36
Q

What is Section 1245 property and is it 5 or 7 year?

A

5 year includes:
computers, autos & light duty trucks
7 year includes:
office furniture and fixtures

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37
Q

What is Section 1250 property and is it 27.5 or 39 years?

A

27.5 year includes:
residential rental property
39 year includes:
nonresidential real property

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38
Q

Under MACRS (which should be used unless told otherwise)

A

Year 1 is 20% or 14.29% (5 year or 7 year)

Year 2 is 32% or 24.49% (5 year or y year)

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39
Q

What is Section 179 property?

A

Tangible property that a business is allowed to expense (rather than capitalize) during a taxable year, up to a limited dollar amount.

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40
Q

What is the 179 deduction allowed?

A

Up to $1,020,000 of qualifying property in the year of acquisition. Qualifying property is generally tangible personal property (1245 property) purchased for use in a trade of business. Maximum cost that can be expensed is reduced dollar for dollar by the cost of qualifying property placed in service during that year that exceeds $2,550,000.
You cannot create a loss with this deduction, but unused can be carried over to the next year.

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41
Q

What are the rules for property to qualify for a like-kind exchange?

A
  1. Must be real property
  2. Real property inside the U.S. and real property outside the U.S. are not like kind
  3. Must be like kind (for example, rental property for rental property)
  4. Taxpayer must use the acquired property in a trade or business
42
Q

For like-kind exchange questions, you should use only three numbers on the exam. What are they?

A
  1. FMV of property received
  2. Adjusted basis of property given up
  3. Boot - anything that is not qualified or like-kind
43
Q

In a like-kind exchange, what is the substitute basis of the property received?

A

The FMV of the asset received less any gain realized in the transaction but not recognized.

44
Q

What is the time limit on a like-kind exchange?

A

Property to be received must be identified on or before 45 days after the transfer and/or received within 180 days after the transfer.

45
Q

What happens when a taxpayer exchanges like-kind property with a related taxpayer and within two years the related party disposes of the property?

A

The gain not recognized in the exchange is recognized on the date of the sale.

46
Q

How much in net capital losses can be used to offset ordinary income in a single year?

A

$3,000

47
Q

What rate are long-term gains from the sale of collectibles sold at?

A

28% - for all brackets

48
Q

Long-term gains from the sale of real property (Section 1250 property) are subject to capital gains tax rates. But how is the portion of any gain that is recognized as a result of depreciation taxed?

A

It is subject to the depreciation “recapture” rate.
25%
So, if property is purchased for $100k, over the years taxpayer has taken $25k of depreciation and sells the property for $140k, gain is $65k. Of that:
$25k is taxed at 25% (recapture rate)
$40k is taxed at LTCG rate

49
Q

What is section 121?

A

The Code section that allows for the exclusion of gains up to a limit from the sale of a principal residence, provided eligibility requirements are met.

50
Q

Can a person qualify for a Section 151 exclusion and a 1031 like-kind exchange?

A

Yes, if all the requirements are satisfied.

51
Q

What kind of property is subject to Depreciation Recapture?

A

Section 1245 property.

52
Q

When a business sells Section 1245 property for a gain, what is the tax treatment?

A
  1. Business must look back and recapture the lesser of total CRDs taken OR the gain realized as 1245 gain (ordinary income)
  2. Recover any excess gain as 1231 gain (capital gain)
53
Q

What kinds of property is considered 1231 property?

A
  1. Depreciable tangible and intangible personal property

2. Real property - whether or not its depreciable

54
Q

When a business sells Section 1245 property for a loss, what is the tax treatment?

A

When the amount realized is less than the adjusted basis, the resulting loss is treated as ordinary loss.

55
Q

What is the recapture rule for an installment sale?

A

If you make an installment sale of tangible personal property, all depreciation recapture must be reported as income in the year of disposition.

56
Q

What are the related party rules for like-kind exchanges and installment sales?

A

When a taxpayer exchanges like-kind property with a related taxpayer and within two years the related party disposes of the property, any gain not recognized in the exchange is recognized on the date of sale.

57
Q

What is the rule for a Charitable Bargain Sale?

A

If a charitable deduction is available, the basis of the property sold to the charity for less than fair market value must be allocated between the portion of the property “sold” and the portion “given” to charity, based on the fair market value of each portion.

58
Q

What are the preference items that need to be added back to calculate AMT?

A

Private-activity municipal bonds
Oil and gas percentage depletion/excess Intangible drilling costs (percentage depletion is the excess depletion over the property’s adjusted basis)
Depreciation (ACRS/MACRS -but not straight line)

59
Q

What are the two big add-back items for the AMT (itemized deductions not allowed for AMT calculation)

A
  1. Property, state, city/income and sales tax

2. Incentive stock option bargain element

60
Q

What is the AMT payable?

A

If the regular tax is less than the AMT amount, the difference between the two is the AMT payable.

61
Q

What is the general rule for passive activity losses?

A

They may only offset profit from other passive activities.

62
Q

How is income from a publicly traded partnership treated/taxed?

A

As portfolio income, like dividends, on Schedule B. It may not be sheltered by passive losses from any other source.

63
Q

How are losses from a publicly traded partnership treated/taxed?

A

They may not be used to offset passive income from any other sources. Net loss from a PTP must be carried forward and used only against the future income from that same partnership or when the partnership is sold.

64
Q

What is the exception to “passive” loss rules for real estate?

A

If you make decisions with respect to the real estate and have more than 10% ownership, you are an active participant and can:

  1. Deduct up to $25,000/year of net losses from the real estate activity (phased out for AGI between $100k and $150k).
  2. Deduction can offset active or portfolio income.
  3. Any loss beyond those limits is subject to passive loss rules.
65
Q

What is the tax treatment of income from renting your principal residence?

A

If you rent it out for 14 days or less, the income is not included in gross income, but you cannot deduct any expenses.

66
Q

How long can someone use their vacation home and not lose its rental characteristics?

A

When the owner’s use of the home for personal purposes exceeds the longer of 14 days or 10% of the rental period.

67
Q

What is the exception to passive loss rules when it involves equipment leasing?

A

A closely held C corporation that is not a personal service corporation may use passive losses to offset active, but not portfolio, income. (NOT available to S Corporations.)

68
Q

What is the tax treatment of alimony payments for divorces beginning January 1, 2019?

A
  1. Payments are not deductible to payor

2. Not included as income to recipient

69
Q

Tax treatment of alimony payments for divorces prior to January 2, 2019?

A

Payments were deductible to payor if made in cash and for benefit of ex-spouse. If alimony decreases too fast, it is a disguised property settlement and alimony deducted will be recaptured as ordinary income.

70
Q

What is the first rule about charitable deductions?

A

You cannot deduct more than 60% of AGI for cash gifts. Any contribution in excess of such limit is carried forward as an itemized deduction for five years, or if sooner, death.

71
Q

After you have calculated 60% of AGI for maximum charitable deduction, what do you do to calculate deduction for cash gifts?

A
  1. Calculate the eligible amount given to public charities (50% of AGI)
  2. Calculate the eligible amounts given to private charities (30% of AGI)

When those are added, any excess beyond 60% of AGI must be carried forward.

72
Q

What are deduction rules for charitable donations of appreciated property?

A

The only difference applies when calculating the eligible amount give to a public charity (50% of AGI). Instead of 50% of AGI, you must limit the deduction to 30% of AGI unless you elect to use basis rather than FMV. If you use basis, you can deduct up to 50% of AGI.

73
Q

What is the deduction for contributions of ordinary income property?

A

The deduction is limited to basis

inventory, a copyright, work of art created by taxpayer, short-term capital gains property, use-related property

74
Q

What is the deduction for artwork?

A

Use basis (subject to limits), unless the art can be used by the recipient, then you can use FMV (subject to limits)

75
Q

What is the charitable deduction limited to for loss property?

A

FMV

76
Q

What deduction is allowed for a charitable contribution by a corporation ?

A

No more than 10% of its taxable income.

77
Q

What is the rule for a charitable contribution of inventory by a corporation?

A
  1. Can deduct its basis plus 1/2 of unrealized appreciation, as long as total does not exceed twice its basis.
  2. Must be for the ill, needy, or care of infants.
78
Q

What is a casualty loss?

A

A casualty is a complete or partial destruction of property resulting from an identifiable event from a federally declared disaster.

79
Q

How do you calculate the deduction for a casualty loss?

A
  1. Use the lesser of basis or FMV
  2. Subtract any insurance coverage
  3. Subtract $100 (the floor)
  4. Subtract 10% of AGI
80
Q

How do you calculate the deduction for a home office (must be self-employed)?

A
  1. Calculate the net income from that self-employment (Schedule C).
  2. Deduct the home office expense from the net income.
  3. Home office deduction cannot create a loss.
81
Q

What factor should you multiply self-employed income by to arrive at amount of self-employment tax?

A

.1413

82
Q

What are FICA taxes?

A

Federal Insurance Contributions Act taxes (SS and Medicare)

  1. The employee and employer each pay (6.2% + 1.45%) or a total of 15.3% up to W-2 earnings of $132,900.
  2. Above $132,900, each pays Medicare taxes of 1.45%, or a total of 2.9% (unlimited).
83
Q

On the exam, how much of the allowable expense should be used for the credit for child and dependent care expenses?

A

20% of the qualifying expense, up to $3,000 for one child or $6,000 for two or more. (The 3k and 6k are limits on the allowable expenses - 20% of those limits for deduction.) AND both parents must have income.

84
Q

What tax credits are refundable?

A
  1. Child Tax Credit (partially refundable - up to $1,400)

2. Earned Income Credit

85
Q

Can Net Operating Loss be carried forward?

A

Yes, indefinitely, but not carried back.

86
Q

What Form number is the Partnership information return?

A

1065

87
Q

What is partnership basis?

A
  1. Cash contributed
  2. Loans made by partner to partnership
  3. Share of other loans made to the partnership that partner may be responsible for
88
Q

What is S corporation basis?

A
  1. Cash contributed
  2. Direct loans made by shareholder to the corporation
  3. Basis is adjusted up for any income or gain for the year
  4. Basis is adjusted down for any corporate loss for the year
89
Q

Under which tax Code section are Intangibles amortized?

A

Section 197 Intangibles

90
Q

What is a Section 179 Deduction?

A

A deduction taken when a taxpayer elects to expense a purchase in one year, rather than write it off over 5 years. Up to $1,020,000 of new Section 1245 can be expensed. A Section 179 deduction cannot create a loss.

91
Q

What is a 1031 exchange?

A

An exchange of certain properties held either for investment or for use in a trade or business that does not recognize any gain or loss.

92
Q

What property can not be used in a 1031 exchange?

A

Inventory of a business
Non-business tangible/personal property
Personal residence
Marketable securities

93
Q

How far must a taxpayer move for a job so that he can qualify for the exception to the two year rule to exclude gains from the sale of a residence.

A

50 miles

94
Q

What is a RELP?

A

Non-publicly traded partnerships (real estate limited partnerships). The netting process for these is generally reported on Schedule E.

95
Q

What is a MLP?

A

A publicly traded partnership (Master Limited Partnership or PTP).

96
Q

What are Insurance related phantom income sources?

A
  1. Any type of lapse with a loan

2. Section 162 life and disability

97
Q

What are Investment related phantom income sources?

A
  1. Zero/STRIP income
  2. TIPS
  3. Declared but not paid dividends and CGs
98
Q

What are Tax related phantom income sources?

A
  1. K-1 income from LP/FLP

2. Recaptures

99
Q

What are Retirement related phantom income sources?

A
  1. ESOP distribution (basis only)

2. Secular trust

100
Q

If a third year of alimony is paid, and the second year is more than $15k higher than the third year, then use second calculation for recapture. What is it?

A

Total Alimony Paid - 37,500 - (third year paid x 2)

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