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CFP > Income Tax Compliance & Calculations > Flashcards

Income Tax Compliance & Calculations Flashcards

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1
Q

Form 1040EZ

A
  • Can be used instead of form 1040 if the taxpayer derives all income from wages, salaries or tips and has income of less than $100,000 annually.
  • Cannot claim any dependents or make adjustments to income.
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2
Q

Married Filing Jointly

A
  • requires clients to be legally married on the last day of their tax year.
  • can be used by a widow in the year of the spouse’s death and two years thereafter if they continue to provide a household for a dependent child and remains unmarried.
  • both taxpayers are jointly and severally liable for the tax liability.
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3
Q

Married Filing Separately

A
  • used if the taxpayers want to avoid being jointly and severally liable .
  • usually results in higher tax liability.
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4
Q

Filing Single

A

-must be unmarried, divorced or legally separated on the last day of the tax year.

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5
Q

Filing Head of Household

A
  • must be single or separated from a spouse for the last six months of the tax year and must pay half the cost of providing a household that is the principal place of abode for a child or dependent for at least half of the year.
  • entitled to a higher standard deduction.
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6
Q

Exclusions from income

A
  • property received as a bequest or gift
  • amounts received under states workmans comp
  • damages on account of personal physical injuries or sickness
  • payments received under accident, health, or long-term care insurance policies.
  • return on original investment in annuities and sales of property.
  • employer paid life insurance premiums up to $50,000
  • reimbursement for qualified moving expenses
  • child support payments received
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7
Q

Imputed Income

A
  • income that has to be reported even though the taxpayer was not in receipt of it.
  • Zero-Coupon Bonds
  • If a taxpayer loans an amount greater than $10,000 with an interest rate lower than the AFR. They must report the difference between the AFR and interest rate. does not apply if the loan is used to buy income producing assets. Also does not apply if the outstanding loan balance does not exceed $100,000 in the year.
  • When property is sold in installments the AFR will be used to discount the the payments to be received, with the difference between the present value and future value reported as interest income. Which is then treated as ordinary income.
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8
Q

Adjustments for adjusted gross income

A
  • contributions by self-employed persons to pension, profit-sharing, and annuity plans.
  • Cash contributions of up to $5,500 for each spouse into a deductible IRA (pending phase out limits)
  • Alimony or separate maintenance payments (paid to the taxpayer)
  • one-half of self-employment tax
  • 100% of medical insurance costs paid for coverage on self-employed taxpayer, spouse, and dependents (limited to the amount of self-employment income)
  • Penalty on early withdrawal of savings. NOT from retirement accounts
  • moving expenses if moving to a new location for work
  • interest on qualified education loans up to $2,500
  • contributions to HSA
  • certain business expenses of reservists, performing artists, and fee-based government officials.
  • domestic production activities
  • education expenses with AGI below $65,000 or $130,00 jointly.
  • Educator expenses for teachers.
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9
Q

Traditional IRA Active Participant AGI Phaseout Ranges

A
  • Single- $62,000-$72,000
  • Married Jointly covered by plan - $99,000-$119,000
  • Married Jointly not covered - $186,000-$196,000
  • Married Separately- $0-$10,000
  • if you fall between the ranges, partial deduction may be claimed.
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10
Q

Medical Expenses Deduction

A
  • taxpayers may only deduct medical costs to the extent that they exceed 10% of AGI.
  • expenses that can be deducted: insurance premiums for medical or long-term care, prescriptions, doctor and hospital costs, dental work, travel and overnight stays necessary for medical care.
  • Any costs reimbursed by a health plan are not deductible.
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11
Q

Taxes Paid Deduction

A
  • Personal property taxes
  • real estate taxes on a unlimited number of properties
  • the part of an auto registration that is based on the value of the vehicle (if any)
  • the greater of 1) state and local income taxes 2) state and local sales tax
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12
Q

Mortgage Interest Deduction

A

-mortgage interest on a principal and a second residence is deductible up to a maximum acquisition cost of $1,000,000 and interest on home equity loans is deductible up to $100,000

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13
Q

Mortgage Points Deduction

A
  • points paid on the acquisition of a principal residence are deductible in the year paid, even if paid by the seller.
  • Points paid on a refinance, must be amortized over the life of the loan.
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14
Q

Mortgage Insurance Premium Deduction

A
  • taxpayers can deduct the premiums paid on mortgage insurance related to loans taken out after Dec 31, 2006.
  • Phased out when AGI reaches $100,000. Taxpayers lose $1,000 for every fraction that their AGI exceeds $100,000 and is therefore phased out at $110,000.
  • for married filing separately, phase out range is $50,000 to $55,000.
  • expired on Dec 31, 2016
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15
Q

Qualified Charitable Contribution Deduction

A
  • cash and property can be deducted to qualified charitable organizations up to 50% of AGI.
  • contributions of appreciated capital gain property are deductible at their fair market value up to 20 or 30% of AGI, depending on the entity receiving the contribution.
  • taxpayers over the age of 70 1/2 can directly contribute up to $100,000 from a traditional IRA to charity and treat it as their RMD. It is treated as an exclusion from taxation as opposed to a deduction.
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16
Q

Casualty and Loss Deduction

A

-casualty and theft losses in excess of 10% of AGI, less $100 per loss, are deductible.
-casualty losses are damage or destruction of property from sudden, unexpected, or unusual cause, such as fire, earthquake, storm or car crash.
-Only the amount of loss that exceeds any reimbursement from insurance is deductible.
-

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17
Q

Gambling Losses Deduction

A

-gambling losses are deductible to the extent of gambling income.

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18
Q

Investment Interest Deduction

A
  • investment interest is interest from loans attributable to property held for investment.
  • deductible to the extent of net investment income.
  • interest on a margin account is investment interest
  • investment expenses are deductible only to the extent that they exceed 2% of AGI floor for miscellaneous deductions.
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19
Q

Itemized Miscellaneous Deductions

A
  • are only deducible to the extent that the aggregate of all the miscellaneous deductions exceed 2% of AGI.
  • Include: Tax return preparation fees, home office expenses, investment expense, professional dues/subscriptions, unreimbursed employee expense, union dues, work clothes, safe-deposit box fee, uniforms, hobby expense to the extent of hobby income.
  • Any activity producing profit in 3 out of 5 consecutive years is a business instead of a hobby, for horses a profit in 2 out of 7 years in sufficient.
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20
Q

Phaseout of Itemized Deductions (taxpayer relief act of 2012)

A
  • $216,500 for single taxpayers, $287,650 for head of household, $313,800 for MFJ and $156,900 for MFS.
  • reduces itemized deductions by 3% of the amount by which AGI exceeds the threshold, with a maximum reduction of 80% of the otherwise allowable deductions, excluding medical expenses, casualty losses, gambling losses, and investment interest.
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21
Q

Personal and Dependency Exemptions

A
  • subject to phaseout reinstated by taxpayers relief act of 2012.
  • under the phaseout the total amount that may be claimed is reduced by 2% for every $2,500 or fraction thereof by which AGI exceeds the applicable threshold.
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22
Q

Criteria to qualify as a dependent

A
  • be a citizen of USA, Canada, or Mexico
  • Not file a joint return with another taxpayer, unless the return was filed in order to claim a refund.
  • not claim another person as their own dependent
  • The spouse of a taxpayer cannot be claimed as a dependent, but a taxpayer can claim a personal exemption for a spouse.
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23
Q

Criteria to qualify as a child dependent

A
  • under the age of 19, or 24 if a full time student for at least 5 months during the year, or any age for permanently disabled
  • lives with the taxpayer for more than half the year
  • child does not provide more than half of his or her own support
  • child must be younger than the taxpayer, unless totally disabled
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24
Q

Kiddie Tax

A
  • children under the age of 19 (24 if a student) can have unearned income (rents, interest, dividends, capital gains) of $1,050 and use their standard deduction to shelter it from tax
  • the next $1,050 of income is taxed at the child’s rate (10%).
  • Any additional income above this limit would then be taxed at the parents marginal tax rate.
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25
Q

Older Dependent Child with unearned income

A
  • with a dependent child over the age of 19 (or 24 if a student), the first $1,050 of unearned income is sheltered from tax by the standard deduction
  • any additional unearned income is then taxes at the child’s rate.
26
Q

Older Dependent Child with earned and unearned income

A

-with a dependent child over the age of 19 (24 if student) the standard deduction will be the greater of $1,050 or $350 plus the individuals earned income, up to the standard deduction for a single tax payer of $6,350.

27
Q

Self Employment Tax

A
  • because self employed individuals pay no FICA taxes they must pay self employment taxes.
  • it applies to all net income derived form self-employment activities, provided the income is greater than $400.
  • it is based on net self-employment earnings - not on taxable income
28
Q

What does self employment include?

A
  • the distributive share of partnership income allocated to general partners or to managing members of an LLC (reported on k-1)
  • income reported on schedule C
  • farm income reported on schedule F
  • amounts paid to those serving on boards of directors of corporations
  • income of ministers, priests, and rabbi’s
  • part time earnings
29
Q

Income not considered self employment income

A
  • Allocated share of S corporation earnings
  • S corporation wages
  • dividends, interest, and capital gains
  • rental income
30
Q

Calculating Self Employment Tax Amount

A
  • 92.35% of the income is subject to self employment taxes
  • 12.4% social security tax up to $127,200 of income
  • Medicare tax of 2.9% on amount subject to tax
  • additional .9% on amount over $200,000.

-Half of self employment tax is deductible from gross income in the calculation of AGI.

31
Q

Taxpayers with wages and Self-Employment income

A

-the social security tax of 12.4% is limited to the cap of $127,00, which must be reduced by the amount of wages of which social security taxes were levied against.

32
Q

Domestic Employee Taxes (Nanny Tax)

A
  • taxpayers who have domestic employees must also pay the payroll taxes on the domestic employee’s salary with their individual income tax returns.
  • the entire wage amount would be subject to 15.3% (12.4% for social security and 2.9% medicare tax).
  • they do not get to claim any deductions for AGI
33
Q

American Opportunity Tax Credit

A
  • taxpayer receives a tax credit of 100% of first $2,000 and 25% of the second $2,000 paid for tuition for the taxpayer, the spouse, their dependents, during the first 4 years of post secondary education.
  • phaseout range is $160,000 to $180,000 for Joint Filers ($80,000-$90,000 for single tax payers).
  • taxpayers can receive up to 40% of the credit as a refundable tax credit
34
Q

Lifetime Learning Credit

A
  • taxpayer is allowed a credit of 20% of the first $10,000 spent on qualified tuition expenses for higher education for the taxpayer, the spouse, or any of their dependents .
  • maximum is $2,000 per tax return
  • phase out is $112,000 to $132,000 for joint $56,000 to $66,000 for single filers
  • graduate expenses are eligible.
35
Q

Child Tax Credit

A
  • if a child, descendant, stepchild, or eligible foster child lived with the taxpayer for at least half of the year and can be claimed as a dependent, the taxpayer is entitled to $1,000 for each child.
  • reduced by $50 for each $1,000 or fraction thereof by which the taxpayers AGI exceeds $110,000 for joint filers or $75,000 for single
36
Q

Child Care and Dependent Credit

A
  • each taxpayer is allowed a credit of 20% (higher if AGI is less than $43,000) of the amount of dependent care expenses paid to allow a taxpayer to be gainfully employed.
  • to be eligible the taxpayer must provide a home for a dependent under the age of 13 or an older dependent/spouse who is incapable of self care.
  • maximum amount of expenses to calculate the credit is the lesser of the amount of income generated by the lowest paid spouse, or $3,000 for on dependent and $6,000 for 2 or more dependents.
37
Q

Child/Dependent Care Credit Coordination with an FSA

A
  • the amount contributed to an FSA reduces the maximum amount of eligible expenses for the child care credit.
  • for clients in the 28% tax bracket or higher, it is better to take advantage of employer provided FSA plans (excluding income from tax), rather than using the credit.
38
Q

Adoption Credit

A
  • credit of up to $13,570 can be claimed for qualified adoption expenses.
  • qualified expenses include: adoption fees, court costs, attorney fees, expenses directly related to and incurred for the principal purpose of a legal adoption.
  • adopted child must be under the age of 18 or physically or mentally incapable of caring for themselves.
  • For special needs adoption the credit is $13,570 regardless of expenses paid.
39
Q

Low-Income Credit

A
  • maximum annual contribution eligible for the credit is $2,000.
  • the credit is 50% of the contribution for those with adjusted gross income below the phaseout range and is reduced to 20 or 10% within the phaseout range.
  • MFJ phaseout is 37-62k
  • single phaseout is 18.5-31k
  • head of household phaseout is 27.75-46.5k
40
Q

Premium Tax Credit

A
  • for taxpayers who purchase health insurance through the marketplace.
  • household income must be between 100% but less than 400% of the Federal Poverty Line
  • those who are eligible can choose to have some or all of it paid directly to the insurance company.
41
Q

Foreign Tax Credit

A
  • a client can use tax paid to other countries on income from foreign sources as a credit against the US tax or as a deduction to reduce income.
  • this is the only tax credit that can be used as either a tax credit or a deduction.
42
Q

Estimated Tax Payments

A
  • taxpayer has a choice of paying 90% of the tax liability for a given year by the 15th of the month following the close of that tax year or paying 100% of the previous years tax.
  • for taxpayers with AGI above $150,000, the requirement is 110% of the prior years tax or 90% of the current years liability.
  • payments are due on the 15th of April, June, and September of the tax year and
43
Q

Cafeteria Plan

A
  • an employee benefit program that permits employees to design their own benefit packages by allocating a predetermined number of dollars among available options.
  • they are required to offer at least one cash benefit.
  • they are prohibited from offering a pension or other retirement plan, a deferred comp plan, educational assistance, employee discounts, or non-cash fringe benefits.
  • can offer 401k with employer matching contributions.
44
Q

Health Savings Accounts

A
  • individuals covered under a high-deductible health plan are eligible to make tax-deductible contributions, employers can also make contributions via a cafeteria plan.
  • employers must make comparable contributions for all participating employees.
  • contributions are above the line deductions
  • Contribution Limits: $3,400 for individual coverage and $6,750 for family coverage.
  • For those 55 or older, the annual limit is increased by $1,000
45
Q

Flexible Spending Accounts

A
  • a type of cafeteria plan that must meet the rules prohibiting discrimination in favor of highly-compensated employees.
  • the dollars allocated are not includible int he employee’s gross income and are not treated as wages for social security taxes. The reduction in an employee’s salary can reduce income taxes, and if the employee’s income will be reduced below the social security wage base, social security taxes will also be reduced.
46
Q

Fringe Benefits

A

-noncash, non statutory fringe benefits, in general, are treated as compensation, will be included in gross income of employees, and are valued at the fair market value of those fringe benefits.

47
Q

Fringe Benefits included in gross income

A
  • personal use of any employer provided automobile
  • personal use of a company airplane or seats on a commercial aircraft
  • discounts available to only highly-paid employees
  • dues for a country club, health club, or other club paid by the employer
  • free tickets for entertainment or sporting events, other than occasional or de minimis benefits.
48
Q

Fringe Benefits Not Included in Gross Income

A
  • No-additional cost services that would remain unused if employees did not use them
  • employee discounts on products or services offered for sale to customers.
  • working condition fringe benefits such as employer-paid business travel
  • employer provided on premises athletic facilities
  • dependent care assistance program benefits
  • business use of employer-provided automobile
  • moving expense reimbursement
  • employee achievement awards
  • cafeteria plan or elective plan benefits
49
Q

Tax Filing Requirements

A
  • must file a tax return in any year where gross income exceeds the standard deduction amount plus the applicable personal exemption for their filing status.
  • for dependent children, a return must be filed if there is unearned income and gross income exceeds $1,050, or if there is any earned income and it exceeds the standard deduction amount for single taxpayers.
50
Q

Failure to File Timely

A
  • 5% per month (or fraction thereof) during which a return is not filed. the maximum penalty amount is 25% of the tax due.
  • if the return is more than 60 days late, the penalty will not be less than the lesser of $210 or 100% of the tax due.
51
Q

Amended Returns

A
  • a refund can be claimed after an original return has been filed if the limitations period is open.
  • the general limitations period on assessments is three years from the date the return is filed.
52
Q

Who can represent clients in front of the IRS?

A
  • attorneys, enrolled actuaries, CPA’s and enrolled agents may represent clients in all controversies before the IRS
  • Only attorneys and CPA’s qualified to practice before the tax court may represent a client in actual legal proceedings.
53
Q

3 ways a tax return may be selected for Audit

A

1) random sample
2) Discrepancy between information returns such as W-2’s, K-1’s or 1099’s and the amount reported on the tax return.
3) computerized scoring system which targets returns with the highest likelihood of underpaid taxes.

54
Q

IRS Targets

A

-home office deductions, tax shelter activity, travel and entertainment, casualty losses, hobby losses, substantial barter income, and substantial auto expenses.

55
Q

Responsibilities when preparing tax returns for other persons

A

1) include an identifying number on the return and manually sign the return.
2) furnish the client with a copy of the return upon presentation of the filing copy
3) keep a record of who prepared the returns, as well as the client returns prepared for 3 years.

56
Q

Understatement Penalty

A
  • 20% of the understatement of tax if the discrepancy is due to:
    1) disregarded tax rules
    2) substantial understatement of income tax (more than either 10% of the tax shown on the return or $5,000 - whichever is greater)
    3) substantial valuation misstatement
57
Q

Fraud Penalty

A

-75% of the understatement attributable to the fraud and takes the place of the accuracy-related penalty

58
Q

Standard Deduction

A

MFJ - $12,700
MFS - $6,350
Head of Household - $9,350
Single - $6,350

Additional amount if over the age of 65 for each spouse:
Married (joint or separately) - $1,250
Single - $1,550

59
Q

Calculating Casualty Losses

A
  • determine the lesser of the fair market value or adjusted basis
  • subtract and reimbursement from insurance
  • subtract $100 (per event)
  • subtract 10% of the taxpayers AGI
60
Q

Personal Exemption

A
  • you can claim $4,050 for each exemption you claim.
  • typically one for you, your spouse and any dependents that you have.
  • they are subject to phaseout limits.

CFP (51 decks)

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