Indiv. Tax, Income (II)

Question 1

IRA Withdrawal Tax Rate, and what happens when withdrawn prematurely?

Answer 1

IRA’s removed are always taxed at marginal tax rate (IE 35% off the top).

Additionally, the “Penalty tax” applies to all those under 59.5, which is 10% from the total pre-tax value of the IRA.

EG: 25 year old removes $30K pretax IRA. First, 10,500 comes out (marginal tax rate 35% x $30K), then 3,000 comes out ($30K x 10% penalty).

Question 2

What gets capitalized under Uniform Capitalization Rules?

Answer 2

Direct materials, direct labor, applicable indirect costs (SUCH AS: warehousing, r&m, indirect labor, rents, storage, depreciation, amortization, insurance, pension contributions, engineering & design, repackaging, spoilage and scrap, admin. supplies, [PAYROLL, recruiting, securities services as part of factory overhead expense]).

**Req. for all inventory acquired for re-sale when receipts from past 3 tax years = $10Mil.

If inventory being produced in-house, there is no profit minimum.

Question 3

Premature IRA withdrawal exceptions: HIM DEAD

Answer 3

H- home buyer (First time, max $10K)
I- insurance (medical)
M- medical expenses in excess of 10% AGI (or 7.5% AGI ages 65 and up)
D- Disability
E- Education
A- AND!!!
D- Death

Question 4

When can you net passive losses in year of passive loss?

Answer 4

When you have passive gains! (You can only net up to amount of passive gain and carry the rest forward.)

Question 5

Group-Term Life Insurance: Tax Rules

Answer 5

First $50K is non-taxable fringe benefit. Then, tax based on “IRS-established uniform cost of insurance” for all amounts in excess of $50K.

Example:
Group-term life ins. of $200K. IRS-established cost of insurance at $2.76 per $1K. What amount must be tacked on to gross income?

150 X $2.76 = $414

Question 6

Allocating Passive Losses

Answer 6

Allocate at their rate to TOTAL losses.

EG activity X lost 30K in a year with 80K total losses, and 60K net loss.

60K x (30/80) = $22.5K

Question 7

Solvency Formula

Answer 7

FMV, all assets (LESS) FMV Liabilities.

if you go NEG. you’re insolvent!

Question 8

Annuities Formula - Nontaxable Portion

Answer 8

Investment Amount is Divided over Months of Expected Recovery
(where Expected recovery = life expectancy in yrs. at time of purchase)

FORMULA:
Purchase Value / months of expected based on life exp, = non-taxable value per month.

EG. 9 months worth of $64,400 investment, 23 yrs life expectancy

(23 X 12 = 276 months)

$64,400/276 = $233.33 non-taxable per month.

Question 9

Stock Option Gross Income Recognition Rule

Answer 9

[Date of Sale FMV (Less) Date of Grant FMV] x total shares = profit/(loss)

Option Price NOT factored in here to gross inc.

Question 10

Incentive Stock Option (ISO)

Answer 10

One of the 2 qualified stock options.
Exercise price WILL NOT dip below price on date of grant.

10 years of grant date
can’t hold more than 10% combined voting power on date of grant

Question 11

Employee Stock Purchase Plan

Answer 11

One of the 2 qualified stock options. Option may not be lesser of 85% of FMV of the stock, when granted or exercised.

• *option cannot be exercised more than 27 months AFTER Grant date!**
• can’t purchase in excess of $25K of stock per year

Question 12

Non-qualifying Stock Option Reporting for Tax purposes - describe the Bargain Element

Answer 12

On the W2, employer will include the “bargain amount” of employee stock purchased. EG, logan purchases $1000 shares for non-qual stock option price of $10/sh, when the FMV on that date is $25/sh.

[$25 FMV - $10 purch price] X Shares Purchased By Employee = Reportable per W2

Question 13

How to tax money received under insurance policy on deceased fathers’ life

Answer 13

Amnt. Received Current year (LESS) Return of principle (Principle / amortizable years of life.)

EG: $12K (less) ($150K principle / 15 yrs of return)
$12K - $10K
=2K Income subject to Income Tax

Question 14

Conditions for Tax Exemption of Cumulative Interest on Series EE U.S. Savings Bonds (purch post-1989)

Answer 14

• purchaser of bonds must be sole owner of bonds (or joint with spouse)
• taxpayer must be over 24 when issued and redemption proceeds must be used to pay for higher ed (reduced by tax-free scholarships) of Taxpayer, dependent, or spouse.

PHASE-OUT:
MAGI over a certain amount.

Question 15

Constructive Receipt of Income

Answer 15

Income that is deemed to have been received when it is made AVAILABLE, regardless of whether payer took possession of it or not (EG - taxpayer receives check in 2005, deposits in business account 2006. Considered CONSTRUCTIVELY RECEIVED in 2005.)

**this type of income goes into the Gross Income of any cash-basis tax payer

Question 16

Head of Household Requirements

Answer 16

1) Indiv. must be NOT married, legally separated, OR married but lived apart for at least last six months of year at close of taxable year.
2) must NOT be qualifying widower
3) must NOT be “non-resident alien”

4) Individual must maintain his or her household, that for MORE THAN HALF of taxable year, is principle residence of:
a) dependent son or daughter (or other descendant) incl. adopted, who otherwise qualifies as a “Dependent” via CARES or SUPORT
b) Dependent Relative (SUPORT - no COUSINS tho.)
c) Father or Mother, don’t have to live with you, however INSTEAD you must have maintained home that was principal res. of parent for ENTIRE year. (maintaining means paying >50% of house upkeep)

Question 17

Net Business Income that is Taxable (the 2 kinds)

Answer 17

1) Income Earned

2) Federal Self-Employment Tax
(NOT counted pre-AGI)

Related: On Sched. C, ONLY expenses related to operation of business itself. Things like S/E health insurance later come out of AGI.

Question 18

Allocating Different IRA distributions for tax purposes (distrib. from Roth, distrib. from traditional IRA, distrib. from non-deductible IRA)

Answer 18

Roth: Roth IRA’s are the tax-free ones so ALL proceeds are excluded from gross income that year.

Trad. /Trad. IRA with no exceptions: Fully Taxable

Non-Deductible IRA: (ALLOCATE Via: Principal/FMV = % that is basis. % that is basis is excluded; rest INCLUDED and taxable.)

Question 19

Are inherited net assets taxable?

Answer 19

No .. not if they are received as is

if they are appreciating interest over time in the form of payments, the appreciation to the basis is taxable.

Question 20

Where does all INTEREST INCOME get reported on a tax return?

Answer 20

Schedule B