Individual Tax Flashcards
A: Gross income including interest, dividends, and guaranteed payments
INCLUDES- Wages, Interest from bonds except for Municipal Bonds, dividends from Investments, Distributions from Normal IRAs or 401ks, Some Social Security Benefits, Alimony received BEFORE 2019, Punitive damages, FMV of Service Received.
NON INCLUDED - Roth IRA Distributions, Child Support, Alimony received for divorce AFTER 2019, Inheritance, parts of annuities, barters.
Capital Gains from Sale of Investments
First you net short term gains and losses,
Next you net long term gains and losses,
if there is a gain in both, then both gains are reported separately. if there is a gain and loss then you net those And if there’s a net loss then it is limited to $3000 of ordinary income.
Capital Gains from Transactions including the sale of Gifted Assets
The donee takes on the donor’s adjusted basis and the donor’s holding period when they are gifted asset
this means that if the donor held the asset for more than one year even if the donee sold it right away, it would stil be long term gain
however, in situations where the selling price is less than the adjusted basis of the donor there are two things that can happen.
1) if the selling price is less than the adjusted basis, but greater than FMV at the date of the gift, then there is no gain or loss
2) if the selling price is less than the adjusted basis AND less than FMV then the FMV is used as the basis for calculating loss
Calculate Capital Gains from Sale of Assets received from a Decent (Inheritance)
When it comes to sales of asset received from inheritance the term is always considered long term.
Also the basis for gains and losses is the FMV of the asset on the date of the death of the decedent.
However, it can be elected to take an alternate valuation date 6 months after the date of death. and this can be the new FMV basis.
Just like with all capital losses when it comes to gross income for an individual, only $3000 of a capital loss can deducted from ordinary income
Excluded income from tax-exempt interest
Municipal bond interest is not taxable.
Interest from an HSA that has qualifying for medical expenses is not taxable.
interest from US EE Series bonds (basically education savings bonda) is also not taxable if distribution/interest were for qualifying educations expenses ( qualifying education expenses would for higher education expenses)
Tax refunds don’t count as taxable interest or income, however, interest from a tax refunds is taxable.
Typical things like interest from savings account at your bank are taxable.
What Excluded income from gifts received and life insurance proceeds
Gifts Received are excluded from Gross Income.
Life insurance Proceeds are excluded from gross income in most cases.
However, If there is a transfer for value of the life insurance policy, then some of it may be taxable to recipient (receipt minus total cost).
Or if there is interest received from the policy because the recipient did not want to receive it in a lump sum, the interest will be taxed.
How to Calculate the income reported in the year of death for a decedent
Final 1040s for a decedent are still just a normal 1040 the only difference is that it is cut off at the date of the death of the decedent. so you still take all the money they earned and received, you still take the same deductions, and the spouse can still file jointly. Anything that is received after the date of death will be considered taxable to the decedent’s estate or the beneficiary.
How to treat Income from a disregarded entity - Use Schedule C on 1040
Disregarded entitles are single member LLC and tax needs to be files with 1040 of the owner, Schedule C is used on 1040 for this tax return.
Pass through entities
Passthrough entities are things like Partnership, S corp and cetain LLCs. Income generated by these entities is passed though and taxed proportionately to each individual who has an ownership interest.
This income is taxed even if the individual did not actually receive any money from the pass through entity.
This is why distributions are not taxed, because the money has already been taxed. separately stated items are not added all together, instead they are put into each corresponding area of the an individual’s tax return (things like guaranteed payments, interest, dividends etc.
Also there are some loss limitations that exist for losses from a Pass through entity (Tax basis limitation and the passive activity loss limitation)
QBI Deduction
The QBI deduction is typically 20% of qualified business income from QBI or SSTB.
If the taxpayer has taxable income other than the QBI, then take into consideration the general QBI deduction limit, which is taking ; the lesser of all QBI deduction OR 20% of the Taxpayer’s Taxable income less any Net capital gains.
The QBI dedction is applied the same way for QTBs or for SSTDs if the taxpayer’s taxable income without the QBI deduction is below a certain threshold.
Once their income passes the threshold, that’s when the other limitations start applying.
QTBs start to look at W-2 Wages paid and unadjusted basis of assets put into service to start reducing the QBI deduction.
SSTB start reducing the QBI deduction in the phase out range, and once above the phase out range, the QBI deduction is not allowed to be taken.
HSA and retirement accounts AGI
HSA are part of High Deductible plans, they let you put in pretax dollars and the contributions can reduce your gross income.
Distributions from an HSA are tax free as long as they are used for qualifying medical expenses.
Traditional IRAs have yearly limits to how much you can contribute and those contributions typically are able to reduce your Gross income.
However if income is high enough then those contributions start phasing out.
Roth IRA contributions do NOT reduce Gross Incomes.
Nondeductible Traditional IRAs are for people who make too much money for a normal traditional IRA and these contributions are also not able to reduce Gross income.
Self employment and AGI
SEP IRAs are limited by a percentage of net self employment earnings.
Net Earnings = Net self employment profit - Half of the self employment tax
Multiply net earnings by the current year contribution percentage limit (Something like 20% or 25% and that gives you the max contributions for an SEP IRA
Half of the SELF Employment tax is deductible.
Self employed health insurance premiums are deductible (up to total net profit)
Alimony can be deducted if for a divorce before Dec 2018
Capital losses can reduce by up to $3000
Moving expenses are not deductible except for active duty military who moves for military reasons.
Medical expense - Itemized Deduction
The allowance deduction = Qualified medical expenses - reimbursement - 7.5% AGI.
Most Medical expenses performed by a medical professional and that are professionally prescribed count.
Expenses covered by HSAs or that are reimbursed are not included/reduce the amount of deduction taken.
Payments made in the current tax year for medical procedures that year count, even if payed by credit card or Check.
Expenses for spouses and dependents (as well as the taxpayer themselves) are counted.
Dependents have to have 50% or more of their support from the tax payer and they either have to be relative (Child, parent, grandparents) or they have to live with the tax payer throughout the year.
mortgage interest Itemized deductions
Interest on a home mortgage is generally deductible, as long as it is for mortgages under 750,000 (1,000,000 if before December 15 2017)
A secondary residence can be included in this calc as long as it is used for personal use more than 14 days or 10% of fair rental days whichever is Larger.
The 750,000 limit is cumulative, so it included the primary and secondary residence.
Home equity loans are also included in this calculation, as long as they were for buying, improving, or building the home they were drawn from.
If the total mortgage amounts are greater than 750,000 then you divide the 750,000 by the total mortgage amount,
Then you take this percentage and multiply it by the total qualified interest.
casualty losses - Itemized deductions
Personal property casualty losses can only be deducted if from a federally declared disaster.
If it s in a federally declared disaster, here is the calculation:
1) Take the Lower of the decrease in FMV or Adjusted basis of the property
2) Substract any insurance reimbursements
3) Substract $100 per casualty loss
4) Substract 10% of AGI
The remainder is allowable casualty loss as a deduction in the current year.
