Individual Tax Flashcards
Social Security Taxability
Publication 17, page 82, states that some Social Security benefits become taxable if one-half of the benefits plus all other income, including tax-exempt interest, exceed the base amount of $32,000 in the case of a couple filing married ($25,000 if filing single or head of household and $0 if married, filing separate, and living with one’s spouse at any time during 2019). 50% or 85% taxable.
Household Employee Taxes
For 2019, employment taxes must be paid if the taxpayer pays to the household employee cash wages of $2,100 ($2,200) or more during 2019 (2020) or total cash wages of $1,000 or more in any calendar quarter of 2019 or 2020 (see Table 1 in Publication 926 (2019 and 2020), page 4).
Transfers not subject to gift tax
There are four types of transfers that are not subject to the gift tax. These are transfers to political organizations, transfers to certain exempt organizations, and payments that qualify for the educational and medical exclusions.
Estate Estimated Tax Payments (Same as Trusts)
Generally, estimated tax must be paid if the estate is expected to owe, after subtracting any withholding and credits, at least $1,000 in the current tax year. You will not, however, have to pay estimated tax if you expect the withholding and credits to be at least (Form 1041 Instructions, page 10):
- 90% of the tax to be shown on the current-year return or
- 100% of the tax shown on the prior-year return. (The percentage is 110% if the estate’s prior-year return’s adjusted gross income (AGI) was more than $150,000.)
Installment Sale Example
During 2019, Frank sold a piece of land with an adjusted basis of $110,000 to Tony for $200,000. Tony paid $50,000 as a down payment in 2019 and agreed to pay $30,000 per year plus interest for the next 5 years beginning in January 2020. Frank incurred selling expenses of $10,000. What is the amount of gain to be included in Frank’s gross income for 2019?
In this problem, Frank sells his property for $200,000 (item 1) and an adjusted basis for installment sale purposes of $120,000, which is the sum of $110,000 (item 2) and selling expenses of $10,000 (item 3). Hence, the gross profit percentage is 40%, which is the gross profit of $80,000 ($200,000 - $120,000) divided by the selling price of $200,000. Thus, Frank would report a gain of $20,000 in 2019, which is 40% of the $50,000 down payment.
ABLE Accounts
As provided on page 7 of Publication 907, contributions to an ABLE account are not tax deductible and must be in cash equivalents. Anyone, including the designated beneficiary, can contribute to an ABLE account. In addition, a person may establish an ABLE account if their blindness or disability occurred before age 26. As a disabled individual, a person may be eligible if either of the following applies:
The person is entitled to benefits based on blindness or disability under Title II or XVI of the Social Security Act, or The person files a disability certification with their qualified ABLE program, including their diagnosis relating to their relevant impairment or impairments signed by a physician (as defined in section 1861(r) of the Social Security Act). In addition, the person must certify one of the following:
-The person has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, which can be expected to result in death or lasted or can be expected to last for a continuous period of not less than 12 months; or
The person is blind (within the meaning of section 1614(a)(2) of the Social Security Act).
The total annual contributions to an ABLE account (including those rolled over from a Section 529 account, but not other amounts received in rollovers and/or program-to-program transfers) are limited to the annual gift tax exclusion amount ($15,000 for 2019, not $15,000 per person), plus certain employed ABLE account beneficiaries may make an additional contribution up to the lesser of these amount:
the designated beneficiary’s compensation for the tax year, or the poverty the continental United States, and $15,180 in Alaska. (Publication 907, page 8)
Nonbusiness Bad Debt
In general, a taxpayer may deduct the amount arising as a nonbusiness bad debt if it is totally worthless and is deducted on the tax return for the year the debt becomes worthless.
The debt, however, must be genuine for the taxpayer, which means it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. (See Publication 17, page 106.)
In the case where a taxpayer lends money to a relative or friend with the understanding that it may or may not be repaid, it is considered a gift and not a loan, and as such, it cannot be taken as a bad debt deduction. See Publication 550, page 54, for more information on this topic.
Those bad debts incurred outside of operating a business or trade are categorized as nonbusiness bad debt and are deductible when deemed totally worthless (not partially worthless). Nonbusiness bad debts are deducted as a short-term capital loss on Form 8949, which is carried over to Schedule D (Form 1040). (Publication 17, page 106, and Form 8949)
Compensation in determining the amount of an allowable contribution to a traditional IRA
Pursuant to Publication 590-A, page 6, compensation in determining the amount of an allowable contribution to a traditional IRA includes wages, salaries, commissions, self-employment income, and alimony and separate maintenance payments.
If a taxpayer is self-employed, compensation for this purpose is the net earnings from the trade or business reduced by the total of:
- the deduction for contributions made on the taxpayer’s behalf to retirement plans and
- the deduction allowed for the deductible part of a person’s self-employment taxes.
Moreover, compensation includes earnings from self-employment even if they are not subject to self-employment tax due to religious beliefs.
Additionally, if there is a net loss from self-employment, this amount is not subtracted from salaries or wages when calculating total compensation.
Prohibited transactions with a traditional IRA
The following are examples of prohibited transactions with a traditional IRA:
- Borrowing money from it
- Selling property to it
- Using it as security for a loan
- Buying property for personal use (present or future) with IRA funds
Saver’s Credit
Publication 590-A, page 46, provides the eligibility criteria for a taxpayer to claim the saver’s credit on their 2019 income tax return. If a taxpayer makes an eligible contribution to a qualified retirement plan, an eligible deferred compensation plan, or an IRA, they can claim the credit if all of the following apply:
- The taxpayer was born before January 2, 2002 (i.e., age 17).
- The taxpayer is not a full-time student.
- No one else, such as the taxpayer’s parent(s), claims an exemption for the taxpayer on their tax return.
- The taxpayer’s adjusted gross income is not more than:
- $64,000 if filing status is married filing jointly,
- $48,000 if filing status is head of household, or
- $32,000 if filing status is single, married filing separately, or qualifying widow(er).
Value of a traditional IRA that is involved in a prohibited transaction
If the account stops being an IRA because the taxpayer or the taxpayer’s beneficiary engaged in a prohibited transaction, the account is treated as distributing all of its assets to the taxpayer at their fair market value on the first day of the year.
Section 1244 Stock Loss
If a taxpayer sustains a loss on the sale, exchange, or worthlessness of small corporation stock that meets the requirements of Section 1244, they may take an ordinary loss deduction. The taxpayer would report the loss on Form 4797, line 10. Any loss in excess of the amounts described in the “Ordinary Loss Limit” paragraph of Publication 550 (page 53) is reported on Form 8949.
As discussed in the “Ordinary Loss Limit” paragraph, the maximum deduction permitted for such losses is $50,000 ($100,000 married filing jointly even if only one spouse has this type of loss). The loss is reported on line 10 on Form 4797. In the case where the taxpayer has a loss of $110,000 and the taxpayer’s spouse has no loss, the taxpayer is able to take a loss of $100,000 on a joint return.
Any losses in excess of the $50,000 ($100,000 married filing jointly) are reported as capital losses.
1040 Estimated Tax Requirements
In general, a taxpayer must pay estimated tax if both of the following apply:
- The taxpayer expects to owe at least $1,000 in tax for 2020 after subtracting his or her withholdings and refundable credits.
- The taxpayer expects his or her withholdings and credits to be less than the smaller of 90% of the tax to be shown on the 2020 tax return or 100% of the tax shown on the 2019 tax return. Moreover, the 2019 tax return must cover all 12 months.
EIC Requirements
Table 34-1, which appears on page 221 of Publication 17, provides a capsule presentation on the qualification’s rules for the earned income credit. As provided by Table 34-1, the rules applicable for tax year 2019 to everyone are as follows:
Your adjusted gross income (AGI) must be less than:
- $50,162 ($55,952 for married filing jointly) if you have three or more qualifying children,
- $46,703 ($52,493 for married filing jointly) if you have two qualifying children,
- $41,094 ($46,884 for married filing jointly) if you have one qualifying child, or
- $15,570 ($21,370 for married filing jointly) if you do not have a qualifying child.
- You must have a valid Social Security number (SSN).
- Your filing status cannot be “married filing separately.”
- You must be a U.S. citizen or resident alien all year.
- You cannot file Form 2555 (relating to foreign earned income).
- Your investment income must be $3,600 or less.
- You must have earned income.
Alternate Valuation Method
The alternate valuation method is used to value property that is included in the gross estate, it must be in agreement with the following applicable dates:
- Any property distributed, sold, exchanged, or otherwise disposed of or separated or passed from the gross estate by any method within 6 months after the decedent’s death is valued on the date of distribution, sale, exchange, or other disposition.
- Any property not distributed, sold, exchanged, or otherwise disposed of within the 6-month period is valued on the date 6 months after the date of the decedent’s death.
- Any property, interest, or estate that is “affected by mere lapse of time” is valued as of the date of decedent’s death or on the date of its distribution, sale, exchange, or other disposition, whichever occurs first.
As an aside, once the election is made for the alternate valuation date, it may not be revoked.
Therefore, if John’s executor decided to use the alternate valuation date for valuing the gross estate, the assets would be valued 6 months from the date of death, December 1, 2019.
