Individual Taxation Flashcards
Earned Income
- W-2
- Schedule C / Sole Proprietorship
Portfolio Income
- Interest Income
- Dividend Income
Passive Income
- Real Estate Rentals
- Business where the taxpayer does NOT PARTICIPATE
Is forgiveness of debt taxable?
YES
Schedule 1, Additional Income - Part I
“Cancellation of Debt”
Is unemployment taxable?
YES
Schedule 1, Additional Income - Part 1
“Unemployment Compensation”
Are prizes received taxable?
YES
Cash prize, fully taxable
Schedule 1 - Additional Income
“Prizes and Awards”
**Exception - never take possession, immediately donated
NON-TAXABLE INCOME
NON-TAXABLE:
- Welfare benefits
- Child support
- Life insurance proceeds
- Compensation for injuries
- Alimony received for divorces after 2018
Are GAMBLING WINNINGS taxable?
YES
Schedule 1 - Additional Income - Part I
**Note: These are NOT netted with gambling losses. Losses can be claimed as an itemized deduction to Schedule A to the extent of gambling winnings.
PORTFOLIO INCOME:
How are INTEREST and DIVIDENDS taxed?
INTEREST
-Ordinary tax
DIVIDENDS
-Lower capital gains rate
NOT TAXED:
- Dividends on a life insurance policy
- Stock dividends
- Stock splits
EXAM TRICK:
-Cash dividends reinvested ARE STILL TAXABLE
How are the following taxed?
- State and Local bonds
- Puerto Rico bonds
- Guam
- US Virgin Islands
TAX-FREE
What form are Interest and Ordinary Dividends reported on?
Schedule B of Form 1040
Condition for a Series EE Bond to be tax-exempt:
- Bought by taxpayer or spouse
- Taxpayer 24+
- Proceeds used for higher education costs
- Phase out 79,700 / 119,550
- Reduced by scholarships received
What form must be filed for a taxpayer who has a financial interest in an account located outside the Unites States that exceeds $10,000 at ANY TIME during the calendar year?
FinCEn form 114
REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS (FBAR)
Due 4/15
Civil/criminal penalties for failure to file
Is interest income from a tax refund taxable?
YES
What can passive losses be deducted against?
ONLY passive gains.
If there is leftover, losses can be carrier over indefinitely.
What are the rules surrounding RENTAL ACTIVITIES?
-Losses of up to $25,000 can be deducted against EARNED INCOME if
the OWNER ACTIVELY PARTICIPATES IN THE ACTIVITY
- Phase out $100-150,000 ($0.50 on the dollar)
- Leftover losses carry forward indefinitely
Schedule C - Sole Proprietorship
Business Meals deductible?
Entertainment deductible?
Business Meals -
2021 - 100%
2022 & 2023 - 50%
Entertainment-
NOT DEDUCTIBLE
SCHEDULE C - Estimated Taxes
Deduction?
NO. They are a credit against final tax liability.
SCHEDULE C -
Is the owner’s salary deductible?
No!
SCHEDULE C -
Is the owner’s health insurance deductible?
Yes, BUT
Not on Schedule C - it gets deducted on Schedule I - Part II - Adjustments to Income
SCHEDULE C - Charitable Contributions deductible
NOT as a business expense
Deductible on Schedule A as a personal itemized deduction
Individual Taxpayer - definition of a capital asset
(a) Stocks and Bonds
(b) property held for PERSONAL use / long-term investment
Note: think what creates capital gains?
Individual taxpayer -
definition of a Section 1231 asset
Section 1231 assets are not capital assets BUT
BUSINESS ASSETS.
How are gains on PERSONAL PROPERTY HANDLED? Losses?
GAINS - reported
LOSSES - no deduction allowed
Patents, Inventions, Models, and Designs
Capital assets?
NO, not for the person that created them.
Therefore if sold, no capital again.
= Ordinary Income
Holding period to be classified as S-T vs. L-T capital gain?
Short-term: 1 year or less
Long-term: Held more than 1 year
Long-term Capital Gains/Losses are __________ to arrive at net Long-Term Gain or Loss for the period.
Netted
Short-term Capital Gains/Losses are __________ to arrive at net Short-Term Gain or Loss for the period.
Netted
If the taxpayer has both a S-T and a L-T gain, they are _________
If the taxpayer has both a S-T and a L-T loss they are _________
Left alone.
If the taxpayer has a S-T gain and a L-T loss they are ____
Netted into a single final figure.
EXAMPLE:
If an individual has a
$9,000 L-T capital gain
$4,000 S-T capital loss
= NET $5,000 L-T capital gain is reported
How are S-T capital gains taxed?
ORDINARY INCOME
How are L-T capital gains taxed?
At reduced rates, 15% for most taxpayers.
What is the Qualified Business Income Deduction?
A deduction is allowed for 20% of the taxpayer’s income from PASS THROUGH ENTITIES and RENTAL REAL ESTATE ACTIVITIES.
(Business must be conducted in the United States to qualify)
It is not a deduction arrive at AGI, nor is it an itemized deduction.
QBI is a deduction from AGI.
QBI deduction liminations
$165,000 / $330,000 if the principal asset of the business is reputation (unfavorable rules apply)
**Architects/Engineers are exempt
What happens if the taxpayer has more than one QBI activity?
QBI is computed separately for each activity
Are scholarships taxable?
Tax-free if:
- Candidate for degree
- Used for tuition
Taxable:
- No degree
- Room & board / living expenses
- Work / Stipend
Are Alimony payments taxable?
Divorced prior to 2018: YES
Divorced after 2018: NO
**Only cash counts, property does not.
Are Social Security Benefits taxable?
INDIVIDUAL:
< $25,000: tax-free
$25-34,000: 50% taxable
$34,000+: 85% taxable
JOINT RETURN:
$32-44: 50% taxable
$44+: 85% taxable
AGI: Spouse’s income + 1/2 SSA
How much can a K-12 teacher deduct as Educator Expenses?
Up to $250
Schedule 1 - Part II
How much of Student Loan Interest is deductible?
Up tp $2500
Phase out:
$70,000 / $140,000
Can you deduct Self-Employed health insurance?
Yes, as long as the profit on Schedule C is more than the cost of health insurance
Schedule 1 - Deductions to arrive at AGI
Taxpayers whose only health coverage qualifies as a high deductible plan can put money into a ____ _____ ____ and receive a deduction in arriving at AGI.
Health Savings Account
Limit -
$3600 single
$7200 families
Is money taxable when it is removed from a Health Savings Account?
No, as long as it is used to cover medical expenses
What happens to money leftover in a Health Savings Account?
It remains in the HSA in the following year.
What qualifies as a high deductible for a HSA?
Single $1400
Family $2500
Are contributions made by an employer to a HSA account included in the employee’s gross income?
No, they are excluded from the employee’s income.
Can you deduct contributions to a Roth IRA?
No
However, distributions are tax free.
Self Employed Pension, Keogh Plan
What are the contribution limits?
Deductible limit is 25% of bottom-line net on Schedule C
OR about $58,000
How do you handle Jury Duty Pay given to employer?
Deduction to arrive at AGI
because the juror will receive a 1099, this cancels it out
Legal fee in connection with a sexual assault case
Are deductible to arrive at AGI, Schedule 1
Are moving expenses deductible?
Only for members of the military called to active duty.
Schedule 1 - Part II - Deductions to arrive at AGI
Penalty on early withdrawal of non-retirement savings
Deductible to arrive at AGI - Schedule 1
Is child support taxable?
No, tax exempt
Are charitable contributions deductible if you don’t itemize?
Individuals who do NOT itemize can STILL deduct up to $300 of charitable contributions to arrive at AGI ($600 if married)
What is better, a credit or a deduction?
Credits!
Deductions reduce TAXABLE INCOME
Credits reduce TAX dollar for dollar
What is the Child Tax Credit for 2021?
$3000 per child under 18 on 12/31
$3600 per child under 6 on 12/3
refundable for 2021
What is the Family Credit for 2021?
$500 for qualifying dependents other than children such as child over 18 or elderly
NON-REFUNDABLE
What is the new limit for charitable contributions?
60% of AGI
How do you value NON-CASH charitable contributions?
Donation are valued at FMV
If the object is held for < 1 year, deduction is limited to basis
What is the SALT limit?
$10,000 in itemized deductions for state and local income taxes and property taxes
(Does not apply to Schedule C business property)
Is interest on a HOME EQUITY LOAN deductible?
Yes, IF the proceeds are used to fix up the home
Lifetime Learning Credit amount?
Limits?
Who can claim? How many per return?
20$=% of tuition paid
Maximum - $2,000 per TAX RETURN
Must be on qualified tuition and related expenses paid at an eligible educational institution
**Not restricted to 1st 4 years of school
**Does not include books, supplies, equipment, room and board, living expenses
NON-REFUNDABLE
American Opportunity credit:
who can claim?
how much?
refundable?
limit?
- Must be pursuing a degree and enrolled at least half time
- 1st four years of a degree are eligible
- Tuition, books, supplies, equipment
- Up to $2500 of the cost (100% of the 1st $2,000, 25% of the next $2,000)
- Up to 40% refundable (max $1000)
- $90,000/$180,000
Family and Medical Leave Credit
Employer must have a _____ ______
- Must include at least __ weeks of paid leave
- Paid leave must be at leave ___% of employee’s normal wages
- The credit for paying half of employee’s wage is ___% for the employer
- Max credit of ___% if the employer pays full wages
Employer must have a WRITTEN POLICY
- Must include at least __ weeks of paid leave
- Paid leave must be at leave ___% of employee’s normal wages
- The credit for paying half of employee’s wage is 12.5% for the employer
- Max credit of 25% if the employer pays full wages
Child and Dependent Care Credit for 2021
Max per child?
Max number of children you can claim?
Refundable?
$8,000 for 1 child
$16,000 for 2 children
- Refundable
- Phase out begins at $125,000
- Taxpayers with AGI over $438,000 are not eligible for this credit
Child Tax Credit for 2021
How much?
Phaseouts?
$3,600 for children ages 5 and under at 12/31
$3,000 for children age 6 - 17 at 12/31
PHASEOUT:
Begins to be reduced to $2000/child if modified AGI exceeds
$150,000 MFJ
$112,500 HOH
$75,000 Single
*reduces $50 for each $1000 over income threshold
Total Phaseout
$400,000 MFJ
$200,000 all others
Earned Income Credit
Who is it for?
Refundable?
Low to moderate income workers and families, particularly those with children
Refundable
Amount varies based on income and number of children
**Note: grandchildren can be a qualifying child, as long as under 19
Work Opportunity Credit
Who?
How much?
Maximum?
-For employers who hire individuals from targeted groups
Maximum of $2,400
Plug-In Credit
Based on battery size
Take the year the owner takes delivery of the car
Retirement Savings Contribution Credit
Limit?
Max?
What about IRA deduction?
Who is it for?
- limited to 50% contribution
- max $1000
- In addition to IRA deduction
- Only for very low AGI (< $31,500)
Elderly and Disabled Credit
Who?
limits?
How much?
- aged 65 or older OR retired
- on permanent and total disability and received taxable disability income for the tax year;
AND
with an adjusted gross income OR the total of nontaxable Social Security, pensions annuities or disability income under specific limits
15% of income
The credit ranges between $3,750 and $7,500.
Can bad debt be deducted on Schedule C?
Only to the extent that it was recognized in income.
For a cash basis taxpayer, how should preparer handle Accounts Receivable?
IGNORE. only pay attention to cash collections during the year.
How should a widow file?
Year 1: One last year of MFJ
Year 2: Qualifying Widow
Year 3: Qualifying Widow
Year 4: Head of Household
Limits for Pass-Thru losses from an active trade or business?
$250,000/500,000. Any remaining amount carries forward.
Under TCJA: with regard to 529 plans, the annual limit that can be distributed from a plan without tax for qualified K-12 plans is __________
$10,000
Are benefits paid to a deceased employee taxed or tax-exempt?
Taxed
Paid preparers are required t o answer due diligence questions regarding what?
How much is the penalty for failing to do so?
- HOH filing status
- American Opportunity Credit
- Earned Income Credit
- Child tax credits
-Penalty is $520 per return
How are security deposits handled in regards to rental income?
A security deposit is not included in income if the landlord plans to return it at the end of the lease.
IRA Early withdrawal 10% penalty exceptions
- home buyers up to $10,000
- qualified education expenses
- inherited IRA
- called to active duty
- health insurance premiums while unemployed
- $5000 adoption expenses
- IRS direct levy
- permanent disability
YEAR OF SWIPE RULE applies to
Charitable contributions
Medical expenses (yours or dependents)
Does rental income qualify for QBI?
Yes
Is a state tax refund taxable in gross income?
Yes, IF the taxpayer itemized last year and claimed state taxes. NO, IF the taxpayer claimed the standard deduction.
QBI: single taxpayer taxable income threshold to qualify for max 20% deduction?
$157,500
Is self-employment tax levied on rental real estate income?
NO, SE tax does not apply to passive activities
How are earnings and distributions taxed for a Roth IRA?
Trick question - not taxed
Are any of the following deductible as medical expenses?
I. Vitamins
II. Health Club Membership
III. Widening hallway for wheelchair
I. No
II. No
III. Yes
QBI wage limits:
Single taxpayer, income $525,000
Pays one employee $50,000
Business income $140,000
QBI deduction?
Wage limits apply so taxpayer gets the lower of:
50% x $50,000 = $25,000
20% x $140,000 = $28,000
=$25,000 QBI deduction
Is RENTAL INCOME subject to self-employment tax?
NO, passive income is not subject to SE tax.
Under TCJA, the loss limitation for pass through activities is what for single filers? MFJ?
MFJ - $500,000
Single - $250,000
The TCJA allows NOLs to be carried forward for how long?
Unlimited carryforward.
Under TCJA, NOLs can offset up to what % of income?
80%
IRA Contributions are limited to what amount?
6000/7000 (catch-up)
Note they must have at least that much in earned income.
Under TCJA, what is the max that can be distributed annually from a Section 529 plan for qualified K-12 expenses?
$10,000
Does the QBI reduce the self-employment tax?
No, it reduces taxable income and therefore federal income tax.
Adult children as dependents rules
Age 19 or under
Or age 24 if full-time student
Must live with you for more than half of the year
Dependency threshold for qualifying relative?
Gross income limit?
Support threshold?
Must have earned less than $4300
Must have provided more than 50% support
For purposes of filing Head of Household can the following qualify as a dependent?
I. Brothers and Sisters
II. Nieces and Nephews
I. yes
II. yes
What is the definition of marginal tax rate?
The marginal tax rate is the tax rate you pay on an additional dollar of income.
QBI Calculation
Lesser of:
Business income x 20%
OR
Taxable income - Capital Gains x 20%
When business property is leased, how should any taxes that have to be paid be handled?
They should be deducted as additional rent.
Employer CAN/CANNOT deduct qualified transportation fringe benefits.
CANNOT, however employee can exclude from income.
Are education expenses to qualify for a NEW JOB or license (such as CPA review costs / costs to get an MBA) deductible?
NO
Are costs required to MAINTAIN a license or expenses to stay in a current job deductible?
YES
For a self-employed taxpayer, are trade association/professional organization fees deductible?
YES
How much can employers deduct for operating a cafeteria for convenience of employer?
50%
Can an employee deduct business miles driven?
NO
Only the self-employed can deduct business miles driven.
