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CPA: Regulation > Individual Taxation > Flashcards

Individual Taxation Flashcards

1
Q

Earned Income

A
  • W-2

- Schedule C / Sole Proprietorship

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2
Q

Portfolio Income

A
  • Interest Income

- Dividend Income

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3
Q

Passive Income

A
  • Real Estate Rentals

- Business where the taxpayer does NOT PARTICIPATE

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4
Q

Is forgiveness of debt taxable?

A

YES

Schedule 1, Additional Income - Part I

“Cancellation of Debt”

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5
Q

Is unemployment taxable?

A

YES

Schedule 1, Additional Income - Part 1

“Unemployment Compensation”

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6
Q

Are prizes received taxable?

A

YES

Cash prize, fully taxable

Schedule 1 - Additional Income
“Prizes and Awards”

**Exception - never take possession, immediately donated

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7
Q

NON-TAXABLE INCOME

A

NON-TAXABLE:

  • Welfare benefits
  • Child support
  • Life insurance proceeds
  • Compensation for injuries
  • Alimony received for divorces after 2018
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8
Q

Are GAMBLING WINNINGS taxable?

A

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.

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9
Q

PORTFOLIO INCOME:

How are INTEREST and DIVIDENDS taxed?

A

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

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10
Q

How are the following taxed?

  • State and Local bonds
  • Puerto Rico bonds
  • Guam
  • US Virgin Islands
A

TAX-FREE

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11
Q

What form are Interest and Ordinary Dividends reported on?

A

Schedule B of Form 1040

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12
Q

Condition for a Series EE Bond to be tax-exempt:

A
  • Bought by taxpayer or spouse
  • Taxpayer 24+
  • Proceeds used for higher education costs
  • Phase out 79,700 / 119,550
  • Reduced by scholarships received
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13
Q

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?

A

FinCEn form 114
REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS (FBAR)
Due 4/15
Civil/criminal penalties for failure to file

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14
Q

Is interest income from a tax refund taxable?

A

YES

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15
Q

What can passive losses be deducted against?

A

ONLY passive gains.

If there is leftover, losses can be carrier over indefinitely.

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16
Q

What are the rules surrounding RENTAL ACTIVITIES?

A

-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
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17
Q

Schedule C - Sole Proprietorship

Business Meals deductible?

Entertainment deductible?

A

Business Meals -
2021 - 100%
2022 & 2023 - 50%

Entertainment-
NOT DEDUCTIBLE

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18
Q

SCHEDULE C - Estimated Taxes

Deduction?

A

NO. They are a credit against final tax liability.

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19
Q

SCHEDULE C -

Is the owner’s salary deductible?

A

No!

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20
Q

SCHEDULE C -

Is the owner’s health insurance deductible?

A

Yes, BUT

Not on Schedule C - it gets deducted on Schedule I - Part II - Adjustments to Income

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21
Q

SCHEDULE C - Charitable Contributions deductible

A

NOT as a business expense

Deductible on Schedule A as a personal itemized deduction

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22
Q

Individual Taxpayer - definition of a capital asset

A

(a) Stocks and Bonds
(b) property held for PERSONAL use / long-term investment

Note: think what creates capital gains?

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23
Q

Individual taxpayer -

definition of a Section 1231 asset

A

Section 1231 assets are not capital assets BUT

BUSINESS ASSETS.

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24
Q

How are gains on PERSONAL PROPERTY HANDLED? Losses?

A

GAINS - reported

LOSSES - no deduction allowed

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25
Q

Patents, Inventions, Models, and Designs

Capital assets?

A

NO, not for the person that created them.

Therefore if sold, no capital again.

= Ordinary Income

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26
Q

Holding period to be classified as S-T vs. L-T capital gain?

A

Short-term: 1 year or less

Long-term: Held more than 1 year

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27
Q

Long-term Capital Gains/Losses are __________ to arrive at net Long-Term Gain or Loss for the period.

A

Netted

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28
Q

Short-term Capital Gains/Losses are __________ to arrive at net Short-Term Gain or Loss for the period.

A

Netted

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29
Q

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 _________

A

Left alone.

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30
Q

If the taxpayer has a S-T gain and a L-T loss they are ____

A

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

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31
Q

How are S-T capital gains taxed?

A

ORDINARY INCOME

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32
Q

How are L-T capital gains taxed?

A

At reduced rates, 15% for most taxpayers.

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33
Q

What is the Qualified Business Income Deduction?

A

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.

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34
Q

QBI deduction liminations

A

$165,000 / $330,000 if the principal asset of the business is reputation (unfavorable rules apply)

**Architects/Engineers are exempt

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35
Q

What happens if the taxpayer has more than one QBI activity?

A

QBI is computed separately for each activity

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36
Q

Are scholarships taxable?

A

Tax-free if:

  • Candidate for degree
  • Used for tuition

Taxable:

  • No degree
  • Room & board / living expenses
  • Work / Stipend
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37
Q

Are Alimony payments taxable?

A

Divorced prior to 2018: YES

Divorced after 2018: NO

**Only cash counts, property does not.

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38
Q

Are Social Security Benefits taxable?

A

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

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39
Q

How much can a K-12 teacher deduct as Educator Expenses?

A

Up to $250

Schedule 1 - Part II

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40
Q

How much of Student Loan Interest is deductible?

A

Up tp $2500

Phase out:
$70,000 / $140,000

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41
Q

Can you deduct Self-Employed health insurance?

A

Yes, as long as the profit on Schedule C is more than the cost of health insurance

Schedule 1 - Deductions to arrive at AGI

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42
Q

Taxpayers whose only health coverage qualifies as a high deductible plan can put money into a ____ _____ ____ and receive a deduction in arriving at AGI.

A

Health Savings Account

Limit -
$3600 single
$7200 families

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43
Q

Is money taxable when it is removed from a Health Savings Account?

A

No, as long as it is used to cover medical expenses

44
Q

What happens to money leftover in a Health Savings Account?

A

It remains in the HSA in the following year.

45
Q

What qualifies as a high deductible for a HSA?

A

Single $1400

Family $2500

46
Q

Are contributions made by an employer to a HSA account included in the employee’s gross income?

A

No, they are excluded from the employee’s income.

47
Q

Can you deduct contributions to a Roth IRA?

A

No

However, distributions are tax free.

48
Q

Self Employed Pension, Keogh Plan

What are the contribution limits?

A

Deductible limit is 25% of bottom-line net on Schedule C

OR about $58,000

49
Q

How do you handle Jury Duty Pay given to employer?

A

Deduction to arrive at AGI

because the juror will receive a 1099, this cancels it out

50
Q

Legal fee in connection with a sexual assault case

A

Are deductible to arrive at AGI, Schedule 1

51
Q

Are moving expenses deductible?

A

Only for members of the military called to active duty.

Schedule 1 - Part II - Deductions to arrive at AGI

52
Q

Penalty on early withdrawal of non-retirement savings

A

Deductible to arrive at AGI - Schedule 1

53
Q

Is child support taxable?

A

No, tax exempt

54
Q

Are charitable contributions deductible if you don’t itemize?

A

Individuals who do NOT itemize can STILL deduct up to $300 of charitable contributions to arrive at AGI ($600 if married)

55
Q

What is better, a credit or a deduction?

A

Credits!

Deductions reduce TAXABLE INCOME

Credits reduce TAX dollar for dollar

56
Q

What is the Child Tax Credit for 2021?

A

$3000 per child under 18 on 12/31
$3600 per child under 6 on 12/3

refundable for 2021

57
Q

What is the Family Credit for 2021?

A

$500 for qualifying dependents other than children such as child over 18 or elderly

NON-REFUNDABLE

58
Q

What is the new limit for charitable contributions?

A

60% of AGI

59
Q

How do you value NON-CASH charitable contributions?

A

Donation are valued at FMV

If the object is held for < 1 year, deduction is limited to basis

60
Q

What is the SALT limit?

A

$10,000 in itemized deductions for state and local income taxes and property taxes

(Does not apply to Schedule C business property)

61
Q

Is interest on a HOME EQUITY LOAN deductible?

A

Yes, IF the proceeds are used to fix up the home

62
Q

Lifetime Learning Credit amount?

Limits?

Who can claim? How many per return?

A

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

63
Q

American Opportunity credit:

who can claim?

how much?

refundable?

limit?

A
  • 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
64
Q

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
A

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
65
Q

Child and Dependent Care Credit for 2021

Max per child?

Max number of children you can claim?

Refundable?

A

$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
66
Q

Child Tax Credit for 2021

How much?

Phaseouts?

A

$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

67
Q

Earned Income Credit

Who is it for?

Refundable?

A

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

68
Q

Work Opportunity Credit

Who?

How much?

Maximum?

A

-For employers who hire individuals from targeted groups

Maximum of $2,400

69
Q

Plug-In Credit

A

Based on battery size

Take the year the owner takes delivery of the car

70
Q

Retirement Savings Contribution Credit

Limit?

Max?

What about IRA deduction?

Who is it for?

A
  • limited to 50% contribution
  • max $1000
  • In addition to IRA deduction
  • Only for very low AGI (< $31,500)
71
Q

Elderly and Disabled Credit

Who?

limits?

How much?

A
  • 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.

72
Q

Can bad debt be deducted on Schedule C?

A

Only to the extent that it was recognized in income.

73
Q

For a cash basis taxpayer, how should preparer handle Accounts Receivable?

A

IGNORE. only pay attention to cash collections during the year.

74
Q

How should a widow file?

A

Year 1: One last year of MFJ

Year 2: Qualifying Widow

Year 3: Qualifying Widow

Year 4: Head of Household

75
Q

Limits for Pass-Thru losses from an active trade or business?

A

$250,000/500,000. Any remaining amount carries forward.

76
Q

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 __________

A

$10,000

77
Q

Are benefits paid to a deceased employee taxed or tax-exempt?

A

Taxed

78
Q

Paid preparers are required t o answer due diligence questions regarding what?

How much is the penalty for failing to do so?

A
  • HOH filing status
    • American Opportunity Credit
    • Earned Income Credit
    • Child tax credits

-Penalty is $520 per return

79
Q

How are security deposits handled in regards to rental income?

A

A security deposit is not included in income if the landlord plans to return it at the end of the lease.

80
Q

IRA Early withdrawal 10% penalty exceptions

A
  • 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
81
Q

YEAR OF SWIPE RULE applies to

A

Charitable contributions

Medical expenses (yours or dependents)

82
Q

Does rental income qualify for QBI?

A

Yes

83
Q

Is a state tax refund taxable in gross income?

A

Yes, IF the taxpayer itemized last year and claimed state taxes. NO, IF the taxpayer claimed the standard deduction.

84
Q

QBI: single taxpayer taxable income threshold to qualify for max 20% deduction?

A

$157,500

85
Q

Is self-employment tax levied on rental real estate income?

A

NO, SE tax does not apply to passive activities

86
Q

How are earnings and distributions taxed for a Roth IRA?

A

Trick question - not taxed

87
Q

Are any of the following deductible as medical expenses?
I. Vitamins
II. Health Club Membership
III. Widening hallway for wheelchair

A

I. No
II. No
III. Yes

88
Q

QBI wage limits:
Single taxpayer, income $525,000

Pays one employee $50,000

Business income $140,000

QBI deduction?

A

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

89
Q

Is RENTAL INCOME subject to self-employment tax?

A

NO, passive income is not subject to SE tax.

90
Q

Under TCJA, the loss limitation for pass through activities is what for single filers? MFJ?

A

MFJ - $500,000

Single - $250,000

91
Q

The TCJA allows NOLs to be carried forward for how long?

A

Unlimited carryforward.

92
Q

Under TCJA, NOLs can offset up to what % of income?

A

80%

93
Q

IRA Contributions are limited to what amount?

A

6000/7000 (catch-up)

Note they must have at least that much in earned income.

94
Q

Under TCJA, what is the max that can be distributed annually from a Section 529 plan for qualified K-12 expenses?

A

$10,000

95
Q

Does the QBI reduce the self-employment tax?

A

No, it reduces taxable income and therefore federal income tax.

96
Q

Adult children as dependents rules

A

Age 19 or under

Or age 24 if full-time student

Must live with you for more than half of the year

97
Q

Dependency threshold for qualifying relative?

Gross income limit?

Support threshold?

A

Must have earned less than $4300

Must have provided more than 50% support

98
Q

For purposes of filing Head of Household can the following qualify as a dependent?

I. Brothers and Sisters
II. Nieces and Nephews

A

I. yes

II. yes

99
Q

What is the definition of marginal tax rate?

A

The marginal tax rate is the tax rate you pay on an additional dollar of income.

100
Q

QBI Calculation

A

Lesser of:

Business income x 20%

OR

Taxable income - Capital Gains x 20%

101
Q

When business property is leased, how should any taxes that have to be paid be handled?

A

They should be deducted as additional rent.

102
Q

Employer CAN/CANNOT deduct qualified transportation fringe benefits.

A

CANNOT, however employee can exclude from income.

103
Q

Are education expenses to qualify for a NEW JOB or license (such as CPA review costs / costs to get an MBA) deductible?

A

NO

104
Q

Are costs required to MAINTAIN a license or expenses to stay in a current job deductible?

A

YES

105
Q

For a self-employed taxpayer, are trade association/professional organization fees deductible?

A

YES

106
Q

How much can employers deduct for operating a cafeteria for convenience of employer?

A

50%

107
Q

Can an employee deduct business miles driven?

A

NO

Only the self-employed can deduct business miles driven.

CPA: Regulation (24 decks)

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