Individual Taxation

Question 1

Accounting method

Answer 1

rules used to determine the tax year in which income and expense are reported for tax purposes (cash and accrual)

Question 2

Accounting period

Answer 2

period of time, usually 12 months, used by a taxpayer for the determination of taxable income. Taxpayers who do not keep records must use a calendar year.

Question 3

Adjusted gross income

Answer 3

unique to individual taxpayers, generally represents an individual’s gross income less business expenses, expenses attributable to rents & royalty, capitol losses, and certain personal expenses

Question 4

Amount realized

Answer 4

amount received by a taxpayer from the sale or other disposition of property (sum of cash and property received, plus debt assumed by the buyer)

there must be a transaction which gives rise to the income

Question 5

At-risk limitation

Answer 5

taxpayer’s deductible loss from an activity is limited to the amount the taxpayer has at risk in the activity at the end of the taxable year. (sum of cash and property contributed, plus amounts borrowed for use in the activity)

Question 6

Cash method

Answer 6

method of accounting under which the taxpayer generally reports income for the taxable year in which payments are actually and constructively received. Expenses deductible when paid

• Constructively received = payment is available to recipient
• prepaid interest is not deductible, whether cash-basis or not

Question 7

Gross income

Answer 7

all income from whatever source derived

Question 8

Material participation

Answer 8

level of participation by a taxpayer in an activity that determines whether the activity is a passive activity or an active trade or business.

Question 9

Passive loss

Answer 9

loss generated from a passive activity (generally not allowed to offset trade or business income)

Question 10

Realized gain or loss

Answer 10

gain or loss determined by taking the amount realized from the sale or exchange of property and subtracting the property’s adjusted basis

Question 11

Statute of limitations

Answer 11

period of time after which a taxpayer’s return is no longer subject to assessment, and the taxpayer can no longer file a claim for refund. Normal stature of limitations is generally three years from the alter of the date the tax return is filed, or its due date

Question 12

Stock redemption

Answer 12

acquisition by a corporation of its own stock from a shareholder in exchange for property

Question 13

Tax benefit rule

Answer 13

recovery of an item that was deducted in a prior year (state income tax refund) must be included in gross income for the year of recovery

Question 14

Annuity exclusion

Answer 14

(net cost of annuity/expected total annuity payments) x Payment received

expected total annuity payments = annual return x # of years receivable or life expectancy

Question 15

Exclusions from Taxable Income

Answer 15

Child Support
Property Settlement (divorce division of capital)
Annuity payment (return of capital)
Life insurance proceeds (installment payments exceeding face amount are taxable)
Employer paid group-term life ins premiums
Employer paid health ins premiums
Employer paid accident & health benefits
Employer contributions to and earnings in MSA
Employer furnished meals & lodging (if for the benefit of the employer)
Employer-provided educational assistance
Employer dependent care assistance
Employer paid qualified adoption expenses
Employee fringe benefits
Sickness or Injury compensation
Damages for physical injury or sickness
State municipal bond interest
Interest on US savings bonds if spent on higher education
Scholarships & fellowships
Political contributions received
Parsonage rental assistance

Question 16

Incentive stock option

Answer 16

If held for two years, total realized gain is treated as long-term capital gain

If not held for two years: employee has ordinary income to the extent that FMV (when exercised) exceeds option price

Question 17

nonqualified stock option

Answer 17

If FMV is determinable: Included in ordinary income when received

FMV not determinable: Included in income when exercised (extent that FMV exceeds option price

Question 18

Employee stock purchase plan

Answer 18

If held for two years after option and one year after exercise: ordinary income = FMV (lessor of grant or disposition date) - option price

If not held: ordinary income = FMV when exercised - option price

Question 19

Installment method (gains)

Answer 19

calculate annual gain reported:

(Gross profit/total contract price) x amount received

Question 20

Alternative Depreciation System

Answer 20

Taxpayer can elect to use straight-line depreciation over the property's ADS class life (12 years if unknown
Must be used for foreign use property, property used 50% or more for personal use

Question 21

Averaging convention

Answer 21

Half-year

Mid-quarter (if 40% of new assets were purchased in last quarter of the year)

Mid-month: for real property

Question 22

Depreciating Leasehold Improvements

Answer 22

1. generally recovered over the MACRS recovery period of the underlying property without regard to the lease term
2. for qualified leasehold improvements place in service between 10/2004 - 12/2011: 15 year, straight-line recovery

Question 23

Section 179 Depreciation

Answer 23

electing to expense the cost of property rather than capitalize

1. Qualifying property: new or used
2. Qualifying real property (2010 - 2013): qualified leasehold improvements, restaurant property

Maximum cost deductible = $500,000 with dollar for dollar reduction for assets exceeding $2mill in cost

Question 24

Cafeteria Plan

Answer 24

employer-sponsored benefit packages that offer employees a choice between taking cash and receiving qualified benefits.

If employee chooses cash, it is included as gross income

Question 25

Group-term life insurance

Answer 25

cost (premiums paid) of the first $50,000 of coverage can be excluded from gross income during the employees life.

Death benefits are generally tax free

Question 26

Basis in Inherited Stock

Answer 26

1. FMV at date of death

2. Alternative method: FMV at date of distribution

Question 27

When are dividends taxable

Answer 27

If paid by mail, taxable when received

Question 28

Stock Dividends

Answer 28

1. common stock: dividend is nontaxable, basis for original stock is allocated to the dividend stock in proportion to FMVs
2. preferred stock: dividend is taxable for FMV on date of distribution

Question 29

Alimony

Answer 29

Must be paid in cash or equivalent, (can be paid on behalf of spouse, college tuition, etc)
Must terminate upon death or remarriage

Recapture:
First year: (1st year payment - average 2nd & 3rd year payments less 2nd year recapture) - 15,000

Second year: (2nd year payment - 3rd year payment) - 15,000

Add 1st & 2nd year recapture for total

Question 30

Provisional income

Answer 30

AGI + tax-exempt income + 50% of SS benefits

Question 31

Tip Income

Answer 31

if over $20, must be reported to employer by 10th day of the following month. Taxable to employee in the month reported.

Question 32

Lease payments received

Answer 32

must be reported and taxable in the period received, regardless if taxpayer is accrual-based

Question 33

Uniform capitalization

Answer 33

all costs incurred (direct and indirect) in manufacturing or constructing real or personal property, or in purchasing or holding property for sale, must be capitalized as part of the cost of property.

• indirect costs include: factory repairs and maintenance, factory administration and officers’ salaries related to production, taxes (other than income taxes), costs of quality control and inspection, service costs of pension and profit-sharing plans.
• indirect costs do not include (immediately deductible) service costs such as marketing, selling, advertising, and general management.
• Rule does not apply to a “small retailer or wholesaler” who acquires personal property for resale if three-year average annual gross receipts are less than $10 mill

Question 34

deductible business gifts

Answer 34

limited to $25 per recipient of git

Question 35

Net Operating Loss

Answer 35

NOL = business loss reduced by business income (wages, rental income, etc).

Personal exemptions and standard deduction are left out of the calculation.

Question 36

Rental real estate losses

Answer 36

passive loss regardless of participation: up to $25,000 can be deducted against ordinary income if AGI is below $150,000 (phase out calculation = 50% of AGI in excess of $100,000)

Question 37

Passive activity limitation

Answer 37

applies to individuals, estates, trusts, closely held C-corps and personal service corporations.

does not apply to partnerships, S-corps, widely held C-corps

*portfolio income in partnerships passes through to partners (is not offset against passive loss)

Question 38

MACRS conventions

Answer 38

half-year: personal property is treated as placed in service or disposed of at the midpoint of the taxable year.

mid-quarter: if 40% of all personal property is placed in service during the last quarter of the tax year, property is treated as placed in service in the middle of the last tax quarter.

half-month: real property treated as placed in service in the middle of the month

Question 39

MACRS categories

Answer 39

3-year, 200%
5-year, 200%: computers, office machinery
7-year, 200%: furniture & fixtures
10-year, 200%
15-year, 150%
20-year, 150%
27.5-year, straight line: residential real property
39-year, straight line

Question 40

Roth IRAs

Answer 40

maximum contribution subject to to reduction if AGI exceeds certain thresholds

contributions can be made even after age 70.5

contributions must be made by tax return deadline not including extensions

no AGI limit for rolling traditional IRA over to Roth

Question 41

Educational IRA

Answer 41

contributions are not deductible, limited to $2,000, and cannot be made after beneficiary is age eighteen or older
withdrawals of earnings are tax free if spent on qualifying educational expenses

Question 42

IRA contributions

Answer 42

can be made for each joint filer, even if one is not working (contribution cannot exceed earned income)

$5,500 for 2012, catch up of $1,000 if over 50

If employer plan is available, deductible contributions out between $59,000 and $69,000 for single filers, $95,000 and $115,000 for covered spouse, and $178,000 to $188,000 for spouse not covered under employee plan

Question 43

defined contribution plan

Answer 43

2013 maximum contribution is $51,000 (or 100% of self-employed income if less)

Question 44

Standard deduction

Answer 44

Single: 6,100
Joint: $12,200
HOH: $8,950
Dependent: lesser of (1) $6,100 or
(2) greater of $1,000 or earned income + $350

Additional standard deduction (65+ or blind):
Single: 1,500
Married: 1,200 each

Question 45

Qualifying child

Answer 45

1. taxpayer’s child, grandchild, sibling
2. younger than taxpayer and under 19 (24 if enrolled in school)
3. live with taxpayer
4. cannot provide more than 1/2 their own support
5. cannot file joint return

Question 46

Qualifying relative

Answer 46

1. cannot file joint return
2. must live with taxpayer or be a relative closer than a cousin
3. cannot have gross income over $3,900
4. cannot provide more than 1/3 of their own support

Question 47

Qualified residence interest

Answer 47

deductible if loan does not exceed $100,000 or FMV of residence - regardless of what the loan proceeds were used for

Question 48

Casualty loss

Answer 48

$100 floor per loss, limited to 10% of AGI

lesser of reduction in FMV or adjusted basis

Question 49

AMT

Answer 49

Adjustments:
depreciation recapture,
incentive stock option benefits (FMV over amount paid at exercise),
no deductions allowed for: qualified residence interest, state & local taxes and 2% itemized deductions, personal exemption, standard deduction

Preference items (added back to income): tax-exempt interest on private activity bonds, accelerated depreciation on real and leased property over straight line, etc.

Question 50

General Business Credit

Answer 50

ex: investment credit, work opportunity credit, alcohol fuels credit, research credit, low income housing credit, disabled access credit, renewable resources electricity credit, empowerment zone employment credit, Indian employment credit, employer social security credit, orphan drug credit, new markets tax credit, small-employer pension plan startup cost credit, employer-provided child care credit

Question 51

dependent care credit

Answer 51

maximum allowed expense ($3,000 per child) x 20-35%

% decreases 1 point for every $2,000 AGI exceeds $15,000

Question 52

Foreign tax credit

Answer 52

can choose whether to take tax as a deduction or credit. If credit, calculate limit by:

(Foreign Income/All Income + Exemptions) x US Tax

*compute passive and business credits separately

Question 53

American Opportunity Credit

Answer 53

maximum is $2,500 ) 100% of first $2,000 of expenses and 25% of second $2,000 expenses

available per student

Question 54

Lifetime Learning Credit

Answer 54

20% of $10,000 expenses

available per taxpayer