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Regulation > Individual Taxation > Flashcards

Individual Taxation Flashcards

1
Q

Individual Taxation

Under what accounting basis are individual tax returns prepared?

A

Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.

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2
Q

Individual Taxation

What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?

A

*MSA/HSA contributions
*Investment penalties for early withdrawal
*Self-employed medical insurance premiums
*Self-Employment Tax (approx. 50%)
*IRA Contributions
*Student loan interest (can’t be another taxpayer’s dependent)
*Moving expenses
*Alimony
*Tuition - can’t take AOC/Lifetime Learning Credit for same expense
*Teacher expenses
*Attorney fees in discrimination lawsuit

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3
Q

Individual Taxation

Which items can be carried over to future years on an individual tax return?

A

Investment interest expense in excess of investment income
Charitable contributions
Excess Section 179
Capital losses
AMT Paid
Passive Activity Losses

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4
Q

Individual Taxation

Characterize the following carryover: Passive Activity Loss

A

No carryback

Can carry forward indefinitely

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5
Q

Individual Taxation

How is excess 179 expense carried forward?

A

Carry forward to next year.

Use in any year is limited to taxable income.

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6
Q

Individual Taxation

How long can investment interest expense in excess of investment income be carried forward?

A

Indefinitely.

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7
Q

Individual Taxation

How long is the carry forward for charitable contributions?

A

Can be carried forward 5 years.

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8
Q

Individual Taxation

How long is AMT paid carried forward, and how is it applied?

A

It can be carried forward indefinitely.

It may be applied against future regular income tax, but not against future AMT tax liability.

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9
Q

Individual Taxation

How are capital losses applied in individual taxes?

A

$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely.

The loss retains its character (STCL or LTCL).

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10
Q

Individual Taxation

How does an individual capital loss carryover differ from a corporate capital loss carryover?

A

Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely.

Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.

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11
Q

Individual Taxation

What ratio is applied to principle payments in an installment sale to determine the gain in a given year?

A

Gross Profit / Contract Price

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12
Q

Individual Taxation

What is the contract price in an installment sale for income tax purposes?

A

Contract Price = Sales Price - Liability assumed by buyer

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13
Q

Individual Taxation

On an individual return, regular mortgage interest on what loan amount is deductible?

A

$1,000,000

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14
Q

Individual Taxation

Interest on home equity loans up to what amount are deductible on an individual tax return?

A

$100,000

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15
Q

Individual Taxation

What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?

A

$25 per person for gifts

Service awards up to $400

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16
Q

Individual Taxation

What income can business losses offset on a 1040?

A

They may only offset active business income.

Note: W2 wages are considered active business income.

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17
Q

Individual Taxation

What income can passive losses offset on a 1040?

A

Only passive income such as rental income or limited partnership income.

Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)

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18
Q

Individual Taxation

Are interest and dividends active or passive income?

A

Neither. They are portfolio income.

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19
Q

Individual Taxation

What is (are) the depreciation convention(s) for personal property?

A

Mid-year/Mid-quarter

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20
Q

Individual Taxation

When is the mid-quarter convention used?

A

For depreciation when 40% or more of all purchases occur in 4th quarter.

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21
Q

Individual Taxation

What depreciation convention is used for real property?

A

Mid-month

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22
Q

Individual Taxation

What depreciation life and convention are used for leasehold improvements?

A

15 year straight line (S/L)

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23
Q

Individual Taxation

What amount of business start-up costs can be deducted? How is it expensed?

A

Up to $5,000

Amortized over 180 months

Reduced dollar-for-dollar by amount over $50,000

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24
Q

Individual Taxation

How are medical expenses deducted on a 1040?

A

On Schedule A:

Amounts in excess of 10% of AGI may be deducted

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25
Q

Individual Taxation

Which personal insurance premiums are not deductible as medical expenses on Schedule A?

A

Accident or disability insurance premiums are not deductible.

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26
Q

Individual Taxation

Under what circumstances can medical expenses paid on behalf of another be deducted on someone’s Schedule A?

A

Must be a citizen of North America

Must live with you, or if they do not, must be mother/father or a relative closer than a cousin.

Benefactor must provide more than 50% support to the beneficiary.

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27
Q

Individual Taxation

Which foreign taxes are deductible?

A

Foreign INCOME and REAL ESTATE taxes are deductible.

Foreign personal property taxes are NOT deductible.

Foreign tax assessments are not deductible- they are added to the basis.

28
Q

Individual Taxation

How is net investment income calculated, for the purpose of deducting excess investment interest expense?

A

Gross investment income - investment expense in excess of 2% of AGI = net investment income

Investment interest expense in excess of net investment income is deductible.

29
Q

Individual Taxation

What investment interest is never deductible?

A

Investment interest expense on tax-free securities is not deductible.

30
Q

Individual Taxation

When are mortgage points deductible and how are they deducted?

A

They are deductible if they represent prepaid interest on purchase of a new home or improving a home.

Refinance points are amortized over the life of the mortgage.

31
Q

Individual Taxation

How are charitable contributions of LTCG property and property related to a charity’s function deducted?

A

Deducted at fair market value (FMV), up to 30% of AGI

32
Q

Individual Taxation

How are charitable donations for STCG property and property not related to the charity’s function deducted on Schedule A?

A

Deduction is taken for adjusted basis in the property, up to 50% of AGI.

33
Q

Individual Taxation

Does a casualty loss affect the basis of property?

A

No. It decreases the fair market value (FMV) of the property.

34
Q

Individual Taxation

How is the deductible portion of a casualty loss calculated?

A

Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS)

GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss

35
Q

Individual Taxation

What are the miscellaneous deductions on Schedule A, and how are they deducted?

A

Deductible in excess of 2% of AGI

Continuing Education - if required to keep your job
Business travel
50% Meals and entertainment
Union Dues
Tax prep fees
Legal fees to collect alimony
Appraisal fees to value casualty loss of charitable contributions

36
Q

Individual Taxation

Which itemized deductions are not subject to phaseout based on income or other factors?

A

Medical
Casualty
Gambling
Investment Interest Expense

37
Q

Individual Taxation

Define qualifying child for most individual tax factors.

A

Must be resident of North America

Under age 19, or under age 24 if a student

38
Q

Individual Taxation

Define qualifying relative for most individual tax factors?

A

Must be citizen of North America

Must live with you, unless mother/father or relative closer than a cousin

You must provide more than 50% support to the individual

39
Q

Individual Taxation

How is minor income taxed at a parent’s rate calculated (AKA kiddie tax)?

A

Child’s unearned income
- early withdrawal penalties
- $1,000
- Greater than $1,000 or child’s itemized deduction related to unearned income
= Amount taxed at parents’ rate

40
Q

Individual Taxation

Can spouses married filing jointly use different accounting methods?

A

Yes, if they each own a small business. All non-business income is cash basis.

41
Q

Individual Taxation

At what rate is self-employment tax assessed?

A

15.3% of net earnings from self-employment

(Note: executor of an estate is NOT self-employment income)

42
Q

Individual Taxation

What is a refundable tax credit? Which individual tax credits are most commonly refunded?

A

A tax credit which takes the taxpayer’s tax owed on the return below zero, resulting in a refund to the taxpayer.

Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit.

Note: the REGULAR child tax credit is NOT refundable.

43
Q

Individual Taxation

How many education credits may be taken on a tax return?

A

American Opportunity Credit - per student

Lifetime Learning Credit - per taxpayer

Note: The American Opportunity Credit is refundable.

44
Q

Individual Taxation

What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?

A

The lesser of:

90% of current year’s total tax

100% of prior year’s total tax

110% of prior year’s total tax (if AGI is $150,000 or more)

45
Q

Individual Taxation

Which farming costs related to land are deductible? Which aren’t?

A

Deductible: Costs incurred to PRESERVE soil/water

Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)

46
Q

Individual Taxation

Which depreciation table is used for personal tangible property related to farming?

A

MACRS 150

47
Q

Individual Taxation

How long does the taxpayer have to petition the court for appeal after an audit?

A

90 days

48
Q

Individual Taxation

If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?

A

10 days

49
Q

Individual Taxation

What is the statute of limitations for a tax audit?

A

3 years, generally

6 years if 25% or more of gross income was omitted

The clock starts on the LATER of the due date or the filing date of the return.

There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.

50
Q

Individual Taxation

How is non-business bad debt deducted on a 1040?

A

It is treated as a STCL

51
Q

Individual Taxation

How long does an individual taxpayer have to file a claim for refund?

A

Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.

52
Q

Individual Taxation

When are life insurance premiums of an employee includable in income?

A

Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.

53
Q

Individual Taxation

When are scholarships not taxable?

A

When they are not in return for services rendered,

AND

The money is used only for tuition and books

Note: Scholarships for room and board are includable in income.

54
Q

Individual Taxation

What interest income is tax free?

A

State & municipal bond interest

US EE Savings Bond interest (note: HH bond interest is taxable)

55
Q

Individual Taxation

Which dividend income is tax free?

A

S-corporation (actually distributions)

Life insurance

56
Q

Individual Taxation

How much social security income can be taxed for individuals in higher income brackets?

A

Up to 85%

57
Q

Individual Taxation

Is unemployment compensation taxable?

A

Yes.

58
Q

Individual Taxation

Which damages awarded in lawsuits are taxable? Which are not?

A

Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability)

Any payments for punitive damages ARE taxable.

59
Q

Individual Taxation

Are workman’s compensation insurance benefits taxable?

A

No - similar to an award for damage to make a person whole.

60
Q

Individual Taxation

Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony

A

Alimony IS taxable.

Child support and divorce property settlements are NOT taxable.

61
Q

Individual Taxation

Adoption expenses - Are they deductible?

A

NO, they are not deductible. However tax benefits are available through the adoption CREDIT.

62
Q

Individual Taxation

Describe alimony recapture.

A

2nd Year: (3rd year - 2nd year - $15,000)

1st Year:
1st Year Alimony Paid
- Avg alimony paid in 2nd & 3rd years
- $15,000
- Recapture from 2nd year
=1st Year Alimony Recapture

Total Recapture = 1st Year Recapture + 2nd Year
Recapture

63
Q

Individual Taxation

How are Net Operating Losses (NOLs) utilized?

A

Can be carried back 2 years

If any left, can be carried forward 20 years.

64
Q

Individual Taxation

Which IRA contributions are deductible?

A

Traditional IRA = deductible

Roth IRA = not deductible

65
Q

Individual Taxation

When can a couple file married filing jointly?

A

They must be married at the end of the year.

If one spouse dies, they must be married at the end of the year.

66
Q

Individual Taxation

What are the requirements for filing as Head of Household?

A

Must have a dependent child

Must provide more than 50% of the child’s support

Must live with them more than 50% of the year

67
Q

Individual Taxation

What are the requirements for filing as qualifying widower?

A

Must have a dependent child.

Essentially gets MFJ status for the year of death + 2 tax years

Regulation (19 decks)

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