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Individual Taxation Flashcards

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1
Q

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

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

A 
I – Interest on Student Loans
E – Self Employment Tax (50%) 
M – Moving Expenses
B – Business Expenses
R – Rent, Royalty Expenses
A – Alimony “CANNOT”
C – Contributions to IRA (Traditional)
E – Early Withdrawal Penalties from CD’s
D – Jury Duty Fees
Education – Qualified Higher Education Expenses
Health – Contributions to Health Savings Plan
Farm – Farm Income
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3
Q

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

Characterize the following carryover: Passive Activity Loss

A

Can only offset passive activity gains
No carryback
Can carry forward indefinitely

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5
Q

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

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

A

Indefinitely.

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7
Q

How long is the carry forward for charitable contributions?

A

Can be carried forward 5 years.

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8
Q

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

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

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

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

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

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

A

$1,000,000

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14
Q

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

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

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

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

Are interest and dividends active or passive income?

A

Neither. They are portfolio income.

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19
Q

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

A

Mid-year/Mid-quarter

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20
Q

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

What depreciation convention is used for real property?

A

Mid-month

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22
Q

What depreciation life and convention are used for leasehold improvements?

A

15 year straight line (S/L)

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23
Q

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

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
Which personal insurance premiums are not deductible as medical expenses on Schedule A?
Accident or disability insurance premiums are not deductible.
26
Under what circumstances can medical expenses paid on behalf of another be deducted on someone's Schedule 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.
27
Which foreign taxes are deductible?
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
How is net investment income calculated, for the purpose of deducting excess investment interest expense?
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
What investment interest is never deductible?
Investment interest expense on tax-free securities is not deductible.
30
When are mortgage points deductible and how are they deducted?
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
How are charitable contributions of LTCG property and property related to a charity's function deducted?
Deducted at fair market value (FMV), up to 30% of AGI
32
How are charitable donations for STCG property and property not related to the charity's function deducted on Schedule A?
Deduction is taken for adjusted basis in the property, up to 50% of AGI.
33
Does a casualty loss affect the basis of property?
No. It decreases the fair market value (FMV) of the property.
34
How is the deductible portion of a casualty loss calculated?
Lower of 1) Drop in FMV; 2) Tax Basis Once the loss is determined, it is reduced by: 1) Insurance/Reimbursements 2) $100/event 3) 10% of AGI
35
What are the miscellaneous deductions on Schedule A, and how are they deducted?
Deductible in excess of 2% of AGIContinuing Education - if required to keep your jobBusiness travel50% Meals and entertainmentUnion DuesTax prep feesLegal fees to collect alimony Appraisal fees to value casualty loss of charitable contributions
36
Which itemized deductions are not subject to phaseout based on income or other factors?
Medical Casualty Gambling Investment Interest Expense
37
Define qualifying child for most individual tax factors.
Must be resident of North America Under age 19, or under age 24 if a student
38
Define qualifying relative for most individual tax factors?
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
How is minor income taxed at a parent's rate calculated (AKA kiddie tax)?
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
Can spouses married filing jointly use different accounting methods?
Yes, if they each own a small business. All non-business income is cash basis.
41
What is a refundable tax credit? Which individual tax credits are most commonly refunded?
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.
42
How many education credits may be taken on a tax return?
American Opportunity Credit - per student Lifetime Learning Credit - per taxpayer Note: The American Opportunity Credit is refundable.
43
What "estimated" tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?
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)
44
Which farming costs related to land are deductible? Which aren't?
Deductible: Costs incurred to PRESERVE soil/water | Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)
45
Which depreciation table is used for personal tangible property related to farming?
MACRS 150
46
How long does the taxpayer have to petition the court for appeal after an audit?
90 days
47
If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?
10 days
48
What is the statute of limitations for a tax audit?
3 years, generally6 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.
49
How is non-business bad debt deducted on a 1040?
It is treated as a STCL
50
How long does an individual taxpayer have to file a claim for refund?
Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.
51
When are life insurance premiums of an employee includable in income?
Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.
52
When are scholarships not taxable?
When they are not in return for services rendered (tuition, fees, required course material) , AND The money is used *only* for tuition and books Note: Scholarships for room and board are included in income.
53
What interest income is tax free?
State & municipal bond interest US EE Savings Bond interest (note: HH bond interest is taxable)
54
Which dividend income is tax free?
S-corporation (actually distributions) Life insurance Liquidating Dividends
55
Who can exclude social security benefits? | Who must include social security benefits in gross income, and what is the maximum amount that is taxed?
A person that has less than $25,000 provisional income can exclude all SS benefits Taxpayers with provisional income exceeding $60,000 are subject to a maximum of 85% inclusion.
56
Is unemployment compensation taxable?
Yes.
57
Which damages awarded in lawsuits are taxable? Which are not?
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.
58
Are workman's compensation insurance benefits taxable?
No - similar to an award for damage to make a person whole.
59
Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony
Alimony IS taxable. | Child support and divorce property settlements are NOT taxable.
60
Adoption expenses - Are they deductible?
NO, they are not deductible. However tax benefits are available through the adoption CREDIT.
61
How are Net Operating Losses (NOLs) utilized?
Can be carried back 2 years If any left, can be carried forward 20 years.
62
Which IRA contributions are deductible?
Traditional IRA = deductible | Roth IRA = not deductible
63
When can a couple file married filing jointly?
They must be married at the end of the year. If one spouse dies, they must be married at the end of the year.
64
What are the requirements for filing as Head of Household?
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
65
What are the requirements for filing as qualifying widower?
Must have a dependent child. Essentially gets MFJ status for the year of death + 2 tax years
66
What are the requirements for a payment to be considered alimony?
``` "CANNOT" Cash Only (or equivalent) - not property Apart when payments are made - not live together Not child support Not designated as property settlement Own return for payer and payee Terminates on death of recipient ```
67
What period is prepaid rent included in gross income? (Regardless of Cash basis or Accrual basis)
In the period received
68
When is a sole proprietor required to use the accrual method instead of the cash basis method?
When the sole proprietor carries significant goods in inventory
69
Entities that are prohibited from using the cash basis:
C Corporations Businesses with gross receipts of $5M or more Tax Shelters Certain truses
70
A claim for refund for erraneously paid income taxes must be filed on what form?
1040X
71
When are stock options taxed?
Non-qualified - taxed when exercised Qualified (incentive stock option-ISO)- taxed when stock sold (For AMT purposes, ISOs are taxed when exercised)
72
What are each of the following Schedules for: | A, B, C, D, E, F
A- Itemized Deductions (personal/employee expenses) B- Interest and Dividend Income C- Profit and Loss from a Business (employer/1099 expenses) D-Capital Gains/Losses E-Supplementary Income or Loss (Rental Income, Royalties, Flow Through Entities) F- Farm Profit/Loss
73
What type of education expense is a deductible item to AGI? How much of this is deductible?
Qualified Higher Education Expenses : Tuition for higher education of up to $4,000 may be deducted.
74
What are the deductible items ("from AGI") - Schedule A?
``` "COMMITT" Charitable Contributions Other Miscellaneous Expenses Miscellaneous Expenses Medical Expenses Interest paid Taxes paid Theft, Casualty Losses ```
75
AMT Adjustments & Preference Items:
``` "SIMPLE-PIE" Adjustments: Standard Deduction Interest on Home Equity loans Medical expenses under 10% AGI Personal and Dependent Exemptions Local and State Income taxes, Property/Sales Tax Employee Business Expenses, Invest exp, tax prep (BIT) ``` Preference Items: Private Activity Bond Interest Incentive Stock Options (when exercised, not sold) Excess Depreciation on personal property
76
A general business credit in excess of the limitation amount is carried back and forward how many years?
Back 1 year, and forward 20 years
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