Individual Taxation

Question 1

Subject: Individual Taxation

List the Passive Activity rules

Answer 1

Subject: Individual Taxation
Passive Activity rules
1. Losses from PASSIVE ACTIVITIES can only be used to offset income from other PASSIVE ACTIVITIES
2. $25,000 of NON-PASSIVE activity income is allowed to be offset from losses from PASSIVE ACTIVITY income
3. $25,000 allowance is reduced by 50% of TAXPAYER MODIFIED AGI in excess of $100,000.
4. $25,000 allowance is fully PHASED OUT at $150,000

Question 2

Subject: Individual Taxation

List the underpayment penalties for Estimated Payments.

Answer 2

Subject: Individual Taxation
Underpayment penalties for Estimated Payment rules
1. There will be no underpayment penalty if amounts withheld and estimated payments made are AT LEAST EQUAL TO THE LESSER OF 90% OF THE ACTUAL INCOME of the individuals CURRENT TAX YEAR or 100% ACTUAL INCOME of the PRECEDING TAX YEAR.
2. AGI > $150,000 must use 110% for the PRECEDING TAX YEAR.

Question 3

Subject: Individual Taxation

Describe the formula for the deduction for NON-BUSINESS casualty losses

Answer 3

Subject: Individual Taxation

LESSOR of:
1.  Adjusted Basis or
2.  Decline in FMV
DECREASED by:
1.  Insurance Recovery
2.  $100 floor
3. 10% of AGI
=  Casualty loss deduction

Question 4

Subject: Individual Taxation

Describe the Section 179 Rules

Answer 4

Subject: Individual Taxation
Section 179
1. For 2014, Section 179 permits a taxpayer to elect to treat up to $500,000 of the cost of qualifying depreciable property as an EXPENSE rather than a CAPITAL EXPENDITURE.
2. $500,000 maximum is reduced DOLLAR BY DOLLAR by the cost of qualifying property placed in service during the taxable year that exceeds $2,000,000
3. Section 179 deduction is limited to a taxpayers TAXABLE INCOME.

Question 5

Subject: Individual Taxation

Describe the Section 179 limitations/ restrictions.

Answer 5

Subject: Individual Taxation
Section 179 limitations/ restrictions
1. Property must be purchased for use in taxpayer’s active trade or business.
2. Property must be purchased from UNRELATED party.
3. $500,000 DOLLAR BY DOLLAR reduction when qualified property placed in service exceeds $2,000,000
4. $500,000 expense limited by taxpayers aggregate TI for the year.

Question 6

Subject: Individual Taxation

When do the six year Statute of Limitations kick in?

Answer 6

Subject: Individual Taxation
Six year Statute of Limitations
- Omit more than 25% of gross income (includes total gross receipts before subtracting COGS and deductions)

Question 7

Subject: Individual Taxation

Describe the Medical Expense limitation deduction

Answer 7

Subject: Individual Taxation
Medical Expense Limitation Deduction
1. 10% of AGI
2. 7.5% of AGI (65 or older)

Question 8

Subject: Individual Taxation

Should Alimony received be included in gross income?

Answer 8

Subject: Individual Taxation

Yes. Alimony received is required to be included in gross income

Question 9

Subject: Individual Taxation

Is Alimony paid deductible?

Answer 9

Subject: Individual Taxation

Yes. Alimony paid is deductible (For AGI adjustment)

Question 10

Subject: Individual Taxation

What percentage of Self -Employment taxes is deductible to arrive at AGI

Answer 10

Subject: Individual Taxation

50% of Self -Employment taxes is deductible to arrive at AGI (FOR AGI ADJUSTMENT)

Question 11

Subject: Individual Taxation

Describe the Child and Dependent Care Credit

Answer 11

Subject: Individual Taxation
Child and Dependent Care Credit- Credit from 20% to 35% of certain dependent care expenses.
1. Limited to the lesser of
a. $3,000 for one qualifying individual,
$6,000 for two or more
b. Taxpayer’s earned income or
spouses if smaller
c. Actual expenses
2. Credit is 35% of AGI is $15,000 or less, but is REDUCED by 1 PERCENTAGE point for each $2,000 (or portion thereof) of AGI in excess of $15,000 (but NOT reduced below 20%)

Question 12

Subject: Individual Taxation

Describe the Child Tax Credit

Answer 12

Subject: Individual Taxation
Child Tax Credit
1. Amount of the credit is $1,000 per qualifying child
2. A qualifying child is a US Citizen or resident who is the taxpayer’s child, adopted child, eligible foster child, stepchild, sibling, step-sibling, or descendant who is under 17.
3. Phaseout when MAGI is $110,000 for joint filers, $55,000 for MFS, $75,000 for single. Credit reduced by $50 for each $1,000 of MAGI above threshhold

Question 13

Subject: Individual Taxation

List the Alternative Minimum Taxable Income (AMTI) Adjustments

Answer 13

Subject: Individual Taxation

1. Difference between regular tax depreciation and S/L (real property)
2. Personal property- Difference between 200% DDB and 150% DDB
3. Long Term Contracts- Excess of Percentage of Completion method over Completed Contract method.
4. Installment method disallowed
5. Medical expense deduction- 10% floor
6. Home mortgage interest deduction disallowed if loan proceeds were not used to buy, build, or improve home.
7. No deduction for personal/ state/ local/items subject to 2% AGI.
8. No deduction for personal exemption/ standard deduction

Question 14

Subject: Individual Taxation

When can awards for civic achievement be excluded from taxable income?

Answer 14

Subject: Individual Taxation
Awards for civic achievement be excluded from taxable income if
1. Recipient was selected without any action on his/ her part.
2. Not required to render future services.
3. Award directly transferred to government unit or tax-exempt organization.

Question 15

Subject: Individual Taxation

Describe the lottery winning rules

Answer 15

Subject: Individual Taxation

1. Lottery winnings are gambling winnings and must be included in gross income.
2. Gambling losses are deductible from AGI as a miscellaneous deduction (TO THE EXTENT OF WINNINGS) NOT SUBJECT TO THE 2% AGI FLOOR if a taxpayer itemizes deductions.

Question 16

Subject: Individual Taxation

Describes the rules for Tips

Answer 16

Subject: Individual Taxation

1. If an individual receives less that $20/ month while working for one employer, DO NOT report to employer but INCLUDE in gross income when received.
2. If an individual receives at least $20/ month while working for one employer s/he MUST REPORT the total amount of tips to that employer by the 10TH DAY OF THE NEXT MONTH.

Question 17

Subject: Individual Taxation

What are the requirements for payments to be defined as alimony per the Internal Revenue Code?

Answer 17

Subject: Individual Taxation

1. Payment must be made in CASH and received by or on behalf of a payee spouse.
2. Payments MUST TERMINATE on death of payee spouse.

Question 18

Subject: Individual Taxation

Describe the Uniform Capitalization (UCC) rules.

Answer 18

Subject: Individual Taxation
UCC rules
-Require that all costs incurred (both direct and indirect) in manufacturing or constructing REAL or PERSONAL property of in purchasing or holding PROPERTY FOR RESALE, must be CAPITALIZED as part of the property.
-Rules do not apply to “small retailer or wholesaler” who acquires property for resale if AVERAGE ANNUAL GROSS RECEIPTS for THREE PRECEDING TAX YEARS is LESS THAN $10,000,000

Question 19

Subject: Individual Taxation

Describe the items that are INCLUDED in UNICAP.

Answer 19

Subject: Individual Taxation
Include
1.  Factory repairs/ maintenance
2. Factory admin/ officer salaries related to production
3.  Taxes
4.  Cost of quality control/ inspection
5. Pension costs
6. Service Support

Question 20

Subject: Individual Taxation

Describe the items that are EXCLUDED in UNICAP.

Answer 20

Subject: Individual Taxation
Exclude
Non-Maintenance costs
Selling
Advertising
Research Costs
Experimental Costs

Question 21

Subject: Individual Taxation

How are non-business bad debts treated?

Answer 21

Subject: Individual Taxation

Non-business bad debts are deductible as a STCL

Question 22

Subject: Individual Taxation

What are the limit for the deductibility of gifts intended as business expenses?

Answer 22

Subject: Individual Taxation

Gifts deductible as a business expense limited to $25 PER RECIPIENT.

Question 23

Subject: Individual Taxation

What are the NOL rules for BUSINESS losses for individuals?

Answer 23

Subject: Individual Taxation

1. In computation of an NOL, no deduction is allowed for PERSONAL and DEPENDENCY EXEMPTIONS.
2. An excess of NON- BUSINESS DEDUCTIONS over NON-BUSINESS INCOME CANNOT be subtracted in computing the NOL.

Question 24

Subject: Individual Taxation

What are the normal depreciation conventions for PERSONAL and REAL property?

Answer 24

Subject: Individual Taxation
In general,
1. HALF YEAR CONVENTION- Depreciable personal property
2. MID MONTH CONVENTION- Depreciable real property.

HOWEVER,
MID- QUARTER CONVENTION MUST BE USED if more than 40% of all personal property is placed in service during the last quarter of the taxable year.

Question 25

Subject: Individual Taxation

What is the general rule for rental properties that are used as a residence for the taxpayer?

Answer 25

Subject: Individual Taxation
Rental Property used as a residence
If personal use is AT LEAST 14 days or AT LEAST 10% of the number of the days to be rented, deductions are limited to rental income.

Question 26

Subject: Individual Taxation

What are the two rules to be aware of for the deductibility of MOVING EXPENSES?

Answer 26

Subject: Individual Taxation
Moving Expenses Deductibility
1. 50 Mile Rule
2. 39 weeks out of 12 month rule

Question 27

Subject: Individual Taxation

What are the general ROTH IRA rules?

Answer 27

Subject: Individual Taxation
General ROTH IRA rules
1. Roth IRA contributions are not deductible but eligible withdrawals are tax exempt
2. Maximum annual contributions to Roth IRA is reduced if AGI exceeds certain thresholds.
3. Individual allowed to make contributions to a Roth IRA even after age 70 1/2.
4. Roth IRA contribution must be made by due date of 1040 (NOT INCLUDING EXTENSIONS)

Question 28

Subject: Individual Taxation

What are the general IRA rules?

Answer 28

Subject: Individual Taxation
General IRA rules
1. For MFJ, up to $5,500 can be deducted for contributions to the IRA for each spouse (even if one spouse is not working provided that COMBINED INCOME of both spouses is EQUAL or MORE than the IRA contribution.
2. Proportional phase out for MFJ AGI
a. If both spouses are covered by a employer sponsored plan the MFJ phase out is between $96,000 and $116,000
b. If ONLY ONE SPOUSE IS COVERED by an employer sponsored plan, the MFJ phase out is between $181,000 and $191,000.
3. An INDIVIDUAL of at least age 50 can make a catch up contribution of $1,000 resulting in an increased maximum contribution of $6,500 for 2014.

Question 29

Subject: Individual Taxation

What are the general Education IRA (Coverdell) rules?

Answer 29

Subject: Individual Taxation
Education IRA (Coverdell) rules
1. Contributions not deductible
2. My contribute up to $2,000 in 2014
3. Eligibility phased out if AGI exceeds certain threshold levels.
4. Contributions can be made on behalf of a beneficiary until the beneficiary reaches 18.

Question 30

Subject: Individual Taxation
True or False- No charitable deduction is allowable for the value of a taxpayer’s services performed for a charitable organization?

Answer 30

Subject: Individual Taxation
True- No charitable deduction is allowable for the value of a taxpayer’s SERVICES PERFORMED for a charitable organization

Question 31

Subject: Individual Taxation

Describe the rules for the charitable contributions of property to a qualified organization.

Answer 31

Subject: Individual Taxation

1. If appreciated property is contributed, the amount of contribution is generally the property’s FMV if a sale of the property would result in a LTCG.
2. If sale would result in a STCL, the amount of allowable contribution deduction is its basis (cost).

Question 32

Subject: Individual Taxation
or False- A capital expenditure made for medical reasons that improves a residence is deductible as a medical expense to the extent that the expenditure exceeds the increase in value of the residence.

Answer 32

Subject: Individual Taxation
True- A capital expenditure made for medical reasons that improves a residence is deductible as a medical expense to the extent that the expenditure EXCEEDS THE INCREASE IN VALUE OF THE RESIDENCE.

Question 33

Subject: Individual Taxation

What is the general credit for the elderly?

Answer 33

Subject: Individual Taxation
Credit for the elderly
Amount of credit (limited to the tax liability) that is 15% of an initial amount reduced by social security and 50% of AGI in excess of $10,000

Question 34

Subject: Individual Taxation
True or False- Expenses incurred in the production of income are deductible as miscellaneous itemized deductions subject to the 2% of AGI floor.

Answer 34

Subject: Individual Taxation
True- Expenses incurred in the production of income are deductible as miscellaneous itemized deductions subject to the 2% of AGI floor.

Question 35

Subject: Individual Taxation

List the requirements for the dependency exemption for a qualifying relative.

Answer 35

Subject: Individual Taxation
Requirements for dependency exemption
1. Taxpayer furnishes more than 50% of the dependent’s support.
2. Dependent’s gross income is less the $3,950
3. Dependent is of specified relationship to the taxpayer or lives in the taxpayer’s household for the entire year.
4. Dependent is a US citizen or a North American resident.
5. Dependent does not file a joint return.

Question 36

Subject: Individual Taxation

True or False- Deduction for interest expense on investment indebtedness is fully deductible.

Answer 36

Subject: Individual Taxation
False
Deduction for interest expense on investment indebtedness is limited to the taxpayer’s NET INVESTMENT INCOME.

Question 37

Subject: Individual Taxation

What is the general rule for deductibility for Qualified Residence Interest?

Answer 37

Subject: Individual Taxation
QRI general rule
Interest on home equity indebtedness loans of up to $1,000,000 is deductible as QRI if the loans are secured by a taxpayers principal or second residence regardless of how the loan proceeds are used.

The amount of indebtedness CANNOT exceed the FMV of home reduced by any existing debt on the residence.

Question 38

Subject: Individual Taxation

In general, what is the overall limit for charitable contributions?

Answer 38

Subject: Individual Taxation

Overall limit to charitable contributions is 50% of AGI. This limit is generally for contributions to the following organizations.

1. Churches
2. Qualified Educational organizations.
3. Tax exempt hospitals
4. Medical research institutions.
5. State or political divisions
6. US or the District of Columbia

Question 39

Subject: Individual Taxation

What is the overall limit for charitable contributions of LTCG property?

Answer 39

Subject: Individual Taxation
Charitable contributions of LTCG property is limited to 30% of AGI.
Taxpayer may elect to reduce all appreciated LTCG property by the potential gain and be exempt from the 30% of AGI limitation.

Question 40

Subject: Individual Taxation
True or False- A taxpayer my deduct as a charitable contribution up to $100 per school month of unreimbursed expenses incurred to maintain a student ( in the 12th or lower grade) in the taxpayer’s home pursuant to a written agreement with a qualified organization.

Answer 40

Subject: Individual Taxation
False
A taxpayer my deduct as a charitable contribution up to $50 per school month of unreimbursed expenses incurred to maintain a student ( in the 12th or lower grade) in the taxpayer’s home pursuant to a written agreement with a qualified organization.

Question 41

Subject: Individual Taxation

What amount of Qualified Adoption Expenses is eligible for nonrefundable tax credit for 2014?

Answer 41

Subject: Individual Taxation

For 2014, up to $13,190 of Qualified Adoption Expenses are eligible for a nonrefundable tax credit.

Question 42

Subject: Individual Taxation

What are the requirements for a qualifying relative under the Dependency Exemption?

Answer 42

Subject: Individual Taxation
Requirements
1. Person must be of specified relationship to the taxpayer OR
2. A member of the taxpayer’s household

Cousins and Foster parents are not of specified relationship and only qualify if a they are a member of the taxpayer’s household.

Question 43

Subject: Individual Taxation

What are the requirements to be eligible to file as a Qualifying Widower?

Answer 43

Subject: Individual Taxation
Qualifying Widower- Allows widowers to use joint return tax rates.
1. Available for the two taxable years following the year of spouses death if
a. Surviving spouse was eligible to file joint return in the year of spouse’s death
b. Does not remarry before end of the current tax year.
c. Surviving spouse pays over 50% of the cost of maintaining household which is the principal home for the child.

Question 44

Subject: Individual Taxation

What is the deduction exclusive for self- employed taxpayers?

Answer 44

Subject: Individual Taxation
A self- employed taxpayer is allowed a deemed deduction equal to 7.65% of self- employment earnings in computing the amount of net earnings upon which the tax is based.

Question 45

Subject: Individual Taxation
True or False- For 2014, there will be no penalty if the total tax shown on the return less the amount paid through withholding (including excess Social Security tax withholding) is less than $1,000

Answer 45

Subject: Individual Taxation
True- For 2014, there will be no penalty if the total tax shown on the return less the amount paid through withholding (including excess Social Security tax withholding) is less than $1,000

Question 46

Subject: Individual Taxation

What is the limit for the deductibility of a Keogh retirement plan for SE taxpayers?

Answer 46

Subject: Individual Taxation
Keogh retirement plan limitation
-Limited to the lesser of $52,000 for 2014, or 25% of self-employment income.

Question 47

Subject: Individual Taxation

When must a Self- Employed individual file an income tax return?

Answer 47

Subject: Individual Taxation

A Self- Employed individual must file an income tax return if the net earnings from self employment are $400 or more.

Question 48

Subject: Individual Taxation

A general business credit in excess of the limitation amount is carried

Answer 48

Subject: Individual Taxation

A general business credit in excess of the limitation amount is carried back 1 year and forward 20 years.

Question 49

Subject: Individual Taxation

What is the maximum annual deduction on the interest on qualified education loans?

Answer 49

Subject: Individual Taxation
The maximum annual deduction on the interest on qualified education loans is limited to $2,500 and is reduced by modified adjusted gross income in excess of $60,000 if single, head of household, or a qualifying widow(er); $120,000 if married filing jointly.

Question 50

Subject: Individual Taxation

What are the requirements of the Earned Income Credit (EIC)?

Answer 50

Subject: Individual Taxation

To be eligible,
1. An individual must have earned income

2. An individual generally must maintain a household for more than half the year for a qualifying child. A qualifying child includes the taxpayer’s child or grandchild who lives with the taxpayer for more than half of the taxable year, and is under age 19, or a full-time student under age 24, or permanently or totally disabled.
3. The earned income credit is not available to married taxpayers filing separately.

Question 51

Subject: Individual Taxation

True or False- Social security received during the year by the taxpayer is included in gross income.

Answer 51

Subject: Individual Taxation
False
Social security received during the year by the taxpayer is NOT INCLUDED in gross income.

Question 52

Subject: Individual Taxation

True or False- A distribution from a Roth IRA is treated as first made from contributions (return of capital).

Answer 52

Subject: Individual Taxation
True
A distribution from a Roth IRA is treated as first made from contributions, and to that extent, will be a nontaxable return of capital.

Question 53

Subject: Individual Taxation

What are the Sec. 1244 rule for stocks that are deemed worthless?

Answer 53

Subject: Individual Taxation
Section 1244 permits a shareholder to deduct an ORDINARY LOSS of up to $50,000 per year ($100,000 if married filing jointly) if qualifying stock is sold, exchanged, or becomes worthless. Any remaining loss is deducted as a CAPITAL LOSS.

Question 54

Subject: Individual Taxation

Describe the support test

Answer 54

Subject: Individual Taxation
The support test requires an individual to furnish over one-half of a dependent’s support. In the event no one person provides more than 50% of the dependent’s support, any individual who contributed more than 10% is entitled to claim the exemption if each other person contributing more than 10% of the support signs a written consent not to claim the exemption (i.e., multiple support agreement).

Question 55

Subject: Individual Taxation
True or False- The cost of group-term life insurance provided by an employer must be included in an employee’s income to the extent of the cost of life insurance coverage in excess of $50,000.

Answer 55

Subject: Individual Taxation
True
The cost of group-term life insurance provided by an employer must be included in an employee’s income to the extent of the COST of life insurance coverage in excess of $50,000.

Question 56

Subject: Individual Taxation
True or False- Annuities and pensions are excluded from taxable income to the extent that they represent a return of capital.

Answer 56

Subject: Individual Taxation
True
Annuities and pensions are excluded from taxable income to the extent that they represent a return of capital.

Question 57

Subject: Individual Taxation
True or False- The use of the adjusted seasonal installment method is available for individuals when calculating estimated taxes.

Answer 57

Subject: Individual Taxation
False
The use of the adjusted seasonal installment method is available to corporations, but is not available for individuals.

Question 58

Subject: Individual Taxation
True or False- The threshold amount of the unearned income of a child under age 18 is normally twice the amount of the applicable standard deduction for a dependent who has only unearned income. Amounts over this threshold are taxed at the parents’ rate.

Answer 58

Subject: Individual Taxation
True
The threshold amount of the unearned income of a child under age 18 is normally twice the amount of the applicable standard deduction for a dependent who has only unearned income. Amounts over this threshold are taxed at the parents’ rate.

Question 59

Subject: Individual TaxationT

True or False- Advance deduction is allowed for interest expense.

Answer 59

Subject: Individual Taxation
False.
No advance deduction for interest expense is allowed. Instead, interest expense must be amortized over the period to which it relates.

Question 60

Subject: Individual Taxation

What are the requirements in order to deduct an ordinary loss on sale or worthlessness of stock under Sec. 1244?

Answer 60

Subject: Individual Taxation
Requirements
(1) the shareholder must be the original holder of stock, and an individual or partnership
(2) the stock can be common or preferred, voting or nonvoting
(3) the amount of ordinary loss is limited to $50,000 ($100,000 on joint return)
(4) the corporation during the 5-year period before the year of loss received less than 50% of its total gross receipts from royalties, rents, dividends, interest, annuities, and gains from sales or exchanges of stock or securities
(5) the corporation’s aggregate amount of money and adjusted basis of other property received for stock as a contribution to capital and paid-in surplus does not exceed $1,000,000.

Question 61

Subject: Individual Taxation
True or False- Self Employment income includes personal interest, dividends, rents, capital gains and losses, and gains from the disposition of business property

Answer 61

Subject: Individual Taxation
False
Self Employment income EXCLUDES personal interest, dividends, rents, capital gains and losses, and gains from the disposition of business property