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Regulation > Individual Taxation > Flashcards

Individual Taxation Flashcards

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

*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
*Attorney fees in discrimination lawsuit

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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

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
Q

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

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

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.

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28
Q

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.

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29
Q

What investment interest is never deductible?

A

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

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30
Q

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.

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31
Q

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

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32
Q

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.

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33
Q

Does a casualty loss affect the basis of property?

A

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

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34
Q

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

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

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

A

Medical
Casualty
Gambling
Investment Interest Expense

37
Q

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

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

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

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

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

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

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

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

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

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

A

MACRS 150

47
Q

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

A

90 days

48
Q

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

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

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

A

It is treated as a STCL

51
Q

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

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

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

What interest income is tax free?

A

State & municipal bond interest

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

55
Q

Which dividend income is tax free?

A

S-corporation (actually distributions)

Life insurance

56
Q

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

A

Up to 85%

57
Q

Is unemployment compensation taxable?

A

Yes.

58
Q

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

Are workman’s compensation insurance benefits taxable?

A

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

60
Q

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

Adoption expenses - Are they deductible?

A

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

62
Q

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

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

Which IRA contributions are deductible?

A

Traditional IRA = deductible

Roth IRA = not deductible

65
Q

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

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

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

68
Q

What are the requirements that must be met for the sale of property to be taxed at the 0% capital gains rate?

A

1) The property must be held for more than 12 months
2) The taxpayer’s marginal rate may not be more than 15%
3) The gain must be recognized after December 31, 2007

69
Q

For higher-income taxpayers, after the application of any other limitation, itemized deductions are reduced by what?

A

The lesser of 3% of the excess of adjusted gross income over the applicable amount or 80% of certain itemized deductions.

The following are considered high-income taxpayers in 2014:

1) Single filers with income over $254,200
2) Head of household filers with income over $279,650
3) Married filing joint filers with income over $305,050
4) Married filing separate filers with income over $152,525

70
Q

What is the difference between an accountable plan and a nonaccountable plan?

A

In an accountable plan, none of the money paid by employer to employee for expenses is included in employees income.

Under nonaccountable plan, all expense payment received are reported in employee income.

71
Q

True or False: Interest expense on a loan for an auto used 75%, for business is partially deductible in Schedule C-Profit or Loss From Business.

A

True

72
Q

Taxes assessed against local improvements are deductible and not deductible when?

A

If they are of a nature that tends to increase the value of the property it is not deductible.

Maintenance, repair, or interest charges related to such assessments are deductible

73
Q

What is earned income credit?

A

The earned income credit (EIC or EICT) is a refundable tax credit, which means the taxpayer could be eligible for a tax refund even if the taxpayer did not have any federal income tax withheld during the tax year.

74
Q

What is the first year he can take tax-free distributions from his Roth IRA?

A

A tax-free distribution must take place after the 5-tax-year period that begins with the first tax year in which a contribution was made to a Roth IRA or rolled over from a non-Roth IRA to a Roth IRA.

75
Q

True or False: No deduction is allowed for losses from sales between related taxpayers.

A

True

76
Q

True or False: An individual may deduct as an itemized deduction, subject to the 2% floor, ordinary and necessary expenses paid or incurred during the tax year for the production or collection of income, for the management, conservation, or maintenance of property held for the production of income.

A

True

77
Q

How to calculate the amount of loss from rental activities (passive income) that can be offset from nonpassive sources?

A

Rental activities are considered passive activities even if the taxpayer materially participates. However, for rental real estate activities, a loss up to $25,000 may be deducted. However, the $25,000 loss must be reduced by half of the adjusted gross income (before the loss) in excess of $100,000. Thus, the deduction is $10,000 ($25,000 - (0.50 × $30,000)).

78
Q

What is the tax treatment of net losses in excess of the at-risk amount for an activity?

A

Any current losses are allowed only to the extent of the amount to which the taxpayer is at risk. Excesses are carried forward until such time they may be deducted from a gain that has adequate at-risk amounts.

79
Q

Rules limiting passive activity losses apply to:

A

Passive loss rules apply to individuals, estates, trusts, personal service corporations, and certain closely held corporations. Limitations on passive activity losses apply to individuals as a result of a flow through from S corporations and partnerships, but do not apply at the S corporation or partnership level.

80
Q

What is the maximum annual amount that can be contributed to the Coverdell education savings account and for what duration?

A

The maximum annual amount is $2,000 and savings account must be made before the account beneficiaries are 18 years old.

81
Q

True or False :When a corporation pays a premium (an amount paid in excess of the bond’s fair amount) for a taxable bond, it has the option of (1) amortizing the premium until the bond matures and reducing the basis of the bond by the amortized amount (which will offset the interest income on the bond) or (2) not amortizing the premium (this means the premium is part of the bond basis). For bonds issued after September 27, 1985, the premium amortization is calculated under a “constant yield method.”

A

True

82
Q

For 2014, what is the amount for the “shared responsibility payment” on one uninsured adult?

A

Under the Affordable Care Act, taxpayers who do not have health insurance are now required to pay a “shared responsibility payment.” The amount is $95 per adult and $47.50 per child, with a maximum family amount of $285

83
Q

Taxpayers using a flexible spending account are allowed what?

A

a $500 carryover balance to the following year or a grace period for the unused balance through March 15 of the following year.

Regulation (20 decks)

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