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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 (Alternative Minimum Tax)
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 (Alternative Minimum Tax) 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

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

A

$1,000,000

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12
Q

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

A

$100,000

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13
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

Qualified award plans up to $1,600

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14
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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15
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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16
Q

Are interest and dividends active or passive income?

A

Neither. They are portfolio income.

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17
Q

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

A

Up to $5,000
Amortized over 180 months over $5k
Reduced by the cumulative cost over $50,000

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18
Q

How are medical expenses deducted on a 1040?

A

On Schedule A: Amounts in excess of 10% of AGI may be deducted

Reduced to 7.5% for ages 65 or older

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19
Q

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

A

Accident or disability insurance premiums are not deductible.

General Health and Wellness - ok

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20
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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21
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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22
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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23
Q

What investment interest is never deductible?

A

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

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24
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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25
Q

How are charitable contributions of LTCG (Long Term Capital Gain) 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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26
Q

How are charitable donations for STCG (Short Term Capital Gain) 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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27
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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28
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

29
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

30
Q

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

A

Medical
Casualty
Gambling
Investment Interest Expense

31
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

32
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
Group 10%

33
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

34
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.

35
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

36
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.

37
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)

38
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.

39
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)

40
Q

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

A

MACRS 150

41
Q

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

A

90 days

42
Q

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

A

10 days

43
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.

44
Q

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

A

It is treated as a STCL (Short Term Capital Loss)

45
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 paying tax, whichever is later.

46
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.

47
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.

48
Q

What interest income is tax free?

A

State and municipal bond interest
US EE Savings Bond interest

(note: HH bond interest is taxable)

49
Q

Which dividend income is tax free?

A

S-corporation (actually distributions)

Life insurance

50
Q

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

A

Up to 85%

51
Q

Is unemployment compensation taxable?

A

Yes.

52
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.

53
Q

Are workman’s compensation insurance benefits taxable?

A

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

54
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.

55
Q

Adoption expenses - Are they deductible?

A

NO, they are not deductible.

However tax benefits are available through the adoption CREDIT.

56
Q

Describe alimony recapture.

A

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

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

57
Q

How are Net Operating Losses (NOLs) utilized?

A

Can be carried back 2 years

If any left, can be carried forward 20 years.

58
Q

Which IRA contributions are deductible?

A

Traditional IRA = deductible

Roth IRA = not deductible

59
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.

60
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

61
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

62
Q

How do you calculate an individual’s income tax?

A 
Gross income
- Adjustments
= Adjusted Gross Income (AGI)
- Greater of Itemized or Standard Deduction
- Personal Exemptions
= Taxable Income
x Tax Rate
= Gross Tax Liability
- Credits
= Net Tax Liability or Refund
63
Q

What must an expense be to be deductible on Schedule C of form 1040?

A

BOTH ordinary and necessary to be deductible

64
Q

How long must a rental property be used before deductions are allowable?

A

Minimum rental - 14 days
Minimum personal - taxpayer uses property more than 14 days or 10% number of days which property rented (rented less than 15 days rental income not be reported)

Pass min rental and fail min personal - must allocate expenses between personal and rental

Pass Both - allocate all to rental

65
Q

What percentage does employer pay for FICA, Medicare and FUTA?

A

SS - 6.2% on 1st $115,200
MCR - 1.45% (extra .9% over threshold)
FUTA (employer only) - 6% up to $7,000

employer/self-employment can deduct employer portion
Employee portion is not deductible

66
Q

What is the MAGI threshold amounts?

A

Single/HOH $200,000
Married - jointly $250,000
Married - separate $125,000

67
Q

What are some items that are disallowed as deductions?

A

Politcal contributions
expenses related to tax-exempt income
expenditures that are against public policy (fines, bribes etc)

68
Q

What is the American Opportunity Credit?

A

Qualified education expenses for eligible student for 1st 4 years of higher education.

Max of $2,500 per student.

MAGI of $80k single or $160k married

Regulation (14 decks)

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