Individual Taxation Flashcards
Standard Deduction
Single $6,300
MFJ $12,600
Personal Exemption
$4,050
2016 Personal Exemption Phase-out
Single AGI - $259,400
MFJ AGI - $311,300
Two types of tax years
Calendar tax year – is 12 consecutive months beginning January 1 and ending December 31.
Fiscal tax year – is 12 consecutive months ending on the last day of any month except December.
Cash Basis recognizes income
when cash or property is received (FMV)
whether earned or unearned
Accrual Basis recognizes income
when cash or property is received
wheb Earned only
Cash basis reports deductions when
cash or check is disbursed
expense charged on CC
Accrual basis reports deductions when
incurred
liability exists when amount is determinable
Cash Basis allowed for
Individual TP’s
Individual TP’s owning a business
Individually owned Partnerships
S-Corps
PSC’s (Health, Law, Accounting)
-exception to corp. rule for accrual
*NOT PUBLICLY TRADED
Accrual Basis allowed for
Corporations
Partnerships with a Corp. partner
Inventory
Prepaid Rent and Royalties must include in GI in period received!
*Anyone can choose Accrual…
Cash Basis NOT allowed for
Corporations (gross receipts > $5MM) P-ships with C-Corp Partner > $5MM Tax Shelters Certain Trusts Inventory
Section 179 Deduction
Max Deduction: $500,000
Max Total Equipment Purchase: $2,000,000
$500,000 deduction is phased out dollar for dollar for the amount of equipment purchases that exceed $2,000,000
CARRYOVERS (GIN PAL CC NOL C)
GL 0 0 Ind. CL 0 infinity ($3,000)(STCGL or LTCGL) NII 0 infinity PAL 0 infinity Charity 0 5 NOL 2 20 CCL 3 5 (STCGL only)
Filing Status Determines
Tax rates
Deductions
Thresholds
Limitations
MFJ
- Married last day of year
- Living apart allowed
- One spouse Itemizes, other is bound
- Both a Citizen or RA taxed on WWB
- Can be a NRA if taxed on WWB
- Different accounting methods OK if each own a small business
- Deceased spouse qualifies in year of death
MFS
- Married last day of year
- Living apart allowed
- One spouse itemizes, other is bound
- Both a Citizen or RA taxed on WWB
- Can be a NRA if taxed on WWB
- Use MFS if in process of divorce, don’t trust each other
- Less benefits with MFS
QW
-Not married last day of year (SS Widow/Widower)
- Year of death, considered MFJ or MFS not QW
* Exemption allowed for deceased spouse - 2 years after death, MFJ favorable rates continue
* No exemption for deceased spouse - Maintains HH for a QI for 100% of year
- Provides 50% cost of HH for a QI
HH
-Not married or QW last day of year
-Only Custodial Parent is eligible for HH
Legal
Physical
-Can’t ever be a non-custodial Parent
-Custodial Parent can claim HH despite a written declaration not to claim child as dependent
-Tie Breaker Rules
General Rule: Dep. of Custodial Parent
Joint Custody: Dep. of Parent with most Time
Joint Custody w/ Equal Time: Dep. of highest AGI
*UNLESS Parent entitled to dependent signs a written waiver annually…
-Maintains HH for a QI for 50% of year
-Provides 50% cost of HH for a QI
-HH QI can’t be unrelated:
Friend
Foster Parent
Cousin
Single
- Default
- Can be married but legally separated under a decree of separate maintenance
Qualified Relative
Joint Return - No
Gross Income < Statutory Exemption
(don’t make much $; don’t include scholarships in GI)
Residence - lived with TP 100% of year
OR
Relative - Lineal or Collateral
Support - TP provides more than 50% of support
Qualifying Child
Joint Return No
Age - 19 or 24 and full time student (5 months)
Residence - lived with TP 50% of year
Relative - Lineal
Support - TP provides more than 50% of support
Dependent Factors
Joint Return - No
Can’t be claimed by two people
North American Resident
Multiple Support Agreement (MSA)
- MSA - Group collectively providing more than 50% of support must have written agreement of who can claim if more than 1 TP in group provides more than 10%. Mainly applicable to Parents.
- If only 1 TP provides more than 10% support, automatically can claim
Net Exemptions
- Inflation adjusted – not prorated (if die during year)
- Reduce AGI to get to Taxable Income
-Types of Exemptions:
Personal exemption - self and spouse
Dependent exemption - for each dependent
a. QI – Relative
b. QI – Child
c. QI – Parent
Net Exemption Formula
Basic Statutory Amount
X # of Exemptions
________________
= “Net Exemptions”
If TP is a dependent on another’s return:
- Standard deduction amount is reduced
- Can’t claim exemption for themselves
Qualifying Costs for a Dependent
MR TUFF
- Mortgage Interest
- Rent
- Taxes (Real Estate)
- Utilities, Repairs, Insurance
- Fees for Condo
- Food Consumed ON Premises
Non-Qualifying Costs for a Dependent
Clothing Medical Treatment Transportation Vacation Education Food Consumed OFF Premises
MUST file a return if: “disjunctive”
Individual must file by 4/15; extension must be filed 10/15
GI > Personal Exemption + Standard Deduction + additional age deduction
(TP can’t consider dependent exemptions or additional deductions based on blindness since these aren’t automatically available without supporting evidence)
“Net” SE Earnings > $400 (15.3%)
Dependents claimed on another return; AND have unearned income AND GI > $1000
Received advanced payments of EIC
Subject to Kiddie Tax
Kiddie Tax Requirements:
- Living parent
- 19 or 24 full time student (5 calendar months)
- Applies to UNEARNED Income only
a. 1st 1000 – limited to child’s standard deduction
b. 2nd 1000 – taxed at child’s rate
c. Over 2000 - taxed at parents rate
Kiddie Tax Rules do not apply if:
Child’s EARNED income is > 50% of their own support (supporting themselves basically)
Child is MFJ (files a joint return)
Kiddie Tax Formula
Childs Unearned Income
- (Early Withdrawal Penalty)
- ($1,000)
- (2nd $1,000 or Amount greater than $1,000 or child’s itemized deduction related to unearned income)
= Amount to be taxed at parent’s rate
Installment Sales
- Gross Profit / Contract Price
- Gross Profit = Revenues (-) COGS
- Contract Price = Sales Price (-) Buyer Liability
Business Gifts (Sch. C)
- $25 per person is deductible
- Service Awards up to $400 is deductible
Business Losses
Business Losses only offset Business Income
(W2 Wages are considered Active Business Income)
Passive Losses only offset Passive Income
(Limited Partnership Income = Passive Income)
Interest / Dividend Income = Portfolio Income
(NOT PASSIVE)
Conventions
Real Property - Midmonth
Personal Property - Midyear or Midquarter (40% Rule)
Leasehold Improvements - 15 years S/L
Business Startup costs
o Deduct up to $5,000 of Startup costs
o Reduced dollar for dollar by amount over $50,000
o Remaining Costs are amortized
Affordable Care Act – imposes penalty on those individuals who do not have health insurance
2016 Penalty for not having “minimum essential coverage” is the Greater of:
$695 per person ($347.50 if under 18)
2.5% of Household Income over threshold
Increased Medicare tax rate (Hospital Insurance aka “HI”) for high income earners:
- 45% rate increased by .9% in individual TP’s earnings in excess of the threshold levels
a. $250,000 MFJ
b. $200,000 all others
New rate is 2.35% (1.45 + .9) on amounts in excess of the thresholds
a. This affects the SE tax rate from 2.9% to 3.8% on amounts in excess of the thresholds
Underpayment Penalties
Estimated tax payments required:
a. Due on form 1040ES b. Due on 4th, 6th ; 9th months of tax year and by the 15th of January (for Individuals)
TP subject to underpayment penalty only if balance due >$1000
*TP’s that have withholdings on salaries and wages have no estimated tax payments to IRS
Late Filing Penalty
Based on net amount of unpaid tax (net amount due)
5% per month
Limited to 25% of unpaid tax
Late Payment Penalty
.05% per month
Excess Social Security Withholdings
Multiple employers who don’t know of another employer withholding FICA
o Wage Base $107,000
o FICA rate 6.2% (excess FICA tax is refundable)
o Doesn’t apply to Medicare 1.45%
Estimated Tax Payments
The Lesser of:
90% of current total tax
100% of prior year’s total tax
110% of prior year’s total tax - If AGI is $150,000 or more
Farming
Damaged crops
(Insurance proceeds included in GI in year received)
Weather forces sale of abnormal volume of livestock, the gain on the extra sales may be deferred until next year
Prepaid feed costs for livestock can be deducted up to 50% of other farming expenses
Farm Personal Tangible Property (i.e. Non Real Estate) use MACRS 150 (picture farmers F-150 truck)
Preservation of Resources =
Costs to preserve soil and water
Deduction
Use of Resources =
Cost to drain wetlands or for Irrigation
No Deduction
Non-business bad debt
Treated as STCL
