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Regulations > Individual Taxation > Flashcards

Individual Taxation Flashcards

Taxation

2
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.

Note 12-month rule: (Ppd items)
1. Benefits don’t extended beyond 12 month from benefits starting

  1. Benefits don’t go beyond the year following the year in which payment was made
    Ex: pd in 2010, can’t go beyond 2011

any items that don’t satisfy 12-rule must be Capitalized (Ppd Interest doesn’t go by this rule

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3
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
  • Tuition - can’t take AOC/Lifetime Learning Credit for same expense
  • Teacher expenses
  • Attorney fees in discrimination lawsuit
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4
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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5
Q

Characterize the following carryover: Passive Activity Loss

A

No carryback

Can carry forward indefinitely

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6
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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7
Q

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

A

Indefinitely.

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8
Q

How long is the carry forward for charitable contributions?

A

Can be carried forward 5 years.

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9
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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10
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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11
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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12
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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13
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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14
Q

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

A

$1;000;000

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15
Q

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

A

$100;000

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16
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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17
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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18
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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19
Q

Are interest and dividends active or passive income?

A

Neither. They are portfolio income.

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20
Q

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

A

Mid-year/Mid-quarter

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21
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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22
Q

What depreciation convention is used for real property?

A

Mid-month

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23
Q

What depreciation life and convention are used for leasehold improvements?

A

15 year straight line (S/L)

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24
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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25
Q

How are medical expenses deducted on a 1040?

A

On Schedule A:

Amounts in excess of 7.5% of AGI may be deducted

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26
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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27
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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28
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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29
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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30
Q

What investment interest is never deductible?

A

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

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31
Q

When are mortgage points deductible and how are they deducted?

A

They are deductible if they represents prepaid interest on purchase of a new home or improving a home.

Refinance points are amortized over the life of the mortgage.

32
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

33
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.

34
Q

Does a casualty loss affect the basis of property?

A

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

35
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

36
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

37
Q

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

A

Medical
Casualty
Gambling
Investment Interest Expense

38
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

Must live with taxpayer for more than 1/2 the year

Child cannot have provided more than 50% of their own support

No joint return w/spouse unless SOLELY for a refund

39
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

Can have income more than exemption = $3,800

Absent of joint return

40
Q

How is minor income taxed at a parent’s rate calculated (AKA kiddie tax)?

A 
Child's unearned income 
- early withdrawal penalties
- $950.00
-  Greater than $950 or child's itemized deduction related to unearned income
= Amount taxed at parents' rate
41
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.

42
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

43
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.

44
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.

45
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)

46
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)

47
Q

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

A

MACRS 150

48
Q

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

A

90 days

49
Q

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

A

10 days

50
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.

51
Q

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

A

It is treated as a short-term casualty loss.

52
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.

3 years are extended to 7 years for bad debts or worthless securities

53
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.

54
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. Non-degree students may not exclude any portion of a scholarship

55
Q

What interest income is tax free?

A

State & municipal bond interest

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

56
Q

Which dividend income is tax free?

A

S-corporation (actually distributions)

Life insurance

57
Q

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

A

Up to 85%

58
Q

Is unemployment compensation taxable?

A

Yes.

59
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.

60
Q

Are workman’s compensation insurance benefits taxable?

A

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

61
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.

62
Q

Adoption expenses - Are they deductible?

A

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

63
Q

Describe alimony recapture.

A

May occur if Alimony payments sharply decline in 2nd or 3rd years

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

64
Q

How are Net Operating Losses (NOLs) utilized?

A

Can be carried back 2 years

If any left; can be carried forward 20 years.

65
Q

Which IRA contributions are deductible?

A

Traditional IRA = deductible

Roth IRA = not deductible

66
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.

67
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

68
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

69
Q

Entities that can use Cash Method

A
  • Qualified Personal Service Corp
  • Entity (not a tax shelter) that as average gross receipts of $5mil or less for any 3-year period
  • –that doesn’t NOT have INVENTORY
  • Small business (no matter inventory) that had average annual gross receipts of $1mil or less
  • if Small business more than $1mil but less than $10mil can use if:
  • no inventory
  • principle business is service

Basically if small business more than $1mil cannot have inventory

70
Q

Child Support (Exclusion of Gross Income)

A

Must be child of person making payments and amount must be specified (by divorce decree) - otherwise treated as alimony

71
Q

Exclusions from Gross Income

A
  • Child Support
  • Property Settlement
  • Annuities and Pensions (Amt that represents return of capital)
  • –know calculation
  • Life insurance proceeds
  • –if paid by reason of death
  • –Dividends seen as return of premium
  • Worker’s Compensation
  • Payments to make one whole
  • Stick Dividends (p/s to p/s)
  • Leasehold improvements
  • –unless taken in lieu of rent
72
Q

Stock Options:

Incentive Plan vs Non-Qualified Plan

A

Inventive:

  • must hold option for 2 years and stock for 1 year
    1. No Income when exercised
    2. Basis = # of shares x option price
    3. Once sold is LTCG (anything over basis)

*if not held for holding period treated as Nonqualified plan

Nonqualified:

  1. Income when exercised at FMV over option price
    - -ordinary income
  2. Basis = # of shares x FV per share
73
Q

ACRS vs MACRS

A

ACRS: 1980 - 1987
- allowed accelerated depreciation on real estate

MACRS: After 1986

  • S/L on R/E
  • No salvage
  • same recovery period for new and used
74
Q

MACRS ADR guideline class

Personal and Real Property

A

Personal Preoperty

5-YEAR, 200% class:
-computers, office machinery, equipment

7-YEAR, 200% class:
-furniture and fixtures

Real Property

27 1/2-YEAR, S/L class
-residential rental property (80% or more of rental income from dwelling units)

39-YEAR, S/L class
-real property, neither residential nor has a class life less than 27.5 years

Note: All personal property classes can elect to change to S/L. This is an annual class by class election

AND thru 10-year class can elect MACRS 150 which is also a annual class-by-class election

Regulations (18 decks)

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