Individual Taxation

Question 1

Two people divorced in 2018. Tim paid alimony of 60k in 2018, 25k in 2019 and nothing in 2020. What is alimony recapture in 2020?

Answer 1

47,500

Excess of 2019 over 2020 is 25,000 (25-0), which is above 15,000 by 10,000 (first recapture).

Reduce 2019 payments by 10k recapture from step 1 resulting in 15k (25-10). 15k plus 2020 amount of zero equals 15k, divided by 2 equals 7,500.

Excess of 2018 payment of 60k over 7,500 equals 52,500 (60k- 7,500). 52,500 is 37,500 in excess of 15,000 (52,500- 7,500).

So 10,000+37,500= 47,500

Question 2

What is the calculation for life insurance benefits to be included in gross income?

Answer 2

100,000 to be paid over 25 yrs. payments of 5,200 were disbursed.

100,000/25= 4,000

5,200- 4,000= 1,200

Question 3

Is interest expense deducted in the period paid?

What is the limitations on interest deductions?

Answer 3

No, it must be deducted in the period in which it relates.

For corps making over 26 mil in gross receipts the limit deduction is 50% of the business’s taxable income.

Question 4

What is the personal casualty deduction formula for individuals?

Is there a difference for a business?

Answer 4

1. The lessor of the basis or the decline of the property’s FMV
2. Reduce that by $100 floor and 10% of AGI

For a business there is no $100 floor or 10% deduction. The deduction would simply be the adjusted basis before the damage

Question 5

1. ) Where is the 20% qualified business income deduction deducted?
2. ) how are the deductions calculated?
3. ) Kelly has income of taxable income of 376,600 and business income of 200,000. The phase in level is 326,600. What is the deduction?

Answer 5

It is deducted “from” AGI and only available to individuals, partnerships and s corps

2.) if business is an specific service trade or business (sstb) meaning a doctor accountant or lawyer there is a deduction limit. Engineers and architects do qualify.

there is a phase in level which is the lower of 20% of combined qbi or 20% of taxable income less capital gains.

3.) 376,600 - 326,600= 50,000 / 100,000= .5

.5 x 20%= 10%
10% x 200,000 taxable income = 20,000 deduct.

Additionally, the qbi deduction cannot exceed 50% of wages paid by business or 25% + 2.5% of unadjusted basis of a qualified property

Question 6

Is there a limit for deduction of personal taxes?

What if it includes property taxes?

Answer 6

1. ) 10,000

2. ) same limit for all personal taxes.

Question 7

1,) What is the deduction for medical expenses?

2.) who is an eligible to be deductible for the taxpayer?

Answer 7

All medical expenses - 7.5% of AGI

2.) the taxpayer, spouse, or dependent (gross income and joint return test doesn’t apply)

Question 8

What is the amount of time needed for a property would be considered a home instead of a rental?

Answer 8

• A home is personal if it was rented for less than 15 days
• A home is rental is if was rented for more than 15 days and not used for personal for more than the greater of 14 days or 10% of days rented.
• A home is personal/rental if it was rented for more than 15 days and used for personal for more than the greater of 14 days or 10% of days rented.

Question 9

What are the limitations of charitable contributions?

Answer 9

1.)for property it is limited to 50% of AGI. For cash it is 100% of AGI. For long term capital gains it is 30%of AGI. FMV is used to calculate.

For capital properties the FMV is used unless for example a painting is donated to an organization that will not use it as intended (to be displayed), in this case basis would be used. For ordinary income the lessor of FMV or adjusted basis

Question 10

1.)What are items deductible from gross income to arrived at AGI?

2,)What are itemized deductibles?

Answer 10

1. ) Self employment tax, penalty for premature withdrawals from CDs
2. ) state income tax

Question 11

What type of taxpayer does the passive activity losses limitation apply to?

Answer 11

Individuals, estates, trusts, closely held c corps, and personal service corps

Question 12

What credits are deductible for AMT?

Answer 12

Child and dependent care credit
Adoption credit
Credit for elderly and disabled
Child tax credit
Education credit
IRA credit
Foreign tax credit

Question 13

What itemized deductions are not allowed for AMT?

Answer 13

State taxes, standard deduction

Question 14

What are the rules for passive losses?

Answer 14

Passive losses can only be offset by passive gains. Real estate is a passive activity even if the taxpayer is materially involved. A special rule permits up to 25k of income not passive to be offset by losses from a rental activity. The 25k is reduced by 50% of the excess of 100k of AGI. It’s capped at 150k of AGI.

Question 15

Federal estate taxes can be reduced by?

Answer 15

Foreign death taxes

Question 16

A taxpayer had a tax liability in yr 8 of 20k and a first time AMT of of 9k. In year 9 she had 50k of tax liability and 45k of AMT. what will be carried to your 10?

Answer 16

AMT credits only reduce regular tax liability. And only to the point that it reduces it to equal the AMT.

Year 8:
20k - 9k = 11k in AMT credits

Year 9:
50 - 45 = 5 (reduction of tax liability to AMT)

11 - 5= 6 (remaining AMT credit)

Question 17

What is the limit an individual can deduct of capital losses?

Answer 17

3,000

Question 18

Can an individual with AGI over 75k deduct ira payments?

Answer 18

No, 75 is the threshold.

Question 19

How much is the adoption credit?

Answer 19

Up to 14,300 in the year incurred

Question 20

What is the self employment deduction?

Ben file schedule c for self employment. Has net earnings of 88,000. What is his tax?

Answer 20

15.3% of net earnings. But you are allowed to reduce by 7.65 (half).

100%- 7.65% =92.35

92.35 x 88,000 =81,268

81,268 x 12.4 = 10,077 ss
81,268 x 2.9%= 2,357

Total 12,434 (15.3%)

Question 21

What does section 1244 entail? It

Answer 21

It relates to the sale and repurchase of small business stock within 30 days or if it’s exchanged or becomes worthless. It allows the taxpayer to take up to 100,000 for MFJ and 50,000 for single, in capital losses from stock transactions deductible as ordinary loss.

Question 22

What is the limit for organizational and startup costs?

Answer 22

Up to 5,000 for each category can be deducted immediately. Any excess is amortized over 180 months starting when business opens doors. Also it is phased out dollar for dollar for any amount over 50,000

Question 23

What is the business interest expense limit?

Answer 23

For business under 26 million it is 100% deductible. For business over, it is limited to 50% of taxable income + any interest income. The remainder is carried forward indefinitely.

Question 24

What is the NOL limitations?

Answer 24

For years 2018 through 2020, 100% of NOLs can be taken. Must be carried back five years

Question 25

What are the rules for the qualifying child?

Answer 25

1. ) relationship: blood related, stepchild, adopted, foster, grandchild or brother/sister
2. ) age: under 19 or under 24 if full time student
3. ) residency: must live with taxpayer for more than half the year. Does not apply if student lives in college dorm
4. ) support: taxpayer must pay more than half of their support

Question 26

What is the qualifying relationship test?

Answer 26

1. ) relationship: must be a family member or live in the same household of the taxpayer (nonfamily members can pass this test if they live in the house for a year. This exemption does not permit the head of household status).
2. ) support: taxpayer must pay more than half
3. ) gross income: must make less than 4,300 a year

Question 27

What are the filing status?

Answer 27

1. ) married filling joint
2. ) married filing separate
3. ) surviving spouse: electable only in the preceding 2 years following death
4. ) head of house hold: single with child dependents. Or dependent parents (do not have to live with taxpayer).

Question 28

What are the rules for child tax credit?

Married taxpayer has 3 children, ages 12, 14 and 16. Combined AGI of 435,000. What is the credit they can take?

Answer 28

1.) credit of 2,000 per child under the age of 17. Phase out of 50 per every 1,000 over 400,000 for married and 200,000 for single.

2.) total possible credit = 6,000
435,000 - 400,000= 35,000
35,000/1,000= 350 x 50 = 1750 phase out

6,000 - 1,750 = 4,250

Question 29

What are the rules for the dependent care credit?

Single taxpayer with 55,000 AGI. Has 10 yr old daughter in after school program worth 3,350. What is her credit?

Answer 29

Provides credit for caregiving expense of a child under 13 or a disabled person. Care can’t be given from a dependent. Taxpayer must be employed. Transport not included.

Credit is the lessor of expenses or 3,000 for one child and 6,000 for more than one. Credit can be up to 35% and bottoms out at 20%. Starting at 15,000 AGI percentage reduces by 1% and bottoms out at 43,000.

2.) 3,000 x 20%= 600

Question 30

What is the difference between the American opportunity credit and the life time learning credit?

Answer 30

The AOC is 2,500 per student. Which must be enrolled at least half time and claimed only for the first 4 years of college.

The lifetime credit is 2,000 per taxpayer, for 1 or more students. It is 20% of education expenses and a max of up to 10,000. Can be claimed for an unlimited number of years.

Question 31

Dennis has AMTI of 600,000. The current yr exemption for a single taxpayer is 71,700. The phaseout begins at excess of 510,300. What is the exemption?

Answer 31

600,000-510,300=89,700
89700x.25=22,425 phaseout
Note: excess of phaseout threshold is phased out .25 cents on the dollar.

71,700-22,425=49,275 exemption

Question 32

What is the amount that can be deducted for personal assets?

Answer 32

0. No losses can be deducted for personal assets.

Question 33

What are itemized deductions?

Answer 33

• Medical expenses (Excess of 7.5% of AGI)
• Personal income taxes (State, local or foreign)
• Property Taxes (10,000 limits)
• Investment Interest Expense (only deductable based on accrual, even if cash is selected)
• Charitable contributions
• Casualty deductions
• Business meals & Lodging (Meals 50%. Employee needs to stay at least overnight in a new place, but no more than a year)
• Travel expenses
• Vacation home expenses

Question 34

Child Care credit:
Mom has 2 child dependents and AGI of 28k (2k in LTCG, 26k in gross income). Expenses include 3k paid to mom to babysit and 3k for a summer camp. What is the credit?

Answer 34

1.) Expense: lessor of 26k, 5k (2+3) or 6k (for 2 or more children).

2.)credit percentage: reduces 1% for every 2k over 15k.
28k-15k= 13k/2= 6.5 (round to 7)
35% - 7%= 28%

3.) 5,000 x 28% = 1,400 credit

Question 35

Foreign Tax credit:
ABC inc has 120k in income, 80k in foreign income, and 25k in foreign taxes paid. US tax liability before the foreign tax credit is 61,250. The foreign tax credit is?

Answer 35

Available for individuals and corps.

80k / 120+80( ww)= 40% x 61,250= 24,500

Lower of 24,500 or paid tax of 25,000