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REG > Individual Taxation > Flashcards

Individual Taxation Flashcards

1
Q

What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?

A

The following are Above-the-Line deductions:

  • MSA/HSA contributions
  • Investment penalties for early withdrawal
  • Self-employed medical insurance premiums
  • Self-Employment Tax (approx. 50% - 58% is deductible to arrive at AGI)
  • IRA Contributions
  • Student loan interest (can’t be another taxpayer’s dependent)
  • Alimony - [in past, not currently]
  • Tuition - can’t take AOC/Lifetime Learning Credit for same expense
  • Teacher expenses
  • 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

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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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 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).

Note: Compare with corporations, where capital loss can be carried backward 3 years and forward 5 years. However, you can only carry forward as a STCL only

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9
Q

How long is the carry forward for charitable contributions?

A

Can be carried forward 5 years.

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10
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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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

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 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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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

How are medical expenses deducted on a 1040?

A

On Schedule A:

Amounts in excess of 10% (use to be 7.5%) of AGI may be deducted

Note: For AMT, the floor is 10% and the different between 10% and 7.5% (assuming old rate) floor is added back

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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

What depreciation life and convention are used for leasehold improvements?

A

15 year straight line (S/L)

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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

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.

Note: If you have a surplus of interest expense that you can’t deduct against investment income in the current tax year, you can carry forward the amount indefinitely

Remember, total interest expense you can offset is limited to total net investment income. In other words, if there is no net investment income; then you can deduct investment interest expense

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29
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.

Note: If mortgage points are paid on a loan and the proceeds are NOT used for the purchase of a new home or improving a home; then the points will be capitalized and amortized over the loan period and a portion will be written-off each year

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30
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

Note: The donation of appreciated stock held more than 12 months is a contribution of intangible, long-term capital gain appreciated property; thus, it would be limited to 30% of AGI

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31
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.

In other words, contributions of STCG (held less than 12 months) property (not to charities) are limited to 50% of AGI & deduction is limited to BASIS property

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32
Q

What investment interest is never deductible?

A

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

33
Q

What are the miscellaneous deductions on Schedule A; and how are they deducted?

(2% Miscellaneous Deductions)

A

Deductible in excess of 2% of AGI:

  1. Continuing Education - if required to keep your job
  2. Business travel
  3. 50% Meals and entertainment
  4. Union Dues
  5. Tax prep fees
  6. Legal fees to collect alimony - note legal fees to collect child support would NOT be deductible because child support is NOT taxable
  7. Appraisal fees to value casualty loss of charitable contributions
  8. Custodial fees / Trustee fees - only deductible if you write a check to pay for these. If you tell brokerage firm to take these out of your account directly; then you CAN’T deduct these
34
Q

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

A

The following itemized deductions are NOT subject to reduction based on other factors:

  1. Medical
  2. Casualty
  3. Gambling losses - to the extend of winnings
  4. Investment Interest Expense
  5. Estate tax related to income in respect of a decedent

Note: The above are NOT subject to the 2% floor. They are deductible in full

35
Q

What are the miscellaneous deductions on Schedule A; and how are they deducted?

A

Deductible in excess of 2% of AGI:

  1. Continuing Education - if required to keep your job
  2. Business travel
  3. 50% Meals and entertainment
  4. Union Dues
  5. Tax prep fees
  6. Legal fees to collect alimony
  7. Appraisal fees to value casualty loss of charitable contributions
36
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 (need to attend school for at least 5 months per year)

Has to be your child (step or foster child is okay)

The qualifying child can’t be younger than the tax payer

Must live with you for more than 1/2 the year; unless mother/father or relative closer than a cousin

Cannot file a joint return (only if getting a refund)

Cannot be claimed as a dependent on more than 1 return

37
Q

Define qualifying relative for most individual tax factors.

A

Must be citizen of North America, Canada or Mexico

Must meet relationship test - relatives, brother/sister, uncle & aunts, nephews & nieces, step siblings and in-laws (not cousins)

Must live with you for more than 1/2 the year; unless mother/father or relative closer than a cousin

You must provide more than 50% support to the individual

Cannot file a joint return (only if getting a refund)

Cannot be claimed as a dependent on more than 1 return

Must make less than $3,800 of TAXABLE income (must make more than the standard deduction)

38
Q

Does a casualty loss affect the basis of property?

A

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

39
Q

At what rate is self-employment tax assessed?

A

15.3% of net earnings from self-employment

Net Earnings from Self-employment
x S/E tax rate

= Self-employment tax - if this is less than $400, then you don’t have to file a schedule SE

(Note: executor of an estate is NOT self-employment income)

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

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.

42
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)

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

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)

45
Q

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

A

MACRS 150

46
Q

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

A

90 days

47
Q

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

A

10 days

48
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.

49
Q

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

A

It is treated as a short-term casualty loss.

50
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.

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 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.

53
Q

What interest income is tax free?

A

State & municipal bond interest

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

54
Q

Which dividend income is tax free?

A

S-corporation (actually distributions)

Life insurance

55
Q

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

A

Up to 85%

56
Q

Is unemployment compensation taxable?

A

Yes.

57
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.

58
Q

Are workman’s compensation insurance benefits taxable?

A

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

59
Q

Which of the following are taxable: Child Support; Divorce Property Settlements; Alimony

A

Alimony is NOT taxable.

Child support and divorce property settlements are NOT taxable.

No deduction for the payor of alimony and child support.

Note: Prior to 2018, these were taxable.

60
Q

Adoption expenses - Are they deductible?

A

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

61
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

62
Q

How are Net Operating Losses (NOLs) utilized?

A

Can be carried back 2 years

If any left; can be carried forward 20 years.

63
Q

Which IRA contributions are deductible?

A

Traditional IRA = deductible

Roth IRA = not deductible

64
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.

65
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

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 is considered Business income?

A

Business income is the following:

  1. Wages
  2. Profit from another business
  3. Rental income

Note: Interest, capital gains and dividend is NOT Business income (it’s portfolio income) because it can ONLY be off-settled against non-business expenses - exemptions and other itemized deductions

68
Q

What can a taxpayer offset Business income against?

A

Taxpayer can only off-set business income with business loss

Example of business deductions:

  1. Casualty loss = business loss
  2. Net business loss

Note: Interest on savings account is an example of Non-business income. Personal & standard deductions and net short-term capital loss are examples of a Non-business deductions

69
Q

What is the rule regarding passive losses in individual taxation?

A

Passive losses can ONLY off-set passive income

(i.e. the loss for a partnership when a taxpayer doesn’t materially participate in the partnership can be used to off-set income from a limited partnership)

Note: Rental activity is ALWAYS passive, even if the tax payer materially participates in the rental property (i.e. maintain the books, painting, etc.)

Also, there is a special rule that permits an individual to off-set up to $25,000 of income that is NOT from passive activities by losses or credits from rental real estate IF the individual actively participates in the rental real estate activity. The $25k is phased out once AGI exceeds $100k at .50 of “special loss deduction” for every dollar exceeded - 50% of the excess amount, which a taxpayer can carry forward indefinitely or until they sell the entire rental property

70
Q

What is 5-year 200% class property?

A

5-year, 200% class property applies to computers, machinery & equipment

71
Q

What is 7-year 200% class property?

A

7-year, 200% class property applies to furniture & fixtures

72
Q

What are the wash sale rules?

A

Note: When a company’s stock is sold and substantially identical stock is purchased within 30 DAYS of the original sale, any loss on the original sale is DISALLOWED

So, the disallowed loss gets “tacked on” to the cost of the repurchased identical shares, which results in a new basis. When the repurchased identical shares are sold, the realized gain or loss is the difference between the price that the shares were sold at less the new basis

Also, the holding period of the replacement stock includes the holding period of the original purchased stock

Note: Wash sale loss is NOT deductible, but is added to the basis of the new stock. Also, wash sales do NOT apply to gains

Note: When solving wash sale problems, calculate the Basis per share using the ORIGINAL shares purchased and price = Cost of share purchased / # of shares purchased. You then use the Basis per share calculated amount and multiply it by the number of shares sold to obtain the basis; you then deduct the basis from the selling price of the shares sold to determine loss. Depending on whether all or half of shares sold were sold, you may have to take a percentage of the disallowed loss, which would get added to the original cost

73
Q

What is 39-year SL property?

A

39-year straight-line property applies to commercial real estate (non-residential) property

74
Q

What is the overall contribution limit that a taxpayer can deduct on their return?

A

The overall limit for contributions is 50% of AGI - this represents that maximum contributions a taxpayer deduct for the year

75
Q

What is the Section 179 expense election?

A

Section 179 expense election allows a taxpayer (other than a trust or estate) to annually elect to treat the cost of qualifying depreciable property as an expense rather than a capital expenditure

  1. Qualifying property is generally recovery property that is tangible personal property acquired by purchase from an unrelated party for use in the active conduct of a trade or business
  2. Maximum cost that can be expensed is $1.16MM for 2023, but is reduced dollar-for-dollar by the cost of qualifying property that is placed in service during the taxable year that exceeds $2.89MM
  3. The amount of expense deduction is further limited to the taxable income derived from the active conduct by the taxpayer of any trade or business. Any expense deduction disallowed by this limitation is carried forward to the succeeding taxable year
  4. If property is converted to nonbusiness use at any time, the excess of the amount expensed over the MACRS deductions that would have been allowed must be recaptured as ordinary income in the year of conversion
76
Q

What is 27 1/2-year SL property?

A

27 1/2-year, straight-line property applies to residential property (i.e. apartment building) real estate

77
Q

Question:

An employee who has had social security tax withheld in an amount GREATER than the maximum for a particular year may claim?

A

The employee may claim the excess as a CREDIT against income tax, if that excess resulted from correct withholding by TWO or more employers

Note: If an individual works for more than one employer and combined wages exceed the maximum used for FICA purposes, too much FICA tax will be withheld. In such case, since the excess results from correct withholding by 2 or more employers, the excess should be claimed as a credit against income tax

REG (18 decks)

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