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Individual Taxation Flashcards

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.

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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

How are medical expenses deducted on a 1040?

A

On Schedule A:

Amounts in excess of 10% of AGI (7.5% if over 65) may be deducted

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25
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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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.

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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

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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.

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34
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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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? 2% AGI limit

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? No phase outs

A 
GMIC
Gambling losses
Medical expenses
Investment Interest Expense
Casualty and theft losses
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

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

40
Q

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

A 
Child's unearned income 
- early withdrawal penalties
- $1,050
-  Greater than $1,050 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 (Hope scholarship 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

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

If tax is not filed 2 years from payment

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.

50
Q

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

A

10 days

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.

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.

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

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

If during the current tax year, one spouse died. The couple has no dependent children. What is the filing status available to the surviving spouse for the first subsequent Tax year?

A

Single as there are no dependent children.

70
Q

What is the total liability associated with the withdrawal from a traditional IRA before 59 1/2?

A

Amount withdrawn X marginal rate

Plus: 10% penalty

71
Q

How is solvency based?

A

FMV of all assets

Less: the value of all liabilities

72
Q

The rule limiting the allowability of passive activity losses and credits applied to which organization?

A

Personal service corporations

73
Q

What is the maximum annual deductible amount for self-employed taxpayer profit-sharing plans (keogh plan)?

A

The lesser of:
$53,000 (2015)
100% net earnings (only if compensation is less than 53,000)

74
Q

How is the child and dependent care credit calculated?

A

The credit is 20 to 35% of eligible expenses for child and dependent care credit. 3000 per child (2 max 6,000).
Decreased by 1% for each 2,000 over 15,000 AGI. Minimum 20% is most tested.
If expenses are 7200 for 2 kids, the maximum amount will be 6000 X 20%

75
Q

What is the formula for the credit for the elderly and or permanently disabled?

A 
5,000 single or 7,500 joint
Less: all social Security
Less: 1/2 excess AGI (7,500S/10M)
= balance 
X 15%
= credit
76
Q

What is a personal tax credit?

A

Personal tax credits may reduce personal tax liability to zero, but they not result in cash refund

77
Q

Which credits are personal tax credits?

A 
Child and dependent care credit
Elderly and permanently disabled credit
Education credits – lifetime learning credit
Retirement savings contribution credit
Foreign tax credit
General business credit
Adoption credit
78
Q

Which credits are refundable?

A 
Child tax credit (refund is limited)
Earned income credit
Withholding taxes (W-2)
Excess social security paid
American opportunity credit (40% refundable)
79
Q

What is the allowable credit for foreign tax credits?

A

The lesser of:
Foreign tax paid, or

Taxable income from all foreign operations divided by worldwide income x U.S. Tax = foreign tax credit limit

80
Q

What is the general business credit formula?

A

Credit may not exceed the net income tax less the greater of 25% of regular tax liability above 25,000 or tentative minimum tax for the year
Tax X allowable % = allowable Amount
Up to 25,000 X 100%
Over 25,000. X 75%

81
Q

What is the work opportunity credit?

A

If he is available to employers who hire employees from target group. This credit is a part of the general business Credit.
Quantified groups are: disabled, 18 to 24-year-olds from poor families, Vietnam veterans, certain food stamp recipients.
The credit is:
40% of the first 6,000 of first years wages
40% off first $3000 to certain summer youth

82
Q

What are the AMTI adjustments?

A 
PANIC TIMME
(TIMME items do not generate alternative minimum tax credit for future years, only PANIC items do)
Passive active losses
Accelerated depreciation (post 1986)
NOL of individual taxpayer 
Installment income of a dealer
Contracts – %completionvs completed
Text deductions
Interest deduct on home equity loans 
Medical deductions 10% AGI
Miscellaneous deductions not allowed
Exemptions personal/standard
83
Q

What are the preference items for AMTI? (always add back)

A

PPP
Private activity bond int. income
Percentage depletion - > basis
Pre-1987 accelerated depreciation

84
Q

How long AMT credit can be carried over?

A

Forever

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