Individual Taxation - General Flashcards
What is a “cafeteria plan”
Cafeteria plans are employer-sponsored benefit packages that offer employees a choice between taking cash and receiving qualified benefits. Thus employees may “select their own menu of benefits”
If an employee chooses qualified benefits under a cafeteria plan, these benefits are ______ (included/excluded) from the employee’s gross income
Excluded (to the extent allowed by law)
If an employee chooses cash benefits under a cafeteria plan, these benefits are ______ (included/excluded) from the employee’s gross income
Included (as compensation)
T/F
Under a cafeteria plan, participation is restricted to employees, their spouses, and their minor children
FALSE
Cafeteria plans are restricted to employees only
T/F
At least three years of service are required before an employee can participate in a cafeteria plan
FALSE
There is no minimum service requirement that must be met before an employee can participate in a plan
T/F
Deferred compensation plans other than 401(k) plans are not included in the definition of a cafeteria plan
TRUE
The amount of premium amortization on taxable bonds acquired by the taxpayer after ______ is treated as _________
1987
An offset to the amount of interest income reported on the bond
T/F
The method of calculating the annual amortization of a bond is determined by the acquisition date of the bond
FALSE
It is determined by the date the bond was issued
If a bond is issued after September 27 ______, the amortization must be calculated under the ______ method
1985
Constant yield to maturity
This method computes the amortizable bond premium on the basis of the taxpayer’s yield to maturity, using the taxpayer’s basis for the bond, and compounding at the close of each accrual period
Constant Yield to Maturity
If a bond is issued BEFORE September 27 1985, the amortization must be calculated _______
Ratably over the life of the bond
T/F
Interest on US Treasury Certificates are subject to tax on an individual’s tax return
TRUE
T/F
Interest on both a refund of federal income tax AND state income tax would be subject to tax on an individual’s tax return
TRUE
Note that the refund itself is excluded from gross income, but interest on a refund must be included in gross income
T/F
Interest on both federal government obligations AND state government obligations would be subject to tax on an individual’s tax return
FALSE
Interest on federal government obligations would be subject to tax on an individual’s tax return
BUT state government obligations would NOT be subject to tax on an individual’s tax return
Interest on an award for personal injuries sustained in an automobile accident is treated as an _______ (inclusion/exclusion) of interest income on the tax return in the year _______ (the accident happened/the interest payment is received)
Inclusion
The year the interest payment is received
In the event that an individual receives an interest forfeiture penalty for making a premature withdrawal from a CD, how should this penalty be treated and what taxable year will be affected?
Deducted from Gross Income in arriving at AGI
In the year in which the penalty incurred
T/F
All payments received for services must be included in income, even if the services are a condition of receiving a grant or are required of candidates for a degree
TRUE
What is alimony recapture?
Alimony recapture may occur if alimony payments sharply decline in the 2nd & 3rd years that payments are made
T/F
The recipient of alimony recapture (the individual who originally paid the alimony) is able to exclude alimony recapture from gross income
FALSE
Alimony recapture is included in gross income of the individual receiving the recapture amount (the original payor of alimony)
T/F
The payee of alimony (the individual who must return the alimony that they originally received) is allowed a deduction for the alimony recapture
TRUE
T/F
For a payment to qualify as deductible alimony by the payor, it must be written in the divorce agreement that the payments must be in cash or a cash equivalent
TRUE
T/F
For a payment to qualify as deductible alimony by the payor, it must be written in the divorce agreement that the payments must end at the recipients death
TRUE
T/F
For a payment to qualify as deductible alimony by the payor, the payments must not be designated as other alimony (for example, child support)
TRUE
T/F
Income in Respect of a cash-basis decedent covers income earned and collected after a decedent’s death
FALSE
T/F
Income in Respect of a cash-basis decedent receives a stepped-up basis in the decedent’s estate
FALSE
T/F
Income in Respect of a cash-basis decedent includes a bonus earned before the taxpayer’s death but not collected until after death
TRUE
T/F
Income in Respect of a cash-basis decedent must be included in the decedent’s final income tax return
FALSE
Not included because of the decedent’s method of accounting (cash-basis decedent will not recognize the income until received)
Income in Respect of a cash-basis decedent includes a bonus earned before the taxpayer’s death but not collected until after death and will be _______ (included in/excluded from) gross income by the person who receives it
Included in
T/F
Income in Respect of a cash-basis decedent includes a bonus earned before the taxpayer’s death but not collected until after death and will be included in gross income by the person who receives it. This income will be treated as ordinary income
FALSE
The income will have the same characteristics to the person who received it as it would have had if the decedent had lived. This means it may be ordinary income or it may be capital income
T/F
Proceeds from the state lottery are included in gross income
TRUE
T/F
Premiums paid by an employer on group-term life insurance in excess of $50,000 are included in gross income
TRUE
These rules require that all costs incurred (both direct and indirect) in manufacturing or constructing real or personal property OR in purchasing or holding property for sale must be capitalized as part of the cost of the property
Uniform Capitalization Rules
Uniform capitalization rules do not apply to a small retailer or wholesaler who acquires personal property for resale if the retailer’s/wholesaler’s average annual gross receipts for the three preceding taxable years do not exceed ___
$10M
T/F
Research costs are included in inventory under the Uniform Capitalization Rules for goods manufactured by the taxpayer
FALSE
T/F
Warehousing costs and/or Off-Site Storage Costs are included in inventory under the Uniform Capitalization Rules for goods manufactured by the taxpayer
TRUE
T/F
Quality Control Costs are included in inventory under the Uniform Capitalization Rules for goods manufactured by the taxpayer
TRUE
T/F
Taxes excluding income taxes are included in inventory under the Uniform Capitalization Rules for goods manufactured by the taxpayer
TRUE
T/F
Marketing Costs are included in inventory under the Uniform Capitalization Rules for goods manufactured by the taxpayer
FALSE
What is the specific charge-off method relating to business bad debts?
If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year.
What is the reserve method relating to business bad debts?
Accrual of bad-debt expense based on the projected worthlessness of receivables or prior experience with uncollectible receivables. The use of the reserve method by accrual basis taxpayers is permitted only for some small banks and thrift institutions with assets of $500 million or less. Other accrual taxpayers must use the specific charge-off method.
T/F
Business bad debts may be deducted under either the specific charge-off method or the reserve method
FALSE
The specific charge-off method must used
A NOL generally represents a ______
Business Loss
T/F
Since a NOL generally represents a Business Loss, nonbusiness income and nonbusiness deductions/losses are not included in the computation for a NOL
TRUE
A NOL can generally be carried back ___ and forward ____
2 years
20 years
T/F
A net capital loss is among the acceptable deductions for a NOL
FALSE
No deduction is allowed for a net capital loss
T/F
Rental activity can be either a passive or a non-passive activity based on the owner’s participation in the operation of the rental property
FALSE
Rental activity is defined as a passive activity regardless of the owner’s participation in the operation of the rental income
Passive losses relating to rental real estate activities that cannot be used in the current year may be carried ______
Forward indefinitely or until the property is disposed of in a taxable transaction
T/F
The maximum annual contribution to a Roth IRA is subject to reduction if the taxpayer’s adjusted gross income exceeds certain thresholds
TRUE
T/F
Like a traditional IRA, contributions to a Roth IRA are not deductible
FALSE
Contributions to a Roth IRA are not deductible but this is UNLIKE a traditional IRA
T/F
Like a traditional IRA, contributions to a Roth IRA can be made even after the taxpayer reaches 70 1/2
FALSE
Contributions to a Roth IRA can be made even after the taxpayer reaches 70 1/2, but this is UNLIKE a traditional IRA
T/F
Contributions to an education IRA are not deductible
TRUE
T/F
A taxpayer may contribute up to $2000 to an education IRA to pay the costs of the designated beneficiary’s higher education
TRUE
However, the annual contribution is phased out by AGI in excess of certain thresholds
T/F
Eligibility for an education IRA is phased out if adjusted gross income exceeds certain threshold levels
TRUE
T/F
Contributions can be made to an education IRA on behalf of a beneficiary until the beneficiary reaches age 21
FALSE
The maximum age is 17. Contributions cannot be made to an education IRA on behalf of a beneficiary if the beneficiary is 18 or older.
T/F
Withdrawals of earnings in an education IRA will be tax-free if used to pay the qualified higher education expenses of the designated beneficiary
TRUE
Where are lottery winnings reported?
As Other Income on pg. 1 of Form 1040
T/F
Guaranteed payment from services rendered to a partnership are subject to self-employment tax
TRUE
T/F
Ordinary income from an S corporation is subject to self-employment tax
FALSE
Estimated income taxes on self-employment income are ______ (included/excluded) from the computation of net self-employment income
Excluded
Charitable Contributions are ______ (included/excluded) from the computation of net self-employment income
Excluded
Investment Income is ______ (included/excluded) from the computation of net self-employment income
Excluded
Gains/Losses on the disposition of property used in a trade or business are ______ (included/excluded) from the computation of net self-employment income
Excluded
Advertising costs are ______ (included/excluded) from the computation of net self-employment income
Included
Business telephone calls are ______ (included/excluded) from the computation of net self-employment income
Included
Self-Employment tax is _____ (fully deductible/partially deductible) from Gross Income in arriving at AGI
Partially Deductible
T/F
If Social Security Tax (FICA) is withheld in an amount greater than the maximum for a particular year, this excess can be used as in itemized deduction
FALSE
T/F
If Social Security Tax (FICA) is withheld in an amount greater than the maximum for a particular year, this excess can be reimbursed by the employers if it resulted from correct withholding by 2 or more employers
FALSE
If 2 or more employers withheld correctly, no reimbursement from them can be obtained
If Social Security Tax (FICA) is withheld in an amount greater than the maximum for a particular year, this excess can be a credit against income tax if that excess resulted from correct withholding by 2 or more employers
TRUE
If Social Security Tax (FICA) is withheld in an amount greater than the maximum for a particular year, this excess can be a credit against income tax if that excess resulted from correct withholding by 1 employer
FALSE
If only 1 employer withheld correctly then the amount should be reimbursed, not used as a tax credit
How are foreign income taxes paid by a corporation treated?
They may be claimed either as a deduction or as a credit at the option of the corporation
T/F
A lifetime learning credit can result in a refund even if the individual had no income tax liability
FALSE
T/F
A credit for the elderly or the disabled can result in a refund even if the individual had no income tax liability
FALSE
T/F
An earned income credit can result in a refund even if the individual had no income tax liability
TRUE
T/F
A Child and dependent care credit can result in a refund even if the individual had no income tax liability
FALSE
T/F
The American Opportunity Credit is available for the first four years of postsecondary education program
TRUE
T/F
The American Opportunity Credit is available on a per student basis
TRUE
T/F
The American Opportunity Credit requires that eligible students must be enrolled full-time for at least one academic period during the year
FALSE
The American Opportunity Credit requires that eligible students must be enrolled HALF-time for at least one academic period during the year
T/F
Under the American Opportunity Credit, if a parent claims a child as a dependent, any qualified expenses paid by the child are deemed to be paid by the parent
TRUE
This means the parent can claim the credit rather than the child
T/F
The Lifetime Learning Credit is available on a per student basis
FALSE
It is available on a per-taxpayer basis
An individual may avoid the penalty of underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of ____ of the tax on the return for the current period, paid in ____ equal installments
90%
4
An individual may avoid the penalty of underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of ____ of the prior year’s tax liability, paid in ____ equal installments assuming the person was in a low-income tax bracket in the prior year (less than _____ gross income)
100%
4
$150,000
An individual may avoid the penalty of underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of ____ of the prior year’s tax liability, paid in ____ equal installments assuming the person was in a high-income tax bracket in the prior year (greater than _____ gross income)
110%
4
$150,000
A claim for refund of erroneously paid income taxes filed by an individual before the statute of limitations expires must be submitted on ______
Form 1040X
The amount on which the penalties for late filing and late payment will be computed is _____
Based on the amount of net tax due
For example, if $50,000 was due and $45,000 was paid, the penalty is based off of the $5,000 net tax due
How is Alimony Recapture Calculated?
Recapture for the 2nd year occurs to the extent that the alimony paid in the second year exceeds the alimony paid in the third year by more than $15,000.
Recapture for the 1st year occurs to the extent that the alimony paid in the first year exceeds the average alimony paid in the second and third years by more than $15,000.
T/F
The uniform capitalization method must be used by manufacturers of tangible personal property
TRUE
T/F
The uniform capitalization method must be used by retailers of personal property with $2M dollars in average annual gross receipts for the three preceding years
FALSE
These rules do not apply to a small retailer or wholesaler who acquires personal property for resale if the retailer’s or wholesaler’s average annual gross receipts for the three preceding taxable years do not exceed $10M
Passive losses relating to rental real estate activities are carried ____
Forward indefinitely or until the property is disposed of in a taxable transaction
