Individual Taxation - Income and Adjustments

Question 1

Capital Gain/Loss

Answer 1

Form 8949 -> Schedule D -> 1040

Deduction limit on Loss = $3000 / year but carry over extra

Question 2

Social Security and Medicare

Answer 2

7.5% paid by each employer and employee - not on 1040

Question 3

Flow of the 1040

Answer 3

General Income - Adjustments = AGI - Deductions = Taxable Income - credits + SE Tax (if applicable) = Total Tax Due - Fed Income Tax Paid = Total Tax Payment/Return

Question 4

Personal Income / Earned Income

Answer 4

W-2
Schedule C Sole Prop

Question 5

Portfolio Income

Answer 5

Interest and Dividend Income - Schedule B

Schedule D - Capital Loss Deduction $3000 max (carryover rest forever)

Question 6

Individual Capital Assets

Answer 6

• Stocks, Bonds
• Personal Property: Can Claim only gains, no deduction on loss (not even to offset gains)
• NOT for Intangible Assets unless purchased
• Long Term Capital: over 1 year holding

-Short Term netted with Short, Long Term netted with Long: Only net together if one is loss and one is gain
- Long Term tax is generally 15%, short is ordinary income
- losses maxed at $3000 but can be carried over indefinitely, MF Separate $1500 each

Stocks Long Term Gains
- 15% most people
- $0 if less than $40/$80
- more than 15% more than $450

Question 7

Portfolio Income - Dividend Income Rules

Answer 7

Schedule B

Cash dividend only - Capital Gains rate is less than normal tax rate
Share Dividend - lowers basis no tax impact until sales
Life insurance dividends - not included

Capital Loss Deduction $3000 max (carryover rest)

Question 8

Portfolio Income - Interest Income Rules

Answer 8

Schedule B

TAX FREE - State and Municipal Bond Interest, Puerto Rico, Guam and US Virgin Islands (less people want to invest - higher risk)

Taxable
- US Government Bonds
- Corporate Bonds
- Interest Tax from Fed/State Return (will get if filed late)
- Bank account Interest
- Security Deposit Interest (deposit itself not taxable)
- Money Damages Interest (not the damages itself)

Question 9

Passive Income

Answer 9

Real Estate Rentals - Schedule E
Business where tax payer does not participate

Income - all included
Losses - Cannot deduct from personal income, only passive income (only real estate) - passive losses carry forward indefinitely

Question 10

Passive Income - Rental Activity Rules

Answer 10

Schedule E

Rent Revenue - Direct Expenses

Earned Income Deduction Rules

AGI <= $100,000
Deduction up to $25,000

AGI 100,000<x>150,000
Deduction is less .50 of each $1 over 100,000 (if AGI $110 - 10x.5=5 so max deduction is 20)</x>

AGI >$150,000
Deduction = 0

Question 11

Other Taxable Income

Answer 11

• Unemployment
• Gambling Winnings/Cash Prize
• Cancellation of Debt
• Alimony (if divorced 2018 or before)

Question 12

Scholarships, Gambling Alimony

Answer 12

Scholarships
- tax free if candidate for a degree
- room and board is taxable
- works and receives money - taxable stipend

Alimony (TCJA)
- 2019 or after - no deduction for alimony paid or income for alimony received
- prior: cash payments only count, property settlement is not taxable, payments must cease at death, child support not taxable

Gambling
- win on 1040
- cannot deduct more loss than winnings - can only deduct if itemized - NOT NETTED
- under TCJA - you can deduct all costs of the wager (travel to the casino)

Question 13

Social Security Benefits

Answer 13

Not taxable unless other income is received over $25/30
(add half SSI to other net income)

50% taxable over $25/$30
85% taxable over $34/$44

Even tax exempt income is included in other income

Question 14

Taxable Distribution from Retirement Plans

Answer 14

Traditional IRA
- Normal Distributions start at 59.5
- taxable as ordinary income
- Early Distributions are permitted but at 10% penalty without exception * Medical expenses, higher ed costs, first time homebuyer up to $10,000, permanent disability (penalty on Schedule 2)
- marginal rate for distribution

Question 14

Stock Options

Answer 14

Non-Qualified Stock Options - taxed when granted if has value when granted (otherwise, taxed when exercised)
- WITH NO ASCERTAINABLE VALUE - NO INCOME ON GRANT DATE - ORDINARY INCOME ON DATE OF EXCERCISE
- ordinary income calc: strike price x number of shares available to buy
- Basis: what you paid at your strike price plus the amount you were taxed prior
- when employee has ordinary income, employer can take deduction

Employee Stock Option (ISO - incentive stock options or qualified stock)
- no taxable income to grant date
- no regular taxable income on exercised date (AMT only)
- sale date LT Capital Gain
- stock MUST be held for more then one year and 2 years after option was granted (defaults if sold sooner)

Question 15

Deductions to arrive at AGI (Adjustments)

Answer 15

SHAMPOO

Student costs - educator and student loan
Health Insurance - paid by self employed HSA
Alimony
Moving Expenses for military
Penalty on early withdrawals
One half self employment tax
Old Age/Retirement Contributions

Also:
- Jury Duty Pay given to employer
- Legal fees for Sexual Harassment Settlements
- If using Standard Deduction, deduct $300/600 for charitable contributions

Question 16

Teacher Adjustment/Deductible

Answer 16

Schedule 1 - deductible to get to AGI

$300 out of pocket costs K-12

Question 17

Student Loan Interest Adjustment/Deductible

Answer 17

Schedule 1 - deductible to get to AGI

$2500 per year deductible
- Self, Spouse or dependent
- phase out $70/140

Question 18

Self Employed Health Insurance Adjustment/Deduction

Answer 18

Schedule 1

Can be deducted if there is a Schedule C profit shown for the year - must be more than Health Insurance Deduction
- if there is a loss on Schedule C or expense is over Schedule C income - it can be an itemized deduction

Question 19

HSA Adjustment/Deduction

Answer 19

Form 8889 needed

High Deductible Health Plan can deduct what they put in
- Not taxable when removed from plan, includes feminine hygiene and nonprescription meds

Question 20

Moving Expenses for Military Adjustment/Deduction

Answer 20

Active Duty Military ONLY

Question 21

Penalty on Early Withdrawal of savings

Answer 21

CD penalty only - 1099 for what would be earned, not received - penalty = difference between what he earned and what he would have earned

Question 22

One Half SE Tax Adjustment/Deduction

Answer 22

Schedule C net profit -> Schedule SE -> Schedule 1

Calculated on Schedule SE based on net profit

SE pay both halves of tax - so half is deductible to help make it more even with employees

If there is a loss - no self employment tax paid

Question 23

IRA Adjustment/Deduction

Answer 23

Traditional
Limit $6500/13000
- catchup $1000 over 50
- must make by April 15
- can make contributions even if taking distributions
- penalty if taken before 59.5
- non-working spouse can make contributions (phases out over $220)

Roth
- no deduction
- distributions tax free after 5 years as long as 59.5
- max is $6500/13000
- after income is 138/218 goes away
- 50 and over $1000 extra

Education IRA
- similar to ROTH
- no deduction for contribution
- $2000 per year per beneficiary
- child must be under 18 to get tax benefit from education ira
- taken out tax free for college

529
- not deductible
- distributions not taxable if used for college
- unlimited distributions if used for college expenses, including housing
- allow distributions of $10,000 for private K-12

Question 24

Self Employed Retirement Adjustment/Deduction

Answer 24

SEP/Keogh - 59.5 age Deductible up to 25% of net Schedule C or max (approx $58,000)

Question 25

Foreign Income Exclusion

Answer 25

US Citizens working overseas can exclude foreign earned income up to limit (est 104K)