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Regulation > Individual_Taxation > Flashcards

Individual_Taxation Flashcards

1
Q

Under what accounting basis are individual tax returns prepared?

A

Cash Basis

NOT ALLOWED for:

  • Accounting for purchase & sales of inventory,
  • C Corporations or Partnerships with a C-Corp partner,
  • Tax shelters,
  • Business with gross receipt of > $5M
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2
Q

When do you recognize income and report deduction?

A

Income recognized when cash or property (FMV, prepaid rent) are received OR constructively received (made available/unrestrictive right - post dated check)

Expenses deducted when cash or check distributed (Not prepaid interest), expense charged to a credit card

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3
Q

What items may be deducted as adjustment for AGI?

I EMBRACE Education, Health & Farm

A

I EMBRACE Education Health & Farm

• Interest Student loan ( $2,500 phase out can’t be another taxpayer’s dependent - MAGI 60K single, HOH,QW/ $120K for MFJ)
• Self-Employment Tax (50% of the tax)
• Moving expenses
• Business Expenses (Schedule C)
• Rental (Schedule E)
• Alimony paid (CANNOT)
• Contribution to retirement plan (IRA, ESA,QTP)
• Early Withdrawal penalty (e.g CD)
• Jury Duty fees remitted to employer
• Expense of elementary and secondary teacher
• Qualified Higher Education Expenses
• Contribution to Health Saving Account
• Farm income

• cost involving discrimination suits

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4
Q

Which 8 items can be carried over to future years on an individual tax return?

A
  1. Investment interest expense in excess of investment income⇒ indefinitely
  2. Charitable contributions⇒ 5 years
  3. Passive Activity Losses⇒indefinitely or deducted when sold
  4. Net capital Loss ⇒$3,000 and the rest indefinitely
  5. AMT credit ⇒indefinitely
  6. NOL is carry back 2 year in general - 3 year for casualty theft loss, small business federal disaster losses
  7. Excess Section 179 Capital losses
  8. A general business credit in excess of the limitation amount is carried back 1 year and forward 20 years
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5
Q

What are the characteristics of Passive Activity Losses?

A
  • Deducted only against passive activity income
  • Unused carried forward indefinitely or deducted when property/activity sold
  • Exception the individual actively participates in the rental real estate activity can deduct up to $25,000 of passive loss per year – But amount reduced by 50% of AGI >$100,000 fully phase out if AGI>$150,000

Note:

  • real estate person losses from rental activities may be treated as ordinary business losses
  • NOL rules applies to indv, estate, trust, closely held C corp, and personal service corporation
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6
Q

How long can investment interest expense in excess of investment income be carried forward?

A

Indefinitely.

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7
Q

How long is the carry forward for charitable contributions?

A

Can be carried forward 5 years.

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8
Q

How long is AMT paid carried forward, and how is it applied?

A

AMT paid can be carried forward indefinitely.

It may be applied against future regular income tax, but not against future AMT tax liability.

The amount of AMT credit to be carried forward = excess of AMT actually paid over AMT that would have been paid if AMTI included only preferrences

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9
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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10
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. Corporate loss carryovers are carried forward as STCL only.

Individual capital losses are carried forward indefinitely. Individual capital loss carryovers retain their character (STCL or LTCL).

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11
Q

On an individual return, on what loan amount is mortgage interest deductible?

A
  • Acquisition indebtedness (buy, build, improve home) up to $1,000,000
  • Loans on home equity _up to $100,00_0 (Note: the amount of home equity indebtednes cannot exceed the FMV of the home as reduced by any acquisition indebtedness)
  • points paid on a loan to aquire a the residence
  • Loan on a 2nd homes are included provided that total loan falls within the limitation
  • Qualified residence interest does include mortgage prepayment penalties
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12
Q

Are interest on personal indebtedness deductible on an individual tax return?

A

NOT deductible - cardit card debt and car loan

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13
Q

What amout for gift/meals/service award are deductible on Schedule C of form 1040?

A
  • $25 per person for gifts
  • **$400 ** tangible property for service awards
  • 50% of the business meal and entertaiment
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14
Q

What type of income can be deducted as business expenses?

A

All reasonable business expenses may only offset active business income.

Note:

  • W2 wages are considered active business income.
  • Employee has to make _an adequate accounting to the employer and return amounts in excess of substantiated _
  • Hobby Loss (no profit in 3 or 5yrs) goes on Schedule A Misc 2%
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15
Q

What income can passive losses offset on a 1040?

A

Passive losses only used to offset passive activity income ( such as rental income or limited partnership income)

Note: Wages are ACTIVE and Interest/Dividends are PORTFOLIO **cannot be offset by passive **

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16
Q

Are interest and dividends active or passive income?

A

Neither. They are portfolio income.

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17
Q

What amount of business start-up costs can be deducted? How is it expensed?

A
  • Up to $5,000 - Reduced dollar-for-dollar by amount over $50,000
  • Remaining is Amortized over 180 months
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18
Q

How are medical expenses deducted on a 1040?

A

On Schedule A: Unreimbursed medical expenses in excess of 7.5% of AGI may be deducted

Medical expenses includes: fees/transportation to doctor, prescriptions drugs, the installation of the pool qualifies as a deductible medical expense to the extent that it does not increase the value of the home, health insurance premium, medical service but NOT over the counter drugs, cosmetic unless due to congenital abnormality or personal injury cause by an accident

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19
Q

Which personal insurance premiums are not deductible as medical expenses on Sch A?

A
  • Accident or disability insurance premiums are not deductible.

or

**Premiums on life insurance and **policies to cover loss of earnings from injuries or illnesses

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20
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

Note: even though a dependency exemption cannot be claimed because the individual has gross income of $3,800 or more or files a joint return.

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21
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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22
Q

How is net investment income calculated, for the purpose of deducting excess investment interest expense?

A
  • Net investment income = Gross investment income **- Investment expense in excess of 2% of AGI **
  • Investment interest expense in excess of net investment income is deductible
  • Investment interest expense is interest paid or accrued on indebtedness properly allocable to property held for investment, including
    • (1) Interest expense allocable to portfolio income, and
    • (2) Interest expense allocable to a trade or business in which the taxpayer does not materially participate, if that activity is not treated as a passive activity
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23
Q

What investment interest is never deductible?

A
  • Investment interest expense on tax-free securities is not deductible
  • Investment interest expense excludes
    • interest expense taken into account in determining income or loss from a passive activity,
    • interest allocable to rental real estate in which the taxpayer actively participates, qualified residence interest, and
    • personal interest
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24
Q

When are mortgage points deductible and how are they deducted?

A

They are deductible if they represent 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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25
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:** • **property is given to a qualified charity • complete gift

Does not include : • value of service performed • value of the service or goods received in return of contribution

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26
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 at LOWER of adjusted basis in the property or FMV at date of contribution, up to 50% of AGI (cash 50% limit too)

Note: property is given to a qualified charity

Does not include : value of service performed , value of the service or goods received in return of contribution

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27
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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28
Q

How is the deductible portion of a casualty loss calculated?

A

1) GROSS LOSS =
the Lower of
• Decrease in FMV or
• Basis in property

The loss is measured by the drop in FMV caused by the sudden event but is limited to the tax basis of the asset

2) Deductible casualty loss =
GROSS LOSS
- Insurance proceeds received
- $100
- 10% of AGI

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29
Q

What are the miscellaneous expenses on Schedule A, and how are they deducted?

BIT

A

BIT: deductible in excess of 2% of AGI

  • Business expenses for an employee (job travel, hotel, 50% business Meals and entertainment Union dues, Uniform specialized, Job education, outside saleman expenses)
  • Investment expenses (safety deposit box, investment advisory fees)
  • Tax preparation and attorney fees (Legal fees to collect alimony, Appraisal fees to value casualty loss of charitable contributions)
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30
Q

Which 5 itemized deductions are not subject to phaseout based on income?

A
  1. • Gambling losses to the extent of winning included in AGI
  2. • Investment Interest Expense to the extent of net investment income Schedule B
  3. • Estate taxes on income in respect of the decedent
  4. • State tax
  5. • Interest paid - mortgage/investment interest
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31
Q

Define qualifying child for most individual tax factors

C -I (age)RS Jack you

A
  • Citizenship - must be US citizen, or resident of US, Canada, Mexico
  • **Age **- under age 19, or under age 24 if a full-time student
  • **Relationship & Household member for the entire year **-TP child, stepchild, sibling, grandchild, eligible foster child
  • Support - child must NOT provide > 1/2 of his own support ♦ Support includes food, FMV of lodging, medical, recreational, educational, and certain capital expenditures made on behalf of a dependent. Excluded from support is life insurance premiums, funeral expenses, nontaxable scholarships, and income and social security taxes paid from a dependent’s own income
  • No Joint return with spouse UNLESS to get a total refund
  • Cannot be claimed as dependent on more than one return

C -I (age)RS Jack you

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32
Q

Define qualifying relative for most individual tax factors

C -IRS Jack you

A
  • *• Citizenship** - must be US citizen, or resident of US, Canada, Mexico
  • *• Income** – less than personal exemption of $3,900 – does not tax exempt income (i.e nontaxable social security)
  • *• Relationship OR Household member for the entire year** – lineal descendant (not cousin) – temporary absence OK (vacation, school, sickness, retirement home)
  • *• Support** - TP must provide > 1/2 of the dependent’s support (10% multilple support)
  • *• No Joint return with spouse** UNLESS to get a total refund
  • *• Cannot be** claimed as dependent on more than one return • Cannot be a qualifying child • MFS - TP can claim an exemption for spouse if spouse no income and not a dependent of another person • TP wife is never a dependent of TP

C -IRS Jack you

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33
Q

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

A

The Kiddie tax was established to prevent the “wealthy” from avoiding taxes on their
investment income by transferring the investments into the names of their children who might
not be subject to tax or, if so, would be taxed at a potentially significantly lower rate.
The Kiddie tax applies to children meeting three conditions:

  • Either parent is alive as of the end of the taxable year
  • The child does not file a joint tax return for the year
  • The child is of the appropriate age, either:
    • Under 18 years old as of the end of the tax year; or
    • Is a student between the ages of 18 and 24 with earned income that does not exceed 50% of the child’s support

An individual subject to the Kiddie tax will be subject to a tax liability for the larger of 2
amounts:
1) The tax that would be owed based on filing a return including the child’s earned and
unearned income.
2) The total of the tax that would be owed based on filing a return including only the
child’s earned income plus the allocable parental tax.

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34
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.

35
Q

Self-employment tax assessed and **premiums for medical insurance **

A
  • 15.3% of net earnings from self-employment (Note: executor of an estate is NOT self-employement)
  • 50% of self-employment tax is deductible on the return 7.65%
  • A self-employed individual can deduct 100% of the premiums for medical insurance for the individual, spouse, dependents, and any child of the taxpayer under the age of 27 at the close of the tax year in arriving at AGI
36
Q

What is a refundable tax credit? Which individual tax credits are most commonly refunded?

A
  • Refundable tax credit: is 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.

►The child tax credit is now a refundable credit for taxpayers with one or more qualifying children when the
taxpayer is not able to claim the full child tax credit for each child (because tax liability is less than the available credit).

37
Q

How many education credits may be taken on a tax return?

A
  • American Opportunity Credit (Hope)- per student
  • Lifetime Learning Credit - per taxpayer

Note: The American Opportunity Credit is refundable.

38
Q

What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?

A

TP is only subject to an underpayment penalty if balance due on the tax return is >$1,000

The lesser of:

  • 90% of current year’s total tax

OR

  • **100% of prior year’s total tax ** 110% of prior year’s total tax if AGI is $150,000 or more
39
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)

40
Q

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

A

MACRS 150

41
Q

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

A

90 days

42
Q

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

A

10 days

43
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** (Note:** gross income based on gross receipts before any deductions)

Tthe clock starts on the LATER of the due date or the filing date of the return

  • NO STATUTE OF LIMITATIONS for either fraud or failure to file
44
Q

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

A

It is treated as a STCL, if totaly worthless

45
Q

How long does an individual taxpayer have to file a claim for refund?

A

Refunds must be claimed **LATER OF **

  • within 3 years of the return due date or
  • within 2 years of tax being paid
46
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.

47
Q

When are scholarships not taxable?

A
  • When they are not in return for services rendered,

AND

  • the money is _u**sed *only* for ** tuition_ and course-related fees, books, supplies, and equipment

**Note: **• Scholarships for room and board are includable in income. • Only a candidate for degree can exclude the scholarship

48
Q

Dividend favorable tax rate

A
  • 0% tax rate if in the 10% or 15% tax bracket
  • 15% tax rate if in the 25%, 28%, 33%, 35% tax bracket
  • 20% tax rate if in the 39.6% tax bracket (“high income”taxpayer with AGI over $450,000 (MFJ), $400,000 (Single)
  • same as LTCG
49
Q

Which dividend income is tax free?

A

Not taxable dividends

  • Dividends received from S Corporation
  • Dividends received on life insurance policies
  • Dividends received f_rom mutual funds investing in tax-exempt bonds _
  • Liquidation dividend, dividend for common stock or splits
50
Q

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

A

Up to 85%

51
Q

Is unemployment compensation taxable?

A

Yes.

52
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.

53
Q

Are workman’s compensation insurance benefits taxable?

A

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

54
Q

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

A
  • Alimony IS taxable

Must be: present in the divorce agreement, made in Cash or equivalent, living Apart, Terminate at the recipient’s death, Not designated as other than alimony - child suport or property settlement , file Own return - CANNOT

  • Child support and Divorce property settlemetns are NOT taxable

Note: payment is first allocated to child support then alimony

55
Q

Adoption expenses - Are they deductible?

A

NO, they are not deductible.

However tax benefits are available through the adoption CREDIT.

Adoption credit → ♦ child <18yr , ♦ expenses incurred or paid in tax year prior to the year of which the adoption is finalized, ♦ phase out, ♦The credit for adoption expenses is a nonrefundable credit of up to $12,970 (for 2013)

56
Q

Describe alimony recapture

A

2nd Year RECAPTIURE = when the alimony paid in the second year exceeds the third year alimony by more than $15,000

**1st Year **RECAPTIURE = occurs to the extent that the alimony paid in the first year exceeds the average alimony paid in the second year (reduced by the recapture for that year) and third year by more than $15,000

Total Recapture = 1st Year Recapture + 2nd Year Recapture

  • EXAMPLE: If a payor makes alimony payments of $50,000 in 2010 and no payments in 2011 or 2012, $50,000 – $15,000 = $35,000 will be recaptured in 2012 (assuming none of the exceptions apply). *
  • EXAMPLE: If a payor makes alimony payments of $50,000 in 2010, $20,000 in 2011, and nothing in 2012, the recapture amount for 2011 is $20,000 – $15,000 = $5,000. The recapture amount for 2010 is $50,000 – ($15,000 + $7,500) = $27,500. The $7,500 is the average payments for 2011 and 2012 after reducing the $20,000 2011 payment by the $5,000 of recapture for 2011. The recapture amounts for 2010 and 2011 total $32,500 and are reported in 2012.*
57
Q

How are Net Operating Losses (NOL) utilized?

A
  • Can be carried back 2 years If any left, can be carried forward 20 years
  • NOL is generally **a business loss BUT could also result from personal casualty loss - **3 yr carried back if the NOL relates to casualty of theft for farm, indv, small business
  • same carry back rule for corporation
  • NOL is NOT from : standard deduction, personal exemption, interest, dividend, CG or CL
58
Q

Which IRA contributions are deductible?

A

**Traditional IRA = deductible ** ♦ 5,500 max deduction per indv (additioanal $1,000 if 50 yr or >) ♦ not participate in a qualified pension or profit-sharing plan at work

Roth IRA = not deductible but qualified distribution of earnings are taxed free if TP is at least 59 yr

Note:♦ contribution must be made by 04/15♦ conversion from IRA to Roth IRA does not have a AGI limit

The contribution limit per individual applies to the total contributed to both varieties of IRA.

The contribution limit for Roth IRAs does not apply to taxpayers with income below $110,000 ($178,000 for MFJ) and cannot be used by taxpayers with more than $127,000(2013) of AGI (or married couples filing a joint return with more than $188,000 (for 2013) of AGI. Traditional IRAs can be used by all taxpayers regardless of AGI.

59
Q

When can a couple file married filing jointly?

A
  • They must be married at the end of the year
  • If one spouse died during the year, they must be married at the date of death
  • can file MFJ or MFS
  • It doesn’t matter if they lived apart during the year.
  • Taxpayers are considered unmarried for the whole year if, on the last day of the year, they are divorced or are legally separated under a divorce or legal separate maintenance decree.
60
Q

What are the requirements for filing as Head of Household?

A
  • Unmarried person
  • Must provide
    • > 50% of the cost of maintaining the household
    • to a qualifying child or relative living in the same house for more than 1/2 of the year
  • TP’s parents must be dependent but no need to live with him
61
Q

What are the requirements for filing as qualifying widower?

A
  • Must provide** > 50% of the cost of maintaining the household** for a dependent child
  • MFJ return was file at year of spouse death
  • Available 2 year after death of spouse
  • Unmarried person

**Cost of maintaining a household ** includes rent, mortgage interest, taxes, insurances on the home, repairs, utilities, food eaten in the home

62
Q

When can you amend the tax return?

A

LATER OF

  • 3 year after original tax return due (including extension)

OR

  • 2 year after actual payment
63
Q

**When to file ** a tax return ?

A

By April 15

but you can file a 6 month extension

64
Q

Who can file a tax return?

(6)

A
  1. Gross income > personal exemption + standard deduction,
  2. Net earnings for Self-employment ≥ $400,
  3. Gross income > personal exemption if MFS
  4. Are individuals claimed as dependents on another taxpayer’s return, have any unearned income and gross income of ≥ $1,000
  5. Are anyone receiving advanced payments of the Earned Income credit (EIC)
  6. Are subject to the Kiddie Tax
65
Q

What is included/excluded in compensation for service?

A

Gross Included
• wages, salaries, tips
• Bonus & commission
• fees for jury duty
• Discount on purchases of employer merchandise to the extend in excess of the gross profit percentage
• Taxable fringe benefits - e.g. use of the company vehicle for personal use

Excluded
• Health insurance paid by employer
• Cost of Group Term Life up to $50,000 coverage
• Employer provided educational assistance limited at $5,250
• Fringe benefits incurred for employer benefit

66
Q

Taxability of Prizes and Awards ?

A

Generally taxable
Excluded from income if
• an employee achievement award of tangible personal property received from employer for year of employment or safety achievement
• recipient (of prize/award for religious, charitable, scientific …)
1. was selected without any action on his part,
2. not required to render future services and
3. designates that the prize/award is to be transferred by the payor to a governmental unit or tax exempt charitable organization

67
Q

What interest incomes are excluded from income?

A
  • Interest on a state or municipal bond
  • Interest earned on a qualified higher education bond
  • Interest on a Series EE U.S. savings bond is not reported as income until the time that the bond is redeemed
  • All over type of interest income are taxable e.g. US Treasuries obligation, Federal bonds,
68
Q

Additional items included in Gross Income

(9)

A
  1. Rents & royalties including rent collected in advance & nonrefundable deposit
  2. Discount on nonqualified stock option upon exercise
  3. Injury awards for punitive damages or lost profit (not physical)
  4. 85% of SS benefit if Modified AGI >$60,000 (rich)
  5. State tax refund IF ITEMIZED IN PY
  6. Proceeds from a traditional IRA of the contributions previously deducted
  7. Proceeds from a traditional IRA representing earnings of IRA
  8. Alimony received in cash provided the payments will terminates upon recipient’s death
  9. Unemployment compensation
69
Q

Describe Uniform capitalization method (UNICAP)

A

UNICAP rules generally require that all costs incurred (direct & 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.

Among the costs that are EXCEPTED from the UNICAP rules are ♦ research and experimental expenditures, ♦ mine development and exploration costs, ♦ and the costs incurred by a freelance writer, ♦ photographer, ♦ or artist whose personal efforts create the product. ♦ the costs of small retailers and wholesalers who acquire personal property for resale if the retailer’s or wholesaler’s average gross receipts for the preceding three tax years do not exceed $10 million

70
Q

Additional items excluded from Gross Income

(11)

A
  1. Damages received for physical injury or lost wages (blood)
  2. Workers’ compensation benefits
  3. SS benefit received by low income TP Modified AGI
  4. State tax refund IF claimed STANDARD deduction in PY
  5. Portion of traditional IRA or pension withdrawal of prior nondeductible contributions
  6. Qualified Roth IRA withdrawals
  7. Federal tax refunds
  8. Gifts & inheritances received
  9. Life insurance proceeds paid by raison of death EXCEPTION_ _If proceeds are received in installments, amounts received in excess of pro rata part of face amount are taxable as interest
  10. Divorce property settlements
  11. Child support payments
71
Q

What are the conditions to deduct moving expenses?

A

Moving expense are deductible if
• New work must be at least 50 miles further form old home, each way
• Must remain employed for at least 39 week (9 months) after the move
• Move due to change in location of job or business (or start of job)

Amounts deductible include direct cost of moving family and belongings (shipping & temporary storage, cost of travel including lodging, cost moving pets, insurrance cost of household good during move) NOT meals, house hunting or temporary living cost

72
Q

What items are included as Itemized Deductions?

COMMITT

A

COMMITT

  • *C**haritable Contribution (credit card payment OK but not promissory note)
    • *O**ther Miscellaneous (not subject to 2%AGI limitation)
  • *M**iscellaneous Expense (BIT)
  • *M**edical Expenses
  • *I**nterest Paid
  • *T**axes Paid (includ deficiency tax paid, real estate tax must be apportioned if property sold) Theft and Casualty losses
73
Q

What taxes are deductible on Schedule A?

A
  • State and local taxes
  • Real property taxes
  • Personal property taxes- are deductible if ad valorem (i.e., assessed in relation to the value of property). A motor vehicle tax based on horsepower, weight, or model year is not deductible.
  • Foreign taxes paid
  • **NOT deductible: ** inheritance tax, federal tax, fines, license & vehicle registration fee not based on FMV
74
Q

What is the maximum contribution and deduction allowed to a Keogh plan (for self-employed individual)?

A
  • The max contribution allowed and deduction to a Keogh plan is the LESSER of
    $50,000 OR 100% of earned income
  • Earned income = net earnings from self-employment reduced by 1/2 of the self-employment tax and deductible Keogh contribution itself
  • Note: this works out to 20% of the self-employment income before Keogh deduction
75
Q

What are requirements must be met to qualify for the additional standard deduction?

A

♦ Blind

AND OR

♦ Older more than 65

76
Q

Provides some AMT _Adjustment & _Preferences

SIMPLE/PIE

A

AMIT Adjustment SIMPLE (can increase or decrease)
• Standard deduction
• Interest on home equity loan NOT used to buy, build, improve TP home
• Medical expense 10% of AGI
• Personal and dependency exemptions
• Local and state tax deduction (state, local, and foreign income taxes, real and personal property taxes)
• Employee and investment expenses subject to 2% AGI limitation

AMIT Preference PIE
• Private activity bond (not at preference in 2009 and 2010)
• Incentive stock options ISO
• Excess depreciation

77
Q

AMT exemption amount & rates

A

** For 2013**
• MFJ $80,800
• Single and HoH $51,900
• MFS $40,400

AMTI is reduced by exemption amount

AMT = tentative AMT > regular tax

Tentative min tax rate = 26% up to $175,000; 28% if more

78
Q

List 7 credits that may reduce a TP total tax

A
  1. Dependent care credit
  2. Credit for the aged & disabled
  3. Earned income credit
  4. Child tax credit → ♦ $1,000/child, ♦ <17yr, phase out
  5. American Opportunity/Hope credit
  6. Lifetime learning credit
  7. Foreign tax credit → foreign tax paid by a corporation can be deducted either as a credit or as a deduction at the option of the corporation
79
Q

Dependent care credit

A

Dependent care credit

  • Child <13yr, disable no age limit,
  • Dependent care expense limited to the lesser of
    • actual expense OR
    • max credit amount $3,000 per 1 dependent, $6,000 for 2 or more dependent
    • ⇒ reduced by 35 % if AGI <$15,000 reduce to 1% per point each to $2,000 but not below 20%
  • At least one spouse must me gainfully employed or be looking for work when the related expense occurred
80
Q

Credit for the aged & disabled

A

Credit for the aged & disabled

  • Low income indv over 65 or permanently disabled
  • The amount of credit is = 15% x ( initial amount reduced by amount excluded from AGI and 50% of AGI in excess of $10,000 if MFJ)
81
Q

Earned income credit

A
  • 2 cdt: TP as earned income & provides support for a dependent child or grandchild 19 or 24 student who live with TP for more than 1/2 year
  • Refundable
  • Not available to MFS
82
Q

American Opportunity/Hope credit

A
  • For 1st 4 year of college,
  • Max $2,500 per student,
  • Student must be enrolled on at least part-time basis,
  • Cover tuition paid for by TP, spouse,
  • If parent claim the child, only parent can
83
Q

Lifetime learning credit

A
  • Claimed for tuition and fees not eligible for Hope credit,
  • Credit equals 20% of the $10,000 of tuition and fees,
  • Max credit $2,000 **per family **
  • Claimed unlimited number of years
84
Q

Annuities and pensions are excluded

A

Excluded portion of each payment is = (Net cost of annuity /Expected total annuity payments) X Payment received

“Expected total annuity payments” = annual return X number of years receivable if it is an annuity for a definite period or life expectancy

Once this exclusion ratio is determined, it remains constant until the cost of the annuity is completely recovered. Any additional payments will be fully taxable

EXAMPLE: Mr. Jones purchased an annuity contract for $3,600 that will pay him $1,500 per year beginning in 2012. His expected return under the contract is $10,800. Mr. Jones’ exclusion ratio is $3,600 ÷ $10,800 = 1/3. For 2012, Mr. Jones will exclude $1,500 x 1/3 = $500; and will include the remaining $1,000 in gross income.

Regulation (21 decks)

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