Lesson 2 of Income Tax Planning: Basic Income Tax Flashcards

Question

A taxpayer who is claimed as a dependent of another taxpayer will have a limited standard deduction.

Answer 1

A taxpayer who is claimed as a dependent of another taxpayer will have a limited standard deduction. A dependent's standard deduction is equal to the greater of: -$1,250 (2023), OR - $400 plus earned income (but not exceeding the normal standard deduction). - -If the dependent is age 65 or older and/or blind, however, the standard deduction may be higher.

Answer 2

**Example 1:** Amy, who is single, blind, and 18 years old, is a dependent of her parents. Amy had earned income of $200 during 2023. Amy is entitled to a total standard deduction of $1,250. (the greater of earned income plus $400 or $1,250) **Example 2:** Brett has $1,500 of earned income and is a dependent of his parents. Brett is not blind or age 65 or older. Brett is entitled to a standard deduction of $1,900 ($1,500 + $400. Note that Brett's earned income plus $400 is greater than $1,250. **Example 3:** Carla has $10,000 of earned income and is claimed by her parents as a dependent. Carla is not blind or age 65 or older, Carla is entitled to a standard deduction of $10,400. Carla's earned income plus $400 equals $10,400, not to exceed $13,850.

Answer 3

Special rules apply to a person who can be claimed as a dependent by another taxpayer. Such a person: (1) may have a reduced basic standard deduction, and (2) is required to file a tax return based on different rules from the gross income test used by taxpayers who are not dependents. An overview of these issues is presented in the section on calculating the standard deduction of a dependent.

Answer 4

Personal and dependency exemptions were repealed for 2018 through 2025.

Answer 5

A Qualifying child must meet: Rules for a qualifying child related to the defintion of a child for purposes of head of household filing status Relationship Test Abode Test Age Test Support Test Tie-Breaker Rules

Answer 6

In addition to the joint return test and the citizenship or residency test (discussed later), a qualifying child must meet all four tests: A relationship test, An abode test, An age test, A support test. Must also Meet: (discussed later) -Joint Return test -Citizenship or Residency Test

Answer 7

These rules for a qualifying child relate to the definition of a child for purposes of head of household filing status, the earned income tax credit, the child tax credit, and the credit for child and dependent care expenses. Note there are different age requirements for the child tax credit and the child and dependent care expense.

Answer 8

In order to satisfy the relationship test, a qualifying child of a taxpayer must be: -The taxpayer's child. -A descendant of the taxpayer's child, -The taxpayer's brother, sister, stepbrother, stepsister, half brother, half sister, or -A descendant of the taxpayer's brother, sister, stepbrother, stepsister, half brother, or half sister. Stated differently, a qualifying child is a descendant of the taxpayer, the taxpayer's sibling, or a descendant of the taxpayer's sibling. Note that a cousin is not a qualifying child. A taxpayer's child may be a natural child, a stepchild, an adopted child, or an eligible foster child.

Answer 9

Elizabeth and Warren McConkie have a remarkably diverse family. In addition to Elizabeth and Warren, the family includes: 1. Matt, Elizabeth's 10-year-old son from a prior marriage, 2. Amy, Elizabeth's 15-year-old sister, 3. Andrei, their 6-year-old son adopted from Russia, 4. Zoe, their 4-year old daughter, and 5. Carlos, a 2-year-old foster child placed with them by a state agency. All five children meet the relationship test as a qualifying child of Elizabeth.

Answer 10

To meet the abode test, a qualifying child must live with the taxpayer for **more than half the year.** The taxpayer and the dependent are **considered to occupy the household even during temporary absences** due to special circumstances such as illness, education, business, vacation, or military service.

Answer 11

The 18-vear-old son of William and Belinda Bates lived at home during the first five months of the year and then entered military service. Since military service is considered to be a temporary absence due to special circumstances, the son meets the abode test for the year.

Answer 12

A full time qualifying **child** must either be under the age of 19 as of the end of the calendar year or a **student** under the age of 24 as of the end of the calendar year in order to satisfy the age test. To be considered a student, the child must be a full-time student at an educational institution during five months of the calendar year. Most primary and secondary schools, colleges, universities and similar educational institutions are acceptable for this purpose

Answer 13

Marilyn's 21-year-old son finished his third year of college in May of this year. He spent the remainder of the year serving as a volunteer in a program to assist the victims of a flood. If the son was a full-time student during the first five months of the year, he meets the age test.

Answer 14

The support test is satisfied if a qualifying child does not provide more than one-half of his or her own support during the year. If a child is the taxpayer's child and is a full-time student, amounts received as scholarships are not considered to be support. If more than one person is eligible to claim another person as a dependent under the qualifying child rules, the tie-breaker rules shown below apply:

Answer 15

Frank and Alice provide $10,000 toward the support of their son, Edward. Edward provides $2,000 toward his own support and receives a scholarship worth $12,000 from the university he attends. Edward is not considered to provide more than one-half of his own support because the scholarship is not considered to be support provided by Edward.

Answer 16

Abode Test and the Custodial Parent Form 8332

Answer 17

Because of the abode test, a child of divorced or separated parents is normally the qualifying child of the custodial parent. If all four of the following requirements are met, however, the child will be treated as the qualifying child of the noncustodial parent. 1. The parents are divorced or legally separated under a decree of divorce or separate maintenance, are separated under a written separation agreement, or they lived apart at all times during the last six months of the year; 2. The child receives over one-half of his support for the year from his parents; 3. The child is in the custody of the parents for more than half the year; and 4. The custodial parent signs a statement that she will not claim the child for the year, and the noncustodial parent attaches the statement to his return (may use Form 8332). Custodial Parent: Is the parent that the child resides with after a divorce or seperation.

Answer 18

For the signed statement or written declaration in requirement four above, the custodial parent may use Form 8332 or a similar statement that contains the same information. The statement may apply to the current year, several years, or to all future years. For divorce or separation agreements after 1984, the requirement for a signed statement can be met by attaching certain pages from the decree or agreement to the tax return of the noncustodial parent. If pages from the decree or agreement are used, they must specify that the noncustodial parent can claim the child the years for which the noncustodial parent is allowed to claim the child. Different rules apply to divorce decrees and separation agreements before 1985.

Answer 19

Edward and Janet were divorced three years ago. Janet was given custody of their daughter, Jes-sica, and Edward was given visitation rights on alternate weekends and other specified times. The divorce decree states that Edward will be allowed to claim Jessica for the child credit each year. Edward will be able to claim Jessica, but he will be required to attach pages from the divorce decree to his income tax return each year. If the right to claim Jessica for the credit had not been given to Edward in the divorce decree, Janet could allow him to claim Jessica by giving him a signed Form 8332 to attach to his tax return

Answer 20

In addition to the joint return test and the citizenship or residency test (discussed later), a qualifying relative must the following four tests to qualify as a dependent of a taxxpayer for the child tax credit: Relationship Test Gross Income Test Support Test Not a Qualifying Child Test Must also Meet: (discussed later) -Joint Return test -Citizenship or Residency Test There is ALSO: Additional Test for Qualifying Child and Qualifying Relative

Answer 21

To satisfy the relationship test for a qualifying relative, the potential dependent of the taxpayer must be: -The taxpayer's child or a descendant of a child (grandchildren, etc.), -The taxpayer's brother, sister, stepbrother, or stepsister, -The taxpayer's father, or mother, or an ancestor (grandparent, etc.), -The taxpayer's stepfather or stepmother, -A son (nephew) or daughter (niece) of a brother or sister of the taxpayer, -A brother (uncle) or sister (aunt) of the father or mother of the taxpayer, -A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law of the taxpayer, or -Any other individual (may be a totally unrelated person) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer's household. A person who was married to the taxpayer during part of the year does not qualify. A child of the taxpayer who does not meet the requirements to be a qualifying child may still meet the requirements to be a qualifying relative of the taxpayer. Note that not all relatives of a taxpayer (a cousin, for example) meet this relationship test. Significantly, individuals who are not actually related to the taxpayer may meet the relationship test if they live with the taxpayer as a member of the taxpayer's household. An unrelated person does not qualify in certain limited circumstances (for example, if the relationship violates state law).

Answer 22

To meet the gross income test, a dependent's gross income must be less than the personal exemption amount ($4,700 for 2023 even though the personal exemption was repealed) for the year. This contrasts with a qualifying child, for whom there is no such test.

Answer 23

Phillip provides more than half the support of his son, David. David is a 25-year-old doctoral student at a university. David's only income is a $12,000 fellowship to pay tuition. Even though David is not under 24 years of age and is therefore not a qualifying child, he may be claimed as a qualifying relative if he meets the gross income test. Since a fellowship or scholarship is normally excluded from gross income, Phillip is allowed to claim David as a dependent.

Answer 24

To satisfy the support test, the taxpayer must provide more than one-half of the support of a dependent. Support normally includes providing housing, food, clothing, education, and medical treatment, among other things. Income received by a dependent does not count as support provided by the dependent unless it is actually expended for that purpose. For example, if income earned by an elderly parent is deposited in a savings account rather than expended for his own support, it does not count as support provided by the parent.

Answer 25

In order to be claimed as a qualifying relative, a person cannot be a qualifying child of any taxpayer for the tax year.

Answer 26

In addition to the four tests for a qualifying child or the four tests for a qualifying relative, anyone who may be claimed as a dependent under the qualifying child or qualifying relative classifications must meet the following two tests: -A joint return test, and -A citizenship or residency test.

Answer 27

To satisfy the joint return test, a married dependent must not file a joint return with a spouse unless a tax return is filed only to claim a refund for tax withheld, if neither spouse is otherwise required to file a tax return, and if no tax liability would exist for either taxpayer on separate returns.

Answer 28

George and Francesca wish to claim their married daughter, Elena, as a qualifying dependent. They met all of the tests to claim her except the joint return test. Elena and her husband filed a joint tax return for the year to reduce their income tax liability. They owed money on their joint return and each would have owed money on a separate return. George and Francesca are not eligible to claim Elena as a qualifying dependent.

Answer 29

A dependent must be a citizen or national of the United States or a resident of the United States, Canada, or Mexico during some part of the year. This test does not apply for certain adopted children.

Answer 30

The personal exemption for 2023 is repealed. The phaseout of the Personal Exemption (PEASE) was repealed by ICJA 2017.

Answer 31

Federal income tax is a Pay-As-You-Go system Taxpayers Who Receive Income That Is Not Subject to Withholding, Make Estimated Payments Avoiding Penalties

Answer 32

The federal income tax is a pay-as-you-go system. As a taxpayer earns wages, the taxpayer pays federal income tax by having it withheld from his or her paycheck.

Answer 33

Taxpayers who receive income that is not subject to withholding or whose employers do not withhold a sufficient amount may be required to make estimated payments. -If a taxpayer is required to estimate, the payments will be due quarterly on April 15, June 15, September 15, and January 15 of the following year. -If the due date of the estimated tax payment falls on a Saturday, Sunday, or legal holiday, it will be considered on time if it is paid on the next business day.

Answer 34

In order to avoid penalties, taxpayers must pay estimated tax for 2023 if both of the following apply. -The taxpayer expects to owe at least $1,000 in tax for 2023, after subtracting withholding and credits. -The taxpayer expects his withholding and credits to be less than the smaller of: --90% of the tax to be shown on your 2023 tax return, or --100% of the tax shown on your prior year's tax return. Your prior year's tax return must cover all 12 months.

Answer 35

Paula, who files as head of household, has the following tax information: -Expected AGI for 2023: $78,725 -AGI for 2022: $73,700 -Tax shown on 2022 return: $10,504. -Tax expected to be shown on 2023 return: $11,501 -Tax expected to be withheld in 2023: $10,400 Paula is trying to determine whether she needs to make estimated payments for 2023. Paula expects to owe at least $1,000 for 2023 after subtracting her withholding from her expected tax ($11,501 - $10,400 - $1,101). Paula expects her income tax withholding ($10,400) to be at least 90% of the tax to be shown on her 2023 return ($11,501 × 90% = $10,351). Therefore, Paula does not need to pay estimated tax

Answer 36

Individual Income Taxes are reported on Form 1040.

Answer 37

Back of Form 140

Answer 38

Definition of Gross Income Sources of Income Items Specifically Included in Gross Income

Answer 39

Under IRC Section 61, gross income is defined as "all income from whatever source derived." This broad definition of income includes accretions to wealth from money, property, or barter, UNLESS the IRC contains a specific provision excluding a particular item from income. Gross income includes both earned and unearned income, regardless of whether or not it is taxable.

Answer 40

Personal Services Income from Property Income from Partnerships, S corporations, trusts and estates Income in community property states

Answer 41

When a taxpayer performs services for which he is compensated, the taxpayer has income as a result of those services.

Answer 42

Income from property (i.e., dividends or interest) must be included in the gross income of the owner of the property.

Answer 43

Partnerships and S corporations are pass-through entities. Therefore, any income from a business whose legal form is a partnership or S corporation will be passed through to the owners of the business. The income of a trust or estate is generally taxable to the beneficiary, unless the income is not distributed, in which case it will be taxable to the trust or estate.

Answer 44

In community property states, one-half of the earnings of each spouse is considered owned by the other spouse. In other words, one-half of the husband's salary is considered to be owned by the wife. Similarly, one-half of the wife's salary is considered to be owned by the husband.

Answer 45

The Following Items are Specifically Included in Gross Income Taxation of Annuity Payments Distributions From Retirement Plans Social Security Benefits Below Market Loans

Answer 46

Annuity payments, Compensation for services (including certain fringe benefits), Gross income derived from business, Gains derived from dealings in property, Interest & dividends, Rents & royalties, Alimony and separate maintenance payments for divorce decrees finalized by 12/31/18 (repealed for divorce decrees after 12/31/2018), Income from life insurance and endowment contracts, Pensions, Discharge of indebtedness, Distributive share of partnership gross income, Income in respect of a decedent, and Income from an interest in an estate or trust.

Answer 47

An annuity is a contract under which the taxpayer makes a lump-sum payment or series of payments to the seller of the annuity. In return, the seller of the annuity agrees to make periodic payments to the taxpayer beginning immediately or at some future date. An annuity is the systematic liquidation of principal and interest over a specified period of time. Each annuity payment includes: -a return of capital (pro rata portion of premiums), which is received tax free, and -Interest, which is taxable. The Exclusion Ratio determines the portion of each payment excluded from taxation and is calculated at the starting date of the annuity.

Answer 48

Exclution Ratio = Investment in the contract ÷ Expected Total Return

Answer 49

Distributions from Qualified retirement plans Distributions from Traditional IRA

Answer 50

Distributions from qualified retirement plans are generally subject to ordinary income tax because the plans usually contain both contributions and earnings that have never been subjected to income tax. -However, a participant will have an adjusted basis in distributions received from a qualified plan if either of the following have occurred --The participant made after-tax contributions to a contributory qualified plan, or --The participant was taxed on the premiums for life insurance held in the qualified plan. -If the participant has an adjusted basis in the distributions, then at least part of the distribution will be a non-taxable return of capital. -Amounts distributed as an annuity are taxable to the participant of a qualified plan in the year in which the annuity payments are received. --Like any other annuity payment, each annuity payment is considered a partially tax-free return of adjusted basis and partially ordinary income using an inclusion/exclusion ratio. --Once the participant has recovered the entire cost basis of the annuity, all future monthly payments will be fully taxed. --Distributions that are not lump sum and are not part of an annuity are taxed pro rata to the account balance in comparison to the pre-taxed portion

Answer 51

Exclusion Ratio = Cost Basis in the Annuity ÷ Total Expected Benefit

Answer 52

Answer: B To calculate the amount of the distribution that is return of adjusted basis, the adjusted basis in the plan is divided by the fair market value of the plan as of the day of the distribution. This ratio is then multiplied times the gross distribution amount. As such, $120,000 ($500,000 - $625,000) x $150,000 of the $150,000 distribution is return of adjusted taxable basis. Accordingly, $30,000 ($150,000 - $120,000) will be subject to income tax.

Answer 53

Distributions from Traditional IRAs are also generally taxed as ordinary income. Like distributions from qualified plans, the exception is for distributions consisting of a combination of tax-deferred earnings and the return of adjusted basis that results from either nondeductible IRA contributions or rollovers of contributions from qualified plan balances that included after-tax contributions (such as thrift plans). In such cases, each distribution will consist of a combination of return of Adjusted Basis (AB and ordinary income. The ratio of return of AB is equal to the ratio of the total AB of the account before the withdrawal to the fair market value of the total account balance. -In addition, taxable distributions before the age of 59½ will generally be subject to a 10 percent early withdrawal penalty, subject to certain exceptions. See Retirement Planning and Employee Benefits Pre-Study Materials for more information on this topic.

Answer 54

AB before Withdrawal ÷ FMV of account at withdrawal

Answer 55

Up to 85% of an individual's Social Security benefits may be taxable. The taxability of an individual's Social Security benefits is based on taxpayer's Modified AGI (MAGI). For purposes of Social Security, MAGI is equal to the taxpayer's adjusted gross income (not including Social Security benefits) plus: -tax-exempt interest; -interest earned on savings bonds used for higher education; -amounts excluded from the taxpayer's income for employer-provided adoption assistance () -amounts deducted for interest paid for educational loans () -income earned in a foreign country, a US possession, or Puerto Rico, that is excluded from income. -items marked with an () are the least likely to be tested on this list.

Answer 56

To calculate the taxable portion of the Social Security benefits, MAGI plus one-half of the taxpayer's Social Security benefits must be compared to the hurdle amounts, which are listed in the following chart.

Answer 57

If MAGI plus one-half of Social Security benefits exceeds the first hurdle but not the second, the taxable amount of Social Security benefits is the lesser of: 50% Social Security Benefits or 50% [MAGI + 0.50 (Social Security Benefits) -Hurdle 1]. | Do not forget it is MINUS Hudle 1

Answer 58

Sammy and Tammy are married and have interest income of $18,000 and Social Security benefits of $20,000. What amount of their Social Security benefits must be included in their taxable income? Because MAGI and 50% Social Security benefits is below hurdle 1 they do not need to include any of their benefits ($18,000 + (50% × $20,000) = $28,000, which is less than $32,000. | This is Calculating to see if it exceeds 1st hurdle.

Answer 59

Answer: B Uli and Violet must include the lesser of 0.50 ($20.000) = $10,000, or 0.50 [$30,000 + 0.50 ($20,000) - $32,0001 = $4,000 Therefore, they would have $4,000 of Social Security benefits included in taxable income,

Answer 60

If MAGI plus one-half the Social Security benefits exceeds the second hurdle, the taxable amount of Social Security benefits is the lesser of: 85% Social Security Benefits, or 85% [MAGI + 0.50 (Social Security Benefits) - Hurdle 2], plus the lesser of: -$6.000 for MFJ or $4,500 for all other taxpayers, or -The taxable amount calculated under the 50% formula and only considering Hurdle 1.

Answer 61

Wendy and Xavier, a married couple, have income of $60,000 and Social Security benefits of $20,000. What amount of their Social Security benefits must be included in their taxable income? Wendy and Xavier must include the lesser of .85 ($20,000) = $17,000, or .885 ($60,000 + $10,000 - $44,000 = $22,100 plus the lesser of. $6,000, or 50 ($60,000 + $10,000 - $32,000) = $19,000. Therefore, Wendy and Xavier must include $17,000 of their Social Security benefits in their taxable income

Answer 62

Answer: C Yanni and Zelda must include the lesser of: 85 (S20,000) = $17,000, or 85 ($45,000 + $10,000 - $44,000) = $9,350 plus the lesser of: $6,000, or 50 ($45,000 + $10,000 - $32,000) = $11,500. Therefore, Yanni and Zelda must include $15,350 ($9,350 + $6,000) of their Social Security benefits in their taxable income.

Answer 63

Below-market loan rules apply to term or demand loans that are gift loans, or tax avoidance loans. Below-market loans have special income tax treatment that requires the lender to impute the interest income that would have been earned had the lender made a bona fide interest-bearing market loan. The interest, also known as phantom interest income, is included in income even though the lender did not actually receive any money. The lender is also considered to have made a gift to the borrower in the amount of the imputed interest. Whatever the amount the lender (donor) must impute as interest income for income tax purposes is also the amount of the gift from the donor (lender) to the donee borrower. Note that the amount of the gift may be eligible for the annual gift tax exclusion.

Answer 64

Answer: C Answer A is incorrect because gift loans do not qualify for the annual exclusion. Answer B is incorrect; loans of less than $10,000 are exempt from both income tax and gift tax consequences. Answer D is incorrect because whether interest is imputed on this loan is based on Avril's level of unearned income, not earned income.

Answer 65

Below-market rate loans by a corporation to a shareholder in that corporation are treated as a dividend to shareholder. As the shareholder makes loan payments, the payments are treated by the corporation as interest income Below-market rate loans from an employer to an employee are treated as paid compensation for the employee and are subject to employment taxes. As the employee makes loan payments, the employer must treat the payments as taxable interest income.

Answer 66

Items Specifically Excluded In Income Gifts and Inheritances Life Insurance Proceeds Scholarships Gain on Sale of Personal Residence Distributions from Roth IRAs and Roth 401(k)/403(b) Plans Compensation for Injuries and Sickness Employer-Sponsored Accident and Health Plans Meals and Lodging Other Employee Fringe Benefits Foreign Earned Income Interest on Certain State and Local Government Obligations Discharge of Indebtedness

Answer 67

Gifts and Inheritances Life Insurance Proceeds Scholarships Gain on Sale of Personal Residence (Up to Specific Limits) Qualified Distributions from Roth Accounts Compensation for Injuries and Sickness Employer-Sponsored Accident and Health Plans Child Support Payments Received

Answer 68

IRC Section 102 A Note about Exclusion Elements of a Gift Gift Definition Payment or GIft Determined by Motive In General Property Received by Gift or Bequest is Not Taxed

Answer 69

IRC Section 102 excludes from Gross Income amounts received by gift, bequest, devise, or inheritance.

Answer 70

Note that this exclusion applies only to property, not income that is later generated on that property.

Answer 71

The donor must have the intent to make a voluntary transfer. The donor must be competent to make the gift. The donee must be capable of receiving the gift. The donee must take delivery. The donor must actually part with dominion and control over the gifted property.

Answer 72

Gratuitous transfer of property. Donor acted out of a "detached and disinterested generosity made out of affection, respect, admiration, charity, or like impulses.

Answer 73

Whether something is a payment or a gift is determined by motive, or whether the transfer was made as the result of: -detached and disinterested generosity, or -from "constraining force of any moral or legal duty" or from the "incentive of anticipated benefit" of an economic nature.

Answer 74

In general, amounts transferred by an employer to an employee will not be treated as gifts.

Answer 75

Property received by gift or bequest is not taxed. -A bequest of specific property or a sum of money is exempt from income tax even if it is paid out of income. -Income earned on the property, however, is subject to tax. Similarly, a bequest of the income on property is subject to income taxation in the beneficiary's hands. -A gift or bequest of a specific amount paid in more than three installments is taxable to the extent it is actually paid from the income of the estate.

Answer 76

Life Insurance Proceeds paid on account of the death When a Life Insurance Policy is Cashed When a Life Insurance Policy is Transferred Amounts Received as Part of a Viatical Settlement Modified Endowment Contracts

Answer 77

Life insurance proceeds paid on account of the death of the insured are not included in the gross income of the beneficiary. -Note: That if the proceeds are received in installment payments, any interest component of the payments taxable to the beneficiary

Answer 78

When a life insurance policy is cashed-in prior to the insured's death, the owner of the policy must recognize any cash received in excess of what the owner paid in premiums. -Losses are not deductible.

Answer 79

When a life insurance policy is transferred for valuable consideration, the amount received is includable in the owner's gross income to the extent that amount exceeds the owner's basis in the policy. In addition, the death proceeds will be taxable to the new owner. -The owner's basis in the policy is defined as the amount that the owner paid for the policy (i.e., premIums). -Under certain circumstances, the proceeds of a life insurance policy can still be excluded from gross income even if the policy is transferred for valuable consideration. These circumstances include: --If the policy is transferred to the insured, --If the policy is transferred to a partner of the insured, --If the policy is transferred to a partnership in which the insured is a partner, --If the policy is transferred to a corporation in which the insured is a shareholder or officer, or --If the policy is transferred by tax-free exchange or gift

Answer 80

A viatical settlement is the sale of a life insurance policy by a terminally or chronically ill policy owner. A viatical settlement generally provides the insured with an immediate cash payment. The IRC defines a "terminally ill individual" as an individual who has been certified by a physician as having an ilness or physcial condition which can reasonably be expected to result in death in 24 months or less after the date of certifcation. A "chronically ill individual" means any indivdual who has been certified by a licensed health care practitioner as being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living (bathing, toileting, transferring, eating, dressing, continence) for a period of at least 90 days due to a loss of functional capacity.

Answer 81

An MEC is a life insurance contract that falls to meet the 7-pay test. -A contract fails to meet the 7-pay test if the accumulated amount paid under the contract at any time during the first 7 contract years exceeds the sum of the net level premiums which would have been paid on or before such time if the contract provided for paid-up future benefits after the payment of 7 level annual premiums. Loans and withdrawals from MECs are subject to LIFO treatment. In other words, basis is recovered last. Therefore, when loans or withdrawals are made from a MEC, the proceeds. of the LOAN or withdrawal are included in gross income to the extend of earnings.

Answer 82

Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization. -A qualified scholarship is any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses. -Qualified tuition and related expenses do not include amounts received for room and board. Any amounts received for room and board are taxable income to the recipient. Qualified tuition waivers or reductions by nonprofit educational institutions are also excluded from income. -Although this provision is generally limited to undergraduate tuition waivers, an exception exists for graduate teaching or research assistants.

Answer 83

Gross Income Does Not Include Gain Up To Under Certain Circumstances The Law Extends the Period of Time The Sale of a Principal Residence Any Appreciation during Non Qualified Use Periods are Not Subject to the Exclusion

Answer 84

Gross income does not include gain (up to $250,000) from the sale or exchange of property if, as of the date of the sale or exchange, the property has been owned and used by the taxpayer as the taxpayer's principal residence for at least two of the last five years. -For taxpayers who are married filing jointly, the exclusion is increased to $500.000. if all of the following apply: --either spouse meets the ownership requirements with respect to such property; --both spouses meet the use requirements with respect to such property; and --neither spouse is ineligible for the exclusion as a result of having excluded gain on the sale of a personal residence in the last two years.

Answer 85

Under certain circumstances, a reduced exclusion may be available even if the taxpayers do not meet the other requirements. A reduced exclusion is available if the sale of the personal residence is due to: -A change in employment, -A change of health, or -Other untoreseen circumstances. -When the reduced exclusion is available, the amount excluded is based on the period of ownership between the last sale and the current sale (pro rata).

Answer 86

The law extends the period of time during which a surviving spouse may use the joint tax filers' $500,000 home sale gain exclusion before being treated as a single individual entitled only to a $250,000 exclusion.

Answer 87

The sale of a principal residence that was jointly owned and occupied by the surviving and deceased spouse is allowed the $500,000 gain exclusion as long as the sale occurs no later than two years after the date of death of the deceased spouse.

Answer 88

Any appreciation during non-qualified use periods are not subject to the exclusion. -For example, Molly purchases a home in Florida while she lives in an apartment in Chicago. She intends to move to Florida in three years, and is currently renting the Florida home to a family friend.

Answer 89

These distributions, if qualified, are tax-exempt and are not included in gross income. Qualified Roth IRA distributions are from an account that has been held for at least 5 years and the distribution must be made on account of a first-time home purchase, disability, death, or on/after the attainment of age 59½. Qualified Roth 401(k) distributions are from an account that has been held for at least 5 years and the distribution must be made on account of disability, death, or on/after the attainment of age 59½. -Distributions made from a Roth 401(k) will be distributed on a pro-rata basis.

Answer 90

The following types of compensation for injuries and sickness are excluded from gross income Punitive Damages Damages for Emotional Distress

Answer 91

Workers' Compensation for personal physical injury or sickness, Any damages received on account of personal physical injuries or sickness, and Payments from accident or health insurance that is personally owned by the taxpayer.

Answer 92

Under Section 104, punitive damages are not excludable from income. An exception is available for damages awarded under a state law in effect on September 13, 1995, that provides that the only damages that can be awarded in a wrongful death action are punitive damages. Generally applies to damages received after August 20, 1996.

Answer 93

Must be included in gross income unless the damages are attributable to physical injury or sickness or are paid for reimbursement of actual medical expenses arising from emotional distress.

Answer 94

Answer: D Only compensatory damages for bodily injury are excludable from gross income. Compensatory damages without bodily injury are includable as are punitive damages.

Answer 95

Medical - The General Rule Group Term Life Insurance Section 79 Requirements Group Terms Not Taxable to Employees When: Taxation of Group Term Insurance

Answer 96

Contributions by an employer to an accident or health plan to provide compensation, through insurance or otherwise, directly to an employee for personal injuries and sickness are excluded from the gross income of the employee. If employees are indemnified in excess of the amount of expenses actually incurred, such excess amounts are taxable income to the employee.

Answer 97

Premiums deductible under Section 162 as ordinary and necessary business expense for the employer. Exceptions: -Deductions made on behalf of sole proprietors or partners, -Deductions made on behalf of stockholders, unless they are providing substantial services, and -When the employer is named the beneficiary.

Answer 98

Death benefit is excluded from federal income tax when it is provided to a group of employees through a policy carried by the employer. Individual selection of coverage outside standard multiple of salary amounts is not permitted if the death benefit is to be excluded from gross income. Exceptions to Section 79. -If group term insurance is issued to trustees of a qualified pension plan, the amount paid for by the employer is taxable to employees.

Answer 99

The employee has terminated because of disability, A qualified charity is named as beneficiary, and An employer is named as the beneficiary.

Answer 100

Under Section 79, the first $50,000 of coverage is not taxable to the employee (applies only once per employee). The cost of excess coverage is determined by Uniform Premium Table I. Employee contributions are subtracted from annual cost to arrive at taxable income.

Answer 101

The cost of meals and lodging are not included in the employee's gross income if they are furnished by the employer: -On employer's business premises, and -For convenience of employer. In the case of lodging, the employee is required to accept lodging as a condition of employment in order for the lodging to be excluded from the employee's gross income.

Answer 102

Dependent Care (2023) Athletic Facilities Educational Assistance Programs Adoption Assistance Programs Cafeteria Plans Classes of nontaxable Employee Benefits

Answer 103

Up to $5,000 of dependent care costs paid for by employer can be excluded from gross income.

Answer 104

The value of use of athletic facilities located on employer premises can be excluded from gross income.

Answer 105

Employer-provided educational assistance for undergraduate education is excludable from gross income. -Benefits include payments for tuition, fees (and similar expenses), books, supplies, and equipment. Education generally includes any form of instruction, or training, that improves or develops your capabilities. The payments may be for un-work-related courses or courses that are part of a degree program. Tax-free education assistance benefits also include payments made after March 27, 2020 and before January 1, 2026, whether paid to the employee or to a lender, towards principal or interest on any qualified education loan incurred by the employee for education of the employee. TCDIRA 2020 extends the exclusion for student loan repayments made by the employer before January 1, 2026. The exclusion is limited to $5,250 per year.

Answer 106

Employee adoption expenses paid by employer are excludable from gross income. -Exclusion is limited to $15,950 (2023) of expenses. -Exclusion phases out between MAGI of $239,230 - $279,230.

Answer 107

Allows employees to choose between cash and certain nontaxable benefits. -If cash is chosen, the amount received is taxable. -If a nontaxable benefit is chosen, the benefit remains nontaxable.

Answer 108

No additional cost services are nontaxable if: Qualified employee discounts are nontaxable if: Working Condition De Minimis fringe benefits Qualified transportation fringes Qualified moving expense reimbursements

Answer 109

The employee receives services (not property), The employer incurs no substantial additional cost in providing the services, The services offered are within line of business in which employee works, and The benefit is offered on nondiscriminatory basis.

Answer 110

The discount is not on realty or investment personalty, The item discounted is from the same line of business in which employee works, The discount cannot exceed gross profit on personalty or 20% on services, and The benefit is offered on nondiscriminatory basis.

Answer 111

Working Condition fringes are not taxable.

Answer 112

These benefits are so small that accounting for them is impractical. Examples include: -Dinner money -Occasional personal use of company copying machine -Company cocktail parties -Picnics for employees These benefits can be provided on a discriminatory basis.

Answer 113

This fringe benefit is designed to encourage the use of mass transit for commuting to work. Examples include: -Commuter highway vehicle and transit passes - ER deduction not permitted for 2023; E may still exclude it from income. -Qualified parking - ER deduction not permitted for 2023; EE may still exclude it from income. Can be provided on discriminatory basis. Employee can choose between employer-provided parking and cash without loss of exclusion

Answer 114

A qualified moving expenses reimbursement may no longer be excluded from an employee's gross income as a fringe benefit whether provided through services in kind, direct payment or reimbursement. ER's may still reimburse a "qualified move" but the ER must include reimbursement in EE's income. The only exception is if you're a member of the Armed Forces on active duty, and your move was due to a military order and permanent change of station. You may be able to deduct your unreimbursed moving expenses for you, your spouse and dependents. -Deductible moving expenses are confined to reasonable expenses for the following: --moving expenses not covered by reimbursements from the government (or paid for directly by the government) --moving household goods and personal effects from the former home to the new home --traveling and associative lodging during the move from the former home to the new home.

Answer 115

To claim the foreign earned income exclusion ($120,000 for 2023), the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following: -A US citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, -A US resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or -A US citizen or a US resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

Answer 116

Interest on certain state and local governmental obligations is exempt under Section 103. Interest on the following bonds is NOT tax exempt: -Private Activity Bonds that are not qualified bonds -Arbitrage Bonds. -Bonds that do not meet all of the requ rements of Section 149.

Answer 117

When creditor cancels a debt, the discharge creates income for the debtor. Discharge of indebtedness is taxable only to the extent that the FMV of the debtor's assets exceeds the debtor's total liablities immediately after the forgiveness. Gain is generally the lower of: -the amount of indebtedness canceled. or -the excess of assets over liabilities after the debt is canceled. Exceptions to inclusion include: -Debts discharged in Bankruptcy. -Certain Student loan debt that is forgiven for public service. -Qualified principal residence after December 31, 2020 and before January 1, 2026. Maximum discharge exclusion is $750,000 ($375,000 for MFS).

Answer 118

Above the Line Deductions (For AGI) Certain Deductions that may be Above the Line Deductions for Self Employed Individuals Adjusted Gross Income (Deductions From AGI)

Answer 119

Above the Line Deductions are Subtracted From? Functions of AGI Deductions for AGI Include: Trade or Buisness Expenses Alimony

Answer 120

Above-the-line deductions are subtracted from a taxpayer's gross income in order to compute the taxpayer's adjusted gross income.

Answer 121

limiting measure (floor) for medical expenses, limiting measure (ceiling) for charitable deductions determines deductibility of IRA contributions determines phaseout of other tax benefits

Answer 122

Trade or business expenses. Deductions from losses on sale or exchange of property. Deductions from rental and royalty property. Alimony payments (for divorce decrees prior to 12/31/2018). One-half of self-employment tax paid. 100% of health insurance premiums paid by a self-employed individual. Contributions to pension, profit sharing, annuity plans, IRAs, etc. Penalty on premature withdrawals from time savings accounts or deposits. Interest on student loans. Health Savings Accounts. Teacher Expense Deduction (up to $300 deduction for qualified expenses for primary and secondary educational professionals) (made permanent by PATH 2015)

Answer 123

In order for expenses to be deductible, they must be: -**Ordinary**: normal, usual or customary for others in similar business, and not capital in nature. -**Necessary**: prudent businessperson would incur same expense. -**Reasonable**: question of fact -Incurred in conduct of business Unreimbursed employee business expenses are no longer deductible as a miscellaneous itemized deduction, subject to the 2% of AGI floor. (TCJA 2017 repealed all itemized deductions subject to the 2% floor through tax year 2025).

Answer 124

Alimony received is no longer income to payee nor deductible by payor for divorce decrees written or materially modified after 12/31/2018. Alimony for divorces finalized prior to 12/31/18 will be grandfathered into the old rules: The Purpose of Alimony Rules: "Alimony" Defined Property Settlements at Divorce What is NOT Alimony

Answer 125

Deduction is available to payor Recipient is taxed on the income

Answer 126

Payment in cash Pursuant to a divorce or separation instrument Does not extend beyond death of payee Is not "excess alimony payments" Not between spouses filing jointly Not part of same household Alimony received is earned income for IRA purposes.

Answer 127

No deduction is available for property transferred among spouses. No gain/loss is recognized on the transfer. The transferee takes a carryover basis in the property. May be a disguised transaction: "Front-Loaded" Alimony

Answer 128

Elective non-alimony payments Any payments that could extend beyond the recipient's life. For example: Payments are made for a 10 year period. Alimony must end upon the death of the recipient (applies to divorces filed prior to 2019. In 2019, and after, it is not relevant as no deductions can be taken by the payor.). Child support -Any amounts reduced upon the happening of a contingency specifically relating to a child. -For example: Heath pays his ex-wife Laura $2,000 per month until their child reaches 18 at which point Heath's payment falls to $1,200. In this example $800 of each payment is deemed to be child support and $1,200 is alimony. Rent-free occupancy of the home

Answer 129

Education Expenses Business Gifts: Limited to $25 each plus wrapping Entertainment Expenses: No Deduction for any entertainment, 50% deduction for meals Home office expenses

Answer 130

Education Expenses: -Education expenses are deductible if they are incurred: --To maintain or improve existing skills, or --To meet the requirements of the employer, profession, licensing, or state law. -Educational expenses are not deductible if they are incurred: --To meet minimum educational standards for existing job, or --Will quality taxpayer for new trade or business. -Educational expenses include --Books --Supplies --Transportation --Travel (including lodging and 50% meals)

Answer 131

Business gifts of tangible personalty with a value of $25 or less per person per year are deductible. If the value is $4 or less and name of business appears on item, not considered a gift (considered advertising) Gifts to employers or superiors are not deductible

Answer 132

TCDTRA 2020 allows for meals provided by a restaurant to be fully deductible when paid or incurred after December 31, 2020 and before January 1, 2023.

Answer 133

Only deductible for self-employed. No longer deductible for W-2 employees.

Answer 134

Deductions are Adjustments From AGI Deductions are Allowed based on Legislative Grace For and FROM AGI Deductions Itemized deductions FROM AGI Include Medical Expenses Certain state and local taxes Contributions to Qualified charitable organizations Casualty Losses Certain Personal Interest Expense Qualified Business Income (QBI) Miscellaneous Itemized Deductions Not Subject to the 2% floor Miscellaneous itemized deductions subject to the 2% are no longer deductible (repealed by TCJA 2017)

Answer 135

Deductions are adjustments from AGI. Itemized deductions and the standard deduction are adjustments from AGI.

Answer 136

Substantiation requirements. -Taxpayer has burden of proof. -Adequate records of expenses must be maintained.

Answer 137

Deductions FOR AGI are those listed in IRC Section 62. -Can be claimed even if taxpayer does not itemize -Called "above-the-line" deductions Deductions FROM AGI are not listed in IRC Section 62. -The total deductions from AGI must exceed standard deduction to provide any tax benefit. -Called "below-the-line," or itemized deductions

Answer 138

Medical Expenses Certain state and local taxes Contributions to qualified charitable organizations. Casualty losses Certain personal interest expense Qualified Business Income Miscellaneous itemized deductions not subject to the 2% floor (2017 - 2025).

Answer 139

Medical Expenses in excess of 7.5% percent of AGI for) Tax Certainty and Disaster Tax Relief Act of 2020 set the medical expense AGI floor to 7.5% permanently. Taxpayers may deduct expenditures for themselves or their dependents that are not reimbursed. Eligible expenses include: -Prescriptions -Noncosmetic surgeries -Some qualitied long-term care services -Insurance premiums including schedule for long-term care policies -Tuition for special, medically necessary schools (e.g., school for deaf or blind dependent) -Capital expenditures --On the advice of a physician --To the extent that the fair market value of the property is not increased --Includes operating expenses (e.g., cost of operating a pool) --For handicapped entrances and railings, there is no increased value test (note that this does not apply to elevators)

Answer 140

Taxpayers may deduct property taxes (both real estate and ad valorem) - only US property. Taxpayers may deduct state income tax paid, or state and local sales tax (actual or standardized table amount). Taxes are capped to $10,000 total per TCJA 2017.

Answer 141

Itemized Tax Filers -Public Charities -Private Charities Deduction Clustering Charitable Contributions from IRAs -Charitable Contributions Directly from a Traditional IRA to a qualified Charity. -Tax Results:

Answer 142

Depending upon the classification of the charitable organization and the type of donated property, the income deduction limitation for individual contributions is either 20 percent, 30 percent, 50 percent or 60 percent of the donor's AGI. Overall, the total deductible contributions for the tax year cannot exceed 50 percent of the donor's AGI.

Answer 143

Good opportunity for a flashcard above.

Answer 144

include churches, schools, hospitals and governmental entities. This group includes familiar charities and organizations such as the Red Cross, Salvation Army, ASCPA, etc.

Answer 145

Contributions to exempt organizations that do not fit the definition of public charity. These charities include veterans organizations, fraternal orders, and certain private foundation that support comes from a small group as opposed to the public. This group is subject to either a 20 percent or 30 percent of AGI limitation, depending on the type of property contributed. Special Rules and Carry-forward of Disallowed Contributions -If a taxpayer makes donations to both a public and private charitable organization during a year, the 50 percent donations are considered first. Any charitable contribution deductions disallowed because of the AGI limitations may be carried over for five years and are used in a first-in-first-out order. The carryover amounts retain their classifications as 20 percent, 30 percent, 50 percent or 60 percent donations.

Answer 146

Lillian makes a cash donation of $200,000 to her church. Lillian's AGI is $120,000. Lilian's cash charitable deduction this year is limited to $72,000 (60% of her AGI). Therefore, Lillian can deduct $72,000 this year, but will have to carry the remaining value of her donation ($128 000) forward for up to five years. If instead of donating cash, assume Lillian donated $200,000 (FMV) worth of tangible personalty with a basis of $50,000 that could be put to a related use by the church. In this case she has two choices: She can deduct 50% of AGI limited to basis ($120,000 x 50% = $60,000 but limited to basis of $50,000) or 30% of AGI limited to FMV ($120,000 x 30% = $36,000 with a $164,000 carry forward for 5 years).

Answer 147

Higher standard deductions have led to less taxpayers itemizing their deductions. Deduction clustering allows taxpayers to "cluster" itemized deduction together in one year and take the standard deduction in the following year. Four categories of itemized deduction that might be able to be bunched are: -Early payment of state income or property taxes -Early payment of mortgage interest -Medical expenses -Charitable donations --For taxpayers that feel charitable but don't have a specific charity they contribute to, they can use donor-advised funds. The donor-advised funds allow for an immediate tax deduction and distribution to a selected charity at another time. Donor-advised funds can be set up through a brokerage firm or a charity.

Answer 148

Charitable Contributions from IRAs. Charitable contributions directly from a Traditional IRA to a qualified charity were first introduced by the Pension Protection Act of 2006 and have been extended throughout the years, so here are the details: -Contributions must be made directly by the IRA trustee to a qualitied charity. -The owner must have reached age 70½ before making these contributions. -Contributions cannot exceed $100,000 per year. --SECURE Act 2019 changed RMD rules to 72 and eliminated the age limit on contributions, which complicates the charitable contribution from IRAs. To further complicate things, SECURE 2.0 Act of 2022 changed the RMD age to 73 for those reaching 72 after 12/31/22, and further to age 75 on January 1, 2033. --The age for the charitable contribution remains age 70½, but the $100,000 annual limit will be reduced by any IRA Contributions made after age 70½. --The new rules apply to distributions made for taxable years after December 31, 2019.

Answer 149

The contribution is not treated as income to the IRA owner. The contribution is not treated as a charitable contribution. The contributions can count as the owner's Required Minimum Distribution (RMD). Charitable contributions from an IRA between age 70½ and age 72 (or 73) will no longer count towards RMDs for those attaining age 72 prior to 1/1/2023 or those reaching 73 if they attain age 72 after 12/31/22.

Answer 150

Casualties are deductible in the year in which loss is sustained Losses caused by? To be deductible, loss must be from? Theft includes? Effects of claim for Reimbursement? Amount of Casualty? (Ony deductible if declared natural disaster)

Answer 151

Personal Casualty losses are only deductible if a national disaster is declared by the President (TCJA 2017). -Net disaster loss (qualified disaster related personal casualty loss minus personal casualty gains) can be deducted as an additional standard deduction subject to a $100 per casualty floor. After the $100 floor, the loss must exceed the 10% of AGI floor. Business casualty losses are deductible to the business. Casualty losses occuring during the administration of an Estate are deductible to the Estate.

Answer 152

Losses caused by fire, storm, shipwreck, other casualty, or by theft.

Answer 153

To be deductible, loss must be from an event that is identifiable and damaging to taxpayer's property, as well as sudden, unexpected, and unusual in nature. -Events not treated as casualties include losses from disease and insect damage

Answer 154

Theft includes robbery, burglary, embezzlement, etc., but does not include misplaced items. -Thefts are deductible in the year in which loss is discovered

Answer 155

If there is a reasonable prospect of full recovery, the loss (any amount not reimbursed) should be deducted in the year of settlement. If only partial recovery is expected, deduct in year of loss any amount not covered by insurance.

Answer 156

Amount of loss and its deductibility depends on whether: -Loss is from nonpersonal (business or production of income) or personal property; and -Loss is partial or complete. Amount of Nonpersonal Casualty & Theft Losses -Theft or complete casualty (FMV after = 0) --Adjusted basis In property less insurance proceeds -Partial Casualty --Lesser of decline in value, difference between fair market value of the property before the event and the FMV of the property after the event, less insurance received, or adjusted basis in property, less insurance proceeds. With business, rental, and royalty properties, the deduction will be FOR AGI Miscellaneous itemized deduction no longer deductible (TCJA2017) Nonpersonal Casualty & Theft Gains -Depending on the property, gain can be ordinary or capital. -The amount of nonpersonal gains is the insurance proceeds less adjusted basis in property Personal Casualty & Theft Gains -Net personal casualty gains and losses: --If gains exceed losses, treat as gains and losses from the sale of capital assets. --Short-term or long-term, depending on holding period --Personal casualty and theft gains and losses are not netted with the gains and losses on business and income-producing property.

Answer 157

Investment interest expense is limited to investment interest income. Excess investment interest expense may be carried over indefinitely. -A special election can be made for LTCG to be treated as ordinary income to offset investment interest income. --Qualified personal residence interest. --Limited to $750,000 of mortgage indebtedness (debts incurred prior to 12/15/17 may be up to $1 million). --Limited to two houses (primary and secondary residences). --No home equity interest.

Answer 158

Answer: C Georgia's investment interest deduction is typically limited to the investment income of $13,000, but she can make the special election to treat the capital gains of $8,000 as ordinary income and deduct $21,000. This election maximizes the amount she can deduct this year. Any excess investment interest can be carried over to next vear.

Answer 159

Mary and Barry own a home worth $2,000,000. Their current mortgage balance is $1,500,000 and they paid $100,000 in mortgage interest this year. Mary and Barry's deduction for the mort- gage interest that they paid may be limited because they have more than $750,000 in mortgage indentedness

Answer 160

The Tax Cuts and Jobs Act of 2017 Reduces Taxable Income Deduction is 20% of QBI Deductible QBI Combined QBI

Answer 161

The Tax Cuts and Jobs Act of 2017 created a new type of below the line deduction under Section 199A for "Qualified Business Income" of pass-through entities for tax years 2018 - 2025. The QBI deduction is a below the line deduction that is not affected by a taxpayer's standard deduction. The taxpayer's that qualifies can take both the QBI deduction plus the greater of their itemized deductions or standard deduction. Qualifying entities include: -sole proprietorships -partnerships -LLCs -S corporations -REITs -Master limited partnerships (MLPs)

Answer 162

Reduces taxable income but does not reduce adjusted gross income.

Answer 163

The deduction is generally 20% of the taxpayer's Qualified Business Income (QBI). The net result is to reduce the tax rate on the business income by 20%. For example, for a taxpayer in the highest marginal bracket (37% in 2023), the tax on the business income is effectively reduced to 29.60% (37% x (1 - .20) = 29.60%).

Answer 164

"Deductible QBI" is determined for each business separately, and is generally 20% of business income, not including investment income (e.g., capital gains or losses, dividend income, or interest income), and not including reasonable compensation paid to an S corp. owner, or guaranteed payments to a partner or LLC member for services performed for the business.

Answer 165

"Combined QBI" is the net amount of "deductible QBI" for all qualifying businesses owned by the taxpayer plus qualified REIT dividend and qualified publicly traded partnership income. In other words combined QBI has already factored in the 20% of QBI for each business as the deductible amount.

Answer 166

Note on QBI: QBI is not a business expense against revenue. It is a deduction on pass through income of the owners. It is taken at the individual level and is a below the line deduction.

Answer 167

Gambling losses (to the extent of gambling income) Credit for estate taxes imposed on IRD (income in respect of a decedent's assets) Loss on the disposition of an annuity contract Repayments of income (such as repayment of Social Security income when the tax payer fails the earnings test)

Answer 168

Miscellaneous itemized deductions **subject to the 2% are no longer deductible. **(repealed by TCJA 2017) Examples of disallowed deductions: -Other Employee Expenses --Other employee expenses that are deductible: --Special clothing (uniforms) --Union dues --Professional expenses --Job hunting in same profession -Unreimbursed Employee Expenses

Answer 169

Tax Credits Kiddie Tax Alternative Minimum Tax (AMT) Loss L Limitations

Answer 170

Earned Income Credit Adoption Expenses Credit Child Tax Credit Family Credit (Qualifying Dependent Child) Child & Dependent Care Credit Education Tax Credits

Answer 171

General Qualifications for Credit Credit Amount Credit for Taxpayers Having No Children

Answer 172

Must have earned income (employee or self-employed), and Must have a qualifying child. -Exception: credit is available for some taxpayers having no children. -Qualifying child must meet relationship, residency, and age tests.

Answer 173

Applicable percentage rate x Earned Income -The applicable percentage rate and maximum amount of earned income are determined by the number of qualifying children. -IRS tables should be used to calculate the exact credit amount.

Answer 174

Taxpayers aged 25 through 64

Answer 175

Credit for qualified adoption expenses incurred in adoption of eligible child. Examples of expenses include adoption fees, court costs, and attorney fees. Maximum credit is $15,950. -Credit is phased out ratably for modified AGI between $239,230 and $279,230. An eligible child is one that is: -Less than 18 years of age, or -Physically or mentally handicapped. The Adoption Expenses Credit is a nonrefundable credit, but the excess may be carried forward for five years.

Answer 176

$2,000 for each dependent child under age 17 (for 2023). -Includes stepchildren and foster children Married taxpayers must file jointly to be eligible for the credit. Eligible children must be: -Under age 17, -a US citizen, and -Claimed as dependent on taxpayer's tax return. Credit is phased out for modified AGI above specified levels (2023). Subject to limitations, up to $1,600 per child may be refundable (2023).

Answer 177

Exam does not generally test phaseout levels; however, the exam has tested who are eligi- ble children. Be sure to know that step children and foster children are eligible children.

Answer 178

A $500 credit for those who would qualify as a dependent (i.e. qualifying child 17 or over and qualifying person)

Answer 179

General Qualifications Credit Amount Earned Income Limitations

Answer 180

Must have employment-related care costs for either: -Dependent under age 13, -Handicapped dependent or spouse. Married taxpayers must file a joint return to obtain credit.

Answer 181

Eligible care costs × Applicable percentage Applicable percentage ranges from 20% to 35% (2023) -AGI of $43.000 and above are at 20%. The expenditures that quality are the lesser of actual costs or $3,000 for one qualified individual, and $6,000 for two or more qualitied individuals (2023). -The deduction for care cannot be made for care provided by a dependent of the taxpayer. For example, you cannot pay your 16 year old child to watch your 9 year old and take a tax credit. Costs for care of qualified individual within taxpayer's home or outside the home. If outside the home, handicapped dependent or spouse must spend at least 8 hours a day within taxpayer's home.

Answer 182

Amount of eligible care costs cannot exceed taxpayer's or spouse's earned income. Full-time student or disabled taxpayer (or spouse) are assumed to have earned income up to maximum per month limits.

Answer 183

Most likely to be tested is 20% x eligible costs ($3,000 for one child or $6,000 for two children).

Answer 184

Two Available Education Credits: 1. American Opportunity Tax Credit 2. Lifetime Learning Credit

Answer 185

The maximum credit per eligible student is $2,500 (2023) per year for first 4 years of post-secondary education. -100% of first $2,000 of qualifying expenses, plus -25% of next $2,000 of qualifying expenses. To be eligible, the student must take at least 1/2 of full-time course load. Not eligible for an American Opportunity Tax Credit if the student already has a 4-year degree. Retundable tax credit up to 40% or $I,000 (2023).

Answer 186

The maximum credit per taxpayer is 20% of qualifying expenses (up to $10,000 per year 2023). -This credit cannot be claimed in same year the American Opportunity Tax Credit is claimed. Income Limitations for Education Credits: -Lifetime Learning Credits are phased out for AGI of $160,000 to $180,000 (MFJ) and $80,000 to $90,000 (other filing statuses) for 2023. -American Opportunity Tax Credits are phased out for AGI of $160,000 to $180,000 (MFJ) and $80,000 to $90,000 (other filing statuses) for 2023. -Taxpayer Certainty and Disaster Tax Relief Act of 2020 increased the phase out levels on Lifetime Learning Credits to match AOTC. This was to offset the removal of the above the line deduction for qualified tuition and related expenses for tax years after December 31, 2020. -Taxpayers can't receive a double tax benefit for education expenses. --In addition, taxpayers cannot claim a credit for amounts otherwise excluded from income (e.g. scholarships and employer-paid education assistance).

Answer 187

Net Unearned Income of a Child Under Age 19... And Age 24 Net Unearned Income does not Include: Kiddie Tax Unearned Income

Answer 188

Net unearned income of a child under age 19 with a living parent is taxed at the parent's rate (or AMT rate, if applicable), and age 24 if the child is a full-time student

Answer 189

Standard deduction of $1,250 (2023) for unearned income. The next $1,250 (2023) of income which is taxed at the child's marginal rate. Therefore, the Kiddie Tax does not apply unless the child has unearned income greater than $2,500.

Answer 190

Interest Dividends Capital gains Royalties Rents Pension and annuity income Unearned income from trusts

Answer 191

Ben is the 10-year-old son of Mr. and Mrs. Reese. In 2023 Ben had $5,000 of unearned income and no earned income. The first $1,250 of Ben's unearned income is not taxed because this is Ben's standard deduction. The second $1,250 of Ben's unearned income is taxed at Ben's marginal rate. The last $2, 700 of Ben's unearned income is taxed at the parent's rate.

Answer 192

The Kiddie Tax only applies to "unearned income" in excess of $2,500 (2023).

Answer 193

Ben is the 10-year-old son of Mr. and Mrs. Reese. In 2023 Ben had $5,000 of unearned income and $7,000 earned income from a few modeling jobs this year. Ben's standard deduction is the greater of $1,250 or earned income plus $400 (not to exceed the single standard deduction), making his standard deduction $7,400. Start with unearned income, as it stays the same as the prior example. The first $1,250 of Ben's unearned income is not taxed because this is Ben's standard deduction. The second $1,250 of Ben's unearned income is taxed at Ben's marginal rate. The last $2,500 of Ben's unearned income is taxed at the parent's rate. Ben's earned income has the remaining standard deduction of $6,150 ($7,400 - $1,250 used for unearned income). His earned income of $7,000 minus the remaining standard deduction of $6,150 = $850 taxed at Ben's marginal rate.

Answer 194

AMT Applies To? Basis for Computing AMT AMT Formula? Chart Summarizing Deductions That Are Lost Under AMT AMT Exemptions Adjustment Items for Individuals Preference Items

Answer 195

The Alterative Minimum Tax (AMT) applies to individual taxpayers who take advantage of "items of tax preference." -A taxpayer is liable for the greater of his regular tax liability or the AMT.

Answer 196

Deductions are allowed for: -Charitable contributions, -Certain deductions for estate tax for income in respect of a decedent, gambling losses to the extent of winnings, casualty losses from federally declared disasters, and Medical expenses in excess of 7.5% of AGI, -Sec. 199A qualified business income, Qualified resident interest, and -Investment interest to the extent of qualified net investment income

Answer 197

The exemption reduces AMTl to arrive at the base on which AMT is computed.

Answer 198

Accelerated depreciation for real and personal property that is allowable for regular tax purposes. -Real property, depreciation in excess of 40-year, straight-line. -Personal property, depreciation in excess of 150% declining balance method. The standard deduction if itemized deductions are not used. Itemized deductions **not allowed** for AMT: -State and Local taxes

Answer 199

Preferences Tend to Arise Because? 1. Percentage Depletion 2. Intangible Drilling Costs 3. Interest on Private Activity Bonds

Answer 200

Preferences tend to arise because of deductions or exclusions that provide substantial benefits. -Unlike adjustments, preferences can only be positive (i.e., increase AMTI). -Thus, preferences reduce the benefits initially received when computing regular tax.

Answer 201

The amount of percentage depletion taken for regular tax in excess of the adjusted basis of the property at the end of the year is a preference item.

Answer 202

AMT requires 10-year amortization. Intangible drilling costs are currently deductible for regular tax. Preference is excess of regular tax deduction over [AMT amortization plus (65% × net oil & gas income)].

Answer 203

This interest is not taxable for regular tax purposes, but is included in income for AMT purposes. Expenses incurred in carrying these bonds are not deductible for regular tax purposes, but offset the interest income in computing the AMT preference.

Answer 204

Make sure to know the three preference items.

Answer 205

Rental Property Hobby Rules At-Risk Rules and Passive Activity Treatment

Answer 206

Nonvacation Rental Property Rental Vacation Homes Rental Losses are Subject to Passive Loss Rules Allocation of Expenses Between Personal and Rental Tax Treatment of Income and Expenses of a Primary Rental Vacation Home Treatment of Allocated Personal Portion of vacation Home Expenses

Answer 207

Rental property is generally considered a trade or business and all ordinary and necessary business expenses are deductible against income. Some rental activities are deemed passive losses and are only deductible to the extent of passive income. There are two exceptions to this rule: -Rental activities by dealers are considered active. -Residential rental losses up to $25,000 are deductible by taxpayers with AGI less than or equal to $100,000. Phase out is between $100,000 and $150,000 Rental property income and expenses are reported on Schedule E of Form 1040.

Answer 208

Rental vacation homes are subject to the same presumption as hobbies. That is, it is presumed that the taxpayer is not engaged in the activity for profit. May have both personal and rental use of a vacation home. Rental may be treated similar to a hobby. -No rental expenses in excess of rental income are allowed and expenses are deducted in same order as for hobby. Determination of vacation home treatment is dependent on personal use vs. rental use. **Fewer than 15 rental days:** No gross income from rentals and no deductible rental expenses. in addition, the mortgage interest and property taxes are treated as if on personal residence (generally deductible in full). **More than 14 rental days:** Treatment depends on amount of personal use. If the personal use days are NOT more than the greater of 14 days or 10 percent of fair rental days, then the taxpayer can deduct all expenses allocated to rental use even if loss results.

Answer 209

Mortgage interest and taxes. -The IRS requires allocation based on total days used. -Courts have allowed allocation based on days in year. Other expenses are allocated based on total das used.

Answer 210

Rental income is included in gross income. Rental expenses are deductible FOR AGI. Rental income and expenses are reported on Schedule E.

Answer 211

**Primarily rental use:** Taxes deductible FROM AGI, mortgage interest nondeductible (personal interest). **Personal/rental use:** Mortgage interest and taxes deductible FROM AGI. Personal portion of other expenses (e.g., insurance, maintenance) nondeductible.

Answer 212

Jeff and Shirley live in Lake Placid, NY, home of three winter Olympics games and tourist destination. Jeff and Shirley rented their house for 14 days to guests from overseas for $15,000 for the two-week period. Jeff and Shirley did not have to report any income because the rental period was less than 15 days,

Answer 213

What is a Hobby? Profit Activity Presumption Rule of Section 183. Hobby Losses Are?

Answer 214

A hobby is an activity not entered into for profit. -Personal pleasure is generally associated with the activity. -Examples: Raising dogs, sailboat racing, gardening. -Often it is difficult to determine whether an activity is profit motivated or a hobby. --Regulations provide nine factors to consider in making this determination.

Answer 215

If an activity is entered into for profit, taxpayer can deduct expenses FOR AGI even in excess of income from the activity. At-risk and passive loss rules may apply.

Answer 216

If activity shows profit 3 out of 5 years (2 out of 7 years for horses), it is presumed that taxpayer has profit motive. -This is a rebuttable presumption that shifts the burden of proof to the IRS. Otherwise, the taxpayer has the burden of proving profit motive. Point to keep in mind; the IRS collects taxes on hobby income and the taxpayer could potentially pay less tax on a for profit venture due to allowed deductions. The taxpayer would like to have a for profit business and needs to prove it in the case of little income the first few years, the IRS would like to collect taxes on the hobby and would try to prove it is a hobby.

Answer 217

Hobby Losses - are no longer deductible due to TCJA.

Answer 218

There are three types of income Under the At risk rules... Passive Losses can only offset passive gains Passive Activity Defined Active Income Includes Portfolio Income Includes Suspended Losses at Risk

Answer 219

Active Passive Portfolio.

Answer 220

Under the at-risk-rules, which apply before the passive activity rules, losses can only be deducted to the extent of property/money that is at risk. Three ways to increase basis (at risk amount) -Add more capital (cash or property) -Undistributed business income of a pass-through entity that is recognized on the owner's income tax return. -The use of debt for the partnership. --The use of recourse debt will increase basis. This is the type of debt the taxpayer is personally liable to repay. --Non-recourse debt will not add to basis. This type of debt is secured by the investment itself and is not an obligation of the investor (taxpayer).

Answer 221

Passive Gains

Answer 222

Mike invests $30,000 for a 40% interest in a general partnership. The partnership produces $250,000 of losses. How much of the losses can Mike deduct? Mike's total loss is $100,000 (250,000 x 40%), and his deductible loss is $30,000 (his at-risk amount). Mike has suspended losses of $70,000 under the at-risk rules. NOTE: a general partnership allots a portion of management and liability to each general part- ner, this is not a passive activity, so only the at-risk rules apply in this example.

Answer 223

Answer. A David has $250,000 at risk. Therefore, he is not required to suspend any of his share of the partnership's losses under the at-risk rules (but beware that the activity may be passive), NOTE: The K-1 shows his proportional share of the loss. You will not need to further calculate the proportional loss as in the prior example

Answer 224

Answer: B David's losses will be suspended under passive activity rules because he has no passive activity gains to offset.

Answer 225

There has to be... Rental Activities Material Participation - Taxpayer must meet one of the following:

Answer 226

No Material Participation

Answer 227

Exception: Real estate rental activities if the client actively participates. This deduction is only available to estates and individuals, and limited partners are never considered active participants. Active participation requires at least 10% ownership, as well as involvement in management decisions, such as approving new tenants or arranging for repairs. If the real estate is actively managed, then the taxpayer can deduct up to $25,000 against ordinary income. This exception is subject to a phaseout of 50 cents for every dollar that AGI exceeds $100,000. Completely phased out at AGI of $150,000.

Answer 228

Raj has an AGI of $128,000. He has $32,000 in rental activity losses. Since he is beyond the $100,000 AGI phase out, a reduction in the phase out will be needed. First, $128,000 - $100,000 = $28,000 over the phase out. Next, calculate the reduction amount by half of the coverage, $28,000 ÷ 2 = $14,000 Then calculate the reduction of the deduction, $25,000 - $14,000 = $11,000 loss can be deducted on Raj's tax return.

Answer 229

Taxpayer must meet one of the following: -Participates greater than 500 hours per year, OR -Taxpayer participation constitutes essentially all participation. -Greater than 100 hours and the most of any participant. -Taxpayer participates for 100 hours in this activity, and their total participation in all such activities exceeds 500 hours

Answer 230

Wages, salaries, Schedule C income, and trade or business income.

Answer 231

Interest, dividends, royalties, and annuities.

Answer 232

If suspended losses are from "at-risk" activity, they are NOT deductible until the at-risk amount is positive from additions or income. If losses are suspended under passive activity rules, the losses are deductible upon disposition.

Answer 233

The passive activities rules are different for publicly traded partnerships (PTP). You can only offset deductions from passive activities of a PTP against income or gain from passive activities of the SAME PTP. Nonpublicly traded partnerships deductions cannot be offset against the gain of a PTP.

Answer 234

Answer: D The investments are passive activities. Therefore, the loss is limited to the at-risk amount and then to the passive activity income. The loss for LLP B is limited to $25,000 since that is the at-risk amount. It can then be netted against LLP A for a total of $50,000 gain ($75,000 - $25,000).

Answer 235

The nonpublicly traded partnerships can be netted together and the remainder is suspended. Publicly traded limited partnerships cannot be netted $22,000 loss netted with a $16,000 gain = $6,000 suspended loss. The entire publicly traded Partnership A loss is suspended = $10,000. And the publicly traded gain is considered investment income = $15,000. The loss on Partnership A can carry forward until there is a gain from that partnership, or until you dispose of that partnership interest.