Memorize! Flashcards
What is series EE bonds?
Face value and interest both paid at maturity.
What are 4 criteria for tax exclusion for the interest from series EE bonds?
- Owner (must be sole owner/joint with spouse) of the bond is at least 24 yrs.
- Proceeds used to pay higher education expenses (tuition and fees) in the year of redemption.
- Higher education expenses are for TP, spouse, dependents.
- Exclusion is phased-out at higher income level.
Life insurance pmt: If TP contributed to the cost of the company’s pension plan during employment, what is the tax impact for this pmt?
ex: Contributed $12,000. Life expectancy: 10yrs.
Will be excluded from the insurance pmts.
12,000/120months=$100 per month will be excluded from the pmt every month.
Alimony recapture ex:
1st yr: Paid $50,000. 2nd yr: Paid $20,000. 3rd yr: $0.
What is the recapture amount?
The excess of the yr 2 pmts over yr 3 is 20,000-0=20,000. This is 5,000 more than 15,000: 20,000-15,000. 5,000 is the 1st recapture amount.
Now, yr 2 pmt is reduced by this amount 20,000-5,000=15,000.
Average 2 and 3rd yr: (15,000+0)/2=7,500.
The excess of yr 1 pmt over 7,500 is 42,500 (50,000-7,500), which is 27,500 more than 15,000. 27,500 is the 2nd recapture amount.
Thus, total recapture in 3rd yr=5,000+27,500=32,500.
What is the net investment income tax? Threshold?
Taxpayers may be subject to the net investment income tax of 3.8% if they have significant investment income. Investment income includes taxable interest income, dividends, annuities, and certain royalties and rents.
The tax equals 3.8% of the lesser of 1) an individual’s net investment income or 2) the excess of AGI over a threshold amount. The threshold amount is $250,000 for married filing joint ($125,000 for married filing separate) and $200,000 for unmarried individuals.
When can scholarships for degree seeking students be excluded from income?
It is used for tuition, fees, books, supplies, and equipment required for courses.
What is the general tax treatment for social security benefits (SSB)? Exception (formula)?
Not taxable.
If TP’s provisional income (PI) exceeds a specified amount, up to 85% can be taxed.
PI=AGI + Tax-exempt interest +50%(SSB).
SSB taxable thresholds (must memorize) and amount taxed?
Married filing joint:
- If less than $32,000, not taxed.
- If more than $44,000, usually 85% of SSB taxed.
- Between, usually 50% of SSB taxed.
Single:
- If less than $25,000, not taxed.
- If more than $34,000, usually 85% of SSB taxed.
- Between, usually 50% of SSB taxed.
When can gain excluded from income for selling a residence? Limit?
If a TP owned and occupied a residence as a principal residence for an aggregate of at least 2 of the 5 yrs preceding sale.
$250,000 for individuals.
$500,000 for married jointly.
What is the criteria for dividends to qualify for the lower rate?
- They must be received from a domestic corporation or a foreign corporation whose stock is tradable on an established US securities market.
- Shareholders must own the stock for a reasonable amount of time (60days before and after the dividend date).
Net investment income tax: what are investment income?
Taxable interest income, dividends, annuities, certain loyalties, rents.
Installment method ex:
In yr 1, TP sold real property for $200,000. Received $100,000 cash and $100,000 plus accrual interest next year. The buyer assumed a $50,000 mortgage. The adjusted basis was $75,000. TP incurred $10,000 expense.
Gross profit and recognized income?
First compute amount realized:
$200,000 + $50,000 - $10,000 = 240,000.
Gross profit = 240,000 - 75,000 = 165,000
Gross profit percentage (gross profit/contract price):
165,000 / 200,000 = 82.5%.
Income: 100,000 x 82.5% = $82,500 in year 1 and 2 each
Installment sale, depreciation recapture ex:
An assets is sold for $100 - Sec. 1245 property. Adjusted basis: $40. Depreciation claimed: $35. $100 will be paid in 2 installment of $60 in Year 1 and $40 in Year 2.
Amount realized (100) - Adjusted basis (40) = Realized/recognized gain (60). Year 1 recapture: $35. (if the entire $100 was received, $35 = Sec. 1245 ordinary income and $25 = Sec. 1231 gain).
Year 1 installment income:
Gross profit is reduced by $35: $60-$35=$25. Gross profit %: 25/100=25%. $60x25%=$15 + $35 (recapture) = $50.
Installment sale: how is the amount of depreciation recapture determined?
Lessor of;
realized gain on the sale or depreciation taken.
Life insurance (group-term policy - can’t discriminate): whats the tax treatment for employees when the employer pays the premiums?
up to $50,000 can be excluded from income.
Amount over $50,000 is taxed based on IRS rate based on the TP’s age.
Tax treatment for undergraduate, graduate tuition fees, books, and supplies provided by employer (not discriminated)? Limits?
Excluded.
up to $5,250.
Non-qualified stock option: whats the tax classification on grant date, exercise date, and sale date?
None.
Ordinary income.
Capital gain (ST or LT depends on holding period).
Incentive stock option: whats the tax classification on grant date, exercise date, and sale date?
None.
None (except for amt purposes).
There can be only capital gain or ordinary income and capital gain (amt.adj.reverses).
Non-qualified stock option: Formula to compute ordinary income on exercise date?
(FMV of stock - Exercise price) x # of shares exercised.
Non-qualified stock option: Formula to compute capital gain on sale date?
Amount realized - adjusted basis (option price + ordinary income: should be added to basis) = Capital gain.
Incentive stock options: what are 2 criteria for the gain on sale is LTCG? What happens if these 2 criteria are not met?
- Held for more than 1 yr.
- Not sold until after 2 years from the date the option was granted.
Treated as non-qualified stock option.
Incentive stock option: when does income recognized when it becomes non-qualified option?
On sale date rather than exercise date.
Traditional IRA: what is the limit on contributions? For married couple?
I: Lower of 2017: $5,500. or compensation. If he is older than 50, additional 1,000 allowed or compensation amount.
M: $11,000 as long as one person has the compensation above the amount.
Traditional IRA: how much can TP deduct the contribution? Is this amount impacted by the amount of income?
All as long as TP is not a participant in another qualified pension plan.
No.