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.
Traditional IRA: What happens re: deduction if TP participates in another qualified plan? What about for a spouse who is not an active participant in another plan? Phase out?
IRA contribution can be deducted but it is phased out proportionately above a certain level of modified AGI.
$99,000 - 119,000.
TP can participate in another qualifying plan as long as his income does not exceed this amount and deduction of $5,500 can be claimed.
Spouse: $186,000 - 196,000.
Single: $72,000.
Traditional IRA: when must distribution be started? If not?
April 1 of the later of when TP reaches age 70 1/2 or TP retires.
Penalty.
Roth IRA: When are distributions non taxable?
- Distributions occurred 5 yrs or more from the date of the initial contribution.
- Distributions are made on or after the TP attains age 59 1/2.
Keough plans (For self-employed TPs): Contribution limitations?
Lesser of the annual limitation ($5,400) or 100% of earned income.
Keough plans: Formula to compute “earned income”?
Earned income = Net income from self-employment - 50% of the self-employment tax - the allowable Keough contribution.
SEP (simplified employee pension plan): what is the maximum contribution limit for employer?
Can’t exceed lower of;
25% of compensation or The dollar limitation for defined contribution plans.
Section 529 plans: what is it? Criteria?
Used to save for college expenses and earnings can be excluded from gross income.
Beneficiary must be specified.
Section 529 plans: Tax treatment for contributions?
Not deductible.
Section 529 plans: Tax treatment for distributions?
Not taxable as long as used for qualifying higher education expenses - tuitions, fees, book, room and board etc.
Section 529 plans: Maximum limit for contribution?
Up to $250,000.
Education IRA: maximum contribution limit? Age limit of beneficiary?
$2,000 (2016).
No contribution allowed for a beneficial 18 or older.
Are interest on education loans deductible? For or from AGI? Maximum limit? Phase-out? Criteria?
Yes. For AGI.
$2,500.
Yes for high income TPs (single/head/widow: $60,000, married joint: $120,000).
A student must be enrolled at least part time.
Are contributions to health savings accounts deductible? When? Limit?
Yes. At the time contributions are made. Individuals: $3,350. Married: 6,650. Additional for those over age 55.
HSA: Tax implications for non-qualified distributions?
Included in gross income and subject to 20% penalty.
Is forfeiture penalties deductible for or from AGI?
For AGI.
Are qualifying higher education expenses deductible? Maximum? For or from AGI? when are they NOT deductible? what are 2 criteria for deduction?
Yes up to $4,000.
For AGI.
NOT: If to meet minimum standards of current job or
If to qualify TP for a new trade or business.
(There is $4000 max deduction for AGI, this rule is when TP has more or doesn’t qualify for $4000 one because AGI is too high).
YES: 1. To maintain or improve existing skills required in current job or
2. To meet requirements of employer or imposed by law to retain employment status.
Is investment interest expense deductible?
Yes, but only to the extent of net investment income (investment income less non interest investment expenses) and 2% rule.
If TP elects to include long-term capital gain and qualified dividend income in investment income, what is the tax implication? Must a TP predict which method is most beneficial during the year?
They are taxed as ordinary income.
No, they can wait till the year is over, compute, and elect.
2% rule example: AGI: $100,000. Investment expense: $3,200. What is the allowed deduction?
$3,200 - (100,000x2%) = $1,200.
Investment expenses are deductible only to the extent they exceed 2% of AGI.
Acquisition indebtedness: Debt limit? Is this limit per residence?
$1,000,000.
No, for one plus other total.
Home equity loan: how is the deductible amount determined?
The portion that does not exceed;
Lesser of;
$100,000 or the FMV of the residence less the remaining acquisition indebtedness (equity).
If lesser part is $75,000 and loan is $100,000, allowable % is 75,000/100,000=75%. Actual interest x 75%= allowable interest deduction
Misc deductions: 2%: What are 3 common types of items?
- Unreimbursed employee expenses, and expenses reimbursed but not under an accountable plan.
- Expenses relating to tax planning and return preparations (for all taxes).
- Investment expenses; including fees paid for investment advice, safe deposit box rental fees.
Misc deduction: not subject to 2% rule: Examples?
- Gambling losses to the extent of gambling winnings.
- Certain expenses of short sales.
- Unrecovered annuity costs.
Itemized deduction: How is the reduction (phaseout) point computed?
The lower of;
3% x (AGI - threshold) or 80% x (itemized deductions: taxes+home mortgage interest+charitable contributions+2% misc deductions).
Casualty losses: How is the deduction computed for personal and business casualty? When the item is completely destroyed?
For personal casualty: Casualty loss deduction = (lower of; decline in FMV or AB (adjusted basis) of property) - insurance reimbursements - casualty floor ($100 per casualty) - 10% of AGI.
For business casualty: $100 floor and 10% of AGI do not apply.
The property’s adjusted basis immediately before the casualty.
What is the classification of non-business bad debt? When is it deductible?
Always treated as a short-term capital loss.
When it becomes totally worthless. Partial bad debt is not allowed for deduction.
When stocks or bonds become worthless, how is it treated? Can partial loss be deductible?
As being sold for no consideration on last day of the year.
No, must be completely worthless.
What are the only 2 items that are allowed for NOL?
Business losses and casualty losses.
NOL computation if starting with taxable loss?
Taxable loss
+ personal exemptions
+ Std deduction or itemized deductions (except for casualty loss) and other non-business deductions in excess of non-business income
+ Excess of non-business capital losses over non-business capital gains (limited to $3,000)
+ An NOL deduction from another year
When stocks or bonds of affiliated business (owe more than 80%) become worthless, is it capital loss?
No, ordinary loss.
Are losses from hobbies deductible?
Considered as personal loss and not deductible.
Are expense of a hobby deductible?
Yes only to the extent of income.
What are the order expenses related to a hobby must be deducted? Classification of deduction?
- Items that would have been deductible anyway.
- Other cash expenses.
- Depreciation.
2% Misc itemized.
Vacation homes: What’s the criteria to be treated as a personal residence?
If rented for less than 15 days a year.
Vacation homes: when it is rented for 15 days or more, how must TP determine the significance of personal use?
If it is not used for personal purposes for more than the greater of;
*14 days or *10% of the total days rented.
Vacation homes: personal use NOT significant + more than 15 days rental (primary rental): Tax treatment of rent income? Is a rental loss allowable?
All rent is taxable, net of al regular rental expenses, prorated for the percentage of rental days only.
Yes, rental loss is allowed.
Vacation homes: personal use significant + more than 15 days rental (personal/rental): Tax treatment of rent income? Is a rental loss allowable? Expense deduction order?
All rent is taxable, net of al regular rental expenses, prorated for the percentage of rental days only.
A rental loss is not allowed.
Same as hobby.
- Items that would have been deductible anyway.
- Other cash expenses.
- Depreciation.
Passive losses: what is it? 2 examples?
Those TP does not materially participate.
Most rental activities, any limited partnership interest regardless of TP’s actual participation.
What are 2 criteria to determine material participation?
- Work more than 500 hrs in the activity
2. Work more than 100 hours if no other individual works more than 100 hours.
Passive losses: When can this offset active and portfolio income? Max? Phase out limit?
When a TP “actively participates” (key decision maker) in a rental real estate activity AND own 10% or more during the entire year.
Max: $25,000.
Phase out: Modified AGI of $100,000 and $150,000 (same for individuals and married) (deduction only allowed if it’s less than $150,000) - excess of over $100,000 - 50% of excess will be reduced from deduction.
Passive losses: what happens to excess passive loss?
Can;
- be carry forward to offset passive income.
- to offset ANY gain or increase the lose when the passive activity is disposed of in a fully taxable transaction.
Real estate professionals: what can they deduct against other income others can’t? Will this have a cap of $25,000?
Deduct rental real estate losses against other income.
No.
What are 2 criteria to be “real estate professionals”?
- Perform more than 50% of his or her personal services in trades or businesses involving real property AND
- Perform more than 750 hours of services in real property trades or businesses in which he or she materially participates.
What is at-risk limitations? To whom does this apply?
Loss deductions are limited to the amount a TP’s has “risk”
To individuals, closely held regular (C) corporations, and personal service corporations.
What are 4 criteria to be qualified for head of household status?
- An unmarried person.
- That provide more than half of the cost of maintaining the household.
- For a qualifying child or a relative
- Who uses the home as a principal residence for more than half the tax year.
Head of household: is a qualifying relative rule the same as dependency relationship test?
No, this does not include non-relative living in the home for the entire tax year.
Can a dependent claim any kind of deduction? Limit? How is the amount that is taxed at parents rate determined?
Yes, “mini” standard deduction - greater of;
$1,050 or earned income plus $350 (2016)..
This deduction is limited to regular standard deduction.
For 2017, the amount taxed at the parent’s rate is the unearned income in excess of $2,100.
Who does kiddie tax include?
All children under 18.
Children who are 18, or between 19-23 who are full-time students, if their earned income does not exceed 50% of their total support for the year.
2017 standard deduction for each filing status?
Married filing joint: $12,700.
Head of household: $9,350.
Single: $6,350.
Married filing separate: $6,350.
AMT adjustment: what must be added back?
Deductions. No deduction allowed for taxes.
2% misc deductions.
Personal exemptions.
Standard deductions (if used).
Home equity interest not used for home.
Difference between FMV and option price for stock option.
Self-employment tax: what is self-employment income? Is this all subject to self-employment tax?
- Gross income from self-employment less deductions associated with the activity.
- Allocations of income to general partners (but not limited partners).
- Guaranteed pmts paid to both general and limited partners.
No, only 92.35% of the total self-employment income.
Self-employment tax: What is the tax rate? For regular employed people?
- 3% (double because TP has to pay both employer and employee share).
- 65% (social security: 6.2%. Medicare: 1.45%)
Self-employment tax: What is the threshold to be subject to self-employment tax?
Self-employment income x 92.35% must exceed $400.
What is Medicare Surtax?
An additional 0.9% hospital insurance tax applies over earned income;
*Joint filer with wages > $250,000.
*Single and HofH filers with wages > $200,000.
Applies to self-employment income in the same way.
Who does tax on next investment income apply to?
Individuals, trust, estates.
What does net investment income include, 3 categories?
- Interests, dividends, annuities, rents, royalties; net of allowed expenses.
- Net income derived from a passive activity or a business of trading in financial instruments or commodities.
- Net gain from the disposition of property NOT held in a trade or business.
Example: what tax liability do TPs have?
Married filing jointly. Earned income: $275,000. Net investment income: $75,000. Modified AGI: $300,000.
Lower of net investment income: 75,000 or excess of 250,000 over modified AGI = 300,000-250,000=50,000. Therefore, 50,000.
50,000x3.8%=1,900 - tax on net investment income.
Also, Earned income exceeds 250,000 threshold by 25,000. Then 25,000x0.9 additional MC tax apply = $225.
AMT adjustments: are gambling losses deductible still or need to add back? Charitable contributions?
Deductible.
Traditional IRA account contribution.
One-half of the self-employment tax.
How much is the child credits and criteria?
$1,000 for a qualifying child under 17 yrs old.
Child credit: Who are included in “qualifying child”
Dependent child, stepchild, grandchild, siblings, and nieces, and nephews.
Child credit: is there phase-out limit? How is it computed? What’s the provision for a portion of credit?
Yes.
The child tax credit is reduced or eliminated if your adjusted gross income is above certain thresholds. The credit amount is reduced by $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income (AGI) exceeds the threshold amount.
The threshold is:
$110,000 on a joint return $75,000 for an unmarried individual $55,000 for a married individual filing a separate return
A portion maybe refundable for some TPs
American opportunity tax credit: what’s the total allowable credit? Criteria?
$2,500 for each eligible student (one-half of the normal load of a full-time students).
Allowed for only 4 yrs for those in post-secondary education (a degree program).
American opportunity tax credit: Credit breakdown?
- A 100% credit for the first $2,000.
* A 25% credit for the next $2,000 paid.
American opportunity tax credit: what are the eligible items? Eligible time frame?
Tuition, fees, course materials.
Must related to an academic period beginning in the current tax year, or the first 3 months of the next tax year.
American opportunity tax credit: phase-out?
Yes. Cap for married filing joint: $160,000
Lifetime learning credit: Total allowable credit? Criteria?
A credit of 20% (up to $10,000) of qualified tuition expenses per TP (NOT per student) (the maximum $2,000 per tax year) when American Opportunity credit is not available.
Lifetime learning credit: phase-out exist?
Ex) If income exceeds the married threshold by $1,000, what is the reduction?
Yes.
The phase-out for married taxpayers is proportional over a $20,000 range beginning at $112,000 ($10,000 range beginning at $55,000 for single taxpayers).
If income exceeds the threshold by $1,000 ($113,000), then they lose 5% of their credit ($1,000/$20,000).
Child and Dependent Care Credit: What is the credit based on? Criteria?
Percentage (between 20-35%) of qualified expenses incurred for care for a qualified individual to enable TP to work or looking for work, or being student.
Child and Dependent Care Credit: who is qualifying individual?
- A qualifying child (as defined for dependency rules) under age 13.
- A dependent or spouse who is physically or mentally incapacitated and has the same abode as TP for more than half the tax year.
Child and Dependent Care Credit: how is the amount of qualified expenses determined?
Lowest of;
- Qualified expense
- Earned income of the lowest paid spouse
- $3,000 ($6,000 for 2 or more qualified individuals) - cap.
Child and Dependent Care Credit: Percentage allocation?
Credit percentage is 35% if AGI is $15,000 or less.
It’s reduced by 1% for each $2,000 (or portion thereof) AGI in excess of $15,000 (but not below 20%).
Earned income credit: is this refundable or non-refundable? What must TP have to obtain this credit? Length covered?
Refundable (even if there was no tax withholding).
Earn income.
Full 12 months period.
Earned income credit: How is the amount of income increased?
When TP maintains a home with qualifying children (who must stay at least half of year).
Earned income credit: does disability pmts qualify? Criteria? Length?
Yes, if they are taxable.
Until TP reaches normal retirement age.
Earned income credit: when will credit disallowed re: disqualified income? What are disqualified income?
If disqualified income exceeds a threshold (2017: $3,450).
Interest, dividends, tax-exempt interest, other investment income.
Earned income credit: what is the filing status that leads to disallowance?
Married filing separately.`
Earned income credit: Must TP be a citizen? Requirement of length of stay in the US? About SSN?
Yes or resident alien.
The entire tax year.
Must have valid SSN.
Adoption credit: Max in 2017? Is this refundable? Age requirement?
$13,570 for reasonable expenses.
No.
Under 18.
Credit for elderly and disabled: 2 criteria?
- 65 or older.
2. Permanently disabled.
Credit for elderly and disabled: formula for credit computation?
- Initial amount
- Less annuities, pensions, social security, disability income (excluded from gross income)
- Less 50% of AGI over threshold for each filing status
- x 15%
- =credit amount.
Credit for elderly and disabled: what is initial amount for each filing status (4)?
- Single or joint return where only one spouse is 65 or older: $5,000.
- Joint return (both spouses are 65 or older): $7,500.
- Married filing separate: $3,750.
- TP under age 65: limited to disability income.
Credit for elderly and disabled: What is threshold for 50% section?
Single: $7,500.
Joint return: $10,000.
Married filing separate: $5,000.
Earned income credit: what happens to unused credit?
Lost. No carry back or forward.
Earned income credit: Can this be claimed by both individuals and corporation?
No, just individuals.
When a property is gifted, what would be the basis for the receiver? Which amount is used for gift tax?
The basis of giver.
FMV.
When the donor pays gift tax, what is the implication for the basis of the donee?
Ex: The basis of donor: $160,000. Tax paid: 66,600. FMV: $200,000.
The donee’s basis in the property for computing gain for income tax purposes is the donor’s basis of $160,000. Since the donor paid $66,600 of gift tax, the donee’s $160,000 basis is increased by the following amount: Appreciation in Property/FMV of Property × Gift Tax Paid = $40,000/$200,000 × $66,600 = $13,320
The donee’s basis is $173,320 ($160,000 + $13,320).
When is FMV determined when AVD is elected and the property is distributed before the AVD date?
On distribution date.
What amount of the property goes into estate when one spouse dies? what is the entirety?
50%. A tenancy by the entirety is a joint tenancy between husband and wife.
Jointly owned property: what is joint-tenancy?
Property was owned with a right-of-suvivership: at death, the property immediately passes to the other owner that is still living.
Jointly owned property: estate tax implication (not husband and wife)?
Generally, 100% of the property is included in the estate of the first owner to die, unless it can be proven that the surviving owner contributed to the purchase of the asset. Then only the portion the person who died put will be added to the estate.
Jointly owned property: what is tenancy in common?
There is no right of survivorship.
The decedent’s share of property passes into the probate estate and its distribution of property is controlled by the decedent’s will.
Life insurance: What are 2 conditions that could make life insurance proceeds to be included in the gross estate?
- The decedent had incidents of ownership (ie. right to designate the beneficiary etc).
- The decedent’s estate is the beneficiary of the insurance policy.
Life insurance: when can proceeds be excluded from the gross estate? What if TP terminate incidents of ownership and dies within 3 years?
When there is buy-sell agreement.
Still included in the gross estate.
What happens to the property re: gross estate when the retained interest was revoked within 3 years of death?
Still included in the gross estate.
When a gift is made within 3 years of death, what is the implication on the gross estate?
Gift will not be included, but any gift tax paid will be included.
When the executor wants to deduct medical expenses on Form 1040, what must he do?
File a waiver. Otherwise, it will be deducted on the estate tax return.
How much is the unified credit that will offset a net estate in 2017?
$5,490,000
What is a possibility of unused credit? Criteria?
May be used by the surviving spouse.
If it’s from a spouse who dies after 2010.
Is the election of AVD revocable?
No.
Is capital loss deduction allowed for Individual AGI computation?
Yes.
How much capital loss deduction is allowed for individual AGI computation?
$3,000 limit.
When does executor must file federal estate tax return?
if the gross estate of a decedent exceeds $5.49 million. If a decedent made lifetime taxable gifts such that the decedent’s tax credit was used to offset gift tax, the $5.49 million exemption amount must be reduced by the exemption equivalent of the unified credit that was used
When can the cost of health and accident insurance premiums paid on behalf of employee deductible by the S corporation and reportable as additional compensation to the shareholder?
When the employee is a greater than 2% S corporation shareholder-employee (hereafter referred to as “shareholder”)
