NINJA Individual Taxation #2 Flashcards by Xee Vang

What can be carryovers?

C - Charitable Contributions
A - AMT Paid
C - Capital Loss (Individual)
P - Passive Activity Loss
I - Investment Interest expense > Investment Income
E - Excess 179 expenses

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How can Passive Activity Loss be carried?

o No Carryback

o Carry Forward Indefinitely

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How can Investment interest expense be carried?

Carry Forward Indefinitely

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How can charitable contributions be carried?

Carry Forward 5 years

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How can AMT paid be carried?

o Carry Forward Indefinitely
o Apply against future Income Tax only
Not against future AMT liabilities

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How can capital losses (individuals) be carried?

o $3,000 Loss and Carry Forward rest Indefinitely

o Loss retains Character (STCL vs LTCL)

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How can corp capital losses be carried?

3 years back /5 years forward

* Corp Carry Forward as a STCL only

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What is the formula for contract price?

Contract Price = Sales Price – (Buyer Liability)

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What is the treatment of home mortgage interest?

Mortgage Interest deductible on loans up to $1M

- Home Equity Interest deductible on loans up to $100K

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What types of business gifts (Sch C) are deductible?

$25 per person is deductible

* Service awards up to $400 are deductible

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How are business losses treated?

Business Losses only offset active Business Income
W2 wages are considered active Business Income
Passive Losses don’t offset active income
W2 wages = Active Income
Can’t be offset by Passive Losses
Ltd Partnership income = Passive Income
Can be offset by passive losses
Interest/dividend income = Portfolio Income
NOT PASSIVE

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What is the treatment of business start-up costs?

Deduct up to $5,000 of Start-up costs
Reduced dollar-for-dollar by amount over $50,000
Remaining costs are amortized

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What is the deductible treatment of medical expenses – Schedule A?

(New) Deductible once 10% AGI threshold is reached
o If your AGI is $100,000, your first $10,000 of medical expenses are not deductible
Accident/Disability insurance is not deductible

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What types of medical expenses – paid on behalf of another treated?

Must be a Citizen of North America
If person is your mother/father or relative closer than a cousin, they don’t have to live with you
Otherwise, they must live with you
Must provide more than 50% support to individual

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Are Foreign Income Tax – Deductible?

Yes

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Are Foreign Real Estate Tax Deductible?

Yes

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Are Foreign Personal Property Taxes Deductible?

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Are Foreign Tax Assessments Deductible?

No, Add to Basis

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How are investment interest expenses – Schedule A treated?

Deductible only the extent of Net Investment Income
Gross Investment Income

= Net Investment Income

Note: Investment expense doesn’t include Interest Expense. Investment interest expense on tax-free securities is not deductible

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How are mortgage points – Schedule A treated?

Deductible if it represents prepaid interest on purchase of a new home or improving a home
Refinance points are amortized over the life of the mortgage

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How are mortgage interest expenses – Schedule A treated?

If used to purchase a house (i.e. not to pay off credit cards) deductible on Schedule A on debt up to $1M
Refinance interest expense deductible up $100k of debt

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How are charitable contributions – Schedule A treated?

LTCG Property + Property related to Charity
o Deduction for FMV of property
o Up to 30% of AGI
STCG Property + Property not related to Charity
o Deduction for Adjusted Basis in property
o Up to 50% of AGI

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What is the treatment of Misc Schedule A deductions?

Must Exceed 2% of AGI
Education - If required to keep your job
Business travel expenses
50% of meals/entertainment
Union Dues
Tax prep fees
Legal fees to collect alimony
Appraisal Fees to Value
o Casualty Loss
o Charitable Contributions

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What types of deductions are not subject to AGI phaseout?

Medical
Casualty
Gambling
Investment Interest Expense

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How are casualty losses treated?

Decrease in FMV of property vs. Basis Use the lower of the two numbers Lower of above number (Note – this was $500 in 2009 tax year) =Deductible amount for casualty loss

Are expenses to repair damaged personal property deductible?

What is a qualifying child?

Must be resident of North America | Under age 19 or age 24, if student

What is a qualifying relative?

Must be citizen of North America Same "relative" test as the test for medical expenses paid for another person o If person is your mother/father or relative closer than a cousin, they don't have to live with you o Otherwise, they must live with you o Must provide more than 50% support to individual o Can't earn more than the Personal Exemption Social Security doesn't count as income

Formula for minor income taxed at parent’s rate

Child's unearned income =Amount taxed at parents' rate

Can MFJ spouses use different accounting methods if they each own a small business?

Yes

Can Non-resident aliens can file MFJ with their spouse?

Yes

What are some AMT add-backs?

1. Difference between Depreciation on Real Estate purchases pre-'99 vs AMT's Straight Line 40 2. Difference between 200% MACRS vs 150% MACRS on personal property 3. Difference between FMV of stock options vs amount paid for them 4. No state income tax, real estate tax, or personal property tax allowed for AMT. 5. No personal exemptions or standard deductions 6. Construction: Only % of Completion Method allowed 7. No installment method on sales allowed 8. AMT paid is carried forward indefinitely and only reduces future regular tax, not future AMT

What is the SE Tax rate?

15.3% of Net Profit

What is an EXAM TRICK related to SE?

Executor of Estate NOT SE Income

What are some refundable tax credits?

Taxpayer receives larger refund than what they paid o Earned Income Credit o Additional Child Tax Credits o American Opportunity Credit

What is the American Opportunity Credit (formerly Hope Credit)?

o Includes first 4 years of post-secondary school Hope Credit only allowed first 2 years o 100% Credit for first $2,000 expenses including Tuition Course-related Books & Supplies • Hope Credit didn't include this o 25% Credit for next $2,000 of expenses aka – up to $500 o Total Available Credit per student: $2,500 Compare to Lifetime Learning Credit, which is per taxpayer o 40% ($1,000) of credit is refundable Compare to Lifetime Learning Credit, which is not refundable

What is the Lifetime Learning Credit?

o Per taxpayer | o Not refundable

What are the estimated tax payments?

``` The lesser of: o 90% of current total tax o 100% of prior year's total tax o 110% of prior year's total tax If AGI is $150,000 or more ```

Will insurance proceeds from damaged crops have to be included in the year they are received?

Yes

What is the treatment if the gains on the extra sales caused by weather issues force the sale of an abnormal volume of livestock?

May be deferred until next year

Are costs to preserve soil/water deductible?

Yes

Are costs to drain wetlands or for irrigation deductible?

Can you deduct if you want to preserve resources?

Yes

Can you deduct if you want to use resources?

How much of feed costs for livestock can be deducted?

Up to 50% of other farming expenses

What is used for personal tangible property (i.e. non RE, such as farmer’s F150 truck)?

MACRS 150

What happens after an audit appeal and no deal is reached after appeal?

o Taxpayer has 90 days to Petition the Tax Court | o If no Petition filed – Tax due within 10 Days

What is the statute of limitations for a tax audit?

3 years

What is the statute of limitations for a tax audit if 25% or more of GI (Gross receipts + capital gains) was omitted from the tax return?

6 years

When does the clock start ticking?

On the Due Date of the return or the date the return was filed - whichever is later

Are there statutes of limitations for Fraud and/or failure to file?

How are non-business bad debt treated?

Treated as a Short-Term Capital Loss (STCL)

When must tax refund be claimed?

Must be claimed within (whichever is later) o 3 years of return Due Date o 2 years of Tax being paid

How is dividend income treated?

Ordinary Income | You cannot offset dividends with a capital loss

How much life insurance premium can an ER pay in life insurance without it being included as income?

$50k

How are life insurance premiums > $50K treated?

As taxable income to the taxpayer

When are scholarships taxable?

1. In return for services rendered (ex. If a graduate assistant gets a scholarship in return for teaching classes, that's not a tax-free scholarship) 2. Room and board counts as income

What is tax-free interest income?

State & Municipal Bonds US EE Savings Bonds o US HH Bonds are taxable

Are US Treasuries taxable?

Yes

What is tax-free dividend income?

Some Stocks S-Corps Life Insurance

What is the tax treatment for SS benefits?

Up to 85% of Social Security income can be taxed for people in higher income brackets

Is unemployment compensation taxable?

Yes

Are damage awared to you to make you “whole” taxable? (ex. You lose a limb in an auto accident and get paid $500,000)

Are punitive damages taxable?

Yes

Is W/C taxable?

Are divorce property settlements and child support taxable and deductible?

Is alimony taxable and deductible?

Yes

Are adoption expenses deductible?

No, but adoption credit is available

What is the tax treatment of Net Operating Loss (NOL)?

Carryback 2 and carryforward 20

Are traditional IRA contributions deductible?

Yes

Are ROTH IRA contributions deductible?

Define Head of Household

o Has a dependent child o Provides more than 50% support o Lives with them more than 50% of year

Define qualifying widow(er)

o Has a dependent child | o Gets MFJ status for year of death + 2 tax years

Define tax effects of Affordable Care Act (Obamacare)

Annual Penalty for not having 'minimum essential coverage o Greater of: $95 per person ($47.50 if under 18) 1% of Household Income over threshold o 3 month grace period for being uninsured