Part 1 Flashcards
Abode Test
A qualifying child must live with the taxpayer for more than one-half of the year. Temporary absences such as being away at school count as being with the taxpayer.
Adjusted basis
The property’s adjusted basis is frequently its cost.
Age Test
A qualifying child must be under the age of 19, or if they are a full-time student, under the age of 24.
Alimony and Separate Maintenance Payments
Alimony payments are deductible by the payor spouse, and included as income by the spouse receiving them. Should the spouse also have children, there may be an element of the payment which includes child support. Child support is not a taxable to the recipient.
Alimony Payments
A deduction is allowed for alimony payments made under a written decree of divorce or separate maintenance.
Alternative Valuation Date
The executor may also elect to value the estate at an alternate date, rather than at the date of death. If the alternate valuation date is elected, and any property is distributed prior to that date, that property is valued as of the distribution date.
Alternative Minimum Tax (AMT)
The AMT is the excess of the tentative minimum tax over the regular tax. The process to determine the AMT is to first identify the various tax preferences or adjustments which were properly elected and planned for by the taxpayer, and then, effectively, disallow them.
American Opportunity Credit
Taxpayers may elect to take a tax credit for tuition, fees and course materials paid during the first four years of postsecondary education. The credit is limited the lessor of the amounts paid or $2,500, and 40% of the credit may be used as a refundable credit.
Amortization Expense
Amortization is the cost of recovering intangible assets such as leasehold improvements and other Section 197 intangibles. The cost of the Section 197 intangibles may be amortized over a 15 year life on a straight-line basis.
Annuity Contracts & Pensions
The allowable methodology is a straight-line recovery of the cost. If the annuity continues after the recovery of cost, the entire payments represent income.
Bad Debts
When a taxpayer extends credit to another taxpayer in the form of a loan, and then the loan becomes uncollectible, a deduction is allowed. When an accrual based taxpayer sells goods and services in exchange for a receivable, and the receivable becomes uncollectible, a deduction is allowed.
Basis of Property in Like-Kind Exchange
The basis of property received in a like-kind exchange is the basis of the property being transferred by the taxpayer. If any gain is recognized, the basis is increased by that amount. If the taxpayer receives boot, basis must be allocated first to the boot and then to the transferred property.
Business Bad Debt
Results from the taxpayer being in the business of lending money or the rendering goods and services in exchange for the receivable. These bad debts are treated as an ordinary loss in the year incurred.
Business Gifts
A deduction is allowed for the cost of business gifts. However, the maximum per gift is $25 per person per year.
Business Meals & Entertainment
The ordinary and necessary expenses paid for business meals and entertainment are deductible if they are (1) directly related or (2) associated with your trade or business. The expense may not be lavish and the taxpayer must be present at the meal.
Cafeteria Plans (Fringe Benefit)
Companies may offer a variety of non-taxable benefits which an employee may choose from, similar to a cafeteria. There is generally no minimum waiting period for employees to take advantage of this plan.
Capital Expenditures of a Medical Nature
When it is necessary to make medical expenditures of a capital nature, they are deductible only to the extent that there is not a corresponding increase in the fair market value of the property.
Casualty Loss Deduction
If a taxpayer in business has a loss from a casualty such as fire, storm, shipwreck, or theft, a deduction is allowed for the decrease in value, or its adjusted basis, whichever is less, minus any insurance reimbursement.
Casualty Losses
A taxpayer may deduct a loss for a personal casualty loss. A casualty loss is sudden and unexpected, and may include a theft loss as well.
Charitable Contributions
A deduction is allowed for a charitable contribution or gift paid during the year to a qualified organization.
Citizenship Test
The dependent must be a citizen or resident of the United States, or resident of Canada or Mexico.
Club Dues and Membership Fees
No deduction is allowed for dues or membership fees in any club organized for business, pleasure, recreation, or other social purpose.
Common Stock Dividend
If a common stock dividend is received on the common stock, then the basis of the stock received is determined by merely allocating the existing basis of the common stock to the new total number of common shares currently held.
Complex Trust
A complex trust is any other trust than a simple trust. It is allowed a deduction for charitable contributions and may also distribute principal.
Cost Recovery and Depreciation Expense
A deduction is allowed for the exhaustion, wear and tear of personal and real property. Assets placed in service after 1986 are under the Modified Accelerated Cost Recovery System (MACRS). Under MACRS, assets have class lives and no salvage value.
Cost Recovery of 27.5 and 39 Year Classes
Assets under the 5 and 7 year classes are recovered under the double declining balance method. Assets under the 27.5 and 39 year classes are recovered under the straight-line method.
Coverdell Education Savings Account (CESA)
Taxpayers can make nondeductible contributions of up to $2,000 for each beneficiary under the age of 18 to a CESA. The contribution is phased-out for individuals with adjusted gross income beginning at $95,000 for single taxpayers and $190,000 for married taxpayers filing a joint return.
De Minimize Fringe Benefits
Refers to non-taxable benefits such as subsidized eating facilities when a plant is located in a remote location; occasional use of the company copy machine; use of company typing services, etc.
Death Benefits (Fringe Benefit)
There is no exclusion for death benefits paid to an employee’s family.
Deductibility of an IRA
In order for the IRA to be deductible, it must be paid during the taxable year, or by the due date of the return. Individuals may contribute up to the age of 70.
Dependent Care Credit
This credit applies to those taxpayers who pay for dependent or child care in order for them to work. To be eligible, the taxpayer must maintain a household for a dependent, age 12 or under, or any dependent of spouse who is physically or mentally incapacitated.
Dependent Day Care and Adoption Expenses
An employee may exclude, up to $5,000 per year, the cost of child and dependent care services paid by the employer to enable the employee to work. The exclusion may not exceed the earned income of the spouse with the lesser income when the taxpayer is married. In addition, an employee may exclude up to $12,170 of qualified adoption expenses.
Discharge of Indebtedness
When a taxpayer is obligated to pay a mortgage, loan or other indebtedness, and the lender discharges the taxpayer from the obligation, the amount of the discharge generally represents ordinary income.
Distributable Net Income
The amount of income that is taxable to the beneficiary is limited to the amount of distributable net income (DNI). This is regardless of the amount that is actually distributed to the beneficiary. In determining the DNI, no deduction is allowed for the personal exemption.
Early Withdrawal of Savings
The bank must report the total interest earned as gross income, the tax code allows a deduction for any penalty assessed for this early withdrawal from an account such as a Certificate of Deposit.
Early Withdrawal Penalties
There is a 10% penalty for the early withdrawal (age 59 ½) of an IRA, however, that 10% tax will not apply to amounts withdrawn for “qualified higher education expenses” or “first time homebuyer expenses.”
Earned Income Credit
This credit provides qualifying taxpayers with relatively low levels of income a credit against their tax liability. This is the only refundable credit. The nature of the credit is to encourage the taxpayer to “earn” income, rather than receive “non-earned” benefits.
Education Savings Bond
In an effort to assist parents in affording the spiraling cost of higher education, Congress passed a law stating that the interest earned on U. S. Savings Bonds is excluded from gross income if certain restrictions are met.
Educator Expense
A taxpayer who is an eligible educator is allowed a deduction of up to $250 for qualified expenses paid in teaching grades K-12 for at least 900 hours during the school year.
Elderly Credit
A credit is provided to the elderly and disabled to provide a form of relief from taxation. The credit applies to taxpayers 65 or older. It is also available to those under 65, provided they are retired with a total and permanent disability.
Employee Compensation
Some compensation is fully taxable, some is fully excluded, and some is partially excluded. Gross income that is fully included in gross income typically includes salaries and wages, bonuses, and commissions. Besides paying for compensation directly, an employee may receive other benefits which may or may not be taxable.
Employee Discounts (Fringe Benefit)
Allowed as a tax-free benefit when the discount on services is not greater than 20% and when the discount on purchases is not below the employer’s cost.
Excess Social Security Paid
This excess may be claimed as a credit against any taxes due.
Exemptions
Exemptions are divided into two types: Personal and Dependency
Failure to File a Return Statute of Limitations
Should a taxpayer fail to file a return, the statute does not begin to run. Once the tax return is filed, the statute runs from that date.
Filing Requirements of Gift Tax Returns
Gift tax returns (Form 709) are required to be filed on an annual basis if a taxable gift is made during the taxable year. The Form 709 is due on April 15th. If a gift is made for less than the $13,000 exclusion, or it qualifies for the marital deduction, then no return is required.
Foreign Income
When a taxpayer earns income from working in a foreign country, there is an exclusion available which is limited to the lesser of $91,500 or the foreign earned income.
Foreign Tax Credit
The foreign tax credit cannot exceed the lesser of the amount of the foreign taxes paid or the pro-rata share of US taxes on the foreign income.
Foreign Taxes
the taxpayer has an option of treating the taxes paid to that foreign country as either a credit against his US taxes, or a deduction.
Fraudulent Return Statute of Limitations
When a taxpayer files a fraudulent return, the statute of limitations does not begin to run. The return may be audited at any time.
Gain or Loss in Related Party Transaction
If the property is subsequently sold for a gain, the disallowed loss may be used to offset the gain. If, instead, the property is subsequently sold for a loss, the disallowed loss is never recognized.
Gambling Losses
Deductible up to the extent of gambling winnings. There is no carryover of any unused losses.
Gambling Winnings
Amounts received from gambling winnings, lotteries, etc., are included in gross income. Gambling losses are deductible only to the extent of the earnings.
Gross Income
All income, from whatever source derived.
Group Term Life Insurance (Fringe Benefit)
An employer may provide an employee with group-term life insurance coverage of up to $50,000 as a non-taxable fringe benefit.
Head of Household Filing Status
This status is available to an unmarried taxpayer who maintains a household and provides for more than 50% of the year the cost for your qualifying child or any other relative who is a dependent as a member of his household.
Health Insurance Premiums and Benefits (Fringe Benefit)
The premiums paid by an employer for an employee’s health insurance coverage are not included as gross income, nor are any of the benefits received from the policy.
Health Savings Account
Qualified participants are able to deduct contributions made into this plan for health care. The limitation on the deduction is calculated on a month by month basis. It is the lesser of 1/12th of the annual deductible amount under a high deductible insurance plan or $3,000 for a single individual (or $5,950 for a married couple).
Hobby Income
Income from the hobby is reported as other income and the deductions are reported on Schedule A as a miscellaneous itemized deduction. They are not reported on Schedule C.
