Part 4: Individuals - Federal Taxation Flashcards
Noncorporate Taxpayers - Qualified Small Business Stock Tax Treatment
Can exclude 100% (or 50% if acquired before 2010)) of the gain on the sale or exchange if held for more than 5 years
-Eligible gain can NOT exceed the greater of $10,000,000 or 10 times the taxpayer’s basis in the stock
Qualified Small Business Stock:
- C Corporation stock acquired as original issue stock
- Corporate assets can NOT exceed $50,00,000 at the date of issuance
- At least 80% of the assets must be used in the active conduct of a trade or business
- Service-based corporations do NOT qualify
Qualified Small Business Stock
- C Corporation stock acquired as original issue stock
- Corporate assets can NOT exceed $50,00,000 at the date of issuance
- At least 80% of the assets must be used in the active conduct of a trade or business
- Service-based corporations do NOT qualify
When services are paid for in property (compensation other than cash) what amount must be included in income?
FMV of the property at the time of receipt must be included in income
What is the taxpayers treatment of cancelled debt?
Income to the debtor when the cancellation is not intended to be a gift
Ex: $45,000 secured by land w basis of $20,000. Foreclosed and settled the debt for $35,000. $25,000 (45,000-20,000) is income to the debtor.
Loss from Section 1244 stock is treated as
Ordinary loss up to $50,000 single/$100,000 joint returns
Any loss in excess of $50,000 is treated as capital loss
Tax Treatment - State disability Payments
NOT taxable unless they are considered a substitute for unemployment compensation
Do NOT include in gross income
What is the phaseout amount for 2020 of the IRA deduction for MFJ?
AGI between $105,000 - $125,000
What is the treatment of prepaid rents for an accrual basis taxpayer?
Treated as income when received
An individual taxpayer may avoid the penalty for failure to pay estimated tax by (assume AGI below $150,000)
Paying at least 90% of current year tax or 100% of prior year tax
When is an employer required to withhold federal income taxes for household employees?
Required ONLY if the requested by the employee and agreed to by the employer
Domestic wages become subject to Social Security and Medicare tax at what level?
Over $2,300 to one employee in a year
Tax Treatment - Rental real estate losses when a taxpayer materially participates
Loss up to $25,000 may be deducted [Must be reduced by half of the AGI before the less in excess of $100,000]
-Rental activities are considered passive activities even if the taxpayer materially participates
Tax Treatment - Group-term life insurance premiums
Included in gross income to the extent the cost exceeds $50,000
Tax Treatment - Workers’ compensation
NOT taxable
if state disability payments are the equivalent to workers’ compensation they are also nontaxable
-benefits that are payable under state law for occupational injury or illness arising out of employment are nontaxable if they are the equivalent to workers’ compensation
How much of an organization’s unrelated business income is exempt from tax?
The first $1,000 of UBI of a non-profit is exempt from tax
If the non-profit is a corporation, the income is taxed at corporate rates
The “eligibility to participate” standard means that group-term life insurance plan is not discriminatory if
The plan benefits 70% of ALL employees
*Premiums paid by the employer on such insurance is not taxed to an employee unless coverage exceeds $50,000
Organizational expenses - special rules
- Immediate expensing of the first $5,000 (phased out dollar for dollar if total exceeds $50,000, if total exceeds $55,000 NONE of the organizational expenses can be immediately expensed)
- Amortized over 180 months
A 33 year old taxpayer withdraws $30,000 (pre-tax) from traditional IRA. What will the total tax liability be?
[33% effective tax rate, 35% marginal tax rate]
Withdrawal amount x marginal rate
+ withdrawal amount x 10% penalty
10,500 (30,000 x 35%)
+ 3,000 (30,000 x 10%)
= 13,500
The kiddie tax is calculated by subjecting the child’s unearned income to
Parents marginal tax brackets
The exemption amount for a simple trust? Complex trust?
$300 simple/$100 complex
What are some common type of taxable interest income?
- Savings bond (at maturity or annual accruals)
- Federal obligations (US Treasury notes and bonds)
- Credit unions, banks, investments, private equity bonds
True or False - Life insurance dividends are taxable and included in gross income
False. Amounts received from an annuity policy in the form of dividends or a return of premium are excludible when received before the annuity begins and up to the point where the dividend exceeds the total premiums paid.
Tax Treatment - Municipal bond interest
Interest on municipal and state obligations are excluded from gross income
Tax Treatment - Dividends (Individuals)
Generally fully included as gross income
Tax Treatment - Jury Duty Pay
Included in gross income as compensation received
Tax Treatment - Unemployment Compensation
Included in gross income
Tax Treatment - Social Security Benefits
Generally excluded from gross income
HOWEVER, if MAGI exceeds a base amount they may have to include 50% to 85% of the SS benefits as gross income
Withholding federal income taxes for household employees is only required if
Requested by the employee and agreed to by the employer
Wages paid for domestic services are subject to federal unemployment if they exceed
$1,000 per quarter
Tax Treatment - Proceeds from Life Insurance
Excluded from gross income - proceeds from life insurance policy by reason of death of the insured
Tax Treatment - Personal Injury
Not included in gross income - amounts from workers’ compensation, accident and health insurance claims, lawsuits for person injuries, disability benefits
Tax Treatment - Traditional IRA Contributions
Taxpayers may contribute and deduct up to $6,000 ($7,000 if over 50) applicable to each spouse if joint return. Contribution cannot exceed the sum of earned income.
Phaseout: MAGI $66,000-7$6,000 single/$105,000-$125,000 joint
Tax Treatment - Hobby income/expenses
Hobby income must be claimed but hobby expenses are no longer deductible
Cap on mortgage interest deductibility
First $750,000 of debt principal
Exempt organizations, other than churches, must file an annual information return if their gross receipts exceed
$50,000
Section 199A allows a deduction of
20% for Qualified Business income from pass-through entities (partnerships, LLCs, S Corps, and soleprietorships)
Passive Losses General Rule
Losses are deductible only to the extent of passive income - excessive losses are carried forward to offset future passive income
Tax Treatment - Medical Expenses
Itemized deduction - deductible portion is the amount that exceeds 7.5% of AGI
For property placed in service after 2017, the annual Section 179 expense limit is increased to
$1,00,000
The maximum corporate tax rate is
21%
Tax Treatment - Real estate taxes
Taxes paid on the ownership of real property are allowed a deduction
Tax Treatment - Interest
Allowed an itemized deduction for payment of qualified residence interest and investment interest
Tax Treatment - Investment Interest Expense
Investment interest expense is allowed only to the extent of the net investment income
Tax Treatment - Expenses paid in advance
Nondeductible - applies to both cash and accrual methods of account and applies to prepaid interest, insurance premiums, and any other prepaid expense
Tax Treatment - Taxes Paid
Deductible only in the year the taxes are actually paid (local, state, and foreign taxes can all be deducted)
Child Tax Credit
Qualifying child must be under the age of 17 and must satisfy the relationship tests and cannot provide over half of their own support
American Opportunity Credit
Election to take a tax credit for tuition, fees, and course materials paid during the first four years of postsecondary education - limited to the lesser of amounts paid or $2,500 and 40% of the credit may be used as refundable
Lifetime Learning Credit
Nonrefundable tax credit for qualified tuition and related expenses for undergraduate, graduate, and professional degree courses. Lesser of $2,000 or up to $10,000 in qualified tuition and fees
