R-1 2013

Question 1

When should a cash basis taxpayer report income?

Answer 1

A cash basis taxpayer should report income in the year in which income is either actually or constructively received, whether in cash or property.

Question 2

State the basic tax formula

Answer 2

Gross Income - Deduction FOR AGI (adjustments) = Adjusted Gross Income - Deductions FROM AGI (greater of itemized deductions or standard deduction) - Exemptions = Taxable Income x Tax Rate = Gross Tax Liability - Credits and Payments = Tax Due or Refund.

Question 3

Identify the due date and extension available for individuals.

Answer 3

Due Date: April 15 (payment regardless of extension). Extension: Form 4868–Automatic six months (October 15), paperwork only, must be requested by April 15

Question 4

Identify the various filing statuses.

Answer 4

Single; Married, filing jointly; Married, filing separately; Head of Household; Qualifying widow(er) with dependent child or Surviving spouse

Question 5

What are the criteria for filing single?

Answer 5

Unmarried or legally separate from spouse at the end of tax year, Does not qualify for another filing status.

Question 6

What are the criteria for filing married filing jointly?

Answer 6

At year-end of tax year: Married and living together as husband and wife; or Living together in a recognized common law marriage; or Married and living apart but not legally separated or divorced; Spouse dies during the tax year.

Question 7

What are the criteria for filing married filing separately?

Answer 7

At year-end of tax year: Married; and If one spouse wants to be responsible only for own tax; or If both spouses do not agree to file a joint return.

Question 8

What are the criteria for filing head of household?

Answer 8

Individual is not married, legally separated, or is married nd has lived apart from his/her spouse for the last six months of the year. Individual is not a “qualifying widower”. Individual is not a nonresident alien. Individual maintained a home that, for more than half the taxable year, is the principle residence of a: 1) Son or daughter who is a qualifying child or qualifies as the taxpayer’s dependent (qualifying relative); 2) A dependent relative who resides with the taxpayer; or 3) A dependent father or mother, regardless of whether they live with the taxpayer.

Question 9

What are the criteria for filing qualifying widow(er) (surviving spouse)?

Answer 9

Unmarried at end of tax year; and Surviving spouse must maintain a household, which for the entire taxable year was the principal place of abode for a son, stepson, daughter, or stepdaughter; and The surviving spouse is entitled to a dependency exemption for the son, daughter, etc. The taxpayer qualifies for this status for two years after year of death of spouse.

Question 10

Name the tests for claiming an exemption for a “qualifying child.” (CARES)

Answer 10

A taxpayer is entitled to an exemption for each qualifying child and/or qualifying relative. QUALIFYING CHILD: Close relative, Age limit (10/24) and younger than the taxpayer, Eliminte gross income test (exemption required), Support test changes.

Question 11

Name the tests for claiming an exemption for a “qualifying relative.” (CARES)

Answer 11

A taxpayer is entitled to an exemption for each qualifying child and/or qualifying relative. QUALIFYING RELATIVE: Support (over 50%) test, Under the personal exemption amount of (taxable) gross income test, Precludes dependent filing a joint tax return test, Only citizens (residents of USA/Canada or Mexico) test, Relative test, Taxpayer lives with individual for the whole year test.

Question 12

What are the requirements for the multiple support aggreement?

Answer 12

Two or more people together provide more than 50% of support, but no one contributes more than 50%. To claim the exemption, must provide more than 10% of support, and meet the other dependency tests. A multiple support declaration, Form 2120, must be filed.

Question 13

Define gross income.

Answer 13

Gross income includes all income from whatever source derived, unless specifically excluded.

Question 14

What are the four categories of individual income?

Answer 14

Categories of Individual Income: Ordinary (wages, salaries); Portfolio (dividends, interest); Passive (real estate investment and limited partnership income); Capital.

Question 15

Name some nontaxable fringe benefits (exclusions).

Answer 15

De minimis fringe benefit; Qualified tuition reduction; Qualified employee discounts; Employer paid accident, medical, and health insurance. Unless specifically excluded by law, the fringe is includible in gross income.

Question 16

Are life insurance premiums paid by an employer taxable to employee?

Answer 16

Premiums on the first $50,000 (face amount) of group term life insurance are not includible in gross income. Premiums paid for coverage above $50,000 should be included in gross income.

Question 17

Give some examples of exempt interest.

Answer 17

Exempt interest examples: State and local government bonds, Bonds of a US possession, Series EE (US Savings Bond) if used for higher education, Interest on Veterans Administration insurance.

Question 18

What is the tax treatment of unearned income of a child who falls under the “Kiddie tax” rules?

Answer 18

Net unearned income of a dependent child who falls under the “Kiddie tax” rules is taxed at his parents’ higher tax rate. Net unearned income = Child’s total unearned income less the child’s standard deduction of $950 (in 2012) (or investment expenses, if greater) less an additional $950 (which is generall taxed at the child’s rate of 10% or 15%).

Question 19

State the tax treatment of property settlements in a divorce.

Answer 19

For a property settlement in a divorce, the transferring spouse gets no deduction for payments made (or property transferred), and the payments are not includible in the gross income of the spouse receiving the payment or property.

Question 20

What are the requirements for alimony to be deductible by the paying former spouse and includible by the recipient?

Answer 20

Payments must be legally required pursuant to a written decree; Payments must be in cash or equivalent; Payments cannot extend beyond death of payee; Payments cannot be made to members of same household; No joint tax return filed. Before alimony is taxable by the recipient, any child support due must be paid.

Question 21

Describe the self-employment tax.

Answer 21

All net self-employment income is subject to the 2.9% Medicare tax, but only self-employment income up to $110,000 (in 2012) is subject to the 12.4% Social Security tax. An adjustment to income for one-half (e.g., 7.65% on up to $110,100 self-employment income for 2012) of self-employment tax (Medicare plus Social Security) paid.

Question 22

On what property do the uniform capitalization rules apply?

Answer 22

Real or tangible personal property produced by the taxpayer for use in his trade or business; Real or tangible personal property produced by the taxpayer for sale to customers (manufacturer’s inventory); Real or tangible personal property purchased by the taxpayer for resale (retailer’s inventory). Exception: The uniform capitalization rules do not apply to (retailer’s inventory) property purcahsed for resale if hte taxpayer’s gross receipts for the preceding three tax years do not exceed $10,000,000 annually.

Question 23

When are funds in a nondeductible IRA taxable?

Answer 23

Withdrawals from nondeductible IRAs are partially taxable. When withdrawn, amounts previously contributed (principal) are nontaxable. Any earnings on those contributions are taxable when withdrawn. A pro rata allocation is generally applied to the distribution to determine the taxable amount.

Question 24

What is the formula to determine the excludable portion of an annuity?

Answer 24

Excludable amount in current year = Investment in contract / Age factor (in months). Note: If the annuitant lives longer than the factor in months, further payments are fully taxable. If the annuitant dies before the factor payments are collected, the unrecovered portion of the investments is a miscellaneous itemized deduction on the annuitant’s final tax return (not subject to the two percent limitation).

Question 25

In premature distributions of an IRA, what are the exceptions to the penalty tax? (HIM DEAD)

Answer 25

Home buyer (first time): $10,000 max if used toward first home (within 120 days); Insurance (medical): Unemployed with 12 consecutive weeks of unemployment compensation; Self-employed (who are otherwise eligible for unemployment compensation); Medical expenses in excess of 7.5% of AGI; Disability; Education: College, tuition, books, fees, etc.; and, Death.

Question 26

How is rental income from a vacation house treated?

Answer 26

1. If rented fewer than 15 days: Treat as personal residence. 2. If rented 15 or more days and personal use is not more than 14 days or 10% of days rented, if greater: Treat as rental property. 3. If rented more than 15 days and personal use is the greater of 14 days or 10% of days rented: Allocate rental expenses to extent of rental income. If treated as personal, income is excluded and deductions for mortgage interest and taxes are reproted on Schedule A. Other expenses are not deductible. If the vacation property is treated as a rental property, the taxpayer reports income and deductions on Schedule E.

Question 27

Define passive activity. Give some examples of passive activities.

Answer 27

A passive activity is any activity in which the taxpayer does not materially participate. Rental activities, interests in limited partnerships, and S corporations are examples of passive activities.

Question 28

What is the tax treatment of nondeductible passive activity losses?

Answer 28

Nondeductible passive activity losses are unused passive activity losses that are held in suspension. Used to offset passive income in future years (indefinitely). Fully tax deductible in the year the property is disposed of (e.g., sold).

Question 29

What are the rules to determine taxable Social Security benefits?

Answer 29

Taxpayers are classified into five categories depending on the level of provisional income, which is defined as AGI plus tax-exempt interest plus 50% of Social Security benefits. Low income: No Social Security benefits are taxable. Lower midle income: Less than 50% of Social Security benefits are taxable. Middle income (over single $25,000/MFJ $32,000): 50% of Social Security benefits are taxable. Upper middle income: Between 50% and 85% of Social Security benefits are taxable. Upper income (over single $34,000/MFJ $44,000): 85% of Social Security benefits are taxable.

Question 30

Are scholarships and fellowships includible in gross income?

Answer 30

For a degree-seeking student, scholarships and fellowshipsare excludable up to the amounts spent on tuition, fees, books, and supplies. All remaining amounts are includible in gross income. For a nondegree-seeking student, all amounts are includible in gross income.

Question 31

What are the tests for foreign-earned income exclusion?

Answer 31

Tests for foreign-earned income exclusion: Bona fide residence test (an entire taxable year); Physical presence test (330 full days out of 12 consecutive months).

Question 32

List some nontaxable miscellaneous income items (exclusions).

Answer 32

Examples of nontaxable miscellaneous income items: Life insurance proceeds; Gifts and inheritances; Medicare benefits; Workers’ compensation; Personal (physical) injury or illness award; Accident insurance–premiums paid by taxpayer; Foreign-earned income exclusion.

Question 33

What is the tax treatment of capital gains/losses?

Answer 33

Net capital losses are deducted up to a maximum of $3,000 per year against non-capital income. Any excess can be carried forward. Capital gains are fully taxable (but at lower tax rates). Holding period: Short-term–one year or less; Long-term–more than one year.

Question 34

In general, how is the donee’s basis of a gift determined? How is the holding period determined?

Answer 34

In general, the donee’s basis of a gift is the same as the donor’s basis. If the sale is greater than the donor’s basis, then the gain is the difference between the donor’s basis and the sales price. If the sale is less than the FMV, the loss is the difference between the FMV at the date of the gift and the sales price. If the sale is at less than basis but greater than FMV, no gain or loss is recognized. The holding period includes the donor’s holding period unless basis becomes FMV, then holding period starts at date of gift.

Question 35

In general, how is the basis of inherited property determined? How is the holding period determined?

Answer 35

The basis of inherited property is the lower of the: 1. FMV at date of death OR 2. FMV at alternative lower valuation date (if elected), which is: Six months from date of death, or Disposal date (if disposed of less than six months from date of death). The holding period is automatically deemed long-term for all inherited property, regardless of how long the deceased owned the property.

Question 36

When is a gain not taxed? (HIDE IT)

Answer 36

Homeowner’s exclusion, Involuntary conversions, Divorced property settlement, Exchange of like-kind business/investment assets (tangible), Installment sale, Treasury and capital stock transactions (by corporation). Gains are not taxed when you can “Hide It.”

Question 37

Udenfy the major tax provisions of involuntary conversions of property?

Answer 37

Gain may be deferred if insurance proceeds are reinvested in property that is similar or related in serviceor use within two years for personal property or three years for business property. A realized gain exists when insurance proceeds are greater than the adjusted basis in the converted property. Note the difference between realized gain versus recognized gain: Gain not recognized if proceeds reinvested in qualified replacement property, Basis is cost of replacement property less any gain not recognized, Losses recognized and basis is replacement cost. Holding period includes period that original property was held.

Question 38

What is the exclusion amount on the recognition of gain on the sale of personal residence, provided the criteria for exclusion are met?

Answer 38

Gain exclusion for personal residence: $250,000 for single taxpayers, $500,000 for married taxpayers.

Question 39

Identify the criteria for the exclusion provision on the sale of personal residence.

Answer 39

Taxpayer must have owned and used the property as the principal residence for two years or more during the five-year period ending on the date of the sale or exchange. Period of non qualified use cause a portion of the gain to be taxable (sales/periods after 2008); Either spouse for a joint return must meet the ownership requirement, and both spouse must meet hte use requirement with respect to the property.; Taxpayers may be eligible for a partial (on a prorated basis) exclusion if the sale is due to a change in place of employment, health, or unforeseen circumstances, when claimed within the previous two years or fail to meet the ownership and use requirements.; No age requirement.; No rollover to another house is required.; Renewable, can be utilized more than one time.

Question 40

Name the criteria for a classification as a like-kind exchange.

Answer 40

Like-kind exchange criteria: Tangible real or personal property, and; Used in trade or business, or; Held for investment (except inventory, stock, and securities).

Question 41

In a like-kind exchange, what is the basis of the property received?

Answer 41

In a like-kind exchange, the basis of property received retains the basis of property given up. Basis of property given up + Any boot paid - Any boot received (at FMV) + Any gain recognized = Basis of property received. Recognize gain to the extent of the lower of the realized gain or the boot received.

Question 42

Identify the nondeductible losses. (WRAP)

Answer 42

Wash sale loss, Related party transactions, And, Personal loss. “Wrap” up these losses, because they are not deductible.

Question 43

What is the tax treatment given to wash sales?

Answer 43

Losses are disallowed if the same security is bought within 30 days before or after the sale. The disallowed loss increases the basis in the property (security). Gains are taxable.

Question 44

What is the tax treatment for sales to related parties?

Answer 44

No deduction is allowed for losses on sales to related parties. On a later resale, any gain recognized is reduced (but not below zero) by the previous disallowed loss.

Question 45

What are the corporate capital gain/loss rules for C Corporations?

Answer 45

Net capital gains (long-term and short-term): Corporate net capital gains are added to ordinary income and taxed at the regular tax rate; Section 11231 gains are entitled to capital gain treatment. Net capital losses (long-term and short-term): Corporate net capital losses are carried back three years and forward five years as short-term capital loss; They are deducted from capital or Section 1231 gains.

Question 46

Describe the employee and employer taxation of nonqualified employee stock options.

Answer 46

Employee Taxation: If there is a readily ascertainable value, the employee recognizes ordinary income in that amount in the year granted. If ther is no readily ascertainable value, the employee recognizes ordinary income based on the fair value of the stock purcashed less any amount paid for the option on the exercise date. Employer Taxation: The employer may deduct the value of the stock option as a business expense in the same year the employee recognizes ordinary income.

Question 47

Describe the employee and employer taxation of incertaive stock options (ISOs).

Answer 47

Employee Taxation: Generally, ISOs are not taxed as compensation. Basis of the stock is the exercise price plus any amount paid for the option. Generally, any gain or loss on the subsequent sale is capital. Employer Taxation: Generally, employers do not recevie a tax deduciton for ISOs.

Question 48

Describe the employee and employer taxation of employee stock purchase plans (ESPPs).

Answer 48

Employee Taxation: Generally, ESPPs are not taxed as compenstaion. Basis of the stock is the exercise price plus any amount paid for the option. Generally, any gain or loss on the subgsequent sale is capatal. Employer Taxation: Generally, employers do not receive a tax deduction for ESPPs.