R1

Question 1

Taxable interest

Answer 1

Taxable interest includes amounts received from general
investment accounts as well as interest on federal obligations.

Interest received from state and municipal bonds is not taxable.

**Interest income on a federal tax refund is taxable but refund itself is not taxed. **

Question 2

ALIMONY

Answer 2

• Alimony includes only payments received in cash or its equivalent (e.g., the payment of bills on behalf of the ex-spouse).
• Alimony received pursuant to a divorce executed on or before December 31, 2018, is included in gross income of the recipient.
  The alimony received is treated as income while child support would not.

Funds that qualify as child support only if
1. specific amount is fixed or is contingent on the child’s status (ex: reaching a certain age)
2. paid solely for the support of minor children
3. payable by decree, instrument or agreement

Question 3

Parking fees

Answer 3

Upto $300 per month excluded for an employee for 2023.
Anything above that is taxable.

Question 4

Employee’s educational expenses by Employer

Answer 4

Upto $5,250 of payments made by an employer on behalf of an employee’s educational expenses are excluded from gross income for both Graduate and Undergraduate level education.

Question 5

Group term insurance policy premiums

Answer 5

Premiums paid by an employer on up to $50,000 of coverage for an employee are excludable from gross income.

Question 6

UNICAP
Uniform Capitalization Rules

Answer 6

The uniform capitalization rules do not apply if the taxpayer’s average gross receipts for the preceding three tax years do not exceed $29 million

(2023).capitalization of certain costs related to inventory
1. Direct materials
2. Direct labor
3. Indirect overhead
capitalization of certain costs related to factory overhead
1. Warehousing costs
2. Quality control
3. taxes excluding income taxes

Costs that are not required to be expensed and not capitalized
1. Distribution - Selling expense
2. Marketing - Selling expense
3. Office maintanance - General and administrative expense
4. Research

**Uniform capitalization rules apply to the following:
(1) real or tangible personal property produced by the taxpayer for use in his or her trade or business;
(2) real or tangible personal property produced by the taxpayer for sale to his or her customers; and (3) real or tangible personal property acquired by the taxpayer for resale, provided the taxpayer’s annual average gross receipts for the preceding three
years exceeds $29 million (2023). **

Question 7

QBI
Qualified Business Income

Answer 7

QBI is a deduction from adjusted gross income separate from the standard deduction and itemized deductions
1.Deduction taken from adjusted gross income
2. which is below the line
3. Not a part of Itemized deductions
4. Not an alternative to standard deduction
5. Not an adjustment to arrive at adjusted gross income
6. A single taxpayer with taxable income before the QBI deduction of $232,100 income from a specified service trade or business (SSTB)
7. BUSINESS NEEDS TO BE IN THE U.S

Calculation if TI is above the threshold

* Combined QBI deductions =
STEP 1
**GREATER OF **
1. 50% of w-2 wages
or
25% of w-2 wages + 2.5% of unadjusted basis of qualified property

2. 20% of the taxpayer’s taxable income - Net capital gain **

Step 2:
**Lesser of **
* Step 1 amount
* 20% Qualified business income

Question 8

what is the sec 199A QBI deduction taxable income limitations?

Answer 8

• Single and all other tax payers
  ==== $182,100 -$232,100
• Married filing jointly
  ===** $ 364,200 - $464,200**

Calculation of 199A QBI Deductions:-
Lesser of
1. Combined QBI deductions (20% of QBI)
; OR
2. 20% of the taxpayers TI in excess of net capital gain
20% (TI - net capital gain)

Question 9

QBI - Not Aggregating qualifying businesses

Answer 9

1. Calculate Taxable Income before QBI deductions
* Flow through business income
(+)
Salary and Gauaranteed payments
=AGI
-MFJ standard deductions of 27,700
=TI before QBI deductions

Rules for calculating QBI deductions after calculating TI before QBI deductions :_

1. For taxpayers with TI at or below 182,100 (single ) or 364,200 to 464,200 (MFJ)

QBI or SSTB = Ful 20% QBI

2. For Taxpyers with TI income above 232,100 (single) or 464,200 MFJ
   * If QTB = Full W-2 wage and property limitation applies
   * If SSTB = No QBI deduction allowed

Question 10

Sec 199A Overview

Answer 10

• 20% deduction for eligible ‘‘flow-through’’ U.S entities with qualifying business income QBI.
• Individuals, partnerships, S-corps, LLC’s and trusts
• must determine if the business is QTB or SSTB.
• SSTB : health, law, accounting, acturial science, performing arts, consulting, athletics, financial services and many others
• QTB: Any business other than SSTB.
• Deduction taken below the line or from AGI

Question 11

Calculate the taxpayer’s qualified business income deduction for a qualified trade or business:

Filing status: Single
Taxable income: $100,000
Net capital gains: $0
Qualified business income (QBI): $30,000
W-2 wages: $10,000

Answer 11

$30,000 QBI × 20% = $6,000.
W-2 wage and property limits do not apply to single taxpayers with taxable income before the QBI deduction below the
taxable income threshold of $182,100 (2023).

Question 12

Passive Activity losses of an individual taxpayer can generally used to offset :-

only against passive activity income

Answer 12

• Passive activity losses (PALs) can only be offset against passive
  activity income, not active or portfolio income.
• Passive activities are trade or business activities in which the taxpayer does not materially participate.
• Rental real estate is a passive activity unless the taxpayer is a real estate professional. which means it would become a active income if he is a real -estate prof.

Question 13

which would be treated as passive activity income under the passive activity loss rules?

Ans

**Income from a taxpayer’s limited partnership interests. **

Answer 13

All income and loss items are sorted into three categories under
the passive activity loss rules. Under these rules, income or loss is either considered active, passive, or portfolio.

• Income from a limited partnership interest is automatically
  considered passive income.
• Commissions received from selling a vacation property are
  considered active income according to the passive activity loss rules.
• Dividend income from a taxpayer’s investment portfolio is
  considered portfolio income under the passive activity loss rules.
• The taxpayer materially participated as a real estate
  professional, the rental real estate income is considered to be active,

Question 14

Suspended Passive activity losses

Answer 14

Suspended losses can be carried forward but not back until utilized

Question 15

what does a person need to be qualified for a real estate professional?

* To be qualified for ACTIVE INCOME under rental income

Answer 15

• more than 50% of the personal property services performed in the year are in real property business
  **and **
• more than 750 hours of services towards real property business during the year.

Question 16

what is the deduction allowed for a taxpayer in RENTAL HOUSE under the MOM and POP Exception?

The allowance is reduced by 50% of the amount of modified AGI in ecxess of $100,000 so that the allowance is fully phased out when the modified AGI reached $150,000

Answer 16

Taxpayers are allowed to deduct $25,000 of the rental loss if the Adjusted gross income EXCLUDING PASSIVE ACTIVITY INCOME AND LOSS are $100,000 or less.

**Which means we can deduct 25,000 if the AGI excuding passive income or loss is less than 100,000. **

But if the AGI excluding passive income or loss is more than 100,000. Then the amount which is the difference of AGI and threshold will be multiplied by 50% and that final 50% will be taken as deduction.

AGI - threshold ;= xxxx( excess)
excess * 50% = ALLOWANCE /DEDUCTION

for example if the AGI is $140,000:-

AGI - Threshold = 140,000-100,000 = 40,000
Deduction =(40,000 * 50% )=20,000
Standard deduction = 25,000
therefore, 25,000 -20,000 = 5000 which is going to be actually deductible.

Question 17

Prize money awarded

Answer 17

Generally FMV of the prizes and awards is taxable income

Exclusions or exceptions when not taxable
1. Winner is selected for the award without entering the contest
(without any action from individuals side)
2. Assigning the award directly to a governmental unit or charitable organization.

Question 18

IRA

Answer 18

• Traditional IRA’s == withdrawls from such IRA for which the contributions were deducted are taxed as ordinary income.
• Withdrawls prior to 59.5 years old is subject to 10% penalty tax.
• Qualified Roth IRA distribution is 100% nontaxable. (age needs to be above 59.5 and should have made 5 years or more contributiond before distribution)

Question 19

Inheritances

Answer 19

• Not taxable

Question 20

Capital loss on investments

Answer 20

• Maximum deduction allowed is $3,000

Question 21

Qualifying Child - CARES

Answer 21

• close relative ,descendent, sibling etc
• under 19 years of age 24 and full time student ( at educational institution for any part of 5 months during the tax year)
• Can be living away from home while at college
• live with the taxpayer for more than half of the year
• no limit on gross income
• Citizens of US , CANADA AND Mexico

Question 22

Qualifying relative

Answer 22

• Should not contribute more than half of taxpayers gross income
• Taxpayer must provide more than half of the dependents support
• Gross income limit of the dependent should be less than $4,000
• Only citizens of US, Canada and Mexico
• Relative - all of the QC plus parents, Grandparents, aunts, uncles OR
• Taxpayer lives with the dependent for the whole year.

Question 23

Self-Employment taxes

Answer 23

• Guaranteed payments from services rendered to a partnership are reasonable compensation paid to a partner for services rendered or use of capital without regard to his ratio of income. Therefore, Earned compensation is subject to SE taxes.
• Payments not guaranteed are merely another way to distribute partnership profits
• The ordinary income reported from an S corp is taxable to the individual on their own individual income tax return but is not subject to SE tax.

Question 24

Unemployment compensation plan

Answer 24

• wages
• state unemployment compensation
• Employer’s unemployment compensation

Question 25

Head of Household

Answer 25

• .A single taxpayer who provides more than one-half of the
  support for a qualifying relative and maintains a home that is the principal residence of the qualifying relative qualifies for head-of-household filing status. A dependent parent is not required to live with the taxpayer, provided the taxpayer contributes more than
  half the cost of maintaining a home that is the principal residence of the parent for the entire year.
• A single taxpayer who maintains a home that is the principal
  residence for a dependent child qualifies for head-of-household filing status. A full-time student under age 24 who does not provide more than half of his or her own support is a qualifying dependent child. A college student living at a university is considered temporarily away from home. The parent’s home is considered the child’s principal
  residence.
• A married taxpayer who has lived apart from his or her spouse
  for the last six months of the year and maintains a household where a dependent child lives for more than half the year qualifies for head-of-household filing status.

Question 26

Surviving spouse or qualifying widower

Answer 26

A taxpayer qualifies for surviving spouse, or qualifying widow(er),
filing status for the two years following the year the taxpayer’s spouse dies if the taxpayer maintains a household where a dependent child lives for the entire year

Question 27

Under a $150,000 insurance policy on her deceased father’s life, May
Green is to receive $12,000 per year for 15 years.
Of the $12,000 received in the current year, the amount subject to income tax is:

Answer 27

Death Benefit = 1,50,000

Amount received in the current year = 12,000
Less : Return of principal
(1,50,000/15 years) =10,000

Taxable interest = 2000

Question 28

Cash basis taxpayer

Answer 28

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

Question 29

Dr. Merry, a self-employed dentist, incurred the following expenses:
* Investment expenses = 700
* Custodial fees for Dr. Merry’s self-employed retirement plan =40
* Work uniforms for Dr. Merry and Dr. Merry’s employees = 320
* Subscriptions for periodicals used in the waiting room =110
* Dental education seminar =1,300
* What is the amount of expenses the doctor can deduct as business expenses on Schedule C, Profit or Loss from Business?

Answer 29

* Business expenses include work uniforms for the taxpayer and taxpayer’s employees, subscriptions for periodicals for patient use, and continuing education expenses.

320+110+1300 = 1730

• Business expenses do not include investment expenses.
• Business expenses do not include custodial fees for selfemployed retirement accounts.
• Business expenses include subscriptions for periodicals for
  patient use.

Question 30

On December 1 of the prior year, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30 of the current year. Michaels paid the entire interest of $12,000 on December 1 of the prior year. What amount of interest was deductible on Michaels’ current year income tax return?

Answer 30

Michaels may deduct $11,000 on her current year return.
Rule: Interest that is prepaid is deductible in the tax year to which, and to the extent that the interest is allocable―i.e., as it accrues. This allocation is required even by cash basis taxpayers.
Term of loan = 12 months (December 1, prior year − November 30, current year)

Interest paid − $12,000 on December 1 of the prior year.
Allocated interest per month = $12,000 ÷ 12 = $1,000/month
Interest deductible in current year = $1,000 × 11 = $11,000

Question 31

ANNUITY

Answer 31

1. Original investments
   +
2. Expected value (pm* Tenure of the annuity in months )
3. Exclusion ratio = step1/ 2
4. Included ratio = 100- excluded
5. Total payments received in the CY = 12* PM payment
6. Taxable annuity payments = Step 5 * Step 4

Question 32

Social Security Benefits

Answer 32

Taxable amount depends on taxpayer’s filing status and modified AGI

Calculation
1. Taxable interest income
2. Taxable IRA distributions
3. Taxable annuity payments
4. Sum of 1, 2 and 3 ===AGI excluding Social security benefits
5. + Tax exempt interest income
6. + One half of social security benefits
7. Steps 4 through 6 === Modified AGI

Taxable social security benefits == LESSER OF
1. 50% Social security benefits
2. 50% of Modified AGI i.e (Mod. AGI - Deductions)* 50%

Deductions here are as follows
1. Married filing jointly = 32,000
2. Single, HOH, SS , MFS etc = 25,000

Question 33

Employer contributions and earnings on it

Answer 33

Employer contributions to a qualified traditional defined
contribution retirement plan and earnings on the amounts contributed are not taxable
income to the employee until distributed.