R1 Flashcards
Individual taxation
Date to file ( and pay) for an individual taxpayer:
April 15th (unless automatic 6 month extension is taken)
Head of household requirements
Not a nonresident alien. Maintained home >1/2 year for qualifying child/relative, dependent who resides w/ individual or mother or father( regardless of where they live)
Widower (surviving spouse) requirements
Must maintain household for ENTIRE yr for dependent child. For 2 years after yr of death. (File married in 1st yr)
Qualifying child test (CARES)
Close Relative
Age limit (19/24) & younger than taxpayer
Residency (same principal residence for > 1/2 yr) and filing requirement (child can’t file unless refund only)
Eliminate gross income test (GI IRRELEVANT if exemption claimed)
Support test changes (child does not contribute >1/2 of own support)
Qualifying relative test (SUPORT)
Support test (taxpayer must provide >50% to dependent)
Under the personal exemption amount (dependent GI must be under)
Precludes dependent filing a joint return (can’t file MFJ)
Only citizens (dependent must be resident of US, Canada or Mexico)
Relative test
OR
Taxpayer lives with individual for whole yr (nonrelatives include cousins and foster parents)
Nontaxable income for qualifying relative test
Social security, tax-exempt interest income, tax-exempt scholarships
Multiple support agreement
-Two or more ppl TOGETHER provide >50% of support
BUT no 1 contributes >50%
-Person must provide at least 10% support and meet dependency test
When does cash basis taxpayer report income?
Income is actually OR constructively received. In cash OR property.
Four categories of individual income
Ordinary, Portfolio, Passive, Capital
Nontaxable fringe benefits:
De minimus
Meals and lodging @ employer convenience
Qualified tuition reduction (partially taxable if >$5,250)
Qualified employee discounts
Employer paid accident, medical & health insurance (amt. paid out/ received is taxable)
-Employer matches 401k contribution
Worker’s compensation
Amt of taxable life insurance premiums paid by an employer:
Amt over $50,000 paid (calculated not entire amt)
*interest income on deferred payouts fully taxable)
Examples of exempt interest:
State and local government bonds (obligations)
Bonds of US possession (guam, puerto rico)
Series EE (if used for higher education exp)
Interest on Veterans admin insurance
Series EE (US savings bonds) tax exempt when:
- Used for higher education exp for taxpayer,spouse or dependents.
- Taxpayer is over 24 when bond is issued
- Income requirements
State & local tax refunds
- Non-taxable when standard deduction is used in prior year
- Taxable to amount deducted in prior yr (NOT refund) if itemized deductions were taken
- Interest on return is taxable
Is Unemployment compensation included in GI?
Yes! Even when provided by employer
Tax treatment for divorce property settlements and child support:
Nontaxable (not included in GI) to extent payments are not considered alimony
Requirements for alimony to be deducted/ included in GI:
- legally pursuant to a written degree
- pymts in cash or cash equivalent (NOT property)
- pymts can’t extend beyond death of payee
- no joint tax return
When are funds in a nondeductible IRA taxable?
- Withdrawals partially taxable
- principal=non taxable, earnings= taxable when withdrawn
- pro rate allocation to determine taxable amt
Penalty tax:
Premature distribution of IRA funds (before age 59 1/2) subject to marginal (regular) tax rate + 10% penalty
Exception to penalty tax: (HIMDEAD)
Home buyer (1st time) up to $10,000 Insurance (medical) Medical expenses in excess of 10% AGI Disability (permanent/indefinite) Education And Death
Excludable portion of annuity:
Investment amt in contract/ age factor in months (given years* 12)
- pymts beyond projected life are fully taxable
- unrecovered pymts are misc itmz deduction
Taxable social security benefits:
Based off of provisional income (AGI + tax-exempt interest + 1/2 social security benefits)
Low income- No benefits taxable
High income- 85% (max amt) taxable
Tests for foreign-earned income exclusion:
- Bona fide residence test (be resident of foreign country for entire taxable year)
- Physical presence test (330 days out of year)
When are scholarships not included in GI?
- degree seeking student
- no services performed/ not made in consideration
- only for tuition, fees, books& supplies (NOT room and board)
Nontaxable miscellaneous income items (exclusions)
- Life insurance proceeds
- Gifts and inheritances
- Medicare benefits
- Worker’s compensation
- Accident insurance recieved (paid by taxpayer)
- foreign earned income exclusion
Self employment tax
- All income subject to 2.9% Medicare tax
- income up to $127,200 is subject to 12.4% social security tax
- Actual SE tax calculated on 92.35% of income (100-7.65 [so employer portion taken out] )
Uniform capitalization rules:
-Results in increase to taxable income
-real/tangible property:
produced in trade/business
manufacturer’s inventory
retailer’s inventory (when 3 yrs gross recepit >10,000,000)
Carryback/ Carryforward net loss for business
Carryback- 2 years
Carryforward- 20 years
(20/20) net operating loss
Rental income treatment (rented <15 days)
Treat as personal residence
- rental income excluded from income
- mortgage and taxes deducted normally
- depreciation,utilities and repairs non deductible
Rental income treatment (rented >15 days & personal use is greater of 14 days or 10% of days rented)
Allocate rental expenses to extent of rental income
Rental income treatment (rented >15 days & personal use is less than 14 days or 10% of days rented)
Treat as a rental propery
Passive activity (definition and examples)
Any activity in which the taxpayer does not materially participate
-Rental activities (even if material participation) , interests in limited partnerships & S corps
Tax treatment for nondeductible passive activity LOSSES
=unused passive activity losses held in suspension
- used to offset passive income in future years (indefinitely)
- fully taxable in yr property is sold
Exceptions to passive activity loss rules
Mom and pop exception
-up to $25,000 deductible if active participation Active NOT material participation
-reduced by 50% when AGI> 100,000 lost when AGI>150,000
Real estate professional (person/agent)
-can fully deduct if >750 hours
Net capital loss deduction
3,000 max deduction for ST or LT
- joint return treated as 1 person
- limited to income before personal exemptions
Net capital loss carryover rules
Carry forward indefinitely, maintain ST/LT character
Tax treatment of guaranteed payments to parners
Distributive deductions to partners via K-1 and taxable income to partner who receives pymt
What is reported on a K-1?
- Ordinary income (+recapture and unearned)
- Used in partnerships & S corportations
- Flow-through income/losses NOT considered ordinary
- Each partner/ shareholder files K-1 for distributive share of income/ losses
Fiduciary accounting
- Used in trusts and estates
- amt taxed are determined by classification of receipts and disbursements as principal (corpus) or income
Employee taxation of nonqualified employee stock options
- when readily ascertainable value, employee recognizes ordinary income for value of option
- when no readily ascertainable value, employee recognizes ordinary income based on FV of stock purchased less any amt paid for option on exercise date
Employeer taxation of nonqualified employee stock options
can deduct value of stock option as a business exp in same year employee recognizes ordinary income
Readily ascertainable value=
-option is traded on established market
Employee taxation of incentive stock options (ISO)
- recognizes ordinary income in amt in yr /exercised granted
- Not taxed as compensation
- stock basis= exercise price+ amt paid for option
- G/L recognized on subsequent sale as capital
Two types of qualified options
- Incentive stock options (ISO)- key employee
- Employee stock purchase plans (ESPP)- all employees
Employee taxation of employee stock purchase plans (ESPP)
- Not taxed as compensation
- stock basis= exercise price + amt paid for option
- G/L recognized on subsequent sale as capital
Employer taxation of qualified options
No tax deduction bc not considered compensation
When do cash basis taxpayers deduct interest paid:
Later of: yr paid or yr to which the interest relates
Nondeductible Schedule C (sole proprietorship) expenses:
- Salaries paid to sole proprietor
- Interest expense
- Federal/state/local income tax
- Bad debt expense
- Charitable contributions
Formula to find accrual & cash base taxable income: (BASE)
Beginning A/R
Add-sales (accrual)
Subtract- cash collections (cash)
Ending A/R
At-Risk Basis=
Taxpayer’s economic risk in the activity
-Losses deductible against future income generated from the same activity
Passive activity loss limitations (suspended loss)
- Losses can be carried forward indefinitely but NOT carried back
- Losses are fully tax deductible in yr sold
Trust distributions tax treatment:
- Deductible by the trust
- Taxable to the beneficiaries (recipients)
Individual deduction for partnership ordinary losses is limited to:
Partner basis + At-Risk amt
-Same for shareholders of S corp
Where is trust income reported
Form 1041 with a schedule K-1 issued to beneficiary
Partner ordinary loss deduction=
Limited to partner basis and any at risk amts
Rule limiting the allowability of passive activity losses applies to:
Personal Service Corporations
Tax treatment for sale of personal residence:
Partially taxable
-Exclusion from gain for qualified single taxpayer is $250,000
Life insurance premiums:
- Included in Income, taxable
- Ratio of premium >$50,000 coverage is taxable
Traditional Deductible IRA distributions
- Fully taxable
- 10% penalty tax
Roth IRA distributions
Nontaxable
