R1 Federal Taxation of Individuals

Question 1

When is a vacation residence considered for business use?

Answer 1

If it has been rented 15 days and more.. Then you can report the rental income and claim the maintenance and utilities as expenses. Also if it has been used for personal reasons for more than 14 days in you cannot claim net loss from any rental property even if you have rented it for 15 days and more.

10% rule on Personal use

You can claim excess loss as offset to other AGI like wages etc.

You can only claim net loss of max $ 25k per year if property has been used exclusively for rent

Question 2

Even if an income is not considered gains from business (only from a hobby) do you still report it in your Gross income?

Answer 2

YES, but there will be no deduction for expenses. Only the cash received is reported as part of Gross Income

Question 3

What is the allowed deductible for capital gain property given to a public charity?

Answer 3

Appreciated property held > 1 year is considered capital gain property. Deduction would be FMV at the time of Donation or 30% of Taxpayer’s AGI , whichever is LOWER

Question 4

What is Casualty Loss?

Answer 4

Casualty loss = Adjusted Basis/ FMV before Disaster - Value of the Property after the disaster - Insurance Recovery- $ 100 per Casualty - 10% of Taxpayer’s AGI. Note you can claim Casualty Loss as an Itemized Deduction if its a Federally Declared Disaster. Also, the Net loss should not exceed the adjusted basis of the property.

Question 5

What is the deduction for Cash Charitable contributions?

Answer 5

It is the actual cash donated and any allowed carryover from last year provided the total does not exceed 60% of Taxpayer’s AGI. Also note that charitable contributions to political party and foreign charities are not deductible.

Excess can be claimed for 5 years.

Comparison to the 60% of AGI is the current year and py carryover.

Question 6

What is the allowable Gambling losses?

Answer 6

It is limited to the gambling winnings , if no winnings then no loss can be claimed. Also all winnings should form part of Gross Income and losses to the extent of winnings are reported as ITEMIZED deductions

Question 7

What are the allowable deductions for Personal residence not used for rental or business?

Answer 7

No deductions for utilities and insurance but can claim itemized deductions for property taxes and mortgage interest on Schedule A 1040

Question 8

What is Guaranteed payments to Partners?

Answer 8

They are allowable tax deduction to the partnership, reported separately on the individual partner’s Schedule K-1, and then included on the partner’s individual tax return on Schedule C subject to self employment tax and federal tax. They are paid to partners for services provided or for the use of capital, without regard to partnership income or profit and loss sharing ratios

Question 9

Deductible Contribution to the Traditional IRA

Answer 9

That means you deduct it from your Gross income as adjustments then its not Taxed. so when you withdraw them you will be taxed as ordinary income regardless of the age. if you withdraw it BEFORE 59 1/2 year old, it will be subject to an additional 10% penalty tax

Marginal tax rate is used for IRA contributions when withdrawn

Distributions will be taxed proprotionately principal and earnings.. compute the taxable portion - deductible contributions and earnings.

Question 10

What is the basic concepts of Charitable contributions being an itemized deductions?

Answer 10

Contributions to charitable entities (including churches, local art museum, hospital thrift shops and state universities) are deductible. If charged to a credit card, deductibility is on the year the charge was made regardless of when it was paid to the CC company. Political contributions and contributions to Foreign Charities are not deductible.

Question 11

When is Home Equity Debt deductible?

Answer 11

It is only deductible when used to buy, build, or substantially improve the taxpayer’s home that secures the loan.

Question 12

What is the allowable amount to be Gross Income for a qualifying relative and he can be claimed as dependent.

Answer 12

he should make 5,050 or less in 2024

Question 13

A child aged > 24 years old can still qualify as dependent as Qualifying Relative?

Answer 13

Yes, if his Gross income is not more than the allowable amount for a qualifying relative which is $ 5,050 for 2024

Question 14

When are Refunds of state income tax part of Gross Income?

Answer 14

Includable in gross income if during the prior year the taxpayer itemized deductions. Note the taxable refunds is up to the extent of the excess of Itemized deduction over SD.

if SD , the refunds is not includable in the Gross Income and will be exempt.

Question 15

How are Awards and Prizes taxed?

Answer 15

Generally, FMV of Prizes and Awards is taxable income.

BUT IT WILL BE EXCLUDED FROM INCOME IF
1. The winner is selected for the award without entering into a contest (i.e., without any action on the individual’s part)

And

2. Assigns the award directly to a governmental unit or charitable organization AFTERWARDS

Question 16

How are scholarships taxed?

Answer 16

Scholarships are nontaxable for degree-seeking students Including MASTERS DEGREE to the extent that the proceeds are spent on tuition, fees, books, and supplies.

Room and Board not included.

Question 17

How does Non Cash Income work?

Answer 17

Trade of services - Accountant or Painter example.

The amount of income to be reported is the FMV of the property or services RECEIVED. Since the accountant received services valued at $550, the accountant must report income of $550.

Question 18

What is a Non Accountable Plan?

Answer 18

Employee gets monthly amount from Employer.
Under a nonaccountable plan (i.e., expenses are not reported to the employer), athat Amount is reported as part of employee’s W-2 Wage (and subject to income tax withholding requirements). The GROSS AMOUNT RECEIVED is reported as income REGARDLESS OF WHETHER EMPLOYEE SENDS BACK REFUND/ EXCESS.

Non accountable plan is non deductible to employers because of missing supports so it is taxable to the employee

Question 19

WHAT IS Qualified Traditional Defined Contribution or Qualified Non ROTH Retirement Plan?
QTDC/ QNRRP

Answer 19

When it says Traditional, its NON ROTH, Non ROTH is not taxable upon contributions , it will be taxed upon withdrawals as ordinary income.

Question 20

Interest earned on Series EE bonds issued after 1989 , does it qualify for EXCLUSION?

Answer 20

YES, under the following conditions:

1. Interest is used to pay tuition and fees for the taxpayer, spouse, or dependent enrolled in HIGHER EDUCATION (Qualfiied HE)
2. Interest must be reduced by QUALIFIED tax free scholarships that are exempt from tax and other nontaxable payments received for educational expenses (other than gifts and inheritances).

One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the:

Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).

The taxpayer/ purchaser is over age 24 when issued and is used to pay for higher education, reduced by tax-free scholarships, of the taxpayer, spouse, or dependents.

Married filing separately cannot claim exclusions

Question 21

Salaries Wages and Fringe Benefits

Answer 21

Question 22

How is Common stock as payment for service rendered being taxed on the employee of the company?

Answer 22

FMV of the stock should be reported as ordinary income on Employee’s Tax return. Any dividends received on that stock is also Taxable

Question 23

Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $13,550, which included $5,500 of state income taxes paid last year.

Robbe’s itemized deduction amount exceeded the standard deduction available to single taxpayers for last year by $1,150.

In the current year, Robbe received a $1,500 state tax refund relating to the prior year.

What is the proper treatment of the state tax refund?

Answer 23

TAX BENEFIT RULE:

An itemized deduction recovered in a subsequent year is included in income in the year recovered.

In this situation, the taxpayer only received a tax benefit of $1,150, the amount by which total itemized deductions exceeded the standard deduction in the prior year.

Therefore only $1,150 of the $1,500 state tax refund is included in taxable income for the current year.

Question 24

ALIMONY NUANCE

Answer 24

The amount of alimony ordered by the court does not determine the amount of alimony that is considered gross income for tax purposes. It might be lesser if paying spouse is having financial difficulty then whatever was paid in CASH or EQUIVALENT will be that amount.

Property etc are not CASH equivalent so they dont qualify as ALIMONY

Cash equivalent can be payment for CC Bills, Tuition Fees

Question 25

What Tax Rate is used for Withdrawals of retirement plan?

Answer 25

Marginal Tax Rate

Question 26

How is prepayment of Interest expense being Taxed?

Answer 26

Prepaid interest must be allocated over the period of the loan, even for a cash basis taxpayer.

Question 27

Non taxable limit for reimbursement of Educational expenses by employer

Answer 27

Up to $ 5,250, in excess of this is TAXABLE to employee

Question 28

Non taxable limit for Scholarships

Answer 28

Scholarships for a degree-seeking student are NON TAXABLE only up to amounts actually spent on tuition, fees, books, and supplies.

Amounts used to pay for other items (such as ROOM AND BOARD) or retained by the recipient would be taxable.

Question 29

Qualifying Relative Rule Nuance

Answer 29

Qualifying Relative Rule- if relative there is no requirement to live with the TP or live with TP for over half of the year?

But if not relative should be Whole year.

Question 30

Who gets to claim the child as dependent in a divorced parents

Answer 30

Who ever has the custody for over half of the year will claim the child as dependent REGARDLESS of who pays more than half of the cost.

Custodial parent as named on the divorce decree . if not named on the decree , IRS gives that status to the parent with whom the child spent more nights during the year

IF Actual is equal custody regardless of the DECREE, then the parent with HIGHER AGI.

Question 31

Qualifying child rule on AGE

Answer 31

AGE should be under 19 or under 24 but full time college student and lives with TP at least part of each of the 5 months of the year

Question 32

Disability insurance proceeds

Answer 32

if you paid the premiums, then its not taxable to you.

but if its paid by your employer its taxable to you.

Question 33

MUTUAL FUNDS TAXABLE?

Answer 33

NO..

Question 34

A nonbusiness bad debt must be totally worthless to be deductible. A nonbusiness bad debt is treated as a short-term capital loss in the year the debt becomes totally worthless.

Question 35

Federal Tax refunds

Answer 35

Are not Taxable. But the interest are taaxable

Question 36

The full 7k deduction per tp is allowable for ira contribution if none of them are active participants in a qualified retirement plan

Answer 36

Yes no AGI Phaseouts