R1 - Individual Tax - Income

Question 1

When should a cash basis taxpayer report income?

Answer 1

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

Question 2

Identify the due date and extension available for individuals.

Answer 2

Due date: April 15 Extension: Form 4868 - Automatic six months

Question 3

Identify the various filing statuses.

Answer 3

~ Single ~ Married, filing jointly ~ Married, filing separately ~ Head of household ~Qualifying widow(er) with dependent child

Question 4

State the basic tax formula.

Answer 4

Gross Income Less Deductions FOR AGI = Adjusted Gross Income Less Deductions FROM AGI (greater of itemized deductions or standard deduction) Less Exemptions = Taxable Income x Tax Rate = Gross tax liability Less Credits and prepayments Tax due or refund

Question 5

What are the criteria for filing single?

Answer 5

~ Unmarried or legally separated from spouse at the end of the 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.

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 and 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 taxalbe 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 principle place of abode of 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 (19/24) and younger than the taxpayer Residency and filing requirement Eliminate gross income test (exemption required) Support test changes

Question 11

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

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 the individual for the whole year test

Question 12

What are the requirements for a multiple support agreement?

Answer 12

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

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 U.S. possession ~ Series EE (U.S. 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 generally 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 recipent?

Answer 20

~ Payments must be legally required pursuant to a written decree ~ Payments must be in cash ~ 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 $110,000 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 purchased for resale if 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 (principle) 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 payemnts are fully taxable. If the annuitant dies before the factor payemnts 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