R1 Individual tax - Income pt 2

Question 1

Give 4 examples of exempt interest:

Answer 1

1. State & local government bonds
2. Bonds of a US possession
3. Series EE (US Saving bond) if used for higher education
4. Interest on Veteran Administration insurance

Question 2

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

Answer 2

Net unearned income of a dependent child who falls under the kiddie tax rules is taxed at his parent’s higher tax rate.

Net unearned income = Child’s total unearned income less the child’s standard deduction of $1,000 (in 2014) (or investment expenses, if greater) less an additional $1,000 (which is generally taxed at the child’s rate of 10% or 15%)

Question 3

State the tax treatment of property settlement in a divorce.

Answer 3

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

Question 4

What are the 5 requirements for alimony to be deductible by the paying former spouse and includable by the recipient?

Answer 4

1. Payments must be legally required pursuant to a written decree.
2. Payments must be in cash or its equivalent.
3. Payments cannot extend beyond death of payee
4. Payments cannot be made to members of same household
5. No joint tax return filed

before alimony is taxable by the recipient, any child support due must be paid.

Question 5

Describe the self-employment tax

Answer 5

1. All net self-employment income is subject to the 2.9% Medicare tax, but only self-employment income up to $117,000 (in 2014) is subject to the 12.4% social security tax
2. An adjustment to income for one-half (e.g. 7.65% on up to $117,000 self-employment income for 2014) of self-employment tax (Medicare plus Social Security) paid.

Question 6

On what property do the uniform capitalization rules apply?

Answer 6

1. Real or TPP produced by the taxpayer for use in his trade or business
2. Real or TPP produced by the taxpayer for sale to customers (mfg inv)
3. Real or TPP purchased by the TP for resale (retailer’s inventory)

Exception: the uniform capitalization rules do not apply to (retailer’s inv) property purchased for resale if the TP’s gross receipts for the preceding three tax years do not exceed $10,000,000 annually.

Question 7

When are funds in a nondeductible IRA taxable?

Answer 7

Withdrawal 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 8

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

Answer 8

Excludable Amount in CY = Investment in contract / Age factor (in month)

Note: if the annuitant lives longer than the factor in months, further payments are fully taxable. If the annuity 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 2% limitation).

Question 9

In premature distribution of an IRA, what are the exception to the penalty tax?

HIM DEAD

Answer 9

Home buyer (first time): $10K max if used forward first home (within 120 days)

Insurance (medical): a) Unemployed with 12 consecutive weeks of unemployment compensation. b) Self-employed (who are otherwise eligible for unemployment compensation)

Medical expenses in excess of 10% of AGI (or 7.5% if 65 or over)

Disability

Education: College, tuition, books, fees, etc

And

Death

Question 10

How is rental income from a vacation house treated?

Answer 10

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: Allocated rental expense to extent of rental income

If treated as personal income is excluded and deduction for mortgage interest and taxes are reported on Schedule A. Other expenses are not deductible

If the vacation property is treated as rental property, the taxpayer reports income and deduction on Sch E.