R1 - Individual Taxation: Part 1 Flashcards
Qualifying Widow(er) (Surviving spouse) with dependent child
Can use standard deduction and rates (not the exemption for deceased spouse) for each of two years following the death of their spouse if he/she doesn’t remarry.
Filling Jointly: RULE
Must be MARRIED at the “end” of the year.
Exception: If they are married but are legally separated.
Subsequent years after death of spouse (no children), filling status?
Single
Qualifying Widower: REQUIREMENTS
- Spouse died in one of the two previous year (no remarry)
- Has a child dependent
- Child lived in the taxpayer’s household all year
- Paid 50% of cost of home
- Taxpayer could’ve filled a joint return in year spouse died
Married filling separate return:
Other spouse may get a personal exemption if the other spouse had:
- No gross income
- Wasn’t claimed by someone else
Qualifying Child: REQUIREMENTS
C: Close relative
A: Age limit
-19 or 24 full-time student
R: Residence
-same home for 6 months
E: Eliminate Gross Income
-see support test
S: Support test changes
-modified to determine whether child provided >50% of own support
Qualifying Relative:
S: Support Test
-taxpayer must have provided >50% of support to claim as dependent
U: Under exemption amount
-can’t claim someone if their Gross Income is <4,050 (exemption amount)
P: Precludes dependent filling a join return (no exemption for wife filling jointly)
O: only US citizens
R: relative
T: taxpayer lives with individual for entire year
Head of Household:
- Dependent children living with taxpayer
- No longer qualifies for married status or surviving spouse (3 years after death)
- Maintains/pays for more than half of principal residence of dependent for “entire” taxable year (doesn’t have to live with them)
-grandma moves to
assisted living facility
Gross Income: Includes
- Common stock (dividends) received for providing services (recognize at FMV)
- Interest income from treasury bonds
- Unemployment comp
Alimony: REQUIREMENTS
- Cash
- Payments can’t extend past death of payee
- Must be required
- Can’t be paid to member of same houshold
- Must be designated as Alimony
- No joint tax return
Excluded from Gross Wage:
- Workers comp
- Interest earned on municipal bonds
- Inheritance (not taxable)
- Child support (not taxable)
- Property settlements (not taxable)
Interest Earned on Series EE Bonds:
- Must be used to pay for tuition, and other higher education expenses.
- Owner of Bonds must be the sole owner
- Taxpayer must be 24 or older
- Married files a joint return
- Certain income requirements
Interest income on US/State obligations:
Generally taxable:
- Federal tax refund
- Treasury Certificates
Not generally taxable:
-State gov’t obligations
Social Security benefits included in Gross Income:
- Based on threshold
- 85% of benefits is maximum amount of benefits that may be included in gross income
Accruable Expense:
Services have been received/performed but not invoiced/paid by the end of the period
Capital Loss Maximum
Amount
$3,000
When a taxpayer elects to amortize a premium on a bond that yields taxable interest, what happens to the basis in the bond?
It is decreased.
When do taxpayers have to recognize gains/losses of stock traded on NYSE?
Trade date not settlement date
Retirement money: Withdrawing from IRA
Must be 59.5 years old.
If not:
-10% penalty for
withdrawal on top of
normal “marginal tax rate”
Note:
-Apply penalty to total
amount of withdrawal (not
“net of tax”)
Divorce: Payments Received (alimony, property settlements, child support)
If payments made don’t equal total amount due, child support is covered first, the rest is considered alimony (taxable)
Example: -15,000 payments -6,000 in child support -6,000 is first applied to child support -remaining 9,000 is alimony and taxable
Retirement Premature Distribution Penalty Excpetions:
H: First time home buyer
I: Insurance medical
M: Medical expenses in
excess of 10% of AGI (or
7.5% if 65 or older)
D: Disability
E: Education
A: and
D; DeathFunds are considered child support only if:
- Specific amount is fixed or contingent on child’s status (reaching a certain age)
- Paid solely fro support of minor children
- Payable my decree, instrument or agreement
Group Life insurance:
First $50,000 is non-taxable amounts exceeding this is taxable based on IRS tables
Purchasing Annuity/Investment
-Discounted over the #months of expected recovery
=Amount of cost recovery and is not taxable
*Number of month effected in current year
then
Payment received “ - “ this amount
=amount included in gross income.
Life Insurance Proceeds:
Discount over #years expected to receive payment. (cost recovery)
Subtract this amount from payment each year
=Taxable amount
Jury Duty Fees:
Deducted from Gross Income to arrive at AGI
Timing of revenue recognition for tax purposes:
Cash:
-recognized in the period
the revenue is “actually” or
“constructively” received
Accrual:
-follows GAAP
Only interest income not taxable:
From state/local gov’t bonds
Life insurance proceeds from death of an officer when the corporation is the owner/beneficiary of the policy:
Proceeds are not taxable
Tax Benefit Rule “Section 111”
Itemized deduction recovered in a subsequent year is included in income the year recovered.
Recovery is limited to the amount previously deducted
Non-accountable plans: Employers providing expense reimbursements
Any amount received by an employee is reported as part of gross income
Rental Properties:
Used for personal use for more than 14 days and rented for less than 15 days:
- Any net loss from rental
will be disallowed
-All expenses are prorated
between personal/rental
-Depreciation is prorated
as wellNet Earnings from Self-Employment:
Gross Business Receipts
-(business expenses)
- COGS
- Rent Expense
- Liability Insurance
Premiums
Cash basis taxpayers: Interest Deduction
Deduct in year paid or year it applies to, whichever is later.
Uniform Capitalization: Deduct vs Capitalization of costs
Capitalize:
- Offsite storage
- DM and DL
- Indirect Costs (overhead)
-utilities, warehousing,
rents
Deduct:
- Marketing costs
- Selling/Admin
- Research
- Officer comp
Being paid with cash and property:
Both are included in taxable income.
- Use FV of property received
What is subject to self-employment tax?
-Guaranteed payments to a partnership for services rendered
Self-Employment Tax: CALCULATION
Business Income
*92.35% (7.65% adjustment
to income for S/E)
=Taxable Income
- 15.3% (2.9% Medicare and
12. 4% Social Security)
=S/E Tax
-This allows a sole
proprietor to deduct the
employer portion of taxes
Uniform Capitalization: Definition
Applies to real/tangible personal property that a taxpayer plans to:
- Produce for their use
(machine tools used in
manufacturing facility) - Sale to customers
(manufacturing)
- Acquired for resale
(retailers)
-applies only if
taxpayer's average gross
receipts for the preceding
3 years exceeds
$10,000,000
General Rule:
- Don’t capitalize period
costs
Rental Income: RULE
Security Deposits held in segregated account, not available to be applied to last month’s rent is not included in Gross Income (liability to the taxpayer)
Rental Income: CALCULATION
Gross Rental Income \+Prepaid Rental Income \+Rent Cancellation Pay \+Improvements in lieu of rent -Rental Expenses
=Net Rental Income(loss)
Salaries Paid Wife/Husband in own business:
Don’t include in Gross Income (considered a “draw”)
Foreign Travel and Business Deductions:
Can only deduct:
- Direct educational expenses (cost of course)
- Daily expenses
Schedule C Items:
Business Income/Loss:
-Only items related to running the business itself should be on this schedule (no personal)
Passive Activities: Losses
Can’t deduct losses from these events:
- Rental
- Limited partnerships
- S-Corps
- Tax Shelters
Exception:
- Passive losses can be
deducted against:
- Wages, salaries (active
income), portfolio or
capital gains incomes
-Only deductible to the extent of income from all passive activities
Passive Activities: EXCEPTION 1
Mom and Pop: "Real Estate"
-$25,000 and active
-can deduct up to
$25,000 attributable to
rental real estate if they
are actively participating
and own at least 10% of
property
Carry-forward:
-Excess can be carried forward indefinitely as “unused passive activity loss”. Estate can qualify for the 2 years after decedent’s death if descendant was active.
Phase Out:
- $25,000 allowance is reduced by 50% of excess of the taxpayer’s AGI > $100,000 and is completely eliminated once AGI is $150,000
Passive Losses: What to deduct??
Losses may only be deducted to the “total amount of passive income”
Example:
Passive Income = 15,000
Passive Loss = 35,000
Current year deduction = 15,000
20,000 remaining is carried forward to be used in subsequent periods.
Suspended Losses:
Used to offset passive income in future years.
If unused, they become fully deductible in the year the property is disposed of (sold)
Allocating Suspended Losses:
Allocate to -> activities with losses -> based on each activities percentage of total loss
Example:
x = (30,000)
y = (50,000)
z = 20,000 income
Total = (60,000) loss
Allocation: 60,000 x (30,000/50,000)
=22,500 to x
3 Factors Limiting Losses:
Tax Basis:
- Taxpayer’s investment in asset adjusted fro income/debt
- Losses not deductible because of these are carried forward until more tax basis is created to absorb loss
At-risk basis:
- If taxpayer has sufficient tax basis to cover a loss then the loss must not be greater than the “at risk” amount. Taxpayer’s economic risk in the activity.
Losses that have sufficient tax basis but not “at risk” basis is carried forward until more “at risk” basis is created or activity is sold.
Passive Activity loss:
- Could have enough tax and at risk basis but still not be able to deduct a loss against ordinary income.
Passive Activity: EXCEPTION 2
Real Estate Professional:
Can fully deduct rental losses if:
- > 50% of taxpayer’s personal services are performed in real estate
- 750 hours in real estate services during the year
PALS: NOTE
Can only be deducted up to passive activity income.
Rule limiting the allow-ability of passive activity losses and credits applies to:
Personal Service Corporations
Guaranteed Payments made by partnerships to partners are:
- Deductible on Form 1065 to arrive to partnership income
- Included on schedule K-1 to be taxed as ordinary income to the partners
- Partner must include on his personal income tax return “his distributive share” of each separate “pass-through” item
Flow-Through Business Entities:
- Partnership: reports income on Form 1065
- SCorp: reports income on Form 1120S
- Sole Proprietorship: reports income on Form 1040 and Schedule C
- CCorp: separate taxpaying entity that reports income on Form 1120
- These entities must provide owners/shareholder with schedule K-1 with income information to be reported on Form 1040
Ordinary losses and their restrictions:
Ordinary loss deduction is restricted to taxpayer’s AGI
SCorps: NOTE
Shareholders must include on their personal income tax return their distributive share of each separate “pass through” item.
Shareholders are taxed on these items whether they have been distributed to them during the year.
SCorps: Items that are separately reported on Schedule K-1 of 1120S
-Gain/Loss on sale of collectibles
SCorp: Calculating Gross Income for individual with share in company:
- (ownership% * operating income)
=Gross Income
- Each shareholder records their pro-rata share of the SCorps Taxable income is her or her Gross income
-Example:
5 shareholders
$75000 Taxable Income
for SCorp
-$15,000 in each
shareholders gross
income
When a trust is created but the Grantor doesn’t retain enjoyment of corpus or have the ability to dispose of the trust income: What happens?
- Trust is considered “separate entity for tax purposes”
- Has to file a 1041
- Issue a schedule K-1 to beneficiary of income
SCorp: What do distributions do to shareholders basis in the SCorp?
Decreases it.
Nonqualified Stock Option:
Employee must recognize as ordinary income the value of the option if traded on an established market.
Option price on market * # of shares
Employee Stock Purchase Plan: RULE
- Option exercise price may not be less than the “lesser” of 85% of the FMV of the stock when granted or exercised
- Option cannot be exercised more than 27 months after the grant date
- Once exercised must be held at least 2 years after grant date and 1 year after exercise date
- Must remain employee from date option is granted until 3 months after it is exercised
- No employee can acquire more than 25,000 of stock per year
- Plan must be written/approved by shareholders
- Can’t grant options to employees with 5% or more of ownership
- Must include full-time employees other than highly compensated and those with <2 years of employment
Non-qualifying stock option:
Bargain Element is included in W-2.
Exercise an option for $10 per share when the stock is worth $25 per share.
=$15 bargain option (recognized on the W2)
