R1 INDV TAX - Income 2 (M)

Question 1

Deductibility of Passive Activity Losses (PALs)

Answer 1

A net passive activity loss may not be deducted against wages, salaries, and other active income or against portfolio or capital gains income

Question 2

Nondeductible PALs

Answer 2

Carry forward without any time limit unused passive activity losses held in suspension
Suspended losses are used to offset passive income in future years
If still unused, suspended losses become fully tax deductible in the year the property is disposed of (sold)

Question 3

Mom and Pop Exception

Answer 3

Taxpayers may deduct up to $25,000 per year of net passive losses attributable to rental real estate annually if the individuals are actively participating/managing. The allowance is reduced by 50% of the excess of the taxpayer’s AGI over $100,000 and eliminated at $150,000

Question 4

Withdrawing Funds from IRA

Answer 4

Generally, retirement money cannot be withdrawn until the individual reaches the age of 59 1/2. They are taxable when withdrawn

Question 5

Taxation of IRA Distribution

Answer 5

When a person retires, the funds will be taxed as ordinary income when received

Question 6

Roth IRA

Answer 6

All qualified benefits received from a Roth IRA are nontaxable

Question 7

Traditional Nondeductible IRA

Answer 7

Benefits received are partially taxable
Principal - nontaxble
Accumulated earnings - taxable (when withdrawn)

Question 8

Penalty Tax

Answer 8

Generally, a premature distribution is subject to a 10% penalty tax (on top of any increase in regular income tax) if the individual has not met an exception

Question 9

Exceptions to Penalty Tax (HIMDED)

Answer 9

Home buyer (1st time)
Insurance (medical)
Medical expenses in excess of 10% AGI
Disability (not temporary)
Education
Death

Question 10

Effective Tax Rate

Answer 10

The net rate a taxpayer pays if all forms of taxes are included and divided by taxable income

Question 11

Marginal Tax Rate

Answer 11

The percentage of tax applied to your income for each tax bracket in which you qualify

Question 12

Taxable Fringe Benefits (non-statutory)

Answer 12

The fair market value of a fringe benefit not specifically excluded by law is includable in income

Question 13

Partially Taxable Fringe Benefits - Portion of Life Insurance Proceeds

Answer 13

Premiums paid by an employer on a group-term life insurance policy covering his employees are not income to the employees up to the cost of the first $50,000 of coverage per employee (nondiscriminatory plans only). Premiums above the first $50,000 of coverage are tax deductible income to the recipient and normally included in W-2 wages

Question 14

Qualified Stock Options

Answer 14

Incentive Stock Options (ISO)

Employee Stock Purchase Plans (ESPP)

Question 15

Incentive Stock Options

Answer 15

Usually granted to a key employee and is a right to purchase the stock at a discount. It is not taxable as compensation and is considered a taxable gain/loss when sold

Question 16

Nonqualified Stock Options

Answer 16

Taxed when granted if the option has a readily available ascertainable value when granted. Otherwise, it is taxed when it is exercised. Employers deduct in same year that employee reports income