R1P3/4- Ind.Tax Flashcards
Characterize the following carryover: Passive Activity Loss
No carryback
Can carry forward indefinitely
What income can passive losses offset on a 1040?
Only passive income such as rental income or limited partnership income.
Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)
Are interest and dividends active or passive income?
Neither. They are portfolio income.
When are life insurance premiums of an employee includable in income?
Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.
Which personal insurance premiums are not deductible as medical expenses on Schedule A?
Accident or disability insurance premiums are not deductible.
Are workman’s compensation insurance benefits taxable?
No - similar to an award for damage to make a person whole.
How is minor income taxed at a parent’s rate calculated (AKA kiddie tax)?
Child's unearned income - early withdrawal penalties - $950.00 - Greater than $950 or child's itemized deduction related to unearned income = Amount taxed at parents' rate
What investment interest is never deductible?
Investment interest expense on tax-free securities is not deductible.
Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony
Alimony IS taxable.
Child support and divorce property settlements are NOT taxable.
How are Net Operating Losses (NOLs) utilized?
Can be carried back 2 years
If any left, can be carried forward 20 years.
Which farming costs related to land are Deductible?
Deductible: Costs incurred to PRESERVE soil/water
Which farming costs related to land are Non-Deductible?
- Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)
Which depreciation table is used for personal tangible property related to farming?
MACRS 150
Is Roth IRA contributions Nontaxable?
- All Qualified benefits received are NOT deductible (Nontaxable)
Which itemized deductions are not subject to Phaseout based on income or other factors?
Medical
Casualty
Gambling
Investment Interest Expense
How much social security income can be taxed for individuals in higher income brackets?
Up to 85%
What are the 3 Nontaxable Income Exemptions?
- Social Security
- Tax-exempt Interest Income
(State& Municipal interest ) - Tax-exempt Scholarships
Which damages awarded in lawsuits are taxable?
Any payments for punitive damages ARE taxable.
Which damages awarded in lawsuits are NOT taxable?
Payments made to make you whole are NOT taxable
(i.e. to pay for losses of property, body parts or earning ability)
Interest Income element on deferred payout arrangement is Taxable or not?
Fully Taxable
Premium Payments for Accident/Medical & Health Benefits are Excluded from the employee’s Income when?
- The Employer paid the insurance premiums
What is it called when Employees have the ability to elect to have part of their salary deposited pretax into a flexible account?
- Flexible Spending Arrangement
In a Flexible Spending Arrangement, When do Funds Forfeit when not used?
- Not used within 2 1/2 months after Year-end
OR - Within a time period (usually 6 months)
Premiums received for opening a Savings account Taxable?
YES
Interest paid by the Federal or State Gov’t for late payment of a Tax Refund Taxable?
YES
Interest on Series EE Savings Bonds is Tax-Exempt when?
It is used to pay for higher Educ. of the taxpayer, spouse or dependents.
At what value are Cash & Property Dividends taxed at?
- Cash= Amount Received
- Property= Fair Market Value
What Dividend/Distribution items are Exempt from Gross Income?
- Return of Capital
- Stock Split
- Stock Dividend
(unless cash or other property option) - Life Insurance Dividend
What is Capital Gain Distribution?
- Distributions by a Corp that has No Earnings & Profits
& - Shareholder has recovered their entire basis
State or Local Tax refunds Itemized in Prior Year then?
- Is Taxable
State or Local Tax refunds; Standard Deduction used in Prior Year then?
- Nontaxable state or local refund
- Only Interest is Taxable
- 1040EZ form
To be Deemed Alimony under Tax Law:
- Payments must be legally required pursuant to a written divorce
- Payments must be in Cash or Equivalent
- Payments can’t extend beyond the death of the payee-spouse
Child Support
- Non-taxable (receiving spouse)
- Payment applies First to Child Support
Business Expenses that are Deductible
- COGS
- Salaries & Commissions paid to others
- Business meal & Entertainment expenses at 50%
- Interest Expense on business loans
- Bad Debts actually written off for Accrual basis taxpayer only.
Business Expenses that are NOT Deductible:
- Salaries paid to the sole proprietor
- Federal Income tax
- Bad Debt expense of a Cash Basis taxpayer
- Personal Portion of: Health Insurance of a Sole Proprietor.
(Reported as a Adjustment to AGI)
What are the 2 Net Business Income Taxes?
- Income Tax
- Federal Self-Employment (S/E) Tax
What Items under Uniform Capitalization Rules are required to be Capitalized?
- Direct Materials
- Direct Labor
- Factory Overhead:
~ Warehousing, storage, engineering, repackaging, scrap, etc
What Items under Uniform Capitalization Rules are required NOT to be Capitalized?
- Selling, General & Administrative
- Research & Development
- Marketing
- Officer Compensation
Cost to Cost Method to determine percentage is calculated as?
- Ratio of the Total Cumulative Costs incurred to date at the end of the tax yr divided by the total expected costs to be incurred under the Contract
Gross Income Recognition Calculation; to calculate amount of income that will be recognized under the contract in a given tax year?
- Multiply the Ratio (from Cost to Cost Method) By the total contract price
& - Subtract the amount of income that was recognized in prior years for the Contract.
Farming Cash Basis Inventories that are NOT considered?
Expense Inventory
Ex- Produce &Livestock
Farming Accrual Method is Required for?
- Certain Corporate & Partnerships Farmers
& - All Farming Tax Shelters
Farming Accrual Method Inventories Must be?
- Used & Maintained
Is Traditional Non-Deductible IRA Taxable?
- Principal: NonTaxable
- Accumulated Earnings: Taxable when Withdrawn
What % is charged when a premature distribution is taken from an IRA?
- Penalty tax of 10% + Regular Income Tax
Exceptions to Penalty Tax but still subject to ordinary Income Tax when used to pay?
- 1st Time Home Buyer
- Medical Insurance & Expenses
- Disability
- Education
- Death
Annuities: Live longer then Actuarial Payout Period
- If lives longer then # Months then further payments are Fully Taxable
Annuities: Death before Full Recovery
- If Dies before the # payments are collected then:
Un-recovered Portion is a Misc. itemized deduction &
not subject to 2% of AGI floor.
When a vacation home is Rented LESS then 15 Days then the Income is?
- Rental Income is Excluded from Income
When a vacation home is Rented MORE then 15 Days then the Income is?
- Expenses must be Prorated betwn personal & rental use
- Rental Use expenses are deductible only to the extent of rental income
A Net Passive Activity may NOT be Deducted against?
- Wages, Salaries & other active income or against portfolio
If Non-Deductible PALs property are unused, suspended losses become fully tax deductible?
- In the year the property is disposed of.
Mom & Pop Exceptions for ‘Active’ Net Passive Losses May deduct up to ?
- $25,000 per year
How much social security income can be taxed for individuals in low income brackets?
- NO Social Benefits are taxable
- Income below $25K, Married: $32K
Prizes & Awards is Taxable Income at what value?
- Fair Market Value
Prizes & Awards when winner has not entered into the contest & assigns winnings to Gov’t or Charity then Income is?
- Not Taxable
Gambling Winnings are included in?
- Gross Income
Gambling Losses may be deducted to the extent of?
- Gambling Winnings.
Punitive Damages are Fully taxable as ordinary income when it is in context with?
- In a Business context or loss of personal reputation
& - Received in a personal injury case
State law has limited Wrongful Death awards to?
- Punitive Damages only
Degree-Seeking Student Grants & Scholarships are excludable only up to?
- Amounts actually spent on Tuition, fees, books & Supplies.
- NOT on Room & Board
Grant & Scholarships are excludable when?
- The Grant s made to a Degree-Seeking Student
- No Services are to be performed as a condition to receiving the grant.
Non-taxable Misc. Items:
- Life Insurance Proceeds
- Gifts & inheritance
- Medicare Benefits
- Worker’s Compensation
- Personal injury or illness award
- Accident Insurance- Premiums Paid by Taxpayer
When does the Holding Period begin for Employee Taxation WITH Readily Ascertainable Value?
- Begins at Exercise Date
When is Employee Taxation WITH Readily Ascertainable Value Taxable?
- Taxable at Grant Date
When does the Employer deduct the value of the Stock Option?
- In the Same Year that the Employer Reports Income.
Under what accounting basis are individual tax returns prepared?
Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.
When are scholarships not taxable?
When they are not in return for services rendered,
AND
The money is used only for tuition and books
Note: Scholarships for room and board are includable in income.
What interest income is tax free?
State & municipal bond interest
US EE Savings Bond interest (note: HH bond interest is taxable)
Which dividend income is tax free?
S-corporation (actually distributions)
Life insurance
Is unemployment compensation taxable?
Yes.
Adoption expenses - Are they deductible?
NO, they are not deductible.
However tax benefits are available through the adoption CREDIT.
Allowable amount of Gambling Losses are deductible in what Schedule & what kind of deduction?
- Sch. A as an Itemized Deduction
When does the Holding Period begin for Employee Taxation WITHOUT Readily Ascertainable Value?
- Begins at Exercise Date
When is Employee Taxation WITHOUT Readily Ascertainable Value Taxable?
- Taxable at Exercise Date
What 2 Conditions have to be met for a Real Estate Professional to be deemed to have material participation?
- More then 50% of the taxpayer’s personal services during the year
& - Taxpayer performs more than 750 hrs of services.
If deemed to have Material Participation & not considered passive, The taxpayer can fully deduct losses from Rental Activities against?
- Other income.
Under the Uniform Capitalization Rules Applicable to Property acquired for Resale do not apply when Avg. Gross receipts do not Exceed?
-$10,000,000 annually
What is included in Rental Income for a Landlord?
- Money received for canceling a Lease
- First & Last Month’s Rent
- DO NOT include Security Deposits
What is the Maximum amount that can be deducted from AGI for a ‘Capital Loss’?
- $3,000 in each year.
- Loss retains its character (STCL or LTCL).
What will happen to the Bond’s Basis when the Taxpayer amortizes the Premium on the Bond that yields taxable interest?
- The Bond’s Basis is reduced by the Amortization
For a Cash Basis Taxpayer, Gain or Loss on a yr-end sale of listed stock arises on what date?
- Trade Date
When a Taxpayer withdraws from Trad. IRA before the age of 59.5, what is the Total Tax Liability % rates?
- Marginal Tax Rate + 10% Penalty Tax
