REG 1

Question 1

What are the general requirements for an individual to file a tax return?

Answer 1

A taxpayer must file a return if his or her income is equal to or greater than the sum of:

a. the personal excemption, plus
b. the regular standard deduction, plus
c. the additional standard deduction amount for taxpayers age 65 or older or blind.

Question 2

What are the requirements to file Head of Household?

Answer 2

1. Cannot be married, or is legally separated, or is married and has lived apart from the spouse for the last six months of the year as of the close of the taxable year.
2. Cannot be a “qualifying widow(er).”
3. Cannot be a nonresident alien.
4. Maintains a household for more than half the taxable year is the principal residence of:
   a. a son or daughter (includes legally adopted children, stepchildren, and decedents).
   b. A mother or father, except they do not have to live with the taxpayer, however the taxpayer must provide over half the cost of maintaining their principal residence for the entire year.
   c. Dependent relatives, including parents, grandparents, brothers, sisters, aunts, uncles, nephews, and nieces. Other than the parents, the dependent relative must live with the taxpayer.

Question 3

What are the requirements to file Head of Household?

Answer 3

1. Cannot be married, or is legally separated, or is married and has lived apart from the spouse for the last six months of the year as of the close of the taxable year.
2. Cannot be a “qualifying widow(er).”
3. Cannot be a nonresident alien.
4. Maintains a household for more than half the taxable year is the principal residence of:
   a. a son or daughter (includes legally adopted children, stepchildren, and descedents)
   b. A mother or father, except they do not have to live with the taxpayer, however the taxpayer must provide over half the cost of maintaining their principal residence for the entire year.
   c. Dependent relatives, including parents, grandparents, brothers, sisters, aunts, uncles, nephews, and nieces. Other than the parents, the dependent relative must live with the taxpayer.

Question 4

What is the personal exemption amount for 2013?

Answer 4

$3,900

Question 5

Personal exemptions for dependents?

Answer 5

Persons eligible to be claimed as dependents on another’s tax return will not be allowed a personal exemption on their own returns.

Question 6

What two tests must be met for a taxpayer to claim a personal exemption for their spouse when filing ‘Married Filing Separately’?

Answer 6

1. The taxpayer’s spouse has no gross income

2. The taxpayer’s spouse was not claimed as a dependent of another taxpayer.

Question 7

There is a phase-out of personal and dependency exemptions. What is the phase-out reduction and to which AGI limits does it apply?

Answer 7

The phase-out reduces exemptions by 2% for every $2,500 or portion thereof ($1,250 for MFS) by which AGI exceeds:

MFJ: $300,000
HOH: $275,000
Single: $250,000
MFS: $150,000

Question 8

What are the requirements to claim a dependency exemption for a ‘Qualifying Child’?

Answer 8

1. Close Relative Test: the child must be the taxpayer’s son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendent of any of these.
2. Age Limit: Generally, a child must be younger than the taxpayer, and under age 19 (or 24 if a full-time student). There is no age limit for an individual who is deemed totally and permanently disabled at any time during the tax year.
3. Residency and Filing Requirements: a child must have the same principal residence as the taxpayer for more than half the year. Furthermore, the child cannot file a joint tax return for the year.
4. Eliminate Gross Income Test: the gross income test does not apply to a qualifying child, however the taxpayer must claim an exemption for the child.
5. Support Test: the child must not have contributed more than one-half of his or her own support.

Question 9

What are the requirements to claim a dependency exemption for a ‘Qualifying Relative’?

Answer 9

1. Support Test: The taxpayer must have provided more than one-half of the support of the person. Support means the actual expenses incurred by or on behalf of the dependent. The dependent’s social security and state welfare payments are included in the dependent’s total support.
2. Under Exemption Amount of (Taxable) Gross Income: A person may not be claimed as a dependent unless the dependent’s gross income is less than the exemption amount ($3,900 for 2013). Nontaxable income includes social security, tax-exempt interest income, and tax-exempt scholarships.
3. Precludes Dependent from Filing a Joint Return: Married children may be claimed as dependents provided they do not file joint returns with their spouses (except to claim a refund of all taxes paid) and provided they satisfy all other requirements for dependency.
4. Only Citizens of the United States or Residents of the United States, Mexico, or Canada.
5. Relative: Children, grandchildren, parents, grandparents, brothers, sisters, aunts and uncles, nieces and nephews can be claimed as dependents. Foster parents and cousins must live with the taxpayer for the entire year.
6. Taxpayer Lives with the Individual (if Non-relative) for the Whole Year: A non-relative member of a household may be claimed as a dependent, provided the taxpayer’s relationship with that person does not violate local law. The non-relative MUST live with the taxpayer for the entire year.

Question 10

What is ordinary income?

Answer 10

Ordinary income includes salaries and wages, state and local tax refunds, alimony, IRA and pension income, self-employment income, unemployment compensation, social security, prizes, the taxable portion of scholarships and fellowships, gambling income, and anything else not deemed passive, portfolio, or capital.

Question 11

What is portfolio income?

Answer 11

Portfolio income includes income a taxpayer would earn on his portfolio of assets, such as interest and dividends.

Question 12

What is passive income?

Answer 12

Passive income generally refers to income from an activity in which the taxpayer did not “materially participate.”

Question 13

What is capital income?

Answer 13

Capital income refers to income generated from the sale of any asset property.

Question 14

How are fringe benefits taxed?

Answer 14

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

Question 15

Life Insurance Proceeds are partially taxable fringe benefits. What portion is taxable?

Answer 15

Premiums paid by an employer on a group-term life insurance policy covering his employees above $50,000 are taxable to the recipient and normally included in W-2 wages.

Question 16

What portion of employer-paid education expenses are excludable from gross income?

Answer 16

Up to $5,250 may be excluded from gross income of payments made by employer on behalf of an employee’s educational expenses.

Question 17

What types of interest income are tax-exempt?

Answer 17

1. State and local government bonds/obligations
2. Bonds of a US possession
3. Series EE Savings Bonds (exceptions apply)
4. Interest on Veterans Administration Insurance

Question 18

For Series EE Savings Bond interest to be exempt, what 4 stipulations must be met?

Answer 18

1. Used to pay for higher education of the taxpayer, spouse, or dependents.
2. There is taxpayer or joint ownership (spouse).
3. The taxpayer is over age 24 when issued.
4. The bonds are acquired after 1989.

Question 19

How do you calculate the net unearned income of a child for kiddie tax purposes?

Answer 19

Net unearned income is calculated by taking the child’s total unearned income (from interest, dividends, rents, royalties, etc) and subtracting $2,000: the child’s allowable $1,000 standard deduction plus an additional $1,000.

Although the income in excess of $2,000 is taxed at the parent’s marginal tax rate, it is nonetheless included on the child’s tax return.

Question 20

What is the new medicare tax for 2013?

Answer 20

Starting in 2013, certain unearned income is subject to a new 3.8% Medicare Tax.

The tax is levied on the lesser of:

1. the taxpayer’s net investment income; or
2. the excess of MAGI for the tax year over the threshold amount of $200,000 ($250,000 MFJ and $125,000 MFS).

Question 21

When are state and local tax refunds nontaxable?

Answer 21

The receipt of a state or local income tax refund in a subsequent year is not taxable if the taxes paid did not result in a tax benefit in the prior year. (must have claimed standard deduction in prior year)

Question 22

What types of payments are deemed alimony?

Answer 22

1. Payments must be legally required pursuant to a written divorce agreement;
2. Payments must be in cash (or its equivalent)
3. Payments cannot extend beyond the death of the payee-spouse;
4. Payments cannot be made to members of the same household;
5. Payments must not be designated as anything other than alimony; and
6. The spouses may not file a joint return.

Question 23

When are property settlements nontaxable?

Answer 23

If a divorce settlement provides for a lump-sum payment or property settlement by a spouse, that spouse gets no deduction for payments made, and the payments are not includable in gross income of the spouse receiving the payment.

Question 24

What are the NOL carryback/carryforward rules?

Answer 24

2-year carryback

20-year carryforward

Question 25

What types of property do Uniform Capitalization Rules apply to?

Answer 25

1. Real or tangible personal property produced by the taxpayer for use in his or her trade or business.
2. Real or tangible personal property produced by the taxpayer for sale to his or her customers (inventory).
3. Real or tangible personal property acquired by the taxpayer for resale (given the taxpayer’s average gross receipts for the three preceding years is greater than $10,000,000 annually).

Question 26

Under Uniform Capitalization Rules, what types of costs are required to be capitalized?

Answer 26

Direct materials, direct labor, and applicable indirect costs (utilities, repairs, maintenance, indirect labor, rents, storage, depreciation and amortization, insurance, pension contributions, engineering and design, repackaging, spoilage, scrap, and administrative supplies.

Question 27

Under Uniform Capitalization Rules, what types of costs are NOT required to be capitalized?

Answer 27

Selling, advertising, and marketing expenses, certain general and administrative expenses, research, and officer compensation.

Question 28

What is the definition of a long-term contract?

Answer 28

A long-term contract is generally defined as a contract that is incomplete at the end of a tax year in which it was started, and relates to the manufacture, installation, building, or construction of real or personal property.

Question 29

What tax accounting method is required for non-exempt long-term contracts?

Answer 29

Unless an exemption exists for a taxpayer or contract, long-term contracts must be accounted for using the percentage-of-completion method to determine taxable income for a particular contract.

Question 30

For a small contractor to be exempt from the percentage-of-completion method, what are the rules?

Answer 30

Projects are expected to last no more than two years and are performed by a taxpayer who has average annual gross receipts not exceeding $10 million for the three years that precede the tax year in question.

Question 31

How do you calculate gross profit for a farming business?

Answer 31

Gross Profit:

Inventory @ End of Year
+ Sales Proceeds
- Inventory @ Beginning of Year
- Inventory Purchases

Question 32

How do you calculate the gain or loss on the disposition of property?

Answer 32

Amount Realized
- Adjusted Basis of Assets Sold
= Gain or Loss Realized

Question 33

Generally, what is a minimum age an individual can begin withdrawing retirement?

Answer 33

59 1/2

Question 34

What is a required minimum distribution age for IRAs?

Answer 34

70 1/2

Question 35

What is the penalty for early distribution of an IRA?

Answer 35

10%

Question 36

What are the exceptions to the premature IRA distribution penalty?

Answer 36

1. First time homebuyer (up to $10,000)
2. Medical insurance (if unemployed or self-employed)
3. Medical expenses in excess of 10% of AGI
4. Disability
5. Education
6. Death

Question 37

What is the penalty for excess IRA contributions?

Answer 37

Excess contributions to the plan are subject to a cumulative 6% excise tax each year until the excess is corrected.

Question 38

When is rental income excluded from income?

Answer 38

If a vacation home is rented less than 15 days per year, it is treated as a personal residence. Income is excluded and mortgage interest/real estate taxes are deductible on Schedule A.

Question 39

When must rental expenses be prorated between Schedule A and Schedule E?

Answer 39

If the residence is rented for more than 15 days and is used for personal purposes for the greater of

1. more than 14 days, or
2. more than 10% of the rental days

it is treated as a personal/rental residence. Expenses must be prorated between personal and rental use. Rental use expenses are deductible only to the extent of rental use income.

Question 40

What is the definition of a “real estate professional” as far as passive vs. material activity is concerned?

Answer 40

1. More than 50% of the taxpayer’s personal services during the year are performed in real property businesses; and
2. The taxpayer performs more than 750 hours of services in real property businesses during the year.

Please note it is generally rental real estate activity that is considered to be passive (even if the taxpayer materially participates in the activity) unless one of the two exceptions applies.

Question 41

What is the foreign-earned income exclusion?

Answer 41

Taxpayers working abroad may exclude from gross income up to $97,600 (2013) of their foreign-earned income.

Question 42

What two tests must be satisfied in order to qualify for the foreign-earned income exclusion?

Answer 42

1. The taxpayer must have been a bona fide resident of a foreign country for an entire taxable year.
2. The taxpayer must have been physically present in the foreign country for 330 full days out of any 12-consecutive-month period (which may begin on any day).

Question 43

What are the tax rules for a nonqualified option?

Answer 43

A nonqualified option is taxed when granted if the option has a readily ascertainable value when granted. Otherwise, the option is taxed when exercised.

Question 44

How do you determine if a nonqualified option has a readily ascertainable value?

Answer 44

If the option is traded on an established market, it will have a readily ascertainable value.

Otherwise, it will only have a readily ascertainable value if all the following conditions are met:

1. The option is transferrable.
2. The option is exercised immediately in full when granted.
3. There are no conditions or restrictions that would have a significant effect on the value.
4. The fair value of the option privilege is readily ascertainable.

Question 45

For a nonqualified option with a readily ascertainable value, how do you account for taxation?

Answer 45

1. The employee recognizes ordinary income in that amount in the year granted. If there is a cost to the employee, then the ordinary income is the value of the option minus the cost.
2. There is no taxation on the date of exercise. The basis of the stock is the exercise price plus any amount previously taxed on the date of grant. Any future sale of the stock could result in a capital gain or loss.
3. The holding period begins with the exercise date.
4. If the employee allows the options to lapse (not exercised), there is a capital loss based on the value of the options previously taxed.

Question 46

For a nonqualified option without a readily ascertainable value, how do you account for taxation?

Answer 46

1. There is no income recognized on the date of grant.
2. On the date of exercise, the employee recognizes ordinary income based on the fair market value of the stock purchased less amounts paid (if any) for the option. The basis of the stock is the actual exercise price plus any ordinary income recognized. Any future sale of the stock could result in a capital gain or loss.
3. The holding period begins with the exercise date.
4. If the options lapse, there are no tax consequences.

Question 47

What are the two types of qualified stock options?

Answer 47

Incentive Stock Options and Employee Stock Purchase Plans.

Question 48

What is an Incentive Stock Option?

Answer 48

An ISO is usually granted to a key employee and is a right to purchase the stock at a discount.

Question 49

What is an Employee Stock Purchase Plan?

Answer 49

It grants options to employees to purchase stock in the corporation.

Question 50

What is the taxability of social security income?

Answer 50

Taxpayers must include in income the lesser of 50% (or 85% depending on income) of social security received or 50% (or 85% depending on income) of the excess provisional income over the threshold.

Question 51

At what AGI level are passive loss allowances eliminated under the “Mom and Pop” exception?

Answer 51

$150,000