REG 1

Question 1

Filing Status - When should a cash basis taxpayer report income?

Answer 1

A cash basis taxpayer should report income in the year in which income is either actually or constructively received. Whether in cash or property.

Question 2

Filing Status - State the basic tax formula

Answer 2

Gross income (less) Deductions FOR AGI = Adjusted gross income (less) Deductions FROM AGI ((greater of itemized deductions or standard deduction)) (less) Exemptions = Taxable income X Tax rate = Gross tax liability (less) Credits and prepayments = Tax due or refund

Question 3

Filing Status - Identify the due date and extension available for individuals

Answer 3

Due Date: April 15, Extention: Form 4868-Automatic six months

Question 4

Filing Status - Identify the various filing statuses

Answer 4

*Single *Married, filing jointly *Married, filing separately *Head of household *Qualifying widow(er) with dependent child

Question 5

Filing Status - What are the criteria for filing single?

Answer 5

*Unmarried or legally separated from spouse at the end of tax year *Deos not qualify for another filing status

Question 6

Filing Status - What are the criteria for filing married filing jointly?

Answer 6

At year-end of tax year *Married and iving together as husband and wife; or *Living together in a recognized common law marriage; or *Married and living apart but not legally separated or divorced

Question 7

Filing Status - Whar are the criteria for filing married filing separately?

Answer 7

At year-end of tax year: *Married; and *If one spouse wants to be responsible onkly for own tax; or *If both spouses do not agree to file a joint return.

Question 8

Filing Status - What are the criteria for filing head of household?

Answer 8

*Individual is not married, legally separated, or is married and has lived apart form his/her spouse for the last six months of the year * Indidvidual is not a “qualifying widower” * Indidvidual is not a nonresident alien *Individual maintained a home that, for more than half the taxable year, is the principle residens of a: (1)Son or daughter who is a qualifying child or qualifies as the taxpayer’s dependent (qualifying relative); (2) A dependent relative who resides with the taxpayer; or (3)A dependent father or mother, regardless of whether they live with the taxpayer

Question 9

Filing Status - What are the criteria for filing qualifying widow(er) (surviving spouse)

Answer 9

*Unmarried at end of tax year; and *Surviving spouse must maintain a household, which for the entire taxable year was the principal place of abode of a son, stepson, daughter, or stepdaughter; and *The surviving spouse is entitled to a dependency exemption for the son, daughter, etc. **The taxpayer qualifies for this status for two years after year of death of spouse

Question 10

Exemptions - name the tests for claiming an exemption for a qualifying child (CARES)

Answer 10

A taxpayer is entitle to an exemption for each qualifying child and/or qualifying relative QUALIFYING CHILD *Close relative *Age limit (19/24) and younger than the taxpayer *Residency and filing requirement *Eliminate gross income test (exemption required) *Support test changes

Question 11

Exemptions - Name the tests for claiming an exemption for a qualifying relative (SUPORT)

Answer 11

A taxpayer is entitle to an exemption for each qualifying child and/or qualifying relative QUALIFYING RELATIVE *Support (over 50%) test *Under the personal exemption amount of (taxable) gross income test *Precludes dependent filing a joint return test *Only citicens (residents of USA/Canada or Mexico) test *Relative test *Taxpayer lives with individual for the whole year test

Question 12

Exemptions - What are the requirements for a multiple support agreement

Answer 12

*Two or more people together grovide more than 50% of support, but no one contributes more than 50% *To claim the exemption, musdt probide more than 10% of support, and meet the other dependency tests *A multiple support declarationk Form 2120, must be filed

Question 13

Gross Income - Define gross income

Answer 13

Gross income includes all income from whatever source derived, unless specifically excluded

Question 14

Gross Income - What are the four categories of individual income

Answer 14

Catagores of Individual Income: *Ordinary (wages, salaries) *Protfolio (dividends, interest) *assive (realestate investment and limited partnership income) *Capital

Question 15

Gross Income - Name some nontaxable finge benefits (exclusions)

Answer 15

*De minimis fringe benefit *Qualified tuition reduction *Qualified employee discounts *Employer paid accident, medical, and health insurance **Unless specifically excluded by law, the fringe is includible in gross income

Question 16

Gross Income - Are life insurance premiums paid by an employer taxable to employee

Answer 16

Premiums on the firest $50,000 (face amount) of group term life insurance are not includible in gross income. Premiums paid for coverage above $50,000 should be included in gross income

Question 17

Gross Income - Give some exambles of exempt interest

Answer 17

Exempt interest examples: *State and local government bonds *Bonds of a US possession *Series EE (US Savings Bond) if used for higher education *Interest on Veterans Administration insuance

Question 18

Gross Income - What is the tax treatment of unearned income of a child who falls unter the “Kiddie tax” rules?

Answer 18

net unearned income of a dependednt child who falls under the “Kiddie tax” rules is taxed at his parents’ higher tax rate. Net unearned income = Child’s total unearnded income less the child’s standard deduction of $950 (in 2011) (or investment expenses, if greater) less an additional $950 (which is generally taxed at the child’s rate of 10% or 15%)

Question 19

Gross Income - State the tax treatment of property settlements in a divorce

Answer 19

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

Question 20

Gross Income - What are the requirements for alimony to be deductible by the paying former spouse and includible by the recipient?

Answer 20

*Payments muct be legally required pursuant to a written decree *Payments must be in cash *Payments cannot extend beyond death of payee *Payments cannot be made to memebers of same household *No joint tax return filed **Before alimony is taxable by the recipient, any child support due must be paid

Question 21

Gross Income - Describe the self-employment tax

Answer 21

*All net self-employment income is subject to the 2.9% Medicare tax, but only delf-employment income up to $106,800 (in 2011) is subject to the 12.4% Social Security tax *An adjustment to income for one-half (eg, 7.65% on up to $106,800 self employment income for 2011) of self-employment tax (Medicare plus Social Security) paid

Question 22

Gross Income - On what property do the uniform capitalization rules apply

Answer 22

*Real or tangible personal property produced by the taxpayer for use in his trade or business *Real or tangible personal property produced by the taxpayer for sale to costomers (manufacturer’s inventory) *Real or tangible personal property purchased by the taxpayer for resale (retailer’s inventory) **EXCEPTION: The uniform capitalization rules do not apply to (retailer’s inventory) property purchased for resale if the taxpayer’s gross receipts for the preceding tree tax years do not exceed $10,000,000 annually.

Question 23

Gross Income - When are funds in a nondeductible IRA taxable

Answer 23

Withdrawals from nondeductible IRA’s 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 24

Gross Income - What is the formula to determine the excludable portion of a annuity

Answer 24

Excluable amount in current year = Investment in contract divided by Age factor (in months) **NOTE: If the annuitant lives longer than the factor in months, further payments are fully taxable. If the annuitant 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 25

Gross Income - Inpremature destributions of an IRA, what are the exceptions to the penalty tax? HIM DEAD

Answer 25

*Home buyer (first rime): $10,000 max if used toward first home (within 120 days) *Insurance (medical) -Unemployed with 12 consectutive weeks of unemployment compensation -Self-employed (who are otherwide eligible for enemployment compensation) *Medical expenses in excess of 7.5% of AGI *Disability *Education: College, tuition, books, fees, etc. *and *Death

Question 26

Gross Income - How is rental income from a vaction house treated

Answer 26

(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 greater of 14 days or 10% of days rented: Allocate rental expenses to extent of rental income *If treated as personl, income is excluded and deductions for mortgage interest and taxes are reported on Schedule A. Other expenses are not deductible. If the vacation property is treated as a rental property, the taxpayer reports income and deductions on Schedule E.

Question 27

Gross Income - Define passive activity. Give some examples of passibe activities.

Answer 27

A passive activity is an activity in which the taxpayer does not materially participate. Rental activities, interests in limited partnerships, and S corporations are examples of passive activities.

Question 28

Gross Income - What is the tax treatment of nondeductible passive activity losses?

Answer 28

*Nondeductible passive activity losses are unused passive actiity losses that are held in suspension *Used to offset passive income in future years (indefinitely) *Fully tax deductible in the year the property is desposed of (eg, sold)

Question 29

Gross Income - What are the rules to determine taxable Social Security benefits?

Answer 29

Taxpayers are classified into five categories depending on the level of provisional income, which is defined as AGI plus tax-exemt interest plus 50% of Social Security benefits. *Low income - no Social Security benefits are taxable. *Lower middle income - Less than 50% of Social Security benefits are taxable *Middle income (over single $25,000/MFJ $32,000) - 50% of Social Security benefits are taxable *Upper middle income - Between50% and 85% of Social Security benefit is taxable *Upper income (over single $34,000/MFJ $44,000) - 85%of Social Security benefits are taxable

Question 30

Gross Income - Are scholarships and fellowships includible in gross income?

Answer 30

For a degree-seeking student, scholarships and fellowships are excludable up to the amounts spent on tuition, fees, books, and supplies. All remaining amounts are includible in gross income. For nondegree-seeking studentm, all amounts are includible in gross income.

Question 31

Gross Income - What are the tests for foreign-earned income exclusion?

Answer 31

Tests for foreign-earned income exclusion: *Bona fide residence test (an entire taxable year) *Physical presence test (330 full days out of 12 consecutive months)

Question 32

Gross Income - List some nontaxable miscellaneous income items (exclusions)

Answer 32

Examples of nontaxable miscellaneous income items: *Life insurance proceeds *Gifts and inheritances *Medicare benefits *Workers’ compensation *Personal (physical) injury or illness award *Accident insurance-pemiums paid by taxpayer *Foreign-earned income exclusion

Question 33

Capital Gains and Losses - What is the tax treatment of capital gains/losses?

Answer 33

Net capital losses are deducted up to a maximun of $3,000 per year. Any excess can be carried forward. Capital gains are fully taxable (but at lower tax rates). Holding period: *Short-term - one year or less *Long-term - more than one year

Question 34

Capital Gains and Losses - In general, how is the donee’s bases of a gift determined? How is the holding period determined?

Answer 34

*In general, the donee’s basis of a gift is the same as the donor’s basis. *If the sale is greater than the donor’s basis, then the gain is the difference between the donor’s basis and the sales price. * If the slae is less than the FMV, the loss is the difference between the FMV at the date of the gift and the sales price. *If the sale is at less than basis but greater than FMV, no gain or loss is recognized. *The holding period included the donor’s holding period unless basis becomes FMV, then holding period starts at the date of gift.

Question 35

Capital Gains and Losses - In general, how is the basis of inherited property determinied (for years other than 2010)? How is the holding period determined?

Answer 35

The basis of inherited property is the LOWER of the: (1) FMV at date of death OR (2) FMV at alternate lwer valuation date (if ELECTED), which is: *six months from date of death, or *Disposal date (if disposed of less than six months from date of death **The holding period is automatically deemed long-term for all inherited property, regardless of how long the deceased owned the property.

Question 36

Capital Gains and Losses - When is a gain not taxed? HIDE IT

Answer 36

*Homeowner’s exclusion *Involuntary conversions *Divorced propertyy settement *Exchange of like-kind business/investment assets (tangible) *Installment sale *Treasury and capital stock transactions (by corporation) **Gains are not taxed when you can “Hide It.”

Question 37

Capital Gains and Losses - Identify the major tax provisions of involuntary conversions of property

Answer 37

Gain may be deferred in insurance proveeds are reinvested in property that is similar or related in service or use within two years for personal property or three years for business property. A realized gain exists when insurance proceeds are greater than the ajhusted basis in the converted property. Note the difference between realized gain versus recognized gain. *Gain not recognized if proceeds reinvested in qualified replacement property. *Basis is cost of replacement property less any gain not recognized. *Losses recognized and basis is replacement cost. –Holding period included period that original property was held.

Question 38

Capital Gains and Losses - What is the exclusion amount on the recognition of gain on the sale of personal residence, provided the criteria for exclusion are met?

Answer 38

Gain exclusion for personal residence: *$250,000 for single taxpayers *$500,000 for married taxpayers

Question 39

Capital Gains and Losses - Identify the criteria for the exclusion provision on the sale of personal residence.

Answer 39

*Taxpayer must have owned and used the property as the principal residence for two years or more during the five-year period endind on the date of the sale or exchange. Periods of nonqualified use cause a portion of the gain to be taxable (sales/periods after 2008) *Either spouse for a joint return must meet the ownership requirement, and both spouses must meet the use requirement with respect to the property. *Taxpayers may be eligible for a partial (on a prorated basis) exclusion if the sale is due to a chang ein place of employemnt, health, or unforseen circumstances, when claimed within the previous two years or fail to meet the ownership and use requirements. *No age requirement *No rollover to another house is required. *Renewable, can be utilized more than one time.

Question 40

Capital Gains and Losses - Name the criteria for classification as a like-kind exchange

Answer 40

Like-kind exchange criteria. *Tangible real or personal property; and *Used in trade or business; or *Held for investment (except inventory, stock, and securities)

Question 41

Capital Gains and Losses - In a like-kind exchange, what is the basis of the property received?

Answer 41

In a like-kind exchange, the basis of property received retains the basis of proprty given up. Basis of property given up + Any boot paid - any boot received (at FMV) + any gain recognized = Basis of property received. Recognize gain the the extent of the lower of the realized gain or the boot received.

Question 42

Capital Gains and Losses - Identify the nondeductible losses. WRAP

Answer 42

*Wash sale loss *Related party transactions *And *Personal Loss -“Wrap” up these losses, because they are not deductible.

Question 43

Capital Gains and Losses - What is the tax treatment given to wash sales?

Answer 43

*Losses are disallowed if the same security is bought within 30 days before or after the sale. *The disallowed loss increases the basis in the property (security). *Gains are taxable.

Question 44

Capital Gains and Losses - What is the tax treatment for sales to related parties

Answer 44

*No deduction is allowed for losses on sales to related parties. *On a later resale, any gain recognized is reduced (but not below zero) by the previous disallowed loss.

Question 45

Capital Gains and Losses - What are the corporate capital gain/loss rules for C Corporations

Answer 45

Net Capital gains (long-term and short-term) *Corporate net capital gains are added to ordinary income and taxed at the regular tax rate. *Section 1231 gains are entitled to capital gain treatment -net capital losses (long-term and short-term) *Corporate net capital losses are carried back three years and forward five years as short-term capital loss. *They are deducted from capital or Section 1231 gains.