REG 1 Flashcards
Requirements for a taxpayer to qualify as a “window(er)”
The requirements that enable a taxpayer to be classified as a “qualifying widow(er)” are:
- The taxpayer’s spouse died in one of the two previous years and the taxpayer did not remarry in the current tax year,
- The taxpayer has a child who can be claimed as a dependent,
- This child lived in the taxpayer’s home for all of the current tax year,
- The taxpayer paid over half the cost of keeping up a home for the child,
- The taxpayer could have filed a joint return in the year the spouse died.
CARES and SUPORT mnemonic
for Dependency Exemptions
Qualifying Child
~Close relative (i.e. son, brother, stepdaughter,etc)
~Age Limit (19/24 college)
~Residency and Filing requirement (more than half of the tax yr)
~Eliminate Gross Income Test
~Support Test Changes (child did not contribute more than 1/2 of their own support)
OR
Qualifying Relative
~Support (over 50%) test -more than 50% support
~Under a specific amount of (taxable) gross income test (less than taxable income of $4k in 2015)
~Precludes dependent filing a joint tax return test
~Only citizens (residents of US/Canada or Mexico) test
~Relative test OR
~Taxpayer lives with individual for whole year test
To qualify as an alimony payment (deductible)
Among the requirements for payments to be classified as alimony are the following:
- Payment must be in cash or its equivalent.
- Payments cannot extend beyond the death of the payee-spouse (recipient).
- Payments must be legally required pursuant to a written divorce (or separation) agreement.
- Payments cannot be made to members of the same household.
- Payments must not be designated as anything other than alimony.
- The spouses may not file a joint tax return.
Note: The requirements for payments to be considered alimony (income) are the same as for payments to be alimony (deductions).
Maximum deductibles
Maximum deductibles:
-“Capital loss” on investment on sale $3,000
Uniform Capitalization Rules of Code Sec. 263A
Uniform capitalization rules apply to the following:
(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; and
(3) real or tangible personal property acquired by the taxpayer for resale, provided the taxpayer’s annual average gross receipts for the preceding three years exceeds $10,000,000.
*With respect to inventory, direct material, direct labor, and factory overhead (applicable indirect costs) are capitalized with respect to inventory under the uniform capitalization rules for property acquired for resale. Applicable indirect costs include depreciation and amortization, insurance, supervisory wages, utilities, spoilage and scrap, design expenses, repair and maintenance and rental of equipment and facilities (including offsite storage), some administrative costs, costs of bonus and other incentive plans, and indirect supplies and other materials (including repackaging costs).
Basic formula for determining net rental income or loss
The basic formula for determination of net rental income or loss follows:
Gross rental income \+Prepaid rental income \+Rent cancellation payments \+Improvements in lieu of rent -(Rental expenses) =Net rental income (loss)
Taxation of Distributions (plan benefits)-Exception to Penalty Tax (still subject to ordinary income tax)
HIM DEAD mnemonic
Premature distribution (prior to retirement or allowable age) from an IRA (individual retirement account) is subject to a 10% penalty tax. However, certain exceptions apply, such as “HIM DEAD”
- Home buyer (1st time) $10,000 max if used toward first home
- Insurance (medical)
- Medical expenses in excess of 10% of AGI (or 7.5% if 65 or over)
- Disability (not temporary, has to be permanent or indefinite)
- Education: College tuition, books, fees.
And
-Death
Mom and pop exception (for passive activity losses)
Generally, passive losses may be used to offset passive income for a tax-year. The remaining net loss is generally “suspended” and carried forward to a year when it may be used to offset passive income (or when the final disposition of the property occurs).
However, there is an exception (the “mom and pop exception,” ) to the general rule. An individual may deduct rental activity losses if either of the following two conditions are met.
(1) $25,000 and active: Taxpayers who own more than 10% of the rental activity and are “actively managing” it
(i) Phase out: The $25K allowance is reduced by 50% of the excess AGI over $100K, up until $150K, after that allowance is eliminated.
(2) Real estate professional “active”
Big Picture Equation for Individual Taxation
Individual Taxation
Gross Income
(Adjustments)
=Adjusted Gross Income
(Standard Deduction)
OR
(Itemized Deductions)
(Exemptions)
=Taxable Income
Federal Income Tax (Tax Credits) Other Taxes (Payments) =Tax Due or Refund
Rental of Vacation home
(1) If rented less than 15 days per year=treat as personal residence
(2) If rented 15 or more days, and is used for personal purposes greater of (i) more than 14 days or (ii) more than 10% of the rental days, treat as personal/rental residence.
Expenses must be allocated between personal and rental use:
~Mortgage int and property taxes based on # months rented/12 months
~Utilities/Depreciation based on rental period/total annual usage of home(such as a vacation home is used for rental purposes 2/3 of the year and 1/3 is personal use)
Specific Items of income
Gross income consist of many forms of compensation:
Salaries and wages
-Money
-Property
-Cancellation of debt
-Bargain purchases
-Guaranteed payments to a partner
-Taxable fringe benefits (i.e. employee’s personal use of a company car)
-Partially taxable fringe benefits - Life insurance premiums (coverage up to $50K not taxable the premium is not taxable, over $50K coverage, premium is taxable)
-Non-taxable fringe benefits (examples in textbook- which includes limits and taxable items)
Employee stock option-Nonqualified Options
A nonqualified option is taxed as ordinary income when the option is granted if the option has a readily ascertainable value when granted. Otherwise, the option is taxed when exercised.
Employee stock option- Qualified Options
Qualified options consist of
(1) Incentive stock options
requirements consist of
-granted under a plan approved by shareholders (approve no. of shares and recipients)
-options must be granted w/in 10 yrs earlier of the date when the plan was adopted or approved. The options must be exercisable within 10 years of the grant date.
-exercise price may not be less than FMV of the stock at the date of grant
-employee may not own more than 10% of the combined voting power at date of grant
-once exercised, stock must be held at least 2 yrs after the grant date and at least 1 yr after the exercise date.
-employee must remain an employee from the date option is granted until 3 months before option is exercised.
(2) Employee stock purchase plan (ESPP)
requirements consist of:
-plan must be written and approved by shareholders
-ESPP cannot grant options to any employee who has more that 5% voting rights
-must full-time employees other than highly compensated employees or those with less than 2 yrs of employment
-Option exercise price may not be less than the lesser of 85% of the FMV stock when granted or exercised
-option cannot be exercised more than 27 months after the grant date
-no employee can acquire the right to purchase more than $25K per yr
-once exercised, stock must be held at least 2 yrs after the grant date AND at least 1 yr after exercise date
-employee must maintain an employee from the date the option is granted until 3 months before the option is exercised.
SIM 1- Items to consider
1) Property received as wages- fully taxable as compensation for services
2) Employer pays on behalf on an employee education expenses-Up to $5,250 may be excluded from gross income.
3) Interest received on state and local bonds obligations is tax-exempt
4) Interest paid by federal or state govt for late payment of a tax return is Taxable
5) Distributions from a traditional non-deductible IRA-is partially taxable. The principal, which was not deductible when contributed, is non-taxable. The accumulated earnings on the principal are taxable when withdrawn.
6) Gifts -property or an inheritance, is non-taxable. However, income received from such property is taxable.
7) Scholarships spent on tuition, fees, books, and supplies are non-taxable. However, room and board or retained by the recipient would be taxable.
8) Workers compensation is non taxable
9) Sale of a personal residence is subject to an exclusion from gross income for gain. For qualified single individuals, the exclusion from the gain is $250,000. The remaining would be taxable as a capital gain.
