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Regulation CPA Review > REG 1 > Flashcards

REG 1 Flashcards

1
Q

When should a cash basis taxpayer report income?

A

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

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2
Q

State the basis tax formula.

A 
Gross income
Less: Deductions FOR AGI ("Adjustments")
Equals: Adjusted Gross Income (AGI)
Less: Deductions FROM AGI
Less: Exemptions
Equals: Taxable Income
x Tax Rate
Equals: Gross tax liability
Less: Credits and prepayments
Equals: Tax due or refund
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3
Q

Identify the due date and extension available for individuals.

A

Due date: April 15

Extension: Form 4868 - Automatic 6 months

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4
Q

Identify the various filing statuses.

A
  • Single
  • Married, filing jointly
  • Married, filing separately
  • Head of household
  • Qualifying widow(er) with dependent child
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5
Q

What are the criteria for filing single?

A
  • Unmarried or legally separated from spouse

- Does not qualify for another filing status

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6
Q

What are the criteria for filing married filing jointly?

A

At the end of tax year:

  • Married and living 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
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7
Q

What are the criteria for filing married filing separately?

A

At year-end of tax year:

  • Married, and
  • If one spouse wants to be responsible only for own tax, or
  • If both spouses do not agree to file a joint return
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8
Q

What are the criteria for filing qualifying widow(er) (surviving spouse)?

A
  • Unmarried at end of tax year, and
  • Surviving spouse must maintain a household, which for the entire 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 the year of death of spouse.

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9
Q

What are the criteria for filing head of household?

A
  • Individual is not married, legally separated, or is married and has lived apart from his/her spouse for the last six months of the year
  • Individual is not a “qualifying widower”
  • Individual is not a nonresident alien
  • Individual maintained a home that, for more than half the taxable year is the principal residence of a :
    (1) Son or daughter who is 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.
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10
Q

Name the tests for claiming an exemption for a “qualifying child.”

Hint: CARES

A

A taxpayer is entitled 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

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11
Q

Name the tests for claiming an exemption for a “qualifying relative.”

Hint: SUPPORT

A

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 citizens (residents of USA/Canada or Mexico) test
Relative test OR
Taxpayer lives with individual for the whole year test

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12
Q

What are the requirements for a multiple support agreement?

A
  • Two or more people together provide more than 50% of support, but no one contributes more than 50%
  • To claim the exemption, must provide more than 10% of support, and meet the other dependency tests
  • A multiple support declaration, Form 2120, must be filed.
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13
Q

Define gross income.

A

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

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14
Q

What are the four categories of individual income?

A

Categories of Individual Income:

  • Ordinary (wages, salaries)
  • Portfolio (dividends, interest)
  • Passive (real estate investment and limited partnership income)
  • Capital
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15
Q

Name some nontaxable fringe benefits (exclusions).

A
  • Life insurance proceeds
  • Employer paid accident, medical, and health insurance
  • De minimis fringe benefit
  • Employer payment of employee’s educational expenses (up to $5250)
  • Qualified tuition reductions
  • Qualified employee discounts
  • Qualified pension, profit-sharing, and stock bonus plans

Unless specifically excluded by law, the fringe is includible in gross income

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16
Q

Are life insurance premiums paid by an employer taxable to employee?

A

Premiums on the first $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.

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17
Q

Give some examples of exempt interest.

A
  • State and local government bonds
  • Bonds of a US possession
  • Series EE (US Savings Bond) if used for higher education
  • Interest on Veterans Administration insurance
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18
Q

What is the tax treatment of unearned income of child who falls under the “Kiddie tax” rules?

A

Net unearned income of a dependent child who falls under the “kiddie tax” rules is taxed at his parent’s higher tax rate.

Net unearned income = Child’s total unearned income less the child’s standard deduction of $950 (or investment expenses, if greater) less an additional $950 (which is generally taxed at the child’s rate of 10% or 15%).

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19
Q

State the tax treatment of property settlements in a divorce.

A

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

20
Q

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

A
  • Payments must be legally required pursuant to a written decree
  • Payments must be in cash (or its equivalent)
  • Payments cannot extend beyond death of payee
  • Payments cannot be made to members of same household
  • Payments must not be designated as anything other than alimony
  • No joint tax return filed

Before alimony is taxable by the recipient, any child support due must be paid.

21
Q

Describe the self-employment tax.

A
  • All net self-employment income is subject to the 2.9% Medicare tax, but only self-employment income up to $110,100 (in 2012) is subject to the 12.4% Social Security tax.
  • An adjustment to income for one-half (e.g., 7.65% of up to $110,100 self-employment income in 2012) of self-employment tax (Medicare plus Social Security) paid.
22
Q

On what property do the uniform capitalization rules apply?

A
  • Real or tangible personal property produced by the taxpayer for use in his trade or business (e.g., machine tools for use in the production line of a machine tool manufacturer)
  • Real or tangible personal property produced by taxpayer for sale to customers (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 three tax years do not exceed $10,000,000 annually.

23
Q

When are funds in a nondeductible IRA taxable?

A

Withdrawals from Nondeductible IRAs 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.

24
Q

What is the formula to determine the excludible portion of an annuity?

A

Excludible portion in current year = Investment in contract / 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).

25
Q

In premature distributions of an IRA, what are the exceptions to the penalty tax?

Hint: HIM DEAD

A
  • Home buyer (1st time): $10,000 max if used toward first home (within 120 days)
  • Insurance (medical)
    • Unemployed with 12 consecutive weeks of unemployment compensation
    • Self-employed (who are otherwise eligible for unemployment compensation)
  • Medical expenses in excess of 7.5% of AGI
  • Disability (permanent or indefinite, not temporary)
  • Education: College, tuition, books, fees, etc.
  • and
  • Death
26
Q

How is rental income from a vacation house treated?

A
  1. If rented less than 15 days: Treat as personal residence.
  2. If rented more than 15 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 used is the greater of 14 days or 10% of days rented: Allocated rental expenses to extent of rental income.

If treated as personal, 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.

27
Q

Define passive activity. Give some examples of passive activities.

A

A passive activity is any activity in which the taxpayer does not materially participate.

Rental activities, interests in limited partnerships, S corporations, and most tax shelters are examples of passive activities.

28
Q

What is the tax treatment of nondeductible passive activity losses (PALs)?

A
  • Nondeductible passive activity losses are unused passive activity losses that are held in suspension.
  • Used to offset passive income in future years (indefinitely)
  • Fully tax deductible in the year the property is disposed of (e.g., sold)
29
Q

What are the rules to determine taxable Social Security benefits?

A

Taxpayers are classified into five categories depending on the level of provisional income which is defined as AGI plus tax-exempt 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: Between 50% and 85% of Social Security benefit is taxable
  • Upper income (over single $34,000/MFJ $44,000): 85% of Social Security benefits are taxable
30
Q

Are scholarships and fellowships includible in gross income?

A

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

For non-degree-seeking students, all amounts are includible in gross income.

31
Q

What are the tests for foreign-earned income exclusion?

A

In order to qualify for the exclusion, the taxpayer must satisfy one of the following two tests:

  • Bona fide residence test (an entire taxable year)
  • Physical presence test (330 full days out of 12 consecutive months)
32
Q

List some nontaxable miscellaneous income items (exclusions).

A
  • Life insurance proceeds
  • Gifts and inheritances
  • Medicare benefits
  • Workers’ compensation
  • Personal (physical) injury or illness award
  • Accident insurance - premiums paid by taxpayer
  • Foreign earned income exclusions
33
Q

What is the tax treatment of capital gains/losses?

A

Net capital losses are deducted up to a maximum 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

34
Q

In general, how is the donee’s basis of a gift determined? How is the holding period determined?

A
  • In general, the donee’s basis of a gift is the same as the donor’s basis.
  • If the sale is at a loss, the basis is the lesser of the donor’s adjusted basis or FMV at date of gift.
  • If the sale is at less than basis but greater than FMV, no gain or loss is recognized.
  • The holding period is the donor’s holding period unless basis becomes FMV, then holding period starts at date of gift.
35
Q

In general, how is the basis of inherited property determined? How is the holding period determined?

A

The basis is the LOWER of the:
1. FMV at date of death
OR
2. FMV at alternate lower valuation date (if ELECTED), which is:
-6 months from date of death, or
-Disposal date (if less than 6 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.

36
Q

When is a gain not taxed?

Hint: HIDE IT

A
  • Homeowner’s exclusion
  • Involuntary conversions
  • Divorced property settlement
  • Exchange of like-kind business/investment assets (tangible)
  • Installment sale
  • Treasury and capital stock transactions (by corporation)
37
Q

Identify the major tax provisions of involuntary conversions of property.

A

Gain may be deferred if insurance proceeds are reinvested in property that is similar or related in service or use within 2 years for personal property or 3 years for business property.

A realized gain exists when insurance proceeds are greater than the adjusted basis in the converted property. Note the difference between realized gain vs. 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 includes period that original property was held.

38
Q

What is the exclusion amount on the recognition of gain on the sale of personal residence, provided the criteria for exclusion are met?

A

Gain exclusion for personal residence:

  • $250,000 for single taxpayers
  • $500,000 for married taxpayers
39
Q

Identify the criteria for the exclusion provision on the sale of personal residence.

A
  • Taxpayer must have owned and used the property as the principal residence for two years or more during the five-year period ending on the date of the sale or exchange. Periods of non-qualified use cause a portion of the gain to be taxable.
  • 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 change in place of employment, health, or unforeseen circumstances, when claimed within the previous 2 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.
40
Q

Name the criteria for a classification as a like-kind exchange.

A
  • Tangible real or personal property, and
  • Used in trade or business, or
  • Held for investment (except inventory, stock, securities, partnership interests, and real property in different countries).
41
Q

In a like-kind exchange, what is the basis of the property received?

A

In a like-kind exchange, the basis of property received retains the basis of property given up.

Basis of property given up
\+ Any boot paid
-  Any boot received (at FMV)
\+ Any gain recognized
= Basis of property received

Recognize gain to the extent of the lower of the realized gain or the boot received.

42
Q

Identify the nondeductible losses.

Hint: WRAP

A

Wash sale loss
Related party transactions
And
Personal loss

43
Q

What is the tax treatment given to wash sales?

A
  • Losses are disallowed is 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
44
Q

What is the tax treatment for sales to related parties?

A
  • 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.
45
Q

What are the corporate capital gain/loss rules for C Corporations?

A

Net capital gains (LT and ST)

  • 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 (LT and ST)

  • 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.

Regulation CPA Review (8 decks)

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