REG 1 Flashcards

1
Q

What are the requirements for a Qualifying Child? And the mnemonic “CARES”? (M1)

A

In general, a child is a qualifying child of the taxpayer if the child satisfies the following:

  • Close Relative
  • Age Limit (19 or 24 + college)
  • Residency and filing requirements
  • Eliminate gross income test
  • Support test changes
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2
Q

What are the requirements for a Qualifying Relative? And the mnemonic “SUPORT”? (M1)

A

In general, an individual is a qualifying relative of the taxpayer if the individual satisfies the following:

  • Support test
  • Under exemption amount or (taxable) gross income
  • Precludes dependent filing a joint return
  • Only citizen of the US
  • Relative
  • Taxpayer
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3
Q

What type of interest is included in taxable income? (M2)

A

Interest on a Federal or State Income tax refund is included in taxable income.

  • Interest on federal income tax refund
  • Interest on state income tax refund
  • Interest on federal government obligations
  • Interest from checking account
  • Interest from money market account
  • Interest from federal bonds purchased 2 yrs ago
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4
Q

What kinds of unemployment compensation needs to be included in the taxpayer’s gross income for tax purposes? (M2)

A

All wages and unemployment compensation must be included in the taxpayer’s gross income for tax purposes.

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5
Q

For degree-seeking students, what is considered nontaxable? (M2)

A

Scholarships are nontaxable for degree-seeking students to the extent that the proceeds are spent on tuition, fees, book, and supplies.

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6
Q

What is the rule with withdrawing money from a traditional IRA? (M2)

A

Generally, retirement money cannot be withdrawn until the individual reaches the age of 59.5. If retirement money is withdrawn before then, it is subject to a 10% penalty tax, in addition to the regular income tax that applies to all distributions of traditional IRA money.

Ex. 33 yr old withdrew $33k from trad. IRA. Taxpayer has 35% marginal tax rate. What is total tax liab?

Regular income tax = 10,500 ($30K * 35%)
Penalty tax = 3,000 ($30K * 10%)
Total tax Liab. = $13,500

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7
Q

Describe how Annuities are handled? (M2)

A

With annuities, the initial investment amount is divided by the number of months of expected recovery. This factor is based on age of person investing. The resulting payments for each month are excludable from income. The remaining amount is taxable.

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8
Q

What are the two taxes on Net Income (business)? (M3)

A
  • Income Tax

- Federal self-employment (SE) tax

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9
Q

What is incorporated with Self-employment tax? (M3)

A
  • All self-employment income is subject to the 2.9% Medicare tax.
  • Up to $127,200 is subject to the 15.3% tax on self-employment earnings
  • The actual SE tax is calculated on 92.35% of SE income

Ex. Tyler earns $20K as sole proprietor. What is Tyler’s SE Tax?

Solution: $20K * 92.35% = $18,470
$18,470 * 15.3% = $2,826

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10
Q

How is Net taxable loss handled? (M3)

A

The losses may be deducted against other sources of income. If loss exceeds the income, it is permitted as a carryover.

  • 2 yr carryback
  • 20 yr carryforward
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11
Q

Describe what a long-term contract is, how it needs to be recognized, and any exemptions. (M3)

A

A long-term contract is generally any contract that is not complete at the end of the year in which it was started. A LT contract must be account for using the percentage of completion method to determine taxable income.

Exemptions:
Certain contracts are exempt from this requirement and may use other methods (completed contract method). These include:

  • Small contractors: projects that are expected to last no more than 2 years and performed by a taxpayer who has ave annual gross receipt not exceeding $10M
  • Home Construction contractors: where at least 80% of the total contract costs are related to the construction of certain dwelling units (NOT hotels).
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12
Q

How is passive activity income and losses treated? (M4)

A

Typically Passive activity losses, whether in the current or prior years, may only be used to offset passive activity income. **The exception to this is in the year the passive activity is sold or disposed of, the passive activity losses are fully deductible in the year of sale.

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13
Q

What is the “mom and pop” rule with passive activities? (M4)

A

Generally, none of the passive losses from real estate are deductible against nonpassive income. **However, if one is activity participating, then the “mom and pop” exception of up to $25K will apply. This exception is phased out over AGI of $100 - $150K.

So if Smith’s AGI is $120K, that is $20K into the phase-out range. So $10K of the $25K is phased out and Smith may deduct $15K of the $40K passive losses.

**Note: The $25,000 is completely phased out when the modified AGI reaches $150K.

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