REG 1 - Individual Taxation Flashcards
Internal Revenue Code (IRC)
the basic foundation of federal tax laws
&
Represents a codification of the federal tax laws of the US
AGI (formula)
Gross Income +/- Adjustments = AGI
*** Adjustments: Schedule B, C, D, E, F (I-EMBRACED-EHF)
Schedule A
Itemized Deductions (Personal & Employee expenses) (COMMITT)
C – Charitable Contributions
O – Other miscellaneous
M – Miscellaneous Expenses (2%)
M – Medical Expenses
I – Interest
T – Taxes
T – Theft or Casualty
I-EMBRACED-EHF
Adjustments “For [to] AGI”: Sched. B, C, D, E, F
I – Interest on Student Loans ($2,500, phase out)
E – self-Employment Tax (50%=7.65%), Med. Premiums (100%, no employer coverage)
M – Moving Expenses
B – Business Expense (Sch. C)
R – Rent/Royalty & Flow Through Entities (Sch E)
A – Alimony (CANNOT)
C – Contributions to Retirements (KEOGH/IRA)
E – Early Withdrawal Penalty
D – jury Duty pay
E – Education ($4,000)
H – Health Savings Accounts (HSA)
F – Farm Income (Sch F)
Taxable Income (formula)
AGI (= GI +/- Adjustments)
- Deductions (Sch A or Std Deduction)
- Net Exemptions ($3,950)
= Taxable Income
Tax Liability (formula)
(Taxable Income) x (Tax Rate) = Tax Liability
Tax Due (formula)
Tax Liability
- Credits
+ Self Employment Tax
+ AMT
- Withholdings
- Prepayments
= Tax Due
Individual Income Tax Return (1040) [Formula]
Gross Income
+/- Adjustments
= AGI
- Deductions (Sch A & Std Deduction)
- Net Exemptions ($3,950)
=Taxable Income
x Tax Rate
= Tax Liability
- Credits
+ SE Tax
+ AMT
- Withholdings
- Prepayments
= Tax Due
Individual Income Tax Return (1040)
[Main Formulas]
- AGI
- Taxable Income
- Tax Liability
- Tax Due
When is an individual REQUIRED to file a tax return?
- If Income > (Personal Exemption + Standard Deduction)
Or
- If Net SE Earnings = $400+
Or
- If you are claimed as a dependent on another taxpayer’s return, and (Unearned Income = $1,000+) or (Earned Income = $6,100+)
Or
- If received advanced payments of the Earned Income Credit (EIC)
Or
- If individual is subject to the Kiddie Tax
What is the Kiddie Tax?
taxes certain unearned income of a child at the parent’s margin tax rate, regardless of whether the child is claimed as a dependent on the parent’s tax return or no
** 3 conditions must be met in order for the Kiddie Tax to apply (parent alive, child does not file a joint tax return, age)
What is the purpose of the Kiddie Tax?
prevents the “wealthy” from avoiding taxes on their investments income by transferring the investments/income to their child names, which would be taxed a significantly lower rate or not subject to tax at all
What are the conditions that must be met in order for the Kiddie Tax to apply?
- Either parent is alive as of the end of the taxable year
- Child Does not file a joint tax return for the year
- Child is of the appropriate age… either:
A) Under 18 years old as of the end of the tax year
Or
B) Is a Student between 18-24 WITH Earned Income less than 50% of the child’s support
What is the tax liability for an individual subject to the Kiddie Tax?
the LARGER of tax due based on filing a return including:
- Child’s Earned Income & Unearned Income
OR
- Child’s Earned Income + the child’s Allocable Parental Tax (APT is not subject to the Tax Rate, only EI)
Steps to calculate each child’s Allocable Parental Tax
- Calculate Parent’s Tax based on their Earned & Unearned Income (not accounting for child’s unearned income)
- Calculate Parent’s Tax based on their (a) Earned & Unearned Income & (b)Net Unearned Income for all of their children subject to the Kiddie Tax
- Allocable Parental Tax = (2) – (1)
- Allocate a portion of APT by using a Ratio (similar to weighted average):
[(Child’s Net Unearned Income) / (Total of All Net Unearned Income)] x (Allocable Parental Tax) = Child’s Allocable Parental Tax
When must any tax balance be paid for the individual return?
On or before April 15 (15th day of the 4th month following the close of the year)
** if the date falls on a weekend, the return is due next business day
What is the automatic extension for the individual tax return?
IRS grants an automatic 6 month extension of the FILING due date for the the return (October 15), which eliminates the need to file the second extension
*** DOES NOT extend the date for payment of tax balance due (interest and penalties will accrue)
How is interest charged for late payment of a tax balance due for an individual return?
Interest is charged from April 15 (due date) until the date of actual payment
- Interest rate = Federal ST Rate + 3%….. (determined quarterly)
- Interest is compounded daily
What are the penalties for late payment & late filing/not filing an individual tax return?
Late Payment: 1/2% per month (pro rated) based on the net tax due
Late Filing/Not Filing: 5% per month (pro rated) based on the net tax due
Both penalties have a maximum of 25% of the net tax due
When do civil penalties apply for an individual tax return?
Negligence or Substantial Understatement of tax liability
When do civil & criminal penalties apply for an individual tax return?
Fraud on the return
Form 4868
Automatic 6 month extension for FILING individual tax return (not an extension for paying tax due)
Form 1040X
Amended Individual Tax Returns
When are Amended individual tax returns due?
(Form 1040X) LATER of:
- 3 years after filing the original tax return (including extensions)
Or
- 2 years after actual tax was paid
IRS statute of limitations (general)
Specific time limits the IRS is required to assess, refund, credit, and collect taxes on. When the limits expire, the IRS is no longer able to pursue the issue or claim. (tax payer can submit a claim, but IRS will not honor it) (IRS cannot purse collection past time frame)
What is the statute of limitation for issues relating to error or “simple” negligence?
(individual taxation)
3 Years after later of due date or filing date
What is the statute of limitation for issues relating to “gross” negligence OR understated total income by 25%+?
(individual taxation)
6 Years after later of due date or filing date
What is the statute of limitation for issues relating to fraud/lie or not filing a tax return?
(individual taxation)
Unlimited
When is the accrual basis of accounting generally required for an individual tax return?
when purchases & sales of INVENTORY are necessary to determine income
Which type of businesses may use the cash basis of accounting for a tax return?
Service Type businesses whose gross receipts are LESS THAN $10M, which includes:
- most individuals, S corps, individually owned Partnerships, personal service corporations (i.e. health, law, accounting, consulting)
Which entities are prohibited from using the cash basis for their tax return?
- C corporations with gross receipts exceeding $5M
- Partnerships that have a C corporation as a partner exceeding $5M
- Tax Shelters
- Certain Trusts
Under Cash Basis, when is income recognized on the tax return?
- cash or property received, at FMV (includes “unearned”/deferred rents or royalties)
Or
- Actually or Constructively received (whichever is earlier)
Under Cash Basis, when is a deduction reported on the return?
- Cash or check is disbursed
- Expense charged on a credit card (not when credit card statement is paid)
**prepaid interest is not deductible
What conditions must be met in order for a scholarship or fellowship to be excluded from taxable income?
- It is not compensation for required services
&
- It is spent by a degree candidate for tuition
What conditions must be met in order for injury awards to be included in taxable income?
If they are for:
- Punitive damages
Or
- Lost Business Profits
Or
- Damages for non-physical injuries (i.e. age or race discrimination)
What conditions must be met in order for injury awards to be excluded from taxable income?
- damages for bodily injury, pain & suffering, and lost wages
Or
- workers’ comp benefits
OR
- Reimbursement of medical expenses paid & not itemized on schedule A
What condition must be met in order for state tax refunds to be included in taxable income?
state taxes paid were originally claimed as a deduction in a earlier year
Interest earned on a qualified higher education bond
Income or Not Income?
Not Income if:
- used for higher education for self, spouse, or dependent
- bought by taxpayer at least 24 years old
- Redeem directly – need not transfer to school
- Tuition and fees qualify but ROOM & BOARD DO NOT
Fringe Benefits
Income or Not Income?
Most are considered income (for employEE’s benefit unless immaterial)
- the fringe benefits primarily incurred for the employER’s benefit, then it is NOT income
- immaterial fringe benefits are NOT income
Bargain Purchases on Employer Merchandise
Income or Not Income?
Income
Employer-provided Educational Assistance
Income or Not Income?
Not Income
Which Dividends are not considered taxable income?
- Stock Dividends from common stock or stock splits (P/S dividends are taxable at FMV)
- Liquidating Dividend
- Dividends received from an S corporation
- Dividends received on a life insurance policy
- Dividends received from a mutual fund that invests in TAX-EXEMPT BONDS
Receipt of Security Deposits (leases)
Income or Not Income?
Refundable Security Deposits: NOT Income
Non-refundable Security Deposits: INCOME
Incentive Stock Option (ISO)
Income or Not Income?
*Aka “Qualified” Stock Option
Not Income when exercised
BUT… Taxed when SELL stock (treated as a capital gain/loss on difference between Sales Price & Exercise Price)
— ISO must be held 2 years from grant date & 1 year from exercise date
**** for AMT calculation, ISO is taxed when exercised
What is the condition for proceeds withdrawn from a traditional IRA or pension plan to be considered as taxable income?
If the original contributions to the plan were excluded or deducted from income
(the invested money was not originally taxed)
How is an annuity taxed?
The interest (“profit”) component of the annuity is taxed annually
- $Profit / $Total Proceeds = Percentage%
- Percentage% x $Annuity Received = Amount Included in Taxable Income
*Profit = Total Proceeds – Original Contribution
Inheritances
Income or Not Income?
Not Income
Child Support
Income or Not Income?
Not Income
Property Settlement (Alimony)
Income or Not income?
Not Income
Constructively Received
When an item of income is unqualified available to the taxpayer without restriction
i.e. dividend that is automatically reinvested
Dividend that automatically reinvests (buys add’l shares)
Income or Not Income?
Income
*** this is an example of cash being “constructively received”
W-2 Form
Salaries and Wages (earned income)
If an employee submits their monthly tip schedule by the 10th of the following month, which month are the tips reported as earned income?
The month the schedule is submitted (following month) but only if amount is $20+
If an employee fails to submit their monthly tip schedule to their employer, how are the tips taxed?
the employee must DIRECTLY REPORT the tips on the tax return
&
Tips are reported in the month of receipt (i.e. tips received in 12/X1, reported in 20X1 tax return)
What causes the premiums on group term life insurance (fringe benefit) to be considered taxable income?
If the term life policy is $50,000+
What condition causes life insurance proceeds (death check) to be considered taxable income?
Investment: If the policy was purchased from a person other than the insurance company (as an investment)
Or
Interest: If paid out in installments (annuity), then a pro rata part of the receipts are taxable as interest
Qualified Cafeteria Plan
Income or Not Income?
Taxable: IF employee chooses to take cash (instead of benefits)
Not Taxable: IF employee chooses to take the benefits (instead of cash)
*** deferred compensation plans are excluded from qualified cafeteria plans (except 401k plans)
How are gambling winnings taxed?
Gross winnings are taxed
- gambling losses can be claimed as an itemized deduction to the extent of winnings
How are prizes and awards taxed?
- Taxed at FMV
- Not taxed if both:
1. Received for years of service or safety achievement
&
- Less than $400 FMV OR assigned to gov. unit or charitable org (taxpayer never actually receives the prize or award)
How is health and medical insurance coverage taxed?
It is NOT taxable
When is government (investment) interest not taxable?
Only if the interest results from State and Local Municipal BONDS
Interest on Series HH SavingsBond
Income or Not Income?
Income (interest is paid semi-annually)
Interest on Series EE Savings Bond
Income or Not Income?
Income (exceptions)***
Interest = Redemption Value - Purchase Price
- paper: issued at discount & redeemed at face
- electronic: issued at face & redeemed at face + accrued interest
*** NOT INCOME (ever) if all following are met:
- used to pay for higher education (reduced by tax-free scholarships)
- there is taxpayer or joint ownerships
- the taxpayer 24+ years old
&
- bonds acquired AFTER 1989
Which methods may a CASH basis taxpayer report interest earned on series E, EE, or I bonds?
- Report all interest earned at redemption or disposal (sold)
OR
- Report interest as the increase in redemption value of the bond each year
Interest on Life insurance dividend (ROP)
Income or Not Income?
Taxable
** the actual life insurance dividend is NOT taxable (but the interest on the dividend is taxable)
Preferred Stock Dividends
Income or Not Income?
Income: Taxable at FMV
*** common stock dividends are NOT taxable
How is dividend income taxed?
Special Rate (Similar to LT Capital gains)
- Applies to dividends from domestic corps (US) & certain qualified foreign corporations. Must meet 60+ day holding period
- DOES NOT apply to dividends from non-taxable entities (i.e. REITs) or dividends that are deductible by the payer organization
- treatment of mutual fund distributions is based on the source of income being distributed
—- 0% tax rate if in the 10% or 15% tax bracket
—- 15% tax rate if in the 25%, 28%, 33%, 35% tax bracket
—- 20% tax rate if in the 39.6% tax bracket
Unearned Income Medicare Contribution Tax
- imposed on individuals, estates, & trusts
- for individuals, the surtax is 3.8% times LESSER of:
1. Taxpayer’s net investment income
Or
- Excess if modified AGI over the threshold
*** effectively adds 3.8% to the “special rate” on LT capital gains and qualified dividends (tax brackets 15% and up)
Net Investment Income (formula)
Investment Income – Allowable Investment Expenses
Modified AGI (MAGI formula)
AGI + Certain Items including:
- foreign income
- foreign-housing deductions
- student-loan deductions
- IRA-contribution deductions
- deductions for higher-education costs
MAGI threshold amounts
Joint Return or Surviving Spouse: $250k
MFS: $125k
All Others: $200k
Non-Qualified Stock Options
Income or Not Income?
Income (treated as compensation)
- taxed when exercised (on excess between FMV & Exercise Price)
What are the conditions for an ISO to be considered a qualified stock option?
ISO must be held 2 years from grant date & 1 year from exercise date
How are social security benefits taxed?
may or may not be taxable depending on provisional income calculation
At the extremes:
- Not taxable if the provisional income is less than $25,000
- 85% taxable (max inclusion) if the provisional income is greater than $60,000
Provisional Income (formula)
AGI before SS + tax-exempt income + ½ of SS benefits
*** determines the amount that social security benefits are subject to tax
(if PI>$60k, taxable at 85% which is the MAX inclusion in income)
How are pension benefits taxed?
Amount included in taxable income depends on the amount contributed by the employee/taxpayer (return of capital is NOT Taxable – only the interest/”profit” is taxable)
- i.e. if the taxpayer did not contribute to the fund, it is 100% taxable income
Percentage of Each Annuity Payment that is Not Taxable (Formula)
Taxpayer Cost of Annuity / Total Expected Proceeds
**100% – (cost/total proceeds) = Percentage that is taxable
What is the Special tax treatment for Lump-Sum Distributions from certain qualified plans?
&
Which “qualified plans” may be eligible?
Within 60 days, may be eligible to roll over lump-sum distributions TAX FREE to a Traditional IRA account
- Plans: qualified pension, profit-sharing, stock bonus, and Keogh plans (but not IRAs)
Foreign earned income exclusion
Individual may ELECT to exclude up to $99,200 (2014) of income earned in a foreign country.
Individual can qualify by meeting a “Bona fide residence test” or “Physical Presence Test”.
** qualified individuals may also exclude additional amount based on foreign housing costs
Bona Fide Residence test
1 of 2 tests to qualify for foreign earned income exclusion (individual may then elect to exclude if qualified)
Test:
- Individual must be a US citizen who is a foreign resident for an uninterrupted period that includes an entire taxable year
Physical Presence Test
1 of 2 tests to qualify for foreign earned income exclusion (individual may then elect to exclude if qualified)
Test:
- Individual must be US citizen or resident present in a foreign country for at least 330 full days in any 12-month period
Form 1099G
State tax refunds are taxable in CY (unless itemized in PY)
Interest on Tax Refunds
Income or Not Income?
Taxable Income for interest on Both federal & state tax refunds
How are LT Capital Gains Taxed?
A. if held more than 1 year, special tax rates for LT capital gains (does not apply to corporations)
—- 0% tax rate if in the 10% or 15% tax bracket
—- 15% tax rate if in the 25% - 35% tax bracket
—- 20% tax rate if in the 39.6% tax bracket
B. If held less than 1 year, ordinary tax rate
Individual Tax Treatment for Net Capital Loss
Up to $3,000 against ordinary income
- unused losses may be carried forward indefinitely
Corporation Tax Treatment for Net Capital Loss
$0 net capital loss (no deductible)
- can carry losses back 3 years and forward 5 years
Form 8949
Individual reports capital gains and losses on form 8949
***totals are reported on schedule D of form 1040
Personal Assets
- also considered capital assets
- Gains from sales of personal assets are taxed as capital gains
- Losses from sales of personal assets are not deductible ($0 net capital loss)
Net Operating Losses (NOL)
Carry back 2 years and carry forward 20 years
- usually results from a business loss, but could also result from personal casualty loss
- results from: trade or business, workings as an employee, casualty or theft loss,
** does not result from: standard deduction, personal exemption, interest, dividends, or capital gains & losses
** same rules for corporations
Schedule B
Interest & Dividend Income
Schedule C
Profit & Loss from a Business (EmployER expenses / 1099 Income)
Schedule D
Capital Gains & Losses (ST & LT Investments)
Schedule E
Supplementary Income or Loss (RRF-COP)
R – Rental Income
R – Royalties
C – Copyrights
O – Oil/Gas Leases
P – Patents
F – Flow through entities (S corps, Partnerships, Estates, & Trusts)
RRF-COP
Schedule E - Supplementary Income or Loss
R – Rental Income
R – Royalties
C – Copyrights
O – Oil/Gas Leases
P – Patents
F – Flow through entities (S corps, Partnerships, Estates, & Trusts)
Schedule F
Profit & Loss from Framing
Form 1116
Foreign Tax Credit
Form 4562
Depreciation & Amortization
Form 4797
Sale of LT Business Property (not inventory or receivables – schedule C)
What is the condition that must be met in order for a self-employed taxpayer to deduct 100% of medical insurance premiums from gross income?
No member of the family may have coverage through an employer
What are the conditions that must be met in order for deduct moving expenses?
- new work must be 50+ miles from old home (one-way) - (“too far to drive”
)
- only Direct costs of moving you and your stuff (NOT meals, house-hunting costs, or temp. living costs but LODGING while moving is deductible)
- Must work 39+ weeks (9 months)
*** if reimbursed by employer, the reimbursement portion (income) should not be included
Uniform Capitalization Rules (UniCAP – Section 263A)
requires that certain indirect business costs be capitalized to inventory produced or held for sale (similar to cost accounting, mfg OH)
Which bad debt expenses are deductible (schedule C- 1099 – Business Expenses)?
Bad debts recognized under Direct Write Off Method
Adjustment for Prepaid Interest (Business Expenses - 1099)
Not deductible when paid, even under the cash basis method
- deductible in period it applies to
Adjustment for gifts to customers (Business Expenses – 1099)
Deductible up to $25 per recipient per year
Adjustment for Meals & Entertainment expenses (Business Expenses – 1099)
50% of expenses are deductible
Adjustment for Travel expenses (Business Expenses – 1099)
100% of travel expenses are deductible
Adjustment for taxes paid by the business (Business Expenses – 1099)
All deductible
Adjustment for promotional items (Business Expenses – 1099)
$4 per promotional item is deductible
Hobby Loss
loss not deductible if business produces no profit in 3 of 5 years
Passive Activity
any business venture in which the taxpayer does not materially participate
- all limited partnership interests
- all rental activity (unless taxpayer is real estate professional, sch C)
Losses from Passive Activities
Passive activity losses may be used to the extent of passive gains (& tax credits from passive losses can only offset taxes arising from passive activities) unless the activity is disposed of, in which all unused amount and loss may be used to deduct from gross income to arrive at AGI
- unused loss carried forward indefinitely or until the activity is disposed of
- no limit on credits or passive losses that may be deducted by grantor trusts, partnerships, & S corporations (flow through entities)
When may rental activities be used to offset ordinary income?
Rental activities in which the taxpayer materially participates
- Real estate person: losses treated as ordinary business losses
or
- Active Participation: may deduct up to $25k against ordinary income each year (unused loss treated as passive losses)
*** When the taxpayer’s MAGI > $100k… 50% of the excess over the $100k threshold reduces the $25k limit
*** if MAGI = $150k+, the taxpayer may NOT claim any rental losses against ordinary income ($25k reduced to $0)…. HOWEVER it may still be carried forward until they dispose of the property
What is the tax treatment for a vacation home?
it depends on if the taxpayer uses the dwelling unit as a “home”
[personal use] > [greater of: 14 days or 10% of the number of days rented]
- If Qualifies as “home” & rented < 15 days —– EXCLUDE rental income from GI & Expenses are NOT deductible as rental expenses (can deduct on Sch A)
- If Qualifies as “home” & Rented 14+ Days —– INCLUDE rental income in G.I. & Deductions are limited to gross rental income. (unused deductions may be carried forward to future years)
- If does NOT qualify as “home” —– INCLUDE rental income in GI & all expenses allocated to the rental portion are allowed. Expenses in excess of income are subject to passive activity loss limits [$25k – 50%(mod AGI)]
What qualifies a dwelling unit as a “home”?
[personal use] > [greater of: 14 days or 10% of the number of days rented]
What is the tax treatment for income from a flow through entities?
Taxable to the INDIVIDUAL in the period in which it is reported (schedule K-1) by the flow through entity
Schedule K-1
Flow Through Entity income
What is the tax treatment for losses from a flow through entities?
Only deductible to the extent that the taxpayer is at “risk”
Risk:
- Money & adjusted basis of property contributed to the partnership (personal interest/investment)
- Debts of the partnership if personally liable or has pledged personal property as collateral (up to net fair value of partner’s interest in the property)
What is the tax treatment for Alimony PAID?
Taxable to the recipient & Deductible by the payer (except child support & property settlement)
- To qualify as “alimony”, the payment must satisfy all conditions: (CANNOT)
C – Cash only or its equivalent (not property)
A – Apart when payments made (not living together)
N – Not Child Support (not taxable / not deductible & payments go to C.S. First, then alimony)
N – Not designated as property settlement (not taxable / not deductible)
O – Own tax return for payer & payee (not joint)
T – Terminates on death of recipient
*** if pay for college as part of divorce agreement, considered alimony
Alimony Recapture Rule
prevents property settlements from being treated as alimony
For purposes of eligibility for the IRA, what is considered “earned income”?
- Salaries & wages
- Net Self-Employment Income
- Alimony Received / Separate Maintenance
- Non-taxable combat pay
- commissions
What age must the individual be to contribute an additional $1,000 to an IRA?
50+ years old but must also have earned income of at least $6,500 to contribute $6,500 ($1,000 + $5,500 contribution limit)
IRA contribution limit (2014)
$5,500
$6,500 (if 50+ years old)
*** contribution applies to the TOTAL contributed of Trad. & Roth
Roth IRA cannot be used by
taxpayers with AGI $129k+ (if MFJ, $191k+) - 2014
Traditional IRA can be used by
All taxpayers can use a traditional IRA, regardless of AGI
When are contributions to a traditional IRA deductible as adjustment for AGI?
Always
UNLESS both conditions apply:
- individual is actively participating in another pension or profit-sharing plan
&
- AGI on the tax return exceeds a threshold amount ($69k single, $115k MFJ – 2013)
What is the benefit of a Roth IRA?
All withdrawals after age of 59.5 are tax-free (Roth IRA must have be in effect for 5+ years)
What is the tax treatment for withdrawals from a traditional IRA?
They are fully taxable except to recover non-deductible contributions made earlier
What is the tax treatment for withdrawals from an IRA (trad. Or Roth) prior to age of 59 ½?
10% early tax penalty of the amount withdrawn (amount is included in gross income as well)
- withdrawal is taxed at your marginal tax rate (tax rate of last & next dollar of taxable income)
Exceptions: withdrawal for medical expenses (>7.5% of AGI), qualified higher education costs, death or disability of the participant** , OR first time purchases of a home ($10k max withdrawal)**
**Last 2: if Roth IRA withdrawal, the amount is not included in gross income (still included in GI if Trad IRA)
Effective Tax Rate
average rate of taxation for all your dollars
Effective Tax Rate = Total Tax / Total Taxable Income
What are the penalty exceptions for early withdrawal of an IRA (both Roth & Traditional)?
- Payment of medical expenses exceeding 7.5% of AGI (65+) (+ included in GI)
- Payment of qualified higher education costs (+ included in GI)
- Death of Disability of the participant***
- First Time Purchases of a Home (max $10k withdrawal)***
*** #3 & #4: need not be included in Gross Income if withdrawn from Roth IRA (included in GI if withdrawn from Trad IRA)
Coverdell Education Savings Accounts (ESA)
- contributions limited to $2,000 per year (NOT tax deductible). Beneficiary must be under the age of 18 while contributions are made (anyone can contribute to the beneficiary, even if unrelated)
- contributions can be made until the tax return due date (4/15)… excluding extensions
- Withdrawals are tax-free if payments are used on elementary, middle school, high school, and college expenses of the beneficiary (includes books, fees, tuition, and room & board)
- When beneficiary reaches the age of 30, the remaining account balance must be distributed (2 Ways)
1. Distributed to the beneficiary, which is subject to taxation & penalties
2. Transferred to an ESA of another family member of the same generation without taxation or penalties
*** formerly aka “Education IRAs”
Qualified Tuition Programs (QTP – 529 Plans)
- contributions made to be used for qualified higher education (undergrad & graduate level)
- contributions limited to annual gift tax exclusion ($14K) or may file an election that allows contribution to be averaged over 5 years ($70k total, but still limited to $14k average per year)
- Investment earnings are tax-free only if the earnings stay in the plan or are withdrawn for educational purposes (tuition, supplies, books, fees, room & board)
- 10% federal penalty if funds are not used for non-educational purposes
- No phase out exists
- Can contribute to a Coverdell ESA & QTP for the same beneficiary in the same year
- 2 Types of Plans:
1. Prepaid Program (paid to the school)
2. Savings Account Plan
Keogh Plans
Retirement plans for self employed unincorporated business owners (not independent contractors)
- contributions may be deducted from gross income
- contributions limited to lesser of $52k or 100% of earned income
- contributions limited to 25% of [net SE income after Keogh deduction & 50% of SE tax is claimed]… this amount is effectively 20% of SE income before the Keogh deduction (net SE income is equal to the remaining 80%)
Simplified Employee Pensions (SEPs)
contributions may be deducted from gross income
- up to lesser of :
1. 25% of compensation
Or
- $52,000
SIMPLE plans
Savings Incentive Match Plan for Employees (SIMPLE)
- contributions may be deducted from gross income
- contributions limited to $12k per year by the employee & up to 100% of income matched by the individual employer
- Withdrawals within 2 years are subject to a 25% penalty tax (instead of the usual 10%)
What is the tax treatment for contributions made by company owners in regards to Keogh plans, Simplified Employee pensions (SEPs), & SIMPLE plans?
- If contribution is made on behalf of the business owner, the contribution is deducted from Gross Income to arrive at AGI
- if contribution is made on behalf of the owner’s employee, the contribution is claimed as ordinary business deduction in the computation of net business profit or loss
“Early Withdrawal Penalty”
(I-EMBRACED-EHF)
early INTEREST withdrawal penalty from a CD is deductible
Tax Treatment for Jury Duty Fee
Taxable Income: Must ALWAYS include the fee in Gross Income (reported on 1040 as “other income”)
- if the jury duty fee is given to the employer, taxpayer may deduct the fee to arrive at AGI (still included in GI)
(usually the case when employer pays wages while employee is away for Jury Duty, the employee will remit fees to employer)
“Qualified Higher Education Expense”
(I-EMBRACED-EHF)
Tuition for higher education is deductible up to $4,000
- courses that are expressly required by an employer, law, government regulation, or to maintain/improve skills required for current job (i.e. CPE courses)
- Phaseout Exists
Health Savings Account (HSA)
- contributions are deductible by a SE taxpayer or employee (must file Form 8889)
- taxpayer must have high deductible health plan (HDHP): $1,250 deductible for self-only coverage or $2500 deductible for family coverage
- contributions limited to LESSER of:
1. deductible (self:$1,250 or fam.:$2,500)
2. limit of $3,330 (self) or $6,550 (family)
** taxpayers 55+ years old can contribute additional $1,000
- amount contributed by employer are excluded from W2 income but still count towards contribution limit
- Expenses paid from the HSA CANNOT be claimed as Schedule A deductions
- Distributions from HSA are tax-free if used for qualified medical expenses (sch A deductibles, except HDHP premiums)
- If not used for qualified medical expenses, the distribution is subject to taxation & 20% penalty.
- No 20% penalty if distributions are made after beneficiary dies, becomes disabled, or turns 65.
Form 8889
Must be filed in order to make contributions to Health Saving Account deductible
What is the contribution limit for a HSA (health savings account)?
- contributions limited to LESSER of:
1. deductible (self:$1,250 or fam.:$2,500)
Or
- limit of $3,330 (self) or $6,550 (family)
When are HSA distributions not subject to a 20% penalty?
- used for qualified medical expenses (same sch A itemized deductions, except HDHP premiums) & tax-free also
- made after beneficiary dies, becomes disabled, or turns 65 (not tax-free)
Crop Method
Accounting method that may be used for Schedule F (Farm Income) – (cash, accural, & hybrid are other options)
- cost of producing the crop is deducted in the year the crop income is realized (similar to accrual: COGS)
Accounting Methods for Farm Income (schedule F)
- Accrual, Cash, Crop Method, or Hybrid/Combination Method may be used if show income & used consistently
** if cash method is used to determine income, it must be used for reporting expenses
** if accrual method is used for reporting expenses, it must be used to determine income
How is farm income taxed?
Farmers may elect to average farm income over 3 years
- there is Schedule F Income (subject to SE Tax) & Form 4797 Income (not subject to SE tax)
Schedule F items:
- raised livestock, produce, and grains held for sale (other items bought for resale)
Form 4797 items:
- animals not held primarily for sale
- Livestock held for draft, breeding, dairy, sporting
- gains from sales of farmland or depreciable farm equipment
Form 4797
(sales of business property) Farm Income Items not subject to SE tax
- animals not held primarily for sale
- Livestock held for draft, breeding, dairy, sporting
- gains from sales of farmland or depreciable farm equipment
Schedule F items
Farm Income items subject to SE tax
- raised livestock, produce, and grains held for sale
- livestock & other items bought for resale
179 Deductions
You can elect to recover all or part of the cost of certain qualifying property (tangible personal property), up to a limit, by deducting it in the year you place the property in service.
You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions
Standard Deduction
- automatically given by the IRS to every taxpayer
- based on the taxpayer’s filing status
- is an alternative to claiming itemized deductions
- dollar amount are adjusted for inflation and updated annually
Highest standard deduction
MFJ with both individuals age 65+ & legally blind
- all 3 traits increase the standard deduction (MFJ, 65+. & Legally Blind)
Tax Treatment for Charitable Contributions to qualified organizations
deductible amount is equal to NET of cash or property donated of any value received from the organization
- deductible in the year the ORGANIZATION RECIEVES the donation
- volunteer services are not deductible but out-of-pocket expenses (i.e. mileage & parking) incurred while volunteering are deductible
- Property contributions are subject to 2 rules:
1. Ordinary Income Rule: Deductible = (FMV – [Ordinary Income Or ST Capital Gain]) —–** (deductible must be lower of deductible calculation or FMV)
2. LT Capital Gain Rule: deductible = HIGHER FMV of LT Capital Gains, but limited to 30% of AGI
TOTAL overall contribution deductions are limited to 50% of AGI (unused may carry forward for 5 years)
- corporations limited to 10% of ATI (5 year carry forward applies)
Ordinary Income Rule
Property is ordinary income property if Sale at FMV on date of contribution would have resulted in ordinary income or ST Capital Gain (held less than 1 year)
** includes inventory, self-created art work, & capital assets (
Deductible = FMV – (Ordinary Income or ST Capital Gain)
** limits deduction to lower of the tax basis (deductible) or FMV
Long Term Capital Gain Rule
Property is capital gain property if its sale at FMV on that date of the contribution would have resulted in a LT capital gain (held 1+ years)
- capital gain property (non-business capital assets held 1+ years)
Deductible = HIGHER FMV of LT Capital Gains but limited 30% of AGI
What is the overall contribution limit that can be deducted per year?
Individual: 50% of AGI & may carry forward unused amounts for 5 years
Corporations: 10% of ATI & may carry forward 5 years as well
What are the itemized deductions for “other miscellaneous expenses”?
- Not subject to 2% of AGI minimum
- Gambling losses: deductible limited to extent of gambling winnings (no carryover)
- Gambling winnings
- Professional Gamblers can deduct non-wagering business expenses on sch. C - Estate Taxes on income in respect to a decedent (IRD)
BIT
BIT is the first M in COMMITT (Miscellaneous Expenses: sch A itemized deductions
B - Business Expenses of Employee (2106 in Sch. A)
I - Investment costs (does not included brokerage buy/sell fees, which is included in P&L of stock)
T - Tax preparation/legal advice relating to taxable income (& costs incurred to collect money owed by others)
BIT expenses deductible = excess of 2% of AGI
Tax Treatment for Business Use of a Home
Employee’s Home office for employer’s convenience, individual can include in Sch A itemized deductions (excess of 2% of AGI)
- if self employed, the home office gets reported in Schedule C
Tax treatment for itemized deductions of medical expenses
Must have been paid & not reimbursed (net)
- deductible is the excess of 10% of AGI (if 65+, 7.5% of AGI)
- deductible in the year expenses are paid
- cosmetic services are not deductible (unless for curing illness, injuries, birth defects)
- general health improvement not deductible (must be specific medical conditions)
- non-prescription drugs not deductible (must be prescription)
- costs for people other than self, spouse, or dependent are deductible if the taxpayer provides over 50% of support (“donated” health care not deductible)
Itemized Deduction for investment interest expenses
deductible to extent of Net Investment Income (which is on Sch B)
- unused amount carried forward idefinitely
Interest Paid (applies to tax year)
Deductible in year it applies (always treat like accrual basis, even if cash basis is used)
— prepaid interest is not deductible until year that it applies to (except for “points” on mortgage loan to acquire a primary or secondary residence, which is a form of prepaid interest… it is deductible immediately)
itemized deductions on personal residence interest
Personal Residence: primary & secondary residence
- Points paid on a loan to acquire the residence: deductible immediately
- Points paid on other qualified personal residence loans: deductible by amortization over the life of the loan (accrual)
- Periodic Interest payments on acquisition indebtedness up to $1M (acquire, construct, improvement loans & loans that replace previous acq. Indebtedness)
- Period interest payments on home equity loans up to $100k (secured by home’s equity)
** home equity loans must NOT be > (FMV of home – O/S Acq. Indebtedness)
Interest on Personal Loans (itemized deduction?)
Not Deductible
Gas or Excise Taxes (itemized deduction?)
Not Deductible
Fees charged by local & state governments (itemized deduction?)
Not deductible UNLESS they are based specifically on income or property value
State and Local Sales taxes (itemized deduction?)
Deductible only if taxpayer chooses to deduct instead of state and local INCOME TAXES
** useful for taxpayer’s in the 9 states without income tax
Itemized deduction for Casualty Losses
Losses that exceed 10% of AGI are deductible
Deductible Calculation:
** loss claimed is LOWER of tax basis (purchase + repairs) OR loss (FMV before event – FMV after event)
Then all following must be subtracted from Loss amount to arrive at Deductible:
- Reimbursements (insurance & governments)
- $100 per event
- 10% of AGI per year
***Casualty loss: sudden event that causes a total loss or drop in value over a time period less than 30 days (accidental breakage not included)
Phase Out for Itemized Deductions (calculation)
Total of All itemized deductions is reduce by the LESSER of:
- 3% of the amount of the excess of AGI over the annual limit
- 80% of the itemized deductions that are affected by the limit
exclude GIMC – Gambling losses, Investment interest, Medical expenses, & Casualty Losses
GIMC
G - Gambling losses
I - Investment interest
M - Medical expenses
C – Casualty Losses
Total of All itemized deductions is reduce by the LESSER of: (exclude GIMC)
- 3% of the amount of the excess of AGI over the annual limit
- 80% of the itemized deductions that are affected by the limit
Personal Exemption for MFJ
2 Personal Exemptions are included if MFJ (spouse is not a dependency exemption)
Qualifying Child
taxpayer’s child, stepchild, sibling, step sibling, half sibling, or a descendant of any such individual (ie nephew)
JARRS
Joint Return-no
Age (under 19 or FT student under 24 or any age if perm & totally disabled)
Residency (US or N.A. Resident)
Relationship (living with ½ year, foster child: whole year)
& Support tests (dependent cannot support THEMSELVES 50%+)
Qualifying Relative
C – IRS – J[ack you]
C – Citizen or resident (US of N.A. Resident)
I – Income: limited to personal exemption amount ($3,950) (ignore SS)
R – Relationship or unrelated & household member for entire year
S – Support: provide 50%+ of total annual support (includes SS & AFDC) (multiple support agreement applicable, 10% support)
J – no Joint return with spouse (unless dependent and spouse are filing only to get total refund of taxes paid or withheld & weren’t required to file)
What are the requirements to qualify as a dependent?
All requirements met for either
- Qualifying Child (JARRS)
Or
- Qualifying Relative (C-IRS-J[ack you])
Personal Exemption
deduction amount one can claim for self or dependent each year
$3,950 (phase out applies)
What does a filing status determine?
- Income tax rates
- Value of various deductions, thresholds, & limitations
Qualifying Widow (surviving spouse) with a dependent child
Death in prior 2 years & qualified to file a joint return in year of death (not divorced, separated)
- not remarried as of end of current year
- Same rate as MFJ
What is the order for considering your filing status?
- MFJ
- MFS
- Qualifying Widow
- Head of Household
- Single
How does a taxpayer qualify as Head of Household?
Satisfy all requirements below:
- Taxpayer NOT married or surviving spouse at year end
- Taxpayer must maintain his home as the principal place of residence for over 50% of year
- Must Provide 50%+ of costs of maintaining a household for:
a. DEPENDENT “qualifying relative” living with the taxpayer for entire year
b. “Qualifying Child”, stepchild, or grandchild living with taxpayer (must be dependent UNLESS custodial parent releases right claim dependency & files form 8332)
c. DEPENDENT parent (but need NOT live with taxpayer)
*** child must be a qualifying dependent child OR qualifying relative in order to qualify a taxpayer for HOH status
What is the filing status for a Married individual but legally separated under decree of separate maintenance?
SINGLE
Child Tax Credits
$1,000 credit for qualifying children under 17 years old at year end.
** refundable credit ($$$) applies when taxpayer is unable the full credit because tax liability is LESS THAN available credit
Adoption Credit
available for costs incurred in adopting a child under the age of 18 (minor)
- credits exceeding the tax liability may be carried forward for up to 5 years (not refundable credit)
- Phase out applies
Child & Dependent Care Credit
available when the taxpayer requires care services for a child or disable dependent in order to be gainfully employed (child must live with the taxpayer for 1/2+ the year—- 50% support does not apply)
Credit is the less of:
- Actual dependent Care Expenses
- Earned Income (if married, based on income of lower-paid spouse)
- $3,000 (one dependent care) or $6,000 (multiple dependents care)
** up to $5,000 of benefits under an employer dependent care assistance plan can be EXCLUDED from taxable income
Tax Credits
dollar for dollar reduction of taxes payable
The types of Education Tax Credits
- American Opportunity Tax Credit [per student] (AOTC… formerly known as Hope Scholarship Credit) – High School (4 years)
- Lifetime learning Credit [per family] – All other years of education & tuition to improve job skills
American Opportunity Tax Credit (AOTC… formerly known as Hope Scholarship Credit)
- Applies to the first 4 years of High School (post-secondary school)
- Tiered Tax Credit per student = (1) 100% of first $2,000…(2) 20% of the next $2,000 (therefore, $2,500 max credit per student)
- applies to tuition, textbooks, and fees of the taxpayer, spouse, or dependent
- 40% of the credit is refundable credit ($1,000 max)
Lifetime Learning Credit
- applies to all other years of education (other than the AOTC first 4 years of HS)
- can also apply to tuition paid to a qualified educational institution to improve job skills
- credit per family = 20% of the first $10,000 paid on behalf of all the family members ($2,000 max credit PER FAMILY)
Restrictions placed on both Education Tax Credits (AOTC & Lifetime Learning Credit)
- credit only applies to tuition and fees paid to qualified educational institutions
- phase out exists
- credit cannot be claimed on the dependent’s tax return
4. Cannot claim both a AOTC (Hope) and Lifetime Learning Credit for the same student in the same year
Savers Credit
available for low to moderate income workers to encourage contributions to retirement accounts (IRA or employer sponsored)
- “eligible” if 18+ age, Not a FT student, & not claimed as a dependent
- $1,000 max credit ($2,000 MFJ), with ranges 10% - 50% of $2,000 depending on income (form 8880)
- May be claimed by:
1. MFJ with income up to $60k (2014)
2. HoH with income up to $45k (2014)
3. Single/MFS with income up to $30k (2014)
Form 8880
Credit for Qualified Retirement Savings Contributions (Saver’s Credit Form)
Foreign Tax Credit
available for payments of foreign income taxes that are not being claimed as itemized deductions (can only be claimed on foreign income that is also subject to domestic taxation)
- calculation is same for individuals & corporations except for one thing:
—- Individuals can claim credit up to $300 ($600 MFJ) for foreign income taxes paid on investment income WITHOUT being subject to any other limits
Credit for the Elderly or Disabled
Available to those:
- 65+ years old at year end
or
- Retired on permanent and total disability and have taxable disability income
Limitations (2):
- AGI must be less than:
- $17,500 if single, HoH, or Surviving Spouse
- $12,500 if MFS
- $20k if MFJ with 1 eligible spouse
- $25k if MFJ with both eligible - Total of Non-taxable Social Security, pensions, annuities, and disability income must be less than:
- $5k if single, HoH, or Surviving Spouse
- $3,750 if MFS
- $5k if MFJ with 1 eligible spouse
- $7,500 if MFJ with both eligible
Age 65 (Rule)
You are considered to be age 65 on the day before your 65th birthday.
As a result, if you were born on January 1, 1949, you are considered to be age 65 at the end of 2013.
Earned Income Credit (EIC)
refundable tax credit
- calculation of EIC only includes taxable income (must have some form of earned income to qualify)
- A qualifying child does not have to meet the support test
—- must have lived with the taxpayer for more than ½ the year & have a valid SSN that is valid for employment in the US
*** if investment income > $3,200, the credit is DENIED
Net Self Employment Income
All business revenue minus ordinary & necessary business expenses (except retirement plan contributions made on the taxpayer’s behalf
** one of the business expenses deducted in ½ of the self-employment tax itself (deducted in arriving to AGI from GI)
Medicare Portion of the SE Tax
it is based on the entire amount of net self-employment income.
** the remaining portion of the SE tax is limited to a certain income limit that changes every year
Self Employment Tax (other than medicare portion)
It is limited to a certain income limit that changes every year:
- based on net SE income that is reduced by any of the taxpayer’s gross wages that were subject to social security taxes
Hospital Insurance (HI) rate
.9% increase in Medicare tax rate for high income earners ($250k for MFJ & $200k for all others):
—- 2.35% tax rate on amounts in excess of the thresholds (old rate 1.45%)
—- the SE tax rate increases from 2.9% to 3.8% on amounts in excess of the threshold
Form 1040ES
If estimated tax payments are required, they are due on form 1040ES by the 4th, 6th, and 9th months of the taxable year & on the 15th of January
When is an individual generally not subject to a penalty for underpayment of estimated taxes?
Any amount may be satisfied:
- balance due is Less than $1,000 on April 15th
- withholding & estimated payment of taxes is more than 100% of PY tax liability (110% if taxable income is $150k+ in PY)
- withholding & estimated payment of taxes is more than 90% of CY tax liability
Or
- did not have a PY tax liability
What is treatment for a late payment penalty and late filing penalty in the same month?
The late filing penalty (5%) is reduced by the late payment penalty (.5% — one-half percent) so that the maximum penalty is 5% per month
** penalties are based on the net tax due
Accuracy-Related Penalty
Penalty of 20% of the tax underpayment amount applies if the underpayment is due to:
- negligence or disregard of rules & regulations
- any substantial understatement of income tax
- any substantial valuation overstatement
- any substantial overstatement of pension liabilities
Or
- any substantial gift or estate tax valuation understatement
When is an individual not require to file a tax return?
- When a tax liability does not result because of insufficient gross income.
- If Gross Income is less than the sum of:
+ Personal exemption (2 if MFJ)
+ basic Standard Deduction based on filing status
+ Additional Standard Deductions based on age
When does the statute of limitations begin for the IRS to file a notice of deficiency?
Day AFTER the later of:
- Date tax return is due (including extensions)
Or
- Date tax return is filed
What is the time limit for a taxpayer to claim a refund (1040X)?
The limit is the later of:
- 3 years after the original return was due (including extensions)
Or
- 2 years after the tax payment
30 Day Letter
issued by the IRS when an examination results in a proposed tax deficiency
- letter includes: report of the examination, reasons for indication, taxpayer’s right to appeal
** within 30 days of the date of the letter, the taxpayer may ask the Appeals Office to consider the case
What is the purpose of the Alternative Minimum Tax (AMT)?
to limit the reaping of benefits from large itemized deductions or special tax benefits
- compared against the Regular Tax Due (higher amount is chosen)
AMT Formula – full (Individuals)
Regular Taxable Income
+/- Adjustments & preferences
= AMTI before exemption
- Exemption
=AMTI
X Tax Rate (26% for first $179.5k, then excess at 28%)
= Tentative Minimum Tax
- Regular Tax
= AMT
AMTI formula (Individuals)
Regular Taxable Income
+/- Adjustments & preferences
= AMTI before exemption
- Exemption
=AMTI
AMT formula – AMTI to AMT (Individuals)
AMTI
x Tax Rate (26% for first $179.5k, then excess at 28%)
= Tentative Minimum Tax
- Regular Tax
= AMT
SIMPLE-PIE
SIMPLE (+/- adjustments) — PIE (+ preferences)
Adjustments (income or expense items) computed differently for AMT & regular tax. they are added or subtracted from Regular taxable income to arrive at AMTI before exemption
SIMPLE(+/- Adjustments)
S – Standard Deduction may NOT be claimed
I – Interest on home equity loans is NOT deductible (unless buy, construct, improve main home)
M – Medical expenses under 10% of AGI are NOT deducted (applies to 65+ in regular tax, which are at 7.5% - need to find the difference)….. [under 65 are already at the 10% threshold]
P – Personal & Dependent Exemptions are NOT allowed
L – Local & State income taxes, all property taxes & sales taxes are NOT deductible
E – Employee B.I.T. expenses subject the 2% of AGI threshold are NOT deductible (other deductions not subject to the 2% threshold are still allowed)
**** corporations have an additional ACE adjustment (does not apply to individuals)
PIE (preferences – can only increase AMTI)
P – Private activity bond interest is fully taxable (interest is not a preference if bond was issued in 2009 or 2010)
I – Incentive Stock Options: taxed when exercised for difference between Exercise Price & Market Price (regular tax: taxed when sold)
E – Excess depreciation on personal property over 150% declining balance (regular tax: double-declining balance)
Private Activity Bonds
used to finance nongovernmental activities, such as industrial housing, low income housing, and student loans
ACE Adjustment
additional AMTI adjustment for corporations only
AMT Exemption
based on the filing status of the tax return (phase out exists)
AMTI before exemption – AMT Exemption = AMTI (or AMT Base)
AMTI Adjustments & Preferences
SIMPLE (+/- adjustments) — PIE (+ preferences)
Adjustments (income or expense items) computed differently for AMT & regular tax. they are added or subtracted from Regular taxable income to arrive at AMTI before exemption
SIMPLE(+/- Adjustments)
S – Standard Deduction may NOT be claimed
I – Interest on home equity loans is NOT deductible (unless buy, construct, improve main home)
M – Medical expenses under 10% of AGI are NOT deducted (applies to 65+ in regular tax, which are at 7.5% - need to find the difference)….. [under 65 are already at the 10% threshold]
P – Personal & Dependent Exemptions are NOT allowed
L – Local & State income taxes, all property taxes & sales taxes are NOT deductible
E – Employee B.I.T. expenses subject the 2% of AGI threshold are NOT deductible (other deductions not subject to the 2% threshold are still allowed)
**** corporations have an additional ACE adjustment (does not apply to individuals)
PIE (preferences – can only increase AMTI)
P – Private activity bond interest is fully taxable (interest is not a preference if bond was issued in 2009 or 2010)
I – Incentive Stock Options: taxed when exercised for difference between Exercise Price & Market Price (regular tax: taxed when sold)
E – Excess depreciation on personal property over 150% declining balance (regular tax: double-declining balance)
Tentative Minimum Tax
Tiered Calculation to get TMT:
- 26% x (First $179,500 of AMTI, if MFJ)
- 28% x (Excess over $179,500, if MFJ)
***[$89,759 if MFS]
When AMT is paid (not regular tax due), what is something to consider?
- Timing Differences (reversal of income differences), which may result in a credit against regular tax liability in future years
- ISO: - AMT taxes them at date of exercise (Market Price – Exercise Price = Taxable Gain for AMT)
- Regular tax is at date the ISO is sold by the taxpayer (Updated Market Price – Exercise Price = Taxable Gain on Sale)
——- Therefore: the AMT tax paid on the ISO’s original gain is claimed as a credit against the regular tax liability
- Exclusion preferences and adjustments do NOT result in credit against regular tax liability (differences that do not reverse)
Non-refundable Personal Credits effect on Regular Tax Liability & AMT
they are allowed to offset both Regular Tax & AMT
Non-refundable personal credits:
- dependent care credit
- credit for elderly or disabled
- adoption credit
- non-refundable portion of the child tax credit
- education credits (hope & lifetime)
Carryover Rule for Charitable Contributions
Back: None
Forward: 5 years
Carryover Rule for Net Op. Losses (NOL)
Back: 2 Years
Forward: 20 years
Carryover Rule for Net Capital Losses (Corporations – 0 net cap loss)
Back: 3 Years
Forward: 5 years
Carryover Rule for Net Capital Losses (Individuals - $3k net cap loss)
Back: None
Forward: Indefinitely
Carryover Rule for Investment Interest
Back: None
Forward: Indefinitely
Carryover Rule for Net Passive Losses
Back: None
Forward: Indefinitely or may be claimed when investment is sold..
Carryover Rule for Net Gambling Losses
Back: None
Forward: None
Section 1244 stock (Capital Gain or Loss tax treatment)
treated as an ordinary income or loss, rather than a capital gain or loss, due to the special rules for small domestic corporation stock losses.
Form 1139
may be used by a corporation to file for a tentative adjustment or tax refund when an PY overpayment of taxes results from the carry back from of a CY’s net operating loss or net capital loss
(like a form 1045 but for corporations only)
Form 1045
may be used by taxpayers other than corporations to apply for a tentative adjustment or tax refund when an PY overpayment of taxes results from the carry back from of a CY’s net operating loss or net capital loss
(like a form 1139 but not for corporations)
Form 843
used to file a refund claim for taxes other than income taxes
What is the amount included in CY gross income if the individual itemized the deduction in the PY?
The LESSER of:
- the amount by which total itemized deductions exceeded the standard deduction in the PY
or
- the amount of state taxes claimed as a deduction
Which tax credits are denied for a MFS filing taxpayer?
- the earned income credit
- the child and dependent care
- adoption credits.
When is a residence treated as part personal residence and part rental property?
If a residence is both:
- Rented for more than 14 days during the year
&
- Qualifies as a “Home”: Personal use > [the larger of (i) more than 14 days or (ii) more than 10% of the rental days]
If this is the case, expenses attributable to the residence must be prorated between personal and rental use
What is required to qualify for the exclusion of capital Gain on the Sale of Personal Residence?
the taxpayer must own & occupy the residence for 2 of the 5 years immediately before the sale.
If qualified, No gain reported up to $250,000 ($500,000 for married taxpayers) of capital gain attributed to the sale of a personal residence.
During the current tax year, one spouse died. The couple has no dependent children. What is the filing status available to the surviving spouse for the first subsequent tax year?
For the first subsequent tax year (and all other subsequent tax years) after the death of a spouse with no dependent children, filing status is single.
Gross Income Deduction Limit for Passive Activity Losses from Flow Through Entities
- no limit on credits or passive losses that may be deducted by grantor trusts, partnerships, & S corporations (flow through entities)
Exception to the Passive Activity Loss Rule
“Mom and Pop Exception”
Taxpayers who own more than 10% of the rental activity, have modified AGI under $100,000, and have active participation (managing the property qualifies), may deduct up to $25,000 annually of net passive losses attributable to real estate.
Phase Out for modified AGI from $100,000 − $150,000 (phased out at $150k)
Tax Treatment for receipt of Prepaid Rent
Prepaid rent is taxable in the year received, even for accrual basis taxpayers
The rule limiting the allowability of passive activity losses and credits applies to
Personal Service Corporations
What are the types of tax-exempt interest income (reportable but not taxable)?
- Series EE Savings Bond (if educational expenses, ownership, 24+, acquired after 1989)
- Bonds of US Possession (e.g. Guam or Puerto Rico)
- State and Local Government Bonds/Obligations (including mutual fund dividends invested in tax-free bonds)
- Veterans Administration Insurance
Rule of thumb to determine the deductions to arrive at Net Self-Employment Income?
Deductions to arrive at net self-employed income include all necessary and ordinary expenses connected with the business
Requirements of an Employee Stock Purchase Plan (ESPP)
- option exercise price must be GREATER THAN the lesser of: (a)85% of the FMV on grant date or exercise date
- no employee cam acquire right to purchase more than $25,000 per year
- option cannot be exercised more than 27 months after the grant date
- once exercised, the stock must be held at least 2 years after the grant date & at least 1 year after the exercise date
- must remain an employee from the grant date until 3 months before option is exercised
Qualified Stock Options
ISO (Incentive Stock Option)
ESPP (Employee Stock Purchase Plans)
What is an individual’s tax treatment for being granted unqualified stock options (in the year of grant)?
Recognize ordinary income as the value of the option if traded on an established market
Steps to Calculate the amount of Child’s Unearned Income (who is subject to Kiddie Tax) that is taxed at parent’s tax rate
Child’s Unearned Income – Standard Deduction* – Standard Deduction = Amount Taxed @ Parents Max Tax Rate
**2014 Standard Deduction = $1,000
*First Standard Deduction in calculation is taxed @ the child’s tax rate
A rule of thumb for deductions on the Schedule C
Personal expenses are not allowed (i.e. health insurance, personal use of automobile)
Gain on Sale of personal residence
Income or Not Income?
Partial Income
- $250k of Gain on Sale is excluded from income, the excess above $250k is taxable income (as capital gain)
Pension Benefits
Income or Not Income?
Income except to the extent they are considered return on capital (amount contributed by the employee)
* amount contributed by the EMPLOYER is taxable
Gambling Winnings and Losses Tax treatment
Gambling Winnings are FULLY taxable & included in AGI
Gambling Losses are deductible in Schedule A (“O” in COMMITT, itemized deductions) to the extent of gambling winnings
- any unused amount is lost, no carry back & no carry forward
Tax Treatment for Penalty from Early Withdrawal from Certificate of Deposit
The penalty is a reduction to interest earned (Deduction “to/for” AGI)
Tax Treatment for State & Local Income Taxes
Full Itemized Deduction (Schedule A) for year in which the taxes paid, regardless of which tax year the taxes apply to
Tax treatment for Real Estate Taxes
Full Itemized Deduction (Schedule A)
Tax Treatment for Losses on Sale of Personal Assets
Not Deductible
**Gains are taxable as capital gains (LT vs ST)
Tax Treatment for Union Dues
Itemized deduction (schedule A) subject to 2% of AGI reduction
- considered a business expense (BIT)
