REG Flashcards
Qualified surviving spouse
-The taxpayer’s spouse died in one of the two pervious years and the taxpayer didn’t marry in the current year
-The taxpayer has a child who can be claimed as dependent
-The child lived in the taxpayer’s home for all of the current year
-The taxpayer paid over half of the living expenses for the child
-The taxpayer could have filed a joint return in the year the spouse died
Qualified Business Income (QBI)
Is taken from adjusted gross income (“below the line”). It is not part of the itemized deductions
If the spouse dies in the current year
The surviving spouse is considered to be married for the entire current year
Individuals
Are required to have a calendar year end
Head of household
can only be elected if the taxpayer is legally separated at year-end and live apart from the spouse for six months
If more than two year have passed since the spouse has died
The taxpayer can no longer file as a qualified surviving spouse
Head of household
can be used when the taxpayer maintains more than half of the upkeep on another person’s principal residence for the ENTIRE tax year. The taxpayer is not required to live with the individual
Social security benefits
are not included in gross income for purposes of the qualifying relative gross income test
Interest earned on a refund
Is taxable
Child support funds qualification
- A specific amount is fixed or is contingent on the child’s status (reaching a certain age)
- It is paid solely for the support of minor children
- Payable by decree, instrument, or agreement
Note that for all divorce or separation agreements executed after 12/31/2018, the alimony is neither taxable to the recipient or deductible by the payor
Awards can be excluded from gross income when
- The taxpayer was selected for the award without entering the contest
- The award is paid to a governmental or charitable organization
Cash basis taxpayers
Should report gross income for the year in which the income is either actually or constructively received, whether in cash or property
Group term life insurance premiums paid by an employer
Are excludable from gross income up to $50,000. The first $50,000 is nontaxable, then the rest is
A trip for meeting sales goals
Would be included in an employees gross income
Gross income
Does not include inheritances. It does include treasure troves and employee achievement awards
Noncash income
The amount of income to be reported is the FMV of the property or services received
Even if a company car is provided to a spouse and the employee doesn’t use it
It’s still considered a taxable fringe benefit for the employee and not for the spouse
Moving expenses
Are only deductible by armed forces personnel who are moving pursuant to a military order
Employer contributions to a traditional defined contribution retirement plan, and earnings on those amounts contributed
Are not taxable income to the employee until distributed
Interest earned on Series EE bonds issued after 1989
May qualify for exclusion from gross income if the interest is used to pay tuition and fees for the taxpayer, spouse, or dependent enrolled in higher education. The interest exclusion is reduced by qualified scholarships that are exempt from tax and other nontaxable payments received for education expenses. The purchaser of the bonds must be the sole owner of the bonds.
Interest on state government obligations
Is not taxable
Interest income from muni bonds
Is not taxable
If common stock is received for services rendered
The FMV of those shares is recognized as income and dividend income on those shares of stock is also recognized as income
Under the tax benefit rule
an itemized deduction recovered in a subsequent year is included in income in the year recovered. Only the amount of the benefit, not the entire refund, is included in taxable income for the current year
Misc. items that aren’t included in income
- Rental value of parsonages (furnished by churches and synagogues) is excluded from the AGI of the minister
- Compensation for injuries and sickness
Taxes on alimony
Includes only payments received in cash (must be settled before 12/31/2018)
Child support and cash from property settlements
Are not included in gross income of the receiving spouse
Money received for child support and alimony - allocation
The money received must first be used to satisfy the child support category for the given time period, the remaining money is then applied to alimony, which is taxable if the divorced was finalized prior to 12/31/2018
Marginal tax rate should be used
When receiving a distribution from a traditional IRA. There will also be a 10% penalty assessed if the taxpayer is over 59.5 years old
For a cash and accrual basis taxpayer
Gain or loss on a sale of stock occurs when the trade date
Rules for alimony deductions for divorces executed on or before 12/31/2018
- Payments must be in cash or cash equivalents
- Payments cannot extend beyond the death of the payee-spouse
- Payments must ne legally required pursuant to an 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 return
Taxes on annuity (and life insurance) distributions
To calculate the nontaxable portion (nontaxable return on capital): Initial investment/years
Anything over this amount is taxable
Taxes on social security benefits
Depends on the income of the benefit holder. The maximum amount of taxable Social Security benefits is 85% if the total benefit received. The amount depends on whether modified AGI ( AGI plus tax-exempt interest plus 50% of the SS benefit) is greater than a threshold amount. For higher income taxpayers with a modified AGI of more than 24,000, up to 85% of the SS benefits received during the year are taxable
Unemployment compensation
Is included in taxable income
Tax returns for a dead person
Are due the next year
Interest income received after death
Are taxable to the estate, not the individual
Damages awarded as a result of physical personal injury
Are not taxable
Misc. items included in gross income
- Payment to a part-time student for teaching services provided
- Payment to a degree candidate for participation in a university-sponsored research project
If vacation time is used on a business trip
The airfare isn’t deductible, even if business activities were involved part of the time
Consideration for cancelling a lease
Is considered rental income
A partnership generates net ordinary business income or loss
And passes each partner’s distributive share through on Schedule k-1
Net self employment income
Gross income - license fees - marketing expenses
Salaries paid to yourself as a business owner
Are considered draws and are not factored into gross income
Total self employment income
Gross business receipts - Business expenses
1040 schedule c, profit or loss from business
Personal expenses are not allowed as deductions on schedule c. Schedule c items should only be related to the operation of the business itself
Business expenses
Do not include investment expenses
Business meals
Are only 50% deductible on form 1040 C
State income taxes for businesses
Are not deducted on schedule C. They are an itemized deduction
Bad debt allowance
Is a direct write off only for accrual basis taxpayers
Prepaid interest
Is deductible, and must be prorated over the life of the loan
If a residence is rented for less than 15 days of the year
No rental income needs to be reported
Shareholder distributions
Are not taxable if they don’t exceed the basis of the corporation
Each shareholder in an S corp
Must report their share of the S corp’s profits in their gross income
The income is passed through to the shareholder whether or not it was actually distributed
Partnership ordinary income
Ordinary income x 50%
A partner
Is not considered an employee. They receive guaranteed payments on form K-1. This income is subject to the self employment tax
Taxable vs. Nontaxable Events
Taxable = FMV for income and basis
Nontaxable = none for income and NBV for basis
In order to be a taxable gain
The gain must be recognizable and realizable
Bargain purchases
The difference is income to the employee
Net income for partnerships
Gross income
- guaranteed partner payments (nothing withheld)
= net income
Life insurance
Premiums above the first $50,000 are taxable
1040 Schedule B
Is for stocks and bonds, and for interest
Interest items that aren’t taxable
Interest on state and local bonds
Mutual fund dividends for funds invested in tax free bonds
Bonds of a US possession
Interest on US EE bonds after 1989 (higher education) for bond holders making under 100k
Types of distributions and tax results
From corporate earnings and profits - Taxable dividend
If there are no earnings or profits but the taxpayer has basis in stock (return on your capital) - Nontaxable reduced basis of stock
If there are no earnings or profits and the taxpayer has no basis (earnings in excess of your capital) - taxable capital gain
Stock dividends vs cash
Stock dividends are generally not taxable, unless cash could also be given
1040 Schedule D - Capital gains and losses formula
Amount earned
- Basis
= Gain or loss
Traditional (Deductible) IRA distributions
Are taxed as ordinary income
Required minimum distributions start at 73
Nondeductible traditional IRAs
The principle portion (contributions) isn’t taxed, but earnings are taxable as ordinary income when withdrawn
Roth IRAs
Are never taxable. Minimum distributions start at 59.5 years old
Rental income formula - Reported on 1040 schedule E
Rental income
- Total rental apartment expenses
= Net amount
Unemployment compensation
Is taxable
Modified AGI (MAGI) - AEIOU
Foreign income and housing
Interest income from EE bonds
Any deduction claimed for student loan interest
Any employer paid adoption expenses that were excluded
Any deduction claimed for an annual contribution to a traditional IRA
Gambling losses
- Are deductible on schedule A as an itemized deduction
- Gambling losses can only be deducted to the extent of gambling winnings
Cancellation of debt
Is taxable except for certain circumstances
1040 schedule C (company)
Net income from self employment is reported as one net amount
Gross business income (cash, property received in lieu of cash, cancelled debt)
- business expenses (COGS, salaries paid, state and local tax, office expenses, auto expenses, business meals (50%), depreciation of business assets (IBM), we benefits, legal and professional fees, bad debts if accrual basis is used), interest on business loans)
= Profit or loss, Net income (an adjustment to income is allowed for one half of SE taxes: Medicare plus SS paid. This is because as a sole prop you pay the business tax. All self-employment income is subject to the 2.9% Medicare tax. Up to 168k is subject to 12.4% SS tax, adding up to 15.3% self employment tax)
Easy self employment tax calculation
Earnings * 92.35% = a
a * 15.3% = self employment tax
Business losses
Go against income
Three of five presumption
If an activity is profitable for three out of five years, the activity is presumed to be an activity engaged in for profit
Rental activity, 1040 schedule e (easy money)
Gross rental income
Prepaid rental income
Rent cancellation payment
Improvement in lieu of rent
- rental expense
= Net rental income or loss
Exclusively rented properties - losses
Are considered passive and only go against passive income
A maximum loss of $25,000 can be deducted against passive income. The rest can be carried forward
Types of flow through entities
Partnership
S Corps
LLC’s taxed as partnerships or S corps
Basis - Partnership
Beginning capital account
% income
- % loss
- distributions
= Ending capital account
% partnership liabilities
= Ending tax basis
Basis - S Corp
Beginning stock basis
% income
- % losses
- distributions
= Ending stock basis
Shareholder loan to S corp
= Ending tax basis
Tax basis loss limitation
A loss can only flow through to the individual and deducted to the extent of the owners tax basis
Adjustment to AGI - above the line deductions
Educator expenses
Traditional IRA deduction
Student Loan interest deduction - limited to $2,500. Phased out at 80k single or 165k MFJ
HSA account deduction
Moving expenses for Military - started in 2017
Deductible portion of self employment tax
Self employment health insurance deduction
Deductions for contributions to certain self employment retirement plans
Penalty on early savings accounts
Alimony paid (only for divorces before 12/31/18)
Attorney fees paid in certain discrimination and whistleblower cases
IRA’s
Annual maximum contributions to IRA’s is limited to the lesser of:
Before age 50:
Unmarried - $7,000 or earned income
Married - $14,000 or earned income
Age 50+:
Unmarried - $8,000 or earned income
Married - $16,000 or earned income
Deductible traditional IRA’s
Can’t be deducted by those who earn too much or have a pension
Minimum distributions are required beginning at age 73
Roth IRAs
Can’t be used by those earning 146k - unmarried, and 230k - married
Capital losses in excess of capital gains
Are deducted up (up to $3k) on form 1040 before the calculation of AGI
SEP IRA Deduction formula
Net self employment income
- 50% of SE taxes
= Self employment earnings before SEP IRA
* 20%
= Calculated SEP IRA deduction
Itemized deductions: Medical Expense
For dependents in this instance, we don’t care about them failing the income test.
Note that most taxpayers are cash basis, meaning in order to be tax deductible the item must have been incurred and paid during the year.
Calculation:
Qualified medical expenses
- insurance reimbursement
= Qualified medical expenses
- 7.5% of AGI
= Deductible medical expenses
Allowable items:
Medicine and prescriptions
Doctors
Medical insurance premiums you pay
Medically necessary surgery
Transportation to the facility
Physically disabled costs - reduced by any increase in value of the home
Note that elective surgeries are not deductable, neither are vitamins or funerals
Spousal deductions
One spouse can’t take the standard deduction while the other itemizes
Itemized deductions: taxes
State local and foreign taxes are generally deductible.
Itemized deductions for SALT taxes, property taxes, and sales taxes are limited to $10k.
Foreign real estate property taxes, other than those incurred as a trade or business, are not deductible.
Real estate taxes:
Taxpayers must be legally obligated to pay.
Taxes are prorated in the year of sale or purchase.
Taxes paid under protest are deductible.
Taxes paid in escrow are deductible when paid to the authority.
Taxes on land held for appreciation (business) may be capitalized or deducted at the option of the taxpayer
Anything business related goes on schedule C
Personal property taxes:
To be deductible, the tax must be based on the value of the personal property and paid during the tax year.
Income taxes (state, local, federal)
Estimated taxes paid during the year are deductible.
Assessments for a prior years tax that are paid in the current year are deductible
Sales taxes:
A taxpayer must elect to deduct income taxes OR sales taxes.
The amount is determined by the amount of actual general sales taxes paid or the relevant IRS table, plus any amount paid for a vehicle boat or other approved items
Note a tax benefit rule applies here. If you would’ve gotten more back item itemizing sales taxes, it counts as income
Nondeductible taxes:
Federal taxes inheritance taxes for states
Business taxes on schedule c
Rental property taxes on schedule e
Itemized deductions: losses
$100 floor for each casualty event
The aggregate of these losses is over 10% of AGI
Losses are only deductible if sustained in a presidentially declared disaster area where the assets aren’t insured.
The amount of the deductible loss is it’s FMV immediately after the incident
Formula:
Smaller Loss of lost cost/adjusted basis or decrease in FMV
- insurance recovery
= Taxpayers loss
- $100
= Eligible loss
- 10% of AGI
= Deductible loss
Itemized deductions: interest expenses
Home mortgage interest:
Deductions are allowed for first and second homes (must be used for 14 days).
Mortgage on a business building goes on schedule C
mortgage on a rental property goes on schedule E
Interest on debt up to 750k is considered mortgage interest otherwise it’s personal
Investment interest:
Investment interest deduction for individuals is limited to net taxable investment income
Excess of investment interest paid over the allowed investment interest deduction can be carried forward forever
Personal interest is not deductible
Prepaid interest:
Must be allocated over the period of the loan, even for a cash basis taxpayer.
Deducted when incurred and paid
Prepaid interest received is income
Educational loan income:
The adjustment is limited to 2,500
Anything over is considered personal and not itemized
Itemized deductions: charitable contributions
Note gifts to individuals and political contributions are not deductible
Amount:
Cash given
FMV of property given
If it’s an ordinary income property (inventory, short term assets, depreciation recapture), it’s the lesser of the basis or FMV.
Note long term capital gains are deductible.
AGI limitations on deductions:
Cash - 60% of AGI to public charities and operations 30% to private nonoperating foundations
Ordinary income property - 50% of AGI to public charities and operations 30% of AGI to nonoperating
LTCG property - 30% of AGI to public charities and operations, 20% of AGI to nonoperating foundations
Carryover is permitted
Consideration for contribution:
Taxpayers may only deduct the excess contribution over the consideration received. Contributions received over $75 prompt the organization to give a statement to the donor indicating the deductible amount
Contributions for services aren’t deductible. Out of pocket expenses related to it are though
Students living abroad:
$50 a month is deductible
Records must be kept for all of this.
For contributions over 500, the taxpayer must fill out form 8283
For something over 5,000 an appraisal is required, except stock
Private operating vs private nonoperating foundations
Private operating - conducts charitable activities and distributes funds to it’s own programs
Private nonoperating - distributes funds to other programs
Itemized deductions vs. adjustments
Itemized deductions are a deduction from AGI itself
Adjustments are made to arrive at AGI
If lack of dependency due to the income limitation is the only reason someone can’t be claimed
You can still deduct their medical expenses if you paid them
Top five income items for individuals to arrive at AGI
- Wages, salaries and tips (use box 1 of W-2)
- Interest income (1099-B)
- Total Ordinary Dividend income (1099-B)
- Capital gain (loss) (1099-B, Proceeds minus cost or other basis)
- Other income (for gambling winnings, report the amount. The losses are backed out below the line to the extent of the winnings)
Real estate taxes
Maximum deduction is 10k
Mortgage interest
Can’t be deducted after the total amount outstanding on your mortgages exceeds 750k
You can’t deduct losses on personal transactions
An example would be selling a used car for less than you bought it
QBI deduction on 199A
20% deduction for eligible flow through entities (S corps, partnerships, LLC, trusts)
Below the line, from AGI
Deduction given to business owners
QTB vs SSTB: QBI deduction
SSTB: specified service trade or business (health, law, accounting, athletics)
QTB: anything other than an STTB
Calculating QBI: Overview
Maximum deduction: QBI x 20%
Limitations:
Taxpayers total taxable income before the QBI deduction
Whether the flow through is an SSTB or QTB
Categories:
Under beginning threshold: QTB and SSTBs are the same
Over ending threshold: QTB is calculated and SSTB isn’t allowed
In between thresholds (192k-242k single) (384k-484k MFJ): Don’t need to worry about calculating
Calculating QBI for category 1 (under the threshold)
- QBI x 20%
- Calculate overall limit ((TI before QBI deduction - cap gains) x 20%
- Choose lesser of 1 and 2
Calculating QBI for category 2 (above the income threshold)
- Determine if SSTB (nothing needed, $0) or QTB (proceed to step 2)
- Calculate tentative QBI deduction (QBI x 20%)
- Calculate full W2 wage and property limitations. Take the GREATER of: W-2 wages x 50% OR (W-2 wages x 25%) + (UBIA x 2.5%)
- Take the lesser of step 2 or 3
- Calculate overall limit: Taxable income before the QBI deduction x 20%
- Choose the lesser of step 4 or 5
