REG 2 Flashcards
Investments
The deduction for interest expense on investment debt is limited to net investment income (investment income less investment expense).
Moving expenses
The moving expense deduction is allowable for only for direct moving expenses:
(1) travel and along-the-way lodging of the taxpayer and taxpayer’s family
(2) transportation to the new location of the taxpayer’s household goods and personal effects.
*Deductible expenses must be reduced by the amount the employer reimbursed, which were not included on form W-2.
Adjustments (aka Deductions to Arrive at Adjusted Gross Income)
(1) Educator expenses-$250 qualified expenses paid, or max $500 (if spouse is also educator of K-12 grade)
(2) IRA
(3) Student loan interest expenses (limit to $2,500)
(4) Tuition and fee deduction
(5) Health Savings Account
(6) Moving expenses
(7) 1/2 Self-employment tax
(8) Self-employed health insurance
(9) Self-employed retirement
(10) Interest withdrawal penalty
(11) Alimony paid
(12) Attorney fees paid in certain discrimination and whistle-blower cases
(13) Domestic production activities deduction
Itemized deductions
(1) Medical expenses: include prescriptions, medical and accident insurance (no life or disability insurance), required surgery, transportation to medical facility, and physically disabled costs (i.e. expenses incurred to accommodate the physically disabled person in a home)
Qualified medical expenses Less (Insurance reimbursement) =Medical expenses "paid" less (10% of AGI) =Deductible medical expenses
***payments on behalf of the taxpayer, spouse, and dependent who received 1/2 of her support from taxpayer (the definition for dependent for this deduction does not consider the dependent’s income)
(2) State, local, and foreign taxes OR State and local general sales taxes
* **Non-deductible taxes include: federal taxes, inheritance taxes for states, and business (schedule C) and rental property taxes
(3) Interest expense
(i) Home mortgage interest: Acquisition indebtedness ($1M max/$500K if Married Filing separately “MFS”); Home equity indebtedness ($100K/$50 MFS max)
(ii) Investment interest expense: limited to net (taxable) investment income
(4) Charitable contributions: given to qualified charitable organizations
Overall limit=50% AGI
(i) Cash-may be 50%
(ii) General property-lesser of basis or FMV
(iii) Long-term appreciated property (asset held over 12 months)-limited to the lesser of:
a) 30% of AGI
b) The remaining amount to reach 50% after cash contributions
*Carry-over of excess charitable contributions-5 yrs
(5) Casualty and theft losses (10% AGI test)
Amount of Loss calculation:
Smaller of the two:
1. Lost cost/adjusted basis
2. Decreased FMV
Smaller loss (insurance recovery) =Taxpayer's loss ($100) Eligible loss (10% AGI) =Deductible loss
(6) Misc Itemized deductions (2% AGI test)-all subject to 2% AGI test
(i) Unreimbursed business expense
(a) Travel, meals, and lodging (overnight business travel)
(b) Transportation expense (100% deductible)
(c) meals/entertainment expenses (50% deductible)
(ii) Educational expenses (those not deducted above AGI)-maintain or improve skills; meet the express requirements for retention of this job
(iii) Uniforms-purchase, cleaning, and repair of uniforms (does not include dry cleaning or business suits/tuxedos)
(iv) Business gifts-deduction is $25 per recipient per yr
(v) Business use of home
(vi) employment agency fees (aka job hunting expenses)
(vii) expenses of investors (safe deposit box to store investments and investment advice)
(viii) subscriptions to professional journals
(viii) tax preparation fee
(x) debit card convenience fees incurred to pay income taxes
(xi) activities not engaged in profit (hobbies)
(7) Other Misc Deductions (no 2% AGI test)
(i) Gambling losses
(ii) federal estate taxes paid on income in respect of a decedent
Itemized deduction - Investment interest expense
Investment Interest expense deduction is limited to net(taxable) investment income.
Taxable investment income includes: (i) interest and dividends (if taxed at ordinary income tax rates), (ii) rents (if the activity is not a passive activity), (iii) royalties (in excess of related expenses), (iv) net short-term capital gains, and (v) net long-term capital gains if the taxpayer elects not to claim the net capital gains reduced tax rate.
*the deduction for investment interest expenses is limited to net taxable investment income which is defined as taxable investment income minus all related investment expense (other than investment interest expenses). **if the investment expense is an itemized deduction, then only those expenses exceeding 2% AGI test are considered.
Taxes paid by an individual to a foreign country
- A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. There is a limitation on the amount of the credit.
- Or an individual may deduct the taxes as an itemized deduction (not subject to the 2% floor)
Refundable Credits i.e. Earned income credit
Earned income tax credit is a refundable tax credit. It is designed to encourage low-income workers (i.e., those with earned income) to offset the burden of U.S. tax. A claimant can have one qualifying child or two or more qualifying children for this credit. There is a maximum credit available for this purpose. Further:
- The taxpayer must meet certain earned low-income thresholds.
- The taxpayer must not have more than the specified amount of disqualified income.
- The taxpayer must be over age 25 and less than 65 if there are no qualifying children.
- If married, the taxpayer must generally file a joint return with his/her spouse (i.e., the married filing separate status disqualifies a taxpayer from claiming the earned income credit).
- A qualifying child can be up to and including age 18 at the end of the tax year, provided the child shared a residence with the taxpayer for 6 months or more.
- The taxpayer must be related to the qualifying child (or children) through blood, marriage, or law.
- The child must be either in the same generation or a later generation of the taxpayer.
- A foster child qualifies if officially placed with the taxpayer by an agency.
Alternative minimum tax -Calculation
Include:
Regular Taxable Income \+/- Adjustments \+Preferences =Alternative minimum taxable income (Exemptions) =Alternative minimum tax base X Tax computation =Tentative AMT Tax (Tax credits) =Tentative minimum tax (Regular income tax) =Alternative minimum tax (pay in addition to regular tax)
Avoid the penalty for “underpayment of estimated tax”
If AGI is not in excess of $150K from prior year:
(a) 90% of the current tax on the return for the current year paid in 4 equal installments OR
(b) 100% of the prior year’s tax liability paid in 4 equal installments
If AGI is in excess of $150K from the prior year
(a) 90% of the current tax on the return for the current year paid in 4 equal installments OR
(b) 110% of the prior year’s tax liability paid in 4 equal installments
Claim a refund -statue of limitations
A taxpayer can file a claim for a refund by the later of the following:
- later of 3 yrs from the time the return was filed
- later of 3 yrs from the original due date of return
- later of 2 yrs from the time the tax was paid (usually is the case if the individual did not file a return)
AICPA Statement on Standards for Tax Services No. 1 (SSTS)
The AICPA Statement on Standards for Tax Services No. 1 states that a tax professional should comply with the standards, if any,
- imposed by the applicable tax authority for recommending a tax position, or preparing or signing a tax return.
- If the tax authority has no written standards, then the tax professional may recommend a tax return position or prepare or sign a return when she has a good-faith belief that the position has a realistic possibility of being sustained if challenged, or
- if there is a reasonable basis for the position and it is adequately disclosed on the tax return.
Tax credits
1) Personal tax credits:
such as:
i. Child and dependent care credit
ii. Elderly and permanently disabled credit
iii. Education credits; i.e. lifetime learning credits
iv. Retirement savings contribution credit
v. Foreign tax credit
vi. General business credit
vii. Adoption credit
2) Refundable credits:
i. Child tax credit
ii. Earned income credit
iii. Withholding taxes
iv. Excess Social security paid
v. American opportunity credit (40% refundable)
Personal tax credits, i.e. Child and dependent care credit
1) Child and dependent care credit:
A tax credit of 20% to 35% of eligible expenditures.
Max of 1 dependent: $3,000; two or more $6,000
i. Eligible if there is qualifying child under 13
ii. Any disabled dependent of any age who is unable to care for himself
iii. A spouse who is disabled and not able to take care of himself.
Earned Income requirement: The credit is computed by using the lowest of 1) the earned income of the spouse with the lesser amount of income, 2) the actual childcare expenditure or 2) the max amount ($3K or $6K in 2015).
The lowest amount multiplied by the applicable percentage.
For AMT, must know
- Exemption Amounts
- Distinguishing “adjustments” from “preferences”
- The AMT credit carryforward period (against regular tax)
- Credits-available to reduce AMT (to reduce AMT not regular tax)
- Exemptions
Start with “Full exemption”
AMTI Income ? (given)
(Threshold) (given AMT)
Excess over threshold = amount x 25% = X
Full exemption
-(X)
=Exemption
For AMT, must know
2. Distinguishing “adjustments” from “preferences”
PANIC TIMME
The below are ALL Adjustments
2a. Timing differences may increase or decrease AMTIncome “PANIC”
P-Passive activity losses
A-Accelerated depreciation (post 1986 purchase)
N-Net operating loss of the individual taxpayer
I-Installment income of dealer
C-Contracts-percentage completion versus completed contract
Increase AMTI (itemized deductions)
T-Tax deductions
I-Interest deductions i.e. mortgage interest NOT used to buy, build, or improve dwelling (house, apartment, condo, mobile home-not used in transient)
M-Medical deductions (limited to excess over 10% AGI, adjustment for taxpayers age 65 and over)
M-Miscellaneous deductions not allowed
E-Exemptions (personal) and standard deductions-may not be claimed for purposes of AMT taxes.
The below are all “add-backs” as Preferences
2b. Preferences
P-Private activity bond interest income (on certain bonds)
P-Percentage depletion the excess over adjusted basis of property
P-Pre-1987 accelerated depreciation
