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REG Flashcards

1
Q

Under what accounting basis are individual tax returns prepared?

A

Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.

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2
Q

What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?

A

*MSA/HSA contributions
*Investment penalties for early withdrawal
*Self-employed medical insurance premiums
*Self-Employment Tax (approx. 50%)
*IRA Contributions
*Student loan interest (can’t be another taxpayer’s dependent)
*Moving expenses
*Alimony
*Attorney fees in discrimination lawsuit

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3
Q

Which items can be carried over to future years on an individual tax return?

A

Investment interest expense in excess of investment income
Charitable contributions
Excess Section 179
Capital losses
AMT Paid
Passive Activity Losses

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4
Q

Characterize the following carryover: Passive Activity Loss

A

No carryback

Can carry forward indefinitely

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5
Q

How is excess 179 expense carried forward?

A

Carry forward to next year.

Use in any year is limited to taxable income.

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6
Q

How long can investment interest expense in excess of investment income be carried forward?

A

Indefinitely.

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7
Q

How long is the carry forward for charitable contributions?

A

Can be carried forward 5 years.

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8
Q

How long is AMT paid carried forward, and how is it applied?

A

It can be carried forward indefinitely.

It may be applied against future regular income tax, but not against future AMT tax liability.

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9
Q

How are capital losses applied in individual taxes?

A

$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely.

The loss retains its character (STCL or LTCL).

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10
Q

How does an individual capital loss carryover differ from a corporate capital loss carryover?

A

Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely.

Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.

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11
Q

What ratio is applied to principle payments in an installment sale to determine the gain in a given year?

A

Gross Profit / Contract Price

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12
Q

What is the contract price in an installment sale for income tax purposes?

A

Contract Price = Sales Price - Liability assumed by buyer

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13
Q

On an individual return, regular mortgage interest on what loan amount is deductible?

A

$1,000,000

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14
Q

Interest on home equity loans up to what amount are deductible on an individual tax return?

A

$100,000

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15
Q

What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?

A

$25 per person for gifts

Service awards up to $400

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16
Q

What income can business losses offset on a 1040?

A

They may only offset active business income.

Note: W2 wages are considered active business income.

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17
Q

What income can passive losses offset on a 1040?

A

Only passive income such as rental income or limited partnership income.

Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)

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18
Q

Are interest and dividends active or passive income?

A

Neither. They are portfolio income.

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19
Q

What is (are) the depreciation convention(s) for personal property?

A

Mid-year/Mid-quarter

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20
Q

When is the mid-quarter convention used?

A

For depreciation when 40% or more of all purchases occur in 4th quarter.

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21
Q

What depreciation convention is used for real property?

A

Mid-month

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22
Q

What depreciation life and convention are used for leasehold improvements?

A

15 year straight line (S/L)

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23
Q

What amount of business start-up costs can be deducted? How is it expensed?

A

Up to $5,000

Amortized over 180 months

Reduced dollar-for-dollar by amount over $50,000

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24
Q

How are medical expenses deducted on a 1040?

A

On Schedule A:

Amounts in excess of 10% of AGI may be deducted

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25
Q

Which personal insurance premiums are not deductible as medical expenses on Schedule A?

A

Accident or disability insurance premiums are not deductible.

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26
Q

Under what circumstances can medical expenses paid on behalf of another be deducted on someone’s Schedule A?

A

Must be a citizen of North America

Must live with you, or if they do not, must be mother/father or a relative closer than a cousin.

Benefactor must provide more than 50% support to the beneficiary.

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27
Q

Which foreign taxes are deductible?

A

Foreign INCOME and REAL ESTATE taxes are deductible.

Foreign personal property taxes are NOT deductible.

Foreign tax assessments are not deductible- they are added to the basis.

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28
Q

How is net investment income calculated, for the purpose of deducting excess investment interest expense?

A

Gross investment income - investment expense in excess of 2% of AGI = net investment income

Investment interest expense in excess of net investment income is deductible.

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29
Q

What investment interest is never deductible?

A

Investment interest expense on tax-free securities is not deductible.

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30
Q

When are mortgage points deductible and how are they deducted?

A

They are deductible if they represent prepaid interest on purchase of a new home or improving a home.

Refinance points are amortized over the life of the mortgage.

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31
Q

How are charitable contributions of LTCG property and property related to a charity’s function deducted?

A

Deducted at fair market value (FMV), up to 30% of AGI

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32
Q

How are charitable donations for STCG property and property not related to the charity’s function deducted on Schedule A?

A

Deduction is taken for adjusted basis in the property, up to 50% of AGI.

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33
Q

Does a casualty loss affect the basis of property?

A

No. It decreases the fair market value (FMV) of the property.

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34
Q

How is the deductible portion of a casualty loss calculated?

A

Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS)

GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss

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35
Q

What are the miscellaneous deductions on Schedule A, and how are they deducted?

A

Deductible in excess of 2% of AGI

Continuing Education - if required to keep your job
Business travel
50% Meals and entertainment
Union Dues
Tax prep fees
Legal fees to collect alimony
Appraisal fees to value casualty loss of charitable contributions

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36
Q

Which itemized deductions are not subject to phaseout based on income or other factors?

A

Medical
Casualty
Gambling
Investment Interest Expense

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37
Q

Define qualifying child for most individual tax factors.

A

Must be resident of North America

Under age 19, or under age 24 if a student

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38
Q

Define qualifying relative for most individual tax factors?

A

Must be citizen of North America

Must live with you, unless mother/father or relative closer than a cousin

You must provide more than 50% support to the individual

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39
Q

How is minor income taxed at a parent’s rate calculated (AKA kiddie tax)?

A

Child’s unearned income
- early withdrawal penalties
- $1,000
- Greater than $1,000 or child’s itemized deduction related to unearned income
= Amount taxed at parents’ rate

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40
Q

Can spouses married filing jointly use different accounting methods?

A

Yes, if they each own a small business. All non-business income is cash basis.

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41
Q

At what rate is self-employment tax assessed?

A

15.3% of net earnings from self-employment

(Note: executor of an estate is NOT self-employment income)

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42
Q

What is a refundable tax credit? Which individual tax credits are most commonly refunded?

A

A tax credit which takes the taxpayer’s tax owed on the return below zero, resulting in a refund to the taxpayer.

Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit.

Note: the REGULAR child tax credit is NOT refundable.

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43
Q

How many education credits may be taken on a tax return?

A

American Opportunity Credit - per student

Lifetime Learning Credit - per taxpayer

Note: The American Opportunity Credit is refundable.

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44
Q

What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?

A

The lesser of:

90% of current year’s total tax

100% of prior year’s total tax

110% of prior year’s total tax (if AGI is $150,000 or more)

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45
Q

Which farming costs related to land are deductible? Which aren’t?

A

Deductible: Costs incurred to PRESERVE soil/water

Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)

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46
Q

Which depreciation table is used for personal tangible property related to farming?

A

MACRS 150

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47
Q

How long does the taxpayer have to petition the court for appeal after an audit?

A

90 days

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48
Q

If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?

A

10 days

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49
Q

What is the statute of limitations for a tax audit?

A

3 years, generally

6 years if 25% or more of gross income was omitted

The clock starts on the LATER of the due date or the filing date of the return.

There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.

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50
Q

How is non-business bad debt deducted on a 1040?

A

It is treated as a STCL

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51
Q

How long does an individual taxpayer have to file a claim for refund?

A

Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.

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52
Q

When are life insurance premiums of an employee includable in income?

A

Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.

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53
Q

When are scholarships not taxable?

A

When they are not in return for services rendered,

AND

The money is used only for tuition and books

Note: Scholarships for room and board are includable in income.

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54
Q

What interest income is tax free?

A

State & municipal bond interest

US EE Savings Bond interest (note: HH bond interest is taxable)

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55
Q

Which dividend income is tax free?

A

S-corporation (actually distributions)

Life insurance

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56
Q

How much social security income can be taxed for individuals in higher income brackets?

A

Up to 85%

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57
Q

Is unemployment compensation taxable?

A

Yes.

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58
Q

Which damages awarded in lawsuits are taxable? Which are not?

A

Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability)

Any payments for punitive damages ARE taxable.

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59
Q

Are workman’s compensation insurance benefits taxable?

A

No - similar to an award for damage to make a person whole.

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60
Q

Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony

A

Alimony IS taxable.

Child support and divorce property settlements are NOT taxable.

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61
Q

Adoption expenses - Are they deductible?

A

NO, they are not deductible. However tax benefits are available through the adoption CREDIT.

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62
Q

Describe alimony recapture.

A

2nd Year: (3rd year - 2nd year - $15,000)

1st Year:
1st Year Alimony Paid
- Avg alimony paid in 2nd & 3rd years
- $15,000
- Recapture from 2nd year
=1st Year Alimony Recapture

Total Recapture = 1st Year Recapture + 2nd Year
Recapture

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63
Q

How are Net Operating Losses (NOLs) utilized?

A

Can be carried back 2 years

If any left, can be carried forward 20 years.

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64
Q

Which IRA contributions are deductible?

A

Traditional IRA = deductible

Roth IRA = not deductible

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65
Q

When can a couple file married filing jointly?

A

They must be married at the end of the year.

If one spouse dies, they must be married at the end of the year.

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66
Q

What are the requirements for filing as Head of Household?

A

Must have a dependent child

Must provide more than 50% of the child’s support

Must live with them more than 50% of the year

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67
Q

What are the requirements for filing as qualifying widower?

A

Must have a dependent child.

Essentially gets MFJ status for the year of death + 2 tax years

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68
Q

How is Gift taxation different from Estate taxation?

A

Property transferred while taxpayer is living

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69
Q

What is the annual exclusion amount for a taxpayer’s Gift taxation? What is required to get the exclusion?

A

$14,000 per year per spouse to each individual

In order to get the exclusion, the recipient must immediately acquire a present interest in the property and get unrestricted access to the property and all of its benefits

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70
Q

If a Gift is an annuity, what value is used for the Gift?

A

If the Gift is an annuity, use Present Value to determine the gross Gift

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71
Q

What is the basic Gift tax calculation?

A

Gross Gifts
- 1/2 of Gifts (treated as given by spouse)
- Total # of donees x $14,000 exclusion
= Taxable Gift

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72
Q

How is a Gift taxed if a recipient gains a future ownership in the Gifted property?

A

Recipient must gain ownership and all rights to property to get the annual exclusion. If recipient merely gains a future ownership, then the present value of the Gift is 100% taxable to donor and cannot exclude from Gift tax calc

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73
Q

What are the deductions for Gift tax, besides the annual exclusion?

A

Tuition and medical expenses paid directly to the provider organization (note: NOT books or dorm fees)

Political contributions

Charitable Gifts

Unlimited Gifts to spouse

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74
Q

What is the basis of Gifted property for the recipient?

A

If a loss on sale, basis is FMV on the date of the Gift

If a gain on sale, basis is same as donor’s basis

No G/L if donor basis is less than sales price, and sales price is less than FMV @ Gift date

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75
Q

How/when are Gift tax returns filed?

A

Calendar-year basis only

Due April 15

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76
Q

What are the basic characteristics of complex Trust?

A

Income distributions are optional
Accumulation of income ok
Charitable contributions ok
Contributions using tax-exempt income are not deductible
Allowed personal exemption of $100

Key Point: Distribution of Trust corpus (principal) ok

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77
Q

What are the basic characteristics of a Simple Trust?

A

Income distributions mandatory

Accumulation of income disallowed

No charitable contributions

Distribution of Trust corpus DISALLOWED

Allowed personal exemption of $300

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78
Q

How are Net Operating Losses handled in a Trust?

A

Trusts can have a Net Operating Loss

Any unused NOL flows through to the beneficiaries

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79
Q

How are expenses and fees related to tax-exempt income handled in a Trust?

A

Expenses and fees from tax-exempt income are not deductible for either a Complex or Simple Trust

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80
Q

When is property transferred in an Estate?

A

After the death of the donor

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81
Q

What amount of a decedent’s Estate is exempt from Estate Tax?

A

The First $5,250,000 is exempt with a 40% tax on amount above that

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82
Q

How are a decedent’s medical expenses handled with respect to an Estate?

A

Medical expenses paid after death, but incurred within 1 year of death go on decedents personal tax return

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83
Q

How is an Estate’s NOL handled?

A

Estates can have a Net Operating Loss

Any unused NOL flows through to the beneficiaries

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84
Q

What does a gross Estate consist of?

A

Cash and Property FMV at death, or alternate valuation.

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85
Q

What is joint tenancy with respect to an Estate? How is it calculated?

A

When two non-spouses jointly own property

FMV at death X % Ownership = Amount in Estate

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86
Q

What is tenancy by entirety?

A

1/2 of marital assets go to deceased spouses Estate

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87
Q

What is tenancy in common in an Estate?

A

A, B, and C own property

If A dies, FMV of As share goes to heirs

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88
Q

How is Estate tax handled with respect to a beneficiary?

A

Property received through inheritance not income to recipient

Property value is FMV at date of death or 6 months later

If property is sold prior to 6 month date and the alternative date is used, FMV at date of sale is used to value property

Basis in property automatically assumes LT holding period

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89
Q

What is distributable net income (DNI)?

A

DNI = Taxable Income Expenses (from income production)

Trust beneficiaries only pay tax if earnings are distributed

Estate beneficiaries pay tax on DNI, regardless if distributed

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90
Q

When must a tax exempt organization file a 990-T for Unrelated Business Income?

A

If a tax exempt organization has more than $1,000 of UBI, it must file a Form 990-T

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91
Q

What are the requirements for a 501(c)3 organization?

A

Organized and Operated exclusively for exempt purposes

No earnings can benefit an individual or private shareholder

Cant attempt to influence legislation as a major part of its activities

Cant campaign politically

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92
Q

Under what accounting basis are individual tax returns prepared?

A

Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.

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93
Q

What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?

A

*MSA/HSA contributions
*Investment penalties for early withdrawal
*Self-employed medical insurance premiums
*Self-Employment Tax (approx. 50%)
*IRA Contributions
*Student loan interest (can’t be another taxpayer’s dependent)
*Moving expenses
*Alimony
*Attorney fees in discrimination lawsuit

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94
Q

Which items can be carried over to future years on an individual tax return?

A

Investment interest expense in excess of investment income
Charitable contributions
Excess Section 179
Capital losses
AMT Paid
Passive Activity Losses

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95
Q

Characterize the following carryover: Passive Activity Loss

A

No carryback

Can carry forward indefinitely

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96
Q

How is excess 179 expense carried forward?

A

Carry forward to next year.

Use in any year is limited to taxable income.

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97
Q

How long can investment interest expense in excess of investment income be carried forward?

A

Indefinitely.

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98
Q

How long is the carry forward for charitable contributions?

A

Can be carried forward 5 years.

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99
Q

How long is AMT paid carried forward, and how is it applied?

A

It can be carried forward indefinitely.

It may be applied against future regular income tax, but not against future AMT tax liability.

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100
Q

How are capital losses applied in individual taxes?

A

$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely.

The loss retains its character (STCL or LTCL).

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101
Q

How does an individual capital loss carryover differ from a corporate capital loss carryover?

A

Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely.

Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.

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102
Q

What ratio is applied to principle payments in an installment sale to determine the gain in a given year?

A

Gross Profit / Contract Price

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103
Q

What is the contract price in an installment sale for income tax purposes?

A

Contract Price = Sales Price - Liability assumed by buyer

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104
Q

On an individual return, regular mortgage interest on what loan amount is deductible?

A

$1,000,000

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105
Q

Interest on home equity loans up to what amount are deductible on an individual tax return?

A

$100,000

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106
Q

What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?

A

$25 per person for gifts

Service awards up to $400

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107
Q

What income can business losses offset on a 1040?

A

They may only offset active business income.

Note: W2 wages are considered active business income.

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108
Q

What income can passive losses offset on a 1040?

A

Only passive income such as rental income or limited partnership income.

Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)

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109
Q

Are interest and dividends active or passive income?

A

Neither. They are portfolio income.

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110
Q

What is (are) the depreciation convention(s) for personal property?

A

Mid-year/Mid-quarter

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111
Q

When is the mid-quarter convention used?

A

For depreciation when 40% or more of all purchases occur in 4th quarter.

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112
Q

What depreciation convention is used for real property?

A

Mid-month

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113
Q

What depreciation life and convention are used for leasehold improvements?

A

15 year straight line (S/L)

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114
Q

What amount of business start-up costs can be deducted? How is it expensed?

A

Up to $5,000

Amortized over 180 months

Reduced dollar-for-dollar by amount over $50,000

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115
Q

How are medical expenses deducted on a 1040?

A

On Schedule A:

Amounts in excess of 10% of AGI may be deducted

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116
Q

Which personal insurance premiums are not deductible as medical expenses on Schedule A?

A

Accident or disability insurance premiums are not deductible.

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117
Q

Under what circumstances can medical expenses paid on behalf of another be deducted on someone’s Schedule A?

A

Must be a citizen of North America

Must live with you, or if they do not, must be mother/father or a relative closer than a cousin.

Benefactor must provide more than 50% support to the beneficiary.

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118
Q

Which foreign taxes are deductible?

A

Foreign INCOME and REAL ESTATE taxes are deductible.

Foreign personal property taxes are NOT deductible.

Foreign tax assessments are not deductible- they are added to the basis.

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119
Q

How is net investment income calculated, for the purpose of deducting excess investment interest expense?

A

Gross investment income - investment expense in excess of 2% of AGI = net investment income

Investment interest expense in excess of net investment income is deductible.

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120
Q

What investment interest is never deductible?

A

Investment interest expense on tax-free securities is not deductible.

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121
Q

When are mortgage points deductible and how are they deducted?

A

They are deductible if they represent prepaid interest on purchase of a new home or improving a home.

Refinance points are amortized over the life of the mortgage.

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122
Q

How are charitable contributions of LTCG property and property related to a charity’s function deducted?

A

Deducted at fair market value (FMV), up to 30% of AGI

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123
Q

How are charitable donations for STCG property and property not related to the charity’s function deducted on Schedule A?

A

Deduction is taken for adjusted basis in the property, up to 50% of AGI.

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124
Q

Does a casualty loss affect the basis of property?

A

No. It decreases the fair market value (FMV) of the property.

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125
Q

How is the deductible portion of a casualty loss calculated?

A

Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS)

GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss

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126
Q

What are the miscellaneous deductions on Schedule A, and how are they deducted?

A

Deductible in excess of 2% of AGI

Continuing Education - if required to keep your job
Business travel
50% Meals and entertainment
Union Dues
Tax prep fees
Legal fees to collect alimony
Appraisal fees to value casualty loss of charitable contributions

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127
Q

Which itemized deductions are not subject to phaseout based on income or other factors?

A

Medical
Casualty
Gambling
Investment Interest Expense

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128
Q

Define qualifying child for most individual tax factors.

A

Must be resident of North America

Under age 19, or under age 24 if a student

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129
Q

Define qualifying relative for most individual tax factors?

A

Must be citizen of North America

Must live with you, unless mother/father or relative closer than a cousin

You must provide more than 50% support to the individual

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130
Q

How is minor income taxed at a parent’s rate calculated (AKA kiddie tax)?

A

Child’s unearned income
- early withdrawal penalties
- $1,000
- Greater than $1,000 or child’s itemized deduction related to unearned income
= Amount taxed at parents’ rate

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131
Q

Can spouses married filing jointly use different accounting methods?

A

Yes, if they each own a small business. All non-business income is cash basis.

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132
Q

At what rate is self-employment tax assessed?

A

15.3% of net earnings from self-employment

(Note: executor of an estate is NOT self-employment income)

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133
Q

What is a refundable tax credit? Which individual tax credits are most commonly refunded?

A

A tax credit which takes the taxpayer’s tax owed on the return below zero, resulting in a refund to the taxpayer.

Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit.

Note: the REGULAR child tax credit is NOT refundable.

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134
Q

How many education credits may be taken on a tax return?

A

American Opportunity Credit - per student

Lifetime Learning Credit - per taxpayer

Note: The American Opportunity Credit is refundable.

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135
Q

What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?

A

The lesser of:

90% of current year’s total tax

100% of prior year’s total tax

110% of prior year’s total tax (if AGI is $150,000 or more)

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136
Q

Which farming costs related to land are deductible? Which aren’t?

A

Deductible: Costs incurred to PRESERVE soil/water

Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)

137
Q

Which depreciation table is used for personal tangible property related to farming?

A

MACRS 150

138
Q

How long does the taxpayer have to petition the court for appeal after an audit?

A

90 days

139
Q

If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?

A

10 days

140
Q

What is the statute of limitations for a tax audit?

A

3 years, generally

6 years if 25% or more of gross income was omitted

The clock starts on the LATER of the due date or the filing date of the return.

There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.

141
Q

How is non-business bad debt deducted on a 1040?

A

It is treated as a STCL

142
Q

How long does an individual taxpayer have to file a claim for refund?

A

Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.

143
Q

When are life insurance premiums of an employee includable in income?

A

Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.

144
Q

When are scholarships not taxable?

A

When they are not in return for services rendered,

AND

The money is used only for tuition and books

Note: Scholarships for room and board are includable in income.

145
Q

What interest income is tax free?

A

State & municipal bond interest

US EE Savings Bond interest (note: HH bond interest is taxable)

146
Q

Which dividend income is tax free?

A

S-corporation (actually distributions)

Life insurance

147
Q

How much social security income can be taxed for individuals in higher income brackets?

A

Up to 85%

148
Q

Is unemployment compensation taxable?

A

Yes.

149
Q

Which damages awarded in lawsuits are taxable? Which are not?

A

Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability)

Any payments for punitive damages ARE taxable.

150
Q

Are workman’s compensation insurance benefits taxable?

A

No - similar to an award for damage to make a person whole.

151
Q

Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony

A

Alimony IS taxable.

Child support and divorce property settlements are NOT taxable.

152
Q

Adoption expenses - Are they deductible?

A

NO, they are not deductible. However tax benefits are available through the adoption CREDIT.

153
Q

Describe alimony recapture.

A

2nd Year: (3rd year - 2nd year - $15,000)

1st Year:
1st Year Alimony Paid
- Avg alimony paid in 2nd & 3rd years
- $15,000
- Recapture from 2nd year
=1st Year Alimony Recapture

Total Recapture = 1st Year Recapture + 2nd Year
Recapture

154
Q

How are Net Operating Losses (NOLs) utilized?

A

Can be carried back 2 years

If any left, can be carried forward 20 years.

155
Q

Which IRA contributions are deductible?

A

Traditional IRA = deductible

Roth IRA = not deductible

156
Q

When can a couple file married filing jointly?

A

They must be married at the end of the year.

If one spouse dies, they must be married at the end of the year.

157
Q

What are the requirements for filing as Head of Household?

A

Must have a dependent child

Must provide more than 50% of the child’s support

Must live with them more than 50% of the year

158
Q

What are the requirements for filing as qualifying widower?

A

Must have a dependent child.

Essentially gets MFJ status for the year of death + 2 tax years

159
Q

How is shareholder basis calculated for a new interest in a Corporation?

A

Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.

160
Q

How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?

A

Transferor’s basis
+ Gain recognized by shareholder
= Basis

OR

FMV of Corporate Interest
- Adjusted basis of property
= Gain

161
Q

What basis do shareholders and Corporations use for property?

A

They both use ADJUSTED BASIS, NOT FMV of property.

162
Q

Describe how loss is taken on Section 1244 small business Corporation stock?

A

A loss on worthless stock is an ordinary loss.

163
Q

What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?

A

Taxpayer must be original stock owner, and either an individual or partnership

$50k (single) or $100k (MFJ) limit - remainder is a capital loss

Must have been issued in exchange for money or property (not exchanged for services)

Shareholder equity must not be in excess of $1 million

Both common and preferred stock is allowed

164
Q

What are the basic rules for filing a form 1120?

A

Return is due regardless of income level

Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year

An automatic six-month extension is available

165
Q

When are Corporate federal tax estimated payments required, and how are they calculated?

A

Required if more than $500 in tax liability expected, or

100% current year liability

100% previous year liability

Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.

166
Q

Describe the AMT calculation for C-Corporations

A 
Taxable Income
\+Tax Preference Items
\+/- Adjustments
= Pre-ACE
\+/- ACE Adjustments
= AMTI
- 40,000 Exemption
= Tax Base
x 20%
= Tentative Minimum Tax
- Regular Tax Liability
= AMT
167
Q

What are the pre-ACE adjustments for C-Corporation tax AMT calculations?

A

Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years

Personal Property - use 150% MACRS, not 200%

Construction must use % completion method

168
Q

What are the ACE adjustments in the C-Corporation AMT tax calculation?

A

Municipal Bond Interest
Life Insurance Proceeds
70% Dividends Received Deduction
Organizational Expenditures must be capitalized, not amortized

Note: AMT paid gets carried forward indefinitely, but never carried back

169
Q

When are C-Corporations exempt from AMT?

A

In year one

In year two, if year one gross receipts were less than $5 Million

In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million

In year four and beyond, if the average from the previous 3 years is less than $7.5 Million

170
Q

How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?

A

Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.

If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.

171
Q

How are Corporate organization costs handled?

A

Amortization of costs begin the month the Corporation commences business activity

If the Corporation doesn’t amortize organization costs in year one, they can never be amortized

Costs associated with offerings are neither deductible nor amortized

172
Q

How are a C-Corporation’s deductible charitable contributions calculated?

A

Sales -COGS= Gross Profit
Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains
=Total Income
Total Income - Deductions (No charitable contributions, Dividends
Received Deductions (DRD), or NOL Carrybacks allowed)
- NOL Carryforwards
=Taxable Income before charitable contributions, DRD, NOL Carrybacks
x 10%
=Deductible Charitable Contributions

173
Q

How are excess charitable contributions treated in a C-Corporations?

A

Excess charitable contributions get carried forward 5 consecutive years (No Carryback)

174
Q

When can a board of directors authorize charitable contributions for a tax year?

A

The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year

175
Q

How is the dividends received deduction (DRD) calculated, and what are the limitations?

A

80% Interest = 100% DRD

20-79% = 80% DRD

less than 20% = 70% DRD

Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.

176
Q

What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?

A

Only take DRD % x Taxable Income

Note: If DRD brings a loss situation, then you can take the full DRD

If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed

177
Q

How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?

A

A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed

178
Q

How are capital losses handled in a C-Corporation?

A

Capital Losses are deductible only to the extent of Capital Gains

179
Q

How are net short term capital gains taxed in a C-Corporation?

A

Net Short Term Capital Gains are taxed at ordinary income rates

180
Q

How are Corporate losses carried back/forward?

A

Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss

181
Q

How are bad debt losses handled in a Corporation?

A

Bad debt losses are classified as ordinary

182
Q

What is the casualty loss floor for a C-Corporation?

A

No floor on Corporate casualty loss like there is with an individual taxpayer

If destroyed, the loss is the property’s basis (minus proceeds)

Calculation: Adjusted basis - Proceeds from Insurance = Loss

If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)

183
Q

How are net operating losses handled in a C-Corporation?

A

If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward

Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year

Any leftover NOL = This year’s NOL

184
Q

How is investment interest expense handled in a C-Corporation?

A

Unlike individual taxation, investment interest expense is not limited to investment income.

Investment interest on tax-free investments are NOT deductible.

185
Q

What is the purpose of Schedule M-1 on a Corporate tax return? Which items are included?

A

Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction

Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.)

186
Q

What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?

A

Reconciles beginning to ending retained earnings

Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated Retained Earnings

187
Q

What is the purpose of Schedule M-3 on a Corporate tax return?

A

Like M1, but for Corporations with $10M+ in assets

188
Q

How are affiliated (80%) Corporation tax returns handled?

A

Consolidation election is binding going forward

Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred.

One AMT exemption

One accumulated earnings tax allowed

Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value

189
Q

How are Corporate distributions to shareholders handled?

A

Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income)

Then, remainder (if any) is a return of basis. Then, add’l remainder (if any) is a Capital Gain

Distribution amount = FMV of Property + Cash - Liability Assumed

Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)

190
Q

What is the order of treatment in a Corporation’s distribution to a shareholder?

A
  1. Distribution is a dividend to the extent of current and accumulated earnings and profits
  2. Shareholder basis is then exhausted
  3. Remainder, if any, is a Capital Gain
191
Q

What is the basic calculation for accumulated earnings and profits in a Corporation?

A

Beginning Accumulated Earnings and Profits
+ Net Income
+ Gain on Distribution (if not already in book income)
- Distribution (but cannot create a deficit)
- NOL of prior years
= Ending Accumulated Earnings and Profits

192
Q

What is the treatment of a gain in a complete Corporate liquidation?

A

If Capital Property, then Capital Gain

If Non-Capital Property, then Ordinary Income

Gain characterization is the same for both the Corporation and the shareholder

193
Q

What is the treatment of a loss in a complete Corporate liquidation?

A

Corporation: Depends on if property is capital in nature, otherwise ordinary loss

Individual: capital loss only

194
Q

What is the treatment of the liquidation of a subsidiary?

A

No G/L to parent company

195
Q

What is a consent dividend? How is it treated?

A

Consented by the Board of Directors but not yet paid

Treat as if distributed by the end of the year

196
Q

Describe the requirements for a personal holding company.

A

No banks or financial institutions can be PHCs

5 or fewer individuals own more than 50% of the stock

60% of the PHC’s income must be from passive means

PHC tax is self-assessing - 20% tax rate on undistributed PHC Income

197
Q

How is Corporate accumulated earnings tax (AET) different from PHC taxation?

A

Not Self-Assessing like a PHC

198
Q

How is the accumulated earnings credit calculated for a Corporation?

A

Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)

199
Q

What are the requirements for holding S-Corporation status?

A

Only individuals, estates and trusts can be shareholders

Domestic only, no international S-corps or foreign shareholders

Up to 100 shareholders allowed, and only one class of stock allowed

Calendar tax year only

200
Q

How is an S-Corporation election made?

A

Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year

To make election, 100% of the shareholders must consent

201
Q

How is an S-Corporation terminated?

A

To terminate election, 50% of the shareholders must consent

No S Corp election allowed for 5 years after termination

S Corp termination effective immediately following an act that terminates status

202
Q

What items are not included in calculating an S-Corporation’s ordinary income?

A

These items are included on Schedule K, not in ordinary income:

Foreign Taxes paid deduction
No Investment Interest expense
Section 179 Deduction 
1231 Gain or Loss
Charitable Contributions
Portfolio Income (dividends or interest)
203
Q

How is S-Corporation shareholder basis calculated?

A

Beginning Basis
+Share of Income Items (including non-taxable income!)
-Distributions (cash or property)
-Non-deductible expenses
-Ordinary Losses (but don’t take income below zero)
= Ending basis

204
Q

What is the formula for an S-Corp Built-in Gains Tax?

A

FMV of Assets @ S-Corp Election Date - Adjust. Basis of Assets = Built-in Gain x 35% Corporate Rate

205
Q

Ind

Under what accounting basis are individual tax returns prepared?

A

Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.

206
Q

Ind

What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?

A

*MSA/HSA contributions
*Investment penalties for early withdrawal
*Self-employed medical insurance premiums
*Self-Employment Tax (approx. 50%)
*IRA Contributions
*Student loan interest (can’t be another taxpayer’s dependent)
*Moving expenses
*Alimony
*Attorney fees in discrimination lawsuit

207
Q

Ind

Which items can be carried over to future years on an individual tax return?

A

Investment interest expense in excess of investment income
Charitable contributions
Excess Section 179
Capital losses
AMT Paid
Passive Activity Losses

208
Q

Ind

Characterize the following carryover: Passive Activity Loss

A

No carryback

Can carry forward indefinitely

209
Q

Ind

How is excess 179 expense carried forward?

A

Carry forward to next year.

Use in any year is limited to taxable income.

210
Q

Ind

How long can investment interest expense in excess of investment income be carried forward?

A

Indefinitely.

211
Q

Ind

How long is the carry forward for charitable contributions?

A

Can be carried forward 5 years.

212
Q

Ind

How long is AMT paid carried forward, and how is it applied?

A

It can be carried forward indefinitely.

It may be applied against future regular income tax, but not against future AMT tax liability.

213
Q

Ind

How are capital losses applied in individual taxes?

A

$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely.

The loss retains its character (STCL or LTCL).

214
Q

Ind

How does an individual capital loss carryover differ from a corporate capital loss carryover?

A

Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely.

Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.

215
Q

Ind

What ratio is applied to principle payments in an installment sale to determine the gain in a given year?

A

Gross Profit / Contract Price

216
Q

Ind

What is the contract price in an installment sale for income tax purposes?

A

Contract Price = Sales Price - Liability assumed by buyer

217
Q

Ind

On an individual return, regular mortgage interest on what loan amount is deductible?

A

$1,000,000

218
Q

Ind

Interest on home equity loans up to what amount are deductible on an individual tax return?

A

$100,000

219
Q

Ind

What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?

A

$25 per person for gifts

Service awards up to $400

220
Q

Ind

What income can business losses offset on a 1040?

A

They may only offset active business income.

Note: W2 wages are considered active business income.

221
Q

Ind

What income can passive losses offset on a 1040?

A

Only passive income such as rental income or limited partnership income.

Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)

222
Q

Ind

Are interest and dividends active or passive income?

A

Neither. They are portfolio income.

223
Q

Ind

What is (are) the depreciation convention(s) for personal property?

A

Mid-year/Mid-quarter

224
Q

Ind

When is the mid-quarter convention used?

A

For depreciation when 40% or more of all purchases occur in 4th quarter.

225
Q

Ind

What depreciation convention is used for real property?

A

Mid-month

226
Q

Ind

What depreciation life and convention are used for leasehold improvements?

A

15 year straight line (S/L)

227
Q

Ind

What amount of business start-up costs can be deducted? How is it expensed?

A

Up to $5,000

Amortized over 180 months

Reduced dollar-for-dollar by amount over $50,000

228
Q

Ind

How are medical expenses deducted on a 1040?

A

On Schedule A:

Amounts in excess of 10% of AGI may be deducted

229
Q

Ind

Which personal insurance premiums are not deductible as medical expenses on Schedule A?

A

Accident or disability insurance premiums are not deductible.

230
Q

Ind

Under what circumstances can medical expenses paid on behalf of another be deducted on someone’s Schedule A?

A

Must be a citizen of North America

Must live with you, or if they do not, must be mother/father or a relative closer than a cousin.

Benefactor must provide more than 50% support to the beneficiary.

231
Q

Ind

Which foreign taxes are deductible?

A

Foreign INCOME and REAL ESTATE taxes are deductible.

Foreign personal property taxes are NOT deductible.

Foreign tax assessments are not deductible- they are added to the basis.

232
Q

Ind

How is net investment income calculated, for the purpose of deducting excess investment interest expense?

A

Gross investment income - investment expense in excess of 2% of AGI = net investment income

Investment interest expense in excess of net investment income is deductible.

233
Q

Ind

What investment interest is never deductible?

A

Investment interest expense on tax-free securities is not deductible.

234
Q

Ind

When are mortgage points deductible and how are they deducted?

A

They are deductible if they represent prepaid interest on purchase of a new home or improving a home.

Refinance points are amortized over the life of the mortgage.

235
Q

Ind

How are charitable contributions of LTCG property and property related to a charity’s function deducted?

A

Deducted at fair market value (FMV), up to 30% of AGI

236
Q

Ind

How are charitable donations for STCG property and property not related to the charity’s function deducted on Schedule A?

A

Deduction is taken for adjusted basis in the property, up to 50% of AGI.

237
Q

Ind

Does a casualty loss affect the basis of property?

A

No. It decreases the fair market value (FMV) of the property.

238
Q

Ind

How is the deductible portion of a casualty loss calculated?

A

Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS)

GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss

239
Q

Ind

What are the miscellaneous deductions on Schedule A, and how are they deducted?

A

Deductible in excess of 2% of AGI

Continuing Education - if required to keep your job
Business travel
50% Meals and entertainment
Union Dues
Tax prep fees
Legal fees to collect alimony
Appraisal fees to value casualty loss of charitable contributions

240
Q

Ind

Which itemized deductions are not subject to phaseout based on income or other factors?

A

Medical
Casualty
Gambling
Investment Interest Expense

241
Q

Ind

Define qualifying child for most individual tax factors.

A

Must be resident of North America

Under age 19, or under age 24 if a student

242
Q

Ind

Define qualifying relative for most individual tax factors?

A

Must be citizen of North America

Must live with you, unless mother/father or relative closer than a cousin

You must provide more than 50% support to the individual

243
Q

Ind

How is minor income taxed at a parent’s rate calculated (AKA kiddie tax)?

A

Child’s unearned income
- early withdrawal penalties
- $1,000
- Greater than $1,000 or child’s itemized deduction related to unearned income
= Amount taxed at parents’ rate

244
Q

Ind

Can spouses married filing jointly use different accounting methods?

A

Yes, if they each own a small business. All non-business income is cash basis.

245
Q

Ind

At what rate is self-employment tax assessed?

A

15.3% of net earnings from self-employment

(Note: executor of an estate is NOT self-employment income)

246
Q

Ind

What is a refundable tax credit? Which individual tax credits are most commonly refunded?

A

A tax credit which takes the taxpayer’s tax owed on the return below zero, resulting in a refund to the taxpayer.

Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit.

Note: the REGULAR child tax credit is NOT refundable.

247
Q

Ind

How many education credits may be taken on a tax return?

A

American Opportunity Credit - per student

Lifetime Learning Credit - per taxpayer

Note: The American Opportunity Credit is refundable.

248
Q

Ind

What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?

A

The lesser of:

90% of current year’s total tax

100% of prior year’s total tax

110% of prior year’s total tax (if AGI is $150,000 or more)

249
Q

Ind

Which farming costs related to land are deductible? Which aren’t?

A

Deductible: Costs incurred to PRESERVE soil/water

Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)

250
Q

Ind

Which depreciation table is used for personal tangible property related to farming?

A

MACRS 150

251
Q

Ind

How long does the taxpayer have to petition the court for appeal after an audit?

A

90 days

252
Q

Ind

If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?

A

10 days

253
Q

Ind

What is the statute of limitations for a tax audit?

A

3 years, generally

6 years if 25% or more of gross income was omitted

The clock starts on the LATER of the due date or the filing date of the return.

There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.

254
Q

Ind

How is non-business bad debt deducted on a 1040?

A

It is treated as a STCL

255
Q

Ind

How long does an individual taxpayer have to file a claim for refund?

A

Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.

256
Q

Ind

When are life insurance premiums of an employee includable in income?

A

Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.

257
Q

Ind

When are scholarships not taxable?

A

When they are not in return for services rendered,

AND

The money is used only for tuition and books

Note: Scholarships for room and board are includable in income.

258
Q

Ind

What interest income is tax free?

A

State & municipal bond interest

US EE Savings Bond interest (note: HH bond interest is taxable)

259
Q

Ind

Which dividend income is tax free?

A

S-corporation (actually distributions)

Life insurance

260
Q

Ind

How much social security income can be taxed for individuals in higher income brackets?

A

Up to 85%

261
Q

Ind

Is unemployment compensation taxable?

A

Yes.

262
Q

Ind

Which damages awarded in lawsuits are taxable? Which are not?

A

Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability)

Any payments for punitive damages ARE taxable.

263
Q

Ind

Are workman’s compensation insurance benefits taxable?

A

No - similar to an award for damage to make a person whole.

264
Q

Ind

Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony

A

Alimony IS taxable.

Child support and divorce property settlements are NOT taxable.

265
Q

Ind

Adoption expenses - Are they deductible?

A

NO, they are not deductible. However tax benefits are available through the adoption CREDIT.

266
Q

Ind

Describe alimony recapture.

A

2nd Year: (3rd year - 2nd year - $15,000)

1st Year:
1st Year Alimony Paid
- Avg alimony paid in 2nd & 3rd years
- $15,000
- Recapture from 2nd year
=1st Year Alimony Recapture

Total Recapture = 1st Year Recapture + 2nd Year
Recapture

267
Q

Ind

How are Net Operating Losses (NOLs) utilized?

A

Can be carried back 2 years

If any left, can be carried forward 20 years.

268
Q

Ind

Which IRA contributions are deductible?

A

Traditional IRA = deductible

Roth IRA = not deductible

269
Q

Ind

When can a couple file married filing jointly?

A

They must be married at the end of the year.

If one spouse dies, they must be married at the end of the year.

270
Q

Ind

What are the requirements for filing as Head of Household?

A

Must have a dependent child

Must provide more than 50% of the child’s support

Must live with them more than 50% of the year

271
Q

Ind

What are the requirements for filing as qualifying widower?

A

Must have a dependent child.

Essentially gets MFJ status for the year of death + 2 tax years

272
Q

Under what accounting basis are individual tax returns prepared?

A

Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.

273
Q

What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?

A

*MSA/HSA contributions
*Investment penalties for early withdrawal
*Self-employed medical insurance premiums
*Self-Employment Tax (approx. 50%)
*IRA Contributions
*Student loan interest (can’t be another taxpayer’s dependent)
*Moving expenses
*Alimony
*Attorney fees in discrimination lawsuit

274
Q

Which items can be carried over to future years on an individual tax return?

A

Investment interest expense in excess of investment income
Charitable contributions
Excess Section 179
Capital losses
AMT Paid
Passive Activity Losses

275
Q

Characterize the following carryover: Passive Activity Loss

A

No carryback

Can carry forward indefinitely

276
Q

How is excess 179 expense carried forward?

A

Carry forward to next year.

Use in any year is limited to taxable income.

277
Q

How long can investment interest expense in excess of investment income be carried forward?

A

Indefinitely.

278
Q

How long is the carry forward for charitable contributions?

A

Can be carried forward 5 years.

279
Q

How long is AMT paid carried forward, and how is it applied?

A

It can be carried forward indefinitely.

It may be applied against future regular income tax, but not against future AMT tax liability.

280
Q

How are capital losses applied in individual taxes?

A

$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely.

The loss retains its character (STCL or LTCL).

281
Q

How does an individual capital loss carryover differ from a corporate capital loss carryover?

A

Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely.

Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.

282
Q

What ratio is applied to principle payments in an installment sale to determine the gain in a given year?

A

Gross Profit / Contract Price

283
Q

What is the contract price in an installment sale for income tax purposes?

A

Contract Price = Sales Price - Liability assumed by buyer

284
Q

On an individual return, regular mortgage interest on what loan amount is deductible?

A

$1,000,000

285
Q

Interest on home equity loans up to what amount are deductible on an individual tax return?

A

$100,000

286
Q

What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?

A

$25 per person for gifts

Service awards up to $400

287
Q

What income can business losses offset on a 1040?

A

They may only offset active business income.

Note: W2 wages are considered active business income.

288
Q

What income can passive losses offset on a 1040?

A

Only passive income such as rental income or limited partnership income.

Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)

289
Q

Are interest and dividends active or passive income?

A

Neither. They are portfolio income.

290
Q

What is (are) the depreciation convention(s) for personal property?

A

Mid-year/Mid-quarter

291
Q

When is the mid-quarter convention used?

A

For depreciation when 40% or more of all purchases occur in 4th quarter.

292
Q

What depreciation convention is used for real property?

A

Mid-month

293
Q

What depreciation life and convention are used for leasehold improvements?

A

15 year straight line (S/L)

294
Q

What amount of business start-up costs can be deducted? How is it expensed?

A

Up to $5,000

Amortized over 180 months

Reduced dollar-for-dollar by amount over $50,000

295
Q

How are medical expenses deducted on a 1040?

A

On Schedule A:

Amounts in excess of 10% of AGI may be deducted

296
Q

Which personal insurance premiums are not deductible as medical expenses on Schedule A?

A

Accident or disability insurance premiums are not deductible.

297
Q

Under what circumstances can medical expenses paid on behalf of another be deducted on someone’s Schedule A?

A

Must be a citizen of North America

Must live with you, or if they do not, must be mother/father or a relative closer than a cousin.

Benefactor must provide more than 50% support to the beneficiary.

298
Q

Which foreign taxes are deductible?

A

Foreign INCOME and REAL ESTATE taxes are deductible.

Foreign personal property taxes are NOT deductible.

Foreign tax assessments are not deductible- they are added to the basis.

299
Q

How is net investment income calculated, for the purpose of deducting excess investment interest expense?

A

Gross investment income - investment expense in excess of 2% of AGI = net investment income

Investment interest expense in excess of net investment income is deductible.

300
Q

What investment interest is never deductible?

A

Investment interest expense on tax-free securities is not deductible.

301
Q

When are mortgage points deductible and how are they deducted?

A

They are deductible if they represent prepaid interest on purchase of a new home or improving a home.

Refinance points are amortized over the life of the mortgage.

302
Q

How are charitable contributions of LTCG property and property related to a charity’s function deducted?

A

Deducted at fair market value (FMV), up to 30% of AGI

303
Q

How are charitable donations for STCG property and property not related to the charity’s function deducted on Schedule A?

A

Deduction is taken for adjusted basis in the property, up to 50% of AGI.

304
Q

Does a casualty loss affect the basis of property?

A

No. It decreases the fair market value (FMV) of the property.

305
Q

How is the deductible portion of a casualty loss calculated?

A

Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS)

GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss

306
Q

What are the miscellaneous deductions on Schedule A, and how are they deducted?

A

Deductible in excess of 2% of AGI

Continuing Education - if required to keep your job
Business travel
50% Meals and entertainment
Union Dues
Tax prep fees
Legal fees to collect alimony
Appraisal fees to value casualty loss of charitable contributions

307
Q

Which itemized deductions are not subject to phaseout based on income or other factors?

A

Medical
Casualty
Gambling
Investment Interest Expense

308
Q

Define qualifying child for most individual tax factors.

A

Must be resident of North America

Under age 19, or under age 24 if a student

309
Q

Define qualifying relative for most individual tax factors?

A

Must be citizen of North America

Must live with you, unless mother/father or relative closer than a cousin

You must provide more than 50% support to the individual

310
Q

How is minor income taxed at a parent’s rate calculated (AKA kiddie tax)?

A

Child’s unearned income
- early withdrawal penalties
- $1,000
- Greater than $1,000 or child’s itemized deduction related to unearned income
= Amount taxed at parents’ rate

311
Q

Can spouses married filing jointly use different accounting methods?

A

Yes, if they each own a small business. All non-business income is cash basis.

312
Q

At what rate is self-employment tax assessed?

A

15.3% of net earnings from self-employment

(Note: executor of an estate is NOT self-employment income)

313
Q

What is a refundable tax credit? Which individual tax credits are most commonly refunded?

A

A tax credit which takes the taxpayer’s tax owed on the return below zero, resulting in a refund to the taxpayer.

Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit.

Note: the REGULAR child tax credit is NOT refundable.

314
Q

How many education credits may be taken on a tax return?

A

American Opportunity Credit - per student

Lifetime Learning Credit - per taxpayer

Note: The American Opportunity Credit is refundable.

315
Q

What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?

A

The lesser of:

90% of current year’s total tax

100% of prior year’s total tax

110% of prior year’s total tax (if AGI is $150,000 or more)

316
Q

Which farming costs related to land are deductible? Which aren’t?

A

Deductible: Costs incurred to PRESERVE soil/water

Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)

317
Q

Which depreciation table is used for personal tangible property related to farming?

A

MACRS 150

318
Q

How long does the taxpayer have to petition the court for appeal after an audit?

A

90 days

319
Q

If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?

A

10 days

320
Q

What is the statute of limitations for a tax audit?

A

3 years, generally

6 years if 25% or more of gross income was omitted

The clock starts on the LATER of the due date or the filing date of the return.

There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.

321
Q

How is non-business bad debt deducted on a 1040?

A

It is treated as a STCL

322
Q

How long does an individual taxpayer have to file a claim for refund?

A

Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.

323
Q

When are life insurance premiums of an employee includable in income?

A

Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.

324
Q

When are scholarships not taxable?

A

When they are not in return for services rendered,

AND

The money is used only for tuition and books

Note: Scholarships for room and board are includable in income.

325
Q

What interest income is tax free?

A

State & municipal bond interest

US EE Savings Bond interest (note: HH bond interest is taxable)

326
Q

Which dividend income is tax free?

A

S-corporation (actually distributions)

Life insurance

327
Q

How much social security income can be taxed for individuals in higher income brackets?

A

Up to 85%

328
Q

Is unemployment compensation taxable?

A

Yes.

329
Q

Which damages awarded in lawsuits are taxable? Which are not?

A

Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability)

Any payments for punitive damages ARE taxable.

330
Q

Are workman’s compensation insurance benefits taxable?

A

No - similar to an award for damage to make a person whole.

331
Q

Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony

A

Alimony IS taxable.

Child support and divorce property settlements are NOT taxable.

332
Q

Adoption expenses - Are they deductible?

A

NO, they are not deductible. However tax benefits are available through the adoption CREDIT.

333
Q

Describe alimony recapture.

A

2nd Year: (3rd year - 2nd year - $15,000)

1st Year:
1st Year Alimony Paid
- Avg alimony paid in 2nd & 3rd years
- $15,000
- Recapture from 2nd year
=1st Year Alimony Recapture

Total Recapture = 1st Year Recapture + 2nd Year
Recapture

334
Q

How are Net Operating Losses (NOLs) utilized?

A

Can be carried back 2 years

If any left, can be carried forward 20 years.

335
Q

Which IRA contributions are deductible?

A

Traditional IRA = deductible

Roth IRA = not deductible

336
Q

When can a couple file married filing jointly?

A

They must be married at the end of the year.

If one spouse dies, they must be married at the end of the year.

337
Q

What are the requirements for filing as Head of Household?

A

Must have a dependent child

Must provide more than 50% of the child’s support

Must live with them more than 50% of the year

338
Q

What are the requirements for filing as qualifying widower?

A

Must have a dependent child.

Essentially gets MFJ status for the year of death + 2 tax years

REG (2 decks)

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