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CPA REG 1-8 > REG Chapter 1 > Flashcards

REG Chapter 1 Flashcards

1
Q

Individual Taxation Formula

A

Gross Income
< Adjustments >
= AGI

< Standard Deduction or Itemize Deductions >
< Exemptions >
= Taxable Income

Federal Income Tax
< Tax Credits >
Other Taxes
< Payments >
= Tax Due or Refund
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2
Q

Who must file a tax return?

A

Must file if income is = or > than the sum of:

  1. Personal exemption
  2. Regular standard deduction
  3. Additional standard deduction amount for 65+

Exception: You must file if:

  1. Net earnings from self employment of $400 or more
  2. Person claimed as dependent by someone else who has unearned income, total income, or earned income exceeding certain amounts.
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3
Q

What happens if individual does not file by 04/15?

A

Individual can claim automatic 6 month extension. Taxpayer will pay penalty though because the payment date was supposed to be 04/15.

If you are out of the country on 04/15 and your business is also on another country, then you get a 2 month AUTOMATIC extension with no penalty. No need to file an extension form, just include documentation when filing tax return.

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4
Q

Who can file as Qualifying Widower - Surviving Spouse?

A

The year of the death the person can file MFJ. After that, the person can file as Qualifying Widower for 2 years and use the joint tax standard deduction (not the exemption) if:

  1. Maintains house for WHOLE year for dependent child
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5
Q

Who can file as Head of Household?

A

The person must be:

  1. Not married, legally separated, or married and away from spouse for over 6 months
  2. Not a qualifying widower
  3. Maintain house for more than 1/2 of the taxable year as the principal residence for:
  • Dependent child
  • Parent (may not live together)
  • Relative (must live together)
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6
Q

Exemptions

Who can claim one?

Phaseout?

A

Individual is entitled to one, it changes every year. For 2015 it was $4,000. If somebody uses it, you lose it

If you file MFS, you may claim an exemption for your spouse as long as:

  1. The spouse had no gross income
  2. The spouse was not claimed as depend by somebody else

Phase out at around $155K - $309K.

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7
Q

Qualifying Child

CARES

A

C - Close relative (child, sibling, or descendant of these)
A - Age limit (19 or 24)
R - Residency (live with taxpayer for + 1/2 of the year)
E - Eliminate gross income test
S - Support test does not matter

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8
Q

Qualifying Relative

SUPORT

A

S - Support by paying +50% or 10% if splitting
U - Unless gross income is < than exemption amount ($4K)
P - Prevent dependent from filing joint return
O - Only citizens or residents, includes Mexico and Canada
R - Relative includes grandparents, uncles, nephews
OR
T - Taxpayer lives with the non-relative person for the entire year

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9
Q

If 65 + or blind

A

Taxpayer gets Increased Standard Deduction, not Additional Exemption

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10
Q

Taxable event, what is your income and what is your basis?

A

FMV

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11
Q

Nontaxable event, what is your income and what is your basis?

A

Income: None
Basis: NBV

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12
Q

Income Categories (4)

A

Ordinary
Portfolio
Passive
Capital

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13
Q

Ordinary Income

A

Includes salaries and wages, state and local tax refunds, alimony, IRA and pension income, self-employment (Schedule C) income, unemployment compensation, social security, prizes, taxable portion of scholarship, gambling income, and anything that does not fit into any of the other categories

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14
Q

Passive Income

A

Rental property - An activity in which a taxpayer did not actively participate. Only passive losses may offset passive income and a net passive loss is not deductible on the tax return, it is carried forward

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15
Q

Capital Income

A

Selling capital assets create capital gains and losses. Includes any property (personal or business). Some exceptions apply

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16
Q

Treatment of cancellation of debt

A

All debts cancelled are included in gross income. If you owe $50K to the bank, you pay only $30K and the bank forgives the remaining $20K, those $20K are income

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17
Q

Partially taxable Fringe benefits

A

Premiums paid by employer on a group-term life insurance policy are income only to the extent they exceed $50K. The exceeding amount is taxable income included in W-2 form

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18
Q

Life insurance proceeds - Nontaxable Fringe Benefit

A

Proceeds are generally not taxable, but the interest is

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19
Q

Educational Expenses, are they taxable?

A

Up to around $5K may be excluded from gross income and applies to undergraduate and graduate level education

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20
Q

Qualified Pension, Profit-Sharing, and Stock Bonus Plans (401K)

A

The employer makes a contribution and this is not taxable to employee

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21
Q

Flexible Spending Arrangements

A

Employee can have some of his salary, usually up to $2.5K, deposited into an account and not pay taxes. This balance would then have to be used for medical expenses and if not claimed will be lost

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22
Q

Tax-Exempt Interest

A

Interest on state and local bonds/obligations is tax-exempt

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23
Q

Series EE - US Savings Bond

A

Used to pay for higher education of taxpayer, spouse, or dependent. Interest is not taxable but it phases out at around $75K for single and $115K for MFJ

Interest exclusion is reduced by qualified scholarships not included in gross income

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24
Q

Kiddie Tax

A

Unearned income of dependent child under 18 or 24 if full time student is taxed at parent’s higher rate

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25
Q

Taxable Dividends

A

The taxable amount is the cash received or the FMV of property

26
Q

Tax Free Distributions

A

Return of capital (reduce basis for not beyond 0)
Stock split
Stock dividend
Life insurance dividend

27
Q

Formula to Determine Rental Income

A

Gross rental income
Prepaid rental income
Rent cancellation payment
Improvement in-lieu-of rent

= Net Rental Income
OR
Net Rental Loss

28
Q

What happens if your home was rented < 15 days?

A

Rental income is excluded

Treated like your home, repairs are not deductible

29
Q

What happens if your home was rented > 15 days?

A

Personal use

1) > 14 days
or
2) > 10% of rental days

Treated as combination: personal/rental
PRORATE
Rental use expenses deductible to the extent of rental income

30
Q

Passive Activity Losses Treatment

Schedule E

A

Carry forward for ever
Passive losses offset passive income
If still not use then you save it for when the property is disposed

31
Q

Passive Activity Losses - Mom and Pop Exception

A

Deduct up to $25K of net passive losses

Phaseout when AGI reaches $150K (meaning no deduction)

Own at least 10% of the rental activity

32
Q

Real Estate Professional and Rental Activity

A

If more than 50% of his income is from real property

and

Works more than 750 hours in real estate

Then, may deduct losses against other income

33
Q

Is Social Security Income Taxable?

A

Yes, only if it exceeds $34K for single and $44K for MFJ

34
Q

Gambling Winnings and Losses

A

Winnings are included in Gross Income

Losses are deducted to the extent of winnings - Schedule A as itemize deduction

35
Q

Non-qualified Employee Stock Option

A

Taxable when granted if you can tell the value

If not, taxed when exercised

Employer will deduct in the same year that employee reports income

36
Q

Qualified Employee Stock Option - INCENTIVE Stock Option

A

Incentive stock option: for the employee is not taxable as compensation, there is a capital gain/loss when sold

Employer has no tax deduction, because the employee did not pay tax

37
Q

Qualified Employee Stock Option - EMPLOYEE Stock Purchase

A

Employee has the option to buy stock

Not taxable as compensation

Capital gain/loss when sold

Employer does not receive a deduction

38
Q

ROTH IRA

A

You pay taxes on your weekly income, therefore when you take out the money and you are over 59 1/2 it is ALL tax free, interest and principal

39
Q

US Treasury Bond Interest

A

Taxable and included in Gross Income

40
Q

Interest on US Treasury Certificate

A

Taxable

41
Q

Interest Income on State Government Obligation

A

Not Taxable

42
Q

Interest on Federal Government Obligation

A

Taxable

43
Q

Interest on federal and state income tax refund

A

Not Taxable

44
Q

Interest from investment in municipal bonds

A

Not taxable

45
Q

When does a taxpayer recognize gain or loss on the sale of stock or securities on an established market?

A

On the trade date, which is the date of when the order to purchase or sell is performed, when executed in the market

46
Q

Interest Income from Money Market Account

A

Taxable

47
Q

Purchase of an Annuity - Tax Treatment

A

Investment / months expected to live

= amount to be excluded from income each month

48
Q

Uniform Capitalization Rule

A

Capitalize: DM, DL, OH, warehousing, utilities, repairs, maintenance, supervisors, rent, storage, depreciation, insurance, pension contribution, design, repackaging, spoilage, scrap, administrative supplies

Do NOT Capitalize: Selling, advertising, marketing, research, officer compensation attributed to production services

49
Q

In order to use the uniform capitalization rule, average gross receipts for the previous 3 years must exceed what amount?

A

$10,000,000

50
Q

If you are self employed, how are you taxed?

A

You are taxed on what you earn, not on what you withdraw

51
Q

How is tax insurance for owner deducted?

A

It is deducted as an adjustment to arrive at AGI. It is not a deduction on schedule C

52
Q

What is schedule C?

A

It is only used for business expenses, not for personal expenses. Schedule C has only items related to operations of the business

53
Q

Self employment activity - How do you treat salary?

A

Salary is considered a draw and is not a business deduction against gross income of the self employment activity

54
Q

Where do you deduct state income taxes for business?

A

Not on schedule C!!! They are an itemize deduction

55
Q

Treatment of capital losses

A

They offset capital gains. Then carry forward for ever, do not carry back

56
Q

Who is taxed on distributions made by a trust?

A

In order to avoid double taxation, distributions are deductible by the trust and only the beneficiary gets taxed

57
Q

Guaranteed payments in a partnership

A

Are deductible as expenses by the partnership and show as ordinary income on the partner’s K-1

58
Q

How is a trust’s income reported?

A

Trust files form 1041

The beneficiary gets a K-1

59
Q

If you receive an interest in the partnership for the services that you rendered, what amount of income do you report?

A

FMV of what is received, even if that is more than what you would typically charge

60
Q

S Corporation, what amount is included in each shareholder’s gross income? The distributions they received or their share of the S Corporation taxable income?

A

Their share of the S Corporation taxable income

61
Q

Charitable contribution of appreciated property held for short term

A

Deductible as charitable contribution the adjusted basis, not the FMV because it is short time

CPA REG 1-8 (7 decks)

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