REG Chapter 1 Flashcards by Maria Nacusse

Individual Taxation Formula

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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Who must file a tax return?

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

Personal exemption
Regular standard deduction
Additional standard deduction amount for 65+

Exception: You must file if:

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

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

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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Who can file as Qualifying Widower - Surviving Spouse?

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:

Maintains house for WHOLE year for dependent child

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Who can file as Head of Household?

The person must be:

Not married, legally separated, or married and away from spouse for over 6 months
Not a qualifying widower
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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Exemptions

Who can claim one?

Phaseout?

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:

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

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

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Qualifying Child

CARES

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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Qualifying Relative

SUPORT

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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If 65 + or blind

Taxpayer gets Increased Standard Deduction, not Additional Exemption

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

FMV

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

Income: None
Basis: NBV

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Income Categories (4)

Ordinary
Portfolio
Passive
Capital

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Ordinary Income

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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Passive Income

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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Capital Income

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

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Treatment of cancellation of debt

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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Partially taxable Fringe benefits

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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Life insurance proceeds - Nontaxable Fringe Benefit

Proceeds are generally not taxable, but the interest is

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Educational Expenses, are they taxable?

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

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

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

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Flexible Spending Arrangements

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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Tax-Exempt Interest

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

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Series EE - US Savings Bond

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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Kiddie Tax

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

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Taxable Dividends

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

Tax Free Distributions

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

Formula to Determine Rental Income

Gross rental income Prepaid rental income Rent cancellation payment Improvement in-lieu-of rent = Net Rental Income OR Net Rental Loss

What happens if your home was rented < 15 days?

Rental income is excluded | Treated like your home, repairs are not deductible

What happens if your home was rented > 15 days?

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

Passive Activity Losses Treatment Schedule E

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

Passive Activity Losses - Mom and Pop Exception

Deduct up to $25K of net passive losses Phaseout when AGI reaches $150K (meaning no deduction) Own at least 10% of the rental activity

Real Estate Professional and Rental Activity

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

Is Social Security Income Taxable?

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

Gambling Winnings and Losses

Winnings are included in Gross Income Losses are deducted to the extent of winnings - Schedule A as itemize deduction

Non-qualified Employee Stock Option

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

Qualified Employee Stock Option - INCENTIVE Stock Option

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

Qualified Employee Stock Option - EMPLOYEE Stock Purchase

Employee has the option to buy stock Not taxable as compensation Capital gain/loss when sold Employer does not receive a deduction

ROTH IRA

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

US Treasury Bond Interest

Taxable and included in Gross Income

Interest on US Treasury Certificate

Taxable

Interest Income on State Government Obligation

Not Taxable

Interest on Federal Government Obligation

Taxable

Interest on federal and state income tax refund

Not Taxable

Interest from investment in municipal bonds

Not taxable

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

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

Interest Income from Money Market Account

Taxable

Purchase of an Annuity - Tax Treatment

Investment / months expected to live = amount to be excluded from income each month

Uniform Capitalization Rule

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

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

$10,000,000

If you are self employed, how are you taxed?

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

How is tax insurance for owner deducted?

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

What is schedule C?

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

Self employment activity - How do you treat salary?

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

Where do you deduct state income taxes for business?

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

Treatment of capital losses

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

Who is taxed on distributions made by a trust?

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

Guaranteed payments in a partnership

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

How is a trust's income reported?

Trust files form 1041 The beneficiary gets a K-1

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

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

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?

Their share of the S Corporation taxable income

Charitable contribution of appreciated property held for short term

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