REG Chapter 1 Flashcards
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
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.
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.
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
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)
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.
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
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
If 65 + or blind
Taxpayer gets Increased Standard Deduction, not Additional Exemption
Taxable event, what is your income and what is your basis?
FMV
Nontaxable event, what is your income and what is your basis?
Income: None
Basis: NBV
Income Categories (4)
Ordinary
Portfolio
Passive
Capital
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
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
Capital Income
Selling capital assets create capital gains and losses. Includes any property (personal or business). Some exceptions apply
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
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
Life insurance proceeds - Nontaxable Fringe Benefit
Proceeds are generally not taxable, but the interest is
Educational Expenses, are they taxable?
Up to around $5K may be excluded from gross income and applies to undergraduate and graduate level education
Qualified Pension, Profit-Sharing, and Stock Bonus Plans (401K)
The employer makes a contribution and this is not taxable to employee
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
Tax-Exempt Interest
Interest on state and local bonds/obligations is tax-exempt
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
Kiddie Tax
Unearned income of dependent child under 18 or 24 if full time student is taxed at parent’s higher rate
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
