Reg - Individual Tax 4

Question 1

What % must high income individuals use if they base their estimated tax payments on their prior year’s tax?

Answer 1

110%

100% for non-high-income earners

Question 2

What is the overall limitation for contribution deductions?

Answer 2

50% of AGI before any net operating loss carryback

Question 3

American Opportunity Credit

Answer 3

provides for a maximum credit of $2,500 per year (100% of the first $2,000 plus $25% of the next $2,000 of tuition expenses) for the first four years of postsecondary eduction.

Question 4

Who is eligible for the American Opportunity Credit?

Answer 4

Student enrolled on at least half-time basis for one academic period during the year.

Available for an individual only if the lifetime learning credit is not claimed for that individual during the same tax year

Question 5

multiple support agreement

Answer 5

can be used if no single taxpayer furnishes more than 50% of the support of a dependent. Then any taxpayer who (meets the other requirements) contributing more than 10% can claim the dependent provided others furnishing more than 10% agree not to claim the dependent as an exemption

Question 6

Miscellaneous expenses deductible to the extent they (in aggregate) exceed 2% of AGI

Answer 6

• outside salesman expenses
• unreimbursed employee expenses
• tax counsel, assistance, and tax return preparation fees
• expenses for the production of income other than those incurred in a tree or business or for production of rents and royalties (e.g. investment counsel fees, clerical help, safe-deposit box rent, legal fees to collect alimony, etc.)

Question 7

Miscellaneous expenses deducted in full (not subject to the 2% floor)

Answer 7

a. Gambling losses to the extent of gambling winnings
b. Impairment-related work expenses for handicapped employees
c. Estate tax related to income in respect of a decedent
d. Deduction for repayment of amounts under a claim of rights if over $3,000
e. Amortizable bond premium on bonds acquired before October 23, 1986
f. Casualty and theft losses of income-producing property
g. The balance of an employee’s investment in an annuity contract where the employee dies before recovering the entire investment

Question 8

Who is eligible for the earned income tax credit?

Answer 8

• an individual must have earned income and generally must maintain a household for more than half the year for a qualifying child
• a qualifying child includes the taxpayer’s child or grandchild who lives with the taxpayer for more than half of the taxable year, is under age 19, or a full-time student under age 24, or permanently or totally disabled.

** not available to married taxpayers filing separately

Question 9

What is the normal period the IRS to assert a notice of deficiency before the statute of limitations expires?

Answer 9

The later of 3 years after the return is filed, or 3 years after the due date of the return.

The assessment period is extended to 6 years if the gross income omitted from the return exceeds 25% of the gross income reported on the return.

Question 10

How is interest expense on a qualified education loan deductible?

Answer 10

In the computation of an individual’s adjusted gross income.

The maximum annual deduction is limited to $2,500 and is reduced by the modified adjusted gross income in excess of $60,000 if single, head of household, or a qualifying widower; $120,000 if married filing jointly.

Question 11

child tax credit

Answer 11

individual taxpayers are permitted to take a tax credit based solely on the number of their dependent children under age 17. the amount of credit is $1,000 per qualifying child. The credit phases out when modified adjusted gross income exceeds specified thresholds.

Question 12

what is the deduction for an individual’s investment interest expense limited to?

Answer 12

the individual’s net investment income.

Question 13

under the cash method of reporting, when should an individual report gross income?

Answer 13

for the year in which income is either actually or constructively received either in cash or in property

Question 14

What is the limit of net capital loss deduction from AGI

Answer 14

$3,000

Question 15

What is required for a qualifying relative to be an exemption?

Answer 15

Provide more than half of her support and her gross income less than $4,000

Question 16

Are tax return preparation fees deductible?

Answer 16

Only as miscellaneous itemized deductions to the extent that the aggregate amount of expenses in that category exceeds 2% of the taxpayer’s adjusted gross income.

Question 17

AMT Formula

Answer 17

Regular taxable income

+ (−) Adjustments
+ Tax preferences

= Alternative minimum taxable income
− Exemption amount
= Alternative minimum tax base
× 26% or 28%
= Tentative before foreign tax credit
− AMT foreign tax credit
= Tentative minimum tax
− Regular tax liability (reduced by regular tax foreign tax credit)
= AMT (if positive)

Question 18

AMT Adjustments

Answer 18

a. For real property placed in service after 1986 and before 1999, the difference between regular tax depreciation and straight-line depreciation over 40 years.
b. For personal property placed in service after 1986, the difference between regular tax depreciation using the 200% declining balance method and depreciation using the 150% declining balance method (switching to straight-line when necessary to maximize the deduction)
c. For long-term contracts, the excess of income under the percentage-of-completion method over the amount reported using the completed-contract method
d. The installment method cannot be used for sales of dealer property
e. The medical expense deduction is computed using a 10% floor (instead of the 7.5% floor that might have been used for regular tax)
f. No deduction is allowed for home mortgage interest if the loan proceeds were not used to buy, build, or improve the home
g. No deduction is allowed for personal, state, and local taxes, and for miscellaneous itemized deductions subject to the 2% floor for regular tax purposes
h. No deduction is allowed for personal exemptions and the standard deduction

Question 19

Lifetime Learning Credit

Answer 19

provides a credit of 20% of up to $10,000 of tuition and fees paid by a taxpayer for one or more students for graduate and undergraduate courses at an eligible educational institution. The credit may be claimed for an unlimited number of years, is available on a per taxpayer basis, and covers tuition and fees paid for the taxpayer, spouse, and dependents.

Question 20

How are losses from passive sources deductible?

Answer 20

Losses from passive sources may generally only be used to offset income from other passive activities.

A special rule permits an individual to offset up to $25k of income that is not from passive activities by losses from a rental real estate activity if the individual actively participates in the rental real estate activity.

This $25k allowance is reduced by 50% of the taxpayer’s AGI in excess of $100,000 and is fully phased out when AGI exceeds $150,000.