REG - Individual Taxation Flashcards
Uniform capitalization rules (UNICAP)
generally require that all costs incurred (both direct and indirect) in manufacturing or constructing real or personal property, or in purchasing or holding property for sale, must be capitalized as part of the cost of the property.
What form is an income tax refund claim made on?
Form 1040X
What form should be used to file a refund claim for taxes other than income taxes?
Form 843
What is Form 1045 used for?
To file for a tentative adjustment or refund of taxes when an overpayment of taxers for a prior year results from the carry back of a current year’s net operating loss.
What part of scholarship or fellowship can be excluded from gross income for a DEGREE candidate?
Tuition and course-related fees, books, supplies, and equipment.
Amounts used for other purposes including room and board are included in income.
NON DEGREE students may not exclude any part of a scholarship or fellowship grant
Coverdell Education Savings Account
contributions of up to $2,000 per beneficiary (until the beneficiary reaches age 18) to pay the costs of a beneficiary’s higher education
- not deductible; withdrawals to pay the cost of a beneficiary’s postsecondary school tuition and room and board are tax free
- earnings distributed but not used to pay a beneficiary’s education expenses must be included in the distributes gross income are subject to a 10% penalty tax
- the amount left in an education IRA before the beneficiary reaches age 30 can be rolled over to another family member’s education IRA without triggering income taxes or penalties
- eligibility is phased out for single taxpayers with modified AGI between $95,00 and $110,000 and for married taxpayers with modified AGI between $190,000 and $220,000
Alimony recapture
may occur if payments sharply decline in the 2nd or 3rd years. This is accomplished by making the payor report the recaptured alimony from the first and second years as income (and allowing the payee to deduct the same amount in the 3rd year)
How does alimony recapture work?
(1) Recapture for the second year occurs to the extent that the alimony paid in the second year exceeds the third-year alimony by more than $15,000.
(2) Recapture for the first year occurs to the extent that the alimony paid in the first year exceeds the average alimony paid in the second year (reduced by the recapture for that year) and third year by more than $15,000.
(3) Recapture will not apply to any year in which payments terminate as a result of the death of either spouse or the remarriage of the payee.
(4) Recapture does not apply to payments that may fluctuate over three years or more and are not within the control of the payor spouse (e.g., 20% of the net income from a business).
EXAMPLE: If a payor makes alimony payments of $50,000 in 2014 and no payments in 2015 or 2016, $50,000 − $15,000 = $35,000 will be recaptured in 2016 (assuming none of the exceptions apply).
EXAMPLE: If a payor makes alimony payments of $50,000 in 2014, $20,000 in 2015, and nothing in 2016, the recapture amount for 2015 is $20,000 − $15,000 = $5,000. The recapture amount for 2014 is $50,000 − ($15,000 + $7,500) = $27,500. The $7,500 is the average payments for 2015 and 2016 after reducing the $20,000 2015 payment by the $5,000 of recapture for 2015. The recapture amounts for 2014 and 2015 total $32,500 and are reported in 2016.
Child and Dependent Care Credit
- Nonrefundable
- Varies from 20% to 35% of the amount paid for qualifying household and dependent care expenses
- Qualifying individual:
- taxpayer’s child, stepchild, sibling, step sibling, descendant) UNDER AGE 13
Maximum amount of qualifying expenses for Child and Dependent Care Credit
$3,000 for one or $6,000 for two or more, 35%
Compute personal casualty loss
Lesser of (1) the basis or (2) decline in FMV resulting from casualty; reduced by $100 floor and 10% of AGI
Example. Pat, a single taxpayer, has adjusted gross income of $40,000 in the current year. During the year, a hurricane causes $4,100 damage to Pat’s personal use car on which Pat has no insurance. Pat purchased the car for $20,000. Immediately before the hurricane, the car’s fair market value was $11,000 and immediately after the hurricane its fair market value was $6,900. What amount should Pat deduct as a casualty loss for the current year after all threshold limitations are applied?
The amount of Pat’s personal casualty loss is computed as the lesser of (1) the basis of the car ($20,000), or (2) the decline in the car’s FMV resulting from the casualty ($11,000 − $6,900 = $4,100); reduced by a $100 floor and 10% of AGI. Here, Pat’s deductible loss is $4,100 − [$100 + (10% of $40,000)] = $0.
Period for filing refund claims
a. Refund claim must be filed within three years from date return was filed, or two years from payment of tax, whichever is later. If return filed before due date, the return is treated as filed on due date.
b. Three-year period is extended to seven years for claims resulting from bad debts or worthless securities.
c. If refund claim results from a carryback (e.g., NOL), the three-year period begins with the return for the year in which the carryback arose.
Is unemployment compensation included in gross income?
Yes
Losses from passive activities
Can only be used to offset income from other passive activities
Describe the special rule permitting an individual to offset up to $25,000 of income that is not from passive activities by losses or credits from rental real estate if the individual actively participates in the rental real estate activity.
the $25,000 amount is reduced by 50% of AGI in excess of $100,000 and fully phased out when AGI exceeds $150,000. For this purpose, AGI is computed before including taxable social security, before deducting IRA contributions, and before the exclusion of interest from Series EE bonds used for higher education.
