REG R1 Part 1

Question 1

State the basic tax formula

Answer 1

Gross income
(Adjustments)
=Adjusted gross income (AGI)
(Standard deduction)
           or
(Itemized deductions)
=Taxable income before QBI deduction
(QBI deduction)
=Taxable income

Federal Income Tax
(tax credits)
Other taxes
(Payments)
=Tax due Or Refund

Question 2

Identify the various filing statuses

Answer 2

• Single
• Married filing jointly
• Married filing separately
• Head of household
• Qualifying widow(er) with dependent child

Question 3

What are the criteria for filing single?

Answer 3

• Unmarried or legally separated from spouse at the end of the tax year
• Does not qualify for another filing status.

Question 4

What are the criteria for filing married filing jointly?

Answer 4

At year-end of tax year:

• Married and living together as spouses; or
• Living together in a recognized common law marriage; or
• Married and living apart but not legally separated or divorced

Question 5

What are the criteria for filing married filing separately?

Answer 5

At year-end of tax year:

• Married; and
• If one spouse wants to be responsible only for own tax; or
• If both spouses do not agree to file a joint return.

Question 6

What are the criteria for filing head of household?

Answer 6

Individual is not married, legally separated, or is married and has lived apart from his or her spouse for the last six months of the year.
-Individual is not a “qualifying widow(er).”
-Individual is not a nonresident alien
Individual maintained a home that, for more than half the taxable year, is the principal residence of a:
-son or daughter who is a qualifying child or qualifies as the taxpayer’s dependent (qualifying relative);
-a dependent relative who resides with the taxpayer; or
-a dependent father or mother, regardless of whether he or she lives with the taxpayer.

Question 7

What are the criteria for filing qualifying widow(er) (surviving spouse)?

Answer 7

-Unmarried at end of tax year; and
-Surviving spouse must maintain a household, which for the whole taxable year was the principal place of abode of a son, stepson, daughter, or stepdaughter; and
-The son, stepson, daughter, or stepdaughter qualifies as a dependent of the taxpayer.
The taxpayer qualifies for this status for two years after year of death of the spouse.

Question 8

Name the requirements for an individual to meet the definition for a “qualifying child” (CARES)

Answer 8

Qualifying Child

• Close relative
• Age limit (19/24) and younger than the taxpayer
• Residency and filing requirement
• Eliminate gross income test
• Support test

Question 9

Name the requirements for an individua to meet the definition for a “qualifying relative” (SUPORT)

Answer 9

Qualifying Relative
-Support (over 50%) test
-Under a specific amount of (taxable) gross income test
-Precludes dependent filing a joint tax return test
-Only citizens (residents of U.S., Canada, or Mexico) test
-Relative test OR
-Taxpayer lives with individual for the whole year test
Note that either the R or T test must be met. Although both of them may be met, only one is required.

Question 10

What are the requirements for a multiple support agreement?

Answer 10

-Two or more people together provide more than 50% of support, but no one contributes more than 50%.
-To claim as a dependent, a person must provide more than 10% of support, and meet the other dependency
tests.
-A multiple support declaration, Form 2120, must be filed.

Question 11

When should a cash basis taxpayer report income?

Answer 11

A cash basis taxpayer should report income in the year in which income is either actually or constructively received, whether in cash or property

Question 12

Define gross income

Answer 12

Gross income includes all income from whatever source derived, unless specifically excluded.

Question 13

Name some nontaxable fringe benefits (exclusions).

Answer 13

-De minimis fringe benefit
-Qualified tuition reduction
-Qualified employee discounts
-Employer-paid accident, medical, and health insurance
Unless specifically excluded by law, the fringe is includable in gross income.

Question 14

Are life insurance premiums paid by an employer taxable to an employee?

Answer 14

Premiums on the first $50,000 (face amount) of group term life insurance are not includable in gross income.
Premiums paid for coverage above $50,000 should be included in gross income. This is calculated from an IRS table, and is not the entire amount of the premium over $50,000.

Question 15

Give some examples of exempt interest

Answer 15

Exempt interest examples:

• State and local government bonds
• Bonds of a U.S. possession
• Series EE (U.S. Savings Bond) if used for higher education

Question 16

State the tax treatment of property settlements in a divorce

Answer 16

For a property settlement in a divorce, the transferring spouse gets no deduction for payments made (or property transferred), and the payments are not includable in the gross income of the spouse receiving the payment or property. This is still true even if the divorce was finalized on or before December 31, 2018.

Question 17

What are the requirements for alimony to be deductible by the paying former spouse and includable by the recipient?

Answer 17

-Divorce or separation agreement must have been executed on or before December 31, 2018
-Payments must be legally required pursuant to a written decree
-Payments must be in cash or its equivalent
-Payments cannot extend beyond death of payee
-Payments cannot be made to members of same household
-No joint tax return filed
Before alimony is taxable by the recipient, any child support due must be paid.

Question 18

When are funds in a nondeductible traditional IRA taxable?

Answer 18

Withdrawals from nondeductible traditional IRAs are partially taxable.
When withdrawn, amounts previously contributed (principal) are nontaxable. Any earnings on those contributions are taxable when withdrawn.
A pro rata allocation is generally applied to the distribution to determine the taxable amount.

Question 19

What is the formula to determine the excludable portion of an annuity?

Answer 19

Excludable amount in current year =
Investment in contract/ Age factor ( in months)
Note: If the annuitant lives longer than the factor in months, further payments are fully taxable. If the annuitant dies before the factor payments are collected, the unrecovered portion of the investments is deducted on the taxpayer’s final income tax return.

Question 20

In premature distributions of an IRA, what are the exceptions to the penalty tax? (HIM DEAD)

Answer 20

-Homebuyer (first time): $10,000 max if used toward first home (within 120 days)
-Insurance (medical)
-Unemployed with 12 consecutive weeks of
unemployment compensation
-Self-employed (who are otherwise eligible for
unemployment compensation)
-Medical expenses in excess of percentage of AGI floor
-Disability
-Education: college tuition, books, fees, etc.
-Adoption or birth of a child made within one year from the date of birth or adoption ($5,000 maximum exclusion)
-Death

Question 21

What are the rules to determine taxable Social Security benefits?

Answer 21

Taxpayers are classified into five categories depending on the level of provisional income, which is defined as AGI plus tax-exempt interest plus 50% of Social Security benefits.

• Low income (less than or equal to $25,000 for single/$32,000 MFJ) - No Social Security benefits are taxable.
• Lower middle income - Less than 50% of Social Security benefits are taxable.
• Middle income (over single $25,000/MFJ $32,000) - 50% of Social Security benefits are taxable
• Upper middle income - Between 50% and 85% of Social Security benefits are taxable.
• Upper income )over single $34,000/MFJ $44,000) - 85% of Social Security benefits are taxable.

Question 22

Are scholarships and fellowships includable in gross income?

Answer 22

For a degree-seeking student, scholarships and fellowships are excludable up to the amounts spent on tuition, fees, books, and supplies. All remaining amounts are includable in gross income.
For a non-degree-seeking student, all amounts are includable in gross income.

Question 23

What are the tests for foreign-earned income exclusion?

Answer 23

Tests for foreign-earned income exclusion:

• Bona fide residence test (an entire taxable year)
• Physical presence test (330 full days out of 12 consecutive months)

Question 24

List some nontaxable miscellaneous income items (exclusions)

Answer 24

Examples of nontaxable miscellaneous income items:

• Life insurance proceeds
• Gifts and inheritances
• Medicare benefits
• Workers’ compensation
• Personal (physical) injury or illness award
• Accident insurance—premiums paid by taxpayer
• Foreign-earned income exclusion

Question 25

Describe the self-employment tax.

Answer 25

• All net self-employment income is subject to the 2.9% Medicare tax, but only self-employment income up to $142,800 (2021) is subject to the 12.4% Social Security tax.
• An adjustment to income for one-half of self-employment tax (Medicare plus Social Security) paid

Question 26

On what property do the uniform capitalization rules apply?

Answer 26

-Real or tangible personal property produced by the taxpayer for use in the taxpayer’s trade or business
-Real or tangible personal property produced by the taxpayer for sale to customers (manufacturer’s inventory)
-Real or tangible personal property purchased by the taxpayer for resale (retailer’s inventory)
Exception: The uniform capitalization rules do not apply to (retailer’s inventory) property purchased for resale if the taxpayer’s gross receipts for the preceding three tax years do not exceed $26,000,000 annually.

Question 27

How is rental income from a vacation house treated?

Answer 27

1. If rented fewer than 15 days: treat as personal residence.
2. If rented more than 15 days and personal use is the greater of 14 days or 10% of days rented: allocate rental
   expenses to extent of rental income.
3. If rented 15 or more days and personal use is not more than 14 days or 10% of days rented, if greater: treat as rental property.
   If treated as personal, income is excluded and deductions for mortgage interest and taxes are reported on Schedule A. Other expenses are not deductible.
   If the vacation property is treated as a rental property, the taxpayer reports income and deductions on Schedule E.

Question 28

Name the four categories of business entities.

Answer 28

The tax system in the United States recognizes four categories of business entities: (1) partnership; (2) S corporation; (3) sole proprietorship; and (4) C corporation.

Question 29

Describe the tax treatment of guaranteed payments.

Answer 29

Guaranteed payments are distributive deductions to the partners via the partnership K-1 and also taxable income to the partner receiving the payments.

Question 30

What is meant by fiduciary accounting?

Answer 30

Trusts use fiduciary accounting. All receipts and disbursements are classified as either principal (corpus) or income.

Question 31

Explain the qualified business income (QBI) deduction.

Answer 31

The QBI deduction is a deduction from AGI available for individuals. The deduction is 20% of business income from sole proprietorships and flow-through entities from business conducted in the United States. AGI and other limitations apply.

Question 32

What are the three categories of individual income?

Answer 32

Categories of individual income:
-Active (wages, salaries, active business income or loss)
-Portfolio (dividends, interest, capital gains or losses)
-Passive (business income or loss when taxpayer does not actively participate; rental real estate and limited
partnership interest automatically passive)

Question 33

Define passive activity. Give some examples of passive activities.

Answer 33

A passive activity is any activity in which the taxpayer does not materially participate.
Rental activities, interests in limited partnerships, and S corporations are examples of passive activities.
Note: Rental activities are passive by definition, even if the taxpayer does materially participate.

Question 34

What is the tax treatment of nondeductible passive activity losses?

Answer 34

-Nondeductible passive activity losses are unused passive activity losses that are held in suspension.
-Used to offset passive income in future years (indefinitely).
-Fully tax deductible against all categories of income (active, passive, portfolio) in the year the property is
disposed of (e.g., sold).