Reg Sec 1

Question 1

Gross Income

Answer 1

Constructively Received.
Illegal drugs are taxable (net of COGS)
Interest on Municipal Bonds are not taxable
Alimony is Taxable if:
    Cash only
     Apart when payments
     Not Child support
     Own return
      Terminates on death
Dividends are taxable unless:
    Life insurance dividends
    Received form an S Corporation
    Stock split or common 
    Liquidating dividend
-Worker's Comp isn't taxable and body injury is tax free not non-physical.

Security deposits held is not consider gross income it is an Liability

Question 2

Surtax on Unearned Income

Answer 2

3.8% lesser of.
Net Investment income reduced by allowable investment income.
MAGI is AGI before any foreign earned income exclusion, threshold of $250,000 Joint, $125,000 married separate, $200,000 all others.
Example: Investment Income of $40,000, MAGI of $300,000 since MFJ ($300,000-250,000=50,000) so lower of 40,000 vs 50,000 or 40,000 x 3.8%=1,520. I Investment Income was 75,000 vs 50,000 or 50,000 x 3.8%=1,900

Question 3

Social Security Benefits

-taxes that can be deducted in same year

Answer 3

May or may not be taxable based on provisional income, a person collecting SS who has less than can exclude all SSB. Income exceeding 60,000 usually are subject to the max 85% inclusion.

-real estate, property, and state income tax can be deducted in same year not state sales taxes in lieu with state income tax.

Question 4

Capital Assets and Capital Loss

Answer 4

Assets:
0% tax rate for 10%-15% tax bracket
15% tax rate for 25%-35% tax bracket
20% tax rate for over 39.6% tax bracket

Loss:
up to $3,000 against ordinary income
Corporations get 0 net loss and can carry back 3 yrs and forward 5 yrs

Net Operating Losses (NOL) carryback 2yrs and carry foward 20yrs

Question 5

Tax Sch.

Answer 5

A-Personal & employee expenses
B-Interest and dividend income
C-Profit and loss Business
D-Cpital gains and Losses
E-Rental,Royalties, and Flow through entities
F- Farming P & L

Question 6

Adj for AGI
Student loan interest
Self employment tax
Business Exp

Answer 6

• Student Loan Interest- up to 2,500 phase out applies if AGI is over 75,000 (155,000 MFJ)
• self employment tax- pays both employer and employee’s share (15.3%), 50% of tax of return is deducted(7.66%) and 100% of medical. Example Gross income is 50,000 then 50,000x15.3x1/2=3,835 or 50,000-3,835=46175
• Business Exp- 50% of meals and entertainment, 100% of travel, Of no profit in 3 of 5 yrs(Hobby loss/Exp Sch A), Hobby losses can only be deducted to hobby income, subject to 2% threshold.

Question 7

Adj for AGI
Rental Loss
Contribution to Retirement plan
Education Exp
Charitable donation

Answer 7

-Rental active rental losses deductible ($25,000-50% (AGI over 100,000) & no deduction if AGI over 150,000)
Example: Active participation Income of 110,000 (25,000-50% (110,000-100,000)=20,000)

-Contribution to Retirement
Roth IRA are not deductible 5,500 11,000MFJ if over 50 6,500 and 13,000MFJ
Withdrawals prior to 59 1/2 may result in a tax penalty of 10% unless+(marginal Rate) (but amount still included in Gross Income):
Payment of medical exp. exceeding 7.5% of AGI, qualified higher education costs, death or disability of the participant, or first time purchase of a home (up to 10,000)

-Education Exp- tuition for higher Edu for up to 4,000

Charitable donation- not to exceed 30% of AGI

Question 8

Itemize deductions

• Long-term capital gain rule
• Medical Exp
• other Miscellaneous Exp
• Miscellaneous Exp.

Answer 8

-Long-term capital gain claim the higher FMV of long-term capital property limited to 30% AGI.
Example AGI of 100,000. bought a stock for 10,000 10 years ago now worth 40,000. Donates stock to qualified charity, the 40,000 is excepted but it exceeds the 30% AGI of 30,000 so the deduction is 30,000

Medical Exp- Deductible for amounts that exceeds 10% of AGI and 7.5% if over 65. Premiums are included.

-Other not subject to 2% of AGI minimum- Gambling losses to extent of of winnings no carry over. Gambling winnings on face of 1040. Professional can deduct business expenses on Sch C

-Miscellaneous Exp-2% of AGI (BIT)(Amount-2%XAGI)
Business Exp (mileage, job travel, Uniforms, etc)
Investment Exp (Safety deposit box, advisory fees, etc)
Tax Preparation/ legal advice relating to taxable income

Question 9

Itemize deduction

• Interest paid
• taxes paid
• theft and Casualty losses

Answer 9

-Interest on mortgage loan interest, acquisition indebtedness to $1,000,000 and home equity loans to 100,000 (up to 100% of net equity in home).

Example buys home for 150,000 and put 30,000 down bank paid 120,000, the 120,000 is acquisition indebtedness. Year later home balance is 110,000 and value increase to 200,000 bank gives 250,000 equity loan(125%). 90,000 is consider the home equity loan and the rest is consider a personal loan 50,000.

• Taxes Paid Personal Property and real estate, state, local or foreign taxes. (Not Fees, Fines, Federal, FICA)
• Casualty losses that exceed 10% and $100 deduction may de deducted then minus the 10%.

Question 10

Alternative Minimum Tax
SIMPLE-PIE
Safe Harbor

Answer 10

Mostly add (Adjustments) SIMPLE
Standard Deduction or personal deduction
Interest on home equity loan
Medical Expenses under 10% of AGI or difference of 7.5% if over 65
Personal and dependent exemptions
Local and State Income taxes
Employee business exp, tax prep, Investment Exp subject to the 2% of BIT

Mostly taxable (Tax Preferences) PIE
Private activity bond interest
Incentive stock options
Excess depr on personal property

to avoid underpayment penalties, the general amout is 100% of the prior year tax liability or 90% of current year, but if AGI in prior year is over 150,000 then safe harbor is 110% of PY tax liability.

Question 11

Adjustments for (to) AGI (I-embraced)

Answer 11

Interest student loans(2,500)
self-Employment tax (50% medical. Premiums-100%)
Moving Exp
Business exp(Sch. C)
Rent, Royalty, & Flow through (25,000-50%(AIG over 100,000)
Alimony paid (CANNOT)
Contributions to Retirement Plan(5,500 (11,000MFJ)
Early withdrawal penalty (CD penalty deductible)
jury Duty fee
Education Exp (4,000qualified higher)
Health Savings Account

Question 12

Itemized Deduction from AGI (COMMITT)

• Gifts
• Pension

Answer 12

Charitable contributions
Other Miscellaneous Exp (not subject to 2% of AGI min)
Miscellaneous Exp (BIT)(subject to 2% of AGI) (Union Dues)
Medical exp
Interest paid
Taxes paid
Theft and Casualty losses

• Gifts are deducted max $25 per gift or person(If hobby meaning no profit for 3 out of 5 year than limit to $4 per gift)
• Pension benefits are taxable except to extent that they are return on capital, if cost of pension plan was incurred by employer and taxpayer had no cost the it is entirely taxable.

Question 13

State Refund
Underpayment penalty
Workers Comp

Answer 13

State tax refunds are included in GI if the tax payer itemized in the prior year and took a deduction on Sch A for state taxes paid

subject to penalty of tax due is greater than 1,000. avoid penalty by paying lesser of 90% of current year or 100% of prior year(110% over 150,000)

Workers comp isn’t taxable.