REG1 Flashcards
When should a cash basis taxpayer report income?
In the year in which income is either actually or constructively received, whether in cash or property.
State the basic tax formula
Gross Income Less: Deductions FOR AGI = Adjusted gross income Less: Deductions FROM AGI (Greater itemized or standard deduction) Less: Exemptions = Taxable Income * Tax rate = Gross tax liability Less: Credits and prepayments =Tax due
Identify the due date and extension available for individuals
Due date: April 15
Extension: Form 4868 - Automatic 6 months
Identify the various filing statuses
- Single
- Married filing jointly
- Married filing separately
- Head of Household
- Qualified widow with dependent child
Criteria for filing single
- Unmarried or legally separated from spouse at the end of the year
- Does not quality for another filing status
Criteria for filing married filing jointly
At the end of the tax year:
- married and living together or
- Living together in a recognized common law marriage or
- Married and living apart but not legally separated or divorced
Criteria for filing married filing separately
At the end of the 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
Criteria for filing head of household
- Individual is not married, legally separated, or is married and has lived apart from his/her spouse for the last 6 months of the year
- Individual is not a “qualifying widower”
- Individual is not a nonresident alien
- Individual maintained a home that, for more than half the taxable year, is the principle residence of a:
1. Son/daughter who is a qualifying child or dependent
2. Dependent relative who resides with taxpayer
3. Dependent father/mother, regardless is live with taxpayer
Criteria for filing qualifying widower/surviving spouse
- Unmarried at the end of the tax year
- Surviving spouse must maintain a household, which for the entire tax year was the principle place of abode of a son/daughter or step children and
- Surviving spouse is entitled to a dependency exemption for the son/daughter
(The taxpayer qualifies for this status for 2 years after the death of spouse)
Test for “qualifying child” CARES
Close relative Age limit (19/24) and younger than the taxpayer Residency and filing requirement Eliminate gross income test Support test changes
Test for “qualifying relative” SUPORT
Support over 50% test
Under the personal exemption amount of gross income test
Precludes dependent filing a joint return
Only citizens of US/Canada/Mexico
Relative test
Taxpayer lives with for whole year
Requirements for a multiple support agreement
- 2 or more people together provide more than 50% of support, but no one contributes more
- To claim the exemption, must provide more than 10% of support, and meet the other dependency tests
- A multiple support declaration, Form 2120, must be filed
Define gross income
Includes all income from whatever source derived, unless specifically excluded
4 categories of individual income
- Ordinary (wages/salaries)
- Portfolio (dividends/interest)
- Passive (real estate investment and limited partnership)
- Capital
Name some nontaxable fringe benefits (exclusions)
- De minimis fringe benefit
- Qualified tuition reduction
- Qualified employee discounts
- Employer paid accident, medical and health insurance
Are life insurance premiums paid by an employer taxable to employee?
Premiums on the first $50,000 of group term life insurance are not includible in gross income. Premiums paid over should be included.
Give some examples of exempt interest
- State and local gov’t bonds
- Bonds of a US possession
- Series EE if used for higher ed
- Interest on Veterans Admin insurance
Tax treatment of unearned income of a child who falls under the “Kiddie tax”
Is taxed at his parents’ higher tax rate.
Net unearned income = child’s total unearned income - standard deduction of $950 - additional $950(which is generally taxed at child’s 10-15% rate
State the tax treatment of property settlements in a divorce
The transferring spouse gets no deduction for the payments made or property transferred, and the payments are not includible in the gross income of the spouse receiving it.
Requirements for alimony to be deductible by the paying former spouse and includible by the recipient
- Payments must be legally required pursuant to a written decree
- Payments must be in cash
- Cannot extend beyond death of payee
- 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.
Describe the self-employment tax
- All net self-employment income is subject to the 2.9% Medicare tax, but only self-employment income up to $110,100 is subject to the 12.4% Social security tax
- An adj. to income for 1/2 of self-employment tax paid
On what property do the uniform capitalization rules apply?
- Real or tangible personal property produced by the taxpayer for use in his trade or business, for sale to customers, or purchased for resale
Exception: do not apply to property purchased for resale if the taxpayer’s gross receipts for the preceding 3 yrs do not exceed $10,000,000 annually
When are funds in a nondeductible IRA taxable
Withdrawals from nondeductible IRAs are partially taxable. When withdrawn, amount previously contributed 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.
Formula to determine the excludable portion of an annuity
Excludable amount in the current yr = (investment in contract/age factor in months)
Note: If live longer, further payments taxable. If die before all paid, rest is miscellaneous itemized deduction on final tax return.
In premature distributions of an IRA what are the exceptions to the penalty tax? HIM DEAD
Home buyer (first time): $10,000 max
Insurance (medical) of unemployed for 12 weeks or self-employed
Medical expenses in excess of 7.5% of AGI
Disability
Education: college, tuition, books, fees….
and Death
How is rental income from a vacation home treated?
- if rented fewer than 15 days = personal residence
- if rented 15+ days and personal 14 days or 10% of days rented = allocate expenses
If personal, income is excluded and deductions for mortgage interest and taxes are reported on Sch. A Other expenses not deductible
If rental, taxpayer reports income and deductions on Sch. E
Define passive activity and some examples
Activity which the taxpayer does not materially participate. Rental activities, interests in limited partnerships, and S corp are examples.
Tax treatment of nondeductible passive activity losses
- Nondeductible passive activity losses are unused passive activity that are held in suspension
- Used to offset passive income in future indefinitely
- Fully tax deductible in the year the property is disposed
Rules to determine taxable Social Security benefits
Depends on provisional income (AGI + tax-exempt interest + 50% Social Security benefits)
Low income = no SS benefits are taxable Lower middle income = less than 50% of SS taxable Middle income (>$25,000single/$32,000MFJ) = 50% SS taxable Upper middle income = between 50-85% SS taxable Upper income (>$34,000/$44,000MFJ) = 85% SS taxable
Are scholarships and fellowships includible in gross income?
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 includible in gross income. For nondegree-seeking student, all amounts are includible in gross income.
Tests for foreign-earned income exclusion
- Bona fide residence test (an entire taxable yr)
- Physical presence test (330 full days out of 12 consecutive months)
List some nontaxable miscellaneous income items(exclusions)
- Life insurance proceeds
- Gifts and inheritances
- Medicare benefits
- Workers comp
- Personal injury or illness award
- Accident insurance-premiums paid by taxpayer
- Foreign-earned income exclusion
Tax treatment of capital gains/losses
Net capital losses are deducted up to $3,000 max per year against non-capital income. Any excess can be carried forward. Capital gains are fully taxable, but at lower tax rates. Holding period defines short or long term.
In general, how is the donees’s basis of a gift determined? How is the holding period determined?
- In general, donee’s basis is the same as donor’s.
- If sale is greater than donor’s basis, then gain is the diff between donor basis and sales price.
- If sale is less than FMV, the loss is diff between the FMV at gift date and sales price.
- If sale is less than basis but greater than FMV, no gain or loss recognized.
- The holding period includes the donor’s holding period unless basis become FMV, then it starts at gift date.
In general, how is the basis of inherited property determined? How is the holding period determined?
The basis of inherited property is the lower of the:
1. FMV at date of death OR
2. FMV at alternate lower valuation date if elected
- 6 months from date of death or disposal date
The holding period is automatically deemed long-term for all inherited property.
When is a gain NOT taxed? HIDE IT
Homeowner’s exclusion
Involuntary conversions
Divorced property settlement
Exchange of like-kind business/investment assets
Installment sale
Treasury and capital stock transactions by corp
Identify the major tax provisions of involuntary conversions of property
Gain may be deferred if insurance proceeds are reinvested in property that is similar or related in service or use within 2 years for personal property or 3 years for business property. Realized gains exist when insurance proceeds are greater than the adj. basis in the converted property.
What is the exclusion amount on the recognition of a gain on the sale of personal residence, provided the criteria for the exclusion are met?
$250,000 Single and $500,000 Married
Identify the criteria for the exclusion provision on the sale of a personal residence
- Must own and use property for 2+ years during 5 year period
- Either spouse for joint return must meet the ownership requirement, both must meet use requirement.
- May be eligible for partial exclusion if sale due to change of employment, health…
- No age requirement
- No rollover to another house
- Renewable, can be utilized more than one time.
Name the criteria for a classification as a like-kind exchange
- Tangible real or personal property and
- Used in trade or business or
- Held for investment (except inventory, stock, and securities)
In a like-kind exchange what is the basis of the property received?
Retains the basis of the property given up + or - any boot paid or received + any gain recognized.
Recognize gain to the extent of the lower of the realized gain or boot received.
Identify the nondeductible losses “WRAP up these losses, because they are not deductible”
Wash sale loss
Related party transactions
and
Personal loss
What is the tax treatment given to wash sales?
Losses are disallowed if the same security is bought within 30 days before or after the sale. This loss increases the basis in the property. Gains are taxable.
Tax treatment for sales to related parties
No deduction is allowed for losses on sales to related parties. On later resale, any gain recognized is reduced (but not below zero) by the previous disallowed loss.
What are the corporate capital gain/loss rules for C corps?
Net capital gains are added to ordinary income and taxed at reg rate. Sections 1231 gains are entitled to capital gain treatment.
Net capital losses are carried back 3 years and forward 5 as short term. They are deducted from capital or section 1231 gains.
Describe the employee and employer taxation on nonqualified employee stock option
Employee: if there is a readily ascertainable value, the employee recognizes ordinary income in that amount. If no RAV, ordinary income recognized based on FMV of stock purchased - amount paid on exercise date.
Employer: may deduct the value as a business expense in the same year the employee recognizes ordinary income.
Describe the employee and employer taxation on incentive stock options (ISOs)
Employee: generally not taxed as compensation. Basis of stock is exercise price plus any amount paid for option. Any gain/loss on subsequent sale is capital.
Employer: do no receive a tax deduction
Describe the employee and employer taxation of employee stock purchase plans (ESPPs)
Employee: generally, not taxed as compensation. Basis of stock is exercise price plus any amount paid for option. Any gain/loss on subsequent sale is capital.
Employer: do no receive a tax deduction
