Review Flashcards
R1 Individual Tax
Due date April 15 and extensions are 6 months due on October 15
R1 Individual Tax
Qualifying widow(er) (Surviving Spouse) with Dependent Child - two years after spoue’s death; the surviving spouse must maintain a household thatfor the dependent child for the WHOLE year.
R1 Individual Tax
Head of household - maintains a household for more than half the taxable year; father and mother not required to live with the taxpayer; dependent relatives must live with the taxpayer
R1 Individual Tax
Dependency exemptions - qualifying child (CARES) - close relative; age limit (19/24 = college); residency and filign requirements (more than one half of the tax year); eliminate gross income test (but exemption is required); support test changes (when the child doesn’t contribute more than 1/2 of his or her own support)
R1 Individual Tax
Qualifying relative (SUPORT) - support test (more than 1/2 of the support); under exemption amount of (taxable) gross income (gross income has to be less than $3,950); precludes dependent filing a joint return (i.e. married dependents can’t file a joint return); only citizens of teh US or residents of the US, Mexico or Canada; relative; taxpayer lives with the individual (if nonrelative) for teh whole year
R1 Individual Tax
Additional standard deduction for being old (age 65 or older) and blind. Not an additional exemption.
R1 Individual Tax
Realization = real world; realization requires the accrual or receipt of cash, property, or services, or a change in the form ofr the nature of the investment (a sale or exchange)
R1 Individual Tax
Recognition = record; recognition means that that the realized gain must be included on the tax return
R1 Individual Tax
Only passive losses may offset passive income
R1 Individual Tax
Gross income includes many forms of compensation for services - money, property, cancellation of debt, bargain purchases (i.e. if employer is selling property for less than its fair market value is income to employee); guaranteed payments to a partner; taxable fringe benefits; partially taxable fringe benefits - portion of life insurance premiums;
R1 Individual Tax
Nontaxable fringe benefits - life insurance proceeds (interest income is taxable); accidental, medical, and health insurance (employer paid but employee’s portion is taxable); de minimis fringe benefits; meals and lodging employer payment of employee’s educational expenses (up to $5,250 from gross income); qualified tuition reductions; qualified employee discounts; qualified pension, profit sharing and stock bonus plans; flexible spending arragements ($2,500 pretax)
R1 Individual Tax
Taxable interest - federal bonds, industrial development bonds, corporate bonds, premiums received for opening a savings account, part of the proceeds from an installment sale is taxable as interest; interest paid by the federal or state government for late payment of tax refund is taxable; for certain taxpayers and certain bonds, teh amortization of a bond premium is an offset (reduction) to the itnerst received and a reduction to the bond;s basis , and the amortization of a bond discount is an addition to the interest received and an addition to the bond’s basis.
R1 Individual Tax
Tax exempt interest income - state and local government bonds, bonds, series EE (U.S. Savings bond) educational bonds interest; veterans administration insurance
R1 Individual Tax
Series EE (U.S. savings bond) Educational Expenses is tax-exempt when used to pay for higher education of the taxpayer, spouse, ord dependents; taxpayer is over age 24 when issued; bonds are acquired after 1989; phase-out starts when modified AGI exceeds an indexed amount (2014 - 76k for single and head of household and $113,950 for married)
R1 Individual Tax
Unearned income of a child under 18 is taxed at the parent’s higher tax rate for amounts over $2,000; otherwise taxed at 0% for less than $1k and $1k-$2k at child’s rate
R1 Individual Tax
Dividend income - source determines taxability; earnings and profits/current = distribute by current year-end; earnings and profits/acculumated = distributed date; return of capital = no earnings and profits; capital gain distributions = no earnings and profits/no basis
R1 Individual Tax
Tax free distribution - return of capital (no earnings and profits); stock split; stock dividend (unless cash or other property option/taxable FMV); life insurance dividend
R1 Individual Tax
Stock dividend - unless the shareholder has the option to receive cash or other property (which would then be taxable at the FMV of the dividend); the basis of the shares after distribution depends on the type of stock received. Same stock - original basis is divided by total shares; different stock - original basis is allocated based on teh relative FMV of the different stock
R1 Individual Tax
Capital gain distribution - distributions by a corporation that has no earnings and profits, and for which the shareholder has recovered his or her entire basis, are treated as taxable gross income.
R1 Individual Tax
State and local refund - itemized in the prior year = state or local refund is taxable; standard deduction used in prior year = nontaxable; interest income is taxable
R1 Individual Tax
Alimony is income to the spouse receiving payments and deductible to arrive at AGI (adjustment) for the contiributing spouse. Payments must be legally required pursuant to a written divorce (or separation) agreement; payments must be in cash or its equivalent; payments cannot extend beyond the death of the payee-spouse; payments can’t be made to members of the same household; payments must not be designated as anything other than alimony; and spouses may not file a joint tax return
R1 Individual Tax
Child support is nontaxable to ex-spouse (wife) receiving the $ and not deductible for paying spouse; payments apply first to child support and then alimony
R1 Individual Tax
Property settlement - non taxable (HIDE IT)
R1 Individual Tax
Business income or loss, schedule C or C-EZ; must use accrual method for inventory
R1 Individual Tax
Business expenses - cost of goods sold is expense when sold; business meals and entertainment (50%); interest expnese on business loans (interest expnse paid in advance by a cash basis taxpayer cannot be deducted until the tax year/period to which the interest relates).
R1 Individual Tax
Nondeductible business expenses - salaries paid to the sole proprietor, federal income tax, personal expenses
R1 Individual Tax
Health insurance of sole proprietor is not reported on schedule C, it is reported as an adjustment to arrive at AGI
R1 Individual Tax
The CPA exam often attempts to confuse the candidate by providign personal itemized deductions as expenses of a sole proprietorship. It is important to only subtract business expenses from business income. Expenses that qualify as itemized deductions and/or other adjustments are deducted elsewhere on the personal income tax return.
R1 Individual Tax
Net business income is taxable - income tax and federal self-employment (S/E) tax adjustment is allowed for one-half (which is 7.65% up to $115,500 of self-employment income)
R1 Individual Tax
Net taxable loss is 2-year carryback and 20-year carryforward
R1 Individual Tax
Uniform capitalization rules - guidelines with respect to capitalizing or expensing certain costs in connection with the acquisition of property . Costs requird to be capitalized include direct materials, direct labor (e.g. compenation, vacation pay, and payroll taxes), and applicable indirect costs (i.e. those to which an allocation must be applied, such as factory overhead). Costs that are not required to be capitalized include selling, advertising, and marketing expenses, certain general and admin expenses, research, and officer compensation not attributed to production services.
R1 Individual Tax
For inventory, even a sole proprietor will be required to apply the following rules: capitalized as inventory (direct materials, direct labor, factory overhead); period expense (selling, general, admin, research & development)
R1 Individual Tax
Unless an exemption exists for a taxpayer or a contract, longer-term contracts must be accounted for using the percentae-of-compoletion method to determine taxable income for a particular contract.
R1 Individual Tax
Certain contracts are exempt from the requirements long-term contract income recognition for tax purposes and may use other medthods (e.g. completed contract method) to calculate their taxable income under the contract for regular income tax purposes. These include: small contractors, home construciton contractors, a long-term construciton contract that includes land and hwere less than 10% of th etotal contract costs relates to teh actual construcion of property on the land; services performed by architects, engineers, designers, construction management advisors, and software implementaiton personnel related to the long-term project; services performed under warranty and maintenace agreements relate to the long-term contract.
R1 Individual Tax
IRA income - cannot be withdrawn until the 59 1/2 and required withdrawal is 70 1/2; taxed at ordinary income; roth IRA are nontaxable; penalty 10% + regular income
R1 Individual Tax
Exceptions to IRA penatlty tax (HIM DEAD) - home buyer 1st time $10k; insurance (medical) unemployed with twelve consecutive weeks of unemployment compensation or self employed; medical in excess of 10% of AGI; disability; education; and Death
R1 Individual Tax
Annuities - treat like depreciation; the investment amoutn is divided by a factor representing the number of months over which the investment will be recovered. Live longer than actuarial payout period (payment over annuity period is taxable); death before full recovery (unrecovered portion is deductible as a miscelaneous deduction not subject to the 2% of AGI)
R1 Individual Tax
Rental income (schedule E) - rental real estate, royalties, partnerships and limited liability company (schedule K-1), S Corp ( schedule K-1), estates (schedule K-1); trusts (schedule K-1)
R1 Individual Tax
Basic formula to determine rental income/loss - gross rental income + prepayment rental income + rent cancellation payment + improvement in-lieu-of rent (at FMV) - = net rental income/loss
R1 Individual Tax
Rental of vacation home - less than 15 days then rental income is excluded; rented more than 15 days (expense must be prorated) and rental use expenses are deductibe only to the extent of rental income. No rental loss allowed.
R1 Individual Tax
Passive activity loss (PALs) includes rental activities, interest in limited partnerships, S corporations,and most tax shelters. A net passive activity loss ay not be educted against wages, salaries, and other active income or against portfolio (interest and dividiends) or capital gains income. Expenses related to passive activities can be deducted only to the extent of income from all passive activiees.
R1 Individual Tax
Nondeductible PALs can be carry forward without any limit unused passive activity losses held in suspsension. Suspeded losses are used to offse passive income in future years. If still unused, it becomes fully tax deductible in the eyar the proerpty is disposed of (sold).
R1 Individual Tax
PAL (disallowed net loss) exception - mom and pop exception $25,000 and “active” in participating/managing and own more than 10%; carryforward indefinitely and 2 years after death. Phase-out starting at $100k and reduced by 50% of $25k and completely phased out at $150k.
R1 Individual Tax
Unemployment compensation is included in gross income. Workers’ compensation is tax-free
R1 Individual Tax
Social security income - low (belwo S-$25k or MFJ $32K) not taxable; middle income taxed at 50% (S $25k and MFJ $32k); upper income = 85% of social security benefits are taxable (income over S $34k/MFJ $44k)
R1 Individual Tax
Gambling winnings and losses - winnings are included in gross income; losses are deductible in schedule A as an itemized dedutcion, but the amout is not subject ot the 2% of AGI limitaitons on misc itemized deductions.
R1 Individual Tax
Punitive damages are fully taxable as ordinary income if received in a business context or for loss of personal reputation.
R1 Individual Tax
Partiall taxable misc items - scholarships and fellowships - room and board and services required are taxable
R1 Individual Tax
Nontaxable misc items - life insurance proceeds (interest income is taxable); gift and inheritances for giver; medicare benefits; workers’ compensation; personal injury or illness award; accident insurance - premiums paid by taxpayer; foreign earned income exclusion
R1 Individual Tax
Employee stock options - a nonqualified option is taxed when granted if the option has a readily ascertainable value when granted. Otherwise, the option is taxed when exercised.
R1 Individual Tax
Definition of readily ascertainable value = taxable when granted; if the option is traded in the market and has a value; the option is transferable; the option is exercisable immediately in full when it is granted; there are no conditions or restrictions that would have a significant effect on the value; the fair value of the option privilege is readily ascertainable
R1 Individual Tax
Employee taxation - readily ascertainable value = taxable at grant
R1 Individual Tax
Employee taxation - without readily ascertainable value = taxed at exercise
R1 Individual Tax
Employer taxation = deduct in same year that employee reports income
R1 Individual Tax
Incentive stock options (ISO) granted to key employees and is a right to purcase the stock at a discount.
R1 Individual Tax
ISO taxation to employee - generally there is no taxation of the option as compensation. Basis of the stock is the exercise price plus any amount paid for the option (if any)
R1 Individual Tax
Employer taxation = no tax deduction; generally an employer does not receive a tax deduction for an ISO because it is not considered compensation income to the employee.
R1 Individual Tax
Employee stock purchase plan (ESPP) - for employee not taxable as compensation and capital gain and loss when sold. Exception when option price is less than FMV of the stock on the grant date, then ordinary income is recognized as the lesser of the difference of teh FMV of the stock when sold and the exercise price, or the difference between the exercise price and the FMV of the stock on teh grant date.
R1 Individual Tax
ESPP Employer taxation = no deduction
R2 Individual Tax: Adjustment & Credits
Adjustment for AGI includes - educator’s expenses, IRA, student loan interest, tuition & fee deduction, HAS, movin expenses, one-half self employment FICA, self-employed health insurance, self-employed retirement, interest withdrawal penalty, alimony paid, attorney fees paid in certain whistle-blower cases, domestic prodution activies deduction
R2 Individual Tax: Adjustment & Credits
The CPA exam will often refer to “adjustments” as “deductions to arrive at AGI”
R2 Individual Tax: Adjustment & Credits
Educator expense - eligible educators can deduct up to $250 of qualified expenses paid or up to $500 if filing jointly. An eligible educator is someone who has worked at least 900 hours durign a school year (i.e. teacher, instructor, counselor, principal aide)
R2 Individual Tax: Adjustment & Credits
No IRA deduction for rich (S: $60k-$70k or joint $96k-$116k) or in another qualified plan
R2 Individual Tax: Adjustment & Credits
IRA dedution is $5,500 or individual’s compensation (lesser of)
R2 Individual Tax: Adjustment & Credits
IRA phased out between $181,000-$191,000 (2014)
R2 Individual Tax: Adjustment & Credits
Phase-out income limits for IRAs (modified adjusted gross income) : single between $114,500 to $129,000; joint filers between $181,000 to $191,000; mariield filing separately from $0 to $10,000
R2 Individual Tax: Adjustment & Credits
Coverdell educational savings account $2,000 per beneficiary (lots of grandchildren), tax-free accumulation of earnings, tax-free distributions (withdrawals); time limit ntil beneficiary reaches 30 years; when benefits are distributed to beneficiaries then it’s taxable and assessed a 10% penalty; the balance can be rolled over to another family membe of the taxpayer, tax free rollover is permitted, no 10% penalty is assessed
R2 Individual Tax: Adjustment & Credits
American opportunity or lifetime learning credit - a taxpayer can claim the american opportunity credit or lifetime learning credit for a tax year and also excldue from gross income amounts distributed from coverdell education savings account
R2 Individual Tax: Adjustment & Credits
The adjustment for education loan interest is limited to $2,500; any excess or disallowed is personal nterest and not deductible
R2 Individual Tax: Adjustment & Credits
Archer medical savings account (MSA) contribution - typically used when HSA is unavailable since HSA are more flexible; no new archer MSA could be established after the year 2007; qualified participants are self employed individuals or employee of a small business (less than 50); these accounts were designed to be and must be used in conjunction with a high deductible ($3,250 single/$6,550 family) health insurance plan. the maximum out of pocket expenses limit for 2014 is $4,350 single/$8,000 family.
R2 Individual Tax: Adjustment & Credits
Moving expenses - deductible if new place of business and his old residence is at least 50 greater than his old residence was from his former principal place of work. For example, if commuting distance is at least 50 miles or more then eligible. 39 week stay during the 12 month period immediately following his arrival. Self-employed person must work full-time at least 78 weeks during the 24-month period after arrival to meet the test. Only direct moving costs are allowd - travel and lodging of taxpayer and family, transportation expenses at 23.5 cents per mile for 2014; tolls and parking, transportation of household goods and personal effects to the new location.
R2 Individual Tax: Adjustment & Credits
The CPA exam frequently includes the following items in moving expense questions (these items are nondeductible) - meals, pre-move house hunting, expense of breaking a lease, temporary living expenses
R2 Individual Tax: Adjustment & Credits
Tax on self-employment (social security 50 percent) - you pay both halves boss and employee; income tax and social secuirty/medicare tax; 50% of the self-employed social security /medicare tax is deductible to arrive at adjusted gross income
R2 Individual Tax: Adjustment & Credits
Self-employed health insurance (100% deductible) not deductible on schedule C
R2 Individual Tax: Adjustment & Credits
Keogh (Profit sharing) Plans - a self-employed taxpayer subject to the self-employment tax is generally allowed to set up a Keogh plan. The maximum annual deductible amount is limited to the lesser of $53k (2016) or 25% net (Keogh/self-employed) earnings
R2 Individual Tax: Adjustment & Credits
Keogh Plan net earnings calculation - business income - = net business income - - = Keogh net earnings x 25%
R2 Individual Tax: Adjustment & Credits
Hint: 25% of self employment after the Keogh deduction is equivalent of 20% (25% / 125%) of self-employment income before the keogh deduction. Example: gross self-employement income $100,000 x 20% = maximum allowed deduction $20,000
R2 Individual Tax: Adjustment & Credits
An additional standard deduction for the elderly and/or blind. The standard deduction for a taxpayer who is age 65 or over or blind is increased by an additonal amount.
R2 Individual Tax: Adjustment & Credits
Qaulified deductible medical expenses 10% of AGI
R2 Individual Tax: Adjustment & Credits
Nondeductible taxes - federal taxes (including social security), inheritance taxes for state, business (on schedule C) and rental property taxes (on Schedule #)
R2 Individual Tax: Adjustment & Credits
Educational loan interest max $2,500
R2 Individual Tax: Adjustment & Credits
Charitable contribution is cash or FMV of property at the time the contribution is made; maximum allowed is cash = 50% of AGI and FMV property = 30% of AGI for gifts and long term capital gain property to public charities; general property - lesser of basis of FMV
R2 Individual Tax: Adjustment & Credits
Carryover of excess charitable contributions - 5 years
R2 Individual Tax: Adjustment & Credits
Casualty and theft losses - 10% of AGI test and $100 deduction before the 10% calc
R2 Individual Tax: Adjustment & Credits
Casualty loss must be sudden or unexpected; termite damage is not casualty loss because it occurs over time; casualty loss for nonbusines property cannot be deducted unless (1) an insurance claim was filed or (2) the losses are not covered by insurance
R2 Individual Tax: Adjustment & Credits
Educational expenses are deductible (misc expenses) if they either maintain or improve the skill needed by the individual in his or her trade or business; or meet the express requirements of the individual’s employer retention of this job.
R2 Individual Tax: Adjustment & Credits
Misc expenses include - unreimbursed bsuienss expenses; travel, meals, and lodging; educational expenses; uniforms; business gifts; business use of home; employment agency fees; expenses of investors - safe deposit box and investment advice; subscriptions to professional journals; tax preparation fee; debit card convenience fees incurred to pay income tax; activities not engaged in for profit (hobbies)
R2 Individual Tax: Adjustment & Credits
Other miscelaneous deductions (no 2% AGI test) - gambling losses; federal estate tax paid on income in respect of a decedent
R2 Individual Tax: Adjustment & Credits
Child and dependent care credit - 20% to 35% of eligible expenditures; one dependent $3,000 and $6,000 for two or more; a qualifying child under 13, any disabled dependent, a spouse who is disabled; eligible expenses - babysitter, nursery school, day care, not grammer school; maximum credit (35%) AGI of $15k or less; min 20% maximum is $600 (20% of $3,000) and $1,200 for 2 or more children (20% of $6,000)
R2 Individual Tax: Adjustment & Credits
Credit for elderly and/or permanently disabled - 15% of eligible income to individuals who are 65 years of age or older; or under 65 and retired due to permanent disability; $5,000 for single, $5,000 for married; example $5,000 - (1/2 over $7,500) = balance x 15% = credit (note joint is $7,500)
R2 Individual Tax: Adjustment & Credits
American Opportunity credit - first four years of post-secondary (college) education; credit is equalt o (max credit of $2,500 in 2014); 100% of the first $2,000 in 2014 of qualified expenses plus 25% of the next $2,000 in 2014 of expenses paid during the year. Per student basis, multiple kids ok.
R2 Individual Tax: Adjustment & Credits
Lifetime learning credit ($2,000 max per year) - unlimited number of years; 20% up to $10,000; phase out S $54k and $108k joint; full phase out $64k ($128k)
R2 Individual Tax: Adjustment & Credits
Adoption credit limitis $13,190 (2014) phase-out $197,880 - $237,880 (2014); all reasonable and necessary expenses, cost and fees; credit is not available for adopting the child of a spouse; medical expenses do not qualify as eligible expenses; the credit is claimed for years after the payment is made until the adoption is final, at which point expenses paid in the year it becomes final are claimed in that year.
R2 Individual Tax: Adjustment & Credits
Foreign tax credit is the lesser of foreign taxes paid or [taxable income from all foreign operations / (taxable income + exemptions *) ] x U.S. tax = foreign tax credit limit
R2 Individual Tax: Adjustment & Credits
Excess FICA (2 or more employers) refunded
R2 Individual Tax: Adjustment & Credits
Regular taxable income
+/- Adjustments
+ Preferences
=Alternative Minimum Taxable Income
=Alternative Minimum Tax Base
x Tax Computation
=Tentative AMT Tax
=Tentative Minimum Tax
=Alternative Minimum Tax
R2 Individual Tax: Adjustment & Credits
The CPA exam has focused the majority of their questions concerning individual alternative minimum tax on the following four areas:
1. The exemption formula
2. Distinguishing “adjustments” from “preferences”
3. The AMT credit carryforward period (against regular tax)
4. Credits - available to reduce AMT (not regular tax)
R2 Individual Tax: Adjustment & Credits
AMT exemption is $53,900 (2016) less 25% for single filers ($119,700 threshold) and $83,800 less 25% for joint filers ($159,700 threshold)
R2 Individual Tax: Adjustment & Credits
AMT example:
Full exemption $83,800
AMTI $256,500
Threshold ( $159,700)
Excess over threshold $96,800
x x 25% ( $24,200)
Exemption $59,600
R2 Individual Tax: Adjustment & Credits
AMT Adjustments: items 1-5 are “timing differences”; items 6-10 are items that may be included in deductions for regular tax purposes but not for AMT puroses and will only increase AMTI.
P Passive activity losses
A Accelerated depreciation (post 1986 purchase)
N Net operating loss of the indiviual taxpayer
I Installment income of a dealer
C Contracts - percentage completion versus completed contract
T* Tax “deductions”
I* Interest deductions on some home “equity loans”
M* Medical deductions (limited to excess over 10% AGI; adjustment for taxpayers age 65 and over)
M* Miscellaneous deductions not allowed
E* Exemptions (personal) and standard deductions
R2 Individual Tax: Adjustment & Credits
Tax preference items (always “add-backs”
P * Private activity bond interest income (on certain bonds)
P * Percentage depletion the excess over adjusted basis of property
P Pre-1987 accelerated depreciation
R2 Individual Tax: Adjustment & Credits
Credit for Prior Year Minimum Tax (AMT credit)
Certain allowable AMT paid in a taxable year may be carried over as a credit to subsequent taxable years. It may only reduce tax, not future alternative minimum tax
The carryforward is forever
AMT created from certain permanent differences cannot be carried forward as part of he “credit.” Therefore, if AMT is paid because of these items, it is never recovered. (identified by an asterick)
R2 Individual Tax: Adjustment & Credits
Home mortgage is ok (not added back for AMT) but home equity interest is added back; charity is not an add-back for AMT
R2 Individual Tax: Adjustment & Credits
AMT credits (FACCE):
Foreign tax credit
Adoption credit
Child tax credit
Contributions to retirement plans credit
Earned income credit
R2 Individual Tax: Adjustment & Credits
Statue of limitations three years from the later of:
a. The due date of the return; or
b. The date the return is filed (including amended returns)
25% understatement of gross income
Six years from the laterof:
a. The due date of the return; or
b. The date the return is filed
Fraud and false returns = bank robber = forever
R2 Individual Tax: Adjustment & Credits
Refunds for individuals:
Refund claim is the later of:
3 years later from the date the return was filed or the original due date of the return; or
2 years fromt eh time the tax was paid (if not when the return was filed)
R2 Individual Tax: Adjustment & Credits
Bad debts, worthless securities = bad luck = 7 years
7 years from the later of:
a. The due date of the return; or
b. The date the return is filed
R2 Individual Tax: Adjustment & Credits
Estimated tax requirement if $1,000 or more in tax liability:
a. 90% of current year’s tax; or
b. 100% of last year’s tax
Penalty for failure to pay estimated taxes unless tax is under $1,000
R2 Individual Tax: Adjustment & Credits
A tax preparer should make a resonable effort to obtain from the taxpayer the information necessary to provide appropraite answers to all questions on a tax return. Should make a resonable effort to answer all questions. Failure to answer a question may result in an incomplete return or a penalty. Reasonable grounds for omission i.e. not easily obtainable and insignificant, undertainty,
R2 Individual Tax: Adjustment & Credits
Tax preparer generally, no responsibility to verify information provided by the taxpayer.
