RT Individual Tax - Income pt 3

Question 1

Define passive activity. Give some examples of passive activities.

Answer 1

A passive activity is any activity in which the TP does not materially participate.

Rental activities, interest in limited PS, and S corp are examples of passive activities.

Note: Rental activities are passive by definition, even if the taxpayer does materially participate.

Question 2

What is the treatment of nondeductible passive activity losses?

Answer 2

1. nondeductible PAL are unused passive activity losses that are held in suspension
2. Used to offset Passive income in future years (indefinitely)
3. Fully tax deductible in the year the property is disposed of (e.g. sold)

Question 3

What are the rules to determine taxable SS benefits?

Answer 3

Taxpayers are classified into 5 categories depending on the level of provisional income, which is defined as AGI plus tax-exempt interest plus 50% of social security benefits.

1. Low income = no ss benefits are taxable
2. Lower middle income = less than 50% of SS benefits are taxable
3. Middle income (over single $25K / MFJ $32K) = 50% of SS benefits are taxable
4. Upper middle income = Between 50% and 85% of SSB are taxable
5. Upper income (Over single $34K / MFJ $44K) = 85% of SSB are taxable

Question 4

Are scholarships and fellowships includable in gross income?

Answer 4

For a degree-seeking student, scholarship, 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 5

What are the test for foreign-earned income exclusion?

Answer 5

Test of Foreign-earned income exclusion:

1. bona fide residence test (an entire taxable year)
2. Physical presence test (330 full days out of 12 consecutive months)

Question 6

List 7 nontaxable miscellaneous income items (exclusions):

Answer 6

1. Life insurance proceeds
2. Gifts and inheritances
3. Medical benefits
4. Workers’ compensation
5. Personal (physical) injury or illness award
6. Accident insurance - premiums paid by taxpayers
7. Foreign-earned income exclusion

Question 7

Describe the employee and the employer taxation of nonqualified employee stock options.

Answer 7

Employee Taxation:

1. If there is a readily ascertainable value, the employee recognizes ordinary income in that amount in the year granted.
2. If there is no readily ascertainable value, the employee recognizes ordinary income based on the FV of the stock purchased less any amount paid for the option on the exercise date.

Employer Taxation

1. The employer may deduct the value of the stock option as a business expense in the same year the employee recognizes ordinary income.

Question 8

Describe the employee and employer taxation of incentive stock options (ISOs)

Answer 8

Employee Taxation = Generally, ISOs are not taxed as compensation. Basis of the stock is the exercise price plus any amount paid for the option. Generally, any gain or loss on the subsequent sale is capital.

Employer Taxation = Generally, employers do not receive a tax deduction for ISOs.

Question 9

Describe the employee and employer taxation of employee stock purchase plans (ESPPs)

Answer 9

Employee Taxation = Generally, ESPPs are not taxable as compensation. Basis of the stock is the exercise price plus any amount paid for the option. Generally, any gain or loss on the subsequent sale is capital.

Employer Taxation = Generally, employers do not receive a tax deduction for ESPPs