Section 1 Individual Taxation

Question 1

How is State Tax Refund treated if you itemize vs if you do not itemize?

Answer 1

If you itemize (Schedule A) last year (in the prior year), your refund is taxable this year (you will get a 1099G and that goes on line 10 of the 1040: Taxable refunds, credits, or offsets of state and local income taxes).

If you did not itemize (you took the standard deduction) last year (in the prior year), your refund is NOT taxable this year.

(Roger page 1-10)

Question 2

Explain Social Security Benefits in terms of individual taxation.

Answer 2

SS benefits may or may not be taxable based on a complicated calculation using provisional income (PI).

PI = AGI before SS + tax-exempt income + 1/2 SS benefits.

In general, if PI $60,000 usually is subject to the maximum of 85% of SS benefits being taxed.

15% of SS benefits will also be tax-free / not taxed.

(Roger page 1-9)

Question 3

Explain Federal Tax Refunds in terms of individual taxation.

Answer 3

Federal refunds are NOT taxable - they are a return of YOUR money.

Interest, however, is taxable.

(Roger page 1-10)

Question 4

Which of the following are taxable to the recipient:

A) Inheritances
B) Gifts
C) Life Insurance Proceeds

Answer 4

Inheritances, gifts, and life insurance proceeds are NOT taxable to the recipient; however, any income received from the property is taxable (discussed in detail in the Estate, Trust, and Gift Tax section).

(Roger page 1-10)

Question 5

Explain when pension benefits and annuities are taxable (today or tomorrow).

Answer 5

If I put in money today and I get a tax deduction today (benefit today), then it’s taxable tomorrow.

If I put in money today and there is no tax deduction today (no benefit today), then it’s NOT taxable tomorrow (like a Roth IRA).

Any amount considered a return of capital is NOT taxable. If the taxpayer did not pay any portion of the cost of the pension plan, such as one in which all costs were incurred by an employer, all benefits are taxable.

Cost of annuity / Expected total annuity payments = percentage of each payment that is excluded from taxes

(Roger page 1-9)

Question 6

Is interest on federal and/or state refund taxable?

Answer 6

YES: interest is taxable

Roger page 1-10

Question 7

What is the student loan interest deduction amount?

Answer 7

Taxpayers may deduct $2500 of interest paid on qualified educational loans in 2015. This deduction is available for each year interest is paid.

This deduction is subject to income limits. The phaseout range begins when AGI exceeds $65,000 ($130,000 for joint filers) and ends at $80,000 ($160,000 for joint filers).

Student loan interest is an “above the line deduction” (AKA: for or to AGI).

(Gleim Unit 4, page 28)
(Roger page 1-11)

Question 8

What amount of self-employment tax is an adjustment for AGI?

Answer 8

A self-employed person is allowed a deduction for the employer’s portion of the FICA taxes paid to arrive at his/her AGI. The deduction for the employer’s share is equal to 50% of the self-employment tax. For 2015, the deduction equals:

1) 6.2% of the first $118,500 of net self-employment income plus
2) 1.45% of net self-employment income (no cap).

Total of 7.65%

(Gleim Unit 4 page 25)
(Roger page 1-11)

Question 9

Describe the self-employed health insurance deduction for AGI.

Answer 9

100% of the medical insurance premiums paid by a self-employed taxpayer for self and family are deductible (no member of the family may have coverage through an employer).

(Roger page 1-11)

Self-employed individuals can deduct 100% of payments made for health insurance coverage for the individual, his or her spouse, and dependents.

The deduction is limited to the taxpayer’s earned income derived from the business for which the insurance plan was established.

(Gleim Unit 4 page 26)

Question 10

Explain the requirements for moving expenses to be a deduction for AGI.

Answer 10

1) New work must be at least 50 miles further from old home, each way
2) Direct costs of moving you and your stuff
3) Not means, house hunting costs, or temporary living expenses
4) Must work at least 39 weeks (9 months)
- if moving expenses were paid by employee and then reimbursed by employer, as long as no moving expense deduction was taken, income shouldn’t be included.

(Roger page 1-11 to 1-12)

Moving expenses are deductible to arrive at AGI to the extent the expenses are not reimbursed or paid for by the taxpayer’s employer.

1) If expenses exceed reimbursements, only the qualified expenses in excess of the reimbursement are deductible.
2) If reimbursements exceed expenses, the excess is included in income.

(Gleim Unit 4 page 24)

Question 11

What are the direct and indirect expenses related to moving and are those expenses deductible for AGI?

Answer 11

Direct expenses are deductible to arrive at AGI. Direct expenses include the expenses of actually moving a taxpayer and his or her household goods and personal effects and travel (including lodging) from the former residence to the new residence.

a) Instead of actual expenses, a mileage rate of $0.23 per mile in 2015 can be used for driving one’s own automobile.
b) The cost of meals en route is not deductible as a direct moving expense.
c) Expenses incurred by members of the taxpayer’s household are deductible.

Indirect expenses are NOT deductible. Indirect expenses include house hunting; temporary living expenses; and expenses related to the sale, purchase, or lease of a residence.

(Gleim Unit 4 page 25)

Question 12

What is the criteria for determining if you have a real business vs a hobby?

Answer 12

An activity that results in a profit in any 3 of 5 consecutive tax years is presumed to be a business and not a hobby.

An activity that is not engaged in for a profit is a hobby (personal).

(Gleim Unit 4 page 3)

Question 13

List some business expenses from schedule C that are included as deductions for AGI

Answer 13

1) All costs of running a business
2) All taxes paid by the business
3) Bad debts recognized under the direct write-off method
4) The Uniform Capitalization Rules (UNiCAP - Section 263A) requires that certain indirect costs be capitalized to inventory produced or held for sale
5) Interest paid in advance is not deductible when paid, even by a cash basis taxpayer
6) Gifts to customers up to $25 per recipient per year
7) 50% of meals and entertainment
8) 100% travel
9) $4 per promotional item
10) Similar to a small corporation
11) If no profit in 3 of 5 years, loss is not deductible - HOBBY LOSS
- Net Income (Other Income) Line 21
- Expenses on Schedule A (Misc 2%

(Roger page 1-12)

Question 14

Are taxes paid or accrued in a trade or business deductible?

Answer 14

Yes

Gleim Unit 4 page 5

Question 15

Are state and local taxes imposed on net income of an individual deductible on Schedule C?

Answer 15

NO - state and local taxes imposed on net income of an individual are NOT deductible on Schedule C.

They are deductible as a personal, itemized deduction not subject to the 2% exclusion.

They are not a business expense of a sole proprietorship.

(Gleim Uni 4 page 5)

Question 16

On Schedule C, for Part II Expenses, explain how rent or lease is determined (line 20):

Answer 16

1) Advance rental payments may be deducted by the lessee only during the tax periods to which the payments apply (Remember… you are a sole proprietor / business and you are renting a warehouse and making rent payments - you are the lessee renting from the lessor).
2) Generally, even a cash-method taxpayer must amortize prepaid rent expense over the period to which it applies. The exception to this rule is if the payments do not extend beyond a year.

(Gleim Unit 4 page 3)

Question 17

Explain the treatment of Entertainment and Meals on a Schedule C

Answer 17

A. Entertainment includes recreation, e.g., entertaining guests at a nightclub or theater, or by vacations, trips, etc, and furnishing a hotel suite, food and beverages, or the like to a customer or a member of his or her family.

1) Club dues for social gatherings are not deductible, e.g., country club membership dues
2) Dues paid to professional clubs are deductible if they are paid for business reasons and the principal purpose is professional, i.e., not for entertainment.

B. The expense must be directly related or associated with the active conduct of a trade or business. The predominant purpose must be the furthering of the trade or business of the taxpayer incurring the expense.

1) “Directly related” means that business is actually conducted during the entertainment period.
2) “Associated with” means that the entertainment must occur directly before or after a business discussion.

C. There is a 50% limit to deductible amounts for meal and entertainment expenses and related expenses, such as taxes, tips, and parking fees.

1) Transportation to and from a business meal is not limited.
2) The IRS has denied deductions for any meal or entertainment expense over $75 for which the claimant did not provide substantiating evidence.

D. Meal expenses are not deductible if neither the taxpayer nor an employee of the taxpayer is present at the meal.

(Gleim Unit 4 pages 3-4)

Question 18

How is foreign travel accounted for as a business expense on Schedule C?

Answer 18

Traveling expenses of a taxpayer who ventures outside the US away from home must be allocated between time spent on the trip for business and time spent for pleasure.

No allocation is required when:

1) The trip is for no more than 1 week and
2) A personal vacation was not the major consideration or
3) The personal time spent on the trip is less than 25% of the total time away from home

(Gleim Unit 4 pages 4-5)

Question 19

How are employment taxes accounted for as a business expense on Schedule C?

Answer 19

1) An employer may deduct the employer portion of FICA and FUTA taxes.
2) An employee may not deduct FICA tax
3) A self-employed person is allowed a deduction for the employer’s portion of the FICA taxes paid to arrive at his or her AGI. For 2015, this equals:

a) 6.2% of the first $118,500 of net self-employment income PLUS
b) 1.45% of net self-employment income (no cap).

4) The employee portion includes an additional 0.9% for high-income earnings, i.e., earnings in excess of $200,000 ($250,000 MFG, $125,000 MFS).

(Gleim Unit 4 page 5)

Question 20

How are automobile expenses accounted for as a business expense on Schedule C?

Answer 20

Actual expenses for automobile use are deductible (e.g., services, repairs, gas).

Alternatively, the taxpayer may deduct the standard mileage rate ($0.575 per mile for 2015) plus parking fees, tolls, etc.

(Gleim Unit 4 page 5)

Question 21

Explain the treatment of Business Gifts on the Schedule C as a business expense.

Answer 21

Expenditures for business gifts are deductible.

Deduction is limited to $25 per recipient per year for excludable items.

The $25 limit does not apply to incidental items costing (the giver) $4 each or less.

A husband and wife are treated as one taxpayer, even if they file separate returns and have independent business relationships with the recipient.

(Gleim Unit 4 page 6)

Question 22

Describe how Employee Achievement Awards are accounted for as a business expense.

Answer 22

A. Up to $400 of the cost of employee achievement awards is deductible by an employer for all non-qualified plan awards.

1) An employee achievement award is tangible personal property awarded as part of a meaningful presentation for safety achievement or length of service.

B. Deduction of qualified plan awards is limited to $1600 per year.

1) A qualified plan award is an employee achievement award provided under an established written program that does not discriminate in favor of highly compensated employees.
2) If the average cost of all employee achievement awards is greater than $400, then it is not a qualified plan award.

(Gleim Unit 4 page 7)

Question 23

List some adjustments for / to AGI (hint: I EMBRACED Education Health Farm)

Answer 23

Interest on student loans

Employment tax

Moving expenses

Business expenses (schedule C)

Rent/Royalty & Flow-Through Entities (Schedule E)

Alimony (CANNOT)

Contributions to retirement (Keogh / IRA)

Early withdrawal penalty

jury Duty pay

Education

Health savings accounts (HSA)

Farm income (Schedule F)

(Roger page 1-1)

Question 24

What are the 2 types of passive income or loss?

Answer 24

There are two types of passive income or loss. Passive income or loss comes from:

1) businesses in which you don’t materially participate (ex: limited partnership interest) and
2) all rental properties you own (unless taxpayer is a real estate professional).

Note: a real estate professional will use Schedule C. A taxpayer with passive activity income / loss will use Schedule E.

(Roger page 1-12)

Question 25

Briefly explain Passive Activity Loss Rules.

Answer 25

Passive Activity Loss Rules are a set of rules that prohibits using passive losses to offset earned or ordinary income. Passive activity loss rules prevent investors from using losses incurred from income-producing activities in which they are not materially involved.

Being materially involved with earned or ordinary income-producing activities means the income is active income and may not be reduced by passive losses. Passive losses can be used only to offset passive income.

The key issue with passive activity loss rules is material participation. If the taxpayer does not materially participate in the activity that is producing the passive losses, then those losses can only be declared against passive income. If there is no passive income, then no loss can be deducted.

Passive activity losses can only be carried forward (indefinitely or until the activity is disposed of); they cannot be carried back.

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