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Tax Flashcards

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1
Q

What is gross income?

A

Any economic wealth or benefit or any clearly realized accession to wealth.

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2
Q

What is realization?

A

The increased or decreased value of an asset is not taken into account for tax purpose until it is realized through the sale or other disposition of the asset.

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3
Q

What are non-cash receipts?

A

Gross income includes FMV of any property received and the FMV of any services received.

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4
Q

What is a claim of right?

A

Property or funds received under claim of right must be reported for tax purposes even though the taxpayer may later be required to return the property, funds or their equivalent.

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5
Q

When has a taxpayer received funds under claim of right?

A

When they are received without restriction as to use or disposition.

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6
Q

What is the tax benefit rule?

A

If a taxpayer takes a deduction in one tax year and recovers the property that gave rise to the deduction in a later tax year, the taxpayer has tax benefit income to the extent that the earlier deduction provided a tax savings or a tax benefit.

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7
Q

What is the alimony rule?

A

Unless otherwise provided in the written agreement, alimony is taxable to the receiving spouse and deductible to the paying spouse.

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8
Q

What are the elements for alimony?

A

1) Written divorce or separation agreement; 2) no living together; 3) payments must cease at or before the death of the receiving spouse; 4) payments must be in cash or equivalent.

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9
Q

What is the child support rule?

A

Not taxable to receiving spouse and not deductible to paying spouse.

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10
Q

What is the child support in disguise rule?

A

If a payment is reduced upon a contingency relating to a child, the amount of the deduction is considered child support.

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11
Q

What is the rule for prizes and awards?

A

Gross income includes the value of cash, property, or services received as a prize, award, or windfall. Examples: raffle prizes, gambling or lottery winnings, treasure trove.

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12
Q

What is the cancellation of indebtedness rule?

A

The borrower has no gross income upon the initial receipt of borrowed funds. However, a taxpayer whose debt is cancelled or discharged at less than the full amount, has discharge of indebtedness income to the extent of the difference between the full amount of the obligation and the amount paid in satisfaction of the debt.

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13
Q

What are the exceptions to the cancellation of indebtedness rule?

A

RIG. 1) Reduction in purchase price; 2) Insolvency; 3) Gift.

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14
Q

What is the reduction in purchase price exception?

A

If the apparent discharge of debt is really a reduction in purchase price in connection w/ the sale of goods, discharge of indebtedness rules don’t apply.

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15
Q

What is the insolvency exception?

A

If the discharge occurs when the taxpayer is insolvent or bankrupt, there is no immediate discharge of indebtedness income.

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16
Q

What is the gift exception?

A

If the lender intends the discharge as a gift, the discharge of indebtedness rules will not apply.

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17
Q

What is the rule for life insurance proceeds?

A

Gross income doesn’t include proceeds paid by reason of death of the insured. However, when proceeds are paid in installments, any interest paid will be taxable.

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18
Q

What is the inheritance rule?

A

Gross income doesn’t include amounts received by bequest, devise, or inheritance.

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19
Q

What is not included w/in the inheritance rule?

A

Limited to inheritance itself (not interest) and can’t be belated compensation.

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20
Q

What is the rule for gifts?

A

Gross income doesn’t include amounts received by gift.

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21
Q

What is a gift?

A

A gift is a transfer made out of detached and disinterested generosity.

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22
Q

What cannot be a gift?

A

Employers can’t gift to employees.

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23
Q

What are the rules for tort awards?

A

(1) Gross income doesn’t include damages received on account of physical personal injury or sickness; (2) By themselves, damages for emotional distress aren’t considered damages received on account of physical injury; (3) Punitive damages received in connection w/ personal injuries are taxable.

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24
Q

What is the rule for qualified scholarships?

A

Qualified scholarships for tuition related expenses only are excluded from gross income. To be qualified, must not be payment for past or future services and be primarily for the benefit of the individual.

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25
Q

What is the rule for receipts from health and accident insurance?

A

Value of employer provided health or accident insurance coverage (premiums paid by employer) are excluded from gross income.

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26
Q

What is the life insurance provided by or through an employer rule?

A

Taxpayers may exclude the value of the first 50K of employer-provided group term life insurance. Gross income includes the value of any excess life insurance coverage provided by the employer.

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27
Q

What is the rule for employee meals and lodging?

A

Excluded if 1) provided for convenience of employer 2) in-kind 3) on the employer’s premises.

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28
Q

What are other tax free benefits for employees?

A

De minimus; no additional cost to employer; qualified employee discounts; contributions to qualified pension plans; employe safety or length of service awards.

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29
Q

What are the two kinds of deductions?

A

1) Above the line and 2) choice of itemized or standard deduction.

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30
Q

What are examples of above the line deductions?

A

Ordinary/necessary business expenses; depreciation; capital losses; alimony; moving expenses; student loan interest.

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31
Q

What is AGI?

A

Adjusted gross income: subtotal reached after subtracting above the line deductions.

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32
Q

What are the itemized deductions?

A

Home mortgage interest, state and local taxes, unreimbursed casualty losses or medical expenses, charitable contributions, etc.

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33
Q

What is the home mortgage interest deduction?

A

Taxpayers may deduct home mortgage interest on mortgages of up to $1M on a principal and a second personal residence. They may also deduct interest on a home equity loan of up to 100K.

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34
Q

What is the state and local tax deduction?

A

Taxes paid to state and local governments are deductible w/ exception of sales tax.

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35
Q

What are unreimbursed casualty loss deductions?

A

They are deductible if 1) loss greater than $100, 2) loss is sudden and unexpected and 3) only to extent that losses exceed 10% of AGI.

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36
Q

What are unreimbursed medical expense deductions?

A

Deductible to the extent they exceed 10% AGI.

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37
Q

What is the charitable contribution deduction?

A

May deduct FMV of property and amount of cash contributed to qualified charities (less the value of any consideration received for your donation).

38
Q

What are the miscellaneous deductions?

A

May deduct eligible misc deductions to extent that they exceed 2% of AGI. EX: employee business expenses, education expenses necessary to maintain and improve skills.

39
Q

personal v. business expenses?

A

Personal expenses not deductible.

40
Q

Are legal fees deductible?

A

Not if incurred in personal setting. If incurred in a business or investment setting, deductible.

41
Q

Are investment fees or expenses deductible?

A

If necessary to generate taxable income.

42
Q

What exemptions are taxpayers eligible for?

A

One exemption for selves and one for each dependent. After divorce, the custodial parent gets the exemption for children of the marriage.

43
Q

Allocation of income: to whom is it income?

A

1) Assignment of income rule: Income must be taxed to he who earns it. 2) Income from property is taxed to he who owns the property.

44
Q

What is cash method accounting?

A

Taxpayer reports income when she receives payment and takes deductions for eligible expenses when she makes payment.

45
Q

When is there constructive receipt of funds in cash method accounting?

A

When funds or property are credited to her account, set apart, or otherwise made available so that she may draw upon them. Issue is control.

46
Q

What is the accrual method of accounting?

A

Taxpayer reports when all events have occurred that fix the right to receive it, and when the amount can be determined w/ reasonable accuracy. Take deductions when all events have occurred that establish the fact of liability.

47
Q

What is realization?

A

Sale, disposition, or exchange of property.

48
Q

What is recognition?

A

Reporting on tax return.

49
Q

What is the general rule for realization and recognition?

A

Unless a specific statutory or common law exception applies, whenever a gain is realized, it must also be recognized for tax purposes.

50
Q

What is the basic sale formula?

A

AR - AB = Gain or Loss. Amount Realized (AR) includes money received plus FMV of property or services received plus mortgages or liabilities to which property sold is subject or which buyer assumes.

51
Q

What is the cost basis rule?

A

A taxpayer’s basis in property acquired by purchase is generally the cost of the property, including money paid and mortgages or liabilities incurred in connection w/ purchase.

52
Q

What are upward adjustments?

A

A taxpayer’s basis in property is increased to reflect additional cost/investment in property.

53
Q

What are downward adjustments?

A

A taxpayer’s basis in property is reduced to reflect deductions previously taken for depreciation or other previous tax free recoveries of basis.

54
Q

What is the rule for divorce property settlements?

A

A transfer of property between spouses or ex-spouses that is incident to divorce isn’t a taxable event to either party. The spouse receiving the property will have the same basis that the donor spouse had. This is a substituted basis rule.

55
Q

What is the basis in gift property rule?

A

Recipient of a gift takes donor’s basis. This is also a substituted basis rule.

56
Q

What is the basis in inherited property?

A

Recipient’s basis in inherited property is the FMV of property at time of decedent’s death.

57
Q

What is the involuntary conversion rule?

A

No gain or loss is recognized if property involuntarily is converted into property that is similar or related in service or use. If property lost or damaged is converted to money, gain or loss isn’t recognized if taxpayer purchases replacement property that is similar or related w/in 2 years from date of involuntary conversion.

58
Q

What is the like-kind exchanges rule?

A

No gain or loss is recognized when taxpayer exchanges property held for productive use in a business or for investment for like-kind property also held for productive use in business or for investment.

59
Q

What is the rule for sale of principal residence?

A

Up to 250K (500K for joint returns) of gain from sale of a principal residence can be excluded if the property has been used and owned as the taxpayers principal residence for periods aggregating 2 years during the 5 year period ending on the date of sale.

60
Q

What are the important factors to consider in deciding what kind of business to form?

A

Limited liability, flexibility in business structure, ease of organization and management and control, AND TAX.

61
Q

What is the benefit of non-corporate structures?

A

Limited liability and single taxation. EX: limited partnership, S corp., and LLC.

62
Q

What rules apply to unincorporated businesses?

A

May elect to be treated either as corporate or pass through rules for tax purposes under regulations requiring only that entity checks a box. Since unincorporated entities tend to prefer pass through classification, the IRS considers unincorporated businesses as pass through unless they explicitly elect otherwise.

63
Q

Capital gains v. ordinary income

A

Top marginal tax rate on most long term capital gains is lower than the top marginal rate on ordinary income.

64
Q

What are capital assets?

A

Assets used for investment purpose NOT inventory, depreciable property, or copyright.

65
Q

What is corporate tax’s basic double tax regime?

A

Corporations pay income tax upon profits. SHs pay a tax upon dividends received from the corporation.

66
Q

In the formation of a corporation, what is the gain or loss rule as to the corporation?

A

No gain to corp upon receipt of property or money upon formation or incorporation.

67
Q

In the formation of a corporation, what is the gain or loss rule as to SHs?

A

No gain or loss to SH upon forming a corporation where 1) SHs contribute property, 2) SHs receive stock in return for the exchange, and 3) SHs are in control immediately after the exchange.

68
Q

What is control?

A

80% ownership of outstanding corporate stock immediately after the exchange.

69
Q

What is the rule for corporate distributions?

A

SHs are taxable on the dividends they receive.

70
Q

What is a dividend?

A

A corporate distribution made out of the corp’s earnings and profits. Most dividends paid by domestic corporations are now eligible for preferential capital gains rates.

71
Q

What if a corporate distribution is not made out of the corporation’s earnings and profits?

A

Treated as a tax free recovery of SHs basis in her stock. Any excess received above the taxpayer’s basis is considered gain from the sale of a capital asset.

72
Q

What is the basis pass-through rule?

A

The entity itself pays no tax at the entity level. Thus, they are single tax entities.

73
Q

What are the types of pass-through entity?

A

General partnership, limited partnership, LLCs, and S-Corps.

74
Q

How is a pass-through entity formed?

A

Transfer of property to a general or limited partnership, an LLC or an S-corp in return for a general partnership interest, limited partnership interest, or stock in an S-corp is not a taxable event.

75
Q

For investors, what is the rule for profits and losses of pass through entities?

A

Each partner, owner, investor, or SH of a pass-through entity generally reports his or her distributive share of income or loss on his or her individual tax return, whether or not they actually receive it.

76
Q

What is an S-corps?

A

An eligible regular corporation may become a pass-through S-corp by making a S-election. To be eligible, corp must have no more than 100 SHs.

77
Q

What are the basic principals of estate and gift tax?

A

Imposed on donor upon the transfer of wealth to another. These tax regimes are distinct from the federal income tax. The estate and gift taxes apply a unified rate structure and generally adopt similar tax principles and definitions.

78
Q

What is a gift tax?

A

Imposed on any completed or irrevocable donative transfer.

79
Q

What is a gift?

A

A bargain sale of property to a family member, an interest free loan to a family member, an interest in a joint bank account.

80
Q

What is the annual exclusion for gifts?

A

Each taxpayer may exclude the first $14,000 in gift transfers per year per donee.

81
Q

What is the marital deduction for gift tax purposes?

A

A gift transfer from one spouse to another is eligible for an unlimited marital deduction.

82
Q

What is the limit on gift tax exemptions?

A

Taxpayers entitled to a $5M lifetime exemption for gift tax purposes. To the extent that the taxpayer has used any of the lifetime gift exemption, it will reduce the available estate tax exemption.

83
Q

What is the estate tax?

A

Decedent’s gross estate includes the value of all assets beneficially owned at the time of death as well as certain lifetime transfers. Executor must file an estate tax return w/in 9 mos. of decedent’s death if the gross estate exceeds $5M.

84
Q

What is the lifetime transfers rule?

A

Even though decedent transferred title to assets during lifetime, certain lifetime transfers will be included to gross estate. Most important examples of this are 1) transfers with a retained life estate and 2) transfers with a retained power to alter or revoke.

85
Q

How does the estate tax rule apply to life insurance?

A

Proceeds of a life insurance policy on the decedents’ own life are included in the gross estate if either 1) the proceeds are receivable by the executor, or 2) the decedent possessed any incidents of ownership at the time of death.

86
Q

What are the most common incidents of ownership in life insurance policies?

A

The right to change beneficiary, a right to pledge against the policy, and a cash surrender value.

87
Q

What is the estate tax exemption?

A

Decedent’s gross estate is entitled to an effective exemption of $5M. Any gift tax exemption previously used by the decedent will count against the estate tax exemption.

88
Q

What is the unlimited marital deduction?

A

The portion of the estate that passes to the surviving spouse is entitled to an unlimited marital deduction.

89
Q

What is the terminable interest exception?

A

Unless the executor makes a qualified terminable interest election (Q-TIP), no marital deduction is allowed for transfers to a surviving spouse if the decedent spouse’s property or interest may ultimately be received by someone other than the surviving spouse.

90
Q

What are the new estate tax exemption portability rules?

A

If decedent makes a proper, timely election, the decedent’s executor will be entitled to use any unused portion of the decedent’s estate tax exemption. Such an election effectively doubles the available estate tax exemption.

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