Tax Flashcards
Gross income is all _______________ from whatever__________
all income from whatever source derived
Is gross income only cash?
NO - whatever form received, money, property, services
Business purpose doctrine is :
transaction will not be effective for income tax purposed unless it is intended to achieve a genuine business purpose other than tax avoidance
Substance over form doctrine:
allows the IRS to look at the real substance of a transaction instead of just the form as basis for taxation (e.g. a CEO taking out a loan instead of comp is still comp)
Assignment of income doctrine:
“fruit and tree”; if you earned the income you can’t assign it to someone else (if you’re the tree, has to be your fruit)
Tax benefit rule or doctrine
converts nontaxable receipts into taxable income; most common is receiving reimbursement for medical expenses year after you deducted them - those then are taxable
Constructive receipt doctrine or rule:
if there isn’t any substantial limitation on taking control of funds, then they are treated as taxed (think check in the mail you didn’t cash, dividends, matured and payable bond interest, etc.)
In personal services, the employer pays _____ compensation to the employee who receives ____ compensation
deductible compensation and the employee receives taxable compensation
Income from property is included in gross income, examples are:
interest from bonds, dividends from stocks, rental income, etc.
Qualified dividends may be taxed at the _____
lt capital gains rates of 0/15/20
Phantom income is income that has not yet been received in _____
cash
For phantom income, your basis is increased each year by the amount of ______ required to be recognized on the taxpayers income tax return
interest income
The income-producing property must be _____ for the income to be taxed to the assignee
assigned
Partnerships and S corps are _____ entitites
pass through
Partnership taxation entails:
- income from parternships taxed to partners at individual rates
- must file informational return (form 1065)
- each partner receives a K-1
- typically it will be self-employment income
- income for a limited partner is considered passive activity income
S Corp taxation entails:
- shareholders, rather than corp, pay the tax
- S corp files form 1120S
- each shareholder receives K-1 and it is considered passive activity income
- employee-shareholder receives W-2 for earned income and material participation rules apply
Income in respect of a decedent (IRD) means that income generated by assets of ______ that is ditributed from the _____ to the ______ is generally taxable
assets of an estate distributed by the estate to the benes is generally taxable
Examples of IRD:
- accrued rents
- salary earned before death
- distributions from qualified plan or IRA
- deferred comp, deductible contributions, and tax-deferred earnings in tax-advantaged accounts
- installment notes and annuity payments after death
For IRD, the character of the income to the decedent is the same as it is to the ______
recipient (i.e. if it was ordinary income to the decedent, it would be ordinary to the recipient)
For IRD, there is no _____ of tax basis at the date of death
no step up - no adjustment to FMV at date of death
A misc. itemized deduction (not subject to the 2% AGI floor) is _____ for the portion of any _____ attributable to the IRD on the tax payers income tax return when income is reported
allowed for any portion of estate tax attributable to IRD on the tax payers income tax return
Income distributed from a trust to beneficiaries is generally ______
taxable
Undistributed income from a trust is generally taxed to the _____
estate or trust
In community property states, _____ of earnings of each spouse during marriage is considered to be owned by the ______
one half of earnings owned by the other spouse during marriage
In CP states, if spouses living apart, then only taxed on your portion if the following conditions are met:
- lived apart for entire year
- did not file joint return
- no portion of earned income was transferred between the spouses
THe idea of “conduit for others” is that if say, a professor conducted a seminar, the fees would go to the university because he is an _____ of the university; he obtained _____ of the income, but he is a _____, so he isn’t taxed on that money
employee; he obtained possession of the income but he is a conduit for the university
For interest on laons below market rates, the lender may be required to _____ interest income
impute (recognize)
For below market loans, imputed interest is calc’d using _____ compounded ______ and adjusted _____
fed borrowing rates, compounded semi annually, adjusted monthly
Imputed interest rules apply to the following types of below market rate loans:
- gift loans (essentially a “gift” is made that is the amount of the imputed interest to the borrower)
- compensation related loans
- corporation-shareholder loans (loan to a non-employee shareholder)
- tax avoidance loans (loans that significantly affect the vborrorwer or lenders federal tax liability)
Exceptions and limitations to the imputed interest rule
- no imputed interest on loans less than $10k unless used to buy income producing property (also for compensation or corporation loans)
- On loans $10k to $100k, imputed interest cannot exceed borrower’s net investment income from all sources for that year
- if the purpose is tax avoidance, none of those exceptions apply
Cash and FMV of prized and awards are _____ in gross income
included
Employee achievement awards paid in _____ and less than ___ per year are excluded
paid in personal tangible property and less than $400 per year
If a winner of a prize chooses an annuity option, income is recognized each year but has to be for a term longer than _____
10 years
If winner gets a prize for nonprofit reasons, and turns proceeds over to another nonprofit, then income is ____
excluded
For annuities, withdrawals (including loans) on contracts issued after 8/13/1982 are included in _____ up to total _____
included in gross income up to total earnings (LIFO)
Exclusion amount for annuity payments =
(investment basis/expected return) x annuity payment
Annuity payments beyond the ____ expectancy are _____
annuity payments beyond the projected life expectancy are fully taxable
If annuitant dies before life expectancy, then unrecovered basis is _____ on the annuitants final income tax return
deductible
Employees can exclude premiums paid by their employers on the first _____ of group term life insurance
$50k
Partners, proprietors, and greater than 2% S Corp owners are _____ for the group term life insurance exclusion
ineligible
If group term is more than $50k, then have to use the monthly uniform premium table to calculate _____ of the benefit
taxable amount of the benefit
For discriminatory plans, key employees and highly compensated employees lose the _____ exclusion for group term
$50k
Are unemployment comp benefits included in gross income?
YES
For SS, what percent can be included in gross income?
85%
Amount of SS benefit subject to tax is based on taxpayers _____ income
provisional
Provisional income is AGI from all sources plus ____ of SS benefits received, foreign income previously excluded, and any tax-exempt interest income
50%
FICA tax consists of the _____ and the _____ taxes
SS tax and medicare tax
OASDI stands for:
old age, survivors, and disability insurance program
OASDI is ____ to wages for the employer share and ______ for employee share
6.2% and 6.2%
Self-employed people pay _____ in OASDI tax
12.4% (double)
The ceiling for OASDI tax is ____ in 2017
$127,200
Medicare tax is ____ for both employer and employee with no ____
1.45% for both, no cap
Self employed people pay ____ in medicare tax
2.9%
When calculating self-employment tax, taxpayer multiples net self-employment earnings by
92.35%
Self employed people can deduct the ____ share of tax paid as a deduction from AGI
employer’s share
The additional medicare tax of ____ applies to self employed individuals if they make over _____ single or ____ MFJ
0.9%; $200k or $250k
Is there an employer part of the additional medicare tax?
NO
What income is the additional medicare tax taxed on?
Incremental over the thresholds
Net investment income tax of _____ is imposed on unearned (investment) income of certain higher-income taxpayers
3.8%
Death benefits paid by an employer to an employee’s benes are ____ in the beneficiaries’ gross income
fully includable (NOT life insurance proceeds)
For windfalls, even if winner accepts prize money in form of annuity, full amount of the annuity must be included in income ______
immediately
There must be a _____ prize option with annuity over 10 year period - then income taxed as received
qualified
Structured settlement payments are generally ____
tax free (if compensatory damages)
Exception to structued settlement tax free payments are:
age, sex or racial discrimination
Punitive damages for structured settlements are generally ______
taxable, except if wrongful death
Earnings on lump-sum payments for damages are ____ taxable
ARE YES
Inheritances, gifts and bequests are _____ from gross income
excludable (except for IRD or income from income producing property)
In order for a scholarship to be excludable from gross income, recipient must be a ____
candidate for degree
If you get a scholarship in one year and dont spend all of it until the next, you do NOT have to include the excess above year 1 ______ expenses as income
qualified expenses
Employees of nonprofits are allowed to exclude a tuition waiver from gross income is the the waiver is pursuant to a ______ reduction plan
qualified tuition reduction plan
Payments by a donor directly to an educational institution are ____ payments, and not includable in students ____; also not subject to ____
qualified payments, not includable in students income, not subject to gift tax
Life insurance proceeds to the bene are generally ______ from income tax
exempt
If life insurance proceeds are received in installments, then interest is generally ____
taxable
Dividends from a life insurance policy are ____ taxable income unless the aggregate dividends received exceed the taxpayer’s ____ in the contract
not taxable unless they exceed the basis in the contract
Businesses cannot deduct life insurance premiums if that insurance covers the life of an _____ , ___ or ____ if the business is directly or indirectly a _____ under the policy
owner, officer or employee if business is directly or indirectly a bene of the policy
If you surrender a life insurance policy and receive lump sum cash value, must recognize the difference between the ____ and your ____
CV and your basis
Basis for a life insurance policy is generally ____ plus ____
premiums paid plus dividends
Are losses from a life insurance policy deductible?
NO
Withdrawals or loans from life insurance use the _____ accounting method
FIFO
If you transfer your life insurance contract for something of value, then the transferee must include the ____ in their _____
proceeds in their income if they are above the basis
Five reasons when a transfer-for-value will not be included in income for the transferee (who gets the policy) (for life insurance):
- transfers to the insured
- transfers to a partner of the insured
- transfers to a partnership in which the insured is a partner
- transfers to a corp in which the insured is an officer or shareholder
- transfers to a transferee whose basis is determined by reference to the transferor’s basis (tax-free exchange or gift)
Are viatical settlements included in gross income for the recipient?
NO
Terminally ill patient means they are expected to die within _____
24 months
Chronically ill means can’t perform at least ___- of ADL for at least _____ days; if receiving benefits, can only be excluded if they use them for _____
2 of 6 ADLs, 90 days, can only exclude if using for longterm care
Under the transfer-for-value rule, purchaser of a life insurance policy will be taxed on any benefits received in _____ of the purchaser’s _____
in excess of the basis
If you simply surrender a life insurance contract and receive cash, then taxable is the difference between the cash value received and investment in the contract (basis) T/F
T
If you make a nonviatical sale, then the proceeds are taxed as follows:
- adjusted basis is reduced by cost of insurance
- basis for purchaser will be deducted from death benefit received
- has to be sold to person who is unrelated and will suffer no economic harm at insured’s death
Modified endowment contract (MEC) is a life insurance policy after 1988 that fails the ___ test
7 pay test
7 pay test means that the total premiums paid in the first ____ years is more than the net level premiums if they offered a paid-up benefit option after the seventh year
7 years
Each time a policy undergoes a material change, has to pass the _____ test
7 pay test
Which accounting method is used for withdrawals from a MEC?
LIFO
Are MECs subject to a an early 10% withdrawal penalty before 59 1/2?
YES
Are MEC death benefit proceeds collected tax free?
YES, if no transfer-for-value applies
Premiums paid by the employer for accident and health plans are ____ by the employer and not ____ for the employee
deductible for employer and not included in gross income for employee
When are benefits paid for employer accident or health plans not taxable as income for the employee?
if for medical care of employee, spouse or dependent, or if for permanent loss or loss of use of function or body part for employee, spouse, or dependent (other benefits are included in gross income)
If a taxpayer pays for disability insurance with after-tax dollars, are benefits taxable?
NO
Are employer contributions to a medical or health savings plan included in employee income?
NO
Employees can exclude up to _____ in child care expenses paid by their employer
$5k
Employer paid education assistance is capped at _____
$5,250, both for undergrad and graduate, cannot discriminate for HCEs
For cafeteria plans, if you select the cash benefits, then those are ____
taxed
If there are “no additional cost” services given to employees, must meet criteria that:
- employee receives services, not property
- employer does not incur substantial cost or loss of revenue to provide
- services are offered to customers in ordinary course of business
- nondiscrimination, can’t just be for HCEs
Employee discounts can be _____ from income
excluded
Can’t exclude employee discount if discount is related to:
- can’t be real or investment property
- if isn’t for product/property that is in same line of business
- limited to gross profit if sold to a customer
- limited to 20% of customer price
- can’t be discriminatory to HCEs
Can you exclude employer payments or reimbursement for adoption expenses?
YES
TO exclude adoption assistance, must meet:
- employer has written adoption assistance plan
- non discriminatory
- 5% or less of total payments made each year by plan for to shareholders owning more than 5%
- employees are given adequate notice of eligibilty
- payments are traceable to qualified employee adoption expense
Total adoption excludable amount in 2017 was
$13,570
Personal auto use from an employer is typically ____
taxable
Can you exempt interest income from Series EE or Series I governemtn savings bonds if used for qualifying higher ed expenses?
YES
To exclude EE or I interest income for higher ed expenses, must:
be issued after 1989
issued to individual at least 24 years old
If married couple files separately, can they exclude EE or I higher ed expenses?
NO
QSBS stands for
qualified small business stock
noncorporate investors can exlude up to 50% of gain they realize on _____
QSBS, any remaining taxed at 28%
QSBS stock must be issued after ____ and held for at least ___
1993 and held for at least 5 years
If you forgive debt, does the borrower have to report that as income?
YES
To avoid double taxation of foreign income, make sure to claim the _____
credit for foreign taxes paid
You can exclude up to _____ for foreign earnings from US gross income
$102,100
Foreign earned income is for _____ provided
services
To qualify for the foreign exclusion, must be a ____ resident or present in foreign country for ____ days during any consecutive 12 month period
bona fide resident or present for 330 days
Foreign exclusion is capped at calculation of:
max exclusion x (number of days present/365)
CESA max contribution is ____ per beneficiary excluded
$2k
Can you contribute to a CESA and QTP in same year for same bene?
YES
Must distribute CESA funds before age ___ otherwise 10% penalty
30
Can you rollover a CESA to non family member taxfree?
NO, must be same family
Can you rollover a QTP to a non family member tax free?
NO
When can you deduct expenses from gross income in arriving at AGI?
- when expense incurred in carrying on trade or business (for sole proprietors, schedule C)
- when incurred in connection with property held for production of rents or royalties
Farm income and expense are reported on schedule ____
F
unreimbursed business expenses of an employee are deductible as misc itemized subject to ____ AGI floor
2%
Self-employed individuals can deduct the 6.2% OASDI and ____ medicare with no earnings limit
1.45%
If self-employment income is less than $400/year, then _____ is payable
no self employment tax is payable
Alimony paid to an ex-spouse is a _____ for AGI
deduction
If you receive alimony is it taxable?
YES
A viable, enforceable premarital agreement must be
- in writing,
- signed by both parties
- include net worth
- nothing about future alimony or child support
- some states require notarization and may be requried to be signed before wedding day
Payments to Keogh and SEP plans are deductible if established and funded by _____
extension due date
Moving expense are generally deductible if:
- incurred in conjunction with starting a new job
- distance between new job and old residence is at least 50 miles
- must be full time at new job for 39 weeks out of next 52 weeks
- if self-employed, must be 78 weeks out of 104 weeks
Deductible moving expenses include:
- moving of household goods and personal effects
- travel and out of pocket travel
- no meals, house hunting or temporary living arranagements
If reimbursed for moving expense, then they aren’t even on your ____ as income
W-2
Commuting expenses are generally _____
non deductible
