Tax Flashcards
what are the filing requirements for IRS form 1040EZ?
income derived solely from wages, salaries, tips
taxable income < $100k/yr
no adjustments to income are claimed
no dependents
what are the filing requirements for IRS 1040A?
not all 1040EZ requirements met
only adjustments to taxpayer income are deductible contributions to IRA and student loan interest deductions
deductions not itemized
only certain tax credits claimed
what is the basic income tax formula?
income - exclusions from gross income = gross income - deductions for AGI = AGI - greater of standard deduction or itemized = taxable income \+/- tax based on filing or other credits = taxpayer's liability
how is gross income defined?
all income from whatever source derived
where are net earnings from self employment report on the 1040?
schedule c
e.g. sole proprietorship
what types of loans do imputed interest rules typically relate to?
gift loans
compensation-related loans (corp’s taxable income does not increase as a result of imputed interest)
business-shareholder loans (corp’s taxable income increases as a result of imputed interest)
tax-avoidance loans
define the constructive receipt income tax rule
income constructively received is taxed to taxpayer as though it was actually received
how are windfalls taxed?
typically recognized immediately as income
unless qualified prize option permitted by state, whereby payouts from an annuity are taxable as received
how are structured settlements taxed?
paid periodically (typically annuity) for remainder of injured person's lifetime compensatory damages = tax free (defamation suit proceeds are taxable) punitive damages = taxable (wrongful death suit is tax-free)
if the victim/claimant has no control over the investment of the settlement amount, how are earnings taxed?
non-taxable
what are the main categories of exclusions from gross income?
items characterized by love, affection, assistance return of capital make taxpayer who socially desirable / legislative grace fringe benefits from employer
how are employer-paid fringe benefits taxed?
non-taxable as long as benefits do not discriminate in favor of highly compensated / key employees
if benefits are discriminatory, ALL discounts taken by officers (not just excess of what’s available to everyone) are includible in officer’s gross income
how are employer paid premiums and benefits taxed for accident/health plans?
premiums paid by employer = not taxable
benefits paid from employer provided coverage = taxed
how are the dues paid by employer to outside health club taxed?
taxable
how is group term life insurance employer-provided premium taxed?
excluded up to first $50k of coverage
above this exclusion, must include the greater of uniform premium table or actual cost of insurance in income
how is college education assistance provided by employer taxed?
excluded up to $5,250 for one year
how child care provided by company and company car taxed?
exclude up to $5k
business use excludable without limit, personal use taxable fringe benefit
what are the capital loss rules on tax return?
offset capital gains without limit
offset ordinary income up to $3k
excess loss can be carried forward indefinitely to future tax years
calc’ed on sch. D
how is self-employed health insurance taxed?
100% deductible
not deductible, however, if premium paid with after-tax dollars for group plan
premiums paid deductible subject to 10% AGI floor
how is student loan interest taxed?
interest on qualified higher ed loans deductible upon to $2500 - deduction for AGI (above line)
do NOT have to itemize
what are the deductibility rules for medical expenses?
expenses must be paid by taxpayer or immediate family and only those above 10% AGI are deductible
must not be reimbursed
what is the tax itemized deductibility limit?
state, local, foreign capped at $10k total
what is itemized deduction limit for acquisition indebtedness interest?
$750k MFJ
points for mortgage also deductible on year incurred
when are casualty losses deductible?
ONLY when declared by government as disaster
how is investment debt interest expense taxed?
deductible up to taxpayer’s net investment income
what is a qualifying child on a tax return?
child, stepchild, foster child, sibling, step-sibling, descendant of taxpayer and must have lived with taxpayer for more than 1/2 of year
under 19 yrs old by end of yr or 24 if in college or permanently disabled
individual must not provide over 50% of their support and cannot be claimed on another person’s return
what is a qualifying relative on tax return?
family member/other individual who resided in taxpayer’s home during year and was provided more than half of their support by taxpayer
income should be less than st. deduction amount of $12k
if qualifying relative is parent, does not have to live w/ taxpayer
what is a refundable tax credit?
paid to taxpayer even if the amount exceeds the taxpayer’s liability (could create a refund on return)
in order to qualify for the child and dependent care credit, what must the taxpayer do?
have earned income
pay dependent care expenses in order to work/looking for work
keep a home for qualifying individual (child <13 yrs old, taxpayer’s spouse who is physically/mentally incapable of self-care, another qualifying dependent/relative incapable of self-care)
capped at $3k on sliding scale 20-35% of related expenses - $43k AGI gets you down to the 20% rate
used for US citizen
cannot be used if FSA already used
what is the child tax credit amount
$2k for each child under age 17, must be dependent, refundable up to $1400/child
AGI phaseout after 200k for single, 400k for MFJ ($50 per $1k above MAGI)
what is the adoption expense credit amount
$14,080
limited to tax liability and cannot be reduced below zero (nonrefundable credit)
credit may be carried forward 5 yrs
for qualified adoption expenses - adoption costs, court costs, attorney fees once adoption becomes final
phaseout beginning AGI $211k
when is interest imputed for a gift loan?
when gift between $10k and 100k
imputed amount cannot exceed borrower’s investment income
if gift >$100k, gift interest imputed at prevailing federal rate
no interest is imputed if the borrower’s investment income for the year does not exceed $1,000
what is the threshold below which interest is not imputed and added to income for a compensation-related loan?
$10k
what is the standard deduction for an individual who may be claimed as a dependent limited to for unearned income?
$1,100
if earned and unearned income - std. ded. = greater of $1,100 or earned income + $350
if a stock becomes worthless after a few months, how is the loss treated?
LT capital loss
treated as becoming worthless @ YE
when may nonbusiness bad debts be written off?
only if totally worthless
deductible as ST capital loss subject to $3k limit offset against ordinary income
what does the IRS classify as a qualified residence?
taxpayer’s personal residence plus one other residence such as a vacation home
what is the difference between an accountable and non-accountable reimbursed employee expenses?
accountable - employees must substantiate expenses
non-accountable - expenses reimbursed are taxable to employee
what is the lowest marginal income tax rate?
10%
in order to qualify as a deductible office expense, what primary requirement must be met?
office must be used regularly and exclusively as a principal place of business
what are the main criteria to be classified as a qualifying relative?
income test
support test (dependent not providing >50% support - social security not counted as support!)
live w/ taxpayer (unless direct ancestor)
US citizen (extends to mexico and canada)
not a dependent on another taxpayer’s return
what are the key points about the foreign tax credit?
nonrefundable
generally more advantageous than taking the foreign earned income exclusion (assuming foreign tax is higher than US tax)
what are the key points about business bad debt?
deductible as ordinary loss
must be part of taxpayer’s employment conditions
allowed for debts partially or wholly worthless if income from debt was previously income in taxpayer’s income
what is the standard deduction for single/MFS, head of household, and MFJ/qual. widower?
$12.2k, 18.35, 24.4
how much of a casualty loss due to a federally declared disaster may be deducted?
$100 deductible first
only deduct amount above 10% AGI
when are charitable contributions allowed as an itemized deduction?
if donor-taxpayer itemizes
and
proper substantiation of contribution is kept
what are the 3 main issues to consider w/ charitable contributions?
type of charity (public/private)
type of property
purpose
what are public and private charities known as, respectively?
60% organization
30% organization
What are 50% organizations?
churches, educational institutions, nonprofit hospitals, etc.
red cross, salvation army, united way, etc.
taxpayer contribution deductions limited to 50% of AGI (60% if donations are in cash)
What are 30% organizations?
charities not classified as public in tax code
typically funded and controlled by one individual, family, corporation
i.e. Gates foundation
contributions deductible up to 30% of taxpayer’s AGI
what are the main deduction limits for appreciated property donations?
donor elects FMV of appreciated property - deduction limited to 30% AGI if recipient is public charity, 20% of AGI if private charity (carryover option)
donor elects tax basis in appreciated property - 60% of AGI permitted to public charity, 20% for private charity (no carryover option)
what are some main nondeductible contributions?
foreign organizations individuals political groups/candidates lottery tickets tuition time
how is a bargain sale to a charity treated?
part sale, part charitable contribution
basis and appreciation are allocated on pro rata basis to sale and gift portions
what are the contribution deductibility rules depending on the property’s use?
no related use - lesser of FMV or basis, limited to 60% or 20% of AGI depending on public/private
relate use - FMV (30, 20% AGI), basis (60, 20% AGI)
when is an appraisal required for noncash property donations?
above $5k
what are the limitations for contributions for gifts of ordinary income property (i.e. stock or selling what you’re in the business of creating)?
50% AGI - public
30% AGI - private
ordinary income property is valued at the lesser of adjusted basis or FMV
how much may taxpayers deduct for noncash charitable contributions to qualified public charities?
50% AGI (if basis is used)
30% AGI if FMV used
what is the carryover limit for disallowed amounts from a donation in the current year?
5 yrs for both public and private charities
what is the formula for determining alternative minimum taxable income?
regular taxable income (1040) \+ positive AMT adjustments - negative AMT adjustments \+ AMT preference items = AMTI
how is AMT payable determined?
AMTI - AMT exemption = AMT base x AMT rate = tentative AMT - regular income tax on taxable income = individual AMT payable
what is a positive AMT adjustment?
deduction/exemption allowed for regular income tax purposes exceeds that allowed for AMT purposes
what 3 general strategies are used when planning for the individual AMT?
move income in AMT year
move deductions into non-AMT year
time recognition of certain AMT adjustments and tax preference items
what does the kiddie tax apply to?
unearned income for child under 19 or 24 if student being supported
how is the kiddie tax imposed?
income above specified amount is taxed to child using marginal rate for estates and trusts
planning consists of UGMA or UTMA accounts
what is the calculation for unearned income taxed to child using parents’ rate?
total unearned income
- $1,050 standard deduction for child
- greater of $1,050 or amount allowable itemized deductions directly connected with production of earned income
= net unearned income of child taxed at applicable rates of estates and trusts
what is the standard deduction for a child with both earned and unearned income?
greater of:
$1,050
amount of earned income + $350 (limited to single taxpayer standard deduction)
how long may an AMT credit be carried forward for use against regular income tax in a future year?
indefinitely
what are the 2 main AMT exclusion items?
excluded section 1202 gain for qualified small business stock
percentage depletion treated as a tax preference for AMT
what type of income does the kiddie tax apply to?
unearned, in excess of $2,200 taxed at estates and trusts tax rate
what is the criteria that must be met for payment to ex-spouse to be considered alimony?
paid in cash or equivalents
agreement does not specify that the payments are not alimony for federal income tax purposes
the payee and payor are not members of the same household at the time payments are made
no liability to make payments for any period after the death of the payee
payments made directly to the payee spouse or third party for direct benefit of payee spouse
how is child support payment classified and treated for tax purposes?
if payment is tied to the child in some way, it is presumed child support
nontaxable to payee and nondeductible by payor
how are property transfers between spouses resulting from divorce treated?
tax-free
what change in alimony payment streams will result in alimony recapture to the payor?
over $15,000
what are personal service corporations?
HALE Health Account, architecture, actuarial science Law Engineering
If structured as regular C-corp, personal service corp tax is imposed at flat rate of 21% (not progressive corporation tax schedule), so above typically structured as an LLC
when is the personal holding company (PHC) tax applied?
ownership test - over 50% of value of outstanding stock of corporation is owned by 5 or fewer individuals
passive income test - 60% of corporation’s AGI consists of personal holding company income (income from securities and other income-producing property)
calculated by multiplying the undistributed personal holding company income by 10% flat rate (in addition to regular corporate tax)
avoided if income is distributed as dividends to shareholders
does not apply to s-corps, banks, and life insurance companies
define section 1244 stock
C corp total capital contributions do not exceed $1M and stock is issued in exchange for investor money
favorable tax consequences (deductible as ordinary loss) if stock sold at loss up to $100k for MFJ - ONLY APPLIES TO LOSSES. Gains are treated the same, capital.
any remaining loss is a regular capital loss which may reduce capital gains up to $3k/yr
what are the 3 elements classifying a general partnership?
common ownership in business by more than one owner
sharing of profits and losses of business by partners (generally in proportion to ownership)
general partners afforded right to participate in management and operation of business and have unlimited personal liability for acts of partnership and other partners
net operating loss tax provision not allowed
what is the main difference between a general partnership and LLP?
LLP - general partners are not liable for acts of other partners. protects individual assets of partners innocent of malpractice
define built-in gains tax
applies to S corps that were formerly c corpsa
tax imposed on unrealized built-in gain recognized on sale of asset by S corp for period of 5 yrs from date of S corp election (from C corp)
paid by the entity, not the shareholders
what are the 3 potential additional taxes an S corp may have to pay?
occurs when s-corp uses to be C-corp
built-in gains
LIFO recapture
excess net passive income (above 25% of gross receipts)
what are the social security and medicare self employment tax rates?
- 4%
2. 9%
what is the basic formula to calc self-employment tax?
SE income - SE income x 7.65% = net earnings (if above 128k, reduce by 2.9% additional medicare tax) = taxable wage base - TWB x 15.3% (SE tax rate) = SE tax
who is subject to the additional medicare tax?
only employees above a certain limit ($250k MFJ, 200k individual)
0.9% in addition to 2.9% assessed on all compensation and self-employment income
employers must start withholding once employee earns above $200k
what does self-employment income include/exclude?
includes: sch. C income distributive share of income to general partner (K-1) part time earnings board of directors fees
does not include:
dividends/interest
real estate income/rentals
distributive share of income to limited partner or S corp shareholder (K-1 income)
what tax forms are required for: sole proprietorship partnership LLP LLC S corp C corp
1040 sch. C 1065 1065 either 1120S 1120
