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Tax Accounting > Tax Chapters 1-5 > Flashcards

Tax Chapters 1-5 Flashcards

1
Q

Which amendment allows the government to collect taxes?

A

The 16th Amendment

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2
Q

What are the 3 categories of tax law objectives?

A

Political, Economic, Social

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3
Q

Why is tax law complex?

A

Because of the political, economic, and social objectives.

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4
Q

What percent of federal revenues are from personal income tax?

A

81%

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5
Q

What are the 3 tax rate structures?

A

Progressive, Proportional, Regressive

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6
Q

How does a progressive tax work?

A

The rate increases when the base increases

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7
Q

What tax rate structure does federal or state income tax use?

A

Progressive

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8
Q

How does a proportional tax work?

A

The rate is the same for everyone (flat tax).

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9
Q

What tax rate structure does property tax use?

A

Proportional

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10
Q

How does a regressive tax work?

A

The rate decreases as the base increases

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11
Q

What tax rate structure does FICA (Social Security use)?

A

Regressive

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12
Q

What tax rate structure does sales tax use?

A

Regressive

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13
Q

How do you calculate an average tax rate?

A

Total tax liability divided by taxable income

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14
Q

What is the name of the tax rate applied to an incremental amount of taxable income?

A

Marginal tax rate

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15
Q

Which type of tax rate is the most useful for tax planning? (It measures the effect of a proposed transaction.)

A

Marginal tax rate

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16
Q

What are the 5 criteria for evaluating tax structures?

A

Equity, Certainty, Convenience, Economy, Simplicity

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17
Q

What is horizontal equity?

A

Similar taxpayers pay similar tax

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18
Q

What is vertical equity?

A

Dissimilar taxpayers pay different tax

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19
Q

Why is it hard to determine what constitutes a fair tax structure?

A

Fairness is subjective

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20
Q

When changes are made to the tax code that affect decisions taxpayers made in the past, which criteria for evaluating tax structures does this violate?

A

Certainty

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21
Q

What factors are considered when evaluating the economy of a tax structure?

A

The cost of compliance and administration

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22
Q

What 2 types of entities pay taxes on taxable income?

A

Individuals and C-Corps

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23
Q

What are the 6 types of flow-through entities?

A

Sole proprietorship, partnership, S-corp, LLC, LLP, Trust

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24
Q

What are the 3 sources of tax law?

A

Legislative, Executive, Judicial

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25
Q

What are 2 types of legislative sources of tax law?

A

Internal Revenue Code, House Ways & Means Committee

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26
Q

What is the highest authority of tax law?

A

Internal Revenue Code

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27
Q

What is the limitation of the Internal Revenue Code?

A

The language is not specific

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28
Q

What is the executive source of tax law?

A

Rulings

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29
Q

What is the judicial source of tax law?

A

Court decisions

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30
Q

What is the statute of limitations for auditing a fraudulent return?

A

Indefinite

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31
Q

What is the statute of limitations for auditing a return where a gross income item in excess of 25% is omitted?

A

6 years

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32
Q

What is the general statute of limitations for auditing a return?

A

3 years

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33
Q

Can a taxpayer be audited after they receive a refund?

A

Yes

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34
Q

How is Gross Income calculated?

A

Income from whatever source derived minus exclusions

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35
Q

How is Adjusted Gross Income (AGI) calculated?

A

Gross income minus deductions for AGI

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36
Q

How is Taxable Income calculated?

A

AGI minus greater of itemized deductions or standard deduction, minus personal and dependency exemptions

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37
Q

How is tax payable (or refund due) calculated?

A

Taxable income times the applicable tax rates, minus credits and prepayments

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38
Q

What is income?

A

An economic benefit that the taxpayer realizes

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39
Q

What are the four types of income?

A

Money, Property, Services/Bartering, Debt Relief

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40
Q

What are the 2 deductions from AGI?

A

Standard Deduction or Itemized Deductions and Exemptions

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41
Q

What is the standard deduction for Married Filing Jointly?

A

$12,200

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42
Q

What is the standard deduction for surviving spouses?

A

$12,200

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43
Q

What is the standard deduction for Head of Household?

A

$8,950

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44
Q

What is the standard deduction for a Single taxpayer?

A

$6,100

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45
Q

What is the standard deduction for Married Filing Separate?

A

$6,100

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46
Q

What are the 2 possible standard deductions for dependents?

A

The greater of $1,000 or earned income plus $350 (up to $6,100)

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47
Q

What is the additional deduction for an aged or blind taxpayer (married or surviving spouse)?

A

$1,200

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48
Q

What is the additional deduction for an aged or blind taxpayer (single)?

A

$1,500

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49
Q

What is the amount of a personal exemption?

A

$3,900

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50
Q

Can a dependent have a personal exemption?

A

No

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51
Q

What are the 4 requirements that a person must meet to be a dependent?

A

Social security number, Citizenship, Separate returns if married, No dependents of their own

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52
Q

What are the 4 qualifying child tests?

A

Relationship, Age, Abode, Support

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53
Q

What is the relationship test for a qualifying child?

A

Must be a child/sibling of the taxpayer or a descendent of either

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54
Q

What is the age test for a qualifying child?

A

Must be either under 19, a full time student (5+ months) under 24, or permanently and totally disabled

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55
Q

What is the abode test for a qualifying child?

A

Must have the same principal abode as the taxpayer for over half the year

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56
Q

How can a noncustodial parent claim a child as a dependent?

A

If the custodial parent agrees to give up the exemption in writing (Form 8332)

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57
Q

What is the support test for a qualifying child?

A

The child cannot provide over half his/her own support

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58
Q

What are the 3 qualifying relative tests?

A

Relationship, Gross Income, Support

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59
Q

What is the relationship test for a qualifying relative?

A

Must live with taxpayer over half the year (related or not), or must be a parent, grandparent, aunt, uncle, stepparent, in-law, or child of the taxpayer

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60
Q

What is the gross income test for a qualifying relative?

A

Dependent’s gross income must be under $3,900 (excluding scholarships, nontaxable bond interest, and social security benefits)

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61
Q

What is the support test for a qualifying relative

A

The taxpayer must provide over half the total support (the total includes any amount spent by the dependent or other individuals on support, including welfare and social security benefits

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62
Q

What is the first tie-breaker for determining who can claim a dependent?

A

Taxpayers who can claim qualifying child have priority over taxpayers who can claim qualifying relative

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63
Q

What is the second tie-breaker for determining who can claim a dependent?

A

Parents have priority over other individuals

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64
Q

What is the third tie-breaker for determining who can claim a dependent?

A

The exemption goes to whoever has the highest AGI

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65
Q

What are the 2 stipulations for a multiple support agreement?

A

Each eligible taxpayer must agree in writing

The person receiving the exemption must provide over 10% of the dependent’s support

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66
Q

What is the amount of the child credit?

A

$1,000

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67
Q

What are the 2 criteria for a child to qualify for a child credit?

A

Must be a qualifying child

Must be under age 17

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68
Q

What is the AGI threshold for the child credit if the taxpayer is Married Filing Jointly?

A

$110,000

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69
Q

What is the AGI threshold for the child credit if the taxpayer is Single?

A

$75,000

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70
Q

What is the AGI threshold for the child credit if the taxpayer is Married Filing Separately?

A

$55,000

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71
Q

How much is a child credit reduced by once the taxpayer’s AGI reaches the threshold?

A

$50 for every $1,000 (or fraction thereof) by which AGI exceeds the threshold

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72
Q

What are the 2 requirements to file a joint return?

A

Must be legally married the last day of the year

Must have the same tax year-end

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73
Q

What type of return should a surviving spouse file in the year of death?

A

A joint return

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74
Q

Which years following a death can a surviving spouse file as such?

A

The second and third year (the first year they file jointly)

75
Q

What are the 4 requirements for filing as a surviving spouse?

A

Cannot be remarried the last day of the tax year

Must qualify for joint return in the year of death

Must have at least 1 son/daughter living at home the entire year

Taxpayer must pay over half the expenses of the home

76
Q

What are the 3 requirements for filing as Head of Household?

A

Must be unmarried last day of tax year

Cannot be a surviving spouse

Must pay over half the cost of maintaining a household where a dependent lives over half the tax year

77
Q

What is the tax filing status of an abandoned spouse?

A

Head of Household

78
Q

What are the 2 requirements to be an abandoned spouse?

A

Must have lived apart from spouse last 6 months of the year

Must pay over half the cost of maintaining a household with a dependent son/daughter living over half the year

79
Q

In what situation can a taxpayer file as Head of Household, even when he or she doesn’t live with any dependents?

A

When the taxpayer maintains a separate household for a dependent parent

80
Q

When would a person’s filing status be single?

A

If they are unmarried and don’t qualify for surviving spouse or head of household

81
Q

Why would a couple file Married Filing Separate?

A

If there is marital discord and one spouse does not want to be liable for the other spouse’s actions

82
Q

When does kiddie tax apply to a child 17 year old or younger?

A

If the child has over $2,000 in unearned income

83
Q

When does kiddie tax apply to an 18 year old child?

A

If the child has over $2,000 in unearned income and the child’s earned income is less than half of his/her support

84
Q

When does kiddie tax apply to a 19-23 year old?

A

If the child is a full-time student, has over $2,000 in unearned income and the child’s earned income is less than half of his/her support

85
Q

How is a child’s net unearned income computed in regard to the kiddie tax?

A

Unearned income

Less: Statutory deduction of $1,000

Less: Greater of:
A) Greater of $1,000 or earned income plus $350 (up to $6,100)
B) Itemized deductions related to unearned income

86
Q

How is a child’s taxable income computed in regard to the kiddie tax?

A

In the standard way (using the tax formula)

87
Q

How is a child’s total tax computed in regard to the kiddie tax?

A

Net unearned income x parents’ marginal tax rate

Plus: (Taxable income - net unearned income) x child’s tax rate

88
Q

Under the cash method, when is income taxable?

A

When it is received (or constructively received)

89
Q

Under the accrual method, when is income taxable?

A

When it is earned

90
Q

When is income considered to be earned?

A

When all events have occurred that fix the right to receive the income and the amount can be reasonably determined

91
Q

When is prepaid income taxable under the accrual system?

A

In the year of receipt (earned or not)

92
Q

When may a taxpayer under the accrual system defer prepaid income in connection with the sale of goods?

A

If the goods are not on hand, the amount received is less than the cost of the item, and the income is deferred for financial accounting purposes

93
Q

When may a taxpayer under the accrual system defer prepaid income in connection with the sale of services?

A

If services are to be rendered before the end of the next tax year

94
Q

How long can prepaid income be deferred if criteria for this exception are met?

A

Only to the next tax year

95
Q

Is a check received after banking hours constructively received?

A

Yes

96
Q

Is interest credited to a savings account constructively received?

A

Yes

97
Q

Are mature bond interest coupons, which have not yet been redeemed, constructively received?

A

Yes

98
Q

If salary is made available to an employee, but the employee does not take the salary, is it constructively received?

A

Yes

99
Q

If a paycheck has been mailed to an employee, and the employee hasn’t received it yet, is it constructively received?

A

No

100
Q

Is a postdated check constructively received?

A

No

101
Q

What types of bonds pay tax-exempt interest?

A

Obligations of states, territories, and US possessions and political subdivisions, school districts, port authorities, toll road commissions, counties, fire districts, private universities, hospitals, churches

102
Q

When is the interest on a Series EE Savings Bond taxed?

A

When the bond is cashed

103
Q

Are rental security deposits considered taxable income?

A

No (unless not refunded to tenant)

104
Q

If a tenant makes improvements to a property, under what condition would this be taxable to the landlord?

A

If there was a reduction in rent for the improvements

105
Q

What are dividends?

A

Distributions from earnings and profits

106
Q

Qualified dividends have the same preferential rates as what?

A

Capital gains

107
Q

What are 2 examples of constructive dividends?

A

When compensation for a business owner is above a reasonable amount

When a business owner charges rent to the business which is above a reasonable amount

108
Q

If certain business expenses are found to be constructive dividends, how will this change the business’ financial records?

A

Receivables (such as “due to owner”) or expenses (such as compensation) will decrease, Dividends will increase

109
Q

How must alimony be paid?

A

In cash, not property

110
Q

What happens to the basis of property in a property settlement after a divorce?

A

Nothing. The original basis is maintained.

111
Q

What are the tax consequences for a property settlement after a divorce?

A

None

112
Q

What are the tax consequences of alimony?

A

Taxable to spouse who receives it, deductible by the spouse who gives it

113
Q

When does recapture come into play with alimony?

A

When alimony drops by over $15,000 in the second or third year

114
Q

If there is alimony recaptured, when is it put into effect?

A

In year 3

115
Q

How is the recapture amount of alimony calculated?

A

Alimony paid in year 1
Minus: $15,000 (allowable reduction)
Minus: the average alimony paid in years 2 & 3

116
Q

When the recaptured amount of alimony is calculated, what are the effects on the payor and payee?

A

The recaptured amount is added back into the payor’s income, and subtracted from the payee’s income

117
Q

How is provisional income calculated (as it applies to social security benefits)?

A

AGI + tax-exempt interest + excluded foreign interest + 1/2 Social Security benefits

118
Q

What is the maximum amount taxable social security benefits?

A

85%

119
Q

When is a proceed or court award due to property destruction included in gross income?

A

Any amount that exceeds the adjusted basis is includable

120
Q

When is a transaction a tax-free gift?

A

If the donor has donative intent

121
Q

What are the 4 requirements that must be met for life insurance proceeds to be excluded from income?

A

If paid because of a death
If they do not exceed fair value
If they are received in a lump sum
If the beneficiary did not pay for the policy

122
Q

When a life insurance policy is surrendered before death, what are the tax consequences?

A

The amount received over the premiums paid is taxable

123
Q

If a life insurance policy is surrendered by a terminally ill person before death, what are the tax consequences?

A

None. The full amount is excluded

124
Q

If a life insurance policy is surrendered by a chronically ill person before death in a lump sum, what are the tax consequences?

A

The amount received over the premiums paid is taxable

125
Q

If a life insurance policy is surrendered by a chronically ill person before death in the form of annuity payments, what are the tax consequences?

A

The greater of $320 per day, or the actual cost of the person’s care is excludable

126
Q

What are the 3 requirements for a meritorious achievement award to be tax-free?

A

Cannot have entered a contest
Cannot be required to perform additional services
Award must be paid directly to a qualified charity

127
Q

Which portion of a scholarship is tax-free?

A

The portion used for tuition, books, fees, supplies, and equipment

128
Q

Which portion of a scholarship is taxable?

A

The portion used for room, board, and any other items not related to the cost of education

129
Q

When are Qualified Tuition Program distributions taxable?

A

If the distributions are used for anything other than tuition, fees, books, supplies, equipment, room, and board

130
Q

Is compensation for personal physical injury taxable?

A

No

131
Q

Is a court award for “pain and suffering” taxable?

A

No

132
Q

Are punitive damages taxable?

A

Yes

133
Q

If medical/health insurance premiums are paid by an employer, are the amounts paid for the premiums taxable to the employee?

A

No

134
Q

If medical/health insurance premiums are paid by an employer, are the benefits received by the employee taxable?

A

No

135
Q

If disability insurance premiums are paid by an employer, are the amounts paid for the premiums taxable to the employee?

A

No

136
Q

If disability insurance premiums are paid by an employer, are the benefits received by the employee taxable?

A

Yes

137
Q

If life insurance premiums are paid by an employer, are the amounts paid for the premiums taxable to the employee?

A

Yes, unless group term life insurance

138
Q

If life insurance premiums are paid by an employer, are the benefits received by the employee taxable?

A

No

139
Q

If medical, disability, or life insurance premiums are paid by a taxpayer directly, are the benefits from those policies ever taxable?

A

No

140
Q

What are the 7 fringe benefits excluded from income under Sec. 132?

A 
No additional cost benefits
Qualified employee discounts
Working conditions benefits
De minimis benefits
Qualified transportation fringes
Recreation and athletic facilities
Educational assistance
141
Q

Is compensation for business travel taxable to the employee?

A

No

142
Q

What is the maximum amount of parking fringe benefits that can be excluded under Sec. 132?

A

$245 per month

143
Q

What are the 5 requirements for an employee award to be a tax-free qualified plan award?

A

Must be given for safety or length of service
Must be given in property
Must be written
The average amount of all awards given cannot exceed a $400 value
The maximum award for 1 employee cannot exceed a $1600 value

144
Q

What are the 3 requirements for an employee award to be a tax-free achievement award?

A

Must be given for safety or length of service
Must be given in property
Cannot be over a $400 value

145
Q

What are the 3 requirements employer-paid meals and lodging to be excluded from an employee’s income?

A

Must be on premises
Must be for the convenience of the employer
Must be required by the employer

146
Q

If an employee an employee’s income is put in a flexible spending account, is it taxable?

A

No

147
Q

What are the 4 situations in which debt relief can be excluded from income?

A

Bankruptcy or insolvency
Student loan forgiveness for public service
Loan forgiveness on principal residence
Motivated by love/affective

148
Q

In general, what is the recipient’s basis when property is received as a gift?

A

The same as the donor’s

149
Q

If a gift is given with a built-in loss (FMV < Donor’s basis), what is the recipient’s basis?

A

There’s a dual basis:

If the property is sold at a gain, the donor’s basis is used

If the property is sold at a loss, the FMV is used

150
Q

If property is inherited, what is the recipient’s basis?

A

The FMV on the date of death

151
Q

What kind of asset is inherited property? (Long-term or short-term)

A

Long-term

152
Q

In general, what is a property’s basis when it is converted from personal to business use?

A

The FMV on the date of conversion

153
Q

If property is converted from personal to business use with a built-in loss (FMV < adjusted basis), what is its new basis?

A

There’s a dual basis:

If the property is sold at a gain, the original adjusted basis is used (minus depreciation)

If the property is sold at a loss, the FMV is used (minus depreciation)

154
Q

How is basis allocated when more than 1 asset is acquired in a single person (ex: land and building)?

A

The basis is apportioned relative to the FMV of the assets

155
Q

Why would a person be inclined to give a building a larger portion of the basis than land when both are purchased together?

A

There is no depreciation allowed for land

156
Q

What are the 5 items that are NOT capital assets?

A 
Inventory
Property used in business
Accounts/notes receivable
Supplies
Copyrights/literary works/etc.
157
Q

For what 2 purposes are capital assets generally used?

A

Investment

Personal use

158
Q

What is the result if net short-term capital losses exceed net long-term capital gains?

A

An overall loss

159
Q

What is the result if net short-term capital gains exceed net long-term capital losses?

A

A net capital gain (NCG)

160
Q

What is the result if net long-term capital gains exceed net short-term capital losses?

A

A net capital gain (NCG)

161
Q

What is the result if net long-term capital losses exceed net short-term capital gains?

A

An overall loss

162
Q

What ordered should net long-term capital losses offset net long-term capital gains?

A

In the order most favorable to the taxpayer (28% group, then 25% group, then 20% group)

163
Q

What are the 4 categories of long-term capital gains?

A

Collectibles gain

The non-excluded gain from the disposition of QSBS

Unrecaptured Sec. 1250 gain

ANCG (everything else)

164
Q

What rate are collectibles gains taxed at?

A

28%

165
Q

What rate is the non-excluded gain from the disposition of QSBS taxed at?

A

28%

166
Q

What rate is unrecaptured Sec. 1250 gain taxed at?

A

25%

167
Q

What rate are ANCG (adjusted net capital gains) taxed at, assuming the taxpayer is in the 39.6% bracket?

A

20%

168
Q

What are the 2 requirements for a business to have stock considered “qualified small business stock”?

A

The business must be small

The business must be active

169
Q

What is the requirement for a taxpayer to exclude 50% of the gains on their QSBS?

A

The stock must be held for at least 5 years

170
Q

What is the maximum amount of QSBS gains that may be excluded?

A

50% of the greater of $10,000,000 or 10 times the AAB (aggregate adjusted basis)

171
Q

What is the aggregate adjusted basis (AAB)?

A

If FMV exceeds the adjusted basis, then the AAB is FMV (otherwise it is the adjusted basis)

172
Q

What is the maximum amount that capital losses may offset ordinary income?

A

$3,000 per year. The rest is carried over to the next year.

173
Q

If a loss carryover consists of both short-term and long-term losses, which should be applied first?

A

Short-term losses

174
Q

When does a holding period on an asset begin?

A

The day after acquisition

175
Q

How long must an asset be held to be considered a long-term asset?

A

Over 1 year

176
Q

What is the first step (of 5) to determining the tax consequence of a property transaction?

A

Determine the realized gain or loss

177
Q

How is realized gain or loss calculated?

A

Amount realized minus the adjusted basis

178
Q

How is the “amount realized” in a property transaction calculated?

A

Money + FMV of property + Debt Relief - Selling expenses

179
Q

How is adjusted basis calculated?

A

Initial basis + capital additions - depreciation

180
Q

What is the second step (of 5) to determining the tax consequence of a property transaction?

A

Determine the recognized gain or loss (remove anything excluded or deferred by loss)

181
Q

What is the third step (of 5) to determining the tax consequence of a property transaction?

A

Determine the character of the property disposed of (Ordinary vs. Capital, Short-Term vs. Long-Term) and the applicable tax rate (ordinary, 28%, 25%, or 20%)

182
Q

What is the fourth step (of 5) to determining the tax consequence of a property transaction?

A

Determine if any losses are limited through the netting process

183
Q

What is the last step (of 5) to determining the tax consequence of a property transaction?

A

Determine the basis and holding period of any exchanges

Tax Accounting (3 decks)

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