Tax Chapters 1-5 Flashcards
Which amendment allows the government to collect taxes?
The 16th Amendment
What are the 3 categories of tax law objectives?
Political, Economic, Social
Why is tax law complex?
Because of the political, economic, and social objectives.
What percent of federal revenues are from personal income tax?
81%
What are the 3 tax rate structures?
Progressive, Proportional, Regressive
How does a progressive tax work?
The rate increases when the base increases
What tax rate structure does federal or state income tax use?
Progressive
How does a proportional tax work?
The rate is the same for everyone (flat tax).
What tax rate structure does property tax use?
Proportional
How does a regressive tax work?
The rate decreases as the base increases
What tax rate structure does FICA (Social Security use)?
Regressive
What tax rate structure does sales tax use?
Regressive
How do you calculate an average tax rate?
Total tax liability divided by taxable income
What is the name of the tax rate applied to an incremental amount of taxable income?
Marginal tax rate
Which type of tax rate is the most useful for tax planning? (It measures the effect of a proposed transaction.)
Marginal tax rate
What are the 5 criteria for evaluating tax structures?
Equity, Certainty, Convenience, Economy, Simplicity
What is horizontal equity?
Similar taxpayers pay similar tax
What is vertical equity?
Dissimilar taxpayers pay different tax
Why is it hard to determine what constitutes a fair tax structure?
Fairness is subjective
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?
Certainty
What factors are considered when evaluating the economy of a tax structure?
The cost of compliance and administration
What 2 types of entities pay taxes on taxable income?
Individuals and C-Corps
What are the 6 types of flow-through entities?
Sole proprietorship, partnership, S-corp, LLC, LLP, Trust
What are the 3 sources of tax law?
Legislative, Executive, Judicial
What are 2 types of legislative sources of tax law?
Internal Revenue Code, House Ways & Means Committee
What is the highest authority of tax law?
Internal Revenue Code
What is the limitation of the Internal Revenue Code?
The language is not specific
What is the executive source of tax law?
Rulings
What is the judicial source of tax law?
Court decisions
What is the statute of limitations for auditing a fraudulent return?
Indefinite
What is the statute of limitations for auditing a return where a gross income item in excess of 25% is omitted?
6 years
What is the general statute of limitations for auditing a return?
3 years
Can a taxpayer be audited after they receive a refund?
Yes
How is Gross Income calculated?
Income from whatever source derived minus exclusions
How is Adjusted Gross Income (AGI) calculated?
Gross income minus deductions for AGI
How is Taxable Income calculated?
AGI minus greater of itemized deductions or standard deduction, minus personal and dependency exemptions
How is tax payable (or refund due) calculated?
Taxable income times the applicable tax rates, minus credits and prepayments
What is income?
An economic benefit that the taxpayer realizes
What are the four types of income?
Money, Property, Services/Bartering, Debt Relief
What are the 2 deductions from AGI?
Standard Deduction or Itemized Deductions and Exemptions
What is the standard deduction for Married Filing Jointly?
$12,200
What is the standard deduction for surviving spouses?
$12,200
What is the standard deduction for Head of Household?
$8,950
What is the standard deduction for a Single taxpayer?
$6,100
What is the standard deduction for Married Filing Separate?
$6,100
What are the 2 possible standard deductions for dependents?
The greater of $1,000 or earned income plus $350 (up to $6,100)
What is the additional deduction for an aged or blind taxpayer (married or surviving spouse)?
$1,200
What is the additional deduction for an aged or blind taxpayer (single)?
$1,500
What is the amount of a personal exemption?
$3,900
Can a dependent have a personal exemption?
No
What are the 4 requirements that a person must meet to be a dependent?
Social security number, Citizenship, Separate returns if married, No dependents of their own
What are the 4 qualifying child tests?
Relationship, Age, Abode, Support
What is the relationship test for a qualifying child?
Must be a child/sibling of the taxpayer or a descendent of either
What is the age test for a qualifying child?
Must be either under 19, a full time student (5+ months) under 24, or permanently and totally disabled
What is the abode test for a qualifying child?
Must have the same principal abode as the taxpayer for over half the year
How can a noncustodial parent claim a child as a dependent?
If the custodial parent agrees to give up the exemption in writing (Form 8332)
What is the support test for a qualifying child?
The child cannot provide over half his/her own support
What are the 3 qualifying relative tests?
Relationship, Gross Income, Support
What is the relationship test for a qualifying relative?
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
What is the gross income test for a qualifying relative?
Dependent’s gross income must be under $3,900 (excluding scholarships, nontaxable bond interest, and social security benefits)
What is the support test for a qualifying relative
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
What is the first tie-breaker for determining who can claim a dependent?
Taxpayers who can claim qualifying child have priority over taxpayers who can claim qualifying relative
What is the second tie-breaker for determining who can claim a dependent?
Parents have priority over other individuals
What is the third tie-breaker for determining who can claim a dependent?
The exemption goes to whoever has the highest AGI
What are the 2 stipulations for a multiple support agreement?
Each eligible taxpayer must agree in writing
The person receiving the exemption must provide over 10% of the dependent’s support
What is the amount of the child credit?
$1,000
What are the 2 criteria for a child to qualify for a child credit?
Must be a qualifying child
Must be under age 17
What is the AGI threshold for the child credit if the taxpayer is Married Filing Jointly?
$110,000
What is the AGI threshold for the child credit if the taxpayer is Single?
$75,000
What is the AGI threshold for the child credit if the taxpayer is Married Filing Separately?
$55,000
How much is a child credit reduced by once the taxpayer’s AGI reaches the threshold?
$50 for every $1,000 (or fraction thereof) by which AGI exceeds the threshold
What are the 2 requirements to file a joint return?
Must be legally married the last day of the year
Must have the same tax year-end
What type of return should a surviving spouse file in the year of death?
A joint return
Which years following a death can a surviving spouse file as such?
The second and third year (the first year they file jointly)
What are the 4 requirements for filing as a surviving spouse?
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
What are the 3 requirements for filing as Head of Household?
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
What is the tax filing status of an abandoned spouse?
Head of Household
What are the 2 requirements to be an abandoned spouse?
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
In what situation can a taxpayer file as Head of Household, even when he or she doesn’t live with any dependents?
When the taxpayer maintains a separate household for a dependent parent
When would a person’s filing status be single?
If they are unmarried and don’t qualify for surviving spouse or head of household
Why would a couple file Married Filing Separate?
If there is marital discord and one spouse does not want to be liable for the other spouse’s actions
When does kiddie tax apply to a child 17 year old or younger?
If the child has over $2,000 in unearned income
When does kiddie tax apply to an 18 year old child?
If the child has over $2,000 in unearned income and the child’s earned income is less than half of his/her support
When does kiddie tax apply to a 19-23 year old?
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
How is a child’s net unearned income computed in regard to the kiddie tax?
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
How is a child’s taxable income computed in regard to the kiddie tax?
In the standard way (using the tax formula)
How is a child’s total tax computed in regard to the kiddie tax?
Net unearned income x parents’ marginal tax rate
Plus: (Taxable income - net unearned income) x child’s tax rate
Under the cash method, when is income taxable?
When it is received (or constructively received)
Under the accrual method, when is income taxable?
When it is earned
When is income considered to be earned?
When all events have occurred that fix the right to receive the income and the amount can be reasonably determined
When is prepaid income taxable under the accrual system?
In the year of receipt (earned or not)
When may a taxpayer under the accrual system defer prepaid income in connection with the sale of goods?
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
When may a taxpayer under the accrual system defer prepaid income in connection with the sale of services?
If services are to be rendered before the end of the next tax year
How long can prepaid income be deferred if criteria for this exception are met?
Only to the next tax year
Is a check received after banking hours constructively received?
Yes
Is interest credited to a savings account constructively received?
Yes
Are mature bond interest coupons, which have not yet been redeemed, constructively received?
Yes
If salary is made available to an employee, but the employee does not take the salary, is it constructively received?
Yes
If a paycheck has been mailed to an employee, and the employee hasn’t received it yet, is it constructively received?
No
Is a postdated check constructively received?
No
What types of bonds pay tax-exempt interest?
Obligations of states, territories, and US possessions and political subdivisions, school districts, port authorities, toll road commissions, counties, fire districts, private universities, hospitals, churches
When is the interest on a Series EE Savings Bond taxed?
When the bond is cashed
Are rental security deposits considered taxable income?
No (unless not refunded to tenant)
If a tenant makes improvements to a property, under what condition would this be taxable to the landlord?
If there was a reduction in rent for the improvements
What are dividends?
Distributions from earnings and profits
Qualified dividends have the same preferential rates as what?
Capital gains
What are 2 examples of constructive dividends?
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
If certain business expenses are found to be constructive dividends, how will this change the business’ financial records?
Receivables (such as “due to owner”) or expenses (such as compensation) will decrease, Dividends will increase
How must alimony be paid?
In cash, not property
What happens to the basis of property in a property settlement after a divorce?
Nothing. The original basis is maintained.
What are the tax consequences for a property settlement after a divorce?
None
What are the tax consequences of alimony?
Taxable to spouse who receives it, deductible by the spouse who gives it
When does recapture come into play with alimony?
When alimony drops by over $15,000 in the second or third year
If there is alimony recaptured, when is it put into effect?
In year 3
How is the recapture amount of alimony calculated?
Alimony paid in year 1
Minus: $15,000 (allowable reduction)
Minus: the average alimony paid in years 2 & 3
When the recaptured amount of alimony is calculated, what are the effects on the payor and payee?
The recaptured amount is added back into the payor’s income, and subtracted from the payee’s income
How is provisional income calculated (as it applies to social security benefits)?
AGI + tax-exempt interest + excluded foreign interest + 1/2 Social Security benefits
What is the maximum amount taxable social security benefits?
85%
When is a proceed or court award due to property destruction included in gross income?
Any amount that exceeds the adjusted basis is includable
When is a transaction a tax-free gift?
If the donor has donative intent
What are the 4 requirements that must be met for life insurance proceeds to be excluded from income?
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
When a life insurance policy is surrendered before death, what are the tax consequences?
The amount received over the premiums paid is taxable
If a life insurance policy is surrendered by a terminally ill person before death, what are the tax consequences?
None. The full amount is excluded
If a life insurance policy is surrendered by a chronically ill person before death in a lump sum, what are the tax consequences?
The amount received over the premiums paid is taxable
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?
The greater of $320 per day, or the actual cost of the person’s care is excludable
What are the 3 requirements for a meritorious achievement award to be tax-free?
Cannot have entered a contest
Cannot be required to perform additional services
Award must be paid directly to a qualified charity
Which portion of a scholarship is tax-free?
The portion used for tuition, books, fees, supplies, and equipment
Which portion of a scholarship is taxable?
The portion used for room, board, and any other items not related to the cost of education
When are Qualified Tuition Program distributions taxable?
If the distributions are used for anything other than tuition, fees, books, supplies, equipment, room, and board
Is compensation for personal physical injury taxable?
No
Is a court award for “pain and suffering” taxable?
No
Are punitive damages taxable?
Yes
If medical/health insurance premiums are paid by an employer, are the amounts paid for the premiums taxable to the employee?
No
If medical/health insurance premiums are paid by an employer, are the benefits received by the employee taxable?
No
If disability insurance premiums are paid by an employer, are the amounts paid for the premiums taxable to the employee?
No
If disability insurance premiums are paid by an employer, are the benefits received by the employee taxable?
Yes
If life insurance premiums are paid by an employer, are the amounts paid for the premiums taxable to the employee?
Yes, unless group term life insurance
If life insurance premiums are paid by an employer, are the benefits received by the employee taxable?
No
If medical, disability, or life insurance premiums are paid by a taxpayer directly, are the benefits from those policies ever taxable?
No
What are the 7 fringe benefits excluded from income under Sec. 132?
No additional cost benefits Qualified employee discounts Working conditions benefits De minimis benefits Qualified transportation fringes Recreation and athletic facilities Educational assistance
Is compensation for business travel taxable to the employee?
No
What is the maximum amount of parking fringe benefits that can be excluded under Sec. 132?
$245 per month
What are the 5 requirements for an employee award to be a tax-free qualified plan award?
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
What are the 3 requirements for an employee award to be a tax-free achievement award?
Must be given for safety or length of service
Must be given in property
Cannot be over a $400 value
What are the 3 requirements employer-paid meals and lodging to be excluded from an employee’s income?
Must be on premises
Must be for the convenience of the employer
Must be required by the employer
If an employee an employee’s income is put in a flexible spending account, is it taxable?
No
What are the 4 situations in which debt relief can be excluded from income?
Bankruptcy or insolvency
Student loan forgiveness for public service
Loan forgiveness on principal residence
Motivated by love/affective
In general, what is the recipient’s basis when property is received as a gift?
The same as the donor’s
If a gift is given with a built-in loss (FMV < Donor’s basis), what is the recipient’s basis?
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
If property is inherited, what is the recipient’s basis?
The FMV on the date of death
What kind of asset is inherited property? (Long-term or short-term)
Long-term
In general, what is a property’s basis when it is converted from personal to business use?
The FMV on the date of conversion
If property is converted from personal to business use with a built-in loss (FMV < adjusted basis), what is its new basis?
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)
How is basis allocated when more than 1 asset is acquired in a single person (ex: land and building)?
The basis is apportioned relative to the FMV of the assets
Why would a person be inclined to give a building a larger portion of the basis than land when both are purchased together?
There is no depreciation allowed for land
What are the 5 items that are NOT capital assets?
Inventory Property used in business Accounts/notes receivable Supplies Copyrights/literary works/etc.
For what 2 purposes are capital assets generally used?
Investment
Personal use
What is the result if net short-term capital losses exceed net long-term capital gains?
An overall loss
What is the result if net short-term capital gains exceed net long-term capital losses?
A net capital gain (NCG)
What is the result if net long-term capital gains exceed net short-term capital losses?
A net capital gain (NCG)
What is the result if net long-term capital losses exceed net short-term capital gains?
An overall loss
What ordered should net long-term capital losses offset net long-term capital gains?
In the order most favorable to the taxpayer (28% group, then 25% group, then 20% group)
What are the 4 categories of long-term capital gains?
Collectibles gain
The non-excluded gain from the disposition of QSBS
Unrecaptured Sec. 1250 gain
ANCG (everything else)
What rate are collectibles gains taxed at?
28%
What rate is the non-excluded gain from the disposition of QSBS taxed at?
28%
What rate is unrecaptured Sec. 1250 gain taxed at?
25%
What rate are ANCG (adjusted net capital gains) taxed at, assuming the taxpayer is in the 39.6% bracket?
20%
What are the 2 requirements for a business to have stock considered “qualified small business stock”?
The business must be small
The business must be active
What is the requirement for a taxpayer to exclude 50% of the gains on their QSBS?
The stock must be held for at least 5 years
What is the maximum amount of QSBS gains that may be excluded?
50% of the greater of $10,000,000 or 10 times the AAB (aggregate adjusted basis)
What is the aggregate adjusted basis (AAB)?
If FMV exceeds the adjusted basis, then the AAB is FMV (otherwise it is the adjusted basis)
What is the maximum amount that capital losses may offset ordinary income?
$3,000 per year. The rest is carried over to the next year.
If a loss carryover consists of both short-term and long-term losses, which should be applied first?
Short-term losses
When does a holding period on an asset begin?
The day after acquisition
How long must an asset be held to be considered a long-term asset?
Over 1 year
What is the first step (of 5) to determining the tax consequence of a property transaction?
Determine the realized gain or loss
How is realized gain or loss calculated?
Amount realized minus the adjusted basis
How is the “amount realized” in a property transaction calculated?
Money + FMV of property + Debt Relief - Selling expenses
How is adjusted basis calculated?
Initial basis + capital additions - depreciation
What is the second step (of 5) to determining the tax consequence of a property transaction?
Determine the recognized gain or loss (remove anything excluded or deferred by loss)
What is the third step (of 5) to determining the tax consequence of a property transaction?
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%)
What is the fourth step (of 5) to determining the tax consequence of a property transaction?
Determine if any losses are limited through the netting process
What is the last step (of 5) to determining the tax consequence of a property transaction?
Determine the basis and holding period of any exchanges
