Tax - Individual Flashcards by Diana Liu

Gross income

All income from whatever source, except those specifically excluded by IRC.

Cash basis reports income when actually or constructively received cash or property.
Accrual basis reports income in year when right to income becomes fixed and amounts can be reasonably determined.

How well did you know this?

Not at all

Perfectly

Gross income: alimony and separate maintenance payments

Qualified payments are included in gross income and deductible if payments are made after:
– Decree of divorce or separate maintenance
– Written separation agreement
– Decree for support

Qualified payments requirements:
– Must be in cash
– Must terminate at death of recipient
– Cannot be made to payeewho lives in same household as payor
– Cannot be specified as something other than alimony

Special rules if second or third year decrease by more than $15,000 from previous year:
– Recapture excess of payments
– All recapture is in third year
- Payor must include excess in gross income
- Payee allowed to deduct from gross income

Alimony recapture formula:
R2: P2 - (P3 + 15,000)
R1: P1 – [(P2 – R2 + P3)/2 + 15000]
R3: R2 + R1

How well did you know this?

Not at all

Perfectly

Gross income: child support

Excluded:
- Cannot be treated as alimony
– Not deductible by payor
- Not income for payee

If both child-support and alimony are provided for, amounts paid are first considered to be child support until obligation met.

How well did you know this?

Not at all

Perfectly

Gross income: annuities

Exclude: portion of annuity proceeds that represents recovery of taxpayers previously taxed investment.

Exclusion amount =
(Investment in contract/total expected return on contract) x amount received

For qualified retirement plan annuities:
Exclusion amount =
investment contract/# anticipated monthly payments

How well did you know this?

Not at all

Perfectly

Gross income: canceled debt

Include: to debtor when it’s not intended to be gift.

Gift intention: presence or absence of consideration.

Where seller cancels buyer’s debt, buyer can generally avoid income recognition by electing to reduce property basis by amounts of debt discharged.

Discharge due to bankruptcy generally not included in gross income, use instead to reduce basis of assets carrying favorable tax attributes.

Shareholders cancellation of corporations debt is treated as contribution of capital.

How well did you know this?

Not at all

Perfectly

Gross income: damages collected

Excludes: Compensatory damages received under suit for physical injury or sickness

Includes: Punitive damages and damages for loss of profits

How well did you know this?

Not at all

Perfectly

Gross income: Dividends received

Include: Dividend

Special dividend tax rate 15%
– 0% for 10% or 15% tax bracket’s
– 20% for 39.6% regular tax bracket

If taxpayer has choice of stock or cash:
– Cash received is income
– Stock received is income to extent of FMV on date received.

Distribution of stock and stock rights to preferred shareholders, FMV is income and basis.

Property dividend is income, FMV is income and basis.

Amounts received in partial or complete liquidation:
– Return of capital until taxpayer’s investment is recovered
– Capital gain on remainder

How well did you know this?

Not at all

Perfectly

Gross income: employee death benefits

Employer payments to the employee’s survivors is taxed unless qualifies as a gift.

How well did you know this?

Not at all

Perfectly

Gross income: farming income

Includes all receipts for cash basis farmer.

How well did you know this?

Not at all

Perfectly

Gross income: gain on home sales

Can exclude up to $250,000 single, $500,000 jointly

If owned at least 2 years
– And lived in as principal residence for 2 out of 5 prior years

Tacking: homeowners can tack on their ownership to another’s:

surviving spouse can tack on the decedent
person can tack on spouse/former spouse

If sold when occupied less than two years, prorate gain if move due to changes in place of employment, health or other allowable unforeseen circumstances.
– If lived in for a one year, prorate 1/2, so up to $125,000 excludable

How well did you know this?

Not at all

Perfectly

Gross income: gambling winnings/losses

Include: all gambling winnings.

Losses are deductible as itemized deduction, but only to extent of winnings. Not subject to 2% of AGI floor.

How well did you know this?

Not at all

Perfectly

Gross income: gifts

Exclude: value of the gift receipt

Include: income generated by property received as gifts

How well did you know this?

Not at all

Perfectly

Gross income: group term life insurance

Include: cost of coverage in excess of $50,000 when employer pays premiums for its employees

Any amounts paid by employee can reduce this income.

For nondiscriminatory group-term life insurance: benefits 70% or more of all employees and at least 85% of participants are not key employees.

How well did you know this?

Not at all

Perfectly

Gross income: employer contributions to HSA

Exclude: within limits

How well did you know this?

Not at all

Perfectly

Gross income: flexible spending accounts

Taxpayers company can allow $500 carryover balance to following year for money not used for allowed purposes, or
Allow a grace period through March 15 of the following year

How well did you know this?

Not at all

Perfectly

Gross income: illness or injury benefits

Exclude if received:
– Under workers comp
– As compensatory damages from suits or settlement
– Under self-purchased accident and health insurance

Benefits received under employer-financed accident and health plan may be exempt:
– Contributions by employer are excludable
– Payments received for medical care and permanent injury arts edible
– Health and accident benefits other than those listed are income to extend they’re attributable to employees contribution

How well did you know this?

Not at all

Perfectly

Gross income: improvements made by lessee

Exclude: to lessor in general, basis is $0

Include: to lessor if in lieu of rent
– Recognize in year improvements completed
– FMV is amount recognized
– landlord’s basis of improvements is market value

How well did you know this?

Not at all

Perfectly

Gross income: income from illegal acts

Include: illegal activities

Legitimate business expenses incurred to produce such income are deductible as business expense.

In case of illegal drug trafficking, only cost of goods sold is deductible. No other expenses can be deducted.

How well did you know this?

Not at all

Perfectly

Gross income: interest received

Include: generally all received or available for withdrawal

Exception: interest on state and municipal obligations

How well did you know this?

Not at all

Perfectly

Gross income: life insurance proceeds

Exclude: proceeds paid by reason of death
– Lump-sum payments of principal sum is fully excluded
– Interest portion of any installment payments is taxable

Dividends received on unmatured policies are not taxed unless amounts received exceeds premiums paid:
– Received before maturity is return of premium
– Collected after maturity is fully taxable

Qualified individuals may cash out policies before death and receive tax free:
– Insured person must be terminally or chronically ill

How well did you know this?

Not at all

Perfectly

Gross income: meals and lodging

Exclude: meals served on premises of employer and for a convenience of employer

Exclude lodging when is condition of employment

Tax exempt for minister’s value of housing or housing allowance used to pay for housing

How well did you know this?

Not at all

Perfectly

Gross income: pensions

Include: pensions pay to retirees

Exclude: payments made under Railroad Retirement Act or Social Security Act. Portion maybe taxable for single taxpayers with provisional income above $34,000, gross income includes a lesser of:
– 85% of Social Security benefits received or
– 85% of excess of provisional income (modified AGI + 1/2 benefit) plus lesser of: 1/2 benefit or $4500

How well did you know this?

Not at all

Perfectly

Gross income: prizes and awards

Include.

Exclude award for safety achievement or length of service if is tangible personal property for no more than $400

Exclude awards for religious, charitable, scientific, educational, artistic, literary, or civic areas if:
– taxpayer selected through no action on taxpayer’s part
– Taxpayer need not perform any substantial future services for award, and
– Award transferred to government unit or charitable organization before taxpayer received any benefits from it

How well did you know this?

Not at all

Perfectly

Gross income: rents and royalties

Include: royalties

Include: rents when received (cash) or accrued (accrual)

Prepaid rental income is recognized in year received whether accrual or cash basis.

Personal residence rented out for less than 15 days, exclude.

How well did you know this?

Not at all

Perfectly

Gross income: recoveries

Include when income tax benefit was obtained by deducting and item on a previous tax return.

If no tax benefit was received in prior years as a result of the item, no income is recognized on current recoveries.

How well did you know this?

Not at all

Perfectly

Gross income: scholarships and fellowships

Exclude: for degree candidate to extend amount received is used for tuition, course fees, books and supplies.
– Amounts used for room and board are taxable.

Amounts received are taxable if specific services, such as teaching, are required to receive scholarship.

Include: any amounts paid to non-degree candidate

How well did you know this?

Not at all

Perfectly

Gross income: unemployment compensation

Include: all such benefits.

Include: company-financed supplemental benefits

Include: guaranteed annual wage payments

How well did you know this?

Not at all

Perfectly

Gross income: educational savings bonds

Exclude: interest on series EE and series I, US savings bonds, if redemption proceeds are used for qualified higher education expenses.

Requirements include:
– Bonds must be used issued after December 31, 1989
– Bonds must be issued to person at least 24 years old
– Joint return is required if married

Qualified higher education expenses:
– Tuition and fees to enroll taxpayer, spouse or dependent
– Does not include room and board
– Must be reduced by scholarships not included in gross income

When redemption proceeds exceed education, only portion of interest is excluded from income:
Interest exclusion =
(education exp
/redemption proceeds incl. interest)
x interest

How well did you know this?

Not at all

Perfectly

Gross income/Itemized deduction: employee business expenses reimbursed by employer

Accountable plan: employee must provide substantiation for expenses:
- If reimbursement equals expenses, employee excludes reimbursement from income
- If reimbursement exceeds expenses, excess is included in gross income
– If expenses exceed reimbursement, employed deducts unreimbursed amount as misc itemized deduction

Non-accountable plan:
- Employee includes reimbursements in income
– Employee then deducts allowable business expenses as misc itemized deductions

How well did you know this?

Not at all

Perfectly

Gross income: Passthrough entities: S-corporations

Shareholders must include on personal tax returns their share of S-corporation’s income or loss.

Where ownership change during year, each owner must recognize their share of income on per-share per-day ownership allocation

Loss in excess of taxpayers basis may carry forward indefinitely

Gross income: pass-through entities: distributions of cash and property

Shareholders must recognize cash and FMV of property.

Taxability determined by source:
– Distributions first come from “accumulated adjustments account”
– Then as dividends to extent of accumulated E&P
– Remainder is return of capital to extent of shareholder’s basis in stock
– Final remainder is capital gain

If S Corp. distributes appreciated property, treat it as if sold at FMV:
- Gain is recognized at the corporate level
– Gain subsequently passed through to shareholders

Gross income: Passthrough entities: partnerships

Are reporting entities, not taxable entities.

Ordinary income and losses, special gain and loss items, report on personal tax returns.

Partnership reports each partner’s distributive share of ordinary gain or loss and special items.

Self employment taxes apply to all ordinary income passed to owners

Gross income: child’s interest and dividends

Parents may elect to report a child’s interest and dividends on their tax return. Under the election, child doesn’t have to file tax return.

Election only if child meets all:
– Under age 19 or age 24 if full-time student at year end
– Has income only from interest and dividends
– Has gross income of more than $1050 but less than $10,500
– No estimated tax payments for the year
– Does not have tax overpayment from preceding year applied to current year
– Not had tax withheld from current year’s income
– Does not file a joint return for year

To qualify for election, taxpayer (parent) must meet one:
– Parents file a joint return
– Parents file separate returns but taxpayer has higher taxable income than spouse
– Taxpayer is custodial parent

Deductions from Gross Income to arrive at AGI

Business expenses (schedule C)
– Net capital losses (schedule D)
– Contributions to HSA (form 8889)
– Job-related moving expenses (form 3903)
– 50% of self-employment tax (schedule SE)
– Contributions to retirement plans, including IRAs
– 100% of self employed health insurance premiums
– Penalty on early withdrawal of savings
– Alimony payments
– Qualified student loan interest up to $2500

Deductions: net operating losses

NOL may be carried back 2 years and forward 20 years

Deductions: passive activity losses

Losses from passive activities can only offset passive income. Not:
– Active income: wages, salaries
– Portfolio income: dividends, interest, royalties, annuities

Unused passive losses carry forward to offset future passive income. Not back.
In year that’s passive activity terminated, remaining unused loss may be deducted in full.

Passive activities include:
– Trade or business where taxpayer does not materially participate
– Rental activities
– Limited partnership activity

Applies to individuals, estates, trusts, personal service Corp., and closely held Corp.
– Apply to individual from pass-through of S-Corp. and partnership, not to entity itself

Deduction: Section 1244 (Worthless) stock

Qualified small business stock. Acquired from corporation. Issued directly to taxpayer, not transferred.

Loss may be treated as ordinary loss – deductible for AGI
– Treatment limited to $50,000 ($100,000 on joint) each year
– Additional loss is capital loss treatment

Gain is capital gain.

Deductions: net capital loss

Can deduct up to $3000

– STCL used before LTCL
– Remainder carried forward indefinitely
– Schedule D

Deduction: personal loss

Not deductible for personal use assets whether sold, exchanged or condemned.

Deduction: personal loss

Not deductible for personal use assets whether sold, exchanged or condemned.

Deduction: start up expenses

Applies to sole proprietor and partnership

$5000 in taxable year that business begins.
Reduced by amount exceeding cumulative $50,000.
Remainder amortized over 15 years

Deduction: Affordable Care Act

Shared responsibility payment on one uninsured adult is higher of:
– 2.5% household income or
– $695 per adult and $347.50 per child under 18

Family max is $2085

Itemized deductions

– Nonbusiness casualty and theft losses that exceed 10% of AGI
– Medical and dental care in excess of 10% of AGI
– Mortgage interest expense
– Charitable contributions
– Investment expenses, including investment interest
– Unreimbursed employee expenses that exceed 2% of AGI
– Tax preparation fees
– Other miscellaneous deductions

Itemized deduction: charitable contributions

Limited to 50% of AGI: public charities
Limited to 30% of AGI: private charities

Contributions of capital gain property:
– Up to 30% of AGI: public charities
– Up to 20% of AGI: other charities

Unused contributions may be carried forward for 5 years

Property contributions are deductible to extent of FMV. Exceptions:
– LTCG property
– Ordinary income property

Itemized deductions: medical expenses

Can deduct:
– Medical insurance payments with after-tax dollars
– parents medical expense paid by taxpayer, but relative not dependent only because of gross income test
– Long-term care insurance premiums

Can’t deduct:
– Disability insurance premiums

Total deductible on Schedule A =
Total deductions – 10% x AGI

Itemized deduction: casualty losses

– Property must not be income generating

Deduction =
(Lesser of loss in FMV or basis)
- insurance or other reimb. received
- $100 per event reduction
– 10% x AGI

Standard deduction

2016 amounts:
– Single/married filing separately: $6300
– Married filing jointly: $12,600
– Head of household: $9300

Exemptions

2016 amount: $4050

Allowed for each of the following:
– Taxpayer (not dependent of another)
– Taxpayer’s spouse: (joint or separate but spouse has no income)
– Qualified dependents

Qualified dependents:
Qualifying relative or non-relative:
- gross income

Tax rate schedules

There are seven brackets applicable: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

Schedules ranked in order of the desirability:
– Married filing jointly and surviving spouse
– Unmarried head of household
– Single individual
– Married filing separate

Tax rates: unearned income of minor children

Children may be taxed at their parents’ highest tax rate if:
– Child has net unearned income of more than $2100, and
– Child does not file a joint return for the year

First $1050 tax free
Next $1050 taxed at child’s rate
Excess of $2100 taxed at parent’s highest rate

Filing status: married filing jointly

For individuals who are married at end of the year and both spouses agreed to file using the status.

If both spouses receive income, they may want to figure tax using married filing separately status too to get lower combined tax available.

Filing status: surviving spouse / qualifying widow(er)

May use joint rate for two tax years following year of spouse’s death if:
– Must be a married
– Must maintain home as household of dependent son or daughter for entire year
– Must have been entitled to file a joint return in deceased’s final tax year

Filing status: married filing separately

For individuals who want to be responsible for only their portion of income, or if it results in less tax than filing jointly.

Filing status: head of household

Requirements:
– Unmarried individual
– Maintains home as principal place of abode for qualifying child or relative (exception: dependent parents don’t need to live with taxpayer)
– Household must be qualified person’s abode for more than half of the taxable year

Additions: Self employment tax

Must be paid as additional to tax if earnings from self-employment are $400 or more.

Net self-employment earnings base changes annually.

Tax rate is 15.3%:

4% for old age, survivor and disability insurance (OASDI)
9% for hospital insurance plan (HIP)

Can’t deduct fringe benefits paid to owner/employee.

Tax credits

Reduces tax liability on dollar for dollar basis.

Tax credit: foreign tax credit

Available for taxes paid to foreign country on income that is taxable in US.

Can choose to be credit or itemized deduction. Election made annually.
– Cannot split between both

– Overall limit for credit on taxes paid to all foreign countries is restricted to that portion of US income tax which relates to taxable income from all foreign countries.
US income tax =
Total foreign taxable income
/Total worldwide taxable income

Excess credit may be carried back 1 year and forward 10 years

Tax credit: child and dependent care credit

Nonrefundable tax credit for expenses incurred in caring for dependents.

– Maximum amount of dependent care expenses is $3000 for one qualifying dependent or $6000 for two or more.

Depended must be:
– Child under age 13 or
– Incapacitated dependent or spouse

Married taxpayers must file a joint return unless they live apart for last six months of year:
– For separated parents, credit available to parent with custody of child for longer.

Expenditures that qualify include:
– In the home care
– Out of the home care

Tax credit: earned income credit

Refundable credit for low income workers with principal residence in US. Represents form of negative income tax.

– Equal to percentage of limited amount of earned income. Taxpayers with qualifying children receive greater benefits.
– when taxpayers AGI exceeds threshold, EIC is phased out
– Without qualifying children, maybe eligible if: they or spouse are at least 25 years but not more than 64 years old, not dependent to another taxpayer.

Qualifying children:
– Relationship: qualifying child, but can provide over half of own support
– Residency: in tax payers residence over half of year; foster children for entire year
– Age: under 19, full-time student under 24, or permanently and totally disabled

Tax credit: child tax credit

May claim $1000 credit for each qualifying child under age 17.

Phases out at rate of $50 per $1000 (or fraction thereof) of modified AGI in excess of thresholds:
– $110,000 on joint return
– $75,000 for singles
– $55,000 for married filing separately

Credit generally not refundable.
But if exceeds tax liability, remaining credit is available for additional child tax credit, which is refundable to extent of 50% of earned income in excess of $3000.

Tax Credit: education tax credits: American Opportunity Credit

May claim $2500 per student for tuition,related expenses, and course materials for each of the first four years of post secondary education.

– Student: taxpayer, spouse, dependents
- Credit = 100% of first $2000 + 25% of next $2000
– Students must be enrolled no less than half time during at least once master of year
– 40% of allowable credit is refundable
– Available for taxpayers earning less than $90,000 single, $180,000 jointly

Tax credit: education tax credits: Lifetime Learning Credit

Not refundable credit equal to 20% of up to $10,000 of tuition expenses paid each year by taxpayer.

student: taxpayer, spouse, dependents
– Does not vary with number of students in household
– Available for a limited number of years
– Applies to undergraduate, graduate and professional degree expenses
– Applies to any course at eligible institution that helps individuals acquire or improve job skills
– Does not require half-time enrollment for one semester (CPE credit courses and professional seminars provided by eligible edu. institutions may qualify)
– Cannot be taken if MAGI is $64,000 or more single $128,000 or more jointly

Alternative minimum tax

Payable to extent that it exceeds the taxpayer’s regular tax before credits

AMT: adjustments

Plus or minus:
– Itemized deductions
– Standard deduction
– Personal exemptions
– Passive activity losses
– Research and experimental expenditures
– Mining exploration and development costs
– Long-term construction contracts
– Incentive stock options
– Certain installment sales
– Alternative tax NOL

AMT: tax preferences

– Percentage depletion
– Accelerated depreciation
– Certain tax-exempt interest
– Intangible drilling costs
– 7% of excluded gain on qualified small business stock

AMT: exemptions

Filing status
Married, jointly/surviving spouses: $83,800
Single/head of household: $53,900
Married, separately: $41,900

AMT: tax credit

Credit may be available when regular taxable income is greater than AMTI.

Regular tax liability may be offset by credit representing minimum tax liabilities from prior years attributable to timing differences.

AMT credit carries forward indefinitely

Self-employment: interest expense

Interest expense on debt for financing business:

– Fully deductible on Schedule C

Self-employment: qualified retirement plan

A.k.a. Keogh plan

Maybe deduct up to $53,000 for contributions.
– Can’t exceed 25% earned income
– Earned income is income including deductible Keogh contribution and portion of SE tax, and after retirement contribution deducted
- So actually can’t exceed 20% of self-employment income

Exclusions: Coverdell education savings accounts

Beneficiary age limit 18
– Annual contributions max $2000 nondeductible
– Qualified expenses: list
– Distributions are taxable earnings

Deductions: rental loss

Rental loss may be deducted up to max $25,000

Deduction: traditional IRA

Deductible only if modified AGI is $61,000 or less

Or partial if modified AGI is between $61,000 and $71,000.

Deduction: student loan interest

Deductible max $2500

Limits on modified AGI for head of household: $80,000

Itemized deduction: mortgage interest

Paid on personal residence used as main home: can deduct expense.

Points to attain mortgage loan for main home is also deductible. Has some criteria.

Brainscape's Knowledge GenomeTM

Tax - Individual Flashcards

Brainscape's Knowledge Genome^TM