R1 module 2

Question 1

Gross Income definition

Answer 1

-all income from whatever source derived
-income determined by amount of cash, FMV property, or services obtained
-if noncash, income determined by FMV of property or services
-Taxable : income and basis at FMV
-Nontaxable: income N/A and basis at NBV

Question 2

taxable gain realization

Answer 2

-the accrual or receipt of cash, property, services or change in investment (sale or exchange)

Question 3

taxable gain recognition

Answer 3

-realized gain to be included in tax return (no exclusion or deferral under IRC)

Question 4

revenue recognition under accrual vs. cash basis

Answer 4

-according to rules of GAAP; revenue taxable when earned
-when revenue is actually constructed or received in cash or FMV of property

Question 5

salary and wage items included in gross income:

Answer 5

1) money received, credited, or available
2) FMV of property
3) Bargain purchases (sell property at less than FMV)
7) Guaranteed payments to partner, subject to self-employment tax
4) FMV of taxable fringe benefits; subject to employment, income and FICA taxes
5) employer Roth 401k contributions
6) life insurance premiums > first $50k, normally included in W-2 wages, not entire amount of premium (calculated)

Question 6

taxable interest

Answer 6

1) federal bonds
2) industrial development bonds
3) corporate bonds
4) part of proceeds from installment sale
5) interest paid by state and federal gov. for late payment of tax refund
6) forfeited interest from penalty on withdrawal from savings
7) interest from investment accounts (money market, checking, savings etc.)

Note: bond discounts and premiums reduce/increase interest received, respectively

Question 7

nontaxable fringe benefits

Answer 7

1) life insurance coverage paid by employer up to $50k
2) accidental, medical, health insurance paid by employer
3) de minimis fringe benefits
4) meals and lodging furnished by employer as condition to employment
5) employer payment of employee education expenses (grad & undergrad up to $5,250)
6) employee adoption assistance program
7) dependent care assistance (includes physically disabled spouse or dependent)
8) qualified tuition reductions (grads be in research work)
9) employee discounts on employer-merch., limited to employer gp %, services discount 20% of FMV
10) employer-provided parking
11) transit passes
12) contributions on non-roth retirement plans by employer and employee; benefits received taxable though
13) flexible spending arrangements (pre-tax deposits or forfeit funds not used within 2 1/2 months after YE if employer amended)

Question 8

nontaxable interest

Answer 8

1) state and local government bond obligations
2) bonds of U.S. possession (Puerto Rico, Guam, U.S.)
3) U.S. Series EE Savings bonds if
-used for higher education (reduced by tax-free scholarships) for taxpayer, spouse or dependent
-taxpayer over age 24
-married taxpayer files joint return
-meets income requirements
-must be registered under taxpayer’s or spouse’s name if used for dependent

Question 9

Forfeited interest (adjustment) (penalty on withdrawal from savings)

Answer 9

-interest received is taxable
-amount forfeited is deductible as adjustment in year penalty incurred; deducted separately and not netted to interest received

Question 10

dividend income

Answer 10

-distribution of property by C corp
-dividends from profits and earnings of corp (taxable)
-no earnings/profits and has stock basis (nontaxable and reduces stock basis)
-no earnings/profits and no stock basis (taxable capital gain income)

Question 11

taxable dividends

Answer 11

-cash = amount received
-property = FMV

Question 12

qualified dividends

Answer 12

-those paid by domestic or qualified foreign companies
-stock must be held for more than 60 days during 120 day period, beginning 60 days before ex-dividend date
-taxed at preferential tax rates as LT capital gains

Question 13

nonqualified dividends

Answer 13

1) employer stock held by employee stock ownership plan (ESOP)
2) amounts treated as investment income
3) short sale positions
4) certain foreign corporations
5) dividends paid by credit unions, mutual savings banks, building and loan associations, mutual insurance companies, farmer’s cooperatives

Question 14

tax free distribution items and excluded from income

Answer 14

1) return of capital (when C corp has no earnings/profits); reduces basis in common stock held
2) stock split, shareholder allocate original basis over total number of shares
3) stock dividend (same stock or different stock); if shareholder option to receive cash or property at FMV
4) life insurance dividend (caused by ownership of insurance)

Question 15

Same stock vs different stock

Answer 15

same stock: original basis/total shares
different stock: original basis allocated based on relative FMV of different stock

Question 16

capital gain distribution

Answer 16

-distributions by corp with no earnings or profit, which shareholder recovered entire basis, treated as taxable gross income

Question 17

state and local tax refunds

Answer 17

-receipt of refund in subsequent year are generally taxable if benefit received
1) itemized in prior year = state or local refund taxable, or portion of it taxable if itemized deductions - standard deduction does not exceed full refund amount
2) standard deduction used in PY = state or local refund nontaxable

Question 18

Alimony included or excluded rules

Answer 18

-alimony received for pursuant to legal separation or divorce agreement on or before 12/31/2018; included in gross income
-alimony received for pursuant to legal separation or divorce agreement after 12/31/2018; excluded from gross income and alimony cannot be deducted

Question 19

Alimony criteria

Answer 19

1) payments legally required pursuant to divorce/separation agreement
2) payments be in cash or equivalent
3) payments cannot extend beyond death of payee-spouse
4) cannot be made to members of same household
5) not designated as anything other than alimony
6) spouses cannot file joint return

Question 20

nontaxable child support

Answer 20

fixed portion to support child is nondeductible by spouse making payment and not includable by spouse receiving payment
-child support if:
1) specific amount fixed or contingent on child’s age status
2) paid solely for support of minor
3) payable by decree, instrument or agreement

Question 21

property settlements

Answer 21

-if divorce settlement provides lump-sum payment or property settlement by spouse, spouse gets no deduction for payments made
-payments not included in gross income for spouse receiving payment

Question 22

business income or loss (schedule c)

Answer 22

-from sole proprietorship calculated on schedule c and reported on form 1040 as single item

Question 23

gain or loss on disposition of property

Answer 23

-amount realized less adjusted basis = gain or loss realized
-gains or losses recognized when asset is sold or disposed
-taxpayers who sell stock or other securities on established securities market must recognize gain/loss on trade date

Question 24

traditional IRA distributions

Answer 24

-distributions of contributions are taxable if taxpayer took deduction for contribution made
-distributions of earnings always taxable
-distribution from nondeductible on traditional IRA is allocated to contributions and earnings pro rata based on relative amounts in IRA account at time of distribution
-required to make distributions by April 1 when 73 years old
-contributions and earnings are not taxable until distributions made

Question 25

roth IRA distributions

Answer 25

-distributions are never taxable because not allowed to deduct contributions to Roth IRA
-distributions of earnings taxable if nonqualified distribution
-distributions come from contributions first, then earnings

Question 26

qualified roth IRA distribution

Answer 26

1) made at least five years after first day of year taxpayer made first contribution
2) taxpayer age 59 1/2 or older
3) taxpayer disabled
4) first-time home buyer (max $10k)
5) distribution made to beneficiary after taxpayer death

Question 27

Nondeductible traditional IRA
Deductible traditional IRA
Qualified roth IRA distribution
Nonqualified roth IRA distribution

Answer 27

1) contributions nontaxable; earnings taxable
2) contributions and earnings taxable
3) contributions and earnings nontaxable
4) contributions nontaxable; earnings taxable

Question 28

Nondeductible traditional IRA taxable earnings calc

Answer 28

(residual earnings/total of IRA account) * amount of distribution

Question 29

distribution of Roth IRA taken out earlier than 5 years calc

Answer 29

amount withdrawn less the original basis of the Roth IRA = taxable ordinary income

Question 30

penalty tax (HIM DEAD)

Answer 30

if you take distribution before 59 1/2, you pay a 10% penalty tax along with regular income

Exceptions:
1) first time homebuyer
2) insurance if unemployed for 12 consecutive months
3) medical expenses > AGI floor
4) permanently disabled
5) education: college tuition, books
6) adoption or birth ($5k max exclusion)
7) qualified natural disaster ($22k max)
8) death or terminal illness

Question 31

Rollover from Traditional to Roth IRA

Answer 31

-amt transferred is taxed if a distribution
-withdrawal from traditional IRA not subject to 10% early withdrawal penalty if taxpayer contributes entire amount to Roth IRA account within 60 days of withdrawal

Question 32

Annuities

Answer 32

-contract between taxpayer and insurance company, which taxpayer contributes lump-sum payment to receive regular annuities over time
-each annuity payment received is return on investment which contributions are nontaxable, earnings taxable as ordinary income
-

Question 33

Fixed period annuity payments

Answer 33

-annuity exclusion ratio = original investment/expected value of annuity
-fixed annuity, expected value is amount of each payment x number of payments

Question 34

Life annuity payments

Answer 34

-use IRS life expectancy tables to determine portion of annuity payment that is nontaxable
-original investment/IRS factor from table = nontaxable return of investment (capital)
-IRS factor represents taxpayer’s life expectancy at time starts receiving annuity payments
-factors range from 360 months for 55 and older to 160 months for 71 and older
-if taxpayer live longer than life expectancy, additional payments received taxable
-if taxpayer die before life expectancy, remaining unrecovered investment deducted from final income tax return
-taxable portion = fixed annuity payment - nontaxable return of capital

Question 35

rental income-passive activity

Answer 35

-net rental income/loss reported on schedule E and reported as single item on Form 1040

Question 36

unemployment compensation

Answer 36

full amount included in gross income

Question 37

social security income

Answer 37

-must include lesser of 50% or 85% of SS benefits received or 50% or 85% of excess modified AGI over threshold

Low income = no SS benefits taxable
Lower/Middle income = less than 50% of SS benefits taxable
Middle income = 50% SS benefits taxable
Upper middle income = 50-85% of SS benefits taxable
Upper income= 85% of SS benefits taxable

Question 38

modified adjusted gross income

Answer 38

AGI + tax-exempt interest + 50% of SS benefits

Includes items:
-income excluded due to foreign earned income exclusion
-exclusion or deduction claimed for foreign housing
-interest income from Series EE bonds
-deduction claimed for student loan interest or qualified tuition and related expenses
-employer paid adoption expense
-deduction claimed for annual (non-roll over) contribution to traditional IRA

Question 39

Year of death income

Answer 39

-Due in April 15th following year of death
-done by personal representative or surviving spouse
-any income received after death included in federal income tax return not the final federal income tax return

Question 40

gambling winnings and losses

Answer 40

-winnings included in gross income
-gambling losses can be deducted to the extent of winnings
-gambling losses include expenses taxpayer paid for gambling
-gambling losses deductible on Schedule A as itemized deduction

Question 41

punitive damages

Answer 41

-fully taxable as ordinary income for business context or personal reputation and personal injury
-in wrongful death for limited death awards are nontaxable

Question 42

Cancellation of debt

Answer 42

-taxable income

Not taxable if:
1) debt discharged through insolvency
2) taxpayer insolvent when debt canceled
3) cancellation of nonrecourse loan, including foreclosure on personal residence
4) student loans forgiven (2021-2025)

Question 43

Degree seeking student scholarships

Answer 43

-scholarships and grant excluded up to amount of tuition, books, fees, and supplies spent
-no services to be performed as condition to receive grant
-grant not made for past, present, future services
-grant made to degree-seeking student

Question 44

Non-degree seeking student

Answer 44

-fully taxable at FMV

Question 45

Tuition reductions

Answer 45

-graduate teaching and research assistants are taxed on reduction if only compensation, but NOT if reduction is in addition to other taxable compensation

Question 46

Proceeds of life insurance policies

Answer 46

-due to death of uninsured excluded from gross income of beneficiary
-interest income on deferred payouts fully taxable
-proceeds for long-term care, assisted living, terminally ill nontaxable
-policies after Aug. 17, 2006, benefits received excluded for total premiums and amounts paid by policy holder unless received more than that, taxable
-nontaxable, highly compensated qualified officer, director, employee or U.S. citizen/resident
-proceeds paid to member of insured’s family
-beneficiary family member or other individual (not policyholder)
-beneficiary is a trust for benefit of insured’s family (or estate of insured)

Question 47

Other Miscellaneous Non-taxable items

Answer 47

-gifts and inheritances (if generate income after receipt of property, taxable)
-medicare benefits
-worker’s compensation
-personal physical illness or injury award
-premiums paid by taxpayer for accident insurance
-up to $120k of foreign earned income, must meet requirements of being resident in foreign country and be present in country 330 full days out of 12 months
-exclusion cannot exceed foreign earned income reduced by foreign housing exclusion ($19,200 max)

Question 48

Prizes and Awards

Answer 48

-awards are included in taxable income unless
1) award given by charitable organization or government unit
2) without any action by taxpayer

Question 49

accruable expense rule

Answer 49

-services have been received/performed but not paid for by end of reporting period

Question 50

taxable fringe benefits

Answer 50

-FMV of a fringe benefit not excluded from law is taxable
-ex. personal use of a company car by employee, even if used by another person
-amounts includes employment taxes, income, and FICA tax withholdings

Question 51

capital gains and losses

Answer 51

-maximum deductible for a capital loss is $3,000
-capital gains and losses reported to extent gains offset losses

Question 52

nonaccountable plan

Answer 52

any amounts received by an employee from the employer must be reported by employer as part of wages on employee W-2 for the year, thus gross amount is treated as income

Question 53

traditional IRA early withdrawal calculation

Answer 53

withdrawal * marginal tax rate = amount to be taxed + (withdrawal * 10% penalty)