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Regulation - 2014 > Individual Taxation > Flashcards

Individual Taxation Flashcards

1
Q

Under what accounting basis are individual tax returns prepared?

A

Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.

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2
Q

What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?

A

*MSA/HSA contributions
*Investment penalties for early withdrawal
*Self-employed medical insurance premiums
*Self-Employment Tax (approx. 50%)
*IRA Contributions
*Student loan interest (can’t be another taxpayer’s dependent)
*Moving expenses
*Alimony
*Tuition - can’t take AOC/Lifetime Learning Credit for same expense
*Teacher expenses
*Attorney fees in discrimination lawsuit

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3
Q

Which items can be carried over to future years on an individual tax return?

A

Investment interest expense in excess of investment income
Charitable contributions
Excess Section 179
Capital losses
AMT Paid
Passive Activity Losses

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4
Q

Characterize the following carryover: Passive Activity Loss

A

No carryback

Can carry forward indefinitely

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5
Q

How is excess 179 expense carried forward?

A

Carry forward to next year.

Use in any year is limited to taxable income.

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6
Q

How long can investment interest expense in excess of investment income be carried forward?

A

Indefinitely.

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7
Q

How long is the carry forward for charitable contributions?

A

Can be carried forward 5 years.

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8
Q

How long is AMT paid carried forward, and how is it applied?

A

It can be carried forward indefinitely.

It may be applied against future regular income tax, but not against future AMT tax liability.

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9
Q

How are capital losses applied in individual taxes?

A

$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely.

The loss retains its character (STCL or LTCL).

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10
Q

How does an individual capital loss carryover differ from a corporate capital loss carryover?

A

Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely.

Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.

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11
Q

What ratio is applied to principle payments in an installment sale to determine the gain in a given year?

A

Gross Profit / Contract Price

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12
Q

What is the contract price in an installment sale for income tax purposes?

A

Contract Price = Sales Price - Liability assumed by buyer

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13
Q

On an individual return, regular mortgage interest on what loan amount is deductible?

A

$1,000,000

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14
Q

Interest on home equity loans up to what amount are deductible on an individual tax return?

A

$100,000

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15
Q

What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?

A

$25 per person for gifts

Service awards up to $400

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16
Q

What income can business losses offset on a 1040?

A

They may only offset active business income.

Note: W2 wages are considered active business income.

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17
Q

What income can passive losses offset on a 1040?

A

Only passive income such as rental income or limited partnership income.

Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)

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18
Q

Are interest and dividends active or passive income?

A

Neither. They are portfolio income (investment income)

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19
Q

What is (are) the depreciation convention(s) for personal property?

A

Mid-year/Mid-quarter

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20
Q

When is the mid-quarter convention used?

A

For depreciation when 40% or more of all purchases occur in 4th quarter.

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21
Q

What depreciation convention is used for real property?

A

Mid-month

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22
Q

What depreciation life and convention are used for leasehold improvements?

A

15 year straight line (S/L)

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23
Q

What amount of business start-up costs can be deducted? How is it expensed?

A

Up to $5,000

Amortized over 180 months

Reduced dollar-for-dollar by amount over $50,000

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24
Q

How are medical expenses deducted on a 1040?

A

On Schedule A:

Amounts in excess of 10% of AGI may be deducted

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25
Q

Which personal insurance premiums are not deductible as medical expenses on Schedule A?

A

Accident or disability insurance premiums are not deductible.

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26
Q

Under what circumstances can medical expenses paid on behalf of another be deducted on someone’s Schedule A?

A

Must be a citizen of North America

Must live with you, or if they do not, must be mother/father or a relative closer than a cousin.

Benefactor must provide more than 50% support to the beneficiary.

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27
Q

Which foreign taxes are deductible?

A

Foreign INCOME and REAL ESTATE taxes are deductible.

Foreign personal property taxes are NOT deductible.

Foreign tax assessments are not deductible- they are added to the basis.

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28
Q

How is net investment income calculated, for the purpose of deducting excess investment interest expense?

A

Gross investment income - investment expense in excess of 2% of AGI = net investment income reported on schedule B

Investment interest expense (borrowings that are used to make personal investments, aka margin loans) in excess of net investment income is deductible. On schedule A as a itemized deduction

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29
Q

What investment interest is never deductible?

A

Investment interest expense on tax-free securities is not deductible.

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30
Q

When are mortgage points deductible and how are they deducted?

A

They are deductible if they represent prepaid interest on purchase of a new home or improving a home.

Refinance points are amortized over the life of the mortgage.

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31
Q

How are charitable contributions of LTCG property and property related to a charity’s function deducted?

A

Deducted at fair market value (FMV), up to 30% of AGI

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32
Q

How are charitable donations for STCG property and property not related to the charity’s function deducted on Schedule A?

A

Deduction is taken for adjusted basis in the property, up to 50% of AGI.

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33
Q

Does a casualty loss affect the basis of property?

A

No. It decreases the fair market value (FMV) of the property.

34
Q

How is the deductible portion of a casualty loss calculated?

A

Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS)

GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss

35
Q

What are the miscellaneous deductions on Schedule A, and how are they deducted?

A

Deductible in excess of 2% of AGI

Continuing Education - if required to keep your job
Business travel
50% Meals and entertainment
Union Dues
Tax prep fees
Legal fees to collect alimony
Appraisal fees to value casualty loss of charitable contributions

36
Q

Which itemized deductions are not subject to phaseout based on income or other factors?

A

Medical
Casualty
Gambling
Investment Interest Expense

37
Q

Define qualifying child for most individual tax factors.

A

Must be resident of North America

Under age 19, or under age 24 if a student

38
Q

Define qualifying relative for most individual tax factors?

A

Must be citizen of North America

Must live with you, unless mother/father or relative closer than a cousin

You must provide more than 50% support to the individual

39
Q

How is minor income taxed at a parent’s rate calculated (AKA kiddie tax)?

A

Child’s unearned income
- early withdrawal penalties
- $1,000
- Greater than $1,000 or child’s itemized deduction related to unearned income
= Amount taxed at parents’ rate

40
Q

Can spouses married filing jointly use different accounting methods?

A

Yes, if they each own a small business. All non-business income is cash basis.

41
Q

At what rate is self-employment tax assessed?

A

15.3% of net earnings from self-employment

(Note: executor of an estate is NOT self-employment income)

42
Q

What is a refundable tax credit? Which individual tax credits are most commonly refunded?

A

A tax credit which takes the taxpayer’s tax owed on the return below zero, resulting in a refund to the taxpayer.

Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit.

Note: the REGULAR child tax credit is NOT refundable.

43
Q

How many education credits may be taken on a tax return?

A

American Opportunity Credit - per student

Lifetime Learning Credit - per taxpayer

Note: The American Opportunity Credit is refundable.

44
Q

What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?

A

The lesser of:

90% of current year’s total tax

100% of prior year’s total tax

110% of prior year’s total tax (if AGI is $150,000 or more)

45
Q

Which farming costs related to land are deductible? Which aren’t?

A

Deductible: Costs incurred to PRESERVE soil/water

Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)

46
Q

Which depreciation table is used for personal tangible property related to farming?

A

MACRS 150

47
Q

How long does the taxpayer have to petition the court for appeal after an audit?

A

90 days

48
Q

If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?

A

10 days

49
Q

What is the statute of limitations for a tax audit?

A

3 years, generally

6 years if 25% or more of gross income was omitted

The clock starts on the LATER of the due date or the filing date of the return.

There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.

50
Q

How is non-business bad debt deducted on a 1040?

A

It is treated as a STCL

51
Q

How long does an individual taxpayer have to file a claim for refund?

A

Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.

52
Q

When are life insurance premiums of an employee includable in income?

A

Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.

53
Q

When are scholarships not taxable?

A

When they are not in return for services rendered,

AND

The money is used only for tuition and books

Note: Scholarships for room and board are includable in income.

54
Q

What interest income is tax free?

A

State & municipal bond interest

US EE Savings Bond interest (note: HH bond interest is taxable)

55
Q

Which dividend income is tax free?

A

S-corporation (actually distributions)

Life insurance

56
Q

How much social security income can be taxed for individuals in higher income brackets?

A

Up to 85%

57
Q

Is unemployment compensation taxable?

A

Yes.

58
Q

Which damages awarded in lawsuits are taxable? Which are not?

A

Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability)

Any payments for punitive damages ARE taxable.

59
Q

Are workman’s compensation insurance benefits taxable?

A

No - similar to an award for damage to make a person whole.

60
Q

Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony

A

Alimony IS taxable.

Child support and divorce property settlements are NOT taxable.

61
Q

Adoption expenses - Are they deductible?

A

NO, they are not deductible. However tax benefits are available through the adoption CREDIT. The Credit is $12,970 available for a child under age 18, non- refundable and can be carried forward 5 years.

62
Q

Describe alimony recapture.

A

2nd Year: (3rd year - 2nd year - $15,000)

1st Year:
1st Year Alimony Paid
- Avg alimony paid in 2nd & 3rd years
- $15,000
- Recapture from 2nd year
=1st Year Alimony Recapture

Total Recapture = 1st Year Recapture + 2nd Year
Recapture

63
Q

How are Net Operating Losses (NOLs) utilized?

A

Can be carried back 2 years

If any left, can be carried forward 20 years.

64
Q

Which IRA contributions are deductible?

A

Traditional IRA = deductible

Roth IRA = not deductible

65
Q

When can a couple file married filing jointly?

A

They must be married at the end of the year.

If one spouse dies, they must be married at the end of the year.

66
Q

What are the requirements for filing as Head of Household?

A

Must provide more than half costs the costs of a qualifying child or dependent relative living in the same household as taxpayer for more than 1/2 of the year

For parents - only need to provide over 1/2 of the support and income should be under $3,900 (personal exemption amount)

Must have a dependent child

Must provide more than 50% of the child’s support

Must live with them more than 50% of the year

67
Q

What are the requirements for filing as qualifying widower?

A

Must have a dependent child.

Essentially gets MFJ status for the year of death + 2 tax years

68
Q

How is underpayment penalty assessed?

A

Penalty is imposed for late payment if the following:

a) Must have a balance due of $1,000
b) Payments = 90% or more of current year’s liability
c) Paid taxes based on 100% of prior years liability (110% for taxpayers with AGI greater than $150K)

69
Q

What are the primary preference items for AMT - Individual taxes?

A

P-I-E

1) Private activity bond interest (fully taxable- private activity bonds used to finance non-govermental activities.
2) Incentive Stock Options - taxed when exercised (difference between FMV & exercise price)
3) Excess Depr. on personal property

70
Q

What are the adjustments for AMTI - Individual taxes?

A

S-I-M-P-L-E

1) Standard Deduction
2) Interest on Home Equity loans
3) Medical Expenses
4) Personal and dependency exemptions
5) Local and state deductions
6) Employee business expenses, tax preparation and investment expenses subject to 2% misc

71
Q

What is the maximum contributions for IRA plans for a individual and a self-employed individual?

A

A self-employed individual may deduct contributions to a defined-contribution self- employed retirement plan up to the lesser of $51,000, or 100% of earned income (for 2013)
An employee may exclude contributions (up to certain amount) contributed to a 401(k) plan
A taxpayer may deduct up to $5,500 for 2013 (plus additional $1,000 if 50 or over) contributed to a traditional IRA, not to exceed earned income
A married couple may deduct contributions to an IRA for each spouse, even though only one spouse has earned income

72
Q

What is the recovery period for depreciable personal property/Section 1245 property?

A

*Equipment, office furniture and fixtures—seven years
*Cars, light trucks, computers, and office equipment—five years
*Small tools—three years
MACRS - DDB -200%
For 15, 20 year property use DDB 150%

73
Q

What is the annual election to treat the cost of qualifying property as an expense instead of capital expenditure?

A

Applies to new or used tangible personal property purchased for use in a business
Deductible up to lower of net business earnings or $500,000 for 2013
Reduced dollar-for-dollar by cost of property acquired in excess of $2 million for 2013 (ie a 2.1 million dollar asset would have a max election of 400k)
Amount deducted reduces depreciable basis of assets

74
Q

What are the supplementary schedules that go along side a form 1040?

A 
Sched A—Itemized Deductions
Sched B—Interest and Dividend Income
Sched C—Profit or Loss From Business
Sched D—Capital Gains and Losses
Sched E—Supplemental Income and Loss
Form 4797—Sale of Business Property
Sched 1116—Foreign Tax Credit
75
Q

What are the special tax rates on dividend income?

A

Special favorable tax rates available for qualified dividends through 2012

Tax rate 15% for most taxpayers, 20% if ordinary rate would otherwise be 39.6%
Tax rate 0% if ordinary rate would otherwise be 10% or 15%
Stock on which the dividend is paid must be held for > 60 days during the 121-day period beginning 60 days before the ex-dividend date

Available for distributions from mutual funds only to extent mutual fund received dividends from taxable corporations.
Available for dividends from foreign corporations traded on US stock exchanges

76
Q

What interest is excluded from taxable income?

A

Interest on state or municipal bonds
Interest on series EE bonds if the redemption proceeds are used to finance the higher education of the taxpayer, spouse, or dependents (taxpayer must have been at least 24yrs old when purchased)

77
Q

How much of foreign income is excluded from federal and state taxes?

A

An individual meeting a bonafide residence test or physical presence test may exclude $97,600 of income.

To qualify must be a US citizen who is a resident in a foreign country for an uninterrupted tax year or 330 days or 12 month

78
Q

How does the section 179 election work?

A

Annual election to treat the cost of qualifying property as expense instead of capital expenditure

Applies to new or used tangible personal property purchased for use in a business
Deductible up to lower of net business earnings or $500,000 for 2013
Reduced dollar-for-dollar by cost of property acquired in excess of $2 million for 2013
Amount deducted reduces depreciable basis of assets
Example—Company purchases $900,000 of used business equipment during September 2013 (assume no other property purchases during year). Taxpayer wants to claim maximum deduction for 2013

Section 179 Election—$500,000 deduction (maximum allowed for 2013)

Regular MACRS Depreciation—$57,143 ($400,000 basis after Section 179 deduction x 2/7 DDB x 1⁄2 year)

Total Deduction for 2013 is $557,143 ($500,000 + $57,143)

79
Q

What is the difference between marginal tax rates and effective tax rates?

A

Marginal tax rate is the rate at which you next last and next dollar are taxable, effective tax rates is the average rate of taxation for all your dollars ( total tax/ total taxable income). ie penalties are taxed at MARGINAL RATES.

80
Q

How much can an individual contribute to a IRA and which amounts are deductible?

A

A taxpayer may deduct up to $5,500 for 2013 (plus additional $1,000 if 50 or over) contributed to a traditional IRA, not to exceed earned income
A married couple may deduct contributions to an IRA for each spouse, even though only one spouse has earned income

In order to deduct traditional IRA contributions, taxpayer must either

Not participate in a qualified pension or profit-sharing plan at work, and
Have adjusted gross income below $69k single and $115k MFJ if it exceeds this amount contributions are allowed but not deductible on tax return

For a ROTH IRA contribution limitations only apply if income is below $110k single and $178k MFJ or AGI is below $127k single or $188 MJF

Regulation - 2014 (19 decks)

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