Tax Flashcards
What is the required time period for a widow and head of household?
W: Whole year
H: Half year (more than)
When can a spouse claim personal exemption on separate return?
Taxpayer’s spouse - no gross income, not claimed as dependent by another taxpayer
What are the requirements for qualifying child?
CARES
Close relative
Age limit (19/24 college)
Residency and filing requirements - same principal place of living as taxpayer for more than 1/2 yr
Eliminate gross income test
Support test - child did not contribute over 1/2 of support
What are the requirements for a qualifying relative?
SUPORT
Support test - taxpayer supplies over 1/2 of support
Under exemption amount of taxable gross income
Precludes dependent filing joint return
Only U.S. citizens or residents of U.S., Mexico, Canada
Relative
Taxpayer lives with individual (if nonrelative) for whole year
What are flexible spending arrangements?
Pretax deposits into employee’s account
Lose funds not used within 2 1/2 months after year-end
What interest on government bonds is tax-exempt?
Interest on state and local bonds/obligations
When are state and local tax refunds taxable?
When itemized
What are alimony requirements under tax law?
Payments:
legally required pursuant to written divorce agreement
in cash/cash equiv
cannot extend beyond death of payee-spouse
not made to members of same household
not designated as other than alimony
spouses may not file joint return
What items are included in gross income?
Cash (amt received)
Property (FMV)
Cancellation of debt
What option do taxpayers have with net business taxable losses?
2-yr carryback
20-yr carryforward
What inventory expenses are capitalized?
Direct materials
Direct labor
Factory overhead
What inventory expenses are period expenses?
Selling
General
Admin
R & D
What are the exceptions to penalty taxes?
HIM DEAD if premature distribution used to pay: Home buyer (1st time) Insurance (medical) Medical expenses > 10% AGI Disability Education: tuition, books, fees and Death
How do taxpayers treat unemployment compensation and workers compensation?
included in gross income;
tax-free
When is income from prizes and awards excluded from taxable income?
winner selected without entering into contest
award assigned directly to government or chfor arity
How do we treat gambling winnings and losses?
Winning included in gross income
Losses only deducted to extent of winnings
What things are taxable for a student scholarship?
Room and board
Services required
When is net loss from rental property disallowed?
Rental property oersonally used > 14 days
How are offsite storage costs treated under uniform capitalization rules?
Capitalized
What type of interest is excludable from gross income?
Municipal Bond Interest
What is an accruable expense?
services have been received/performed but have not been paid for by the end of the reporting period
What is the maximum capital loss deduction on investment sale?
$3000
How do we treat Kiddie Tax?
Total Income - standard deduction = diff. not taxed
Diff. above - standard deduction = diff. taxed at child’s rate
Remainder taxed at parent’s rate
What is the basic formula for net rental income or loss?
Gross rental income Prepaid rental income Rent cancellation payments Improvements in lieu of rent (Rental expenses) Net rental income (loss)
Are these taxable or non-taxable?
Child Support
Alimony
Property Settlements
Non-tax
Taxable
Non-Tax
When are gains and losses on securities recognized?
Trade Date
What amount of passive losses are deductible?
Amount of passive gains to offset
What is the exception for passive activity losses
Losses fully deductible in year of disposal
What are not allowed as deductions on Schedule C of the 1040?
Personal Expenses
uniform capitalization rules do not apply to inventory acquired for resale if the taxpayer’s average gross receipts for the preceding three tax years do not exceed
$10,000,000
What is the tax rule for suspended passive losses?
allows loss carryforwards, but not loss carrybacks until utilized
What is the mom and pop exception?
up to $25,000 of passive losses and the deduction equivalent of tax credits that are attributable to rental real estate may be used as an offset against income from nonpassive sources.
$25,000 allowance is reduced, but not below zero, by 50% of the amount by which the individual’s modified AGI exceeds $100,000.
$25,000 is therefore completely phased out when modified AGI reaches $150,000.
What do we do with qualified stock option income?
Do not recognize in year of grant
When are nonqualified options taxed?
When granted if option has ascertainable value
Taxed when exercised otherwise
What does the rule limiting the allowability of passive activity losses and credits apply to?
personal service corporations
When should a cash basis taxpayer report gross income?
for the year in which income is either actually or constructively received, whether in cash or in property
How do we calculate deductible medical expenses?
Qualified medical expenses - insurance Qualified medical expense "paid" - 10% of AGI Deductible medical expenses
Which expenses are deductible as itemized deductions subject to the 2% floor?
Employee business expenses
What is amount deductible for donated short-term capital gain property?
Deductible to the donor to the extent of his/her adjusted basis
What is the deduction limit for FMV of donated property?
30% of taxpayer’s AGI
What must an employee report as wages under a nonaccountable plan?
any amounts received by an employee from the employer
What was the maximum amount of charitable contributions taxpayers can claim as an itemized deduction for the current year?
50% of contribution base (AGI)
What do we do with state and local income taxes withheld from a cash-basis taxpayer?
Deductible in the year withheld
What amount of self-employment tax is deductible to get to AGI?
1/2
The deduction for interest expense on investment indebtedness is limited to what?
net investment income
investment income less investment expenses
What do we do with interest paid on a debt secured by a home mortgage?
Classified as deductible qualified residence interest. Able to deduct the interest paid as an itemized deduction.
Limit is $100,000 of mortgage interest since the loan was not to buy, build, or improve the home.
How much of mortgage interest can be deducted?
Mortgages of up to $1,000,000 to buy, build, or substantially improve a home allow for the full deduction of interest
Tax return preparation fee is a miscellaneous itemized deduction subject to
2% adjusted gross income (AGI) floor
Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward how long?
five years
What is the tax benefit rule?
if one receives a tax benefit from an item in a prior year because of a deduction and then recovers the money in a subsequent year, the money must be counted as income in the subsequent year.
How do we treat moving expenses?
Deductible before AGI
To qualify for additional standard deduction, what needs to happen?
65 years old
Blind
What part of medical expenditures are deductible for capital expenditures?
deductible to the extent that the expenditure exceeds the increase in value of the asset
When are premiums on insurance policies deductible?
When payments of policy used for medical expenses
What education loan interest is an itemized deduction or an adjustment?
Adjustment of lower of: amount paid or $2500
For IRAs, when are adjustments allowed?
Adjustment allowed for a year ONLY if the contribution is made by the due date of the tax return for individuals (April 15)
The due date for filing the tax return under a filing extension is NOT allowed
What is Schedule A and what does it contain?
Personal Itemized Deductions schedule Medical Taxes Interest Charity Casualty Misc.
What is all included in adjustments for AGI?
Educator expenses IRA contributions Student loan interest expense Tuition and Fee deduction Health savings accounts Moving expenses 50% self-employment FICA Self-employment health insurance Self-employed retirement Interest withdrawal penalty Alimony paid Attorney fees Domestic production activities deduction
What is the itemized deduction for medical expenses?
10% of AGI
What amount of refund is included in this year’s taxable income?
Recovery limited to amount actually deducted
What are the rules for educational loan interest?
Adjustment (above AGI)
limited to $2500 per tax year
What is the requirement for a casualty loss deduction?
Sudden or unexpected
When is prepaid interest deductible?
year and extent interest is allocable (when accrues)
How are long and short term property contributions treated differently for deductions?
LT: deduct at FMV at date of gift
ST: deduct at lower of cost or FMV
What is the deduction for investment interest expense limited to?
Net taxable investment income (taxable investment income - related investment expenses)
What is the taxpayer’s deduction for investment interest expense?
lesser of net investment income or investment interest expense
What do we do with capital losses in excess of capital gains?
up to $3000 deducted before AGI
What credit results in a refund even if the individual had no income tax liability?
Earned Income Credit
The credit for prior year alternative minimum tax liability may be carried
Forward indefinitely
What are the AMT adjustments?
PANIC (increase or decrease) TIMME (only increase)
Passive activity losses
Accelerated depreciation
Net operating loss of individual taxpayer
Installment income of dealer
Contracts - percentage completion vs. completed contract
Tax “deductions”
Interest deductions on home “equity loans”
Medical deductions (limited to excess of 10 percent AGI)
Misc deductions not allowed (2% AGI)
Exemptions (personal) and standard deduction
What are the tax preference items for AMT?
Always add-backs (increase) PPP Private activity bond interest income Percentage depletion excess over adjusted basis of property Pre-1987 accelerated depreciation
What are the AMT credits?
FACCE Foreign tax credit Adoption credit Child tax credit Contributions to retirement plans credit Earned income credit
What does the wealthy taxpayer have to do to avoid the penalty for the underpayment of estimated tax?
Pay lesser of:
90% current year tax (annualized method)
110% of prior year tax (prior year method)
What form does an individual submit a claim for refund of erroneously paid income taxes?
Form 1040X
What is the latest date that the Internal Revenue Service can assess tax and assert a notice of deficiency (general rule)?
3 years from later of:
Due date of return
Date return is filed