REG 1 - Individual Taxation

Question 1

Tax Filer - Filing Requirements (5)

Answer 1

An individual must file a tax return if:

1. Income is greater than the sum of their personal exemption plus their standard deduction
2. Have net self-employment earnings >$400
3. Are individuals claimed as dependents on another taxpayer’s return, but have unearned income & gross income >$1000
4. Anyone receiving advance payments on the Earned Income credit (EIC)
5. Are subject to the Kiddie Tax

Due date is 4/15 - 6mo extention to File, not to pay!

Question 2

Kiddie Tax (3)

Answer 2

Kiddie Tax - Established to prevent the “wealthy” from avoiding taxes on their investment by transferring the investments into the names of their children who might not be subject to tax or who may have a lower tax rate. Basically, the kid’s uneraned income will be taxed at the parent’s tax rate.

Kiddie Tax applies to children meeting three coditions:

1. Either parent is alive at the end of the tax year
2. Child does NOT file a joint tax return for the year
3. Child is of the appropriate age, either:
   
   • Under 18
   • Is a student between 18-24 with earned income that does NOT exceed 50% of the child’s support

An individual subject to the Kiddie tax will be subject to a tax liability for the larger of 2 amounts:

• Tax liability based on the child’s earned & unearned income
• Tax liability based on the child’s earned income PLUS the allocable parental tax (if kiddie income were included in the parent’s return).

Example: if child has $3K interest income, the parent’s additional income will be $1K. For the child taxable income is up to $2K.

Question 3

Tax Due Dates

Individual

Amended

Statue of Limitations for IRS

Answer 3

Individual Tax (1040) - is on or before the 15th day of the 4th month following the close of the year.

• If date falls on a weekend, the return is due on the next business day.
• Extensions - IRS grants an automatic 6 month extension

Amended Returns (1040X) due by later of:

• 3 Years after the original tax return was filed
  
  • If filed late, 3 yrs from date return was due
• 2 Years after actual tax was paid

Statue of Limitations for IRS:

• 3 years - Error/Simple Negligence
• 6 years - Gross Negligence or Total Income is Understated by 25% or more
• Unlimited - Fraud or Non-filing

Question 4

Who may use Cash Basis?

(Individuals & Businesses)

Answer 4

Entities allowed to use the cash basis:

• Most individuals use the Cash basis of accounting
  
  • But accrual method is used if purchases & sales of inventory is present.
• Service Types of Businesses whos gross receipts do NOT exceed $10M may use the cash basis which includes:
  
  • Most individuals
  • S-Corps
  • Partnerships

Question 5

Who may NOT use Cash Basis? (3)

Answer 5

Entities prohibited from using the cash basis:

• C-Corps with gross receipts greater than $5M
• P/S that have a C-Corp as a partner w/ receipts >$5M
• Tax Shelters

Question 6

Cash Basis

Recognition of Income

&

Reporting of Deductions

Answer 6

Recognize Income:

• Cash or Property received, at FMV
  
  • Even if “unearned” (pre-paid rent), still considered as income when received.
  • NOTE: Change in A/R amount does NOT affect taxable income.
• Actually or “Constructively Received”
  
  • Date when the taxpayer has income made available for use.
  • Example: Pre-paid rent, post dated checks
• Accrual for purchase/sale of inventory

Report Deductions:

• When the cash or check is disbursed
• Expense charged on credit card (date chrg on the card)
  
  • Prepaid interest is not deductible

Question 7

Accrual Basis

Recognition of Income

&

Reporting of Deductions

Answer 7

• Recognize income when “earned”
  
  • An accrual basis tax payer that receives rents or royalties in advance is required to include them as taxable income in the period received.
  • NOTE: If Inventories are necessary to clearly determine income, then the Accrual method must be used.
• Book expenses as “Incurred”
  
  • if Liability exists & amount is Determinable

Question 8

Individual Income Tax Return (1040)

Answer 8

+Gross Income

+/- Adjustments (Schedules B,C,D,E,F [I-EMBRACED])

= AGI

• Deductions (Std Deduction OR Schedule A)
• Net Exemptions (JARRS & C-IRS-Jack)

= Taxable Income

x Tax Rate

=Tax Liability

• Credits

+ Self-Employment Tax

+ AMT

• Witholdings
• Prepayments

= Tax Due

Question 9

Gross Income

Answer 9

• Earned Income (W2)
• Scholarships
• Interest Income - Schedule B
• Dividend Income - Schedule B
• Stock Options (non-qualified, ISOs)
• Injury Awards
• Prizes & Awards
• S-Corps
  
  • Earned income of the corp w/o consideration of distribution.

Question 10

Gross Income

Earned Income

Answer 10

Compensation for services including:

• Wages & Salaries (W2)
• Tips
• Jury Duty Fee
• Bonuses & Commissions
• Unemployment compensation
• Payment in non-monetary form @ FMV
  
  • Example: Stocks or property
• Bargain purchases of employer merchandise
  
  • Is limited to 20% of the amount normally charged to nonemployee customers. As a result, Norbert would be able to exclude an employee discount up to 20% x $2,000 or $400 with the remaining $600 included in gross income.
• Fringe benefits
  
  • The first $50K of group term-life insurance provided by an employer is a non-taxable as a fringe benefit, anything over $50K is taxable.
• Life Insurance payments IF purchased
• Prizes & Awards
  
  • Years of Service award, $400 & over is taxable.
• Gambling winnings
• Illegal drug income (net of COGS)

Question 11

Gross Income

Scholarships

Answer 11

To be included in Gross Income if:

• Scholarship is earned or for compensation
• Fellowships
• Scholarships spent on Living Expenses are Taxable

Not Included in Gross Income if: BOTH

• NOT compensation for required services
• Money spent for tuition, books, or class supplies for students

Question 12

Gross Income

Interest

Answer 12

To be included in Gross Income if: (Schedule B)

• Most govt interest is taxable (Federal bonds, T-bills)
• Interest accrued each year on zero-coupon bonds or bonds purchased at a discount
• Interest on US T-Bills
• Interest on Series HH US Savings Bonds (paid semi-ann)
• Interest on Series EE savings bonds when Redemmed

Not Included in Gross Income if:

• Interest on State or Municipal bond (NOT Taxed)
• Interest earned on a qualified higher education bond
• Interest on a Series EE US Savings Bonds NOT reported to gross income UNTIL redemeed.

Question 13

Gross Income

Dividends

Answer 13

To be included in Gross Income if: (Schedule B)

• Ordinary Distributions
• Short-term capital gains
• Capital gains distributions/Long-term capital gains
• Stock dividend on Preferred stock

NOT included in Gross Income if:

• Stock dividends or stock splits
• Dividends received from an S Corporation
• Dividends received on a Life Insurance policy
• Dividends received from a mutual fund that invests in tax-exempt bonds
• Liquidating dividends

NOTE:Taxed at special 0%, 15%, 20%, similar to LT-Capital Gains Rate: (Meets 60+ days holding period)

• 0% tax rate = 10% or 15% tax bracket
• 15% tax rate = 25%, 25%, 33%, 35% tax bracket
• 20% tax rate = 39.6% tax bracket

Question 14

Gross Income

Stock Options (2)

Answer 14

1.) Non-qualified - Taxed when stock is exercised (even if not sold), treated as compensation for excess of FMV over exercise price.

2.) Qualified or Incentive Stock Option (ISO) - Taxed when stock is sold, treated as capital gain or loss on difference between sales price & exercise price.

• For AMT purposes, ISOs are taxed when excercised.
• ISO must be held 2yrs from grant date & 1 yr from excercise date

Question 15

Gross Income

Injury Awards

Answer 15

Included in Gross Income if:

• Non-physical - Taxable
  
  • Age or Race discrimination
  • Punitive Damages (to punish employer)
  • Lost of business process

NOT included in Gross Income if:

• Bodily Injury - Tax Free (BLOOD)
  
  • Pain & suffering for physical injury
  • Worker’s compensation
  • Reimbursement of medical expenses paid & not itemized on schedule A

Question 16

Gross Income

Prizes & Awards

Answer 16

Included in Gross Income if:

• All prizes & awards are Taxable at FMV
• Gambling Winnings
• Years of Service Awards greater than $400

NOT included in Gross Income if:

• If received for Years of Service or Safety Achievement
  
  • $400 may be deductible from gross income & the rest will be included.
    
    • Amount greater than $400 IS taxable

Question 17

Gross Income

Social Security (2)

(Provisional Income)

Answer 17

Included in Gross Income if:

• 85% of SS benefits are taxable if the taxpayers earns $60K+ of provisional income

NOT included in Gross Income if:

• SS benefits are NOT taxable if taxpayer earns less than $25K of provisional income

Provisional Income - AGI before SS + Tax-exempt income + one-half of SS benefits.

Question 18

Gross Income

Pension (IRAs)

Answer 18

Included in Gross Income if:

• Proceeds withdrawn from Pension Plan or Traditional IRA
  
  • Subject to: 10% Penalty + Marginal Tax Rate
• Traditional IRA distributions
• Pension Plan benefits in which employer paid all costs

NOT included in Gross Income if:

• Roth IRA withdrawals or distributions
• Return of Capital is NOT taxable
• Lump-sum Distributions - certain distributions may be rolled-over tax-free to a Traditional IRA account if done within 60 days.

Question 19

Gross Income

Annuities

Answer 19

Included in Gross Income if:

• Interest component of an annuity

NOT included in Gross Income if:

• % of Annuity Excluded from Taxes = Cost of Annuity / Expected Total Annuity Payments
• Lump-sum Distributions - certain distributions may be rolled-over tax-free to a Traditional IRA account if done within 60 days.

Question 20

Gross Income

Tax Refunds - Federal & State

(Heavily Tested)

Answer 20

Tax Refunds consists of Federal & State refunds:

Federal

• Refund - NOT Taxable (return of money)
• Interest - YES, Taxable (frm T-bills, T-bonds)

State

• Interest - Yes Taxable
• Refund - Yes OR No
  
  • Yes - If itemized in the P/Y, got deduction in Schedule A, so taxable in current year (1099G).
  • No - If did NOT itemize in P/Y, chose standard deduction, refund is not taxable in current year.

Question 21

Gross Income

Inheritances, Gifts, & Life Insurance Proceeds

Answer 21

Inheritances, Gifts & Life Insurance Proceeds - NOT taxable to recipient.

• Estate pays for the tax.
• However, any income received from property is taxable.

Question 22

Gross Income

Capital Assets

(Gain vs. Loss)

Answer 22

Capital Assets - Are reported on Schedule D, which includes assets held for investments, personal use, or goodwill (non-business assets). Two types of gains if Capital Assets are sold Short-term Capital Gains & Long-term Capital Gains.

• STCG - taxed at ordinary rate IF held <1Yr
• LTCG - taxed at special rate IF held >1 yr.
  
  • Now taxed at special 0, 15, 20% capital gains rate:
    
    • 0% tax rate = 10% or 15% tax bracket
    • 15% tax rate = 25%, 25%, 33%, 35% tax bracket
    • 20% tax rate = 39.6% tax bracket
• Net Capital Loss up to $3,000 against Ordinary Income
  
  • Unused carried forward indefinitely
  • Corporation gets 0 net captial loss. Can carry back 3 years & forward 5 years.

Question 23

Tax Schedules

(A,B,C,D,E,F)

Answer 23

A - Itemized Deductions (Personal & Employee expenses)

B - Interest & Dividend income

C - Profit/Loss from a Business (Employer Expenses & 1099)

D - Capital Gains/Loses (S/T & L/T Investments)

E - Supplementary Income/Loss (RRF-COP)

• Rental Income
• Royaltiies
  
  • Copyrights
  • Oil/Gas leases
  • Patents
• Flow Through Entities (info from K-1)
  
  • S corps
    
    • S-Corp earnings = Partner’s earnings without regard to distribution.
  • Partnerships
  • Estates & Trusts

F - Profit/Loss from Farming

Question 24

I-EMBRACED EHF

“For AGI” Adjustments

Answer 24

Interest on Student Loans - $2,500.00

Employment Tax 50%, Med. Premiums - 100%

Moving Expenses

Business Expense > Schedule C

Rent/Royalty/Flow-Through Entities > Schedule E

Alimony (CANNOT)

Contributions to Retirement (KEOGH/IRA)

Early Withdrawal Penalty

Jury Duty Pay

Education - $4,000.00

Health Savings Accounts (HSA)

Farm Income > Schedule F

Question 25

I-EMBRACED EHF

Student Loan Interest

Answer 25

Student Loan Interest - for higher education

• $2,500.00 phase out applies
• Applies to entire repayment period

Question 26

I-EMBRACED EHF

Self-Employement Tax

Answer 26

• Self-Employment tax on return may be deducted
  
  • 50% of tax return (7.65%)
    
    • FICA 6.2%
    • Medicare 1.45%
• 100% of Medical Insurance Premiums paid by self-employed taxpayer for self & family are Deductible.

NOTE:

• Income from an S-Corp is NOT subjected to Self-employment tax.
• Employment Tax - Employer & Employees share (15.3%)

Question 27

I-EMBRACED EHF

Moving Expenses

Answer 27

Moving Expenses

• Must be 50 miles further from old home
• Direct costs of moving
  
  • Ex: hotels, flights, truck expenses
• Must work at new job for 39 weeks (9 Months)
• NOT Meals, house hunting cost, temp living expense

Question 28

I-EMBRACED EHF

Business Expenses

Answer 28

Business Expenses (Schedule C - 1099)

• All cost of running a business
• All taxes paid by the business
• Bad Debts > Direct write-off method
  
  • ​Example: Loaned to a person who declared bancruptcy; that amount may be deducted in the current year.
• Gift - $25 per receipient
• Promotional Item - $4 per item
• 50% Meals & Entertainment
• 100% Travel
• Hobby Loss - If no profit in 3 of 5 years, loss is NOT deductible.
  
  • Net Income (other income) Line 21
  • Expenses on Schedule A (misc 2%)

Question 29

I-EMBRACED EHF

Rental, Royalty, & Flow through Entities

(Schedule?)

Answer 29

Rental, Royalty, & Flow thru Entities - Schedule E “Passive Activity”

• Taxpayer doesn’t materially participate
• ALL limited partnership interests
• ALL rental activity
  
  • Unless a real estate professional or 10% activity
• Losses only to extent of passive gains
  
  • Unused carried forward until activity disposal

Materiallly Participates in Rental Activities?

• When the taxpayer materially participates, real estate losses may be used to offset ordinary income.
  
  • Real Estate Person - losses from real estate rental activities may be treated as ordinary business losses.
  • Active Participation (10% Interest in Activity) - Active rental losses partially deductible.
    
    • $25K - 50% (AGI over $100K)
      
      • ​Example: $25K - .5(AGI - 100K)
    • No deduction if AGI is over $150K

Dwelling Units Rules: HOME & RENTAL

• If rended for LESS than 15 days & used as a home:
  
  • Rental Income is EXCLUDED from gross income
  • Rental Expenses are NOT to be deductible
• If rended for more than 14 days:
  
  • And personal use is MORE than 14 days
    
    • ​Rental income is included in gross income
    • Expenses to be deducted are limited to gross rental income
  • And personal use is NO more than 14 days
    
    • Rental income is included in gross income &
    • All expenses allocated to rental portion are may be deducted.

Question 30

I-EMBRACED EHF

Alimony

(CANNOT)

Answer 30

Alimony is taxable to the recipient & deductible by the payer. However, payments for child support & property settlements are NOT deductible by the taxpayer.

Alimony has six requirements: (CANNOT)

1. Cash Only or its equivalent (NOT Property)
2. Apart when payments made
3. Not child support (not taxable/deductible)
4. Not a property settlement (not taxable/deductible)
5. Own return for payer & payee
   
   • No joint return filed
6. Terminates on death of receipient

• If pay for college as part of divorce agreement, considered Alimony.

Question 31

I-EMBRACED EHF

Contributions to Retirement Plan (5)

Answer 31

Contributions to Retirement Plan may be deducted at arriving to AGI.

• IRA contributions are limited for to $5,500 for individuals
  
  • $11K,000 for MFJ per year.
  • $6,500 if over 50yrs old
• Deductible if NO other plan
  
  • Even with another plann, always fully deductible if AGI is less than $71,000
  • NOT deductible if, with another plan & AGI >$193K
• ROTH IRA are NOT deductible, interest is tax free
• Educational IRA - $2000 per child is deductible

Question 32

I-EMBRACED EHF

Early Withdrawal Penalty

Answer 32

Early Withdrawal Penalty - premature intrest withdrawal penalty from a CD account is deductible.

Exempt from Penalty if:

• Payment of medical expenses
• Payments to higher education costs
• Death or disability of participant
• First time purchase of a home, up to $10,000 may be withdrawn

Joan, age 40, withdrew $15,000 from her traditional individual retirement account last year, using the proceeds to pay off an outstanding hospital bill ($12,000) and the balance of her auto loan ($3,000). Her adjusted gross income was $100,000 and her other deductible medical expenses totaled $2,500. Compute the early withdrawal penalty, if any, that Joan will have to pay.

Incorrect! The early withdrawal penalty is 10% of the amount of the withdrawal, but it does not apply to amounts paid for medical expenses in excess of 10% of AGI. Joan’s medical expenses totaled $14,500 and 10% of her AGI is $10,000, so the penalty does not apply to $4,500 of her withdrawal. Therefore the penalty is assessed at 10% of the other $10,500, or $1,050.

Question 33

I-EMBRACED EHF

Jury Duty Fee

Answer 33

Jury Duty Fee - is Deductible if remitted to employer

• Fee received is always included/added to gross income
• If remit fee to employer, deduct in arrving at AGI

Question 34

I-EMBRACED EHF

Qualified Higher Education Expenses

Answer 34

Qualified Higher Education Expenses

• Tuition for higher education of up to $4000 may be deducted.
  
  • Courses that are expressly required by an employer, by law or by govt to maintain or improve skills in performing a present job. Example: CPEs

Question 35

I-EMBRACED EHF

Contributions to Health Savings Account (HSA)

Answer 35

Contributions to Health Savings Account (HSA)

• May be deducted by a self-employed tax payer OR employee.
• Form 8889 must be filed.

Question 36

Net Operating Losses (NOL)

Answer 36

• Carryback 2 years & carryforward 20 years.
• Usually in Schedule C
• Generally a business loss, but could also result from a personal casualty loss.
• Results from:
  
  • trade or business
  • working as an employee
  • casualty or theft loss
• Corporation, same rules

Question 37

Individual Retirment Account (IRA)

Traditional vs. Roth

Answer 37

IRAs come in two basic varieties:

Traditional - contributions up to $5,500 (+1,000 if over 50) to a Traditional IRA are deductible in arriving at AGI unless both of the following conditions apply:

• Individual is actively participating in another pension or profit-sharing plan &
• AGI is greater than $193,000

Roth IRA - contributions to a Roth IRA are NOT deductible in arriving at AGI, but withdrawals after the age of 59.5 are exempt from taxation.

• Penalty of 10%, if funds are withdrawn before the age of 59.5
• Exempt from Penalty if:
  
  • First time purchase of a home, up to $10,000 may be withdrawn
  • Death or disability of participant
  • Payments to higher education costs
  • Payment of medical expenses

NOTE: Funds rolled over from Traditional IRA must vest for 5 years before receiving tax-free distributions.

Question 38

Qualified Tuition Programs (QTP - 529 Plans)

Answer 38

A type of IRA contribtution to be used for qualified higher education in which contributions may be deductible.

• Educational purposes include tuition, room/board, books, supplies & fees.
• 10% federal penalty if funds are withdrawn for non-educational purposes.
• Can front load plan $14K (gift exemptions) x 5yrs = $70K

Question 39

Keogh Plans

Answer 39

Contributions to a Keogh plan are limited to 25% of net self-employment income after the Keogh deduction & 50% of self-employment tax is claimed (this works out to 20% of self-employment income before the Keogh deduction.

Question 40

“From AGI Deductions”

Standard

OR

Itemized Deductions (Schedule A)

Answer 40

From AGI Deductions may be either of the two:

1. ) Standard Deduction or
2. ) Itemized - Schedule A (COMMITT)

• Charitable Contributions - 50% of AGI
• Other miscellaneous expenses (no 2%)
• Miscellaneous Expenses (BIT 2% over)
• Medical Expenses (10% over)
• Interest (1M Aquistion, 100K Equity)
• Taxes
• Theft or Casualty (10% over, less $100)

Question 41

Itemized Deductions (Schedule A) - COMMITT

Answer 41

Itemized Deductions - Schedule A consists of: (COMMITT):

Charitable Contributions

• Contributions to Qualified Organizations
• Receipts for $250 or larger contributions
• Cash contributions are generally limited to 50% of AGI
  
  • Excess may be carried forward up to 5yrs
  • Services may NOT be deducted
• ​Property contributions are subject to two rules:
  
  1. Ordinary Income Rule - if contributed property would normally result in ordinary income or short-term capital gain.
     
     • Limits the deduction to the lower of the original basis (purchase price) or the FMV on the date of contribution
  2. LT Capital Gain Rule - if contributed property would normally result in a long term capital gain.
     
     • Deduction is at the FMV
     • Deduction is Limited to 30% of AGI

Question 42

Itemized Deductions (Schedule A) - COMMITT

Answer 42

Itemized Deductions - Schedule A consists of: (COMMITT):

Other Miscellaneous Expenses

• NOT subject to 2% of AGI minimum
• Gambling Losses - to extent of winnings - no carryover
• Estate taxes on income in respect of a decedent (IRD)

Question 43

Itemized Deductions (Schedule A) - COMMITT

Answer 43

Itemized Deductions - Schedule A consists of: (COMMITT):

Miscellaneous Expenses - BIT

• ​Subject to 2% of AGI minimum.
  
  • ​”Lose first 2%, the rest may be deducted”
  • Example: If AGI is $100K, & business expenses are $10K, only $8K may be deducted due to the threshold. ​
• Business Expense of an Employee
  
  • Business mileage
  • Union Dues
  • AICPA professional publications
  • Uniforms (not a tux)
  • CPE
  • Business use of home
  • Laptop
• Investment Expenses
  
  • Example: Investment advisory fees, custodial fees
• Tax Preparation & Attorney Fees
  
  • Tax prep & advice
  • Attorney costs to collect money owed by others

NOTE:Legal expenses and agency fees are not deducted as expenses.

Question 44

Itemized Deductions (Schedule A) - COMMITT

Answer 44

Itemized Deductions - Schedule A consists of: (COMMITT):

Medical Expenses - Paid & NOT reimbursed

• To extent exceeds 10% of AGI, if 65yrs >7.5% of AGI
• Must be for specific injury, illness or birth defect
• Durgs must be prescriptions
  
  • Not life insurance
  • NOT cosmetic
• Property improvements LESS appreciation of home

Question 45

Itemized Deductions (Schedule A) - COMMITT

Answer 45

Itemized Deductions - Schedule A consists of: (COMMITT):

Interest Paid on:

• Investment Interest - refers to borrowings used to make personal investments, such as loans to purchase stocks.
  
  • To extent of net investment income.
    
    • Note: can be worded as, Net Investment Income = Investment Income LESS expenses
  • Unused carried forward indefinitely
• Mortgage Loan Interest - Personal Residence Interest
  
  • Aquisition indebtedness to $1M on two houses
  • Home Equity Loans to $100K

Question 46

Itemized Deductions (Schedule A) - COMMITT

Answer 46

Itemized Deductions - Schedule A consists of: (COMMITT):

Taxes Paid on: (deductible)

• Personal Property taxes
• Real Estate taxes
• State & Local taxes
• Fees, Fines, Federal, FICA are NOT deductible. FORGET IT!

Question 47

Itemized Deductions (Schedule A) - COMMITT

Answer 47

Itemized Deductions - Schedule A consists of: (COMMITT):

Theft & Casualty Losses:

• Casualty losses that EXCEED 10% of AGI may be deducted.
• Once Loss is determined, it must be reduced by all the following:
  
  • Insurance & govt reimbursements
  • $100 per event of loss
  • 10% of AGI per year

Question 48

Exemptions

Personal Exemptions

Answer 48

Personal Exemptions:

• 2 for married filing jointly
  
  • Spouse is not considered a dependency exemption, it is still a personal exemption
• If a parent supports a dependent child, the child may NOT claim a personal exemption on their own return

Question 49

Exemptions

“Qualifying Child” - JARRS

Answer 49

“Qualifying Child” - JARRS

• NO Joint Return
• Age
  
  • Under 19
  • Under 24 if a student
    
    • Must be in school 5 out of 12 mos
  • Any age IF permanently & totally disabled
• Resident of US, Mexico, or Canada
• Relationship
  
  • Child, stepchild, grandchild
    
    • Must live w/ taxpayer for 1/2yr
  • Foster child
    
    • Must live w/ taxpayer for 1 full year
• Support
  
  • Dependent can’t provide over 50% of their own support

Question 50

Exemptions

“Qualifying Relative” - C-IRS-J

Answer 50

“Qualifying Relative” - C-IRS-Jack you

• Citizen or Resident - of US, Mexico, Canada
• Income - below personal exemption (roughly $4,000)
• Relationship
  
  • Lineal descendant (doesn’t include cousins)
    
    • Parent, grandparent, brother, sister, step-brother, uncle, aunt, in-laws, brother-in-law
  • Household member for the entire year
• Support - annual support of over 50% to dependent
• No Joint Return

Question 51

Filing Status (5)

Answer 51

1. Married Filing Jointly (MFJ)
   
   • married on last day of the year
   • spouse dies during a current tax year
2. Maried Filing Separately (MFS)
3. Suriving Spouse (Qualifying Widow)
   
   • death in prior 2 years
   • not re-married & have dependents
   • provide over 50% of costs to dependents
   • same rate as MFJ
4. Head of Household
   
   • Has dependends
5. Single

Question 52

Refundable Tax Credits (3)

Answer 52

Tax credits may be used to reduce taxes &, when in excess of the tax liability, may be carried back/forward, depending on the provisions of the credit, but may not reduce the tax liability below zero. Refundable tax credits include:

1. Earned Income Credit (EIC) - Example: W2 Income
2. Child Tax Credit
3. American Opportunity Credit - Partial, up to $1K
4. Excess Social Security Credit
5. Health Coverage Tax Credit

Question 53

Nonrefundable Tax Credits (8)

Answer 53

Tax credits may be used to reduce taxes &, when in excess of the tax liability, may be carried back/forward, depending on the provisions of the credit, but may not reduce the tax liability below zero. Non refundable tax credits include:

• Child & Dependent Care Credit
• Educational Credits (AOC)
• Credit for the Elderly or Disabled
• Child Tax Credit
• Foreign Income Tax Credit
• Residential Energy Credits
• Retirement Savings Contribution Credit
• Adoption Credit

Question 54

What are the two Tax Credits related edication?

(AOTC & Lifetime Learing)

Answer 54

Tax credits may be used to reduce taxes &, when in excess of the tax liability, may be carried back/forward, depending on the provisions of the credit, but may not reduce the tax liability below zero.

American Opportunity Tax Credit

• Applies to the first 4 years after high-school
• $2500 per student
• Up to $1000 credit may be refundable
• May claim for dependent

Lifetime Learning Credit

• $4000 per family
• One per family
• Applies to all other years of education

NOTE: Cannot claim both in the same year for same student.

Question 55

What are the three Tax Credits related to having children?

(Child, Child & Dependent Care (3), Adoption)

Answer 55

Tax credits may be used to reduce taxes &, when in excess of the tax liability, may be carried back/forward, depending on the provisions of the credit, but may not reduce the tax liability below zero.

Child Tax Credits

• $1,000.00 per kid < 17 yrs old at year-end.
• Child tax credit is also a refundable credit.

Child & Dependent Care Credit

• Availalbe if: Child <13 or a disabled spouse/dependent
• The credit is based on the smallest of three amounts:
  
  1. Actual dependent care expenses
  2. Child/Dependent’s earned income
  3. $3K for one; $6K for two dependents
     
     • NOTE: NOT refundable or can’t carry forward

Adoption Credits

• Available for costs incurred in adopting a child under the age of 18
• Credit is limited to the first $13,400.00 in fees for adoption & attorney/court fees
• Credits exceeding tax liability may be carried forward up to 5 years & phase out exists.

Question 56

Tax Credit

Savers Credit

Answer 56

Savers Credit is available for low to moderate income workers.

• Credit up to $1000, if voluntary contributions made to IRAs or 401Ks
• Credit may be claimed/available by: (2014)
  
  • MFJ - Income up to $60K
  • HH - Income up to $45K
  • Single - Income up to $30K

Question 57

Foreign Tax Credit (2)

Answer 57

The foreign tax credit is available for payments of foreign income taxes that are not being claimed as itemized deductions. Also a non-refundable credit.

Tax Credit is the lower of:

• Actual Taxes paid oversees OR
• Current US Tax Liability x (Foreign Income/Total Income)

Question 58

Surtax on Unearned Income

Answer 58

Surtax on Unearned Income - is imposed on the unearned income of individuals, estates, & trusts. For individuals, the surtax is 3.8% of the lesser of either:

• Tax payer’s NET investment income OR
• The excess of *MAGI
  
  • Excess of $200K for Single (others)
  • Excess of $250K for MFJ
  • Excess of $125K for MFS

*MAGI (Modified Adjusted Gross Income) - AGI before any foreign earned income exclusion.

EFFECT: Makes the tax rate on L/T capital gains & qualified dividends 23.8% (20+3.8) for high income tax payers, & 18.8% for income over $250K but under $450K.

Question 59

Underpayment Penalty

Answer 59

A penalty imposed on tax payers who do not prepay a sufficient portion of their tax liability on a timely basis, resulting in a tax liability of $1000 or more. Penalties are calculated based on the unpaid tax liability.

No Penalty IF:

• Taxpayer has paid in the lower of:
  
  • 100% of the prior period’s liability or
    
    • 110% of prior liability if AGI is over $150K
  • 90% of the current year’s liability

Late Filing Penalty:

• Based on unpaid tax liability
• 5% per month, limited to 25% of unpaid tax.

Late Payment Penalty:

• .5% each month

Question 60

Alternative Minimum Tax (AMT) for Individuals

(SIMPLE-PIE)

Answer 60

Taxes an individual taxpayer may be required to pay, in addition to the regular income tax, when taxable income includes certain items that qualify for preferential treatment, or when it has been reduced by certain deductions. It is the excess of the tentative minimum tax over the regular income tax.

• Standard Deduction
• Interest on Home Equity Loans
• Medical expenses under 10% of AGI, NOT deductible
  
  • Applies to 65 & older. 7.5%-10% add back
• Personal & Dependent Exemptions
• Local & State taxes, Property Taxes, & Sales Taxes
• Employee business exp, Investment exp, & Tax prep (BIT)
• Private activity bond interest
• Incentive stock options
• Excess depreciation on personal property

NOTE: AMT Refunds/Adjustments can only be carryforward to offset against a future regular tax liability ONLY.

Question 61

AMT Calculations

Answer 61

+ Regular Taxable Income

+/- Adjustments & Preferences (SIMPLE-PIE)

= AMTI before exemption

• Exemption (usually given in a problem)

= AMTI (Alternative Minimum Tax Income)

x Tax Rate (26/28%)

= Tentative Minimum Tax

• Rular Tax (usually Given in a problem)

= AMT (Alternative Minimum Tax)

Question 62

AMT Tax Adjustments

SIMPLE-PIE

Answer 62

Amounts added back to taxable income to compute AMTI, consisting SIMPLE:

• Standard Deduction may NOT be claimed
  
  • NOT calculated if taxpayer decides to Itemize
• Interest on home Equity Loans is not deducted
  
  • Interest on aquisition indebtedness & investments may still be claimed
• Medical Expenses under 10% of AGI cannot reduce AMTI. As a result:
  
  • People over 65 must make an adjustment equal to the difference between computing medical expenses with a 10% treshold & computing it with 7.5% threshold.
  • 7.5% - 10% of medical expenses ADD to AMTI
  • >10% of medical expenses may be DEDUCTED from AMTI
• Personal & Dependent Exemptions are NOT allowed
• Local & State Income Taxes, all Property Taxes & Sales Taxes are NOT deductible
• Employee Business Expenses, Investment Expenses/Tax Prep subject to the 2% (BIT) are not deductible.

Question 63

AMT Tax Preferences

SIMPLE-PIE

Answer 63

Additional items that are added to regular taxable income in computing ATMI due to their preferential tax treatment, consisting of PIE:

• Private Activity Bond Interest is fully taxable
• Incentive Stock Options are taxed when exercised fot the difference between the exercise price & market price of the stock
• Excess Depreciation on Personal Property over 150% declining balance when double-declining balance was used for regular tax purposes

Question 64

If qualifying small business corporation stock (Cod Sec. 1244 stock) is sold at a loss?

Answer 64

If qualifying small business corporation stock (Cod Sec. 1244 stock) is sold at a loss, up to $50,000 of that loss may be treated as ordinary loss. The remaining $18,000 of the loss would be treated as a capital loss.

TREATED AS ORDINARY INCOME/LOSS

Question 65

How may taxes paid by an individual to a foreign country be treated?

Answer 65

Foreign taxes can either be taken as an itemized deduction (NOT subject to the 2% floor) or be treated as a credit against federal income taxes due.

Question 66

S-Corp Rules (Losses)

Answer 66

A taxpayer’s deduction for losses passed through from an S corporation is limited to the taxpayer’s basis. The taxpayers beginning basis of $5,000 is first reduced by distributions received. This leaves $1,500 of basis, so the taxpayer may only deduct $1,500 of the $2,000 loss.

Question 67

What are the due dates for estimated tax payments for a calendar-year taxpayer who is self-employed?

Answer 67

When a taxpayer is required to make estimated tax payments, they are due on the 15th of the 4th, 6th, and 9th months of the taxpayer’s tax year and on the 15th of the 1st month of the taxpayer’s subsequent tax year.