Exam 2 Flashcards
(120 cards)
1
Q
When are bad debt allowed to be deducted
A
when debt is not repaid
sale of goods or provisions (on credit) become worthless (this is for Accrual method only
2
Q
Bad debt deduction timing is different for both business and non-business. How?
A
business bad debt is when it becomes partially or wholly worthless
Specific nonbusiness debt becomes wholly worthless
3
Q
amount of deduction if the debt was bought and turns into bad debt
A
deduction is the basis
4
Q
Bad debt deduction if loan was debt by taxpayer, what is the amount?
A
the amount of deduction is the amount of loan not repaid.
5
Q
Bad debt Deduction equals, if debt was A/R
A
it is the amount previously included in income
6
Q
what happens when you collect from bad debt after you take the deduction?
A
reverse the write-off in the year you receive the collection (remember tax benefit rule)
7
Q
what are casualty and theft losses (for deductions)
A
casualty are any event that is identifiable; damaging to property and sudden, unusual and unexpected.
8
Q
when is the timing for deductions of casualty and theft losses?
A
in the year it occurs (unless reimbursement claim Ex. Disaster area losses)
9
Q
when are theft deductions allowed?
A
in the year they are discovered.
10
Q
what is the loss amount deduction for complete destruction of business or invesment/rental property?
A
loss is adjusted basis (purchase cost + improvements)
11
Q
what is the loss amount of partial destruction of business/investment property or personal-use property?
A
the lesser of
adjusted basis of property
or
difference between FMV before and after
12
Q
Insurance proceeds reduce the loss amount deduction.
A
TRUE
13
Q
loss in connection with business or rental royalty activity for individuals is a deduction
A
FOR AGI
14
Q
Loss from investment activities is a deduction
A
FROM AGI
15
Q
Loss of personal-use property is a deduction
A
FROM AGI
16
Q
Individuals must file an insurance claim to deduct loss on personal-use property.
A
TRUE
17
Q
What is Net Operating Loss?
A
having losses from operating throughout the year
DEDUCTIONS EXCEED GROSS INCOME
18
Q
What are you allowed to do with NOL?
A
Carry-back: 2 years preceding the loss then 1 year preceding the loss
Carry-forward: the loss 20 years
19
Q
NOL ONLY APPLY TO
A
losses from operating of trade or business or casualty or theft
20
Q
what are at risk limitations?
A
limits the losses from a business to the amount the tax payer is at risk
21
Q
how to calculate at risk amount?
A
Cash + adjusted basis of property contributed + debt the taxpayer is liable for
22
Q
how does the amount risk increase and decrease?
A
increased for share of income and additional contributions
Decreased for share of deductible losses and withdrawals
23
Q
what are the at risk limitations?
A
Suspended losses are carried forward to same activity
applied by business by business or activity by activity
Applies to individuals (including partners, S-corps, and shareholders)
24
Q
what happens when taxpayer is at $0 for at risk amount and withdraws money to reduce it below $0?
A
the withdrawal amount is recognized as income
25
what are Passive activity loss limits?
net losses from passive activities cannot offset active income or portfolio income
26
rule for passive activity loss if suspended?
carried forward until there is passive activity income to or taxpayer disposes it
27
Rule for disposition of passive activity loss
it is netted against the gain of disposition, then other passive activity income.
28
What is a passive activity?
any trade or business the tax payer does not materially participate in
Rental activities
limited partner
29
Is portfolio income and passive income the same?
NO
30
What happens to passive activity business changes to active?
previous suspended passive activity loss can be used to offset active income from that business.
31
Applying At-Risk limitations and Passive Activity loss limits together
apply at-risk rules first
if loss is allowed under at risk rules, the apply passive activity loss limits
32
what is the tax formula for individuals?
Income - Exclusions = Gross Income
Gross Income - Business and investment income Deductions = AGI
AGI - (itemized or standardize) deductions= Taxable Income
33
What are deductions for AGI?
These are deductions above the AGI line
34
Deductions from AGI are...
these are usually itemized or standarize deductions
35
what are the standardize deductions?
standard deduction for yourself, and/or spouse
the additional standard deduction for taxpayer or spouse 65 or blind
36
examples or itemized deductions
allowable personal expenses
ordinary and necessary expenses
casualty loss (personal or investment property)
37
How to calculate standard deduction for taxpayer that can be claimed as dependent?
it is limited to greater of $1050
or
earned income plus $350
38
examples of deductions for AGI
alimony
| ordinary and necessary business expense
39
Married filing separately must either both take standard deductions or both take itemized deductions.
TRUE
40
What personal exemptions?
personal exemptions for for taxpayer and spouse ($4050 each)
41
What are dependency exemptions?
they are the qualifying children and qualifying relatives of the tax payer.
42
What are the qualifications for child exemptions?
MUST MEET ALL
1. Relationship test (must be related to you)
2. Abode test (live with tax payer 6 months)
3. Age Test (under 19 or 24 if full time student)
4. Support test (child is not self supporting)
43
What are the requirements for qualifying dependent exemption?
MUST MEET ALL OF THE FOLLOWING
1. relationship test (member of taxpayer's household)
2. Gross income test (less than exemption amount)
3. Support test (provide at least 1/2 of dependent's support
44
what is the phaseout for exemptions?
Personal and dependency exemptions are phased out at a certain AGI.
the phase out is 2% for every $2500
(make sure you always round up)
45
What are the five filing statuses?
1. single
2. Married filing jointly
3. Married filling separately
4. Qualifying widow with dependent child
5. Head of Household
46
How is marital status determined?
on the last day of the year unless spouse died
47
When are you generally required to file a tax return?
if gross income equals or exceeds sum of personal exemptions and standard deductions
48
When must dependents file tax return?
if earned income or unearned income is over the standard deduction
49
When are self-employed required to file tax returns?
$400 or more in net earnings
50
If income falls under $100k use
tax table method
51
if income is over $100k use
Tax Rate schedule Method
52
marginal tax rate
Rate at which the next dollar will be taxed @
53
Average tax rate
Tax liability / taxable income
54
What tax credits?
they reduce the tax liability (dollar for dollar)
MORE VALUABLE TO TAXPAYER
55
What are tax deductions?
they reduce taxable income
56
difference between refundable and non-refundable tax credits?
refundable tax credits reduce tax liability below zero (thus pay you money)
Non-refundable tax credits expire at the end of the year (do not payout)
57
What is the additional medicare tax?
more medicare tax if you are over a certain income
58
What is the Kiddie Tax?
child having over $2100 in net unearned income then the child is taxed at parents tax rate.
59
How to calculate Net earned Income for Kiddie Tax?
Unearned Income - $1050 - (greater of $1050 of SD or ID connected w/ unearned income)
60
surviving spouse filing status rules
year spouse died- married entire year
following 2 years : if you maintain household with dependent child then qualifying widow
61
What are the Tax effects of alimony?
included as gross income for receiving party
Deduction for AGI for whom paid it
62
tax consequences of child support?
not included in gross income for receiver
63
How to distinguish alimony and child support?
child support is until the child turns a certain age
alimony supports spouse until they do something
64
what happens when transfer of property due to a divorce?
this is not a taxable event and basis stays the same
65
When are prizes included in gross income?
when the recipient receives and accepts the award
the value is the FMV on date of receipt
66
is unemployment compensation included in gross income?
it varies by state but Federal Gov includes it in gross income
67
Are social security benefits included in income?
only if taxpayer's income exceeds a certain base amount
| but there is a max
68
When are gifts excluded from income?
when it is a voluntary transfer of property without expecting anything in return
69
When are scholarships excluded in income?
when it is used for tuition,books, supplies/equipment
| and student must be in school
70
damage payments for loss of income are
generally taxable
71
damage payments for destroyed property are
taxable if the payment causes a gain for taxpayer
72
Punitive damage payments are
included in gross income
73
Compensatory damages are excluded in gross income if
they are physical damages
74
Business Expenses are generally deductions
for AGI
75
HSA contributions are generally deductions
for AGI
76
Contributions for your IRA are deductions
for AGI
77
Student Loan interest is a deduction
for AGI
78
Mortgage interest is deductible as
an itemized deduction
79
medical expenses are deductible as
an itemized deduction
80
charitable contributions are deductible as
an itemized deduciton
81
What medical expenses are deductible?
expenses paid for care for you, spouse, and dependents
preventive care
insurance premiums
82
In order for medical expenses to be deducted they must meet 10% of AGI
TRUE
83
what taxes are deductible as itemized deductions?
taxes on personal use
Ad valorem real estate taxes (% of the value of the home)
State and local income taxes
84
Business interest is a deduction
For AGI
85
Interest on a qualified student loan is a deduction
FOR AGI
86
Qualified residence interest is a deduction
FOR AGI
87
interest on qualified student loan deduction is capped at...
$2500 per year
88
qualifications and amounts for qualified residence interest deductible
you get principal residence
interest on up to $1M in acquisitions indebtedness
interest up to $100k of home equity loans
89
when are mortgage insurance premiums and points deductible?
in the year paid
90
qualification and limits of charitable contribution deductions
must be qualified organization
it is fully deductible if less than 20% of AGI
and the max is 50% of AGI
(the disallowed amount can be carried forward 5 years)
91
What is the "Pease Limitation"?
some itemized deductions are phased out at a certian AGI
92
The "Pease Limitation" applies to
state, local, and property taxes
Mortgage interest and points
charitable contributions
Misc. itemized deductions subject to 2% floor
93
What is the child tax credit?
credit up to $1000 per child per child
it is nonrefundable
but additional child tax credit is refundable?
94
What is the child and dependent care expenses credit?
it is a credit for a % of the expense
Nonrefundable
95
What is the American opportunity tax credit?
credit for 100% of first $2000 and 25% of next $2000
max is $2500
96
limits for American Opportunity Tax credit
limited to 4 years per student
97
What is the lifetime learning credit?
20% of the first $10,000
| up to $2000 per year
98
What are the eligible expenses for AOT and lifetime learning credit?
Tuition and fees but books only for AOC
99
What factors does the IRS use to determine an employee and independent contractor?
Behavioral Control
Financial Control
Type of relationship
100
What are fringe benefits?
the can be excluded from taxpayer's income
deductible by employer
101
how are Employer-sponsored Accident and Health plans affect taxes?
Premiums deductible by employer and excluded in employee's gross income
insurance benefits to employee are generally excluded from income
102
When are meals and lodging furnished by employer excluded from gross income to the employee?
when it is
furnished by the employee
on the employer's premises
for the convenience of employer
required as a condition of employment
103
how do flexible spending accounts work?
Health FSA: estimate how much you will spend in medical expenses and throughout the year you will be reimbursed those expenses from the withholdings from your check (max is $2250)
104
When can an employee deduct travel expenses?
itemized deductions subject to 2% floor
when the employee not in travel status and going place to place because of work
105
Travel expenses are deductible. (what and when)
when related to employment
travel expenses, meals and entertainment (cut 50%), lodging, laundry
106
When are education expenses deducted as business expense?
if it is
to meet requirements of employer to retain employment status
maintain or improve skills at the current job
they are ordinary and necessary
107
Tuition and fees deduction is for
everyone but up to o$4000 of qualified tuition and expenses involving higher education
(For AGI)
108
What are the requirements for home office deduction?
must be regular and exclusive use
principal place of business or meeting customers
convenience of employer
109
What happens if employer reimburses expenses under accountable plan?
this is excluded from income (not a deduction)
110
What are the requirements for accountable plans?
(must meet all)
Employee timely and adequate accounts for the expense (receipts within 60 days)
Employee returns any excess reimbursement or allowance
Reimbursed expenses would have been deductible by employee had they not been reimbursed
111
What are the requirments to contribute to an IRA?
must be under 70.5 years old
must be from earned income
$5500 contribution limit but $1000 catch up if 50 or older
112
Facts about traditional IRA
Contributions are deductions for AGI
Grows tax free
Taxable when you take money out
Early withdrawal penalty before 59.5
113
Facts about ROTH IRA
Contributions are not deductible
contribution phaseout from income limits
withdrawals are tax free
Early withdrawal penalty
Conversions and rollovers
114
Schedule C tells you about
the profit or loss of a business
115
Self-employment taxes include
SS 12.4% (capped at $118500)
Medicare tax - 2.9%
(but there is a deduction for 1/2 of self-employment taxes paid)
116
what are the hobby loss rules?
Hobby losses are not deductible
Hobby expenses can be claimed on schedule A
these itemize deductions are subject to 2% floor
117
what goes on schedule A?
itemized deductions
118
What goes on schedule B?
Dividend and interest income
119
What goes on Schedule D?
Capital Gains
120
What goes on schedule E?
Supplemental income
