GI, AGI, Limitations & Pass thru entities

Question 1

What is the amount of capital loss deduction that is allowed to be applied in a tax year.

Answer 1

only 3k allowed to be applied against ordinary income, the rest is carried forward to the next year NEVER carried back

Question 2

“State the rules/threshold treatment for gain on sale of personal residence.
How long do they have to own/occupy the residence”

Answer 2

“Taxpayers can
Exclude up to 250k of gain on sale for individual and 500k for MFJ. In order to qualify for exclusion: they must Own and Occupy the residence for 2 to 5 yrs immediately before sale”

Question 3

What is a passive activity

Answer 3

Passive activity - trade/business a taxpayer doesnt materially participate in (e.g - partnerships, S Corps)

Question 4

What is Schedule C (1040) used for

Answer 4

Schedule C (on a 1040). For sole proprietorship, Used to record a business’s income and expenses EXCEPT farming business

Question 5

what is Schedule A (1040)for

Answer 5

Schedule A, 1040 is used to report personal itemized deductions (e.g. medical exp, mortgage interest)

Question 6

What is in Schedule F (1040)

Answer 6

used to report farming income and exp

Question 7

Computation of Taxable Income

Answer 7

“Gross Income
- Exclusions from Income
- Adjustments for AGI
AGI
- Adjustments from AGI
Taxable Income”

Question 8

True/False. QBI is a deduction FROM AGI but is not an itemized deduction

Answer 8

TRUE

Question 9

What is in Schedule E (1040)

Answer 9

Income and Exp from rental and royalty arrangements Ordinary income/loss from K-1s pass through activities

Question 10

Tax treatment of Earned interest, what interest are Included and Excluded from Gross Income

Answer 10

“Included in GI: Interest on tax refunds, Zero-coupon bonds (accrued each yr), US treasury obligations, Series EE savings bonds, int on savings account

Excluded from GI : Interest on sate or municipal bonds, qualified higher education bonds, Series EE savings bonds for qualified higher education exp (tuition and fees)”
Interest on HSA account especially if used for qualified medical expense

Question 11

List/Explain Adjustments For AGI (Mnemonic)

Answer 11

“I EMBRACED Health and Farming
I - Interest in student loans ( lesser of qualified student loan interest paid or $2,500, no time limit, deduction is phased out if AGI>$75k for single and >$155K when MFJ
E - self Employment deductions (Can deduct 50% of their self employment tax, can also deduct health insurance premiums for themselves and their families, Contr to SEP-IRAs, SIMPLE IRAs, and self employed 401ks are deductible
M - Moving expenses (Schedule C) suspended from 2018 to 2025 except for US armed forces and active duty
B - Business expenses (schedule (Bad debts recognized as write-off, 50% meals, entertainment exp no longer allowed after 2017, 100% business travel, Misc 2% deductions have been suspended until 2026, gifts of $25 per item up to 250, $4 per promotional item, Hobby Losses (If no profit in 3 of 5 years, loss generally not deductible)
R - Rental, royalty, and flow thru entities (has to be rented out for over 14days otherwise its considered a home)
A - Alimony paid (prior to 2019 is not deductible by payer and included in gross income as taxable for the receiver)
C - Contributions to Qualified Retirement Plans (IRA Contr - The max contr to an IRA for 2024 is $7,000 ( $7,500 catchup if you are age 50 or older , 401K Contr for 2024 contr. limit is $23,000 with a catch-up contr limit of $7,500 for 50 or older
Contributions to a traditional IRA are deductible in arriving at AGI unless both of the following conditions apply: The individual is actively participating in another pension or profit sharing plan, and the individuals AGI exceeds a threshold amount; 2024 amounts: single filers: phaseout range starts at $77,000, ends at $87,000, MFJ Filers: phaseout range starts at $123,000, ends at $143,000
For a married couple, if the individual is not actively participating in another plan but the individuals spouse is a participant, contributions for the nonparticipating spouse cannot be deducted if the joint AGI exceeds $228,000 for 2024.
The phaseout is computed as:
Modified AGI Phaseout range starting point: IRA contribution limit Phaseout range (ie, $10,000 or $20,000)
E - Early withdrawal penalty
D - jury Duty (jury duty pay remitted to employer)
Health Savings Plan
Farming - Farming Income (schedule F)”

Question 12

Which of the IRAs are taxed or not taxed

Answer 12

Traditional IRA is taxed, Roth IRA is not taxed

Question 13

Whats included in Gross Income (Mnemonic)

Answer 13

“WIDGF It Period Understood
WAGES (Regular Pay, bonus pay, overtime, tips, commission, vacation pay, sick pay)
INTERESTS (interests from bank accounts, interests from bonds and treasury notes, interest from loans, US Savings bonds interest, Interest from tax refunds
DIVIDENDS - Ordinary dividends, qualified dividends, capital gain distr.
GUARANTEED PAYMENTS - pmts for services, payments for use of capital, retiremnt pmts to retired partners.
FRINGE BENEFITS - personal use of a company car(like when the company gives u car, the portion not used for work purpose, cash bonuses or gift cards, gym memberships if not on site at the company’s premises, reimbursements for moving that do not meet IRS criterias, Excess life insurance coverage (thats coverage that is over $50K, amount over $50k is taxable))”
INCOME FROM QUALIFIED RETIRED PLAN - Distribution from Traditional IRA, Roth Conversion
PUNITIVE DAMAGES (usually associated with non physical injuries) - Legal settlements and awards, damages for non physical injuries.
UNEMPLOYMENT COMPENSATION unemployment benefit plan

Question 14

which retirement plan is included in gross income

Answer 14

• INCOME FROM QUALIFIED RETIRED PLAN - Distr from traditional IRAs because contr. was made with pretax dollars,
• Distr from 401k and similar employer sponsored plans, pension & annuity pmts,
• Roth IRA Conversions,
• Non qualified Distr. from Roth IRAs which are withdrawals from earnings in a Roth IRA that do not meet the qualified distr. criteria.

Question 15

Deductions from AGI - Below the line - COMITT

Answer 15

“C - Charitable contr (limited to 60% of AGI for cash contr, and 30% of AGI for property
50% for ordinary income property donation ( like office supplies)’

When a taxpayer has multiple donations, apply as such : 1. cash doanation 2. 50% ord income donation, 3. Prop donation.
ycontributions, has to be 501(c)3, for non-cash donations more than $250, you need a written acknowledgement from the charity, for items valued greater than $5k you generally need a qualified appraisal.
remaining can be carried forward for 5yrs. if FMV < adjusted basis, then amt deducted is FMV
.
O - Other deductions -1. gambling losses deductible to extent of gambling winnings, excess losses cant be carried forward, 2. estate taxes

M - Medical Expense Deductions - thresshold is 7.5% of AGI, can deduct unreimbiursed medical exp that exceeed 7.5%of AGI. EXp must be deducted in the yearthey were paid regardless of when the services were provided.
I - Interest expenses (Qualified Residence Interest Deduction)

Interest on home equity loan for mortgage debtYou can deduct ““home Acquisition debt”” - these are interest on mortgages obtained to build, buy, or substantially improve your primary or secondary residence) Loan limits - loans after Dec 15, 2017 deduct interset up to $750K for qualified residence loan. Loans taken after Dec 15, 2017, limit is $1milliion. If you refinance, loan amt is limited to old mortgage amt at time of refinancing
Loan Limits - For loans taken after Dec 15, 2017 you can deduct interest up to $750,000 of qualified residence loan
For loans taken no or before Dec 15, 2017 you can deduct interest up to $1,000,000 of qualified residence loan. LImit is cumulative so it include 1st and 2nd home.
Refinanced Debt - if you refinance your original mortgage, the new loan amount for the deduction is limited to the balance of the old mortgage at the time of refinancing
Form 1098 - Mortgage lenders typically issue form 1098 detailing the amount of interest paid during the yr
Taxpayer must have stayed in the home for at least 14 days
T - Taxes ( greater of state, local and foreign taxes OR sales tax. cannot take both, limit is $10k MFJ, $5k if MFS. personal and property taxes included. real estate taxes, foreign income taxes
Non deductible taxes - fed incomme taxes, SS taxes, Medicare, fed estate and gift taxes etc.
T - Theft & casualty ( has to be a federally declared disaster, Casualty loss is the lesser of the adjusted basis OR decrease in FMV of the property as a result of the casualty. Subtrsct any insurance or other reimbursement you received or expect to receive.
To calculate casualty loss: Amount of loss= lesser of Adj Basis the property or the decrease in the FMV of the property as a result of the casualty.after calculating loss, reduce by insurance reimbursement if any, reduce by $10,and reduce by 10% of AGI
you must itemize deductions to claim a casualty loss”

Question 15

What is QBI

Answer 15

“Qualified Business Income - also known as section 199A deduction, is a significant tax break for small business owners and self employed individuals
QBI allows eliigible taxpayers to deduct up to 20% of their qualified business income from their taxable income
claimed on individual tax returns”

Question 16

What Income is eligible under QBI

Answer 16

income from pass-through entities like S corp, partnership or sole-proprietorship. Does NOT apply to C corps.

Question 16

What are the thresholds for QBI

Answer 16

For 2024 the thressholds amounts for single filers is $185K, for MFJ $370K

Question 17

What type of businesses qualiify for QBI

Answer 17

Most businesses except for “specified service trades or businesses”(SSTBs) like law, health, consulting. If your income is above the thresholds, the deduction for SSTBs may be reduced or eliminated.

Question 18

What is W-2 Wages & Capital Limit for QBI

Answer 18

For taxpayers with income above the threshold, the deduction may be limited based on the W-2 wages paid by the business and the unadjusted basis of qualified property used in the business. If your taxable income surpasses these thresholds, the deduction will be reduced according to a formula that considers the excess income. If you make $191,950 or less as a single filer or $383,900 as a joint filer u may qualify for QBI

Question 19

How do you calculate

Answer 19

“Material Participation : taxpayer must materially participate in the business

Basis Limitation: Taxpayer can only deduct loss up to their basis in the company, this includes adjusted basis of other property brought to the business

At-Risk Limitation: Losses are limited to the amount the taxpayer has at-risk to the business

Passive Activity Loss Rules: ““Passive Activity Loss Rules: If the taxpayer does not materially participate, the loss may be considered a passive activity loss, which can only be used to offset passive income.”””

Question 20

What is the Exclusion of gain on principal residence, and the criterias

Answer 20

“Taxpayers can elect to exclude 250K
(500k if MFJ) to recognize
Criterias are:
1.They owned the prop at least 2yrs within the 5 yr period ending on sale date
2. Used the prop as a principal residence at least 2yrs within the 5yrs
3. Has not excluded gain on another principal residence within the 2yr pd”

Question 21

Taxpayers withdrawal from IRA before 59.5 yrs old may result in a tax penalty of :

Answer 21

a tax penalty of 10%, in addition to the inclusion in gross income

Question 22

Tax treatment of Earned interest, what interest are Included and Excluded from Gross Income

Answer 22

“Included in AGI: Interest on tax refunds, Zero-coupon bonds (accrued each yr), US treasury obligations, Series EE savings bonds
Excluded from AGI : Interest on state or municipal bonds, qualified higher education bonds, Series EE savings bonds for qualified higher education exp (tuition and fees)”

Question 23

True/False Premiums on disability insurance policy are not tax deductible, they are taxable (included in Income if they are employer contributed)

Answer 23

TRUE

Question 24

True/False Long term capital gains are taxed at a lower rate than your ordinary income tax rate

Answer 24

TRUE

Question 25

Short term capital gains are taxed as what

Answer 25

Short term capital gains are taxed at your ordinary income tax rate

Question 26

List the Exceptions to Penalty Tax for Early IRA Withdrawal (Mnemonic)

Answer 26

"HIMDEADD Exceptions to Penalty Tax for Early IRA Withdrawal H - Homebuyer (first time) I - Insurance (medical; must be unemployed for 12 consecutive weeks) M - Medical expenses in excess of percentage AGI floor. D - Disability (not temporary) E - Education A - Adoption or birth of child made within one year from date of birth or adoption D - Disaster D - Death or terminal illness"

Question 27

What are the Three types of nondeductible losses.(Mnemonic)

Answer 27

"WRaP Three types of nondeductible losses. W - Wash sales R - Related party transactions and P - Personal losses"

Question 28

True/False Interest from U.S. Treasury obligations/bonds are taxed

Answer 28

TRUE

Question 29

When a taxpayer is paid with noncash property, what amount should be reported as income :

Answer 29

Taxable income = Cash + FMV of the property or services received

Question 30

QBI deduction is available only to

Answer 30

"Individuals Trusts Estates"

Question 31

"state which of these are tax deductible and what percentage 1. Credit losses(bad debts) accounts written off 2. Lodging for business 3. Business meals 4. Business gifts"

Answer 31

"1. Deductible 100% 2. Deductible 100% 3. Business meals 50% 4. Business gifts $25 per gift"

Question 32

Calculate Casualty loss Deduction

Answer 32

"Lower of FMV decrease OR Assets basis - Insurance or govt reimbursements -$100per event -10% of AGI"

Question 33

State or federal tax refund is excluded except if taxpayer itemized deductions in PY and then state refund may be taxable

Answer 33

TRUE

Question 34

Gifts and Inheritances are excluded from GI, but income from gifts isincluded in GI

Answer 34

TRUE

Question 35

List taxes that are not deductible

Answer 35

1.SS Taxes 2. fed income taxes 3. Medicare, 4. fed estate 5. gift taxes

Question 36

What is section 1231 property

Answer 36

Section 1231 property is real or depreciable business property held for more than one year. Has to be held for more than a year. A section 1231 gain from the sale of a property is taxed at the lower capital gains tax rate versus the rate for ordinary income. If the sold property was held for less than one year, then its not a section 1231 property

Question 37

Common examples of 1231 assets are

Answer 37

office building, the land it sits on, office equipment, and manufacturing equipment. Specifically excluded is inventory, property held for sale to customers, accounts and notes receivable arising from the ordinary course of business

Question 38

Capital Assets

Answer 38

A capital asset is property used - - personally or - held for investment. The most common examples of capital assets owned by a company are stocks and bonds purchased as investments. Assets that are not Capital Assets are: Land used for trade/business A/R, Inventory self created Intangible assets like music, arts, patents

Question 39

What is section 1245 property

Answer 39

Simply put, property that falls under Section 1245 is the same property that would fall under Section 1231 – except for buildings and their structural components. The difference between the two is that Section 1245 still has unrecaptured depreciation. Section 1245 depreciable assets are personal property used in a trade, business, or income-producing activity  

Question 40

How to Calculate QBI

Answer 40

Final deduction is the lower of 20%of QBI or 20% of Taxable Income - Capital Gain However when taxpayers income >threshold: 50% of w-2 wages paid by the business OR sum of 25% of w-2v wages plus 2.5% of unadjusted basis of qualified property

Question 41

TRUE/FALSE Life Insurance proceeds are excluded from GI

Answer 41

TRUE, as long as its due to death but interest from deferring payout is taxable when the deferred amount is being payed out

Question 42

Is income from Gifts included in Gross Income

Answer 42

Yes

Question 43

What is the tax treatment when an insurance policy is sold by the beneficiary to someone else

Answer 43

There is a taxable amount which is Death Benefit - Any Consideration (premium Amt paid by the recipient for the policy after transfer)

Question 44

What is IRD

Answer 44

Income in respect of a deceased. Income earned b4 death but paid after death, its not included in deceased last 1040 instead it is taxed to beneficiary or estate that received d money.

Question 45

What is the tax treatment of Alimony Paid b4 AND AFTER 2019

Answer 45

Before 2019: Deductible by payer Taxable to receiver After 2019 Non deductible to payer Non taxable to receiver

Question 46

TRUE/FALSE Self employment health insurance are deductible up to total net profit

Answer 46

TRUE

Question 47

For a cash-basis taxpayer when should income be reported

Answer 47

when the the income is actual or constructively received: in possession/control of the taxpayer its available and there is no substantial restriction on the taxpayer using the funds

Question 48

TRUE/FALSE Forgiveness of student loan debt due to disability and also the interest on it, is NOT included in Gross Income

Answer 48

TRUE

Question 49

Capital loss of MFS can only be offset ordinary income up to $1,500 loss and MFJ is $3k loss

Question 50

Employer paid Life Insurance proceeds paid by reason of death is totally excludable from Gross income, but if its paid b4 death it is usually up to 50K. remaining is not excludable (amount is determined per whats paid premium per coverage)

Question 51

When a pension payment in form of an annuity paid entirely be the employer it is NOT excludable from Gross Income

Question 52

Losses on the sale of 100% use personal property are not deductible. so its disregarded and cnt be used to offset gain or be deducted. like loss on sale of a house

Answer 52

coz its loss from a personal use property

Question 53

US Treasury Bond - is an investment income Rental Income - is a passive income Municipal bond income - is a tax exempt income

Question 54

To determine the amount of deductible investment interest expense

Answer 54

Lesser of NII or Investment interest paid Excess is carried forward to the next tax year

Question 55

investment interest expense

Answer 55

is the amount of interest paid on the loan acquired to invest. if invst interest exp exceeds NII, the excess is carried fwd

Question 56

NII

Answer 56

Net Invstmt Income is invstmt income minus invstmt exp other than interests Investment income - includes iincome from property held for invstmt like dividends invstmt expenses - exp directly related to the production of the invst income other than invst interest exp like custodial fee, safe deposit rental NOTE: the deduction of these exp is suspended until end of 2025 therefore its usually $0

Question 57

Although some interest is deductiblel however forprepaid Interest, its only amount pertaining to the CY is deductible the remaining prepaid interest is amortized over time

Question 58

The following are deductible for charitable contributions: 1. Cash 2. Unreimbursed costs - transportation, suppleies 3. Non cash Property - vehicles, clothikkng, company stock, land Time or services is NOT deductible as charitable contribution

Question 59

Contributions made to Educational tuition program are NOT deductible from AGI because they are tax exempt when withdrawn

Question 60

for charitable contr, when u purchase an item that has cost and FMV. the amount deductible is difference btw FMV and cost

Question 61

if you itemize deduction, and receive a tax refund in the following year for overpayment of tax, then the refund and interest is taxable. BUT if you use standard deduction, the refund is NOT taxable but the interest on the refund IS taxable

Question 62

Alternative to “HIMDEADD” - exceptions to early withdrawal penalty tax. (mnemonic)

Answer 62

CHIME – ● C - Child birth or adoption ● H - Homebuyer (first time) ● I - Insurance (health) ● M - Medical expenses ● E - Education ● (As well as death or disaster)

Question 63

Modified AGI (MAGI) includes these items that were were previously deducted: (mnemonic)

Answer 63

AEIOU – ● A - Adoption exclusion ● E - EE bond income ● I - IRA deductions ● O - Out of U.S. Income ● U - University student loan

Question 64

60% of adjusted ordinary income for a Personal Holding Company must come from these sources(mnemonic)

Answer 64

NIRD – ● N - Net rent (if less than 50% of ordinary gross income) ● I - Interest that is taxable ● R - Royalties (but not mineral, oil, gas, or copyright royalties) or ● D - Dividends

Question 65

Shareholder ’s basis in S corp stock(mnemonic)

Answer 65

BASE – (see notes for more details) ● B - Beginning basis ● A - Add (income, contributions) ● S - Subtract (distributions, losses) ● E - Ending balance