Individual Taxation

Question 1

Individual Taxation

Under what accounting basis are individual tax returns prepared?

Answer 1

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

Question 2

Individual Taxation

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

Answer 2

*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

Question 3

Individual Taxation

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

Answer 3

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

Question 4

Individual Taxation

Characterize the following carryover: Passive Activity Loss

Answer 4

No carryback

Can carry forward indefinitely

Question 5

Individual Taxation

How is excess 179 expense carried forward?

Answer 5

Carry forward to next year.

Use in any year is limited to taxable income.

Question 6

Individual Taxation

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

Answer 6

Indefinitely.

Question 7

Individual Taxation

How long is the carry forward for charitable contributions?

Answer 7

Can be carried forward 5 years.

Question 8

Individual Taxation

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

Answer 8

It can be carried forward indefinitely.

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

Question 9

Individual Taxation

How are capital losses applied in individual taxes?

Answer 9

$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).

Question 10

Individual Taxation

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

Answer 10

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.

Question 11

Individual Taxation

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

Answer 11

Gross Profit / Contract Price

Question 12

Individual Taxation

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

Answer 12

Contract Price = Sales Price - Liability assumed by buyer

Question 13

Individual Taxation

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

Answer 13

$1,000,000

Question 14

Individual Taxation

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

Answer 14

$100,000

Question 15

Individual Taxation

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

Answer 15

$25 per person for gifts

Service awards up to $400

Question 16

Individual Taxation

What income can business losses offset on a 1040?

Answer 16

They may only offset active business income.

Note: W2 wages are considered active business income.

Question 17

Individual Taxation

What income can passive losses offset on a 1040?

Answer 17

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)

Question 18

Individual Taxation

Are interest and dividends active or passive income?

Answer 18

Neither. They are portfolio income.

Question 19

Individual Taxation

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

Answer 19

Mid-year/Mid-quarter

Question 20

Individual Taxation

When is the mid-quarter convention used?

Answer 20

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

Question 21

Individual Taxation

What depreciation convention is used for real property?

Answer 21

Mid-month

Question 22

Individual Taxation

What depreciation life and convention are used for leasehold improvements?

Answer 22

15 year straight line (S/L)

Question 23

Individual Taxation

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

Answer 23

Up to $5,000

Amortized over 180 months

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

Question 24

Individual Taxation

How are medical expenses deducted on a 1040?

Answer 24

On Schedule A:

Amounts in excess of 10% of AGI may be deducted

Question 25

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

Answer 25

Accident or disability insurance premiums are not deductible.

Question 26

# Individual Taxation Under what circumstances can medical expenses paid on behalf of another be deducted on someone's Schedule A?

Answer 26

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.

Question 27

# Individual Taxation Which foreign taxes are deductible?

Answer 27

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.

Question 28

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

Answer 28

Gross investment income - investment expense in excess of 2% of AGI = net investment income Investment interest expense in excess of net investment income is deductible.

Question 29

# Individual Taxation What investment interest is never deductible?

Answer 29

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

Question 30

# Individual Taxation When are mortgage points deductible and how are they deducted?

Answer 30

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.

Question 31

# Individual Taxation How are charitable contributions of LTCG property and property related to a charity's function deducted?

Answer 31

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

Question 32

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

Answer 32

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

Question 33

# Individual Taxation Does a casualty loss affect the basis of property?

Answer 33

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

Question 34

# Individual Taxation How is the deductible portion of a casualty loss calculated?

Answer 34

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

Question 35

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

Answer 35

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

Question 36

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

Answer 36

Medical Casualty Gambling Investment Interest Expense

Question 37

# Individual Taxation Define qualifying child for most individual tax factors.

Answer 37

Must be resident of North America Under age 19, or under age 24 if a student

Question 38

# Individual Taxation Define qualifying relative for most individual tax factors?

Answer 38

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

Question 39

# Individual Taxation How is minor income taxed at a parent's rate calculated (AKA kiddie tax)?

Answer 39

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

Question 40

# Individual Taxation Can spouses married filing jointly use different accounting methods?

Answer 40

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

Question 41

# Individual Taxation At what rate is self-employment tax assessed?

Answer 41

15.3% of net earnings from self-employment (Note: executor of an estate is NOT self-employment income)

Question 42

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

Answer 42

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.

Question 43

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

Answer 43

American Opportunity Credit - per student Lifetime Learning Credit - per taxpayer Note: The American Opportunity Credit is refundable.

Question 44

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

Answer 44

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)

Question 45

# Individual Taxation Which farming costs related to land are deductible? Which aren't?

Answer 45

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

Question 46

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

Answer 46

MACRS 150

Question 47

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

Answer 47

90 days

Question 48

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

Answer 48

10 days

Question 49

# Individual Taxation What is the statute of limitations for a tax audit?

Answer 49

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.

Question 50

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

Answer 50

It is treated as a STCL

Question 51

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

Answer 51

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

Question 52

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

Answer 52

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

Question 53

# Individual Taxation When are scholarships not taxable?

Answer 53

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.

Question 54

# Individual Taxation What interest income is tax free?

Answer 54

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

Question 55

# Individual Taxation Which dividend income is tax free?

Answer 55

S-corporation (actually distributions) Life insurance

Question 56

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

Answer 56

Up to 85%

Question 57

# Individual Taxation Is unemployment compensation taxable?

Answer 57

Yes.

Question 58

# Individual Taxation Which damages awarded in lawsuits are taxable? Which are not?

Answer 58

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.

Question 59

# Individual Taxation Are workman's compensation insurance benefits taxable?

Answer 59

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

Question 60

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

Answer 60

Alimony IS taxable. Child support and divorce property settlements are NOT taxable.

Question 61

# Individual Taxation Adoption expenses - Are they deductible?

Answer 61

NO, they are not deductible. However tax benefits are available through the adoption CREDIT.

Question 62

# Individual Taxation Describe alimony recapture.

Answer 62

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

Question 63

# Individual Taxation How are Net Operating Losses (NOLs) utilized?

Answer 63

Can be carried back 2 years If any left, can be carried forward 20 years.

Question 64

# Individual Taxation Which IRA contributions are deductible?

Answer 64

Traditional IRA = deductible Roth IRA = not deductible

Question 65

# Individual Taxation When can a couple file married filing jointly?

Answer 65

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

Question 66

# Individual Taxation What are the requirements for filing as Head of Household?

Answer 66

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

Question 67

# Individual Taxation What are the requirements for filing as qualifying widower?

Answer 67

Must have a dependent child. Essentially gets MFJ status for the year of death + 2 tax years