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CPA REGULATION > Individual Taxation > Flashcards

Flashcards in Individual Taxation Deck (86):

Under what accounting basis are individual tax returns prepared?

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


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

*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
*Attorney fees in discrimination lawsuit


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

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


Characterize the following carryover: Passive Activity Loss

No carrybackCan carry forward indefinitely


How is excess 179 expense carried forward?

Carry forward to next year.

Use in any year is limited to taxable income.


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



How long is the carry forward for charitable contributions?

Can be carried forward 5 years.


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

It can be carried forward indefinitely.

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


How are capital losses applied in individual taxes?

$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).


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

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.


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

Gross Profit / Contract Price


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

Contract Price = Sales Price - Liability assumed by buyer


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



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



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

$25 per person for gifts

Service awards up to $400


What income can business losses offset on a 1040?

They may only offset active business income.

Note: W2 wages are considered active business income.


What income can passive losses offset on a 1040?

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)


Are interest and dividends active or passive income?

Neither. They are portfolio income.


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



When is the mid-quarter convention used?

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


What depreciation convention is used for real property?



What depreciation life and convention are used for leasehold improvements?

15 year straight line (S/L)


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

Up to $5,000

Amortized over 180 months

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


How are medical expenses deducted on a 1040?

On Schedule A:

Amounts in excess of 10% of AGI may be deducted


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

Accident or disability insurance premiums are not deductible.


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

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.


Which foreign taxes are deductible?

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.


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

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.


What investment interest is never deductible?

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


When are mortgage points deductible and how are they deducted?

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.


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

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


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

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


Does a casualty loss affect the basis of property?

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


How is the deductible portion of a casualty loss calculated?

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


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

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


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

Investment Interest Expense


Define qualifying child for most individual tax factors.

Must be resident of North America

Under age 19, or under age 24 if a student


Define qualifying relative for most individual tax factors?

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


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

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


Can spouses married filing jointly use different accounting methods?

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


At what rate is self-employment tax assessed?

15.3% of net earnings from self-employment

(Note: executor of an estate is NOT self-employment income)


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

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.


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

American Opportunity Credit - per student

Lifetime Learning Credit - per taxpayer

Note: The American Opportunity Credit is refundable.


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

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)


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

Deductible: Costs incurred to PRESERVE soil/water

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


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



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

90 days


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

10 days


What is the statute of limitations for a tax audit?

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.


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

It is treated as a STCL


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

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


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

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


When are scholarships not taxable?

When they are not in return for services rendered, ANDThe money is used *only* for tuition and books Note: Scholarships for room and board are includable in income.

Any amount paid to non-degree candidate is taxable.


What interest income is tax free?

State & municipal bond interest

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


Which dividend income is tax free?

S-corporation (actually distributions)

Life insurance


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

Up to 85%


Is unemployment compensation taxable?



Which damages awarded in lawsuits are taxable? Which are not?

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.


Are workman's compensation insurance benefits taxable?

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


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

Alimony IS taxable.

Child support and divorce property settlements are NOT taxable.


Adoption expenses - Are they deductible?

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


Describe alimony recapture.

Special Rule - if alimony payments in 2nd and 3rd yr decrease by more than $15k from py pmt.
1- if change in pmts > statutory limits, recapture excess
2- All recapture takes place in year 3.

Amt of Alimony to include Formula:
R2: P2 - (P3+15k)
R1: P1 - [(P2 - R2 + P3)/2 +15k]
R3: R2 + R1


How are Net Operating Losses (NOLs) utilized?

Can be carried back 2 years

If any left, can be carried forward 20 years.


Which IRA contributions are deductible?

Traditional IRA = deductible

Roth IRA = not deductible


When can a couple file married filing jointly?

They must be married at the end of the year.

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


What are the requirements for filing as Head of Household?

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


What are the requirements for filing as qualifying widower?

Must have a dependent child.

Essentially gets MFJ status for the year of death + 2 tax years


When are Qualified payment: alimony & separate maintenance payments included/deducted from GI?

1. decree of divorce or separate maintenance
2. written separation agreement
3. decree of support (including period pending finality of divorce or legal separation)


What guidelines are qualified payments required to meet?

1. payments must be in cash
2. payments must terminate at the death of the recipient.
3. payments cannot be made to a payee who lives in the same household as the payor
4. payments cannot be specified as something other than alimony.


How is child support treated?

Any amt that can be identified as child support cannot be treated as alimony.

-child support pmts are neither deductible by the payor nor income to the recipient.
-if both child support and alimony are provided for in the agreement, any amounts paid are first considered to be child support until that obligation is met.
-any transfer of property in exchange for release of marital obligations is nontaxable


How is damages collected treated?
- compensatory damages
- punitive damanges

Compensatory damages received for physical injury or sickness is excluded from income

Punitive damages received for loss of profits is included in income


How are Gambling winning/Losses treated?

- All winning are included in Gross Income
- Loss are deductible as an itemized deduction, up to the extent of winnings.


How are Gifts received treated?

- the value of gifts received are excluded from income
- income generated from the gift receives IS taxable


How is the Flexible Spending Account treated?

- A taxpayer's company will be able to choose an allowance of either a $500 carryover balance or a grace period through March 15 of the following year. Therefore there will no longer be a "use it or lose it" policy


How is income from Illegal Acts treated?

-Income from illegal activities is included in gross income.
-legitimate bus exp can be deducted
-In the case of illegal drug trafficking, only COGS is deductible, nothing else.


How are life Insurance Proceeds treated?

- Funds paid by death are not taxed as income (except for a policy received in a transfer for a valuable consideration).Principal = excluded, Interest = included
- Dividends received on un-matured policies are not taxed unless the amount received exceeds the consideration (premiums) paid.
1) dividends received before policy maturity = return on premium
2) dividends received after policy maturity = fully taxable.


How are pensions treated?

Retirees must include pensions received as taxable income.


How are Social Security Benefits treated?

A portion of the SS benefit may be taxable.


How are prizes and awards treated?

Generally taxable under Form 1040 as other income


How are rents and royalties treated?

Royalties are included in gross income
Rent is included if cash received, even if prepaid rent, plus any lease cancellation payment received.

Cash received for security deposits + held in separate account, are not included as gross income


What is the tax benefit rule?

a refund or credit of prior year state or local income taxes are taxable (must include in gross income) to the extent that the payment of that amount in the prior year reduced your taxable income.


How is Section 1244 stock treated?

- A loss from section 1244 stock (worthless stock) is treated as an ordinary loss (up to $50k if single). any loss > $50k is treated as a capital loss


Employee Bus Exp Reimbursed - Accountable plan


- if reimbursement = receipt, exclude from income
- if reimbursement > receipt, include excess
- if reimbursement


S-Corporations Taxes

These are corporations that prefer to pay taxes via its shareholders. Shareholders must include on their personal tax their share of income or loss. This income is recognized on a basis similar to that of partnerships.


What is a Foreign Tax Credit?

When taxpayer apply income taxes paid to a foreign country or US possession as a credit against US income tax liability or may use such taxes as an itemized deduction.

excess credits may be 1/10forward.


What are the Child and Dependent Care Credit criteria's?

Taxpayer is permitted a nonrefundable tax credit for expenses incurred in caring for dependents so that the taxpayer may be gainfully employed.
$3k - credit for 1 child or qualifying dependent
$6k - credit for 2 or more children or qualifying dependent at a maximum.