Individual Taxation: Part 1

Question 1

taxable income formula for individuals

Answer 1

GI
(adjustments) e.g., 1/2 SE taxes
\_\_\_\_\_\_\_\_\_\_\_
AGI
(itemized or standard deduction)
\_\_\_\_\_\_\_\_\_\_\_
taxable income before QBI deduction
(QBI deduction)
\_\_\_\_\_\_\_\_\_\_\_
taxable income

*from AGI deduction is known as a “below the line” deduction

Question 2

qualifying child (CARES)

Answer 2

close relative

age: under 19 (or 24 if FT student)
residency: lived with TP for more than 1/2 year. US citizen or resident of US, Canada, or Mex

eliminate GI test

support: did not provide more than half of his/her own support. If FT student and son, daughter, step of TP, scholarship not included in calculation

Question 3

qualifying relative (SUPORT)

Answer 3

support: same as for QC

under GI limit: 4,300 of taxable income

precludes dependent filing a joint return

only US citizens or residents of US, Canada, or Mex

relative: foster parents and cousins excluded

taxpayer lives with person (if non-relative) for WHOLE YEAR

Question 4

qualifying widow(er)

Answer 4

2 years following year of spouse’s death

primary residence for dependent child for WHOLE YEAR

Question 5

head of household

Answer 5

primary residence for qualifying person for more than 1/2 the year:

child (CARES must be met)

parent (not required to live with TP) pays over 1/2 cost for the WHOLE YEAR

relatives (must live with TP) cousins, foster parents, and unrelated people excluded! (SUPOR)

Question 6

what is the maximum amount of taxable SS benefits?

Answer 6

85%

Question 7

what amount of payments made by employer on behalf of an employee’s educational expenses may be excluded from GI?

Answer 7

5,250

applies to both undergrad and grad

Question 8

what amount of premiums paid by employer for employee’s group term life insurance are excludable from GI?

Answer 8

50,000

Question 9

what amount of employer provided parking may be excluded from an employee’s GI per month?

Answer 9

270 (assuming 2020 rules)

Question 10

what criteria must be met for interest on Series EE Savings Bond to be tax-exempt? 5

Answer 10

interest used for higher education of TP, spouse, dependents

eligible expenses are reduced by tax free scholarships

TP over 24 when interest issued

bonds are acquired after 1989

interest exclusion is subject to phase out

Question 11

are scholarships taxable?

Answer 11

not if they are used for tuition, fees, and books

Question 12

what portion of an annuity is included in GI?

Answer 12

anything over the return of capital

annuity pays 500 per month; return of cap is 364.58

500 - 364.58 = 135.42

Question 13

when is a state income tax refund taxable?

Answer 13

when the original deduction created a tax benefit in the prior year. If PY itemized deductions exceeded the standard by 400, then that 400 would be taxable in CY

Question 14

in relation to a divorce, are property settlement payments deductible/taxable?

Answer 14

NO

Question 15

how are gambling losses treated?

Answer 15

deductible to the extent of winnings, but are deducted on Schedule A (itemized deductions)

Question 16

is interest on a state tax refund taxable?

Answer 16

YES

Question 17

when would a person with a traditional IRA not be subject to 10% penalty for withdrawing before age 59 1/2?

Answer 17

distribution used for college tuition, books, fees, supplies

pay for medical expenses in excess of 10% of AGI

pay for first-time home purchase. within 120 days of distribution and max $10,000

person received 12 consecutive weeks of unemployment and purchases medical insurance

Question 18

is disability pay taxable?

Answer 18

Yes, if disability insurance is paid by employer as a nontaxable fringe benefit

Question 19

if a person was supposed to earn 1,000 of interest on a CD, but withdrew early and paid a 200 penalty, actually earning only 800, how is this treated for taxes?

Answer 19

the 1,000 is included in GI, but the 200 is an adjustment for the forfeited interest resulting in an AGI of 800

Question 20

if money is withdrawn from a traditional (deductible) IRA, what portion of that money is subject to income tax?

Answer 20

the entire amount, it does not matter if the money is kept or put into another investment such as a Roth IRA

Question 21

are the proceeds of a life insurance policy paid because of the death of the insured taxable to the beneficiary?

Answer 21

NO

Question 22

are gifts and inheritances taxable to the recipient?

Answer 22

NO

Question 23

when would the uniform capitalization (UNICAP) rules not apply to a retailer’s inventory?

Answer 23

retailer’s avg gross receipts for the preceding 3 tax years do not exceed 26,000,000 annually

Question 24

how is self-employment income taxed?

Answer 24

subject to fed income tax and SE tax

SE tax (15.3%) = medicare (2.9%) + SS (12.4%)

12.4% tax only up to a certain threshold

Question 25

in what situations is the percentage-of-completion method for LT contracts not required to be used for tax purposes?

Answer 25

project not expected to last more than 2 years and performed by TP with avg annual gross receipts not exceeding 10 million for the previous 3 years

services performed under a maintenance agreement

service of an engineer contracted by a builder

LT contract that includes land and less than 10% of total contract cost relates to the actual construction of property on the land

Question 26

what are business losses limited to?

Answer 26

250,000 (unmarried)

500,000 (married)

remaining business loss can be carried forward indefinitely

Question 27

what kind of income is subject to self-employment tax?

Answer 27

income from a sole proprietorship (schedule C) and general partnerships

Question 28

is estimated self employment tax deductible on Schedule C?

Answer 28

NO, but 1/2 of SE tax paid is deductible as an adjustment to AGI

Question 29

if a person rents his/her beach house for fewer than 15 days, what is the tax treatment?

Answer 29

treated as a personal residence. rental income is excluded from GI. mortgage interest and real estate taxes are itemized deductions on Schedule A (subject to limitations)

Question 30

are Roth IRA contributions deductible?

Answer 30

NO

Question 31

are business meals deductible?

Answer 31

YES, but only 50%

Question 32

basic calculation for QBI deduction

Answer 32

20% x QBI

Question 33

when is no QBI deduction allowed for a specified service trade or business (SSTB)?

Answer 33

when the SSTB is over the taxable income limitation (213,300 for single/other) (426,600 for MFJ)

Question 34

what is the overall limitation to the QBI deduction?

Answer 34

lesser of the combined QBI or 20% of the TP’s taxable income in excess of net capital gain.

*QBI deduction is first calculated based on TP’s eligibility

Question 35

regarding S corps (and partnerships), when are distributions to shareholders (partners) not taxable?

Answer 35

shareholders’ (partners’) basis exceeds the distribution

*distributions reduce shareholders’ basis in stock

Question 36

does a partnership’s ordinary income include distributions or LT capital gains?

Answer 36

NO

Question 37

what’s the rule with suspended passive activity losses?

Answer 37

can be carried forward, but not back, until utilized

Question 38

what are the 3 categories of income (loss)?

Answer 38

Active:
salaries/wages
guaranteed payments for services
business income/loss (active participation)
other that does’t fall into passive or portfolio

Passive:
business income/loss (TP does not materially participate)
rental real estate (unless an exception applies)
income/loss from limited partnership

Portfolio:
interest
dividends
annuities
royalties
capital gains/losses

Question 39

T or F, only a passive activity loss (PAL) can be offset against passive activity income.

Answer 39

T.

however, PALs can be used to offset any income in the year the activity is disposed of

Question 40

what is the mom-and-pop exception to the passive activity loss limitation?

Answer 40

individual TP can deduct up to 25,000 of net PAL attributable to rental real estate if TP:

activity participates
owns at least 10% of the rental real estate activity

25,000 is reduced by 50% of the excess of the TP’s AGI over 100,000. 25,000 is eliminated when AGI exceeds 150,000

Question 41

are incentive stock options generally taxed as compensation?

Answer 41

NO, no income is recognized in the year options are granted