Individual Taxation Part 2

Question 1

To attain filing status as a Widow or Head of Household, how long must the dependent child live with each?

Answer 1

Widow/Widower = Whole Year

Head of Household = Half Year

Question 2

When a tax payer receives non-cash items as income, how is that property valued?

Answer 2

The tax payer will record the property received at FMV on his/her taxes.

Question 3

What are the 4 types of income?

Answer 3

1. Ordinary = wages, salary, etc
2. Portfolio = interest and dividends
3. Passive = rental and royalties
4. Capital = sale of capital assets

Question 4

Which bonds/debts are taxable:

State
Local
Federal

Answer 4

Only state and local (municipal) debt = non-taxable

Federal Debt = taxable

Question 5

Define: Kiddie Tax

Answer 5

For children under 18 (or 24 in college) who provide less than 50% of their own support, part of their income is taxed at their parent’s marginal tax rate.

Example:

1. First $900 is the standard deductions
2. Second $900 is deducted to be taxed at the child’s rate
3. Last remaining value is taxed at the parent’s highest marginal tax rate.

Question 6

How are the following refunds taxed?

Refunds from:
Itemized prior year deductions
Standard Deductions

Answer 6

Refunds from prior year itemized deductions are taxable.

Refunds from a standard deduction (like a form 1040-EZ deduction) are non-taxable.

Question 7

Describe the concept of Uniform Capitalization Costs and give examples.

Answer 7

Certain costs are capitalized, so they can’t be expensed. Taxable income will likely increase.

Capitalized as Inventory:

1. Direct Materials
2. Direct Labor
3. Factory Overhead

Period Expenses:

1. Selling
2. General
3. Admin
4. Research & Development

Exception: Inventory acquired for resale does for business with fewer than $10mm in sales do not need to capitalize it.

Question 8

How are Passive Activity Losses (PAL) treated?

Answer 8

Carried forward indefinitely

Question 9

Describe the situation when a gifted property has a LOWER FMV value than the transfer basis.

Answer 9

Selling price will determine the transfer price basis:

Higher = Record Gain

————- = Donor Basis: use if sold for more

Mid = No Gain

————- = FMV = use if sold for less

Lower = Record Loss

Question 10

Which gains are not taxed for individuals?

Answer 10

HIDEIT

Homeowner Exclusion = $500k ($250k single)

Involuntary Conversion = Personal property must be reinvested within 2 years; Business property within 3 years

Divorce Property Settlement

Exchange for Like-Kind Assets = Must be tangible property

Installment Sales

Treasury Stock

Question 11

What losses are disallowed?

Answer 11

WRaP

Wash Sales Losses = stock sold for a loss and repurchased within 30 days before or after the sale

Related Party Transactions

Personal Losses

Question 12

What are the Net Capital Loss Deductions for Individuals and Corporations?

Answer 12

Individuals:
Offset income = $3k
No carry back
Carry forward indefinitely

Corporations:
No offsetting income
Carry back 3 years
Carry forward 5 years

Question 13

Filing Status:

What are the requirements for Head of Household?

Answer 13

Individual can be:

Married but has lived apart from spouse for the last 6 months.
Divorced mom maintaining household for more than half the year.
If mom/dad is in nursing mom, tax payer must maintain the original home for at least 1 year.
Dependent relative must live with taxpayer.

Question 14

What is the maximum gross income a dependent can make and tax payer to claim the dependent’s exemption?

Answer 14

In 2013, the maximum a person can make in order to be claimed as a dependent is $3,900.

Question 15

Individual Passive Activity Loss Rule:

When do Non-deductible PALs become deductible?

Answer 15

If carry forward (indefinitely) PAL’s are still unused, they become fully deductible in the year the property is disposed.

Question 16

Like Kind Exchange Recognition:

What is the formula to determine basis of newly exchanged asset?

Answer 16

New Basis = Adj Basis + Gain Recognized - Boot Received + Boot Paid

Question 17

With like-kind exchanges, can realized losses be recognized?

Answer 17

A realized loss can never be recognized.

Question 18

Which of the following taxes are deductible as itemized deductions?

State
Local
Foreign
Federal

Answer 18

Deductible: State/Local/Foreign

Federal taxes are not deductible

Bonus: Inheritance and Business taxes on Rental Property are NOT deductible.

Question 19

What are the minimum estimated tax payments one needs to make?

Answer 19

100% of last year’s tax liability

or

90% of current year’s tax liability

NOTE: If AGI is over $150k, the 2 options are 90% of current year OR 110% of last year’s liability.

Question 20

What is the formula to calculate AMT?

Answer 20

Regular Taxable Income 
\+ Adjustments 
\+ Preference 
= AMTI 
- Exemptions 
= Taxable Base x Tax Rate 
= Tentative AMT Tax 
- Tax Credit 
= Tentative Minimum Tax 

If Tentative Minimum Tax is greater than Regular Income Tax, the difference become the Alternative Minimum Tax.

Question 21

What are the Adjustment added back to determine AMT?

Answer 21

+ 10% Medical
+ Mortgage Interest (NOT used to buy or improve a home)
+ Real Estate/Local/State Taxes
+ Misc. 2% Deductions

No Standard Deductions
No Personal Exemptions

Question 22

What are the add back Preferences for AMT?

Answer 22

Private Bond Activity
Percentage Depletion
Pre 1987 Accelerated Depreciation

Question 23

What are the AMT credit carry foward rules?

Answer 23

AMT Credit Carry Forward = Forever

AMT credit can only offset future regular tax NOT AMT tax.

Question 24

What are the allowable AMT credits?

Answer 24

1. Foreign Tax Credit
2. Adoption Credit
3. Child Tax Credit
4. Contributions to Retirement Plans Credit
5. Earned Income Credit

Question 25

When is the latest a taxpayer can claim a refund for taxes paid?

Answer 25

1. 3 years from original due date of return 2. 2 years from taxes paid Pick whichever is later.

Question 26

What is the "Mom and Pop" exception rule when it comes to passive activity loss?

Answer 26

Mom and Pop exception rule: Requires the taxpayer to be an active participant, more than 10%, in the rental real estate market $25k may be used to offset income from non-passive sources. For every dollar AGI is over $100k, the dollar amount is multiplied by 50% and reduces the $25k write off. AGI > $150k = complete phase out

Question 27

How is property valued when inherited from a decedent (person who died)?

Answer 27

Property valuation = FMV or FMV at alternative valuation date

Question 28

What is a Section 1231 Asset? How are gains and losses treated?

Answer 28

- Asset used in a trade or business - Used for more than 1 year Section 1231 Gains = Long Term Capital Gains Losses = always Ordinary Losses

Question 29

Explain Section 1245 Recaptures rules.

Answer 29

After calculating realized/recognized gain, Actual depreciation = ordinary income Realized/recognized gain - Actual depreciation = Section 1231 Gain (Long Term Capital Gain)

Question 30

Explain Section 1250 Recapture rules.

Answer 30

Straight Line Depreciation = 25% tax rate Actual depreciation - Straight line = section 1250 gain (ordinary income) Realized/recognized gain - Actual depreciation = Section 1231 Gain (Long Term Capital Gain)

Question 31

# Define: Form 1040 Form 1040 Schedule A Schedule C Schedule E

Answer 31

Form 1040: US individual Income Tax Return Form 1040 Schedule A: Itemized Deductions Schedule C: Profits and Losses from Business Schedule E: Supplemental Income from Real Estate/Royalties/Partnerships/S Corporations/Estates/Trusts

Question 32

Are federal income taxes paid deductible?

Answer 32

No, federal income taxes paid are not deductible.

Question 33

What are 3 specifically disallowed individual deductions?

Answer 33

1. Life insurance premiums 2. Funeral expenses 3. Disability insurance premiums

Question 34

Itemized Deductions (Below the Line Deductions): What type of taxes are deductible and non-deductible?

Answer 34

Deductible Taxes: State/Local/Foreign Government Non-deductible Taxes: Federal/Death/Excise Taxes

Question 35

Itemized Deductions (Below the Line Deductions): What are the 5 expenses subject to a 2% Floor?

Answer 35

1. Employee expenses reimbursed under a non-accountable plan 2. Investment expenses 3. Tax return preparation expenses 4. Home office expenses an an employee 5. Hobby expenses (deducible if generating revenue) (Extra: legal expenses to collect alimony are also subject to 2% floor)

Question 36

Employee Reimbursed Expenses: What is the tax treatment for: Accountable Plan Non-accountable Plan

Answer 36

Accountable Plan: - Reimbursement = non-taxable - No deductions allowed Non-Accountable Plan: - Reimbursement: report as income - Deduction subject to 2% AGI floor

Question 37

Child Tax Credit (Personal tax credit for having kids): What is the amount? Who can be a qualifying child? How is the child tax credit phased out?

Answer 37

Child tax credit = $1000 per child Qualifying child: - Dependent son/daughter, niece, nephew, grand children, step children - Must be under 17 (under 24 if in college) Phase out: - Every $1000 AGI exceeds $110,000 (married) or $75,000 (single), child tax credit is reduced by $50 - AGI is always rounded UP to the nearest thousand

Question 38

Child and Dependent Care Credit (Tax credit for care-giving expenses when taxpayer is employed): Who can qualify? What are the tax credit benefits?

Answer 38

Eligible people: Must live with taxpayer at least half the year. All children under 13 (can violate gross income test). Disabled person that lives with taxpayer for at least half year. Credit amount: Max credit = $3,000 per individual Min credit percentage = 20% (AGI over $43k) Max credit percentage = 35% (AGI under $15k)