R1 Federal Taxations of Individuals Flashcards
(66 cards)
1
Q
R1M1
A
Filing Requirements/Status
2
Q
You are considered unmarried the whole year if …
A
on the last day of tax year you are either unmarried or legally separated.
If married during the year, a joint return may be filed, proided the parties are married at year end
3
Q
Requirements to enable a TP to be classified as a “Qualifying Surviving Spouse”
A
- Spouse died within last two years and TP has not remarried
- TP could have filed a joint return in the year the spouse died
- Has a Dependent Child
- Dependent child lived with TP for entire tax year
4
Q
Qualified Business Income is applied as a…
A
deduction from adjusted gross income separate from the standard deduction and itemized deductions.
5
Q
Taxpayers who are married but lived apart during the year are…
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allowed to file a joint return for the year, the fact that they did not live together doesn’t effect the issue
6
Q
Individual TPs must use the calendar year or fiscal year (January 1 to December 31) as their tax year for filing purposes. Fiscal years are not permitted for individuals.
A
calendar year (January 1 to December 31) as their tax year for filing purposes. Fiscal years are not permitted for individuals.
7
Q
In the year a spouse dies the surviving spouse is considered…
A
married for entire year and can file MFJ that year regardless of DOD. For the 2 years follwoing the year of death, if TP meets requirements, they can be Qualifying Surviving Spouse which uses same tax rates and standard deduction as MFJ. After the two years, if still unmarried, the surviving spouse must file as either HOH if they still have qualifying dependent or single
8
Q
Head of Household Filing Status Requirements
A
- Be unmarried or considered unmarried on the last day of tax year
- Pay more than 1/2 the cost of maintaining a home for the year
- Have qualifying person who lived in the home for MORE THAN 1/2 the year
- The qualifying person can be: a) a dependent child under age 19 or 24 if fulltime student or any age if permanently disabled
b) a dependent parent who does not have to live with TP provided the TP maintinas the parent’s principal residence for entire year
c) other qualifying relatives who live with the TP for more than half the year and meet dependency tests
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Q
Qualifying Child Criteria
A
CARES TEST
Close relative: must be your child, sibling, or descendant of these
Age limit: Under 19 or under 24 if fulltime student
Residence: Must live with you for more than 1/2 a year
Eliminate gross income test: No gross income limit applies
Support: the child must not provide more than half of their own support
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Q
Qualifying Relative Criteria
A
SUPORT Test
Support: You must provide more than half of their support
Under GI limit: their GI must be below threshold of 5200 for 2025
Precludes Joint Return: they cannot file joint return except claim to refund
Only one TP: they cannot be claimed by someone else
Relationship or residence: must be a relative or live with you entire year as member of household
TP relationship: must be related or live with you all year
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Q
You can still be considered HOH of a parent or child if
A
Child has to live with you for more than 1/2 of year
Parents don’t have to live with you but they have to live in the resident for the year
Relatives must be a dependent and live with you
12
Q
R1M2
A
Gross Income P1
13
Q
Tax Benefit Rule for State Tax Refunds
A
A state income tax refund is taxable income in the year received only if the TP itemized deductions in the prior year (only up to the amount of the itemized deduction and received a tax benefit from deducting those state taxes)
If the TP did not itemize the deductions in the prior year, the state tax refund is not taxable
Interest received on state tax refunds (except interest from state and local gov bonds) is always taxable
If the TP claimed the standard deduction in the prior year (and thus did not deduct state taxes) the state tax refund is not taxable
14
Q
Pre 2019 Divorce Agreements
Alimony
A
- Payments must be legally required by a written divorce or separation agreement
- Payments must be made in cash or its equivalent
- Payments are taxable income to the recipient and deductible by the payor
- Payments must end at the death of the recipient spouse
- Payments cannot be designated as anything other than alimony
- Payments cannot be made to members of the same household
- The spouses may not file a joint tax return
15
Q
Pre 2019 Divorce Agreements
Child Support Payments
A
- Any portion of payments contingent on a child-related event (18yo) is considered child support
- Child support is not taxable income to the recipient and not deductible by the payor
- The actual use of the funds does not affact the classification
- If the divorce decree specifies a reduction in payments upon the child reaching a certain age, that reduction amount is treated as child support
16
Q
Allocation of Payments of Alimony and Child Support
A
- When a payment is reduced by a certain percentage contingent on the child’s age, that percentage of the total payment is considered child support
- The remainder is alimony and must be included in gross incoem by the recipient
- When total paid is less than tota due in divorce payments: the payments received are first allocated to child support (nontaxable) then remaining is allocated to alimony
17
Q
Post 2019 Divorce Agreements
A
Alimony received under agreements in 2019 and later is not taxable to recipment.
and Child support payments are never taxable income to recipient regardless of agreement execution date
Property settlements are also not taxable to recipient ever
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Q
General Rule for Excluding Prizes and Awards from Gross Income:
A
- The Prize or award is excluded from taxable income only if both of the following conditions are met:
1. The recipient is selected for the award without any action on their part
2. The recipient directs the award to be paid directly to a governmental unit or a qualified charitable organization
If either is not met then is is included in GI
19
Q
Tax Treatment of Payments to Degree Candidates for Services
A
Any amts received as compensation for services like teaching, research, or work performed are included in gross income and taxable
Payments made to degree candidates for services they perform is taxable
20
Q
An accruable expense is one which
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the services have been received or performed but have not been paid for by the end of the reporting period
21
Q
For a cash basis taxpayer, gross income must be reported
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in the year it is either actually received or constructible received and this includes income received in the form of cash or property
- actual receipt means the TP physically receives the income
- constructive receipt means the income is made available to the TP without the substantial restrictions, even if they haven’t physically taken possession yet
22
Q
Employer Provided Benefits
1. Group term life insurance
2. Employer paid educational assistance
3. Awards and Prizes from Employer
4. Employer - Provided Parking
A
- Group Term Life Insurance
- Premiums paid by an employer for up to 50K of coverage are excluded from employee’s gross income
- anything above 50k is taxable - Employer Paid Educational Assistance
- Undergrad/Grad : Up to $5250 of employer payments for an employee’s education can be excluded from gross income - Awards and Prizes from Employer
- Awards such as trips, cash, or other prizes given by the emplyer for meeting goals or performance are generally included in gross income annd taxable - Employer - Provided Parking
- Employer paid parking benefits are excluded up to a montly limit (325 per month in 2025, totaling 3900 annually
- The amt above this is taxable
23
Q
For both cash and accrual basis TPs, G/L on the sale of stock or securities on an established securities market are recognized on
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on the trade date, not the settlement date or the date cash received
24
Q
Gross Income Includes
A
all income from whatever source derived, unless specifically excluded by law
this includes: compensation for services, the FMV of property or services received, treasure troves (found cash/valuables), employee acheivement awards, except for certain tangible personal property lodging
this does not include: inheritances, gifts, certain fringe benefits (like first 50k of group term life insurance
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Reporting Income in Barter Transactions
When a TP receives property/services in exchange for providing services/property, the amt of income to report is the FMV of the property/service received, not the FMV of difference or what was given
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Fringe Benefit
- Any fringe benefit provided by an employer is taxable to the employee who receives the benefit regardless of who actually uses the benefit
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Taxable Income Equation for Accrual Basis
Cash collected - Beg. A/R + End A/R
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Taxable Income Equation for Cash Basis
equal to cash collected
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Employer Reimbursements for moving expenses:
Unless specifically excluded by tax law, the employer reimbursements for moving expenses are considered taxable fringe benefits and must be included in the employee's gross income
Moving expenses are not deductible by the employee unless the move is due to a military order, so that reimbursement increases the employee's taxable income and is not deductible
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Contributions to retirement plans
Earnings on retirement plans are not included in employee's gross income, it only becomes taxable income upon retirement or withdrawal
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What is a Series EE Bond?
- A type of US gov bond that you can buy as a safe investment. It earns interst over time so when you cash it later you get original money plus interest
- The money is usually taxable unless you use it to pay for qualified higher education expenses (tuition/fees) for yourself, spouse or dependent
The exclusion is subject to a modified adjusted gross income (if the income is too high, the exclusion phases out) and a limit based on the amt of qualified education expenses actually paid
The amt of qualified educations expenses used to determine the exclusion must be reduced by any tax free scholarships or grants received that are are not included in gross income
If the qualified expenses are fully covered by scholarships or other tax-free aid, no exclusion of bond interest is allowed because no out-of-pocket qualified expenses remain
- The purchaser of the bonds must be the sole owner (or joint owner with their spouse) of the bonds.
- The bonds must be issued after 1989.
- The owner must be over age 24 at the time the bonds are issued.
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Interest Income for Federal Tax
- Interest income from US government obligations like treasury bonds and certificates is generally taxable
- Interet income received on a federal/state income tax refund is also taxable, even thought the refund itself is not taxable
- Interest income from state or local government obligations (municipal bonds) is generally exempt from federal income tax.
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Traditional IRAs with Deductible Contriburtions:
- Both the contributions(principal) and the earnings in the traditional IRA are taxable as ordinary income when withdrawn
- Early withdrawal penalties (10%) may apply if the taxpayer is under age 59½, unless an exception applies.
- If the taxpayer is over 59½, no early withdrawal penalty applies, but the full amount withdrawn is still taxable
- If withdrawn early, tax as ordinary income at marginal tax rate, and then tax the penalty with 10% tax rate
- There are some exceptions to premature distribution: HIM DEAD TED
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HIM DEAD TED
Homebuyer (first time): Distribution used toward the purchase of a first home iwthin 120days of distribution (10k is max exclusion)
Insurance (medical if unemployed and with 12 consecutive weeks of unemployment compensation)
Medical expenses in excess of percentage of AGI floor
Disability (permanent or indefinite disability, but not temporary disability)
Education (college tuition, fees, books)
Adoption or birth of child made within one year from the date of birth or adoption (5k max exclusion)
Disaster: Qualified natural disaster ($22,000 maximum per disaster)
Terminal illness or death
Emergency expenses (for personal or familty emergency, up to $1000 per year)
Domestic abuse victims (lesser of $10,300 2025 or 50% of retirement account
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Taxation of Fixed Period
Annuities
- When you invest in a fixed period annuity (one that pays a set amount over a fixed number of years) your original investment (also called the return of capital) is recivered evently over the payment period
- Each payment consists of two parts:
- nontaxable return of capital: this is your orginal investment divided by the number of payments. It is not included in gross income
- taxable income: this is the amt of each payment that exceeds the nontaxable return of capital. This portion is included in gross income
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Social Security Benefits
- Up to 85% of SS Benefits received may be included in gross income depending on the TP's gross income
MAGI is calculated as adjusted gross income + tax exempt interest plus 50% of the social security benefits. If the MAGI exeeds certain threshold amts:
34K for single filers and 44k MFJ then 85% of SS benefits are taxable
"For middle-income taxpayers (MAGI between $25,000 and $34,000 for single filers or $32,000 and $44,000 for married filing jointly), up to 50% of the benefits are taxable. For lower-income taxpayers (MAGI at or below $25,000 single or $32,000 married filing jointly), Social Security benefits are not taxable.
"
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Final Income Tax Return
- the final income tax return for a TP who dies during the year is due on the same date the return would have been due if the TP were still alive
- For a calendar-year taxpayer, this means the final return is due by April 15 of the year following the year of death, regardless of when during the year the death occurred.
- Income earned and received before the date of death is included in the taxpayer's final individual income tax return for that year.
- Income received after the date of death is not included on the decedent's final return but is instead reported on the estate's income tax return (Form 1041).
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Damages allocation:
- Damages awarded as compensation for physical personal injury or physical illness are not taxable and should be excluded from gross income. These compensatory damages are meant to reimburse the injured person for actual losses like medical expenses, pain, and suffering.
- Punitive damages, however, are fully taxable and must be included in gross income. Punitive damages are awarded to punish the wrongdoer and are considered a financial gain rather than compensation.
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R1M3 Gross Income Part 2
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Business Expenses on Personal Foreign Trip
-If foreign travel is primarily personal in nature (such as vacation) non of the travel expenses like airfare are deductible as business expenses, even if the TP engages in business activities abroad. However expenses directly related to business activities themselves like seminar fees/daily costs during those business days are deductible
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Rental Income Recognition
-For both cash and accrual basis TPs, prepaid rent and lease cancellation payments are included in taxable income in the year they are received regardless of when rent is actually earned or lease period covered
-The IRS prioritizes collecting tax on cash received rather than following GAAP revenue recognition principles.
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Partnership Income and Deduction
-The partnership calculates ordinary business income or loss by deducting ordinary expenses(like salaries to nonpartner employees, advertising, depreciation) from revenues
- Guaranteed payments to partners are a special type of deduction: they a dedeductible by the partnership when calculating ordinary business income but they are also separately stated on each partner's sch k-1
- Each partner reports their distributive share of the partnership’s ordinary business income or loss on their individual tax return.
- Guaranteed payments are included separately on the partner’s Schedule K-1 and must be reported as income by the receiving partner on their individual return.
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Self-Employement Income and Salary Draws
- Net income from a Sch C (sole proprietorship) business is reported as gross income on the individuals Form 1040. This net income is calculated by subtracting allowable business expenses ( like license fees and marketing expenses) from the gross income receipts)
- Owners of a sole proprietorship do not take a salary in a traditional sense. Instead any money they withdraw form the business is considered a draw not a salary expense
- Because draws are not business expenses, they do not reduce the net income reported on sch C. The entire net income from the business is taxable and included in gross income . Therefore, if a question shows a "salary paid" to the owner from the business, it is actually a draw and should not be deducted from gross income or treated as a separate income item.
- Wages earned from a job outside the self-employment business (e.g., Tom’s wages from his employer) are included separately in gross income.
- = Gross business recieipts minus all ordinary and necessary business expenses directly related to the business
- Do not deduct personal expenses or adjustments such as 1/2 self employment tax, self employed health insurance premiums, or anything personal unrelated to business like investment expenses, custodial fees for retirement plan
- Expenses related to illegal activities or penalties/fines (such as illegal referral fees or parking fines) are nondeductible and must be excluded from the calculation of net profit."
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Schedule C Deductions and State/Local Taxes
- State and Local Business Taxes (such as property taxes on businness assets or business license taxes) are fully deductible as business expenses on sch C
- State and Local Income Taxes, even if related to business income, are considered personal expenses and cannot be deducted on Schedule C. Instead, these are deductible only as an itemized deduction on Schedule A.
- Wages paid to the owner (sole proprietor) are not deductible on Schedule C because they are considered draws or distributions, not business expenses.
- Health insurance premiums for the owner are not deductible on Schedule C but are deducted as an adjustment to income (above-the-line deduction).
- Business meals are generally 50% deductible on Schedule C.
- Bad debt expense for accrual basis taxpayers is deductible only when directly written off, not on an allowance basis.
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Sole Proprioertor
- If you operate a business as a sole proprietor, you do not receive a wage subject to withholding for FICA taxes. Instead, your business earnings are considered self-employment income, and you must pay self-employment tax on those earnings. This tax covers both the Social Security and Medicare taxes that would otherwise be withheld from an employee's wages.
- The self-employment tax applies if your net earnings from self-employment (after the 92.35% adjustment) are $400 or more.There is no exemption period for new businesses; self-employment tax applies from the first year of operation if the income threshold is met.
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C Corps
Dividends
- Shareholders report dividends received as taxable incoem only when dividends are actually distributed The amt reported is the shareholder's proportionate share of the cash dividends received
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S Corps
- Income from S corps is taxable to the individual but not subject to self employemnt tax
- An S Corp, a shareholder who provides services is treated as an employee and receives deductible wages, which are reported on Form W-2
- Each shareholder must include their pro rata share of the S corp's taxable income, regardless of whether th eincome is acutally distributed
- Distributions to shareholders are generally not taxable as long as the distribution does not exceed the shareholder's stock basis
- Distributions reduce the shareholder's basis in the S corporation stock.
- If a distribution exceeds the shareholder's basis, the excess is treated as a capital gain and is taxable.
- Shareholders report their proportionate share of the S corporation’s taxable income on their individual tax returns regardless of whether the income is distributed. This income flows through and is taxable even if the shareholder does not receive any cash distribution.
- Cash distributions from an S corporation are not taxable income to the extent of the shareholder’s stock basis. Instead, distributions reduce the shareholder’s basis in the S corporation stock. If distributions exceed basis, the excess is treated as a capital gain.
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Partnership
- A partner cannot by an employee and does not receive wages. Instead the partner receives guaranteed payments for services,which are dedutible by the partnership and reported on the partner's Sch K-1 as ordinary income
- They are also deductible expenses on the partnership's tax return Form 1065
"- A guaranteed payment is a salary or other payment to a partner that is not calculated with respect to partnership income.
- Since the 25 percent interest is calculated with respect to partnership profits, it is not a guaranteed payment."
Losses and Tax Basis
- a partner can only deduct partnership losses ( including capital losses) to the extent of their tax basis in the partnership interest
- if the partnership loss exceeds the partner's basis, the excess loss is suspended and carried forward until the partner's basis is increased (e.g., by additional contributions or income allocations).
- When calculating adjusted gross income (AGI), only the deductible portion of the loss (limited by basis) is allowed.
- Capital gain dividends received by the partner are included in gross income and are not limited by basis.
"- Net capital losses are subject to an annual $3,000 deduction limit against ordinary income for individuals, after netting all capital gains and losses.
"
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Personal / Rental Residence
A residence is considered a personal/rental residence if :
1. It is rented for more than 14 days during the year and
2. It is used personally for the greater of: more than 14 days or more than 10% of the total rental days
Expense Allocation
- Expenses such as utilities, maintenance, mortgage interst, real estate taxes, and depreciation must be divided (prorated) between peersonal use and rental use based on the number of days or each purpose
Rental Expenses Deduction
- Only the portion of expenses allocated to rental use is dedutible against rental income on Sch E
- Rental expenses are deductible only up to the amt of rental income ( no rental loss deduction if expenses exceed rental income )
- Depreciation is allowed on the rental portion, limited to net rental income
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Personal Use Expenses:
- The personal use portion of mortgage interest and real estate taxes may be deductible as itemized deductions on Sch A ( subject to limits )
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Interest expense is deductible in the year
it is paid or the year to which the interst relates, whichever is later.. This means if you prepay interst that covers multiple period, you must prorate the deduction to the protion of interst that acutally applies to the current tax year. Interest related to future periods cannot be deducted until those periods occur
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Hobby Income and Expenses:
- Income from a hobby must be included in gross income and is taxable
- Expenses related to a hobby are not deductible. This means even if you incur expenses exceeding the income from the hobby, you cannot deduct those expenses to reduce your taxable income.
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Basic Formula of Net Rental Income or Loss:
Gross rental income
Add: Prepaid Rental Income
Add: Rent Cancellation payments
Add: Improvements in lieu of rent
Less: Rental Expenses
Net rental income (loss)
If security deposits are held separately and not available to be applied to last month's rent (as in a segregated account), they are a liability of the taxpayer and not included in income in the year received.
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R1M4 Adjustments
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Adjustments for AGI (often referred to as "above the line" deductions or "deductions to arrive at AGI") include the following:
- Educator expenses, traditional IRA contribution deduction, student loan interest deduction, health savings account deduction, moving expenses (only for members of US armed forces for miltary order) dedutible part of self employement tax (50%), self employed health insurance deduciton, deduction for contributions to certain self-employed retirement plans, penalty on early withdrawal of savings, alimony paid on or before dec 31 2018, attourney fees paid in certain discrimination and whistle-blower cases
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Adjustments from AGI include:
- Charitable contributions, medical and dental expenses, state and local taxes, home mortgage interest, casualty and theft losses
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Traditional IRA Deduction
- Max contribution and deduction limit: 7k per person (including catch up contributions if age 50 or older
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What is “earned income” and why it matters?
To contribute to a Traditional IRA, you need to have earned income — basically, money you worked for.
Earned income includes: Wages, salaries, tips, Self-employment income, Alimony (only if the divorce was finalized before Dec. 31, 2018)
Doesn’t count as earned income:Investment income (like interest or dividends), Pensions or annuities, Alimony from divorces after 2018
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What happens with IRA with MFJ and only one spouse works?
If you file jointly, the working spouse’s income can count for both spouses.
The non-working spouse can still contribute to their own IRA as long as the working spouse earns enough to cover both contributions.
So if the working spouse earns $20,000, and each spouse wants to contribute $7,000 (assuming age 50+), that’s fine because $14,000 < $20,000.
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MFJ Phaseout with IRA contributions
If either spouse is covered by a workplace retirement plan (like a 401(k)), then the ability to deduct your IRA contribution depends on your AGI (Adjusted Gross Income).
If you are covered by a retirement plan:
Your deduction phases out if AGI is between $126,000–$146,000 (2024 numbers) for married filing jointly.
If you are not covered but your spouse is:
Your deduction phases out if AGI is between $236,000–$246,000.
If your AGI is below the range, you can deduct 100% of the contribution.
If it’s within the range, you can deduct a portion. ( ((((((((Maximum deductible amount × (upper limit – your AGI) / phase-out range = deductible amount))))))
If it’s above the range, you get no deduction, though you can still contribute (just non-deductible).
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what is the max TPs can deduct for traditional IRA?
In 2025, taxpayers can contribute and deduct up to $7,000 to a traditional IRA. For couples filing a joint return, where at least one spouse is an active participant in an employer-sponsored retirement plan, the deductible portion of a traditional IRA contribution is phased out. For a spouse who is an active participant, the AGI phase-out range in 2025 begins at $126,000. For a spouse who is not an active participant, but is married to someone who is, the AGI phase-out range in 2025 begins at $236,000.
If you are covered by a retirement plan:
Your deduction phases out if AGI is between $126,000–$146,000 (2024 numbers) for married filing jointly.
If you are not covered but your spouse is:
Your deduction phases out if AGI is between $236,000–$246,000.
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Taxpayers may deduct student loan interest (above-the-line for AGI) paid on qualified education loans up to
a maximum of $2,500 for the tax year. There is a phase-out for the deduction and other minor restrictions, such as a married couple being required to file joint returns to take the deduction.
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The maximum annual deductible amount for self-employed individuals to a SEP IRA is the lesser of
$70,000 (2025) or 20 percent of net earnings. "Net earnings" is defined as net self-employment income minus 50 percent of self-employment (S/E) taxes.
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AGI phase-out threshold for a single taxpayer for 2025
the current year student loan interest expense AGI phase-out threshold for a single taxpayer of $85,000 (2025).
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