R2 - Individual Taxation - Part 2

Question 1

Who can qualify for an additional standard deduction?

Answer 1

The additional standard deduction is for a taxpayer who is age 65 or over or blind is increased by an additional amount

	                                Unmarried 	 Married  One Qualified Taxpayer:			 65 or blind		                    1,750 	           1,400  Both 65 and blind		     3,500 	   2,800  Two Qualified Taxpayers:			 Each 65 or blind			                           2,800  Both 65 and blind			                   5,600

Question 2

When can a casualty loss for a personal property can be deducted?

Answer 2

Casualty losses can be deducted to the extent that each individual loss exceeds $100 and that aggreagate of these excess losses (excess over $100) exceeds 10% of AGI. The $100 floor applies to each separate casualty event. The losses are only deductible if sustained in a presidentially declared disaster area.

Question 3

What is the formula to compute the deductible amount for casualty loss?

Answer 3

Smaller loss (1. lost cost/adjusted basis, or 2. Decreased FMV)
< insurance proceeds >
= Taxpater’s loss
< $100 >
= Eligible loss
< 10% AGI>
= Deductible loss

Question 4

When can charitable contributions be deducted as an itemized deduction?

Answer 4

• Charitable contributions made to a qualified organization can be deducted.
• Gifts made directly to a “needy family” are not deductible.
• When making a donation to a church, or other qualified organization, if anything is received in return, donation is the amount in excess of value received.
• When a person purchase art at a church bazaar, and the purchase price is higher than the FMV, then the difference between the purchase price and the FMV is deemed to be a charitable contribution and is deductible.
• If an asset (e.g., car) is donated, the deductible amount is the FMV of the asset.

Question 5

How is the charitable contribution categorized to help determine the amount deductible?

Answer 5

The charitable contribution can be categorized to determine the deduction amount if it is ordinary income property or long-term capital property

Question 6

How is the amount of ordinary income to deduct as charitable contribution determined?

Answer 6

The amount of the deduction for ordinary income property is the lesser of the property’s adjusted basis or the FMV at the time of the contribution. Ordinary income property includes:
- Inventory
- ST assets (held for one year or less) (e.g., stock)
- Investment or personal-use assets that have depreciated in value
- Depreciation recapture on LT, business-use assets

Question 7

How is the amount of long-term capital gain property to deduct as charitable contribution determined?

Answer 7

The amount of the deduction for LTCG property is its FMV at the time of the contribution. LTCG property is appreciated capital gain property that has been held for more than one year and includes:
- Investment assets
- Personal-use asset (art work)
- Gains in excess of ordinary income depreciation recapture for LT, business-use assets.

Question 8

What is the maximum allowable deduction amount for charitable contributions determined?

Answer 8

The maximum allowable deduction amount for charitable contribution depends on the type of property contributed and the type of charity whom the contribution was made:

		                                              Public Charities	Private Operations Foundations	Private Nonoperating Foundations Cash 	                         60% of AGI	       60% of AGI	                                    30% of AGI Ordinary income property	        50% of AGI	                          50% of AGI	                                    30% of AGI LT capital gain property	        30% of AGI	                          30% of AGI	                                    20% of AGI

• When taxpayers has charitable contributions that are subject to different AGI limitations, the AGI limitations are applied first to cash (60% AGI limit), then ordinary income property (50% AGI limit), then LTCG property (30% AGI limit)

Question 9

How is a charitable contribution carryover applied?

Answer 9

A charitable contribution carryover are applied for 5 years on a FIFO basis, after current year contributions are deducted, subject to the % of income limitation

Question 10

What is the formula to determine the deduction amount to be itemized for medical expenses?

Answer 10

Qualified medical expenses
(insurance reimbursement)
= Qualified medical expenses “paid”
<7.5% of AGI>
= Deductible medical expense (excess of AGI floor)

Question 11

What is the amount deductible for a business gift?

Answer 11

$25 is the allowed amount deductible as a business expense for gifts given to clients

Question 12

What is the amount to be deducted for student loan interests?

Answer 12

Interest on student loans can be deducted up to $2,500 per year. Any excess is “personal interest,” and not deductible.

Question 13

Can a non-qualified stock option be taxed on the grant date?

Answer 13

If the option has a readily ascertainable value (i.e., the FMV is determined at the grant date), then the option is taxable at the grant date and it’s treated as ordinary income in the W-2.
- taxed ordinary income = (stock price - FMV) * #stock * #shares

Employer can also take a deduction on the year the non-qualified stock options are granted

Question 14

How are the non-qualified stock options treated at the exercise date if there is readily ascertainable value?

Answer 14

1. The shares are purchased by the employee the exercise date at the option price per the grant date.
2. The shares are not taxable because they were taxed at the grant date.
3. Basis of shares = (option price @ grant date * # shares) + taxed ordinary income @ grant date

Question 15

How is the gain of the non-qualified stock option determined when there is readily ascertainable value?

Answer 15

Gain = Sales Price - the basis of stock at the exercise date
- Holding period start date: it’s determined as of the exercise date

Question 16

What are the requirements of an Employee Stock Purchase Plan (ESPP)?

Answer 16

1. Plan must be written and approved by shareholder
2. Options cannot be granted to an employee who has 5% or more of voting power
3. Must include full-time employees (except for highly compensated employees and with less than 2 years of employment)
4. Option exercise price may not be < lesser of 85% of FMV of stock when granted or exercised.
5. Option cannot be exercised more than 27 months after the grant date.
6. Employees cannot acquire the right to purchase $25k of stock per year
7. Once exercised, the stock must be held 2 years after grant date and 1 year after exercise date
8. The employee must remain employee of corp from date option is granted until 3 months before option is exercised.

Question 17

What is an Incentive Stock Option (ISO)

Answer 17

An ISO is usually granted to key employees and is a right to purchase the stock at a discount.

Question 18

How can a key employee qualify for the Incentive Stock Option (ISO) program?

Answer 18

1. Granted under a plan, approved by shareholders, sets out the total number of shares that may be issued and who may receive them.
2. Must be granted within 10 years of the earlier of the date when the plan was adopted or approved.
3. The options must be exercisable within 10 years of the grant date
4. The exercise price may not be less than the FMV of the stock at the date of the grant.
5. The employee may not own more than 10% of the combined voting power of the corp. as of the date of the grant
6. Once exercised, must be held at least two years after grant date and at least one year after exercise date.
7. Employee must remain employee from date option is granted until 3 months before the option is exercised

Question 19

How is social security tax withheld in excess of the maximum amount for a particular year treated?

Answer 19

1. If the social security tax withheld is from two or more employers, the individual may use the excess as a credit against income tax, if it resulted from the correct withholding.
2. if the excess was withheld only by one employer, the employer must refund the excess to the employee. No credit is allowed.

Question 20

How much can an individual contribute and deduct to traditional IRA?

Answer 20

An individual can contribute and deduct up to $6,000 to a traditional IRA

Question 21

How to compute the charitable contribution deduction?

Answer 21

1. Determine the AGI limitation:
   Cash - 60% of AGI
   Ordianry income - 50% of AGI
   LT property - 30% of AGI
2. Determine the charitable contribution amount (add carryforward as well)
3. if the chartitable contribution amount is covered under the AGI limitation, you can deduct the entire amount.

Question 22

How are the nonqualified stock options treated when there is not ascertainable value?

Answer 22

If a nonqualified option has no readily ascertainable value, then the taxable event is the exercise date, not the grant date.

Question 23

How is the nonqualified stock option recognized if there is not ascertainable value?

Answer 23

If there is not ascertainable value, at exercise date (purchase date), the employee recognizes ordinary income based on the difference between FMV of stock purchased less amount paid. This is called bargain price. This income is shown in the W-2.

Question 24

How is the bargain price calculated?

Answer 24

Bargain price = FMV stock @ exercise date - cost of stock (paid) * # shares *# options

Question 25

How is the basis of the nonqualified stock option without ascertainable value computed?

Answer 25

Basis = cost of shares * # shares * # options + income from bargain price (amount taxed)

Question 26

How is the realized gain of the nonqualified stock option without ascertainable value computed?

Answer 26

Realized gain = Sales Price - basis

Question 27

What is the lifetime learning credit?

Answer 27

1. An educational credit
2. Offsets an individual taxpayer’s tax liability but does not result in a refund if the credit amount is more than the taxpayer’s tax liability

Question 28

What are nondeductible medical expenses?

Answer 28

1. elective surgeries
2. health club memberships
3. unecessary medical expenditures.

Question 29

Is IRA contributions adjusted to arrive at AGI?

Answer 29

1. Contributions to IRA are not deductible when made.
2. Earnings accumulate tax free while in a Roth IRA account.
3. No deduction is allowed for Roth IRA contributions, so distribution of principal (contributions) is tax free. Distribution of earnings may be taxable, depending on whether the distribution is “qualified” or “nonqualified”

Question 30

Is jury duty pay remitted to employer included as an adjustment to AGI?

Answer 30

Yes, jury duty pay remitted to empoyer is an adjustment to AGI.

Question 31

Are educator expenses considered adjustments for AGI?

Answer 31

Yes, educator expenses is an adjustment for AGI.

Question 32

What are the adjustments for AGI (SHAMPOO)?

Answer 32

S - Student Costs - including educator and loan interest
H - Health insurance paid by self-employed - HSA
A - Alimony paid-or divorce agreement prior to 12/31/18
M - Moving expenses for members of the Military
P - Penalty on early withdrawal of savings
O - One half of self employment tax
O - Old Age/Retirement contributions IRA, $6,000

Question 33

Are write-offs of worthless nonbusiness loans adjusted for AGI?

Answer 33

Yes, write-offs of worthless nonbusiness loans are adjusted for AGI.

Question 34

What are non-refundable personal tax credits?

Answer 34

Personal tax credits may reduce personal liability to zero, but they may not result in a refund. Personal tax credits include:
1. Child and dependent care credit
2. Education credits
> Lifetime learning credits
> American opportunity credit (60% nonrefundable)
3. Retirement savings contribution credit
4. Foreign tax credit
5. General business credit
6. Adoption credit

Question 35

How is the deductible amount of charitable contributions determined?

Answer 35

Charitable contributions may be in cash or property. The contribution depends on whether the property is ordinary income or long-term capital gain property.

Question 36

How is the deductible amount from a charitable contribution related to ordinary income property computed?

Answer 36

The amount deductible is the lesser of the property’s adjusted basis or its FMV at the time it is contributed. Ordinary income property includes:
1. Inventory
2. ST assets (held for one year or less) (stock)
3. Investment or personal-use assets that have depreciated in value
4. Depreciation recapture on LT, business-use assets.

Take the lesser of the amount deductible or 50% of AGI

Question 37

How is the deductible amount from a charitable contribution related to long-term capital (LTCG) property computed?

Answer 37

The deductible amount for LTCG property is the FMV at the time of the contribution. LTCG property is appreciated property that has been held for more than 1 year and includes:
1. Investment assets
2. Personal-use assets (art work)
3. Gain in excess of ordinay income depreciation recapture for LT, business-use assets.

Take the lesser of the amount deductible or 30% of AGI

Question 38

How is the deductible amount from a charitable contribution related to cash computed?

Answer 38

The deductible amount for cash is the FMV of the contribution. Take the lesser of the deductible amount or 60% of AGI.

Question 39

What charitable contributions are nondeductible?

Answer 39

1. Gifts to foreign charities,
2. Gifts to political campaigns
3. Gifts to needy families.

Question 40

How are estimated tax payments calculated when there is self-employment tax reported in the 1040?

Answer 40

If the taxpayer owes $1,000 or more in tax payments after withholding (tax liability), the taxpayer will have to pay the lesser of:
Prior Year Current Year
Tax liability XXX XXX
Tax % 100% 90%
Estimated tax liability - lesser of the two

If prior year AGI is greater than $150K for individual or $75K for MFJ, then the Safe Harbor for estimated payments is calculated as follows to determine the estimated tax liability (lesser of prior or current year)
Safe Harbor for estimated payments = Tax liability * 110%

Question 41

Can personal property taxes (state and local taxes) be itemized?

Answer 41

Personal property taxes are those assessed by state and local governments on personal property owned by the taxpayer, such as vehicles and boats.

Question 42

What is the purpose of the American Opportunity Tax Credit (AOTC)?

Answer 42

The AOTC is available against federal income taxes for qualified tuition, fees, and course materials (including books) paid for student’s first four years of post secondary (college) education at an eligible educational institution.

Question 43

How is the American Opportunity Tax Credit (AOTC) computed?

Answer 43

The maximum AOTC credit is $2,500, and it’s computed as follows:
100% of the first $2,000 of qualified expenses
Plus: 25% of the next $2,000 or (total expenses - $2,000)
= AOTC

Question 44

When is the Lifetime Learning Credit (LLC) granted to taxpayers?

Answer 44

The lifetime learning credit is available for an unlimited number of years for qualified tuition and related course fees at eligible educational institutions. Forumla to compute the credit is as follows:
lifetime learning credit = 20% * qualified expenses up to $10,000

Question 45

What are the qualified expenses included under the lifetime Learning credit?

Answer 45

It includes tuition and course fees (not course materials) for undergraduate courses, graduate-level courses, certain professional degree courses, and courses to acquire or improve job skills.

Question 46

can a deduction to the traditional IRA be deductible?

Answer 46

Traditional IRAs are deductible from gross income to arrive at AGI. The adjustment is allowed for a year only if the contribution is made by the due date of the tax return for individuals, which is April 15 (filing extensions are not considered).

Question 47

What are the requirements to qualify for the earned income credit?

Answer 47

1. The taxpayer must meet certain earned low-income threholds.
2. The taxpayer must not have more than the specified amount of disqualified income.
3. The taxpayer must be at least age 19 if there are no qualifying children.
4. If married, the taxpayer must generally file a joint return with his/her spouse (i.e., married filing separately status disqualifies a taxpayer from claiming the earned income credit).
5. A qualifying child can be up to and including age 18 (or age 23 if full-time student) at the end of the tax year, provided the child shared a residence with the taxpayer for 6 months or more.
6. The taxpayer must be related to the qualifying child (or children) through blood, marriage, or law.
7. The child must be either in the same generation or a later generation of the taxpayer.
8. a foster child qualifies if officially placed with the taxpayer by an agency.

Question 48

Up to what amount is a taxpayer allowed to deduct state and local taxes as itemized deductions?

Answer 48

The taxpayer can deduct up to $10,000 of state and local taxes as itemized deductions.

Question 49

How is the SEP IRA contribuion amount deductible computed?

Answer 49

The maximum annual deductible amount for self-employed individuals to a SEP IRA is the lesser of $58,000 or 20% of net earnings. it is computed as follows:

Self-employment net icome
less: 50%* self-employment tax
= self-employment earnings before SEP IRA
* 20%
= Calculated SEP IRA deduction

Question 50

How is the deduction by an individual for interest on investment indebteness?

Answer 50

The investment interest deduction is limited to net taxable investment income

Question 51

What is included as part of the net taxable investment income?

Answer 51

1. Interest
2. Dividends (other than qualified dividends)
3. ST capital gains
4. Royalties (in excess of expenses)
5. Net LT capital gains and qualified dividens (only if the taxpayer elects not to cliam the reduced capital gain tax rate).

Question 52

Are personal disability insurance premiums deductible as a medical expense?

Answer 52

No, personal disability insurance premiums are not deductible (but disability insurance benefits are also generally not taxable when received- if the premiums are paid by the taxpayer with post-tax dollars).

Question 53

What real estate taxes (state and local taxes) can or cannot be deducted as itemized deductions (schedule A)?

Answer 53

1. Taxpyaer must be legally obligated to pay in order to deduct the taxes.
2. Prorate taxes in year of sale/purchase
3. Taxes paid under protest are deductible. Subsequent recovery is included in gross income.
4. Real estate taxes do not include street, sewer, and sidewalk assessment taxes.
5. Taxes paid through an escrow account are deductible when paid to the taxing authority.
6. Foreign real estate taxes paid are only deductible if paid in carrying on a trade or business.
7. Real estate taxes on land held for appreciation may be capitalized or deducted.
8. Real estate taxes allocated to part of the home that is used exclusively for business may be deductible on schedule C.