REG 1 - Individual Taxation Flashcards Preview

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Flashcards in REG 1 - Individual Taxation Deck (252):
1

Internal Revenue Code (IRC)

the basic foundation of federal tax laws

&

Represents a codification of the federal tax laws of the US

2

AGI (formula)

Gross Income +/- Adjustments = AGI

*** Adjustments: Schedule B, C, D, E, F (I-EMBRACED-EHF)

3

Schedule A

Itemized Deductions (Personal & Employee expenses) (COMMITT)

C – Charitable Contributions

O – Other miscellaneous

M – Miscellaneous Expenses (2%)

M – Medical Expenses

I – Interest

T – Taxes

T – Theft or Casualty

4

I-EMBRACED-EHF

Adjustments "For [to] AGI": Sched. B, C, D, E, F

I – Interest on Student Loans ($2,500, phase out)

E – self-Employment Tax (50%=7.65%), Med. Premiums (100%, no employer coverage)

M – Moving Expenses

B – Business Expense (Sch. C)

R – Rent/Royalty & Flow Through Entities (Sch E)

A – Alimony (CANNOT)

C – Contributions to Retirements (KEOGH/IRA)

E – Early Withdrawal Penalty

D – jury Duty pay

E – Education ($4,000)

H – Health Savings Accounts (HSA)

F – Farm Income (Sch F)

5

Taxable Income (formula)

AGI (= GI +/- Adjustments)

- Deductions (Sch A or Std Deduction)

- Net Exemptions ($3,950)

= Taxable Income

6

Tax Liability (formula)

(Taxable Income) x (Tax Rate) = Tax Liability

7

Tax Due (formula)

Tax Liability

- Credits

+ Self Employment Tax

+ AMT

- Withholdings

- Prepayments

= Tax Due

8

Individual Income Tax Return (1040) [Formula]

Gross Income

+/- Adjustments

= AGI

- Deductions (Sch A & Std Deduction)

- Net Exemptions ($3,950)

=Taxable Income

x Tax Rate

= Tax Liability

- Credits

+ SE Tax

+ AMT

- Withholdings

- Prepayments

= Tax Due

9

Individual Income Tax Return (1040)

[Main Formulas]

1. AGI

2. Taxable Income

3. Tax Liability

4. Tax Due

10

When is an individual REQUIRED to file a tax return?

- If Income > (Personal Exemption + Standard Deduction)

Or

- If Net SE Earnings = $400+

Or

- If you are claimed as a dependent on another taxpayer's return, and (Unearned Income = $1,000+) or (Earned Income = $6,100+)

Or

- If received advanced payments of the Earned Income Credit (EIC)

Or

- If individual is subject to the Kiddie Tax

11

What is the Kiddie Tax?

taxes certain unearned income of a child at the parent's margin tax rate, regardless of whether the child is claimed as a dependent on the parent's tax return or no

** 3 conditions must be met in order for the Kiddie Tax to apply (parent alive, child does not file a joint tax return, age)

12

What is the purpose of the Kiddie Tax?

prevents the “wealthy” from avoiding taxes on their investments income by transferring the investments/income to their child names, which would be taxed a significantly lower rate or not subject to tax at all

13

What are the conditions that must be met in order for the Kiddie Tax to apply?

1. Either parent is alive as of the end of the taxable year

2. Child Does not file a joint tax return for the year

3. Child is of the appropriate age... either:

A) Under 18 years old as of the end of the tax year

Or

B) Is a Student between 18-24 WITH Earned Income less than 50% of the child's support

14

What is the tax liability for an individual subject to the Kiddie Tax?

the LARGER of tax due based on filing a return including:

1. Child's Earned Income & Unearned Income

OR

2. Child's Earned Income + the child's Allocable Parental Tax (APT is not subject to the Tax Rate, only EI)

15

Steps to calculate each child's Allocable Parental Tax

1. Calculate Parent's Tax based on their Earned & Unearned Income (not accounting for child's unearned income)

2. Calculate Parent's Tax based on their (a) Earned & Unearned Income & (b)Net Unearned Income for all of their children subject to the Kiddie Tax

3. Allocable Parental Tax = (2) – (1)

4. Allocate a portion of APT by using a Ratio (similar to weighted average):

[(Child's Net Unearned Income) / (Total of All Net Unearned Income)] x (Allocable Parental Tax) = Child's Allocable Parental Tax

16

When must any tax balance be paid for the individual return?

On or before April 15 (15th day of the 4th month following the close of the year)

** if the date falls on a weekend, the return is due next business day

17

What is the automatic extension for the individual tax return?

IRS grants an automatic 6 month extension of the FILING due date for the the return (October 15), which eliminates the need to file the second extension

*** DOES NOT extend the date for payment of tax balance due (interest and penalties will accrue)

18

How is interest charged for late payment of a tax balance due for an individual return?

Interest is charged from April 15 (due date) until the date of actual payment

- Interest rate = Federal ST Rate + 3%..... (determined quarterly)

- Interest is compounded daily

19

What are the penalties for late payment & late filing/not filing an individual tax return?

Late Payment: 1/2% per month (pro rated) based on the net tax due

Late Filing/Not Filing: 5% per month (pro rated) based on the net tax due

Both penalties have a maximum of 25% of the net tax due

20

When do civil penalties apply for an individual tax return?

Negligence or Substantial Understatement of tax liability

21

When do civil & criminal penalties apply for an individual tax return?

Fraud on the return

22

Form 4868

Automatic 6 month extension for FILING individual tax return (not an extension for paying tax due)

23

Form 1040X

Amended Individual Tax Returns

24

When are Amended individual tax returns due?

(Form 1040X) LATER of:

- 3 years after filing the original tax return (including extensions)

Or

- 2 years after actual tax was paid

25

IRS statute of limitations (general)

Specific time limits the IRS is required to assess, refund, credit, and collect taxes on. When the limits expire, the IRS is no longer able to pursue the issue or claim. (tax payer can submit a claim, but IRS will not honor it) (IRS cannot purse collection past time frame)

26

What is the statute of limitation for issues relating to error or "simple" negligence?

(individual taxation)

3 Years after later of due date or filing date

27

What is the statute of limitation for issues relating to "gross" negligence OR understated total income by 25%+?

(individual taxation)

6 Years after later of due date or filing date

28

What is the statute of limitation for issues relating to fraud/lie or not filing a tax return?

(individual taxation)

Unlimited

29

When is the accrual basis of accounting generally required for an individual tax return?

when purchases & sales of INVENTORY are necessary to determine income

30

Which type of businesses may use the cash basis of accounting for a tax return?

Service Type businesses whose gross receipts are LESS THAN $10M, which includes:

- most individuals, S corps, individually owned Partnerships, personal service corporations (i.e. health, law, accounting, consulting)

31

Which entities are prohibited from using the cash basis for their tax return?

- C corporations with gross receipts exceeding $5M

- Partnerships that have a C corporation as a partner exceeding $5M

- Tax Shelters

- Certain Trusts

32

Under Cash Basis, when is income recognized on the tax return?

1. cash or property received, at FMV (includes "unearned"/deferred rents or royalties)

Or

2. Actually or Constructively received (whichever is earlier)

33

Under Cash Basis, when is a deduction reported on the return?

1. Cash or check is disbursed

2. Expense charged on a credit card (not when credit card statement is paid)

**prepaid interest is not deductible

34

What conditions must be met in order for a scholarship or fellowship to be excluded from taxable income?

1. It is not compensation for required services

&

2. It is spent by a degree candidate for tuition

35

What conditions must be met in order for injury awards to be included in taxable income?

If they are for:

- Punitive damages

Or

- Lost Business Profits

Or

- Damages for non-physical injuries (i.e. age or race discrimination)

36

What conditions must be met in order for injury awards to be excluded from taxable income?

- damages for bodily injury, pain & suffering, and lost wages

Or

- workers' comp benefits

OR

- Reimbursement of medical expenses paid & not itemized on schedule A

37

What condition must be met in order for state tax refunds to be included in taxable income?

state taxes paid were originally claimed as a deduction in a earlier year

38

Interest earned on a qualified higher education bond

Income or Not Income?

Not Income if:

- used for higher education for self, spouse, or dependent

- bought by taxpayer at least 24 years old

- Redeem directly – need not transfer to school

- Tuition and fees qualify but ROOM & BOARD DO NOT

39

Fringe Benefits

Income or Not Income?

Most are considered income (for employEE's benefit unless immaterial)

- the fringe benefits primarily incurred for the employER's benefit, then it is NOT income

- immaterial fringe benefits are NOT income

40

Bargain Purchases on Employer Merchandise

Income or Not Income?

Income

41

Employer-provided Educational Assistance

Income or Not Income?

Not Income

42

Which Dividends are not considered taxable income?

- Stock Dividends from common stock or stock splits (P/S dividends are taxable at FMV)

- Liquidating Dividend

- Dividends received from an S corporation

- Dividends received on a life insurance policy

- Dividends received from a mutual fund that invests in TAX-EXEMPT BONDS

43

Receipt of Security Deposits (leases)

Income or Not Income?

Refundable Security Deposits: NOT Income

Non-refundable Security Deposits: INCOME

44

Incentive Stock Option (ISO)

Income or Not Income?

*Aka "Qualified" Stock Option

Not Income when exercised

BUT... Taxed when SELL stock (treated as a capital gain/loss on difference between Sales Price & Exercise Price)

--- ISO must be held 2 years from grant date & 1 year from exercise date

**** for AMT calculation, ISO is taxed when exercised

45

What is the condition for proceeds withdrawn from a traditional IRA or pension plan to be considered as taxable income?

If the original contributions to the plan were excluded or deducted from income

(the invested money was not originally taxed)

46

How is an annuity taxed?

The interest ("profit") component of the annuity is taxed annually

1. $Profit / $Total Proceeds = Percentage%

2. Percentage% x $Annuity Received = Amount Included in Taxable Income

*Profit = Total Proceeds – Original Contribution

47

Inheritances

Income or Not Income?

Not Income

48

Child Support

Income or Not Income?

Not Income

49

Property Settlement (Alimony)

Income or Not income?

Not Income

50

Constructively Received

When an item of income is unqualified available to the taxpayer without restriction

i.e. dividend that is automatically reinvested

51

Dividend that automatically reinvests (buys add'l shares)

Income or Not Income?

Income

*** this is an example of cash being "constructively received"

52

W-2 Form

Salaries and Wages (earned income)

53

If an employee submits their monthly tip schedule by the 10th of the following month, which month are the tips reported as earned income?

The month the schedule is submitted (following month) but only if amount is $20+

54

If an employee fails to submit their monthly tip schedule to their employer, how are the tips taxed?

the employee must DIRECTLY REPORT the tips on the tax return

&

Tips are reported in the month of receipt (i.e. tips received in 12/X1, reported in 20X1 tax return)

55

What causes the premiums on group term life insurance (fringe benefit) to be considered taxable income?

If the term life policy is $50,000+

56

What condition causes life insurance proceeds (death check) to be considered taxable income?

Investment: If the policy was purchased from a person other than the insurance company (as an investment)

Or

Interest: If paid out in installments (annuity), then a pro rata part of the receipts are taxable as interest

57

Qualified Cafeteria Plan

Income or Not Income?

Taxable: IF employee chooses to take cash (instead of benefits)

Not Taxable: IF employee chooses to take the benefits (instead of cash)

*** deferred compensation plans are excluded from qualified cafeteria plans (except 401k plans)

58

How are gambling winnings taxed?

Gross winnings are taxed

- gambling losses can be claimed as an itemized deduction to the extent of winnings

59

How are prizes and awards taxed?

- Taxed at FMV

- Not taxed if both:

1. Received for years of service or safety achievement

&

2. Less than $400 FMV OR assigned to gov. unit or charitable org (taxpayer never actually receives the prize or award)

60

How is health and medical insurance coverage taxed?

It is NOT taxable

61

When is government (investment) interest not taxable?

Only if the interest results from State and Local Municipal BONDS

62

Interest on Series HH SavingsBond

Income or Not Income?

Income (interest is paid semi-annually)

63

Interest on Series EE Savings Bond

Income or Not Income?

Income (exceptions)***

Interest = Redemption Value - Purchase Price

- paper: issued at discount & redeemed at face

- electronic: issued at face & redeemed at face + accrued interest

*** NOT INCOME (ever) if all following are met:

1. used to pay for higher education (reduced by tax-free scholarships)

2. there is taxpayer or joint ownerships

3. the taxpayer 24+ years old

&

4. bonds acquired AFTER 1989

64

Which methods may a CASH basis taxpayer report interest earned on series E, EE, or I bonds?

1. Report all interest earned at redemption or disposal (sold)

OR

2. Report interest as the increase in redemption value of the bond each year

65

Interest on Life insurance dividend (ROP)

Income or Not Income?

Taxable

** the actual life insurance dividend is NOT taxable (but the interest on the dividend is taxable)

66

Preferred Stock Dividends

Income or Not Income?

Income: Taxable at FMV

*** common stock dividends are NOT taxable

67

How is dividend income taxed?

Special Rate (Similar to LT Capital gains)

- Applies to dividends from domestic corps (US) & certain qualified foreign corporations. Must meet 60+ day holding period

- DOES NOT apply to dividends from non-taxable entities (i.e. REITs) or dividends that are deductible by the payer organization

- treatment of mutual fund distributions is based on the source of income being distributed

---- 0% tax rate if in the 10% or 15% tax bracket

---- 15% tax rate if in the 25%, 28%, 33%, 35% tax bracket

---- 20% tax rate if in the 39.6% tax bracket

68

Unearned Income Medicare Contribution Tax

- imposed on individuals, estates, & trusts

- for individuals, the surtax is 3.8% times LESSER of:

1. Taxpayer's net investment income

Or

2. Excess if modified AGI over the threshold

*** effectively adds 3.8% to the "special rate" on LT capital gains and qualified dividends (tax brackets 15% and up)

69

Net Investment Income (formula)

Investment Income – Allowable Investment Expenses

70

Modified AGI (MAGI formula)

AGI + Certain Items including:

- foreign income

- foreign-housing deductions

- student-loan deductions

- IRA-contribution deductions

- deductions for higher-education costs

71

MAGI threshold amounts

Joint Return or Surviving Spouse: $250k

MFS: $125k

All Others: $200k

72

Non-Qualified Stock Options

Income or Not Income?

Income (treated as compensation)

- taxed when exercised (on excess between FMV & Exercise Price)

73

What are the conditions for an ISO to be considered a qualified stock option?

ISO must be held 2 years from grant date & 1 year from exercise date

74

How are social security benefits taxed?

may or may not be taxable depending on provisional income calculation

At the extremes:

- Not taxable if the provisional income is less than $25,000

- 85% taxable (max inclusion) if the provisional income is greater than $60,000

75

Provisional Income (formula)

AGI before SS + tax-exempt income + ½ of SS benefits

*** determines the amount that social security benefits are subject to tax

(if PI>$60k, taxable at 85% which is the MAX inclusion in income)

76

How are pension benefits taxed?

Amount included in taxable income depends on the amount contributed by the employee/taxpayer (return of capital is NOT Taxable – only the interest/"profit" is taxable)

- i.e. if the taxpayer did not contribute to the fund, it is 100% taxable income

77

Percentage of Each Annuity Payment that is Not Taxable (Formula)

Taxpayer Cost of Annuity / Total Expected Proceeds

**100% – (cost/total proceeds) = Percentage that is taxable

78

What is the Special tax treatment for Lump-Sum Distributions from certain qualified plans?

&

Which "qualified plans" may be eligible?

Within 60 days, may be eligible to roll over lump-sum distributions TAX FREE to a Traditional IRA account

- Plans: qualified pension, profit-sharing, stock bonus, and Keogh plans (but not IRAs)

79

Foreign earned income exclusion

Individual may ELECT to exclude up to $99,200 (2014) of income earned in a foreign country.

Individual can qualify by meeting a "Bona fide residence test" or "Physical Presence Test".

** qualified individuals may also exclude additional amount based on foreign housing costs

80

Bona Fide Residence test

1 of 2 tests to qualify for foreign earned income exclusion (individual may then elect to exclude if qualified)

Test:

- Individual must be a US citizen who is a foreign resident for an uninterrupted period that includes an entire taxable year

81

Physical Presence Test

1 of 2 tests to qualify for foreign earned income exclusion (individual may then elect to exclude if qualified)

Test:

- Individual must be US citizen or resident present in a foreign country for at least 330 full days in any 12-month period

82

Form 1099G

State tax refunds are taxable in CY (unless itemized in PY)

83

Interest on Tax Refunds

Income or Not Income?

Taxable Income for interest on Both federal & state tax refunds

84

How are LT Capital Gains Taxed?

A. if held more than 1 year, special tax rates for LT capital gains (does not apply to corporations)

---- 0% tax rate if in the 10% or 15% tax bracket

---- 15% tax rate if in the 25% - 35% tax bracket

---- 20% tax rate if in the 39.6% tax bracket

B. If held less than 1 year, ordinary tax rate

85

Individual Tax Treatment for Net Capital Loss

Up to $3,000 against ordinary income

- unused losses may be carried forward indefinitely

86

Corporation Tax Treatment for Net Capital Loss

$0 net capital loss (no deductible)

- can carry losses back 3 years and forward 5 years

87

Form 8949

Individual reports capital gains and losses on form 8949

***totals are reported on schedule D of form 1040

88

Personal Assets

- also considered capital assets

- Gains from sales of personal assets are taxed as capital gains

- Losses from sales of personal assets are not deductible ($0 net capital loss)

89

Net Operating Losses (NOL)

Carry back 2 years and carry forward 20 years

- usually results from a business loss, but could also result from personal casualty loss

- results from: trade or business, workings as an employee, casualty or theft loss,

** does not result from: standard deduction, personal exemption, interest, dividends, or capital gains & losses

** same rules for corporations

90

Schedule B

Interest & Dividend Income

91

Schedule C

Profit & Loss from a Business (EmployER expenses / 1099 Income)

92

Schedule D

Capital Gains & Losses (ST & LT Investments)

93

Schedule E

Supplementary Income or Loss (RRF-COP)

R – Rental Income

R – Royalties

C – Copyrights

O – Oil/Gas Leases

P – Patents

F – Flow through entities (S corps, Partnerships, Estates, & Trusts)

94

RRF-COP

Schedule E - Supplementary Income or Loss

R – Rental Income

R – Royalties

C – Copyrights

O – Oil/Gas Leases

P – Patents

F – Flow through entities (S corps, Partnerships, Estates, & Trusts)

95

Schedule F

Profit & Loss from Framing

96

Form 1116

Foreign Tax Credit

97

Form 4562

Depreciation & Amortization

98

Form 4797

Sale of LT Business Property (not inventory or receivables – schedule C)

99

What is the condition that must be met in order for a self-employed taxpayer to deduct 100% of medical insurance premiums from gross income?

No member of the family may have coverage through an employer

100

What are the conditions that must be met in order for deduct moving expenses?

1. new work must be 50+ miles from old home (one-way) - ("too far to drive"

)

2. only Direct costs of moving you and your stuff (NOT meals, house-hunting costs, or temp. living costs but LODGING while moving is deductible)

3. Must work 39+ weeks (9 months)

*** if reimbursed by employer, the reimbursement portion (income) should not be included

101

Uniform Capitalization Rules (UniCAP – Section 263A)

requires that certain indirect business costs be capitalized to inventory produced or held for sale (similar to cost accounting, mfg OH)

102

Which bad debt expenses are deductible (schedule C- 1099 – Business Expenses)?

Bad debts recognized under Direct Write Off Method

103

Adjustment for Prepaid Interest (Business Expenses - 1099)

Not deductible when paid, even under the cash basis method

- deductible in period it applies to

104

Adjustment for gifts to customers (Business Expenses – 1099)

Deductible up to $25 per recipient per year

105

Adjustment for Meals & Entertainment expenses (Business Expenses – 1099)

50% of expenses are deductible

106

Adjustment for Travel expenses (Business Expenses – 1099)

100% of travel expenses are deductible

107

Adjustment for taxes paid by the business (Business Expenses – 1099)

All deductible

108

Adjustment for promotional items (Business Expenses – 1099)

$4 per promotional item is deductible

109

Hobby Loss

loss not deductible if business produces no profit in 3 of 5 years

110

Passive Activity

any business venture in which the taxpayer does not materially participate

- all limited partnership interests

- all rental activity (unless taxpayer is real estate professional, sch C)

111

Losses from Passive Activities

Passive activity losses may be used to the extent of passive gains (& tax credits from passive losses can only offset taxes arising from passive activities) unless the activity is disposed of, in which all unused amount and loss may be used to deduct from gross income to arrive at AGI

- unused loss carried forward indefinitely or until the activity is disposed of

- no limit on credits or passive losses that may be deducted by grantor trusts, partnerships, & S corporations (flow through entities)

112

When may rental activities be used to offset ordinary income?

Rental activities in which the taxpayer materially participates

- Real estate person: losses treated as ordinary business losses

or

- Active Participation: may deduct up to $25k against ordinary income each year (unused loss treated as passive losses)

*** When the taxpayer's MAGI > $100k... 50% of the excess over the $100k threshold reduces the $25k limit

*** if MAGI = $150k+, the taxpayer may NOT claim any rental losses against ordinary income ($25k reduced to $0).... HOWEVER it may still be carried forward until they dispose of the property

113

What is the tax treatment for a vacation home?

it depends on if the taxpayer uses the dwelling unit as a "home"

[personal use] > [greater of: 14 days or 10% of the number of days rented]

1. If Qualifies as "home" & rented < 15 days ----- EXCLUDE rental income from GI & Expenses are NOT deductible as rental expenses (can deduct on Sch A)

2. If Qualifies as "home" & Rented 14+ Days ----- INCLUDE rental income in G.I. & Deductions are limited to gross rental income. (unused deductions may be carried forward to future years)

3. If does NOT qualify as "home" ----- INCLUDE rental income in GI & all expenses allocated to the rental portion are allowed. Expenses in excess of income are subject to passive activity loss limits [$25k – 50%(mod AGI)]

114

What qualifies a dwelling unit as a “home”?

[personal use] > [greater of: 14 days or 10% of the number of days rented]

115

What is the tax treatment for income from a flow through entities?

Taxable to the INDIVIDUAL in the period in which it is reported (schedule K-1) by the flow through entity

116

Schedule K-1

Flow Through Entity income

117

What is the tax treatment for losses from a flow through entities?

Only deductible to the extent that the taxpayer is at "risk"

Risk:

- Money & adjusted basis of property contributed to the partnership (personal interest/investment)

- Debts of the partnership if personally liable or has pledged personal property as collateral (up to net fair value of partner's interest in the property)

118

What is the tax treatment for Alimony PAID?

Taxable to the recipient & Deductible by the payer (except child support & property settlement)

- To qualify as "alimony", the payment must satisfy all conditions: (CANNOT)

C – Cash only or its equivalent (not property)

A – Apart when payments made (not living together)

N – Not Child Support (not taxable / not deductible & payments go to C.S. First, then alimony)

N – Not designated as property settlement (not taxable / not deductible)

O – Own tax return for payer & payee (not joint)

T – Terminates on death of recipient

*** if pay for college as part of divorce agreement, considered alimony

119

Alimony Recapture Rule

prevents property settlements from being treated as alimony

120

For purposes of eligibility for the IRA, what is considered “earned income”?

- Salaries & wages

- Net Self-Employment Income

- Alimony Received / Separate Maintenance

- Non-taxable combat pay

- commissions

121

What age must the individual be to contribute an additional $1,000 to an IRA?

50+ years old but must also have earned income of at least $6,500 to contribute $6,500 ($1,000 + $5,500 contribution limit)

122

IRA contribution limit (2014)

$5,500

$6,500 (if 50+ years old)

*** contribution applies to the TOTAL contributed of Trad. & Roth

123

Roth IRA cannot be used by

taxpayers with AGI $129k+ (if MFJ, $191k+) - 2014

124

Traditional IRA can be used by

All taxpayers can use a traditional IRA, regardless of AGI

125

When are contributions to a traditional IRA deductible as adjustment for AGI?

Always

UNLESS both conditions apply:

1. individual is actively participating in another pension or profit-sharing plan

&

2. AGI on the tax return exceeds a threshold amount ($69k single, $115k MFJ – 2013)

126

What is the benefit of a Roth IRA?

All withdrawals after age of 59.5 are tax-free (Roth IRA must have be in effect for 5+ years)

127

What is the tax treatment for withdrawals from a traditional IRA?

They are fully taxable except to recover non-deductible contributions made earlier

128

What is the tax treatment for withdrawals from an IRA (trad. Or Roth) prior to age of 59 ½?

10% early tax penalty of the amount withdrawn (amount is included in gross income as well)

- withdrawal is taxed at your marginal tax rate (tax rate of last & next dollar of taxable income)

Exceptions: withdrawal for medical expenses (>7.5% of AGI), qualified higher education costs, death or disability of the participant** , OR first time purchases of a home ($10k max withdrawal)**

**Last 2: if Roth IRA withdrawal, the amount is not included in gross income (still included in GI if Trad IRA)

129

Effective Tax Rate

average rate of taxation for all your dollars

Effective Tax Rate = Total Tax / Total Taxable Income

130

What are the penalty exceptions for early withdrawal of an IRA (both Roth & Traditional)?

1. Payment of medical expenses exceeding 7.5% of AGI (65+) (+ included in GI)

2. Payment of qualified higher education costs (+ included in GI)

3. Death of Disability of the participant***

4. First Time Purchases of a Home (max $10k withdrawal)***

*** #3 & #4: need not be included in Gross Income if withdrawn from Roth IRA (included in GI if withdrawn from Trad IRA)

131

Coverdell Education Savings Accounts (ESA)

- contributions limited to $2,000 per year (NOT tax deductible). Beneficiary must be under the age of 18 while contributions are made (anyone can contribute to the beneficiary, even if unrelated)

- contributions can be made until the tax return due date (4/15)... excluding extensions

- Withdrawals are tax-free if payments are used on elementary, middle school, high school, and college expenses of the beneficiary (includes books, fees, tuition, and room & board)

- When beneficiary reaches the age of 30, the remaining account balance must be distributed (2 Ways)

1. Distributed to the beneficiary, which is subject to taxation & penalties

2. Transferred to an ESA of another family member of the same generation without taxation or penalties

*** formerly aka "Education IRAs"

132

Qualified Tuition Programs (QTP – 529 Plans)

- contributions made to be used for qualified higher education (undergrad & graduate level)

- contributions limited to annual gift tax exclusion ($14K) or may file an election that allows contribution to be averaged over 5 years ($70k total, but still limited to $14k average per year)

- Investment earnings are tax-free only if the earnings stay in the plan or are withdrawn for educational purposes (tuition, supplies, books, fees, room & board)

- 10% federal penalty if funds are not used for non-educational purposes

- No phase out exists

- Can contribute to a Coverdell ESA & QTP for the same beneficiary in the same year

- 2 Types of Plans:

1. Prepaid Program (paid to the school)

2. Savings Account Plan

133

Keogh Plans

Retirement plans for self employed unincorporated business owners (not independent contractors)

- contributions may be deducted from gross income

- contributions limited to lesser of $52k or 100% of earned income

- contributions limited to 25% of [net SE income after Keogh deduction & 50% of SE tax is claimed]... this amount is effectively 20% of SE income before the Keogh deduction (net SE income is equal to the remaining 80%)

134

Simplified Employee Pensions (SEPs)

contributions may be deducted from gross income

- up to lesser of :

1. 25% of compensation

Or

2. $52,000

135

SIMPLE plans

Savings Incentive Match Plan for Employees (SIMPLE)

- contributions may be deducted from gross income

- contributions limited to $12k per year by the employee & up to 100% of income matched by the individual employer

- Withdrawals within 2 years are subject to a 25% penalty tax (instead of the usual 10%)

136

What is the tax treatment for contributions made by company owners in regards to Keogh plans, Simplified Employee pensions (SEPs), & SIMPLE plans?

- If contribution is made on behalf of the business owner, the contribution is deducted from Gross Income to arrive at AGI

- if contribution is made on behalf of the owner's employee, the contribution is claimed as ordinary business deduction in the computation of net business profit or loss

137

"Early Withdrawal Penalty"

(I-EMBRACED-EHF)

early INTEREST withdrawal penalty from a CD is deductible

138

Tax Treatment for Jury Duty Fee

Taxable Income: Must ALWAYS include the fee in Gross Income (reported on 1040 as "other income")

- if the jury duty fee is given to the employer, taxpayer may deduct the fee to arrive at AGI (still included in GI)

(usually the case when employer pays wages while employee is away for Jury Duty, the employee will remit fees to employer)

139

"Qualified Higher Education Expense"

(I-EMBRACED-EHF)

Tuition for higher education is deductible up to $4,000

- courses that are expressly required by an employer, law, government regulation, or to maintain/improve skills required for current job (i.e. CPE courses)

- Phaseout Exists

140

Health Savings Account (HSA)

- contributions are deductible by a SE taxpayer or employee (must file Form 8889)

- taxpayer must have high deductible health plan (HDHP): $1,250 deductible for self-only coverage or $2500 deductible for family coverage

- contributions limited to LESSER of:

1. deductible (self:$1,250 or fam.:$2,500)

2. limit of $3,330 (self) or $6,550 (family)

** taxpayers 55+ years old can contribute additional $1,000

- amount contributed by employer are excluded from W2 income but still count towards contribution limit

- Expenses paid from the HSA CANNOT be claimed as Schedule A deductions

- Distributions from HSA are tax-free if used for qualified medical expenses (sch A deductibles, except HDHP premiums)

- If not used for qualified medical expenses, the distribution is subject to taxation & 20% penalty.

- No 20% penalty if distributions are made after beneficiary dies, becomes disabled, or turns 65.

141

Form 8889

Must be filed in order to make contributions to Health Saving Account deductible

142

What is the contribution limit for a HSA (health savings account)?

- contributions limited to LESSER of:

1. deductible (self:$1,250 or fam.:$2,500)

Or

2. limit of $3,330 (self) or $6,550 (family)

143

When are HSA distributions not subject to a 20% penalty?

1. used for qualified medical expenses (same sch A itemized deductions, except HDHP premiums) & tax-free also

2. made after beneficiary dies, becomes disabled, or turns 65 (not tax-free)

144

Crop Method

Accounting method that may be used for Schedule F (Farm Income) – (cash, accural, & hybrid are other options)

- cost of producing the crop is deducted in the year the crop income is realized (similar to accrual: COGS)

145

Accounting Methods for Farm Income (schedule F)

- Accrual, Cash, Crop Method, or Hybrid/Combination Method may be used if show income & used consistently

** if cash method is used to determine income, it must be used for reporting expenses

** if accrual method is used for reporting expenses, it must be used to determine income

146

How is farm income taxed?

Farmers may elect to average farm income over 3 years

- there is Schedule F Income (subject to SE Tax) & Form 4797 Income (not subject to SE tax)

Schedule F items:

- raised livestock, produce, and grains held for sale (other items bought for resale)

Form 4797 items:

- animals not held primarily for sale

- Livestock held for draft, breeding, dairy, sporting

- gains from sales of farmland or depreciable farm equipment

147

Form 4797

(sales of business property) Farm Income Items not subject to SE tax

- animals not held primarily for sale

- Livestock held for draft, breeding, dairy, sporting

- gains from sales of farmland or depreciable farm equipment

148

Schedule F items

Farm Income items subject to SE tax

- raised livestock, produce, and grains held for sale

- livestock & other items bought for resale

149

179 Deductions

You can elect to recover all or part of the cost of certain qualifying property (tangible personal property), up to a limit, by deducting it in the year you place the property in service.

You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions

150

Standard Deduction

- automatically given by the IRS to every taxpayer

- based on the taxpayer's filing status

- is an alternative to claiming itemized deductions

- dollar amount are adjusted for inflation and updated annually

151

Highest standard deduction

MFJ with both individuals age 65+ & legally blind

- all 3 traits increase the standard deduction (MFJ, 65+. & Legally Blind)

152

Tax Treatment for Charitable Contributions to qualified organizations

deductible amount is equal to NET of cash or property donated of any value received from the organization

- deductible in the year the ORGANIZATION RECIEVES the donation

- volunteer services are not deductible but out-of-pocket expenses (i.e. mileage & parking) incurred while volunteering are deductible

- Property contributions are subject to 2 rules:

1. Ordinary Income Rule: Deductible = (FMV – [Ordinary Income Or ST Capital Gain]) -----** (deductible must be lower of deductible calculation or FMV)

2. LT Capital Gain Rule: deductible = HIGHER FMV of LT Capital Gains, but limited to 30% of AGI

TOTAL overall contribution deductions are limited to 50% of AGI (unused may carry forward for 5 years)

- corporations limited to 10% of ATI (5 year carry forward applies)

153

Ordinary Income Rule

Property is ordinary income property if Sale at FMV on date of contribution would have resulted in ordinary income or ST Capital Gain (held less than 1 year)

** includes inventory, self-created art work, & capital assets (

Deductible = FMV – (Ordinary Income or ST Capital Gain)

** limits deduction to lower of the tax basis (deductible) or FMV

154

Long Term Capital Gain Rule

Property is capital gain property if its sale at FMV on that date of the contribution would have resulted in a LT capital gain (held 1+ years)

- capital gain property (non-business capital assets held 1+ years)

Deductible = HIGHER FMV of LT Capital Gains but limited 30% of AGI

155

What is the overall contribution limit that can be deducted per year?

Individual: 50% of AGI & may carry forward unused amounts for 5 years

Corporations: 10% of ATI & may carry forward 5 years as well

156

What are the itemized deductions for “other miscellaneous expenses”?

1. Not subject to 2% of AGI minimum

- Gambling losses: deductible limited to extent of gambling winnings (no carryover)

- Gambling winnings

- Professional Gamblers can deduct non-wagering business expenses on sch. C

2. Estate Taxes on income in respect to a decedent (IRD)

157

BIT

BIT is the first M in COMMITT (Miscellaneous Expenses: sch A itemized deductions

B - Business Expenses of Employee (2106 in Sch. A)

I - Investment costs (does not included brokerage buy/sell fees, which is included in P&L of stock)

T - Tax preparation/legal advice relating to taxable income (& costs incurred to collect money owed by others)

BIT expenses deductible = excess of 2% of AGI

158

Tax Treatment for Business Use of a Home

Employee's Home office for employer's convenience, individual can include in Sch A itemized deductions (excess of 2% of AGI)

- if self employed, the home office gets reported in Schedule C

159

Tax treatment for itemized deductions of medical expenses

Must have been paid & not reimbursed (net)

- deductible is the excess of 10% of AGI (if 65+, 7.5% of AGI)

- deductible in the year expenses are paid

- cosmetic services are not deductible (unless for curing illness, injuries, birth defects)

- general health improvement not deductible (must be specific medical conditions)

- non-prescription drugs not deductible (must be prescription)

- costs for people other than self, spouse, or dependent are deductible if the taxpayer provides over 50% of support ("donated" health care not deductible)

160

Itemized Deduction for investment interest expenses

deductible to extent of Net Investment Income (which is on Sch B)

- unused amount carried forward idefinitely

161

Interest Paid (applies to tax year)

Deductible in year it applies (always treat like accrual basis, even if cash basis is used)

--- prepaid interest is not deductible until year that it applies to (except for "points" on mortgage loan to acquire a primary or secondary residence, which is a form of prepaid interest... it is deductible immediately)

162

itemized deductions on personal residence interest

Personal Residence: primary & secondary residence

- Points paid on a loan to acquire the residence: deductible immediately

- Points paid on other qualified personal residence loans: deductible by amortization over the life of the loan (accrual)

- Periodic Interest payments on acquisition indebtedness up to $1M (acquire, construct, improvement loans & loans that replace previous acq. Indebtedness)

- Period interest payments on home equity loans up to $100k (secured by home's equity)

** home equity loans must NOT be > (FMV of home – O/S Acq. Indebtedness)

163

Interest on Personal Loans (itemized deduction?)

Not Deductible

164

Gas or Excise Taxes (itemized deduction?)

Not Deductible

165

Fees charged by local & state governments (itemized deduction?)

Not deductible UNLESS they are based specifically on income or property value

166

State and Local Sales taxes (itemized deduction?)

Deductible only if taxpayer chooses to deduct instead of state and local INCOME TAXES

** useful for taxpayer's in the 9 states without income tax

167

Itemized deduction for Casualty Losses

Losses that exceed 10% of AGI are deductible

Deductible Calculation:

** loss claimed is LOWER of tax basis (purchase + repairs) OR loss (FMV before event – FMV after event)

Then all following must be subtracted from Loss amount to arrive at Deductible:

1. Reimbursements (insurance & governments)

2. $100 per event

3. 10% of AGI per year

***Casualty loss: sudden event that causes a total loss or drop in value over a time period less than 30 days (accidental breakage not included)

168

Phase Out for Itemized Deductions (calculation)

Total of All itemized deductions is reduce by the LESSER of:

1. 3% of the amount of the excess of AGI over the annual limit

2. 80% of the itemized deductions that are affected by the limit

exclude GIMC – Gambling losses, Investment interest, Medical expenses, & Casualty Losses

169

GIMC

G - Gambling losses

I - Investment interest

M - Medical expenses

C – Casualty Losses

Total of All itemized deductions is reduce by the LESSER of: (exclude GIMC)

1. 3% of the amount of the excess of AGI over the annual limit

2. 80% of the itemized deductions that are affected by the limit

170

Personal Exemption for MFJ

2 Personal Exemptions are included if MFJ (spouse is not a dependency exemption)

171

Qualifying Child

taxpayer's child, stepchild, sibling, step sibling, half sibling, or a descendant of any such individual (ie nephew)

JARRS

Joint Return-no

Age (under 19 or FT student under 24 or any age if perm & totally disabled)

Residency (US or N.A. Resident)

Relationship (living with ½ year, foster child: whole year)

& Support tests (dependent cannot support THEMSELVES 50%+)

172

Qualifying Relative

C – IRS – J[ack you]

C – Citizen or resident (US of N.A. Resident)

I – Income: limited to personal exemption amount ($3,950) (ignore SS)

R – Relationship or unrelated & household member for entire year

S – Support: provide 50%+ of total annual support (includes SS & AFDC) (multiple support agreement applicable, 10% support)

J – no Joint return with spouse (unless dependent and spouse are filing only to get total refund of taxes paid or withheld & weren't required to file)

173

What are the requirements to qualify as a dependent?

All requirements met for either

1. Qualifying Child (JARRS)

Or

2. Qualifying Relative (C-IRS-J[ack you])

174

Personal Exemption

deduction amount one can claim for self or dependent each year

$3,950 (phase out applies)

175

What does a filing status determine?

1. Income tax rates

2. Value of various deductions, thresholds, & limitations

176

Qualifying Widow (surviving spouse) with a dependent child

Death in prior 2 years & qualified to file a joint return in year of death (not divorced, separated)

- not remarried as of end of current year

- Same rate as MFJ

177

What is the order for considering your filing status?

1. MFJ

2. MFS

3. Qualifying Widow

4. Head of Household

5. Single

178

How does a taxpayer qualify as Head of Household?

Satisfy all requirements below:

1. Taxpayer NOT married or surviving spouse at year end

2. Taxpayer must maintain his home as the principal place of residence for over 50% of year

3. Must Provide 50%+ of costs of maintaining a household for:

a. DEPENDENT "qualifying relative" living with the taxpayer for entire year

b. "Qualifying Child", stepchild, or grandchild living with taxpayer (must be dependent UNLESS custodial parent releases right claim dependency & files form 8332)

c. DEPENDENT parent (but need NOT live with taxpayer)

*** child must be a qualifying dependent child OR qualifying relative in order to qualify a taxpayer for HOH status

179

What is the filing status for a Married individual but legally separated under decree of separate maintenance?

SINGLE

180

Child Tax Credits

$1,000 credit for qualifying children under 17 years old at year end.

** refundable credit ($$$) applies when taxpayer is unable the full credit because tax liability is LESS THAN available credit

181

Adoption Credit

available for costs incurred in adopting a child under the age of 18 (minor)

- credits exceeding the tax liability may be carried forward for up to 5 years (not refundable credit)

- Phase out applies

182

Child & Dependent Care Credit

available when the taxpayer requires care services for a child or disable dependent in order to be gainfully employed (child must live with the taxpayer for 1/2+ the year---- 50% support does not apply)

Credit is the less of:

1. Actual dependent Care Expenses

2. Earned Income (if married, based on income of lower-paid spouse)

3. $3,000 (one dependent care) or $6,000 (multiple dependents care)

** up to $5,000 of benefits under an employer dependent care assistance plan can be EXCLUDED from taxable income

183

Tax Credits

dollar for dollar reduction of taxes payable

184

The types of Education Tax Credits

1. American Opportunity Tax Credit [per student] (AOTC... formerly known as Hope Scholarship Credit) – High School (4 years)

2. Lifetime learning Credit [per family] – All other years of education & tuition to improve job skills

185

American Opportunity Tax Credit (AOTC... formerly known as Hope Scholarship Credit)

- Applies to the first 4 years of High School (post-secondary school)

- Tiered Tax Credit per student = (1) 100% of first $2,000...(2) 20% of the next $2,000 (therefore, $2,500 max credit per student)

- applies to tuition, textbooks, and fees of the taxpayer, spouse, or dependent

- 40% of the credit is refundable credit ($1,000 max)

186

Lifetime Learning Credit

- applies to all other years of education (other than the AOTC first 4 years of HS)

- can also apply to tuition paid to a qualified educational institution to improve job skills

- credit per family = 20% of the first $10,000 paid on behalf of all the family members ($2,000 max credit PER FAMILY)

187

Restrictions placed on both Education Tax Credits (AOTC & Lifetime Learning Credit)

1. credit only applies to tuition and fees paid to qualified educational institutions

2. phase out exists

3. credit cannot be claimed on the dependent's tax return

4. Cannot claim both a AOTC (Hope) and Lifetime Learning Credit for the same student in the same year

188

Savers Credit

available for low to moderate income workers to encourage contributions to retirement accounts (IRA or employer sponsored)

- "eligible" if 18+ age, Not a FT student, & not claimed as a dependent

- $1,000 max credit ($2,000 MFJ), with ranges 10% - 50% of $2,000 depending on income (form 8880)

- May be claimed by:

1. MFJ with income up to $60k (2014)

2. HoH with income up to $45k (2014)

3. Single/MFS with income up to $30k (2014)

189

Form 8880

Credit for Qualified Retirement Savings Contributions (Saver's Credit Form)

190

Foreign Tax Credit

available for payments of foreign income taxes that are not being claimed as itemized deductions (can only be claimed on foreign income that is also subject to domestic taxation)

- calculation is same for individuals & corporations except for one thing:

---- Individuals can claim credit up to $300 ($600 MFJ) for foreign income taxes paid on investment income WITHOUT being subject to any other limits

191

Credit for the Elderly or Disabled

Available to those:

1. 65+ years old at year end

or

2. Retired on permanent and total disability and have taxable disability income

Limitations (2):

1. AGI must be less than:

- $17,500 if single, HoH, or Surviving Spouse

- $12,500 if MFS

- $20k if MFJ with 1 eligible spouse

- $25k if MFJ with both eligible

2. Total of Non-taxable Social Security, pensions, annuities, and disability income must be less than:

- $5k if single, HoH, or Surviving Spouse

- $3,750 if MFS

- $5k if MFJ with 1 eligible spouse

- $7,500 if MFJ with both eligible

192

Age 65 (Rule)

You are considered to be age 65 on the day before your 65th birthday.

As a result, if you were born on January 1, 1949, you are considered to be age 65 at the end of 2013.

193

Earned Income Credit (EIC)

refundable tax credit

- calculation of EIC only includes taxable income (must have some form of earned income to qualify)

- A qualifying child does not have to meet the support test

---- must have lived with the taxpayer for more than ½ the year & have a valid SSN that is valid for employment in the US

*** if investment income > $3,200, the credit is DENIED

194

Net Self Employment Income

All business revenue minus ordinary & necessary business expenses (except retirement plan contributions made on the taxpayer's behalf

** one of the business expenses deducted in ½ of the self-employment tax itself (deducted in arriving to AGI from GI)

195

Medicare Portion of the SE Tax

it is based on the entire amount of net self-employment income.

** the remaining portion of the SE tax is limited to a certain income limit that changes every year

196

Self Employment Tax (other than medicare portion)

It is limited to a certain income limit that changes every year:

- based on net SE income that is reduced by any of the taxpayer's gross wages that were subject to social security taxes

197

Hospital Insurance (HI) rate

.9% increase in Medicare tax rate for high income earners ($250k for MFJ & $200k for all others):

---- 2.35% tax rate on amounts in excess of the thresholds (old rate 1.45%)

---- the SE tax rate increases from 2.9% to 3.8% on amounts in excess of the threshold

198

Form 1040ES

If estimated tax payments are required, they are due on form 1040ES by the 4th, 6th, and 9th months of the taxable year & on the 15th of January

199

When is an individual generally not subject to a penalty for underpayment of estimated taxes?

Any amount may be satisfied:

1. balance due is Less than $1,000 on April 15th

2. withholding & estimated payment of taxes is more than 100% of PY tax liability (110% if taxable income is $150k+ in PY)

3. withholding & estimated payment of taxes is more than 90% of CY tax liability

Or

- did not have a PY tax liability

200

What is treatment for a late payment penalty and late filing penalty in the same month?

The late filing penalty (5%) is reduced by the late payment penalty (.5% --- one-half percent) so that the maximum penalty is 5% per month

** penalties are based on the net tax due

201

Accuracy-Related Penalty

Penalty of 20% of the tax underpayment amount applies if the underpayment is due to:

- negligence or disregard of rules & regulations

- any substantial understatement of income tax

- any substantial valuation overstatement

- any substantial overstatement of pension liabilities

Or

- any substantial gift or estate tax valuation understatement

202

When is an individual not require to file a tax return?

- When a tax liability does not result because of insufficient gross income.

- If Gross Income is less than the sum of:

+ Personal exemption (2 if MFJ)

+ basic Standard Deduction based on filing status

+ Additional Standard Deductions based on age

203

When does the statute of limitations begin for the IRS to file a notice of deficiency?

Day AFTER the later of:

1. Date tax return is due (including extensions)

Or

2. Date tax return is filed

204

What is the time limit for a taxpayer to claim a refund (1040X)?

The limit is the later of:

1. 3 years after the original return was due (including extensions)

Or

2. 2 years after the tax payment

205

30 Day Letter

issued by the IRS when an examination results in a proposed tax deficiency

- letter includes: report of the examination, reasons for indication, taxpayer's right to appeal

** within 30 days of the date of the letter, the taxpayer may ask the Appeals Office to consider the case

206

What is the purpose of the Alternative Minimum Tax (AMT)?

to limit the reaping of benefits from large itemized deductions or special tax benefits

- compared against the Regular Tax Due (higher amount is chosen)

207

AMT Formula – full (Individuals)

Regular Taxable Income

+/- Adjustments & preferences

= AMTI before exemption

- Exemption

=AMTI

X Tax Rate (26% for first $179.5k, then excess at 28%)

= Tentative Minimum Tax

- Regular Tax

= AMT

208

AMTI formula (Individuals)

Regular Taxable Income

+/- Adjustments & preferences

= AMTI before exemption

- Exemption

=AMTI

209

AMT formula – AMTI to AMT (Individuals)

AMTI

x Tax Rate (26% for first $179.5k, then excess at 28%)

= Tentative Minimum Tax

- Regular Tax

= AMT

210

SIMPLE-PIE

SIMPLE (+/- adjustments) --- PIE (+ preferences)

Adjustments (income or expense items) computed differently for AMT & regular tax. they are added or subtracted from Regular taxable income to arrive at AMTI before exemption

SIMPLE(+/- Adjustments)

S – Standard Deduction may NOT be claimed

I – Interest on home equity loans is NOT deductible (unless buy, construct, improve main home)

M – Medical expenses under 10% of AGI are NOT deducted (applies to 65+ in regular tax, which are at 7.5% - need to find the difference)..... [under 65 are already at the 10% threshold]

P – Personal & Dependent Exemptions are NOT allowed

L – Local & State income taxes, all property taxes & sales taxes are NOT deductible

E – Employee B.I.T. expenses subject the 2% of AGI threshold are NOT deductible (other deductions not subject to the 2% threshold are still allowed)

**** corporations have an additional ACE adjustment (does not apply to individuals)

PIE (preferences – can only increase AMTI)

P – Private activity bond interest is fully taxable (interest is not a preference if bond was issued in 2009 or 2010)

I – Incentive Stock Options: taxed when exercised for difference between Exercise Price & Market Price (regular tax: taxed when sold)

E – Excess depreciation on personal property over 150% declining balance (regular tax: double-declining balance)

211

Private Activity Bonds

used to finance nongovernmental activities, such as industrial housing, low income housing, and student loans

212

ACE Adjustment

additional AMTI adjustment for corporations only

213

AMT Exemption

based on the filing status of the tax return (phase out exists)

AMTI before exemption – AMT Exemption = AMTI (or AMT Base)

214

AMTI Adjustments & Preferences

SIMPLE (+/- adjustments) --- PIE (+ preferences)

Adjustments (income or expense items) computed differently for AMT & regular tax. they are added or subtracted from Regular taxable income to arrive at AMTI before exemption

SIMPLE(+/- Adjustments)

S – Standard Deduction may NOT be claimed

I – Interest on home equity loans is NOT deductible (unless buy, construct, improve main home)

M – Medical expenses under 10% of AGI are NOT deducted (applies to 65+ in regular tax, which are at 7.5% - need to find the difference)..... [under 65 are already at the 10% threshold]

P – Personal & Dependent Exemptions are NOT allowed

L – Local & State income taxes, all property taxes & sales taxes are NOT deductible

E – Employee B.I.T. expenses subject the 2% of AGI threshold are NOT deductible (other deductions not subject to the 2% threshold are still allowed)

**** corporations have an additional ACE adjustment (does not apply to individuals)

PIE (preferences – can only increase AMTI)

P – Private activity bond interest is fully taxable (interest is not a preference if bond was issued in 2009 or 2010)

I – Incentive Stock Options: taxed when exercised for difference between Exercise Price & Market Price (regular tax: taxed when sold)

E – Excess depreciation on personal property over 150% declining balance (regular tax: double-declining balance)

215

Tentative Minimum Tax

Tiered Calculation to get TMT:

1. 26% x (First $179,500 of AMTI, if MFJ)

2. 28% x (Excess over $179,500, if MFJ)

***[$89,759 if MFS]

216

When AMT is paid (not regular tax due), what is something to consider?

1. Timing Differences (reversal of income differences), which may result in a credit against regular tax liability in future years

- ISO:

1. AMT taxes them at date of exercise (Market Price – Exercise Price = Taxable Gain for AMT)

2. Regular tax is at date the ISO is sold by the taxpayer (Updated Market Price – Exercise Price = Taxable Gain on Sale)

------- Therefore: the AMT tax paid on the ISO's original gain is claimed as a credit against the regular tax liability

2. Exclusion preferences and adjustments do NOT result in credit against regular tax liability (differences that do not reverse)

217

Non-refundable Personal Credits effect on Regular Tax Liability & AMT

they are allowed to offset both Regular Tax & AMT

Non-refundable personal credits:

- dependent care credit

- credit for elderly or disabled

- adoption credit

- non-refundable portion of the child tax credit

- education credits (hope & lifetime)

218

Carryover Rule for Charitable Contributions

Back: None

Forward: 5 years

219

Carryover Rule for Net Op. Losses (NOL)

Back: 2 Years

Forward: 20 years

220

Carryover Rule for Net Capital Losses (Corporations – 0 net cap loss)

Back: 3 Years

Forward: 5 years

221

Carryover Rule for Net Capital Losses (Individuals - $3k net cap loss)

Back: None

Forward: Indefinitely

222

Carryover Rule for Investment Interest

Back: None

Forward: Indefinitely

223

Carryover Rule for Net Passive Losses

Back: None

Forward: Indefinitely or may be claimed when investment is sold..

224

Carryover Rule for Net Gambling Losses

Back: None

Forward: None

225

Section 1244 stock (Capital Gain or Loss tax treatment)

treated as an ordinary income or loss, rather than a capital gain or loss, due to the special rules for small domestic corporation stock losses.

226

Form 1139

may be used by a corporation to file for a tentative adjustment or tax refund when an PY overpayment of taxes results from the carry back from of a CY's net operating loss or net capital loss

(like a form 1045 but for corporations only)

227

Form 1045

may be used by taxpayers other than corporations to apply for a tentative adjustment or tax refund when an PY overpayment of taxes results from the carry back from of a CY's net operating loss or net capital loss

(like a form 1139 but not for corporations)

228

Form 843

used to file a refund claim for taxes other than income taxes

229

What is the amount included in CY gross income if the individual itemized the deduction in the PY?

The LESSER of:

1. the amount by which total itemized deductions exceeded the standard deduction in the PY

or

2. the amount of state taxes claimed as a deduction

230

Which tax credits are denied for a MFS filing taxpayer?

- the earned income credit

- the child and dependent care

- adoption credits.

231

When is a residence treated as part personal residence and part rental property?

If a residence is both:

1. Rented for more than 14 days during the year

&

2. Qualifies as a "Home": Personal use > [the larger of (i) more than 14 days or (ii) more than 10% of the rental days]

If this is the case, expenses attributable to the residence must be prorated between personal and rental use

232

What is required to qualify for the exclusion of capital Gain on the Sale of Personal Residence?

the taxpayer must own & occupy the residence for 2 of the 5 years immediately before the sale.

If qualified, No gain reported up to $250,000 ($500,000 for married taxpayers) of capital gain attributed to the sale of a personal residence.

233

During the current tax year, one spouse died. The couple has no dependent children. What is the filing status available to the surviving spouse for the first subsequent tax year?

 For the first subsequent tax year (and all other subsequent tax years) after the death of a spouse with no dependent children, filing status is single.

234

Gross Income Deduction Limit for Passive Activity Losses from Flow Through Entities

- no limit on credits or passive losses that may be deducted by grantor trusts, partnerships, & S corporations (flow through entities)

235

Exception to the Passive Activity Loss Rule

"Mom and Pop Exception"

Taxpayers who own more than 10% of the rental activity, have modified AGI under $100,000, and have active participation (managing the property qualifies), may deduct up to $25,000 annually of net passive losses attributable to real estate.

Phase Out for modified AGI from $100,000 − $150,000 (phased out at $150k)

236

Tax Treatment for receipt of Prepaid Rent

Prepaid rent is taxable in the year received, even for accrual basis taxpayers

237

The rule limiting the allowability of passive activity losses and credits applies to

Personal Service Corporations

238

What are the types of tax-exempt interest income (reportable but not taxable)?

1. Series EE Savings Bond (if educational expenses, ownership, 24+, acquired after 1989)

2. Bonds of US Possession (e.g. Guam or Puerto Rico)

3. State and Local Government Bonds/Obligations (including mutual fund dividends invested in tax-free bonds)

4. Veterans Administration Insurance

239

Rule of thumb to determine the deductions to arrive at Net Self-Employment Income?

Deductions to arrive at net self-employed income include all necessary and ordinary expenses connected with the business

240

Requirements of an Employee Stock Purchase Plan (ESPP)

- option exercise price must be GREATER THAN the lesser of: (a)85% of the FMV on grant date or exercise date

- no employee cam acquire right to purchase more than $25,000 per year

- option cannot be exercised more than 27 months after the grant date

- once exercised, the stock must be held at least 2 years after the grant date & at least 1 year after the exercise date

- must remain an employee from the grant date until 3 months before option is exercised

241

Qualified Stock Options

ISO (Incentive Stock Option)

ESPP (Employee Stock Purchase Plans)

242

What is an individual's tax treatment for being granted unqualified stock options (in the year of grant)?

Recognize ordinary income as the value of the option if traded on an established market

243

Steps to Calculate the amount of Child's Unearned Income (who is subject to Kiddie Tax) that is taxed at parent's tax rate

Child's Unearned Income – Standard Deduction* – Standard Deduction = Amount Taxed @ Parents Max Tax Rate

**2014 Standard Deduction = $1,000

*First Standard Deduction in calculation is taxed @ the child's tax rate

244

A rule of thumb for deductions on the Schedule C

Personal expenses are not allowed (i.e. health insurance, personal use of automobile)

245

Gain on Sale of personal residence

Income or Not Income?

Partial Income

- $250k of Gain on Sale is excluded from income, the excess above $250k is taxable income (as capital gain)

246

Pension Benefits

Income or Not Income?

Income except to the extent they are considered return on capital (amount contributed by the employee)

* amount contributed by the EMPLOYER is taxable

247

Gambling Winnings and Losses Tax treatment

Gambling Winnings are FULLY taxable & included in AGI

Gambling Losses are deductible in Schedule A ("O" in COMMITT, itemized deductions) to the extent of gambling winnings

- any unused amount is lost, no carry back & no carry forward

248

Tax Treatment for Penalty from Early Withdrawal from Certificate of Deposit

The penalty is a reduction to interest earned (Deduction “to/for” AGI)

249

Tax Treatment for State & Local Income Taxes

Full Itemized Deduction (Schedule A) for year in which the taxes paid, regardless of which tax year the taxes apply to

250

Tax treatment for Real Estate Taxes

Full Itemized Deduction (Schedule A)

251

Tax Treatment for Losses on Sale of Personal Assets

Not Deductible

**Gains are taxable as capital gains (LT vs ST)

252

Tax Treatment for Union Dues

Itemized deduction (schedule A) subject to 2% of AGI reduction

- considered a business expense (BIT)