REG 1 - Individual Taxation Flashcards
(67 cards)
1
Q
Tax Filer - Filing Requirements (5)
A
An individual must file a tax return if:
- Income is greater than the sum of their personal exemption plus their standard deduction
- Have net self-employment earnings >$400
- Are individuals claimed as dependents on another taxpayer’s return, but have unearned income & gross income >$1000
- Anyone receiving advance payments on the Earned Income credit (EIC)
- Are subject to the Kiddie Tax
Due date is 4/15 - 6mo extention to File, not to pay!
2
Q
Kiddie Tax (3)
A
Kiddie Tax - Established to prevent the “wealthy” from avoiding taxes on their investment by transferring the investments into the names of their children who might not be subject to tax or who may have a lower tax rate. Basically, the kid’s uneraned income will be taxed at the parent’s tax rate.
Kiddie Tax applies to children meeting three coditions:
- Either parent is alive at the end of the tax year
- Child does NOT file a joint tax return for the year
- Child is of the appropriate age, either:
- Under 18
- Is a student between 18-24 with earned income that does NOT exceed 50% of the child’s support
An individual subject to the Kiddie tax will be subject to a tax liability for the larger of 2 amounts:
- Tax liability based on the child’s earned & unearned income
- Tax liability based on the child’s earned income PLUS the allocable parental tax (if kiddie income were included in the parent’s return).
Example: if child has $3K interest income, the parent’s additional income will be $1K. For the child taxable income is up to $2K.
3
Q
Tax Due Dates
Individual
Amended
Statue of Limitations for IRS
A
Individual Tax (1040) - is on or before the 15th day of the 4th month following the close of the year.
- If date falls on a weekend, the return is due on the next business day.
- Extensions - IRS grants an automatic 6 month extension
Amended Returns (1040X) due by later of:
-
3 Years after the original tax return was filed
- If filed late, 3 yrs from date return was due
- 2 Years after actual tax was paid
Statue of Limitations for IRS:
- 3 years - Error/Simple Negligence
- 6 years - Gross Negligence or Total Income is Understated by 25% or more
- Unlimited - Fraud or Non-filing
4
Q
Who may use Cash Basis?
(Individuals & Businesses)
A
Entities allowed to use the cash basis:
-
Most individuals use the Cash basis of accounting
- But accrual method is used if purchases & sales of inventory is present.
-
Service Types of Businesses whos gross receipts do NOT exceed $10M may use the cash basis which includes:
- Most individuals
- S-Corps
- Partnerships
5
Q
Who may NOT use Cash Basis? (3)
A
Entities prohibited from using the cash basis:
- C-Corps with gross receipts greater than $5M
- P/S that have a C-Corp as a partner w/ receipts >$5M
- Tax Shelters
6
Q
Cash Basis
Recognition of Income
&
Reporting of Deductions
A
Recognize Income:
-
Cash or Property received, at FMV
- Even if “unearned” (pre-paid rent), still considered as income when received.
- NOTE: Change in A/R amount does NOT affect taxable income.
-
Actually or “Constructively Received”
- Date when the taxpayer has income made available for use.
- Example: Pre-paid rent, post dated checks
- Accrual for purchase/sale of inventory
Report Deductions:
- When the cash or check is disbursed
- Expense charged on credit card (date chrg on the card)
- Prepaid interest is not deductible
7
Q
Accrual Basis
Recognition of Income
&
Reporting of Deductions
A
-
Recognize income when “earned”
- An accrual basis tax payer that receives rents or royalties in advance is required to include them as taxable income in the period received.
- NOTE: If Inventories are necessary to clearly determine income, then the Accrual method must be used.
- Book expenses as “Incurred”
- if Liability exists & amount is Determinable
8
Q
Individual Income Tax Return (1040)
A
+Gross Income
+/- Adjustments (Schedules B,C,D,E,F [I-EMBRACED])
= AGI
- Deductions (Std Deduction OR Schedule A)
- Net Exemptions (JARRS & C-IRS-Jack)
= Taxable Income
x Tax Rate
=Tax Liability
- Credits
+ Self-Employment Tax
+ AMT
- Witholdings
- Prepayments
= Tax Due
9
Q
Gross Income
A
- Earned Income (W2)
- Scholarships
- Interest Income - Schedule B
- Dividend Income - Schedule B
- Stock Options (non-qualified, ISOs)
- Injury Awards
- Prizes & Awards
-
S-Corps
- Earned income of the corp w/o consideration of distribution.
10
Q
Gross Income
Earned Income
A
Compensation for services including:
- Wages & Salaries (W2)
- Tips
- Jury Duty Fee
- Bonuses & Commissions
- Unemployment compensation
-
Payment in non-monetary form @ FMV
- Example: Stocks or property
- Bargain purchases of employer merchandise
- Is limited to 20% of the amount normally charged to nonemployee customers. As a result, Norbert would be able to exclude an employee discount up to 20% x $2,000 or $400 with the remaining $600 included in gross income.
-
Fringe benefits
- The first $50K of group term-life insurance provided by an employer is a non-taxable as a fringe benefit, anything over $50K is taxable.
- Life Insurance payments IF purchased
- Prizes & Awards
- Years of Service award, $400 & over is taxable.
- Gambling winnings
- Illegal drug income (net of COGS)
11
Q
Gross Income
Scholarships
A
To be included in Gross Income if:
- Scholarship is earned or for compensation
- Fellowships
- Scholarships spent on Living Expenses are Taxable
Not Included in Gross Income if: BOTH
- NOT compensation for required services
- Money spent for tuition, books, or class supplies for students
12
Q
Gross Income
Interest
A
To be included in Gross Income if: (Schedule B)
- Most govt interest is taxable (Federal bonds, T-bills)
- Interest accrued each year on zero-coupon bonds or bonds purchased at a discount
- Interest on US T-Bills
- Interest on Series HH US Savings Bonds (paid semi-ann)
- Interest on Series EE savings bonds when Redemmed
Not Included in Gross Income if:
- Interest on State or Municipal bond (NOT Taxed)
- Interest earned on a qualified higher education bond
- Interest on a Series EE US Savings Bonds NOT reported to gross income UNTIL redemeed.
13
Q
Gross Income
Dividends
A
To be included in Gross Income if: (Schedule B)
- Ordinary Distributions
- Short-term capital gains
- Capital gains distributions/Long-term capital gains
- Stock dividend on Preferred stock
NOT included in Gross Income if:
- Stock dividends or stock splits
- 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
- Liquidating dividends
NOTE:Taxed at special 0%, 15%, 20%, similar to LT-Capital Gains Rate: (Meets 60+ days holding period)
- 0% tax rate = 10% or 15% tax bracket
- 15% tax rate = 25%, 25%, 33%, 35% tax bracket
- 20% tax rate = 39.6% tax bracket
14
Q
Gross Income
Stock Options (2)
A
1.) Non-qualified - Taxed when stock is exercised (even if not sold), treated as compensation for excess of FMV over exercise price.
2.) Qualified or Incentive Stock Option (ISO) - Taxed when stock is sold, treated as capital gain or loss on difference between sales price & exercise price.
- For AMT purposes, ISOs are taxed when excercised.
- ISO must be held 2yrs from grant date & 1 yr from excercise date
15
Q
Gross Income
Injury Awards
A
Included in Gross Income if:
-
Non-physical - Taxable
- Age or Race discrimination
- Punitive Damages (to punish employer)
- Lost of business process
NOT included in Gross Income if:
-
Bodily Injury - Tax Free (BLOOD)
- Pain & suffering for physical injury
- Worker’s compensation
- Reimbursement of medical expenses paid & not itemized on schedule A
16
Q
Gross Income
Prizes & Awards
A
Included in Gross Income if:
- All prizes & awards are Taxable at FMV
- Gambling Winnings
- Years of Service Awards greater than $400
NOT included in Gross Income if:
- If received for Years of Service or Safety Achievement
-
$400 may be deductible from gross income & the rest will be included.
- Amount greater than $400 IS taxable
-
$400 may be deductible from gross income & the rest will be included.
17
Q
Gross Income
Social Security (2)
(Provisional Income)
A
Included in Gross Income if:
- 85% of SS benefits are taxable if the taxpayers earns $60K+ of provisional income
NOT included in Gross Income if:
- SS benefits are NOT taxable if taxpayer earns less than $25K of provisional income
Provisional Income - AGI before SS + Tax-exempt income + one-half of SS benefits.
18
Q
Gross Income
Pension (IRAs)
A
Included in Gross Income if:
-
Proceeds withdrawn from Pension Plan or Traditional IRA
- Subject to: 10% Penalty + Marginal Tax Rate
- Traditional IRA distributions
- Pension Plan benefits in which employer paid all costs
NOT included in Gross Income if:
- Roth IRA withdrawals or distributions
- Return of Capital is NOT taxable
- Lump-sum Distributions - certain distributions may be rolled-over tax-free to a Traditional IRA account if done within 60 days.
19
Q
Gross Income
Annuities
A
Included in Gross Income if:
- Interest component of an annuity
NOT included in Gross Income if:
- % of Annuity Excluded from Taxes = Cost of Annuity / Expected Total Annuity Payments
- Lump-sum Distributions - certain distributions may be rolled-over tax-free to a Traditional IRA account if done within 60 days.
20
Q
Gross Income
Tax Refunds - Federal & State
(Heavily Tested)
A
Tax Refunds consists of Federal & State refunds:
Federal
- Refund - NOT Taxable (return of money)
- Interest - YES, Taxable (frm T-bills, T-bonds)
State
- Interest - Yes Taxable
-
Refund - Yes OR No
- Yes - If itemized in the P/Y, got deduction in Schedule A, so taxable in current year (1099G).
- No - If did NOT itemize in P/Y, chose standard deduction, refund is not taxable in current year.
21
Q
Gross Income
Inheritances, Gifts, & Life Insurance Proceeds
A
Inheritances, Gifts & Life Insurance Proceeds - NOT taxable to recipient.
- Estate pays for the tax.
- However, any income received from property is taxable.
22
Q
Gross Income
Capital Assets
(Gain vs. Loss)
A
Capital Assets - Are reported on Schedule D, which includes assets held for investments, personal use, or goodwill (non-business assets). Two types of gains if Capital Assets are sold Short-term Capital Gains & Long-term Capital Gains.
- STCG - taxed at ordinary rate IF held <1Yr
-
LTCG - taxed at special rate IF held >1 yr.
- Now taxed at special 0, 15, 20% capital gains rate:
- 0% tax rate = 10% or 15% tax bracket
- 15% tax rate = 25%, 25%, 33%, 35% tax bracket
- 20% tax rate = 39.6% tax bracket
- Now taxed at special 0, 15, 20% capital gains rate:
-
Net Capital Loss up to $3,000 against Ordinary Income
- Unused carried forward indefinitely
- Corporation gets 0 net captial loss. Can carry back 3 years & forward 5 years.
23
Q
Tax Schedules
(A,B,C,D,E,F)
A
A - Itemized Deductions (Personal & Employee expenses)
B - Interest & Dividend income
C - Profit/Loss from a Business (Employer Expenses & 1099)
D - Capital Gains/Loses (S/T & L/T Investments)
E - Supplementary Income/Loss (RRF-COP)
- Rental Income
-
Royaltiies
- Copyrights
- Oil/Gas leases
- Patents
-
Flow Through Entities (info from K-1)
- S corps
- S-Corp earnings = Partner’s earnings without regard to distribution.
- Partnerships
- Estates & Trusts
- S corps
F - Profit/Loss from Farming
24
Q
I-EMBRACED EHF
“For AGI” Adjustments
A
Interest on Student Loans - $2,500.00
Employment Tax 50%, Med. Premiums - 100%
Moving Expenses
Business Expense > Schedule C
Rent/Royalty/Flow-Through Entities > Schedule E
Alimony (CANNOT)
Contributions to Retirement (KEOGH/IRA)
Early Withdrawal Penalty
Jury Duty Pay
Education - $4,000.00
Health Savings Accounts (HSA)
Farm Income > Schedule F
25
**I**-EMBRACED EHF
Student Loan **I**nterest
Student Loan **I**nterest - for higher education
* **$2,500.00** phase out applies
* Applies to entire repayment period
26
I-**E**MBRACED EHF
Self-**E**mployement Tax
* Self-**E**mployment tax on return may be deducted
* 50% of tax return (7.65%)
* FICA 6.2%
* Medicare 1.45%
* **100%** of **Medical** Insurance **Premiums paid** by **self-employed** taxpayer for self & family **are Deductible**.
**_NOTE_****:**
* Income from an **S-Corp is NOT subjected** to Self-employment tax.
* Employment Tax - Employer & Employees share (15.3%)
27
I-E**M**BRACED EHF
**M**oving Expenses
**M**oving Expenses
* Must be **50 miles further** from old home
* Direct costs of moving
* Ex: hotels, flights, truck expenses
* Must work at new job for **39 weeks (9 Months)**
* **NOT Meals,** house hunting cost, temp living expense
28
I-EM**B**RACED EHF
**B**usiness Expenses
**B**usiness Expenses (Schedule **C - 1099**)
* All cost of running a business
* All taxes paid by the business
* Bad Debts \> **Direct write-off method**
* ****Example: Loaned to a person who declared bancruptcy; that amount may be deducted in the current year.
* **Gift - $25** per receipient
* **Promotional Item - $4** per item
* 50% Meals & Entertainment
* 100% Travel
* **Hobby Loss** - If no profit in 3 of 5 years, loss is NOT deductible.
* Net Income (other income) Line 21
* Expenses on Schedule A (misc 2%)
29
I-EMB**R**ACED EHF
**R**ental, Royalty, & Flow through Entities
(Schedule?)
**R**ental, Royalty, & Flow thru Entities - **Schedule E "Passive Activity"**
* Taxpayer doesn't materially participate
* ALL limited partnership interests
* ALL rental activity
* Unless a real estate professional or 10% activity
* **Losses only to extent of passive gains**
* Unused carried forward until activity disposal
**Materiallly Participates in Rental Activities?**
* When the taxpayer materially participates, real estate losses may be used to offset ordinary income.
* **Real Estate Person** - losses from real estate rental activities may be treated as ordinary business losses.
* **Active Participation** (10% Interest in Activity) - Active rental losses partially deductible.
* **$25K - 50% (AGI over $100K)**
* **Example: $25K - .5(AGI - 100K)**
* No deduction if AGI is over $150K
**_Dwelling Units Rules:_ HOME & RENTAL**
* If rended for **LESS than 15 days** & used as a home:
* Rental **Income** is **EXCLUDED** from **gross income**
* Rental **Expenses** are **NOT** to be **deductible**
* If rended for **more than 14 days:**
* And **personal use is MORE than 14 days**
* ****Rental income is included in gross income
* Expenses to be deducted are **limited** to gross rental income
* And **personal use is NO more than 14 days**
* Rental income is included in gross income &
* All expenses allocated to rental portion are may be deducted.
30
I-EMBR**A**CED EHF
**A**limony
(CANNOT)
**Alimony** is **taxable to** the **recipient & deductible by** the **payer.** However, payments for **child support** & **property settlements** are **NOT deductible** by the taxpayer.
Alimony has six requirements: **(CANNOT)**
1. **C**ash Only or its equivalent (NOT Property)
2. **A**part when payments made
3. **N**ot child support (not taxable/deductible)
4. **N**ot a property settlement (not taxable/deductible)
5. **O**wn return for payer & payee
* No joint return filed
6. **T**erminates on death of receipient
* If **pay** for **college** as part of divorce agreement, **considered Alimony**.
31
I-EMBRA**C**ED EHF
**C**ontributions to Retirement Plan (5)
**C**ontributions to Retirement Plan may be deducted at arriving to AGI.
* IRA contributions are **limited for to $5,500** for individuals
* $11K,000 for MFJ per year.
* **$6,500 if over 50yrs old**
* Deductible if NO other plan
* Even with another plann, always fully deductible if AGI is less than $71,000
* NOT deductible if, with another plan & AGI \>$193K
* ROTH IRA are NOT deductible, interest is tax free
* **Educational** IRA - **$2000 per child** is deductible
32
I-EMBRAC**E**D EHF
**E**arly Withdrawal Penalty
**E**arly Withdrawal Penalty - premature intrest **withdrawal penalty from a CD account is deductible.**
**_Exempt from Penalty if:_**
* Payment of **medical** expenses
* Payments to **higher education** costs
* **Death** or **disability** of participant
* **First** time **purchase** of a **home**, up to **$10,000** may be withdrawn
Joan, age 40, withdrew $15,000 from her traditional individual retirement account last year, using the proceeds to pay off an outstanding hospital bill ($12,000) and the balance of her auto loan ($3,000). Her adjusted gross income was $100,000 and her other deductible medical expenses totaled $2,500. Compute the early withdrawal penalty, if any, that Joan will have to pay.
Incorrect! The early withdrawal penalty is 10% of the amount of the withdrawal, but it does not apply to amounts paid for medical expenses in excess of 10% of AGI. Joan’s medical expenses totaled $14,500 and 10% of her AGI is $10,000, so the penalty does not apply to $4,500 of her withdrawal. Therefore the penalty is assessed at 10% of the other $10,500, or $1,050.
33
I-EMBRACE**D** EHF
Jury **D**uty Fee
**Jury Duty Fee** - is Deductible if remitted to employer
* Fee received is always included/added to gross income
* If remit fee to employer, deduct in arrving at AGI
34
I-EMBRACED **E**HF
Qualified Higher **E**ducation Expenses
Qualified Higher **E**ducation Expenses
* **Tuition** for higher education of **up to $4000** may be deducted.
* Courses that are expressly required by an employer, by law or by govt to maintain or improve skills in performing a present job. Example: CPEs
35
I-EMBRACED E**H**F
Contributions to **H**ealth Savings Account (HSA)
Contributions to **H**ealth Savings Account (HSA)
* May be deducted by a self-employed tax payer OR employee.
* Form 8889 must be filed.
36
Net Operating Losses (NOL)
* **Carryback 2 years** **& carryforward 20 years.**
* **Usually in Schedule C**
* Generally a business loss, but could also result from a personal casualty loss.
* Results from:
* trade or business
* working as an employee
* casualty or theft loss
* **Corporation**, same rules
37
Individual Retirment Account (IRA)
Traditional vs. Roth
**IRAs** come in **two** basic **varieties**:
**Traditional** - contributions up **to $5,500 (+1,000 if over 50)** to a Traditional IRA are **deductible in arriving at AGI** unless both of the following conditions apply:
* Individual is actively participating in another pension or profit-sharing plan &
* AGI is greater than $193,000
**Roth IRA** - contributions to a Roth IRA are **NOT deductible in arriving at AGI**, but **withdrawals after** the **age** of **59.5** are **exempt** from **taxation**.
* **Penalty of 10%**, if funds are withdrawn **before** the age of **59.5**
* Exempt from Penalty if:
* **First** time **purchase** of a **home**, up to **$10,000** may be withdrawn
* **Death** or **disability** of participant
* Payments to **higher education** costs
* Payment of **medical** expenses
**_NOTE_**: **Funds rolled over from Traditional IRA** must *v**est for 5 years before receiving tax-free distributions.***
38
Qualified Tuition Programs (QTP - 529 Plans)
A type of IRA contribtution to be used for qualified higher education in which contributions may be deductible.
* Educational purposes include tuition, room/board, books, supplies & fees.
* 10% federal penalty if funds are withdrawn for non-educational purposes.
* Can front load plan **$14K (gift exemptions) x 5yrs =** **$70K**
39
Keogh Plans
Contributions to a **Keogh** plan are limited to 25% of net self-employment income after the Keogh deduction & 50% of self-employment tax is claimed (this works out to **20% of self-employment income before the Keogh deduction**.
40
"From AGI Deductions"
Standard
OR
Itemized Deductions (Schedule A)
From AGI Deductions may be either of the two:
1. ) Standard Deduction or
2. ) Itemized - Schedule A (COMMITT)
* Charitable Contributions - 50% of AGI
* Other miscellaneous expenses (no 2%)
* Miscellaneous Expenses (BIT 2% over)
* Medical Expenses (10% over)
* Interest (1M Aquistion, 100K Equity)
* Taxes
* Theft or Casualty (10% over, less $100)
41
Itemized Deductions (Schedule A) - **C**OMMITT
Itemized Deductions - Schedule A consists of: (COMMITT):
_**C**haritable Contributions_
* Contributions to Qualified Organizations
* Receipts for $250 or larger contributions
* **Cash contributions** are generally limited to **50% of AGI**
* Excess may be **carried forward up to 5yrs**
* *Services* may *NOT* be *deducted*
* ****Property contributions** are subject to **two rules:**
1. **Ordinary Income Rule** - if contributed property would normally result in ordinary income or short-term capital gain.
* **Limits** the deduction to the **lower** of the **original basis** (purchase price) or the **FMV** on the **date of** contribution
2. **LT Capital Gain Rule** - if contributed property would normally result in a long term capital gain.
* Deduction is at the **FMV**
* Deduction is **Limited to 30% of AGI**
42
Itemized Deductions (Schedule A) - C**O**MMITT
Itemized Deductions - Schedule A consists of: (COMMITT):
_**O**ther Miscellaneous Expenses_
* NOT subject to 2% of AGI minimum
* **Gambling Losses** - to extent of winnings - no carryover
* Estate taxes on income in respect of a decedent (IRD)
43
Itemized Deductions (Schedule A) - CO**M**MITT
Itemized Deductions - Schedule A consists of: (COMMITT):
_**M**iscellaneous Expenses - **BIT**_
* Subject to **2% of AGI minimum.**
* *"Lose first 2%, the rest may be deducted"*
* Example**:** If AGI is $100K, & business expenses are $10K, only $8K may be deducted due to the threshold.
* **B**usiness Expense of an Employee
* Business mileage
* Union Dues
* AICPA professional publications
* **Uniforms (not a tux)**
* CPE
* Business use of home
* Laptop
* **I**nvestment Expenses
* Example: Investment advisory fees, **custodial fees**
* **T**ax Preparation & Attorney Fees
* Tax prep & advice
* Attorney costs to collect money owed by others
**_NOTE:_**Legal expenses and agency fees are not deducted as expenses.
44
Itemized Deductions (Schedule A) - COM**M**ITT
Itemized Deductions - Schedule A consists of: (COMMITT):
_**M**edical Expenses_ - Paid & NOT reimbursed
* To extent **exceeds 10% of AGI**, if **65yrs \>7.5% of AGI**
* Must be for specific injury, illness or birth defect
* Durgs must be prescriptions
* Not life insurance
* NOT cosmetic
* **Property improvements LESS appreciation of home**
45
Itemized Deductions (Schedule A) - COMM**I**TT
Itemized Deductions - Schedule A consists of: (COMMITT):
_**I**nterest Paid on:_
* **Investment Interest** - refers to borrowings used to make personal investments, such as loans to purchase stocks.
* **To extent** of net investment **income**.
* Note: can be worded as, Net Investment Income = Investment Income LESS expenses
* Unused carried forward indefinitely
* **Mortgage Loan Interest** - Personal Residence Interest
* **Aquisition** indebtedness to **$1M** on two houses
* Home **Equity Loans** to **$100K**
46
Itemized Deductions (Schedule A) - COMMI**T**T
Itemized Deductions - Schedule A consists of: (COMMITT):
_**T**axes Paid_ on: (deductible)
* **Personal** Property taxes
* **Real** Estate taxes
* **State** & Local taxes
* Fees, Fines, Federal, FICA are **NOT deductible. FORGET IT!**
47
Itemized Deductions (Schedule A) - COMMIT**T**
Itemized Deductions - Schedule A consists of: (COMMITT):
_**T**heft & Casualty Losses:_
* **Casualty losses that EXCEED 10% of AGI** may be deducted.
* Once **Loss** is determined, it must be **reduced by all** the following:
* Insurance & govt **reimbursements**
* **$100 per event** of loss
* **10% of AGI** per year
48
Exemptions
Personal Exemptions
**Personal Exemptions:**
* 2 for married filing jointly
* Spouse is not considered a dependency exemption, it is still a personal exemption
* If a parent supports a dependent child, the child may NOT claim a personal exemption on their own return
49
Exemptions
"Qualifying Child" - JARRS
"Qualifying Child" - **JARRS**
* NO **J**oint Return
* **A**ge
* Under 19
* Under 24 if a student
* Must be in school 5 out of 12 mos
* Any age IF permanently & totally disabled
* **R**esident of US, Mexico, or Canada
* **R**elationship
* Child, stepchild, grandchild
* Must live w/ taxpayer for 1/2yr
* Foster child
* Must live w/ taxpayer for 1 full year
* **S**upport
* Dependent can't provide over 50% of their own support
50
Exemptions
"Qualifying Relative" - C-IRS-J
"Qualifying Relative" - **C-IRS-J**ack you
* **C**itizen or Resident - of US, Mexico, Canada
* **I**ncome - below personal exemption (roughly $4,000)
* **R**elationship
* *Lineal descendant* (doesn't include cousins)
* Parent, grandparent, brother, sister, step-brother, uncle, aunt, in-laws, brother-in-law
* *Household member for the entire yea*r
* **S**upport - annual support of over 50% to dependent
* No **J**oint Return
51
Filing Status (5)
1. **Married Filing Jointly (MFJ)**
* married on last day of the year
* spouse dies during a current tax year
2. **Maried Filing Separately (MFS)**
3. **Suriving Spouse (Qualifying Widow)**
* death in prior 2 years
* not re-married & have dependents
* provide over 50% of costs to dependents
* same rate as MFJ
4. **Head of Household**
* Has dependends
5. **Single**
52
Refundable Tax Credits (3)
Tax credits may be used to reduce taxes &, when in excess of the tax liability, may be carried back/forward, depending on the provisions of the credit, but may not reduce the tax liability below zero. Refundable tax credits include:
1. **Earned Income Credit (EIC) - Example: W2 Income**
2. **Child Tax Credit**
3. **American Opportunity Credit - Partial, up to $1K**
4. Excess Social Security Credit
5. Health Coverage Tax Credit
53
Nonrefundable Tax Credits (8)
Tax credits may be used to reduce taxes &, when in excess of the tax liability, may be carried back/forward, depending on the provisions of the credit, but may not reduce the tax liability below zero. Non refundable tax credits include:
* Child & Dependent Care Credit
* Educational Credits (AOC)
* Credit for the Elderly or Disabled
* Child Tax Credit
* Foreign Income Tax Credit
* Residential Energy Credits
* Retirement Savings Contribution Credit
* Adoption Credit
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What are the two Tax Credits related edication?
(AOTC & Lifetime Learing)
Tax credits may be used to reduce taxes &, when in excess of the tax liability, may be carried back/forward, depending on the provisions of the credit, but may not reduce the tax liability below zero.
**American Opportunity Tax Credit**
* Applies to the first 4 years after high-school
* **$2500 per student**
* Up to **$1000 credit may be refundable**
* May claim for dependent
**Lifetime Learning Credit**
* **$4000 per family**
* One per family
* Applies to all other years of education
**_NOTE:_** Cannot claim both in the same year for same student.
55
What are the three Tax Credits related to having children?
(Child, Child & Dependent Care (3), Adoption)
Tax credits may be used to reduce taxes &, when in excess of the tax liability, may be carried back/forward, depending on the provisions of the credit, but may not reduce the tax liability below zero.
**Child Tax Credits**
* $**1,000.00 per kid \< 17 yrs old** at year-end.
* Child tax credit is also a **refundable credit.**
**Child & Dependent Care Credit**
* Availalbe if: Child \<13 or a disabled spouse/dependent
* The credit is based on the **smallest of three** amounts:
1. Actual dependent care expenses
2. Child/Dependent's earned income
3. **$3K** for one; **$6K** for two dependents
* **_NOTE:_ NOT refundable** or can't carry forward
**Adoption Credits**
* Available for costs incurred in adopting a child **under the age of 18**
* Credit is limited to the first **$13,400.00 in fees for adoption & attorney/court fees**
* Credits exceeding tax liability may be **carried forward up to 5 years** & phase out exists.
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Tax Credit
Savers Credit
Savers Credit is available for low to moderate income workers.
* **Credit up to $1000**, if voluntary contributions made to IRAs or 401Ks
* Credit may be claimed/available by: (2014)
* MFJ - Income up to $60K
* HH - Income up to $45K
* Single - Income up to $30K
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Foreign Tax Credit (2)
The foreign tax credit is available for payments of foreign income taxes that are not being claimed as itemized deductions. Also a non-refundable credit.
Tax Credit is the lower of:
* Actual Taxes paid oversees OR
* Current US Tax Liability x (Foreign Income/Total Income)
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Surtax on Unearned Income
**Surtax on Unearned Income** - is **imposed on the unearned income** of individuals, estates, & trusts. For individuals, the surtax is **3.8%** of the **lesser of** either:
* Tax payer's **NET** investment income _OR_
* The **excess of \*MAGI**
* Excess of **$200K for Single (others)**
* Excess of $250K for MFJ
* Excess of $125K for MFS
**\*MAGI** (Modified Adjusted Gross Income) - AGI before any foreign earned income exclusion.
**_EFFECT:_** Makes the tax rate on L/T capital gains & qualified dividends 23.8% (20+3.8) for high income tax payers, & 18.8% for income over $250K but under $450K.
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Underpayment Penalty
A penalty imposed on tax payers who do not prepay a sufficient portion of their tax liability on a timely basis, resulting in a tax liability of **$1000** or more. Penalties are calculated **based on the unpaid tax liability.**
**_No Penalty IF:_**
* Taxpayer has paid in the **lower of:**
* **100%** of the **prior period's liability** or
* **110%** of prior liability **if AGI** is **over $150K**
* **90%** of the **current** year's **liability**
**Late Filing Penalty:**
* Based on unpaid tax liability
* 5% per month, limited to 25% of unpaid tax.
**Late Payment Penalty:**
* .5% each month
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Alternative Minimum Tax (AMT) for Individuals
(SIMPLE-PIE)
Taxes an individual taxpayer may be required to pay, in addition to the regular income tax, when taxable income includes certain items that qualify for preferential treatment, or when it has been reduced by certain deductions. **It is the excess of the tentative minimum tax over the regular income tax.**
* **S**tandard Deduction
* **I**nterest on Home Equity Loans
* **M**edical expenses under 10% of AGI, NOT deductible
* Applies to 65 & older. 7.5%-10% add back
* **P**ersonal & Dependent Exemptions
* **L**ocal & State taxes, Property Taxes, & Sales Taxes
* **E**mployee business exp, Investment exp, & Tax prep (BIT)
* **P**rivate activity bond interest
* **I**ncentive stock options
* **E**xcess depreciation on personal property
**_NOTE:_** AMT **Refunds/Adjustments** can only be **carryforward** to offset against a **future regular tax liability ONLY.**
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AMT Calculations
+ Regular Taxable Income
+/- **Adjustments & Preferences (SIMPLE-PIE)**
= AMTI before exemption
- Exemption (usually given in a problem)
= **AMTI** (Alternative Minimum Tax Income)
x Tax Rate (26/28%)
= Tentative Minimum Tax
- Rular Tax (usually Given in a problem)
= **AMT** (Alternative Minimum Tax)
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AMT Tax Adjustments
**SIMPLE**-PIE
Amounts **added** back to taxable income to compute AMTI, consisting **SIMPLE**:
* **S**tandard Deduction may NOT be claimed
* NOT calculated if taxpayer decides to Itemize
* **I**nterest on home Equity Loans is not deducted
* Interest on aquisition indebtedness & investments may still be claimed
* **M**edical Expenses under 10% of AGI cannot reduce AMTI. As a result:
* People over 65 must make an adjustment equal to the difference between computing medical expenses with a 10% treshold & computing it with 7.5% threshold.
* **7.5% - 10%** of medical expenses **ADD** to AMTI
* **\>10%** of medical expenses may be **DEDUCTED** from AMTI
* **P**ersonal & Dependent Exemptions are NOT allowed
* **L**ocal & State Income Taxes, all Property Taxes & Sales Taxes are NOT deductible
* **E**mployee Business Expenses, Investment Expenses/Tax Prep subject to the 2% (BIT) are not deductible.
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AMT Tax Preferences
SIMPLE-**PIE**
Additional items that are added to regular taxable income in computing ATMI due to their preferential tax treatment, consisting of PIE:
* ****_P_**rivate Activity Bond Interest** is fully taxable
* ****_I_**ncentive Stock Options** are taxed when exercised fot the difference between the exercise price & market price of the stock
* ****_E_**xcess Depreciation on Personal Property** over 150% declining balance when double-declining balance was used for regular tax purposes
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If qualifying small business corporation stock (Cod Sec. 1244 stock) is sold at a loss?
If qualifying small business corporation stock (Cod Sec. 1244 stock) is sold at a loss, up to $50,000 of that loss may be treated as ordinary loss. The remaining $18,000 of the loss would be treated as a capital loss.
TREATED AS ORDINARY INCOME/LOSS
65
How may taxes paid by an individual to a foreign country be treated?
Foreign taxes can either be taken as an itemized deduction (NOT subject to the 2% floor) or be treated as a credit against federal income taxes due.
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S-Corp Rules (Losses)
A taxpayer’s **deduction for losses** passed through from an **S corporation** is **limited** to the **taxpayer’s basis**. The taxpayers beginning basis of $5,000 is first reduced by distributions received. This leaves $1,500 of basis, so the taxpayer may only deduct $1,500 of the $2,000 loss.
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What are the due dates for estimated tax payments for a calendar-year taxpayer who is self-employed?
When a taxpayer is required to make estimated tax payments, they are due on the **15th of the 4th, 6th, and 9th** months of the taxpayer’s tax year and **on the 15th of the 1st month of the taxpayer’s subsequent tax year.**
