Under what accounting basis are individual tax returns prepared?
Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.
What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?
- MSA/HSA contributions
- Investment penalties for early withdrawal
- Self-employed medical insurance premiums
- 57.5% of first $14,204.40 of Self-Employment tax and 50% on amount over $14,204.40
- IRA, SEP, Keogh, Simple contributions
- Student loan interest (can’t be another taxpayer’s dependent)
- Moving expenses
- Tuition - can’t take Hope/Lifetime Learning credit for same expense
- Teacher expenses
- Attorney fees in discrimination lawsuit
Which items can be carried over to future years on an individual tax return?
Investment interest expense in excess of investment income Charitable contributions Excess Section 179 Capital losses AMT Paid Passive Activity Losses
Characterize the following carryover: Passive Activity Loss
Can carry forward indefinitely
How is excess 179 expense carried forward?
Carry forward to next year.
Use in any year is limited to taxable income.
How long can investment interest expense in excess of investment income be carried forward?
How long is the carry forward for charitable contributions?
Can be carried forward 5 years.
How long is AMT paid carried forward, and how is it applied?
It can be carried forward indefinitely.
It may be applied against future regular income tax, but not against future AMT tax liability.
How are capital losses applied in individual taxes?
$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely.
The loss retains its character (STCL or LTCL).
How does an individual capital loss carryover differ from a corporate capital loss carryover?
Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely.
Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.
What ratio is applied to principle payments in an installment sale to determine the gain in a given year?
Gross Profit / Contract Price
What is the contract price in an installment sale for income tax purposes?
Contract Price = Sales Price - Liability assumed by buyer
On an individual return, regular mortgage interest on what loan amount is deductible?
Interest on home equity loans up to what amount are deductible on an individual tax return?
What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?
$25 per person for gifts
Service awards up to $400
What income can business losses offset on a 1040?
They may only offset active business income.
Note: W2 wages are considered active business income.
What income can passive losses offset on a 1040?
Only passive income such as rental income or limited partnership income.
Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)
Are interest and dividends active or passive income?
Neither. They are portfolio income.
What is (are) the depreciation convention(s) for personal property?
When is the mid-quarter convention used?
For depreciation when 40% or more of all purchases occur in 4th quarter.
What depreciation convention is used for real property?
What depreciation life and convention are used for leasehold improvements?
15 year straight line (S/L)
What amount of business start-up costs can be deducted? How is it expensed?
Up to $5,000
Amortized over 180 months
Reduced dollar-for-dollar by amount over $50,000
How are medical expenses deducted on a 1040?
On Schedule A:
Amounts in excess of 7.5% of AGI may be deducted
Which personal insurance premiums are not deductible as medical expenses on Schedule A?
Accident or disability insurance premiums are not deductible.
Under what circumstances can medical expenses paid on behalf of another be deducted on someone’s Schedule A?
Must be a citizen of North America
Must live with you, or if they do not, must be mother/father or a relative closer than a cousin.
Benefactor must provide more than 50% support to the beneficiary.
Which foreign taxes are deductible?
Foreign INCOME and REAL ESTATE taxes are deductible.
Foreign personal property taxes are NOT deductible.
Foreign tax assessments are not deductible- they are added to the basis.
How is net investment income calculated, for the purpose of deducting excess investment interest expense?
Gross investment income - investment expense in excess of 2% of AGI = net investment income
Investment interest expense in excess of net investment income is deductible.
What investment interest is never deductible?
Investment interest expense on tax-free securities is not deductible.
When are mortgage points deductible and how are they deducted?
They are deductible if they represents prepaid interest on purchase of a new home or improving a home.
Refinance points are amortized over the life of the mortgage.
How are charitable contributions of LTCG property and property related to a charity’s function deducted?
Deducted at fair market value (FMV), up to 30% of AGI
How are charitable donations for STCG property and property not related to the charity’s function deducted on Schedule A?
Deduction is taken for adjusted basis in the property, up to 50% of AGI.
Does a casualty loss affect the basis of property?
No. It decreases the fair market value (FMV) of the property.
How is the deductible portion of a casualty loss calculated?
Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS)
GROSS LOSS - insurance proceeds rec’d - $100 - 10% of AGI = Deductible casualty loss
What are the miscellaneous deductions on Schedule A, and how are they deducted?
Deductible in excess of 2% of AGI
Continuing Education - if required to keep your job
50% Meals and entertainment
Tax prep fees
Legal fees to collect alimony
Appraisal fees to value casualty loss of charitable contributions
Which itemized deductions are not subject to reduction based on income or other factors?
Investment Interest Expense
Define ‘qualifying child’ for most individual tax factors.
Must be resident of North America
Under age 19, or under age 24 if a student
Define ‘qualifying relative’ for most individual tax factors?
Must be citizen of North America
Must live with you, unless mother/father or relative closer than a cousin
You must provide more than 50% support to the individual
They can’t earn more than $3,500 (excluding social security)
How is minor income taxed at a parent’s rate calculated (AKA ‘kiddie tax’)?
Child's unearned income - early withdrawal penalties - $950.00 - Greater than $950 or child's itemized deduction related to unearned income = Amount taxed at parents' rate
Can spouses married filing jointly use different accounting methods?
Yes, if they each own a small business. All non-business income is cash basis.
At what rate is self-employment tax assessed?
15.3% of net earnings from self-employment
Note: executor of an estate is NOT self-employment income
What is a refundable tax credit? Which two individual tax credits are most commonly refunded?
A tax credit which takes the taxpayer’s tax owed on the return below zero, resulting in a refund to the taxpayer.
Earned Income Credit (EIC) and the Additional Child Tax credit.
Note: the REGULAR child tax credit is NOT refundable.
How many education credits may be taken on a tax return?
Hope Credit - per student
Lifetime Learning Credit - per taxapayer
Note: Education credits are not refundable.
What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?
The lesser of:
90% of current year’s total tax
100% of prior year’s total tax
110% of prior year’s total tax (if AGI is $150,000 or more)
Which farming costs related to land are deductible? Which aren’t?
Deductible: Costs incurred to PRESERVE soil/water
Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)
Which depreciation table is used for personal tangible property related to farming?
How long does the taxpayer have to petition the court for appeal after an audit?
If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?
What is the statute of limitations for a tax audit?
3 years, generally
6 years if 25% or more of gross income was omitted
The clock starts on the LATER of the due date or the filing date of the return.
There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.
How is non-business bad debt deducted on a 1040?
It is treated as a short-term casualty loss.
How long does an individual taxpayer have to file a claim for refund?
Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.
When are life insurance premiums of an employee includable in income?
Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.
When are scholarships not taxable?
When they are not in return for services rendered,
The money is used only for tuition and books
Note: Scholarships for room and board are includable in income.
What interest income is tax free?
State & municipal bond interest
US EE Savings Bond interest (note: HH bond interest is taxable)
Which dividend income is tax free?
S-corporation (actually distributions)
How much social security income can be taxed for individuals in higher income brackets?
Up to 85%
Is unemployment compensation taxable?
Which damages awarded in lawsuits are taxable? Which are not?
Payments made to make you ‘whole’ are NOT taxable (i.e. to pay for losses of property, body parts or earning ability)
Any payments for punitive damages ARE taxable.
Are workman’s compensation insurance benefits taxable?
No - similar to an award for damage to make a person whole.
Which of the following are taxable: Child Support, Divorcre Property Settlements, Alimony
Alimony IS taxable.
Child support and divorce property settlements are NOT taxable.
Adoption expenses - Are they deductible?
NO, they are not deductible. However tax benefits are available through the adoption CREDIT.
Describe alimony recapture.
2nd Year: (3rd year - 2nd year - $15,000)
1st Year: 1st Year Alimony Paid - Avg alimony paid in 2nd & 3rd years - $15,000 - Recapture from 2nd year =1st Year Alimony Recapture
Total Recapture = 1st Year Recapture + 2nd Year
How are Net Operating Losses (NOLs) utilized?
Can be carried back 2 years
If any left, can be carried forward 20 years.
Which IRA contributions are deductible?
Traditional IRA = deductible
Roth IRA = not deductible
When can a couple file ‘married filing jointly’?
They must be married at the end of the year.
If one spouse dies, they must be married at the end of the year.
What are the requirements for filing as Head of Household?
Must have a dependent child
Must provide more than 50% of the child’s support
Must live with them more than 50% of the year
What are the requirements for filing as qualifying widower?
Must have a dependent child.
Essentially gets MFJ status for the year of death + 2 tax years