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Flashcards in REG Lecture 1 Deck (35):
1

When should a cash basis taxpayer report income?

A cash basis taxpayer should report income in the year in which income is either actually or constructively received whether in cash or property.

2

State the basic tax formula.

Gross Income
LESS Adjustments

Adjusted Gross Income

LESS Deductions (greater of itemized OR standard)
LESS Exemptions
Taxable Income

x Federal Income Tax
LESS Tax Credits
Other Taxes
LESS Prepayments
Tax due OR refund

3

Identify the due date and extension available for individuals.

Due Date: April 15

Extension: Form 4868--Automatic six months

4

Identify the various filing statuses.

  • Single
  • Married, filing jointly
  • Married, filing separately
  • Head of household
  • Qualifying widow(er) with dependent child

5

What are the criteria for filing single?

  • Unmarried or legally separated from spouse at the end of tax year.
  • Does not qualify for another filing status.

6

What are the criteria for filing married filing jointly?

At year-end of tax year:

  • Married and living together as husband and wife; or
  • Living together in a recognized common law marriage; or
  • Married and living apart but not legally separated or divorced.

7

What are the criteria for filing married filing separately?

At year-end of tax year:

  • Married; and
  • If one spouse wants to be responsible only for own tax; or
  • If both spouses do not agree to file a joint return.

8

What are the criteria for filing head of household?

  • Individual is not married, legally separated, or is married and has lived apart from his/her spouse for the last six months of the year 
  • Individual is not a "qualifying widow(er)"
  • Individual is not a nonresident alien
  • Individual maintained a house that for more than half the taxable year is principle residence of a:
    • son or daughter who is a qualifying child or qualifies as the taxpayer's dependent (qualifying relative);
    • a dependent relative who resides with the taxpayer; or
    • a dependent father or mother, regardless of whether they live with the taxpayer.

9

What are the criteria for filing qualifying widow(er) (surviving spouse)?

  • Unmarried at end of tax year; and
  • Surviving spouse must maintain a household, which for the entire taxable year was the principal place of abode of a son, stepson, daughter or stepdaughter; and
  • The surviving spouse is entitled to a dependency exemption for the son, daughter, etc.

The taxpayer qualifies for this status for two years after year of death of spouse.

10

Name the tests for claiming an exemption for a "qualifying child."

[CARES]

A taxpayer is entitles to an exemption for each qualifying child and/or qualifying relative.

QUALIFYING CHILD

Close relative
Age limit (19/24) and younger than the taxpayer
Residency and filing requirement
Eliminate gross income test (exemption required)
Support test changes

11

Name the tests for claiming an exemption for a "qualifying relative."

[SUPORT]

A taxpayer is entitles to an exemption for each qualifying child and/or relative.

QUALIFYING RELATIVE

Support (over 50%) test
Under the personal exemption amount of (taxable) gross income test
Precludes dependent filing a joint tax return test
Only citizens (residents of USA/Canada or Mexico) test
Relative test OR
Taxpayer lives with individual for the whole year test

Note that either the R or T test must be met. Although both of them may be met, only one is required.

12

What are the requirements for a multiple support agreement?

  • Two or more people together provide more than 50% of support, but no one contributes more than 50%
  • To claim the exemption, a person must provide more than 10% of support, and meet the other dependency tests
  • A multiple support declaration, Form 2120, must be filed

13

Define gross income.

Gross income includes all income from whatever source derived, unless specifically excluded.

14

What are the four categories of individual income?

Categories of Individual Income:

  • Ordinary (wages, salaries)
  • Portfolio (dividends, interest)
  • Passive (real estate investment limited partnership income, and some S corporations)
  • Capital

15

Name some nontaxable fringe benefits (exclusions).

  • De minimis fringe benefit
  • Qualified tuition reduction
  • Qualified employee discounts
  • Employer paid accident, medical and health insurance

Unless specifically excluded by law, the fringe is includable in gross income.

16

Are life insurance premiums paid by an employer taxable to an employee?

Premiums on the first $50,000 (face amount) of group term life insurance are not includable in gross income. Premiums paid for coverage above $50,000 should be included in gross income. This is calculated from an IRS table, and is not the entire amount of the premium over $50,000.

17

Give some examples of exempt interest.

Exempt interest examples:

  • State and local government bonds
  • Bonds of a U.S. possession
  • Series EE (U.S. Savings Bond) if used for higher education
  • Interest on Veterans Administration insurance

18

What is the tax treatment of unearned income of a child who falls under the "kiddie tax" rules?

Net unearned income of dependent child who falls under the "kiddie tax" rules are taxed at his parents' higher tax rate.

Net unearned income = Child's total unearned income less the child's standard deduction of $1,050 (in 2015) (or investment expenses, if greater) less an additional $1,050 (which is generally taxed at the child's rate of 10% or 15%).

19

State the tax treatment of property settlements in a divorce.

For a property settlement in a divorce, the transferring spouse gets no deduction for payments made (or property transferred), and the payments are not includable in the gross income of the spouse receiving the payment or property.

20

What are the requirements for alimony to be deductible by the paying former spouse and includable by the recipient?

  • Payments must be legally required pursuant to a written decree
  • Payments must be in cash or its equivalent
  • Payments cannot extend beyond death of payee
  • Payments cannot be made to members of same household
  • No joint tax return filed

Before alimony is taxable by the recipient, any child support due must be paid.

21

Describe the self-employment tax.

  • All net self-employment income is subject to the 2.9% Medicare tax, but only self-employment income up to $118,500 (in 2015) is subject to the 12.4% Social Security tax.
  • An adjustment to income for one-half (e.g. 7.65% on up to $118,500 self-employment income for 2015) of self-employment tax (Medicare plus Social Security) paid.

22

On what property do the uniform capitalization rules apply?

  • Real or tangible personal property produced by the taxpayer for use in his trade or business
  • Real or tangible personal property produced by the taxpayer for sale to customers (manufacturer's inventory)
  • Real or tangible personal property purchased by the taxpayer for resale (retailer's inventory)

Exception: The uniform capitalization rules do not apply to (retailer's inventory) property purchased for resale if the taxpayer's gross receipts for the preceding three tax years do not exceed $10,000,000 annually.

23

When are funds in a nondeductible IRA taxable?

Withdrawals from nondeductible IRAs are partially taxable.

When withdrawn, amounts previously contributed (principal) are nontaxable. Any earnings on those contributions are taxable when withdrawn.

A pro rata allocation is generally applied to the distribution to determine the taxable amount.

24

What is the formula to determine the excludable portion of an annuity?

Excludable amount in current year = [Investment in contract/Age factor (in months)]

Note: If the annuitant lives longer than the factor in months, further payments are fully taxable. If the annuitant dies before the factor payments are collected, the unrecovered portion of the investments is a miscellaneous itemized deduction on the annuitant's final tax return (not subject to the 2% limitation).

25

In premature distributions of an IRA, what are the exceptions to the penalty tax?

[HIM DEAD]

  • Home buyer (first time): $10,000 max if used toward first home (within 120 days)
  • Insurance (medical)
    • unemployed with 12 consecutive weeks of unemployment compensation
    • self-employed (who are otherwise eligible for unemployment compensation)
  • Medical expenses in excess of 10% of AGI (or 7.5% if 65 or over)
  • Disability
  • Education: College, tuition, books, fees etc.
  • and
  • Death

26

How is rental income from a vacation house treated?

  1. If rented fewer than 15 days: Treat as personal residence.
  2. If rented 15 or more days and personal use is not more than 14 days or 10% of day rented, if greater: Treat as rental property.
  3. If rented more than 15 days and personal use is greater of 14 days or 10% of days rented: Allocate rental expenses to extent of rental income.

If treated as personal, income excluded and deductions for mortgage interest and taxes are reported on Schedule A. Other expenses are not deductible.

If the vacation property is treated as a rental property, the taxpayer reports income and deductions on Schedule E.

27

Define passive activity. Give some examples of passive activities.

A passive activity is any activity in which the taxpayer does not materially participate.

Rental activities, interests in limited partnerships, and S corporations are examples of passive activities.

Note: Rental activities are passive by definition, even is the taxpayer does materially participate.

28

What is the tax treatment of nondeductible passive activity losses?

  • Nondeductible passive activity losses are unused passive activity losses that are held in suspension.
  • Used to offset passive income in future years (indefinitely).
  • Fully tax deductible in the year the property is disposed of (e.g., sold)

29

What are the rules to determine taxable Social Security benefits?

Taxpayers are classified into five categories depending on the level of provisional income, which is defined as AGI plus tax-exempt interest plus 50% of Social Security benefits.

  • Low income: No social security benefits are taxable
  • Lower middle income: less than 50% of Social security benefits are taxable
  • Middle income (over single $25K/MFJ $32K): 50% of Social Security benefits are taxable.
  • Upper middle income: Between 50% and 85% of Social Security benefits are taxable
  • Upper income (over single $34K/MFJ $44K): 85% of Social Security benefits are taxable

30

Are scholarships and fellowships includable in gross income?

For a degree-seeking student, scholarships and fellowships are excludable up to the amounts spent on tuition, fees, books, and supplies. All remaining amounts are includable in gross income.

For a non-degree-seeking student, all amounts are includable in gross income.

31

What are the test for foreign-earned income exclusion?

Tests for foreign-earned income exclusion:

  • Bona fide residence test (an entire taxable year)
  • Physical presence test (330 full days out of 12 consecutive months)

32

List some nontaxable miscellaneous income items (exclusions).

Examples of nontaxable miscellaneous income items:

  • Life insurance proceeds
  • Gift and inheritances
  • Medicare benefits
  • Workers' compensation
  • Personal (physical) injury or illness award
  • Accident insurance--premiums paid by taxpayer
  • Foreign-earned income exclusion

33

Describe the employee and employer taxation of nonqualified employee stock options.

Employee Taxation

  • If there is a readily ascertainable value, the employee recognizes ordinary income in that amount in the year granted.
  • In there is no readily ascertainable value, the employee recognizes ordinary income based on the fair value of the stock purchase less any amount paid for the option on the exercise date.

Employer Taxation

  • The employer may deduct the value of the stock option as a business expense in the same year the employee recognizes ordinary income.

34

Describe the employee and employer taxation of incentive stock options (ISOs).

Employee Taxation

  • Generally, ISOs are not taxed as compensation. Basis of the stock is the exercise price plus any amount paid for the option. Generally, any gain or loss on the subsequent sale is capital.

Employer Taxation

  • Generally, employers do not receive a tax deduction for ISOs.

35

Describe the employee and employer taxation of employee stock purchase plans (ESPPs).

Employee Taxation

  • Generally, ESPPs are not taxed as compensation. Basis of the stock is the exercise price plus any amount paid for the option. Generally, any gain or loss on the subsequent sale is capital.

Employer Taxation

  • Generally, employers do not receive a tax deduction for ESPPs.