REG Lecture 2

Question 1

List the deductions for AGI.

Answer 1

• Educator Expenses (expired 12/31/14)
• IRA
• Student Loan Interest Expenses
• Tuition and Fee Deduction (expired 12/31/14)
• Health Savings Account
• Moving Expenses
• One-Half Self-Employment FICA
• Self-Employed Health Insurance
• Self-Employed Retirement
• Interest Withdrawal Penalty
• Alimony Paid
• Attorney Fees Paid in Certain Discrimination and Whistle-Blower Cases
• Domestic Production Activities Production

Question 2

What is a deduction for AGI: child support or alimony?

Answer 2

Deduction for (to arrive at) AGI = Alimony paid

Child support is not alimony and is not deductible by the payor or taxable to the recipient.

Question 3

What are the limits on IRA deductions?

Answer 3

For IRAs, the lesser of $5,500 or individual’s compensation; with a nonworking spouse, limit is $11,000 provided the combined earnings of both spouses total at least that much.

Where a spouse is an active participant in an employer retirement plan, the allowable deduction to arrive at AGI is phased out proportionally for modified AGI between $61,000 (base) and $71,000 ($98,000 and $118,000 for MFJ). [2015]

Phase-out percentage is 20% of the maximum IRA deduction (AGI less base).

Question 4

What are the limits on nondeductible IRAs?

Answer 4

The lesser of:

1. $5,500 for 2015
2. Individual compensation
3. Limit not contributed to other regular and Roth IRAs

Earnings on such contributions will accumulate tax-free (deferred) until withdrawn.

Question 5

What is the time limit on Coverdell Education Savings Accounts (Education IRAs)?

Answer 5

Any amount remaining when the beneficiary reached the age of 30 must be distributed.

“Left over funds”:

• Must be distributed to a beneficiary, are taxable, and a 10% penalty is assessed, or
• Rollover to another family member is permitted with no 10% penalty.

Question 6

What are the limits on deductions to Keogh plans?

Answer 6

Keogh plans are for self-employed taxpayers and their employees.

Deductible amount is lesser of 25% of net earnings for self-employment (after Keogh deduction) and one-half of self-employment tax or $53,000 (2015).

The maximum annual addition (contribution) may exceed the deductible amount for the year. It is limited to lesser of $53,000 (2015) or 100% net earnings if compensation is less than $53,000.

Question 7

Describe the self-employed deductions (“adjustments”) for AGI.

Answer 7

Self-employment tax:

50% of self-employment tax

Self-employed health insurance:

100% may be deducted

Question 8

What are the requirements for moving expenses to be deductible?

Answer 8

• Must changes job sites
• 50-mile move (distance from former residence to new job site must be 50 miles or more of the distance from former residence to former job site).
• Must work in new location for 39 weeks during the 12 months following arrival (if self-employed, 78 weeks during the 24-month period after arrival).

Note: There is a per-mile car allowance or actual out-of-pocket amounts. Meal costs are not deductible.

Question 9

What is the additional deduction for elderly and/or blind?

Answer 9

For 2015, if 65 or older, add $1,550 (single or head of household), or $1,250 (married filing jointly or separately or qualifying widow[er]).

If blind, add same amounts as above.

If both are over 65 and blind, amounts are $3,100 and $2,500, respectively.

Question 10

What taxpayers are not eligible to use the standard deduction?

Answer 10

• One spouse itemizes deductions on a separate return.
• Taxpayer is a dual-status or nonresident alien.
• Taxpayer has a short tax year.

The standard deduction is limited if a taxpayer can be claimed on another person’s return (greater of $1,000 or earned income of dependent plus $350 up to basic standard deduction amount).

Question 11

Identify the major classes of itemized deductions.

Answer 11

• Medical and dental expenses
• Taxes paid
• Interest paid
• Gifts to charity
• Casualty and theft losses
• Miscellaneous deductions subject to the 2% floor (job expenses, investment expenses, tax preparation)
• Other miscellaneous deductions not subject to the 2% floor (gambling losses to the extent of winnings)

Question 12

What are the limitations on medical expenses?

Answer 12

• Medical expense are deductible to the extent they exceed 10% of AGI (7.5% for taxpayers age 65 and older).
• Cost of surgery for elective cosmetic reasons is not deducible.
• Self-employed individuals may deduct 100% of medical insurance premiums from gross income.
• A dependent for medical expense must meet only the support, relationship, and citizenship or residency tests.

Question 13

Identify the taxes that are deductible as itemized deductions.

Answer 13

• Taxpayers have a choice of deducting either the local sales tax (expired 12/31/13) or state and local income tax.

Other deductible taxes include:

• Real estate taxes
• Personal property taxes
• Foreign taxes (either deductible or may be taken as a credit)

Question 14

Identify the types in interest that are deductible and nondeductible.

Answer 14

• Qualified residence interest on principal and second residence is subdivided into:
  
  • Acquisition indebtedness ($1,000,000 limitation).
  • Home equity indebtedness ($100,000 limitation).
  • Points paid on a principal residence mortgage loan fully deductible.
  • Points paid to refinance a home (or for a home equity loan) must be capitalized and deduction spread out over the life of the loan.
  • Certain mortgage insurance premiums.
• Interest on loans for investment purposes, limited to net of investment income, can be carried forward.
• Prepaid interest (use accrual basis for determining deductible amount)
• Educational loan interest is an adjustment and not an itemized deduction.
• Consumer interest is NOT deductible.

Question 15

What are the limitations on charitable contribution deductions?

Answer 15

• Overall limit = 50% of AGI

Cash, may be all 50%

Long-term capital gain property (deduct FMV) is limited to the lesser of:

• • 30% of AGI
    
    • the reaming amount to reach 50% after cash contributions
• Excess contributions can be carried forward five years.
• Cash contributions must be substantiated by a bank record or a written communication by the charitable organization.

Question 16

What is the limit on nonbusiness casualty and theft losses?

Answer 16

If partial loss: Deduction is based on decrease in FMV not to exceed adjusted basis.

If total loss: Deduction is adjusted basis.

Aggregate losses are reduced by:

• Insurance recovery
• $100 per casualty/theft event
• 10% of AGI

Question 17

Identify some miscellaneous deductions subject to the 2% of AGI floor.

Answer 17

• Unreimbursed business expenses
• Educational expenses not deducted above AGI
• Uniforms
• Business gifts ($25 limit per recipient per year)
• Business use of home
• Employment agency fees
• Expenses of investors
• Subscriptions to professional journals
• Tax preparation fee

Question 18

Identify some miscellaneous expense NOT subject to the 2% of AGI floor.

Answer 18

• Gambling losses
• Federal estate tax paid on income in respect of a decedent

Question 19

Identify some tax credits.

Answer 19

Nonrefundable tax credits

• Foreign tax credit
• Child and dependent care credit
• Elderly and disabled credit
• Education credit (American opportunity credit is 40% refundable)
• Adoption credit
• Retirement plan contribution credit
• General business credit
• Long-term unused minimum tax credits

Refundable credits

• Child tax credit
• Earned income credit
• Withholding taxes
• Excess Social Security paid

Question 20

What are the child/dependent care credit limitations?

Answer 20

Up to 35% of eligible expenditures or $3,000 maximum ($6,000 for two or more dependents). Maximum of $15,000 AGI, reduced by 1% for each $2,000 increment over $15,000, to a minimum of 20%.

A qualifying child is one under age 13 for whom an exemption may be claimed, any disabled dependent who is unable to care for self, or a spouse who is disabled and unable to care for self.

Question 21

Describe the tax credit for the elderly or disabled.

Answer 21

• Either at least 65 or totally and permanently disabled and have disability income.
• In single or marred and only one is over 65, 15% of $5,000 reduced by nontaxable Social Security benefits received and half of AGI over $7,500 (single) or $10,000 (married).
• If married and both are over 65, 15% of $7,500 reduced by nontaxable Social Security benefits received and half of AGI over $10,000.
• Claim the credit to the extent of tax liability.

Question 22

State the limitation of the American opportunity tax credit.

Answer 22

For 2014, the credit for the first four years of postsecondary education is limited to $2,500 as follows: 100% of the first $2,000 in tuition costs and 25% of the second $2,000.

Question 23

What are the eligibility requirements for the retirement plan contribution credit?

Answer 23

• At least 18 by close of the tax year
• Not a full-time student
• Not a dependent
• Income limits apply

Question 24

State the formula to determine the amount of the foreign tax credit.

Answer 24

• Can claim either deduction or credit.
• There is no limitation to the amount of foreign taxes paid that are claimed as deductions.
• Overall limitation for the credit:

[Net foreign income/ Worldwide taxable income] x U.S. tax liability before credit on worldwide taxable income

Credit is lesser of foreign taxes paid or overall limit. Any unused credit can be carried back 1 year and forward 10 years.

Question 25

State the limitation of the work opportunity credit (expired 12/31/13).

Answer 25

• 40% of the first $6,000 wages per employee paid during the first year of employment
• 40% of the first $3,000 to certain summer youth

Question 26

Describe the child tax credit.

Answer 26

$1,000 tax credit for each qualifying child.

Qualifying child:

“CARES” rules apply, except that a child must be under the age of 17.

Higher-income taxpayers must reduce credit by $50 for each $1,000 by which modified AGI exceeds:

• $110,000 for a joint return
• $75,000 for an unmarried individual
• $55,000 for married filing separately

Question 27

What are the eligibility requirements for the EIC?

Answer 27

Eligibility: To be eligible for the earning income credit, a taxpayer must:

• Live in the U.S. (main home) for more than half the taxable year;
• Meet certain low earned income thresholds;
• Not have more than a specified amount of disqualified income;
• Be over 25 and under 65 if there are no qualifying children; and
• File a joint return with spouse (if married).

Question 28

State the alternative minimum tax formula and the tax rate.

Answer 28

Taxable income
+/- Certain adjustments
+ Tax preferences
- Exemption allowance [2014]

$82,100 married filing jointly
$52,800 single
$41,050 married filing separate

=AMTI
x Tax rate [26% and 28% for individuals]
AMT (The greater of AMT or regular tax is the total tax liability)

The exemption amount is phased out by 25 cents per dollar of AMTI above $156,500 ($117,300 for single, $78,250 married filing separate).

For AMTI in excess of $182,500, tax rate on excess is 28%.

Question 29

Name some adjustments for AMTI calculations.

[PANIC TIMME]

Answer 29

• Passive activity losses
• Accelerated depreciation
• Net operating loss
• Installment income of a dealer
• Contracts, percentage completion vs. completed contract
• Tax deductions
• Interest deductions on some home equity loans
• Medical deductions (limited to excess over 10% AGI)
• Miscellaneous deductions not allowed
• Exemptions (personal) and standard deduction

Question 30

Name some tax preference items for AMTI calculations.

Answer 30

• Private activity bond interest income (exceptions apply)
• Percentage depletion
• Pre-1987 accelerated depreciation

Question 31

What credits are allowed against the AMT?

Answer 31

• Foreign tax credit
• Adoption credit
• Child tax credit
• Contributions to retirement plans credit
• Earned income credit
• Small business health care tax credit

Question 32

What is the statute of limitations for an assessment?

Answer 32

Three years from the later of:

• Due date of return
• Date return filed

Question 33

What is the statute of limitations for a refund?

Answer 33

The later of:

• Three years from the time the return was filed
• Three years from the due date of the original return
• Two years from the time the tax was paid (if not when the return was filed)

Question 34

Who must make estimated tax payments?

Answer 34

Taxpayers with:

1. $1,000 or more tax liability and the taxpayer’s withholding is less than the lesser of 90% of current year’s tax, or
2. 100% of last year’s tax [110% if AGI is > $150,000 ($75,000 for married filing separately)]

Question 35

The statute of limitations on assessment is the statutory period during which the government can assess an additional tax. How long are these statutory periods?

Answer 35

• General*: Three years from the later of the due date of the return or the date the return is filed (including amended returns).
• 25% Understatement of Gross Income*: Six years from the later of the due date of the return or the date the return is filed.
• Reopen Closed Years*: If a taxpayer prevails in a finding allowing a deduction in an open tax year that was taken erroneously in a closed tax year, the IRS may disallow the deduction on the closed tax year.

There is no statute of limitations for fraud of filing false returns.

Question 36

What is the statute of limitations on refunds claimed by an individual taxpayer?

Answer 36

Refund claim–the later of

• Three years from the date the return was filed or the original due date of the return; or
• Two years from the time the tax was paid (if not when the return was filed).

Bad debts/Worthless securities–seven years from the later of:

• The due date of the return; or
• The date the return is filed.

Question 37

Describe the IRS requirement to make estimated quarterly tax payments.

Answer 37

A taxpayer is required to make quarterly tax payments if both of the following conditions are met:

• The amount of taxes owed is expected to be $1,000 or more (“owed” is the excess of tax liability over withholding).
• The taxpayer’s withholding is less than the lesser of:
  
  • 90% of the current year’s tax; or
  • 100% of the prior year’s tax

If estimated payments have been insufficient to avoid a penalty, a taxpayer can increase withholding from wages before year-end and the withholding will be considered to have been paid evenly throughout the year.

Question 38

[Tax Standards and Research]

Who published these standards, and what are they?

Answer 38

The AICPA’s Tax Executive Committee published the seven Statements on Standards for Tax Services. The SSTSs set forth the ethical tax practice standards for members of the AICPA.

Question 39

List the sections of each standard.

Answer 39

Introduction, statement (often consisting of several paragraphs) and explanation.

Question 40

List the topics covered in the standards.

Answer 40

• Tax return positions.
• Answers to questions on returns.
• Certain procedural aspects of preparing returns.
• Use of estimates.
• Departure from a position previously concluded in an administrative or court hearing.
• Knowledge of error: return preparation and administrative proceedings.
• Form and content of advice to taxpayers.

Question 41

If a tax return position does not have at least a realistic possibility of being sustained, the tax preparer may nevertheless recommend that position under what circumstance?

Answer 41

The tax preparer:

1. Concludes that there is a Reasonable Basis for the position; and
2. Advises the taxpayer to disclose appropriately that position.

Question 42

If a tax return reflects a tax return position which the tax preparer has concluded only a reasonable basis, under what circumstances may the preparer sign that return?

Answer 42

Sign the return only if that return position is appropriately disclosed.

Question 43

List the levels of support from the least stringent to the most stringent.

Answer 43

1. Reasonable basis standard (least stringent)
2. Realistic possibility standard
3. Substantial authority standard
4. More-likely-than-not standard (most stringent)

Question 44

What is the tax preparer’s responsibilities with respect to answering questions on the return?

Answer 44

Make a reasonable effort to answer all questions on tax returns; these must be reasonable grounds for omission of an answer.

Question 45

Summarize the procedural aspects of preparing a return.

Answer 45

Generally, no responsibility to verify information provided by taxpayer.

However, make reasonable inquired if the information appears to be incomplete, incorrect, or inconsistent.

Also determine whether the taxpayer (i) maintains appropriate books and records when required by statute or rule, and (ii) possesses substantiating documentation when required by statute or rule.

Whenever possible, review one or more returns from previous years in order to obtain information concerning the taxpayer.

Question 46

What is the standard regarding the tax practitioner’s use of estimates?

Answer 46

The tax preparer may use estimates provided by the taxpayer, and disclosure of estimates is not generally required.

Question 47

When can a tax practitioner depart from a position previously concluded in an administrative proceeding or in a court decision?

Answer 47

A tax preparer may recommend a tax position that is different from the treatment as concluded in an administrative proceeding or in a court decision with respect to previous year’s return if (i) the taxpayer is not bound to a specified treatment in a later year and (ii) the tax return preparer follows Statement on Standards for Tax Services No. 1, “Tax Return Positions.”

Question 48

What is required of the tax return preparer who becomes aware of an error in a previously filed return?

Answer 48

Notify the taxpayer but do not notify any taxing authority regarding an error without first obtaining permission from the taxpayer, except when required by law.

Question 49

What is required of the tax return preparer who becomes aware that the taxpayer has failed to file a tax return?

Answer 49

Notify the taxpayer but do not notify any taxing authority regarding the non-filing without first obtaining permission from the taxpayer, except when required by law.

Question 50

What is required of the tax preparer who, while representing the taxpayer in the administrative proceeding, becomes aware of an error or non-filing?

Answer 50

Request the taxpayer’s agreement to disclose to the taxing authority the error or non-filing. If the taxpayer does not agree, the tax preparer should consider whether it is appropriate to continue the professional relationship.

Do not notify any taxing authority regarding the error or non-filing without first obtaining permission from the taxpayer, except when required by law.

Question 51

When must the tax preparer notify the taxpayer about new or changing tax developments occurring after the preparer has given advice to the client?

Answer 51

When assisting a taxpayer in implementing a plan associated with advice preciously given, rives the plan if there are new developments.

If not assisting implementing the plan, these is no requirement to notify the taxpayer of subsequent developments that may affect the advice previously given.