REG R2 Flashcards by Catherine Mill

List the deductions for AGI

Educator expenses
Traditional IRA
Student loan interest
Health savings account
Moving expenses (for military orders only)
One-half self-employment tax
Self-employed retirement
Interest withdrawal penalty
Alimony paid (only for divorce or separation agreements executed on or before December 31, 2018)
Attorney fees paid in certain discrimination and whistle-blower cases
Qualified charitable contributions by non-itemizers

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Which is a deduction for AGI: Child support or alimony?

Deduction for (to arrive at) AGI = Alimony paid (if paid for a divorce or separation agreement executed on or before December 31, 2018)

Child support is never a deduction to arrive at AGI. Child support is not deductible by the payor or taxable to the recipient.

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What are the limits on traditional IRA deductions?

For traditional IRAs in 2021, the deduction is the lesser of $6,000 or individual’s earned income ($12,000 if married or earned income of the married couple). An additional $1,000 deductible contribution is allowed for each taxpayer over age 50.

If the taxpayer or spouse participates in an employer-sponsored retirement plan, the taxpayer’s allowable deductible contribution phases out proportionately.

If a married taxpayer is not an active participant in an employer’s retirement plan, but the spouse is, the deduction for the spouse who is not an active participant is phased out proportionately.

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What are the limits on nondeductible traditional IRAs?

The lesser of:

$6,000, plus an additional $1,000 if
age 50 or older, for 2021
Individual’s compensation
Limit not contributed to other regular
and Roth IRAs

Earnings on such contributions will accumulate tax-free (deferred) until withdrawn. When withdrawn, only the accumulated untaxed earnings are taxable.

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What are the limits on deductions to SEP IRA plans?

SEP IRA plans are for self-employed taxpayers and their employees.

Deductible amount is the lesser of 20% of net earnings from self-employment (after SEP IRA deduction and deduction for portion of self-employment tax) or $58,000 (2021).

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

Self-employment tax:
-50% of self-employment tax

Self-employed health insurance:
-100% may be deducted

Self-employed retirement plan contributions:
-100% may be deducted

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What are the requirements for moving expenses to be deductible?

Moving expenses are only deductible for members of the U.S. Armed Forces moving pursuant to military order.

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

For 2021, if 65 or older, add $1,700 (single or head of household), or $1,350 (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 $3,400 (single or head of household) and $2,700 (MFJ, MFS, or qualifying widow[er]).

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What is the standard deduction for a taxpayer who is the dependent of another taxpayer?

The standard deduction is limited, if a taxpayer can be claimed on another person’s return, to the greater of $1,100 (2021) or the earned income of the dependent plus $350.

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Identify the major classes of itemized deductions.

Medical and dental expenses.
Taxes paid
Interest paid
Gifts to charity
Casualty and theft losses
Gambling losses to the extent of winnings

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What are the limitations on medical expenses?

Medical expenses are deductible to the extent that they exceed 7.5% of AGI.
Cost of surgery for elective cosmetic reasons is not deductible.
Self-employed individuals may deduct 100% of medical insurance premiums as an adjustment toward AGI.
A dependent for medical expenses must meet only the support, relationship, and citizenship or residency tests.

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Identify the taxes that are deductible as itemized deductions.

Limited to $10,000 total:
   -State and local income tax
   -State and local property tax
   -Sales tax
Foreign real property taxes are only deductible if incurred in a trade or business.

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Identify the types of interest that are deductible and nondeductible.

-Qualified residence interest on principal and second residence is subdivided into:
-Qualified indebtedness ($750,000 debt
limitation).
-Points paid on a principal residence
mortgage loan are fully deductible.
-Points paid to refinance a home (or for a
home equity loan) must be capitalized
and deduction spread out over life of
loan.
-Interest on loans for investment purposes, limited to net 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.

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What are the limitations on charitable contribution deductions?

-AGI limitations
-Cash: 60% of AGI (100% in 2021)
-Ordinary income property: 50% of AGI
-Long-term capital gain (LTCG) property:
30% of AGI
-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.

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What is the limit on nonbusiness casualty and theft losses?

For tax years 2018-2025, the deduction for casualty and theft loss is limited to losses incurred in a federally declared disaster area.

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

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Identify some refundable individual tax credits.

Refundable credits

Child tax credit
Earned income credit
Excess Social Security tax withheld
American opportunity credit (40% refundable)

Identify some nonrefundable individual tax credits.

Nonrefundable tax credits
  -Child and dependent care credit
  -Elderly or disabled credit
  -American opportunity credit (60% 
   nonrefundable)
  -Lifetime learning credit
  -Adoption credit
  -Retirement savings contribution credit
  -Foreign tax credit
  -General business credit
  -Work opportunity credit

What are the child/dependent care credit limitations?

Up to 35% of eligible expenditures or $3,000 maximum ($6,000 for two or more dependents). Maximum child care credit of 35% for AGI of $15,000 or less. The credit decreases by 1% for each $2,000 (or fraction thereof) of AGI over $15,000. Minimum child care credit is 20%.

A qualifying child is one under age 13 who qualifies as a dependent, any disabled dependent who is unable to care for self, or a spouse who is disabled and unable to care for self.

Describe the tax credit for the elderly or disabled.

Available to individuals who are:
-65 years of age or older; or
-Under 65 and retired due to permanent
disability and received taxable disability
income.
Base amount for the credit as follows is subject to AGI limitations:
-$5,000 if single
-$5,000 if married filing jointly and one
qualified individual
-$7,500 if married filing jointly and both
are qualified individuals
-$3,750 if married filing separately and
qualified individual

State the limitations of the American opportunity tax credit.

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. Credit phase-out begins with modified AGI of $80,000 ($160,000 MFJ), with full phase-out at $90,000 ($180,000 MFJ).

State the limitations of the lifetime learning credit.

The credit for an unlimited number of years for tuition and fees at eligible education institutions is limited to 20% of tuition and fees up to $10,000. Credit phase-out begins with modified AGI of $80,000 ($160,000 MFJ), with full phase-out at $90,000 ($180,000 MFJ).

What is the time limit on Coverdell education savings accounts?

Any amounts remaining when the beneficiary reaches the age of 30 must be distributed.

“Leftover 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.

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

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

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

There is no limitation to the amount of foreign taxes paid that are claimed as deductions.
Overall limitation for the credit:

Taxable income from all foreign operations/Total taxable worldwide income X U.S. tax

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

State the limitation of the work opportunity credit.

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

Describe the child tax credit.

$2,000 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: -$400,000 for a joint return -$200,000 for an unmarried individual -$200,000 for married filing separately

What are the eligibility requirements for the earned income tax credit?

Eligibility: To be eligible for the earned income tax 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)

Who must make estimated tax payments?

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)]

Describe the IRS requirement to make estimated quarterly tax payments.

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.

What is the net investment income tax?

The net investment income tax applies a rate of 3.8% to certain net investment income of individuals who have income above the statutory threshold amounts ($250,000 for married filing jointly and $200,000 for single or head of household filing status).

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

Net unearned income of a dependent child who falls under the "kiddie tax" rules is taxes at the parent's marginal rate. Net unearned income = Child's total unearned income less $2,200 (the child's standard deduction of $1,100 plus an additional $1,100 taxed at the child's tax rate).

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. -If there is no readily ascertainable value, the employee recognizes ordinary income based on the fair value of the stock purchased 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.

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.

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.