Tax Flashcards
(214 cards)
1
Q
what are the filing requirements for IRS form 1040EZ?
A
income derived solely from wages, salaries, tips
taxable income < $100k/yr
no adjustments to income are claimed
no dependents
2
Q
what are the filing requirements for IRS 1040A?
A
not all 1040EZ requirements met
only adjustments to taxpayer income are deductible contributions to IRA and student loan interest deductions
deductions not itemized
only certain tax credits claimed
3
Q
what is the basic income tax formula?
A
income - exclusions from gross income = gross income - deductions for AGI = AGI - greater of standard deduction or itemized = taxable income \+/- tax based on filing or other credits = taxpayer's liability
4
Q
how is gross income defined?
A
all income from whatever source derived
5
Q
where are net earnings from self employment report on the 1040?
A
schedule c
e.g. sole proprietorship
6
Q
what types of loans do imputed interest rules typically relate to?
A
gift loans
compensation-related loans (corp’s taxable income does not increase as a result of imputed interest)
business-shareholder loans (corp’s taxable income increases as a result of imputed interest)
tax-avoidance loans
7
Q
define the constructive receipt income tax rule
A
income constructively received is taxed to taxpayer as though it was actually received
8
Q
how are windfalls taxed?
A
typically recognized immediately as income
unless qualified prize option permitted by state, whereby payouts from an annuity are taxable as received
9
Q
how are structured settlements taxed?
A
paid periodically (typically annuity) for remainder of injured person's lifetime compensatory damages = tax free (defamation suit proceeds are taxable) punitive damages = taxable (wrongful death suit is tax-free)
10
Q
if the victim/claimant has no control over the investment of the settlement amount, how are earnings taxed?
A
non-taxable
11
Q
what are the main categories of exclusions from gross income?
A
items characterized by love, affection, assistance return of capital make taxpayer who socially desirable / legislative grace fringe benefits from employer
12
Q
how are employer-paid fringe benefits taxed?
A
non-taxable as long as benefits do not discriminate in favor of highly compensated / key employees
if benefits are discriminatory, ALL discounts taken by officers (not just excess of what’s available to everyone) are includible in officer’s gross income
13
Q
how are employer paid premiums and benefits taxed for accident/health plans?
A
premiums paid by employer = not taxable
benefits paid from employer provided coverage = taxed
14
Q
how are the dues paid by employer to outside health club taxed?
A
taxable
15
Q
how is group term life insurance employer-provided premium taxed?
A
excluded up to first $50k of coverage
above this exclusion, must include the greater of uniform premium table or actual cost of insurance in income
16
Q
how is college education assistance provided by employer taxed?
A
excluded up to $5,250 for one year
17
Q
how child care provided by company and company car taxed?
A
exclude up to $5k
business use excludable without limit, personal use taxable fringe benefit
18
Q
what are the capital loss rules on tax return?
A
offset capital gains without limit
offset ordinary income up to $3k
excess loss can be carried forward indefinitely to future tax years
calc’ed on sch. D
19
Q
how is self-employed health insurance taxed?
A
100% deductible
not deductible, however, if premium paid with after-tax dollars for group plan
premiums paid deductible subject to 10% AGI floor
20
Q
how is student loan interest taxed?
A
interest on qualified higher ed loans deductible upon to $2500 - deduction for AGI (above line)
do NOT have to itemize
21
Q
what are the deductibility rules for medical expenses?
A
expenses must be paid by taxpayer or immediate family and only those above 10% AGI are deductible
must not be reimbursed
22
Q
what is the tax itemized deductibility limit?
A
state, local, foreign capped at $10k total
23
Q
what is itemized deduction limit for acquisition indebtedness interest?
A
$750k MFJ
points for mortgage also deductible on year incurred
24
Q
when are casualty losses deductible?
A
ONLY when declared by government as disaster
25
how is investment debt interest expense taxed?
deductible up to taxpayer's net investment income
26
what is a qualifying child on a tax return?
child, stepchild, foster child, sibling, step-sibling, descendant of taxpayer and must have lived with taxpayer for more than 1/2 of year
under 19 yrs old by end of yr or 24 if in college or permanently disabled
individual must not provide over 50% of their support and cannot be claimed on another person's return
27
what is a qualifying relative on tax return?
family member/other individual who resided in taxpayer's home during year and was provided more than half of their support by taxpayer
income should be less than st. deduction amount of $12k
if qualifying relative is parent, does not have to live w/ taxpayer
28
what is a refundable tax credit?
paid to taxpayer even if the amount exceeds the taxpayer's liability (could create a refund on return)
29
in order to qualify for the child and dependent care credit, what must the taxpayer do?
have earned income
pay dependent care expenses in order to work/looking for work
keep a home for qualifying individual (child <13 yrs old, taxpayer's spouse who is physically/mentally incapable of self-care, another qualifying dependent/relative incapable of self-care)
capped at $3k on sliding scale 20-35% of related expenses - $43k AGI gets you down to the 20% rate
used for US citizen
cannot be used if FSA already used
30
what is the child tax credit amount
$2k for each child under age 17, must be dependent, refundable up to $1400/child
AGI phaseout after 200k for single, 400k for MFJ ($50 per $1k above MAGI)
31
what is the adoption expense credit amount
$14,080
limited to tax liability and cannot be reduced below zero (nonrefundable credit)
credit may be carried forward 5 yrs
for qualified adoption expenses - adoption costs, court costs, attorney fees once adoption becomes final
phaseout beginning AGI $211k
32
when is interest imputed for a gift loan?
when gift between $10k and 100k
imputed amount cannot exceed borrower's investment income
if gift >$100k, gift interest imputed at prevailing federal rate
no interest is imputed if the borrower's investment income for the year does not exceed $1,000
33
what is the threshold below which interest is not imputed and added to income for a compensation-related loan?
$10k
34
what is the standard deduction for an individual who may be claimed as a dependent limited to for unearned income?
$1,100
if earned and unearned income - std. ded. = greater of $1,100 or earned income + $350
35
if a stock becomes worthless after a few months, how is the loss treated?
LT capital loss
| treated as becoming worthless @ YE
36
when may nonbusiness bad debts be written off?
only if totally worthless
| deductible as ST capital loss subject to $3k limit offset against ordinary income
37
what does the IRS classify as a qualified residence?
taxpayer's personal residence plus one other residence such as a vacation home
38
what is the difference between an accountable and non-accountable reimbursed employee expenses?
accountable - employees must substantiate expenses
| non-accountable - expenses reimbursed are taxable to employee
39
what is the lowest marginal income tax rate?
10%
40
in order to qualify as a deductible office expense, what primary requirement must be met?
office must be used regularly and exclusively as a principal place of business
41
what are the main criteria to be classified as a qualifying relative?
income test
support test (dependent not providing >50% support - social security not counted as support!)
live w/ taxpayer (unless direct ancestor)
US citizen (extends to mexico and canada)
not a dependent on another taxpayer's return
42
what are the key points about the foreign tax credit?
nonrefundable
| generally more advantageous than taking the foreign earned income exclusion (assuming foreign tax is higher than US tax)
43
what are the key points about business bad debt?
deductible as ordinary loss
must be part of taxpayer's employment conditions
allowed for debts partially or wholly worthless if income from debt was previously income in taxpayer's income
44
what is the standard deduction for single/MFS, head of household, and MFJ/qual. widower?
$12.2k, 18.35, 24.4
45
how much of a casualty loss due to a federally declared disaster may be deducted?
$100 deductible first
| only deduct amount above 10% AGI
46
when are charitable contributions allowed as an itemized deduction?
if donor-taxpayer itemizes
and
proper substantiation of contribution is kept
47
what are the 3 main issues to consider w/ charitable contributions?
type of charity (public/private)
type of property
purpose
48
what are public and private charities known as, respectively?
60% organization
| 30% organization
49
What are 50% organizations?
churches, educational institutions, nonprofit hospitals, etc.
red cross, salvation army, united way, etc.
taxpayer contribution deductions limited to 50% of AGI (60% if donations are in cash)
50
What are 30% organizations?
charities not classified as public in tax code
typically funded and controlled by one individual, family, corporation
i.e. Gates foundation
contributions deductible up to 30% of taxpayer's AGI
51
what are the main deduction limits for appreciated property donations?
donor elects FMV of appreciated property - deduction limited to 30% AGI if recipient is public charity, 20% of AGI if private charity (carryover option)
donor elects tax basis in appreciated property - 60% of AGI permitted to public charity, 20% for private charity (no carryover option)
52
what are some main nondeductible contributions?
```
foreign organizations
individuals
political groups/candidates
lottery tickets
tuition
time
```
53
how is a bargain sale to a charity treated?
part sale, part charitable contribution
| basis and appreciation are allocated on pro rata basis to sale and gift portions
54
what are the contribution deductibility rules depending on the property's use?
no related use - lesser of FMV or basis, limited to 60% or 20% of AGI depending on public/private
relate use - FMV (30, 20% AGI), basis (60, 20% AGI)
55
when is an appraisal required for noncash property donations?
above $5k
56
what are the limitations for contributions for gifts of ordinary income property (i.e. stock or selling what you're in the business of creating)?
50% AGI - public
30% AGI - private
ordinary income property is valued at the lesser of adjusted basis or FMV
57
how much may taxpayers deduct for noncash charitable contributions to qualified public charities?
50% AGI (if basis is used)
| 30% AGI if FMV used
58
what is the carryover limit for disallowed amounts from a donation in the current year?
5 yrs for both public and private charities
59
what is the formula for determining alternative minimum taxable income?
```
regular taxable income (1040)
+ positive AMT adjustments
- negative AMT adjustments
+ AMT preference items
= AMTI
```
60
how is AMT payable determined?
```
AMTI
- AMT exemption
= AMT base
x AMT rate
= tentative AMT
- regular income tax on taxable income
= individual AMT payable
```
61
what is a positive AMT adjustment?
deduction/exemption allowed for regular income tax purposes exceeds that allowed for AMT purposes
62
what 3 general strategies are used when planning for the individual AMT?
move income in AMT year
move deductions into non-AMT year
time recognition of certain AMT adjustments and tax preference items
63
what does the kiddie tax apply to?
unearned income for child under 19 or 24 if student being supported
64
how is the kiddie tax imposed?
income above specified amount is taxed to child using marginal rate for estates and trusts
planning consists of UGMA or UTMA accounts
65
what is the calculation for unearned income taxed to child using parents' rate?
total unearned income
- $1,050 standard deduction for child
- greater of $1,050 or amount allowable itemized deductions directly connected with production of earned income
= net unearned income of child taxed at applicable rates of estates and trusts
66
what is the standard deduction for a child with both earned and unearned income?
greater of:
$1,050
amount of earned income + $350 (limited to single taxpayer standard deduction)
67
how long may an AMT credit be carried forward for use against regular income tax in a future year?
indefinitely
68
what are the 2 main AMT exclusion items?
excluded section 1202 gain for qualified small business stock
percentage depletion treated as a tax preference for AMT
69
what type of income does the kiddie tax apply to?
unearned, in excess of $2,200 taxed at estates and trusts tax rate
70
what is the criteria that must be met for payment to ex-spouse to be considered alimony?
paid in cash or equivalents
agreement does not specify that the payments are not alimony for federal income tax purposes
the payee and payor are not members of the same household at the time payments are made
no liability to make payments for any period after the death of the payee
payments made directly to the payee spouse or third party for direct benefit of payee spouse
71
how is child support payment classified and treated for tax purposes?
if payment is tied to the child in some way, it is presumed child support
nontaxable to payee and nondeductible by payor
72
how are property transfers between spouses resulting from divorce treated?
tax-free
73
what change in alimony payment streams will result in alimony recapture to the payor?
over $15,000
74
what are personal service corporations?
```
HALE
Health
Account, architecture, actuarial science
Law
Engineering
```
If structured as regular C-corp, personal service corp tax is imposed at flat rate of 21% (not progressive corporation tax schedule), so above typically structured as an LLC
75
when is the personal holding company (PHC) tax applied?
ownership test - over 50% of value of outstanding stock of corporation is owned by 5 or fewer individuals
passive income test - 60% of corporation's AGI consists of personal holding company income (income from securities and other income-producing property)
calculated by multiplying the undistributed personal holding company income by 10% flat rate (in addition to regular corporate tax)
avoided if income is distributed as dividends to shareholders
does not apply to s-corps, banks, and life insurance companies
76
define section 1244 stock
C corp total capital contributions do not exceed $1M and stock is issued in exchange for investor money
favorable tax consequences (deductible as ordinary loss) if stock sold at loss up to $100k for MFJ - ONLY APPLIES TO LOSSES. Gains are treated the same, capital.
any remaining loss is a regular capital loss which may reduce capital gains up to $3k/yr
77
what are the 3 elements classifying a general partnership?
common ownership in business by more than one owner
sharing of profits and losses of business by partners (generally in proportion to ownership)
general partners afforded right to participate in management and operation of business and have unlimited personal liability for acts of partnership and other partners
net operating loss tax provision not allowed
78
what is the main difference between a general partnership and LLP?
LLP - general partners are not liable for acts of other partners. protects individual assets of partners innocent of malpractice
79
define built-in gains tax
applies to S corps that were formerly c corpsa
tax imposed on unrealized built-in gain recognized on sale of asset by S corp for period of 5 yrs from date of S corp election (from C corp)
paid by the entity, not the shareholders
80
what are the 3 potential additional taxes an S corp may have to pay?
occurs when s-corp uses to be C-corp
built-in gains
LIFO recapture
excess net passive income (above 25% of gross receipts)
81
what are the social security and medicare self employment tax rates?
12. 4%
| 2. 9%
82
what is the basic formula to calc self-employment tax?
```
SE income
- SE income x 7.65%
= net earnings
(if above 128k, reduce by 2.9% additional medicare tax)
= taxable wage base
- TWB x 15.3% (SE tax rate)
= SE tax
```
83
who is subject to the additional medicare tax?
only employees above a certain limit ($250k MFJ, 200k individual)
0.9% in addition to 2.9% assessed on all compensation and self-employment income
employers must start withholding once employee earns above $200k
84
what does self-employment income include/exclude?
```
includes:
sch. C income
distributive share of income to general partner (K-1)
part time earnings
board of directors fees
```
does not include:
dividends/interest
real estate income/rentals
distributive share of income to limited partner or S corp shareholder (K-1 income)
85
```
what tax forms are required for:
sole proprietorship
partnership
LLP
LLC
S corp
C corp
```
```
1040 sch. C
1065
1065
either
1120S
1120
```
86
when must a s-corp election be filed
Form 2553 - before 15th day of 3rd month of tax year the election is to take place
87
what amount of retained earnings may be kept without having to prove a reasonable business need?
$250k
88
what are the main noncapital assets / ordinary income assets whose disposition generates ordinary income / loss (section 1221)?
```
ACID
A/R or notes receivable
copyrights or creative works
inventory as part of business operations
depreciable personal / real property used by business
```
89
what is the max rate at which sale of collectibles will be taxed?
28%
90
what is the holding period for gifted property?
if donor's basis carries to donee, donor's holding period is also added to donee's holding period
91
how is inherited property from decedent treated?
LT, regardless of actual holding period
92
what is the holding period for section 1031 exchange?
holding period of property surrendered in exchange carries over and is added to like-kind property received
93
in order for qualified dividend income to be treated at LTCG rates, what criteria must be met?
dividend is declared and paid by domestic / qualified foreign corporation
stock held for more than 61 days during 121 day period beginning 60 days before ex-dividend date
dividend must be paid from stock or regulated investment company
94
define substituted basis
property's FMV less any deferred gain or plus any postponed loss
95
```
what is the MACRS useful life used for depreciation/amortization for:
autos, light trucks, computers
office furniture and fixtures
residential rental property
commercial rental property
```
5 yrs
7 yrs
27.5 yrs
39 yrs
96
when is the alternate depreciation system used?
listed property used 50% or less in business
| based on straight-line method
97
what is the section 179 expense election?
allows an annual expensing of the cost of tangible personal property in any one year up to a certain amount
permits taxpayer to write off cost of tangible personal property dollar for dollar without reference to any depreciation or MACRS table
carryforward permitted
to be eligible, property must be used at least 50% for business in first year placed in service
limited to $1M
total amount of property placed in service for given year may be reduced dollar for dollar for amounts above $2.5M
does not include property held for the production of income
deduction cannot exceed taxable income from trade or business of taxpayer
98
what are section 197 assets?
intangibles
| amortized over 15 yrs
99
define section 1231 property
depreciable real / personal property used in trade or business for production of income
held for more than 1 yr
encompasses section 1250 (real) and 1245 (tangible)
does not include inventory / COGS (not depreciable)
- property sold at gain is afforded capital gain treatment (but previous depreciation portion is taxed as ordinary income)
- property sold at loss is afforded ordinary loss tax treatment
100
what is the lookback rule?
net gains must be reported as ordinary income to the extent of any section 1231 losses reported within past 5 tax years
101
what is section 1245 property?
depreciable tangible personal property used in trade or business
any recognized gain on sale of section 1245 should be treated as ordinary income to extent of any depreciation taken (full recapture)
any remaining gain above this recapture amount is section 1231 capital gain
102
what is section 1250 property?
depreciable real property used in trade or business (real estate) for production of income
partial recapture
depreciation amount of gain taxed at marginal rate up to max of 25%
remaining taxed as capital gain
103
define installment sale
any sale of property where seller receives at least one payment after the year of sale
permits taxpayer to spread taxable gain as payments received using following formula:
profit / total contract price = gross profit percentage
then, multiply GP% by installment payment for given year
not allowed with public securities or company inventory
104
how are losses from related party property sales treated?
disallowed, although if property is subsequently sold to non-related party, the previously unrecognized RP loss can offset the gain
105
define cost depletion method
asset's basis / total recoverable units of asset x # units sold = depletion deduction used for the year
106
how are futures and other contracts treated for capital gains purposes upon sale?
40% ST
| 60% LTCG
107
what are the requirements for a depreciation deduction to be allowed?
legally / equitably own asset
limited and determinable life
used in taxpayer's trade / business or held for production of income
108
when does immediate recognition of remaining gain occur under the installment sale method?
upon cancellation
gift of installment sale
sale of installment note
installment note pledged as collateral for loan
109
what is the difference between realized and recognized gain?
realized - economic gain received by taxpayer
| recognized - gain reported on tax return
110
how is like-kind exchange basis calculated?
```
adjusted basis in property surrendered
+ adjustment basis of boot given (if property = property's FMV)
+ gain recognized
- FMV of boot received
- loss recognized
= recipients basis in new property
```
only domestic real property qualifies for like-kind treatment
111
what is boot in section 1031?
cash or receipt of other property to make the two properties exchanged equal in value
recognized gain is lesser of realized gain or boot received
no recognized losses allowed
if boot given = boot received, no gain
112
what are the related party rules for 1031 exchanges?
taxpayer and related party must not dispose of like-kind property received until after 2 yrs following the exchange. if disposed of early, all previously deferred gain is recognized immediately
EXCEPTION for death of recipient taxpayer or involuntary conversion
Gain may be deferred if the taxpayer reinvests the amount realized from the converted property in another property. The period for reinvestment is 2 years from the end of the year in which the realization took place for conversion events caused by nature. The reinvestment period for conversion acts caused by government/eminent domain is 3 years from the end of the year in which realization of the conversion took place. If the conversion is into cash, nonrecognition is elective.
NOT allowed for real-estate dealers
113
what is a section 1033 exchange?
allows taxpayer who undergoes involuntary conversion to postpone recognition of gain
required to reinvest in similar replacement property in order to defer/postpone gain recognition
2-3 yrs to replace property after theft, condemned, respectively
only applies to gains
upon replacement, updated basis = FMV of new property at acquisition - deferred gain
if amount reinvested in replacement property is less than amount initially realized, gain is recognized to extent proceeds are not reinvested (gain recognized as taxable income)
114
what tests must be passed for section 1033 exchanges?
owner-user: functional use test - use of replacement property and converted property must be the same (more strict)
owner-investor: properties must be used in similar ways as previously held properties
115
for both section 1031 and 1033 exchanges, what is the general basis equation?
FMV or property in exchange - deferred gain
116
what is section 121 of the IRC?
upon sale of personal residence, allows gain exclusion of up to $250/500k for S/MFJ to individual satisfying ownership and use tests
if tests failed, may still be entitles to partial exclusion
may be used once every 2 yrs
117
define ownership and use tests
ownership: home owned and used as principal residence for at least 2 of 5 yrs preceding date of sale
use: same as ownership timeframe, but both spouses must meet this test (exception = employment relocation, ***can use the gain exclusion in proportion to the # of months lived there / 24)
118
define the 3 categories of vacation home / rental property use
primarily personal: property rented for fewer than 15 days per year, considered only personal residence and all rent generated is excluded from income. can deduct interest and property tax on sch. A (itemized)
primarily rental use: property rental at least 15 days per year and not use for personal use more than the greater of 14 days per year or 10% of rental days, taxpayer can deduct expenses associated with rental on sch. E of 1040 and has possible deduction of rental losses up to $25k (phaseout at 100-150k MFJ)
mixed: rented for at least 15 days per year and also used for personal use more than 14 days per year or 10% of rental days, rental expense deducted only to extent of rental income (no possibility of $25k ordinary loss against income as shown above)
119
when does the IRS presume an activity not to be a hobby?
if there are profits in any 3 of 5 consecutive years ending with the tax year in question
all of hobby income is reported on 1040
120
how are passive activities defined?
trade/business activities in which taxpayer does not materially participate
rental activities, even if taxpayer is material participant, unless taxpayer is a real estate professional
121
define the at-risk rules
maximum deductible loss for an investment limited to the amount the taxpayer-investor has at risk at end of current year
carryover permitted
total cash/property invested in activity
any debt/borrowings by activity for which the investor is personally liable
122
define passive activity loss rules
passive losses may be only deducted against passive income
excess passive activity losses are disallowed on the taxpayer's current tax return, but instead are deferred.
excess passive activity losses are fully allowed in the year in which the taxpayer disposes of his or her entire interest in the passive activity in a taxable transaction.
123
define material participation
rules where answering "yes" indicates the activity is not classified as passive income
124
what are the main rules for limited partnerships?
public and private partnerships cannot be used to offset income for the opposite
in order to offset for publicly traded partnership, must come from same publicly traded partnership
125
when are rental real estate activities not considered passive?
real estate professional whose real estate activities are more than 50% of services for year and more than 750 hours of work is put into activity
losses may be fully deducted from real estate activities against active income, portfolio income, or both
126
what tests must be met for a small investor who dabbles in rental real estate activity in order to deduct up to $25k of rental real estate losses against active and portfolio income?
must actively participate in activity (at least management decisions of real property)
must own at least 10% in value of all interests in the activity during the taxable year
AGI phaseout between $100 and 150k
127
to whom do passive activity rules apply?
```
individuals
estates
trusts
personal services corporations
closely held C corps
```
128
what are the 2 main considerations for full/partial sale of a passive activity interest?
suspended amounts and credits cannot be used when there is a partial sale, only once ENTIRE interest is disposed of
suspended deductions and credits can be used to offset current activity, other passive activities (OF IDENTICAL NATURE - I.E. MLP HAS TO OFFSET ANOTHER MLP, and other income or gains in a full sale
129
how are deductions from passive activity disallowed under passive loss rules for given tax year treated?
may be carried forward to next tax year
130
is a CFP certificant permitted to represent a taxpayer before the IRS in the event of an audit?
no, without evidence of additional credentials, such as the CPA or state attorney license
131
what is the cash method of accounting?
taxpayer reports income when any cash is collected (or constructive receipt) and reports expenses when cash payment made
may be used by taxpayers, most businesses with annual gross receipts $25M or less
132
what is the accrual method of accounting?
opposite of cash method
recognizes taxable income in same year report on financials when income is earned and expenses are reports as they're incurred
income does not have to be actually received, not do expenses have to actually be paid
matches expenses with income
133
what is the hybrid method of accounting?
taxpayer accounts for some items using cash method (service income) and others using accrual method (sale of merch)
134
how may an accounting method be changed?
by IRS approval
135
how may a correction of error me amended?
form 1040X amended filing
136
if a taxpayer owns a business with a differing tax year, what must happen?
taxpayer must report income in the same tax year that the business tax year ends
137
what is the limit for net operating losses?
80% of total taxable income
carried forward indefinitely
not allowed for pass through entities (partnerships, S corps)
oldest loss written off first
138
define business purpose doctrine
transaction will not be effective for income tax purposes unless intended to achieve a genuine business purpose other than tax avoidance
139
define assignment-of-income doctrine
AKA the fruit of the tree
taxpayer who earns income and is the source of that income cannot assign that income to someone else for income tax purposes
taxpayer who earns the income will be taxed on that income
140
define tax benefit rule
converts otherwise nontaxable receipts into taxable income
e.g. taxpayer received tax benefit in earlier year for something, then is taxed on the subsequent reimbursements in the current year, like when an employer pays disability insurance premiums, the disability benefits are taxable to the insured
141
most taxpayers are not required to file a return unless their income is equal to or above...
the standard deduction
142
when is the individual tax filing deadline?
april 15th
| if extension filed - october 15th
143
define failure to file penalty
5% per month up to 25% max
| if return filed more than 60 days after due date, minimum penalty smaller of $210 or 100% of unpaid tax
144
define failure to pay penalty
0.5% per month up to 25% max
| reduced by Failure to file penality, if also imposed
145
what are the 4 main tax penalties in order of severity?
criminal fraud - tax evasion, heavy fines / imprisonment
civil fraud - 75% portion of tax underpayment attributable to fraud
negligence penalty - 20% portion of underpayment attributable to negligence
frivolous return - $5k
146
what are the 3 types of audits performed by the IRS?
correspondence - through mail, minor issue
office - at IRS office, restricted in scope
field - on premises of taxpayer, examination of numerous items
147
who can represent a taxpayer in an IRS audit?
licensed attorney
CPA
enrolled agent / actuaries
unenrolled tax return preparer
148
which method of inventory valuation results in lower taxable income during an inflationary period?
LIFO
| results in higher COGS
149
if IRS assesses interest on underpayment of income taxes, when does interest begin to be calculated?
from original due date of income tax return
150
when is the C and S corp filing deadline?
15th day of third month following end of corp's tax year
151
in order to avoid underpayment penalty, what estimated payment must taxpayers make?
lesser of:
1. 90% of tax liability shown on CY return
2. 100% tax liability shown on PY return
if AGI is > $150k (MFJ), taxpayer must have made estimated payments of at least 110% of PY tax liability
152
what is the double basis rule?
no gain or loss is recognized if the donee sells the property at a price that is between the donor's adjusted basis and the FMV on the date of the gift.
used for gifted property where, at time of gift, FMV < basis
if done subsequently sells at greater than FMV or basis, basis is used
if sold at less than FMV/basis, FMV is used
gift tax not allocated when property disposed of
153
what amount does a gift have to be to be reported on gift tax return?
Gifts loans of $10,000 or less are not subject to gift tax unless the donee uses the proceeds to purchase income-producing property.
154
what is the statute of limitation on IRS audits?
1. later of 3 years after filing date or due date
2. 6 yrs if 25% gross income is unreported
3. no limit if fraudulent return filed or no return filed
155
what is the accuracy-related penalty?
20%
| if without the intent to defraud, due to negligence or substantial understatement
156
what must be in place to claim innocent spouse relief?
1. understatement of tax due to erroneous items
2. individual did not know of reason of understatement
3. unfair to hold this person liable considering the facts and circumstances
157
what are the 3 differences in taxation of trusts relative to individuals?
1. no std deduction
2. no deduction for distributions to beneficiaries
3. trust has $300 deduction for simple, $100 for complex
medical (if paid within 1 yr) and admin expenses may be deductible on either estate or income tax return of decedent
158
AMT preference items
private activity bonds interest
percentage depletion in excess of adjusted basis on a mining property.
exclusion of gain on the sale of certain qualified small business corporation stock (section 1202).
159
up to what percentage of AGI may corporations deduct for charitable contributions?
10%
160
when is a passive rental activity classified as a service?
If a rental is 30 days or less and significant personal services are provided
161
Losses from publicly traded partnerships cannot be offset against
income from nonpublicly traded partnerships
162
when is the mid quarter convention for depreciation used?
40% or more of personal property placed in service during last quarter of the year (then applies to all property placed in service that year)
163
what is the donee's basis for an appreciated gift?
donor's adjusted basis + (unrealized appreciation / FMV - donor's annual exclusion amt) * gift tax paid)
164
which day is included when calculating holding period - acquisition or disposition?
disposition
165
what happens to the basis in a wash sale?
unrecovered portion from loss in a wash sale of formerly held security is added to the basis of the basis of the new security
166
what is the main difference between taxes on NQSO's and ISO's
NQSO's - taxed as ordinary income on grant date
| ISO - taxed either at cap gain (if held 2 yr+) or ordinary income once option exercise and stock subsequently sold
167
how are mutual fund dividends and capital gain distributions taxed?
cap gain - if distributed, no increase in basis. if automatic reinvestment, increased basis, but still taxed
dividend - same as above, qualified divs taxed at cap gain rate
168
what is the surtax on net investment income?
additional 3.8% tax on the lesser of
1. MAGI
2. NII
$250k - MFJ, $200k - single
169
what are the methods of stock/MF basis designation?
```
FIFO (default)
spec id
avg cost (MF only)
```
170
what is the main characteristic of an llc?
members have limited liability for debts and claims of business even though participating in management
171
what is an s corp?
corporation with 100 or fewer shareholders and only one class of stock
pass-through entity
main advantage - avoids double taxation of dividends that C-corps experience (shareholders pay income tax, corporation does not)
172
what is the main tax advantage of a family limited partnership?
reduced asset values through valuation discounts for gift and estate tax purposes
173
what is the dividends received deduction?
if corporation owns shares of another company, gets a discount on the dividends they need to include on their tax return:
1. <20% - 50% DRD
2. 20-80% - 65% DRD
3. 80+% - 100% DRD
174
what is the accumulated earnings tax?
prevents taxpayers from using corporate entity soley for tax avoidance purposes (accumulating earnings beyond reasonable needs)
flat 20% tax
175
what are the 3 main additional taxes imposed on c corps (if applicable)?
personal service corporation tax
personal holding company tax
accumulated earnings tax
176
on what date must a stock be held to have dividends included in income?
date of record
177
what is the annuity exclusion amount?
(investment basis / expected return) * annuity payment
return of basis can be excluded from periodic annuity payment
178
what is the SS tax rate for employee and employer (each)?
6.2%
| wage base cap of $132,900
179
what is the medicare tax rate for employee and employer (each)?
1.45%
no cap
additional medicare tax of 0.9% if income is above 200k (S) or 250k (MFJ) - employee pays only
180
how are the following damages treated?
compensatory (making whole)
punitive (additional punishment)
1. non-taxable
| 2. taxable
181
what is the rule with section 1202 small business stock?
noncorporate investors can exclude up to 50% of gain realized on QSBS, remaining gain taxed at 28% cap gains rate
***must be held more than 5 yrs
issued after 8/10/93
exclusion limited to greater of 10x basis or $10m
***QSBS acquired after 9/27/10, 100% of gain is excluded for both regular income and AMT
182
what options are available to mitigate double taxation of foreign income?
1. exclude up to $105,900 of foreign earnings from US income
2. include foreign income in US taxable income, then claim a credit for foreign taxes paid
to qualify for exclusion, taxpayer must be either:
bonafide resident of the foreign country
live in foreign country for 330 days in any 12 consecutive months
indexed amount of exclusion:
max exclusion * (#days in foreign country / number of days in the year)
183
what is the main tax change in the treatment of alimony payments?
divorces effective 1/1/19 or later - alimony not deductible of payor's return and not included in taxable income on payee's return
184
what are the limits on deductible taxes?
applies to state, local, and foreign
| aggregate limit of $10k (MFJ) for income and property taxes
185
how may investment interest be itemized?
this is interest on funds borrowed to acquire investment assets
deduction limited to net investment income
186
what are the real estate transfer apportionment rules?
allocation of real estate taxes
based on # days each party held asset during the year
basis adjustment required if not specified in purchase agreement
- buyer pays all tax: seller's portion added to realized amount, buyer's basis increases by same amount
- seller pays all tax: buyer's portion deducted from amount realized by seller, buyer's basis is reduced by same amount
187
how is interest treated in the following scenarios?
paid for business use of the production of income
paid for personal use
deductible FOR AGI
deductible FROM AGI (below line)
personal interest is NOT deductible (i.e. credit cards)
188
What are section 165 losses and how are they deductible?
```
losses of nonbusiness property limited to losses from federally declared disaster
following conditions must be met:
1. identifiable event causing loss
2. property damage results
3. event is sudden, usual, unexpected
```
generally deductible in year of disaster, however, disaster area losses may be deducted in year preceding the loss
amount of loss is lesser of:
1. adjusted basis
2. decline in FMV resulting from event
losses allocated between business and personal portions and reduced by insurance recovery that would have been received (i.e. amount of loss - deductible)
appraisal generally required
personal property limits:
10% AGI aggregate
$100 floor per event
does not apply to recoveries through insurance claims (disallowed)
189
what are the additional std. deductions for those taxpayers 65+ yrs old and/or blind?
MFJ, MFS, Qual. Widower - $1,300
| Head of House, Single - $1,650
190
whether taxpayer has a qualifying relative or child as a dependent is most important when determining what?
head of household or qualifying widower status
child tax credit, child and dependent care credit
191
which relatives do not need to live with taxpayer to meet member of household or relationship tests?
child, stepchild, fosterchild, or dependents of any
192
what is the income test when determining qualifying relative?
gross must be less than individual standard deduction (SS counts toward support threshold)
193
what age and residence tests must qualifying child meet to be included as a dependant?
age - 19 or younger (younger than 24 if full-time student) or permanently and totally disabled
residence - must live w/ taxpayer more than half of year
gross income test not relevant if full-time student under 24 or generally under age 19
194
when is marital status determined for filing classification?
end of yr
| if spouse passes during year, MFJ is still allowed
195
what conditions must be met to qualify for head of household status?
unmarried individuals who maintain household for qualifying person for over 1/2 year
household must be qualifying person's principal home (unless parent of taxpayer - but must pay half of their residence costq) and taxpayer must pay over half costs of maintaining household for qualifying person
196
what conditions must be met to file as qualifying widower?
deceased spouse
eligible for 2 years following death
must not remarry before end of tax year in question
must have a qualifying person as dependent and cover over half of their living expenses for that year
197
what are the principal filing requirements/threshold?
must file if income at or above filing status std. deduction amount (including additional 65+ std. deduction amount, if applicable)
198
what is the individual tax return extension period and form?
form 4868
| 6 mo. extension
199
what is the deadline to claim a refund after the return has been filed?
claim must be filed by later of:
1. 3 yrs from date return was filed
2. 2 yrs from date tax was paid
200
when are life insurance policy dividends included in taxable income?
ordinarily excluded, but included to the extent dividends exceed taxpayer's basis in contract (i.e. premiums paid)
201
In order to fulfill the deduction requirement using this category, the home office must be used
exclusively and regularly by the taxpayer for administrative or management activities of a trade or business. There must also be no other fixed location where these activities are performed to a substantial extent.
202
A defaulted loan is only deductible as a bad debt if
the loan consists of a legal obligation for repayment and if it is made with the reasonable expectation of obtaining repayment.
203
Withdrawals from an HSA for other than qualifying medical expenses are subject to
both income tax and a 20% penalty unless made after the taxpayer reaches age 65, dies, or becomes disabled.
204
how is a death benefit only plan treated for income tax purposes?
The entire payment from a DBO plan is included in the gross income of the recipient. A DBO plan is a form of deferred compensation, which distinguishes it from ordinary group term life insurance. The DBO plan benefit is considered compensation for services rendered, and is therefore taxable as ordinary income.
205
how is LT unrelated-use tangible property contributions valued for deductibility purposes?
lesser of basis or FMV
206
what is the transfer-for-value rule?
if an existing policy is transferred for valuable consideration, insurance proceeds are includable in gross income of transferee to extent the proceeds exceed basis
designed to prevent tax-free windfall that might occur from speculation in life insurance policies
EXCEPTION - when the transfer is to a transferee whose basis in the policy is determined by reference to the transferor's basis (tax-free exchange or gift), the resulting death benefit is not taxable to the transferee.
207
how are the costs of defending a criminal action related to business and fines/penalties for law violation treated for deductibility purposes?
1. fully deductible
| 2. not deductible
208
what is the 7-pay test?
- requires that the total premiums paid never exceed the amount of level annual premiums paid if the policyholder had been charged a level amount that would pay the policy up after 7 years.
- If at any time the total premiums paid exceed the net level premiums that would have been paid up to the time in question, the policy is considered a modified endowment contract and its tax treatment changes.
209
how are annuities taxed?
The portion of the annuity payment that is attributable to the premiums paid (i.e., a return of capital) should not be taxable as income.
The portion of the annuity payment that represents interest earned (i.e., income earned from the investment of capital) should be taxable as income.
210
After the IRS, what is the organizational authority ranking in order from most to least?
treasury regulations
revenue rulings and procedures
private letter rulings
211
what is the max sq footage deduction for the simplified home office deduction?
300 sq ft @ $5/per
212
what is the valuation of gifted life insurance equal to?
unearned premiums at date of gift
213
in order to take the depreciation deduction for a home office, what must be in place?
gross income from the business must be sufficient to cover all of his other operating expenses in addition to the home office deduction
214
in a divoraced family, if there is no decree specifying who can claim children as dependents, who is able to?
parent with custody for greater portion of year
