Tax Manual Review

Question 0

NQSO’s

Answer 0

1. Taxpayer will recognize income when NQSO is granted, if option traded on exchange and not subject to risk of forfeiture.
2. Individual taxed on bargain element when the option is exercise - (bargain element is the difference between the FMV on the date of exercise and the option price)
3. Bargain element considered compensation and taxed at ordinary wages, and subject to FICA/FUTA
4. Appreciation after date of exercise taxed as capital gain
5. Basis is FMV on date of exercise
6. Holding period begins date of exercise

Question 1

ISO’s Key Points

Answer 1

1. Tax due when stock is stold.
2. Capital Gain - 2 yrs from Grant date, 1 yr from exercise
3. Ordinary Income tax - within 1 yr from exercise date, reported on W-2, not FICA/FUTA
4. No AMT positive adjustment if stock sold within calendar year
5. AMT may required earlier recognition of income - addback for the difference between option price and FMV date of exercise

Question 2

ISO’s and Basis
George’s ER grants him an ISO on Jan 1, Year 1, with an exercise price of $25. George exercises the ISO on Jan 2, Year 2, FMV is $40. No ordinary income recognition is triggered, but $15 will be an AMT adjustment. George sells the stock 2 years later for $60, his basis is $25. What is his long term capital gain?

Answer 2

LTCG = $35 and His AMT basis is $40 and AMT gain is $20

Question 3

Major Itemized Deductions General

Answer 3

1. Medical
2. Taxes
3. Interest
4. Charitable Contributions
5. Casualty Loss

Question 4

Miscellaneous Itemized Deductions Not Subject to 2% of AGI

Answer 4

1. Impairment related work expenses
2. Gambling losses, but only to extent of net winnings
3. Annuity contract basis recover
4. Pro Rata portion of estate taxes paid IRD

Question 5

Miscellaneous Itemized Deductions Subject to 2% AGI

Answer 5

1. EE business expenses
2. Home office expenses for EE’s
3. Investment expenses
4. Tax Return Preparation Fees
5. All other Miscellaneous Itemized Deductions

Question 6

Medical Expense Deduction

Answer 6

1. Must not be reimbursed
2. AGI Floor (Under 65 - 10% AGI; 65+ - 7.5% AGI)
3. Coverage:
   a. Diagnosis, cure, mitigation, treatment, prevention of disease
   b. Transportation due to medical
   c. Qualified LTC (Limits)
   d. Insurance premiums covering all the above

Question 7

Medical Expenses Capital Expenditures Restrictions

Answer 7

1. Expenditures are of a medical nature
2. Expenditures are on advice of physician
3. Facilities used primarily by patient
4. Facilities built at reasonable cost
5. Operating/maintenance expenditures are allowable
6. Appraisal costs allowable
7. Only allowed when medical condition exists

Question 8

State and Local Taxes may be deducted in lieu of what?

Answer 8

Answer: Income taxes for 2013

Question 9

Property taxes are deductible for who?

Answer 9

answer: deductible for the person on whom the taxes are imposed regardless of who pays them

Question 10

Interest - qualified residence is Deductible. What are the rules?

Answer 10

1. Interest paid or incurred on debt for a qualified residence of taxpayer. (Qualified residence includes primary residence plus one other residence)
2. Acquisition indebtedness includes construction and substantial improvements.
3. Home equity loans are covered

Question 11

Home Equity Loans two limits

Answer 11

1. Interest on Home Equity Loans is deductible to the extent the debt does not exceed the lesser of:
   a. $100,000
   b. FMV less acquisition costs (equity in home)

Question 12

Investment Income Deduction

Answer 12

1. Deduction for investment interest is limited to net investment income.
   a. Net investment is investment income (interest, non qualifying dividends) less investment expenses (subject to 2% AGI)
2. Carry over disallowed of investment interest.

Question 13

Casualty Loss deduction

Answer 13

1. Casualty losses lesser of decline in value or basis subject to 10% of AGI hurdle and $100 floor.
   a. Cash/property received as compensation for or to repair/replace damage property reduces the amount of the loss. (Insurance)

Question 14

Casualty Loss Example
L had art with FMV of $10,000 (basis of $15k), stolen from his apartment. During the year, he had a salary of $30k, and no other deductions. Calculate Larry’s itemized deduction from the theft of art.

Answer 14

Loss: $10k (Lesser of basis or reduction in FMV)

Loss $10,000
Less: 10% AGI (10% x $30,000) ($3,000)
$100 floor (100)

Itemized Deduction $6,900

Question 15

KIDDIE TAX

Answer 15

1. Child not yet 19 before close of yr, or full time student who has not turned 24 by end of tax year.
2. Full time student at least five months
3. Does not apply to 18 and up if their earned income for taxable yr, exceeds 1/5 of their support

Question 16

Kiddie Tax Computation

“Kiddie tax only applies to unearned income”

Answer 16

1. Gross Income = Unearned Income + Earned Income
   a. The first $2000 of unearned income taxed to child at child’s rate
   b. Earned income over standard deduction taxed to child at child’s rate. (Standard deduction: the great of $1000 or earned income + $350.)
2. Qualified dividends taxed at capital gains rate of 0% for 10%-15% income bracket; and 15%-20% for higher bracket. Depends on child’s income.
3. LTCG taxed at 15% for income tax in brackets 0%-15%

c.

Question 17

Kiddie Tax Example

Answer 17

Mr Jones gifted $70k to granddaughter, age 8, Jennifer. Jennifer received $2200 in interest. Jennifer’s parents are in 28% tax bracket. Jennifer’s net unearned income taxed at her parent’s rate is $200 ($2,200 - $2000) and a total of $150 is imposed on her taxable unearned income

$2,200 Total Unearned Incomoe
-1,000 standard deduction
-1,000 (taxed at child’s rate of 10% = $100)
$200 (taxed at parent’s rate of 25%)
Total due in tax: 150

Question 18

Straight Line Depreciation

Answer 18

1. Depreciation is uniform throughout the useful life of the asset
2. The cost or adjusted basis of the asset, less the asset’s residual/salvage value, is deducted in equal annual installments over the life of asset.
   3 SL = (Cost - residual value) / useful life
3. This method can be used under MACRS and ACRS and using the applicable recovery period instead of the useful life, and salvage value is not considered
4. Must use half year convention