CPA Exam Regulation - Individual Taxation

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Regulation - Individual Taxation

What is the criteria for filing a tax return?

A taxpayer must file a return, if their income is greater than the sum of:
The personal exemption, plus
The regular standard deduction, plus
The additional standard deduction amount for taxpayers 65 or over, and/or blind.

What is the basic tax formula?

Gross Income
(Adjustments)
Adjusted Gross Income
Standard Deduction
OR
Itemized Deductions
(Exemptions)
Taxable Income
Federal Income Tax
(Tax Credits)
Other Taxes
(Payments)
Tax Due OR Refund

Identify the various filing statuses.

Single
Married, Filing Jointly
Married, Filing Separately
Head of Household
Qualifying Widow(er) with dependent child

What is the criteria for filing Single?

Does not qualify for another filing status
Unmarried or legally separated from spouse at December 31.

What is the criteria for filing: Married, filing jointly?

At the end of the 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

What is the criteria for filing: Married, filing separately?

File a separate return if only one spouse has income.
In a separate property state - a husband and wife must report their own income, exemptions, credits, and deductions on their own tax returns.
In a community property state - the income, deductions, credits are split 50/50.

What are the criteria for filing as Head of Household?

Individual is not married, legally separated if married, and has lived apart from his or her spouse for the last six months of the year
Individual is not a "qualifying widower"
Individual is not a non resident alien
Individual maintained a home that, for more than half the taxable year is the principal 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 taxpayer; or
A dependent father or mother, regardless of whether they live with the taxpayer.

What are the criteria for filing Qualifying Widow(er) with dependent child?

Unmarried at the end of the tax year, and
Is a surviving spouse that must maintain a household, which for the entire taxable year was the principal place of abode of a son, stepson, daughter, or stepdaughter, and
As the surviving spouse is entitled to a dependency exemption for the child
The taxpayer qualifies for this status for two years after year of the death of spouse.

Can a married dependent be claimed as an exemption?

A taxpayer will lose the exemption for a married dependent who files a joint return unless the return is filed solely for a refund of all taxes paid or withheld for the year.

Note: Persons claimed as dependents on another's tax return will not be allowed a personal exemption on their own return.

Name the requirements for a "qualifying child" exemption.

The requirements include:
Close relative
Age limit - 19/24
Residency and filing requirements
Eliminate gross income test
Support test

List the requirements for a "qualifying relative" exemption.

The requirements are:
Support test
Under exemption amount (Income)
Precludes dependent filing a joint return
Only citizens: US, Mexico, or Canada
Relative
Taxpayer lives with individual for entire year.

When determining income amounts for the support test, what types of income are not included?

Income types that are not included are:
Social Security
Tax - exempt interest income
Tax - exempt scholarships
To claim an exemption for a qualifying relative, a dependent's income must be less than the exemption amount. Only income that is taxable is included in the support test.

Who is granted the exemption claimed under a "multiple support agreement"?

Where two or more taxpayers together contribute more than 50% to support a person, but none of them contributes more than 50%, the contributing taxpayers may agree among themselves which contributor may claim the dependency exemption.
The individual who receives the exemption:
Must be a qualifying relative
Must have contributed more than 10% of the person's support
Must meet the other dependency tests

Explain the exemption rule for children of divorced parents.

General Rule:
The parent who has custody of the child for the greater part of the year takes the exemption. (determined by the time test, not the divorce decree).
It does not matter whether the parent actually provided more than one-half of the child support.
If the parents have equal custody, the parent with the higher adjusted gross income will claim the exemption.
Exception:
A noncustodial parent is not allowed a dependency exemption based solely upon a divorce decree. The custodial parent may revoke the release of the exemption claim.

Define Gross Income.

Gross income is defined as all income from whatever source derived, unless specifically excluded.

Name some nontaxable fringe benefits.

Nontaxable fringe benefits include:
Life insurance proceeds
Accident, Medical, and Health insurance (Employer Paid)
De minimis fringe benefits
Educational expenses (up to $5,250)
Qualified employee discounts
Qualified pension, profit-sharing, and stock bonus plans
Flexible spending arrangements

Are life insurance premiums paid by an employer taxable?

Premiums on the first $50,000 (face amount) of group-term life insurance are not included in income. Premiums paid for coverage above $50,000 should be included in gross income.
The interest portion of deferred payment arrangements are income.
Accelerated death benefits for the terminally ill are not income (if expected to die within 24months and if used to pay for long-term care.)

Give some examples of taxable and nontaxable interest.

General Rule: all interest is taxable. (Unless specifically excluded)

Taxable - Federal bonds, Industrial Development bonds, Corporate bonds, Premiums from opening savings account, Part of proceeds from installment sales, Interest paid on late payment of federal and state refunds.

Non-taxable - State and local government bonds, Bonds of a US possession, Series EE bonds (when used for education or taxpayer was over 24 years old when received).

What is the tax treatment of unearned income of a child under 18?

The net unearned income of a dependent child under the age of 18 years of age is taxed at the parent's higher tax rate.
Calculation:

Total unearned income
Less: $1,900
Net unearned income

Note: Report the net unearned income on the child's tax return. (Parents may elect to include income on their own return if the income is between $950 and $9,500 and consists solely of interest and dividends.)

How do you determine if dividends received are taxable?

To determine if a dividend is taxable, the source of the dividend must be determined. There are four sources:
 Earnings & profits/Current  Taxable dividend
 Earnings & profits/Accumulated  Taxable dividend
 Return of capital = no earnings & profits  Not taxable
Capital gain distributions - no E&P/No basis  Taxable at a favorable rate of 15%
To qualify for the favorable tax rate, the stock must be held for more than 60 days.

What types of dividends do not receive favorable tax treatment?

Dividends received from the following do not receive a favorable tax rate:
Regulated investment companies
Real estate investment trusts
Employer stock held by ESOP
Short sale positions
Certain foreign corporations

What types of distributions are considered to be tax-free?

The following items are exempt from gross income and are not taxable:
Return of capital - If company distributes funds but has no earnings or profits, the funds are not taxable. The taxpayer will reduce their basis in the stock held.
Stock split - the shareholder will allocate the original basis over the total number of shares held after the split.
Stock dividend - the basis of the shares after distribution depends on the stock received unless the option to receive cash or property is given. If the same stock is received, the original basis is dividend by total shares. Different stock received - basis is allocated based upon FMV of stock.
Life insurance Dividend

Are state and local refunds taxable?

The receipt of a state or local income tax refund is not taxable if the taxes paid do not result in a tax benefit in the prior year.

Itemized deductions prior year - taxable
Standard deduction prior year - nontaxable

Describe the tax treatment of payments pursuant to a divorce.

Payments for the support of a spouse are income to the spouse receiving payments and are deductible to arrive at adjusted gross income by the contributing spouse. To be deemed alimony under the tax law:
Payments must be legally required to a written divorce agreement;
Payments must be in cash;
Payments cannot extend beyond the death of the payee-spouse;
Payments cannot be made to members of the same household; and
Payments must not be designated as anything other than alimony.

How is the payment of child support treated for tax purposes?

Payments fixed by the divorce agreement for the support of minor children:
The paying spouse: not deductible
The receiving spouse: not included in income.

Note: If payments are for both alimony and child support, amounts will be allocated first to child support and then to alimony. (If spouse falls behind in payment)

Explain the tax treatment of property settlements in a divorce.

If the divorce settlement provides for a lump-sum payment or property settlement by a spouse:

The spouse paying - no deduction allowed

The spouse receiving - not included in income.

What income and expenses are reported on a Schedule C?

Gross Income: revenue in a trade or business
Cash = Amount received
Property = Fair market value
Cancellation of Debt
Expenses:
Cost of goods
Salaries and commissions paid to others
State and local taxes paid
Office expenses
Actual automobile expenses
50% of Business meals and entertainment
Depreciation of business assets
Interest expense on business loans (must be incurred and paid)
Employee benefits
Legal and professional services
Bad debts written off by the direct write-off method

What expenses are not deductible on a Schedule C?

Nondeductible expenses include:
Salaries paid to the sole proprietor
Federal income tax
Personal portion of:
Automobile, travel, and vacation expenses
Personal meals and entertainment expenses
Interest expense
State and local tax expense
Health insurance of a sole proprietor
Bad debt expense of a cash basis taxpayer
Charitable contributions

Describe the self - employment tax.

An adjustment to income is allowed for one-half of S/E tax paid.

All self-employment tax is subject to the 2.9% Medicare tax. Up to $106,800 is subject to the 12.4% Social Security tax.

What is the tax treatment of a business loss?

A business loss may be deducted against other sources of income. When the loss exceeds the amount of income, the excess is a net operating loss. A net operating loss is then permitted to be carried over - either forward or back.
2-year carryback
20-year carryforward

Explain the Uniform Capitalization Rules.

The uniform capitalization rules provide guidelines with respect to capitalizing or expensing certain costs. The apply to:
Property produced for use
Property produced to sale
Property produced for resale

Costs that should be capitalized are:
Direct materials, direct labor, and factory overhead
Costs that should not be capitalized are:
Selling, general, administrative, research & development expenses

List the basic formula for determining a gain or loss on a disposition of property.

The basic formula is:

Amount realized
(Adjusted basis of assets sold)
Gain or loss realized

What general rules apply to IRA income?

The general rules for IRA income are:
Amounts cannot be withdrawn until the individual reaches the age of 59½
A taxpayer is required to start withdrawals by the age of 70½
Benefits are not taxable until they are withdrawn

Explain how IRA distributions are taxed.

IRA income is taxed as ordinary income when received. (Regardless of what type of income was earned while the funds were invested)
Roth IRA - All qualified benefits from a Roth IRA are non-taxable.
Traditional Non-deductible IRA - Benefits received from this type of IRA are partially taxable.
(1) Principal - nontaxable
(2) Accumulated earnings - taxable

List the exceptions to the premature distribution penalty.

There is no penalty if the premature distribution was used to pay:
H Homebuyer: $10,000 maximum exclusion if the distribution is used toward the purchase of a first home within 120 days of the distribution.
I Insurance (medical) - Unemployed with twelve consecutive weeks of unemployment; self-employed.
M Medical expenses in excess of 7.5% of AGI
D Disability
E Education: College tuition, books, fees, etc.
A and
D Death

Discuss how annuity investments are taxed.

The investment portion of the annuity is divided by a factor representing the number of months over which the investment will be recovered.
If the taxpayer lives longer than the recovery period any further payments received are fully taxable.
If the taxpayer dies before the recovery period ends, the unrecovered portion is a miscellaneous itemized deduction on their final tax return.

What is the basic formula to determine net rental income or loss?

The basic formula is:
Gross rental income
Prepaid rental income
Rent cancellation payment
Improvement in lieu of rent
(Rental Expenses)
Net rental income or loss

What is the tax treatment for income received from a vacation home?

If rented less than 15 days:
Personal residence
If rented more than 15 days and is used for personal reasons for the greater of more than 14 days or more than 10% of rental days:
Personal/Rented residence
Expenses are prorated between personal and rental use. A different pro-ration method is used for mortgage interest and property taxes.
Rental use expenses are deductible only to the extent of rental income.

What is a passive activity?

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

Explain how passive activities are deducted.

Expenses related to passive activities can be deducted only to the extent of income from all passive activities.

A net passive activity loss may not be deducted against wages, salaries, and other active income or against portfolio or capital gains income.

What is the tax treatment of nondeductible passive activity losses?

Nondeductible passive activity losses that are unused are carried forward without any time limit.
Suspended losses are used to offset passive income in future years.
If still unused, suspended losses become fully tax deductible in the year the property is disposed of/sold.
If the taxpayer becomes a material participant in the activity, unused passive losses can be used to offset the taxpayer's active income in the same activity.

List the taxpayers that are subject to the passive activity loss rules.

Taxpayers that are subject to passive activity loss rules include:
Individuals
Estates
Trusts
Personal service corporations
Closely held C corporations

What are the exceptions to the passive activity loss rules?

An taxpayer may deduct rental activity losses if either of the following two conditions are met:
Mom and Pop exception - deduct up to $25,000 (per year) of losses attributable to rental real estate annually if the individuals are actively participating/managing, and own more than 10% of the rental activity.
Real estate professional - More than 50% of the taxpayer's personal services during the year are performed in real property businesses, and the taxpayer performs more than 750 hours of services.

List the criteria used to determine if Social Security Benefits are taxable.

Taxpayers are classified into five categories depending on the level of provisional income, which is AGI plus tax-exempt interest plus 50% of Social Security benefits.
Low Income = No SS benefits are taxable.
Lower Middle Income = Less than 50% of SS benefits are taxable
Middle Income = 50% of SS benefits are taxable
Upper Middle Income = Between 50% and 85% of SS benefits are taxable
Upper Income = 85% of SS benefits are taxable

List some taxable miscellaneous income items.

Some miscellaneous taxable items include:
Prizes and awards - FMV
Gambling winnings and losses - losses to the extent of winnings
Business recoveries - if compensation for lost profit
Punitive damages - if received in a business context or for loss of personal reputation. Damages received by an individual in a personal injury case are taxable except in wrongful death cases.

Are scholarships and fellowships included in income?

Scholarships and fellowship grants are excludible only up to the amounts actually spent on tuition, fees, books, and supplies (not room and board) provided:
The grant or scholarship is made to a degree- seeking student;
No services are to be performed as a condition of the grant or scholarship; and
The grant or scholarship is not made in consideration for past, present, or future services of the recipient.

List some nontaxable miscellaneous items.

Miscellaneous nontaxable items include:
Life insurance proceeds
Gifts and inheritances
Medicare benefits
Workers compensation
Personal injury or illness award
Accident insurance - paid by taxpayer
Foreign-earned income exclusion - up to $91,500; must meet tests:
Be a bona fide resident of a foreign country for an entire year.
Be present in the foreign country for 330 days out of any 12- consecutive month period

Define Real Property.

Real property is land and all items permanently affixed to the land.

What is a capital asset?

Capital assets are property (real and personal) held by the taxpayer, such as:

Personal automobile Furniture and fixtures
Stocks and securities Copyrights
Interest in a partnership Goodwill
Literary, musical, or artistic compositions that have been purchased
Real property and personal property not used in a business
Other assets held for investment

What is a non-capital asset?

Non-capital assets are:
Property normally included in inventory or held for sale to customers in the ordinary course of business
Depreciable property and real estate used in a trade or business
Accounts and notes receivable arising from sales or services in the taxpayer's business
Copyrights, literary, musical, or artistic compositions held by the original artist
Treasury stock

What is the basic formula for determining a gain or loss?

Amount Realized
(Adjusted Basis of Asset Sold)
Gain
or
Loss

Define Amount Realized.

Amount realized includes:
Cash received (boot);
Cancellation of debt (boot);
Property received at fair market value; and
Services received at fair market value;
Reduce the amount realized by any selling expenses

Discuss Adjusted Basis of Asset sold.

The adjusted basis of an asset sold is calculated for three different situations:
Purchased property
Gifted property
Inherited property

How is Purchased Property Basis calculated?

Purchased property basis = cost
Generally, the basis of property is the cost of such property to the taxpayer. The basis should be adjusted for the following:
Increase the basis for capital improvements
Reduce the basis for accumulated depreciation

Explain Gifted Property Basis.

General Rule: Donor's rollover cost basis

Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of gift. Basis is increased by any gift tax paid that is attributable to the net appreciation in the value of the gift.

The recipient of the gift normally assumes the donor's holding period.

Explain the exception(s) to Gifted Property basis rule.

If the fair market value at the date of gift is lower than the rollover cost basis from the donor, the basis for the recipient depends upon the future selling price of the asset.

Sell Higher Use "donor's basis to determine gain


Sell Between No gain or loss


Sell Lower Use "lower FMV at date of gift for loss

What are the rules for Inherited Property Basis?

General Rule: Date of death FMV becomes basis.
Alternate Valuation date: if elected by the executor, the FMV on the alternate valuation date may be used to value all of the estate property. (the earlier of 6 months later or the date of distribution/sale)
Property acquired from a decedent is automatically considered to be long-tern property regardless of how long it actually has been held.

When is a gain not taxed?

Based upon the belief that a taxpayer's investment has no substantially changed, the gain is excluded from tax. These exclusions are:
H Homeowner's exclusion
I Involuntary Conversions
D Divorced Property Settlement
E Exchange of like-kind business investment assets
I Installment sales
T Treasury and capital stock transactions (by corporation)

Explain the Homeowner's Exclusion.

Gain Exclusion for Personal Residence:
$250,000 for single taxpayers
$500,000 for married taxpayers
To qualify for the exclusion:
Taxpayer must have owned and used the property as principal residence for two years or more during the five year period ending on the date of sale or exchange.
Either spouse for a joint return must meet the ownership test. Both spouses must meet the use requirement with respect to the property.
The is no age limit. No rollover to another house is required. The exclusion is renewable.

Discuss Involuntary Conversions of property.

Gain may be deferred if insurance proceeds are reinvested in property that is similar or related in service or use within 2 years for personal property or 3 years for business property.
A realized gain exists when insurance proceeds are greater than the adjusted basis of the converted property. Note the difference between realized gain and recognized gain:
Gain not recognized if proceeds reinvested in qualified replacement property
Basis is cost of replacement property less any gain not recognized.
Losses recognized and basis is replacement cost.

Holding period includes period that original property was held.

Discuss Divorced Property Settlements.

When a divorce settlement provides for a lump-sum payment or property settlement, it is a non-taxable event.

The basis for the property to the recipient spouse will be the carryover basis.

Explain what the tax treatment is for Exchange of Like-Kind Business/Investments Assets.

Non-recognition treatment is accorded to a "like kind" exchange of property used in a trade or business or held as an investment, EXCEPT Inventory, stock, services, partnership interests, and property in different countries.
Recognize gain to the extent of the lower of the realized gain or the boot received.
In a like-kind exchange, the basis of property received retains the basis of property given up.
Basis of property given up
+ Any boot paid
- Any boot received (at FMV)
+ Any gain recognized
Basis of property received

Discuss Installment Sales.

The installment method is the method of reporting gains of sales made by a "nonmerchant" in personal property and "nondealer" in real estate.
Revenue is reported over the period in which the cash payments are received. The method does not alter the type of gain to be reported.
Reportable Installment Sale Gain/Income:
Gross profit = Sale - Cost of goods sold
Gross profit percentage = Gross profit/Sales price
Earned Revenue(taxable income) = Cash collections X Gross Profit
All depreciation recaptured shall be reported in income in the year of sale.
Compute the gross profit percentage from the original sale and apply the profit percentage to cash received in the year to recognize realized profit for the year.

List the types of Treasury and Capital Stock transactions exempt from gain tax.

The following corporate transactions are exempt from gain:
Sales of stock by a corporation
Repurchase of stock by a corporation
Reissue of stock

What types of losses are nondeductible?

These losses are nondeductible:
Wash sale loss
Related party transactions
And
Personal loss

What is a Wash Sale loss?

A wash sale exists when a security is sold for a loss and is repurchased within 30 days before or after the sale date.
The basis of the repurchased security is equal to the purchase price of the new security plus the disallowed loss on the wash sale.
The date of acquisition of the repurchased security is the date of acquisition of the original security.

If a sold security results in a gain and it is repurchased within 30 days, the taxpayer cannot use "substituted basis" They must use the new purchase price as the basis.

Explain the tax treatment of Related Party transactions.

No deduction is allowed for losses on sales to related parties.
Basis Rules:

Sell Higher Use Relative's basis to determine gain

Relative's Basis ------------------

Sell Between No gain or loss

Lower purchase price by relative --------------

Sell Lower Use Purchase price to determine loss

The holding period starts with the new owner's period of ownership.

State the type of Personal Loss that is nondeductible.

No deduction is allowed for the loss on a non-business disposal or loss.

List the types of capital gains.

Capital gains include:
Long-term gains
Short-term gains
Unrecaptured Section 1250 gain
Collectibles and small business stock

How are the four types of capital gains treated for tax purposes?

Net capital gain rules:
Long-term: holding-period - more than one year; tax rate - 15% is max, 0% if taxpayer is in 10 - 15% income bracket
Short-term: holding-period - One year or less; tax rate - treat as ordinary income.
1250 Gain: if not treated as ordinary income tax at 25%
Collectibles/Business Stock: Long-term gains on this type are taxed at 28%.

Explain the Net Capital Loss Deduction and the carryover rules.

Individual taxpayers realizing a net long- or short-term capital loss may only recognize (deduct) a maximum of $3,000 if the amount realized from other types of gross income.
A joint return is treated as one person. If the husband and wife file separately, the loss deduction is limited to half ($1,500).
Carry forward is an unlimited amount of time until exhausted. It retains its character as either long- or short-term in future years.

Describe the netting procedures for short and long-term capital gains and losses.

Gain and losses are netted within each tax group.

Short-term gains and losses: If there are any short-term losses (this includes loss carryovers), they are first offset against any short-term gains that would be taxable at the ordinary income rates. Any remaining loss would be used to offset any long-term capital gains at the 28% rate group. Then offset any long-term gains from the 25% group. Finally, they offset any long-term gains at the 15% tax rate.

Long-term gains and losses: Any long-term losses from the 28% rate group will offset any net gains from the 25% rate group then the 15% rate group. Any remaining losses from the 15% rate group will offset any net gains from the 28% rate group and then offset gains from the 25% rate group.

How are worthless stocks and securities treated under the tax code?

The cost (or other basis of worthless stock or securities is treated as a capital loss, as if they were sold on the last day of the taxable year in which they became totally worthless.

Explain how Corporate net capital gains and losses are treated for tax purposes.

Net capital gains:
Netted capital gains of a corporation are added to ordinary income and taxed at the regular tax rate.
Net capital losses:
Corporations may not deduct any capital loss from ordinary income. Net capital losses are carried back three years and forward five years as a short-term capital loss.

List the Adjustments for AGI.

Adjustments for AGI include the following:
Educator Expenses
IRA
Student Loan Interest Expense
Tuition & Fee Deduction
Health Savings Account
Moving Expenses
One-half Self Employment FICA
Self-employed Insurance
Self-employed Retirement
Interest Withdrawal Penalty
Alimony Paid
Attorney Fees Paid - Discrimination/Whistleblower cases
Domestic Production Activities Deduction

Exam can use phrase: "Deductions to arrive at AGI"

Explain the adjustment for Educator Expenses.

Deduct up to $250 of qualified expenses

If both spouses are educators - $500


An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours per school year.

What are the four types of Individual Retirement Accounts?

The four IRA Accounts are:
Deductible IRA
Non-Deductible IRA
Roth IRA
Coverdell Education Savings Account

Describe the characteristics of a Deductible IRA.

A deductible IRA has the following features:
Earnings are tax deferred
Withdrawals are taxable
Deduct contributions up to $5,000/$10,000
Allows a catch-up contributions for persons 50 years and over of $1,000
Receive a tax credit for contributions made.

When will a deduction for contributions made to an IRA not be permitted?

A taxpayer will not be permitted to deduct a contribution to an IRA when both the following conditions are exist:
Excessive AGI: If AGI exceeds $66,000 or $109,000;
Active participation in another qualified plan

What is the exception to the participation in another qualified plan requirement?

The exception for taxpayers participating in another qualified plan is:
An individual is not considered an active participant in an merely because the individual's spouse is a participant.

Spouse's income can be used to qualify a spouse for additional contribution amount if spouse does not work.

Describe a Roth IRA.

A Roth IRA has the following characteristics:
Contributions are not deductible
Earnings accumulate tax-free
Qualified distributions are tax-free
Contribution limits are: $5,000/$10,000 after taking into account contributions to all other IRA accounts

What are the limits on Nondeductible IRAs?

The less of:
$5,000 or Individual compensation

Contributions are limited to the amount of contributions not already made to other IRAs
Earnings will accumulate tax-free until withdrawn.

Describe the features of a Coverdell Education Savings account.

Contributions are non-deductible; maximum contribution per beneficiary is $2,000.
Contributions must be made for any child under the age of 18
Earnings accumulate tax-free
Distributions are tax-free to the extent they are used for qualified educational expenses of the beneficiary
Amounts must be withdrawn before beneficiary reaches age 30 years
Distributions made directly to a beneficiary are taxable and assessed a 10% penalty
The balance may be rolled over to another family member

What are the educational deductions FOR AGI?

Student loan interest:
Limited to $2,500
A dependent may not claim the deduction
Taxpayer must be legally obligated to pay the loan for incurred qualified educational expenses
Tuition and Fees:
Maximum deduction is $4,000
Expenses are for qualified higher and work-related education
Cannot claim if expenses were applied to the Hope Credit and/or the Lifetime Learning Credit

List the requirements for a Health Savings account deduction.

A health savings account enables workers with high-deductible health insurance to make pre-tax contributions of up to $3,050 to cover costs. No contributions are allowed once a taxpayer becomes covered by Medicare Parts A or B.
Any amount paid or distributed used to pay the qualified medical expense of an account holder is excluded from income. If not used for qualified expenses: it is includible in income and subject to a 10% penalty.

List the requirements for moving expenses to be deductible.

Must be work related
Must be 50 miles or more (Distance must be 50 miles farther from OLD house than OLD workplace was)
Must work in new location for 39 weeks during the 12 month period after the move
Only direct costs allowed:
Travel and lodging for the taxpayer and family
Transporting household goods and personal effects to new location

What self-employment deductions are FOR AGI and not on deducted on Schedule C?

Self-employment tax - 50% of tax (Boss' half)
Self-employed health insurance - 100%
Keogh (profit sharing) plans

Describe the limitations to Keogh Plans.

Keogh plans are for self-employed taxpayers.
Deduction is limited to:
$49,000
or
25% of net self-employed earnings
The maximum annual contribution cannot exceed the amount deducted. Limited to the lesser of $49,000 or 100% net earnings if compensation is less.

List some other miscellaneous deductions FOR AGI.

Penalty on early withdrawal of savings - interest forfeited can be deducted.
Alimony - deducted by contributing spouse. If payments are for both child support and alimony and the payer falls behind payments apply to child support first.
Attorney fees paid in discrimination/whistleblower cases - deduction limited to the amount claimed as income from the judgment.
Domestic Production Activities - deduct a percentage (9%) of qualified production activities income or the taxpayer's taxable income before the adjustment, whichever is less

List some other miscellaneous deductions FROM AGI.

Medical expenses
Taxes
Interest
Charity
Casualty
Miscellaneous items

Explain how medical expenses are deducted.

Payments made for medical expenses are deductible when made on the behalf of yourself, your spouse, and your dependents.
Expenses must be paid or charged during the tax year.
Qualified medical expenses to the extent they exceed medical insurance reimbursement and are 7.5% if the taxpayer's AGI are deductible.

What is the formula used to determine deductible medical expenses?

Qualified Medical Expenses
(Insurance Reimbursement)
_______________________
Qualified Medical Expense "Paid"
(7 ½ % of AGI)
___________________________
Deductible Medical Expenses

What types of medical expenses are deductible?

Medicine and drugs
Doctors
Medical and accident insurance
Required surgery
Transportation to medical facility
Physically handicapped costs

What types of medical expenses are not deductible?

Elective surgery
Drugs that are against the law
Vitamins
Social security tax paid for basis Medicare
Life insurance
Capital expenditures
Health club memberships
Personal hygiene
Funerals

What types of taxes are deductible? Which are not?

Taxes are deductible in the year paid.
Real estate taxes (not special assessments)
Income taxes
Personal property taxes
Sales tax (income or general)

Taxes that are not deductible:
Federal taxes
Inheritance taxes for states
Business taxes

List the types of interest expenses that can and cannot be deducted.

H Home mortgage interest (On up to $1,000,000) interest for home equity is the lesser of $10,000 or the FMV of the property reduced by the amount outstanding.
I Investment interest Limited to net investment income
P Personal interest NOT DEDUCTIBLE
P Prepaid interest Must be allocated over the period of the loan
E Educational loan interest IS AN ADJUSTMENT (IT IS NOT AN ITEMIZED DEDUCTION)

Discuss the Charitable Contributions deduction.

Payments or property given to a charitable organization during the year are deductible.
The maximum allowable deduction is:
Cash = 50% of adjusted gross income
General property = Lesser of basis or FMV
Long-term appreciated property = limited to the lesser of:
30% of AGI
The remaining amount to reach 50% after cash contributions
A taxpayer may only deduct the excess contribution over the consideration received.
Excess charitable contributions can be carried over for 5 years

What is the formula used to determine deductible Casualty and Theft losses?

Smaller Loss 1. Lost cost or Adjusted Basis
2. Decreased FMV
(Insurance Recovery)
Taxpayer's Loss
($100)
Eligible Loss
(10% AGI)
Deductible Loss

Casualty loss must be sudden and/or unexpected. An insurance claim must be filed or the losses are not covered by insurance.

Identify some miscellaneous expenses subject to the 2% AGI floor.

Unreimbursed expenses
Educational expenses not taken as an adjustment
Uniforms
Business gifts ($25)
Business use of home
Employment agency fees
Investment expenses
Subscriptions to professional journals
Tax return preparation fee

List those miscellaneous expenses not subject to the 2% AGI floor.

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

Identify the nonrefundable tax credits.

Child and dependent care credit
Elderly and permanently disabled credit
Education credits
American Opportunity credit
Lifetime Learning credit
Adoption credit
Retirement Savings Contribution credit
Foreign Tax credit
General Business credit

What are the requirements of the Child and Dependent Care credit?

A tax credit of 20% to 35% for eligible expenses up $3,000 for one child; $6,000 for two or more children
A qualifying child, under age 13, for whom an exemption can be claimed
Both spouses must work
Eligible expenses are for the purpose of enabling the taxpayer to be gainfully employed

When is a taxpayer eligible for the Elderly or Permanently Disabled credit?

Eligible individuals are those that are:
65 years of age or older
or
Under 65 and retired due to permanent disability
Credit of 15% of eligible income
Reduce eligible income by:
Social security payments
One-half of AGI that exceeds:
Single: $7,500 MFJ: $10,000
MFS: $5,000

What is the American Opportunity Credit?

The American opportunity credit is available against federal taxes for qualified tuition, fees, and course materials paid for the student's first four years of post secondary education.
The credit is equal to:
100% of the first $2,000 of qualified expenses plus
25% of the next $2,000 of expenses paid
The student must be at least half-time
NOT available for convicted felony drug offenses

What is the Lifetime Learning Credit?

The credit is available for an unlimited number of years for qualified tuition and related expenses.

Equal to 20% of qualified expenses up to $10,000.

When can a taxpayer receive an Adoption credit?

A credit is available for all reasonable and necessary expenses, costs, and fees.

Per child: $13,170
Special needs child: $13,170

Medical expenses do not qualify.

List the requirements for the Retirement Savings Contribution Credit.

Taxpayers must be:
at least 18 by the close of the tax year
not a full-time student
not a dependent
Limited to the excess of the regular tax liability over the alternative minimum tax liability of the taxpayer, minus the taxpayer's nonrefundable personal credits. No carryover is allowed.

What is the Foreign Tax credit?

A credit for foreign income taxes paid to a foreign county or US possession.

Credit is limited to the lesser of:
Foreign taxes paid
or
Taxable income from all foreign operations
Taxable income + Exemptions
Credit can be carried back one year or carried forward ten years.

What are some Business Tax credits?

Investment credit
Work opportunity credit
Alcohol fuels credit
Increased research credit
Low-income housing credit
Qualified childcare expenditures
Welfare-to-work credit
Employer provided childcare credit
Small employer pension start-up costs credit
Alternative motor vehicle credit
Worker retention credit

Identify the refundable tax credits.

Child tax credit
Earned income credit
Withholding tax credit
Excess Social Security paid
Long-term unused minimum tax credit
American Opportunity credit
Making work pay credit
Adoption credit

What is the Child Tax credit?

Taxpayers may claim a $1,000 tax credit for each "Qualifying Child."

Refundable to the extent of the lesser of:
Excess child tax credit (over tax liability);
Earned income less $3,000 times 15%.

What are the limitations of the Earned Income credit?

The credit is limited to those taxpayers that:
Lives in the US for more than half the taxable year,
Meest certain low-income thresholds,
Not have more than a specified amount of disqualified income,
Be over the age of 25 and less than 65 if there are no qualifying children, and
File a joint return with spouse with certain exceptions.

What is the maximum basic earned income credit allowed?

Single taxpayer - 7.65% of earned income
Taxpayer w/ one qualifying child - 34% of earned income
Taxpayer w/ two qualifying children - 40% of earned income
Taxpayer w/ three or more qualifying children - 45% of earned income

What are the requirements of the employment credits?

Withholding:
All income taxes withheld from a taxpayer's paycheck are treated as a "credit" against their tax liability.

Excess FICA:
A credit may be claimed against income tax, if that excess resulted from correct withholding by two or more employers. If withheld by only one employer the employer must refund the excess to the employee.

Explain the Employer Pension credit.

A credit of 50% of first $1,000 of start up costs for establishing a new qualified pension plan for three years. (Up to $500 per year.)

Identify the characteristics of the Business Healthcare Tax credits.

Up to 35% of the employer's cost of the plan premiums provided the employer contributes at least 50% of the costs of health coverage.
May offset the alternative minimum tax; it is not refundable, and can be carried forward for 20 years.
If expense were used to qualify for the credit, they are not allowed as a tax deduction for employee benefits expense.

Define Alternative Minimum Tax.

Designed to ensure that taxpayers who take a large number of tax-preferenced deductions pay a minimum amount of tax on their income.

It is the excess of the tentative AMT over the regular tax.

What is the Alternative Minimum Tax calculation?

Regular Taxable Income
± Adjustments
+ Preferences
Alternative Minimum Taxable Income
(Exemption)
Alternative Minimum Tax Base
X Tax Computation
Tentative Minimum Tax
(Tax Credits)
Tentative Minimum Tax
(Regular Income Tax)
Alternative Minimum Tax

What is the Alternative Minimum Tax Exemption?

The AMT Exemption amount is:
Single: $33,750
MFJ: $45,000
MFS: $22,500
The exemption is reduced by 25% of excess AMTI over:
Single: $112,500
MFJ: $150,000
MFS: $75,000

What are the Adjustments for the Alternative Minimum Tax calculation?

Adjustments are timing differences:
P Passive Activity Losses
A Accelerated Depreciation
N Net operating Loss of the individual taxpayer
I Installment income of a dealer
C Contracts - percentage completion vs. completed contract
T Tax "deductions"
I Interest deductions on some home "equity loans"
M Medical deductions (limited to the excess over 10% AGI)
M Miscellaneous deductions not allowed
E Exemptions (personal) and standard deduction
Timme adjustments do not generate a AMT credit for future years. They are always adds to regular taxable income.

What are the Preference items of the Alternative Minimum Tax calculation?

Private activity bond interest income
Percentage depletion the excess over adjusted basis of property
Pre-1987 accelerated depreciation

What credits reduce AMT?

Foreign tax credit
Adoption credit
Child tax credit
Contributions to retirement plans credit
Earned income credit

What is the statute of limitations applicable to taxpayers?

General: Three years from the later of:
Due date of the return
Date return is filed
25% understatement of Income: Six years from the later of:
Due date of the return
Date return is filed

Fraud or false returns: No statute of limitations

Identify the statutory period for a taxpayer to receive a refund.

Refund claim: 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.

What are the conditions that require a taxpayer to make estimated tax payments?

If both of the following are met:
$1,000 or more tax liability
If the taxpayer's withholding is less than the lesser of:
90% of current tax, or
100% of last year's tax

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