3308 exam 2💓
Kevin bought 240 shares of Intel stock on January 1, 2021, for $66 per share, with a brokerage fee of $140. Then, Kevin sells all 240 shares for $83 per share on December 12, 2021. The brokerage fee on the sale was $190. What is the amount of the gain/loss Kevin must report on his 2021 tax return?
Amount realized = 240 shares x $83 amount you sold per share - $190 brokerage fee on the sale = 19,730 net proceeds Adjusted basis= (240 shares x $66 amount you bought per share/ tax basis) + $140 brokerage fee on the purchase = 15,980 basis Gain= 19,730 net proceeds - 15,980 tax basis = 3,750 capital short term gain
Business tax credits
Nonrefundable -Employment tax credit -research and development credit (McDonald's changing menu) -if credit > tax liability, carry back 1 year and carry forward 20 years
Excess credit for tax credits
Nonrefundable excess credit is lost Business credit excess credit is carry back & over Excess Refundable personal credit is refunded Exception: if excess credit exceeds tax liability
capital gain/loss netting process step 5
Offset the net short term amount against the long term results of step 4 aka the highest taxed gain first if they are of opposite sign Add totals of each group together
capital gain/loss netting process step 4
Offset the results after step 3 against the 0,15,20 amount if they are of opposite sign. If 0,15,20 amount is a loss, offset the loss against the highest taxed GAIN first
Ordinary income property donating to charitable organizations
Ordinary income- assets held for a year or less, inventory sold in trade or business, business assets held for more than one year to the extent the taxpayer would recognize ordinary income under deprecation recapture rules, an asset with a value less than tax basis ONLY DEDUCT LESSER OF FMV OR ADJ BASIS Tangible personal property donations are subject to the related use rule. Land is not tangible personal property.
Adjusted Basis
Original cost - depreciation
Investment activities that are NOT deductible
Other investment expenses such as commission fees and manager fees
American opportunity tax credit
Partial refund per student (for taxpayer, taxpayer's spouse, or dependents) for the first 4 years of education for eligible expenses and institutions ; phased out based on AGI ; max is $2500 Expenses must be paid in the current year
Tax credit sequence
Subtract out credits 1st: nonrefundable personal credit 2nd: business credit 3rd: refundable personal credit
capital gain/loss netting process step 3
Subtract/add the net 28% and net 25% amounts together if they are of opposite sign (one is a gain with a + bal and one is a loss with a - bal)
Net investment income
Sum of interest, dividends, annuities, royalties, rents, passive activity income, net gains for, disposing of property minus related allowed deductions
Sherry reports a tax liability of $1,070. She also claims $470 of non refundable personal credits, $735 of refundable personal credits, $270 of business credits. What is sherry's tax refund or tax due after applying the credits?
Tax liability of $1070 Minus nonrefundable personal 2nd of - $470 Minus business credit 3rd of - $270 Minus refundable personal credit 4th of - $735 (405) refund
Kiddie tax
Tax on a child's net unearned income at their parents tax rate rather than their own Requirements: Under age 18; over 18 but earned income < half of support ; 18-24 , full time student , and earned income is not greater than half of child's support
Late filing penalty
Taxpayers don't file a tax return by due date/extension
Late payment penalty
Taxpayers don't pay entire tax owed by due date of return
Educational expenditures for business
Taxpayers maintain/improve
Mike sold equipment he is no longer using in his business at a loss of $4,000, and he sold investments at a loss of $8,000. Mike had no other sales of property in the current year. What are the tax implications of these losses to Mike?
Deduct the $4,000 loss on equipment and $3,000 of the loss on investment in the current year. The remaining investment loss is carried forward. -business losses are fully deductible for AGI, but taxpayers are only allowed to deduct capital losses (investment) against capital gains. any excess capital loss is allowed to reduce Agi by 3,000 in the current year. the remainder is carried forward.
Margaret Lindley paid $15,000 of interest on her $300,000 acquisition debt for her home (fair market value of $500,000), $4,000 of interest on her $60,000 home-equity debt used to buy a new boat and car, $1,000 of credit card interest, and $3,000 of margin interest for the purchase of stock. Assume that Margaret Lindley has $10,000 of interest income this year and no investment expenses. How much of the interest expense may she deduct this year?
Deductible interest expense = Interest on home acquisition debt + margin interest for purchase of stock 15,000 + 3,000
Alternative minimum tax
Different tax base then regular income tax base ; for higher income taxpayers ; taxpayers must pay the AMT only when tax on AMT base > regular tax liability Phase out for each dollar over the AMT threshold
Wash sale rule
Disallows taxpayers from claiming a loss on the sale of a stock IF the taxpayer purchases the same stock within a 61 day period (30 days before sale & 30 days after sale) -the realized loss is not recognized at time of sale and added to basis of newly acquired stock
Individual proprietors report their business income and deductions on:
Form 1040, Schedule C
Personal use assets
Gains are taxable as capital gains and losses are not deductible
Individual income tax formula
Gross income - for AGI = AGI - greater of standard or itemized deduction - deduction for qualified business income = taxable income x tax rates from tax rate schedule = income tax liability + other taxes =total tax - credits - prepayments = taxes due or refund
Gross profit
Gross sales - cogs
capital gain/loss netting process step 1
Group all gains and losses into four groups : Short term, 28%, 25%, and 0/15/20% long term
Capital assets
Investment assets, business assets, or personal use assets
Diff between business and investment expenses
Investment expenses do not require high levels of involvement while business expenses do
Qualified dividends
Investor must hold the dividend payment stock for more than 60 days during the 121 day period that begins 60 days before the ex-dividend date
Earned income credit
a refundable credit designed to help offset employment taxes to low-income taxpayers and to encourage lower income taxpayers to seek employment. Requirements: -must have one qualifying child or live in US , be 25-64, and not a dependent yourself -taxpayers over certain AGI are ineligible
FICA
Federal Insurance Contributions Act -self employed taxpayers are subject to the entire tax
WASH SALES RULE: Miss fresh bought 1000 shares of Ibis corporation stock for $6200 on January 15, 2019. On December 31, 2021, she sold all 1000 shares of her stock for $5100. Based on a hot tip from her friend, she bought 1000 shares of Ibis stock on January 23, 2022 for $3300. What is Miss Freshes recognized loss on her 2021 sale, and what is her basis in her 1000 shares purchased in 2022?
$0 dollars Long term capital loss and $4,440 basis Calculation: 2019 basis of 1000 shares x $6200 original purchase price in 2019 = 6,200,000 Minus 2021 Sale proceeds of 1000 shares x $5100 selling price of 2019 stock in 2021 = 5,100,000 2019 basis of 6,200,000 - 2021 sale proceeds 5,100,000 = 1,100 $3,330 new purchase price in 2022 + 1,100 = 4,400 basis Explanation:
Which of the following costs are deductible as an itemized medical expense?
A) the cost of prescription medicine and over the counter drugs B) the cost of elective cosmetic surgery C) medical expenses reimbursed by health insurance D) medical expenses incurred to prevent disease D! Medical expenses incurred to prevent disease is a itemized medical expense Medical expenses include any payments that health care does not reimburse for the care, prevention, diagnosis, or cure of injury, disease, or bodily function.
Child tax credit (non refundable personal)
$2000 credit for each qualifying child under age 17 who is claimed as a taxpayers dependent ; $500 for qual dependent - phase out amount = (AGI - threshold) / 1000 x $50 -phase out amount reduces child tax credit Ex) A taxpayer with 200,000 AGI - 200,000 threshold / 1000 x $50 will equal 500 so the 2000 child tax credit will be reduces to 1500
In the CURRENT year, Aaron had the following capital gains/losses from the sale of her investments: $2100 LTCG, $24,900 STCG, ($9100) LTCL, & ($15,100) STCL. What is the amount and nature of Aaron's capital gains and losses?
$2100 LTCG + ($9100) LTCL = ($7,000) $24,900 STCG + ($15,100) STCL = $9,800 SHORT TERM CAPITAL GAIN = ($7,000) + $9,800 = 2,800
Nate is a head of household with a dependent son, Jerry, who is a full-time student. This year Nate made the following expenditures related to Jerry's support: Auto insurance premiums $2700 Room and board at Jerry's school $5200 Health insurance premiums $3000 Travel (to and from school) $850 What amount can Nate include in his itemized deductions?
$3000 of health insurance premiums is the only itemized deduction
Which of the following does not affect the amount of the earned income credit?
Filing status, amount taken in previous year, number of qualifying children, taxpayer's AGI Amount taken in previous year
Dependent and child care credit (non refundable personal) example: Amanda's AGI is 90,000 and earned income is $75,000 in 2023. Courtney spent 5,600 to provide her son, Terry's care. Terry is 5 years old. What amount of child and dependent care credit would Amanda be allowed to claim?
($3000 for one qualifying person and $6000 for the rest) Lesser of: (1) Dependent care expenditures $5600 (2) Limit on qualifying expenditures for one dependent $3000 (3) Amanda's earned income $75,000 Expenditures eligible for credit $3,000 Credit percentage rate (given based on AGI) x 20% = dependent care credit $600
Itemized deductions FROM AGI
- medical & dental expenses -health insurance premiums (if not deducted for AGI by self employed taxpayers) and insurance for long term care services - state income taxes - home morgage interest expense - charitable contributions - sales taxes -real estate taxes for personal & investment -personal property taxes -state and local property taxes -gambling losses to the extent of gambling income -may elect to deduct state sales tax instead of state income tax (either or but not both) - investment interest expense - most investment activities - foreign income taxes - casualty and theft losses on personal use assets ONLY IF attributable to federally declared disaster -casualty and theft losses on investment property/assets -unrecoverable cost of life annuity at death (dies before recovering full cost of annuity) 10,000 LIMIT for state and local taxescasulty
Capital assets
-Assets held for investment (land, stocks, bonds) -personal use assets -business assets held for over a year
Which assets are NEVER included in capital assets?
-Assets used in trade or business held for less than a year -accounts or notes receivable,e acquired in business from sale of services or property -inventory
Income taxes
-Employees pay tax through withholding -estimated tax payment: typically for self employed and due on April 15, June 15, September 15, and January 15
Capital gain property/assets (tangible personal property) contributed to qualifying charitable organizations
-Must have generated a long term capital gain (not a loss or decrease in $$$) if the taxpayer had instead sold the property -taxpayers allowed to deduct the FMV of property if u were under the assumption the property was used for charity purposes -deduction limited to adjusted basis of property if used for unrelated charitable purpose Personal tangible property is Not land/buildings
Investment interest
-Purchase of investment assets such as stocks, bonds, loans or land -deduction limited to taxpayer's net investment income
Not deductible itemized deductions
-unreimbursed employee business expenses -tax preparation fees -investment expense -hobby expenses
Baker is single and earned $225,000 of salary as an employee in 2023. How much should his employer have withheld from his paycheck for FICA taxes?
1.) Social security tax is 6.2% on the maximum $142,800 wages (142,800 x 6.2% = $8,853) 2.) Medicare tax is 1.45% (225,00 x 1.45%) 3.) additional Medicare tax is 2.35% (1.45% regular Medicare + 0.9% additional) on excess of 200,00 wages Add'l Medicare: (225,000 - 200,000 excess) x 2.35% Add totals together to get FICA taxes withhold
For agi deductions
1.self-employed business expenses 2. rent and royalty (copyright, franchise) 3. business assets/activities/expenses 4. Interest expense on qualified education loans (student loan interest) up to $2500 5. alimony paid (pre-2019 divorce decree) 6. capital losses for REAL PROPERTY (not personal & limited to $3,000) 7. contributions to qualified retirement accounts 8. Losses from investment assets (used to offset capital gains, up to $3,000) 9. Self employed Health insurance premiums to the extent of self employment income 10. Individual traditional retirement accounts (IRA) 11. Penalty for early withdrawals of savings 12. Qualified educational expenses (tuition, fees, books)
Net long term capital gain %'s
25%- applies to unrecaptured gain and gain from disposition assets (depreciable real estate) 28%- applies to collectibles and qualified small business stock (must purchase at original issue straight from the stock or company 0,15,20- apply to any remaining net long term capital gain
Child and Dependent Care Credit
A married couple must file jointly
Which of the following statements concerning estimated tax payments and underpayment penalties for individuals is true in 2023?
A) Whether taxpayers are subject to underpayment penalties is determined on a quarterly basis. B)Due dates for estimated tax payments are April 15, June 15, September 15 of that year, and January 15 of the next year, unless these dates fall on a weekend or a holiday. C)The amount of penalty depends on the amount of the underpayment among other factors. All of these statements are true.
The law requires that capital gains and losses be separated from other types of gains and losses. What is the reason for this treatment?
A) capital losses that are short term are not deductible B) net capital loss is deductible only up to $3000 per year C) long-term capital gains may be taxed at a lower rate than ordinary Gains D) net capital losses are deductible for corporations C
Adjusted taxable income
Add back: Non business losses Business interest expense Net operating loss deductions Depreciation, amortization, depletion QBI deduction Subtract: Non business income Business interest income
Ben paid the following to attend a business meeting in Chicago 2022: Airfare - $1200 Hotel- $750 Meals not provided by restaurant- $270 What amounts are deductible if Ben spent one day in the meeting for primarily personal?
Airfare- $0 Hotel- $250 one night Meals- $45 ($90 x .50) Total travel deduction: $295 What amounts are deductible if the meals were provided by a restaurant for the travel in 2022? $90
Ben paid the following to attend a business meeting in Chicago 2022: Airfare - $1200 Hotel- $750 (250 per day) Meals not provided by restaurant- $270 ($90 a day) What amounts are deductible if Ben spent two days in the meeting for primarily business?
Airfare- full deductible $1200 Hotel- $500 two nights Meals- $90 Total travel deduction: $1,790 What amounts are deductible if the meals were provided by a restaurant for the travel in 2022? $180 not subject to 50% limit
Business income
All income from whatever source derived -gross profit from sales -income from services -renting personal property for business
Qualified business income deduction
Any business EXCEPT: Specified service trade or business such as, Fields in accounting, law, financial services, brokerage services, science, investments 2 Excretion to SSTB: 1) Architecture and engineering are excluded from SSTB 2) taxpayer's taxable income before QBI is less than the threshold amount , can be phased in
Business Meals Deduction if primary purpose is business
For 2021 and 2022, 100% deductible if meals are provided by a restaurant. For other years, business meals are 50% deductible
Small business gross receipts test
Average gross receipts for the prior three years is $29 mill or less ; for short years divide the number of months in short year then multiply the produce by 12 months
Capital expenditures
Business deduction; Businesses recover the cost of capitalized tangible assets (other than land) either by immediate expensing (when allowed by law) or through depreciation
Amortization
Businesses recover the cost of capitalized intangible asset through amortization
Opal fell on the ice and injured her hip this winter. As a result she paid $3,000 for a visit to the hospital emergency room and $750 for follow-up visits with her doctor. While she recuperated, Opal paid $500 for prescription medicine and $600 to a therapist for rehabilitation. Insurance reimbursed Opal $1,200 for these expenses. What is the amount of Opal's qualifying medical expense?
Emergency room and doctor visits 3750 + meds 500 + physical therapy 600 Total quality med expenses : 4,850 - insurance reimbursement 1200 = 3650 qualifying medical expenses for this accident
If an employer withholds taxes from an employee, in general, when are these taxes treated as paid to the IRS?
Evenly throughout the year
Business deductions
Expenses must be directly connected to business profit Must be necessary, ordinary, reasonable to be deductible -no deduction for fines, penalties, bribes, illegal kickback, lobby costs, political contributions, tax-exempt income
The maximum deduction for interest on student loan is $5,000 for married taxpayers filing joinly
False; It is $2500
TRUE OR FALSE: Self employment taxes paid by self employed taxpayers are deductible as business expense
False; dedcuted as one-half of the EMPLOYER portion self employment tax paid as a deduction FOR agi
The child for whom the full child tax credit is claimed must be under the age 15 at the end of the year other than 2021
False; under age 17
A taxpayer may not claim the American opportunity tax credit unless the taxpayer pays a dependent's qualifying educational expenses
False
When can self employed taxpayers NOT deduct health insurance premiums FOR agi?
If the self employed taxpayer or taxpayer's spouse is eligible to participate in employer-provided health plan whether they participate or not
Pure business travel
If the travel is solely for business purposes, all costs are deductible
capital gain/loss netting process step 2
Net the gain and losses within each group (add or subtract from each group)
Lifetime learning credit
Non refundable; tuition and fees (NOT BOOKS) for any course of instruction to acquire or improve a taxpayer's job skills ; includes grad school ; phase out based on taxpayer AGI ; Max credit 2000
State and local taxes
Itemized deductions limited to $10,000. Individual income tax, sales tax, corporate income tax, property tax, excise, use, ad valorem, real estate tax
Dick pays insurance premiums for his employees. What type of insurance premium is not deductible as compensation paid to the employee?
Key-employee life insurance with benefits payable to Dick
Kasey's AGI is $251,000. Her current liability is $52,168. Last year, her tax liability was $48,822. How much is her total estimated tax payment at least so that she will not owe underpayment penalties?
LESSER OF: Current tax liability $52,168 x .90 = 46,951 Last year tax liability $48,822 x 1.10 = 53,704 Explanation: Avoid underpayment penalties if their withholdings or estimated tax payments must be the lesser of 90% of current tax liability or 100% of previous year tax liability (110% for individuals with AGI greater than $150,000)
Business interest expense deduction limit
Limited to business interest income + 30% of adjusted taxable income
Jerry purchased 3,000 shares of Bank of America Corporation stock at $60,000 and 50 shares of Apple stock at $50,000 in 2020. In this year, Jerry sold 25 shares of Apple Stock and had a $15,000 gain on selling Apple Stock. Jerry also sold all Bank of American corporation stock and had a $25,000 loss on selling the stock Jerry has $140,000 ordinary income. How much capital loss will Jerry carry forward to next year's.?
Loss of $25,000 Bank of America stock - $15,000 gain on Bank of Apple stock = $10,000 net capital loss - $3,000 = $7,000 capital loss being carried forward IRRELEVANT INFO FOR CAPITAL LOSS: amount of shares, tax basis, and ordinary income
Horatio and Maria are married and have three children. Horatio is self-employed and pays health insurance premiums for himself and his family. Which of the following situations would disqualify part or all of the premium costs from being deductible for AGI?
Maria has an employer-sponsored health insurance plan available at work, but they do not participate.
Business meals deduction if primary purpose is personal
Meals for the business portion of the trip are deductible For 2021 and 2022, 100% deductible if meals are provided by a restaurant. For other years, business meals are 50% deductible.
use of capital loss carryovers
Net short term cap loss Carries over as short term capital and combined with short term items of the current year Same as long term Cap loss but the carryover is first offset with 28% gain of the current year, then 25% gain, and then 0,15,20 gain until it is absorbed
Medical expenses (from AGI)
Prescription medication, payments to medical care providers and facilities, transportation costs, long term care facilities and services, health insurance premiums if not deducted for AGI by self employed taxpayers -limited to the amount of unreimbursed qualified medical expenses paid during the year over 7.5% of the taxpayers AGI no matter when services are provided
Income from investments
Produce interest from corporate bonds, CDs, savings accounts and US treasury bills notes and bonds, dividends, royalties, annuities, or capital gains -may be exempted from taxation or taxes at preferential tax rates
The IRS would most likely apply the arm's length transaction test to determine which of the following?
Reasonableness of an expenditure.
What is NOT included in net investment income?
Retirement distribution, self employment income, selling a house and getting an exclusion amount
This year MH Inc. reported $1,000,000 of taxable income on $50 million of revenue. The revenue included $250,000 of interest income. In calculating the taxable income, MH deducted: $340,000 of depreciation $210,000 of interest expense $200,000 of net operating loss What is MH's maximum business interest deduction this year?
Step 1: calculate adjusted income Taxable income 1,000,000 - interest expense 250,000 + depr 340,000 + interest expense 210,000 + net operating loss 200,000 = 1,500,000 adjusted taxable income Step 2: maximum business interest expense deduction: 1,500,000 adj taxable income x 30% + interest income 250,000 = max interest deduction 700,000
Calculate a gain/loss
Sale proceeds - tax basis
Chris, a calendar year single taxpayer, has the following information for this year: AGI $200,000 State income taxes $15,000 State sales taxes $3000 Real estate taxes $20,900 Gambling losses (gambling games were $12,000) $8000 How much is Chris's allowable itemized deductions for this year?
State income tax $15,000 + real estate tax $20,900 = $10,000 MAX amount of deductible taxes + $8,000 gambling loss = $18,000 itemized deductions -You can choose to deduct EITHER state income tax OR state sales tax -If gambling losses were $15,000 , you can only deduct up to the amount of losses of $12,000
Harli is taking her 6-month-old daughter to the doctor to receive vaccinations. Which of the following statements is correct regarding the deductibility of the vaccinations?
The cost of vaccinations is deductible because it is for the prevention of a disease.
Interest income calculation
The proceeds - the tax basis in the treasury bills, notes, or bonds
The deductions self employed taxpayers may claim for valid business expenses are for AGI
True
Business activities that are NOT deductible
Unreimbursed employee business expenses such as paying member fees as a CPA that's not reimbursed to you ; moving expenses related to a new job
Qualified educational loans for agi
Up to $2500 of interest on education loans and can be reduced (phased out) or even eliminated
FIFO vs special identification
Use special identification if you have all of your receipts bc it provides greatest minimization on gains and increasing losses
How does the $160,200 social security earnings cap apply when receiving both wages and self employment earnings in the same year?
Use wages for the limitation first because you only pay half instead of the self employed being used when you'd pay the full amount
Can the interest on (qualified educational) student loans be reduced?
Yes, the interest deduction can be reduced (phased-out), or even completely eliminated for higher modified AGI taxpayers
This year Ashley incurred $4,000 in unreimbursed qualifying medical expenses. Given that Ashley's AGI is $180,000 , what is the amount of Ashley's itemized medical expense deduction?
Zero dollars Calculation: Total unreimbursed qualifying medical expenses 4,000 - 13,500 7.5% of AGI (180,000 x 7.5%) Explanation: Total medical expense is less than the % of AGI
Casualty Loss - Completely Destroyed
amount of insurance proceeds- the asset's adjusted basis (og cost - depr)
casualty loss - partially destroyed
amount of insurance proceeds- the lesser of assets adjusted basis or the decline in value of asset (og cost - market value)
In the current year, Norris, an individual, has $61,000 of ordinary income, in that short term capital loss (NSTCL) of $8900 and a net long-term capital gain (NLTCG) of $3900. From his capital gains and losses, Norris reports:
and offset against ordinary income of $3000 and a Net short term capital loss carryforward of $2000 Calculation: $3900 net long term capital gain - $8900 Net short term capital loss = ($5,000) NSTCL Explanation: 3,000 of the (5,000) gets offset/subtracted out and the remaining 2,000 gets carried forward
losses on dispositions of business property
deductuble but not losses on sales to related parties
Investment INTEREST expense
interest paid on borrowings or loans (like from banks) that are used to fund portfolio investments -deductible as itemized deduction
