ACC 4328 Exam 2

Net Short Term Cap Gain ordinary or preferential rates?

Not eligible for preferential tax rates Taxed at ordinary taxable income tax rate

Interest from U.S. Treasury obligations (bills, notes, bonds) - Not taxable by states, but taxable for ___ Interest income = the proceeds - the basis in the bills, notes, or bonds

Not taxable by states, but taxable for federal income tax. Interest income = the proceeds - the basis in the bills, notes, or bonds

Generally, method changes require IRS permission. The business is required to file Form ___ with the IRS to change the accounting method. The business must provide ___ for the change and have to ___

Form 3315 (on exam!) ...must provide a good business purpose for the change and pay a fee If gross income is over 1 million, the fine is $11,500 If gross income is under 1 million, the fine is $500

Limitations on Capital Loss Deductions Special rules apply to the sale of personal-use assets Gains are taxable as ___ gains.

Gains are taxable as capital gains. Losses are not deductible

Which of the following is deductible as an other itemized deduction? Gambling losses to the extent of gambling winnings Fees for investment advice Employee business expenses Tax preparation fees All of these choices are correct.

Gambling losses to the extent of gambling winnings

Long-term capital gains

Generally 0, 15, or 20%, but can be as high as 25% or 28%

Qualified dividends

Generally taxed at 0, 15, or 20%

Individual Income Tax Formula

Gross Income - For AGI deductions = AGI - From AGI deductions: (1) Greater of Standard or Itemized deductions (2) Deduction for qualified business income (3) Charitable contribution deduction for those who do not itemize = Taxable income x tax rates = income tax liability x other taxes = total tax - credits - prepayments = tax due or (refund)

Investments held for appreciation potential These types of investments are generally investments in ___

Growth stocks, land, mutual funds, other assets (precious metals, collectibles, etc.) Capital assets

Nate is head of household with dependent son, Jerry, who is a full time student. This year Nate made the following expenditures related to Jerry's support. Auto Insurance Premiums Room and Board at Jerry's school Health insurance premiums Travel (to and from school) What can Nate include in his itemized deductions?

Only Health insurance premiums

Ned is a head of household with a dependent son, Todd, who is a full-time student. This year Ned made the following expenditures related to Todd's support: Auto insurance premiums Room and board at Todd's school Health insurance premiums (not through an exchange) Travel (to and from school) Which of these can Ned include in his itemized deductions?

Only Health insurance premiums

Interest from corporate bonds, CDs, savings accounts: What kind of income is it? What rate is it taxed at? Exception?

Ordinary income taxed at Ordinary rate except municipal bond interest***

Charitable Contributions deductions (itemized, FROM AGI): Contribution of money or property must be made to qualifying charitable organizations, what does not count for deductions?

Political and campaign contributions, they are not deductible

Deductions directly related to business activities

Profit-motivated activities are classified as either 1. business activities (or trade) - Business activities require a relatively high level of involvement or effort from the taxpayer. (more than 500 hours a year) Ex: actively managing a lot 2. investment activities - Investment activities do not require a relatively high level of involvement or effort from the taxpayer. Ex: holding a lot of investment

Cash Method (Pros and Cons)

Pros Flexible Simple and relatively inexpensive Cons Poor matching of income and expense Restricted use (only small business)

Losses on Dispositions of Business Property What is deductible? What is not deductible?

Recognized losses are deductible. Losses on sales to related parties are NOT deductible by the seller (In C-Corps, shareholders count as related party, in S-Corps and Partnerships, shareholders do NOT count as related party)

Self-employed taxpayers Responsible for ___ amount FICA tax Same $___ earnings cap applies to Social Security Tax. If net earnings from self-employment < _____, no self-employment tax. How does the $147,000 Social Security earnings cap apply when receiving both wages and self-employment earnings in the same year?

Responsible for entire FICA tax (employee and employer portions and additional Medicare tax) Same $147,000 earnings cap applies to Social Security Tax. If net earnings from self-employment < $400, no self-employment tax. Both wages and self-employment earnings in the same year? Wages use up limit 1st!

Employer portion for Social Security tax (%): Medicare (%):

SS = 6.2% Medicare = 1.45% These are technically half since employee pays the same %

For married couples, the Social Security wage base limitation applies separately to each spouse. True or False

True

For married couples, the additional Medicare tax is based on the couple's combined wages. True or False

True

Reasonable in amount means that expenditures cannot be exorbitant even if the amount is motivated by profit. True or False

True

T/F: Deductions self-employed taxpayers may claim for valid business expenses are FOR AGI

True

T/F: the child for whom the full tax credit is claimed must meet the definition of a qualifying child

True

Tax rate schedules are provided for use by (relatively) higher-income taxpayers, while the tax tables are provided for use by (relatively) lower-income taxpayers. True or False

True

Two important exceptions for Specified Service Trade or Business, SSTB:

Two important exceptions for SSTB: (1) Architecture and engineering services are specifically excluded from the definition of SSTB (2) SSTB Taxable Income Exception

Biden's Billionaire Minimum Tax

Under the proposal, households with net wealth exceeding $100 million would pay a minimum effective tax rate of 20% on an expanded measure of income that includes unrealized capital gains

Unreimbursed employee business expenses (are/are not) deductible.

Unreimbursed employee business expenses are NOT deductible.

Deduction for interest on qualified educational loans

Up to $2,500 of interest on education loans is deductible FOR AGI

Kasey's AGI is $251,000. Her current tax 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? (She makes the required payments every quarter)

Use 90% of her current tax liability, .90x52,168 = $46,951. (It was either that or 110% of her previous tax liability, 1.10x48,822, which would have been more than this year's times 90%)

28% gain relates to ___

collectibles and small business stock gain

Deductions for individaul retirement accounts have to be

created by you (FOR AGI deduction) Schedule 1, "IRA deduction"

Accrual, Prepaid Income = Advance payments for goods and services Businesses can elect to ___ for one year unless income is earned or recognized for financial records Exception:

defer recognition Exception: Business must recognize interest and rental income immediately upon receipt

Gross receipts for short years must be annualized by

dividing the number of months in the short period and then multiplying the produce by 12 months

Which of the following is a true statement? a. The cost of business entertainment is not deductible. b. An employer can only deduct half of any meals provided to employees. c. Meals are not deductible as a business expense. d. A taxpayer can only deduct the full cost of a meal for a client if business is discussed after the meal. e. None of the choices are true.

e. None of the choices are true.

Taxpayers disposing of business assets at a loss are allowed to deduct the loss ___ AGI

for AGI

Generally, taxpayers must file tax return (Form 1040) if ___ > standard deduction amount

gross income > standard deduction amount

Self-employed taxpayers are not allowed to deduct ___ if the taxpayer is eligible to participate in their spouse's employer-provided health plan.

health care premiums

Gary incurred $5,200 in qualified medical expenses in 2022. His AGI for the year is $50,000. Gary will be able to deduct $___ itemized deduction for medical expenses

$1,450 5200 - (.075x50,000) = 1,450

The total itemized deduction for taxes you paid is limited to

$10,000 (a marriage penalty) ($5,000 married filing separate)

The IRS usually requires you to deduct major expenses over time, rather than all at once, as capital expenses. However, you can deduct up to $___ in business startup costs in the FIRST year of active trade or business.

$5,000 Tax-deductible startup costs include market research and travel-related expenses for starting your business, scoping out potential business locations, advertising, attorney fees, and accountant fees. The $5,000 deduction is reduced by the amount that your total startup cost exceeds $50,000. In addition, if you set up a corporation or LLC for your business, you can deduct up to $5,000 more in organizational costs, such as state filing fees and legal fees.

To use the actual expense method, you must calculate the percentage of driving you did FOR BUSINESS all year and the total cost of operating your car, (including depreciation, gas, oil changes, registration fees, repairs, and car insurance). For example, if you spent $3,000 on car operating expenses and used your car for business 10% of the time, your deduction would be ___.

$300

Special 2021 from AGI charitable contribution deduction: For taxpayers who take the standard deduction rather than itemized deductions: Up to $___ of cash charitable contributions ($___ for married taxpayers filing jointly) to qualified charitable organizations

$300 $600 MFJ

Business deductions (Schedule C) - Expenses must be directly connected to ___. - Business expenditures must be ___, ___, and ___ in amount to be deductible.

- Expenses must be directly connected to business profit. - Business expenditures must be ordinary, necessary, and reasonable in amount to be deductible. Ordinary and necessary expenses (to generate profit) and reasonable in amount (not extravagant)

Which of the following taxes will not qualify as an itemized deduction? - Personal property taxes assessed on the value of specific property - State, local, and foreign income taxes - Real estate taxes on a residence - Gasoline excise taxes on personal travel - None of the choices qualify as itemized deductions.

- Gasoline excise taxes on personal travel

Investment interest

- Interest paid on loans used to purchase investment assets (EXCLUDING Municipal bonds which are not taxed) - Deduction of investment interest is limited to a taxpayer's NET investment income. - Any investment interest in excess of the net investment income limitation carries forward to the extent of net investment income in subsequent years

Two itemized deductions for interest expense:

- Investment Interest - Home Mortgage Interest

Deductions for individual retirement accounts

- Taxpayers with earned income can contribute to traditional IRAs. - Deductible contributions to traditional IRAs are for AGI deductions - Distributions from traditional IRAs are taxed as ordinary income, and early distributions (before age 59½) are generally subject to a 10% penalty.

Margaret Lindley paid interest on her acquisition debt for her home, interest on her home-equity debt used to buy a new boat and car, credit card interest, and margin interest for the purchase of stock. Assume that Margaret Lindley has $10,000 of interest income this year and no investment expenses. which of these interest expenses may she deduct this year?

- The credit card interest is nondeductible personal interest and the home equity interest is not deductible. - All other interests were deductible. - The remaining interests that are deductible are qualified residence interest and investment interest. - The investment interest is not restricted by her net investment income if her interest paid is not greater than the interest income received

Phase out for Modified AGI exceeding what amounts: When is the deduction eliminated?

- The interest deduction is REDUCED (phased-out) for taxpayers with Modified AGI exceeding $70,000 ($145,000 married filing jointly). - The deduction is ELIMINATED for taxpayers with Modified AGI exceeding $85,000 ($175,000 filing jointly). [Modified AGI for this purpose is AGI before deducting (2 things) 1. interest expense on the qualified student loans and 2. qualified education expenses]

Rental & Royalty Expenses are deducted ___ the line Count be considered what kind of activity? Taxpayers report these expenses and revenue on Schedule ____

- above the line (for AGI) - Could either be an investment or business activity - Schedule E

tax avoidance

- an action taken to lessen tax liability and maximize after-tax income. - legal because there are plenty of ways that you can legitimately claim deductions, tax credits or other adjustments to income, these ways to avoid taxes are often called tax shelters.

You can deduct the cost of business supplies and materials that have been "consumed and used during the tax year." This includes such mundane concerns as copy paper, postage, paper clips, and pens. The IRS also allows books, professional instruments, and equipment, as long as ___. If the items' use extends beyond a year, however, you generally must recover their costs through ___?

- as long as they are used within the year - depreciation

Wash Sale Rule

- cannot declare a loss on a security if you purchase the identical security within 30 days before the sale or 30 days after the sale So a 61 day period around the Date of Sale

Tax evasion

- failure to pay or a deliberate underpayment of taxes

Households would calculate their effective tax rate for the minimum tax and, if it fell below 20 percent, would ___. In other words, households would owe taxes on capital gains each year, even if the underlying asset had not been sold, and amounts paid would be treated as ___.

- if it fell below 20 percent, would owe additional taxes to bring their effective rate to 20 percent. - amounts paid would be treated as prepayments of future capital gains tax liability

Contribution of money - Cash contributions are deductible in the year ___ - Taxpayers ARE allowed to deduct their transportation costs and other out-of-pocket costs of providing services for charities (14 cents for a mile driven) - Taxpayers are NOT allowed to deduct the value of the services they provide for charities

- in the year paid. - you need receipts - cash contributions less than $250 at one time you don't need receipt - Monthly contributions count as separate times

Flow-through Entities Owners typically report ordinary income/loss passed-through by these entities on Schedule ___

- legal entities like partnerships, limited liability companies, and S corporations that do not pay income tax. Income and losses from flow-through entities are allocated to their owners. - Schedule E

- Any education expenses you want to deduct must be related to ___ for your existing business. The cost of classes to prepare for a new line of work (is/is not) deductible. If you're a real estate consultant, taking a course called "Real Estate Investment Analysis" to brush up on your skills (is/is not) tax deductible, but a class on a line of work not relevant (such as a yoga class) is not deductible.

- must be related to maintaining or improving your skills - new line of work is NOT deductible - IS tax deductible

exceptions to early distribution penalty

- sickness/illness, no penalty if paid to hospital directly - school, no penalty if withdraw to school directly

Tax sheltering

- strategies usually used to avoid paying taxes. - Many tax shelters are legal and can include 1. investment strategies, taking 2. tax deductions and 3. tax credits

You have two choices for calculating your home office deduction:

- the standard method or - the simplified option and you don't have to use the same method every year

Congress allows self-employed taxpayers to deduct the cost of health insurance for AGI because:

- this deduction provides a measure of equity between employees and the self-employed. - Employers are allowed to deduct the premium as a compensation expense, and employees are allowed to exclude from taxable income the value of the premiums paid on their behalf.

Problems with this tax:

- volatility in the market highlights how a tax on unrealized gains would be an unstable revenue source. - a currently overwhelmed IRS - complexity for taxpayers - tax code already contains a flawed individual alternative minimum tax - we don't tax until gains are realized

Ben has signed a binding contract for Peter to provide Ben with repair services. Ben paid $1,500 to Peter and owes an additional $6,000 on the contract. The repairs will commence late next year. When can Ben claim the deduction if he uses the accrual method?

-> events test satisfied, but not economic performance test until next year So can deduct the full $7,500 next year when both tests are satisfied

Chap 6

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Chap 7

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Chap 9

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Review

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3.8% net investment income tax applies to... 3.8% of the lesser of:

... Applies to higher-income taxpayers with investment income The tax is 3.8% of the lesser of: (a) Net investment income, or (b) The excess of Modified AGI over $250,000 (MFJ) $125,000(MFS) $200,000 (all others)

Generally, large corporations and partnerships with corporate partners must use ___ method. Taxpayers that satisfy the gross receipts test can elect ___ method

...accrual method ...cash method

Now Investment INTEREST expense

Is deductible as an itemized deduction Limits to taxpayer's investment income Carries forward indefinitely

Kiddie Tax Net unearned income

Is tax on a child's net unearned income at their parents' tax rate rather than at their own tax rate Net unearned income is lesser of the child's unearned income over $2,300 or their taxable income The child pays for it

Certain charitable contributions of capital gain property do not qualify for a fair market value deduction. Which of the following characteristics of capital gain property will definitely cause it to qualify for a fair market value deduction? It is NOT used by the charity for a related purpose. It is intangible property such as stocks and bonds. It has appreciated in value. It is personal property. It is tangible property.

It is intangible property such as stocks and bonds.

Medical expense deduction limitation

It is limited to the amount of unreimbursed qualified medical expenses paid during the year OVER 7.5% of the taxpayer's AGI. (no matter when the services were provided) Equation: Total unreimbursed qualifying medical exp - 7.5% of their AGI = medical exp itemized deduction

LT cap gain/loss if capital asset is held for how long? How about ST?

LT: more than a year ST: One year or less

Ordinary income Property amounts for: Private Operating foundation Private NON-operating foundation

Lesser of Fair market value or Basis Lesser of Fair market value or Basis

Chris, a calendar year single taxpayer, has the following: AGI of $200,000 State income taxes of $15,000 State sales tax of $3,000 Real estate taxes of $20,900 Gambling losses of $8,000 (gambling gains of $12,000) How much is his allowable itemized deductions for this year?

Max of state income taxes is $10,000 (not his full $15,000) + Gambling losses of $8,000 (which is not in excess of gains) = $18,000 allowable itemized deduction

Deductions from AGI (below the line):Itemized Deductions - Schedule A

Medical Expenses Taxes (sales, Foreign income, real estate, property) Interest (investment and home mortgage) Charitable Contributions (money and property) Capital gain property Ordinary income property Casualty and theft losses on personal-use assets Others (such as gambling losses/expenses)

Accrued Business Expense Deductions must meet (how many of the tests)?

Meet BOTH all-events test and economic performance test for deducting business expenses

Modified AGI (MAGI) =

Modified AGI = regular AGI + income excluded under the foreign earned income exclusion - any disallowed deductions associated with the foreign earned income exclusion

Net ST cap gains are taxed at ___ Net LT cap gains are taxed at ___

Net ST cap gains are taxed at ordinary rates Net LT cap gains are taxed at one or more of 5 alternate tax rates

If one parent in provided health insurance through work and one parent is self employed, are you able to deduct?

No (on exam)

Company A begins its business operation on July 1, 2022, and reports $20 million in gross receipts for the six months of 2022, does Company A qualify as a small business?

No, because if you divide the $20 mil into the six months multiplied to a 12-month year... (20/6)x12=40 million ... exceeding the amount needed to fall under a small business which is Average gross receipts for the prior 3 years is $27 million or less

Qualified business income (QBI) deduction A qualified business is any business except for ___.

...except for certain specified service businesses: In the fields of accounting, health, law, consulting, athletics, financial services, brokerage services, actuarial science, performing arts or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance or services that consist of investing and investment management, trading, or dealing insecurities, partnership interests or commodities

Henry is single. In 2022, he reported $30,000 of taxable income, including a long-term capital gain of $10,000. At what rate will his long-term capital gain be taxed (use the tax rate schedules)?

0%

Net Long Term Cap Gain eligible for 5 alternate tax rates:

0% 15% 20% 25% 28% (With 25% and 28% in unique circumstances)

Qualified dividends are taxed at a preferential tax rate What are those rates?

0/15/20 depending on taxpayer's taxable income level

1. Standard Deduction Definition: 2. Taxpayers generally deduct (standard or itemized deductions) 3. The amount of the standard deduction varies according to the taxpayer's ___. 4. Taxpayers who are at least 65 years of age on the last day of the year or blind (are/are not) entitled to additional standard deduction amounts above and beyond their basic standard deduction

1. A fixed amount that most individuals can elect to deduct instead of deducting their itemized deductions. 2. the greater of their standard deduction or their itemized deductions 3. filing status, age, and blindness. 4. They are

Limitations on business expense deductions:

1. Expenditures against Public Policy 2. Political Contributions and Lobbying Costs 3. Capital Expenditures 4. Expenses associated w production of tax-exempt income 5. Personal expenditures

Ordering procedure 1. group all gains and losses into 4 groups: 2. Net ___ within each group 3. Offset 28% and 25% amount if they are ___ 4. Offset 0/15/20 amount if they are ___, if at a loss ___ against the highest tax gain first 5. Offset ___ against ___ if opposite sign

1. Groups: short term, 25/28%, 0/15/20%, Long term 2. net gains and losses within each group 3. if they are opposite signs 4. if they are opposite signs, if at a loss offset gain against the highest tax rate 5. Offset Net short-term amount against Net long term results if opposite sign

Congress created two important deductions FOR AGI to subsidize higher education:

1. Interest expense on qualified educational loans (student loan interest) 2. Qualified educational expenses (tuition, fees, books, etc.) [in "Other Adjustments" on Schedule 1, made it hard to find on purpose]

Adjusted taxable income is taxable income without taking into account:

Nonbusiness income (e.g., gains from the sale of assets held for investment) Business interest income or expense Net operating loss deductions Depreciation, amortization, and depletion Any qualified business income (QIB) deduction

Additional Taxes:

3.8% net investment income tax Employment FICA Taxes Self-employed 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?

4,000 - 13,500 (which is 180,000x7.5%) =$0

This year Ashley incurred $4,000 in unreimbursed qualifying medical expenses. This year her AGI is $20,000. What is Ashley's itemized medical expense deduction?

4,000 - 1,500 (which is 7.5% of 20,000) This step is easy to forget =$2,500

Cash donations to public charities are limited to ___% of a taxpayer's AGI. Donations of capital gain property to public charities are generally limited to ___% of a taxpayer's AGI. And, donations of certain capital gain property to private nonoperating foundations are limited to ___% of AGI

60 30 20

The overall limitation for cash charitable contribution deductions for individual taxpayers is ___% of AGI. The limit is reduced to ___% for ordinary gain property other than cash, and ___% for long-term capital gain property

60 50 30

Qualified Dividends The investor must hold the dividend-payment stock for more than ___ days during the ___ day period that begins 60 days before ...

60 days during the 121-day period begins 60 days before the ex-dividend date

Underpayment penalties Safe-harbor provisions Avoid underpayment penalties if their withholdings or estimated tax payments must be the lesser of the following two safe harbors:

90% of their current year tax liability or 100% of their previous year tax liability (110% for individuals with AGI greater than $150,000).

Qualified business income (QBI) deduction

A deduction as a from AGI deduction. The deduction applies to taxpayers with qualified business income from a partnership S corporation sole proprietorship Taxpayers may deduct up to 20% of qualified business income they received.

Deductions for penalties on other types of savings accounts?

A taxpayer is allowed a deduction FOR AGI for a penalty for early withdrawing a CD or similar deposit.

Deductions subsidizing specific activities

Alimony payments are deductible for AGI to maintain equity if paid pursuant to a divorce or separation agreement executed before 2019

All events test (for deductions)

All events have occurred to establish the liability to pay. The amount is determinable with reasonable accuracy. Estimated expenses or reserves are not allowed.

Which of the following suggests that a working taxpayer is an employee rather than an independent contractor? Works for only one firm Working hours set for taxpayer Works on employer premises All of the choices suggest employee status.

All of the choices suggest employee status.

Underpayment Penalty equation

Amount of underpayment at each quarter × (federal short-term interest rate + 3%)

Taxpayers (are/are not) allowed to deduct the interest expenses if the taxpayers borrow to buy investments that produce tax-exempt income

Are NOT

Which of the following is a true statement? a. The cost of transportation is never deductible for business travel if the taxpayer enjoys the travel. b. Employees can deduct the cost of meals when they must work during the lunch hour. c. Half of the costs of travel are deductible for employees who travel on business. d. The cost of lodging is deductible if the taxpayer is away from home overnight on business. e. None of the choices are true.

D. When the travel has both business and personal aspects, the deductibility of the transportation costs depends upon whether business is the primary purpose of a trip is business, the transportation costs are fully deductible, but meals (50%), lodging, and incidental expenditures are limited to those incurred during the business portion of travel

Calendar year ends on

December 31

Partially destroyed assets casualty loss equation =

Casualty loss = amount of insurance proceeds - the lesser of asset's adjusted basis or the decline in value of the asset (like a loss on value of a car)

Kiddie tax applies to a child if

Child is under age 18 at year-end Child is 18 at year-end but earned income not greater than half of child's support, or Child is over age 18 but under age 24 at year-end, is a full-time student during the year, and child's earned income not greater than half of child's support (excluding scholarships)

Child and Dependent care credit

Child under age of 13 (or disabled dependent) Amount of credit is based on amount of taxpayer's expenditures to provide care for one or more qualifying persons A married couple must file jointly to claim the credit.

28% rate applies to

Collectibles (like stamps) and qualified small business stock gain

Gross income includes all income realized during the year.

F

T/F: Generally, interest income is taxed at ordinary rates and dividend income is taxed at capital gains rates.

F

All capital gains are taxed at preferential rates. True or False

FALSE - Only LONG-TERM capital gains are taxed at preferential rates. Long-term capital gains, dividends, and taxable interest income are all taxed at preferential rates.

A taxpayer may deduct interest expense paid on qualified educational loans where the proceeds were used for tuition, fees, books, and other necessary expenses. The interest is deductible (for/from) AGI.

FOR AGI

Cap Gain Property amounts for: Private Operating foundation Private NON-operating foundation

Fair market value Basis

If a married couple has one primary breadwinner, filing a joint return will likely result in a marriage penalty. True or False

False

Taxpayers can always defer recognition of a receipt of payments in advance of sales or services until the payment is recognized as income for financial reporting purposes. True or False

False

The cost of a business meal is deductible only if an existing client is present at the meal. True or False

False

T/F: The maximum deduction for interest on student loan is at $5,000 for married taxpayers filing jointly

False $2,500 for single and MFJ (marriage penalty)

T/F: Self-employment taxes paid by self-employed taxpayers are deductible as business expenses

False Self-employment taxes are on schedule SE and business expenses are on Schedule C only. Not the same thing, reported on different schedules.

T/F: The child for whom the child tax credit is claimed must be under the age of 15 at the end of the year other than 2021

False, suppose to be under 17, not 15 (except for 2021, which is under 18)

Accounting methods are adopted with ___ tax return.

First tax year

Lifetime learning credit ___ of up to $10,000 of eligible expenses (maximum credit is $2,000)

Nonrefundable Eligible expenses (tuition and fees, not books) for any course of instruction to acquire or improve a taxpayer's job skills. (trade schools count) Includes professional or graduate school, or continuing education Applied to one taxpayer for each household 20% of up to $10,000 of eligible expenses (maximum credit is $2,000)

Businesses also capitalize the cost to create or acquire ___ assets, through ___

intangible; through amortization

Royalty

made payment to use intangible objects (trademarks, logo, etc)

Rental activities may be classified as FOR or FROM AGI?

may be classified as investment activities or business activities, but the expenses are ALWAYS deducted FOR AGI

Specific identification method provides greatest opportunity for minimizing ___. What is the other method used for calculating cap gains/losses or sale of capital assets?

minimizing gains or increasing losses on selling stock First in, first out (FIFO)

If capital losses exceed capital gains, this is called a

net capital loss

Distributions from traditional IRAs are taxed as

ordinary income

Income from investments may be taxed at

ordinary tax rates preferential tax rates or may be exempt from taxation

Taxpayers may elect to deduct state and local sales taxes instead of deducting

state and local income taxes

Businesses must capitalize expenditures for ___ assets

tangible

Taxpayers with taxable income less than $100,000 generally must use ___ to determine their tax liability

tax tables

Financial and Tax Accounting Methods In reporting financial statement income, businesses have incentives to select accounting methods permissible under GAAP that accelerate ___ and defer ___. In contrast, for tax planning purposes, businesses have incentives to choose accounting methods that defer ___ and accelerate ___. The IRS requires businesses to use ___ accounting method to figure its' taxable income and to keep its' books

that accelerate income and defer deductions that defer income and accelerate deductions The IRS requires businesses to use the same accounting method to figure its' taxable income and to keep its' books

When it comes to deductions from indirectly related business activities you can only deduct up to

the extent of self employment income from business

Fiscal year ends on

the last day of a month (cannot be December)

The business determines its taxable income for the year of change using the (new/old) method

the new method

For purposes of the deduction for educational interest, qualified education expenses are those paid for the education of ___.

the taxpayer, the taxpayer's spouse, and/or the taxpayer's dependent.

The standard method requires you to calculate your ___ expenses and keep ___ in the event of an audit

to calculate your actual home office expenses keep detailed records

25% gain is called ___

unrecaptured §1250 gain gain from disposition of §1231 assets (§ = "section")

25% rate applies to

unrecaptured §1250 gain & related to gain from disposition of §1231 assets (depreciable real estate)

Illegal tax shelters

usually nothing unlawful about moving the money. What's illegal is not reporting or paying taxes on the income, which is when it can become tax evasion.

Accrual Method Income is recognized when ___ Expenses are recognized when ___.

when earned or received (whichever is first generally) when incurred

The income thresholds for additional Medicare tax apply to self-employment income and your spouses' combined wages/income. So, if your self-employment income and your spouse's employee wages exceed the threshold for your filing status, ___.

you'll have to pay the additional Medicare tax of 0.9% on the combined income exceeding your specific filing status threshold.

The simplified option lets you multiply an IRS-determined rate by ___. To use the simplified option, your home office must not be larger than ___ square feet, AND you cannot deduct ___ (2 things)

your home office square footage 300 sqft cannot deduct depreciation or home-related itemized deductions

Using the standard milage rates from the IRS. The standard mileage rates are $0.655 per mile in 2023, up from $0.625 in 2022. Using the standard mileage rate is easiest, because it requires minimal record-keeping and calculation. Just write down the business miles and the dates when you drive them. Then, multiply ___ by ___. This amount is your deductible expense.

your total annual business miles by the standard mileage rate

Investment expenses (are/are not) deductible

Investment expenses (other than interest) are not deductible

Cash amounts for: Private Operating foundation Private NON-operating foundation

The cash amount you give them The cash amount you give them

Larry recorded the following donations this year: $500 cash to a family in need $2,400 to a church $500 cash to a political campaign To the Salvation Army household items that originally cost $1,200 but are worth $300. What is Larry's maximum allowable charitable contribution if his AGI is $60,000?

$2,400 to church + $300 Fair Mkt Value of household items. = $2,700

Standard deductions for filing statuses 2022: MFJ HoH Single Married filing separately Additional SD for age or Blindness at end of year (2022):

$25,900 MFJ $19,400 HoH $12,550 Single $12,950 Married filing separately $1,400 MFJ $1,750 HoH $1,750 Single $1,400 Married filing separately

Use up to $_____ of net capital loss to against ordinary income (It is a for AGI deduction.)

$3,000 Catch: ordinary income has to be greater than the loss counted for that year Losses in excess of the $3,000 limit are carried forward indefinitely to subsequent years

Accrual Method All events test for income: Businesses recognize income when ... (2 things) The test is satisfied when earliest of these dates has occurred: (3 things)

(1) all events have occurred that determine or fix the right to receive the income and (2) the amount can be determined with reasonable accuracy Test is satisfied when earliest of these dates has occurred: Complete service or sale Payment is due from the customer Payment is received for the task

Child tax credit

- $2,000 for each qualifying child under age 17 (under 18 for 2021 only) - Additional $1,000 child tax credit - Additional $1,600 for children under age 6 for 2021 only - $500 for qualifying dependent - credit is subject to phase-out based on the taxpayer's AGI

Which of the following is a true statement? - A taxpayer can deduct medical expenses incurred for members of his family who are dependents. - A taxpayer can deduct medical expenses incurred for a qualified relative even if the relative does not meet the gross income test. - A divorced taxpayer can deduct medical expenses incurred for a child even if the child is claimed as a dependent by the former spouse. - Deductible medical expenses include long-term care services for disabled spouses and dependents. - All of these choices are true.

- All of these choices are true.

- Ordinary income PROPERTY definition: - Ordinary assets are... 1.... Assets the taxpayer has held for ___ 2.... Inventory the taxpayer sells in ___ 3.... Business assets held for more than 1 year to extent the taxpayer would recognize ordinary income under the depreciation recapture rules if the taxpayer had ___ 4.... An asset with a value (greater than/less than) than its tax basis - Can taxpayers deduct the property's FMV or adjusted basis?

- Any assets other than capital gain assets - 1. a year or less 2. a trade or business 3. sold the property 4. less than - Taxpayers can only deduct the lesser of the property's FMV or adjusted basis

Capital gain PROPERTY - Capital assets: (3 assets) - Any appreciated capital asset that would have generated a ___ capital gain if the taxpayer had sold the property for its FMV instead of contributing the asset to charity. - Taxpayers are allowed to deduct the ___ of property on the date of the donation. - The charitable contribution deduction for tangible personal property (not realty) is limited to the adjusted basis of the property if the charity uses the property for ___ purpose

- Capital assets: Investment assets, business assets, and personal-use assets - long-term - Fair market value - an unrelated charitable Deduction from AGI (below the line): Itemized Deduction - Schedule A

Nonrefundable personal credits:

- Child tax credit - Child and Dependent care credit - American opportunity tax credit (AOTC) - Lifetime learning credit

Refundable personal credits:

- Earned income credit (EIC)

Business tax credits: Refundable? If credit > tax liability, carry back ____and carry forward____years

- Employment tax credit - Research and Development credit - NON-refundable credits - If credit > tax liability, carry back 1 year and carry forward 20 years as a "rebate"

The cost of specialized magazines, journals, and books directly related to your business is tax deductible as supplies and materials, as are dues or fees for certain professional membership organizations. - A daily newspaper, for example, (is/is not) considered a business expense because ___. - A subscription to Nation's Restaurant News (is/is not) tax deductible if you are a restaurant owner, and Nathan Myhrvold's several-hundred-dollar Modernist Cuisine boxed set (is/is not) a legitimate book purchase for a self-employed, high-end personal chef. - As for membership dues or fees, you (can/cannot) deduct them for belonging to clubs "organized for business, pleasure, recreation, or any other social purpose." Ex: "country clubs, golf, and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions." - However, the IRS does make exceptions for groups that it considers do not exist for entertainment purposes. These are ___.

- Is NOT because it is not specific enough. - IS and IS - Cannot deduct - Boards of trade, Business leagues, Chambers of commerce, Civic or public service organizations, Professional organizations such as bar associations and medical associations, Real estate boards, and Trade associations

The self-employment tax refers to the ___ and ___ taxes that self-employed people must pay. This includes ___,___, and ___. The self-employment tax rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. Employers and employees share the self-employment tax. Each pays ___. People who are fully self-employed pay for both parts themselves. An additional 0.9% Medicare tax rate applies if ___.

- Medicare and Social Security - freelancers, independent contractors, and small-business owners - each pay 7.65% - if income is above a certain threshold.

Home mortgage interest

- Mortgage interest on up to $1 million of acquisition indebtedness if the indebtedness incurred before December 16, 2017 - Mortgage interest on up to $750,000 of acquisition indebtedness if the indebtedness incurred after December 15, 2017

qualified business income (QBI) deduction for pass-through businesses

- Pass-through businesses: those that pay taxes as individual taxpayer(s) rather than through a corporation. - The deduction provides a great benefit for owners of sole proprietorships, partnerships, S corporations, and certain limited liability companies (LLCs), trusts, and estates. - Eligible taxpayers can deduct up to 20% of their QBI. - A pass-through's QBI is the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business.

Taxpayers are not allowed to deduct personal expenditures. Exceptions:

- Personal items are adapted to business use (uniforms) - Educational expenditures for business - Self-employed taxpayers to maintains/improves skills REQUIRED by EXISTING business

American opportunity tax credit (AOTC) _____ of first $2,000 of eligible expenses and ____ of next$2,000 (maximum credit is $2,500) _____ of a taxpayer's allowable AOTC is refundable (up to $1,000)

- Provides an up to $2,500 per tax credit (per child) to help defray college expenses for the first four years of postsecondary education (not trade school). - Money spent for tuition, fees, books, and course materials paid by the taxpayer during the tax year. - Must be enrolled at least half-time. 100% of first $2,000 of eligible expenses and 25% of next $2,000 (maximum credit is $2,500) 40% of a taxpayer's allowable AOTC is refundable (up to $1,000)

Tax Credits Definition: Consist of three categories:

- Reduce TAX LIABILITY dollar-for-dollar 1. Nonrefundable personal credits - may reduce a taxpayer's tax liability to zero 2. Refundable personal credits - credits in excess of a taxpayer's tax liability are refundable & create the possibility of a negative tax liability 3. Business credits (nonrefundable credit)

Business expenses are reported on Schedule ___ of Form 1040 It is also called what?

- Schedule C (Business revenues from the same activity are also reported on the same Schedule C) - "Profit/Loss From Business"

Self-employment tax deduction

- Self-employed taxpayers are allowed to deduct the EMPLOYER portion of the self-employment tax (Social Security and Medicare taxes) they pay. - So One-half of self-employment tax paid (employer portion) is a deduction for AGI

Choosing an accounting period - Sole proprietorships: - Flowthrough entities (Partnerships and S corporations): - C corporations:

- Sole proprietorships: Use a calendar year end to report their business income. - Flowthrough entities (Partnerships and S corporations): Adopt tax years consistent with owners' tax years - C corporations: Are generally allowed to select a calendar, fiscal, or 52/53week year-end. (Made choice on the first tax return) Once a business has adopted its tax year, the business must get IRS approval to change it (Form 1128)

Individuals may deduct itemized deductions payments for which taxes:

- State, local, and foreign INCOME taxes - State and local REAL ESTATE taxes on property held for personal or investment purposes - State and local PERSONAL PROPERTY taxes that are assessed on the value of the specific property

Earned income credit (EIC) Requirements: Taxpayers with investment income in excess of ________ are ineligible for the credit. The amount of the credit depends

- Taxpayer must have earned income - Taxpayer must be qualified individuals who have at least one qualifying child, or do not have a qualifying child but live in the US for more than 1/2 the year, satisfy age requirements, and NOT a dependent of another Taxpayers with investment income in excess of $10,300 are ineligible for the credit. The amount of the credit depends on the 1. taxpayer's filing status 2. the number of qualifying children 3. taxpayer's AGI

(2) SSTB Taxable Income Exception Rules

- Taxpayers are allowed QBI deduction based on taxable income - either taxable income phases-out, does not apply to you, or fully phased-in Thresholds adjusted annually for inflation

Deductions for AGI (above the line) Deductions INDIRECTLY related to business activities:

1. Moving expenses - Moving expenses related to a new job are generally not deductible except for Members of the Armed Forces (or their spouse or dependents) 2. Health insurance deduction by self-employed taxpayers - Self-employed taxpayers can claim personal health insurance premiums for the taxpayer, their spouse, their dependents, and their children under age 27 as deductions for AGI. - The health insurance deduction is only to the extent of the self-employment income from the business. - Self-employed taxpayers are not allowed to deduct health insurance premiums if the taxpayer or taxpayer's spouse is ELIGIBLE to participate employer-provided health plan. (It doesn't matter if they actually do participate or not)

For Investment activities, 1. the FOR AGI deduction is 2. the FROM AGI deductions is 3. Not deductible is

1. Rental/Royalty expenses 2. Investment interest expense 3. Other investment expenses (ex: advertising fees)

Ben paid the following to attend a business meeting in Chicago: Airfare (first class)—$1,200 Hotel (three nights)—$750 Meals (three days)—$270 (Meals are not provided by a restaurant.) 1. What amounts are deductible if Ben spent two days in the meeting (primarily business)? 2. What amounts are deductible if Ben spent one day in the meeting (primarily personal)? 3. What amounts are deductible if the meals were provided by a restaurant?

1. What amounts are deductible if Ben spent TWO days in the meeting (primarily business)? = All airfare covered, 2 out of 3 days in hotel covered, 50% of meals for 2 days covered 2. What amounts are deductible if Ben spent ONE day in the meeting (primarily personal)? = NO airfare covered, 1 day in hotel covered, 50% of meals for 1 day covered 3. What amounts are deductible if the meals were provided by a restaurant? = Meals would be 100% for all business days

Deductions for AGI: Business Expenses must be (3 things):

1. directly connected to the business activity 2. ordinary and necessary for the activity (e.g., appropriate and helpful for generating a profit) 3. reasonable in amount (not extravagant)

ordering procedure steps

1. group all gains and losses in 4 groups: ST 28% LT 25% LT 0/15/20 LT 2. Net gains and losses within each group 3. Offset Net 25 and 28 amounts if they are opposite signs, net together if opposite 4. Offset results after step 3 against 0/15/20 amounts if opposite signs. If 0/15/20 amount is a loss, offset against highest tax gain first 5. Offset net ST amount against LT results of step 4. Highest taxed gain 1st if opposite sign

For Business activities, 1. the FOR AGI deduction is 2. the FROM AGI deduction is 3. Not deductible is

1. self employed business expenses 2. there is no FROM AGI deduction. 3. unreimbursed employee business expense is not deductible

Tax brackets or marginal tax rates on ordinary income at

10% 12% 22% 24% 32% 35% 37%

Early distributions (before 59 1/2 yrs) are generally subject to a

10% penalty (Deducted immediately, you never see that 10%)

If your home office occupies 15% of your home, ___% of your annual electricity bill becomes tax deductible

15% of your annual electricity bill becomes tax deductible

Credit application sequence (order)

1st Nonrefundable personal (any excess credit lost) 2nd Business (any excess credit carry back & carry forward) 3rd Refundable personal (any excess credit refunded)

Ex dividend date is

1st day after dividend announcement

Business casualty losses are defined as

Assets are stolen, damaged, or completely destroyed by a force outside the control of the business

Gross receipts test for small business

Average gross receipts for the prior 3 years is $27 million or less

___ deductions are one of the most common deductions for AGI, but they are not readily visible on Schedule 1 of Form 1040.

Business deductions

Business interest deduction limitation (does/does not) apply to small businesses

Business interest deduction limitation does NOT apply to small businesses. Small business def: Average annual gross receipts of $27 million (in 2022 tax year only) or less for the prior three taxable years

Max business interest expense deduction equation

Business interest income Plus: 30% adjusted taxable income (easy to forget to add!) = Max interest deduction for business interest expense

Business interest expense deduction is limited to:

Business interest income + 30% of the adjusted taxable income

If I took a CD out early and got a bank penalty, what can I at least do?

Can deduct FOR AGI

Which are capital assets? Personal-use assets Inventory Business assets with holding period more than one year Asset used in trade or business and holding period is less than one year Assets held for investment Accounts or notes receivable acquired in business from sale of services or property

Capital assets: Assets held for investment Personal-use assets Business assets with holding period more than one year NOT capital assets, (actually ordinary assets): Asset used in trade or business and holding period is less than one year Accounts or notes receivable acquired in business from sale of services or property Inventory

The IRS usually requires you to deduct major expenses over time, rather than all at once, as ___ expenses. However, you can deduct up to $___ in business startup costs in the 1st year of active trade or business. In addition, if you set up a corporation or LLC for your business, you can deduct up to $___ more in organizational costs, such as state filing fees and legal fees.

Capital expenses up to $5,000 $5,000 more in organizational costs

Contributions of property other than money - Special rules apply to charitable contributions of property depending on the type of property:

Capital gain property Ordinary income property

Capital losses from sales to "related parties" (are/are not) deducted. Related party is all family members EXCEPT ___

Capital losses from sales to "related parties" are NOT deducted Related party is all family members EXCEPT in-laws and cousins

Permissible "overall" accounting methods:

Cash Accrual Hybrid

Cash AGI limit for Public charity and Private Operating foundation vs Private NON-operating foundation: Capital gain Property AGI limit for Public charity and Private Operating foundation vs Private NON-operating foundation: Ordinary income Property AGI limit for Public charity and Private Operating foundation vs Private NON-operating foundation:

Cash AGI limit for: Public charity and Private Operating foundation = 60% Private NON-operating foundation = 30% Capital gain Property AGI limit for: Public charity and Private Operating foundation = 30% Private NON-operating foundation = 20% Ordinary income Property AGI limit for: Public charity and Private Operating foundation = 50% Private NON-operating foundation = 30%

Which one of the following types of charitable contributions is NOT deductible for federal income tax purposes? Cash paid to purchase fundraising products where a portion of the proceeds go to fund a charitable cause Travel costs incurred for charitable purposes Contributions made with credit cards where the charge is paid in a subsequent year Contributions made through payroll deduction

Cash paid to purchase fundraising products where a portion of the proceeds go to fund a charitable cause

Completely destroyed assets casualty loss equation =

Casualty loss = amount of insurance proceeds - asset's adjusted basis

Investment advisory expenses (are/are not) deductible.

Investment advisory expenses are NOT deductible.

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.

What are deductible and what are not? tax preparation fees investment expenses casualty and theft losses on investment property unreimbursed employee business expenses unrecovered cost of a life annuity at death hobby expenses gambling losses and expenses (to the extent of gambling income)

Deductible: gambling losses and expenses (to the extent of gambling income) casualty and theft losses on investment property unrecovered cost of a life annuity at death Not deductible: unreimbursed employee business expenses tax preparation fees investment expenses hobby expenses

Casualty and theft losses on personal-use assets Deduction? (For/From AGI) Exceptions? Limits?

Deductions FROMAGI (below the line): Itemized Deductions - Schedule A - Usually no deduction except losses are attributable to a federally declaredly disaster - The deduction is subject to a $100 floor for each casualty and a 10% of AGI floor for all casualties in a year

Three categories of deductions FOR AGI

Deductions directly related to business activities Deductions Indirectly related to business activities Deductions subsidizing specific activities

Business income (Schedule C) Definition: Includes...

Def: Includes "all income from whatever source derived". Gross profit from sales, income from services, and renting personal property for business

Economic performance test

Economic performance has occurred when taxpayers: receive goods or service from another party use a property provide goods/services to another party for satisfying the liability actually pay the liability (Applys for accrual deductions only)

In the current year, Ellen sold investment stock that she had owned for five years. The sale generated a loss of $5,000. Assuming she had no other asset sales during the year, how should Ellen handle the loss for the current tax year purposes? How much above/below the line?

Ellen can deduct $3,000 FOR AGI.

Employment FICA Taxes Employees: ____ Social Security tax rate ____ Medicare tax rate _____ Additional Medicare tax rate on salary or wages in excess of $200,000 [$125,000 MFS; $250,000 MFJ] (anything employer doesn't match) $147,000 earnings cap applies to Social Security tax in 2021 (won't have to pay SS tax) Multiple employers during year = excess Social Security tax payment Employers: _____ Social Security tax rate _____ Medicare tax rate

Employees: 6.2% Social Security tax rate 1.45% Medicare tax rate 0.9% Additional Medicare tax rate on salary or wages in excess of $200,000 [$125,000 MFS; $250,000 MFJ] (marriage penalty, only $50,000 more than filing single) Employers: 6.2% Social Security tax rate 1.45% Medicare tax rate

52/53 week fiscal year ends

Ends on the same day of the week or on the same day closest to the end of the month every year. Example: the last Friday in July or the Friday nearest to March 31 Cannot be other days of a month as a valid tax year (ex: December 15th)

In other words, limitations on business expense deductions:

Expenses against public policy (No deduction for fines, penalties, bribes, illegal kickback, lobby costs, or political contributions) Expenses relating to tax-exempt income: 1. Interest expense on loan where proceeds invested in municipal bonds = no deduction 2. Key employees' life insurance premiums (no deduction if business is beneficiary of death benefit from the life insurance) 3. Capital expenditures 4. Personal expenses 5. Mixed-motive expenses

Credit card interest for business purchases (is/is not) tax deductible.

IS

Interest on a business loan from a bank (is/is not) a tax-deductible business expense

IS

you pay for Facebook or Google ads, billboards, TV commercials, or mail fliers? The costs that you incur to advertise your business (is/is not) tax deductible.

IS You can even deduct the cost of an ad that encourages people to donate to charity while also putting the name of your business before the public in the hope of gaining customers. EX: a sign advertising "Holiday Toy Drive Sponsored by Robert's Hot Dogs" would be tax deductible

Interest on a business loan from a bank (is/is not) a tax-deductible business expense. If a loan is used for both business and personal purposes, then the business portion of the loan's interest expense is allocated based on ___.

IS a tax-deductible business expense. ...on the allocation of the loan's proceeds.

Late filing penalty definition

If taxpayers don't file a tax return by the due date/extension

Mixmotive expenditures = Expenses are motivated by both business and personal If the primary purpose for the travel is for business: Transportation costs, lodging, and incidental expenses, ___% deductible For 2021 and 2022, ___% deductible if meals are provided by a restaurant. Otherwise, business meals are ___% deductible If the primary purpose for the travel is for personal: Transportation cost to arrive at the location (is/is not) deductible Lodging, other transportation costs, and expenses for the business portion of trip (deductible %?) Meals for the business portion of trip (are/are not) deductible Record keeping for the trip includes...

If the PRIMARY purpose for the travel is for BUSINESS: All transportation costs, lodging, and incidental expenses, 100% deductible For 2021 and 2022, 100% deductible of business meals. Otherwise, business meals are 50% deductible If the PRIMARY purpose for the travel is for PERSONAL: Transportation cost to arrive at the location is NOT deductible Lodging, other transportation costs, and expenses for the business portion of trip, 100% deductible Meals for the business portion of trip ARE deductible Document business purpose, such as keeping minutes, dates, who attended, how long, etc.

Your travel expenses for business are 100% deductible, including (restaurant) meals for 2022. In 2023 they ___

In 2023, they revert to being limited to 50%.

Prepayments: Income taxes must be paid as you go through ___. Employers withhold income taxes from employee's wages based on ___ Self-employed taxpayers generally pay taxes through estimated tax payments, due on ___

Income taxes must be paid as you go through witholdings. Based on the employee's martial status, and estimated annual pay. Self-employed taxpayers generally pay taxes through estimated tax payments, due on April 15th, June 15th, September 15th, and January 15th of the following year

Charitable contribution deduction limitations Apply the AGI limitations in the 3 steps:

Step 1: Determine limitation for the 60% contributions, if applicable. Step 2: Apply limitation to 50% contributions. AGI × 50% - contributions subject to the 60% limit Step 3: Apply limitation to 30% contributions. The lesser of (a) AGI × 30% or (b) AGI × 50% - contributions subject to the 50% limit - contributions subject to the 60% limit. Contributions exceed the AGI ceiling limitation can be carried forward for 5 years

Net investment income:

Sum of interest, dividends, annuities, royalties, rents, passive activity income, net gains from disposing of property minus related allowed deductions

T/F: Qualified dividends received by individuals are taxed at either a 0 percent, a 15 percent, or a 20 percent preferential rate.

T

T/F: You can also deduct premiums you paid to provide coverage for your spouse, your dependents, and your children younger than 27 at year's end, even if they aren't dependents on your taxes

T

Calc adjusted taxable income

Taxable income Less: interest income Add back: depreciation Add back: interest expense Add back: net operating loss = Adjusted taxable income

Late payment penalty definition

Taxpayers don't pay entire tax owed by due date of return

Alternative Minimum Tax (AMT)

Taxpayers must pay the AMT only when the tax on the AMT base EXCEEDS their regular tax liability

AMT Exemption The amount of the AMT exemption depends on ___. The exemption is phased-out (reduced) ___ for each dollar the AMTI over the threshold.

The amount of the AMT exemption depends on the taxpayer's filing status. The exemption is phased-out (reduced) 25 cents for each dollar the AMTI over threshold.

What does the ordering procedure do?

The ordering procedure, ensures that any long-term capital gain is taxed at the lowest preferential rate possible

Advertising costs for your business deductible?

Yes

If you pay premiums for insurance to protect your business, such as fire insurance, credit insurance, car insurance on a business vehicle, or business liability insurance, can you can deduct your premiums?

Yes

If you pay premiums for insurance to protect your business, such as fire insurance, credit insurance, car insurance on a business vehicle, or business liability insurance, can you deduct these?

Yes

Do self-employed taxpayers pay both sides, the entire tax? How much, if any can they deduct?

Yes Can deduct EMPLOYER portion of self-employment taxes they pay (SS & Medicare)

Can you deduct deductibles?

Yes Just not over-the-counters

Can you deduct Medical expenses for your spouse and dependents?

Yes for qualifying medical expenses

Can you subtract between LT and ST gains/losses?

Yes you "net" them if opposite signs.

Do brokerage fees count towards losses on stock?

Yes, can add towards net gain/loss

Deductions FROM AGI (below the line): Itemized Deductions: Are health insurance premiums deductible?

Yes, if not deducted FOR AGI by self-employed taxpayers

Can you deduct: - Rent for an office space - Amounts paid for any equipment that you rent - A fee to cancel a business lease

You can deduct all of these in the amounts you paid for them

Internet and Phone Bills Deduction Limitations:

You can deduct the business portion of your phone and internet expenses. The key is to deduct only the expenses directly related to your business. (For example, you could deduct the internet-related costs of running a website for your business) Limitation: It has to be a second landline, cannot deduct any percentage of a first landline in your home.

Cash Method Revenue is recognized when property/services are ___. Deduction is recognized when expense is ___.

actually or constructively received paid

Pure business travel If the travel is solely for business purposes...

all costs are deductible

0/15/20 rates apply to

any remaining net LT cap gain

Which of the following taxes will not qualify as an itemized deduction? a. Personal property taxes assessed on the value of specific property. b. Gasoline taxes on personal travel. c. Foreign income taxes paid this year. d. State income taxes withheld from salary. e. None of the choices qualify as an itemized deduction.

b. Gasoline taxes on personal travel.

Which of the following costs are deductible as an itemized medical expense? a. The cost of prescription medicine and over-the-counter drugs b. Medical expenses incurred to prevent disease c. The cost of elective cosmetic surgery d. Medical expenses reimbursed by health insurance e. None of these costs are deductible.

b. Medical expenses incurred to prevent disease

Ben is employed as a carpenter and his wife, Marilyn is a self-employed consultant. Besides Ben's salary, Ben and Marilyn own a condominium that they only rent to tourists. This year they paid $2,200 for utilities in the condo. Marilyn also paid self-employment tax of $4,200 and Ben had $3,000 of Social Security taxes withheld from his pay. Which of the following is a true statement? a. One-half of Ben's social security tax is deductible for AGI. b. The cost of the utilities is deductible for AGI. c. None of Marilyn's self-employment tax is deductible. d. Only the $2,200 utility bill is deductible for AGI. e. None of the choices are true.

b. The cost of the utilities is deductible for AGI.

Now Deductions FROM AGI topics:

below

Capital expenditures Does the expenditure provide future benefit (beyond this year)? If so, ___

capitalize it as asset rather than deduct it as expense