Chapter 1
How is income from capital assets taxed? (Schedule D)
-0% tax rate if income is below $40,000 for single individuals, $80,000 for MFJ/SS, and $53,600 for HOH -15% tax rate if income is between the applicable 0% rate amount and below $441,450 for single individuals, $496,600 for MFJ/SS, and $469,050 for HOH -20%: 20% tax rate for all other "high-income" individuals above these thresholds Net capital loss up to $3,000 is allowable against an individual's ordinary income ($1,500 for MFS). Any loss above the 3,000 deduction should be carried forward to future years but not backwards and offset against capital gains.
What is the penalty for withdrawing early from your traditional 401k?
-10% plus your marginal tax rate. There is a 10% penalty on early withdrawal of retirement funds in addition to the usual marginal rate imposed on income. The total tax rate would be 45% (35% marginal rate + 10% penalty). At 45%, the tax on $30,000 would be $13,500.
What types of debt are not taxable when forgiven?
-Gifts or inheritances -Certain qualified student loans -Title 11 bankruptcy debt -Qualified Real Property and Qualified residence indebtedness
When you sell your personal property, how much capital gain can you exclude?
-You are entitled to an exclusion of up to $250k in personal gain, if it is attributable to the sale of personal property. -To qualify the taxpayer must own and occupy the residence for two of the five years immediately before the sale.
How are dividends taxed? (Schedule B)
0%: $40K (single) or $78k (MFJ) 15%: Income below $434k (single), $488 (MFJ), and $461k (HH) 20%: Must be above these threasholds
How much can you deduct for theft and casualty loss?
1) The loss is measured by the lower of the drop in FMV or basis in property. Example: A casualty loss is measured as the difference between the fair value of an affected asset before the loss and the fair value after the loss, indicating a total casualty loss of [1] $150,000 - $125,000 or $25,000. This is [2] reduced by insurance proceeds of $10,000, resulting in a net casualty loss of $15,000. Each casualty loss is [3] reduced by $100 to determine the deductible amount, which would be $14,900. The itemized deduction will be the total of all casualty losses reduced by [5] 10% of AGI (Gross Income was $40k), or $4,000, giving an itemized deduction for casualty losses of $10,900.
For a tax payer that itemizes deductions, what is the real estate tax and state income taxes, the itemized deduction is limited to?
10,000 Taxpayers who itemize deductions on their federal income tax returns can deduct state and local real estate and personal property taxes, as well as either income taxes or general sales taxes. The Tax Cuts and Jobs Act limits the total state and local tax deduction to $10,000.
If you roll over your qualified retirement account, how many days do you have before it becomes included in taxable income?
60 days (2 months)
What is a taxable fringe benefit?
A fringe benefit is nonmonetary compensation for services performed (eg, employee or contract labor). Unless excluded by law, fringe benefits are taxable to the individual who performed services, regardless of whether the payer provided the benefit directly to the recipient or to another individual (eg, recipient's spouse). The first $50,000 of group term-life insurance provided by an employer is a non-taxable fringe benefit. The remainder would be taxable.
What amount can a partner deduct in partnership losses from their tax return?
A partner's deductible loss is limited to the lesser of the partner's basis or amount at risk. A partner's basis in a partnership at year end is adjusted for the partner's share of income and losses, liability changes, additional contributions, and distributions. Basis may never fall below zero. If allocated losses exceed the year-end basis, any excess loss is disallowed as a deduction and is carried forward to future years until there is sufficient basis to absorb the loss. In addition, a partner may not deduct more than the amount at risk. Generally, a partner's amount at risk equals the basis. However, if the partner is not personally liable to repay any liability used to determine the partner's basis, the partner's at-risk amount equals the basis reduced by such liability.
What is surtax on unearned income?
A surtax called the Unearned Income Medicare Contribution Tax is imposed on the unearned income of individuals, estates, and trusts. Surtax is 3.8% the lessor of 1) Tax payer's net investment income (NII) 2) The excess of modified adjusted gross income (MAGI), which is AGI before any foreign earned income exclusion, over the threshold amount ($250,000 for MFJ/SS), $125,000 for a married individual filing a separate return (MFS), and $200,000 for all others)
For head of household, how do you know if the person is qualifying?
A taxpayer's filing status affects income exclusions, deductions, credits, and applicable tax rates. The five filing statuses are primarily determined by marital status (ie, married or unmarried) on the last day of the individual's tax year.
How are life insurance proceeds received in installments taxed?
Although the insurance proceeds representing the face value of the policy are nontaxable, any interest received is taxable. An allocation between the face value of the policy and the interest component must be made for each installment received. The formula to determine the nontaxable portion of each installment is the face value of the policy divided by the number of installments
What are the specific rules around alimony payments? (Hint: CANNOT)
Among the many specific rules regarding alimony, one important rule is that alimony must not contain any type of property settlement. For a payment to qualify as alimony, it must be cash or a cash equivalent. The painting and the use of the beach house are neither cash nor cash equivalents. Therefore, only the $25,000 cash is true alimony and included in Blair's income tax filing.
How much do you report in taxes when you are paid in services? Example: A painter and an accountant agree to trade their services. The painter provides services valued at $550, and the accountant provides services worth $500. What amount should the accountant report as income or expense?
Answer: $550 income. The general rule under IRC §61(a) is that all income, from whatever source, is included in gross income unless specifically excluded by other tax provisions. When analyzing barter transactions, CPAs must determine the proper amount of gross income when a taxpayer receives noncash compensation (eg, property) The regulations for IRC §61 specify that when the taxpayer is paid with noncash property, the amount to report as income is the fair market value (FMV) of the property or services received. In the question, the accountant receives services from the painter that have an FMV of $550.
Another casualty loss example: On the night of October 14, Year 1, a hurricane caused serious damage to Paige's personal vehicle and to the roof of her personal residence, a townhome. The event was a federally declared disaster. Just prior to the hurricane, Paige had a $200,000 basis in her home and a $12,000 basis in her vehicle, which had a fair market value just prior to the hurricane of $10,000. The damage to the roof is appraised at $7,000 and the fair market value of the vehicle immediately after the hurricane is appraised at $5,000. Paige is uninsured and has a Year 1 AGI of $40,000. What amount of casualty loss deduction may Paige claim on her Year 1 tax return as a result of the hurricane?
Answer: $7,900 The hurricane damage results in a personal casualty loss, which will be measured as the lower of (1) the reduction in fair value of the property or (2) the property's adjusted basis. The loss on the roof is $7,000 and the loss on the vehicle is the reduction in the fair value from $10,000 to $5,000, or $5,000, for a total loss of $12,000. Since both amounts resulted from the same event, they are treated as a single casualty. The allowable loss is reduced by $100, to $11,900, and is further reduced by 10% of AGI, or $4,000, for a deductible casualty loss of $7,900.
How are pensions and annuities taxed?
Any return of original capital is not taxed. An annuity is a contract between an individual and an insurance or investment company in which the individual pays a lump sum of money today to receive regular, fixed payments in the future. Earnings from an annuity accumulate on a tax-deferred (postponed) basis. For tax purposes, an annuity is classified as "qualified" or "nonqualified." A qualified annuity is purchased as part of an employer-provided retirement plan or an individual retirement arrangement and funded with pre-tax dollars. All distributions are fully taxable.
How is investment expenses treated on an individuals tax return?
Background: Taxpayers are allowed to deduct investment expenses if those expenses are related to producing taxable investment income. -Investment expenses would be seen on the Schedule A of the 1040 -Classified as either interest expense or miscellaneous itemized deductions (subject to 2% of AGI). -Interest expense is limited to the lesser of the investment interest paid or net investment income (NII). NII is investment income minus investment expenses other than interest.
Let's say you make a charitable donation of inventory, but you have held this inventory for more than a year. How would this be taxed?
Because inventory will always offset, ordinary income, then you will use the lower of the FMV or adjusted basis.
What are some examples of costs to determine whether you'd qualify as head of household or a dependent?
Compared to single and married filing separately, the head of household (HOH) filing status applies lower tax rates at certain income levels and often receives larger deductions and credits. With some exceptions, HOH is available to unmarried taxpayers who: [1] contributed (ie, paid) more than 50% of the cost of maintaining a household for the entire tax year and [2] had a qualifying person who lived with the taxpayer for more than 50% of the tax year. Costs of maintaining a household (ie, keeping a home) relate to the operation and upkeep of a primary residence, which communally benefit the occupants (eg, rent, utilities, food consumed on premises). When classifying a service as an eligible cost, it is important to identify who performed the service. Because services rendered in the household by the taxpayer (eg, cooking, cleaning) are not paid costs, the value of services rendered by the taxpayer is not considered a cost of maintaining a household.
What are the rules around taking a deduction for charitable contributions?
Contributions of a taxpayer's time or services are nondeductible. For example, CPAs volunteering to prepare a qualified organization's tax return cannot take a deduction for the value of their time or services. Nevertheless, the CPA may take an itemized deduction for any unreimbursed direct costs (eg, postage) incurred because of the contributed services.
When you donate to a charity, what is deductible?
Contributions of a taxpayer's time or services are nondeductible. For example, CPAs volunteering to prepare a qualified organization's tax return cannot take a deduction for the value of their time or services. Nevertheless, the CPA may take an itemized deduction for any unreimbursed direct costs (eg, postage) incurred because of the contributed services.
What are the tax characteristics of a traditional IRA?
Contributions to a traditional IRA generally are deductible for the purpose of arriving at adjusted gross income (AGI). The amount and deductibility of the contributions are subject to certain limitations. However, a contribution to the plan is permitted even if it is not deductible.
What is the Keogh contribution limit?
Due to their low contribution limits, individually managed retirement accounts (eg, IRAs) are not attractive options for self-employed taxpayers. Therefore, several Keogh plans (ie, qualified retirement plans) were created that allow those taxpayers to make significantly higher tax-deferred contributions from their self-employment income. -25% of net self-employment income after the deduction for Keogh contributions (ie, 20% of net self-employment income before the deduction) -the annual limit ($58,000 in 2021), or -100% of earned income.
How much in medical expenses can you deduct from your taxes?
Example includes AGI of $25,000 The Internal Revenue Code defines medical expenses as "costs of diagnosis, cure, mitigation, treatment or prevention of disease and the costs for treatments affecting any part of the body." Unreimbursed medical expenses are allowed as an itemized deduction to the extent the amount exceeds 10% of AGI. When a taxpayer resides in a nursing home or similar institution, the deductibility of the costs depends on the reason the individual is at the facility. If the reason is primarily for obtaining medical care, the entire cost, including meals and lodging, is deductible as a medical expense. However, if the primary reason is other than medical, only the costs for medical expenses and nursing care are deductible as a medical expense. Non-Taxable: -Compensation for emotional distress, if caused by a physical injury -Workers compensation -Any medical expenses not already deducted Taxable: -Punitive damages -Reimbursements for medical expenses (if amount has been deducted already)
How are tax refunds taxed?
Federal: -Interest: Yes taxable -Refund: No, not taxable State: -Interest: Yes taxable -Refund: Depends upon when/if the person took the period of benefit. If a person received the tax benefit prior year, then yes the refund is taxable in the current year. If the benefit was received this year, then not taxable. -Interest is still taxable
What's the order of the most tax advantage filing status, and what are the five statuses to file?
Filing statuses for unmarried taxpayers (ordered from most to least tax advantaged) are: 1) qualifying widow(er) [with dependent child] (available only for the first two tax years after the death of a spouse (unless the surviving spouse remarried)) 2) head of household (HOH) 3) Single Note: MFJ requires: -Be considered married -Agree to file a joint return -Have the same tax year -Be U.S. citizens or resident aliens (eg, green card holders) for the entire tax year -Basis of accounting (cash vs accrual) does not matter
Under cash basis tax payer, what is the concept of constructive receipt?
For income tax purposes, cash-basis taxpayers must report income in the period in which it is actually or constructively received, regardless of when it was earned. The concept of constructive receipt is included in the IRC to limit a taxpayer's ability to manipulate when taxable income that has been earned is reported. -In the taxpayer's possession and control, or -Available without substantial restrictions or limits on the taxpayer's ability to use the funds. A taxpayer may not defer possession or access to the income to avoid receipt. For example, postponing the pickup of a check for services performed until next year will not prevent constructive receipt.
What are qualified and nonqualified annunities?
For tax purposes, an annuity is classified as "qualified" or "nonqualified." A qualified annuity is purchased as part of an employer-provided retirement plan or an individual retirement arrangement and funded with pre-tax dollars. All distributions are fully taxable. A nonqualified annuity is purchased by individuals with after-tax dollars (after taxes have been paid). The individual recovers the cost of the original investment tax-free, but all accumulated interest earnings are taxable. To determine the nontaxable portion of the payments received each year, an exclusion ratio is used (Investment in the annuity / Expected return).
What is form 1040-X?
Form 1040-X, Amended U.S. Individual Income Tax Return, is used by individuals to make corrections to all past individual income tax forms (eg, Form 1040, 1040-NR). If the correction results in a tax overpayment, 1040-X is used to claim a refund. When the correction results in an underpayment, taxpayers use Form 1040-X to pay the additional taxes, plus interest and underpayment penalties. If the correction results in a tax overpayment, 1040-X is used to claim a refund. When the correction results in an underpayment, taxpayers use Form 1040-X to pay the additional taxes, plus interest and underpayment penalties. Generally, the statute of limitations for filing Form 1040-X is three years from the time the original return was filed (including extensions) or two years after the tax was paid, whichever date is later.
Is hobby income taxable and hobby expenses deductible?
Hobby income is taxable, but you cannot deduct any hobby expenses. It was previously reported on Schedule A
What is an AMT credit?
If AMT is paid, the portion of the tax associated with the adjustments causing temporary differences may create an AMT credit that is carried forward indefinitely. For example, incentive stock options are taxed when exercised for AMT purposes but are taxed when the stock is actually sold for regular income tax. If AMT is paid because of the stock options, a carryforward credit is created and may be used only against regular income taxes in future years.
What's the 20% rule for employee discounts?
In general, employee discounts do not result in taxable income to the recipient. The amount that may be excluded in relation to services purchased by employees, however, is limited to 20% of the amount normally charged to nonemployee customers. As a result, Norbert would be able to exclude an employee discount up to 20% x $2,000 or $400 with the remaining $600 included in gross income. Norbit only had to pay $1,000 for a service normally costing $2,000.
Which types of interest income is included in gross income and which is not?
In general, under the all-inclusive approach to income, interest earned by a taxpayer is taxable. However, the IRC does provide certain statutory exclusions and exceptions. For instance, interest on U.S. state and local (ie, municipal) bonds is specifically excluded. However, there is no statutory authority to exclude interest earned on federal Treasury bills or interest earned on tax refunds. Interest on Series EE bonds may be deferred until the bond is redeemed. Series EE bond interest is excluded if the proceeds are used to pay higher education tuition and fees for the taxpayer, spouse or dependent. The bond must be purchased by the taxpayer or spouse and the buyer must be at least 24 years old. Room and board are not qualified expenses
How is Social Security Taxed?
Income: -Less than $25k, not taxed -More than $60k, then 85% may be included. Therefore you can exclude 15% from being taxed.
How do you calculate your net investment income?
Investment interest expense is interest paid on money borrowed to acquire property held for investment. The deduction for investment interest expense is limited to the lesser of the investment interest paid or net investment income (NII). If the investment interest expense is greater than the NII, the excess expense is carried forward to the next tax year(s). NII is investment income less investment expenses other than interest. Investment income includes taxable income from property held for investment (eg, interest, dividends) but excludes tax-exempt income, such as municipal bond interest. Investment expenses include expenses directly related to the production of investment income other than investment interest expense (eg, custodial fees, safe deposit rental). However, the deduction for these expenses is suspended through 2025; therefore, the amount of investment expenses used to compute NII is usually zero.
What is the tax treatment for investment interest expense?
Investment interest expense is interest paid on money borrowed to acquire property held for investment. The deduction for investment interest expense is limited to the lesser of the investment interest paid or net investment income. Deductible investment interest expense is an itemized deduction on Schedule A. If the investment interest expense is greater than the net investment income, the excess expense is carried forward. Like investment interest expense, other itemized deductions are also subject to limitations. Certain deductions are limited based on a percentage of AGI (eg, medical expenses, charitable contributions, casualty losses) or a statutory dollar amount (eg, taxes).
Can you name the common itemized deductions? (COMMIT)
Itemized deductions are certain expenses that an individual taxpayer may claim on the federal tax return in place of the standard deduction to reduce taxable income. Many of the deductions are subject to either an overall dollar amount or AGI limitations. Itemized deductions can be classified into the following categories: charitable contributions, other miscellaneous deductions, medical expenses, interest paid, taxes, and theft/casualty losses (COmMITT). The Tax Cuts and Jobs Act suspended miscellaneous itemized deductions subject to a 2% of AGI limitation through 2025. Tax return preparation fees, investment expenses, and unreimbursed employee business expenses are currently suspended itemized deductions and cannot be deducted.
How are life insurance proceeds which have been transferred taxed?
Life insurance proceeds generally are not included in the gross income of a beneficiary if the payment is due to the death of the insured. An exception to this rule applies when there has been a transfer of the insurance policy (during the insured's lifetime) for valuable consideration. When this occurs, the policy (1) is treated as an investment, allowing the basis (ie, amount paid) to be recovered tax-free, and (2) a portion of the proceeds is taxable to the beneficiary. Example: The amount taxable is limited to the excess gross proceeds over the sum of the consideration paid for the transferred policy and subsequent premiums paid on the policy. In this example, the friend (who acquired the policy from the original owner) paid a total of $65,000 ($25,000 for the policy plus $40,000 in subsequent premiums). Of the $200,000 proceeds received, $135,000 ($200,000 − $65,000) is taxable; the $65,000 is treated as a tax-free return of capital
What is your tax status for the current year if your spouse dies in August of the current year?
MFJ If a married taxpayer dies, the surviving spouse and the decedent are considered married for that entire tax year unless the surviving spouse gets remarried that year. The surviving spouse is considered unmarried for subsequent tax years until remarried.
How are Net Operating Losses Taxed?
May be carried forward indefinitely Deduction is limited to 80% of taxable income for the year before the NOL Note: For 2018 - 2020, NOLs may offset 100% of taxable income.
Can you deduct the loss on the sale of your personal property?
No, not deductible
Are income, social security, and Medicare taxes paid from the individual's own income; and life insurance premiums; and funeral expenses considered when determining the support of a dependent?
No. Typically, Payments for food, lodging, clothing, education, medical and dental care, recreation, transportation, and other necessities are included.
Is a refundable security deposit taxable?
No. You don't get taxed when received and you can't exclude when paid. A refundable security deposit is not deductible at the time it is paid and is not taxable when it is received at the termination of a lease. But rent received in advance is taxable
How are stock options taxed?
Nonqualified: Taxed when excercised. Take excercise price minus option price at time of award times the # of shares excercised ($90-$60)x500 Qualified: Taxed when sold
What are the adjustments you need to make for Alternative Minimum Tax?
Note: Other itemized deductions, including medical expenses, interest deducted, and charitable contributions, are allowed for both regular taxable income and AMTI and require no adjustment.
What is the calculation to determine whether you get a tax refund or have more tax due?
Note: The taxpayer may choose to receive the overpayment as a refund or to have it applied to next year's taxes (as a prepayment). If there is an underpayment, then additional fees/ penalties may apply.
Will you draw me the basic 1040 form? Hint, mnemonic (I-EMBRACED) and "COMITT"
Note: Try to understand how they relate, b/c one deduction can appear in multiple schedules. Schedule A: Itemized deductions Schedule B: Interest and dividend income Schedule C: Profit/Loss from a business Schedule D: Capital Gains and losses Schedule E: Rental and Royalty Income -Royalties include: Copyrights,Oil/gas leases, Patents, -Flow through entities: Schedule K-1 Income (S-Corps, Partnerships, Estates and Trusts). Schedule F: Profit/Loss from Farming Form 1040X - Amended return (3 years) Form 1116 - Foreign Tax Credit Form 4562 - Depreciation and Amortization Form 4797 - Sale of L/T business property (not inventory or receivables - Schedule C)
What are the stautory exclusions from gross income?
Note: Unemployment benefits is apart of gross income. See PDF document I saved for a complete list.
Which of these can be deducted? 1) Credit card interest 2) Student loan interest 3) Investment interest 4) Mortgage loan interest
Only III and IV Generally personal interest expense is not deductible
How much in passive activity losses can you deduct?
Only deductible to the extent of passive gains. There is no limit on PALs that may be deducted by grantor trusts, partnerships, and S corporations, since they are flow- through entities and these items are passed through to the individual shareholders and partners. Real Estate Professional Exception: May be deducted against ordinary income Active Participation Exception: If taxpayer only actively participates in the rental activity and has at least a 10% interest in the activity, they may deduct up to $25,000 of losses against ordinary income each year. The $25,000 deduction is reduced by 50% of modified adjusted gross income (MAGI) over $100,000 and is completely phased out if MAGI exceeds $150,000. Note: When a taxpayer sells the entire interest in a passive activity, that activity is no longer subject to the passive activity rules. Current and suspended losses from the activity can offset any income (including the gain on the sale).
What is the rental real estate active participation exception rule? This is for a tax payer that actively participates in real estate, but doesn't have any real estate income to offset the loss.
Passive activities include all rental activities (except for a real estate professional). Rental real estate losses are deductible to the extent of passive income unless the active participation exception applies. A taxpayer who actively participates in a rental real estate activity is permitted to deduct up to $25,000 of the loss (after offsetting passive income) against ordinary income. The $25,000 deduction is reduced by 50% of modified adjusted gross income (MAGI) over $100,000 and is completely phased out if MAGI exceeds $150,000. Note: When a taxpayer sells the entire interest in a passive activity, that activity is no longer subject to the passive activity rules. Current and suspended losses from the activity can offset any income (including the gain on the sale).
How do you allocate suspended losses?
Passive activity income includes all rental activities (except for real estate professionals). Passive activity losses are deductible to the extent of passive activity income (unless the active participation exception applies). Unused losses are suspended and carried forward indefinitely. If the taxpayer has more than one passive activity, and losses exceed passive income, the total excess loss must be allocated on a pro rata basis to all activities that produced a loss. In future tax years, the allocated losses can only be deducted against income earned by that activity or used against other income when the activity is sold.
How are alimony payments taxed?
Prior to the Tax Cuts and Jobs Act (TCJA), alimony payments were income to the payee and deductible to the payer. TCJA flipped the rules for divorce decrees issued or modified after 2018 so that alimony is no longer included in taxable income, nor is it deductible. Note that modified divorce decrees must specifically elect the TCJA rules in the modification.
What is the qualified business income deduction?
Qualified business income is defined as "the net amount of qualified items of income, gain, deduction and loss with respect to any trade or business." Broadly speaking, that means your business's net profit. Applies to people who have pass through income -S Corps, Partnerships, Sole Proprietorships, LLCs QBI excludes: -Capital gains or losses -Dividends -Interest Income -Income earned outside the US -Certain wage and guaranteed payments made to partners and shareholders If your total taxable income is at or below $163,300 for single filers or $326,600 for joint filers, then in 2020 you may qualify for the 20% deduction on your taxable business income. In 2021, the limits rise to $164,900 for single filers and $329,800 for joint filers.
How may a company expense research and experimental (R&E) expenditures?
R & E expenditures are generally capitalized but a taxpayer may elect to deduct them in the period occurred. The election, if made in the first tax year in which R & E expenditures are incurred, requires no filing with the IRS. Such an election is binding for the current and future periods unless a change is approved by the IRS. As an alternative, the taxpayer may file an election to defer and amortize R & E expenditures over a period of at least 60 months. One reason companies will defer and amortize R & E costs is the anticipation of higher, not lower, tax rates in the future. Land and depreciable property are not considered R & E expenditures qualified for immediate deduction or amortization over 60 months or more
When doing your taxes, what method of accounting should you use?
Section 446 of the tax code generally requires taxpayers to use the basis of accounting that is used in keeping their books: Either Cash basis or Accrual. -A farming business can use cash basis -C corporation that has less than $26M cash receipts for the past 3 years. -Personal service corporations Note, the following are not allowed to use cash basis of accounting: -C corporations unless they fall below the $26M gross receipts test -Partnerships that have a C corporation as a partner unless they meet the $26M gross receipts test -Tax Shelters
Which farm activities are considered self employment?
Self-employment (SE) tax is the Social Security and Medicare tax for individuals who work for themselves. It is similar to the payroll taxes (ie, Federal Insurance Contributions Act [FICA]) paid by employees and employers. The tax is assessed on the earned income (ie, profits from providing services or selling inventory) from the self-employed activity. Gains on the sale of productive assets (eg, equipment, land) used in the trade or business are not subject to SE tax. Like other self-employed individuals, farmers are subject to SE tax. Farmers are in the business of raising livestock, produce, or grains for sale. Profit from these activities is considered earned and subject to SE tax. Specifically, livestock raised for sale or purchased for resale are inventory to a farmer and are included in earned income.
Can you deduct series EE saving bonds?
Series EE Savings Bonds are nonmarketable bonds issued by the U.S. Treasury that pay interest on redemption. -Taxable on the federal level, but not state -Interest on bonds is recognized when redeemed -If redemption is used to pay qualified higher education expenses of the taxpayer, spouse, or dependent, the interest is excluded from gross income -Limitations based on taxpayers AGI -Qualified higher education expenses include tuition and fees. Does not qualify for deduction -Qualified higher education expenses are reduced by the amount of any scholarships that are not includible in gross income and any disbursements from Section 529 plans
When do you include state tax refunds in your gross income?
State tax refunds are generally included in gross income if the taxpayer itemized deductions in the prior year and took a deduction on Schedule A for state taxes paid.
What is your deduction amount for non-cash property charitable contribution?
Subject to limitations, individuals may take an itemized deduction for charitable contributions made directly to a qualified organization. The contribution amount is determined by the type of contribution (eg, cash, noncash property). The deduction for noncash property is either the lower of the FMV or adjusted basis at the time it was given.
How do you tax cash plus a barter transaction (i.e receive property/service)?
Take the cash plus FMV received to include in gross income The general rule is that all income, from whatever source, is included in gross income unless specifically excluded by other tax provisions. In barter transactions, CPAs must determine the proper amount of gross income when the taxpayer receives noncash compensation (eg, property).
What are self-employment taxes?
Tax on self-employment. It will be the twice the FICA rate. 50% maybe deducted.
What are some examples of miscellaneous itemized deductions (subject to 2% of AGI)?
Taxpayers are allowed to deduct investment expenses if those expenses are related to producing taxable investment income. These expenses are itemized deductions on Schedule A and are generally classified as either interest expense or Miscellaneous itemized deductions (subject to 2% of AGI). Investment expenses classified as miscellaneous itemized deductions include items such as fees for investment advice and safe deposit box rental.
What are the IRS penalties on unpaid taxes?
Taxpayers who fail to file their returns by the original or extended due date are subject to a late filing penalty (also called the failure-to-file penalty). An extension to file a tax return does not extend the time to pay the taxes. There is a late payment penalty (also called the failure-to-pay penalty) if any portion of the total taxes due is not paid by the original due date.
What is the Kiddie tax and the requirements?
The Kiddie tax was established to prevent the "wealthy" from avoiding taxes on their investment income by transferring the investments into the names of their children, who might not be subject to tax. Thus, a child's unearned income above the following thresholds in 2020 is subject to tax at the parent's tax rate*: -$2,200 or -If greater, $1,100 plus itemized deductions related to the production of the unearned income. Note: Child must be under 18 and have one parent still alive
What are the key AMT deductions? What are the itemized deductions for regular tax vs AMT?
The alternative minimum tax (AMT) is a separate tax that is assessed in addition to the regular income tax. Certain high-income taxpayers may receive tax benefits (eg, large itemized deductions) that significantly reduce their regular income tax. The AMT attempts to limit the tax savings from these benefits. Individuals are not allowed certain deductions in computing AMT that are permitted for regular taxable income. If a taxpayer itemizes deductions, the state and local taxes, income taxes (or general sales tax), and property taxes deducted are excluded from the computation of AMT.
What is the Alternative Minimum Tax and how do you calculate it?
The alternative minimum tax (AMT) requires high-income taxpayers to calculate their tax twice: once according to regular income tax rules and again under the AMT rules. Applies to people who have large itemized deductions or special tax benefits.
For married filing jointly (MFJ), can the spouses have different accounting methods and different accounting years?
The five filing statuses are primarily determined by a taxpayer's marital status (ie, married or unmarried) as of the last day of the tax year. For example, a calendar-year taxpayer who gets married on December 31 is considered married for the entire tax year. To qualify as married filing jointly (MFJ), taxpayers generally must: -Be married -Agree to a joint return -Have the same tax year -Be either U.S. citizens or resident aliens (eg, green card holders) for the entire tax year.
What are some common adjustments for AGI and from AGI?
The formula used to determine an individual's taxable income includes calculating adjusted gross income (AGI). AGI is important because it is used to determine eligibility for certain tax deductions and credits. It is calculated as Gross income − Exclusions − Adjustments for AGI. Deductions for AGI (ie, above-the-line deductions) generally relate to business activities (eg, training expenses) or specific personal expenses (eg, certain retirement contributions). These deductions are allowed regardless of whether the taxpayer takes the standard deduction or itemizes.
As it relates to the Kiddie tax, what is the calculation of net unearned income?
The kiddie tax was established to prevent wealthy taxpayers from avoiding taxes by transferring income-producing investments to their children, whose income might not be subject to tax or, if it was, might be taxed at lower rates. NUI is calculated as unearned income minus a statutory threshold. Currently, the threshold is the greater of double the standard deduction for a dependent child ($2,200) or $1,100 plus itemized deductions related to the production of the unearned income. Examples of unearned income are interest, dividends, and capital gains—excluding performance for services (eg, wages). The child has NUI of $800 ($3,000 unearned income − $2,200) that is subject to the kiddie tax assessed at the parents' income tax rates
How do you calculate the real estate participation exception rule? Example problem: Taxpayers who file a joint return actively participate in a solely-owned rental real estate activity that produces a $30,000 loss during the current year. Their adjusted gross income was $120,000 before considering the rental activity. How much of the rental loss, if any, are the taxpayers entitled to deduct?
The taxpayers have no passive income to offset the passive loss. However, because they actively participate in the rental activity, part of the loss is deductible. Since the taxpayers' MAGI exceeds $100,000, a portion of the $25,000 deduction is phased out. The $15,000 deductible loss is computed as follows: Note: When a taxpayer sells the entire interest in a passive activity, that activity is no longer subject to the passive activity rules. Current and suspended losses from the activity can offset any income (including the gain on the sale).
What are the rules around personal use rental properties: days rented and the amount of income you have to report?
The treatment of rental income and expenses for a dwelling unit that is also used for personal purposes depends on the number of rental days. If a home is rented for 14 or fewer days during the tax year, the property is considered a personal residence. Homes rented for more than 14 days (ie, significant rental) are considered vacation homes. For personal residences, rental income is excluded from gross income, and rental expenses (eg, commissions, advertising) are not deductible. Property-related expenses (eg, mortgage interest, real property taxes) are not allocated to rental use.
What are some of the common tax credits a person can deduct?
There are hundreds of tax credits, but the most common ones are: 1) Child Tax credit: $2k deduction per child under 17 2) Dependent care credit: Applies if caring for a child under 13 or someone who is disabled 3) Adoption Credit: Applies to first $14,300 of cost 4) Education Credit: -Hope scholarship credit -Lifetime learning credit 5) Saver's Credit: Available to low-moderate income earners and encourages saving into their retirement account 6) Foreign Tax Credit: Can't be itemized deductions, applies to foreign income 7) Earned Income Credit(Bell shape curve): But if you file Married Filing Separately then you are disqualified.
What is modified gross income (MAGI) and what are the thresholds for singles and MFJ?
This is AGI before any foreign earned income exclusion over the threshold amount of $250k (MFJ) or $200k (single)
Under the cash basis of taxes, what is the 12 month test?
Under the 12-month test, a cash-basis taxpayer may deduct prepaid expenses in the year they are paid only when the prepayment creates a right or benefit that does not last beyond the earlier of: 1) 12 months 2) the end of the tax year following the year the payment was made Taxpayers must capitalize all prepaid expenses that fail the 12-month test. Capitalized prepayments are expensed ratably (eg, monthly) over the time covered by the prepayment (just like accrual-based taxpayers).
When your debt is cancelled/forgiven, how much income should you recognize?
Unless excluded by law, cancelled (ie, forgiven) debt is subject to income tax. Recognized income is determined similarly to that from a sale, which equals the value of the benefit received (ie, cancelled debt) minus the adjusted basis of any secured property that was taken (eg, repossessed) from the taxpayer to settle the debt. Recognized income = forgiven debt − adjusted basis
How may taxes paid by an individual to a foreign country be treated?
Usually as a an itemized deduction or a credit against federal income taxes due.
For federal tax purposes, what is considered solvent and insolvent?
When debt is discharged, for federal tax purposes debtors realize income in the difference between the amount of debt discharged and the amount of cash/FMV of property transferred in exchange. Insolvent debtors may qualify to exclude discharged income from recognition.
When must an individual file a tax return?
When their income is greater than the standard deduction: -Single $12,400 -HH $18,650 -MFJ $24,800
Can your suspended losses from real estate offset any gain from when you sold the property?
Yes When a taxpayer sells the entire interest in a passive activity, that activity is no longer subject to the passive activity rules. Current and suspended losses from the activity can offset any income (including the gain on the sale).
Is the profit and loss from operating a sole proprietorship fully deductible?
Yes- But with certain limitations. If the operation did not yield a profit in at least 3 of the preceding 5 years, it is considered a hobby rather than a business and losses are not deductible. No hobby expenses are deductible Note: A deduction for promotional items is limited to $4 per item.
Are Qualifying contributions to a simplified employee pension plan deductible?
Yes- Fully deductible on Form 1040 to arrive at adjusted gross income. This could be a SEP IRA.
Can you deduct expenses like lodging, transportation costs, meals (50%) from your gambling activity?
Yes- Under TCJA, any expense related to gambling can be deducted.
Can you deduct your COGS in illegal drug activities?
Yes. But, you cannot deduct other business expenses like rent, salary etc...
If you donate a long-term capital gain asset, what is your limitation for taking a deduction?
You are limited to 30% of your AGI. You recognize the donation at the FMV of the asset contributed. Example, my AGI is $90k. I donate land at a FMV of $25k. This is below my $27k ($90k x 30%) limitation.
What's the difference between your marginal and effective tax rate?
Your marginal tax rate is the rate at which your last and your next dollar of taxable income are taxed. Your effective rate is the average rate of taxation for all your dollars (total tax / total taxable income).
When are cash awards excludable from gross income?
[1] Cash awards are excludable from gross income if no services were required [2] if selection for the award was made without any action by the recipient; [3] AND the proceeds are assigned to a governmental unit or charitable organization.
Extra notes on Schedule A deductions:
[1] Charitable contributions: are deductible as itemized deductions on Schedule A. Cash donations are allowed up to a maximum of 60% of AGI, and any unused portion may be carried forward up to 5 years. Property charitable contributions are only allowed 50% deduction [2] State and local income: taxes are deductible in the year paid up to $10,000 per year. But Federal income tax payments are not deductible [3] The self-employment tax: is related to her part-time job as a real estate agent. One half of the self-employment tax paid by a self-employed taxpayer is allowed as an adjustment for AGI, deductible on Page 1 of Form 1040. [4] Funeral expenses are a personal expense, not deductible