REG 2
What is another way of saying something is allowable as an ADJUSTMENT?
"Deductible from gross income in arriving at adjusted gross income"
Payment of the LESSOR of 90% of the individual income tax on the return for the current year or 110% of the prior year's tax grants the taxpayer "__________," meaning ________.
"Safe harbor," meaning they will not be penalized.
Mortgages up to $__________ to buy, build, or substantially improve a home allow for the FULL deduction of interest.
$1,000,000
Donation of a Claude Monet painting worth $12M to a local church has an associated deduction limited to...
Contributions of appreciated capital gain property to public charities are deducted at fair market value, normally subject to a limitation of 30% of AGI.
Which of the following credits can result in a refund even if the individual had no income tax liability? a. Child and dependent care credit. b. Credit for prior year minimum tax. c. Elderly and permanently and totally disabled credit. d. Earned income credit.
D - The earned income credit is refundable. Eligible taxpayers can get advance payments from their employers because the credit is assured.
In what year are state and local taxes withheld from a cash-basis taxpayer deductible?
Deductible in the year PAID.
Alimony is considered (earned/unearned) income for IRA purposes.
EARNED
Education loan interest - is it deductible? above or below the line? how much?
Education loan interest is an allowable ADJUSTMENT (above-the-line deduction to arrive at AGI) and is limited to the amount paid or $2500 (whichever is lower). This adjustment is phased out (starting at $65k for single taxpayers and starting at $130k for MFJ)
Which expense, both incurred and paid in the same year, can be claimed as an itemized deduction subject to the two percent-of-adjusted-gross-income floor? a. Employee's unreimbursed moving expense. b. Employee's unreimbursed business car expense. c. One-half of the self-employment tax. d. Self-employed health insurance.
Employee business expenses, including unreimbursed car expense, are deductible as itemized deductions subject to the 2% floor.
Nondeductible Taxes include -
F - Federal taxes (including Social Security) I - Inheritance taxes for states (also called "federal estate pick-up tax") B - Business (on Schedule C) and rental property taxes (on Schedule E)
AMT - Credits permitted to reduce the alternative minimum tax.
FACCE it!!! - F - Foreign tax credit (*seen most often) A - Adoption Credit C - Child tax credit C - Contributions to retirement plans credit E - Earned income credit
Alimony payments are deductible (For/From/Not at all) AGI.
FOR
Insurance premiums are deductible (for/from) AGI.
FROM
Investment interest expense qualifies as a deduction (for/from) AGI. This deduction is limited to ______ income. (i.e. Interest expense on Sandy's margin balance in her brokerage account)
FROM; Net Investment Income;
Form used to file for an individual tax refund
Form 1040x
Form to request a quick refund of individual income taxes due to the carryback of a net operating loss
Form 1045
Form to claim a refund of corporate income taxes
Form 1139
Alternative Minimum Tax Form #
Form 6251
Form used to request a refund of taxes other than income tax
Form 843
Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried ______.
Forward 5 years.
Miscellaneous Itemized Deductions (NO 2% of AGI Test)
Gambling Losses Federal Estate Tax Paid on Income in Respect of a Decedent
What is the tax benefit rule?
Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax previously imposed.
What are the 5 different types of Interest Expense
HIPPE - H - Home (Home mortgage interest & Equity Indebtedness) I - Investment P - Personal P - Prepaid E - Education
Child support (is/is not) deductible to the payee / (is/is not) considered income to the spouse receiving the support.
IS NOT; IS NOT
What is the "additional standard deduction?"
If an individual is age 65 or older OR blind by the end of the tax year, he or she qualifies for the additional standard deduction, an additional $1200/individual. The "additional standard deduction" refers to an increase standard deduction, NOT a full additional standard deduction. YES: standard deduction + more money NO: standard deduction + standard deduction (The CPA Exam often presents this question incorrectly as described here.)
At what point can the FMV of donated property (such as art work) be deducted (itemized deduction) instead of the purchase price.
If the property has been held by the donor for >1 year.
If a taxpayer underpays (doesn't withhold) enough money for income tax during the year, at what point will they be subject to an underpayment penalty - How much would they have to underpay to be penalized?
If underpayment is greater than or equal to $1,000 then they may be subject to a penalty.
Which of the following are excluded from Gross Income? Salary Inheritance proceeds from a lawsuit for physical injuries
Inheritance and proceeds from a lawsuit for physical injuries are NOT taxable income and are NOT included in gross income.
1. A saleswoman (employee) gives $200 in football tickets to a customer who does significant business with her. (Itemized deduction subject to 2% floor; Itemized deduction not subject to 2% floor; Adjustment for AGI; Not Deductible?) - How Much?
Itemized Deduction subject to 2% floor; $25 ( business gifts are a miscellaneous itemized deduction up to $25 per recipient per year. The remainder is not deductible at all.)
unreimbursed employee business expenses are an (adjustment to arrive at AGI OR and itemized deduction)?
Itemized deduction
Business Travel Expenses as an employee who is not reimbursed by his/her employer are deductible as __________, up to _______.
Itemized deduction subject to the 2% floor; the full amount of the expense less the 2% of AGI floor.
Business Gifts are deductible as an ________ deduction up to $___ per recipient per year.
Itemized; $25
The deduction by an individual taxpayer for interest on investment indebtedness is limited to __________.
Limited to the taxpayer's NET investment income for the year (Investment income - Investment expense).
What is the limit on deductible qualified residence interest?
$100,000 of mortgage interest if the loan is not to buy, build, or improve the home.
With regard to itemized deductions for qualified residence interest, home equity indebtedness incurred during a year is limited to __________.
$100k on a joint income tax return or a single return; $50k if married filing separately.
What is the maximum eligible child care expense PER CHILD amount for the Child and Dependent Care Credit? After this max limit, what else is this credit limited by? What % of eligible expenses may be used as a credit based on the parent's combined AGI?
$3,000 The eligible expense for this credit is limited to the lowest earned income of either spouse. Then based on the couple's combined income range, they may take a % of the eligible expenses as a credit. Combined AGI >$43,000 THEN, 20% Combined AGI >$15,000 THEN, credit decreases by 1% for each $2,000 of AGI over $15,000 Combined AGI<$15,000 THEN, 35%
AGI Limitation for charitable contributions of - 1. Cash and short-term capital gain property 2. FMV Property (long-term capital gain property)
1. 50% of AGI 2. 30% of AGI *The COMBINED limit is 50% of AGI, counting the cash contributions first and adjusting the Property deduction value appropriately.
1. Self-employment tax is based on what income? 2. Is/how much self-employment tax is deductible?
1. On the net income 2. Half of it is allowable as an ADJUSTMENT. "It is one-half deductible from gross income in arriving at AGI."
What is the maximum deduction a taxpayer can take for a donation to a 50%-type charity?
30% of AGI is the maximum deduction.
Total cash & property contributions to charity have an associated deduction limited to...
50% of the contributor's AGI.
If the taxpayer is over the age of 65, what is the AGI floor limitation for Medical Expense Deductions? ------%
7.5%
7.5% vs. 10% - What is this thing you NEED TO REMEMBER?
7.5% of AGI is the floor for medical expense deductions if the taxpayer is age 65 or older. 10% of AGI is the floor for all taxpayers under the age of 65.
Phase out of Itemized Deductions - Maximum phase out is ___ of the amount allowed before phase out. What items are never phased out from a taxpayer's itemized deductions?
80% is the max. G - Gambling losses I - Investment interest expense M - Medical Expenses C - Casualty & theft (non-business)
What is a Keogh Plan? What is earned income for Keogh Plans?
A Profit Sharing Plan set up by a self-employed taxpayer. Earned Income = net self-employment earnings - allowable Keogh deduction - 1/2 self-employment tax.
At what age (of a child) do childcare expenses become ineligible for the Child and Dependent Care Credit?
A child must be under age 13 for these expenses to qualify.
Qualified Dividend - How is it taxed?
A type of dividend to which CAPITAL GAINS TAX RATES are applied. These tax rates are usually lower than regular income tax rates.
Which itemized deduction is included in the category of unreimbursed expenses that are deductible only to the extent that the aggregate amount of such expenses exceeds 2% of the taxpayer's adjusted gross income? a. Subscriptions to professional journals. b. Moving expenses. c. Medical expenses. d. Gambling losses to the extent of winnings.
A. Subscriptions to professional journals are miscellaneous itemized deductions subject to the 2% of AGI limitation. - CORRECT ANSWER B. Moving expenses are an adjustment C. Medical expenses area category of itemized deductions subject to a 10% AGI limitation (or 7.5% if over 65 years old) D. Gambling losses to the extent of winnings are considered to be miscellaneous itemized deductions. NOT subject to the 2% floor.
Moving expenses not reimbursed by your employer are deductible as an ______________.
Adjustment to arrive at AGI
A self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer's adjusted gross income?
Adjustments for AGI include: 0.5 x $8,000 self-employment tax $6,000 self-employed health insurance $5,000 alimony $2,000 contribution to a traditional IRA AGI = Gross income ($57,000) - Adjustments for AGI ($17,000) = $40,000
Above the line or below? Alimony Payments
Alimony is an adjustment (an above-the-line deduction to arrive at AGI)
Ordinary Dividend - How is it taxed?
All dividends are considered ordinary unless they are specifically classified as qualified dividends. They are taxed as ordinary income and are reported on Line 9a or the SCHEDULE B of Form 1040.
Which of the following are allowable deductions? a) Real estate tax on personal residence b) Ad valorem tax on personal automobile c) Current-year state and city income taxes withheld
All of these taxes are allowable ITEMIZED deductions.
Lifetime Learning Credit How Much? How Long? Phase out?
Amount = 20% of qualified expenses up to $10k (Maximum = $2k) Unlimited number of years of education (undergrad, graduate, some professional degree programs, some courses to acquire/improve job skills) There is a phase out over 54k for single and $108k for joint.
Deducting Casualty Losses What threshold limitations are there? Is this an itemized deduction or a deduction o arrive at AGI?
Begin with FMV (Which is LIMITED to the property's basis). LESS: Any Insurance recovery LESS: $100 (for each individual loss) LESS: 10% of AGI = Deduction amount This is an ITEMIZED DEDUCTION.
Deduction in determining AGI (Above the line) OR Itemized Deduction (Below the line)? Personal residence interest (mortgage interest) - Property Taxes -
Both are itemized deductions
Is the cost associated with breaking an existing lease deductible as moving expenses?
NO
Are "hobby losses" deductible?
NO.
Is consumer interest deductible (i.e. on an auto loan)
NO.
Is the Retirement savings contribution credit a refundable tax credit?
NO.
Investment interest expense is limited by...
Net Investment Income
How do you calculate the allowable deduction for investment interest expense?
Net Investment Income = Investment income - Related investment expenses other than investment interest expenses. The taxpayers deduction is the lessor of net investment income (as calculated above) OR investment interest expense (actually incurred).
Is the following a casualty loss? Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident
No, because damage caused in home by dog is controllable and avoidable and thus, is not unexpected and does not qualify as a casualty.
Is there a deduction for along-the-way meal expenses when moving for work?
No.
Are contributions to a roth IRA every deductible?
No. And the distributions/earnings are generally excluded from gross income.
The self employment tax is (one half/fully) deductible from gross income to arrive at AGI.
One half
base on the tax benefit rule, how much of a tax refund received in the subsequent year is considered taxable income.
Only the amount of that refund that realized the taxpayer a tax benefit in the prior year. (I.e. If a taxpayer claimed $5500 in itemized deductions made up solely of income taxes paid, and that deduction exceeded the standard deduction by only $1,150, then a tax refund received in the subsequent year should be included in income only up to the amount of benefit received in PY ($1,150) from taking the related deduction.
Common adjustments for AMTI
P - Passive activity losses A - Accelerated depreciation N - Net operating loss of the individual taxpayer I - Installment income of a dealer C - Contracts - % of completion vs. completed contract T - Tax "deductions" I - Interest deductions on some home "equity loans" M - Medical deductions M - Miscellaneous deductions not allowed E - Exemptions (personal) and standard deduction
AMTI - Tax Preference Items
P - Private activity bond interest income (on certain bonds) P - Percentage depletion the excess over adjusted basis of property P - Pre-1987 accelerated depreciation
NOT DEDUCTIBLE - Interest Expenses include:
Personal (Consumer) Interest - [i.e. personal note to a bank or person for borrowed funds; life insurance loans; bank credit cards; purchase of personal property such as a car, tv, etc.; interest on federal, state, or local tax underpayments.] Educational Loan Interest - This is an ADJUSTMENT, not an itemized deduction.
Qualifying Medical Expenses VS. Deductible Medical Expenses
Qualifying Medical Expenses - 10% AGI = Deductible Medical Expenses. (Pay attention to the wording of related exam questions - Remember that if the question asks for "Qualifying Medical Expenses" then they want the total of all of those medical expenses without any reduction due to the 10% of AGI.)
The earned income credit (pathetic credit) is a __________ credit.
REFUNDABLE
Personal Itemized Deductions show up on what form?
SCHEDULE A
Business Itemized Deductions show up on what form?
SCHEDULE C
Rental Itemized Deductions show up on what form?
SCHEDULE E
"Hobbies" - Brenda, employed full time, makes beaded jewelry as a hobby. In year 2, Brenda's hobby generated $2,000 of sales, and she incurred $3,000 of travel expenses. What is the proper reporting of the income and expenses related to the activity?
Sales of $2k are reported in gross income, & $2k of expenses are reported as an itemized deduction subject to the 2% floor. *Note that expenses for a hobby may be deducted up to the amount of income generated from the hobby and that those deductions are subject to the 2% floor.
During the tax year a taxpayer may choose to deduct the higher of state and local income tax payments OR ___________. These are deductions (for/from) AGI.
Sales tax payments; FROM
How does self-employment affect taxable income? Is it an itemized deduction or an adjustment to arrive at AGI?
Self-employment tax is NOT an itemized deduction, but 50% can be used as an adjustment in arriving at AGI.
Formula for an individual Casualty or Theft Loss Deduction =
Smaller Loss - Insurance Recovery = Taxpayer's Loss Taxpayer's Loss - $100 = Eligible Loss Eligible Loss - 10% of AGI = DEDUCTIBLE LOSS. *Note that the answer is usually the lowest amount option.
If you don't itemize, you take the ___________.
Standard Deduction
TRUE OR FALSE: Contributions to an IRA can qualify for both a tax deduction and a tax credit given certain conditions are met.
TRUE
Transportation to a physician's office for required medical care is a deductible medical expense for tax purposes. True or false?
TRUE
Is a charitable contribution of stock subject to the 50% of AGI rule, like cash, OR the 30% of AGI rule, like property.
The 50% of AGI Rule, like cash.
Donations of short-term capital gain property (i.e. a painting you've had for only 4 months) are deductible based on what value?
The amount deductible to the donor is the amount of his/her adjusted basis (the amount paid for
American Opportunity Credit How Much? How Long? Phase out?
The first $2k of qualified expenses + 25% of the next $2k of qualified expenses. (Maximum = $2500) Available for the first 4 years of post-secondary college. There is a phase out over 80k for single and $160k for joint.
Statute of limitations on refunds. How long after filing/due date of return can a taxpayer claim and receive a refund?
The later of: 3 years from the date the return was filed or original due date of the return. OR 2 years from the date the tax was paid (if not when return was filed)
What limitation is there on deductible IRA contributions, not considering the applicable phase-out.
The max allowable deduction for IRA contributions is $5500/ person.
Self-employment tax: is it deductible and if so, how much?
The self-employment tax is 1/2 deductible from gross income in arriving at AGI. (This is an adjustment)
what limitations are there on the deduction of student loan interest (above-the-line for AGI) paid on qualified education loans?
The taxpayer may deduct up to $2500 for the tax year. The deduction is phased out at a certain point and married taxpayers must be filing a joint return to qualify. There is no time limitation on the deduction of interest other than that it must be deducted in the period paid.
2% of AGI limitation is applied to the sum of all Miscellaneous itemized deductions. (2% of AGI is $1,500) Thus if you have tax prep fees of $500; Custodial fees for an IRA of $100; Professional Publication expenses of $150; and Union Dues of $2,000, then you have total miscellaneous deductions of ___________ and Allowable Miscellaneous deduction after application of the 2% floor of ___________.
Total misc. deductions =$2,750 LESS: 2% of AGI = ($1,500) = Allowable misc. deductions = $1,250.
Qualifying Medical Expenses on Inpatient Treatment at a center for drug addiction include -
Treatment, lodging, and meals.
Is interest paid on a debt (for instance to pay college tuition) secured by a home mortgage deductible?
Yes, as deductible qualified residence interest. This is an itemized deduction.
If you contributed greater than 50% of your AGI to charity, can you ever deduct the excess? when?
Yes, you can carry the excess forward for the next 5 years and see if it meets the next year's requirements. All charitable contribution carryovers are applied on a FIFO basis AFTER current year deductions are made.
Is the Child tax credit a refundable tax credit?
Yes.
Is the Excess Social Security paid credit a refundable tax credit?
Yes.
Tax paid by an individual to a foreign country reduce federal taxes due in the form of _________.
a credit against federal income taxes due OR an itemized deduction NOT subject to the 2% floor.
What is the prior year method?
a method to calculated estimated tax payments to avoid underpayment penalties. Must meet at least 110% of the PY's tax if AGI is greater than $150,000. If AGI is less than $150,000 then the taxpayer must pay 100% of PY's tax.
Complete the following for charitable contributions - a) A contemporaneous written acknowledgement is required for donations of $____ or more. b) A qualified appraisal for real property donations is NOT required to be attached to the tax return UNLESS the property value exceeds $_____. c) The charitable contribution deduction for LONG-term appreciated stock is limited to ____ % of AGI.
a) $250 b) $5,000 c) 30%
Deductible Above the line or Below the line? a. Employee business expenses b. self-employment tax c. employee's unreimbursed moving expenses
a) BELOW - Itemized deductions b) ABOVE (1/2 deductible to arrive at AGI) c) ABOVE (to arrive at AGI)
The annualization method is used to... How does it calculate?
calculated estimated tax payments in order to avoid underpayment penalties. Must meet 90% of current year's actual tax.
Which itemized deduction is included in the category of unreimbursed expenses that are deductible only to the extent that the aggregate amount of such expenses exceeds 2% of the taxpayer's adjusted gross income? a. Medical expense. b. Interest expense. c. Charitable contributions. d. Tax return preparation fee.
d. Tax return preparation fee is a miscellaneous itemized deduction subject to the 2% AGI floor.
Classify the following as ITEMIZED DEDUCTIONS, Adjustment to arrive at AGI, or NOT Deductible below or above the line. a) Interest paid on their home mortgage b) State taxes paid c) Medical expenses in excess of 10% AGI d) Deductible contributions to IRAs e) Alimony paid to Mr. Stevenson's first wife f) Child support paid for Mr. Stevenson's daughter g) Self-employed FICA (50%) h) Self-employed Health Insurance
a) Itemized Deduction (Schedule A) b) Itemized Deduction c) Itemized Deduction d) Adjustment to arrive at AGI e) Adjustment to arrive at AGI f) Not deductible below or above the line g) Adjustment to arrive at AGI h) Adjustment to arrive at AGI
How may taxes paid by an individual to a foreign country be treated? a. As a credit against federal income taxes due. b. As a nondeductible expense. c. As an itemized deduction subject to the 2% floor. d. As an adjustment to gross income.
a. As a credit against federal income taxes due.
Adjustment or Deduction below the line? a. Unreimbursed employee business expenses b. interest on a student loan c. charity contribution
a. Itemized Deduction b. Adjustment c. Itemized Deduction
Which of the following is deductible/not deductible? a. An employee drives from home to his or her office. b. An employee drives from his or her office to the office of a client. c. An employee flies from San Francisco to Miami on business. d. An employee drives from a first job to second.
a. NOT deductible b. Deductible c. Deductible d. Deductible
Penalties on early withdrawals of savings are deductible as _________.
an adjustment (to arrive at AGI)
Alternative Minimum Tax Preference Items
are added to the amount of AMT income in the tax formula.
moving expenses due to job relocation are deductible as: a) itemized deduction b) as a deduction to arrive at AGI Are temporary living expenses during the process of relocation deductible?
b) moving expenses are deductible to arrive at AGI, NOT as an itemized deduction. Temporary living expenses are NOT deductible.
In 2014, how much can a taxpayer contribute and DEDUCT per year to an IRA? Are there any exceptions?
$5,500 limit per year. Exceptions - There is a phase out on this amount.
Formula for Elderly and/or Permanently Disabled CREDIT
(Prize (5k for single; 7.5k for joint) - any social security received - 1/2 Excess AGI) x 15% = Credit amount.
If an individual paid income tax in the current year but did not file a current year return because his income was insufficient to require the filing of a return, the deadline for filing a refund claim is:
(a taxpayer may file a claim for refund within 3 years of the time the return was filed OR 2 years from the time the tax was paid) ANSWER: 2 years from the time the tax was paid.
Matthews was a cash basis taxpayer whose current year records showed the following: X State and local income taxes withheld - $ 1,500 X State estimated income taxes paid December 30 of the current year - $400 X Federal income taxes withheld - $2,500 X State and local income taxes paid April 17 of the following year - $300 What total amount was Matthews entitled to claim for taxes on her current year Schedule A of Form 1040?
*State and local income taxes withheld from a cash-basis taxpayer are deductible in year withheld. Thus, $1,500 + $400 = $1,900 deductible in the current year.
The government is allowed to assess an additional tax for how long after the due date/date the return is filed? - Generally - If you understated your gross income by 25% or more - If you have submitted a fraudulent or false return
- Generally 3 years - If understated income by 25% or more, then 6 years - fraud or false return, then no limitation
Home Equity interest - Used to buy, build, or improve a house - Not used to buy, build, or improve a house Which of these are/are not allowed as itemized deductions to AMT?
- If used to buy, build, or improve a house, then it can be deducted for AMT - IF not used to buy, build, or improve a house, then it can NOT be used for AMT.
Who may get the additional standard deduction and how much is it for?
Anyone over 65 or blind by the end of the tax year. This adds an additional $1200 to the standard deduction per qualifying individual.
What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year's return?
April 15th (the due date for filing a tax return). Filing an extension is NOT considered and will not extend this limitation.
Maximum allowable deductions for an individual with regards to charitable contributions in the form of Cash = Property =
Cash = 50% of AGI General Property (short-term) = Lesser of basis or FMV FMV Property = 30% of AGI for gifts of long-term capital gain property to public charities *All of the above types of contributions combined can NOT create a deduction exceeding 50% of AGI.