Exam 4 Income Tax Collum

BE ABLE TO CALCULATE THE TAXABLE AND NONTAXABLE PORTIONS OF GROUP-TERM LIFE INSURANCE

(Coverage - $50,000) x table number x 12 months If [coverage - 50,000] < 0, no coverage After-tax cast Is the premiums x (1-21%) CORPORATE TAX RATE = 21%

Know what is meant by the term points and what conditions must be met to deduct them immediately.

1% of the principal amount of the loan. In order for taxpayers to deduct points, the points must be made for a reduced interest rate (rather than for the service of providing the loan). Requirements to deduct points: Settlement statement: document that details monies paid out and received by the buyer and seller as part of the loan transaction. Must designate amounts as points payable in connection with the loan (ex: loan orientation fees, loan discount or discount points) Amounts must be computed as a percentage of the stated principal amount of the loan. Amounts paid must conform to an established business general practice of charging points for loans in the area where the residence is located and the amount of points paid must not exceed the amount generally charged in that area. Amounts must be paid in connection with the acquisition of the taxpayer's principal residence and the loan must be secured by that residence(deduction for points not available for points paid in connection with a loan for a second home). Points paid on a home acquisition loan in excess of the acquisition debt limit isn't deductible. Buyer must provide enough funds in the down payment on the home to equal the costs of the points(buyer not allowed to borrow from the lender to pay points). Points paid by the seller to the lender to pay the points). However, points paid by the seller to the lender in connection with the taxpayer's loan are treated as paid directly by the taxpayer. Consequently, such points are generally deductible by the buyer.

Be able to determine if a dwelling unit is a residence (personal days versus rental days).

A dwelling unit is a residence if personal-use days are more than the greater of 14 days or 10% of the number of rental days during the year. Personal-use days: Taxpayer (owner) or other owner stays in the home. A relative of owner stays in the home even if relative pays full FMV rent (unless home is relative's principal residence) A non-owner stays in the home under vacation home exchange or swap. A taxpayer rents out the property for less than FMV rent. Rental days Days the taxpayer rents property at FMV rent. Days spent repairing or maintaining home for rental use. Days that the home is available for rent but is not rented out are not personal or rental days.

KNOW THE DIFFERENCES BETWEEN A DEFINED BENEFIT PLAN AND A DEFINED CONTRIBUTION PLAN FOR BOTH THE EMPLOYER AND THE EMPLOYEE

Benefit plans Based on fixed formula of average compensation and years of service LESSER of 100% of 3 highest consecutive calendar years of compensation or $230,000 Cliff vesting- 5 year- after the 5 years, all the benefits fully vest Graded vesting- 7 year- employees vested benefits increase each year that they are employed. Taxable as ordinary income Contribution plans Employer specifies up-front contribution on employee's behalf Employer typically match employee contributions. Employee chooses how funds are invested and bears investment risk. Employers maintain a separate account for each participating employee. 2020 overall contribution limits for sum of employer and employee contributions: Lesser of $57000 ($63500 for employees 50 years old by year-end) or 100% of employee's annual compensation. 2020 employee contribution limit to 401(k) plan: $19500 or $26000 for employees 50 years old by year-end.

WHEN SALARY PAYMENTS ARE DEDUCTIBLE

Cash method: when they pay the employee Accrual method: as the employees earn the wages

Know the requirements to exclude gain on a principal residence and be able to determine the exclusion amount.

Determining tax basis of home (see page 14.4 Loss recognized on disposition of a personal residence is not deductible. Part or all of the gain might be excluded if the taxpayer meets ownership and use tests. Maximum exclusion of gain is $500,000 for MFJ taxpayers ($250,000 for other taxpayers) Gain in excess of exclusion is generally taxed at LTCG. Ownership test Taxpayer must have owned the property for 2 or more years during the 5- year period ending on the date of sale. For married taxpayers, either spouse can satisfy this requirement. Prevents a taxpayer from buying a home, fixing it up, and soon thereafter selling it and excluding the gain. Use test Taxpayer must have used the property as the taxpayer's principal residence 2 or more years during the 5-year period ending on the date of sale. If married, both spouses must satisfy the requirement. Ensures that taxpayers are selling homes they actually lived in instead of investment property.

KNOW AND BE ABLE TO APPLY THE DISTRIBUTION RULES TO DISTRIBUTION RULES FOR DEFINED CONTRIBUTION PLANS

Distribution Rules: Taxed at ordinary rates. 10% penalty on early distributions: Before 59 ½ years of age if not retired or Before 55 years of age if retired or let go. Required minimum distributions: Must receive by April 1 of the later of (1) the year after the year in which the employee retires. Retired employee who waits until year after turning age 72 to begin receiving distributions must receive two distributions in year of first distribution. 50% penalty to the extent required minimum distributions are not made.

UNDERSTAND THE EMPLOYEE AND EMPLOYER CONSIDERATIONS FOR NONQUALIFIED DEFERRED COMPENSATION

Employee considerations: Employee defers current income in exchange for future payment. Employee is taxed when payment is received. Employee generally selects investment choices up front to determine return on deferral. Just as for traditional deferred compensation plans, after- tax rate of return depends on before- tax rate of return, marginal tax rate at time of deferral, and marginal tax rate at time of distribution. Payment is not guaranteed. If employer doesn't pay, employee becomes unsecured creditor. Employer Considerations: Employer promises to pay deferred compensation at some point in future. Deduct when paid to employee Not required to fund obligation Use to accomplish compensation objectives such as proving more deferred compensation to employees who are over contribution limits on qualified plans. Employer's marginal tax rates at time of deferral relative to those at time of payment affect after-tax cost of providing deferred compensation relative to those at time of payment affect after-tax cost of providing deferred compensation relative to current compensation.

KNOW WHAT IS MEANT BY A FLEXIBLE SPENDING ACCOUNT

FSAs Allow employees to set aside portion of before-tax salary for payment of health or dependent care benefits Medical-related expense limit of $2,750 Can allow up to $500 to be carried to the next FSA plan year or provide a 2.5 extra month grace period to use remaining balance, but excess forfeited

KNOW WHAT IS MEANT BY GRANT DATE, VESTING DATE, EXERCISE DATE, EXERCISE PRICE, AND BARGAIN ELEMENT

Grant date: date in which employees initially allocated stock options Vesting date: time when stock options granted can be exercised Exercise date: date that employees purchase stock using their options Exercise price: amount paid to acquire shares with stock options Bargain element: difference between FMV of stock and exercise price on exercise date

Be familiar with the interest deduction rules that apply to home equity loans.

Home equity loans: treated as acquisition indebtedness only to the extent the taxpayer uses the loan proceeds to substantially improve the home.

UNDERSTAND THE DIFFERENCES BETWEEN INCENTIVE STOCK OPTIONS AND NONQUALIFIED STOCK OPTIONS

Incentive stock options (ISOs): favorable tax treatment to employees Defer the bargain element for regular tax purposes until the stock acquired from option exercises is sold Taxed at capital gains rates Cannot deduct the bargain element as compensation expense Nonqualified stock options (NQOs): all stock that is not an ISO Requiring employees to treat the bargain element from options exercised as ordinary income May deduct the bargain element as compensation expense in the tax year options are exercised. Options that don't meet requirements for being classified as incentive stock options

BE ABLE TO DETERMINE THE MAXIMUM CONTRIBUTION TO A SEP IRA AND A 401(K) PLAN FOR A SELF-EMPLOYED TAXPAYER

Individual 401(k) 2020 contribution limit Lesser of $57000 or 20% of schedule C net income (after reducing Schedule C net income by the deduction for the employer's portion of self-employment taxes paid) plus $19500. ' Taxpayers who are at least 50 years old at the end of the year may contribute an additional $6500 per year ( maximum of $63500, if self-employment earnings are sufficient). Contribution cannot exceed schedule C net income minus self-employment tax deduction.

Be familiar with the rules to determine if a residence is a principal residence.

Is a residence a principal residence? Amount of time taxpayer spend at one residence. Proximity of each residence to taxpayer's place of employment Principal place of abode of taxpayer's immediate family. Taxpayer's mailing address for bills and correspondence.

Be able to apply the income and deduction tax rules to minimal rental use of a home, significant rental use of a home (IRS Method only), and rental of a nonresidence.

Minimal rental use: live in the residence for at least 15 days and they rent it for 14 or fewer days. Taxpayers not required to include gross receipts in rental income and not allowed to deduct any expenses related to the rental. They are allowed to claim as itemized deductions any home mortgage interest and real property taxes on the home Significant rental use: rental use is 15 days or more and personal use exceeds the greater of 14 days or 10% of rental days. Irs method allocates interest and taxes to rental use based on rental use to total use for the year. Nonresidence: rental use at least one day but no more than the greater of 14 days and 10% of rental days. Allocates expenses to rental use and personal use. Rental deductions in excess of rental income are deductible subject to passive loss limitation rules. Interest expense allocated to personal use is not deductible.

BE ABLE TO DETERMINE TAX CONSEQUENCES TO EMPLOYERS ON THE GRANT DATE, VESTING DATE, THE EXERCISE DATE, AND THE STOCK SALE DATE FOR INCENTIVE STOCK OPTIONS AND NONQUALIFIED STOCK OPTIONS

NQOs No tax consequences on grant date On exercise date, bargain element is treated as ordinary income to employee Employers deduct bargain element as compensation expense on exercise date ISOs No tax consequences on grant date and exercise date if employee holds for 2 years after grant date and 1 year after exercise date If holding requirements are not met, option becomes an NQO When employee sells stock, employee recognizes LTCG No deduction for employers unless employee does not meet holding requirements Not as favorable as NQOs: ISOs don't have a tax deduction IRS regulatory requirements are cumbersome Lose tax benefits issuing ISOs rather than NQOs if high marginal rate

BE ABLE TO DETERMINE TAX CONSEQUENCES TO EMPLOYEES ON THE GRANT DATE, VESTING DATE, AND THE EXERCISE DATE FOR INCENTIVE STOCK OPTIONS AND NONQUALIFIED STOCK OPTIONS

No tax consequences on grant date or vesting date Holding period for stock acquired with NQOs and ISOs begins on exercise date NQOs Report ordinary income equal to the total bargain element on the shares of stock acquired Taxpayer's basis is FMV on exercise date Exercise price + ordinary income recognized n the bargain element ISOs Basis in shares acquired is the exercise price Bargain element added to AMT income If shares are held for at least 2 years after grant date and 1 year after exercise date, then the difference between sales proceeds and the exercise price are long-term capital gains If holding period requirements are not met, the sale is a disqualifying disposition and the bargain element is taxed as ordinary income

BE ABLE TO DETERMINE WHEN A DISTRIBUTION FROM A ROTH 401(K) IS A QUALIFIED OR NONQUALIFIED DISTRIBUTION AND KNOW THE RELATED TAX IMPLICATIONS

Qualified distributions Not taxable Account must be open for five years before distribution. Employee must be at least 59 ½ at time of distribution Nonqualified distributions Distributions of account earnings are taxable and subject to 10% penalty it taxpayer is not either 59 ½ of age or 55 and retired. Distributions of contributions are not taxed or penalized. Distribution x ratio of contributions to account balance is nontaxable. The remainder of distribution is from account earnings. After- tax rate of return equals before-tax rate of return.

BE ABLE TO DETERMINE WHEN A DISTRIBUTION FROM A ROTH IRA IS A QUALFIED OR A NONQUALIFIED DISTRIBUTION AND KNOW THE RELATED TAX IMPLICATIONS

Qualified distributions: Not taxable, occurs at least 5 years after taxpayer opened Roth IRA and meets one of these requirements: Distribution is made on or after date taxpayer reaches 59 ½ years of age. Distribution is made to the beneficiary (or to the estate of the taxpayer) on or after the death of the taxpayer. Distribution is attributable to the taxpayer being disabled. Distribution is used to pay qualified acquisition costs for first-time homebuyers(limited to $10000). Nonqualified distributions: Not necessarily taxable, able to withdraw contributions tax free at any time. Nonqualified distributions of the earnings of a Roth IRA are taxable as ordinary income. Nonqualified distributions come first from taxpayers contributions(non taxable) Then from the account earnings after the total contributions have been distributed (different from equivalent rule for Roth 401(k)s and traditional IRAs with nondeductible contributions)

Know the definition of real property taxes and how real property taxes are allocated between a buyer and a seller.

Real property taxes: tax on the fair value of land and structures permanently attached to land for land, rental properties, business buildings and other real property. Buyer: homeowners frequently pay real property tax bill through an escrow account. Deduction timing is based on date of payment of taxes to governmental body, not date of deposits to the escrow account. Seller: deduction is based on the proportion of the year the taxpayer lived in the home, no matter who actually pays the tax.

KNOW THE RULES AND THE TAX IMPLICATIONS FOR A ROLLOVER FROM A TRADITIONAL TO A ROTH IRA

Rollovers from traditional IRAs to Roth IRAs: Account transferred or withdrawn from traditional IRA is fully taxable but not penalized Taxpayer must contribute full amount withdrawn to Roth IRA account within 60 days of withdrawal. Amounts withdrawn but not contributed are subject to tax and 10% penalty.

UNDERSTAND THE RULES FOR EMPLOYER ROTH 401(K) PLANS AND HOW THEY DIFFER FROM TRADITION 401(K) PLANS

Roth 401(k) plans: Employees but not employers may contribute. Employers contribute only to traditional 401(k) plans. Contributions are not deductive. Same contribution limits as for traditional 401(k) plans.

UNDERSTAND THE RULES FOR A ROTH IRA CONTRIBUTION

Roth IRAs: Contributions are not deductible Same contribution limits as traditional IRAs but For 2020, contribution phases out for MAGI between $124000 and $139000 for unmarried taxpayers and between $196000 and $206000 for married taxpayers filing jointly. Distributions come first from contributions and then from account earnings.

BE ABLE TO CALCULATE THE EMPLOYER'S AFTER-TAX COST OF SALARIES, INCLUDING THE LIMIT ON "COVERED" PERSONS

Salary x (1 - marginal tax rate) $1,000,000 maximum compensation deduction per covered person (CEO, CFO, 3 highest paid after CEO and CFO, and all covered from prior years beginning in 2017) If public company (1,000,000 limitation X (1 - marginal rate) + left-over amount Read book to see what counts as compensation(bonus and other sources)

BE FAMILIAR WITH THE NONTAX CONSIDERATION OF A SEP IRA AND A 401(K) PLAN FOR A SELF-EMPLOYED TAXPAYER

Self-employed retirement accounts limit: Lesser of $57000 or 20% of schedule C net income (after reducing Schedule C net income by the deduction for the employer's portion of self-employment taxes paid).

UNDERSTAND WHAT IS MEANT BY RESTRICTED STOCK

Stock employees receive as compensation that may be sold only after the passage of time or after certain performance targets are achieved Can't be sold or otherwise treated as owned by employees until employees legally have the right to sell the shares on the vesting date

KNOW THE DIFFERENCE IN TAX CONSEQUENCES TO EMPLOYER AND EMPLOYEE FOR TAXABLE AND NONTAXABLE FRINGE BENEFITS

Taxable EMPLOYEES recognize compensation income on all benefits received unless specifically excluded by tax laws May prefer a taxable benefit to an equivalent amount of cash when they benefit from employer-provided quantity or group discounts associated with the benefit Must recognize a certain amount of GI when employers pay life insurance premiums for the employee for policies with a death benefit > 50,000 EMPLOYER deducts cost and pays employee's share of FICA taxes on benefits Treat taxable fringe benefits just like cash compensations Has an outlay for the cost of the benefit and must pay the employer's share of FICA Deducts its cost of the benefit (plus FICA), not the value of the benefit to the employee Often able to purchase fringe benefits at a lower cost than can individual employees Nontaxable Identified in the Internal Revenue Code EMPLOYEE excludes benefit from taxable income and employer deducts cost when benefit is paid Group-term life insurance up to $50,000 Health and accident insurance and benefits Meals and lodging for the convenience of the employer Employee educational assistance up to $5,250 for tuition, books and fees Dependent care benefits up to $5,000 No-additional-cost services Qualified employee discounts Working condition fringe benefits De minimis fringe benefits Qualified transportation fringe benefits Cafeteria plans and flexible spending accounts (FASs) EMPLOYEES: after-tax cost benefits is ZERO EMPLOYERS: deduct the cost of providing these benefits

BE ABLE TO DETERMINE THE TAX CONSEQUENCES TO THE EMPLOYER AND TO THE EMPLOYEE ON THE GRANT DATE AND THE VESTING DATE FOR RESTRICTED STOCK WITH AND WITHOUT THE §83(b) ELECTION

Taxed on the full FMV of the shares on the date the restricted stock vests Without §83(b) No tax consequences on grant date Employee recognizes ordinary income on FMV of stock on vesting date Holding period for stock begins on vesting date Employer deducts value of stock on vesting date With §83(b) On grant date, employee recognizes FMV of stock as ordinary income Employee takes FMV basis in stock Holding period for stock begins on grant date If employee never vests, no deduction for basis in stock Employer Timing of the deduction is determined by the employee's decisions regarding as §83(b) election For tax purposes, employers deduct the FMV of stock when the employee recognizes income For GAAP purposes, employers deduct the grant date value over the vesting period

Know and be able to apply the limits for the home mortgage interest deduction for both acquisition indebtedness incurred before December 16th, 2017, and acquisition indebtedness incurred after December 15th, 2017. (Just remember after 2017 and before 2018).

Taxpayers are allowed to deduct home mortgage interest(itemized deduction) on a limited amount of acquisition indebtedness( debt to acquire, construct, or substantially improve the residence. 69000 Principal residence and one other residence Acquisition indebtedness limit: For debt incurred before Dec. 16, 2017, limit is $1,000,000($500,000 MFS) For debt incurred after Dec. 15, 2017, limit is $750,000 ($375,000 MFS)

BE ABLE TO APPLY THE RULES FOR A DEDUCTIBLE CONTRIBUTION TO A TRADITIONAL IRA AND KNOW HOW DISTRIBUTIONS ARE TAXED

Traditional IRAs 2020 deductible contribution limit: Lesser of $6000 or earned income For taxpayers over 50, lesser of $7000 or earned income. If taxpayers participate in employer-provided plan: For 2020, deduction limit phased out for single taxpayers with MAGI(modified AGI) between $65000 and $75000, and for married filing jointly taxpayers with MAGI between $104000 and $124000. Special rules if one spouse is covered by plan and the other is not. Deductible contributions to IRAs are for AGI deductions.

Know what events qualify as unforeseen circumstances to still qualify for a prorated exclusion if the sale or exchange occurs before the time requirement is satisfied and how to calculate the gain exclusion amount.

Unforeseen Circumstances: , health issues, Unforeseen circumstances provision maximum exclusion= full exclusion x months of qualifying ownership and use/24 months.

KNOW WHAT IS MEANT BY VESTING AND BE ABLE TO APPLY THE VESTING SCHEDULES TO DETERMINE EMPLOYEE BENEFITS FOR BOTH A DEFINED BENEFIT PLAN AND A DEFINED CONTRUBUTION PLAN

Vesting: Process of becoming legally intitled to receive a particular benefit without risk of forfeiture; gaining ownership. Vesting for Benefit plans: 2020 Annual compensation limit: $285000 Vesting for Contribution Plans: Employees involved are Fully vested in the accrued benefit from those contributions (employee contributions plus earnings on the contributions) If contribution plans do not maintain separate employee accounts, then you multiply the total accrued benefit in the account by the ratio of employee contributions to total contributions to the account. The remaining is the accrued benefit from employer contributions.

PURPOSE OF W-2 AND W-4

W-2: summarizes an employee's taxable salary and wages and various amounts withheld W-4: employee supplies withholding information to employer Remains constant unless employee changes

Understand the differences between the actual and the simplified methods for determining the home office deduction. Be able to calculate the home office deduction using each of these methods.

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UNDERSTAND WHAT IS MEANT BY NO-ADDITIONAL COST SERVICES, QUALIFIED EMPLOYEE DISCOUNTS, AND WORKING CONDITION FRINGE BENEFITS

no-additional-cost services: benefits that don't cost the employer a material amount qualified employee discounts: exclude discounts from income if goods at a discount < average gross profit percentage if services at discount < 20% working condition: exclude income any benefit or reimbursement of a benefit provided by an employer ex. Reimbursement for CPA fees telephones or computers provided to employees for business use