REG - Roger CPA
Standard Deduction
An amount a taxpayer may deduct from AGI in computing taxable income when deductions for certain personal expenses are not itemized, the amount of which depends on the taxpayer's filing status
Casualty loss claim after consideration of threshold limitations
(1) Differences in loss of FMV and tax basis of asset (2) Less: 10% of AGI (3): Less: $100 per casualty occurence(s)
Post-tax dollar calculation of purchase annuity:
(1) Expected Return = Frequency x Payment Amount x # of years (2) Exclusion Ratio = Investment / Expected Return (3) Excludable Portion = Current Year Payment x Exclusion Ratio (4) Taxable Portion = Current Year Payment - Excludable Portion
Determination of gross income
(A) Gross Income - (B) Statutory Exclusion = Gross Income for tax return (A) Section 61(a): All income from whatever source derived (B) Examples: Compensation for injuries; workers' compensation; gifts, inheritance; employee fringe benefits
When services are exchanged for cash and property, income will be measured at:
the amount of cash plus the fair value of property received
"FOR" AGI Adjustments
(*I EMBRACED H*ealth & *F*armers) Adjustments added to or subtracted from gross income in computing AGI, including deductions for interests on student loans, 50% self-*E*mployment tax, *M*oving expenses (military only), *B*usiness expenses (Sch. C), *R*ent/royalty & Flow-through entities (Sch. E)(S Corp, P/S, Trusts), *A*limony (pre-2019 divorces/separations), *C*ontributions to Retirement (IRA/Keogh), *E*arly withdrawal penalty, jury *D*uty pay, *H*ealth savings accounts (HSA) and *F*arm Income (Sch. F)
Calculation for Qualified Medical deduction
(1) AGI (2) Less: Limit deduction 7.5% of AGI
Alternative Minimum Tax (AMT) Calculation for Individuals
*AMT - Individuals* Regular taxable income +/- *Adjustments & Preferences (PLIERS)* = AMTI before exemption - Exemption *AMTI* X Tax rate (26%/28%) = Tentative minimum tax - Regular tax = *AMT*
With regard to the inclusion of social security benefits in gross income, what is true?
*Eighty-five percent* of the social security benefits is the maximum amount of benefits to be included in gross income
Alternative Minimum Tax Preferences include:
*P*rivate Activity Bond Interest *L*ocal/State/Prop Tax *I*ncentive Stock Option (when exercised) *E*xcess Depreciation (150DB not 200DB) *R*efund from state/local taxes *S*tandard Deduction
What is true regarding the deduction for self-employment taxes?
50% of self-employment taxes are deductible to arrive at AGI
Earned Income Credit
A "refundable credit" treated the same as a tax payment, it can result in a refund for taxpayer who has paid no income taxes. There are no carryovers of unused credits, since all will be used.
Unearned Income Medicare Contribution Tax (Surtax on Unearned Income)
A 3.8% surtax charged on the lower of the net investment income or modified adjustment gross income (MAGI) in excess of $200,000 for most taxpayers, $250,000 for married couples filing joint returns, and $125,000 for married filing separate
Inception of Lease (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 lat beyond the earlier of: • 12 months • The end of the tax year following the year the payment was made Otherwise, the prepaid expense must be capitalized and expensed ratably over the time period covered by the prepayment
What is correct regarding the deductibility of donations made to qualifying charities by a cash-basis individual taxpayer?
A charitable contribution deduction is *not* allowed for the value of services rendered to a charity
Qualifying Relative
A dependent *R*elative of the taxpayer, or someone who lived with the taxpayer for the entire year, provided certain qualifications are met: 1. Not a qualifying child of another taxpayer 2. *C*itizen of U.S., or resident of the U.S., Canada, or Mexico 3. *I*ncome for the year less than $4,200 for 2019 4. The taxpayer provided more than half of the cost of *S*upport 5. *J*oint return not being filed
Underpayment Penalty for Individuals
A penalty imposed on individual taxpayers who do not prepay a sufficient portion of their tax liability (through estimated payments or withholding) during the year, which results in a tax balance due of $1,000 or more. The penalty does not apply, however, if the taxpayer has paid in the lower of: • 100% of the prior year's liability (110% for certain high-income individuals), or • 90% of the current year's liability
What is correct regarding self-employment taxes?
A portion of the self-employment tax is equivalent to the *Social Security* tax paid equally by the employee and the employer on the employee's income, limited to a certain amount. The remainder represents payments for Medicare and are applied to all income without limitation. The amount of self-employment income that is therefore subject to the self-employment tax that is equivalent to Social Security is the amount of the limit reduced by any wages upon which the taxpayer has paid the Social Security tax through an employer. No such reduction is made for the Medicare portion.
What is excluded from gross income on an individual's year 4 tax return?
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.
Which payment(s) is (are) included in a recipient's gross income?
A scholarship or grant covering tuition, fees, or course materials is excluded from a recipient's gross income if the recipient is a degree candidate and if the amounts paid are not for services rendered by the recipient. Payments for teaching or for participating in research projects are for services, and are included in gross income.
In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes?
A taxpayer is allowed up to *$2,500* of interest on a qualified education loans to arrive at AGI for the year.
A taxpayer's spouse dies in August of the current year. What is the taxpayer's filing status for the current year?
A taxpayer may claim the most beneficial available filing status. If a taxpayer's spouse dies during the current tax year, the taxpayer may still file as married filing jointly for that year.
A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a six-month extension to file but did not file the return for 8 months. 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?
A taxpayer may deduct a contribution to a qualified retirement account if that payment has been made before the original tax return due date
Medical expense deduction (regardless of AGI threshold)
A taxpayer may deduct as medical expenses, subject to limitations, expenses paid on behalf of a dependent or spouse, including one that is deceased, as long as the individual qualified as a dependent or spouse either at the time the services were provided or at the time the payment was made. payment of medical expenses by credit card are considered to be paid by the taxpayer in the period in which they are charged to the credit card, not the period in which the credit card balance is paid.
Liability Surtax
AGI before adjustment Less: Single ($20,000) /Married Threshold ($40,000) : Excess of MAGI x Unearned Income Medicare Contribution Tax Rate : Liability Surtax
AMT Tax Preferences for Individuals
Additional items that are added to regular taxable income in computing AMTI due to their preferential tax treatment for regular tax purposes *(P)*: • *Private activity bond interest* is fully taxable (private activity interest). Private activity bonds are used to finance nongovernmental activities, such as industrial development, student loans and low-income housing • Excess Intangible Drilling Costs • Excess Percentage Depletion • Small Business Stock Gain Exclusions
Penalty for underpayment of estimated taxes
An individual is only subject to an underpayment penalty if the balance of tax due is greater than $1,000. The penalty may also be avoided by paying the lessor of 90% of the current tax liability or 100% of the prior year tax liability (110% if the current year taxable income is over $150,000).
An individual recently started operating a business as a proprietorship. In its first year of operations, the business had a taxable income. Assuming that the individual had no other employment-related earnings,
An individual operating as a sole proprietorship is considered self-employed. Earnings from a sole proprietorship are self-employment income that are subject to *self-employment tax*, which consists of Social Security and Medicare taxes.
What types of interest paid may generally be deducted as an itemized deduction?
Both investment interest expense, to the extent of net investment income, and mortgage interest are deductible as an itemized deduction for interest paid. Personal interest, such as interest paid on credit card debt, is not deductible. Student loan is deductible as an adjustment for AGI, not as an itemized deduction.
Tax treatment: Donation of gently used furniture and clothing
Charitable contributions are deductible is itemized deductions on Schedule A. Property donations are allowed up to a maximum of 50% of AGI, and any unused portion may be carried forward up to 5 years
Recognition on Gain of Primary Home Sale
No gain recognition if lived at residence at least two out of previous five years
What can result in a refund even if the individual had no income tax liability?
Earned income credit (refundable tax credit); when amount of a refundable credit exceeds a taxpayer's tax liability, the excess is refunded to the taxpayer, similarly to an overpayment of taxes through estimated payments or withholding
Regarding the tax treatment of a business's research and experimental (R&E) expenditures, what is true?
Companies generally prefer to expense R&E costs immediately, but may elect instead to defer and amortize such costs over a minimum of 60 months
Tax Treatment: Cost in excess of the increase in value of residence, for the installation of a stairlift, related directly to the medical care of the taxpayer
Costs of home improvements that are directly related to a medical condition of a taxpayer, the taxpayer's spouse, or a dependent, are deductible as medical expenses to the extent that they exceed the increase in the value of the home resulting from the improvement. As a medical expense, the costs are deductible on Schedule A as an itemized deduction and are reduced by 7.5% of AGI
How should a taxpayer treat the prepayment of interest for tax purposes?
Deduct the current year's interest and amortize the balance over the next remaining interest years
For a sole proprietor with no employees that has a Keogh profit-sharing plan to which he/she may contribute 15% of annual earned income. "Earned income" is defined as net self-employment earnings reduced by the
Deductible Keogh contribution and one-half of the self-employment tax; When a pension or profit-sharing arrangement specifies a percentage limitation on contributions, it is applied based on net self-employment income after deduction of all business expenses, as well as the one-half of the self-employment taxes that qualify as a deduction from gross income in arriving at AGI; and the Keogh contribution itself
Tax Treatment: Cash donation
Deductible in Schedule A - Itemized Deductions, subject to maximum of 60% of adjusted gross income
Tax Treatment: Payment in state income taxes
Deductible on Form 1040 to arrive at adjusted gross income; deductible in the year paid up to $10,000 per year (applies to all state and local taxes (ie, property, income, and sales taxes)
Tax Treatment: Penalty on early withdrawal of funds from a certificate of deposits
Deductible on Form 1040 to arrive at adjusted gross income; it is a reduction in the interest earned
Tax Treatment: Payment in real estate taxes
Deductible on Form 1040 to arrive at adjusted gross income; real estate taxes on the taxpayer's principal residence are deductible in the year paid up to $10,000 per year
General Business Credit
Designed to combine several tax credits, including the low-income housing credit, the alcohol fuel credit, and the targeted jobs credit. The purpose of the combination is to provide uniformity related to the deduction of the credit for the current, carryback, and carryover years.
What credits cannot be claimed by a corporation?
Earned income credit
With regard to the inclusion of social security benefits in gross income for the 20X3 tax year, what is correct?
Eighty-five percent of the social security benefit is the maximum amount of benefits to be included in gross income
Gross Income for Employer Service
Employer Service (1 - 20% nondeductible) - Employee Discount : Gross Income for Employer Service 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.
Itemized Deductions
Expenses incurred by a taxpayer that may be deducted "FROM AGI" on Schedule A, instead of the standard deduction when computing taxable income. The deductions include (*COmMITT*): *C*haritable contributions, *O*ther *m*iscellaneous (e.g., gambling losses), *M*edical & dental expenses (10%), *I*nterest, *T*axes paid, *T*heft or casualty loss (from federally declared disasters or to the extent of personal casualty gains).
What amount for payments should be reported as income for alimony paid?
Pre 2018: Alimony Payment x (1 - reduction by child support*) Post 2018: $0 income/deductible * IRS classified this as disguised child support For divorce decrees issued or modified after 2018, alimony is no longer taxable or deductible. Alimony paid pursuant to a divorce decree issued on or before December 31, 2018, is taxable income to the payee (and deductible by the payer) Also note: Alimony payments attributable to divorce/separation agreements finalized prior to 2019 remain deductible by the payer and includible in the recipient's income
AMT Tax Adjustments for Individuals
Income or expense items computed differently for AMT vs. regular tax; therefore, they can increase or decrease AMTI for purposes of computing AMT. These include (*LIERS*): • *Local and state and income taxes*, all property taxes, and sales taxes paid are not deductible • *Incentive stock options* are taxed when exercised for the difference between the exercise price and market price of the stock • *Excess depreciation on personal property* over 150% declining balance when double-declining balance was used for regular tax purposes • *Refunds of local and state taxes paid* that were included in income for regular tax purposes should be taken out of income for AMT purposes • *Standard deduction* may not be claimed if less than itemized deduction
Tax treatment: Prior year tax paid on current year's tax return
Federal income tax payments are not deductible
A cash-basis taxpayer should report gross income
For the year in which income is either actually or constructively received, whether in cash or in property
Pre-tax dollar calculation of purchase annuity
Full deductible amount
Tax Treatment: Loss on the sale of the family car
Gains from sale of personal assets, including the family automobile, are taxable as a capital gains. Losses on the sale of personal assets, however, are not deductible.
What would be subjected to self-employment tax by a farmer?
Gains on the sale of livestock raised for sale
Tax treatment: Gambling losses
Gambling losses are deductible to the extent of gambling winnings. While the winnings are included in AGI, losses, to the extent deductible, are treated as a miscellaneous itemized deduction on Schedule A
Tax Treatment: Health insurance premiums for hospitalization coverage
Health insurance premiums are deductible as a medical expense. As a result, they are deductible as itemized deductions on Schedule A and are reduced by 7.5% of AGI
What are included in determining the total support of a dependent?
I. Medical Expenditures paid on behalf of the dependent II. Fair rental value of dependent's lodging
Deductions allowed from illegal drug activities to arrive at taxable income
Income from illegal activities - Cost of goods sold = Taxable income Prohibit deduction of expense from: • Rental activities • Insurance • Interest • Office • Depreciation • Salaries Note: The all-inclusive approach for gross income includes income and gains from illegal and criminal activities (eg, sale of illegal drugs). Although all ordinary and necessary expenses incurred in operating a business are generally deductible, only the cost of goods sold is deductible for illegal drug activities
Acquisition Indebtedness Interest
Interest on qualified residence indebtedness up to $750,000 is deductible; debt used to buy, build, or substantially improve the home that secures the loan
Nondeductible personal interest
Interest receive that does not go to acquisition indebtedness (ex: secured home loan to buy new car)
Total amount of interest subject to tax in a return
Interest received on U.S. obligation and refund of overpaid prior-year income taxes
Deductions from self-employment income
Is the cost *ordinary* and *necessary* to operate the business? Yes: (1) Employees (wages and benefits) (2) Cost of goods sold No: (1) Benefits for sole proprietor Note: A sole proprietor's revenue less ordinary and necessary expenses is considered self-employment (SE) income, which is subject to SE tax. Although income tax adjustments are available for qualifying retirement contributions and health insurance premiums, costs for the benefit of a sole proprietor are not deductible from SE income because they are not necessary to operate a business
What best describes the effect of a tax credit?
It reduces a person's tax liability
Tax treatment: Amortization over the life of the loan of points paid to finance $150,000 mortgage at a lower rate on the taxpayer's new vacation home. Primary residence is paid off.
Loan points paid to finance a mortgage at a lower rate are amortized over the life of the loan. The amortization is treated as an adjustment to the mortgage interest expense, which is fully deductible for primary and secondary homes on Schedule A as an itemized deduction, so long as the loan is for acquisition indebtedness and the taxpayer's total acquisition indebtedness on the first and second homes does not exceed $750,000
Fringe Benefits
Non monetary forms of 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)
What form should hobby loss be report on?
None. Former to TCJA, hobby expenses could be deducted against hobby income and were reported on Schedule A as a Miscellaneous deduction subject to a 2% AGI floor. This treatment is no longer available. Hobby expenses are *no longer deductible*, although any related income still is taxable.
Tax Treatment: Premiums on personal life insurance policy
Not deductible; fair since the death benefits are not taxable
Tax treatment: One-half the self-employment tax paid
One half of the self-employment tax paid by a self-employed taxpayer is allowed as an adjustment for AGI on Form 1040
What can be used to claim an education credit?
Only *tuition* and *fees*; Education credits, which include the American Opportunity Tax Credit and the lifetime learning credit, are associated with tuition and fees paid to qualified educational institutions. They do not take into account amounts paid for room and board or meals.
Are state tax refund always included in gross income?
Only if the prior year option was itemized deduction instead of standard deduction for the taxpayer(s)
What deductions for taxes paid may be taken in the same year?
Real estate taxes, property taxes, state income taxes Deductible taxes include real estate, personal property, and state income taxes. State sales taxes are deductible in lieu of state income taxes, but they may not be deducted in the same year.
Debt Cancellation
Recognized income = forgiven debt - adjusted basis; unless excluded by law, cancelled (forgiven) debt is subject to income tax. The taxpayer's recognized income equals the cancelled debt reduced by the adjusted basis of property repossessed to settle the debt
The term active participation for a passive activity loss is relevant in relation to
Rental real estate activities
Gain/Loss as a result of Property Sale
Sales Price - Cost of Property : Gain on Sale - Suspended Loss : Gain/Loss Passive activity losses are deductible to the extent of passive activity income. Unused losses are suspended and carried forward to offset future passive income. If the entire interest in the activity is sold, any current loss and suspended loses are used to offset any type of income.
Tax Filer
Someone required to file a tax return because their income is higher than their standard deduction, or someone who has net self-employment of at least $400; is claimed as a dependent and has gross income over the standard deduction for a dependent; is receiving advanced Earned Income Credit (EIC) or Premium Tax Credit (PTC) payments; or is subject to the Kiddie Tax
Nonrefundable Tax Credits
Tax credits that may be used to reduce taxes and, when in excess of the tax liability, may be carried back or forward, depending on the provisions of the credit, but may not reduce the tax liability below zero. Example include: • Dependent Care Credit • Lifetime Learning credit • Credit for Elderly or Disabled • Family Tax Credit • Foreign Tax Credit • Retirement Savings Credit • Adoption Credit
Refundable Tax Credits
Tax credits that may be used to reduce taxes and, when in excess of the tax liability, may reduce the tax liability below zero, resulting in a refund to the taxpayer. Examples include: • Child Tax Credit • Earned Income Credit (EIC) • Additional Tax Credit • American Opportunity Credit (40%)
Determination of Tax Refund or Tax Due
Taxable Income x Tax Rate (or amount from tax tables) : Income Tax Liability + Self-Employment Tax + AMT - Tax Credits - Federal Income Withheld - Prepayments (Est. Payments) : Tax or Refund Due
Alternative Minimum Tax (AMT) for Individuals
Taxes an individual taxpayer may be required to pay, in addition to the regular income tax, when taxable income includes certain items that qualify for preferential tax treatment, or when it has been reduced by certain deductions. It is the excess of the tentative minimum tax over the regular income tax
Constructive Receipt
Term used to describe the date on which a cash basis taxpayer has become made available for use, which is the date on which it is considered received for tax purposes
What conditions would cause a business to be considered a non-passive activity?
The business must materially participate in the business. This determination is based on the seven tests for material participation outlined in Regulation 1.469-5T. One of the seven tests is the individual participates in the activity for more than 500 hours during the year.
A business owner started operating a flower shop as a proprietorship. In its first year of operations, the shop had a taxable income of $60,000. Assuming that the business owner had no other employment-related earnings:
The business owner will be exempt from self-employment taxes for the *first three years of operations*
What is neither a refundable tax credit nor a credit that can be carried forward?
The child and dependent care credit is limited to actual expenses, earned income, or a dollar limitation and is neither refundable nor subject to carry forward
What credit is not refundable?
The child and dependent care credit, available to taxpayers who require care for a child or disabled dependent to be gainfully employed, is not a refundable credit.
Tentative Minimum Tax
The minimum amount of tax that must be paid by a taxpayer based on multiplying the alternative minimum taxable income (AMTI) by 26% up to a certain amount, and 28% on the excess
Income with respect to an S corporation on a taxpayer's gross income
The taxpayer report shares on reported partnership income without regard to distributions
Qualifying Widow(er) with Dependent Children Filing Status
To qualify, taxpayer must meet the following criteria: • Spouse died in prior 2 years and taxpayer qualified to file a joint return in year of death • Taxpayer provided over 50% of cost of maintaining a principal residence of dependent child • Taxpayer must not be remarried as of end of year A taxpayer may file a tax return as a qualifying widow or wider for 2 tax years after the year inw which a spouse dies provided the couple qualified to file a joint return for the year of death; that the taxpayer provided over 50% of the cost of maintaining the principal residence of a dependent child or stepchild; and that the taxpayer has not remarried as of the end of the current year. Maintaining the cost of the taxpayer's principal residence for six months is not sufficient.
Head of household (HOH) Filing StatusWhat de
To qualify, taxpayer must: • Be unmarried, and • Maintain a home as the principal place of residence for over 50% of the year and provide more than 50% of costs of maintaining a household for a dependent: ○ "Qualifying Child" ○ "Qualifying Relative", including uncles/aunts, nephews/nieces, adult siblings or children, or certain step-relatives and in-laws. Dependent relatives further removed and unrelated persons do NOT qualify a taxpayer for HOH ○ Exception: Dependent parents need not live with the taxpayer
For head of household filing status, what costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household?
Uncompensated and untaxed value of services rendered is not considered in determining whether the taxpayer has contributed more than one-half of maintaining a household, but the cost of food consumed in the home is considered
What costs associated with products must be capitalized rather than expensed on Schedule C under Uniform Capitalization Rules?
Under the Uniform Capitalization Rules, costs required to be capitalized will include: *Preproduction costs* such as design, bidding, and purchase expenses; *Production costs* such as direct materials, direct labor, and other direct production costs, and indirect production costs; *Presale costs* such as storage, handling, and some excise taxes
Tax treatment: Union dues
Union dues are considered an employee expense and are not deductible for 2018 to 2025
Deductible Passive Activity Loss Calculation
Up to maximum amount of: (Passive Activity Loss / Sum of Passive Activity Loss) x (Passive Activity Loss + Gain)
Early Withdrawal Penalty Calculation
Use Marginal Tax Rate + 10% Penalty on early withdrawal
Upon retirement, an employee receives pension benefits in the form of an annuity that was paid for entirely by the employer. The portion of the benefits received that may be excluded from income is:
When a pension benefit is in the form of an annuity that has been paid for entirely by the employer, no portion is excluded from income
Recognition rules for cash basis taxpayers: Recognition of Income
When cash or property is actually or constructively received
Married Filing Jointly (MFJ) Requirements
• Be considered married • Agree to file a joint return • Have the same tax year • Be U.S. citizens or residents aliens (eg, green card holders) for the entire tax year Taxpayers may file married filing jointly (MFJ) if they are considered married as of the last day of the tax year, agree to file a joint return, have the same tax year, and are either U.S. citizens or resident aliens for the entire tax year (with exceptions). Spouses with different accounting methods (eg, cash, accrual) may file MFJ if they may these criteria.
Classification of income for passive activity loss rules: Activity Income
• Earned income (Eg, wages, commissions, bonuses) • Profit from a trade or business in which taxpayer materially participates • Gain on the sale of assets used in active trade or business • Income from intangible property if personal efforts significantly contributed to its creation
Classification of income for passive activity loss rules: Portfolio Income
• Most interest, dividends, annuities, and royalties • Gain from disposition of property that produces portfolio income
Qualifying Child
• No *J*oint Return w/ spouse, unless filing only to get a refund • *A*ge - Unless disabled, a child must be: ○ Under age 19, or 24 if a full-time student for at least 5 months of the year, and ○ Younger than the taxpayer or spouse • *R*elationship - Taxpayer's child, stepchild, foster child, sibling, half sibling, or a descendant of any such individual • *R*esidency - Child must live with the taxpayer more than half the year in the U.S. • *S*upport - Child must NOT have provided more than 50% of their own support, not including scholarships
Which type of taxpayers may use the cash method of accounting?
• Service businesses with gross receipts of $10M or below including most individuals, S corporations, and individually owned partnerships • A qualified personal service corporation
Classification of income for passive activity loss rules: Passive Income
• Trade or business activities in which taxpayer does not materially participate (eg, partnerships, S corporations) • All rental activities, even if taxpayer materially participates (exception for real estate professionals)
Recognition rules for cash basis taxpayers: Recognition of expenses
• When cash is paid or check is disbursed • When charged to a credit card
