When should a cash basis taxpayer report income?
A cash basis taxpayer should report income in the year in which income is either actually or constructively received, whether in cash or property.
State the basic tax formula.
- Gross income
- Less Deductions FOR AGI
- Adjusted gross income
- Less Deductions FROM AGI
- (greater of itemized deductions or standard deduction)Less Exemptions
- Taxable income
- X Tax rate
- Gross tax liability
- Less Credit and prepayments
- Total due or refund
Identify the due date and extension available for individuals.
Due date: April 15
Extension: Form 4868 - Automatic 6 months
Identify the various filing statuses.
- Married, filing joint
- Married, filing separately
- Head of household
- Qualifying widow(er) with dependent child
What are the criteria for filing single?
- 1).Unmarried or legally separated from spouse
- 2).Does not qualify for another filing status
What are the criteria for filing married filing joint?
- At year-end of tax year:
- 1).Married and living together as husband and wife, or
- 2).Living together in a recognized common law marriage, or
- 3).Married and living apart but not legally separated or divorced.
What are the criteria for filing married filing separately?
- At year-end of tax year:
- 1).Married, and
- 2).If one spouse wants to be responsible for own tax, or
- 3).If both spouses do not agree to file a joint return.
What are the criteria for filing head of household?
- 1). Individual is not married, legally separated or is married and has lived apart from his/her spouse for the last six months of the year
- 2). Individual is not a "qualifying widower"
- 3). Individual is not a nonresident alien.
- 4). Individual maintained a home that, for more than half the taxable year is the principal residence of a:
- a). Son or daughter who is a qualifying child or qualifies as the taxpayer's dependent (qualifying relative);
- b). A dependent relative who resides with the taxpayer; or
- c).A dependent father or mother, regardless of whether they live with the tax payer.
What are the criteria for filing qualifying widow(er) (surviving spouse)?
- 1). Unmarried at end of tax year, and
- 2). Surviving spouse must maintain a household, which for the entire taxable year was the principal place of abode of a son, stepson, daughter, or stepdaughter, and
- 3). The surviving spouse is entitled to a dependency exemption for the son, daughter, etc.
The taxpayer qualifies for this status for two years after year of death of spouse.
Name the tests for claiming an exemption for a "qualifying child."
A taxpayer is entitled to an exemption for each qualifying child and/or qualifying relative.
- QUALIFYING CHILD
- Close relative
- Age limit (19/24) and younger than the taxpayer
- Residency and Filing requirement
- Eliminate gross income test (exemption required)
- Support test changes
Name the tests for claiming an exemption for a "qualifying relative"
A taxpayer is entitled to an exemption for each qualifying child and/or qualifying relative.
- QUALIFYING RELATIVE
- Support (Over 50%) test
- Under the personal exemption amount of (taxable) gross income test
- Precludes dependent filing a joint tax return test
- Only citizens (residents of USA/Canada or Mexico) test
- Relative test
- Taxpayer lives with individual for the whole year test
What are the requirements for a multiple support agreement?
- 1). Two or more people together provide more that 50% of support, but no one contributes more than 50%.
- 2). To claim the exemption, must provide more than 10% of support, and meet the other dependency tests.
- 3). A multiple support declaration, Form 2120, must be filed.
Define gross income.
Gross income includes all income from whatever source derived, usless specifically excluded.
What are the four categories of individual income?
- Categories of Individual Income:
- 1). Ordinary (wages, salaries)
- 2). Portfolio (dividends, interest)
- 3). Passive (real estate investment and limited partnership Income
- 4). Capital
Name some nontaxable fringe benefits (exclusions)
- De minimis fringe benefit
- Qualified tuition reduction
- Qualified employee discounts
- Employer paid accident, medical and health insurance
Unless specifically excluded by law, the fringe is includible in gross income.
Are life insurance premiums paid by an employer taxable to the employee?
Premiums on the first $50,000 (face amount) of group-term life insurance are not includible in gross income. Premiums paid for coverage above $50,000 should be included in gross income.
Give some examples of exempt interest.
- Exempt interest examples:
- State and local government bonds.
- Bonds of a US possession
- Series EE (US Savings Bond) if used for higher education
- Interest on Veterans Administration insurance
What is the tax treatment of unearned income of a child who falls under the "Kiddie tax" rules?
Net unearned income of a dependent child who falls under the "Kiddie tax" rules is taxed at his parent's higher tax rate.
Net unearned income = Child's total unearned income less the child's standard deduction of $950 (in 2010) (or investment expenses, if greater) less an additional $950 (which is generally taxed at the child's rate of 10% or 15%)
State the tax treatment of property settlements in a divorce.
For a property settlement in a divorce, the transferring spouse gets no deduction for payments made (or property transferred), and the payments are not includible in the gross income of the spouse receiving the payment of property.
What are the requirements for alimony to be deductible by the paying former spouse and includible by the recipient?
- 1). Payments must be legally required pursuant to a written decree
- 2). Payments must be in cash
- 3). Payments cannot extend beyond death of payee
- 4). Payments cannot be made to members of same household
- 5). No joint tax return filed
Before alimony is taxable by the recipient, any child support due must be paid.
Describe the self-employment tax.
- 1). All net self-employment income is subject to the 2.9% Medicare tax, but only self-employment income up to $106,800 (in 2010) is subject to the 12.4% Social Security tax.
- 2). An adjustment to income for one-half (e.g. 7.65% on up to $106,800 self-employment income for 2010) of self-employment tax (Medicare plus Social Security) paid.
On what property do the uniform capitalization rules apply?
- Real or tangible personal property produced by the taxpayer for use in his trade or business
- Real or tangible personal property produced by the taxpayer for sale to customers (manufacturer's inventory)
- Real or tangible personal property purchased by the taxpayer for resale (retailer's inventory)
: The uniform capitalization rules do not apply to (retailer's inventory) property purchased for resale if the taxpayer's gross receipts for the preceding three tax years do no exceed $10,000,000 annually.
When are funds in a nondeductible IRA taxable?
Withdrawals from Nondeductible IRA's are partially taxable.
When withdrawn, amounts previously contributed (principal) are nontaxable. Any earnings on those contributions are taxable when withdrawn.
A pro-rata allocation is generally applied to the distribution to determine the taxable amount.
What is the formula to determine the excludible portion of an annuity?
- Excludible amount in current year =
- Investment in contract
- Age factor (in months)
Note: If the annuitant lives longer than the factor in months, further payments are fully taxable. If the annuitant dies before the factor payments are collected, the unrecovered portion of the investments is a miscellaneous itemized deduction on the annuitant's final tax return (not subject to the 2% limitation)
In premature distributions of an IRA, what are the exceptions to the penalty tax?
- Home buyer (1st time): $10,000 max if used toward first home (within 120 days)
- Insurance (Medical)
- Unemployed with twelve consecutive weeks of unemployment compensation
- Self-employed (who are otherwise eligible for unemployment compensation)
- Medical expenses in excess of 7.5% of AGI
- Education: College, tuition, books, fees, etc.
How is rental income from a vacation house treated?
- 1). If rented less than 15 days: Treat like personal residence.
- 2). If rented more than 15 days and personal use is not more than 14 days or 10% of days rented, if greater: Treat as rental property.
- 3). If rented more than 15 days and personal use is greater than 14 days or 10% of days rented: Allocate rental expenses to extent of rental income.
If treated as personal, income is excluded and deductions for mortgage interest and taxes are reported on Schedule A. Other expenses are not deductible.
If the vacation property is treated as a rental property, the taxpayer reports income and deductions on Schedule E.
Define passive activity. Give some examples of passive activities.
A passive activity is any activity in which the taxpayer does not materially participate.
Rental activities, interests in limited partnerships, and S corporations are examples of passive activities.
What is the tax treatment of nondeductible passive activity losses?
- Nondeductible passive activity losses are unused passive activity losses that are held in suspension.
- Used to offset passive income in future years (indefinitely)
- Fully tax deductible in the year the property is disposed of (e.g. sold)
What are the rules to determine taxable Social Security benefits?
Taxpayers are classified into five categories depending on the level of provisional income which is defined as AGI plus tax-exempt interest plus 50% of Social Security benefits.
- Low income - No SS benefits are taxable
- Lower middle income - Less than 50% of SS benefits are taxable
- Middle income(over $25,000-S, Over $32,000-MFJ) - 50% of SS benefits are taxable
- Upper middle income - Between 50% and 85% of SS benefit is taxible
- Upper income(over $34,000-S, over $44,000-MFJ) - 85% of SS benefits are taxable.
Are scholarships and fellowships includible in gross income?
For a degree seeking student. scholarships and fellowships are excludible up to the amounts spent on tuition, fees, books, and supplies. All remaining amounts are includible in gross income.
For nondegree-seeking students, all amounts are includible in gross income.
What are the tests for foreign-earned income exclusion?
- Tests for foreign-earned income exclusion:
- 1). Bona fide residence test (an entire taxable year)
- 2). Physical presence test (330 full days out of 12 consecutive months)
List some nontaxable miscellaneous income items (exclusions)
- Examples of non-taxable miscellaneous income items:
- Life insurance proceeds
- Gifts and inheritances
- Medicare benefits
- Workers' compensation
- Personal (physical) injury or illness award
- Accident insurance-premiums paid by taxpayer
- Foreign earned income exclusion
What is the tax treatment of capital gains/losses?
Net capital losses are deducted up to a maximum of $3,000 per year. Any excess can be carried forward.
Capital gains are fully taxable (but at lower tax rates).
- Holding period:
- Short-term - one year or less
- Long-term - more than one year
In general, how is the donee's basis of a gift determined? How is the holding period determined?
- In general, the donee's basis of a gift is the same as the donor's basis.
- If the sale is at a loss, the basis is the lesser of the donor's adjusted basis of FMV at date of gift.
- If the sale is at less than basis but greater than FMV, no gain or loss is recognized.
- The holding period is the donor's holding period unless basis becomes FMV, then holding period starts at date of gift.
In general, how is the basis of inherited property determined (for years other than 2010)? How is the holding period determined?
- The basis of inherited property is the LOWER of the:
- 1). FMV at date of death, or
- 2). FMV at alternate lower valuation date (if ELECTED), which is:
- - 6 months from date of death, or
- - Disposal date (if disposed of less than six months from date of death)
The holding period is automatically deemed long-term for all inherited property, regardless of how long the deceased owned the property.
When is a gain not taxed?
- Homeowner's exclusion
- Involuntary conversions
- Divorced property settlement
- Exchange of like-kind business/investment assets (tangible)
- Installment sale
- Treasury and capital stock transactions (by corporation)
- Gains are not taxed when you can:
- HIDE IT
Identify the major tax provisions of involuntary conversions of property?
Gain may deferred if insurance proceeds are reinvested in property that is similar or related in service or use within 2 years for personal property or 3 years for business property.
- A realized gain exists when insurance proceeds are greater than the adjusted basis in the converted property. Note the difference between realized gain versus recognized gain:
- 1). Gain not recognized if proceeds reinvested in qualified replacement property.
- 2). Basis is cost of replacement property less any gain not recognized.
- 3). Losses recognized and basis is replacement cost.
Holding period includes period that original property was held.
What is the exclusion amount on the recognition of gain on the sale of personal residence, provided the criteria for exclusion are met?
- Gain exclusion for personal residence:
- $250,000 for single taxpayers
- $500,000 for married taxpayers
Identify the criteria for the exclusion provision on the sale of personal residence.
- Taxpayer must have owned and used the property as the principal residence for two years or more during the five-year period ending on the date of the sale or exchange. Period of non-qualified use cause a portion of the gain to be taxable (sales/periods after 2008)
- Either spouse for a joint return must meet the ownership requirement, and both spouses must meet the use requirement with respect to the property.
- Taxpayers may be eligible for a partial (on a prorated basis) exclusion in the sale is due to change in place of employment, health, or unforeseen circumstances, when claimed within the previous 2 years or fail to meet the ownership and use requirements.
- No age requirement
- No rollover to another house is required.
- Renewable, can be utilized more than one time.
Name the criteria for a classification as a like-kind exchange.
- Like-kind exchange criteria:
- Tangible real or personal property, and
- Used in trade or business, or
- Held for investment (except inventory, stock, and securities)
In a like-kind exchange, what is the basis of the property received?
In a like-kind exchange, the basis of property received retains the basis of property given up.
- Basis of property given up
- + Any boot paid
- - Any boot received (at FMV)
- + Any gain recognized
- Basis of property received
Recognize gain to the extent of the lower of the realized gain or the boot received.
Identify the nondeductible losses.
- Wash sale loss
- Related party transactions
- Personal loss
"WRAP" up these losses, because they are not deductible
What is the tax treatment given to wash sales?
- Losses are disallowed is the same security is bought within 30 days defore or after the sale.
- The disallowed loss increases the basis of the property (security)
- Gains are taxable.
What is the tax treatment for sales to related parties?
- No deduction is allowed for losses on sales to related parties.
- On a later resale, any gain recognized is reduced (but not below zero) by the previous disallowed loss.
What are the corporate capital gain/loss rules for C Corporations?
- Net capital gain (long-term and short-term)
- - Corporate net capital gains are added to ordinary income and taxed at the regular tax rate.
- - Section 1231 gains are entitled to capital gain treatment.
- Net capital losses (long-term and short-term)
- - Corporate net capital losses are carried back three years and forward five years as short-term capital loss.
- - They are deducted from capital or section 1231 gains.