CPA REG

What is the individual tax formula?

What are the itemized deductions?

MTICCM

Medical

Taxes (state + local)

Interest expense (home + investment)

Charitable contributions

Casualty/theft loss attributable to federal or state declared disaster

Miscellaneous - educator

Who must file?

A taxpayer if their income is greater than:
- The standard deduction PLUS

the additional stadard deduction for taxpayers 65 or older

When to file? Extension? What does this mean for payments?

April 15

15th day of the 4th month after the taxable year close

• Auto 6 month extension to October 15

• NOT an extension for payment of taxes

What are the filing statuses? Criteria to be eligble

QSS:

• _ years after spouse’s death

• Pay over __ the cost of maintaining a housewhole where a dependent child lives for the _ taxable year

• Dependent child CANT be a ___

1. Single - everything else

2. Married filing separately - don’t want to talk to other person + protect from tax liability

3. Married filing jointly

4. Qualifying surviving spouse

• 2 years after spouse’s death

• Pay over half the cost of maintaining a household where a dependent child lives for the whole taxable year

• CANT be a foster child

4. Head of Household

• Separate flash

Head of Household criteria

• Individual ____

• Pay over __ the cost for more than __ the taxable year

• Qualifying person + requirement to live with

• Individual unmarried

• Pay over half the cost of maintaining a household of a qualifying person for more than half the taxable year

• Qualifying person: Dependent child + relative (must live with), parent (not required to live with)

Qualifying Child criteria

CARES

Close Relative - child, foster, sibling

Age limit - younger than taxpayer + under age 19 (or age 24 if full-time student). No age limit if disabled

Residency - same residence for more than half the year

Eliminate gross income

Support test - qualifying child can’t contribute more than half their support. Scholarships not included

Qualifying Relative criteria

SURT

Support test - taxypayer must have supplied more than half the support

Under a specfic amount of gross income/ taxable income - $5,300

Relative test - children, parents, siblings, foster

Taxpayer lives with individual for the whole year

What is the rule for qualified children of divorced parents?

What about support?

What about equal custody?

• Parent who has custody for the greater part of the year - claim as dependent

• Does not matter whether that parent has provided more than half the support

• If equal custody, parent with higher AGI will claim tax benefits

A married taxpayer who has lived apart from his or her spouse for the last six months of the year and maintains a household where a dependent child lives for more than half the year qualifies for which filing status?

Head of household

If your spouse dies this year what filing status?

MFJ

Income is determined as…

In the case of noncash income

• Cash, property (FMV) or services obtained

• Noncash income → FMV of property/services received

In order to be taxable, a gain must be…

• Realized - change in form eg sale

• Recognized → gain must be included on the tax return

Eg if a stock appreciates, you need to sell it to tax the gain

When is revenue recognized for taxes?

• Recognition occurs in the period the revenue is actually or constructively received in cash or FMV or property

Is life insurance premiums included in gross income?

• Not income for the first 50k of coverage

• Premiums above 50k are taxable income

What are de minimus fringe benefits? Included in income?

What about meals + lodging?

• Benefits that are so minimal that they are impractical to account for + excluded from gross income

• Meals not included in gross income if on the employer’s premisis

• In order to be nontaxable, the lodging must be required as a condition for employent. Eg firefighters

Is employee’s educational expenses included in gross income?

What about adoption?

• Up to 5250 may be EXCLUDED from gross income

• Can exclude up to 17670 of adoption expenses. Phase out

Don’t need to memorize these numbers

Is dependent care assitance included in gross income?

Amount

Either:

• Children under age _

• _ or _ that is disabled

• Employees can exclude 7500 for qualifying dependents:

  • Children under age 13

  • Spouse or dependent that is disabled

What is the qualified tuition reduction?

• Grad students may only exclude if:

• Employees of educational institutions studying at the undergrad level may excludee tuition reductions from income

• Grad students may only exclude if:

  • They are engaged in teaching or research

  • Tuition reduction is in addition to pay for teaching or research

Merchandise v service discounts

• Employer parking

• Transit

• Merchandise → discount limited to % of gross profit. Excess reported as income

• Service → discount limited to 20% of the FMV of services. Excess reported as income

• Parking → up to 340 a month may be excluded

• Transit → up to 340 a month may be excluded

What interest is taxable?

Nontaxable?

When:

• Used to pay for __ __

• Taxpayer over __ when bond is issued

• __ requirements

• Phase out?

• Federal bonds

• Fed or state for late payment of a tax refund

Nontaxable:

• State + local bonds

• US Series EE Savings bonds when:

  • Used to pay for higher education

  • Taxpayer over 24 when bond is issued

  • Income requirements

  • Phase out
    
    

When a taxpayers uses bonds to pay for a child’s education, bonds must be…

… registered in the taxypayer’s name

Taxable dividends?

Qualified dividends?

Holding period?

What tax rate?

• Distributions of a corp’s earnings

• Domestic investments

• Held for more than 60 days during 120 day period that begins before the dividend declared

• Preferred rate

Nonqualified divdends?

Taxfree distributions?

• Employee stock ownership plan (ESOP)

• Investment income

• Return of capital

• Stock split

• Stock dividend

• Life insurance dividend

• Capital gain distribution

Types of IRA distributions taxable or non? Principal v earnings

Taxpayers required to start taking minimum distributions when?

April 1 of year after taxpayer is 75

What is a qualified distribution from a Roth IRA?

Made at least _ years after the first day of the year which taxpayer made their first contribution

One of the following

• Made at least 5 years after the first day of the year which taxpayer made their first contribution

One of the following:

• Taxpayer age 59.5+

• Disabled

• First time homebuyer + uses distribution to purchase a home

• Distribution made to a beneficiary after taxpayer’s death

A premature distribution from an IRA is subject to?

Exception to tax

A 10% penalty tax

HIM DEAD TED

What is a Trump account? Criteria

Earnings are taxed at ___ tax rates when distributed

• Tax-deferred investment account for children under age 18 with valid SSN

• No distributions allowed until beneficiary turns age 18

• Ordinary

What is an annuity?

2 Types?

Each payment consists of? Taxable v non

• Contract between a taxpayer and an insurance company where taxpayer contributes a lump sum + receives regular annuity payments over time

1. Fixed → payments received over a fixed period of time

2. Life → payments received over lifetime

• Return of investment → nontaxable

• Earnings → taxable

For a fixed period annuity, what is the expected value of the annuity?

Annuity exclusion ratio?

Taxable portion of each?

Expected value = Amount of each payment x number of payments

Annuity Exclusion Ratio = Original investment / expected value

Taxable portion = Annuity exclusion ratio x monthly payment

How to determine taxable portion for life annuity payments?

If the taxpayer lives longer than expected

If they die before

• Use IRS life expectancy tables

1. Nontaxble = original investment / IRS factor

2. Taxable portion = payment - nontaxable

• Entire amount of additional payments received are taxable

• Remaining unrecovered portion is deducted on the taxpayer’s final return

Is interest paid by the state on a late refund taxable?

1. Itemized in prior year

2. Standard deduction in prior year

1. Taxable

2. Nontaxable

Alimony gross income?

Requirements?

• Before December 31, 2018, alimony included in gross income by recipient + deduction by the payor spouse

• After, alimony NOT included in gross income, not deducted

• Divorce agreement

• Cash only

• Can’t be designated as anything other than alimony

Is child support taxable?

If payments aren’t enough for child support + alimony what is the priority order?

What about property settlements?

• Nontaxable to recipient + nondeductible to payor

• Child support then alimony

• Nontaxable + nondeductible

1040 Schedules

A → Itemized deductions

B → interest + dividends

C → Self Employed Net Income

D → property disposals

E → rental real estate, royalites + flow through income

K → Entity’s total income

Is unemployment compensation taxable?

What about social security?

Taxpayer must include in income the lesser of:

Yes

Taxpayer must include in income the lesser of:

• 50% or 85% of social security benefits received; or

• 50% or 85% of MAGI (AGI + Tax exempt interest + 50% of social security benefits

What adjustments to AGI to get MAGI?

AEIOU

Adoption exclusion

EE bond income

IRA

Out of US income

University student loans

Prizes + Awards

• FMV → taxable income

• Exclusion applies when the winner:

  • Is selected for the award without entering the contest

  • Assigns award directly to a governmental unit or charity -
    
    

Gambling winnings + losses taxable income?

Losses deductible on schedule _

• Limited to __ % of losses

• Only allowed to extent of

• Carry forward?

• Winnings included

• Losses deductible on schedule A as an itemized deduction

  • Limited to 90% of losses

  • Only allowed to extent of gambling winnings

  • Can’t be carried forward

Punitive damages taxable?

• Taxable if received:

  • In business context; or

  • Loss of personal reputation

Cancellation of debt taxable?

Exceptions

• Yes

• Death

• Bankruptcy

• Gift or inheritance

Scholarships taxable? Excluded if:

• __ student

• No __ performed to receive

• Only spent on…

Degree v non degree

What about tuition reductions? Grad assistants taxed if…

Excluded if:

• Degree-seeking student

• No services are performed to receive

• Only spent on tuition, books + supplies

• Non-degree → taxable

• Tuition reductions → grad assistants taxed if it’s their only compensation

Life insurance proceeds taxable?

Medicare?

Workers comp?

Personal injury?

Accident insurance?

• Excluded from gross income

• Interest taxable

EXCLUDE

What is the foreign earned income exclusion?

But must pass _ tests:

• Taxpayers may exclude gross income from foreign earned income up to 132,900

But must pass 2 tests:

1. Bona Fida Residence →. lives in a foreign country for an entire taxable year

2. Physical presence → 330 days out of a year

Schedule C Business interest expense deduction

Limited to the sum of:

Can prepaid be deducted?

Limited to the sum of:

• Business interest income;

• 30% of adjusted taxable income (EBITDA); and

• Floor plan financing interest expense (debt used to acquire motor vehicles held for sale where debt secured by inventory)

• Prepaid can’t be deducted until the period in which interest relates

Nondeductible expenses on schedule C

• Salaries paid to ___ __

• __ __ tax

• __ __ of meal expenses

• __ contributions

• Salaries paid to sole proprietor

• Federal income tax

• Personal portion of meal expenses

• Charitable contributions

How to calculate the self employment tax?

SE tax on 92.35 of self employment income

15.3% tax

What to do with hobby losses?

For vs not for profit

What about incomes?

• If an activity has profit for 3/5 years, activity is for profit

• If not for profit, can’t deduct expenses

• Still required to include revenue as taxable income

What are the 3 different rental situations?

1. Rental of your house for less than 15 days

   1. Rental income excluded from income

2. Rental of your house for more than 15 days

   1. Expenses prorated between personal + rental use

   2. Expenses deductible only to extent of rental income

3. Rental of property that you never use → true rental

How are guaranteed payments to partners vs distributions treated on the K1? Taxable income

Guaranteed payments to partners → business expense that reduce income

Separately stated item on the K1

Distributions → not taxable income

Partnership is taxed regardless of whether there’s a distribution

Owner’s share of ordinary business income partnership v s corp → is it self employment income?

Partnership → if actively involved → self employment income

If not actively involved → not self employment income

S corp → active or not → not self employment income

What is the tax basis loss limitation?

Carry forward?

• A loss can only be flowed through an individual’s income tax return + deducted to the extent of the owner’s tax basis

• Loss carried forward indefinitely

What is the excess business loss limitation?

NOLs? Different dates

• Taxpayers can’t deduct an excess business loss

1. NOL prior to 2018 → carried forward 20 years. Can offset 100% of future taxable income

2. 2018-2020 → 100% taxable income + carried forward forever

3. NOL 2021 → carried forward forever. 80% of taxable income

Adjustment FOR AGI

SMASSSH A PIE

Student loan interest deduction

Moving expenses

Alimony paid

Self-employment tax deduction

Self-employed health insurance deduction

Self-employed retirement plan contribution

Health savings account deduction

Attorney fees

Penalty on early withdrawal of savings

IRA contribution deduction

Educator expenses

Educator expenses? What type of AGI?

• What level of eduction? How many hours in a school year?

• Qualified expenses?

FOR AGI

Can deduct up to $350 of qualified expenses

• Kindergarten through grade 12 teacher at least 900 hours during a school year

• Qualified expenses → books, supplies etc

Student loan interest expense.

What type of AGI?

Limited to

Phase out?

• FOR AGI

• Limited to $2500

• Phase out

What is a health savings account?

Make contributions → get a __ on your tax return

Enable workers with __ __ health insurance plans to make pretax contributions

Distributions not used to pay qualified medical expenses are:

• Includable in __ __

• Subject to an additional __% tax

HSA → tax-advantaged savings account for qualfiied medical expenses

• Make contributions → get a deduction on your tax return

• Enable workers with high deductible health insurance plans to make pretax contributions

Distributions not used to pay qualified medical expenses are:

• Includable in gross income

• Subject to an additional 20% tax

What are Archer Medical Savings account?

__ __ individuals

Employees of ___ ___

High ___ health insurance plans

How are they compared to HSAs?

• Self employed individuals

• Employees of small businesses (fewer than 50 employees)

• High deductible health insurance plans

• Archer less flexible

When are moving expenses deductible?

• US military

Which IRA is a FOR AGI deduction?

• Deductible traditional IRAs

Describe:
Self-employment tax deduction

Self-employed health insurance deduction

Self-employed retirement plan contribution

• ½ employer portion of tax → adjustment FOR AGI

• Health insurance → can deduct all

• REtirement → max amount they can contribute yearly depending on the plan

What are the types of self-employed retirement plans? Max contributions

Simplified employee pension (SEP) IRA:

• Max employer contribution is the lesser of:

  • 20% of net income from self employment after the deduction for self employment tax

  • 72k

Savings Incentive Match Plan for employees (SIMPLE) IRA:

• Max employee or employer lesser of:

  • 100% of employee’s compensation

  • 17k

Solo 401k

• Only available for self employed taxpayers with no full time employees

• Max is the lesser of:

  • 20% of net income from self employment reduced by the deduction for ½ of self employment tax

  • 72k

Who receives an additional standard deduction?

65+ or blind

What is the standard deduction for the dependent’s of another?

Standard deduction greater of:

• 1250

• Earned income + 450

Medical expenses? What type of deduction? Max allowed?

What are nondeductible expenses?

FROM AGI

Qualified medical expenses

Minus insurance reimbursement

= Qualified medical expenses paid

Minus 7.5% of AGI

= Deductible medical expenses

• Elective surgery

• Travel

• Vitamins

• Funerals

• Life insurance

• Gym memberships

SALT Taxes. What type of deduction?

Max allowed?

Phase out?

Choice?

FROM AGI

Limited

Phase out

Can choose:

• SALT income

• SALT sales → actual sales tax paid or IRS table

Casualty losses. What type of deduction?

How to calculate?

Can only be claimed if…

FROM AGI

Less of decrease in FMV or property’s adjusted basis

MINUS insurance recovery

= Taxpayer’s loss

Minus 100

Eligible loss

Minus 10% AGI

= Deductible loss

… insurance claim was filed or losses not covered by insurance

Home Mortgage Interest. What type of deduction? Max allowed?

What are points?

Deductible?

FROM AGI

• Deductions allowed for qualified residence interest on first or second home

• Interest up to 750k MFJ

Points → fees that banks charge in return for a lower interest rate.

Deductible

Investment interest.
What type of deduction?
Limited to
Excess loss…

FROM AGI

Investment interest deduction limited to net taxable investment income

• Excess loss carried forward indefinitely

Are political contributions + gifts deductible?

Nondeductible

Charity deduction limits for public charities

Also in excess of…

Carry forward how long?

What about charities services? What can they deduct? Example

Ceiling:

1. Cash 60% of AGI

2. Ordinary income property 50% of AGI

3. LTCG property 30% of AGI

Also in excess of 0.5% AGI Floor

5 years

• Can deduct services. Includes cost of driving

Deduction for student living in taxpayer’s home

• Charitable deduction when the taxpayer taxes into the home a full-time student

• Not beyond the 12th grade

• Up to $50 a month

Limitation on tax benefit of itemized deductions

• For taxpayers in the highest marginal tax bracket of 37%, the total amount of itemized deductions allowed reduced by 2/37 of the lesser of:

  • Itemized deductions

  • Amount which taxable income plus itemized deductions exceed the applicable 37% bracket

What is the qualified business income deduction? How to determine?

Qualified Trade or Business vs specified service trade or business?

What does it exclude?

Minimum deduction?

• 20% deduction for eligible flow through entities QBI

QTB → anything else

SSTB → principal asset of the business is the reputation or skills of the employees. Eg accounting, law. If over taxable income, no deduction allowed

Exclude engineering

Greater of:

1. Amount calculated under regular QBI

2. $400

3 Types of limitations for QBI

What are the categories?

1. Limitations based on taxable income

2. W-2 wage

3. Overall taxable income

Category 1 → taxable income below threshold

Category 2 → taxable income above threshold

Category 3 → taxable income within threshold

QBI deduction calculation category 1

Lesser of:

Lesser of:

Tentative QBI deduction: QBI x 0.2

Overall limit: (TI before QBI deduction - Net Capital gains) x 0.2

QBI deduction calculation category 2

Steps:

1. Take the lesser of:

2. Calculate overall limit

3. Lesser of:

1. Take the lesser of:

1. Tentative QBI deduction: QBI x 0.2

2. W2 wage limit

Greater of:

1. 50% of W2 wages

2. 25% of W2 wages + 2.5% of unadjusted basis of qualified property

2. Calculate the overall limit. TI x 0.2

3. Lesser of step 2 and step 1

Tax on tips or overtime?

Qualified vehicle loan interest?

Enhanced deduction for seniors?

For all:

__ deduction

Phase out?

__ not eligible

Valid __ required

• Max deduction

• Phase out

• MFS not eligible

• Valid SSN required

What type of tax rate structure does the US have? What does this mean

LTCG taxed at what?

• Progressive → higher marginal tax rate as taxable income increases

Preferential rates → 0, 15, 20

What are tax credits? What are the 2 basic types?

• Reduce personal tax liability, dollar for dollar

1. Nonrefundable → reduce tax, but no refund

2. Refundable → reduce tax, refund

What are examples of the refundable tax credit?

FAAACES

Federal income tax withheld

American opportunity credit

Adoption credit

ACA premium tax

Child tax

Earned income

Excess social security tax

Child + Dependent Care Credit

Qualifying person (3)

Lesser of:

Max?

Phase out

Qualifying person:

• Maintain a household

• Work

• Incur eligible expenses for dependent children under 13 or disabled any age, includes spouse

  • Eligible eg babysitter, day care

Lesser of:

• Earned income of lesser earning spouse

• Actual expenses incurred

• Maximum allowable amount

Max 3000 for single, 6000 for MFJ

Phase out

What is the American Opportunity Tax Credit?

Qualified expenses?

How long?

Max credit?

On a ___ ___ basis?

Phase out?

What % is refundable?

Qualified expenses: tuition, books

How long: 4 years of undergrad

Max: $2500

• 100% of first 2000 of qualified expenses

• 25% of next 2000

Per student

Phase out

40% refundable

What is the lifetime learning credit?

How long?

Max credit?

On a ___ ___ basis?

Phase out?

What portion is refundable?

Is there a limit on AOTC vs LLC?

• Unlimited number of years

• 20% of qualified expenses up to 10k

• Qualified expenses: tuition undergrad + grad, courses to improve job skills

• Per taxpayer basis

• Phase out

• Can claim both for different children

What is a coverdell education savings account?

Deductible?

Max contribution

Phase out?

Distributions are tax free to the extent that they are used for…

Any amounts remaining when beneficiary reaches __ must be distributed

Nondeductible

2000k

Phase out

… qualifying education expenses - tuition, books, room + board

Any amounts remaining when beneficiary reaches 30 must be distributed

What is a qualified tuition program?

Distributions are…

A person may purchase tuition credits on behalf of a beneficiary for payment of qualified higher education expenses - tuition, fees

… excluded

Education Tax Incentives Summary
Years

Refundable

Max allowed per __

What does it cover?

Phase out?

Credit for the elderly and/or permanant disabled

Steps

15% of eligibile income for those 65+ or disabled

1. Base amount

2. Reduce base amount by social security payments + ½ of AGI that exceeds a certain level

3. Multiply the result by 15%

What is the adoption credit? Max amount? Is it refundable?

Carry forward?

Phase out?

• Max 17670

• Up to 5120 refundable

• 5 years

• Phase out

What taxpayers is the retirement savings contributions credit for?

Who is eligible (3)?

Allowable credit % depending on the?

Max contribution?

• Low income taxpayers

• At least 18 years old

• Not a full time student

• Not a dependent

• 10, 20 or 50% depending on the filing status + AGI

• $2000

What is the foreign tax credit?

Limited to

Any disallowed may be carried over?

Lesser of:

• Foreign taxes paid

• Taxable income from all foreign operations/ total taxable worldwide income x US tax

• Carried back 1 year

• Carried forward 10 years

What is the general business credit?

Limit

Carried back + forward?

• Regular tax liability after other credits - 25% of regular tax liability over 25k

• Carried back 1 year, forward 20

What is the work opportunity credit?

Calculation

Qualified groups

• Available to employees from a targeted group

40% of first 6000 of first year’s wages

• Disabled

• 18-24

• Vietnam veterans

Small employer pension plan start up costs - eligible employers:

• No more than ___ employees who received at least __ in compensation

• At least __ plan participant is a non-highly compensated employee

Employer can choose…

Greater of:

1. _% of the first 1000 of employers with 50- employees (_% for 51-100) OR

2. Lesser of:

   1. __ for each employee who is eligible for the plan + not a highly compensated individual

   2. ___

Eligble employers:

• No more than 100 employees who received at least 5k in compensation

• At least one plan participant is a non-highly compensated employee

… to deduct start up costs or claim a credit. Can’t do both

Greater of:

1. 100% of the first 1000 of employers with 50- employees (50% for 51-100) OR

2. Lesser of:

   1. $250 for each employee who is eligible for the plan + not a highly compensated individual

   2. 5000

What is the small business healthcare credit?

Carried back?

Carry forward?

Employer contributes 50% of health converage on behalf of employees enrolled in a small business health plan

• Carried back 1 year

• Carried forward 20 years

Child tax credit

Limit

Qualifying child

phase out?

Refundable?

Lesser of:

2200 max

CARES

And US citizen

Phase out

Non refundable

Lesser of:

• Excess of child tax credit liability

• Earned income in excess of 2500 × 0.15

• 1700 per qualifying child

What is a non child dependent credit?

How much?

Children who are age __

OR other __ who are qualifying __

$500

• Children who are age 17+

• Other dependents who are qualifying relative

What is the earned income credit?

Is it refundable?

• Low income earner

• At least 25 years old but under 65

• Refundable

When is excess FICA withheld?

• When 2 or more employers withhold social security tax. Excess is a credit

• 1 employer → no credit allowed

What is the ACA Premium Tax Credit?

• Refundable credit that helps low income families with health insurance