REG CPA Flashcards!!!!

What items are included in an individuals Gross Income?

Wages, Interest, Dividends, State Tax Refunds, Alimony received (agreement before 2019), Business Income, Capital gain/loss, IRA income, Pension and annuity, Rental income/loss, K-1 flow-through income/loss, Unemployment compensation, Social Security benefits, Other Income

What items are considered Adjustments to Gross Income (Above the line adjustments)?

Educator expenses, IRA contributions (traditional), Student loan interest, Health savings account, Moving expenses (military), One-half self-employment taxes, Self-employed health insurance, Self-employed retirement, Interest withdrawal penalty, Alimony paid (agreement before 2019), Attorney fees paid in certain discrimination and whistle-blower cases

What are some examples of itemized deductions for individuals?

Medical expenses (in excess of 7.5 % AGI), Taxes - state/local (property and either income or sales, up to 10,000), Interest Expense (Mortgage and Investment), Charitable Contributions (AGI limit varies by type), Casualty/theft losses attributable to federal disaster (in excess of $100 floor and 10% of AGI)

Who is required to file an individual tax return?

Income is greater than or equal to the standard deduction, (if blind or 65 years old - additional standard deduction amount applies)

When must an individual pay their taxes?

April 15th

When must an individual file their taxes?

April 15th (October 15th with 6 month-extension)

Who should file under the single filing status?

Unmarried, legally separated or divorced at 12/31

Who can file as married filing jointly?

Married, living together in a legally recognized common law marriage, married but living a part with no legal separation, someone whose spouse died during the year

When would someone file married filing separately?

the couple wants to keep their finances separate; not advantageous.

What are the two qualifying factors someone must meet to file as a Qualifying Widow(er) with Dependent Child?

Can only file the following two tax years after spouse death and must maintain principal residence for dependent child for the WHOLE taxable year

How do you qualify to file as head of household?

Must not qualify as married filing jointly or widower; maintains a household for their dependent (qualifying child, father or mother, dependent relatives) for more than HALF the taxable year

Who qualifies as a qualifying child to file under head of household?

Must be under 19 or under: Child, stepchild, legally adopted child, foster child, brother or sister, or a descendant of any of these (grandchild); must live with taxpayer

How do your parents qualify as a qualifying person to file under head of household?

you maintain a home (over half of their expenses) that is the principal residence for your parent for the whole year; they do not have to live with you (nursing home, assisted living, etc.)

Who qualifies as a qualifying relative under head of household filing?

Grandparents, brothers, sisters, aunts, uncles, nephews, nieces, stepparents, parents-in-law, sister/brother in laws; must live with taxpayer

What are the 5 requirements someone must meet to be considered a qualifying child?

CARES

1. Close relative = son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister or a descendant (child) of any of these

2. Age limit = younger than taxpayer, under age 19 or under age 24 if a full-time college student

3. Residency = same principal residence as the taxpayer for more than half of the tax year, a citizen of US or resident of US, Mexico or Canada,=

4. Eliminate Gross Income test = no gross income requirements

5. Support Test = qualifying child cannot contribute more than half of their own support (scholarships do not count)

What are the 6 requirements someone must meet to be considered a qualifying relative?

SUPORT

1. Support Test = taxpayer provides more than half of the dependent’s support

2. Under Gross Income limitation (Taxable): must be less than $4,700

3. Precludes Dependent Filing a Joint Return: unless there is no tax liability on the couple’s joint return

4. Only citizens of the US or residents of US, Mexico or Canada

5. Relative: children, grandchildren, parents, grandparents, brothers, sisters, aunts, uncles, nephews, nieces, stepparents, parents-in-law, sister/brother-in-laws

   OR

6. Taxpayer lives with the individual (if nonrelative) for the Whole Year

When there are multiple people supporting one relative, who is able to claim the relative for tax benefits?

Must be qualifying relative of (or lived the entire year with) the individual and must contribute more than 10 % of the relatives support; If multiple people qualify, they must decide who can claim them

Who can claim the child as a dependent in a divorce arrangement?

who has custody of the child for the greater part of the year (if equal custody - parent with higher AGI can claim)

What is considered a salary or wage for individual tax payers?

all money constructively received, FMV of property received, bargain purchase discount amount, guaranteed payments to partner (self employment tax applies), taxable fringe benefits, portion of life insurance premiums (exceeding $50,000 of coverage per employee)

What are examples of nontaxable fringe benefits for employees?

Life insurance coverage (up to $50k), employer-paid accident, medical and health insurance, de minimis fringe benefits, meals and lodging if on employer’s premises, reimbursement for educational expenses (up to $5,250), employee adoption expenses ($15,950), dependent care expenses (if child is under 13 and up to $5,000), Qualified tuition reduction (if in addition to pay received for teaching or research), Qualified employee discounts, Employer-provided parking or transit passes (up to $300 a month), Qualified retirement plan contributions, Flexible spending arrangements (FSA) (forfeited if not used by march 15th in the following year)

What interest income is considered taxable?

federal bonds, industrial development, corporate bonds, a portion of proceeds from installment sales, interest on late refunds paid by the federal or state government, amortization of bond discount, gifts to open up a bank account (FMV), forfeited interest adjustment

What are some examples of tax-exempt interest income?

State and Local (Municipal) Bonds/Obligations, US Territory Bonds, US Series EE (Educational Expenses) savings Bonds (subject to specific requirements to be tax exempt)

When is a US Series EE Savings Bond tax exempt?

1. Used to pay for higher education (reduced by tax-free scholarships) of the taxpayer, spouse or dependents

2. taxpayer is over 24 when bond is issued

3. married tax payer files a joint return

4. the taxpayer must meet certain income requirements

Where are interest and dividends reported?

Schedule B

What are the different tax treatments for dividends?

1. Out of Earnings and Profits - Taxable Dividend (cash of FMV of property)

2. No earnings and profits but taxpayer has basis in stock - nontaxable and reduces basis in stock

3. No Earnings and profits and no stock basis - taxable as capital gains

4. Stock split - nontaxable, allocate original basis over total number of shares after split

5. Stock dividend - taxable

6. Life insurance dividend - nontaxable

When are state and local tax refunds taxable?

If the taxpayer itemized in the prior year

If alimony and child support payments fall short (before 2019), how are these payments taxed?

Payment applies to child support first (nontaxable) and then the rest is taxed as alimony

Where is net business income or loss from a sole proprietorship reported?

Schedule C

Where is profit or loss from farming income reported on a 1040?

Schedule F

Where are Gains and Losses on Disposition of Property reported on a 1040?

Schedule D

What are the different tax treatments for IRA distributions?

1. Nondeductible traditional IRA distribution = Contributions (Nontaxable), Earnings (taxable)

2. Deductible traditional IRA distribution = Contributions (Taxable), Earnings (Taxable)

3. Qualified Roth IRA distribution = Contributions (Nontaxable), Earnings (Nontaxable)

4. Nonqualified Roth IRA distribution = Contributions (Nontaxable), Earnings (Taxable)

What requirements does the taxpayer need to meet to have a qualified Roth IRA distribution?

• Distribution is made five years after the first day of the year in which the taxpayer made his first contribution to the Roth IRA

• Meets one of the following requirements

  • 59 ½or older

  • disabled

  • first time homebuyer

  • death benefit

When are taxpayers exempt from the 10% penalty tax on premature (before 59 ½) retirement distributions?

HIMDEAD

1. Homebuyer (first time)

2. Insurance (medical)

3. Medical Expenses (in excess of % of AGI floor)

4. Disability or federally declared disaster

5. Education

6. Adoption or birth

7. Death or terminal illness

How are annuity payments taxed for individuals?

contribution portion (nontaxable); earnings portion (taxable)

Where is Rental Income reported on a 1040?

Schedule E

What is the maximum amount of social security benefits that will be considered taxable?

85%

How are gambling winning and losses treated on a 1040?

Winnings are taxable as gross income, losses can be deducted to extent of winnings on Schedule A

What are some examples of fully taxable miscellaneous income?

Prizes and awards, gambling winnings, damages awarded, punitive damages, cancellation of debt (unless insolvency, nonrecourse or student loans)

What are some examples of partially taxable miscellaneous items?

Scholarships/grants for degree seeking students in excess of tuition, fees, books and supplies, scholarships for nondegree seeking students, tuition reductions if it is the students only compensation

What are some examples of nontaxable miscellaneous items?

Life insurance proceeds (interest is fully taxable), gifts and inheritance, Medicare benefits, workers compensation, accident insurance proceeds when premiums paid by taxpayer, foreign income exclusion ($120k)

What are considered deductible expenses on Schedule C?

COGS, Salaries and commissions paid to others, state and local business taxes paid, office expenses, actual automobile expenses or mileage, business meals (50%), depreciation expense of business assets, employee benefits, legal and professional services, bad debt writeoffs, interest expense on business loans (limits if income is over $29 million)

How much business interest expense deduction can sole proprietors who make more than $29 million a year in average gross receipts over the past three years receive?

Total business interest income + 30% of adjusted taxable income (ATI) (taxable income excluding interest income and interest expense) + floor plan financing interest expense

What are considered nondeductible expenses on schedule C on a 1040?

salaries paid to sole proprietor, federal income tax, personal use of automobile, travel, meal expenses, interest expense (for mortgage or investment expenses - Schedule A), state and local tax expense (Schedule A), health insurance of sole proprietor (Adjustment to AGI), bad debt expense for cash basis taxpayer, charitable contributions (Schedule A), entertainment expenses

How do you calculate the net earnings from self-employment?

Total self-employment income * 92.35%

How do you calculate the self employment tax paid?

Total self-employment income times 92.35% times 15.3%

How do you calculate the deduction for self-employment tax paid that will be an above the line deduction (for AGI) on Form 1040?

Self-employment tax * 50%

How are net taxable losses treated on schedule C on a 1040?

A loss over $578,000 (MFJ) or $289,000 (all others) must be carried forward and can only offset 80% of future income after Dec 31. 2020

Who is subject to the uniform capitalization rules and what is required to be capitalized?

Any business that has average gross receipts of over $29 million for the previous three years; raw materials, direct labor and factory overhead are capitalized (included in inventory) and not expensed (Taxable income is higher until they sell those goods)

What is the difference between the cash basis and accrual method for Farming Income (Schedule F)?

Cash basis = does not have to consider inventory - all expenses deductible

Accrual basis = consider inventory = Sales - COGS (Beg inv. + purchases - end. inv) = Profit

What is the formula for Net Rental income or loss on schedule E?

Gross rental income + prepaid rental income (nonrefundable deposits) + rent cancellation payment + improvement-in-lieu of rent (at FMV) - rental expenses

What are the tax treatments for rental of personal residence on Schedule E?

1. If rented fewer than 15 days, exclude from income

2. If rented 15 or more days, expenses must be prorated between personal and rental use.

Where are Partnership/LLC Income and Losses reported on a 1040?

Schedule E

How are guaranteed payments treated for partnership income and income to a partner?

Reduce partnership ordinary income but are taxable income to the partner receiving the guaranteed payments (must pay self-employment tax on this)

How is the ordinary business income or loss calculated for a partnership/llc?

Business income - Business expenses - Guaranteed Payments

When are partnerships and S corporation income taxed?

when the business earns and reports the income - not when distributed

T/F: All income received by a partner or shareholder from a Partnership/LLC/S Corp is subject to self-employment tax.

False - S Corp shareholders can be employees of the S Corp, so their salaries would not be subject to self-employment tax.

What entities does the Section 199A Business income deduction apply to?

Sole proprietorship/Schedule C, Partnership, LLC/LLP, S Corp

What is not included in QBI?

Wages earned as an employee, guaranteed payments, dividends, interest, capital gains/losses

What is considered a Specified Service Trade or Business (SSTB)?

health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, securities trading or dealing, partnership interests, celebrities, rock stars, trade in which the principal asset is the reputation or skill

How is the QBI deduction Section 199A calculated?

20% * Qualified Business Income

T/F: If the taxpayer earns less than $182,100 (single) or $364,200 (MFJ), they qualify for the full 20% QBI deduction no matter what type of entity they are.

True - SSTB and QTB are treated the same

If the taxpayer earns taxable income of $232,100 (Single) or $464,200 (MFJ), what are the QBI deduction limits?

SSTB = $0 deduction

QTB: Lesser of: 20% of taxpayers taxable income or

Greater of:

1. 50% of W-2 wages for the business

   1. 25% of W-2 wages for the business plus 2.5% of UBIA of qualified property

If a taxpayer has multiple sources of qualified business income, what happens if they have a negative QBI at one entity?

The losses will be allocated prorata among the qualifying business with positive QBI to determine the QBI deduction for the other entities.

If a taxpayer has multiple sources of qualified business income, what happens if they have a negative QBI at all entities?

the QBI loss is carried forward

When may a taxpayer aggregate QTB QBI and W-2 wages?

1. the same person, or group of persons (family members), owns at least 50% of each business

2. Must satisfy two of the following factors:

   1. products/services are the same

   2. share facilities

   3. operated in coordination

What are the four limitations on the deduction of business and rental activity losses?

1. Tax basis limitation = extent of owner’s tax basis - loss in excess is carried forward indefinitely

2. At-Risk Basis Limitation: extent that the owner is “at risk” (excludes the owner’s share of certain debt) - loss in excess is carried forward indefinitely

3. Passive activity loss (PAL) limitation - to the extent of passive activity income - net PAL loss is carried forward indefinitely

4. Excess business loss limitation: excess over $289,000 (single) and $578,000 (MFJ) is carried forward

What are the passive activity loss (PAL) exceptions?

1. Real Estate Professional

   1. more than 50% of the taxpayer’s personal services during the year are performed in the real estate business

   2. more than 750 hours are performed

2. Mom and Pop Exception: can deduct up to $25,000 of net passive activity losses attributable to rental real estate if the taxpayer:

   1. actively participates in the rental real estate activity

   2. owns at least 10% of the rental real estate activity

   3. AGi over $150,000 is a complete phase-out

What are the Net Capital Loss Deduction and Loss Carryover Rules?

1. $3,000 maximum deduction

2. Limitation: taxable income

3. excess net capital loss - carry forward indefinitely

4. Personal (Nonbusiness) bad debt and worthless stock and securities- short term capital loss

What self-employment adjustments for AGI are not deducted on Schedule C, but are deducted on the 1040?

Deductible part of self-employment tax, Self-employed health insurance deduction, deduction for contributions to certain self-employed retirement plans

Who is an eligible educator and how much can they deduct for educator expenses?

K-12 teacher (not homeschool); $300 for one educator; $600 if both spouses are educators.

What are the annual maximum contributions that can be made to an IRA?

Lesser of: $6,500 (Single) or Earned Income

$13,000 (MFJ) or Earned Income

What is considered Earned Income? What is not considered Earned Income?

Included: Salary and wages + Commissions + Bonuses + Alimony (executed before December 31, 2018) + Net earnings from Self-employment + Non-tuition fellowship and stipend payments treated as taxable compensation

Excluded: Interest and Dividends + Annuity income + Pensions + Alimony (executed after December 31, 2018)

What are the three types of IRAs?

Deductible Traditional IRA, Roth IRA, Nondeductible Traditional IRA

What are the characteristics of a Deductible Traditional IRA?

1. Only deductible if contribution is made by April 15th

2. Earning accumulate tax free until withdrawn

3. Distributions are taxed as ordinary income

4. RMD = Age 73

5. No IRA deduction if: already participating in retirement plan and “rich”

   1. Special rule: can deduct if spouse not working, unless “super rich”

What are the characteristics of a Roth IRA?

1. Contributions not deductible

2. Distributions of contributions are tax free and earnings are tax free (unless nonqualified)

3. No RMD

4. Only able to contribute if under a certain modified AGI

What are the characteristics of a Nondeductible Traditional IRA?

1. use when not eligible for Deductible or Roth IRA

2. No phase out = disallowed based on high income)

3. Distributions: Earnings taxed as ordinary income, Principal contributions are nontaxable

4. RMD applies at 73

What is the Early Distribution Penalty for IRA’s?

Regular tax + 10% penalty

Distributions before taxpayer reaches 59 ½

What is the tax treatment for rollovers from a Traditional IRA to a Roth IRA?

Must pay tax on ordinary income BUT no penalty tax

What are the rules for the Student Loan Interest Expense Deduction?

• Limited to $2,500 per year (any extra interest is not deductible)

  Phase out: 

  • Unmarried: $75,000 - $90,000

  • MFJ: $155,000 - $185,000

  • Dependent cannot claim adjustment

What are the rules for the Health Savings Account adjustment?

• Pretax contributions = up to $3,850 ($7,650 for families)

• Excludable distributions = used for qualified medical expenses - tax free

Who is allowed to have an adjustment for moving expenses?

members of the armed forces

How much can be taken as an adjustment for AGI for Self-employed health insurance?

All of the premiums paid

What are the three types of Self-Employed Retirement Plans that allow contributions to be taken as an adjustment for AGI?

• SEP IRA: lesser of

  • 20% of self-employment income reduced by self employment tax deduction

  • $66,000

• SIMPLE IRA: lesser of

  • 100% of self-employment income reduced by self employment tax deduction

  • $15,500

• Solo 401(k): lesser of

  • 20% of self-employment income reduced by self employment tax deduction

    • $66,000

What are the qualifications for Alimony paid to count as an adjustment for AGI?

Agreement must be legally executed before 1/1/2019

Payments must be in cash (or payoff credit card bills or pay tuition)

What are the tax treatments for Child Support for the Payor and Payee?

Nondeductible for payor; Nontaxable for payee

What is the standard deduction for dependents?

Greater of $1,250 or earned income plus $400

Where are Itemized Deductions reported?

Schedule A

What is the calculation for the deduction for medical expenses?

Qualified Medical expenses - Insurance reimbursement - 7.5% of AGI = Deductible Medical expenses

Who can medical expenses be deducted for?

Filing taxpayer, spouse or qualifies as a dependent (SUPORT - do not consider taxable income or joint return filing dependents)

When can the medical expense deduction be taken?

when paid for in cash or when the amounts are charged to credit cards

What are some examples of nondeductible medical expenses?

elective surgery, any drugs not prescribed, life insurance, increase in FMV of property for medical related home improvements, health clubs, over the counter medicine

T/F: You can deduct State Sales Tax AND State Income Tax.

False - can deduct one or the other

What is the difference between personal property tax and real estate taxes?

Personal property taxes are for boats and vehicles; Real Estate taxes are paid on homes

What portion of state, local and foreign income taxes are deductible?

Estimated tax payments, taxes withheld, assessment for PY tax paid in the CY

When would you include a state or local income tax refund in gross income?

If you itemized in PY (taxable amount is excess of itemized deductions over standard deduction)

What are the nondeductible taxes on schedule A?

Federal, Inheritance state taxes, Business (Report on schedule C), Rental Property Taxes (report on schedule E)

What are the different types of interest expense deductible on schedule A?

Home Mortage interest (for mortgage or home equity loans up to $750 K MFJ and $375K MFS)

Investment Interest Expense = limited to net taxable investment income (CF excess indefinitely)

Prepaid interest = deduct when incurred and paid

What is considered net investment income?

interest (unless tax free), dividends (other than qualified dividends), STCG, Royalties (in excess of expenses), Net LTCG and Qualified dividends (if using ordinary income rates)

T/F: Interest paid on Credit Cards or Auto Loans is deductible.

FALSE - personal consumer interest is not deductible