Individual tax returns are prepared using what basis of accounting?
Cash Basis.
Note: Cash basis is not allowed for Corporations, Partnerships with a C-Corp partner, or for companies that carry inventories if Gross Receipts is more than $25MM over a three-year period.
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What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?
Deductions at AGI for individuals are:
- MSA/HSA contributions
- Investment penalties for early withdrawal
- Self-employed medical insurance premiums
- Self-Employment Tax (approx. 50%)
- IRA Contributions (Roth excluded)
- Student loan interest (can’t be another taxpayer’s dependent)
- Alimony (divorce must occur prior to 2019)
- Qualified Tuition & Fees
- Teacher Expenses
Which items can be carried forward to future years on an individual tax return?
- Investment interest expense in excess of investment income
- Charitable contributions (5 years)
- Excess Section 179
- Capital losses
- AMT Paid
- Passive Activity Losses
Characterize the following carryover for individuals: Passive Activity Loss.
Characteristics of Passive Activity loss:
- No carryback
- Can carry forward indefinitely
What is the maximum Section 179 Deduction?
$1,080,000 deduction with a dollar-for-dollar reduction after $2,700,000 in qualified purchases.
What is the current bonus depreciation percentage?
100% Bonus Depreciation
- Use the 179 Deduction first
- 100% of amount remaining is Bonus Depreciation
- Must be New Equipment
How long can investment interest expense in excess of investment income be carried forward?
Indefinitely.
How long is the carry forward for charitable contributions?
It can be carried forward 5 years.
How long is AMT paid carried forward, and how is it applied?
It can be carried forward indefinitely.
It may be applied against future regular income tax, but not against future AMT tax liability.
How are capital losses applied in individual taxes?
$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely.
The loss retains its character (STCL or LTCL).
How does an individual capital loss carryover differ from a corporate capital loss carryover?
- Corporate capital loss carryovers may be carried back 3 years and forward 5 years.
- Individual capital losses are carried forward indefinitely.
- Individual capital loss carryovers retain their character (STCL or LTCL).
- Corporate loss carryovers are carried forward as STCL only.
What is the current personal exemption amount?
$0. The personal exemption was repealed for individuals under TCJA.
Note: Trusts still have a personal exemption, which could make for a good Exam Day MCQ.
How did TCJA affect the deductibility of moving expenses?
Under TCJA, moving expenses are only deductible for military personnel.
On an individual return, regular mortgage interest on what loan amount is deductible?
$750,000
Interest on home equity loans up to what amount are deductible on an individual tax return?
$100,000
Total mortgage interest (Regular Mortgage + Home Equity Loans) cannot exceed $750,000 of acquisition indebtedness.
Proceeds must be used to buy or substantially improve a home (i.e. not used to pay off credit cards)
What is the AMT threshold for medical expense deductions?
10% - the same as with regular taxation
What is the Qualified Business Income Deduction (QBID)?
The QBID is the lesser of:
QBID before Income Limitation or your Calculated Income Limitation.
Calculated Income Limitation:
Taxable Income before QBID
< Net Capital Gains* >
$$$
x 20%
= Calculated Income Limitation
* (losses do not get deducted in this calculation)
For the Qualified Business Income Deduction, what is
QBI-REIT-PTP?
For QBID, you are allowed a deduction of up to:
- 20% of your Net Qualified Business Income (QBI)
- 20% of Net Qualified Real Estate Investment Trust (REIT) Dividends
- 20% of Net Qualified Publicly Traded Partnership
- Income (PTP)
Are interest and dividends active or passive income?
Neither. They are portfolio income.
What is (are) the depreciation convention(s) for personal property?
Half-year/Mid-quarter
When is the mid-quarter convention used?
Mid-quarter convention is used for depreciation when 40% or more of all purchases occur in the 4th quarter.
What depreciation convention is used for real property?
Mid-Month
Which Tax Credits are refundable?
- Earned Income Credit
- Child Tax Credit
- $2,000 per child
- $1,400 max refundable amount
- $2,000 per child
- American Opportunity Credit
What amount of business start-up costs can be deducted?
- Up to $5,000 can be deducted.
- Reduced dollar-for-dollar by the amount over $50,000
- Remaining costs amortized
How are medical expenses deducted on Form 1040?
On Schedule A:
Amounts in excess of 10% of AGI may be deducted.
Are accident or disability insurance premiums deductible as medical expenses on Schedule A?
No - they are not deductible.
Under what circumstances can medical expenses paid on behalf of another be deducted on Schedule A?
- Must be a citizen of North America.
- Must live with you, or if they do not, must be mother/father or a relative closer than a cousin.
- Benefactor must provide more than 50% support to the beneficiary.
Which foreign taxes are deductible?
Foreign income taxes are deductible.
Foreign real estate and personal property taxes are not deductible.
Foreign tax assessments are not deductible; they are added to the basis.
What are the AGI limitations for charitable contributions?
Cash & Check contributions: up to 60% of AGI
Property contributed: up to 30% of AGI
What is the current deduction limitation on Roth IRA contributions for married taxpayers?
$0 - Roth IRA contributions are made with after-tax dollars and are not deductible. Traditional IRA contributions are deductible, however.
What is the deduction limitation for State and Local Taxes (SALT) on Schedule A?
$10,000
How did casualty loss deductions change under TCJA?
In order to be deductible under TCJA, the casualty loss must have occurred in a federally-declared disaster area.
How is the deductible portion of a casualty loss calculated?
Must have occurred in a federally-declared disaster area.
Take the lower of either:
- Decrease in FMV or
- Basis in property (call this number GROSS LOSS)
GROSS LOSS
- insurance proceeds received
- $100
- 10% of AGI
= Deductible casualty loss
What are the miscellaneous deductions on Schedule A, and how are they deducted?
Miscellaneous itemized deductions were repealed under TCJA.
How are gambling losses deducted on Schedule A?
Gambling losses are deducted to the extent of gambling income.
Define qualifying child for most individual tax factors.
Qualifying child must be:
- Resident of North America.
- Under age 19, or under age 24 if a student
Define qualifying relative for most individual tax factors?
- Be citizen of North America
- Must live with you, unless mother/father or relative closer than a cousin.
- You must provide more than 50% support to the individual.
How is the “Kiddie Tax” calculated?
Child’s Unearned Income
< $1,100 >
< $1,100 or Earned Income +$350* >
= Net Unearned Minor Income**
* Use greater amount
** Taxed at Trust & Estate Rates
Can spouses married filing jointly use different accounting methods?
Yes, if they each own a small business.
All non-business income is cash basis.
At what rate is self-employment tax assessed?
15.3% of net earnings from self-employment.
Note: Executor of an estate is NOT self-employment income.
Which tax credits are non-refundable?
These tax credits don’t reduce the tax liability below zero (non-refundable):
- Foreign Tax Credit
- General Business Credit
- Adoption Credit
- Lifetime Learning Credit
- $500 Dependent Credit (new under TCJA)
How many education credits may be taken on a tax return?
American Opportunity Credit - per student
Lifetime Learning Credit - per taxpayer
Note: The American Opportunity Credit is refundable.
What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?
The lesser of:
- 90% of current year’s total tax
- 100% of prior year’s total tax
- 110% of prior year’s total tax (if AGI is $150,000 or more)
What are examples of non-taxable interest and dividends?
- State, Municipal and US Possession Bond Interest
- Series EE and I savings bond
- Non-taxable return of Capital
- Stock Splits and Stock Dividends
- S-Corp Dividends
What is the holding period for a Short-Term Capital Gain?
For STCG, the holding period is less than 1 year and the gain is taxed at ordinary income rates vs capital gain rates.
How long does the taxpayer have to petition the court for appeal after an audit?
90 days
If no petition to appeal is filed, how long does a taxpayer have to pay the tax due after an audit?
10 days
What is the statute of limitations for a tax audit?
The stature of limitations for a tax audit is:
- 3 years, generally
- 6 years if 25% or more of gross income was omitted.
The clock starts on the LATER of the due date or the filing date of the return.
There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.
How long does an individual taxpayer have to file a claim for refund?
Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.
When are life insurance premiums of an employee includable in income?
Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.
When are scholarships not taxable?
Scholarships are not taxable when:
- They are not in return for services rendered, and
- The money is used only for tuition and books.
Note: Scholarships for room and board are includable in income.
Business Meals & Entertainment - what % is deductible?
Business meals are 50% deductible.
Entertainment is no longer deductible under TCJA.
What deductions are disallowed for AMT?
Real Estate Tax
State Income Tax
Personal Property Tax
Standard Deduction
How much social security income can be taxed for individuals in higher income brackets?
Up to 85%
Is unemployment compensation taxable?
Yes.
Which damages awarded in lawsuits are taxable? Which are not?
Payments made to make you whole are not taxable (i.e. to pay for losses of property, body parts or earning ability).
Any payments for punitive damages are taxable.
Are workman’s compensation insurance benefits taxable?
No - similar to an award for damage to make a person whole.
Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony
Alimony is taxable*.
Child support and divorce property settlements are not taxable.
*On the CPA Exam, pay attention to what date they give you for the divorce. If the divorce was prior to 2019 (i.e. 2018, 2017, etc), then the alimony is taxable/deductible.
For divorces in 2019 and beyond, alimony is no longer taxable/deductible under TCJA.
Adoption expenses - Are they deductible?
No, they are not deductible.
However, tax benefits are available through the adoption credit.
Describe alimony recapture.
2nd Year: (3rd year - 2nd year - $15,000)
1st Year: 1st Year Alimony Paid - Avg alimony paid in 2nd & 3rd years - $15,000 - Recapture from 2nd year = 1st Year Alimony Recapture
Total Recapture = 1st Year Recapture + 2nd Year Recapture
How are Net Operating Losses (NOLs) treated?
Under TCJA, an NOL can’t be carried back but can be carried forward indefinitely, but are limited to 80% of Taxable Income.
Which IRA contributions are deductible?
Traditional IRA = deductible
SEP IRA = deductible
Roth IRA = not deductible
When can a couple file married filing jointly?
They must be married at the end of the year.
If one spouse dies, they must be married at the end of the year.
What are the requirements for filing as Head of Household?
A Head of Household must:
- Have a dependent child
- Provide more than 50% of the child’s support
- Live with them more than 50% of the year
What are the requirements for filing as a qualifying widower?
A qualifying widower must have a dependent child.
Essentially gets MFJ status for the year of death + 2 tax years.
