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RTRP STUDY CARDS

TAX - domains 1 and 2

QuestionAnswer
Tell if the following income is earned or unearned AND whether the income is includible or excluded from gross income WAGES Earned and includible
Is the following income earned or unearned AND is it includible or excludible from gross income INTEREST FROM A STATE BOND Unearned and excludible
Is the following income earned or unearned and is it includible or excludible from gross income TIPS from waiting tables Earned and includible
Is the following income earned or unearned and is it includible or excludible from gross income RENTAL INCOME Unearned and includible
Is the following income earned or unearned and is it includible or excludible from gross income ALIMONY Unearned and includible
Is the following income earned or unearned and is it included or excluded from gross income INTEREST FROM A SAVINGS ACCOUNT Unearned and includible
Is the following income earned or unearned and is it included or excluded from gross income UNEMPLOYMENT COMPENSATION unearned and includible
Is the following income earned or unearned and is it included or excluded from gross income BIRTHDAY GIFT FROM A FRIEND Unearned and excluded
Which form does a taxpayer need to get an automatic 6 month extension to file their income tax return? Form 4868 Application for Automatic Extension of Time to File U.S. Individual Income Tax Return
Fill in the blanks.______________ _______________ means world wide income from whatever source derived unless specifically excluded from taxation by law. Gross Income
TRUE OR FALSE . Disability retirement benefits qualify as earned income until the taxpayer reaches retirement age. TRUE
TRUE OR FALSE. Social Security disability payments, Social Security Disability Insurance (SSI) payments and military disability payments are considered earned income. FALSE
Is the following included or excluded from gross income - Life insurance payments, federal income tax refunds , pensions Life insurance payments - EXCLUDED, federal income tax refunds - EXCLUDED, pensions - INCLUDED.
Of the 3 forms, 1040EZ, 1040A, 1040, which would you use if your client had only interest income of less than $1,500 1040EZ
Of the 3 forms 1040EZ, 1040A and 1040, which would you use if your client has Pensions and annunities, educators expense, and earned income credit 1040A
Of the 3 forms which form would you use if your client had taxable scholarship and fellowship grants, student loan interest deduction standard deduction, child tax credit and tax for certain children who have morre than $1,900 investment income? 1040A or 1040
Of the 3 forms which form would you use if your client had taxable income of less than $100,000, Standard deductions and capital gains. 1040
Which copy of the W2 is given to the employee for his/her records. Copy C
In box 12 of the W2 what does a code H stand for? Code H is a 501(c) (18) (D) contribution
In box 12 of the W2 what does a code B stand for? Code B stands for uncollected medicare tax on tips.
In box 12 of the W2 what does code C stand for? The cost of group term life insurance coverage in excess of $50,000. This amount has been included in income in boxes 1, 3, and 5 as taxable income.
In box 12 of the W2 what does code Q stand for? Nontaxable combat pay
Mark(43)& Linda(42) Ferris have no dependents. Their AGI is $49,165. They use the standard deduction. They did not receive the Economic Recovery Payment in 2010. What is their taxable income? $30,465 [$49,165AGI - $11,000 standard deduction - ($3,650 X 2 exemptions)
What is the most common way of computing the tax on federal tax returns? The Tax Table
Which Tax Table is required if your client has taxable income over $100,000? The Tax Computation Worksheet is required.
What is gross income? Gross income means all worldwide income from whatever source derived, unless specifically excluded by law.
What are the two types of gross income? The two types of gross income are earned income and unearned income.
What are the five individual income tax forms? The five forms are Forms 1040EZ, 1040A, 1040, 1040NR, and 1040PR.
What form is used by an employer to report wage and tax information to an employee? Form W-2.
Where are total wages entered on Form 1040? On line 7.
Where are total wages entered on form 1040A? On line 7.
Where are total wages entered on Form 1040EZ? On line 1.
Where is total federal income tax withheld entered on Form 1040? On line 62.
Where is total federal income tax withheld entered on Form 1040A? On line 36.
Where is total federal income tax withheld entered on Form 1040EZ? On line 7.
What does code D in box 12 signify? Pre-tax contributions to a §401(k) plan.
What does it mean if the “Retirement Plan” box in box 13 of Form W-2 is checked? It means that the employee was an active participant in an employermaintained retirement plan, such as a §401(k) plan, at some time during 2011
Where are state and local income taxes withheld entered? On the state and local tax returns and sometimes on federal Schedule A.
If the employee thinks his Form W-2 is not correct, what should he do? If the name or SS # is wrong, the TP may change it himself and need not obtain a corrected W-2 before filing his tax return. The employer should be notified of the error and asked to update his records also contact the SS administration
What happens on Form 1040, line 19, if there is more than one Form 1099-G with unemployment compensation? If there is more than one, for example in the case both spouses get one, the box 1 amounts of each one should be added together and the total entered on Form 1040A, line 13 or on Form 1040, line 19 or on Form 1040EA, line 13.
How will any amount in box 4 of the Form 1099-G be handled? Any amount in box 4 will be combined with all other withholding amounts, and the total will be entered on Form 1040A, line 36, or Form 1040, line 62, or Form 1040EZ, line 7.
What does the amount in box 2 of the Form W-2 represent? Box 2 represents the amount of federal withholding from wages
Where will the amount from box 2 of the Form W-2 appear on her Form 1040? The amount in box 2 will appear in Form 1040, line 61 (totaled with any other withholding she may have).
Where can the regular standard deduction amounts be found? They are located in the left margin of page 2 of Forms 1040A and 1040. They are: Single and MFS, $5,800; MFJ and QW, $11,600; and HOH $8,500. The amounts differ for TP's 65 or older or blind and those who may be claimed as dependents by other taxpayers
What is the exemption amount for 2011? $3,700 for each taxpayer and dependent.
Under what circumstance must a taxpayer use the Tax Table to determine tax liability? If taxable income is less than $100,00 0
A member of a clergy has taken a vow of poverty. He is directed by the order to perform work in an institution associated with the church. He has renounced his claim to any earnings.He surrenders his wages to the order. Are these wages included in his G NO
What information do you need to know to determine whether a return is required? The taxpayer’s marital status and age at the end of the tax year, gross income for the year, and whether the taxpayer is a dependent.
For tax purposes, when is a person’s marital status determined? On the last day of the tax year.
When is the marital status of a deceased taxpayer (and spouse, if married) determined? On the date of the decedent’s death.
What is a common-law marriage? A legal marriage entered into without the parties obtaining a license or having a ceremony.
For general tax purposes, when is a taxpayer’s age determined? A person is considered to have attained any given age on the first moment of the last day of that year of his life; that is to say, the day before his birthday.
What’s the main difference between a separate property state and a community property state? In a sep pro state, inc earned by either spouse belongs to the one who earned it. Filing separate returns, the spouses report their own earned inc. In a com prop state, inc earned by either spouse belongs 1/2 to each & would be reported on sep returns
What is the standard deduction? An amount of income, based on filing status, that reduces the amount of income that is subject to tax.
What two amounts combine to make up the gross income filing requirement for most taxpayers? The taxpayer’s standard deduction and personal exemptions.
How much is the 2011 standard deduction for each filing status? Single and married filing separately $5,800; married filing jointly and qualifying widow(er) $11,600; and head of household $8,500.
How much is added to the standard deduction if the taxpayer (or spouse) is age 65 or older or blind? $1,150 for married taxpayers and qualifying widow(er)s or $1,450 for all other unmarried taxpayers is added for each condition.
TRUE OR FALSEthat, if a married couple is filing jointly and both spouses are age 65 or older and blind, for example, they will be allowed an additional $4,600 standard deduction. TRUE that, if a married couple is filing jointly and both spouses are age 65 or older and blind, for example, they will be allowed an additional $4,600 standard deduction. [$1,150  4 = $4,600]
How much is the standard deduction for a taxpayer who is being claimed as a dependent by another taxpayer? The greater of (1) $950 or (2) his earned income plus $300; not to exceed the regular standard deduction for his filing status.
Does a dependent filing his own return qualify to get the additional standard deductions for age and blindness? Yes
What is the exemption amount for 2011? $3,700.
May a dependent claim his own personal exemption? No. Only the person entitled to claim the dependent can take the dependent’s exemption.
Under what circumstances might a taxpayer who does not meet the filing requirements want to file a return anyway? If they had any tax withheld from their pay or if they are entitled to any refundable credits, they will want to file to obtain a refund.
What are the filing statuses available to taxpayers who are married for tax purposes? Married filing jointly; married filing separately
A taxpayer’s spouse died during 2011, and the taxpayer did not remarry. May the taxpayer file a joint return with his deceased spouse? Yes.
Assume the surviving spouse did remarry. May the surviving spouse file a joint return with the deceased spouse? How about with the new spouse? What is the filing status of the deceased spouse? The surviving spouse who remarries may not file jointly with the deceased spouse. The newly married couple may file a joint return or separate returns. In either case, the filing status of the deceased spouse would be married filing separately.
If one spouse refuses to file a joint return, can the other spouse do anything about it? No. Both will have to file using the married filing separately status unless one or both qualifies to be considered unmarried
Can the taxpayer expect to receive the total refund calculated by the Tax Professional? No. All income tax refunds are subject to offset against past-due debts.
What types of debt might be offset by an income tax refund? Past-due debts that may affect an income tax refund include: past-due federal income tax, student loans, or child and spousal support payments.
What are the two factors that must apply before a taxpayer is considered an injured spouse? The injured spouse must not be legally obligated to pay the past-due debt and the injured spouse must have made or reported tax payments or be eligible to claim a refundable tax credit.
What form is filed to request an injured spouse allocation? Form 8379, Injured Spouse Allocation.
When taxpayers file a joint return, how is it determined who is held responsible for the tax, interest, and any penalties due on the return? On joint returns, both spouses are equally responsible for the tax, interest, and any penalties due on the return.
When should form 8857, Request for Innocent Spouse Relief be filed? Form 8857 should be filed after a joint return has been filed and it is discovered that one spouse has understated the income or overstated a deduction or credit.
What is the indication on Form 1040EZ that the taxpayer is being claimed by another taxpayer? The “You” box on line 5 is checked.
What is the amount that may be subtracted from a taxpayer’s taxable income for each exemption claimed? $3,700 for 2011.
What are the five tests for a qualifying child? Relationship, residency, age, support, and joint return.
How is the relationship test met? Must be TP'S son,daughter(biological, adopted, step),eligible foster child, brother /sister (biological by blood or 1/2 bld,adoptive,or step),or a direct descendant of any of these (G-son, G-daughter,great-G-son,grt-G-daughter,nephew,niece,G-nep, G-niece.
Define an eligible foster child. A child placed in the taxpayer’s home by a government-authorized placement agency or by a court order, decree, or judgment.
How is the residency test met? The person must share the same principal place of abode (except for certain temporary absences) for more than half the year
How is the age test met? The person must not have reached age 19 (age 24 if a full-time student) by the end of the year.
Define full-time student, for purposes of this age test. A student attending school on a full-time basis (as defined by the school) for some part of at least five months of the year
What special provision regarding the age test exists for disabled dependents? A dependent who is permanently and totally disabled may be of any age and meet this test.
How is the support test met? The qualifying child cannot provide more than 50% of his own support.
How can a married individual meet the joint return test to remain a qualifying child? They can meet this test by not filing a joint return with their spouse, or they can file a joint return with their spouse if they are filing only to claim a refund of any taxes withheld.
What four tests must be met to be considered a qualifying relative? Relationship or member of the household, gross income, support, and not a qualifying child.
How can the gross income test be satisfied? The qualifying relative’s gross income must be less than the exemption amount ($3,700 for 2011)
What is gross income? Total worldwide income that is subject to tax and not specifically exempt or excluded by law
How can the support test of a qualifying relative be satisfied? The taxpayer must provide over 50% of the qualifying relative’s support
Can a taxpayer’s parent ever be a qualifying relative? Yes, the relationship test is automatically met and generally the parent would not be a qualifying child of another taxpayer. So if the gross income and support test are met, the parent could be a qualifying relative of the taxpayer.
Under what circumstances might you have to determine who paid more than 50% of a qualifying relative’s support? When support is received from multiple sources, such as other relatives, government programs, and the dependent’s own income.
How can you determine who paid more than half of the person’s support? Total support is determined and reduced by the funds received by and for the person from all sources other than the taxpayer. The remaining support is considered to be provided by the taxpayer
When computing support, how do we determine the value of lodging? We use the fair rental value of the lodging It also includes the actual cost of repairs, utilities, and food consumed in the home.
Under what circumstances would an education expense not be included in support? If the dependent is a full-time student and is the taxpayer’s son, daughter, stepson, or stepdaughter, you will not include any scholarships received, whether taxable or nontaxable, or any education expenses paid with such scholarships.
Under what circumstances would medical and dental expenses not be included in support? Medical and dental expenses paid by a health insurance policy are not included in support, and the insurance proceeds are not included as available funds.
How can the funds available for support from sources other than the taxpayer be reduced? The dependent may save or otherwise invest all or part of these funds.
What is the tax purpose of investing these funds by the dependent? It will be easier for the taxpayer to provide over 50% of total support.
What is the purpose of Form 2120, Mul ti ple Support Declaration? If two or more persons together provided over one-half of a person’s support, the other(s) agree to allow the specified taxpayer to claim the exemption.
What requirements must be satisfied to use Form 2120? The other dependency requirements must be met, and each taxpayer must have provided over 10% of the total support.
What happens if the parties do not agree on who will be allowed to claim the exemption? No one will be allowed to claim it.
How much is the Child Tax Credit worth? Up to $1,000 per qualifying child.
What additional requirements must be met by a qualifying child for purposes of the CTC credit For purposes of the Child Tax Credit, the child must be a qualifying child who is the taxpayer’s dependent and who has not reached his 17th birthday by the end of the year. The child must be a citizen,national,or resident of the US
At what income level is the allowable CTC credit phased out for higher- income taxpayers? The taxpayer’s credit will be disallowed in part or in full if his modified adjusted gross income exceeds: • $75,000 (single, head of household, or qualifying widow(er)) • $110,000 (married filing jointly) • $55,000 (married filing separately)
Is this credit refundable or nonrefundable? The Child Tax Credit is generally nonrefundable. However, certain taxpayers may qualify for the additional Child Tax Credit, which is refundable.
Is a foreign student placed in an American home for a temporary period considered a resident for purposes of the dependency tests? No; however, the taxpayer who provides the home may qualify for a charitable contribution deduction.
What filing statuses are available to tax payers who are unmarried? Qualifying widow(er), head of household, and single.
Under what circumstance would an unmarried taxpayer use the single status? When the taxpayer does not qualify to use either of the other statuses. The effective tax rates for the single status are the highest rates of the three statuses available to un married taxpayers.
Why would a married taxpayer want to be considered unmarried for tax purposes? A taxpayer must be unmarried for tax purposes in order to qualify as HOH. The effective tax rates for HOH are considerably lower than those for taxpayers who are MFS Additionally, some credits are reduced or unavailable to taxpayers using the MFS statu
Under what circumstances do you need to determine whether a taxpayer paid over half the cost of maintaining his home? If you are determining if the taxpayer may be considered unmarried, a qualifying widow(er), or head of household
What are some of the costs of maintaining a home? Mortgage interest and real estate taxes (or rent), fire/casualty (or renter’s) insurance, upkeep and repairs, utilities, and food consumed in the home.
Is the principal portion of a home mortgage payment considered part of the cost of maintenance? No. However, the portions attributable to interest, taxes, and fire and casualty insurance are counted as part of the cost of maintenance.
Under what circumstances would you need to actually compute the cost of maintaining a home? If a qualifying individual for whom the home is maintained has income available to pay part of the cost of maintenance, the taxpayer receives public assistance, or ano ther person pays part of the cost of maintenance.
What requirements must be met for a taxpayer to qualify to file as a head of household? The taxpayer must be unmarried (or qualify as unmarried for tax purposes) and must pay over half the cost of maintaining a home, which for over half the year was the main home of the taxpayer and his qualifying child or qualifying relative.
What requirements must be met for a taxpayer to use the qualifying widow(er) status? Death of TP spouse must've occurred in 1 of the 2 preceding tax years; TP can't have remarried & must have been entitled to file a joint return for year of death. TP must paid over 1/2 cost of keeping home which, for entire year, was main home of children
Fred’s wife died on February 6, 2011. Fred has a dependent son, age 10, who lived with him all year in a home Fred maintained. What is the most advantageous filing status Fred can use for 2011? Married filing jointly.
Assuming Fred whoes wife dies 2/9/2011, does not remarry and continues to maintain the home in which he and his dependent son both live, what will be the most advantageous filing status for Fred in 2012? Qualifying widow(er
Assuming Fred wwhoes wife died 2/9/2012 does not remarry and continues to maintain the home in which he and his dependent son both live, what will be the most advantageous filing status for Fred in 2013? 2014? In 2013, Fred may use qualifying widow(er). In 2014, he will no longer be eligible to use the QW status. At that point, if all other conditions remain the same, Fred will qualify as head of household.
Do the rules for divorced and separated parents apply to parents who were never married? Yes
In general, which parent gets to claim the qualifying child? The custodial parent.
What happens if an individual is a qualifying child of more than one taxpayer? The eligible taxpayers may decide among themselves who will claim the child.
Joyce’s sons, Joe (25) and Steve (17 and he has no income), lived with her all year. Who may claim Steve as their qualifying child? In 2009, Steve would have been the qualifying child of either Joyce or Joe. With the changes made in 2009, Joe could only claim Steve if Joyce does not and if his AGI is greater than Joyce’s AGI.
Is it ever possible for a person to live with their spouse, in the last six months of the year and still be considered unmarried for head of household purposes? If so, what other condition must exist to use the head of household filing status? Yes, if the person’s spouse was a NR alien at any X of year & the person chooses to not treat their spouse as a resident alien. Under these conditions, the person considered unmarried for HOH would have to have a QP (the spouse is not a qualifying person
Where is taxable interest income reported on the tax return? Forms 1040 or 1040A, line 8a, or Form 1040EZ, line 2
At what amount must interest income be reported on Form 1040, Schedule B? When total taxable interest exceeds $1,500 or there is any interest that is required to be reported on Schedule B. Schedule B can be used with either Form 1040 or Form 1040A.
What other situation requires the completion of Schedule B? A Schedule B is required if the taxpayer received a Form 1099-INT for interest that actually belongs to someone else or if the taxpayer received any amount of seller-financed mortgage interest.
Where is a penalty on early withdrawal of savings reported on the Form 1099-INT? Box 2.
Is interest received on U.S. Treasury Obligations taxable on state and/or local returns? No. Interest on U.S. Treasury Obligations is exempt from state and local tax by federal law.
A taxpayer received $1,800 taxable interest and $200 municipal bond interest. He received a 1099-INT for the municipal bond interest. What procedure would you follow for the municipal bond interest? Enter the $1,800 interest on Schedule B and enter the $200 amount directly on line 8b.
A taxpayer received a Form 1099-DIV showing $200 of ordinary dividends in box 1a and $100 in box 1b. Where is the box 1a amount entered on the tax return? On Form 1040 or 1040A, line 9a.
A taxpayer received a Form 1099-DIV showing $200 of ordinary dividends in box 1a and $100 in box 1b. Where is the box 1b amount entered on the tax return? Qualified dividends in box 1b, which are included in box 1a, are entered on Form 1040 or 1040A, line 9b.
How do qualified dividends differ from other ordinary dividends? Qualified dividends—those received on most shares of common stock held more than 60 days (or preferred stock held more than 90 days)—are taxed as long-term capital gain, which is subject to lower rates than ordinary income.
Q.Suppose that the taxpayer’s Form 1099-DIV also showed an $80 capital gain distributions in box 2a. Where is this amount entered on the tax return? On Form 1040, line 13, or Form 1040A, line 10
Where are nontaxable distributions, shown in box 3 of Form 1099-DIV, reported? Generally, nontaxable distributions are not reported on the tax return. They represent return of a taxpayer’s investment.
What types of taxpayers will require the Qualified Dividends and Capital Gain Tax Worksheet—Line 44? TP's receiving a 1099-DIV showing they received qualified div must use it. TP's having capital gain dist in box 2a of 1099-DIV will use the worksheet. TP's having any other type of capital gains, including from the sale of stocks, will use this worksheet.
What are capital assets? All assets except those assets that are specifically not capital assets; generally, assets used for personal or investment purposes.
What difference does it make if an asset is a capital asset? Sales and exchanges of capital assets are reported on their own separate form (Schedule D) and net long-term capital gains are taxed at lower rates than ordinary income.
What qualifies as long term capital gain? Generally, an asset must be held (owned) more than one year to qualify as long term.
If a taxpayer receives interest as a beneficiary of an estate or trust, that interest should be reported to the taxpayer on what form? The interest would be reported on Schedule K-1 (1041)
What are the two types of property? Real and personal
What are the two classifications of personal-type property? Tangible and intangible.
What are the four ways in which property can be used? It can be for personal use, for business use, for investment use, or as stockin- trade (inventory).
Give some examples of business-use tangible personal property. Machines, vehicles, equipment, office machines, computer hardware, and furniture.
Give some examples of business-use tangible personal property. Machines, vehicles, equipment, office machines, computer hardware, and furniture.
Give examples of business-use real property. Office buildings, rental homes, and commercial parking lots.
Define basis. Basis is a measure of the taxpayer’s investment in property for various tax purposes.
What is the basis of purchased property? Cash paid plus the fair market value of services rendered plus the fair market value of property traded. Certain closing costs are added to the basis.
When a taxpayer buys a new home, certain closing costs may be added to the basis. What are some of them? They would include commissions paid by the purchaser, legal fees, recording fees, and state transfer taxes on real estate.
The cost of restoration after a casualty minus “something” can be added to the original basis to find the adjusted basis. What is that “something” that must be subtracted from the cost of restoration? Any insurance reimbursement received for a casualty must be subtracted from the cost of restoration.
How is the holding period measured for property acquired by inheritance? Inherited property is considered to have been held long term, regardless of the actual holding period of the beneficiary and/or the decedent.
Where are sales and exchanges of capital assets reported if held: (a) short term; (b) long term? (a) Schedule D, Part I; (b) Schedule D, Part II
How is gain or loss computed? Gross sales price minus the adjusted basis plus ex penses of sale, or net sales price minus adjusted basis.
What types of gains are taxable? Gains realized on most sales or exchanges of personal-use, investmentuse, and business-use assets are taxable.
Which types of losses are deductible and not deductible? Losses on sale or exchange of investment-use & business-use assets are deductible. Losses on sale or exchange of personal-use sssets are not deductible. Losses on sales & exchanges between related TP's are not deductible, but will ^ TP's basis in asset
The top marginal tax rate for 2011 is 35%. For most capital assets sold during 2011, what is the maximum tax rate for long-term capital gains? 15%. For taxpayers in the 10% and 15% brackets, the rate is 0%. However, some long-term capital gains are taxed at other rates.
A taxpayer purchased a capital asset (not a collectible) on May 26, 2010. If he sold the asset at a gain on May 26, 2011, and sold no others during the year, at what rate will his capital gain be taxed? His marginal tax rate for 2011 is 33%. 33%. The asset has been held short term.
A taxpayer purchased a capital asset (not a collectible) on May 26,2010.If he had sold the asset on May 27, 2011, at what rate would his capital gain be taxed? 15%; the asset has now been held long term.
A taxpayer purchased a capital asset (not a collectible) on May 26, 2010. If he sold the asset at a gain on May 27, 2011, and sold no others during the year, at what rate will his capital gain be taxed? His marginal tax rate for 2011 is 15% 0%.
Okay, let’s put our taxpayer back in the 33% bracket. But now the asset is a rare Swiss coin. What is the maximum capital gains tax rate for this asset? 28% is the maximum rate for collectibles, regardless if the asset was held long-term or short-term.
What is the one kind of loss on personal-use property that is allowed? Casualty/theft losses.
What is the maximum net capital loss that a taxpayer may deduct in one year? $3,000 ($1,500 MFS).
What happens if a taxpayer has more capital losses than he can claim in one year? The Capital Loss Carryover Worksheet is completed and the unused loss is carried over to future years. Unused capital losses can be carried forward indefinitely until they are used up.
How are sales of stock usually reported to the stockholder? On Form 1099-B, shown in Illustration 7.4, or similar form.
.What does a recognized exchange call the date the proceeds are received? The date of purchase and the date of sale? Settlement date. Trade date.
How do sales commissions affect sales of stock? Commissions paid at the time of purchase are added to the basis of the stock. Commissions paid at the time of sale may be handled in one of two ways:•Deducted by the broker from the gross proceeds of the sale.•Added to the basis of the stock by the TP
On what form are certain real estate transactions reported to the taxpayer? Form 1099-S
Will every real estate transaction result in a Form 1099-S being issued? No, not every real estate transaction needs to result in a Form 1099-S being issued. Typically the sale of a personal residence will not be reported on Form 1099-S.
In 2011, Marlene surrendered her life insurance policy for cash. She received $1,000 more than she paid in total premiums. Are any of her proceeds taxable? Yes, the $1,000 would be taxable
Is tip income taxable? Yes. Tips are always subject to income tax and are generally subject to social security and medicare taxes.
Under what circumstances are tips not subject to social security and medicare taxes? Tips totaling less than $20 in a calendar month are not subject to these taxes, but are subject to income tax. Also, if the taxpayer has already paid the maximum social security tax for the year, further tips are not subject to social security tax.
Where should you record tip income that was not reported to the employer? It should be included on Form 1040EZ, line 1, or on Forms 1040 or 1040A, line 7.
Under what circumstances are tips required to be reported to the employer? Tips of $20 or more received by an employee at any one job during a calendar month are required to be reported to the employer.
Under what circumstances is Form 4137 prepared? Only if the taxpayer did not report tips to his employer as required, or if he is reporting allocated tips.
Must a taxpayer always report allocated tips on his return? No. He may report a lesser amount or none at all if he has records to substantiate the fact that he did not receive the amount allocated and/or that he shared his tips with other employees of the establishment.
If a taxpayer has an amount shown in box 8 of Form W-2 and does not possess sufficient records to demonstrate he did not actually receive the money, how should the box-8 amount be handled? The box-8 amount should be entered in addition to the box-1 amount on Form 1040, line 7. Form 4137 should also be completed.
.When would an employee have to file Form 8919? Employees must file Form 8919 when their employer did not withhold social security and medicare tax from their wages.
Where must a taxpayer who receives alimony report it? Alimony is reported only on Form 1040, line 11
.Are scholarships and fellowships taxable? Sometimes. Scholarships and fellowships may be excluded from income by degree candidates to the extent they are used to pay tuition and courserelated fees. If they are used to pay for room and board or other non-qualified expenses, they are taxable.
Are taxable scholarships and fellowships not reported on Form W-2 considered to be earned income? Such income is treated as earned income for purposes of a dependent’s standard deduction only.
A student received $5,000 in scholarships, which is not reported on a W-2. She spent $3,000 of the money for tuition and $2,000 for room and board at her college, where she is a degree candidate. What are the tax consequences? The $3,000 spent for tuition is excludible, but the $2,000 spent for room and board is not. The $2,000 should be included in the total on Form 1040 or 1040A, line 7, and “SCH $2,000” should be written to the left of line 7.
Under what circumstances are gross gambling winnings taxable? Always. The gross winnings must always be included in income, regardless of whether a Form W-2G was received or whether there were offsetting losses.
On which line of Form 1040 are gambling winnings reported? Line 21.
May Form 1040A be used to report gambling winnings? No. There is no line on Form 1040A to report such income. Form 1040 must be used.
.For the purpose of this section, what is “minimum retirement age”? Minimum retirement age is the age at which the taxpayer could have first received a pension or annuity from the employer if the taxpayer was not disabled.
How is disability pension income received under a plan paid for by the taxpayer’s employer reported on the taxpayer’s tax return? Reporting of disability income depends upon the taxpayer’s age when the income is received:
What document will the taxpayer receive from their employer reporting the disability pension? The income is reported on Form 1099-R.
How can a disability pension qualify as earned income for the EIC? Normally, pensions are not earned income. disability pension income received before the taxpayer attains minimum retirement age is reported as wage income. It is also considered earned income for purposes of EIC.
How do you explain to a taxpayer who knows they are receiving disability income about the fact their tax return shows wage income and that they have earned income? disability pension income received before the taxpayer reaches minimum retirement age is treated as wage income.
If a taxpayer is awarded damages for emotional distress that is not due to a physical injury or sickness, must the amount of damages be reported on the taxpayer’s income tax return? Yes, if not due to physical injury or sickness, it must be reported on the tax return. It would be reported on line 21 of Form 1040.
How much may an eligible educator deduct for qualified classroom expenses as an adjustment to income? Up to $250.
Who is an eligible educator? Someone who worked at least 900 hours during the school year as a teacher, teacher’s aide, counselor, or administrator in an elementary or secondary school.
Which expenses qualify for the educator's deduction? Ordinary and necessary expenses for books, equipment, computer software, classroom supplies, and other supplemental instructional materials and services used in the classroom.
Do homeschooling expenses qualify for the educator's deduction? No
Where is the educator expense deduction reported? The educator expense is reported on Form 1040, line 23, or Form 1040A, line 16.
What happens to any expenses in excess of the $250 limit? They may be deducted on line 21 of Schedule A, the same as any other qualified employee expenses.
Who may deduct student loan interest? A TP who paid qualified higher edu expenses at eligible institution for eligible student Student must be a degree candidate with a 1/2 time course load. Expenses must be for TP, his spouse, or someone he claimed as dependent in year education furnished.
Who may not claim a student loan interest deduction? Someone who is claimed as a dependent may not claim the deduction in the current tax year, nor may someone who uses the married filing separately filing status.
What is a qualified student loan? Any type of loan used to pay qualified expenses. Credit card debt may be included, provided the card was used exclusively to pay for qualified expenses.
Can money borrowed from a relative qualify as a student loan? Money borrowed from a related person is not a qualified student loan.
In addition to those expenses that qualify for the education credits, what expenses are qualified expenses for student loan interest purposes? All course-related books, room and board, transportation, and other necessary expenses.
What is the deduction limit for the student loan interest deduction? $2,500.
Is there an income limit for the student loan interest deduction also? The deduction is limited for joint filers with modified AGI over $120,000, and all other filers with modified AGI over $60,000. The deduction is not available for married filing separately taxpayers.
Where is the educator expense deduction reported? The educator expense is reported on Form 1040, line 23, or Form 1040A, line 16.
What happens to any expenses in excess of the $250 limit in the educator's deduction? They may be deducted on line 21 of Schedule A, the same as any other qualified employee expenses.
What two general requirements must be met before moving expenses can be deducted? Distance and work time.
Explain the requirements of the distance test. The new job location must be at least 50 miles farther from the old residence than the distance between the old residence and the old job location.
What are the requirements of the work time test? Employee must work full time in general vicinity of new location for 39 weeks during the 12 months following move.The employee must begin working at new location within 13 weeks of his arrival or moving expenses will not be deductible.
What additional requirements related to work time must selfemployed persons meet? Self-employed people must work on a full-time basis for 78 weeks during the 24 months following the move. At least 39 of the 78 weeks must be within the first 12 months.
What is meant by “closely related to start of work”? Only moving expenses incurred no later than one year after beginning a new job may be deducted, unless the taxpayer can show that circumstances prevented an earlier move.
Are the cost of moving household goods, personal possessions, vehicles, and pets (including packing, insurance, and in-transit storage for any 30 consecutive days between pick-up and delivery)deductible moving expenses? Yes, in addition, reasonable cost of lodging (but not meals) for family members during the move, actual cost of gas and oil plus parking and tolls for each vehicle driven to the new location, and/or the cost of public transportation are deductible.
Can the cost of gas be an eligible moving expense Yes taxpayers can choose between the actual cost of gas and oil or the standard mileage rate: • 19¢ per mile from January 1–June 30 • 23.5¢ per mile from July 1–December 31.
Where are moving expenses deducted on Form 1040? On line 26 as an adjustment to income.
What is an HSA? An HSA is a tax-advantaged savings account that can be used to pay current and future medical expenses.
What are the three requirements to be eligible to contribute to an HSA? Be in a high deductible health plan. • Not be covered by other health insurance, including Medicare. (Accident, disability, dental, vision, and long-term care coverage are allowed.) • Not be eligible to be claimed as a dependent on someone else’s retur
What is a high deductible health plan (HDHP)? a health insurance plan with a minimum annual deductible of $1,200 for self-only coverage or $2,400 for family coverage and maximum annual out-of-pocket expenses not exceeding $5,950 for self-only coverage and $11,900 for family coverage (for 2011).
What are qualified medical expenses with regard to an HSA? For the most part, they are unreimbursed medical expenses that would normally be deductible on Schedule A. There are some exceptions.
What form is used to report HSA contributions and determine any allowable deduction? Form 8889
What happens if a taxpayer receives a nonqualified distribution from an HSA? The taxpayer may be subject to tax and to a 10% penalty. The penalty, however, is waived if the account owner is age 65 or older, becomes disabled, or dies.
What two general tests must be met by taxpayers wishing to deduct moving expenses? The distance test and the work time test. Form 3903 is used to compute the deduction.
What is the maximum annual contribution for an HSA? Maximum annual contribution depends on TP HDHP coverage:$3,050 ($4,050 if age 55 by December 31, 2011) for self-only coverage or $6,150. Amount is increased by $1,000 for each eligible individual who is age 55 or older by the end of the tax year.
Martin rents out his old house to his Uncle Max. Martin has no real intention of making a profit from the rental; he is just trying to help out his uncle through a difficult economic time. Where does Martin report the income from this rental? Line 21, Form 1040
What types of income should be reported on Sched ule C? Income from a trade or business, commissions received by independent salespeople, income received for services rendered by independent contractors, and income of a statutory employee if the employee has expenses to offset some of the income.
What income-reporting form should an independent contractor sometimes receive from the person who paid him for his services? Form 1099-MISC.
Line F of Schedule C asks for the accounting meth od used in the business. What is the difference between the cash method and the accrual method of accounting? Under cash method, only income actually or constructively received or expenses actually paid during year are included on return. Under accrual method, inc & expenses are reported in year earned or incurred, even if received or paid in another year.
What accounting method generally must be used for inventory? The accrual method generally must be used for inventories and for taxpayers who produce, purchase, or sell merchandise in their businesses, for gross receipts.
If a proprietor uses the accrual method of accounting for his inventory and gross receipts and the cash method for his operating expenses, what is that called? A hybrid method.
What does it mean if a proprietor “materially participates” in the business? It means he is active in running the business in a substantial way on a day-to-day basis.
Why is it important to know whether or not the proprietor materially participates? If the proprietor does not materially participate, any loss from the business is a passive loss and generally may be currently deducted only against passive income.
What must be done if the income reported here is on a Form W-2? If the income was reported on a Form W-2, check to see if the “Statutory employee” box is checked. If it is not checked, you must determine if it was not checked in error or whether the income really belongs on a Schedule C.
What are returns and allowances? They are amounts included in gross income that were later refunded to customers who returned merchandise for refund or who were given a partial refund for having received damaged merchandise or other similar reasons.
How is cost of goods sold determined? Beginning inventory plus purchases, plus labor, supplies, depreciation, etc. attributable to product man u facture or preparation for sale, minus ending inventory.
Does every business have a cost of goods sold? No. Generally service businesses and commission salespeople do not have a cost of goods sold.
How is gross profit determined? Gross receipts minus returns and allowances, minus cost of goods sold equals gross profit.
If the client has contract labor, what should you remind the client that they need to do? You need to remind the client that if they paid any individuals over $600, they need to complete 1099-MISC forms for each individual.
How can we determine the difference between materials and supplies used in figuring the cost of goods sold and supplies that go on line 22? The difference is determined by the use of the supplies. If they are consumed in production of a product, they should be entered in Part III. If used again & again in the process,may go on line 22, or may be items or tools that should be depreciated.
If a Schedule-C filer has deductible home-office expenses, where are they deducted on Schedule C? They are deducted on line 30 after completion of Form 8829, Expenses for Business Use of Your Home.
The amount on line 31, Schedule C, represents net profit or loss. To what two places is this figure carried after Schedule C is completed? Line 2 of Schedule SE (unless the taxpayer is a statutory employee) and on Form 1040, line 12. Project Form 1040, and indicate line 12.
What is the purpose of self-employment tax? To provide social security and Medicare coverage to self-employed individuals.
What special treatment is available to self-employed taxpayers with regard to health insurance premiums they pay? They may deduct their premiums as an adjustment to income, if they qualify. Beginning in 2010, they can also deduct the premiums from their self-employment income before figuring their self-employment taxes.
How is the self employment health insurance deduction limited? It may not exceed the net earnings from self-employment; that is, the total from Schedule C minus the deductions for one-half of the self-employment tax and contributions to a qualified retirement plan attributable to that Schedule C.
A married taxpayer has inc from self-employment, Spouse is employed. Spouse’s employer offers health insurance, Couple chooses not to participate. They purchase their own health insurance.May they take the deduction for self-employed health insurance? No. The deduction is not available to any taxpayer for any calendar month in which the taxpayer is eligible for coverage through a subsidized health insurance plan maintained by his (or his spouse’s) employer.
What happens to any portion of the self employment health insurance premiums that cannot be deducted as an adjustment to income? It can be claimed as a medical expense deduction on Schedule A.
What form and schedule will a taxpayer with farming income file? Form 1040 and Schedule F
What activities are considered farming activities? cultivating land; operating dairy farms, fruit farms, nurseries, orchards, poultry farms, fish farms, plantations, ranches, stock farms, and truck farms; and breeding and raising fur-bearing animals or laboratory animals.
cultivating land; operating dairy farms, fruit farms, nurseries, orchards, poultry farms, fish farms, plantations, ranches, stock farms, and truck farms; and breeding and raising fur-bearing animals or laboratory animals. Schedule C. Farming does not include breeding, raising, or caring for dogs, cats, or other pets.
Mario takes a client to a football game. The cost of the ticket is $110. He attends the game with his client and discusses an upcoming business venture with the client. How much may Mario deduct as a business expense? $55
What is a qualified retirement plan? A plan that meets the requirement of IRC Section 401(a) and the Employment Retirement Income Security Act of 1974 (ERISA) and is therefore eligible for favorable tax treatment.
What is a non-qualified retirement plan? A retirement plan which does meet IRS or ERISA requirements for favorable tax treatment.
TRUE OR FALSE In a qualified plan mployers are allowed to deduct annual allowable contributions for each plan participant. TRUE
TRUE OR FALSE In a qualified plan Contributions and the earnings on the contributions to be tax deferred until withdrawn for each plan participant. TRUE
TRUES OR FALSE: In a qualified retirement planSome taxes to be deferred even further through a transfer into a different type of IRA account. TRUE
What are some key differences between qualified and non-qualified plans? Do not have tax benefits of qualified plans. • Are funded by employers• May be more flexible than qualified plans (non-qualified plans may have different rules regarding who must be allowed to participate in the plan and how the plan is administered).
What is a 401(k) plan? A popular type of qualified plan (the plans take their name from the IRC section governing their existence). 401(k) plans are primarily employersponsored plans
What is a primary tax benefit of a traditional 401(k) plan? Employee contributions and earnings on contributions to a traditional 401(k) plan are tax deferred.
What is another major benefit of many 401(k) plans? An employer may choose to match all or part of the employee’s contribution to the account (this may be done by matching contributions or by offering a profit-sharing contribution to the plan).
What is a 403(b) plan? A 403(b) plan is a tax-advantaged retirement savings plan available for public education organizations, some non-profit employers, cooperative hospital service organizations, and self-employed ministers.
What is a 457 plan? A 457 plan is a tax-advantaged, deferred-compensation retirement plan available primarily for governmental employees.
What are the features of 403(b) and 457 plans? For the purpose of this course, 403(b) and 457 plans are essentially identical to 401(k) plans. All allow tax deferred contributions and earnings. All are a valuable tool to help save for retirement.
What is the 2011 contribution limit to 401(k) plans? The maximum contribution for 2011 is $16,500. Taxpayers age 50 and above are allowed a $5,500 annual “catch-up” contribution.
How do you identify contributions to a deferred compensation (such as a 401(k) or 403(b)) plan? Form W-2 easily identifies these contributions
What are the key differences between a traditional 401(k) or 403(b) and Roth 401(k) or 403(b)? Contributions to Roth accounts are not tax deferred. Distributions from Roth accounts are tax free when taken.
How are Roth 401(k) and 403(b) participants identified? Form W-2 easily identifies these taxpayers.
What does IRA stand for? Individual retirement arrangement (or account).
In tax terms, what is it called when a taxpayer puts money into an IRA? A contribution.
What is it called when a taxpayer takes money out of an IRA? A distribution.
What is it called if a taxpayer takes money out of one IRA and puts it into another IRA (and all requirements are met)? A rollover, or a transfer if the money just goes from one traditional IRA to another traditional IRA
What are the advantages of a traditional IRA? Contributions may be deductible from gross inc. Earnings not taxed til withdrawn. Distributions after individual retires are taxable at lower rate b/c taxable inc usually lower in retirement years. Nondeductible contributions can be recovered tax-free.
Who is eligible to establish a traditional IRA? Any taxpayer who has not reached age 70½ at the end of the year and who has received compensation during the tax year. This includes selfemployed taxpayers.
What is compensation for IRA purposes? Compensation = wages,salaries,tips, commissions,professional fees,bonuses,net self-employment inc (minus amts on 1040, lines 27 & 28),& other amts TP receives for personal services Alimony & separate maint payments received count as comp for this purpose.
What effect does a net loss from self-employment have on total compensation? None. A net loss from self-employment does not reduce other compensation for IRA purposes.
What is the last date on which a contribution may be made and qualify as a contribution for a given year? The due date (not including extensions) of the return for that year
What is the IRA contribution limit for 2011? The lesser of 100% of the taxpayer’s compensation or $5,000. Individuals who have reached age 50 by the end of the year may contribute an additional $1,000, for a total of $6,000.
What is the impact of a taxpayer being covered by an employersponsored retirement plan? Depending on TP inc level,some conts to traditonal IRA acct may not be deductible. In such a case,TP must keep careful records of nondeductible contributions as any nondeductible contributions can be recovered tax-free when dists taken from account(s).
What are the contribution limitations for a spousal IRA? Eligible TP can start IRA for spouse. Total amt that may be cont for lower-inc spouse is lesser of 100%of couple’s combined comp, reduced by amt cont to higher-inc spouse’s traditional & Roth IRAs, or $5,000 ($6,000 if lower-inc spouse is 50 or older)
How do we determine how much can be contributed to a taxpayer’s (and spouse’s) IRAs? By using the IRA Contribution and Deduction Worksheet
Why is it important to distinguish between taxpayers who are active participants in an employer-maintained retirement plan and those who are not? TP who not active participants & whose spouses R active may deduct full amt they cont to a traditional IRA if they stay in cont limits.TP who R active or whose spouses R active may still cont within limits, may find allowed deduct reduced/eliminated.
A single taxpayer is receiving pension benefits from previous employment. Is he considered an active participant because of this? No. A person is not considered an active participant solely because he is receiving retirement benefits from previous employment.
What is the easiest way to determine if an employee is an active participant in his employer’s qualified retirement plan? Look to see if the Retirement plan box in box 13 of the W-2 is marked.
Under what circumstances would an active participant’s deduction be limited? When the taxpayer is married filing separately and lived with their spouse at any time during the year, or their modified AGI (for 2011) exceeds $56,000 (S, HH, or MFS and lived apart the entire year) or $90,000 (MFJ or QW).
What about a nonparticipant whose spouse is an active participant? Under what circumstances would his or her deduction be limited? When the spouse is married filing separately and lived with the taxpayer at any time during the year, or when their modified AGI exceeds $169,000.
How is modified AGI determined for traditional IRA purposes? By adding back any student loan interest deduction, tuition and fees deduction, excludible U.S. Savings Bond interest, excludible adoption benefits, and certain excludible foreign and U.S. possession income.
What are the main differences between traditional IRAs and Roth IRAs? Contributions to Roth IRA R never deductible,qualified distributions R tax exemp. Participation N an employer-maintained ret plan has no effect on Roth IRA cont & cont can be made after TP has reached age 70½. Cont to Roth IRAs R not reported on return.
Under what circumstances would a taxpayer’s Roth IRA contributions be limited? When the taxpayer is married filing separately and lived with his or her spouse at any time during the year, or his or her modified AGI exceeds $107,000 (S, HH, or MFS and lived apart the entire year) or $169,000 (MFJ or QW).
How is modified AGI computed for Roth IRA purposes? The same as it is for traditional IRA purposes, except that any amount arising from the conversion of a traditional IRA to a Roth IRA is subtracted.
A single taxpayer has AGI of $80,000. He is an active participant in an employer-maintained pension plan. Why should he choose to contribute to a Roth IRA rather than a traditional IRA? His contribution to a T-IRA would not be deductible. While same is true of Roth IRA cont's, qualifying dist's from his Roth IRA would not be subject to tax at all. Distr's from a T-IRA containing nondeductible contributions would be partly taxable.
Which taxpayers are not entitled to claim a retirement savings contribution credit (the Saver’s Credit)? Taxpayers who were: • Born after January 1, 1994 • Claimed as a dependent on someone else’s 2011 return • Full-time students during any part of five-calendar months in 2011
Which contributions qualify for the Saver’s Credit? Contributions to traditional and Roth IRAs and voluntary salary deferrals to most employer plans.
What types of distributions will reduce the amount eligible for the Saver’s Credit? Distributions from the same types of plans made in the two tax years prior to the current year up to the due date of the current year’s return (including extensions).
What is the maximum amount of contributions on which the Saver’s Credit may be based? $2,000 for 2011. In the case of a joint return, up to $2,000 per spouse.
What are the rates for the Saver’s Credit? The rates are 10%, 20%, or 50%, depending upon filing status and modified AGI.
What is a SEP? A simplified employee pension (SEP) is an employer-funded plan under which the employer contributes to each employee’s IRA. It can also be a self-employed retirement plan.
May an employee contribute to his SEP-IRA or separate IRA in addition to his employer’s contribution? Yes, the employee may contribute the allowed amount either to the SEPIRA or a separate IRA, based on the rules for active participants. These rules will be discussed in Chapter 19.
Are the employer’s contributions to an employee’s SEP-IRA reported on the employee’s tax return? No.
What is a qualified automatic contribution arrangement, and why may it be beneficial to a taxpayer? Under a qualified automatic contribution arrangement, an employer may treat an employee as having elected to contribute a certain portion of their comp to a 401(k) plan. Basically, this means the employee is automatically enrolled in the 401(k) plan.
What is the full retirement age for taxpayers born before 1938? In 1938? 1939? 1940? 1941? For TP's born before 1938, full retirement age is 65. 1938, it is 65 years & 2 months; 1939, 65 years and 4 months; 1940, 65 years & 6 mos; 1941, 65 yrs & 8 mos. Retirement age is increasing to age 67 over a 25-year period.
On what form are social security benefits reported to the recipient? Form SSA-1099
What is the maximum amount of SS/equivalent tier 1 RR benefits that is subject to tax? Up to 85%. See Illustration 19.4. The worksheet in Illustration 19.5 is used to compute the taxable amount
Can Form 1040A be filed for a taxpayer whose benefits are taxable? Yes
Under what circumstances might social security/tier 1 railroad retirement benefits be taxable if the taxpayer had no other source of income? If the taxpayer is using the married filing separately status and lived with their spouse at any time during the year.
Are supplemental security income (SSI) payments taxable? No.
Are benefits received for a child ever taxable to the parent? No. The benefits, if taxable, must be included in the income of the person who has the legal right to receive the income.
What form is used to report pension income to the recipient? Forms 1099-R and RRB-1099-R
What pensions are fully taxable? Pensions to which the taxpayer contributed no after-tax money to the cost, or from which they have already recovered their after-tax cost.
Under what circumstances would a pension be partly taxable? When the taxpayer has contributed after-tax money to the cost and has not yet recovered it.
What does recovery of cost mean? Getting back amounts paid in (that were taxed in previous years) without being taxed again. These amounts are not income or gain
What does the 7 in box 7 of a 1099-R mean? This is a normal distribution
What would a code 1 in box 7 of a 1099-R mean? An early distribution, and as far as the payer knows, the recipient is subject to the 10% penalty tax on early distributions.
Where is pension income reported on the tax return? Fully taxable pensions on 1040, line 16b, or 1040A,- 12b. Partly taxable(if taxable amt is not known by TP) R reported on P/A Worksheet where taxable part is known. When partly taxable, gross amt received entered on 16a (12a) & taxable amt on 16b (12b).
What traditional IRA distributions are fully taxable? Those to which the taxpayer made no nondeductible contributions (all contributions were fully deductible).
When would a traditional IRA distribution be partly taxable? When the taxpayer has made nondeductible contributions
When is a Roth IRA distribution exempt from taxation? A qualified dist is 1 taken after end of the 5 yr period that began Jan 1 of tax year for which the acct was setup. Plus, the dist must be taken after owner died,become disabled,or reached age 59½ or must be used to buy,build,or rebuild TP 1st home.
What form is required to determine the taxable portion of a traditional or Roth IRA distribution? Form 8606
Where are fully taxable IRA distributions reported on the tax return? Form 1040, line 15b, or Form 1040A, line 11b
Where is income tax withheld from a pension or IRA distribution reported on the tax return? It is included on Form 1040, line 62 or Form 1040A, line 36
Are early distributions from qualified retirement plans always penalized? No, there are exceptions that apply in many situations.
How does a Tax Professional know if an exception applies to early distributions from a qualified retirement plan? They can determine that by using thorough interview questions when discussing the distribution with the client. The distribution code on the Form 1099-R can also be helpful to the Tax Professional.
Can a taxpayer claim an exception to the early distribution penalty if they paid for qualified higher education expenses with funds withdrawn from their 401(k)? No, Exception 08 applies only to IRAs
When would a taxpayer be required to file Form 5329 by itself? A taxpayer may file Form 5329 by itself if they did not meet the gross income filing requirement but had a distribution subject to the penalty.
What is the “10-Year Tax Option” and which clients may qualify to use the option? It is a special formula used to calculate a separate tax on the portion of a lump-sum distribution that is ordinary income. To be eligible for the option, the plan participant must have been born before January 2, 1936.
In general terms, what is a passive activity? A trade or business in which the taxpayer does not materially participate.
What other type of activity is arbitrarily classified as passive? Rental real estate activities.
Name three subcategories of nonpassive income. (Do not give examples at this time.) Personal service income, portfolio income, and other nonpassive income.
Give some examples of personal service income. Wages, salaries, tips, etc., and self-employment income, including guaranteed payments received by a general partner from a partnership.
What are some examples of portfolio income? Interest, dividends, capital gains, royalties (unless business income), and annuities.
What are some other types of nonpassive income? Pension and IRA distributions, unemployment compensation, alimony, and gambling winnings
What is rental income? Inc got for use of personal or real property. Rent got for personal property must usually be reported on Schedule C. Rent received for real property is reported on Sch E, page 1, unless substantial services are provided, in which case it is Sch-C inc.
TRUE OR FALSE: Current, advance, and late rent payments received during the year is considered rental income TRUE
TRUE OR FALSE:Lease cancellation payments and forfeited security deposits (included in the year received or forfeited) are included in gross rental income. TRUE
TRUE OR FALSE: Owner obligations paid by the renter are included in gross rental income TRUE
The value of services provided by the renter in exchange for rent-free or reduced-rent use of property are included in gross rental income TRUE
What types of expenses of rental property are deductible? Any expenses that are ordinary and necessary for the production of rent, including property maintenance and repair.
How does a landlord deduct improvements to the rental property? Improvements that ^ the value or the useful life of the property must be capitalized. If depreciation has not begun, the ^ value is added to the basis. If depreciation of original property has already begun, the value is added as separate property.
Is the value of the rental property owner’s labor or unpaid labor of friends deductible? NO
May the standard mileage rate be used to compute transportation expenses allocable to rental income? Yes, if qualifications for the use of this method are satisfied.
What is the MACRS recovery period for residential rental property? For nonresidential real property? 27½ years for residential rental property; 39 years for nonresidential real property. (31½ years if it was placed in service before May 13, 1993, and after 1986.)
What property, in addition to the building, are you likely to find on the depreciation worksheet for rental real estate? Furniture, appliances, improvements, and ma jor remodeling.
What is the recovery period for carpets, appliances, and furniture used in rental real estate activities? Five years.
May a taxpayer elect to take a §179 deduction for furniture used in a rental house? No. §179 is not available for heating and air conditioning units, furniture, or appliances used in a rental property.
When may prepaid expenses be deducted? In the applicable tax year
What are two of the most common prepaid expenses for rental houses? Insurance and points.
How are deductible property expenses determined if part is strictly rental and part is strictly personal? The expenses that apply to the entire property are prorated by the ratio of rental space to total space and only that amount may be deducted from rental income.
.What happens to the personal portion of the ex penses if part is strictly and part is strictly personal? Mortgage interest, taxes, and casualty/theft losses may be deducted on Schedule A. The personal portion of the other expenses cannot be deducted at all
.Under what circumstances do the vacation home rules apply? When a dwelling unit is used as a personal residence part of the time and also rented at fair rental value for 15 days or more during the year.
How are deductible expenses determined under the vacation home rules? Exp R prorated by the ratio of days rented at FRV in the yr to the # of days property used during the yr. Mortgage int, RE taxes,& casualty losses may be prorated by the ratio of days rented at FRV during the yr to the # of days property was owned in yr.
What special rule applies if a residence is used as a residence and is rented for fewer than 15 days? The rental income is exempt from tax. No rental expenses are deductible, except those that are normally deducted on Schedule A
What are royalties? Payments received for the right to extract natural resources or to use or sell a taxpayer’s literary, musical, or artistic creation.
On what form are royalty payments usually reported to the taxpayer and to the IRS? Form 1099-MISC. Refer the participants to Illustration 20.3 in their participan’st guides.
What is depletion? A method by which taxpayers who own economic interests in natural resources can recover their costs over the economic lives of the resources.
What are the two methods of depletion? Cost depletion and percentage depletion.
What is cost depletion? Cost depletion is computed by dividing the TP's adj basis by the # of recoverable units remaining at the beginning of the yr, then multiplying the result by the # of units sold during the yr. The total amt of depletion claimed cannot exceed the basis.
What is percentage depletion? % depletion is computed based on gross royalties. Tax law specifies the % to use for each type of resource. Percentage depletion may be claimed every year the TP has qualifying royalties, even though the basis may have been reduced to zero.
What form does an estate or trust file with the IRS? Form 1041. A separate Schedule K-1, reflecting each beneficiary’s portion of income and expenditures, is provided to each beneficiary
What kind of taxpayer will receive this type of Schedule K-1? A beneficiary of a decedent’s estate or a trust
How is an estate or trust taxed? An estate or trust is often a pass-through entity. However, the beneficiary of an estate or trust pays tax only on the income distributed to them; any income not distributed to a beneficiary is taxable to the estate.
How is a partnership taxed?
What special rule applies if a residence is used as a residence and is rented for fewer than 15 days? The rental income is exempt from tax. No rental expenses are deductible, except those that are normally deducted on Schedule A
What are royalties? Payments received for the right to extract natural resources or to use or sell a taxpayer’s literary, musical, or artistic creation.
On what form are royalty payments usually reported to the taxpayer and to the IRS? Form 1099-MISC. Refer the participants to Illustration 20.3 in their participan’st guides.
What is depletion? A method by which taxpayers who own economic interests in natural resources can recover their costs over the economic lives of the resources.
What are the two methods of depletion? Cost depletion and percentage depletion.
What is cost depletion? Cost depletion is computed by dividing the TP's adj basis by the # of recoverable units remaining at the beginning of the yr, then multiplying the result by the # of units sold during the yr. The total amt of depletion claimed cannot exceed the basis.
What is percentage depletion? % depletion is computed based on gross royalties. Tax law specifies the % to use for each type of resource. Percentage depletion may be claimed every year the TP has qualifying royalties, even though the basis may have been reduced to zero.
What form does an estate or trust file with the IRS? Form 1041. A separate Schedule K-1, reflecting each beneficiary’s portion of income and expenditures, is provided to each beneficiary
What kind of taxpayer will receive this type of Schedule K-1? A beneficiary of a decedent’s estate or a trust
How is an estate or trust taxed? An estate or trust is often a pass-through entity. However, the beneficiary of an estate or trust pays tax only on the income distributed to them; any income not distributed to a beneficiary is taxable to the estate.
How is a partnership taxed? A P-ship does not pay federal inc tax. The P-ship is a “passthrough entity,” It passes through to each partner’s share of inc/loss, deductions/credits. These R shown on Sch K-1 & then on partner’s return. Report of dist is made whether dist or not.
What kind of taxpayer will receive this type of Schedule K-1? Someone who holds an interest in a partnership or is a member of an LLC filing as a partnership.
What form does the partnership file with the IRS? Form 1065. Schedule K-1 is an attachment to Form 1065, as Schedule A is an attachment to Form 1040. A separate Schedule K-1, reflecting each partner’s share of income and expenditures, is completed for (and provided to) each partner in the partnership.
What is a limited partner? A limited partner is a partner whose liability for partnership debts is limited to the amount of money or other property contributed to the partnership. Usually, a limited partner does not participate in the operation of the business
What is a limited liability company member? An LLC member is an owner in an LLC who may or may not participate in the day-to-day activities of the business and who receives the benefit of limited liability.
How is an S-corp taxed? Like a partnership, an S-corp is a pass-through entity. It passes its items of income, loss, deduction, and credits through to its shareholders to be included on their individual returns.
A shareholder in a subchapter-S corporation should receive what information document from the business? The taxpayer should receive Schedule K-1 (Form 1120S).
What are passive income and losses? Income or loss from rental real estate activities (except for real estate professionals) and from business activities in which the taxpayer does not materially participate. The most common examples are rental activities and limited partnerships.
What form is received by a taxpayer who holds an interest in a limited partnership or a limited liability company? Schedule K-1. Although a complete discussion of Schedules K-1 is beyond the scope of this course, some introductory material can be found in the participant’s guide.
In its simplest terms, what is the passive loss rule? Passive losses may be currently deducted only against passive income.
How about the “ordinary taxpayer” with losses from a rental house? Law provides exception for TP's. As long as mod AGI is $100,000 or less & actively participates N rent R-estate activity,TP may deduct up to $25K rent losses against other inc.If there is other passive inc on return, deductble rent loss may exceed $25K
If a taxpayer has a passive loss that cannot be deducted in full in the current year, is the deduction lost forever? No. The loss is “suspended” and may be deducted in future years when there is sufficient passive income to absorb it. If the loss has not been deducted by the time the taxpayer sells the passive activity, they may deduct it in full at that time.
Are working interests in oil and gas properties subject to the passive loss rules? No.
What three components make up basic living accommodations for the purpose of a dwelling unit? Sleeping space, toilet facilities, and cooking facilities.
Created by: mslinda