Passmaster -R1

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The requirements for payments to be considered alimony (income) are the same as for payments to be alimony (deductions)

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Wages and Interest on U.S. treasury bonds are includible in gross income and must be reported as part of gross income on a taxpayer's income tax return.

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Whether on the cash or accrual method of accounting taxpayers who sell stock or securities on established securities market must recognize gains and losses on the trade date, rather than on the settlement date.

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Generally, unless an exception applies, retirement money cannot be withdrawn until the individual reaches the age of 59.5 If retirement money (without an exception) is withdrawn before the age of 59.5 the premature distribution is subject to a 10% penalty tax (in addition to the applicable regular income tax that applies to all distributions of traditional IRA money).

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Gift cost basis is increased by any gift tax paid that is attributable to the net appreciation in the value of the gift.

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Government bonds held by an individual investor are considered capital assets, when sold the resulting gain or loss is reported as capital gain or loss.

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If there are any short-term capital losses (this includes any short-term capital loss carryovers), they are first offset against any short-term gains that would be taxable at the ordinary income rates.

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Any remaining short-term capital loss is used to offset any long-term capital gains from the 28% rate group (e.g. collectibles).

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Any remaining short-term capital loss is then used to offset any long-term gains from the 25% group (e.g. unrecaptured Section 1250 gains).

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Any remaining short-term capital loss is used to offset any long-term capital gains applicable at the lower (e.g.15%) tax rate.

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If there are any long-term capital losses (this includes any long-term capital loss carryovers) from the 28% rate group, they are first offset against any net gains from the 25% rate group and then against net gains from the 15% rate group.

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If there are any long-term capital losses (this includes any long-term capital loss carryovers) from the 15% rate group, they are offset first against any net gains from the 28% rate group and then against net gains from the 25% rate group

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Realized loss is never recognized in like-kind exchanges.

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What are the conditions that should be met in order for the interest on series EE bonds to be tax exempt?

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1. It is used to pay for higher education, reduced by tax-free scholarships, of the taxpayer, spouse. or dependents;
2. There is taxpayer or joint ownership (spouse);
3. Taxpayer is over age 24 when issued; and
4. The bonds are acquired after 1989.

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Monthly alimony must be more than annual child support received in order for the excess portion to be eligible to be calculated as taxable income.

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A cash basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property.

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Losses realized on transactions between a partnership and a partner owning more than a 50% interest is not deductible as the parties would be considered related and any realized loss would be disallowed.

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In order for a spouse to file his tax return as a Widow (widower) his died spouse must have dead during only the previous 2 years, any years more than that his (her) filing status wouldn’t be considered as widow (widower).

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The receipt of a nontaxable stock dividend will require the shareholder to spread the basis of his original shares over both the original shares and the new shares received.

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The requirements that enable a taxpayer to be classified as a qualifying widow (widower) are:
1. The taxpayer’s spouse died in one of the two previous years and the taxpayer did not remarry in the current tax year,
2. The taxpayer has a child who can be claimed as a dependent,
3. This child lived in the taxpayer’s home for all of the current tax year,
4. The taxpayer paid over half the cost of keeping up a home for the child,
5. The taxpayer could have filed a joint return in the year the spouse died.

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For all other subsequent tax years after the death of a spouse with no dependent children, filing status is single.

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Net earnings from self employment = Gross business receipts – Cost of Goods Sold – Rent Expense – Liability Insurance Premium

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The educational expenses consist of the following:
1. Live course, Books & Supplies
2. Accommodation expenses

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“Modified Adjusted Gross Income” can be defined as the amount of income that determines how much of an individual's IRA contribution is deductible. The modified adjusted gross income is found by taking the individual's adjusted gross income and adding back certain items such as:
1. Foreign income,
2. Foreign-housing deductions,
3. student-loan deductions,
4. IRA-contribution deductions and deductions for higher-education costs.

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The higher the modified adjusted gross income, the more the deductible amount of the IRA contribution will be reduced, possibly going down even to zero.

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The excluded Interest earned on Series EE bonds added back while computing the “MAGI” is reduced by qualified scholarships that are exempt from tax and other nontaxable payments received for educational expenses (other than gifts and inheritances).

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Interest on federal government obligations is taxable, but interest on state government obligations is nontaxable.

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Guaranteed payment from services rendered to a partnership is subject to self-employment tax only if that partner is a general partner.

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Generally, unless an exception applies, retirement money cannot be withdrawn until the individual reaches the age of 59.5 If retirement money (without an exception) is withdrawn before the age of 59.5 the premature distribution is subject to a 10% penalty tax (in addition to the applicable regular income tax that applies to all distributions of traditional IRA money).

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If there are any long-term capital losses (this includes any long-term capital loss carryovers) from the 15% rate group, they are offset first against any net gains from the 28% rate group and then against net gains from the 25% rate group.

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Regular tax rate applicable to all distributions of traditional IRA money= Marginal tax rate

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The long-term capital gain is the gain on the property that has been held for more than one year and was sold for more than it cost.

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Realized loss is never recognized in like-kind exchanges

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In case of calculation of rental income If security deposits are held separately and not available to be applied to last month's rent (as in a segregated account), they are a liability of the taxpayer and not included in income in the year received.

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Nonrecognition treatment is accorded to a "like-kind" exchange of property used in the
trade or business or held for investment (except inventory, stock, securities, partnership
interests, and real property in different countries).

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RULE: If a vacation residence is rented for less than 15 days per year, it is treated as a personal residence. The rental income is excluded from income, and mortgage interest (first or second home) and real estate taxes are allowed as itemized deductions. Depreciation, utilities, and repairs are not deductible.

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New basis = Adjusted basis of property given up + Gain recognized - Boot received

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Interest on state government obligations is the only non-taxable interest

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RULE: If a vacation residence is rented for less than 15 days per year, it is treated as a personal residence. The rental income is excluded from income, and mortgage interest (first or second home) and real estate taxes are allowed as itemized deductions. Depreciation, utilities, and repairs are not deductible.

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Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift.
Basis is increased by any gift tax paid that is attributable to the net appreciation in the value of the gift.

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What are the capital assets examples?

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1. Personal automobile of taxpayer.
2. Furniture and fixtures in the home of the taxpayer.
3. Stocks and securities of all types (except those held by dealers).
4. Personal property of a taxpayer not used in a trade or business.
5. Real property not used in a trade or business.
6. Interest in a partnership.
7. Goodwill of a corporation.
8. Copyrights, literary, musical, or artistic
compositions that have been purchased.
9. Other assets held for investment.

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What are the Non capital assets examples?

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1. Property normally included in inventory or held for sale to customers in the ordinary course of business.
2. Depreciable personal property and real estate used in a trade or business (for example, Section 1231, Section 1245, and Section 1250 property).
3. Accounts and notes receivable arising from sales or services in the taxpayer's business
4. Copyrights, literary, musical, or artistic compositions held by the original artist. (Exception: Sales of musical compositions held by the original artist receive capital gain treatment.)
5. Treasury stock (not an ordinary asset and not subject to capital gains treatment).

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Income exclusion Requirements
1. Taxpayer must have owned and used the property as a principal residence for two years or more during the five-year period ending on the date of the sale or exchange by a taxpayer
2. Any one of the spouses must meet the ownership requirement, but both must sit in that home for at least 2 years out of the last 5 years ending on the date of the sale or exchange by a taxpayer.

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In the year the passive activity is disposed of (sold), if still unused, passive activity losses are fully deductible in the year of disposal

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Mom and Pop exception allows the tax payer to deduct up to USD 25000 (Per Year) of net passive losses attributable to rental real estate annually.

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What are the conditions that should be met in order for a taxpayer to be eligible for the Mom and Pop Exception from the PALs rules?

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1. The individual should be actively participating
2. Owns more than 10% of the rental activity
3. Has AGI less than USD 150,000

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Any excess above the USD 25000 deducted would be carried forward indefinitely as an unused passive activity loss.

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An estate PALs in excess of the USD 25000 can be carried forward for the two years following the decedent's death if the decedent actively participated in the operation.

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What is the phase-out that can be applied in the case of the Mom and Pop exception?

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The $25,000 allowance is reduced by 50% of the excess of the taxpayer's AGI over $100,000. The allowance is eliminated completely when AGI exceeds $150,000.

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Employer's unemployment compensation plan is Taxable Income

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Filing Form 1040EZ means that the taxpayer did not itemize in the prior year, and therefore, did not deduct any state income taxes last year. Under the tax benefit rule, the refund is not taxable this year since the taxpayer did not deduct the tax last year.

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An individual receiving common stock for services rendered must recognize the fair market value as ordinary income. Any dividends received on that stock would also result in income recognition.

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Basis of new Property =Adjusted Basis of Property Given Up + Gain Recognized + Boot Paid - Boot Received

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There is no income tax on the value of inherited property, but on the gain or loss from its sale

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Under the cash method, recognition occurs in the period the revenue is actually or constructively received in cash or (FMV) property.

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Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift.

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Individuals, estates, trusts, personal service corporations, and closely held C corporations are subject to the passive activity rules.

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What is taxed is the interest revenue on the principal of the insurance policy and not the principal itself

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Recognized capital loss can not exceed $3000

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The amount of income for a child under 18 that is taxable at the parents' maximum tax rate is deemed the "kiddie tax."

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Mom & Pop Exceptions states that Taxpayers who own more than 10% of the rental activity, have modified AGI under $100,000, and have active participation (managing the property qualifies), may deduct up to $25,000 annually of net passive losses attributable to real estate.

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Jury duty received should be included in Gross income - Jury duty remittance should be included in Adjustments

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Net earnings from self-employment = Gross business receipts - COGS - Rent Expense - Liability Insurance premium

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Municipal bond interest income which is considered "Interest on state and local bonds" is excluded from gross income.

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An investment in a capital asset (e.g., stock) results in the income being capital (either a capital loss or a capital gain).

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Wages and all unemployment compensation are not excluded from being taxable.

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Estimated federal income tax payments are not an expense. Charitable contributions by an individual are only deductible as an itemized deduction on Schedule A.

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Rule: The basis of the property acquired will be the property's cost consisting of the amount of cash paid plus any amount of related debt assumed. Cost will be adjusted to reflect any additional costs incurred in purchasing the property.

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Interest on state government obligations is normally not taxable.

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Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift. Basis is increased by any gift tax paid that is attributable to the net appreciation in the value of the gift.

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Rule: If foreign travel is primarily for personal in nature (e.g., a vacation), none of the travel expenses (e.g. , round trip airfare) incurred will be allowable business deductions, even if the taxpayer was involved in business activities while in the foreign country.

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The former employer's company-paid supplemental unemployment benefit plan is included as part of gross income.

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The income in exchange of a service rendered is based on the value in money or fair value of property received

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Its not a must that the taxpayer should buy another residence to be able to exclude the gain from the sale of the old residence till a max amount

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Scholarships are nontaxable for degree seeking students to the extent that the proceeds are spent on tuition, fees, books and supplies.

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Payment to a graduate assistant for a part-time teaching assignment at a university, and a grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university should be included in a recipient's gross income.

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Rule: Whether on the cash or accrual method of accounting taxpayers who sell stock or securities on an established securities market must recognize gains and losses on the trade date, rather than on the settlement date.

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The rule limiting the allowability of passive activity losses and credits applies to personal service corporations.

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Repackaging costs should be capitalized with respect to inventory Under the uniform capitalization rules applicable to taxpayers with property acquired for resale

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What are the conditions that should be met in order for the interest on series EE bonds to be tax exempt?

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1. It is used to pay for higher education, reduced by tax-free scholarships, of the taxpayer, spouse. or dependents;
2. There is taxpayer or joint ownership (spouse);
3. Taxpayer is over age 24 when issued; and
4. The bonds are acquired after 1989.

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Investment assets of a taxpayer that are not inventory are capital assets.

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There is no income tax on the value of inherited property.

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Rule: Nonrecognition treatment is accorded to a "like-kind" exchange of property used in the trade or business or held for investment (with the exception of inventory, stock, securities, partnership interests, and real property in different countries).
"Like-kind" means the same type of investment (e.g., realty for realty or personality for personality, assuming the personal property falls within the same "asset class" for tax depreciation purposes).

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Government bonds held by an individual investor are considered capital assets in the hands of the investor. When these types of security investments are sold, the resulting gain or loss is reported as capital gain or loss.

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Prepaid rent is income when received even for an accrual-basis taxpayer.

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Rule: Under the installment method, revenue is reported over the period in which the cash payments are received. The amount of cash received is multiplied by the g ross profit percentage on the sale to determine the revenue (which retains its character as capital gain or ordinary income, depending on the transaction).

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losses from sales and exchanges are recognized from transactions with all "in-law relatives."

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"Shares" is always considered to be " long-term" property, regardless of how long it has been held by the decedent and by the beneficiary or heir.

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The bond's basis is reduced by the amortization of the premium.

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Jury duty fees can be deducted as Above the line adjustments

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Municipal bond interest income is excluded from gross income.

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Sales tax is included in the asset's depreciable base

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"Both of these 2 items should be included in taxable gross income:
1- A payment to a student for a part-time teaching assignment is taxable income just as a payment for any other campus job would be. This is not a scholarship or fellowship.
2- There is no exclusion in the tax law for amounts paid to a degree candidate for participation in university-sponsored research ."

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Whether it’s a capital gain or capital loss no recognition should happen between relatives transactions

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Proceeds of a lawsuit for physical injuries are excluded from taxable gross income

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Taxable interest includes amounts received from general investment accounts as well as interest on federal obligations. Interest received from state and municipal bonds is not taxable.

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For a personal residence that is not used for rental purposes, no deduction is allowed for utilities costs or insurance, the only deduction is for mortgage interest & property taxes related to the residence

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Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward five years.

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Rule: Qualified higher education expenses are tuition and fees required for the enrollment or attendance of the taxpayer, the taxpayer's spouse, or any dependent for whom the taxpayer is allowed a dependency exemption, at an eligible educational institution. The expenses otherwise taken into account must be reduced by the total amounts received for excludable qualified scholarships, certain educational assistance allowances, and other tax-exempt payments ( other than gifts, bequests, devises, or inheritances)

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The aunt didn't have to live with the taxpayer, only non relative dependents that have to live with the taxpayer for the whole year

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Interest income from U.S. obligations is generally taxable.

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Generally, a premature distribution (prior to retirement or other allowable age) from an IRA is subject to a 10% penalty tax. Certain exceptions to this tax are available and are contained in the mnemonic "HIM DEAD."

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A self-employer's salary for himself from his own business is considered withdrawal and not an expense against his taxable gross income

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Earned compensation is subject to self-employment tax.

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The ordinary income reported from a partnership may be subject to self-employment tax (if to a general partner).

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The ordinary income reported from an S corporation is taxable income to the individual or their own individual tax return but is not subject to self-employment tax.

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Who are the taxpayers that are subject to the PALs Rules?

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"1.Personal services corporations
2. Individuals
3.Closely held C corporations
4. Estates
5. Trusts
PIC ET"

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If the residence is rented for less than 15 days per year, it is treated as a personal residence. The rental income is excluded from income, and mortgage interest (first or second home) and real estate taxes are allowed as itemized deductions. Depreciation, utilities, and repairs are not deductible.

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In the like-kind exchange If the other party will pay "Cash" so it should be netted against the cash that the taxpayer will pay in calculating the recognized gain amount, but if the other party will give the taxpayer another asset so there will not be netting.

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"IRS forms require the taxpayer to:
1- Increase the adjusted basis by the amount of the selling costs
2- Not reduce the amount realized by the selling costs."

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Net earnings from self-employment is net income from self-employment reduced by the employer's portion of FICA taxes (7.65%) times the taxpayer's net income from self-employment.

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The points on a conventional mortgage loan are deductible even though the points represent prepaid interest

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Capital gains and losses & contributions to retirement plans are not considered income or expenses for self-employment purposes