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128 Cards in this Set
- Front
- Back
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Adjusted Gross Income |
Gross Income - Adjustments = AGI (Anyone is automatically allowed any amount as an adjustment anytime at any year) |
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1040EZ |
Referencing this is how it's communicated that the standard deduction was used. |
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Six Month Extension |
Taxpayer must file form 4868 by April 15th, but the six month extension will be granted automatically. This is an extension to file the paperwork not the payment. |
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Extensions for Individuals Outside the US |
Taxpayers outside of the US on the filing date and have their principal place of business outside the US or are stationed outside the US have an automatic 2 month extension. This extension does not need to be requested, however documentation must be included if extension is taken. This is an extension to file, not pay. |
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Single |
Use end of year test. Must be single or legally separated on Dec 31. |
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Joint Return |
Must be married as of Dec 31. If divorced during the year a joint return can not be filed. The only exception is death. If a spouse dies during the year a joint return can still be filed. |
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Qualifying Widow(er) Surviving Spouse with Dependent Child Status |
*They may use the joint deduction and rates (but not the deceased spouse's exemption) for two years following death of spouse, unless they remarry. *Must maintain a HH for the WHOLE TAXABLE YEAR that was the principal residence for their child or stepchild, either by blood or adoption. Must be eligible for the dependency exemption for the child. |
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Head of Household |
*Larger standard deduction and wider tax brackets. *Must have a dependent, that uses taxpayers home as principal residence for more than half the year. *Not married or is legally separated. |
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Head of Household Requirements (continued) |
*Dependent son or daughter (includes through adoption, stepchild, or descendants) i.e. divorced mom *Father or mother (not required to live with taxpayer, but must maintain more than half of housing/living expenses) i.e. nursing home *Dependent relatives (must live with taxpayer) cousins, foster parents and those unrelated don't count. No freeloading friends. |
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Personal Exemptions |
Persons eligible to be claimed as dependents on another's tax return will not be allowed a personal exemption on their own returns. |
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A married taxpayer filing separately may claim his or her spouse's personal exemption if both of the following tests are met: |
a. The taxpayer's spouse has no gross income b. the taxpayer's spouse was not claimed as a dependent of another taxpayer |
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How does birth or death during the year impact exemptions? |
If a person is born or dies during the year, he or she is entitled to either a personal or a dependency exemption for the entire year. Exemptions are not prorated. |
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Phase-Out of Personal Exemptions |
This phase-out reduces exemptions by two percent for every $2,500 ($1,250 for married taxpayers filing separately) by which adjusted gross income exceeds the specified limits. |
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Dependency Exemptions |
A taxpayer is entitled to an exemption for each qualifying child and qualifying relative. |
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What is a qualifying child? |
Close Relative Age Limit Residency and Filing Requirements Eliminate Gross Income Test Support Test Changes |
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What is a qualifying relative? |
Support (over 50%) test Under a specific amount of (taxable) income Precludes dependent filing joint return test Only citizens (residents of US/Canada/Mexico) Relative Test or Taxpayer lives with individual for whole year test |
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Qualifying Child (Close Relative) |
Must be taxpayers son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or descendant of any of these. Legally adopted or legal foster child also counts. |
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Qualifying Child (Age Limit) |
19 if not a student, 24 if a full time student. Must have attended school for at least part of the five months during the tax year. Night school doesn't count. |
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Qualifying Child (Residency and Filing Requirements) |
Must have the same residence for at least half the year and can not file a joint tax return unless only to receive a refund. |
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Qualifying Child (Support Test Changes) |
Modified to determine only if the child does not provide more than half of their own support. |
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Qualifying Relative (Support Test) |
Taxpayer must provide more than half of the relative's support. Also a multiple support agreement exists if two or more taxpayers together contribute more than half of the support of a person. If all are qualifying relatives, they can agree upon themselves who can take the exemption. A contributor must provide more than 10% of the person's support and meet the other SUPORT requirements. |
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Qualifying Relative (Under Exemption Amount of Taxable) Gross Income |
A person can not be claimed unless their taxable income is less than the exemption amount. |
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Relative OR Taxpayer lives with the individual (if nonrelative) for the whole year |
Foster parents and cousins do not count as relatives. A non-relative must live with the taxpayer for the whole year. |
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What is the benefit to being old (age 65 or older) or blind? |
An increased standard deduction (not an additional exemption). |
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If income is taxable, the income and basis are treated at... |
Income = FMV Basis= FMV The gain must be realized and recognized. |
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If income is nontaxable, the income and basis are treated at... |
Income= NONE Basis= NBV |
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Realization |
(Real World) The accrual or receipt of cash, property, or a sale of exchange of an investment. |
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Recognition |
(Record) The realized gain must be included on the tax return. |
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Accrual Method |
Recognition occurs according to GAAP, revenue is is taxable when earned. |
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Cash Method |
Recognition occurs in the period the revenue is actually or constructively received in cash of (FMV) property. |
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Ordinary Income |
Includes salaries and wages, state and local tax refunds, alimony, IRA and pension income, self-employment (schedule c) income, unemployment compensation, social security, prizes, the taxable portion of scholarships and fellowships, gambling income, and anything not falling under one of the other categories |
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Portfolio Income |
Includes income a taxpayer would earn on their portfolio of assets, such as interest and dividends. |
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Passive Income |
(Includes Rental Activity, K-1s) Only passive losses may offset passive income. A net passive loss is not deductible. It can be carried forward until passive income exists. |
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Capital Income |
Sales of capital assets create capital gains and losses. |
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Gross Income includes salaries and wages such as: |
Money, property (valued at FMV), cancellation of debt, bargain purchases, taxable fringe benefits (like using company car for personal use) |
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Partially Taxable Fringe Benefits (Portion of Life Insurance Premiums) |
For nondiscriminatory plans, premiums for portion of insurance above the first $50,000 of coverage are taxable income to the recipient and included in W-2 wages. |
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Life Insurance Proceeds |
The proceeds of life insurance paid because of death are generally excluded from gross income. The interest income element on a deferred payout is fully taxable. |
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Accident Medical and Health Insurance |
Premium payments are excludable from the employee's income when the employer paid the insurance premiums, but amounts paid to the employee under the policy are includable in income unless it is reimbursement for medical expenses actually incurred by the employee or compensation for the permanent loss or loss of use of a member or function of the body. |
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Employer payment of employee's educational expenses |
Up to $5,250 may be excluded from gross income of payments made by employer on behalf of employee educational expenses. |
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Qualified pensions, profit-sharing and stock bonus plans |
1. Payments made by employer- Nontaxable at the time of contribution. 2. Benefits Received- Taxable in the year when distribution made to employee. |
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Flexible Spending Arrangements |
1. Pretax deposits into the employee's account- can elect to have part of salary ($2550 for 2015) put into FSA for health care or qualified dependent costs. 2. Forfeit funds not used within 2 1/2 months after year end. |
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Taxable Interest Income |
a. federal bonds b. industrial development bonds c. corporate bonds d. prizes for opening savings acct at FMV e. part of proceeds from an installment sale f. interest paid by government for late payment of a tax refund |
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Tax-Exempt Interest Income |
A. State and Local Gov't Bonds/Obligations B. Bonds of US Territory (Guam or Puerto Rico) C. Series EE (US Savings Bonds) when used to pay for higher education, a phaseout starts when MAGI exceeds an indexed amount. D. Veterans Administration Insurance |
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Unearned Income of a Child Under 18 "Kiddie Tax" |
The net unearned income of a dependent child under 18 (or under 24 if who does not provide over half his/her own support and is a full-time student) is taxed at the parent's higher tax rate. $0-$1050- taxed at 0% $1,051-$2,100 tax at child's rate $2,101 and over taxed at parent's rate |
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Forfeited Interest (Adjustment)- Penalty on withdrawal from savings |
This is a penalty for early withdrawal of savings (generally on a time deposit such as a certificate of deposit) The amount forfeited is deductible as an adjustment in the year the penalty is incurred. The amount of the forfeited interest is reported separately and not netted with income interest. |
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Taxable dividends |
All dividends that represent distributions of a corporation's earnings and profits (similar to retained earnings) are includable in gross income.
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Qualified dividends |
*special lower tax rate The stock must be held for more than 60 days during the 120-day period that begins 60 days before the ex-dividend date. |
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What dividends are disqualified? |
1. Employer stock held by an ESOP 2. Amounts taken into account as investment income (for purposes of the limitation of investment expenses) 3. short sale positions 4. certain foreign corporations 5. dividends paid by credit unions, mutual savings banks, building and loan associations, mutual insurance companies and farmers coops |
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Special tax rates for qualified dividends |
15%- most taxpayers 0%- low income tax payers (those in the 10% to 15% ordinary income tax bracket 20%- high income tax payers those in the 39.6% ordinary income tax bracket. |
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Tax-Free Distributions |
These items are exempt from gross income: a. return of Capital b. stock split c. stock dividend d. life insurance dividend |
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Return of Capital |
(No E&P)
This exists when a company distributes funds but has no E&P. The tax payer will simply reduce their basis in the common stock (but not below 0) |
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Stock split |
When a stock splits the shareholder will allocate the original basis over the total number of shares held after the split. |
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Stock Dividend |
If receiving the same stock. The original basis is allocated over the total number of shares. If different stock the basis is allocated based on the relative FMV of the other stock. |
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Life insurance dividend |
Dividends caused by ownership of insurance with a mutual company (premium return) |
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Capital gain distribution |
Distributions by a corporation that has no earnings and profits and for which the shareholder has recovered their entire basis. These are treated as taxable gross income. |
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Medicare Tax |
Applies to certain unearned income. It is levied on the lesser of the taxpayers net investment income or the excess of MAGI for the tax year over the threshold amount of $200,000 ($250,000 if married filing jointly and $125,000 for married filing separately) |
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State and local tax refunds |
It is taxable if the taxpayer itemized in the previous year. If is nontaxable if the taxpayer used the standard deduction. |
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Alimony/Spousal Support |
Taxable income to spouse receiving and an adjustment for spouse paying. 1. Must be required by written divorce 2. Must be in cash or equivalent 3. Cannot extend beyond death of payee 4. May not be designated as anything other than alimony. 5. Spouses may not file a joint return. |
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Child Support |
Non Taxable to individual receiving. Not deductible for individual paying. Payment applies for to child support, not alimony. |
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Property Settle |
If a lump sum payment is made or property settlement by a spouse, that spouse gets no deduction for payments made and receiving spouse does not report that as income. |
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Business Income |
Net income from self employment is computed on a schedule C, that information is then transferred to their 1040 as one amount. |
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Deductible Self-Employed Expenses |
A. Cost of Goods sold (inventory is expensed when sold) B. Salaries and commissions paid to others. C. State and Local business taxes paid D. Office expenses E. Actual automobile expenses (only applies for portion used for business) F. Business meal and entertainment at 50% G. Depreciation of business assets. H. Interest expense for business loans (only applicable when due AND paid (not advance payments) I. Employee benefits J. Legal and professional services K. Bad debts actually written off for an accrual tax payer only |
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Non-deductible business expenses |
A. Salaries paid to sole proprietor B. Federal Income Tax C. Personal Portion of automobile, travel and vacation, personal meals and entertainment, interest expense, state and local tax, health insurance of sole proprietor (not schedule c but an adjustment to arrive at AGI. D. Bad debt expense of a cash taxpayer E. Charitable contributions (itemized deduction on schedule A) |
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Net Business Income |
It is taxable, there are two taxes. Income tax and federal self-employment (S/E) tax. |
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F ederal Self-Employment Income |
An adjustment is allowed for 1/2 (which is 7.65% of up to $118,500 of self-employment income in 2015 plus 1.45% of self-employment income in thereafter) of SE tax (medicare plus social security) paid |
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Net taxable loss |
A business with a loss may deduct the loss against other sources of income. When the loss exceeds these amounts, the excess net operating loss is permitted as a carryover (at taxpayer's election, it may be used to carry forward only. 1. 2 year carryback 2. 20 year carryforward |
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Uniform Capitalization Rule |
Guidelines with respect to capitalizing or expenses certain costs. In the first year it typically causes an increase carrying cost and decrease in operating expense. Applies to: 1. produced for use (real or tangible personal property for use in trade or business. 2. produced for sale (real or tangible property for sale to customers) 3. Real or tangible property produced for resale (does not apply if preceding 3 years gross receipts were less than $10 mil) |
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Costs required to be capitalized |
Include direct materials, direct labor (eg. compensation, vacation pay and payroll taxes) and indirect costs such as factory overhead, |
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Costs not required to be capitalized |
Selling, advertising and marketing expenses, certain general and admin expenses, research and officer compensation. |
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Capitalized as Inventory |
*Direct Materials *Direct Labor *Factory Overhead |
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Period Expense |
*Selling *General *Administrative *Research and Development |
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Long Term Contract |
Generally defined as a contract that is incomplete at the end of a tax year in which it was started and relates to the manufacture, installation, building or construction of real or personal property. |
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Percentage of Completion Method |
Required for tax for nonexempt long term contracts. |
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Exemptions from Percentage of Completion Method |
May use "completed contract method". A. Small contractors- projects expected to last no more than 2 years which annual gross receipts do not exceed $10 mil for the 3 preceding years. B. Home Construction Contractors C. A long-term construction contract where less than 10% of the total contract costs relates to actual construction of property on the land. D. Services performed by architects, engineers, designers, construction management advisors, and software implementation personnel related to a long term contract. E. Services performed under warranty and maintenance agreements related to the long term contract. |
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Production Period- State Date |
For cash basis taxpayers it is generally the date on which the contractor incurs costs. For accrual taxpayers it is generally the later of the date for cash basis taxpayers or the date the taxpayer incurred at least 5% of the total costs initially estimated under the contract. |
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Production Period- End Date |
Generally the date on which the work under the contract is complete or the date the taxpayer has incurred at least 95% of the total costs expected under the contract. |
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Cost-to-Cost Method |
A ratio of the total cumulative costs incurred to date at the end of the tax year divided by the total expected costs to be incurred under the contract. Provides a percent complete amount for the contract. |
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Gross Income Recognition Calculation |
Multiply the ratio determined using the cost-to-cost method by the total contract price and subtract the amount of income that was recognized in prior years for the contract.
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Miscellaneous Impacts of Long Term Contracts |
1. Corporate earnings and profits must be calculated using the percentage of completion method. 2. A change in the accounting method can not be made with the consent of the IRS. If a long term contract is to be severed into smaller contracts or smaller contracts made into a larger contract consent from the IRS must be received and attached to the tax return. |
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Long Term Personal Property Contract |
In order for the manufacture of personal property to qualify as a long-term contract it must be an item made specifically for a customer and could not be sold to others, is not generally part of the taxpayers normal inventory and requires significant pre-production costs. |
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Farming Income |
Entered on Schedule F and then carried over to the 1040 |
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Cash Basis- Farming |
1. Most farmers use cash basis. 2. Inventories of produce, livestock, etc, are not considered. Gross income is considered from produce livestock, etc, raised by the farmer. If it was bought and sold, profit is computed from subtracting the purchase price from the sales price. |
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Accrual Basis- Farming |
The accrual method is required for certain corporate and partnership farmers and farming tax shelters. Inventories must be used and maintained and they must be taken at the start of the year and the end of the year. |
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Inventories allowed for farmers. |
A. Cost B. Lower of cost or market C. Farm-Price Method (valued at market prices less disposition costs and must be used for all items of inventory except livestock. D. Unit-Livestock-Price Method- Uses a value for each livestock class at a standard unit price for animals within the class. |
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Profit for accrual method farming |
Gross profit equals the value of inventories at year-end plus the proceeds received from the sale of during the year less the value of inventories at the beginning of the year less the cost of inventory purchased during the year. |
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Gains and Losses on the Disposition of Property |
Measured by the difference between the amount realized and the adjusted basis. Must recognize gains on the trade date not the settlement date. |
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Traditional IRA Income |
*Generally retirement money cannot be withdrawn until the individual reaches age 59 1/2, required to start distributing by age 70 1/2. Not taxable until distribution is received. The funds are taxed as ordinary income. |
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Roth IRA |
All qualified benefits received from a RothIRA are nontaxable |
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Traditional Nondeductible IRA |
*Partially taxable Return of capital is not taxable. The amount received is prorated between principal and accumulated earnings. |
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Penalty Tax |
Generally a premature distribution is subject to a 10% penalty tax (on top of any increase in regular income tax) if the individual has not met an exception. |
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Exception to Penalty Tax |
Home buyer (1st time) up to $10k Insurance (medical) A) unemployed with 12 consecutive weeks of unemployment benefits B) Self-Employed Medical Expenses in Excess of 10% of AGI Disability (permanent or indefinite) Education (College Tuition, Books, Fees) And Death |
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Annuities |
*Treat like Depreciation If they live longer than the annuity then further payments are fully taxable If they die before full recovery, the unrecovered portion of the $60,000 is a miscellaneous itemized deduction on the annuitant's final tax return not subject to the 2% of AGI Floor. |
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Rental Income |
*Passive Activity Schedule E is used to report supplemental income and loss. |
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Basic Formula for Rental Income |
Gross Rental Income Prepaid Rental Income (nonrefundable deposit) Rent Cancellation Payment Improvements in Lieu of Rent ____________________ Net Rental Income or Loss |
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Vacation Home Rented for Less than 15 days |
The rental income is excluded from income. |
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Vacation Home rented for more than 15 days. |
*Expenses must be prorated between rental and personal use. A different proration method is used for mortgage interest and property taxes. Rental use expenses are only deductible to the extent of rental income. No rental loss allowed. |
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Passive Activity |
Any activity in which the taxpayer does not actively participate. These include rental activities, interests in limited partnerships, S corporations, and most tax shelters. |
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Passive Activity Loss |
May not be deducted against wages, salaries, and other active income or against portfolio or capital gains income. |
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Non-Deductible PALs |
Carryforward without any time limit. Suspended losses are used to offset passive income in future years. If still unused they become fully deductible in the year property is disposed of. |
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PAL Exceptions |
An individual can deduct rental losses if: May deduct up to $25k a year if the individuals are actively managing and participating and own more than 10% of the rental activity. This allowance is reduced by 50% of the excess taxpayer's AGI over $100,000. The allowance is eliminated completely when AGI exceeds $150,000. |
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Rules for Passive Income for Real Estate Professionals |
Not considered passive and can fully deduct losses if two requirements are met. A. More than 50% of the taxpayer's personal services during the year are performed in real estate businesses B. The taxpayer performs more than 750 hours of services in real property businesses during the year. |
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Unemployment Compensation |
A taxpayer must include in gross income the full amount received. |
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Social Security Income |
Low Income- No social security benefits are taxable (single $25k MFJ $32k) Lower Middle= Less than 50% are taxable Middle= 50% are taxable (single over $25k MFJ over $32k) Upper Middle= 50% to 85% are taxable Upper Income= 85% of social security benefits are taxable (income over 34k single and 44k MFJ) |
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Prizes and awards |
The FMV of prizes and awards are taxable. An exclusion is made if someone wins and award without applying and assigns the award directly to a governmental unit or charitable organization. |
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Gambling winnings and losses |
Winnings are included in gross income. Gambling losses may only be deducted to cancel out gambling winnings. They are an itemized deduction. The amount is not subject to the 2% of AGI limitation. |
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Business Recoveries |
If the damage award is paid in lieu of lost profits the award is income. |
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Punitive Damages |
Fully taxable as ordinary income if received in a business context or for loss of personal reputation. Punitive damages for personal injury are also taxable except for wrongful death cases.
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Degree-seeking student |
Scholarships and fellowship grants are excludable only up to amounts spent on tuition, fees, books and supplies (not room and board). A. The grant is made to a degree seeking student B. No services are to be performed as a condition to receiving the grant. |
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Non-degree seeking student |
Scholarships and fellowships awarded to a non-degree seeking student are fully taxable at FMV. |
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Tuition Reductions |
Graduate teaching assistants and research assistants who receive tuition reductions are taxed on the reduction if it is their only compensation.
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Life Insurance Proceeds |
The proceeds of a life insurance policy paid because of the death of the insured are excluded from gross income of the beneficiary. The interest income element to a deferred payout is taxable |
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Gifts and inheritance |
Non-taxable to recipient, however income received from the property after it is received is taxable. |
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Medicare Benefits |
Excluded from gross income. |
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Worker's compensation |
Excluded from gross income received under a worker's compensation act for personal injury or illness. |
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Personal Injury or Illness Award |
Exclude from gross income damages received as compensation for personal injury or illness. |
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Accident Insurance |
Exclude from gross income all payments received if the individual paid all premiums for the insurance. |
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Foreign Income Exclusion |
Taxpayers working abroad can exclude up to $100,800 from foreign earned income if two tests are passed. 1. The taxpayer must have been a bona fide resident of another country for an entire taxable year 2. The physical presence test requires that the taxpayer must have been present in the foreign country for 330 full days out of any 12-consecutive-month period (which may begin on any day. |
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Non-Qualified Option |
Taxed when granted if the option has a readily ascertainable value when granted, otherwise it is taxed when exercised. |
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Readily Ascertainable Value |
If the option is traded on an established market. Otherwise if the option is transferable, exercisable immediately in full when granted, no conditions or restrictions that would significantly impact, the fair value of the option privilege is readily ascertainable.
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Employee Taxation- when readily ascertainable value |
Recognizes ordinary income in that amount in year where granted. Value minus any cost. No taxation on the date of exercise. Holding period begins on the exercise date. If the employee allows the option to lapse there is a capital loss based on the value of the options previously taxed. |
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Employee Taxation- without readily ascertainable value |
Taxed at exercise. The holding period begins at exercise date. If the option lapses there are no tax consequences. |
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Employer Taxation |
Deduct in same year employee declares income. |
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Incentive Stock Option |
Usually granted to a key employee and is a right to purchase stock at a discount. |
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ISO Employee Taxation |
Generally there is no taxation of the option as compensation. May only recognize up to $100k of ISOs in one year. Any amount after that is non-qualified. |
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ISO Employer Taxation |
No tax deduction. |
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Employee Stock Purchase Plan |
Grants employees options to purchase stock in the corporation. Can not grant options to employees with more than 5% combined voting power. Generally must include all employees except for highly compensated and those with less than 2 years experience. No less than 85% of FMV. Once exercised the stock must be held at least two years after the grant date and one year after the exercise date. |
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Employee Taxation on ESPP |
Not taxable as compensation. Capital gains when sold. |
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Employer Taxation on ESPP |
No deduction |
