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EA Exam Lite Part 1 Individuals

EA Exam Lite Part 1 Individuals. Topic 1. Overview: The Individual Tax Computation Format. 1A Sorting Those Deductions. Basic Components of Individual Formula: Gross Receipts ( Statutory Exclusions ) Gross Income ( Deductions for Adjusted Gross Income ) Adjusted Gross Income

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EA Exam Lite Part 1 Individuals

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  1. EA Exam Lite Part 1 Individuals

  2. Topic 1 Overview: The Individual Tax Computation Format

  3. 1A Sorting Those Deductions • Basic Components of Individual Formula: Gross Receipts (Statutory Exclusions) Gross Income (Deductions for Adjusted Gross Income) Adjusted Gross Income (Personal Exemption Deductions) (Larger of Itemized or Standard Deduction) Taxable Income • Figure 1 – A helpful guide for deductions

  4. 1B Format Example With AMT • Figure 2 – A comprehensive example with both regular tax and AMT computations • Note impact of: • AGI floors on itemized deductions • Phaseouts of exemption and itemized deductions • AMT computation starts with regular taxable income and adjusts for differences • The “permanent” column is used to compute the AMT credit (which is only for timing differences)

  5. Topic 2 Itemized Deductions: A Broad Brush

  6. 2A Medical Expenses - Family • Deduction – Those of TP, spouse, dependent (7.5%) • Dependent – Ignore gross income & filing status tests • Expense – Must be for specific disease/illness • Nonqualified – Over the counter drugs, cosmetic surgery (unless deformity), health club dues, meals Capital Expenditures Increasing Value of Property – Deduct only to extent of not increasing the value of the property (e.g., elevator, swimming pool, etc.) • Question 1

  7. 2B State, Local & Foreign Taxes • Personal Property Taxes – Deduct if based on value • Taxes on Realty – Deductible only by owner, always based on actual period of ownership (not payment; allocate deduction, adjust selling price and basis) • Assessments – Not deductible if add to value (e.g., sidewalks) • Sales Tax Option – May elect to deduct state & local sales taxes rather than state & local income taxes (increase table amount by taxes on large purchaes) • Question 2

  8. 2C Interest Expense • Interest Expense on Investments – Deduction is limited to net investment income; excess is carryover • Qualified Acquisition Indebtedness – Interest on 1st $1M loans secured by home (two homes) and spent on home; pre-10/14/87 debt qualifies, reduces $1M • Home Equity Indebtedness – Interest on 1st $100,000 of loans secured by home (two homes qualify) but NOT spent on home; no limit on pre-10/14/87 debt • Points – On a primary residence are deductible • Question 3

  9. 2D Charitable Deductions • Deductible – Cash, property, & credit card to listed orgs. (not needy ind’s); services not deductible • Out-of-Pocket Exp – Deduct ($.14 per mile) • Overall Limit – 50% of AGI for both (5 yr c/o) • Public Limit – 50% of AGI (deduct first) • Private Limit – 30% of AGI (deduct last) • Special Rules – Property (30% or 50% rules), and stringent $ limit documentation rules • Question 4

  10. 2E Casualty & Theft Losses • Casualty – Fire, storm, shipwreck or other sudden destruction • Temporary Living Expenses – Taxable, reduce by excess cost • Initial Deduction – Lesser of (1) cost or (2) decrease in FMV of property (could be repairs); reduce by insurance • Personal Loss Floors - $100 per casualty/theft, and 10% AGI on total net personal C&T loss • Business Losses – No floors, and if completely destroyed, deduct adjusted basis of property • Casualty in Federally Declared Disaster Area – May elect to deduct on prior-year return • Question 5

  11. 2F Miscellaneous Itemized Deduct. • Miscellaneous Itemized Not Subject to 2% Floor– • Impairment-related work expense • Deductions against Income in Respect of a Decedent • Unrecovered annuity or pension costs of decedent • Gambling losses of amateur, to extent of winnings • Limited expenses of certain performing artists • Miscellaneous Itemized Subject to 2% Floor: • Investment expenses for other than rent or royalty income • Allocated investment fees of nonpublic mutual funds (public funds net these on Form 1099-DIV) • Tax return preparation and litigation fees • Legal fees related specifically to tax advice • Certain hobby expenses • Question 6

  12. Topic 3 Travel & Entertainment Expenses

  13. 3A Meals and Entertainment • Deductible Entertainment – Either directly related (bus. discussion during entertain) or associated with (before or after) • Tickets - Entertainment if TP present, either as gift or entertainment if TP is not present) • 50% Disallowance – On M&E to ultimate payor • Entertainment Facilities – Maintenance cost not ded. • Country Club Memberships – Not deductible, but any direct costs incurred at facility (e.g., lunch) may be • Gifts - $25 limit per donee per year ($400/$600 for service awards); related party rules apply • Question 7

  14. 3B Transportation and Auto Exp. • Deductible Commuting Costs – Office to client, or between two jobs, incremental costs for tools/equip. • Auto – Deduct larger of actual or standard mileage • Actual Costs – All actual operating costs (gas, oil, insurance, depreciation), prorate for business usage • Std. Mileage Rate - $.485 per business mile • Parking & Fees – If business, add to either method • Actual Costs & Accelerated Depreciation – May not switch to Standard Mileage Method

  15. 3C Travel Expenses • Travel Expenses – Includes transportation, meals, lodging, incidentals while “away from home” on bus. • Tax Home – Workplace, determined by time spent, activity, & total income; may be personal residence Temporary Location – In travel status unless (1) more than one year, or (2) indefinite; in both cases, tax home has moved to new location • Transportation Costs – For domestic travel, deductible if trip is “primarily business” (bus. days > personal days); travel days are business days

  16. Topic 4 Tax Credits for Individuals: A Broad Brush

  17. 4A Child & Dependent Care Credit • Credit – Qualified amount x Qualified percentage Qualified Amount – Smallest of: • Actual qualifying child care expenses • $3,000 (one dependent), $6,000 (two or more) • Earned income of lesser earning spouse (impute at $250/ $500 mo. for each month spouse is disabled or f/t student) • Qualified Percentage – • 35% if AGI <= $15,000 • decreases 1% for each additional $2,000 AGI • constant at 20% once AGI > $43,000 • Question 8

  18. 4B Credit for Elderly & Disabled • Credit – For (1) taxpayers age 65 or older with limited social security, or (2) permanently disabled individuals of any age • Formula for Credit – 15% of: • Initial Amount*=$5,000 S, $7,500 MJ, $3,750 MS • Less any social security payments received • Less ½ AGI > $7,500 S, $10,000 MJ, $5,000 MS * Disabled substitute disability pay, if smaller • Question 9

  19. 4C Earned Income Tax Credit • E/I Credit – Refundable if no tax due (up to 60% adv) • Married – Must file MJ; if divorced, custody parent • Claimant – May not be a “qualifying child” • Investment Income Limit for Credit - $2,900 • Qualifying Child –Natural/step/ foster/ adopted, if < age 19 or F/T student < age 24, lived with TP > ½ yr • Qualifying Earned Income – Deferred comp, meals & lodging, excluded fringes (but not alimony, unemp) • Computation – Max for >1; phaseouts apply • Question 10

  20. 4D Child Tax Credit • Child Tax Credit - $1,000 for qualifying child < age 17 (natural/step/foster, brother/sister & step, or direct descendant of any of these); limited to tax liability • Phaseout of Credit - $.50 for each $1,000 AGI > $110,000 (MJ), $75,000 (S or HH), $55,000 (MS) • Refundable Portion – 15% of taxpayer’s earned income (+ combat pay) > $11,750

  21. 4E Hope Scholarship & Lifelong Learning Credits • Credits – For higher education expenses other than room & board; claimed by person eligible to take exemption (even if paid by dependent) • Hope Scholarship Credit – Up to $1,650 per student for first 2 years of post-secondary education expenses (100% of first $1,100, 50% of next $1,100) • Lifelong Learning Credit – 20% per TP for first $10,000 of expenses for all other courses • AGI Phaseout – $94,000-$114,000 MJ ($47,000-$57,000 other) • Question 11

  22. 4F Other Individual Credits • Adoption Credit – Credit for qualified adoption expenses up to $11,390 per child under age 19 or incapacitated, AGI phase out, maximum if special needs, regardless of actual costs • Elective Deferrals Credit – 50% for up to $2,000 to IRA or 403(b); phaseouts of % begin at $30,000 • Residential Energy Credits – • $500 – For nonbusiness energy property, with specified maximums of $200 (windows), $50 (circulating fans), $150 (boilers), $300 (energy-efficient building property) • 30% of up to $2,000 Cost – Alternative home solar equip.

  23. Topic 5 Determining the Adjusted Basis of Property

  24. 5A Basis of Purchased Property • Adjusted Basis = Cost + Installation + Capital Improvements – Depreciation/Cost Recovery • Taxes & Closing Costs – Add to basis • Above-Mkt. Price – If bus., excess is goodwill • Liabilities Assumed – Always in basis Property as Compensation – FMV of property received is taxable, and that becomes basis • Securities – Use specific ID; otherwise, FIFO flow; if stock split, reallocate cost to all

  25. 5B Basis of Stock Dividends and Securities • Stock Dividends – Nontaxable; spread original cost over old & new shares (tack holding periods); if blocks of securities, allocate within each block • Fractional Shares – Allocate basis (relative FMVs) • Stock Dividends – Different Class – if nontaxable, allocate old cost by relative FMVs of both stocks • Proportionate Stock Rights – If nontaxable, allocation if FMV rights > 15% FMV of stock • Question 12

  26. 5C Basis – Gift Property • Gift Basis – Gain – Always use donor’s basis • Gift Basis – Loss – Use lesser of (1) donor’s basis or (2) FMV of gift at date of gift • If FMV < Donor’s Basis – And amount realized is between the two possible bases, no gain or loss • Gift-Tax Add-On – To donor’s basis, portion of gift tax related to appreciation in value (100% for pre-77) • Donor Holding Period – Tacks if donor basis used • Figure 3 • Questions 13 and 14

  27. 5D Basis – Inherited Property • General Rule – FMV at date of death (state valuation if no federal estate tax return) • Jointly –Held – FMV on inherited portion • Alternate Valuation Date (AVD) – 6 months after date of death; elect only if (1) value of adjusted gross estate decreases, and (2) estate tax decreases • Distributed Prior to AVD – Use FMV @ distribution • Holding Period – Automatically long-term for all • Question 15

  28. 5E Basis of Personal Property Converted to Business Use • Basis for Gain – Always cost of property • Basis for Loss – Lesser of (1) cost or (2) FMV of property on date of conversion • Loss Basis – Is always the depreciation basis • Date of Conversion – Determines the cost recovery method (e.g., ACRS, MACRS, etc.) • Question 16

  29. Topic 6 Netting Capital Gains & Losses of Individuals

  30. 6A Capital Asset Definition • Capital Asset Definition – NEVER includes: • Property held for resale (e.g., inventory) • Property used productively in a trade or business • Copy, literary or artistic composition (c/o basis) • Ordinary accounts or notes receivable • U.S. Government. publications issued at a discount • Commodities and derivatives, hedges, business supplies • What is a Capital Asset? – Personal assets and Investment properties • Question 17

  31. 6B Capital Gain and Loss Netting Process • 3-Step Process – (1) Net all S/Ts, (2) Net all L/Ts (> 1 yr.), (3) if same sign, add separately to income; if opposite signs, add net difference to income • Final Result – 4 Basic Rules (for final net result): • S/T Capital Gain – Treat as ordinary income • S/T Capital Loss - $3,000 offset against ordinary income • L/T Capital Gain – 15% max. rate (5% if 10/15 bracket) • L/T Capital Loss - $3,000 offset against ordinary income • Figures 4 and 5

  32. 6C Preferential Tax Rates for Long-term Capital Gains • If Net L/T Gain – Determine appropriate rates • 15% (or 5%) - Basic rate for most L/T capital gains • 25% - For “unrecaptured Sec. 1250 gain” on realty • 28% - For collectibles, Sec. 1202 stock gain, all c/o’s • Netting Process – Four columns for 4 rates: • If 15% Nets to a Loss – Net against 28% result first • If S/Ts Net to a Loss – Net against 28% result first • If 28% Nets to a Loss – Net against 25% result first • If 25% Nets to a Loss – Net against any 15% gain result • Figures 6 and 7 • Question 18

  33. 6D Tax Treatment of Net Capital Losses • $3,000 – Maximum combined ordinary income offset for net S/T and net L/T losses each yr. (use S/T first) • $1,500 – Married – filing separately limit • If Taxable Income < Capital Loss – Full limit (up to $3,000) still assumed utilized in computing carryover • Capital Loss Carryover – Indefinite (retain character) • Decedent’s Return – No carryovers possible • Question 19

  34. Topic 7 Vacation Home Rentals Under Sec. 280A

  35. 7A Sec. 280A Basic Classifications • Sec. 280A – 3 Basic Vacation Home Rules: • De Minimis – Ignore income and expenses if rental days < 15 • Insignificant Personal Usage – If <= larger of 14 days or 10% days rented, deduct loss (passive?) • Significant Personal Use – If > larger of 14 days or 10% days rented, deductions limited to income (carryover any unused losses to future years)

  36. 7B Sec. 280A Loss Limitations • If Limit Applies – Deduct (1) interest/taxes/casualty & theft losses first, then (2) non-depreciation expense, then (3) depreciation • Allocations of Expenses to Rental & /Personal – IRS (days actually used), Bolton (365 days for int./taxes) • Co-owner Use & Swaps – Count as personal days • Repair Days (substantial) – Not personal days • Figure 8 • Questions 20 and 21

  37. Topic 8 Individual Retirement Accounts

  38. 8A IRAs – Qualification Requirements • Required – Earned comp., < age 70½ at year end • Spouses – Each has account (total comp. limit) • Contributions – Up to due date (no extension); owner cannot be trustee (bank or fiduciary is OK) • Investments in IRA – Not allowed in saving bonds or collectibles (except U.S. gold or silver coins OK) • Rollovers – If w/d, redeposit w/i 60 days; no loans • Death – IRA included in estate, can only be rolled over by spouse, can combine with spouse, basis c/o

  39. 8B IRAs – Earned Compensation • “Earned” – Limit on IRA contribution/deduction • Does Not Include - Deferred comp, unearned sources (int, div, etc.), or a limited partner’s share of income • Includes – Wages/salary/commissions, S/E income (less ½ SE tax & other retirement contributions), taxable alimony & separate maintenance payments • S/E Loss – Does not offset salary for limit • Question 22

  40. 8C IRAs – Prohibited Transactions • Prohibited Transactions – Plan and D/Q Person: • Transfer income/assets to “disqualified” person • Fiduciary acting in its own self-interest • Consideration to fiduciary from plan party • Any acts between plan/disqualified Person (sell, lending) • IRA Rule – If prohibited transaction, lose IRA status as of 1st day of year, treated as distribution of cash (FMV of account) as of first of year

  41. 8D IRAs –Maximum Contribution & Deduction • Maximum Contribution – Lesser of $4,000 per spouse ($5,000 if 50 or older), or taxpayers’ combined earned income • Maximum Deduction – Dependent on other plan participation: • Neither Spouse Participates – Maximum $4,000/$5,000 each • Both Spouses Participates – Reduce $4,000/$5,000 by $.40 (or $.50) for each $1 AGI > $52,000 (S), $83,000 (MJ), $0 (MS) • One Spouse Participates – If covered, same as both; if not covered, AGI phaseout over $156,000-$166,000 [$200 min.] • Figure 9 • Question 23

  42. 8E Roth IRAs [R] • Roth IRA – No age limit, contribute up to $4,000/$5,000; nondeductible, but no tax on withdrawals after 5-year period; reduce $4,000/$5,000 by contributions to regular IRA • Phaseout – MJ($156,000-$166,000), S($99,000-$114,000) • Tax-Free Distributions – After 5 yrs if age 59½, disabled, or first-time home buying • Regular IRA – May be converted to Roth if AGI < $100,000; recognize deferred income at conversion • Recharacterizations – Possible if trustee to trustee • Question 24

  43. 8F Educational (Coverdell) IRA • Educational IRA – Designate as such, for education expenses of beneficiary (child < 18) • Contributions - $2,000 maximum total per child, nondeductible; AGI phaseouts @$95,000/$190,000 • Amounts Spent – Nontax. if for qualified education exp; any excess taxed @ regular rate + 10% • Req. Withdrawal – Within 30 days of beneficiary reaching age 30, or date of death if before • Exceptions – Special needs, military adv. • Question 25

  44. 8G Sec. 401(k) Plans – Basic Requirements • CODA – Employee choice - cash or deferred annuity • Contributions – Excluded, 100% vested, deferred taxes, tax-free accumulations • Nondiscrimination - Tests for highly comp. • Sec. 403(b) Plan – Similar plan for educators • Maximum Contribution - $15,500 per year ($20,500 if age 50 or older) – not excluded from payroll tax • Overall Limit on Contribution – Lesser of 25% comp or $45,000, less all contributions to qualified plans

  45. Topic 9 Federal Gift Tax – A Quick and Dirty Overview

  46. 9A Requirements to File a Gift Tax Return • Certain “Gifts” Are Not Gifts for Gift Tax Purposes: • Tuition paid for someone else • Medical expense paid for someone else • Political contributions • Gifts to spouse or charity • Gifts to 3rd party < $12,000 (if present interest) • Spouses – No “joint return,” but may elect to split gifts • Generation-Skipping Transfer Tax – Any gift to “skip” (2 generations younger), tax at maximum rate, $2,000,000 exemption • Question 26

  47. 9B Types of Gifts • Types of Gifts – Include bargain sales, release of general power of appointment, forgiveness of debt (family), below-market loans, beneficiary assignment, property settlements in divorce, exchanging single annuity for joint annuity • Donee Disclaimer – Donor must receive from donee within 9 months of gift; if so, no gift has been made • Due Date – By April 15th after year end (penalties exist for late filing and/or payment) • Deceased Donor – Due date is earlier of (1) gift tax due date (2) estate tax due date (plus extensions)

  48. 9C Computing Taxable Gifts • Gift-Splitting – By married couple, splits gifts in half; (must file 709) • Annual Exclusion - $12,000 per donee per year for gifts of present interest (currently enjoy) • Marital Deduction – Unlimited for any gift to (U.S. citizen) spouse that is not a terminable interestCharitable Deduction – Unlimited for gifts of present interests to recognized charities • Credits - $345,800 unified credit, prior gift taxes paid • Figures 10, 11, and 12 • Question 27

  49. Topic 10 Federal Estate Tax – A Quick and Dirty Overview

  50. 10A Estate Tax – Minimum Requirements to File • Form 706 – Due 9 months after date of death • Gross Estate – FMV of all properties owned by decedent at death • Required Filing – If sum of gross estate and lifetime gifts > $2,000,000 (the exemption equivalent of unified credit for the estate tax) • Unified Credit – Different for gifts & estates • Questions 28 and 29

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