ACC401 - Final Exam Study Guide PDF

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Tax exam study guide. (final)...

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NOTE #1: The final exam “cheat sheet” will contain the following:  MACRS Table 8.1 (Personal Property Half-Year)  MACRS Table 8.2 (Personal Property Mid-Quarter)  2016 Rate Schedule for Child & Dependent Care Tax Credit  2016 AGI Phase-Out Thresholds for Child Tax Credit  2016 Social Security Maximum Wage Base Amount  2016 Self-Employment Tax Rates  2016 Tax Rate Schedules QUARTER 1 = 1/1 – 3/31, QUARTER 2 = 4/1 – 6/30, QUARTER 3 = 7/1 – 9/30, QUARTER 4 = 10/1 – 12/31 PREFERENTIAL RATES = 0% (10/15%), 15% (25/28/33%), 20% (39.6%)… (ordinary tax bracket) 1. Use the MACRS depreciation tables, and other tax provisions, to properly calculate cost recovery deductions for different classes of personalty in the placed in service year and in the disposal year.  Section 179  AFYD  MACRS – biz or rental use, determinable useful lives (or decline in predictable basis)… TANGIBLE o Realty – land & buildings permanently affixed to the land  Residential, non-residential  Residential real estate (mix use) o Personalty – any asset is NOT REALTY (furniture, machinery, equipment, etc)  Statutory lives: 3/5/7/10/15/20  Convention: HALF YEAR (DEFAULT), MID-QUARTER (EXCEPTION) 2. Properly calculate cost recovery under Section 179 and Additional First Year “Bonus” Depreciation rules.  AFYD o 50% cost recovery deduction in YR ASSET PLACED IN SERVICE o Must take AFYD, or ELECT NOT TO o Applies to QUALIFIED PROPERTY (new property, NO BUILDINGS)  Section 179 o Immediately expense up to 500K of BIZ USE PERSONALTY & QUALIFIED REALTY (no bldgs) o Reduces depreciable basis for AFYD & MACRS (taken before afyd and macrs) o Avoid mid-quarter convention… IF ASSETS PLACED IN Q4 o LIMITATIONS  Dollar-for-dollar reduction of max deduction (500k) for expenses over $2,010,000  179 deductions CANNOT exceed taxable income (before 179) for taxpayer biz (schedule C to determine TI)  Carry over excess section 179 deduction to future years  Carried forward amount still reduces basis currently 3. Properly execute the mid-quarter convention test, and calculate cost recovery using the proper table.  Mid-quarter convention o 40% of personalty is placed in QUARTER 4 (for the year) o If exception applies: USE MID-Q FACTORS FOR ALL ASSETS TO DETERMINE COST RECOV.

4. Calculate and identify the appropriate measure of basis to use for: converted assets, gifted assets, cost recovery deductions, gain calculations, and loss calculations.  Converted assets (personal to biz/income-producing use) o Basis measure = LESSER OF:  Adjusted basis or…  Capital improvements are added to A/B  Fair market value (DATE OF CONVERSION)  Gifted assets (no cost) o DUAL BASIS (GAIN AND LOSS CALCULATIONS DIFFER)  Gain basis = CARRYOVER BASIS  DONEE Holding period = includes holding period of DONOR  Loss basis = LESSER OF:  FMV OR… DONORS A/B GIFT OF DATE o IF, loss basis = FMV & loss realized, HOLDING PERIOD BEGINS ON GIFT DATE o IF, loss basis = FMV, & amount realized FALLS BETWEEN GAIN/LOSS BASIS, nothing recognized (holding period not needed: ST/LT)  Cost recovery basis adjustments o Basis reduced by GREATER OF: allowed or allowable  Allowed – cost recovery actually taken (on return)  Allowable – amount that COULD HAVE BEEN taken  If no cost recovery claimed… STILL REDUCE BASIS BY ALLOWABLE 5. Understand how debt does and/or does not affect asset basis.  When buyer assumes mortgage on purchase from previous owner… o O/S (owed amount) is capitalized to cost basis (original basis) for the buyer o 400k house with 70k mortgage outstanding… original basis = 470k (less disposal) 6. Properly calculate amount realized on the sale of property.  7. Properly calculate adjusted basis for depreciable property and for improved property. 8. Properly identify situations where realized losses are not recognized.  Sale of personal use asset  Related party transactions 9. Utilize measures of amount realized and adjusted basis to properly calculate both realized and recognized gains and losses on sale.

10. Implement a basic strategy to minimize gain on the sale of specifically identifiable securities which have been purchased over time at different price points.

11. Properly calculate recognized gains and losses on related party sales of income producing assets.  Related Party = family members, corporation and >50% shareholders, partnership and >50% partners  GR: losses on sale of assets between related parties are DISALLOWED

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Exception: disallowed loss, can be used to reduce gain on subsequent sale of the asset to UNRELATED PARTY (sis to bro… loss not recognized, bro to random person… gain recognized use loss from related parties to offset portion) o ONLY AVAIL TO ORIGINAL TRANSFEREE o Not available for personal use assets

12. Properly calculate recognized gains and losses on the sale of gifted assets.  Ch14 practice problem 13. Determine the tax results of netting capital gains and losses, including carryover amounts, both in the year the carryforward is generated and the year the carry-forward is applied.

14. Properly identify items that qualify as capital assets, §1231 assets, and ordinary assets.  Capital assets (NO BIZ/RENTAL USE) o Investment use assets (stocks, bonds, land) o Personal use assets (residence, car) o Miscellaneous assets set by Congress  Section 1231 assets o LONG-TERM: real estate, depreciable biz use/income-producing use  Loss = ORDINARY TAX  Gain = CAPITAL GAIN, 25% PREF RATE  Depreciation recapture portion taxed ordinary rate  Ordinary asset o Business or rental use asset  Ordinary gain/loss on schedule C or E

15. Identify gains and losses as either capital or ordinary.  Capital gains/losses separated from other types because: o LT capital gains TAXED AT PREFERENTIAL RATE o Only $3000 of net capital loss deductible each year  Gains/losses classified based on: o Tax status (use labels) o Manner of property’s disposition (sale/exchange/casualty/theft/etc) o Holding period (LT/ST)

16. Calculate the recognized gain or loss on the sale of a personal residence.  Loss on sale: o Realized loss on PERSONAL (principal) residence not recognized  Gain on sale: o Gain is recognized, EXCEPTION: partly or wholly excluded under SECTION 121  SECTION 121 o Allows up to $250,000 GAIN to be excluded on sale on principal residence  Taxpayer must OWN and USE residence for at least 2/5 YEARS, ending on SALE DATE  MFJ exclude up to $500,000 if:  EITHER spouse meets 2yr OWNERSHIP  BOTH meet the 2-year USE  NEITHER is ineligible from sale within last 2 years (CAN ONLY APPLY SEC 121 EVERY 2 YEARS)

17. Calculate the recognized gain or loss on the transfer of a personal residence in a divorce settlement, and properly identify the basis of the property in the hands of the party receiving the asset.

18. Determine the amount of the reduction in tax liability derived from a percentage based tax credit.  1000 expenditure, 25% credit o Tax credit 25% = 250 credit NO MATTER TAX BRACKET o Tax deduction = 0% bracket – 0 credit, 15% bracket – 150 credit, 35% bracket - 350

19. Calculate the dollar amount of the child tax credit, including using the phase out rules.  Nonrefundable - $1000 PER CHILD o ELIGIBLE CHILD:  Under age 17 (16 or younger)  US citizen, AND  Claimed as dependent on taxpayer’s return o PHASE OUT:  $50 for each $1000 of AGI above specified levels  $110,000 MFJ  55,000 MFS  75,000 SINGLE 20. Calculate the dollar amount of the child & dependent care tax credit.  TO QUALIFY, employment related costs: (costs so you can go to work, childcare/etc) NONREFUNDABLE o Dependent (child) under 13 (12 years or younger)

Dependent or spouse who is PHYSICALLY or MENTALLY incapacitated, and lives with taxpayer over half the year Credit amount o Eligible care costs * applicable %  % range from 20% to 35% DEPENDING ON AGI  AGI < 15000 = 35%  AGI > 43000, % rate drops 1% each $2000 from that threshold o Married must file MFJ for credit ELIGIBLE CARE COSTS**** o Costs to care for qualified individuals, within taxpayer home or outside o IF OUTSIDE HOME, handicapped dependent or spouse must spend at least 8 hours in home o Qualified costs = LESSER OF: actual costs vs. $3000 for 1 qualified or $6000 for 2 qualified individuals o ELIGIBLE COSTS CANNOT EXCEED THE LOWER OF TAXPAYERS EARNED INCOME o

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21. Use a tax formula worksheet & the 2016 tax rate schedule, to determine the total tax to report on Form 1040 for a comprehensive set of taxpayer facts. 22. Calculate Gross Income, AGI, and Taxable Income given a set of facts. 23. Calculate total deductions for (before) AGI given a set of facts. 24. Calculate total itemized deductions given a set of facts. 25. Choose between the standard deduction and itemized deductions to maximize tax benefit for the taxpayer.  If Itemized is higher than standard, choose ITEMIZED 26. Identify and properly treat expense items which are deductions FOR AGI and those that are deductions FROM AGI (itemized deductions). 27. Calculate the profit or loss for tax purposes for a schedule C business and the related self-employment tax.  Self-employment tax o Find schedule C profit o Apply 7.65% cutback (*0.9235) o Find SS 12.4% tax to FIRST $118500 o Find medicare tax 28. Properly test individuals for dependency status.  Qualifying child o Relation test: DOWNWARD LOOK OF TREE (MUST BE YOUNGER) o Age test: under age 19 (18 or less), under age 24 (23 or less) if student  IF DISABLED: age test voided o Abode test: must live with taxpayer more than half the year (temp absence not considered) o Support test: child cannot provide more than 50% of support (tests child)  Qualifying relative (UP AND DOWN FAMILY TREE) o Relation test: also includes UNRELATED PARTIES lived entire year with taxpayer o Gross Income test: dependent cannot make more than $4050 o Support test (tests taxpayer): taxpayer must provide more than 50% of support 29. Determine the proper dollar amount of personal and dependency exemptions on a tax return. 30. Identify cash inflow and cash outflow amounts that are not reported on a tax return and explain why.

31. Specify which legal expenses are deductible and which are not.  Personal legal expenses not deductible  Legal expenses to resolve breaking law is not deductible  Legal expenses for divorce to determine allocation is deductible 32. Execute the proper tax treatment for employee business expenses and for business expenses of self-employed individuals. 33. Properly apply the 50% cut back for entertainment expenses and determine the total expense deduction.  Meals, entertainment, other items are cutback from FMV… tips included in meals, MUST ALL BE RELATED TO BUSINESS

Deductions “for” AGI Partial list includes: • Trade or business expenses (Schedule C) •

Deductions from losses on sale or exchange of property

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Deductions from rental and royalty property (Schedule E)

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Alimony

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One-half of self-employment tax paid

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100% of self-employed health insurance premiums

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Contributions to pension, profit sharing, IRAs, etc.

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Moving expenses

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Interest on student loans

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Qualified tuition and related expenses under § 222

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$250 of supplies for elementary & HS school teachers

Deductions “from” AGI Itemized deductions include: • Medical expenses (in excess of 10% of AGI) •

Certain state and local taxes

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Contributions to qualified charitable organizations

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Personal casualty losses (in excess of 10 % of AGI & a $100 floor per casualty) •

Non-personal loss (inv use) = OTHER MISC. (no floor)

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Certain personal interest expense (e.g., mortgage interest, property tax)

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Miscellaneous itemized deductions (in excess of 2% of AGI)...