CPA® > CPA (3) REG > Area IV - Federal Taxation of Individuals > Flashcards

Area IV - Federal Taxation of Individuals Flashcards

Understanding individual income tax regulations and applications. (59 cards)

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1
Q

Under which accounting method are personal tax returns typically filed?

A

Cash Basis.

Note: This method is not allowed for Corporations, Partnerships with a C-Corp partner, or for companies with inventories if Gross Receipts exceed $25MM over a three-year period.

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2
Q

Identify the deductions that lead to Adjusted Gross Income (AGI) for individuals.

A
  • MSA/HSA contributions
  • Penalties for early investment withdrawal
  • Self-employed health insurance premiums
  • 50% of Self-Employment Tax
  • IRA Contributions (excluding Roth)
  • Student loan interest (not if claimed as another’s dependent)
  • Alimony (for divorces before 2019)
  • Qualified Tuition & Fees
  • Educator Expenses
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3
Q

Which items can be carried forward on an individual’s tax return to future years?

A
  • Excess investment interest expense
  • Charitable contributions (5-year limit)
  • Unused Section 179
  • Capital losses
  • AMT Paid
  • Passive Activity Losses
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4
Q

Describe the characteristics of Passive Activity Loss carryover for individuals.

A
  • No carryback allowed
  • Indefinite carryforward period
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5
Q

What was the 2025 maximum deduction allowed under Section 179?

A

$2,500,000, with a dollar-for-dollar reduction after $4,000,000 in qualified purchases.

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6
Q

What is the current percentage for bonus depreciation for qualifed property placed in service in 2025?

A

40% Bonus Depreciation

  • Apply the 179 Deduction first
  • 100% of the remaining amount is eligible for Bonus Depreciation
  • Applicable to New Equipment only
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7
Q

For what duration can investment interest expense exceeding investment income be carried forward?

A

Indefinitely.

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8
Q

How long can charitable contributions be carried forward on an individual tax return?

A

They can be carried forward for 5 years.

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9
Q

What is the carryforward period for AMT paid, and how can it be utilized?

A

It can be carried forward indefinitely and applied against future regular income tax, but not against future AMT tax liability.

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10
Q

How are capital losses handled in individual taxation?

A

A $3,000 net capital loss can be claimed annually, with the remainder carried forward indefinitely, maintaining its short-term or long-term character.

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11
Q

Contrast individual capital loss carryovers with corporate capital loss carryovers.

A
  1. Corporate losses are carried back 3 years and forward 5 years.
  2. Individual losses carry forward indefinitely.
  3. Individuals maintain the loss’s character (STCL or LTCL).
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12
Q

What is the current amount for personal exemptions?

A

$0. The personal exemption was repealed for individuals under TCJA.

Note: Trusts still have a personal exemption, which could make for a good Exam Day MCQ.

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13
Q

How did the Tax Cuts and Jobs Act (TCJA) change the deductibility of moving expenses?

A

Moving expenses are deductible only for military personnel under TCJA.

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14
Q

On an individual’s tax return, what is the deductible loan amount for mortgage interest?

A

$750,000

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15
Q

What is the deductible limit for interest on home equity loans on a personal tax return?

A

Total mortgage interest (Regular Mortgage + Home Equity Loans) cannot exceed $750,000 of acquisition indebtedness. Proceeds must be used to buy or substantially improve a home (i.e., not for paying off credit cards).

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16
Q

What is the AMT threshold for medical expense deductions?

A

Must exceed 10% of adjusted gross income (AGI)

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17
Q

What does the Qualified Business Income Deduction (QBID) entail?

A

The QBID is the lesser of QBID before Income Limitation or your Calculated Income Limitation.

Calculated Income Limitation:
- Taxable Income before QBID
- Minus Net Capital Gains
- Multiplied by 20%

= Calculated Income Limitation

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18
Q

For the Qualified Business Income Deduction, what does QBI-REIT-PTP cover?

A

For QBID, you may deduct up to:

  • 20% of your Net Qualified Business Income (QBI)
  • 20% of Net Qualified Real Estate Investment Trust (REIT) Dividends
  • 20% of Net Qualified Publicly Traded Partnership Income (PTP)
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19
Q

Are interest and dividends considered active or passive income?

A

Neither. They are classified as portfolio income.

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20
Q

What are the requirements to qualify for Head of Household (HOH) filing status?

A
  • Be unmarried or considered unmarried on the last day of the year
  • Pay more than half the cost of keeping up a home for the year
  • Have a qualifying person living with you for more than half the year

The Head of Household status provides a higher standard deduction and lower tax rates than the single filing status.

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21
Q

True or False:

A qualifying widow(er) can use the same tax rates as married filing jointly for two years after their spouse’s death.

A

TRUE

This status provides the benefit of using the married filing jointly rates for two years, but only if the taxpayer has a dependent child.

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22
Q

What is the basic eligibility requirement for the Earned Income Tax Credit (EITC)?

A

Must have earned income and meet certain adjusted gross income limits

Eligibility also depends on filing status, investment income limits, and the presence of qualifying children.

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23
Q

How does the Child Tax Credit (CTC) phase out for single taxpayers in 2025?

A

Phases out at $200,000

For married couples filing jointly, the phase-out begins at $400,000.

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24
Q

What is the maximum amount of foreign income that can be excluded using the Foreign Earned Income Exclusion (FEIE) in 2025?

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A

$130,000

The FEIE allows U.S. citizens and resident aliens to exclude a significant portion of foreign-earned income if they meet certain residency requirements.

25
# Fill in the blanks: To claim the foreign tax credit, taxpayers must choose either the \_\_\_\_\_\_ or the \_\_\_\_\_\_.
foreign tax credit; foreign income exclusion ## Footnote Taxpayers cannot claim both the credit and the exclusion for the same income.
26
What are the two tests used to determine whether a taxpayer is eligible for the foreign tax credit?
* Bona fide residence test * Physical presence test ## Footnote These tests determine if taxpayers are eligible to exclude foreign-earned income from U.S. taxation.
27
# True or False: The Child Tax Credit is refundable up to $1,700 per qualifying child in 2025.
TRUE ## Footnote The refundable portion is known as the Additional Child Tax Credit.
28
What is the foreign tax credit designed to prevent?
Double taxation of income ## Footnote It ensures that taxpayers do not pay tax to both the U.S. and a foreign country on the same income.
29
How is the allowable foreign tax credit calculated?
Lesser of foreign taxes paid or U.S. tax liability on foreign income ## Footnote The credit is limited to the portion of U.S. tax attributable to foreign income.
30
What filing status should be used if a taxpayer is legally separated?
Single ## Footnote Legally separated individuals cannot file jointly, even if they are not yet divorced.
31
Which form is used to claim the foreign tax credit?
Form 1116 ## Footnote This form is necessary to calculate and claim the credit, ensuring accurate credit determination.
32
What are the maximum qualifying ages for a dependent child to be eligible for the Child Tax Credit?
Under 17 at the end of the tax year ## Footnote The age limit ensures the credit supports families with younger children.
33
# True or False: Noncustodial parents can claim the Child Tax Credit if they have a signed release from the custodial parent.
TRUE ## Footnote A signed Form 8332 from the custodial parent allows the noncustodial parent to claim the credit.
34
What is the residency requirement for a child to be a qualifying child under the EITC?
Must live with the taxpayer in the U.S. for more than half the year ## Footnote This requirement ensures the credit supports families raising children in the U.S.
35
How does the EITC benefit vary with the number of qualifying children?
Increases with more qualifying children ## Footnote The credit is structured to provide more support to larger families with lower incomes.
36
What is the maximum investment income allowed to qualify for the EITC in 2025?
$11,950 ## Footnote This limit ensures the credit targets low- to moderate-income earners.
37
# Fill in the blank: The foreign tax credit is limited by the \_\_\_\_\_\_ rule.
per-country ## Footnote This rule ensures that the credit reflects the tax paid to each individual foreign country.
38
What is the additional benefit of filing as a qualifying widow(er) with a dependent child?
Use of the married filing jointly tax rates ## Footnote This status offers tax relief during a challenging life transition.
39
What is one requirement for a taxpayer to claim the Child Tax Credit for a qualifying child?
The child must have a valid Social Security number by the due date of the tax return ## Footnote This requirement ensures the accurate identification and eligibility verification of qualifying children.
40
Is unemployment compensation taxable?
Yes, unemployment compensation is generally taxable. ## Footnote Unemployment benefits are considered income and must be reported on your federal tax return. However, some states may not tax these benefits.
41
What is the tax treatment for interest earned on municipal bonds?
Interest earned on municipal bonds is generally tax-exempt at the federal level. ## Footnote Municipal bonds are issued by states, cities, or counties, and their interest is often exempt from federal taxes and, in some cases, state and local taxes if the bondholder resides in the same state as the issuer.
42
# True or False: All lawsuit damages are taxable.
False. ## Footnote Compensatory damages for physical injury or sickness are not taxable. However, punitive damages and awards for emotional distress or lost wages are generally taxable.
43
Which types of lawsuit damages are taxable?
* Punitive damages * Emotional distress (not linked to physical injury) * Lost wages ## Footnote Taxation depends on the nature of the damages; compensatory damages for physical injuries are usually not taxable, while other types may be.
44
# Fill in the blank: Interest on municipal bonds is typically exempt from \_\_\_\_\_\_ taxes.
federal ## Footnote Municipal bond interest is often exempt from federal income tax, and may also be exempt from state and local taxes if the bondholder lives in the state where the bond was issued.
45
What is the tax treatment for unemployment benefits under the American Rescue Plan Act of 2021?
The first $10,200 of unemployment benefits received in 2020 was tax-free for individuals with a modified AGI of less than $150,000. ## Footnote This was a special provision for the 2020 tax year only, aimed at providing relief during the COVID-19 pandemic.
46
# True or False: Interest from private activity municipal bonds is always tax-exempt.
False. ## Footnote Interest from private activity bonds may be subject to the alternative minimum tax (AMT), even though they are generally exempt from regular federal income tax.
47
What condition makes the interest from municipal bonds taxable at the state level?
Interest from municipal bonds may be taxable if the bondholder does not reside in the state where the bond was issued. ## Footnote State tax exemption generally applies only to bonds issued within the bondholder's state of residence.
48
Identify a key exclusion that affects the taxation of compensatory damages for physical injury.
Compensatory damages for physical injury or sickness are excluded from taxable income. ## Footnote This exclusion does not apply to punitive damages or damages for emotional distress unless linked to a physical injury.
49
What is a common misconception about the taxability of lawsuit settlements?
A common misconception is that all lawsuit settlements are tax-free. ## Footnote Only compensatory damages for physical injury or sickness are typically tax-free; other settlements like punitive damages are taxable.
50
What is the first step in calculating the Alternative Minimum Tax (AMT)?
Determine the taxpayer's Alternative Minimum Taxable Income (AMTI). ## Footnote AMTI is calculated by adjusting the regular taxable income with AMT adjustments and preference items.
51
Name two common AMT preference items.
* Tax-exempt interest from private activity bonds * Percentage depletion of natural resources ## Footnote Preference items increase the AMTI and can trigger the AMT if the taxpayer's AMTI exceeds the exemption amount.
52
# True or False: State and local tax deductions are allowed in the AMT calculation.
FALSE ## Footnote State and local tax deductions are added back to income for AMT purposes since they are not deductible under AMT rules.
53
What happens if the AMT liability is higher than the regular tax liability?
The taxpayer must pay the higher AMT liability. ## Footnote The AMT ensures that taxpayers with large incomes cannot avoid paying their fair share of taxes through deductions and credits.
54
# Fill in the blank: The AMT is designed to ensure that \_\_\_\_\_\_ pay a minimum amount of tax.
high-income taxpayers ## Footnote The AMT targets taxpayers who benefit significantly from exclusions, deductions, or credits to maintain tax equity.
55
What is a key characteristic of AMT preference items?
They are items that receive favorable treatment under regular tax rules but are added back to taxable income under AMT rules. ## Footnote Preference items can significantly increase a taxpayer's AMTI, potentially triggering AMT liability.
56
What is the purpose of the AMT exemption amount?
To reduce the AMTI for lower-income taxpayers, preventing them from being subject to the AMT. ## Footnote The exemption amount phases out for higher-income taxpayers, aligning with the AMT's goal of taxing high-income earners.
57
How does a donor report a gift for gift tax purposes?
By filing Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. ## Footnote Gifts exceeding the annual exclusion amount per recipient must be reported to ensure compliance with gift tax regulations.
58
# True or False: Gifts to a spouse are always subject to gift tax.
FALSE ## Footnote Gifts to a spouse are generally not subject to gift tax due to the unlimited marital deduction, unless the spouse is not a U.S. citizen.
59
What is the annual exclusion amount for gift tax reporting in 2025?
$19,000 per recipient ## Footnote The annual exclusion allows donors to give up to $19,000 per person in 2025 without incurring a gift tax or having to file Form 709.
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