CPA® > CPA (6) TCP > Area I - Tax Compliance and Planning for Individuals and Personal Financial Planning > Flashcards

Area I - Tax Compliance and Planning for Individuals and Personal Financial Planning Flashcards

Understanding tax compliance and financial planning for individuals. (51 cards)

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1
Q

How does gift taxation differ from estate taxation?

A

Gift taxation applies to property transferred during the donor’s lifetime.

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2
Q

What is the annual gift tax exclusion limit and its requirements for tax year 2025?

A

The annual exclusion is $19,000 per individual, per spouse. A married couple can give up to $38,000 tax-free. The recipient must have immediate and unrestricted access to the gift’s benefits.

This rule helps reduce taxable gifts.

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3
Q

Which value is used for a gift when it’s an annuity?

A

Use the Present Value to assess the gross gift amount.

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4
Q

Explain the basic formula for calculating gift tax for tax year 2025.

A

Gross Gifts

- Half of gifts attributed to spouse

- (Number of donees x $19,000 exclusion)

= Taxable Gifts

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5
Q

What happens to gift tax if the recipient only gains future ownership?

A

If future ownership is obtained, the donor faces 100% taxation on the present value, with no exclusion possible.

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6
Q

List additional gift tax deductions beyond the annual exclusion.

A
  • Tuition and medical payments made directly
  • Political contributions
  • Charitable donations
  • Unlimited gifts to a spouse
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7
Q

How is the basis of gifted property determined for the recipient?

A

For a loss, use FMV at gift date. For a gain, use the donor’s basis. No gain/loss if the donor’s basis is less than sale price and above FMV.

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8
Q

When must gift tax returns be filed?

A

Gift tax returns are due annually, with a deadline of April 15.

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9
Q

What is the basic property basis calculation?

A

Cost + Purchase expenses + Assumed debt + Back taxes and interest = Basis.

Taxes and interest from periods when the property wasn’t owned are added to the basis, not deducted.

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10
Q

How is the basis determined for donee’s property received as a gift?

A

Gain sale: Use donor’s basis.
Loss sale: Use lower of donor’s basis or FMV.
In-between sale: No gain or loss.

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11
Q

What is the basis and holding period for inherited property?

A

The basis is the FMV at death or 6 months later if elected. If sold before 6 months, use FMV at death. All inherited property is LTCG regardless of holding time.

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12
Q

What is the standard deduction for a single filer in the 2025 tax year?

A

$15,000

The standard deduction reduces the amount of income subject to tax and varies by filing status. It’s subject to annual adjustments for inflation.

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13
Q

True or False:

Charitable contributions can be deducted if you take the standard deduction.

A

FALSE

Charitable contributions are deductible only if you itemize deductions on your tax return.

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14
Q

Fill in the blank:

The deadline for filing individual tax returns in the U.S. is typically ______.

A

45762

If April 15 falls on a weekend or holiday, the deadline may be extended to the next business day.

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15
Q

List three types of income that must be reported on an individual tax return.

A
  • Wages and salaries
  • Interest and dividends
  • Rental income

All sources of income, unless specifically exempted, must be reported on the tax return. This includes earned and unearned income.

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16
Q

What is the tax rate for qualified dividends for most taxpayers for tax year 2025?

A

0%, 15%, or 20%, depending on taxable income and filing status.

Qualified dividends are taxed at capital gains tax rates, which are lower than ordinary income tax rates for most taxpayers.

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17
Q

True or False:

A taxpayer can claim a child as a dependent if the child provides more than half of their own support.

A

FALSE

To claim a child as a dependent, the taxpayer must provide more than half of the child’s support during the tax year.

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18
Q

What is the purpose of Form 1040?

A

To report individual income, calculate taxes owed or refunds due.

Form 1040 is the U.S. Individual Income Tax Return and is used by individuals to file their annual income tax returns.

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19
Q

List two common tax credits available to individual filers.

A
  • Earned Income Tax Credit (EITC)
  • Child Tax Credit

Tax credits reduce the amount of tax owed and can sometimes increase a refund, unlike deductions which reduce taxable income.

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20
Q

Fill in the blank:

The maximum contribution to a Traditional IRA for individuals under 50 is ______ for 2025.

A

$7,000

The IRS sets limits on contributions to retirement accounts, which can be adjusted periodically for inflation.

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21
Q

What is the penalty for early withdrawal from a retirement account?

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A

10% penalty

Withdrawals before age 59½ from retirement accounts such as IRAs and 401(k)s typically incur a 10% early withdrawal penalty, in addition to regular income tax.

22
Q

What is a passive activity under IRS regulations?

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A

A trade or business activity in which the taxpayer does not materially participate.

Passive activities generally include rental activities and businesses in which the individual does not actively engage in management or operations.

23
Q

True or False:

Losses from passive activities can be used to offset active or portfolio income.

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A

FALSE

Passive losses can only offset passive income. Any excess passive losses are carried forward to future years to offset passive income in those years.

24
Q

Fill in the blank:

The ______ rule limits the deductible loss for passive activities to the amount the taxpayer has at risk in the activity.

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A

at-risk

The at-risk rule is designed to prevent taxpayers from deducting more than their actual economic stake in an activity.

25
What test determines material participation in an activity?
The taxpayer must meet one of the seven tests for material participation set by the IRS. ## Footnote Examples include: participating for more than 500 hours, being the only individual participating in the activity, or participating more than anyone else.
26
Name two types of income that are typically considered non-passive.
* Salaries and wages * Portfolio income ## Footnote Non-passive income is generally active income or income from investments, which is not subject to passive activity loss limitations.
27
What happens to unused passive activity losses?
They are carried forward to future years until they can be deducted against passive income. ## Footnote These losses can also be deducted in full if the taxpayer disposes of their interest in the activity in a fully taxable transaction.
28
How does the at-risk limitation apply to rental real estate activities?
The at-risk limitation restricts losses to the amount the taxpayer has at risk in the rental activity. ## Footnote This means that deductions are limited to the extent of the taxpayer's financial investment in the property.
29
# True or False: Taxpayers can elect to group multiple activities to meet material participation requirements.
TRUE ## Footnote Taxpayers can group activities if they constitute an appropriate economic unit, which can help meet material participation standards more easily.
30
List one exception to the passive activity loss rules for real estate professionals.
Real estate professionals can treat rental real estate activities as non-passive if they materially participate. ## Footnote A taxpayer qualifies as a real estate professional if more than half of the personal services they perform in trades or businesses during the year are in real property trades or businesses.
31
What is the primary purpose of the passive activity loss rules?
To prevent taxpayers from using losses from passive activities to reduce taxes on active income. ## Footnote These rules were enacted to close loopholes that allowed taxpayers to generate tax losses without significant economic risk.
32
What is the annual gift tax exclusion amount for 2025?
$19, 000 ## Footnote The annual gift tax exclusion allows a donor to give up to $19,000 per recipient each year without incurring a gift tax or using the lifetime gift and estate tax exemption.
33
# True or False: Gifts to a spouse who is a U.S. citizen are subject to the gift tax.
FALSE ## Footnote Gifts to a spouse who is a U.S. citizen are generally unlimited and not subject to the gift tax due to the unlimited marital deduction.
34
Name two types of transfers that are generally not considered gifts for tax purposes.
* Tuition payments made directly to an educational institution * Medical expenses paid directly to a medical provider ## Footnote These are exceptions under the IRS rules, which allow direct payments for qualifying education and medical expenses to be excluded from gift taxation.
35
# Fill in the blank: The lifetime gift and estate tax exemption for 2025 is \_\_\_\_\_\_.
$13.99 million ## Footnote This exemption is the total amount that an individual can give away during their lifetime and at death without incurring federal estate or gift taxes.
36
What is a 'split gift' in the context of gift taxation?
A 'split gift' allows a married couple to treat a gift made by one spouse as if it were made equally by both, effectively doubling the annual exclusion amount. ## Footnote For 2025, this means a couple can give up to $38,000 per recipient without gift tax implications.
37
# True or False: Gifts to a political organization are subject to the gift tax.
FALSE ## Footnote Gifts to political organizations are exempt from gift tax under IRS regulations.
38
Identify one key difference between gift tax and estate tax.
Gift tax applies to transfers made during a person's lifetime, while estate tax applies to transfers made at death. ## Footnote Both taxes are unified under a single lifetime exemption but are assessed at different stages of wealth transfer.
39
What form must be filed to report gifts above the annual exclusion?
Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return ## Footnote This form is required for reporting gifts that exceed the annual exclusion or when using part of the lifetime exemption.
40
List two strategies to minimize gift tax liability.
* Utilizing the annual gift tax exclusion * Making direct payments for educational and medical expenses ## Footnote These strategies effectively reduce taxable gifts, thereby preserving the lifetime exemption for larger future transfers.
41
Explain the term 'generation-skipping transfer' (GST) in gift taxation.
A GST is a transfer of assets to a person who is at least two generations younger than the donor, such as a grandchild. ## Footnote GSTs are subject to their own tax, in addition to the gift tax, to prevent avoidance of estate taxes through skipping generations.
42
What is the primary objective of personal financial planning?
To achieve personal economic satisfaction. ## Footnote Personal financial planning helps individuals manage their finances to meet short-term and long-term goals while considering risk tolerance, life goals, and resources.
43
Name three key components of a comprehensive financial plan.
* Budgeting and saving * Investment planning * Risk management and insurance ## Footnote A comprehensive financial plan also includes tax planning, retirement planning, and estate planning to ensure all aspects of personal finance are covered.
44
# True or False: Emergency funds should cover at least 3-6 months of living expenses.
True. ## Footnote An emergency fund acts as a financial safety net, providing liquidity during unforeseen events like job loss or medical emergencies.
45
# Fill in the blank: \_\_\_\_\_\_ is the process of evaluating potential investments for their potential risk and return.
Investment analysis. ## Footnote Investment analysis is crucial for making informed decisions about where to allocate resources to achieve financial growth while managing risk.
46
What is the role of insurance in personal financial planning?
To protect against financial loss from unforeseen events. ## Footnote Insurance helps individuals mitigate risks associated with health, life, property, and liability, ensuring financial stability in adverse situations.
47
List two benefits of tax planning.
* Minimizing tax liability * Maximizing after-tax income ## Footnote Effective tax planning involves understanding tax laws and using deductions, credits, and strategies to optimize financial outcomes.
48
What is the significance of retirement planning in personal financial planning?
Ensures financial independence during retirement years. ## Footnote Retirement planning involves saving and investing to accumulate sufficient funds to maintain one's lifestyle after ceasing employment.
49
# Define: estate planning
The process of arranging for the management and disposal of a person's estate during life and after death. ## Footnote Estate planning aims to minimize taxes and legal complications, ensuring beneficiaries receive assets according to the individual's wishes.
50
# True or False: Diversification reduces investment risk.
True. ## Footnote Diversification spreads investments across various assets, reducing the impact of a poor performance from any single investment on the overall portfolio.
51
What is the purpose of a budget in personal financial planning?
To track income and expenses, ensuring financial goals are met. ## Footnote A budget provides a framework for managing finances, helping individuals identify spending patterns and adjust to maintain financial health.
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