Gleim CPA Review Updates to Regulation · PDF filePage 1 of 21 Gleim CPA Review Updates to Regulation 2017 Edition, 1st Printing June 2017 NOTE: Text that should be deleted is displayed

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Gleim CPA ReviewUpdates to Regulation2017 Edition, 1st Printing

June 2017

NOTE: Text that should be deleted is displayed with a line through it. New text is shown with a blue background.

The revisions included in this PDF primarily update amounts to reflect tax laws that became effective January 1, 2017. These tax laws are testable on the CPA exam beginning July 1, 2017. All Gleim outlines, questions, and simulations have been updated accordingly.

This PDF does not include outline sections or questions in which the only changes were to update tax years. Please make note that these need to be updated by you for your book. Our online materials already reflect all tax year updates. As of the date of this update, the IRS had not yet released all of the 2017 tax forms. Please check www.gleim.com/taxforms for any updates. The IRS forms will be updated online as they are released.

Study Unit 1 – Ethics and Professional Responsibilities

Page 18, Subunit 1.3, item 1.a.1):

1) Requirements for licensure vary from state to state. In addition to passing the CPA examination and paying the applicable license fee, a candidate may need to satisfy a state’s educational, experience, and residency criteria.

Study Unit 3 – Federal Tax Authority, Procedures, Planning, and Individual Taxation

Page 57, Subunit 3.1, item 3.b.4)c):

c) Final regulations are adopted after public comment on the proposed versions has been evaluated by the Treasury.

i) When a proposed regulation becomes final or an existing regulation is amended, the document that describes the finalization or amendment is referred to as a Treasury Decision (TD).

ii) Some Code sections do not have final Treasury Regulations.

Copyright © 2017 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].

EXAMPLESection 385 was enacted in 1969 to provide guidance on whether a debt issue is considered stock or debt for tax purposes. Various versions of the proposed regulations have been issued and withdrawn. No final regulations have ever been issued.

https://www.gleim.com/taxforms/

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Page 61, Subunit 3.2, items 1.c. and 1.d.:

c. The penalty will not be imposed if any of the following apply:

1) Actual tax liability shown on the return for the current tax year (after reduction for amounts withheld by employers) is less than $1,000.

2) No tax liability was incurred in the prior tax year.3) The IRS waives it for reasonable cause shown.

d. Any tax liability must be paid by the original due date of the return. An automatic extension for filing the return does not extend time for payment. Interest will be chargedfrom the original due date.

1) A penalty of 5% per month up to 25% of unpaid liability is assessed for failure to file a return. Additionally, the minimum penalty for filing a return over 60 days late is the lesser of $205 210 or 100% of tax due.

Page 62, Subunit 3.2, item 3.b., table:

Tax Year Type 2016-2025 2026

Calendar/Dec. 31 Fiscal YearOriginal: 4th month (April 15)Extended: 9th month (Sept. 15)

Original: 4th month (April 15)Extended: 10th month (Oct. 15)

June 30 Fiscal YearOriginal: 3rd month (Sept. 15)Extended: 10th month (April 15)

Original: 4th month (Oct. 15)Extended: 10th month (April 15)

Calendar/Other Fiscal YearOriginal: 4th month Extended: 10th month

Page 65, Subunit 3.2, item 7.g.2):

2) The S/L is 6 years if there is omission of items of more than 25% of gross income stated in the return. Specifically for goods or services from a trade or business, gross income includes gross receipts before deduction for cost of goods sold. Onlyitems completely omitted are counted.


EXAMPLETaxpayer has AGI of $170,000 and a tax liability of $11,000 for 2017. Taxpayer’s employer withheld $7,000 for 2017. Taxpayer’s 2016 liability was $7,000.

Even though only $700 [($7,000 prior year liability × 110%) – $7,000 current year withholding] is subject to the penalty, the $1,000 minimum exception does not apply due to the fact that the exception is based on the current year. The total tax liability shown on the tax return of $11,000 minus the amount paid through withholding of $7,000 is greater than $1,000. Hence, the taxpayer will be subject to an underpayment penalty.

EXAMPLE

A sole proprietor had the following income transactions:

Gross receiptsLess: COGSNet business incomeCapital gainsGross income

$300,000 (200,000)$100,000 40,000 $140,000

For determining the 25% GI threshold, the sole proprietor's GI is as follows:

Gross receiptsCapital gainsGross income for 25% threshold

$300,000 40,000$340,000

Note that for the nonbusiness item, i.e., capital gains, only the gain and not the sale amount is included.

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Page 73, Subunit 3.5, item 3.b., example:

Page 79, Subunit 3.5, Question 19:

19. Al and Mary Lew are married and filed a joint 2016 2017 income tax return in which they validly claimed the $4,050 personal exemption for their dependent 17-year-old daughter, Dora. Since Dora earned $8,600 8,650 in 2016 2017 from a part-time job at the college she attended full-time, Dora was also required to file a 2016 2017 income tax return. What amount was Dora entitled to claim as a personal exemption in her 2016 2017 individual income tax return?

A. $0

B. $1,050

C. $1,550

D. $4,050

Answer (A) is correct. REQUIRED: The personal exemption deduction alloweda dependent. DISCUSSION: An exemption is allowed for each dependent whose gross income for the taxable year is less than the exemption amount ($4,050 in 2016 2017) or who is a child of the taxpayer and has not attained the age of 19. Nopersonal exemption may be taken on the return of an individual who can be claimed as a dependent on another taxpayer’s return. Dora’s parents are entitled to claim her as a dependent on their return. Therefore, Dora is not entitled toa personal exemption herself.

Study Unit 4 – Accounting Methods and Gross Income

Page 97, Subunit 4.2, item 11.d.4):

4) Are related to principal residence indebtedness. The basis of the residence is reduced by the excluded income.

NOTE: This exception expired December 31, 2016, but is likely to be renewed and applicable retroactively for 2017. Therefore, this course covers it as if it has been extended for 2017.


EXAMPLETaxpayer A and B file a joint return for this year. They are entitled to five personal exemptions (three children). Their gross amount of personal exemptions is $20,250 ($4,050 × 5). Their AGI of $316,300 318,800 exceeds the applicable threshold amount of $311,300 313,800 by $5,000. They must reduce the gross exemption amount by $810 ($5,000 ÷ $2,500 = 2; 2 × 2% = 4%; $20,250 × .04 = $810). Their allowable deduction for personal exemptions is $19,440 ($20,250 – $810).

THE DEDUCTION FOR PERSONAL EXEMPTIONS – 2016 2017

Filing StatusAmount perExemption

ThresholdAGI Amount Step Size

PhaseoutRate AGI Cap

Married Filing Joint $4,050 $311,300 313,800 $2,500 2% $433,800 436,300

Surviving Spouse 4,050 311,300 313,800 2,500 2% 433,800 436,300

Head of Household 4,050 285,350 287,650 2,500 2% 407,850 410,150

Unmarried (other than above) 4,050 259,400 261,500 2,500 2% 381,900 384,000

Married Filing Separately 4,050 155,650 156,900 1,250 2% 216,900 218,150

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Page 103, Subunit 4.4, item 9.b.3):

3) The taxpayer’s modified AGI must not exceed a certain limit. For 2016 2017, the exclusion is reduced when MAGI exceeds a threshold of $77,550 78,150 ($116,300 117,250 if a joint return). The amount at which the benefit is completely phased out is $92,550 93,150 ($146,300 147,250 if a joint return).


Page 106, Subunit 4.4, item 15.:

15. Foreign-Earned Income Exclusion

a. U.S. citizens may exclude up to $101,300 102,100 (in calendar year 2016 2017) of foreign-earned income and a statutory housing cost allowance from GI.

b. To qualify for exclusion, the taxpayer must either be a resident of one or more foreign countries for the entire taxable year or be present in one or more foreign countries for 330 days during a consecutive 12-month period.

c. The $101,300 102,100 limitation must be prorated if the taxpayer is not present in (or a resident of) the foreign country for the entire year.


10. Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year, Mel informs Easel that the only business expense incurred was for business mileage of 8,333 8,411 at a rate of 54 53.5 cents per mile, the IRS standard mileage rate at the time of travel. Mel encloses a check for $300 to refund the overpayment to Easel. What amount should be reported in Mel’s gross income for the year?

A. $0

B. $300

C. $4,500

D. $4,800

Answer (D) is correct. REQUIRED: The gross income reported for reimbursements from a nonaccountable plan. DISCUSSION: In a nonaccountable plan, the reimbursements are included in the employee’s gross income, and all the expenses are deducted from AGI (below-the-line-deductions). These expenses are a miscellaneous itemized deduction subject to the 2% floor. Since the employee accounted to the employer and returned the excess reimbursement, this could have qualified as an “accountable plan.” Under an accountable plan, the employee would include nothing in income and take no deduction. However, the company uses a nonaccountable plan, and Mel must include $4,800 ($400 × 12 months) in his gross income. Answer (A) is incorrect. Under a nonaccountable plan, Mel must include all reimbursements in gross income ($4,800). Answer (B) is incorrect. With a nonaccountable plan, the amount included in gross income is the total reimbursement (not limited to overpayment of the reimbursement). Answer (C) is incorrect. Under a nonaccountable plan, Mel must include all reimbursements ingross income ($4,800).


EXAMPLETaxpayer pays state income tax in excess of the standard deduction and itemizes deductions. Subsequent refunds in excess of the applicable standard deduction must be included in GI. However, if Taxpayer used filed Form 1040 EZ, which does not allow for itemizing deductions, and therefore must use the standard deduction, the refund would not be included because no tax benefit was realized.

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11. In 2016 2017, Emil Gow won $10,000 in a state lottery and spent $800 for the purchase of lottery tickets. Emil elected the standard deduction on his 2016 2017 income tax return. The amount of lottery winnings that should be included in Emil’s 2016 2017 gross income is

A. $0

B. $2,900 2,850

C. $3,700 3,650

D. $10,000

Answer (D) is correct. REQUIRED: The amount of state lottery winnings included in gross income. DISCUSSION: Gambling winnings (whether legal or illegal) are included in gross income. Therefore, Emil must include the full $10,000 in gross income. Gambling losses, i.e., amounts spent on nonwinning tickets, may be deductiblebut only as an itemized deduction to the extent of gambling winnings. Answer (A) is incorrect. All gambling winnings constitute gross income. Answer (B) is incorrect. If the standard deduction is claimed, itemized deductions are not allowed. In addition, the standard deduction reduces AGI, not the amount included in gross income. Answer (C) is incorrect. Although the standard deduction may reduce taxable income,it does not reduce the amount of gambling winnings included in gross income.

Study Unit 5 – Self-Employment and Farming


9. Automobile Expenses

a. Actual expenses for automobile use are deductible (e.g., services, repairs, gas).

b. Alternatively, the taxpayer may deduct the standard mileage rate ($.54 0.535 per mile for2016 2017), plus parking fees, tolls, etc.

Page 117, Subunit 5.1, item 10.g.3):

3) A self-employed person is allowed a deduction for the employer’s portion of the FICA taxes paid to arrive at his or her AGI. For 2016 2017, this equals

a) 6.2% of the first $118,500 127,200 of net self-employment income plus b) 1.45% of net self-employment income (no cap).

Page 118, Subunit 5.1, item 14.c.:

c. In the case of a gift (e.g., tickets to an event) that appears to qualify as a gift or a more tax friendly entertainment expense, the defining factor is attendance by the taxpayer.

Allowed Treatment Gift Entertainment

Taxpayer does not attend with customer X X

Taxpayer does attend with customer X

Page 125, Subunit 5.2, items 1.a.-d.:

1. Federal Insurance Contributions Act (FICA) -- Social Security & Medicare Tax

a. Employers are required to pay employment tax based on the employee’s pay.

b. The employer must pay

1) 6.2% of the first $118,500 127,200 (2016 2017) of wages paid for Social Security tax plus

2) 1.45% of all wages for Medicare tax. There is no cap on this tax.


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c. The Additional Medicare Tax on earned income is a 0.9% tax on wages and net self-employment income in excess of a threshold.

1) This additional tax applies to earned income exceeding $200,000 for single, head-of-household, or surviving spouse; $250,000 for married filing jointly; and $125,000for married filing separately. Employers withhold an additional 0.9% for income beyond $200,000 regardless of filing status.

d. The employer must withhold the following amounts from the employee’s wages:

1) Tier 1 – From $0 to $118,500 127,200; 7.65% × Employee’s wages (Social Security + Medicare)

2) Tier 2 – From $118,500 127,200 to $200,000 or $250,000; 1.45% × Employee’s wages (Medicare)

Page 125, Subunit 5.2, items 3.a.-b.:

3. Self-Employment Tax

a. Self-employment taxes are paid through estimated payments, not withholding.

b. The FICA tax liability is imposed on net earnings from self-employment at the employer rate plus the employee rate as follows:

1) Tier 1 – From $0 to $118,500 127,200; 15.3% × Net self-employment income

2) Tier 2 – From $118,500 127,200 to $200,000 or $250,000; 2.9% × Net self-employment income

Page 126, Subunit 5.2, item 3.d.:

e. A self-employed person is allowed a deduction for the employer’s portion of the FICA taxes paid to arrive at his or her AGI. For 2016 2017, this equals

1) 6.2% of the first $118,500 127,200 of net self-employment income plus2) 1.45% of net self-employment income (no cap).

Study Unit 6 – Adjustments and Deductions from AGI

Page 141, Study Unit 6 introduction:

Adjustments to Gross Income Itemized Deductions

• Educator expenses

• Certain business expenses for reservists, performing artists, etc.

• Health savings account deduction

• Moving expenses

• Deductible part of self-employment tax

• Self-employed SEP, SIMPLE, and qualified plans

• Self-employed health insurance deduction

• Penalty on early withdrawal of savings

• Alimony paid

• IRA deduction

• Student loan interest deduction

• Tuition and fees deduction

• Domestic production activities deduction

• Jury duty repayments

• Medical and dental expenses

• Taxes paid

• Interest paid

• Gifts to charity

• Casualty and theft losses

• Job expenses and certain miscellaneous deductions

• Unreimbursed employee expenses

• Tax preparation fees

• Other expenses (e.g., investment fees, safe deposit box, etc.)

• Other miscellaneous deductions


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[ . . . ]

2016 2017 Individual Income Tax Rates and Brackets

Rate 10.00% 15% 25% 28% 33% 35% 39.6%

Taxable IncomeFiling Status

From 10%Max. up to

From 15%Max. up to

From 25%Max. up to

From 28%Max. up to

From 33%Max. up to

From 35%Max. up toThe First

Married Filing Jointly and Qualifying Widow(er)

$18,55018,650

$75,30075,900

$151,900153,100

$231,450233,350

$413,350416,700

$466,950470,700 $Balance

Head of Household $13,25013,350

$50,40050,800

$130,150131,200

$210,800212,500

$413,350416,700

$441,000444,550 $Balance

Single $9,2759,325

$37,65037,950

$91,15091,900

$190,150191,650

$413,350416,700

$415,050418,400 $Balance

Married Filing Separately $9,2759,325

$37,65037,950

$75,95076,550

$115,725116,675

$206,675208,350

$233,475235,350 $Balance


2) The deduction for an Archer MSA is not included with other medical expenses and is not subject to the 10% (7.5% if 65 or older) limitation.


4) Distributions that do not meet any criteria on the previous page are subject to a 15 20% penalty tax.

Page 143, Subunit 6.1, item 3.b.2)a):

2) The amount that may be contributed to a taxpayer’s Health Savings Account depends on the nature of his or her coverage and his or her age.

a) For self-only coverage, the taxpayer or his or her employer can contribute up to$3,350 3,400 ($4,350 4,400 for taxpayers who have reached age 55).

Page 144, Subunit 6.1, item 4.d.2)a):

a) Instead of actual expenses, a mileage rate of $.19 .17 per mile in 2016 2017 can be used for driving one’s own automobile.

Page 144, Subunit 6.1, item 5.a.1)a):

a) 6.2% of the first $118,500 127,200 of net self-employment income plus

Page 144, Subunit 6.1, item 5.b.2)a):

a) The maximum annual contribution is limited to the lesser of 25% of the self-employed earnings or $53,000 54,000 (indexed for inflation).

Page 145, Subunit 6.1, item 8.a.:

a. Individual Retirement Arrangement (IRA) Contributions

1) For 2016 2017, contributions are fully deductible (subject to certain qualifying rules and limitations) up to the lesser of $5,500 ($6,500 for taxpayers age 50 and over) or 100% of includible compensation. Because contributions are deducted from gross income, all distributions are included as ordinary gross income.


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[ . . . ]

5) If the taxpayer is an active participant in an employer-sponsored retirement plan and has earned income of over $98,000 99,000 [married filing jointly or qualifying widow(er)] in 2016 2017 ($61,000 62,000 in 2016 2017 for head of household or single taxpayers, and $0 for married filing separate), the IRA deduction is proportionately reduced over a phaseout range.

a) An individual is not labeled an active plan participant due to the status of that individual’s spouse.

b) If an individual’s spouse is an active plan participant, that individual’s deductiblecontribution will be phased out when AGI is between $184,000 186,000 and $194,000 196,000.

[ . . . ]

8) IRA distributions made before age 59 1/2 are subject to regulation taxation plus a 10% penalty tax. Some exceptions to the penalty include distributions for

a) Death or disabilityb) Medical expenses in excess of 10% (7.5% if 65 or older) of AGIc) Qualified higher education expensesd) The purchase of a first home (up to $10,000)


9. Education

NOTE: The above-the-line tuition and fees deduction expired at the end of 2016 and is not available for tax years 2017 or later.

a. Student Loan Interest Deduction

1) Taxpayers may deduct $2,500 of interest paid on qualified educational loans in 2016 2017. This deduction is available for each year interest is paid.

2) The deduction is subject to income limits.

a) The phaseout range begins when AGI exceeds $65,000 ($130,000 135,000 for joint filers) and ends at $80,000 ($160,000 165,000 for joint filers).

b) The amount of reduction in the deduction can be calculated as follows:

$2,500 ×(AGI – $65,000)

$15,000 phaseout range

b. Tuition and Fees

1) Taxpayers may deduct a maximum of $4,000 of qualified higher education expenses paid by the taxpayer during the year on behalf of the taxpayer, the taxpayer’s spouse, or a dependent of the taxpayer.

2) Taxpayers with AGI exceeding $65,000 ($130,000 for joint filers) will not be entitled to the full deduction.

a) Taxpayers with an AGI between $65,000 and $80,000 ($130,000 and $160,000 for joint filers) are able to deduct $2,000.

b) Taxpayers with an AGI exceeding $80,000 ($160,000) do not receive any deduction.

NOTE: The tuition statement (Form 1098-T) provided to the taxpayer/student is required to include the name, address, and TIN (Taxpayer Identification Number) of the taxpayer/student.


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4. Standard DeductionSTANDARD DEDUCTION AMOUNTS -- 2016 2017

Filing Status Basic Additional

Age 65/BlindMarried Filing Jointly (MFJ) $12,600 12,700 $1,250 Qualifying Widow(er) 12,600 12,700 1,250Head of Household (HH) 9,300 9,350 1,550Single (other than above) 6,300 6,350 1,550Married Filing Separately (MFS) 6,300 6,350 1,250


d. As mentioned in Study Unit 3, Subunit 2 under Filing Requirements, the threshold requiring a tax return to be filed is generally the sum of the standard deduction (excluding any amount for being blind) plus personal exemptions (excluding dependency exemptions).


a. Amounts paid for qualified medical expenses that exceed 10% (7.5% if 65 or older or spouse of individual 65 or older) of AGI may be deducted.

NOTE: The disparity in the threshold percentage between taxpayers 65 or older and taxpayers under 65 ended starting with the 2017 tax year.

Page 151, Subunit 6.2, item 6.i.2):

2) The taxpayer may choose between actual expenditures (e.g., taxis, air fare) or $.19 .17 per mile for 2016 2017 (plus the cost of tolls and parking).


9) Qualified mortgage insurance qualifies as home mortgage interest. The taxpayer may allocate these premiums over the shorter of the mortgage or 84 months.


a. Employee expenditures not reimbursed by the employer are itemized deductions. These expenses are deductible because services as an employee are considered trade or business.

NOTE: Remember that Study Unit 4, Subunit 3, explained reimbursements under a nonaccountable plan, e.g., expense advance. The advance is income to the employee and the expense deductions are itemized as explained below and on the following pages.

Page 158, Subunit 6.3, item 2.a.3)d)i):

i) The standard mileage rate is $.54 .535 per mile for 2016 2017, plus parkingfees and tolls.

Page 158, Subunit 6.3, item 2.a.3)e):

e) Reimbursements for transportation from an employer not exceeding $.54 .535 per mile for 2016 2017 must be adequately substantiated by a record of time, place, and business purpose.


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7. Overall Limitation

a. In 2016 2017, married taxpayers filing a joint return with AGI that exceeds $311,300 313,800 ($285,350 287,650 if head of household, $259,400 261,500 if single, and $155,650 156,900 if married filing separately) must reduce the aggregate amount of their itemized deductions. The amount of the reduction is the lesser of 80% of otherwise allowable itemized deductions or 3% of the amount by which AGI exceeds the threshold.


2. A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 33% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?

A. $10,000

B. $10,500

C. $13,000

D. $13,500

Answer (D) is correct. REQUIRED: The tax liability associated with an early distribution from a traditional IRA. DISCUSSION: IRA distributions made before age 59 1/2are subject to taxation as well as a 10% penalty. Each amount is calculated based on the distribution. No penalty is applied if it is for reason of death or disability, use of medical expenses in excess of 10% (7.5% if age 65 or older) limitation, or up to $10,000 use of purchase of a first home. None of these circumstances are applicable; therefore, tax and penalty apply to the entire $30,000. The applicable tax rate is 35% for a tax liability of $10,500 ($30,000 × 35%), which is added to the penalty of $3,000 ($30,000 × 10%), for a total of $13,500. Answer (A) is incorrect. Early distributions from a traditional IRA must be taxed as well as penalized. Answer (B) is incorrect. In addition to the tax at a rate of 35%, a 10% penalty is also applicable. Answer (C) is incorrect. The tax rate used should be the marginal rate, not the effective rate.


12. In 2016 2017, Welch paid the following expenses:

Premiums on an insurance policy against loss of earnings due to sickness or accident $3,000

Physical therapy after spinal surgery 2,000Premium on an insurance policy that

covers reimbursement for the cost of prescription drugs 500

In 2016 2017, Welch recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Welch’s 2016 2017 income tax return for medical expenses?

A. $4,000

B. $3,500

C. $1,000

D. $500

Answer (C) is correct. REQUIRED: The amount of deductible medical expenses. DISCUSSION: Medical expenses are deductible to the extent they exceed 10% (7.5% for age 65 and over) of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. The term medical care also includes amounts paid for insurance covering medical care. However, the amount deductible for expenses incurred for medical care is reduced by the amount of reimbursements. The cost of insurance against loss of earnings is not deductible. Therefore, deductible medical expenses are $1,000 [($2,000 – $1,500 reimbursement) + $500]. Answer (A) is incorrect. The cost of insurance against loss of earnings is not deductible. Answer (B) is incorrect. The cost of insurance against loss of earnings is not deductible. The cost of insurance for medical care, which includes the cost of prescription drugs, is deductible. Answer (D) is incorrect. The cost of insurance covering medical expenses is deductible.


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16. Smith paid the following unreimbursed medical expenses:

Dentist and eye doctor fees $5,000

Contact lenses 500

Facial cosmetic surgery to improve Smith’s personal appearance (surgery is unrelated to personal injury or congenital deformity) 10,000

Premium on disability insurance policy to pay him if he is injured and unable to work 2,000

What is the total amount of Smith’s tax-deductible medical expenses before the adjusted gross income limitation?

A. $17,500

B. $15,500

C. $7,500

D. $5,500

Answer (D) is correct. REQUIRED: The amount of deductible medical expenses. DISCUSSION: Medical expenses are deductible to the extent they exceed 10% (7.5% for age 65 and over) of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. Therefore, $5,500 ($5,000 dentist and eye doctor fees + $500 contact lenses) qualifies for the deduction before the AGI limitation. Answer (A) is incorrect. Cosmetic surgery is not deductible unless it corrects a congenital deformity. Furthermore, only premiums paid for medical insurance that provides for reimbursement of medical care expenses is deductible. Answer (B) is incorrect. Cosmetic surgery is not deductible unless it corrects a congenital deformity. Answer (C) is incorrect. Only premiums paid for medical insurance that provides for reimbursement of medical care expenses is deductible.


20. Which of the following is a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor?

A. Gambling losses up to the amount of gambling winnings.

B. Medical expenses.

C. Real estate tax.

D. Employee business expenses.

Answer (D) is correct. REQUIRED: Identify the itemized deduction subject to the 2% of AGI floor. DISCUSSION: Miscellaneous itemized deductions are subject to a 2%-of-AGI exclusion. Only that portion of the aggregate amount of allowable second-tier itemized deductions that exceeds the threshold amount of 2% of AGI may be deducted from AGI. Any surplus cannot be carried forward to a succeeding year. The three categories of miscellaneous itemized deductions are employee expenses, tax determination expenses, and other expenses. Answer (A) is incorrect. Gambling losses up to the amount of gambling winnings are reported on Schedule A after itemized deductions that are subject to the 2% of AGI floor. Answer (B) is incorrect. Medical expenses are subject to a 10% (7.5% for age 65 and over) of AGI floor and not partof the deductions subject to the 2% of AGI floor. Answer (C) is incorrect. Real estate taxes are itemized deductions but are reported above those subject to the 2% of AGI floor.


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Study Unit 7 – Credits, AMT, and Losses

Page 168, Subunit 7.1, item 2.d.1):

1) Phases out for AGI between $55,000 56,000 and $65,000 66,000 for singles and between $111,000 112,000 and $131,000 132,000 on a joint return.

Page 168, Subunit 7.1, items 2.e.1)-2):

1) AGI limit is $30,750 31,000 ($61,500 62,000 MFJ, $46,125 46,500 HH) in 2016 2017.

2) The maximum credit is 50% of $2,000 contribution (i.e., $1,000) $1,000 on a retirement contribution of $2,000 (double the amounts if married filing jointly).

Page 169, Subunit 7.1, item 2.h.:

h. General Business Credit. The General Business Credit (GBC) is a set of several more than thirty credits commonly available to businesses. The GBC includes credits for investment, research, work opportunity, welfare-to-work, low-income housing, and alternative motor vehicles and alcohol fuels (i.e., biofuel producers), among others.

Page 170, Subunit 7.1, item 2.h.1)d):

d) Excess over the limit may be allowable as a current deduction to the extent it is attributable to the Work Opportunity Tax Credit and the Biofuel Producer Credit, among others.

Page 170, Subunit 7.1, item 2.h.2)a):

a) Generally, the maximum credit is $2,400 ($6,000 × 0.40) [$4,000 for LT Family Assistance Recipients ($10,000 × 0.40) and $1,200 for Qualified Summer Youth Employees ($3,000 × 0.40)] per non-veteran groups ($9,600 per veteran groups).

Page 170, Subunit 7.1, item 2.i.2):

2) The maximum credit is $13,460 13,570 per qualified child, including a special-needsadoption.

a) The maximum credit amount is allowed for the adoption of a child with special needs regardless of the actual expenses paid or incurred in the year the adoption becomes final.

b) The amount of the credit allowable for any tax year is phased out for taxpayers with modified adjusted gross income (MAGI) in excess of $201,920 203,540 and is fully eliminated when MAGI reaches $241,920 243,540.

Page 171, Subunit 7.1, item 3.c.1)g):

g) Have investment income less than $3,400 3,450 for 2016 2017


Page 13 of 21

Page 171, Subunit 7.1, item 3.c.5), table:

EIC: Maximum Amounts, 2016 2017Type of

TaxpayerApplicablePercentage

EarnedIncome Amount Maximum EIC

0 QC 7.65% $6,610 6,670 $506 5101 QC 34% $9,920 10,000 $3,373 3,4002 QC 40% $13,930 14,040 $5,572 5,616

3 or more QC 45% $13,930 14,040 $6,269 6,318

Page 172, Subunit 7.1, item 3.c.6), table:

EIC: Phaseout Amounts, 2016 2017

Type of Taxpayer

ApplicablePhaseout

Percentage

BeginningPhaseout Amount

BeginningPhaseout Amt. for Joint Filers

CompletedPhaseout

Amount

CompletedPhaseout Amt. for Joint Filers

0 QC 7.65% $8,270 8,340 $13,820 13,930 $14,880 15,010 $20,430 20,6001 QC 15.98% $18,190 18,340 $23,740 23,930 $39,296 39,617 $44,846 45,2072 QC 21.06% $18,190 18,340 $23,740 23,930 $44,648 45,007 $50,198 50,597

3 or more QC 21.06% $18,190 18,340 $23,740 23,930 $47,955 48,340 $53,505 53,930

Page 173, Subunit 7.2, AMT Formula:

AMT FORMULATaxable income

+ Tax preferences

+ Personal exemptions

+ Standard deduction if taxpayer does not itemize

+/– Certain other adjustments

= Alternative minimum taxable income (AMTI)

– Exemption amount2016

2017 25% phaseout

for excess over

Married filing jointly $83,800 84,500 $159,700 160,900

Single $53,900 54,300 $119,700 120,700

Married filing separately $41,900 42,250 $79,850 80,450

= Alternative minimum tax base

× Rate2016

2017

AMT base (married filing jointly)

First $186,300 187,800 ($93,150 93,900 MFS) 26%

Excess 28%

= Tentative minimum tax

– Regular income tax

= Alternative minimum tax


Page 14 of 21

Page 173, Subunit 7.2, items 3.a.-b.:

a. Only certain itemized deductions are allowed in calculating the AMT. The following are not allowed and must be added back for AMT if deducted for regular tax:

1) Miscellaneous itemized deductions (only the allowed regular tax deduction subject to 2% of AGI floor is an adjustment)

2) State, local, and foreign income taxes

3) Real and personal property taxes

b. Medical expense deduction is allowed, but only for the amount that exceeds 10% of AGI as opposed to 7.5% for regular tax for those 65 or over subject to the same 10%-of-AGI floor as regular tax. Therefore, the prior adjustment for the 7.5% AGI regular tax and 10% AGI for AMT discrepancy is no longer applicable.

Page 176, Subunit 7.2, Example:

EXAMPLE

A taxpayer over 65 with AGI of $100,000 and taxable income of $92,000 has the following return items:

• $10,500 medical expenses

• $5,000 mortgage interest paid

• $2,000 municipal bond interest received

This taxpayer’s AMTI is calculated as follows:

AGI $100,000 Exempt interest 2,000 Medical expense [$10,500 – ($100,000 × .10)] (500)Mortgage interest (5,000)AMTI $ 96,500

Page 178, Subunit 7.3, item 4.e., example:


EXAMPLEFor 2016 2017, Sally realized a $30,000 net loss (sales of $200,000 less expenses of $230,000) from operating a sole proprietorship without regard to dispositions of property other than inventory. Other than this, the income tax return showed gross income of $10,000 ($4,500 of wages, $1,000 interest on personal savings, and a $4,500 long-term capitalgain on business property). The excess of deductions over income was $30,350 30,400 ($10,000 gross income – $30,000 loss from business operations – $6,300 6,350 standard deduction – $4,050 personal exemption).

To compute Sally's NOL,(1) Add back the $4,050 personal exemption amount and(2) Add the $5,300 5,350 excess of nonbusiness deductions over nonbusiness income ($6,300 6,350 standard

deduction – $1,000 interest).

Thus, Sally’s NOL for the current tax year is $21,000 [$(30,350 30,400) “negative taxable income” + $4,050 + $5,300 5,350].

Page 15 of 21


1. Karen, filing as head of household, and her son James and daughter Julia are all in graduate school. James and Julia are not dependents on Karen’s return, although theylive with her and she pays all of their education expenses.Karen paid $6,000 in qualified tuition expenses for herselfin January 2016 2017 for the term starting in January 2016 2017. She also paid $2,500 in qualified tuition expenses for James and another $2,500 for Julia in July 2016 2017 for the terms starting in July 2016 2017. Her adjusted gross income is $66,000 67,000. Which of the following is true for tax year 2016 2017?

A. Karen may claim no American Opportunity Credit and $2,000 Lifetime Learning Credit.

B. Karen may claim $5,000 American Opportunity Credit and $1,000 Lifetime Learning Credit.

C. Karen may claim neither the American Opportunity nor the Lifetime Learning Credit.

D. Karen may claim no American Opportunity Credit and $1,000 Lifetime Learning Credit.

Answer (C) is correct. REQUIRED: The amount of American Opportunity Credit and Lifetime Learning Credit a taxpayer may claim. DISCUSSION: The American Opportunity Credit and Lifetime Learning Credit may not be claimed at the same time. The American Opportunity Credit is available during a student’s first 4 years in college. Since Karen is in graduate school, she does not qualify for the American Opportunity Credit. The Lifetime Learning Credit is available in years that the American Opportunity Credit is not taken (for example, graduate school). However, the Lifetime Learning Credit phases out for single filers whose AGI is between $55,000 56,000 and $65,000 66,000 in 2016 2017. Since Karen’s AGIis $66,000 67,000, the Lifetime Learning Credit is completely phased out.


18. Capital losses incurred by a married couple filing a joint return

A. Will be allowed only to the extent of capital gains.

B. Will be allowed to the extent of capital gains, plus up to $3,000 of ordinary income.

C. May be carried forward up to a maximum of 5 years.

D. Are not allowable losses.

Answer (B) is correct. REQUIRED: The correct statement concerning deductibility of capital losses incurred by a married couple filing jointly. DISCUSSION: The amount of capital losses that can bededucted are the lesser of the excess of capital losses over capital gains or $3,000 [Sec. 1211(b)]. The maximum amountin excess of capital gains allowed as a deduction is $3,000 ($1,500 for taxpayers filing separately). Answer (A) is incorrect. Capital losses are deductible in excess of capital gains, but this excess is limited to $3,000. Answer (C) is incorrect. Capital losses that are not deductiblein the current year may be carried forward indefinitely. The capital losses disappear at death. Answer (D) is incorrect. Capital losses are deductible to the extent of capital gains, and any excess is deductible to the extent of $3,000.


Page 16 of 21

Study Unit 8 – Property Transactions

Page 195, Subunit 8.2, item 3.e., table:

MACRS Recovery Periods (Personal Property)

MACRSRecovery

Period(# of Years)

Midpointof ADR

for Class(# of Years)

DBRate

ApplicablePercent Examples

3 4 or less 200Special tools, e.g., for rubber manufacturingMost race horses

5 >4, <10 200Computers, office machinery (e.g., copier)Cars, trucksR&E equipment

7 >10, <16 200

Most machineryOffice furniture and equipmentAgricultural structures (single-purpose)Property without ADR midpoint & not otherwise classified

10 >16, <20 200Water vessels, e.g., bargePetroleum processing equipmentFood & tobacco manufacturing

15 >20, <25 150Data communication plants, e.g., for phoneSewage treatment plantsBillboards

20 >25 150Utilities, e.g., municipal sewersNot real property with ADR midpoint 27.5 years

Page 196, Subunit 8.2, item 4.c.:

c. For 2016 2017, a deduction may be for no more than either

1) The amount of $500,000 510,000 minus the excess of Sec. 179 costs for the year over $2.01 2.03 million or

2) Taxable income from the active conduct of any trade or business during the tax year.

Page 197, Subunit 8.2, item 6.b.:

b. Any start-up costs or organizational expenses after the allowed $5,000 immediate deduction are amortized over 15 years. The $5,000 deduction is reduced by the amount of the total costs exceeding $50,000. Amortization starts with the month the active trade or business begins.


Page 17 of 21


5. Browne, a self-employed taxpayer, had 2016 2017 business taxable income of $435,000 505,000 prior to any expense deduction for equipment purchases. In 20162017, Browne purchased and placed into service, for business use, office machinery costing $450,000 508,000. This was Browne’s only 2016 2017 capital expenditure. Browne’s business establishment was not inan economically distressed area. Browne made a proper and timely expense election to deduct the maximum amount. Browne was not a member of any pass-through entity. What is Browne’s deduction under the election?

A. $435,000 505,000

B. $450,000 508,000

C. $500,000 510,000

D. $2,010,000 2,030,000

Answer (A) is correct. REQUIRED: The maximum amount of Sec. 179 deduction in 2016 2017. DISCUSSION: Tangible and depreciable personal property can be expensed by up to $500,000 510,000 in 2016 2017, the year of acquisition. This amount is reduced when the amount of Sec. 179 property placed in service in a given year exceeds $2,010,000 2,030,000. Since this limit does not apply, the maximum deduction would be $500,000 510,000; however, there are other limits. Section 179(b)(3)(A)limits the deduction to taxable income derived from the activeconduct of any trade or business. In this case, the maximum deduction is $435.000 505,000. Answer (B) is incorrect. The Sec. 179 deduction is limited to taxable income. Answer (C) is incorrect. The maximum Sec. 179 deduction of $500,000 510,000 for 2016 2017 ignores the taxable income limit. Answer (D) is incorrect. The amount of $2,010,000 2,030,000 is the threshold at which the deduction is reduced dollar-for-dollar, ignoring the taxable income limit in this case.

Study Unit 9 – Corporate Taxable Income


2) Beginning with the 2016 tax year, a A C corporation’s tax return is due on or before the 15th day of the 4th month following the close of the tax year (e.g., April 15 for acalendar year corporation).

a) Through 2025, a A corporation that files Form 7004 and pays its estimated unpaid tax liability is allowed an extension of up to 5 6 months (after 2025, it goes back to 6 months) for calendar year and fiscal year C corporations and 6months for non-calendar year or other than June 30 fiscal year C corporations.

b) An exception to the new rule applies to C corporations with a June 30 fiscal year. These C corporations will continue to have a due date of the 15th day of the 3rd month following the close of the tax year. This will continue until tax years beginning after December 31, 2025. The extension date is April 15, effective for the 2016 fiscal year resulting in a 7-month extension until tax year2026.

Page 227, Subunit 9.3, item 3.g.:

g. Deductions are limited to 10% of taxable income (TI) before any

1) Charitable contributions 2) Dividends-received deduction 3) Dividends-paid deduction Domestic production activities deduction4) NOL carryback 5) Capital loss carryback 6) Deduction allowed under IRC Sec. 249 for bond premium


Page 18 of 21

Page 228, Subunit 9.3, item 4.f.1)b):

f. The DRD is limited by the recipient corporation’s adjusted taxable income. The TI limit amount varies with the recipient’s stock ownership of the corporation.

1) To compute the limit, use TI before any of the following:

a) Dividends-received deduction b) Dividends-paid deduction Domestic production activities deduction c) NOL deduction d) Capital loss carryback e) Certain extraordinary dividend adjustments

Study Unit 10 – Corporate Tax Computations


a. Each of the following is an example of tax benefit items of which only one must be shared by the members of a controlled group:

1) Tax brackets 2) Section 179 expensing maximum of $500,000 510,000 3) AMT exemption base of $40,000 4) General business credit $25,000 offset 5) AET $250,000 presumed deduction base

NOTE: A controlled group generally may choose any method to allocate the amounts among themselves. By default, an item is divided equally among members.

Page 249, Subunit 10.5, item 1.c.2)a):

a) A 26% rate applies to the first $186,300 187,800 ($93,150 93,900 if married filing separately) of AMTI (net of the exemption amount).


7) Distributions from a trust or estate.


7) Tax exempt interest.


Page 19 of 21


Study Unit 12 – S Corporations and Exempt Organizations


d. To change its tax year other than by a Sec. 444 election, an S corporation should file Form 1128 by the 15th day of the 2nd 3rd month of the new tax year.


a. The penalty is imposed in the amount of the number of persons who were shareholders during any part of the year, multiplied by $195 200 for each of up to 12 months (including a portion of one) that the return was late or incomplete.

Study Unit 13 – Partnerships


8. Partners’ Capital Accounts

a. A capital account is maintained for each partner at the partnership level.

1) A partner’s initial capital account balance is the FMV of the assets (net of liabilities) (s)he contributed to the partnership.

2) It is separate from the partner’s AB in his or her partnership interest.

3) Basis in partnership interest vs. capital account.


COMPUTATIONAL EXAMPLE

AMT COMPUTATIONS ACE Adjustment

Taxable income (for regular tax) $200,000 ACE $400,000 Tax preference items (+) Gross tentative AMTI $300,000 Excess depletion $15,000 Installment sales 20,000 Tax-exempt bonds 1 25,000 $ 40,000 Tentative AMTI net adjustments (320,000)Adjustment items (+/–) Difference $ 80,000 Depreciation on machinery Times: Percentage × .75 ($150 – $105) $45,000 ACE adjustment $ 60,000 Mining exploration costs 15,000 60,000 Gross tentative Pre-adjustment AMTI $300,000 ACE adjustment (see computation at right) 60,000 AMT Exemption AMT NOL deduction (20,000) Basic exemption $ 40,000 AMTI $340,000 Less:Less: AMT exemption (see computation at right) 0 AMTI $340,000 AMTI (the base) $340,000 Threshold (150,000) Rate for AMT × .20 Excess $190,000 Gross tentative AMT $ 68,000 Times: Percentage × .25 Foreign tax credit (AMT) 0 Phaseout amount 47,500 Tentative minimum tax $ 68,000 AMT exemption $ 0 Less: Regular tax (62,500)AMT $ 5,500

1 No adjustment for amounts attributed to bonds issued in 2009 and 2010

EXAMPLETaxpayer contributes property that has an adjusted basis of $400 and a FMV of $1,000. Taxpayer’s partner contributes $1,000 cash. While each has increased their capital account by $1,000, the adjusted basis of Taxpayer’s partnership interest is only $400 and the adjusted basis of Taxpayer’s partner’s partnership interest is $1,000.

Page 20 of 21

Page 324, Subunit 13.2, items 13.f.-h.:

f. Starting with the 2016 tax year, a A partnership return is due (postmark date) on or before the 15th day of the 3rd month following the close of the partnership’s tax year (March 15 for calendar-year partnerships). Partnership extension periods are, like mostothers, 6 months (September 15 for a calendar-year partnership).

g. Signature by any partner is evidence that the partner was authorized to sign the return. Only one partner is required to sign the return.

h. Inadequate filing. A penalty is imposed in the amount of the number of persons who were partners at any time during the year, multiplied by $195 200 for each of up to 12 months (including a portion of one) that the return was late or incomplete.

Study Unit 14 – Estates, Trusts, and Wealth Transfer Taxes


2. Tax Rates

a. Tax is imposed on taxable income of a trust or estate at the following rates for 2016 2017:

Fiduciary Taxable Income Brackets Applicable Rate $0.00 - $2,550 15%

> 2,550 - 5,950 6,000 25% (+ $382.50)> 5,950 6,000 - 9,050 9,150 28% (+ $1,232.50 1,245.00)> 9,050 9,150 - 12,400 12,500 33% (+ $2,100.50 2,127.00)

> 12,400 12,500 39.6% (+ $3,206.00 3,232.50)


2) Any excess fiduciary taxable income over the amount at which the highest tax bracket for estates and trusts begins for the tax year ($12,400 12,500 for 2016 2017).

Page 348, Subunit 14.3, item 2.e.:

e. To the extent credit is extended with less than sufficient stated interest, the Code imputes that interest is charged. If the parties are related, the lender is treated as having made a gift of the imputed interest to the borrower each year the loan is outstanding.


a. The amount of a gift transfer to a spouse is deducted in computing taxable gifts. Donor and donee must be married at the time of the gift, and the donee must be a U.S. citizenfor the unlimited amount. For noncitizen spouses the deduction is limited to $149,000.


d. Applicable credit amount (ACA). Tentative tax may also be reduced by any ACA. The ACA is a base amount ($2,125,800 2,141,800 in 2016 2017) reduced by amounts allowable as credits for all preceding tax years. This excludes the first $5.45 5.49 million of taxable gifts.


Page 21 of 21

Page 354, Subunit 14.4, item 4.e.:

e. The ACA is a base amount ($2,125,800 2,141,800 in 2016 2017), not reduced by amounts allowable as credits for gift tax for all preceding tax years.

1) The ACA offsets the estate tax liability that would be imposed on a taxable estate of up to $5.45 5.49 million computed at current rates.

2) Any unused amount by a deceased spouse may be used by the surviving spouse inaddition to the surviving spouse’s own exclusion amount. Under this portability election, the surviving spouse could potentially have an available exclusion amount of $10.98 million.


1) The threshold is $5.45 5.49 million in 2016 2017.

Page 355, Subunit 14.4, items 6.b.-d.:

b. If a decedent has no estate tax filing requirement [perhaps due to the gross estate beingvalued at less than the basic exclusion amount ($2,125,800 2,141,800 in 2016 2017)] and for whom a return is filed for the sole purpose of making an allocation or election respecting the generation-skipping transfer tax, a Form 8971 is not required.

c. For estate tax returns filed after July 2015 and before June 2016, the due date for the corresponding Form 8971 is June 30, 2016. For estate tax returns filed after June 2016, the due date for the corresponding Form 8971 is 30 days after the due dateof the estate tax return.

d. Form 8971 is subject to both the $250 260 failure to file penalty and the accuracy-relatedpenalty equal to 20% of the underpayment. The latter applies to the beneficiary overstating the basis upon a subsequent sale. This prevents estates from claiming a low basis to avoid estate tax and a high basis to prevent a gain on the subsequent sale.


a. Each individual is allowed a $5.45 5.49 million exemption in 2016 2017 that (s)he, or hisor her executor, may allocate to GST property. The exemption is indexed for inflation. Gift splitting applies to GSTTs; $10.98 million is allocable.


EXAMPLEThe deceased spouse only used $3.45 3.49 million of the allowed exclusion. The surviving spouse is allowed a $7.45 7.49 million exclusion ($5.45 5.49 million surviving spouse original amount + $2 million unused by the deceased spouse).

Documents

Gleim CPA Review Updates to Regulation · PDF filePage 1 of 21 Gleim CPA Review Updates to Regulation 2017 Edition, 1st Printing June 2017 NOTE: Text that should be deleted is displayed