Austin Income Tax Planning Deck

Question 1

Kiddie Tax

Answer 1

1. The Kiddie Tax only applies to “unearned income” in excess of $2,300 (2022).
2. The Kiddie Tax applies to children under age 19 (or under age 24 if the dependent is a full-time student).

Formula:
1. $1,150: NO TAX (this is the standard deduction)
2. $1,150 - $2,300: Taxed at Child’s tax rate
3. Over $2,300: Taxed at the parent’s tax rate

Unearned Income
1. Interest; Dividends; capital gains; Unearned trust income
2. Royalties; Rent
3. Pension and Annuity Income

Question 2

Modified Accelerated Cost Recovery System (MACRS Property Classes)

Answer 2

M.A.C.R.S Property: MACRS property is depreciable if it wears out, has a useful life that exceeds one year, and is used in a trade or business or for the production of income.

5 Year Useful Life (depreciates in 5 years)
* Automobiles
* Office equipment/ appliances/ machinery
* Cattle/ Livestock

7 Year Useful Life (Depreciates in 7 years)
* Office Furniture/ desks/ chairs

Question 3

S Corporation

Answer 3

• An S corporation is normally created under law by FIRST forming a C-Corporation and THEN FILING an “S” Election with the IRS
• Can pay owner’s compensation in the form of “dividends”, which are not taxed for FICA and are deductible by employer

Requirements:
1. Must be a domestic corporation
2. May not have more than 100 shareholders, and
3. May not be owned by C corporations, partnerships, and certain trusts.
4. The corporation is allowed only one class of outstanding stock
5. Share owners must be U.S citizens/ U.S Residents/ or U.S Trusts

Question 4

Section 1231 Assets

Answer 4

Assets that are used in a trade or business. They are either (1) depreciable property or (2) real property.
They do not include:
1. Inventory
2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business
3. Copyrights or creative works
Section 1231 specifically includes certain property, such as:
1. Timber or Unharvested crops (under certain conditions)
2. Coal
3. Iron Ore
4. Certain Livestock

Question 5

What are the “wash sale” rules?

Answer 5

1. Wash sales occur when a taxpayer disposes of securities at a loss and acquires substantially identical securities within 30 days before or after the date of the loss sale.
2. The disallowed loss is added to the cost of the new stock or security to determine the new basis of the substantially identical securities.
3. Wash sale rules do not apply to gains.
4. Wash Sales CAN APPLY TO IRAs

Question 6

What are the steps for netting capital gains and losses?

Answer 6

1. First, net long term capital gains and long term capital losses.
2. Second, net short term capital gains and short term capital losses.
3. Third, if the taxpayer has a net loss in one category and a net gain in the other category, then the net long term gain/loss should be netted against the net short term gain/loss.

Question 7

What is the standard deduction for a taxpayer who is claimed as a dependent?

Answer 7

Greater of:
* $1,150 (2022), or
* $400 plus earned income (but not exceeding the single standard deduction).
* Additional standard deduction if it applies.

Question 8

Qualifying Relative Test (4)

Answer 8

1. Not a Qualifying Child Test - The person cannot be the qualifying child of any other taxpayer.
2. Relationship Test - The person either (a) must be related to the taxpayer (b) must live with the taxpayer all year as a member of their household
3. Gross Income Test - The person’s gross income for the year must be less than $4,400 (2022)
4. Support Test – The taxpayer must provide more than half of the person’s total support for the year.

ADDITIONAL: joint return test, and citizenship or residency test

Question 9

A Qualifying Child Tests (4)

Answer 9

1. Relationship Test - The child of the taxpayer must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.
2. Age Test - The child must be (a) under age 19 at the end of the year, (b) under age 24 at the end of the year and a full-time student, or (c) any age if permanently and totally disabled.
3. Abode Test - The child must have lived with the taxpayer for more than half of the year.
4. Support Test - The child must not have provided more than half of his or her own support for the year.

Question 10

Workers Comp Included/ Excluded from Income

Answer 10

Excluded:
1. Workers’ Compensation for personal physical injury or sickness
Included:
1. Punitive Damages
2. Damages for Emotional Distress

Question 11

Charitable Organizations and Deduction %

Answer 11

60% Deduction:
1. CASH donations to Public Charities
50% Deduction Organizations:
1. Public Charities (not cash)
2. Private Operating Foundations
3. Pass Through Private Foundations
30% Deduction Organizations:
1. Private Non-Operating foundations

General:
1. If someone donates and receives an item in return: charitable deduction can only be taken in the amount OVER the FMV of the item you received: Amount paid - fmv = deduction amount
2. If you make a donation of an object; you can only take deduction for the mount you paid for it (basis)

Question 12

Federally Declared Disaster

Answer 12

Federally Declared Disasters:
1. Loss amount is deductible (ONLY if from disaster)
2. The deduction is limited to the net disaster loss.

Unreimbursed casualty expenses ARE NOT tax deductible unless there is a federally declared desaster

Question 13

Child Tax Credit

Answer 13

Define:
$2,000 for each dependent child under age 17 for 2022.
Eligible children are:
* Partially Refundable (up to $1500 per child)
Eligible children are:
Under age 17, a US citizen, and claimed as dependent on taxpayer’s tax return.
Phaseout:
Single; MFS: $200,000
MFJ: $400,000

Question 14

Child and Dependent Care Credit

Answer 14

Must have employment-related care costs for a: dependent under age 13, or handicapped dependent or spouse.
Credit Amount (Dependent on AGI)
* Eligible care costs x applicable percentage
* Applicable percentage ranges from 20% to 35%.
* Amount of costs that qualify is the lesser of actual costs or $3,000 for one qualified individual, and $6,000 for two or more qualified individuals.

Question 15

Vacation Home Treatment (Personal or Rental)

Answer 15

Personal Use Property:
1. Considered Personal Use property if rented for LESS THAN 15 days
2. No gross income from rentals and no deductible rental expenses.
2. In addition, the mortgage interest and property taxes are treated as if on personal residence (generally deductible in full).

Not Considered Rental Property:
1. NOT Rental property if: Used for personal use of 14 days OR 10% of rental days

Mixed Use Property:
1. Can ONLY offset rental expenses up to the amount of rental income earned

Question 16

Treasury Department Regulation (3)

Answer 16

Final Regulations:
* have the full force and effect of law
* the second highest authority of tax law (after the IRC)
* Types of Final (3): Procedural; Interpretive; Legislative
Temporary Regulations
* Temporary regulations are issued when guidance is needed quickly
* HAS the SAME AUTHORITY value as final regulations.
Proposed Regulations
* A PREVIEW of final regulations and have ZERO legal precedence

Question 17

3 Types of Final Treasury Regulation

Answer 17

Procedural Regulations:
1. are essentially housekeeping instructions.

Interpretive Regulations:
1. implement the intent of committee reports and the IRC.

Legislative Regulations:
1. allow the Treasury to determine the details of the law. However, Congress must specifically delegate this authority to the Treasury.

Question 18

Revenue Procedures

Answer 18

1. Revenue procedures describe internal practices and procedures within the IRS.
2. Revenue procedures, like Revenue Rulings, are published in the Internal Revenue Bulletin.
3. Revenue Procedures generally state changes in techniques and administrative procedures used by the IRS.

Question 19

Revenue Rulings

Answer 19

1. Revenue Rulings are interpretations of the tax laws issued by the IRS. They are usually provided in response to a taxpayer request and are based on facts common to many taxpayers.
2. While Revenue Rulings do not have the full force and effect of law, they are binding on officials of the IRS.

Question 20

Private Letter Rulings

Answer 20

1. Private Letter Rulings (PLRs) are issued by the IRS at the request of the taxpayer. - With regard to the taxpayer who requested the PLR, the IRS is bound by its determination in the ruling.
2. PLRs are made available to the public after deletion of certain materials and can be used by other taxpayers as guidance regarding the described transaction.
3. PLRs cannot be relied on by other taxpayers as precedent.

Question 21

IRS Statute of Limitations

Answer 21

For Assessment of Deficiency:
1. Generally 3 years from due date of return
2. 6 years if material omission (25% of income or more)
For Refund
1. Later of 3 years from date return is filed or 2 years from date of payment.

No statute if fraudulent return

Question 22

Depreciation Property Requirements

Answer 22

1. It must be property you own.
2. It must be used in your business or income-producing activity.
3. It must have a determinable useful life.
4. It must be expected to last more than one year.

Question 23

Section 179 General Rules

Answer 23

1. Can elect to immediately offset UP TO $1,080,000 (for 2022) of business tangible property placed in service during the year AGAINST Net Business Income
2. Can ONLY offset UP TO Net business income (cant create a loss)
3. Cannot use Section 179 for realty or production of income property. NOT FOR RENTAL PROPERTY
4. The amount expensed reduces depreciable basis.
5. Cost recovery available on remaining basis… meaning you CAN carryforward losses
6. CANNOT exceed cost of the property put in service

Expense limitation:
* is reduced by amount of Section 179 property placed in service during year that exceeds $2,700,000.
* Paint IS NOT a deductible expense

Question 24

Income Tax Consequences of Section 1031 Exchange (real-estate)

Answer 24

General Notes:
1. Clients who receive only like-kind property in the exchange will not have any current income tax consequences.
2. You CANNOT use a 1031 for personal property/ primary residence (must be used in trade or business)
3. Must be exchanged for a property with a similar use
4. 45 Days: to identify a new property
5. 180 days to complete the transaction
Party Trading UP:
* The party trading up recognizes no gain and adds to their old basis any boot/cash given to the other party.
Party Trading Down (receiving less like-kind property than given up)
* will be required to recognize gain to the extent of boot received.
* If the boot exceeds gain, the amount of boot in excess of the gain is treated as a return of capital and reduces the basis in the new asset.
Basis in New Asset:
FMV of New Asset - gain not recognozed (trade up) + loss not recognized (trade down)

Question 25

1231 Asset

Answer 25

Section 1231 Asset Definition: is “depreciable or real property used in a trade or business.”

Main Benefity of Section 1231 Assets:
1. Gains generated from the sale of a Section 1231 asset are treated as capital gains (must be held for 1 year)
2. losses generated from the sale of a Section 1231 asset are treated as ordinary losses for income tax purposes.

Question 26

Important Business Entity Information

Answer 26

Flow Through/ Pass Through Entities:
1. Partnerships
2. LLCs AND LLPs
3. S-Corps
Entities with UNLIMITED Liability
1. General Partnerships
2. Sole Proprietorships
Self Employment Income (self-employment tax)
1. Proprietorships
2. Partnerships
3. LLPs
W-2 Income
1. S-Corp
2. C-Corp

Question 27

Major Tax Forms

Answer 27

• 1099: Income for independent contractors
• W-2: Income tax return to report income from employer
• W-4: Used when hired to determine withholding
• 1040: individual income tax return form that is submitted by April 15th
• Form 5500: annual form filed by TPAs for ERISA plans (File Deadline is: End of 7th month after plan year ends)
• Form 5498: Reflects contributions to a IRA
  Other:
  1. Widow can maintain MFJ status for the year that the spouse died
  2. Widow can maintain MFJ for following 2 years IF she is taking care of dependent child!

Question 28

Above the Line Deductions (FOR AGI) (7 of them)

Answer 28

1. Trade or business expense (ordinary; Necessary; and reasonable)
2. Loss of sale or exchange on property
3. One half of self employment tax paid
4. Contributions to IRA; HSAs; 401(k); Pension; Profit Sharing; etc
5. Interest on Student Loans
6. Educator Expenses
7. 100% of health insurance premiums paid by the self employed individual

REMEMBER:
1. These can be taken with below line deductions or standard deductions
2. Child support and Alimony (if after 2018) CANNOT be taken as a deduction to income!

Question 29

Below the Line Deductions (FROM AGI)

Answer 29

1. Charitable contributions
2. Limited Casualty Losses (Federally Declared Disaster)
3. Medical expenses IN EXCESS of 7.5% of AGI
4. Interest on mortgage (limited)
5. Interest on investments (limited)
6. HELOC Interest: ONLY if used for home improvement
7. Mortgage insurance premiums
8. Taxes (state, sales, local, and property):
9. Long-Term Care Premiums (DETERMINED BY INSURED’S AGE)

Question 30

AMT Preference Items (3 of them) (P.P)

Answer 30

1. Percentage depletion
2. Intangible drilling costs
3. Interest on private activity bonds

REMEMBER: Preferences can ONLY BE POSITIVE; which is BAD for the taxpayer (increase AMTI)

Question 31

Net Unrealized Appreciation (NUA) (Define and Formula)

Answer 31

Net Unrealized Appreciation (General)
* Taxpayers who receive a lump-sum distribution of employer securities (stock) may benefit
* Allows more favorable treatment for employer stock only

Tax Calculation:
1. Basis = FMV of the securities at the date of contribution IS TAXED AT ORDINARY INCOME
2. Gain on the Excess of basis = Taxed at long term capital gain rates

Question 32

Gift Tax Notes:
1. Net Gift
2. Bank Account vs Investment Accounts

Answer 32

Net Gift:
* A net gift is simply a gift for which the recipient agrees to pay the gift tax, thereby reducing the value of the gift for tax purposes
* can have gift tax consequnces for giftor
Bank Account vs Investment Account:
Joint Bank Account: Gift is made when child TAKES OUT
Investment Account: Gift is made AT FUNDING

Question 33

Home Office Deduction Rules

Answer 33

1. Employees may only take the home office deductionif they maintain a home office for the convenience of the employer
2. The home office deduction is limited to income from the home office activities; BUT any allowable excess deduction may be carried forward to later years
3. Home office must be used exclusively and regularly as the principal place of business and deal with customers

Question 34

Cash Basis vs Accrual Basis Taxpayer

Answer 34

Cash Basis Taxpayer:
1. You pay taxes based on when income is RECEIVED
2. when you perform the service or did the work does not matter
Accrual Basis Taxpayer:
1. You pay taxes WHEN YOU PERFORM A SERVICE
2. when you receive the income does not matter
3. Typically much more complicated and uses accounts receivable

Question 35

Alternative Minumum Tax (AMT)

Answer 35

Define:
* An alternative minimum tax (AMT) places a floor on the percentage of taxes that a filer must pay to the government, no matter how many deductions or credits the filer may claim.
* AMT is a tax that applies to high-income individuals who otherwise might pay little or even no taxes due to breaks
Rules:
1. Tentative Minimum Tax (TMT) is difference between AMT and the AMT Exemption
2. Individual must pay AMT if the AMT is higher than ordinary income tax
3. AMT is MANDATORY and not a choice of the taxpayer

Question 36

AMT Adjustments

Answer 36

AMT Adjustments can be Positive OR Negative
Common AMT Adjustments:
1. Accelerated Depreciation for real and personal property
2. Standard Deduction IF: itemized deductions arent used
3. Taxes: State and Local
4. Incentive Stock Options ONLY (NOT NQSO)

ISO Rules:
* At Exercise: ADDED TO AMT
* At Sale: NEGATIVE to AMT

Additional:
SOME adjustments made for AMT purposes result in a permanent increase in tax

Question 37

AMT Preference Items

Answer 37

Preference Items: ALWAYS ADDED for AMT:
1. Percentage Depletion (depreciation allowed for domestic fossil fuel production)
2. Intangible Drilling Costs
3. Interest on private activity bonds

Remember:
1. Preference items are ALWAYS ADDED (bad for person)
2. Drilling related stuff and private activity

Question 38

Cost Basis:
1. General
2. Inherited Property
3. Gifted Property

Answer 38

General:
1. Cost Basis = Original Cost + Additions - Capital Recoveries
2. Capital Recoveries: Depreciation take OR Casualty Losses
Inherited Property (received from estate) General Rule:
1. Step Up in Basis to FMV at death OR Alternate Date
2. EXCEPTION: Deathbed gifts made within 1 year of death have carryover basis (donor basis–>Donee Basis)
Gifted Property:
1. Most situations; gifted property receives carryover basis (basis from donor is moved to be the basis of the donee)
Gifted Property Exceptions:
1. Loss Property: If Sale Price < FMV then FMV at date of gift is donees new basis
2. Appreciated Property with Gift tax paid

Question 39

Gift Taxation

Answer 39

General Gift Tax Rules (during life):
1. Donee (Recipient) Basis: Carryover Basis…same basis as donor
2. Donee Holding Period: Carryover holding period…take on holding period from donor

2 EXCEPTIONS (see Calc/ Steps to remember):
1. Property gifted at a loss (when FMV is LESS than Basis)
2. Gifted Property at a GAIN WITH GIFT TAXES PAID

Question 40

83(b) Election

Answer 40

1. 83(b) election is made for restricted stock/ stock bonuses
2. With an 83(b) election entirety of Ordinary Income tax is paid when the stock is given to the employee
3. NO TAXES are paid when stock VESTS; even if there is a significant gain

Question 41

Passive Activity Rules

Answer 41

Common Problems: Refer to 2 Filter Method!
1. What is suspended loss of @ risk
2. What is suspended loss of Passive income
General Rules:
1. No material participation
2. Rental activities (even with material participation UNLESS you are a real estate dealer)
3. IF you are a real estate dealer, you CAN deducti $25,000 against ordinary income (does have a phaseout)
Material Participation:
1. Greater than 500 hours per year, OR
2. Greater than 100 hours and the most of any participant. INCLUDE Similar activities
Definitions:
1. At Risk: Amount of initial investment
2. Passive Income: amount of Passive Income from ALL Passive actities