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CFP Exam - BIF Exam Prep > BU - Tax > Flashcards

BU - Tax Flashcards

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1
Q

What is the flow of the tax formula - high level

A

Income
-minus exclusions
Gross income
-minus deductions FOR AGI
AGI
-minus deductions FROM AGI
Taxable Income
-multiplied tax rate
Gross Tax
-minus tax credits
Final tax due
-minus prepayments
Net tax payable or refund due

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2
Q

What is included in “income”

A

both taxable and non-taxable income from ANY source

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3
Q

What is gross income

A

income reduced by exclusions

includes wage, dividends, capital gains, business income, retirement distributions

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4
Q

What is AGI

A

measure of income that falls between Gross income and taxable income

it is important because it is used in tax computations

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5
Q

What is taxable income

A

AGI reduced by deductions FROM AGI

the amount of income that is taxed and is used to determine tax rates

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6
Q

What is gross tax?

A

the tax assessed against the money you earn

can be further reduced by applicable tax credits

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7
Q

What are exclusions from income?

A

exclusions are income that are not taxable

IF I ADDED SCAM PAM

Inheritances & gifts
Fringe benefits

Interest on education savings bonds (Series EE/I)

Accident & health plan - ER premiums
Death benefits (life insurance proceeds)
Dependent care assistance program (public assistance)
Education assistance program - up to $5250
Debt discharge - certain circumstances

Scholarship
Compensatory damage compensation
Accident & health plans - amounts received
Meals & lodging for EEs

Personal residence sale up to $250k/$500k
Adoption assistance program - up to $14890 (22) AGI phaseout
Municipal bond interest

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8
Q

AGI calculation

A

Gross income - deductions for AGI (above the line deductions or adjustments to income)

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9
Q

What are deductions for AGI (Above the line)

Be Ms Hearts

A

Business expenses

Educator expenses

Moving expenses

Self employment tax - ER portion

HSA & Health Ins. Premiums (SE)
Early withdrawal penalties
Alimony payments before 2019

Retirement account contributions

Traditional IRA contributions
Student loan interest

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10
Q

Itemized Deductions

A

Schedule A
Below the line or deductions FROM AGI
If filing MFS, and one itemizes, so will the other

  • Unreimbursed medical/dental expenses - exceeding 7.5% of AGI
  • Taxes paid: State, local and property taxes - up to $10k
  • Interest paid: Mortgage interest paid on up to $750k and Investment interest limited to net investment income
  • Gifts to Charity: cash limited to 60% of AGI, private and public different maxes
  • Casualty/Theft losses: FEDERALLY DECLARED DISASTER, lesser of FMV or BASIS - Insurance PMT - $100 deductible; losses in excess of 10% AGI

Mortgage interest qualifies if you buy, build or substantially improve primary or secondary home

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11
Q

Standard Deduction

A

Higher if taxpayer is 65+ and/or blind

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12
Q

Tax Deductions v Tax Credits

A

Deductions reduces taxable income; credit lowers tax due
Deductions adjust before tax rates: credit adjusts after tax rates
Deductions reduce tax by marginal percentage; credit reduces tax due dollar to dollar
Deductions are more valuable to high income tax payers; credit benefit all tax payers

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13
Q

Refundable and non refundable credits

A

Refundable:
Earned Income Credit
Add’l child tax credit
American Opportunity Credit
Premium Tax Credit

Nonrefundable:
Child & Dependent Care Credit
Child Tax Credit
Retirement Savings Contribution Credit
Lifetime Learning Credit

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14
Q

Forgiveness of Debt is …

A

A taxable event

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15
Q

Tax Forms/Schedules & Functions

A

Form 1040 Individual Income Tax Return
Form 1040X 1040 Amended Tax Return
Form 1040ES Est. Tax for Individuals
Form 1041 Estates and Trusts
Form W-2 Wages & Taxes

Schedule 1 Add’l Income and Adjustments to Income
Schedule A Itemized Deductions
Schedule B Interest and Dividend Income
Schedule C Profit/Loss from Business
Schedule D Capital Gains/Losses
Schedule E Rental and Royalty Income
Schedule F Profit or Loss from Farming
Schedule H Household Employment Taxes
Schedule SE Self Employment Tax
Schedule K1 Partnership Distributions

706 Estate & GSTT
709 Gift & GSTT
1098 Mortgage Interest Statement
1099-DIV Dividends & Distributions
1099-INT Interest Income
1099-NEC Non-employee comp
1099-MISC Miscellaneous Income
1099-R Retirement Distributions

Form 4868 Extension of time to file
Form 5498 IRA contributions Individuals
Form 8606 Nondeductible IRAs

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16
Q

Tax Filing Status

A

Marital status on 12/31 determines the whole year
Sometimes more than one filing status may apply

Single - unmarried, divorces or legally separated
MFJ - married, spouse dies in current year
MFS - married & filing separately
HoH- unmarried, and taxpayer paid more than 1/2 of cost to keep up home for themselves and a qualifying person
Qualifying Widow(er) w/Dependent - spouse dies during tax year & a there is a dependent child

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17
Q

MFJ

A

Married & spouses agree to file
Income + deductions for both used
Not allowed in one spouse is a non-resident alien
Jointly + separately liable

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18
Q

Head of Household

A

Single or unmarried
Pay more than 1/2 housing costs
Qualifying child - lived w/taxpayer more than 1/2 the year
Qualifying relative - provided at least 50% annual living expenses

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19
Q

MFS

A

2 separate returns
Each spouse separate items + income, deduction and credits
If one itemizes, the other must too

Lose credits: Child & dependent care, earned income, adoption, AOTC, LLC, student loan interest

Reduced credits: child tax credit & savers credit

Must file when gross income exceeds $5

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20
Q

Widow(er)

A

Not married
Year of death = MFJ or MFS
Year 2 & 3 = QW if 50% of household expenses & claim qualifying child

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21
Q

Estimated Tax Payments

A

Form 1040-ES
May be required if taxpayer has income that doesn’t withhold taxes such as investment income, rents, self employment and capital gains.

To avoid penalty on underpaid amounts, the est. quarterly payments must be 25% the lesser of the following amounts:

  • 90% of the tax liability shown on the current year return
  • 100% of the tax liability shown on the previous year return if the AGI was $150k or less

If AGI is greater than $150k ($75k MFS), no penalty if quarterly payments equal:

  • 110% of the prior year’s tax
  • 90% of the current year’s tax
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22
Q

Tax Penalties Reasons (4)

A

Taxpayer does not:

File a tax return on time
Pay any taxes owed on time and in the right way
Prepare an accurate return
Provide accurate information returns

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23
Q

Types of Penalties

A

Negligence - Deficiency of tax liability if there was no intent to defraud

Fraud - taxpayer intends to defraud

Frivolous return - “go pound sand” written across the return

Failure to File -

Failure to Pay -

Understatement of liability - if the tax withheld from W-2 or estimated payments is less than required

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24
Q

Tax Penalty amounts

A

Negligence - 20% to the amount of deficiency
Fraud - 75% to the amount of deficiency
Frivolous Return - $5000
Failure to file - 5% of unpaid taxes for each month or part of month the return is late up to 25%
Failure to pay - .5% per month tax is unpaid up to 25%
Understatement of liability - based on amount of underpayment, when it was due and interest rate for underpayments published quarterly

Failures by the tax preparers:
to give copy to taxpayer $50/each
to signed returned $50/each
to provide identification number: $50/each
to retain copy or list: $50/each
to correct information: $50/each
to be diligent in determining eligibility for certain tax benefits: $545 for HoH or the following credits - dependent credits, add’l child tax credit, child tax credit, AOTC, Earned income tax credit, LLC

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25
Q

S Corp

A

Limited liability
Max 100 owners (members of a family may be treated as 1)
Only one class of ownership interests
Dividends are not taxed

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26
Q

C Corp

A

Limited liability
Two levels of income tax
Liquidation is taxable to corp and shareholders
Losses are not deductible by shareholders

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27
Q

Partnerships

A

Limited partners have protection from partnership’s debt
Must have at least 2 owners

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28
Q

Limited Liability Company

A

Limited liability

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29
Q

Sole Proprietorship

A

No limited liability
Only 1 owner
NO classes of ownership
Losses are deducted on the owner’s tax return

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30
Q

Self Employment Tax

A

Made up of social security and Medicare (12.4% & 2.9%)

If taxable income is more than $147K, then only the 2.9% applies to the excess (1.45 ER an 1.45 EE)

1/2 of the SE tax is adjusted to income on Schedule 1 (For AGI deduction)

1/2 of SE tax is subtracted from net earnings from self employment in the calculation of the max contribution to retirement

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31
Q

Calculate Self Employment Tax

A
  1. Get Net Earnings
  2. Multiply Net Earnings by .9235
  3. Multiply Step 2 by .153 to get SE tax

Remember to subtract 1/2 of the SE tax FOR AGI

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32
Q

Accounting Methods

A

Cash Method - recognizes expenses when they are paid and revenue when they are actually or constructively received

Constructive receipt - occurs when the funds are available without restrictions

Accrual Method - recognizes revenue when the “right to receive” exists (account receivables); recognizes expenses when the liability can be clearly established

Hybrid method - accrual for inventory purchases and sales of the inventory, but cash used for service portion

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33
Q

Inventory & Accounting Method

A

When prices are rising:

FIFO = higher profit, higher tax liability, realistic inventory value

LIFO = lower profit, lower tax liability, understated inventory value

When prices are falling:

FIFO = lower profit, lower tax liability, realistic inventory value

LIFO= higher profit, higher tax liability, overstated inventory value

Specific Identification: major advantage is that both inventory and COGS are accurate

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34
Q

Depreciation items and requirements

A

Tangible items such as: buildings, machinery, vehicles, furniture and equipment

Intangible items such as: patents, copyrights and computer software

Must meet ALL the following:

  1. must be property owned by the taxpayer
  2. must be used in business or income producing activity
  3. must have determinable useful life
  4. must be expected to last more than 1 year
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35
Q

Depreciation Types

A

Straight-line

  • (Purchase Price - salvage value)/useful life = yearly deduction *except year 1 and last year*

Accelerated

  • Used to increase cash flow or max deduction
  • Adjusted basis x MACRS rate
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36
Q

Useful Life

A

ACHORN

Auto = 5 years

Computers = 5 years

Heavy Machines = 7 years

Office Furniture = 7 years

Residential Real Estate = 27.5 years

Non-residential Real Estate = 39 years

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37
Q

Depreciation Notes

A

Depreciation reduces the owner’s basis

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38
Q

Not Capital Assets

A

ACID

Accounts or note receivable from ordinary business

Copyrights (literary, musical or artistic composition, letter, memo)

Inventory or property held primarily for sale to customers

Depreciable property used in business (1231 assets)

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39
Q

Methods to Determine Cost Basis

A

FIFO - IRS default, cost determined from the shares that were purchased first

Avg Cost - determined by averaging all purchases

Specific ID - best and most powerful

40
Q

Net Capital Gain =

A

Excess of net LTCG over net STCL

41
Q

Netting Capital Gains process

A
  1. Separate short term and long term into baskets
  2. Net each basket
  3. Net the two baskets together
42
Q

Taxation on LT and ST gains

A

Long-term - see tax tables Short-term - ordinary tax rates 3.8%

Net Investment Income tax can be triggered

43
Q

Capital Gains

A

Taxable income determines LTCG tax rate 0/15/20 STCG is taxed at ordinary rates

Unrecaptured 1250 gains are taxed at 25% Collectibles = 28%

Net Investment Income tax of 3.8% could be triggered

$3000 Capital loss per year, ($1500 for MFS), allowed and excess can be carried over indefinitely

44
Q

Net Investment Income

A

is the amount that gross investment income & cap gains net income exceeds the allowable deductions

will owe the tax if net investment income AND MAGI are over thresholds

Tax is the lesser of net investment income OR excess of the MAGI over threshold

45
Q

Items NOT investment income

A

Wages Unemployment comp

Operating income from non passive business

Social security benefits

Alimony Tax-exempt interest

SE income

Distributions from certain qualified plans

Tax exempt interest on gov’t obligations

46
Q

1231 Property - what is it and how is it taxed?

A

Property that is used in trade or business AND Property held for the production of income

Gains are taxed at capital gains

Losses are taxed as ordinary losses

47
Q

1231 parts

A

1245 - personalty (furniture, computers, carpet)

1250 - realty (buildings, barns, rental property)

48
Q

1245 Property Taxation

A
  1. Original cost - depreciation = adjusted basis
  2. If the property is sold below adjusted bass > reported as ordinary loss
  3. If the property is sold between adjusted basis > the amount over adjusted basis will be recaptured as ordinary income
  4. If the property is sold above original cost > the amount above adjusted basis will still be recaptured at ordinary income , but the amount over the original cost will be taxed as capital gains
49
Q

1250 Property Taxation

A
  1. Original cost - depreciation = adjusted basis
  2. If the property is sold below adjusted bass > reported as ordinary loss
  3. If the property is sold between adjusted basis > the amount over adjusted basis will taxed at 25% (unrecaptured gain)
  4. If the property is sold above original cost > the amount above adjusted basis will still be taxed at 25% (unrecaptured gain), but the amount over the original cost will be taxed as capital gains
50
Q

Section 1031: Like Kind Exchanges

A

Allows for the deferral of gain or loss recognition on realty for realty exchanges

Only applies to 1231 property, and must be realty for realty

Boot is non-qualifying property

Boot kicks in tax

51
Q

Section 1031: Time Requirements

A

The taxpayer has 45 days from the date of transfer to identify potential replacement properties

The replacement must be received and the exchange completed no later than whichever is earlier:

  1. 180 days after the transfer of the original property OR
  2. the due date (with extensions) of the tax return for the tax year in which the transfer of original property occurs
52
Q

Section 1031: Definitions

A
  1. Amount Realized: FMV of qualifying property received +/- net boot
  2. Realized Gain: the amount realized - the basis of the property transferred
  3. Recognized Gain: the lesser of realized gain or net boot received******
  4. Deferred Gain: the realized gain - recognized gain
  5. Substituted basis: FMV of qualifying property received - the deferred gain
53
Q

Section 267: Related Party Transaction

A

Related person: spouse, child, grandchild, parent, sibling, entities where taxpayer owns more than 50% of the stock

Gains are treated normally

Losses will not be recognized until asset is sold to an unrelated party

Losses may be allowed, partially allowed or disallowed.

The related party purchaser is who has a chance to use the loss

54
Q

What entities are “pass-through”

A

S-Corp, Partnerships, LLC

55
Q

At-Risk Rule

A

applies before the passive activity rules

states that he taxpayer can only deduct losses to the extent that there is enough basis (amount at risk)

If a loss passes the at-risk rules, THEN the loss will be subject to the passive activity rules

56
Q

What are the two types of interests in passive activities

A

Private interests - LLC, partnership or S-corp

Public interests - publicly traded partnership

57
Q

How do you handle Private interests and PTPs losses

A
  1. Separate private interests from PTPs
  2. Private interest passive losses are allowed to be netted against all private interest passive income, Losses can not exceed income
  3. PTPs income can ONLY be netted against PTP losses from the SAME PTP. You can only do this by netting current year PTP income against a prior suspended loss from the same PTP
58
Q

passive activity rules

A

passive losses can only used to the extent of passive income

excess passive losses will be suspended

59
Q

Rental activities are considered passive activities except when…

A

taxpayer ownership is at least 10% of the property AND substantial involvement in managing the property

60
Q

Actively participate in rental real estate can deduct up to

A

$25k loss if MAGI is equal to or less than $100k

$25k is phased-out if MAGI is $100k-$150k

no loss allowed if MAGI is over $150k

61
Q

Active participant: Real Estate Loss Deduction Calculation

A

(150k - MAGI)/2 = max loss allowed

62
Q

3 categories for tax treatment of property

A

Personal Use

Rental Use

Mixed Use

63
Q

Personal Use requirements of property

A

Rented for less than 14 days

Not required to report rental income

Can deduct mortgage interest and taxes as itemized deduction

only applies to primary and vacation home

64
Q

Rental Use Property requirements

A

Personal Use is less than 14 days or 10% of days rented

Trips to property for maintenance and repairs do not count as personal usage

All expenses allocated to the property are allowed and the property can produce passive losses subject to the passive activity rules

65
Q

Mixed Use property requirements

A

Personal use is more than 14 days or 10% of days rented

Expenses must be allocated between personal and rental use

Deductions are limited to gross rental income

Unused losses are carried forward to future years

66
Q

Determining Rental property category

A

Is rental use less than 14 days? Yes then personal use

Is personal use less than 14 days or 10% of days rented? yes than rental use

If no, then mixed.

67
Q

Section 121: Personal residence Sale Exclusion

A

Cannot recognize loss for personal residence sale

Exclusion can be used every 2 years (730 days)

Taxpayer must meet both usage and ownership test

If married, both spouses have to pass the usage test and 1 spouse must meet the ownership test

Taxpayer who do not meet the ownership or usage test, or use the the exclusion more than once within 730 days, may qualify for reduced exclusion

68
Q

IRC lists the following as acceptable reasons for a reduced exclusion:

A
  • Job relocation
  • Employment change leaves you unable to pay your living expenses
  • Qualifying for unemployment benefits
  • Health issues
  • Divorce or legal separation
  • Birth of twins or other multiples
  • Damage to home from disaster
  • Condemnation or seizure of the property
  • Other unforeseen circumstances
69
Q

Section 121 Reduced exclusion

A

(#of days or months in home)/(either 730 days or 24 months) x 250k (or $500k) exclusion to get the prorated exclusion

70
Q

Section 121 Usage and Ownership Tests

A

Single taxpayer

must have owned the home for 2 years out of the last 5 years and used it for 2 out of the last 5 years

Married taxpayers

One must have owned the home for 2 years out of the last 5 years and both must have used it for 2 out of the last 5 years

71
Q

Charitable Contributions: Record keeping requirements

A

Gifts less than $250 require a receipt

Gifts more than $250 require a donor letter

Donor responsible for obtaining written communication from organization

72
Q

Charitable Contributions: Services

A

Can only deduct un reimbursed expenses incurred

Examples: unreimbursed transportation expenses, lodging, meals while away from home

Mileage can be deducted at .14/mile rate

Services are not deductible

73
Q

Charitable Contributions: Auctions

A

Purchase price minus FMV = contribution deduction

74
Q

Charitable Contributions: Use Related and Use UnRelated

A

Related: charity makes use of the donated property in a manner consistent with exempt purpose

Deduction is 30% of FMV or 50% of cost basis

Unrelated: charity uses property in a way unrelated to the exempt purpose (art given to school that will not use it for education purposes)

Deduction is the lesser of cost basis or FMV

75
Q

Charitable Contributions: Types and Max Deductions

A

Cash - no valuation needed, 60% for public and 30% for private

LTCG - Donor elects FMV (30% public and 20% private) or Basis (50% public and 30% private)

Ordinary - capital assets held for less than 12 months, or property created by donor, inventory 50% public and 30% for private)

76
Q

Charitable Contributions: Carryover

A

Contribution in excess of AGI limit in the current year can be carried over for 5 succeeding years

Subject to the original percentage limits in the carryover years

Deducted after deducting current year contributions

Carryovers 2+ years, the earliest carry over is used first

77
Q

Alimony Recapture: conceptual

A

This only applies for alimony agreements before 2019 & alimony payments decrease or stop during the first 3 years

If applicable, the payor will have to include in income in the 3rd year (previously deducted) & payee can deduct from income in the 3rd year (previously reported as income)

78
Q

Alimony Recapture: test and calculations

A

Is P1 - P2 > $7500? AND Is P2-P3 > $15K

If no - then no alimony recapture require, did not front load

If yes - then decide which calculation to use

  1. P2-P3 >$15000 then use P1 + P2 - 2(P3) - $37,500 = recaptured
  2. P2-P3=$15000 then use P1 - [(P2 + P3) / 2] - $15,000 = recaptured
79
Q

Imputed Interest Income: conceptual

A

The IRS authorized to impute an interest charge if the taxpayer charges less than adequate

IRS looks closely at gift loans, corporate shareholders loans and compensation related loans greater than $10k

Exceptions are loans or gifts less than $10k, debt subject to original issue discount provisions, sales of property less than $3k and when all payments are due within 6 months

80
Q

When do apply imputed interest income

A

Loan amount = $10k or less then no imputes

Loan amount = $10k-$100k then it is the lesser of NII and AFR (if NII is $1000 or less, no imputed interest)

Loan amount = $100k+ then the AFR is used

81
Q

Alternative Minimum Tax: conceptual

A

AMT applies to taxpayers with high economic income by setting a limit to ensure those taxpayers at least pay a minimum tax

Applies to individuals, corporate and trust tax returns

When AMT exceeds regular tax liability, the difference is known as AMT payable

If a taxpayer is subject to AMT in the current tax year:

  • Accelerate income* into the AMT year
  • Defer tax deductions* until a regular tax year

The optimal strategy would be to do as above until the AMT liability equals the regular tax liability.

82
Q

Alternative Minimum Tax: calculation flow

A

Regular taxable income

Add in tax preference items

Add in standard deduction (if TP does not itemize)

Add/Subtract AMT adjustments and tax preference items

= AMTI (Alternative Minimum Taxable Income)

Subtract Exemption Amounts (phased out)

= AMT Bases

X AMT tax rates

= Gross AMT Tax

Subtract AMT foreign tax credit

= Tentative Minimum Tax

Subtract Regular tax liability

= AMT

83
Q

Foreign Accounts: When are you required to file an FBAR

A

Foreign Bank and Financial Accounts

When US person has a financial interest in or signature authority over at least one account outside the US

and

The aggregate value exceeds $10k at any time during the year

Must file FinCEN Form 114 by tax deadline (Financial Crimes Enforcement Network)

84
Q

Foreign Accounts: When are you required to file Form 8938

A

US Taxpayer holds financial assets outside the US of certain threshold - due with 1040

Financial accounts include: savings, deposit, checking and brokerage accounts held with a bank or broker

Thresholds:

MFJ (US residents) $100k on last day or $150k at any point

MFS or Single (US resident) $50k on last day or $75k at any point

MFJ (non US) $400k on the last day or $600k at any point

MFS or Single (non US) $200k on last day or $300k at any point

85
Q

Kiddie Tax applies to…

A

dependent children under 19 or full-time students under 24 that is claimed as a dependent by parents

86
Q

Kiddie Tax: Earned Income v. Unearned Income

A

Earned: wages, tips, professional fees, any amount received for performing work

Unearned: interest, dividends, capital gains, rents, royalties

Distributions of unearned income from a trust are also unearned income to a beneficiary of a trust

87
Q

Kiddie Tax: Standard deduction for dependent

A

$1150 or earned income + $350, but not more than the standard deduction for single

88
Q

Kiddie Tax: calculation of just unearned income

A

Unearned Income - $1150

next $1150 is taxed at 10%

Remaining is taxed at parents tax rate, this is the “kiddie tax”

Add the $115 to the “kiddie tax” to get total tax due

89
Q

Kiddie Tax: calculation of just earned and unearned income

A

Step 1: Gross Income (this is earned + unearned) Minus the standard deduction (this is the greater of the $1150 or earned income +350) = Child’s taxable income

Step 2: (Unearned income - $2300) x parent’s tax rate = parent’s tax due

Step 3: (Child’s taxable income - amount taxed at parent’s rate) x 10% = Child’s tax due

Step 4: Add parent’s tax due + child’s tax due = total tax due

90
Q

If an expenditure either improves the efficiency of an asset or extends the life of an asset beyond the end of the year

A

the expenditure should generally be capitalized.

91
Q

Corporate charitable deductions are limited to _____ of the corporation’s taxable income for the year.

A

25%

92
Q

Application form to change accounting periods

A

Form 1128

93
Q

Qualifying child must meet these tests

A

Relationship

Age

Abode

Support

94
Q

S Corp and Personal Services adopt this accounting period

A

calendar year

95
Q

Criminal tax fraud carries a max penalty of

A

$100k and prison up to 5 years, or both.

96
Q

Statue of Limitation for tax return

A

3 years from the date the tax return was filed

6 year if tax payer omits items of gross income in total excess of 25% of gross income

Unlimited/indefinite if fraud

97
Q

Section 179 Expense Election

A

only pertains to property used in trade or business NOT for property for the production of income

$1,080,000 max amount is reduced dollar for dollar to the extent the firm exceeds $2.7M in capital spending

The deduction of any elected 179 expense is limited to the firm’s net profit, not including 179 expenses

Any elected 179 expense that is limited by profitability can be carried over to next year’s taxes

For purpose of profitability, a sole-pro can aggregate net business profit with unrelated W-2 wages

CFP Exam - BIF Exam Prep (17 decks)

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