CFP - 4.1 Tax Flashcards
What is the taxable income formula?
INCOME minus EXCLUSIONS equals GROSS INCOME
GROSS INCOME minus DEDUCTIONS equals AGI
AGI minus the greater of the STANDARD DEDUCTION or ITEMIZED DEDUCTIONS equals
TAXABLE INCOME
What is the business purpose doctrine?
A business must have a valid business purpose and cannot be formed just to take advantage of lower tax rates on a transaction
What are tax law doctrines?
Made by the IRS to guide people in what is proper vs abusive tax management
What is the substance-over-form doctrine?
Allows the IRS to look through the formalities of a transaction to determine its actual economic substance
What is the assignment-of-income doctrine?
“Fruit and the tree” A taxpayer who earns income cannot assign that income to someone else for tax purposes
Jill is in the highest income tax bracket. She directs her employer to assign $18k of her income to her son who is in the lowest tax bracket. What is the tax consequence?
Can’t do this according to the assignment of income doctrine. Jill’s W-2 would include the $18k AND she would have made a gift of the $18k to her son. She would have to file a gift tax return.
A corporate executive has the company loan him money rather than receive it as income. What is the tax consequence?
Substance-over-form: the IRS will likely deem this as income as the loan proceeds are in lieu of salary
What is the tax benefit doctrine?
The principle that if a loss was suffered in a previous year and taken as an income reduction for tax purposes, and an insurance reimbursement for that loss is received in the current year, that reimbursement must be counted as part of gross income for the current year
What is an example of the tax benefit doctrine?
Bob deducted medical expenses last year, then received reimbursement this year. The reimbursement will be considered income because he already got the tax benefit of the deduction.
What is the constructive receipt doctrine?
If there is no substantial limit to the taxpayer’s right to bring the funds under personal control, the income is taxed as though it had been received
A payroll check is issued and available for pickup December 31st 2018. The employee picks it up January 3rd and cashes it January 4th 2019. What year is the income taxed?
- Constructive receipt.
Dan is in a high tax bracket. He solely owns a rental property that generates $2k per month in rent. He instructs his tenant to pay the rent to his daughter who is in the lowest tax bracket. What is the tax consequence?
Assignment - Because Dan owns the property, the payment of rent is his that he has assigned to his daughter.
What types of corporate structures are pass-throughs?
Partnerships and S corps
How is income taxed in a partnership?
Income is taxed to each partner at their own individual rates
Who pays tax on S corp income?
Shareholders
What form does a partnership have to file and what form do partners receive?
1065, informational return
K-1, self employment income
What form does an S corp file and what form do shareholders receive?
Form 1120S
K-1, passive income
What form do employees of S corps and partnerships receive?
S corp - W-2
Partnership - K-1, self employment income
How is trust income taxed?
Income distributed to beneficiaries is taxable to them as income. Undistributed income is taxable to the estate.
When is a below-market loan’s interest imputed?
When the interest charged on the loan is less than the federal rate
How is imputed interest compounded?
Semi annually
Can gift loans occur between businesses?
No, only between individuals
How is imputed interest on a gift loan recognized?
The borrower has an interest expense, the lender has interest income. The lender is viewed as gifting the imputed interest to the borrower.
What are compensation-related below market loans?
Employer loans to employees. The imputed interest is treated as compensation and the loan amount is considered income.
What are corporation-shareholder loans?
The imputed interest is treated as a dividend to the shareholder
No interest is imputed on gift loans, compensation-related loans, or corporation shareholder loans if the loan is ________ or less.
$10,000
For below market loans above _____ but below ______, the imputed interest cannot exceed what?
$10k, $100k
The borrower’s investment or interest income from all sources for the year
Richie loaned Beth $90k and didn’t charge her interest. Richie’s investment income was $200k. Beth’s income was $30k in salary and $3k in interest income. The relevant federal rate was 9%. How much imputed interest must Richie recognize?
$3,000. The loan is below $100k and Beth only had $3,000 in interest income for the year.
Employee achievement awards of less than $_____ per year based on length of service are excluded from gross income.
$400
Rose wins the lottery. Her winnings are $1,000,000. She chooses to receive an annuity of $50,000 per year for 20 years instead of a lump sum. How are her winnings taxed?
She will be taxed on the annuity amount ($50k) in the year that the income is received.
Wendy is 55. She is receiving annuity payments of $1,500 per month over her life expectancy of 25.5 years. Her contributions to the annuity were after tax and her basis is $91,800. How much of the annuity payment must she recognize for tax purposes?
$1,500 x 12 x 25.5 = $459,000
91,800/459,000 = 20%
She can exclude 20% (3,600) each year and must claim 80% (14,400)
Employees can exclude premiums paid by their employers on the first $________ of group term life insurance - except for who?
$50,000
Partners, proprietors, and S corp owners who own more than 2%
Are unemployment benefits included in gross income?
Yes
Up to ___% of Social Security benefits may be included in gross income.
85%
What is provisional income?
AGI from all sources plus 50% of SS benefits received, foreign income, and tax-free interest
What two things make up the FICA tax?
Social Security Tax (OASDI) and Medicare Tax (HI)
What is the earnings ceiling for OASDI?
$128,400
How much is the OASDI tax?
6.2% paid by employee and 6.2% paid by the employer
What does OASDI stand for?
Old Age Social and Disability Insurance, (SS)
How much is the HI (Medicare) tax?
1.45% for employee and 1.45% for employer
How much is the HI tax for self employed individuals?
2.9%, they pay the employee and employer parts together
What is the earnings ceiling for Medicare?
there isn’t one
What is the total self-employment FICA taxes?
15.3% (12.4% + 2.9%)
The Additional Medicare Tax is ____%
0.9%
Who pays the additional medicare tax?
Only the employee. No employer share
What corporate structure can avoid FICA taxes?
S Corp, as the earnings are not considered employment income
What are DBO benefits and how are they taxed?
Death Benefit Only, fringe benefit paid by employer to employee’s beneficiaries and included in gross income
Are compensatory damages taxable?
No, except in discrimination or defamation cases
Are punitive damages taxable?
Yes
Does the recipient of a gift have to include the FMV as income?
No
Does the recipient of an inheritance include the FMV in gross income?
no, unless it is income in respect of a decedent (IRD)
Are scholarships included in gross income?
No, as long as they are used for qualified education expenses and the recipient is a candidate for a degree
Are life insurance proceeds taxable?
Not if they are paid to the beneficiary
What tax is due on life insurance proceeds that are received in installment payments?
Tax on the interest income
When are life insurance dividends taxed?
When the aggregate received exceed the basis in the contract
Can businesses deduct life insurance premiums if the company is directly or indirectly a beneficiary?
No
Are losses on surrendered policies tax deductible?
No
Withdrawals or loans from life insurance policies are received on a ______ basis when surrendered.
FIFO
What is Transfer-For-Value Rule?
A transfer-for-value rule stipulates that, if a life insurance policy (or any interest in that policy) is transferred for something of value (money, property, etc.), a portion of the death benefit is subject to be taxed as ordinary income
What are the Transfer For Value Rule Exceptions? (5)
Transfers to…
- The insured
- A partner of the insured
- A partnership in which the insured is a partner
- A corporation in which the insured is an officer or shareholder
- A transferee (such as a child)
Are viatical settlement proceeds included in gross income?
No, as long as the recipient has been certified as terminally ill OR chronically ill and used for long-term care
What is the definition of terminally ill?
Having a condition or illness that can reasonably be expected to result in death in 24 months or less
What is the definition of chronically ill?
Unable to perform at least 2 activities of daily living for at least 90 days
How are viatical settlement benefits taxed to the purchaser?
Benefits received over the basis and premium payments are included in gross income
Is cost of insurance included in a cash surrender calculation?
NO
Bob surrenders a policy with $80,000 of cash value. He paid $70,000 in premiums and the cost of insurance was $11,000. What is his income?
$10k
Bob sells a policy with $80k cash value to Jim for $95k. He paid $70,000 in premiums and the cost of insurance was $11,000. How is he taxed on the transaction?
$95k - $70k - $11k = $36k.
Basis = $80k - $70k = $10k.
Capital gain of $26k
How is Section 1202 qualified small business stock (QSBS) taxed?
Noncorporate investors can exclude up to 50% of the gain realized. Remaining gain is taxed at the 28% capital gains rate.
What is the tax consequence of a lender forgiving a debt?
The borrower must report the forgiven debt as income, except in the case of bankruptcy
What is the tax consequence of a taxpayer paying a debt with appreciated property?
This is treated as though the taxpayer sold the property, then repaid the debt. They cannot give away the appreciation without paying taxes.
How is foreclosure taxed?
It is treated as a sale or exchange
What is the max amount of foreign income that can be excluded from US gross income?
$103,900
What qualifications must be met to qualify for the foreign exclusion?
The taxpayer must be a bona fide resident of the foreign country
OR
Be present in a foreign country for at least 330 days during any 12 consecutive months
How is the foreign exclusion pro rated?
Max Exclusion (103,900) x (# of days in a foreign country / # of days in the year)
Can you contribute to a Coverdell and 529 in the same year for the same beneficiary?
Yes
Coverdell amounts must be distributed by age _____ if not used.
30
Can Coverdells be rolled over?
Yes, free of taxation and penalty if rolled over to a beneficiary who is a member of the same family
Can Coverdells pay for K - 12 education?
Yes
Can 529s pay for K - 12 education?
Yes, but there is a $10,000 limit per student
Can 529s be rolled over?
Yes, free of taxation and penalty if rolled over to a beneficiary who is a member of the same family
Are unreimbursed business expenses of an employee deductible?
No
What 2 things can a business owner/taxpayer deduct expenses from gross income to arrive at AGI?
- Expenses incurred in carrying on a trade or business
2. Expenses incurred in connection with property held for the production of rents or royalties
What Schedule are Farm income and expenses reported on?
Schedule F (duh)
How much self-employment tax can self-employed individuals deduct?
- 2% of OASDI up to SS taxable wage base and 1.45% with no earnings limit.
- 65% total
What is the Social Security taxable wage base for 2018?
$128,400
What is the self-employment tax applied to?
Net income from self-employment
If net earnings from self-employment are less than $_____, no self employment tax is payable.
$400
