CFP - 4.2 Tax Flashcards
What is the deductible amount equal to for a donation of:
Cash
FMV
What is the deductible amount equal to for a donation of:
Ordinary income property and short-term capital gain property
Lesser of adjusted basis or FMV
What is the deductible amount equal to for a donation of:
Intangibles
FMV or basis election
What is the deductible amount equal to for a donation of:
Related use tangible property
FMV or basis election
What is the deductible amount equal to for a donation of:
Unrelated use tangible property
Lesser of adjusted basis or FMV
What is the deductible amount equal to for a donation of:
Real property
FMV or basis election
What is the AGI limit for public charities and private operating foundations for:
Cash
60%
What is the AGI limit for public charities and private operating foundations for:
Ordinary income property and short-term capital gain property
50%
What is the AGI limit for public charities and private operating foundations for:
Intangibles
30% of FMV
or
50% of basis election
What is the AGI limit for public charities and private operating foundations for:
Tangible related use
30% of FMV
or
50% of basis election
What is the AGI limit for public charities and private operating foundations for:
Tangible unrelated use
50%
What is the AGI limit for public charities and private operating foundations for:
Real property
30% of FMV
or
50% of basis election
What is the AGI limit for private nonoperating foundations for:
Cash
30%
What is the AGI limit for private nonoperating foundations for:
Ordinary income property and short-term capital gain property
30%
What is the AGI limit for private nonoperating foundations for:
Long-term capital gain property?
(intangibles, tangibles (related or unrelated use), and real property)
20%
What is a bargain sale to charity?
Sale of property for a sum that is less than FMV. Considered part sale part contribution.
What is the taxable portion and charitable portion of a bargain sale?
Capital Gain = sales proceeds - (basis x amount realized on sale / FMV)
Charitable Contribution = FMV - sales proceeds
What is the formula for basis allocation for a bargain sale to charity?
Basis x amount realized on sale / FMV
What is the max charitable deduction a corporation can take in a taxable year as a percent of their taxable income?
10%
What does a C corp deduct when donating property to charity?
FMV for ordinary income or related use
Basis for unrelated use
At-Risk Rules:
The maximum deductible loss for any investment activity is limited to…
The amount that the investor has at risk (invested) at the end of the current tax year
Do at-risk rules apply to passive income?
Yes
A taxpayer invested $10,000 in stock. The stock grew to $20,000 before becoming worthless. What is the amount of the loss?
$10,000, at-risk rules
Can losses disallowed because of at-risk rules be carried forward?
Yes, carried forward and can be taken int he first year the at-risk amount becomes positive to absorb the loss
Can losses disallowed because of at-risk rules be deducted against income?
Yes, at-risk income must first be applied against basis. In carry over years, it can be used against partnership income
What are the 3 types of losses?
Active, passive, and portfolio
Can passive losses be deducted against active income?
No
Can passive losses be deducted against portfolio income?
No
What partnerships are not considered passive?
Oil and gas activity (not royalty)
A taxpayer has the following passive losses and income:
$15k loss from A
$30k loss from B
$10k income from C
How are the losses allocated?
$45k total loss
$35k net loss
$15k/45k x 35k = $11,666.67 to A
$30k/45k x 35k = $23,333.33 to B
When is an activity passive? (2)
- Taxpayer does not materially participate (except oil and gas partnerships)
- Rental activity (even if they do materially participate)
A taxpayer is a material participant in an activity if they complete more than ______ hours of participation during a year.
500
If an individual’s participation constitutes substantially all of the participation in the activity regardless of hours, are they a material participant?
Yes
If a taxpayer materially participates in an activity in _____ of the last _____ years, they are considered a material participant.
5 of 10
A taxpayer is a material participant in an activity if they participate for ____ hours on a regular, substantial basis, or the other participants participated the same or less.
100
Can losses from an oil and gas working interest be deducted against active or portfolio income?
Yes
Are limited partners material participants?
Nope, passive activity
An activity is not a rental if it is used for ____ days or less
7
Is an activity a rental if it is incidental to non-rental business?
no
Is an activity a rental if the owner provides significant personal services?
No, as long as the customer uses it for less than 30 days
Is an activity a rental if the owner provides extraordinary services?
No. No time limit either
Jeff buys shares of ATAX (MLP) and EPD (MLP). ATAX produces $1,000 of income and EPD produces a $2,000 loss. Can Jeff offset the income?
No, MLP and PTP losses can only be offset against income from that MLP/PTP
MLP losses can only be offset against…
Income from that same MLP
Real estate losses are not considered passive if the professional gets more than _____% of their personal service income for the year from real estate, or if they perform more than ______ hours of service in real property trades.
50%
750
Real estate pros who meet the participation test treat real estate income as…
Active
Non-real estate professionals can deduct up to $_______ of rental losses against active and portfolio income, as long as they are active participants and own _____% or more of the interests. This is phased out between $_______ and $_______ for $1 of every $2 over the AGI limit.
$25,000
10%
$100k - $150k AGI
Which is applied first, at-risk rules or passive loss rules?
At-risk
Mavis died with an investment in a passive activity. Her basis was $50,000 and the FMV was $70,000. She had suspended losses in the amount of $40,000. How much can be deducted on her final return?
$20,000 of the $40,000. This is the amount of FMV over basis.
What is the standard deduction for 2018?
Single
$12,000
What is the standard deduction for 2018?
MFJ
$24,000
What is the standard deduction for 2018?
HOH
$18,000
What is the standard deduction for 2018?
MFS
$12,000
What is the standard deduction for 2018?
Qualifying widow(er)
$24,000
Who gets the additional standard deduction?
People 65 and older or people who are blind
What is the additional standard deduction?
Single MFJ HOH Qualifying Widow(er) MFS
$1,600 for Single and HOH
$1,300 for the rest
Archibald is 72, single, and blind. What is his standard deduction?
Single = $12,000
Blind = $1,600
Over 65 = $1,600
= $15,200
What makes someone a qualifying widow(er)?
They have to have a qualifying child or qualifying dependent relative
Qualifying child:
Relationship test
Child, stepchild, foster child, brother/sister, stepbrother/stepsister, or a descendant of any of these
Qualifying child:
Income test
N/A
Qualifying child:
Residence test: Child must have lived with taxpayer for more than _____% of the tax year.
50%
Qualifying child:
Age test: Under ____ or a full time student under ____ or _______.
19
24
permanently disabled
Qualifying child:
Support test: must not have provided more than ____% of own support. Do scholarships count towards this?
50%
No
Is an individual a qualifying child if they claim a dependent?
No
Is an individual a qualifying dependent relative if they claim a dependent?
No
For qualifying children/dependents, where must the taxpayer be a citizen?
US citizen
US national
or
Resident of US, Mexico, Canada
Qualifying relative:
Relationship test
Have to be related OR live in the taxpayer’s principal home during the tax year
Qualifying relative:
Income test
Gross income must be less than the standard deduction for a single person. Nontaxable income counts. (SS…)
Qualifying relative:
Age test
There isn’t one
Qualifying relative:
Support test: Taxpayer must have provided more than ____% of support
50%
Qualifying relative:
Residence test
Don’t have to live in the same household unless they are unrelated
Can you file joint and have a qualifying child or dependent relative?
No
Can MFS take the tax credit for child and dependent care or education expenses?
No
A head of household is an unmarried person who maintains a household for a qualifying person for more than ______% of the tax year and pay more than _____% of the cost.
50%
50%
Can parents be claimed as dependents if they don’t live in the same house as you?
Yes
Can you be a qualifying widow(er) if you remarry?
Nope
What filers have to file if their income is below the standard deduction (including 65+, not including blindness deduction)?
Only MFS
When is tax day?
15th day of the 4th month after the end of the tax year.
AKA 4/15
You can file a 1040-EZ if your income is only from…
Wages, salaries, and tips
You can file a 1040-EZ if your income is below…
$100k
Can you file a 1040-EZ if you make income adjustments?
No
You can’t file a 1040-EZ. But you can file a 1040-A if you…
Only make adjustments for IRA contributions and student loan interest and don’t itemize.
How long is the tax filing extension?
6 months
Can a surviving spouse file a joint return with the decedent for the tax year in which they died?
Yes - if the decedent did not already file and an executor or administrator has not been appointed prior to the return being prepared or the extended due date of the tax return
What income is included in the decedent’s final income tax return?
Only constructively received (cash) or income accrued (accrual) income up to the point of death
What is a dollar for dollar reduction of the income tax liability of the taxpayer
Tax credit
Which is more equitable, deductions or tax credits?
Usually tax credits because they aren’t affected by the taxpayer’s tax rate
What is the difference between refundable and nonrefundable tax credits?
Nonrefundable can only bring the tax liability to 0. Cannot create a refund
List the 6 tax credits (FCACAL)
- Foreign tax credit
- Childcare and dependent care credit
- Adoption credit
- Child tax credit
- American Opportunity tax credit
- Lifetime learning tax credit
Can you take the foreign tax credit and the foreign earned income exclusion?
Not both
When is it advantageous to use the foreign tax credit?
When the foreign tax is more than the US tax for the same income
What is the age limit for the childcare credit?
13
What are the 3 qualifications for the childcare credit?
- Both spouses have to be working (or one if single)
- Have to be paying the childcare expenses in order to work
- Must keep a home for the qualifying child
What are the limits for the childcare credit for 1 and 2+ qualifying children?
$3,000 for one
$6,000 for 2 or more
Is the adoption credit refundable?
No
What is the max amounts for the adoption credit?
$13,810 per child
What is the carry forward for the adoption credit?
5 years
What is the adoption credit phaseout AGI?
$207k to $247k
The child tax credit is $_____ for each child under age _____.
$2,000
17
The child credit is reduced $_____ for each $_____ above the AGI threshold
$50
$1,000
What are the AGI thresholds for the child credit?
MFJ:
Everyone else:
MFJ: $400,000
Everyone else: $200,000
How much of the child credit is refundable per child?
$1,400
Can the American Opportunity Tax Credit be used for room and board?
No
Who is the American Opportunity Tax Credit available for?
Taxpayer, spouse, or dependent
How much is the American Opportunity Tax Credit?
100% of the first $2,000
then 25% of the next $2,000 up to $2,500
Is the American Opportunity Tax Credit per student or per household?
Per student
Who is not eligible for the American Opp credit?
Drug felons
How much of the Am Opp credit is refundable?
40%, unless subject to kiddie tax
What filing category is not allowed to get the Am Opp credit?
MFS
Can the Lifetime Learning credit be used for room and board?
No
What is the max Lifetime Learning credit?
20% of qualified expenses up to $10,000
Is the Lifetime Learning credit per student or per household?
Per household
What filing category is not allowed to get the Lifetime Learning credit?
MFS
Lil Bobby used $10k from his Coverdell to pay for his $10k of qualified education expenses. He is a dependent on his parents tax return. How much of the Lifetime Learning Credit or Am Opp credit can they take?
None. The credits cannot be used for the same educational expenses for which a Coverdell distribution was used
Can you take the Am Opp credit and Lifetime Learning credit in the same year?
No, unless for different children
What is the phaseout for the Am Opp credit?
$80 - $90 single. Double it for married
What is the phaseout for the Lifetime Learning credit?
$57 - $67 for single. Double it for married
Is inventory eligible for depreciation?
No
What property is eligible for depreciation?
Personalty, realty, and intangibles
How much is basis reduced for depreciation?
By the cost recovery taken and no less than what the taxpayer COULD have taken
Bob has a tractor. He could depreciate by $2,000 this year. He doesn’t. Does his basis change?
Yes, its reduced by what he could have taken whether he takes it or not
What is the formula for straight line depreciation?
SL = (cost - residual value) / useful life
What is section 179 property?
Section 179 allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year.
Are capital improvements deductible?
No, added to basis and subject to depreciation
What happens to loss in a wash sale?
The loss cannot be deducted. It is added to the basis
Without specifically identifying which shares will be sold, what is the cost basis determination ?
FIFO
Can stocks use the average cost method of basis?
No, only mutual funds
What is the donee’s basis in gifted property?
The lesser of the donors basis or the FMV on the date of gift
Can losses from personal use assets be deducted?
No
Can losses from investment assets be deducted?
Yes
Section 1221 defines what is not a capital assets. What 4 things? (ACID)
Accounts Receivable
Copyrights/creative works
Inventory
Depreciable property and real estate
What happens when ordinary assets are sold?
Ordinary income is recognized
What are the 4 ordinary assets? (IWAC)
Inventory
Works of art from creator
Accounts and notes receivable
Copyright for the person who applied and received it
Section 1231 are depreciable personal or real property used for…
Business or in the production of income. Also Capital assets
What term describes recording an asset as a long-term asset on the balance sheet and expensing over its useful life through deprecation, amortization. or depletion
Capitalization
What type of assets are timber, coal, and iron ore?
section 1231
What types of assets can be amortized?
Certain intangibles: goodwill, trademarks, non competes, copyrights, patents
Certain intangible assets can be amortized over a ______ year period.
15
What types of assets are subject to depletion?
Natural resources excluding land
How does cost depletion work?
The asset basis is divided by the estimated total number of recoverable units of the asset and multiplied by the number of units sold to determine the amount of deduction.
How does percentage depletion work?
A statutory percentage is applied to the gross income from the property (limited to 50% of AGI). Unrelated to the cost or basis.
What 2 options do taxpayers have for intangible drilling and development costs?
- Expense in the year incurred
2. Capitalize and deplete
If intangible drilling costs are expensed, what is the limit that can be deducted?
50% of AGI
If intangible drilling costs are capitalized, the basis of the property…
Increases
How much capital loss can be used to offset ordinary income in a given year? (S, MFJ)
$1,500
$3,000
What is the formula for adjusted basis?
Cost + Capital Additions - Capital Recoveries
What are 3 capital recoveries?
depreciation, casualties, and theft
What are capital additions?
Capital improvements made to the property BY THE TAXPAYER outside of regular repair and maintenance
What is the formula for donee’s basis?
Donor’s adjusted basis +
Unrealized appreciation /
(FMV - Donor’s annual exclusion amount used for the gift) +
gift tax paid
If property is gifted and sold at a loss, what is the basis?
FMV on the day of the gift
If property is gifted and sold at a gain, what is the basis?
The donor’s adjusted basis
What is the holding period of a gifted asset if sold at a gain?
Donor’s holding period
What is the holding period of a gifted asset if sold at a loss?
Date of gift
If donee sells donation between donor’s basis and FMV, is a loss or gain recognized?
Neither
What is the holding period on inherited property?
Always long term
How are capital gains on Section 1256 contracts treated?
40% short term, 60% long term
What are Section 1256 contracts?
Futures, currency contracts, index options, equity options
Tiffany purchased 30 shares of ABC for $8,400 on 1/1/2018. She sold 30 shares for $8,000, then bought 30 shares 29 days later for $7,500. What is her gain/loss and what is the basis of the new 30 shares?
Wash sale $0 loss.
Amount realized: $8,000
Adjusted basis: $8,400
Realized Loss: $400
Recognized Loss: $0
Her new basis:
Purchase price: $7,500
Postponed loss: $4,000
Basis: $7,900
The Internal Revenue Service has a time limit within which, under most circumstances, it can audit a tax return and demand that a taxpayer pay additional taxes. What is that time limit?
3 years past the date the return was filed.
Returns that are filed early are deemed by the IRS to have been filed on the due date. For returns that are filed late, the 3-year assessment period begins the day after the actual filing date.
Chip files a timely tax return but is later required to pay an additional $15,000 in tax. Of this amount, $6,000 is attributable to Chip’s negligence. The negligence penalty will be:
20% on the negligent amount due.
$6,000 x 20% = $1,200
Qualifying widower (also known as surviving spouse) can be used for the _____ years following spouse’s death if surviving spouse continues to maintain a home for dependent children.
2
Excess passive activity losses are fully allowed in the year in which the taxpayer…
disposes of his or her entire interest in the passive activity in a taxable transaction.
Rental and real estate passive losses are allowed up to $________
$25,000 minus 50% of the amount of AGI over $100,000
Medical expenses are deductible only to the extent they exceed ____% of AGI
7.5%
Capital loss deductions are limited to $______ per year.
$3,000
Is child support received included in AGI?
No
Recall that the deduction for State and Local Taxes (SALT) is limited to $________
$10,000
Are losses on personal use assets deductible?
No
What are personal use assets?
House, car, etc.
Max is the sole shareholder in the ABC Corporation. This year, ABC has accumulated earnings and profits of $40,000. Max’s basis for the stock he owns in the company is $7,000. ABC makes a distribution of $60,000 to Max. How much of this distribution is taxable to Max as a capital gain?
Earnings and profits of the corporation are considered to be the first source of the distribution and are considered dividends. The first $40,000 is treated as a dividend. From the remaining $20,000, Max deducts his tax-free return of basis of $7,000. The net amount remaining of $13,000 will be treated as a capital gain.
