CFP Exam Flashcards
Schedule B
Taxable interest and Ordinary Dividends
Schedule C
Business income or losses
Schedule D
Capital gains/losses
Capital assets
Net short term gains and losses.
Net long term gains and losses.
If gain AND loss remains, net again.
If loss remains, $3,000 net losses can be used to offset ordinary income in one specific tax year.
Long term gains taxed at favorable rates 0%/15%/20%.
Short term taxed at ordinary rates.
Schedule E
Real estate
Schedule A
Itemized Deductions
Shortcut to Calculate Self Employment Tax
Sum of:
- Net Schedule C
- General partnership income (K-1 income)
- Part time earnings (1099)
Multiply by .1413
Does not include:
- Distributions from S corp (K-1 income)
- Wages from an S Corp (FICA wages)
- Distributive share of income or loss of a limited partner
- Real estate income or rents paid
FICA Taxes
Employer and employee each pay (6.2% + 1.45% = 7.65%)
Total of 15.3% up to W-2 earnings of $160,200
After $160,200, each pay Medicare taxes of 1.45%, total of 2.9% (unlimited).
Wages over $200k (single), $250k (MFJ), $125k (MFS):
Medicare Tax increases to 2.35% (1.45% + 0.9%)
Medicare Tax Increase and Medicare Tax on Investment Income
Wages over $200k (single), $250k (MFJ), $125k (MFS):
Medicare Tax increases to 2.35% (1.45% + 0.9%)
Calculation above $160,200 is for Medicare tax only.
Additional 3.8% Medicare tax on investment income for taxpayers > $200k, $250k (MFJ)
- Investment income includes LTCG and non qualified annuities.
- Does not include municipal bond interest or distributions from Qualified Plans or IRAs.
Deduction to Credit Formulas
Deduction x Tax bracket = Credit
Tax Credit / Tax bracket = Deduction
Calculating Gain on Installment Sales
Profit / Total Contract Price = Gross Profit Percentage
Example:
Harold sold land with a basis of $100,000 for $1,000,000. The purchaser paid $100,000 down and a note to pay $100,000 plus interest for 9 more years. How much gain must Harold recognize for the current year if he owned the land for 8 years?
Profit $900,000 / Total contract price $1,000,000
= 90% Gross profit percentage
Installment ($100,000) × Gross Profit percentage (90%) = $90,000 LTCG
Exception to Installment Sale
If sold to related party, and they sell within 2 years.
Then all gain is taxed retroactively in the first year.
C corporation Tax Rate
21%
Section 1244 qualified small business stock
- Only applies to the first million dollars of stock (C or S) initially issued
- Loss of $100,000 per year (JT) ($50,000 otherwise) is ordinary (not capital loss)
Example
Bob (married) starts a corporation qualifying under Section 1244. His business fails. Bob loses $150,000. If he closes the business, what kind of losses can he take? He can claim a 1244 ordinary loss of $100,000 and a $3,000 capital loss. Without 1244, he can only take a $3,000 capital loss and a $147,000 carry forward. A Section 1244 election is an advantage.
How are Intangibles treated Tax wise?
Intangibles are assets with no physical substance, but represent a valuable right or economic attribute, like goodwill or franchise.
It is amortized under Section 197 intangibles.
Recovery method is similar to a straight line depreciation.
Ex. Goodwill can be amortized over a 15 year period using the straight line method with no salvage value.
What are the cost recovery deductions for the various Property classes?
Modified accelerated cost recovery system (MACRS)
Cost-recovery deductions (CRDs) are an allowance for the exhaustion and wear and tear of property used in a trade or business. The modified accelerated cost recovery system (MACRS) applies to all recovery property (not land or intangibles) placed in service after 1986. Prior to 1986, ACRS was used. Straight-line is an option under MACRS;
half-year convention must be used.
Property classes:
5-year (1245 property) - Computers, Autos, and light duty Trucks
7-year (1245 property) - Office equipment except computers
27½ year (1250 property) - Residential rental property
39-year (1250 property) - Nonresidential real property
When can 179 deduction be used?
The numbers have never been tested, but the concept is tested.
This is an election to expense up to $1,160,000 (2023) of qualifying property in the year of acquisition.
Qualifying property generally is tangible personal property (1245 property). It cannot create a loss.
Can’t be used for:
- 1250 (real estate) or
- 197 (intangible property - goodwill or franchise)
Form 1041
Fiduciary Income Tax Return
For Estates and Trusts
- Estates may choose same accounting period as decedent, calendar tax year or any fiscal year
- All trusts (except 501a or charitable) MUST use a calendar year
Trust beneficiaries - share of income on K-1
Due on 15th of fourth month after entity’s year end.
File a return if:
- Any taxable income for the year
- Gross income over $600
- Beneficiary who is a nonresident alien
Form 706
Estate Tax Form
Form 709
Gift Tax
Trust Exemption Amounts - Complex and Simple
$300 - Simple trust (by nature, income is distributed)
$300 - Complex trust that’s required to distribute all of its income
$100 - Complex trust that’s not required to distribute all of its income
Grantor Trusts
When the maker holds too much control over trust.
Also known as defective or trained trusts
- Grantor will be taxed on income produced by trust
The following violations create a defective trust for income tax purposes:
- Income may be accumulated or distributed for later distribution to grantor or spouse
- Income used to discharge legal obligation
- Power to control beneficial enjoyment of trust principal (deciding beneficiary or when)
- Reversionary interest that exceeds 5% of the trust value at the time of creation is retained by the grantor.
- Administrative power is held by grantor or spouse
- Income used to pay life insurance premiums for grantor or spouse
In unfunded ILIT, yearly gift to trust pays life insurance premium (not income taxable to grantor).
In funded ILIT, investment income from investments in trust pays the insurance premium (taxable to the grantor - only amount of actual premium paid).
Remainder is taxed to the trust (if accumulated), or to the beneficiaries (if distributed).
A trust may also be defective or tainted for estate tax purposes if:
- A right to income or enjoy trust property
- A reversionary interest that exceeds 5% measured at death.
An irrevocable trust that is tainted for both income tax and estate tax serves no purpose.
Basis of property received by gift (for gift and tax purposes)
For gift tax purposes - FMV at date of gift
For tax purposes:
- If FMV > donor’s adjusted basis, Use donor’s basis
- If FMV < donor’s adjusted basis:
1. If sale price below FMV, there is a loss
2. If sale price between FMV and basis, no loss or gain
3. If sale price above basis, there is a gain
Basis of inherited property
FMV on date of death or AVD
Community property state - full step up in basis
Common law state - half step up in basis
1245 gain and 1231 gain
When business sells 1245 property (MACRS property other than RE):
1. Look back and recapture lesser of total CRD or gain realized as 1245 gain (ordinary income)
2. Recover any excess gain as 1231 gain (capital gain)
- If gain if greater than CRDs
- If gain is less than CRDs, no 1231
1231 property includes depreciable tangible and intangible personal property, and real property, whether depreciable or not
Installment Sales Recapture
If taxpayer makes an installment sale of tangible personal property, all depreciation recapture must be reported as income in year of disposition (serious disadvantage)
1245 recapture is lesser of CRDs or realized gain
Remainder of gain is subject to installment sales rules.
Profit / Contract Price = % Gross Profit Percentage
