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CFP > CFP INCOME TAX > Flashcards

CFP INCOME TAX Flashcards

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1
Q

AMT Preference Items

A

IPOD
Excess intangible drilling costs (IDC)
Private-activity muni bonds
Oil & gas percentage depletion
Depreciation (ACRS/MACRS) - but not straight line

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2
Q

AMT add back items

A
  1. Incentive Stock Option bargain element (ISO)
  2. Property income tax
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3
Q

AMT non-deductible item

A

Standard deduction

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4
Q

4 ways of postponing AMT

A
  1. Increase taxable income
  2. Defer exercise of ISO to later date
  3. Disqualify ISO so it becomes NQSO
  4. Purchase public purpose muni bonds instead of private purpose muni bonds
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5
Q

Boot taxation keys

A

• Boot received = Recognized gain
• Boot Paid = Add to basis
• Basis carries over from last property

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6
Q

Tax filing penalties:

Frivolous Return

A

$5000

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7
Q

Tax filing penalties:

Negligence

A

20% of the portion of the underpayment attributed to negligence

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8
Q

Tax filing penalties:

Civil Fraud

A

75% of the portion of underpayment attributed to fraud

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9
Q

Tax filing penalties:

Failure to File

A

5% of tax due per month up to 25% max

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10
Q

Tax filing penalties:

Failure to Pay

A

0.5% per month of the tax due up to 25% max

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11
Q

Tax filing penalties:

Estimated Tax underpayment

A

The lesser of:
• Must pay 90% of current years tax liability, or
• 100% of prior year’s tax liability (110% if AGI was over $150k)

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12
Q

Typical adjustments for AGI (above the line)

A

• Deductible IRA contributions
• SEP/Keogh contributions
• 1/2 of self employment tax
• self employed health insurance premiums
• Alimony paid (pre-2019 divorce)
• $2500 student loan interest
• HSA contributions
• Penalty for early w/d from savings
• Moving expenses for active duty military

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13
Q

Schedule A - itemized deductions

A

• Medical, dental, & LTC over 7.5% AGI
• Casualty losses (Fed. Declared Disaster)
• SALT (includes real estate taxes) limited to $10k
• Home mortgage interest ($750k max for MFJ after 12/15/2017)
• Charitable gifts
• Investment interest expense (margin)

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14
Q

Federally Declared Disaster casualty and theft loss calculation

A
  1. Use lesser of FMV or Basis
  2. Subtract insurance coverage
  3. Subtract $100 floor
  4. Subtract 10% of AGI
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15
Q

What is the self employment tax multiplier?

A

14.13%

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16
Q

Credit for Child and Dependent Care Expenses
• Refundable or nonrefundable
• Max age
• Max amount

A

• Nonrefundable
• 13
• Qualifying expenses are limited to $3k for 1 dependent or $6k for 2+ dependents. Credit percentage of 20% applies to AGI above $43k.

Ex. AGI is $50k, you have 4 children in day care, $650/mo ($7800/yr). Max credit is $1200. $6k (2+ kids) x 20% = $1200.

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17
Q

Child Tax Credit
• Refundable or nonrefundable
• Who’s eligible
• Max age
• What’s the amount of the credit

A

• Refundable (up to a limit)
• Child, stepchild, foster child
• 17
• $2000/child under 17 (subject to phaseouts - see tax sheet)
• Up to $1400/child is refundable tax credit

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18
Q

Credit for other dependents or “family credit”

A

Allows taxpayer to claim a $500 nonrefundable credit for dependents that don’t meet definition of qualifying child. Taxpayer cannot claim credit for providing support to elderly parent having taxable income over $4500 as adjusted for inflation.

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19
Q

Section 1244 qualified small business stock

A

• Can be used be S or C Corps.
• Loss of $100k/yr (JT) ($50k otherwise) is ordinary (not capital loss)
• Can be carried forward

Ex. A married owner starts a business qualifying under 1244 fails and the owner loses $200k. $100k can be claimed under 1244 + $3k capital loss. The other $97k is carried forward

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20
Q

S Corp Cash distribution taxation and basis

A

Cash distributions are non taxable return of investment that reduce basis. Not subject to FICA or SE tax

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21
Q

What businesses can utilize QBI-199A

A

Sole proprietorship, S Corp, LLC, Partnerships

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22
Q

MACRS 1245 property & 1250 property

A

CAT
O
R
N

1245 property
• 5yr - (CAT) Computers, Autos, Light duty Trucks
• 7yr - Office equipment except computers

1250 property
• 27.5 yr - Residential property
• 39yr - Nonresidential real property

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23
Q

179 deduction

A

Election to expense $1,080,000 of qualifying property (usually tangible 1245 property) in year of acquisition. Cannot create a loss

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24
Q

Real estate activity max loss

A

$25k deduction of net losses from real estate activity. Deduction is phased out for taxpayers w/ AGI btwn $100k - $150k on a 2 for 1 basis. Deduction can offset active or portfolio income.

AGI $110k, losses $28k - $20k deduction allowed ($10k x 0.5). Remaining $8k subject to passive loss rules

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25
Q

Max charitable contribution and deduction

A

Taxpayer cannot deduct more than 60% AGI in the contribution year. Any excess amount can be carried forward as an itemized deduction for 5yrs or if sooner, death.

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26
Q

What are 50% organizations for charitable giving?

A

Churches, schools, hospitals, and all organizations organized and operated for charitable, religious, educational, or literary purposes, or prevention of cruelty to animals.
ex. Red Cross, United way

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27
Q

What are 30% organizations for charitable giving?

A

Private charities, private non-operating foundations, fraternal orders, and war veterans organizations.

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28
Q

Charitable gifts of appreciated property

A

• At FMV is 30% AGI
• At Basis is 50% AGI

29
Q

What qualifies as ordinary income property for charitable donations and what’s the max deduction?

A

• STCG property
• Use-unrelated property (watch out for artwork and collectibles)
• Art
• Inventory
• Copyright

*Real estate and stock are always use related

Deduction is always limited to basis

30
Q

Charitable bargain sale calculation

A

Step 1: (Sale price / FMV) x Basis = Adjusted Basis

Step 2: Sale price - Adjusted Basis = Taxable gain

31
Q

Time limit on like-kind exchanges

A

Treatment is barred if property to be received must be identified within 45 days after the transfer and/or the acquired property title isn’t received within 180 days after transfer

32
Q

Names for Bypass Trust

A

B Trust
Nonmarital
Family
Applicable Credit Amount
Applicable Credit Amount shelter Trust

33
Q

Bypass Trust keys
• Funding amount
• for who’s benefit
• who controls
• how do assets pass at 2nd death
• simple or complex

A

• usually funded w/ lifetime exemption $12,060,000

• usually for surviving spouse’s benefit, they will receive income. Income stream CAN also be split among spouse and other individuals if decedent chooses. As long as no 5 or 5 or HEMS provisions, trust will not be included in surviving spouse’s estate

• first to die controls

• assets pass after surviving spouse’s death estate tax free to remainder beneficiary

• could be either

34
Q

Marital Trust keys
• who controls
• how does it pass
• Estate tax
• other names

A

• surviving spouse
• passes by unlimited marital deduction
• subject to estate tax after survivor dies
• A Trust, Marital A Trust

35
Q

Qualified Terminal Interest Trust (QTIP)
• other names
• simple or complex
• who controls
• usage
• main advantage
• estate tax

A

• Current Income Interest Trust or C Trust
• Simple
• First to die controls
• used when descendent wishes to provide surviving spouse w/ stream of income for life, yet also wishes to qualify the property for the marital deduction.
• allows decedent to have post Morten control
• included in gross estate of surviving spouse

36
Q

Qualified Domestic Trust (QDT or QDOT)
• simple or complex
• who’s it for

A

• simple
• foreign spouses

37
Q

Charitable Remainder Annuity Trust (CRAT) keys

A

• donor receives income
• no additions
• fixed income payments of at least 5%
• payable to any charity
• 10% ending value

38
Q

Charitable Remainder Unitrust (CRUT)

A

• donor receives income
• additions allowed
• income payments of at least 5%, revalued annually
• payable to any charity
• 10% ending value to charity

39
Q

Pooled Income Fund

A

• income to donor
• additions allowed
• variable income payments
• payable to 1 specific charity
• can’t use Munis

40
Q

Charitable Gift Annuity

A

• Donor needs income
• no additions
• fixed lifetime payments
• payable to one specific charity
• charitable deduction based on gift less annuity

41
Q

Charitable Lead Trust (CLAT/CLUT)

A

• donor wants to give charity income
• income or estate tax deduction
• after period paid to charity, paid to non-charitable ben
• no 5% payout rule

42
Q

Private Foundation (Family Foundation)

A

• 30% income tax deduction
• payable to a charity or individual
• can continue for indefinite period of time
• must pay out at least 5%

43
Q

Installment Sale keys

A

• Owner needs income
• Sale of property at FMV
• PV of remaining payments is INCLUDED in owner’s estate
• Property is secured
• capital gain
• DO NOT use if subject to recapture (1245 depreciation)

44
Q

Self-canceling Installment Note (SCIN)

A

• owner needs income
• No value is included in owner’s estate
• capital gain
• Assets can be depreciated
• interest can be deducted
• higher payout than installment sale
• chosen when there’s an estate tax issue

45
Q

Private Annuity

A

• owner needs income (sale of property in exchange for periodic payments)
• naked promise
• no value included in owners estate
• all gain is recognized in first year vs spread across annuity

46
Q

Grantor Retained Annuity Trust (GRAT/GRUT)

A

• irrevocable trust that allow grantor to make gift of property in exchange for income interest
• at end of term, corpus is distributed to remainder person
• value of gift is discounted
• owner must outlive term otherwise entire asset is brought back into estate
• best asset is one likely to appreciate

47
Q

Partnership/S corp (gifting shares)

A

• Owner wants to gift assets/income to family

  1. Family member receives conduit income (don’t use if U-24 (kiddie tax))
  2. Business entity must be capital sensitive (not available if business is service related, like PSC)
48
Q

Family Limited Partnership (FLP)

A

• Owner wants to gift assets/income to family
• Gift interests to limited partners to reduce estate
1. Qualifies for various “valuation discounts” allowing for lower gift tax
2. General partner maintains control

49
Q

Gift Leaseback

A

• owner wants to gift assets/income to family
• gift FULLY depreciated property
1. lease payments are a business deduction, income to family member
2. DON’T use if child is U-24 (kiddie tax)

50
Q

Qualified Personal Residence Trust (QPRT)

A

• owner wants to gift assets/income to family
• irrevocable transfer of personal residence
• at end of term, residence is ELIMINATED from estate (grantor must outlive term)
• value of gift is discounted
• can transfer up to 2 homes but 1 must be primary

51
Q

When to recommend a QPRT

A

• Home value $1mm+
• life expectancy should be at least 10yrs but preferably longer
• donor continues to live in the residence
• a large estate (at least above lifetime exclusions)

52
Q

GSTT - Taxable termination

A

When Trust corpus passes to skipping person after death of non-skipping person. Trustee pays GST

53
Q

GSTT - Direct skip

A

When transferor (donor or estate) directly skips to the skipping person. Transferor pays GST. $16k annual exclusion allowed

54
Q

GSTT - Taxable Distribution

A

When trust pays income to non-skipping person (still alive) and distributes to skipping person. Transferee (receiver) pays GST

55
Q

Who’s a skip person

A

Related person who’s at least 2 generations younger or unrelated persons who are more than 37.5 years younger

56
Q

Alternative Valuation Date (AVD)
• when is it calculated
• what must occur to be able to use it
• when can’t it be used

A

• FMV 6 months after death
• AVD must lower federal tax liability and must cause reduction in the total value of the gross estate

• Can’t be used when assets pass via unlimited marital deduction, or assets passing to friends/family that are less than $12.06mm

57
Q

Inheritance Disclaimer keys

A

• disclaimer must be irrevocable refusal to accept the interest
• refusal must be in writing
• refusal must be received within 9 months
• cannot have accepted any interest in the benefits

58
Q

Section 303 stock redemption keys

A

• used for postmortem estate liquidity
• business must be incorporated (closely held stock)
• value of stock must EXCEED 35% of decedent’s AGE
• amount of stock redeemed as capital gain can’t exceed the sum of the estate taxes plus admin expenses

59
Q

Installment payment of estate taxes (6166)

A

• used for postmortem estate liquidity
• property must be in sole proprietorship, partnership, or corporation.
• value of business must EXCEED 35% of decedent’s AGE
• during first 4 years (of 14) can pay interest only on taxes due - int. Rate will be 2% on first $1mm (indexed to $1,640,000 in ‘22) and isn’t deductible

60
Q

Special use valuation (2032A)

A

• used for postmortem estate tax reduction
• real estate used for farming or closely held business
• 50% of gross estate must consist of real and personal property
• 25% of the gross estate must consist of real property
• $750k reduction in decedent’s estate ($1,230,000 in ‘22)
• must be qualified use: 5 out of 8 rule before death / 10 years after death

61
Q

Can Bypass Trusts pass via marital deduction?

A

No, they use lifetime exclusion

62
Q

Reversionary Interest Rule on Trusts

A

Reversionary interest that exceeds 5% of trust value at CREATION is retained by the grantor.

Ex. Grandpa transfers $500k to a trust for granddaughter and income is paid to granddaughter. After 10yrs the $500k reverts back to either grandparent (grantors), then the income paid to granddaughter is taxable to the grantor.

63
Q

Who’s taxed on tainted trusts

A

The grantor of a trust (rather than the Trust or the beneficiary) will be taxed on income produced by the trust.

64
Q

Other names for Grantors Trust

A

Tainted Trust
Defective Trust

65
Q

Violations that create a tainted trust

A

• income is or can be distributed or accumulated for later distribution to grantor or grantor’s spouse
• income is or can be used to discharge any legal obligation of the grantor
• power to control the beneficial enjoyment of trust principle or income is held by grantor or grantor’s spouse
• trust income is or can be used to pay premiums on life of grantor or grantor’s spouse

66
Q

Estimated Tax requirements

A

Pay lesser of:
• pay 90% of current year’s tax liability
• pay 100% of prior year’s tax liability (or 110% if prior year’s AGI is over $150k)

67
Q

What’s included in investment income

A

Interest, non-qual dividends, royalties, and short term gains.

68
Q

How are munis treated for Investment Interest Expense

A

They are not included as investment income to deduct against investment interest expense charges

CFP (7 decks)

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