CFP INCOME TAX Flashcards
AMT Preference Items
IPOD
Excess intangible drilling costs (IDC)
Private-activity muni bonds
Oil & gas percentage depletion
Depreciation (ACRS/MACRS) - but not straight line
AMT add back items
- Incentive Stock Option bargain element (ISO)
- Property income tax
AMT non-deductible item
Standard deduction
4 ways of postponing AMT
- Increase taxable income
- Defer exercise of ISO to later date
- Disqualify ISO so it becomes NQSO
- Purchase public purpose muni bonds instead of private purpose muni bonds
Boot taxation keys
• Boot received = Recognized gain
• Boot Paid = Add to basis
• Basis carries over from last property
Tax filing penalties:
Frivolous Return
$5000
Tax filing penalties:
Negligence
20% of the portion of the underpayment attributed to negligence
Tax filing penalties:
Civil Fraud
75% of the portion of underpayment attributed to fraud
Tax filing penalties:
Failure to File
5% of tax due per month up to 25% max
Tax filing penalties:
Failure to Pay
0.5% per month of the tax due up to 25% max
Tax filing penalties:
Estimated Tax underpayment
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)
Typical adjustments for AGI (above the line)
• 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
Schedule A - itemized deductions
• 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)
Federally Declared Disaster casualty and theft loss calculation
- Use lesser of FMV or Basis
- Subtract insurance coverage
- Subtract $100 floor
- Subtract 10% of AGI
What is the self employment tax multiplier?
14.13%
Credit for Child and Dependent Care Expenses
• Refundable or nonrefundable
• Max age
• Max amount
• 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.
Child Tax Credit
• Refundable or nonrefundable
• Who’s eligible
• Max age
• What’s the amount of the credit
• 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
Credit for other dependents or “family credit”
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.
Section 1244 qualified small business stock
• 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
S Corp Cash distribution taxation and basis
Cash distributions are non taxable return of investment that reduce basis. Not subject to FICA or SE tax
What businesses can utilize QBI-199A
Sole proprietorship, S Corp, LLC, Partnerships
MACRS 1245 property & 1250 property
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
179 deduction
Election to expense $1,080,000 of qualifying property (usually tangible 1245 property) in year of acquisition. Cannot create a loss
Real estate activity max loss
$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
Max charitable contribution and deduction
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.
What are 50% organizations for charitable giving?
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
What are 30% organizations for charitable giving?
Private charities, private non-operating foundations, fraternal orders, and war veterans organizations.
Charitable gifts of appreciated property
• At FMV is 30% AGI
• At Basis is 50% AGI
What qualifies as ordinary income property for charitable donations and what’s the max deduction?
• 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
Charitable bargain sale calculation
Step 1: (Sale price / FMV) x Basis = Adjusted Basis
Step 2: Sale price - Adjusted Basis = Taxable gain
Time limit on like-kind exchanges
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
Names for Bypass Trust
B Trust
Nonmarital
Family
Applicable Credit Amount
Applicable Credit Amount shelter Trust
Bypass Trust keys
• Funding amount
• for who’s benefit
• who controls
• how do assets pass at 2nd death
• simple or complex
• 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
Marital Trust keys
• who controls
• how does it pass
• Estate tax
• other names
• surviving spouse
• passes by unlimited marital deduction
• subject to estate tax after survivor dies
• A Trust, Marital A Trust
Qualified Terminal Interest Trust (QTIP)
• other names
• simple or complex
• who controls
• usage
• main advantage
• estate tax
• 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
Qualified Domestic Trust (QDT or QDOT)
• simple or complex
• who’s it for
• simple
• foreign spouses
Charitable Remainder Annuity Trust (CRAT) keys
• donor receives income
• no additions
• fixed income payments of at least 5%
• payable to any charity
• 10% ending value
Charitable Remainder Unitrust (CRUT)
• donor receives income
• additions allowed
• income payments of at least 5%, revalued annually
• payable to any charity
• 10% ending value to charity
Pooled Income Fund
• income to donor
• additions allowed
• variable income payments
• payable to 1 specific charity
• can’t use Munis
Charitable Gift Annuity
• Donor needs income
• no additions
• fixed lifetime payments
• payable to one specific charity
• charitable deduction based on gift less annuity
Charitable Lead Trust (CLAT/CLUT)
• 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
Private Foundation (Family Foundation)
• 30% income tax deduction
• payable to a charity or individual
• can continue for indefinite period of time
• must pay out at least 5%
Installment Sale keys
• 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)
Self-canceling Installment Note (SCIN)
• 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
Private Annuity
• 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
Grantor Retained Annuity Trust (GRAT/GRUT)
• 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
Partnership/S corp (gifting shares)
• Owner wants to gift assets/income to family
- Family member receives conduit income (don’t use if U-24 (kiddie tax))
- Business entity must be capital sensitive (not available if business is service related, like PSC)
Family Limited Partnership (FLP)
• 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
Gift Leaseback
• 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)
Qualified Personal Residence Trust (QPRT)
• 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
When to recommend a QPRT
• 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)
GSTT - Taxable termination
When Trust corpus passes to skipping person after death of non-skipping person. Trustee pays GST
GSTT - Direct skip
When transferor (donor or estate) directly skips to the skipping person. Transferor pays GST. $16k annual exclusion allowed
GSTT - Taxable Distribution
When trust pays income to non-skipping person (still alive) and distributes to skipping person. Transferee (receiver) pays GST
Who’s a skip person
Related person who’s at least 2 generations younger or unrelated persons who are more than 37.5 years younger
Alternative Valuation Date (AVD)
• when is it calculated
• what must occur to be able to use it
• when can’t it be used
• 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
Inheritance Disclaimer keys
• 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
Section 303 stock redemption keys
• 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
Installment payment of estate taxes (6166)
• 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
Special use valuation (2032A)
• 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
Can Bypass Trusts pass via marital deduction?
No, they use lifetime exclusion
Reversionary Interest Rule on Trusts
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.
Who’s taxed on tainted trusts
The grantor of a trust (rather than the Trust or the beneficiary) will be taxed on income produced by the trust.
Other names for Grantors Trust
Tainted Trust
Defective Trust
Violations that create a tainted trust
• 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
Estimated Tax requirements
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)
What’s included in investment income
Interest, non-qual dividends, royalties, and short term gains.
How are munis treated for Investment Interest Expense
They are not included as investment income to deduct against investment interest expense charges
