CFP Review T.R.E. (Part II) Flashcards
filing status for taxpayer that provides over 50% of the living expenses with a qualifying dependent
Head of Household
filing status for taxpayer that divorced during the tax year and has no qualifying dependents
Single
filing status for taxpayer married two days before year’s end
Married Filing Jointly
filing status for taxpayer who has two qualified children whose spouse died last year (not this year)
Qualifying surviving spouse
Progressive Tax System
taxes increase as income increases;
this is contrasted with flat tax and regressive tax (opposite of progressive)
Self Employment (how much income makes them file?)
greater than or equal to $400 of net earnings
method of accounting in which the recognition of income occurs AFTER the job is completed and funds are received. “right to collect”
accrual method
What type of taxpayer does not have to recognize income until it is received?
cash basis
Gross Income - Adjustments = ?
AGI (adjusted gross income)
AGI - below the line deductions = ?
Taxable Income
(deductions are either itemized or standard deduction)
Schedule B
interest & ordinary dividends
Schedule A
itemized deductions
Schedule F
farming & ag income
Schedule C
business income / loss sole proprietorship
Schedule D
short & long term capital gains
Schedule E
rental income, royalties, partnership income, s corp, trust, etc
municipal bond interest income
excluded from federal income tax
inheritance
excluded from federal income tax
Qualifying Roth IRA distributions
excluded from federal income tax
life insurance proceeds from the death of insured
excluded from federal income tax
scholarships or fellowships
excluded from federal income tax
child support payments
excluded from federal income tax
cash or property gifts
excluded from federal income tax
alimony (if agreement is post Dec 31 2018)
excluded from federal income tax
retirement deferrals (certain plans)
excluded from federal income tax
gain on sale of principal residence (if qualified)
excluded from federal income tax
Student loans discharged (2021-2025)
excluded from federal income tax
an employee was mailed a check before the end of the calendar year. This check must be included in their income. This is an example of what?
constructive receipt
Kiddie Tax
$1250 standard deduction OR earned income plus $400 (up to a maximum of $13,850)
Net Unearned Income (NUI) = unearned income - $2500 (twice the std deduction)
Net Unearned Income (NUI) is taxed at…
the highest marginal rate of the parents
test for qualifying child
- age (under 19, or under 24 and in school)
- relationship
- residency
- joint return (cannot have filed with anyone)
IRS safe harbor rules for income tax
The IRS is ok if you pay 100% of last year’s tax liability or 90% of the current year’s liability
5% penalty up to 25% for not…
filing taxes (failure to file)
note: this is reduced to 4.5% if concurrent with failure to pay
0.5% penalty up to 25% for not…
paying taxes (failure to pay)
qualifying relative
- you can claim anyone if they’ve lived with you for the entire year and you provided over 50% of their support (they cannot have made over the income threshold)
- Cannot be qualifying child
- Relationship/Residency Test
- Support Test (provide over 50% of their support)
- Income Test (gross taxable income is under the threshold)
Uses of Assets
Personal Use
Investment or Production of Income
Trade or Business (1231 assets)
Taxation of Assets
most personal use assets and most investment assets are classified as capital assets - even though personal use assets DO NOT get any treatment for losses!!
taxation purposes - capital assets gains are taxed at capital gains rates, losses are capital losses (offset against only ST or LT)
1231 assets for business or trade are taxed via depreciation methods (losses are ordinary, gains are capital gains)
ordinary income assets are taxed as ordinary income (both losses and gains)
All assets are Capital Assets except…
ACID:
Accounts/notes receivable
Copyrights and creative works
Inventory
Depreciable property used in trade or business
*ordinary income assets ACI, D is 1231 property
nature of gains on inherited property
ALWAYS long term capital gain
holding period for gifted/inherited assets
inherited - LONG term
gifted - donor’s holding period PLUS donee’s holding period
property transfer classifications
death - FMV basis @ long term holding
divorce - gift @ carryover basis
gift - combine holding periods, basis carries over (except for gift tax paid and loss property - double basis)
Realized Gain vs Recognized Gain
What’s the difference?
Realized Gain is Economic or Inherent Gain at the time of the transaction.
Recognized Gain is the part of Realized that is immediately taxable.
Section 121 (personal residence exclusion)
principal residence (owned and occupied!!) for 2 of last 5 years
Exclusion can only be used once every two years
250k Single
500k MFJ
A pro-rated exclusion can apply if the sale happens due to job change, change of health or other unforeseen circumstances (death, divorce, multiple birth from same pregnancy, bullying)
Spouses must both meet the use requirement and not have used the exclusion in last 2 years, but either may utilize the ownership requirement
Section 1244 Stock
Qualified Small Business Stock
-original issuee, paid for by cash/property (not services)
can deduct 50k single or 100k MFJ losses against ordinary income
any further losses are capital losses
Section 1031 (Like Kind Exchange Realty)
- only real property
- exchange one property for another without having to realize any gain or loss
- $ must be held by an escrow agent while you have 45 days to identify property to roll over to
- must be closed on by either 180 days OR the due date of tax return (including extensions)
Form 8824
Boot / Gain Recognized / Basis
No Boot Received: Recognized Gain is zero
When Boot is Received, just answer the recognized gain is the boot received
Boot paid is added to Basis
Basis carries over from the prior property
nontaxable exchanges
- 1031 (Like Kind Realty) - 45 days to find new prop, 180 days to close (or tax deadline)
- 1032 (corporation stock for property)
- 1033 involuntary conversions (fire, hurricane, eminent domain - wanting a new property instead of rebuilding on site – 2-3 yr from yr end)
*1035 ( life to life, life to annuity, annuity to annuity, but NOT annuity to life) - transactions between spouses incident to divorce (within 1 yr of divorce date)
Section 121 (spouse hasn’t met 24 month rule)
If one spouse has met the occupancy and the other has not, split the 500k exclusion and apply the pro rata
qualifying child
- Relationship - descendant, sibling or descendant of sibling, step child or foster
- Abode - live with for more than 6 mo. of year
- Age - <19 or <24 and in school*
- Support - child cannot provide >50% support
*Spring semester counts for age test
qualifying relative
- Relationship Test (no abode test)
- Gross Income < $4300
- Support (taxpayer provided >50%)
- Not a qualifying child
Joint return test - married dependent cannot file if they wish to be claimed
Citizenship or Residency test- must be citizen or national of US or a resident of US, Mexico, Canada during some part of the year
social security taxation hurdles
MFJ:
1st Hurdle @ 32,000
2nd Hurdle @ 44,000
Single, HoH:
1st Hurdle @ 25,000
2nd Hurdle @ 34,000
Charitable Giving
Calculate the Maximum Deductible - 60% of AGI
Calculate the eligible amounts given to 50% organizations (public charities) such as all churches, schools, hospitals and organizations such as United Way, Red Cross, Humane Society, etc.
Calculate the eligible amounts given to 30% organizations (private charities) such as private non-operating foundations, war veteran groups, and fraternal orders.
Charitable Giving (Types of Property - 60% Charities)
Long-Term Appreciated Property, using FMV deduct up to 30% of AGI
Use-unrelated Property, ST Capital Gain Property using basis deduct up to 50% of AGI
Dates for Paying Estimated Taxes
April 15
June 15
September 15
January 15
Federal Withholding Tax Underpayment Penalty
To avoid, pay the lesser of:
90% of the current year’s tax liability
100% of the prior year’s tax liability (or 110% if the last year’s adjusted gross income exceeded $150,000)
Adjustments for Adjusted Gross Income (AGI)
Above the Line
The second step in the 1040 calculation is adjusted gross income. It is Total Income (or Gross Income) less adjustments to income.
The main Adjustments or Deductions to Income are:
IRA Contributions
Self-employment Tax
Self-employment Health Insurance (100%)
Keogh or SEP Alimony paid
Schedule A Itemized Deductions
Medical, Dental, and LTC (7.5% of AGI)
Casualty and Theft Losses
Real Estate Taxes**
Investment Interest Expense
Home Mortgage Interest
State and Local Taxes**
Personal Property Tax**
Charitable Gifts
**Limited to $10,000/yr.
Casualty Losses (Calculation of the Deductible Loss)
First: Use the lesser of basis or FMV
Second: Subtract any insurance coverage
Third: Subtract $100 (floor)
Fourth: Subtract 10% of AGI. Must be a presidentially declared “natural disaster”
Kiddie Tax
All net UNEARNED income of a child who has:
NOT attained age 18, or
Turns 19-23 if a full-time student and who has at least one parent alive is taxed at parent’s rate regardless of the source of the assets.
Children under 18 are entitled (2023) to a Standard Deduction amount ($1,250) and an additional $1,250 of unearned income will be taxed at the child’s rate (10% marginal tax bracket).
Self-Employment Income
Net Schedule C Income
General Partnership Income (K-1 income)
Board of Directors fees
Part-time earnings (1099) NOT wages or K-1 distributions from an S Corp
Self-Employment Tax Calculation
The Taxable Wage Base will not exceed $160,200 (2023).
If you added up the self-employed income, and you exceeded $160,200, you did something wrong. Why? Social Security tax stops at $160,200 (2023).
Shortcut: Multiply Total Self-employment Income by 0.1413
Accounting Methods
Cash: Mandatory where taxpayer’s records reflect only cash transactions, and there are no inventories.
Accrual: Mandatory for purchases and sales over $25M where there are inventories.
Hybrid: Combines accrual for inventory portion of business and cash for cash portion of business.
Percentage of Completion: For long-term contracts where the contract will not be completed within the taxable year started.
bargain loans
Loan must be over 100k & net investment income must be over 1000 for interest to be imputed on below-market-rate loans
Unused Adoption Credit can carry over for…
up to 5 years
Sources of Federal Tax Law/Authority
Internal Revenue Code: Primary Source of all tax law.
Treasury Regulations: Great authority, but not law.
Revenue Rulings and Revenue Procedures: Administrative interpretation. May be cited.
Congressional Committee Reports: Indicate the intent of Congress. May not be cited.
Private Letter Rulings: Apply to a specific taxpayer .
Judicial Sources: Court decisions interpret
IRS Penalties
Frivolous Return: $5000
Negligence: Penalty is 20% of the portion of the underpayment attributed to negligence.
Civil Fraud: Penalty is 75% of the portion of the tax underpayment attributable.
Failure to File: Penalty is 5% of the tax due per month, with a maximum of 25%.
Failure to PAY: Penalty is 0.5% per month the tax is unpaid, with a maximum of 25% (Pay-Point)
Federal Withholding Tax Underpayment Penalty
To avoid, pay the lesser of:
90% of the current year’s tax liability
100% of the prior year’s tax liability (or 110% if the last year’s adjusted gross income exceeded $150,000)
Dates for Paying Estimated Taxes
April 15
June 15
September 15
January 15
Section 179
Qualifying vs. Non-Qualifying Property
Qualifying:
Tangible Personal Property
1245 Property
Non-Qualifying:
Real Estate
1250 Property
Intangible (owning a franchise)
Ways of Postponing AMT
Accelerating receipt of taxable income or deferring the payment of property taxes, state income taxes, deductible medical expenses or charitable giving, the regular tax (1040) may exceed the AMT payable (more taxable income)
Deferring exercise of incentive stock options (preference item) to a later date or disqualifying the ISO so that it becomes NQSO (subject to ordinary income tax).
Purchase public purpose muni bonds instead of private activity bonds.
AMT Add-Back Items
AMT Not-Deductible Items
A
Add Back:
Incentive Stock Option Bargain Element
Property and Income Taxes
De minimis
negligible
child support
excluded from gross income and not deductible if sent
amortization of intangible property
15 years
depletion of natural resources
50% limit of gross
or
(basis / units recoverable )* units sold
What are the eligibility requirements for a
Subchapter S Corporation?
Number of shareholders is limited to 100
The Corporation can only have a single class of outstanding Common Stock (no preferred), but the Common can be voting or non-voting.
Must be a Domestic Corporation Only individuals, estates and certain Trusts may be shareholders.
NOTE: Non-resident aliens (persons who are neither citizens nor permanent residents of the US) cannot be shareholders.
Tax Basis for Partnership / LLC
Cash invested
Direct loans made to the partnership
Partnership Debt: Loans made to the partnership - not the partner (bank loans)
NOTE: S-Corp basis does NOT include bank loans even if the S-Corp owner personally guarantees the debt.
dividend-received deductions (DRD)
Ownership < 20% = 50% DRD
Ownership 20> but <80 = 65% DRD
Ownership >80% (affiliated corporations) = 100% DRD
Increase in Donee’s Basis
= (Appreciation of the Property/ Taxable Gift) × Gift Tax Paid
dependent care credit
AGI over 43k is 20% of qualified expenses (3k for one child, 6k for 2+)
Age and Service Rules - Qualified Plans
Max age and service are age 21 and one year of service (21-and-one-rule)
Special provision allows up to 2-year service requirement, BUT then employee is immediately vested (2-year/100%)
Year of service is 1,000 hours (includes vacations, holidays and illness time) or 500 hours if worked 3 consecutive years
Defined Contribution Plans
(Integration with Social Security)
Base % + Permitted Disparity = Excess %
Base % - DC plan contribution for compensation below integration level
Permitted Disparity - Lesser of base % or 5.7%
Excess % - DC plan contribution for compensation above integration leve
Defined Benefit Plans
(Integration with Social Security)
Base % + Permitted Disparity = Excess %
Base % - DB plan contribution for compensation below integration level
Permitted Disparity - Lesser of base % or 26.25%
Excess % - DB plan contribution for compensation above integration level
Who can establish a 401(k) plan?
Corporations
Partnerships
LLCs
Proprietorships
Tax-exempt entities
Cash or Deferred Arrangement (CODA) aka..
401(k) Plan
Subject to ADP and ACP nondiscrimination tests
Safe Harbor Match / Vesting
The statutory contribution using a match is $1/$1 on the first 3% employee deferral and $0.50/$1 on the next 2% employee deferral.
If the employer chooses to use the non-elective deferral method, the employer must contribute 3% of all eligible employees’ compensation regardless of whether the employee is deferring or not.
Employer contributions must be immediately vested.
A defective grantor trust
is treated as a grantor trust for income tax purposes but as a completed gift for gift and estate tax purposes.