CFP Review T.R.E. (Part II)

Question 1

filing status for taxpayer that provides over 50% of the living expenses with a qualifying dependent

Answer 1

Head of Household

Question 2

filing status for taxpayer that divorced during the tax year and has no qualifying dependents

Answer 2

Single

Question 3

filing status for taxpayer married two days before year’s end

Answer 3

Married Filing Jointly

Question 4

filing status for taxpayer who has two qualified children whose spouse died last year (not this year)

Answer 4

Qualifying surviving spouse

Question 5

Progressive Tax System

Answer 5

taxes increase as income increases;

this is contrasted with flat tax and regressive tax (opposite of progressive)

Question 6

Self Employment (how much income makes them file?)

Answer 6

greater than or equal to $400 of net earnings

Question 7

method of accounting in which the recognition of income occurs AFTER the job is completed and funds are received. “right to collect”

Answer 7

accrual method

Question 8

What type of taxpayer does not have to recognize income until it is received?

Answer 8

cash basis

Question 9

Gross Income - Adjustments = ?

Answer 9

AGI (adjusted gross income)

Question 10

AGI - below the line deductions = ?

Answer 10

Taxable Income

(deductions are either itemized or standard deduction)

Question 11

Schedule B

Answer 11

interest & ordinary dividends

Question 12

Schedule A

Answer 12

itemized deductions

Question 13

Schedule F

Answer 13

farming & ag income

Question 14

Schedule C

Answer 14

business income / loss sole proprietorship

Question 15

Schedule D

Answer 15

short & long term capital gains

Question 16

Schedule E

Answer 16

rental income, royalties, partnership income, s corp, trust, etc

Question 17

municipal bond interest income

Answer 17

excluded from federal income tax

Question 18

inheritance

Answer 18

excluded from federal income tax

Question 19

Qualifying Roth IRA distributions

Answer 19

excluded from federal income tax

Question 20

life insurance proceeds from the death of insured

Answer 20

excluded from federal income tax

Question 21

scholarships or fellowships

Answer 21

excluded from federal income tax

Question 22

child support payments

Answer 22

excluded from federal income tax

Question 23

cash or property gifts

Answer 23

excluded from federal income tax

Question 24

alimony (if agreement is post Dec 31 2018)

Answer 24

excluded from federal income tax

Question 25

retirement deferrals (certain plans)

Answer 25

excluded from federal income tax

Question 26

gain on sale of principal residence (if qualified)

Answer 26

excluded from federal income tax

Question 27

Student loans discharged (2021-2025)

Answer 27

excluded from federal income tax

Question 28

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?

Answer 28

constructive receipt

Question 29

Kiddie Tax

Answer 29

$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)

Question 30

Net Unearned Income (NUI) is taxed at…

Answer 30

the highest marginal rate of the parents

Question 31

test for qualifying child

Answer 31

1. age (under 19, or under 24 and in school)
2. relationship
3. residency
4. joint return (cannot have filed with anyone)

Question 32

IRS safe harbor rules for income tax

Answer 32

The IRS is ok if you pay 100% of last year’s tax liability or 90% of the current year’s liability

Question 33

5% penalty up to 25% for not…

Answer 33

filing taxes (failure to file)

note: this is reduced to 4.5% if concurrent with failure to pay

Question 34

0.5% penalty up to 25% for not…

Answer 34

paying taxes (failure to pay)

Question 35

qualifying relative

Answer 35

• 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)

1. Cannot be qualifying child
2. Relationship/Residency Test
3. Support Test (provide over 50% of their support)
4. Income Test (gross taxable income is under the threshold)

Question 36

Uses of Assets

Answer 36

Personal Use
Investment or Production of Income
Trade or Business (1231 assets)

Question 37

Taxation of Assets

Answer 37

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)

Question 38

All assets are Capital Assets except…

Answer 38

ACID:

Accounts/notes receivable
Copyrights and creative works
Inventory
Depreciable property used in trade or business

*ordinary income assets ACI, D is 1231 property

Question 39

nature of gains on inherited property

Answer 39

ALWAYS long term capital gain

Question 40

holding period for gifted/inherited assets

Answer 40

inherited - LONG term

gifted - donor’s holding period PLUS donee’s holding period

Question 41

property transfer classifications

Answer 41

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)

Question 42

Realized Gain vs Recognized Gain

What’s the difference?

Answer 42

Realized Gain is Economic or Inherent Gain at the time of the transaction.
Recognized Gain is the part of Realized that is immediately taxable.

Question 43

Section 121 (personal residence exclusion)

Answer 43

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

Question 44

Section 1244 Stock

Answer 44

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

Question 45

Section 1031 (Like Kind Exchange Realty)

Answer 45

• 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

Question 46

Boot / Gain Recognized / Basis

Answer 46

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

Question 47

nontaxable exchanges

Answer 47

• 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)

Question 48

Section 121 (spouse hasn’t met 24 month rule)

Answer 48

If one spouse has met the occupancy and the other has not, split the 500k exclusion and apply the pro rata

Question 49

qualifying child

Answer 49

1. Relationship - descendant, sibling or descendant of sibling, step child or foster
2. Abode - live with for more than 6 mo. of year
3. Age - <19 or <24 and in school*
4. Support - child cannot provide >50% support

*Spring semester counts for age test

Question 50

qualifying relative

Answer 50

1. Relationship Test (no abode test)
2. Gross Income < $4300
3. Support (taxpayer provided >50%)
4. 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

Question 51

social security taxation hurdles

Answer 51

MFJ:
1st Hurdle @ 32,000
2nd Hurdle @ 44,000

Single, HoH:
1st Hurdle @ 25,000
2nd Hurdle @ 34,000

Question 52

Charitable Giving

Answer 52

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.

Question 53

Charitable Giving (Types of Property - 60% Charities)

Answer 53

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

Question 54

Dates for Paying Estimated Taxes

Answer 54

April 15
June 15
September 15
January 15

Question 55

Federal Withholding Tax Underpayment Penalty

Answer 55

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)

Question 56

Adjustments for Adjusted Gross Income (AGI)

Above the Line

Answer 56

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

Question 57

Schedule A Itemized Deductions

Answer 57

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.

Question 58

Casualty Losses (Calculation of the Deductible Loss)

Answer 58

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”

Question 59

Kiddie Tax

Answer 59

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).

Question 60

Self-Employment Income

Answer 60

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

Question 61

Self-Employment Tax Calculation

Answer 61

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

Question 62

Accounting Methods

Answer 62

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.

Question 63

bargain loans

Answer 63

Loan must be over 100k & net investment income must be over 1000 for interest to be imputed on below-market-rate loans

Question 64

Unused Adoption Credit can carry over for…

Answer 64

up to 5 years

Question 65

Sources of Federal Tax Law/Authority

Answer 65

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

Question 66

IRS Penalties

Answer 66

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)

Question 67

Federal Withholding Tax Underpayment Penalty

Answer 67

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)

Question 68

Dates for Paying Estimated Taxes

Answer 68

April 15
June 15
September 15
January 15

Question 69

Section 179

Qualifying vs. Non-Qualifying Property

Answer 69

Qualifying:

Tangible Personal Property
1245 Property
Non-Qualifying:

Real Estate
1250 Property
Intangible (owning a franchise)

Question 70

Ways of Postponing AMT

Answer 70

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.

Question 71

AMT Add-Back Items

AMT Not-Deductible Items

Answer 71

A
Add Back:

Incentive Stock Option Bargain Element
Property and Income Taxes

Question 72

De minimis

Answer 72

negligible

Question 73

child support

Answer 73

excluded from gross income and not deductible if sent

Question 74

amortization of intangible property

Answer 74

15 years

Question 75

depletion of natural resources

Answer 75

50% limit of gross

or

(basis / units recoverable )* units sold

Question 76

What are the eligibility requirements for a

Subchapter S Corporation?

Answer 76

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.

Question 77

Tax Basis for Partnership / LLC

Answer 77

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.

Question 78

dividend-received deductions (DRD)

Answer 78

Ownership < 20% = 50% DRD
Ownership 20> but <80 = 65% DRD
Ownership >80% (affiliated corporations) = 100% DRD

Question 79

Increase in Donee’s Basis

Answer 79

= (Appreciation of the Property/ Taxable Gift) × Gift Tax Paid

Question 80

dependent care credit

Answer 80

AGI over 43k is 20% of qualified expenses (3k for one child, 6k for 2+)

Question 81

Age and Service Rules - Qualified Plans

Answer 81

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

Question 82

Defined Contribution Plans

(Integration with Social Security)

Answer 82

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

Question 83

Defined Benefit Plans

(Integration with Social Security)

Answer 83

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

Question 84

Who can establish a 401(k) plan?

Answer 84

Corporations
Partnerships
LLCs
Proprietorships
Tax-exempt entities

Question 85

Cash or Deferred Arrangement (CODA) aka..

Answer 85

401(k) Plan

Subject to ADP and ACP nondiscrimination tests

Question 86

Safe Harbor Match / Vesting

Answer 86

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.

Question 87

A defective grantor trust

Answer 87

is treated as a grantor trust for income tax purposes but as a completed gift for gift and estate tax purposes.