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CFP Tax Flashcards

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1
Q

CCH

A

Commerce Clearing House
publisher of reference books on federal income tax
cannot be cited to audit / tax court
NOT a source of tax law

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2
Q

Research Institute of America
RIA

A

publisher of reference books on federal income tax
cannot be cited to audit / tax court
NOT a source of tax law

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3
Q

Tax authorities

A

Internal Revenue Code - primary source of all tax law

Treasury regs - source of tax law

Revenue rulings and procedures - administrative interpretation / may be cited

Congressional Committee reports - indicate the intent of Congress / may not be cited as precedent

Private letter rulings - specific taxpayer situation

Judicial sources - court decisions interpret law

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4
Q

Audit representation

A

attorney
CPA
enrolled agent
enrolled actuary

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5
Q

client is unsure if he has filed taxes. do you?
call IRS
call CPA
call daughter, also a client
call his attorney, ask him to call CPA

A

attorney - a privileged person who can protect confidentiality of client

CPA is not privileged
IRS will not speak to you
calling daughter breaches confidentiality

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6
Q

Tax penalty: Frivolous return

A

$5000
omits information
shows substantially incorrect tax
based on taxpayer desire to impede tax collection

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7
Q

Tax penalty: Negligence

A

20% of the underpayment attributed to negligence
accuracy related penalty that is not due to fraud

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8
Q

Tax penalty: Civil fraud

A

75% of underpayment attributed to fraud
intent to cheat
deliberately understating liability

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9
Q

Tax penalty: Failure to file

A

5% of tax due per month with a maximum of 25%

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10
Q

Tax penalty: Failure to PAY

A

0.5% per month with a max of 25%
Think “Pay Point”

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11
Q

Qualifying widower status

A

uses MFJ rates
for two years IF there is a dependent

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12
Q

AGI adjustments
Above the line

A

IRA contributions
Keogh or SEP contributions
1/2 SE tax (.1413 / 2)
Alimony paid (pre 2019)
SE health insurance

others:
$2500 student loan interest
HSA contributions
Penalty for early withdrawal of savings
Moving expenses - active military

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13
Q

Deductions for AGI / Deductions from AGI

A

above the line / below the line

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14
Q

Investment interest deduction limits

A

Up to net investment income
Includes:
interest, dividends, royalties, short-term gains

NOT dividends or LTCG unless electing NOT to use reduced rates
NOT allowed against TAX EXEMPT bonds

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15
Q

Schedule A Casualty & Theft Losses

A

Must be federally declared disaster
Then:
Loss amount (Lesser of basis or FMV)
- Insurance payments
= Unreimbursed loss
- $100
- 10% of AGI
= Deductible loss

MUST file insurance claim if they have coverage
only able to deduct the loss in excess of 10% of AGI

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16
Q

Misc itemized deductions

A

Repealed

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17
Q

Home office deduction for employees

A

Suspended

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18
Q

Entertainment expenses

A

not deductible unless for benefit of employees (not HCE’s) - ie office parties

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19
Q

Tickets to sporting events / cultural events

A

NOT deductible

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20
Q

Business meal deduction

A

50% deductible if ordinary and necessary to business

Salaried employee cannot deduct anything. Ever.Only option is to get reimbursed.

Company can reimburse employees for business expenses and deduct 50% of meals (0% for entertainment)

Self employed person must pay 100% of expense and can only deduct 50% meals only on Schedule C

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21
Q

How many exemptions…?

A

ALWAYS ZERO

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22
Q

Kiddie tax

A

REMEMBER TO ADD THE $130
UNearned income from any source
under age 24

Standard deduction 0-1300
Next 1300-2600 at child’s rate 10%
then at parents rate - always the parent even if money was from GPA

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23
Q

Kiddie tax with EARNED income

A

Deduction is greater of $1300 OR
Earned Income + 450

NOT more than standard deduction of $14,600

HOWEVER, would be subject to SE tax if self-employed

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24
Q

SE Tax income

A

Net schedule C income - do not subtract health premiums - that goes to 1040
General partnership K1
Board of director fees
1099 part time earnings

NOT subject:
Real estate income or rents paid
Limited partner income/loss
Wages from S corp (subject to FICA instead)
Distributions from S corp (K1)

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25
Q

SE Tax Amount

A

.1413
Cannot be on more than $168,600
amounts above only subject to Medicare tax only

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26
Q

Dependent care tax credit

A

20% of allowable expense (for exam purposes, actually a % scale)
Taxpayer must be working
Kid only until age 13
Non refundable

Limited to
$3000 for 1 dependent = $600
$6000 for 2 = $1200

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27
Q

Qualified vs Ordinary dividends

A

Qualified at capital gains rates
Ordinary at ordinary income tax rates

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28
Q

Child tax credit

A

$2000
Partially refundable up to $1700
Under age 17
» I am 16 going on 17=no credit

phased out over $200K / $400K MAGI MFJ

Other dependents: $500 non refundable “family credit”
only if dependents have taxable income < 4500 adjusted for inflation

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29
Q

Adoption credit

A

100% of eligible expenses
child under 17 or child with special needs
claimed in year that adoption is finalized

Not surrogacy or adopting spouse’s child

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30
Q

Earned income credit

A

Refundable
Anti-poverty for very low income earners

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31
Q

Which tax credits are refundable?

A

Child tax credit (partially refundable)
Earned income

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32
Q

Tax deduction vs tax credit for different tax brackets

A

Tax credit more valuable for low bracket
Tax deduction more valuable for high bracket

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33
Q

Calculation of taxable gain on installment sale

A

calc gross profit percentage
gain on the sale / total contract price

basis 100K
sale for $1M
gain = 900K / 1M = 90%
apply to each installment payment

Exceptions:
if buyer is a RELATED party who sells within TWO years, sale collapses and all gain is taxable to original seller in first year
Sold at a Loss
All payments in year of sale

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34
Q

Net Operating Loss tax implications

A

NOL can be carried forward indefinitely - think CII
Under TJCA, NOL may not be carried back to prior years

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35
Q

Type of business entity for PROFITABLE business

A

C corp
or
PSC - Personal Service Corp

Both 21%

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36
Q

PSC
Personal Service Corp

A

closely held C corp for professionals
H-A-L-E
Health (doc, dentist)
Accounting, Architecture, Actor/Actresses, Actuarial science
Law
Engineering

37
Q

Types of business entities for a business with LOSSES and risk-free

A

Sole Prop
Partnership

38
Q

Types of business entities for a business with LOSSES and risky (liability exposure)

A

S corp
Limited Partnership
LLC

39
Q

Corporation dividend deduction

A

US corporation (C corp only) investing in another US corp receives a deduction for dividends rec’d

50% of dividends rec’d from qualifying corp may be excluded from income if receiving corp owns 20% or less of distributing corp

65% exclusion if between 20-80% owner

100% exclusion if > 80% owner

40
Q

Difference between PSC and S-Corp

A

S corp can pass through earnings/losses. PSC is self-contained and losses would be carried forward, earnings taxed 21%

Stock in both would step up at death.

Both have limited liability but only general liability not professional.

Both can deduct business expenses.

41
Q

Sole proprietorship business loans

A

Interest paid on debt is deductible on schedule C without limit

42
Q

Sole prop losses

A

Offsets any other income on 1040
Then carry forward as net operating loss like a corp

43
Q

General partnership basis

A
  1. Cash contributed by partner
  2. Loans from partner
  3. Other bank loans (b/c partner can be held responsible for debt)

UNLIMITED PERSONAL LIABILITY

44
Q

S Corp Basis

A

Cash contributed
Direct loans from shareholder to corp

NOT bank loans

This can be a disadvantage - can only take losses up to basis

45
Q

S Corp Eligibility

A

100 or fewer shareholders
No preferred stock
No non resident aliens
Individuals, estates, and certain trusts can be shareholders

46
Q

QBI

A

Deduction for qualified business income
up to 20% depending on Tiered status (Tier 1,2,3) based on TAXABLE INCOME, not AGI
pass through income from partnerships, sole props, and other pass through businesses (including REITs, publicly traded partnerships)

BELOW THE LINE
Available even with std deduction

47
Q

S Corp taxation

A

Cash distributed is a non taxable return of investment that reduces basis
Not subject to FICA or SE taxes

Salary paid to owners IS subject to FICA/FUTA

Any unearned income / losses become adjustment to basis

48
Q

LLC with two or more members

A

LLP
ltd liability partnership

49
Q

Limited partner - when is a limited partnership the wrong answer

A

Can NOT be active in operations
passive only

50
Q

What is included / excluded from basis in business?

A

included: legal fees, commissions, sales tax, freight, improvements (must be capitalized)

excluded: repairs, real estate taxes, normal operating expenses
repairs deducted as expenses

51
Q

INEligible property for nontaxable 1031 exchange

A

Inventory of a business
Non business tangible / personal property
Personal residence
Marketable securities

must be business real estate

someone can exchange for a personal residence IF they then use that for business purposes, but owner of personal residence will be taxable

52
Q

1031 exchange: Realized gain (1)

A

FMV property rec’d + any boot rec’d
Minus
Adjusted basis of property given up (given)

53
Q

1031 exchange: Recognized gain (2)

A

Usually = to boot rec’d
else
Zero

54
Q

1031 exchange: Substitute basis (3)

A

FMV of new property
Minus
(Realized gain (1) - Recognized gain (2))

55
Q

Net Investment Income tax

A

3.8% on UNearned income

56
Q

CRD / tax implications

A

Cost Recovery Deduction - depreciation which offsets business’s ORDINARY income

When assets are sold for a gain:
1. Look back and recapture the LESSER of total CRDs taken OR the gain realized as a 1245 gain (ordinary income)
2. Recover any excess gain as 1231 gain (capital gain). If gain is less than the CRD’s there is no 1231 recovery.

Recapture applies to all MACRS property mainly equipment
other than real property (27.5) and non residential (39 yr class)

example:
equipment cost $12K
CRDs $7392
Sale price $13K

CRDs recaptured as 1245 gain (ord income)
Sale price minus adjusted basis (original cost minus CRD) = Gain
$13k - ($12k-7392) = $8392
CRD is less than gain so recapture is $7392

Amount of 1231 gain
Difference between Gain and CRD = $1000

57
Q

AMT preference items

A

IPOD

Excess Intangible drilling costs (IDC)
PRIVATE-activity muni bonds (not public)
Oil and gas % depletion (not cost depletion)
Deprecation (ACRS/MACRS not straight line)

58
Q

AMT add back items

A

Previously deducted items that must be added back
ISO bargain element
SALT taxes

Home equity interest if not used for home improvement

59
Q

Depletion

A

like depreciation but for natural resources, recover the cost of an asset over productive life

% depletion is an AMT preference item but not cost depletion

60
Q

AMT payable

A

If tentative AMT is less than regular tax, no AMT due
If tentative AMT is higher than regular tax, the difference is AMT payable

aka tentative minimum tax

61
Q

How to avoid / minimize AMT

A

Increase regular tax by:
accelerate receipt of taxable income
reduce deductions - defer payment of property tax, state income tax, medex, charitable giving

defer exercise of ISO to a later date
or
disqualify the ISO so that it becomes an NSO subject to ordinary income tax

buy pubic purpose muni bonds instead of private purpose (reduce preference items)

62
Q

Master Limited Partnership (MLP)
PTP

A

Publicly traded partnership - PTP

Income is portfolio income on Schedule B
cannot be sheltered by passive losses from any other source

Losses can ONLY be used against income from the SAME partnership

63
Q

Non Publicly Traded partnerships
RELP

A

Real estate limited partnership

Passive activity losses can only e used to offset income from other non public limited partnerships (Passive Income Generators)

Usually reported on schedule E for real estate

64
Q

Material vs active participation

A

Material - regular, continuous, substantial basis
Active - less demanding standard
requires bona fide/real involvement in management decisions
limited partner cannot be active participant

Both are exceptions to the passive activity rules

A merely formal and nominal participation in management without genuine exercise of independent discretion is insufficient

65
Q

Net loss deduction for ACTIVE participation in real estate activity

A

up to $25k/year
phased out for AGI 100-150K on 2:1 basis

66
Q

Principal residence rental

A

Not taxable income if < 15 days in tax year
No deductions attributable to rental allowed

67
Q

Rental of vacation home

A

Personal use cannot exceed longer of 14 days or 10% of the rental use
THEN
deductions attributable to rental use are allowed

68
Q

Low income housing program

A

held as a passive activity may generate a deduction-equivalent credit up to $25K
NO INCOME PHASEOUT

calculate tax to determine max marginal bracket. If it is 37%, multiply $25K times 37% to get credit of $9250

credit allowed annually over a 10 year “credit period”
don’t confuse with the 27.5 year straight line deprecation

69
Q

Historical Rehabilitation Credit

A

still available but often not productive
phases out at $200K AGI

if tax rate is 25% tax credit is $25K * 25% = $6250

these programs depend on credits, not returns, to make them worthwhile

??? This may be wrong
IRS says it is 20% of expenses over 5 years

70
Q

Oil and gas partnership

A

Exempted from PAL rules
IF taxpayer is personally liable then losses are deductible without limits against active or portfolio income

IF LIMITED partner, just passive loss until dissolution of partnership

71
Q

Phantom income from real estate property

A

when real estate properties have declined in market value and are refinanced or debt is forgiven

portions of debt forgiven is phantom income

72
Q

Phantom income sources

A

Insurance:
any type of lapse with a loan
section 162 life and disability

Investments:
Zero/STRIPS
TIPS
Declared but not paid dividends/capital gains

Tax:
K-1 from LP/FLP
Recaptures

Retirement:
ESOP distribution (basis only)
Secular trust

73
Q

Alimony & tax

A

PRE 2019 - taxable to payee and deductible by payor
cash payments only
not if property owned by payor spouse
not if life insurance owned by payor spouse

74
Q

Charitable donation limits

A

START WITH CALCULATING THE MAX # at 60%

a)Cash
b)LTCG (use related, stocks, real estate)
c) Ordinary Property (not cap gain)
» Use unrelated
» STCG
» inventory
» artwork
» copyright
d) Loss Property

What is the value?
a) cash amount
b) basis or FMV
c) basis ONLY
d) FMV

How much can i deduct? Overall = Total gift value. Deduction can be carried forward 5 add’l years.

How much can i write off THIS YEAR?
a) 60% of AGI
b) FMV 30% AGI (FMV is 3 letters)
Basis 50% AGI (Basis is 5 letters)
c) 50% AGI
d) 50% AGI

75
Q

50% vs 30% charitable organizations

A

50% - public charities
schools, churches, hospitals
all orgs for charitable, religious, educational, or literary purposes, or prevention of cruelty to children or animals

30% private charities
private non-operating foundations, fraternal orders, war veterans orgs

76
Q

Simplified approach to charitable deduction

A

Step 1: Calc max at 60%
Step 2: Cal amount to public charities (50% orgs):
» Up to 60% for cash donations
» Up to 30% of AGI for LTCG property at FMV

Up to 50% of AGI for:
Basis for inventory/works of art
Basis for STCG
Basis for Use Unrelated Property

77
Q

Charitable bargain sale taxation

A

sale for less than FMV
gain must be allocated between property “sold” and property “gifted”

sale amount / FMV * basis = adjusted basis

sale amount - adjusted basis = taxable gain

78
Q

Taxation of scholarship $

A

Tuition and books not included in income
Room & board IS included

79
Q

Exclusions from gross income

A

Gift
Inheritance
Child support
Workers comp
compensatory damages (punitive is taxable)
Muni bond interest
Scholarship tuition and books

80
Q

Investment interest
Reg T vs Reg U

A

only reg T broker / dealer interest is deductible
not
reg U commercial banks

81
Q

Qualified dividend tax rates vs tax brackets

A

Use tax tables

10- 12 bracket: 0%
22-35 bracket: 15%
35-37 bracket: 20%

82
Q

Medicare tax

A

1.45% paid by ER, 1.45% paid by EE (2.9% total)
plus additional 0.9% on income over 200/250K MFJ

PLUS additional tax on Net Investment Income
3.8%

83
Q

Cash vs accrual accounting

A

If over $29M revenue over 3 years average, accrual method
Cash is ok if < 29

84
Q

Corporate accumulated earnings

A

20% penalty/tax if above $250K or $150K for PSC

85
Q

Which entity types count bank loans as part of basis?

A

Sole prop
Partnership
LLC

Not S corp

86
Q

Depreciation tables

A

MACRS
5 year (100/5) = 20%
7 year (100/7) = 14.29%

Straight line(half year convention)
5 year (100/5/2) = 10%
y year (100/7/2) = 7.14%

87
Q

Hobby income / expenses

A

Expenses NOT deductible after TJCA 2017
Income counts as misc income

Unless 3/5 years income is a business
or 2/7 years for horses

88
Q

Alimony recapture for front-loaded payments

A

If alimony paid too fast it is a disguised property settlement
alimony paid and deducted the has to be recaptured

Recapture / tax amount paid in years 1 & 2 exceeding constant of $37,500
year 1 + year 2
minus
$37500
= recapture amount

CFP (7 decks)

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