CFP - Tax Flashcards
Roadmap - Publicly and non-publicly traded MLPs
Ex. Your client, Jeremy owns the following investments:
A 2% interest in a non-publicly traded partnership. His initial investment was $100,000. The partnership sent him a K-1 showing a $10,000 loss.
A 30% active interest in a limited liability company. His basis is $100,000. The LLC sent him a K-1 showing a $30,000 loss.
Non-publicly traded partnerships (RELPS/PIGs) = can net
Publicly traded partnerships (MLPs) = no netting
-Notice that losses stay inside the circle; to utilize, that particular PTP must generate income or the business must be sold; income comes out of the circle
REMEMBER - Up to $25,000 loss for active participants in real estate deductible against active or portfolio income (AGI PHASEOUT between $100-$150k)
Ex. $30,000 loss
A loss from a non-publicly traded partnership is a passive loss. The loss is not deductible until the limited partner sells the interest or dies. A loss from an LLC in which the investor is an active participant is deductible up to basis.
Roadmap - Business w/ losses
Roadmap - Taxation of businesses
Roadmap - 1040
Gross income (less above the line deductions) = AGI (less below the line deductions) = Taxable income X tax rates (less tax credits) = tax liability (less quarterly’s + w/h) = tax due/refund
Schedules A-E
-Itemized deductions (sch A)
-Dividends + interest (sch B)
-Business income (sch C)
-Cap gains (sch D)
-Real estate (sch E)
-Household employees (sch H)
Filing status
Single, MFJ, MFS, head of household, widower + child unearned ($1,300)
Ex. If spouse dies, get MFJ year of death, widower the following 2 years, and then single.
Net Investment Income (what can be written off against investment interest expense)
Limited to the taxpayer’s investment income (dividends ONLY IF elected not to use reduced cap gains rates, interest, and ST cap gains - NOT long-term unless you elect ST treatment)
Margin interest can be carried forward forever
Self-employment deductions + tax
Home office: $10,000 max deduction (limited to income; home office can’t create a loss)
-must use office exclusively for business and must be used to conduct admin/management activities + no other fixed business location
Self-employment tax - 0.1413%
Deductible business expenses
Entertainment is not deductible, meals for clients or wooing prospects or social/office parties are deductible, and general meals for employees are up to 50% deductible
Shortcut - 100% travel, 50% meals, 0% entertainment
FICA Taxes
15.3% (employee 7.65% / employer 7.65%)
-SS up to $168,600 - 6.2%
-Medicare no cap - 1.45%
Child, dependent care, adoption credit
Dependent care credit (nonrefundable) - $3,000 per kid under 13 up to $6,000 - For exam, X 20%
Child care credit (partially refundable) - $2,000 / kid UNDER 17, up to $1,700 is refundable
-If parents are divorced, it’s claimed by the custodial/care providing parent
Other dependents (nonrefundable) - $500
Adoption credit (nonrefundable) - Up to $16,810 in qualified expenses for 2024; claim in the year adoption is finalized
Other credits - Elderly & disabled (must be both) (nonrefundable), foreign tax credit (nonrefundable), earned income credit (refundable)
-Foreign tax credit can operate as a tax credit or itemized deduction
Installment sale - gain calc
Calculates the gain recognized each year in the installment sale - Profit / Total contract price = Gross profit %
-Profit = sale price - basis
Installment received X gross profit % = cap gain
REMEMBER - Related party trap - I sell building to Garrett. He sells it within two years to someone else, installment sale collapses and all gain is taxed retroactively to me.
Section 1244 qualified small business stock
This applies to the first $1M of stock issued (C or S), and election allows for $100k ord. loss each year (MFJ) / $50k ord. loss (single) + $3,000 cap gain loss; 1244 election is an advantage = allows you to write off business losses faster
Sole prop, GP features, LLC + QBI Rules
Sole prop - If individual borrows money for a business purpose relating to the sole prop, interest paid (WITHOUT LIMIT) on the debt is deductible on Sch. C
General partnership - Businesses must file 1065 for information purposes only; partners file K-1 with their return. ADVANTAGE - 3. things contribute to basis 1. Cash/contributions 2. Direct loans from partners 3. Loans made to the partnership, not the partner (bank loans)
Passthroughs = QBI-199A deduction up to 20% qualified business income | NOTE that non-pass through (C Corp) don’t get this
-IF taxable income exceeds the phaseout threshold of $483,900, their deduction is now limited to the lesser of 20 percent of business income or 50 percent of W-2 wages. HOWEVER, PERSONAL SERVICE CORP, above threshold equals zero for QBI deduction
-must be US-sourced income
179 v. 197 amortization/deduction/depreciation
179 - Can’t create a loss or depreciate for more than 20 yrs. - Generally elected for 1245 property & can’t take a loss
-179 generally can’t be taken for 1250 or intangible/franchise property
1250 property CAN take a loss
197 - 15 yr. straight line depreciation for intangibles like goodwill
1031 and like-kind for real estate + boot
Keep it simple;
-Recognized gain = boot
-Realized = New prop + boot - org. prop adjusted basis
Keys - Boot paid = add to basis + basis carries over from the last property
Realized v. recognized gain for selling a home
Realized = Actual
Recognized = Takes into account $250/$500k exclusion
Flows to Sch. D
121 exclusion rules + pro rating
Ex. Married clients bought home in CA. After 6 mo. they sold home for $50k gain and moved to OH for a job. What taxable gain must they report?
To qualify, must live in home for 2/5 years before sale.
Exception - If you move due to unforeseen circumstances (a move for work has to be more than 50 miles) - In this case, you get pro rated exclusion based on live in over past 2 yrs.
Ex. 0.5 / 2 years = 0.25 X $500k = $125k allowable exclusion
AMT (preference + add back items, corporate AMT, and tax application)
- Preference items
-IPOD (O: Oil and gas % depletion, NOT cost depletion) - Add back items
-ISO bargaining element + prop, state, city/income taxes - Corporate AMT eliminated
- Delta between normal/regular tax and AMT is added to tax owed (remember rock and river example)
Rental property rules
Renting principle residence - If less than 15 days, income = tax-free
Renting vacation home - Personal use can’t exceed the longer of 14 days or 10% of rental use
Oil & gas working interests
Exempt from PAL rules + losses for which taxpayer is personally liable are deductible against active or portfolio income; though limited partner = passive loss, take loss when partnership is dissolved
SO REMEMBER - If you want to lower taxable income, be a general partner in oil and gas interest/partnership or do low-income housing (no phase out for either)
Calculating charitable giving
- Calc max deductible amount - up to 60% of AGI
- Calc amount given to 50% orgs
- Calc amount given to 30% orgs
Types of donated property
-Cash - up to 60% AGI
-Appreciated prop - 30% AGI based on FMV unless basis is elected –> 50% of AGI
-Ord income + use-unrelated prop (prop, if sold, creates ord. income, not cap gains) - limited to basis & 50% AGI
Cash + stock is always use-related
REMEMBER – Charitable carry forward is only five years & non-cash property, other than publicly traded securities of more than $5000 require an appraisal
Charitable bargain sale
Ex. Prop w/ $500k FMV is sold to charity for $300k, and basis is $100k. What is the taxable gain?
When property is sold to charity for less than FMV. The amount discount must be reduced from the basis.
Ex. $240,000
-Sale price - adj. basis = cap gain
Hobby loss rules
Hobby income still must be filed, but you don’t get hobby loss deductions; ideally, have 3/5 of last consecutive years turn a profit to qualify as a business (instead of a hobby)
Clients are divorcing and neither are getting custody; one of the clients mother’s is. Who gets the tax exemptions for the kids?
NO ONE - personal exemptions repealed by TCJA.
Alimony features and being subject to recapture
Ex. Clients divorce.; one client receives $100k in yr. 1, $85k in yr. 2, and $0 in yr. 3. How much is subject to recapture?
What happens if person dies before all alimony is paid out?
If person required to pay alimony for seven years, dies into year three, the alimony payments generally cease in the ex spouse generally has no rights to the decedent’s estate. To mitigate this often times life insurance is mandated per divorce decree.
If alimony is paid too quickly, it will be recaptured as ord. income. To calc recapture, add alimony paid in year 1 and 2 and subtract $37,500 = recapture
Itemized deductions
Acronym – my tax is calculated correctly
-Medical - 7.5% above AGI
-Taxes paid - $10k limit
-Interest - mortgage and margin (up to investment income - ord. income investments)
-Charitable
-Casualty losses
A couple has lived in their primary residence for 3 years and are in the 32% federal marginal tax bracket. They sold the following assets in the current year:
The couple’s capital gain tax liability will be which of the following amounts?
$1,460
Depreciation/cost recovery – Cost recovery deductions are allowance for exhaust & wear/tear
- Modified accelerated cost recovery system (MARCS) – Applies to all recovery property placed in service after 1986; prior ARCS was used
- Straight-line is an option under MACRS, but half year convention used for year of acquisition
- MARCS requires mid-quarter convention if > 40% of the depreciable property is put into service by the business during the fourth quarter of its tax year
Real property depreciation recapture
When real property is sold, a special 25% depreciation recapture at 25% applies at sale
A sole proprietor, has a gross income of $40,000 from his landscaping business. He also has $1,000 of tax-free municipal bond interest and $1,000 from qualified dividends. He made a $500 IRA contribution, $500 of meals expenses and $500 of business expenses for advertising and supplies. What is his AGI?
Provisional income thresholds for Social Security
Provisional income = Gross income, tax-free interest, and 50% of their social security benefits
Credit v. deduction
Ex. Jane is in a 22% marginal income tax bracket. What would you recommend she do to reduce her taxes?
A credit produces a direct reduction in tax liability. A credit is more valuable to a low bracket taxpayer than a deduction would be. Jane would only get a 20% reduction in taxes with a deduction. Please review pre-study Income Tax Chapter 2. This is a tested concept.
Section 179
Section 179 of the Internal Revenue Code allows businesses to deduct/EXPENSE the cost of qualifying property in the year it is purchased and placed into service, rather than depreciating it over several years.
This is a good thing as you can take deductions faster. Limit is around $1.2 million.
