Domain II - Wealth Mgmt. - Technical Design Flashcards
Explain Marginal / Effective Tax Rates
Marginal - Tax rate applied to the next marginal (incremental) portion of income earned. Use this rate when considering new projects.
Effective - Tax rate actually paid on total income. Calculated by dividing total taxes paid by total income.
(HSA) health savings account, half of SE tax paid, qualified plan and IRA contributions, SE health insurance premiums, qualified alimony paid (per pre 2019 agreements), student loan interest deduction and tuition and fees are examples of what?
Above the line deductions
Calculate Self-Employment Tax
OASDI (6.2% for employee and 6.2% for employer = 12.40% for self-employed on net earnings from SE up to maximum income level $160,200 for 2023)
Medicare’s Hospital Ins (HI) program is taxed at a flat rate (1.45% for employee and 1.45% for employer = 2.90% for self-employed on net earning from SE without limitation.
15.3% total on SE
Schedule A itemized deductions(6)?
- Medical and Dental Expenses - 7.5% of AGI threshold / 10% in some cases
- Tax You Paid - State and local tax deductions (limited to $10,000 MFJ $5,000 single)
- Interest You Paid- Qualified mortgage interest and points (limitations apply), mortgage insurance premiums, investment interest (to the extent of net investment income)
- Gifts to Charity - subject to limitations
- Casualty Losses have been suspended unless the specific casualty has been declared a disaster by the President
- Job Expenses and Certain Miscellaneous Deductions -Unreimbursed employee expenses, tax prep fees, other expenses. No longer allowed but come back in 2026
Tax credits directly _____.
Tax deductions _____. This means the value of a tax deduction lies in the _____ rate which rises with addtional income.
reduce tax liability (dollar for dollar).
taxable income / marginal
Estimated Tax Payment Rules?
If prior year AGI was $150,000 or less, to avoid underpayment penalties, pay 100% of prior year tax or 90% of current year tax, whichever is less.
If prior year AGI was over $150,000, to avoid underpayment penalties, pay 110% of prior year tax or 90% of current year tax, whichever is less.
*Tax withheld from retirement distributions is considered paid evenly throughout the year and qualifies as estimated tax payments.
Distributable Net Income (DNI)?
The amount transferred to unitholders (if an income related trust) or the amount distributed to beneficiaries (if an estate related trust).
_____-tier beneficiaries must have income distributed to them in the year earned. They are taxed on income actually or constructively distributed to the extent of the trust ‘s or estate’s distributable net income (DNI). Currently distributable income must be distributed in the same tax year as earned. It includes any amount that may be paid out of income or corpus to the extent it is paid out of income for that tax year.
First
_____-tier beneficiaries receive all distributions that are properly paid, credited or required to be distributed other than tier one distributions and gifts or specific bequests of property or sums of
money. This includes discretionary distributions, distributions required upon a specified occurrence, an annuity paid out of corpus and a spousal support allowance required by court order.
Second
2017 Tax Cuts & Job Act
Personal Exemptions / Itemized Deductions
Suspended beginning ____
Comes back after _____
2018 / 2025
Long-term capital gains and qual. dividend rates (2023)?
0% (up to $89,250 MFJ)
15% ($89,251 to $553,850 MFJ)
20% (over $553,850 MFJ)
What are the Alternative Min. Tax (AMT) rates?
26% and 28% (over $220,700)
Tax rate on collectibles and certain small business stock?
28%
_____% Medicare Hospital Insurance Tax
Tax assessed on earned income above:
_____ MFJ
_____ Single
0.9 / $250,000 / $200,000
_____% surtax on Net Investment Income
Tax assessed on certain net investment income when modified AGI is above:
_____ MFJ
_____ Single
3.8 / $250,000 / $200,000
Gifts to Minors
_____ - Limited to transfer of certain assets. Growth can be _____. Ownership typically transfers to child at age _____.
UGMA (Uniform Gift to Minors Act)
tax-free
18
Gifts to Minors
_____ - Growth can be _____. May be included in grantor’s taxable estate until child takes ownership which transfers from age _____ - _____.
UTMA (Uniform Transfer to Minors Act)
tax-free
21
25
Kiddie Tax (Secure Act)
Unearned income amounts above $_____ for those dependents under _____ yrs. old and full-time student dependents from _____-_____ yrs. old to be tax at the _____ rate.
2,300
19
19 to 23
parent’s
*For 2018-2019 (per the TCJA) kiddie tax was based on trust tax rates but in certain situations the parents could elect this inocme to be taxed at their income tax rates.
This term is used to describe a strategy by which a taxpayer seeks to allocate taxable income in different years or through different taxpayers to “fill up” lower tax rates in order to avoid taxation at higher rates given a progressive tax system.
Tax Bracket Stacking
The basic steps for computing an individual’s AMT are:
(1) Taxable Income +/− AMT Adjustments + AMT Preference Items = ?
(2) AMTI − Exemption Amount (subject to phase out) = ?
(3) AMT Base × AMT Rate(s) = ?
26% on first $220,700
28% on amounts above $220,700
(4) Preliminary AMT - Tax Credits = ?
(5) Tentative AMT − Regular Tax = ?
(1) AMTI (“alternative minimum taxable income”)
(2) AMT Base
(3) Preliminary AMT
(4) Tentative AMT
(5) AMT Due
AMT Exemptions
Exemption Amount (2023) - _____ for MFJ
Exemption Phaseout Begins (2023) - _____ for MFJ
$126,500 / $1,156,300
AMT Planning Opportinities
Income and Expense Planning (5)?
– Defer deductions for state income or property taxes
– Defer or accelerate receipt of income
– Reduce exposure to private activity bonds to avoid AMT
– Consider taxable bonds if subject to AMT
– Time charitable contributions
AMT Planning Opportunities
Stock and Option Planning (3)?
– Defer or accelerate receipt of capital gains
– Consider disqualifying disposition on ISOs
– Consider tandem exercise of ISOs and NSOs
2023 Percentage Deduction Limitation Rules
Public Charity
Cash - ?
Long-term capital gain property - ?
Tangible personal property - ?
Short-term or ordinary income property - ?
60% of AGI (FMV)
30% of AGI (FMV)
30% AGI (FMV - same use) or 50% of AGI (basis - not same use)
50% AGI (Basis)
2023 Percentage Deduction Limitation Rules
Private Charity
Cash - ?
Long-term capital gain property - ?
Tangible personal property - ?
Short-term or ordinary income property - ?
30% of AGI (FMV)
20% of AGI (Basis) - unless qual. appreciated stock (FMV)
20% of AGI (Basis) - same use or not same use
30% of AGI (Basis)
Gift Property with imbedded loss (i.e., depreciated property)
General Rule: The taxpayer deducts the _____ of FMV or cost basis for gifts of depreciated assets.
Lesser
Result: The taxpayer deducts FMV on property that has lost value since purchase.
Gift Property Encumbered by Debt
FMV of gift property is calculated _____.
Net of debt
*The transfer of encumbered property to charity is considered a bargain sale (i.e., the amount of debt is considered an amount realized by the donor).
Deducting Mortgage Interest
Limits on deductibility - $_____ (after 12/15/2017)
Applies to _____ or _____,
750,000
Primary residence / second home
- $1,000,000 prior to 12/15/2017
Qualified & Non-qualified Dividends
Dividends are generally taxed as _____.
Qual. dividends are taxed at _____ rates.
ordinary income / capital gains
Holding period - Common Stock
In order to qualify for the lower rates, investors are
required to hold common stock for more than _____ days in the _____ day period beginning _____ days before the ex-dividend date.
60 / 121 / 60
Holding period - Preferred Stock
In order to qualify for the lower rates, investors are
required to hold preferred stock for more than _____ days in the _____ day period beginning _____ days before the ex dividend date.
90 / 181 / 90
A wash sale occurs if the taxpayer sells or disposes of the stock or securities, and within _____ days before or after that date (the _____ day period) the taxpayer acquires, or enters into a contract or option to acquire, substantially identical stock or securities. When a loss is disallowed because of the wash sale rule, the disallowed loss is added to the cost basis of the new stock or securities.
30 / 61
_____ gains occur upon transaction. _____ gains occur when triggering a taxable event.
Realized / Recognized
Taxation of Incentive Stock Options (ISOs)
Holding period requirements: hold _____ yrs. after grant
If holding period is met…
Grant -
Exercise -
Sale -
If holding period is not met…
Difference between FMV at time of exercise and the option price is considered _____ for tax purposes.
- 2
- not a taxable event
- not a taxable event
- taxation upon sale as appropriate (LTCG or STCG)
ordinary income
ISO Spread Impact on AMT
The holder of an ISO realizes gain/loss for AMT purposes equal to the difference between the _____ of the stock on the date of exercise and the _____ price.
FMV / exercise price
*called the “spread.” The spread is an AMT preference item that must be added back when computing AMTI.
Taxation of Non-qualified Stock Options
NQSO are taxed as _____ at time of _____.
*Second taxable event
LTCG/L if stock is sold more than one year after the exercise
STCG/L if stock is sold one year or less after the exercise
ordinary income / exercise
Partnerships, LLPs, and S-Corporations are categorized as _____ entities.
LLCs can elect to be taxed as a corporation, but LLC members usually elect to be taxed as a _____. With this election, an LLC is also a _____ entity.
pass-through
partnership / pass-through
Basis in an S-Corporation (recalculated each year)
Beginning basis
+/- Capital contributions?
+/- Debt shareholder personally loaned to company?
+/- Income/gains?
+/- Distributions?
Adjusted basis before loss allocation
+/- Deductions/losses?
Ending Basis
Plus
Plus
Plus
Less
Less
Basis in a Partnership/LLC (recalculated each year)
Beginning basis
+/- Capital contributions?
+/- Allocable share of recourse debt?
+/- Allocable share of qualified nonrecourse debt?
+/- Income/gains?
+/- Distributions?
Adjusted basis before loss allocation
+/- Deductions/losses?
Ending basis
Plus
Plus
Plus
Plus
Less
Less
Qualified Business Income (QBI) Deduction
_____% deduction available to individuals and trusts.
Deduction is equal to _____% of net income from a business operated as an S-Corp, Partnership, or a Sole Proprietorship.
After income threshold $_____ (MFJ 2023) - certain businesses (investment mgmt., for ex.) will not qualify for the deduction.
20
20
$364,200
There are two types of debts: A _____ debt holds the borrower personally liable. All other debt is considered _____.
recourse / non-recourse
Pass-Through At-Risk Limitations
S-Corporations: Shareholders include only debt that they _____ loan to the corporation.
Partnerships/LLCs: General partners include all partnership debt on which they have _____ liability. Limited partners and LLC members include only _____ debt for which they are personally exposed and qual. non-recoure debt for business real estate.
personally
personal
recourse
Form _____ reports all passive income/loss activity
8582
1031 Exchanges: Gain recognition is deferred on like-kind exhcnages of real property only.
Does/Does Not apply to personal use property or residences?
Losses are/are not recognized?
Does not / are not
Re-characterization of cap. gains as ordinary income to recapture accelerated depreciation on certain real property. Section _____?
Section 1250
