Income Tax Flashcards
FICA Tax Amount Employee Pays
6.2% on the first $142,800 + 1.45% on the TOTAL if above $142,800
Example
W-2 income = $150,000 6.2% x $142,800 = $8,853.60 + 1.45% x $150,000 = $2,175 TOTAL FICA = $11,028.60
Installment Sale Calculation of Gain
Profit / Total Contract Price = Gross Profit %
C corporation Advantages
- Separate tax entity (uses IRS Form 1120)
- Dividend received deduction (50% exclusion)
- Sale of stock to unlimited number of investors
- Can provide non-qualified deferred comp
- Limited Liability
- Continuity of life
PSC’s Personal Service Corporation
- A closely held C corporation that is owned and funded by fees from professionals who perform certain services (HALE)
- Cannot pass earnings or losses to shareholders
- Any income retained is tax at a flat 21%
S Corporation Characteristics & Tax Keys
- Conduit entity
- Pension Plan
- 100% of Medical, Dental, and LTC insurance deductible for > 2% owners
- Losses up to basis
- All shareholders must consent to election
*Remember S Corp requirements*
100 shareholder max
One share class of stock (common)
Must be domestic
No foreign shareholders
Limited Liability Corporation Characteristics and Tax Keys
- Conduit entity
- Provides limited liability (like a corporation)
- Losses up to basis (like a partnership)
Limited Partnership Characteristics & Tax Keys
- Conduit Entity
- Must have at least 1 general partner
- Limited Partners CANNOT actively participate in the business
- Limited Partners are only responsible for Partnership debt up to their capital investment.
- Losses up to basis
Sole Proprietorship Characteristics & Tax Keys
- Conduit entity
- Pension Plan (Keogh)
- 100% of medical, dental, and LTC deductible for owner
- Lack of continuity
Partnership Characteristics & Tax Keys
- Conduit entity
- Pension Plan (Keogh)
- 100% of medical, dental, and LTC deductible for owners
- Lack of continuity
- Losses up to basis
Original Basis
- A Taxpayer’s investment in any asset or property right.
*Basis is increased by:
- Legal Fees
- Commissions
- Sales Tax
- Freight
- Improvements
*Basis NOT increased by:
- Repairs
- Real Estate Taxes
- Normal business operating expenses
***Improvements must always be capitalized
***Repairs are always deducted as expenses
Adjusted Basis
Cost recovery deductions are an allowance for the exhaustion and wear&tear of property used in a trade or business or held for the production of income.
Rental Home Max personal use
Personal use cannot exceed the LONGER of:
- 14 days
Or
- 10% of the rental use
(ex: 300 rental days = 30 days for personal use)
Rental of Principal Residence
Rental income EXCLUDED if rented less than 15 days during taxable year
FORM 1040 FLOWCHART
Gross Income Inclusions
- Wages
- Taxable Interest (Schedule B)
- Ordinary Dividends (Schedule B)
- Business Income or Losses (Schedule C)
- Real Estate (Schedule E)
- Alimony Received (Pre-2019)
- Taxable Social Security
- IRA Distributions
- Pensions & Annuties
- Unemployment Income
- Punitive Damages
Adjustments For AGI
***For AGI is above the line. Deductions to Gross income to arrive at AGI.
MAIN ADJUSTMENTS THAT ARE TESTED
- IRA, Keogh, SEP Contributions
- 1/2 Self Employment Tax (.07065)
- Alimony Paid (Pre-2019 Divorce)
- Self Employment Health Insurance
Others (Less Tested)
- $2,500 Student Loan Interest
- HSA Contributions
- Early Withdrawal Penalties Paid
- Moving Expenses (Active Military Only)
Adjustments From AGI
***From AGI is below the line. These are the deductions from AGI that get you to Taxable Income.
- Standard Deduction
-
Itemized Deductions (Schedule A)
-Medical, Dental , LTC (more than 7.5% of AGI)
-Real Estate Taxes (part of $10k combined)*
-State, Local, & Sales Taxes (part of $10k combined)*
-Home Mortgage Interest
-Chariable Gifts
-Investment Interest Expense
*(limited to net investment income)
*(LTCG only included if you opt-out of LTCG treatment)
Entertainment, Meals, and Travel
Expense Deductibility
- Entertainment = 0%
- Meals = 50%
- Travel = 100%
SELF EMPLOYMENT TAX CALUCLATION FACTOR
.1413
Tax Credits
- Child & Dependant Care (non-refundable)
- $3,000 for 1 dependant
- $6,000 for 2 or more dependants
- Use 20% of allowable expense on the exam
- Child Tax Credit (Partially Refundable)
- $2,000 for each child under age 17 (Phaseout applies)
- Adoption Credit (non-refundable)
- Credit claimed in the year the adoption is finalized
- Elderly & Disabled Credit (non-refundable)
- Must be age 65 and totally diabled
- Foreign Tax Credit (non-refundable)
- Can choose as a credit or a deduction for foreign taxes paid
- Earned Income Credit (refundable)
- for certain people who work and have income below a certain amount.
Refundable vs Non-Refundable Tax Credits
- Refundable - Can generate a tax refund
- Non-Refundable - Cannot generate a tax refund, can only reduce tax liability to zero
BUSINESS ENTITIES FLOW ROAD MAP
Non- Publicly Traded Partnerships
ARE A PASSIVE ACTIVITY
- Referred to as RELPs (Real Estate Limited Partnerships)
- Passive activity loss (PALs) may not be used to reduce portfolio income, compensation, or business income.
- Can only be used to offset income from other non-public limited partnerships (called Passive Income Generators or PIGs)
- Netting of gains and losses done on Schedule E
Passive Activity & At-Risk Rules
- A Passive activity is a trade or business in which the taxpayer does not “materially participate”.
- Dedcutions for losses to passive investors is limited.
Publicly Traded Partnerships (PTPs)
PTPs ARE A PASSIVE ACTIVITY
- Referred to as Master Limited Partnerships (MLPs)
- A Partnership is publicly traded if the interest are traded on an established securities market or tradable on a secondary market.
- Income from a PTP may not be sheltered by passive losses from any other source.
- PTP Income is portfolio income (security income) and is reported on Schedule B.
- Losses from a PTP may not be used to offset passive income from other sources.
-Net losses must be carried forward and can only be used to offset losses from that same partnership (cannot escape the “circle”)
Material Participation
(Exceptions to the passive activity rules)
A taxpayer will be treated as materially participating in an activity only if the taxpayer is involved in the operation of the activity on a regular, continuous, and substantial basis.
Active Participation
(Exception to the passive activity rules)
Active participation is a less demanding standard than material participation.
It merely requires bona fide involvement in management decisions.
A limited partner may never be an active participant.
*Note: Active participation can produce income or loss, reported on Schedule E
QBI (Qualified Business Income) Deduction
A deduction of up to 20% of qualified business income from passthrough entities such as Sole Proprietorships, Partnerships, S Corps, LLCs, and more.
*Subject to phaseouts*
