Income Tax Flashcards
What are the gross income inclusions (12)
- ordinary dividends
- taxable interest
- business income and losses
- capital gains and losses
- real estate
- punitive damages, except wrongful death
- wages, salaries, tips
- IRA distributions
- pensions and annuities
- alimony received, divorce before 2019
- unemployment income
- taxable social security
Gross income adjustments to get AGI (10)
*IRA contributions
-student loan interest, $2,500, schedule one
*Keogh or SEP
*Self-employed tax (.07065)
*Certain alimony paid, divorce before 2019
*100% self-employment health insurance
-active military moving expenses
-penalty for early withdrawals of savings
-HSAs
-$4,000 education expenses. AGI limits apply and used as an alternative to AOC.
Itemized deductions (10)
Schedule A
- medical, dental, qualified LTC expenses. Less than 7.5%.
- state and local taxes*
- sales taxes*
- personal property taxes*
- real estate taxes*
- mortgage insurance residents. Less than $100,000 AGI
- home mortgage interest
- charitable gifts
- investment interest
- casualty losses from federally declared disaster areas
What are the steps for calculating a deductible casualty loss? (4)
Step one: use the lesser of basis or FMV
Step two: subtract any insurance coverage
Step three: subtract $100 (floor)
Step four: subtract 10% of AGI
What is the deductible for miscellaneous itemized deductions?
Zero, between 2018 and 2025, miscellaneous itemized deductions are repealed
What are the personal and dependency exemptions?
Personal exemptions for 2021 remain at zero, and have been that way since 2018. TCJA also suspended dependency exemptions.
What are FICA taxes?
Who pays them?
Social security tax, also known as OASDI taxes (6.2%). Medicare tax (generally 1.45%).
An employer and an employee both pay these taxes (7.65% each). A self-employed person pays both halves of the tax since they are both the employer and the employee.
What are other payroll taxes besides FICA?
Federal taxes, state taxes, local income or wage taxes, federal unemployment taxes (FUTA), and state unemployment taxes (SUTA).
What is the Medicare tax rate?
What is the SS rate?
On wages $200,000/250,000 or less, it is a 1.45% rate. Above $200,000, 0.9% is added, totaling 2.35% on wages over $200,000. Both the employee and the employer pay 1.45%, the employee will pay more based on wages.
6.2%
What are the tax rates for qualifying dividends and long-term capital gains
- 0% if the taxpayer is in the 10 to 12% bracket
- 15% if taxpayer is in the 22 to 35% bracket
- 20% when the taxpayer is in the 35 to 37% bracket.
What is kitty tax?
It is intended to discourage the shifting of income to children in a lower tax bracket. It applies to children with an *unearned* income greater than $2,200, and who have at least one living parent at the end of the year.
It is calculated as followed:
- Child gets $1,100 standard deduction, no tax applies to this amount.
- The next one $1,100 is taxed at the child’s income rate of 10%, $110.
- Anything greater than 2,200 are taxed at the parents marginal rate.
*If the child has earned income greater than the standard deduction of $1,100, the amount of earned income plus $350 is used in step one.
What is the full single taxpayer standard deduction amount?
$12,550. Standard deductions cannot go above that amount.
What is self-employment tax?
It is FICA taxes where the self-employed person pays both halves of the tax since they are both employee and employer.
This tax is based on net earnings, not salary or taxable income. To get net earnings, you take income minus business expenses.
What is included in self-employment income? (4)
- net schedule c income
- general partnership income/k1 income
- board of directors fees
- part-time earnings/1099
What is not included in self-employment income? (6)
- dividends or interests on investments
- games, or deductions for losses, from property, securities, or commodities
- real estate income or rents paid
- distributive share of income or loss of a limited partner
- wages from an s corporation
- distributions from an s corporation/k1 income
*Any distribution from an s corporation is not self-employed income. It is either salary or investment income.
How do you calculate self-employment taxes?
Step one: calculate the total self-employment income
Step two: subtract 7.65%.
Step three: multiply remainder by 15.3%. (7.65% + 7.65%)
For the test, taxable income will not exceed $142,800.
What is the self-employment tax rate?
7.65%
How does the child and dependent care expenses tax credit work?
- kids until age 13
- for the purposes of the test, multiply AGI * 20%
In real life:
- qualifying expenses are limited to $3,000 for one dependent, or $6,000 for 2+ dependents
- the credit is 35% to AGI under $15,000, 20% to AGI above $43,000
Child tax credit (4)
- $2,000 for each qualifying child under 17 years of age
- qualifying child includes son, daughter, stepchild, or foster child.
- The amount of the credit is reduced by $50 for each $1,000 above $400,000 and MAGI/$200,000 MAGI
- there is a $500 family credit for each dependent who is not a qualifying child. This includes children 17 or older, elderly parents, a disabled adult child, etc presuming that the taxpayer provides more than 50% of their support. It uses the same phase out thresholds as the child tax credit
Adoption credits (4)
- Max credit is $14,440 per eligible child, including both special needs and unimpaired children
- if special needs, the credit can be claimed in the year the adoption is finalized, not necessarily the year of the adoption expenses.
- if the child is a foreign national, the credit is available only in the year when the adoption becomes final. Any expenses paid in the year after the adoption is finalized can be claimed as a credit for the tax year in which they were actually paid.
- adoption credit is phased out rapidly for taxpayers with an MAGI between $216,660 and $256,660
Credit for the elderly and the permanently and totally disabled
The credit is available to an individual who:
- reaches 65, or
- is under 65, and retired with a permanent and total disability, AND receives disability income
What is the difference between a refundable tax credit and a (unrefundable) tax credit?
Taxpayers subtract both refundable and non-refundable credits from the taxes they owe. If a refundable credit exceeds the amount of taxes owed, the difference is paid as a tax refund. If a non-refundable credit exceeds the amount of taxes owed, the excess is lost.
Tax deduction versus tax credit
A deduction is worth more to a high bracket taxpayer and a credit is worth more to a low bracket taxpayer. Examples are in the formula notebook.
What are the accounting methods? (4)
- cash method / cash receipts and disbursements (businesses under $25m in average revenues)
- accrual method (businesses above $25m in average revenues during the prior 3 years)
- hybrid method
- installment method: permits the capital gain recognized on the sale of a property to be spread over the life of the note rather than entirely in the year of the sale. (Exceptions to this method: if all payments received are in the year of the sale, if the property is publicly traded securities, if it is sold at a loss, or if it is sold to a related party who in turn sells the property within 2 years of the original purchase state)
How are long-term contracts handled with accounting?
They use a percentage of completion method of accounting
Do you use FIFO or LIFO during a period of rising prices?
L i f o
What conduit entity does not include third-party debt in its basis?
An s corporation
Can an estate make any deductions?
Yes, it is a separate entity. Allowable deductions can include administration costs, accounting and attorney fees, and expenses of preparing the estate’s return.
What is the taxable year for trusts and estates?
Estates: they may select any tax year and accounting period. The first return might be for a short period of time to cover the unexpired term of the decedent’s regular tax year. (An exemption of $600 is allowed on a short period return.)
Trust: must use a calendar year unless it is a charitable trust or 501(a)
What violations create a defective/tainted trust for income tax purposes? (5)
- Trust income is distributed or accumulated for later distribution to the grantor or grantor’s spouse
- Trust income is used to discharge any legal obligation of the grantor
- Trust income is used to discharge illegal support obligation of the grantor
- The power to control the beneficial enjoyment of the trust principle or income is held by either the grantor or grantor’s spouse. For example retaining the right to decide who will receive and/or when a beneficiary will receive trust income or principal.
- Trust income is used to pay premiums on life insurance on the life of either the grantor or the grantor’s spouse.
What violations create a defective/tainted trust for estate tax purposes? (2)
- A right to income or the right to use or enjoy trust property. This is beneficial enjoyment.
- A reversionary interest that exceeds 5% measured at the time of death
What is the difference between a revocable and an irrevocable trust?
With a revocable trust, the grantor still has rights. It is usually used to avoid probate because upon death of the grantor, it becomes irrevocable. Funding a revocable trust has no gift tax consequences because the transfer is not complete. and while the grantor is alive, all income earned is taxable to the grantor.
With an irrevocable trust, the grantor gives up all rights in the property transfer to the trust. At this point, nothing can be modified in any material way. It becomes a non-grantor trust.
What deductions are available to a trust?
- A charitable deduction (only for complex trusts)
- Depreciation, cost recovery, and depletion are calculated in the same manner as for individuals. If income is distributed, it must be allocated between the trust and the beneficiaries.
- Net operating carry forwards are allowed
- Administration expenses are allowed
- The trust is allowed a deduction for all income that it is required to distribute. It does not matter whether or not that income is actually distributed. The trust is still allowed a corresponding deduction.
- A complex trust that is required to distribute all of its income has an exemption of $300 if not required to distribute income the exemption is $100.
What is the difference between a tax exemption and a tax deduction?
A tax exemption frees the taxpayer to any obligation to submit taxes on the tax-free amount.
A tax deduction is used to lower tax obligation by lowering gross income.
What increases basis?
Legal fees, commissions, sales tax, freight, and improvements. When basis is increased by these incidental costs, it becomes the cost basis.
Improvements versus repairs and how they impact basis
Improvements: replace roof, advents, pave driveway, replace plumbing, add room. These typically need to be capitalized. An item is capitalized when it is recorded as an asset. This means that the expenditure will appear in the balance sheet.
Repairs: repair roof, pay property tax, patch holes and driveway, pay for a lawn service, pay for property management, pay liability insurance. Repairs are typically deducted as expenses so they don’t affect basis. These appear on the income statement.
Amortization and accretion
Amortization or accretion calculations are used to adjust the cost basis from the purchase amount to the expected redemption amount.
Amortization decreases cost, decreasing basis. It is typically used for intangibles and the recovery method is similar to straight line depreciation.
Accretion increases cost, increasing basis. It is typically used for discounted bonds, often a zero coupon bond.
What is the value of a gift?
Gift text: FMV at the date of gift
Income tax: use the lesser of FMV at the date of gift, or the donors adjusted basis.
If FMV is less, then the following occurs:
- A loss is measured using the FMV on the date of the gift
- A gain is measured using the donor’s basis
- If the sale price of the gift is between the donors basis and the FMV on the date of the gift, no gain or loss is recognized
What is the basis of inherited property?
FMV on the date of death or the alternative evaluation date if elected.
In community property states, marital property gets a full step up in basis. In non-community/common law property states, property only gets a half step up in basis.
To calculate common law, the portion that is owned by the surviving spouse remains at the original basis. The portion that is the deceased spouses gets the step up in basis. Don’t forget to divide the assets in half when this is being calculated.
What is MACRS
Modified accelerated cost recovery system. It applies to The depreciation of applicable property which does not include land or intangibles. Straight line depreciation can be used under this method, but a half year convention must be used.
What are the property classes with MACRS? (4)
5-year: computers, autos and light duty trucks (1245)
7-year: office furniture and fixtures (1245)
27.5-year: residential rental property (1250)
39-year: non-residential real property (1250)
What is the difference between expense and capitalize?
When a cost that is incurred will have been used, consumed or expired in a year or less, it is typically considered an expense. Conversely, if a cost or purchase will last beyond a year and will continue to have economic value in the future, then it is typically capitalized.
If expensed, depreciation does not need to be maintained and the cost is deducted the same year.
179 deduction
A business may expense up to $1,050,000 of qualifying property in the year of acquisition.
Qualifying property is generally 1245 property purchased for business purposes.
1245 property
tangible/personal property, depreciated over shorter periods of time
1250 property
real property, depreciates over longer periods of time
Like-kind exchanges (6)
Aka; 1031 exchange
- Exchanging real estate property that is of like kind does not trigger a gain or loss.
- TCJA eliminated personal property exchanges, so now real estate is the only eligible property.
- The acquired property must be used in a trade or business.
- They are of like kind if they are of the same nature (ex: rental for rental), even if they differ in grade or quality.
- Property outside of the US are not deemed to be like kind.
- Time limit: the property received must be identified on or before 45 days after the transfer and/or the acquired property title mist be received within 180 days after transfer
Boot
In a 1031 exchange, the cash or other property (consideration) that is not of like kind meant to get the lower valued property up to the same value of the exchange property is called “boot”. The party receiving the boot must recognize a portion of the realized gain equal to the lesser of the boot or the realized gain.
What is the maximum amount of net losses that can be deducted from capital gains?
Only $3,000 of net losses can be used to offset ordinary income in a single year. Make sure when calculating the net amount, you add and subtract short-term capital gains/losses separate from long-term capital gains/losses
How are short and long-term capital gains taxed?
Long-term capital games and qualified dividends: there’s a provided bracket table on the exam. After 2018, these brackets are indexed for inflation.
Short-term capital gains: taxed at ordinary marginal income rates.
Code section 121
Sale of residence.
Married filing jointly $500k/single $250k is the maximum amount of realized gain that can be *excluded* from gross income upon sale of the house.
To clean the exclusion, the taxpayer must have owned and used the home as a principal residence for an aggregate time period of two out of five years immediately proceeding the home state of sale. They may be eligible for partial exclusions if less than 2 years.
What are the reasons a home seller might be able to qualify for a partial exclusion under code section 121?
When I move his required by change of employment, health reasons, where unforeseen circumstances. Unforeseen circumstances include:
- divorce, legal separation, or death of a spouse
- becoming eligible for unemployment compensation
- The change in employment that makes it impossible to pay the mortgage or basic living expense
- multiple births resulting from the same pregnancy
- damage to the home from a natural disaster, and act of war, or terrorism
- condemnation, seizure, or involuntary conversion of the property such as foreclosure
- a job related music qualify for a home sale exception if the taxpayers new job is more than 50 miles farther away from the old home that the old workplace
The size of the deduction depends on how long the seller lived in the house during the 5 years before the sale. For instance, a taxpayer lived in a house for a year, or 50% of the 2-year requirement, is entitled to a 50% exclusion. This would allow home sale profit of $125,000 per person or $250,000 per couple
If someone claims depreciation on real estate, how does that impact basis?
The amount of depreciation that has been claimed is deducted from the original basis. Therefore the basis will go down.
When can you claim depreciation on a 1250 property?
It must be for investment purposes. If it is your primary residence, you can depreciate the area that is used exclusively for business purposes.
Can taxpayers do both the 121 exclusion and 1031 like kind exchange?
Yes, if requirements are satisfied
What is cost recovery deduction (CRD)?
Cost recovery refers to the deduction of a portion of the cost of an asset, used in a business or for the production of income, over its useful life through depreciation, amortization, or depletion.
12:45 property depreciation recapture
Depreciation recapture may apply to all MACRS 1245 property. Something takes cost recovery deductions (depreciation), The CRDs offset the businesses ordinary income. When it sells the equipment for a gain, the business must do the following:
- Look back and recapture the lesser of total CRDs taken or the gain realized as 1245 gain (ordinary income).
- Recover any excess gain as 1231 gain (capital gain). If total CRDs taken are lower than the gain, the excess is the gain minus the CRDs. If the gain is less than the CRDs, there is no 1231 recovery.
*If the tangible personal property is an installment sale (the debt/note pays the seller in installments), All depreciation recapture must be reported as income in the year of disposition.
What happens if there is a wash sale?
The basis of the shares that are within the 60-day window are increased by the amount of the disallowed loss.
Material participation versus active participation
Material participation is if the taxpayer is involved in operations on a regular, continuous, and substantial basis.
Active participation is less stringent. It is still passive, but requires bona fide involvement in management decisions. To qualify, the taxpayer must own at least 10% interest in the property, and they cannot be a limited partner.
Losses from investment real estate activity
Qualifying taxpayers may deduct up to $25,000 per year of net losses from real estate activity. It is phased out for taxpayers with AGIs between $100,000 and $150,000 on a two for one basis. The deduction can offset their active or portfolio income.
Tax treatment of renting a vacation home
It is a residence if the owner uses it for personal purposes for the longer of:
- 14 days, or
- 10% of the period of rental use
If less than this, it is treated as a rental property
Low income housing credit
Figure out maximum marginal tax bracket. Multiply that by $25,000.
Low income housing program must be held as a passive activity. There is no phase out.
Children dependency exemptions
- Under age 24 as of the end of the year if full-time student
- Under age 19 as of end of the year whether or not a student
*Children can earn any amount and still be claimed as a dependent as long as the taxpayer provides more than 50% of the child’s support
Between 2018 and 2025, dependent exemption deductions are eliminated. It is still important to know these numbers for other tax provisions such as head of household filing status, dependent care tax credit, education tax credits, etc.
Community versus non-community property
In community property states, assets are owned by a marital unit. (Except gifts and inheritances, generally)
And a non-community property state (common law), assets are divided property.
Alimony test for deductibility
*only applicable for divorces prior to 2019
- transfers of non-cash items including services, property or the use of property, or promissory notes will not qualify as alimony
- cash payments to third parties can qualify if made pursuant to the divorce instrument for an obligation of the spouse, such as payments of the spouses rent, mortgage, tax, or tuition liabilities
- any payments to maintain property owned by the payor spouse and used by the payee spouse (including mortgage payments, real estate taxes, and insurance premiums) Will not qualify as payments made on behalf of a spouse and will not be alimony, even if required under the terms of the divorce instrument
- if the payee spouse owns the life insurance policy on the life of the payor, the policy payments made by the payor will qualify as alimony if the payments are made under the divorce instrument
Recapture rules for front-loading of alimony
- Add 1st and 2nd year alimony payments up
- Subtract $37,500 (constant)
(3. If there is a 3rd year alimony payment, double it, then add it to the constant. Subtract that constant from the 1st two years.
What is left is the amount to recapture
What types of property that, if sold, would produce ordinary income, not capital gains?
- inventory
- A copyright
- use-unrelated property (not sick or real estate)
- a work of art created by the taxpayer
- short-term capital gains property
What are the eligibility requirments for a
Subchapter S Corporation?
- 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.
Tax Basis for Partnership / LLC
- 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.
Property Classes
1245 Property (non real estate)
- 5 year:Computers,Autos,Trucks
- 7 year:Office Equipment except computers,
1250 Property (real estate)
- 27.5 year: Residential rental property
- 39 year: Non-residential real property
Remember: CATCORN
Boot / Gain Recognized / Basis
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
Netting Capital Gains and Losses
Step 1:
- ST Capital Gains and ST Losses are Netted
- LT Capital Gains and LT Losses are Netted
Step 2:
- If a Gain and Loss remain, they are again Netted
Step 3:
- If a Loss remains after Netting Capital Gains and Losses, only $3,000 of the Net Losses can be used to offset ordinary income
Sale of a Personal Residence (Section 121)
$250K (single) and $500k (MFJ) of Gain from the sale is tax-free if lived in for 2 out of the last 5 years.
- Exception available if taxpayer lives in the residence less than two years and moves because of a new job, for health reasons, etc. Receives a pro-rated amount.
Recapture (1245 Property)
When the sole proprietor purchases equipment and takes Depreciation (Cost Recovery Deduction - CRD), the CRDs offset the sole proprietor’s ordinary income.
When the sole proprietor sells the equipment for a gain, the sole proprietor must:
- 1st: Look back and recapture the lesser of the CRDs taken or the Gain realized as 1245 Gain (ordinary income)
- 2nd: Recover any excess gain as 1231 (capital gain)
Section 179
Qualifying vs. Non-Qualifying Property
Qualifying:
- Tangible Personal Property
- 1245 Property
Non-Qualifying:
- Real Estate
- 1250 Property
- Intangible (owning a franchise)
AMT Preference Items
- Excess Intangible Drilling Costs (IDC)
- Private Activity Municipal Bond
- Oil and Gas Percentage Depletion / Excess intangible drilling costs (IDC)
- Depreciation (ACRS/MACRS) but not straight line
Remember: I.P.O.D.
AMT Add-Back Items
AMT Not-Deductible Items
Add Back:
- Incentive Stock Option Bargain Element
- Property and Income Taxes
Postponing AMT
- 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.
Historic Rehabilitation Programs
Historic Rehabilitation programs that are held as passive activity may generate a Deduction:
- Equivalent Tax Credit of up to $25,000.
The benefit of this Deduction:
- Equivalent Tax Credit phases out between $200- 250k of AGI.
How does the Deduction Equivalent tax credit work?
- Calculate tax to determine the maximum marginal tax bracket. If it is 25%, for example, then you multiply $25,000 by 25% to get $6250.
Low Income Housing Credit
Low-Income Housing programs that are held as passive activity may generate a Deduction:
- Equivalent Tax Credit up to $25,000. There is NO phase out.
- The Low Income Housing Credit is allowed annually over a 10 year “credit period.”
- The Depreciation is straight-line over 27.5 years.
How does the credit work?
- For example, multiply 35% by $25,000 to get a credit of $8750.
NOTE: Because there is no phaseout, it produces a higher credit.
Types of Phantom Income
Insurance:
- Lapse of Policy Loan
- Section 162 Life/Disability
Investments:
- Zero/Strip Income
- TIPS
- Declared but not paid Dividends
Tax/Retirement:
- K-1 Income from LP/FLP
- Recapture
- NUA
- 20% withholding plan distributions, Secular Trust
Charitable Giving
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.
Charitable Giving (Types of Property - 60% Charities)
- 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
Sources of Federal Tax Law/Authority
- 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
Step Transaction
Ignore the individual transaction and instead tax the ultimate transaction
- Example: The XYZ Corporation sells property to an unrelated purchaser who subsequently resells the property to a wholly owned subsidiary of XYZ.
Sham Transaction
A transaction that lacks a business purpose and economic substance will be ignored for tax purposes.
- Example: A sale by XYZ to ABC, but both XYZ and ABC are owned by the same persons.
Substance Over Form
The substance of a transaction, and not merely its form, governs its tax consequences.
- Example: The president of XYZ has the company loan him the money he needs. He never intends to repay the loan or take a salary.
Assignment of Income
Income is taxed to the tree that grows the fruit, even though it may be assigned to another prior receipt.
- Example: Mr. T owns XYZ, an S Corp. He directs that all income be paid to his son. Mr. T reports no income.
Dates for Paying Estimated Taxes
- April 15
- June 15
- September 15
- January 15
IRS Penalties
- 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)
Federal Withholding Tax Underpayment Penalty
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)
Adjustments for Adjusted Gross Income (AGI)
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
Schedule A Itemized Deductions
- 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.
Casualty Losses (Calculation of the Deductible Loss)
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”
Kiddie Tax
All net UNEARNED income of a child who has:
- NOT attained the age 18
- Is 19-23 and a full-time student
- Has at least one parent alive
…is taxed at Parent’s Rates regardless of the source of the assets.
Children under 18 are entitled (2020) to a Standard Deduction amount ($1,100) and an additional $1,100 of unearned income will be taxed at the child’s rate (10%).
Self-Employment Income
- 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
Self-Employment Tax Calculation
The Taxable Wage Base will not exceed $142,800 (2021).
- If you added up the self-employed income, and you exceeded $142,800, you did something wrong. Why? Social Security tax stops at $142,800 (2021).
Shortcut: Multiply Self-employment Income by 0.1413
Tax Credits
- Credit for child and dependent care expenses
- Child Tax Credit (up to $1,400 could be refundable)
- Adoption Credit
- Elderly and Disabled Credit
- Foreign Tax Credit
- Earned Income Credit (refundable)
Accounting Methods
- 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.
Personal Service businesses that are also regular Corporations (C-Corp)
- Health
- Accounting / Architectural
- Law
- Engineering
Remember: H.A.L.E.
Realized Gain vs Recognized Gain
What’s the difference?
- Realized Gain is Economic or Inherent Gain at the time of the transaction.
- Recognized Gain is the part of Realized that is immediately taxable.
An individual is required to file a tax return if earnings from self employment (1099) are more than ______?
$400
Capital Gains
Tax rates on capital gains depend on how long the seller owned or held the asset. Short-term capital gains, for assets held for less than a year, are taxed at ordinary income rates. However, if you held an asset for more than a year, then more preferential long-term capital gains apply. These rates are 0%, 15%, or 20%—depending on your income level
Capital gains tax is paid on income that derives from the sale or exchange of an asset, such as a stock or property that’s categorized as a capital asset. Capital assets are significant pieces of property such as homes, cars, investment properties, stocks, bonds, and even collectibles or art. For businesses, a capital asset is an asset with a useful life longer than a year that is not intended for sale in the regular course of the business’s operation.
Income Tax
Income tax is paid on earnings from employment, interest, dividends, royalties, or self-employment, whether it’s in the form of services, money, or property.
