Income Tax Flashcards
Capital assets
- most PU assets and investment assets
- not depreciable property
all assets are capital assets EXCEPT ACID
- accounts/notes receivable, copyrights and creative works, inventory, and depreciable property used in a trade or biz
Ordinary Income asset
- when sold result in income to the owner of the asset
inventory, accounts receivable, creations in the hand of the creator and copyrights in the hands of the creator, stock in trade held for sale to customers in the ordinary course of biz
How property is held
- personal use
- investment
- for business purposes
- capital asset
- OI asset
- section 1231 asset
1231 Assets
- assets used in a trade or biz
- are either depreciable property or real property
- includes: timber, coal, iron ore, livestock, unharvested crops
- do NOT include: inventory, copyrights, property held by the taxpayer for sale to customers for his trade
Basis
- necessary to determine the gain/loss on a sale or other disposition of property
- determine the amount that may be recovered tax free through depreciation deductions
- determine the deduction for obsolescence and sometimes for depletion
cost basis
- the amount paid in cash, debt obligations, other property, or services
- includes amounts paid for the following items:
- sales tax, freight, installation and testing, excise tax, legal and accounting fees, revenue stamps, recording fees, real estate taxes
when property is acquired in a taxable exchange
- the cost is the FMV of the property
when property is acquired subject to a mortgage
- the basis of the property is the FMV of the property
when property is acquired as a dividend in kid or as compensation for services
- the taxpayers basis in the property is the FMV of the property at the time of acquisition
increase in the basis of an asset
- capital improvements (addition on home, new roof, paving driveway, installing central air, rewiring)
- assessments for local improvements including water connections, sidewalks, and roads
- cost or restoring damaged property after a casualty loss
- legal fees, such as cost of defending and perfecting the title to property
decreases to basis
- exclusion from income of subsidies for energy conservation measures
- casualty or theft loss deductions and insurance reimbursements (biz only)
- deduction for clean fuel vehicles and vehicle refueling property
- section 179 deduction
- credit for qualified electric vehicles
- depreciation
- nontaxable corporate distributions
property acquired in an exchange
- the newly acquired property will have a carryover basis if the property is exchanged for property of equal value (no boot is paid)
property that is exchanged for a more valuable asset
- boot is paid, the new asset will have a carryover basis (cost basis of exchanged property) + boot paid
property that is exchanged for a less valuable asset
- boot is received, and the new asset will have a carryover basis reduced by any boot received that was greater than the gain
holding period for capital gains
- always LT for inherited property
Basis of gifted property
- general rule: the donees basis in the gifted property is the same as the donors basis in the gifted property
- exception 1: when FMV of gifted asset is < the donor’s basis = double basis rule must be used
- gains: basis of the donor is also the adjusted basis of the donee
- losses: basis of the donee is the FMV of the property on the date of the gift
- no gain/loss: if the asset is later sold by the donee and amount realized is between the FMV and the adjusted basis of the donor
- exception 2: when gift tax has been paid and asset appreciated in the hands of the donor, the portion of the tax which is associated with appreciation is added to donors basis to determine donees basis
Donee’s basis
= Donors basis + (( net apprec in value of gift / value of taxable gift) * gift tax paid)
net appreciation = FMV - adjusted basis
Loss on the sale of gifted property
- basis of the property in the hands of the donee is the lower of:
- donors basis
- FMV of property at time of gift
HP for gifted property
- general rule: HP in the hands of the donee includes the HP of the donor
- if double basis asset ( gifted asset where FMV < donors basis at time of gift) is sold for a loss, then the HP for the donee starts on the date of the gift
gifted property general rule
- there is no sale of stock when donee receives it
- must maintain the donors original basis
basis of property transferred between spouse incident to divorce
- treated the same as gifts
- the carryover basis applies
- no gain/loss is recognized on a transfer between spouses or former spouses incident to a divorce
- treated as incident to divorce if it occurs within one year of the date on which the marriage legally ended and is related to the cessation of the marriage
- sales price - former spouses basis = LT/ST cap gain/loss for the divorced spouse
Gain on asset
= sale price - net appreciation
Related Party Transactions Section 267 Rule
- only affects transactions where there is a loss
- transferors loss is forever lost (Cannot claim a loss on the asset), transferee takes asset with double basis rule (FMV for losses, transferors basis for gains)
- HP always begins at the date of the sale
Related Party transaction of loss property
- FOLLOWS DOUBLE BASIS RULE
if a taxpayer sells property to charity for < FMV
- the basis of the property must be used between the portions of the property sold and the portion given to charity
Basis for Sale Purposes
= (Amount Realized / FMV) * Basis of property
3.8% medicare contribution tax
- for taxpayers with AGI > $200k single or AGI > $250k MFJ
- tax is imposed on the lesser of:
- individuals NII for the tax year or
- modified AGI in excess of the limits
Collectibles
- taxed at 28%
Unrecaptured Section 1250 Gain
- taxed at 25%
Qualifying Small Biz Stock section 1202
- a % of the gain is taxed at 28% if the HP is at least 5 years
Amount of gain you can exclude:- 50% of the QSBS is acquired before Feb 2009
- 75% is the QSBS is acquired after Feb 2009 and before Sep 2010
- 100% if the QSBS is acquired after Sep 2010
Holding period for LT cap gains
- taxed at a min rate of 20%
HP for ST cap gains
- taxed as OI
HP calculation
- the day of disposition is included in the HP, but the day of acquisition is not included in the HP
Taxation of gains on capital assets
- taxed only when there has been both a realization event and a recognition event
Gains must be realized before recognized
Realized before recognized
Realization
- occurs when theres a disposition of property (sale/exchange)
- occurs when there is segregation of the gain
Recognition
- occurs when a realized gain is taxed
Exception when realized gains are not recognized (taxed)
- when the gain is exempt from taxation
- when the gain is deferred to a future time
in order for a gain to be realized
- an asset must be sold or exchanged
less obvious situations if an exchange has happened
- natural disasters that destroy property cause a realization event to occur for income tax purposes since the G/L can be calculated at that time.
- the loss may or may not be recognized at that time
- the bankruptcy of a company ( special rules govern the recognition of loss associated with worthless securities)
Adjusted Basis
= Cost of Property + capital additions - cost recovery
Ordinary Gains
= fully taxable
Ordinary Losses
= Fully deductible
subject to special tax treatment
- capital G/L’s
Amount Realized on the sale/exchange of an asset
= sum of cash received + FMV of property received in exchange + liabilities shed
Non-Recourse Loans
- sale of mortgaged real estate yields phantom income
- when the tax payer takes large write-offs or disposes of the property subject to the loans
Recognition of gain occurs:
- when debt is relieved (portion of mortgage is forgiven, that is income)
- when money is “taken out of” an investment as a loan when the indiviual is not personally liable for the loan
- with net gifts (transfers where the donee agrees to pay the gift tax)
Realized but NOT recognized
- like-kind exchanges of real property held for productive use/investment
- certain exchanges where cash received is quickly reinvested in similar property
- transfer of property to controlled corp
- exchange for plans of corporate reorg
- transfers to or distribs from partnerships
wash sale
- disallowed loss
- when a taxpayer disposes of securities at a loss and acquires identical securities within 30 days before/after the date of loss sale
- disallowed loss is added to the cost of the new stock or security to determine the new basis of the substantially identical securities
wash sale rule applies
- index fund for index fund
was sale rule does NOT apply
- index fund for managed large cap fund
wash sale
= bought stock for $100/sh, fell to $10/sh. Sold stock to take a $90/sh loss. Thought stock was going to go back up so went in the market again and bought same stock for $30/sh.
no loss is allowed, and disallowed loss amount + new stock price = new basis
(100-10) + 30 = new basis
wash sale loss rules
- do not apply to futures or foreign currencies
- apply if a warrant and stock are identical
preferred stock is identical to common stock if preferred stock:
- is convertible to common stock
- has same voting rights as common stock
- is subject to the same div restrictions
- trades @ prices that don’t vary significantly from the conversion ratio
- is unrestricted as to convertibility
capital gain on sale of principal residence for single tax payers
$250,000
sell price - purchase price - exclusion amount = LT/ST cap gain
capital gain on sale of principal residence for MFJ tax payers
$500,000
sell price - purchase price - exclusion amount = LT/ST cap gain
reduced exclusion
- available if the sale of the personal residence is due to change in employment
- change in health - diagnosis, cure, mitigation, treatment
- other unforeseen circumstances - disaster area, involuntary conversion, death, unemployment, divorce/breakup of engaged couple, bullying
a loss resulting from worthless securities
- deductible in the year in which the securities become completely worthless
worthless stock
- purchase stock that becomes worthless is treated as having sold the stock and resulting in a ST/LT cap loss
Net Capital Losses
allowed $3,000 per year
excess are carried to next year indefinitely
always retain their ST/LT features
net LTCG and STCG if 1 is - and the other is +, but do NOT net if they are BOTH +
net capital gain
- recognized in the current tax year regardless of its size
capital loss
- $3,000 per year indefinitely
- used against other income
IRC Sec 1244
a taxpayer can deduct (single $50k, MFJ $100k) of the loss on small biz stock as an ordinary loss in any given year if the following reqs are met:
IRC Sec 1244
a taxpayer can deduct (single $50k, MFJ $100k) of the loss on small biz stock as an ordinary loss in any given year if the following reqs are met:
- stock reps ownership in domestic corp - corp was a small biz corp at time stock was issued - company was incorporated after Nov 1978 - loss was sustained by original owner of the stock who is not a corp, trust or estate - stock was issued to the original owner in exchange for money or property . Stock issued in return for services or other stock does not qualify - for 5 years prior to loss, the corp must have earned > 50% of its gross receipts from sources other than royalties, rents, divs, interest, annuities, cap gains
Section 267
- applies to losses only
- disallows losses from in/direct sales or exchanges of property between related parties
- related parties do NOT include: in-laws, aunts/uncles, cousins
Never gift or sell an asset to a related party when the donor’s basis is > the FMV of the asset
You are not able to take a loss on the sale
Section 1231 Gain/Loss
- when a taxpayer disposes of a business asset
Section 1231 Asset
- depreciable or real property used in a trade or business
- owner must have a LT holding period
- asset must be depreciable real or personal property used in a trade/business
- trade or business assets that qualify for depreciation deductions
- the generation of a section 1231 gain will not result in a tax benefit for the corp, capital losses can only be used to offset capital gains
1231 Gains
- treated as capital gains for income tax purposes
- gains will qualify for LT CGs tax rate
- full amount of depreciation must be recaptured as OI
- Only when the sale price exceeds the original purchase price there will be a 1231 gain
1231 Losses
- treated as ordinary losses for income tax purposes
- will not be subject to the limitations that typically apply to capital assets
Section 1245 Property
- includes property that is or has been subject to an allowance for depreciation or amortization
- tangible personal property used in a trade or biz and includes depreciable prop: equip, patents, copyrights, and other intangibles
- land and buildings (real property) is NOT section 1245 property
- any gain is treated as OI to the extent of depreciation allowed on the property, and any gain beyond that which must be treated as OI is treated as a 1231 gain
When Section 1245 property is sold
- property will be sold for an amount = its adjusted basis where there will be no G/L and no depreciation recap and no tax consequence
- property will be sold for an amount < the adjusted basis, where the taxpayer will have an OL and will not have any depreciation recap. AKA not enough depreciation was taken to achieve economic reality because the FMV < adjusted taxable basis
- the property will be sold for an amount that exceeds the adjusted basis of the property, but the gain does not exceed the amount of depreciation taken, where the taxpayer will have an ordinary gain to the extent of the gain AKA the taxpayer took too much depreciation and now must give it back
- the property will be sold for an amount that exceeds the adjusted basis of the property and the gain exceeds the amount of depreciation taken, where the taxpayer will have OI to the extent of the depreciation taken and cap gain on the remainder of the gain AKA the asset appreciated instead of depreciated and the taxpayer shouldnt have taken depreciation
New basis once taken 1245 depreciation
= cost basis - depreciation amount
The only way to have a section 1231 gain on a section 1245 property is to sell it for more than it was originally purchased for
Section 1231 Gain
= sell price - (purchase price - depreciation) - (amount of depreciation)
Any sale amount in excess of the original purchase price of a section 1245 asset is a section 1231 gain
Section 1250
governs the recapture of depreciation on real section 1231 assets (business realty, buildings, real estate)
requires that the excess depreciation as OI at OI rates
when sold, gain is treated as the lesser of the gain or the difference between depreciation taken and the straight line depreciation will be taxed as OI. This is the recapture of the depreciation
Recognized Value
= depreciation - Straight line depreciation
Unrecaptured 1250 Depreciation
- if the gain exceeds the recognized value, the lesser of the remaining gain or the straight line depreciation taken on the property will be taxed at 25%
All section 1250 losses
= Ordinary Losses
5 year lookback rule
- forces the taxpayer to net section 1231 G/Ls over a 5 year period
Non recognition Transactions
- “realized” but not “recognized” income
- like-kind exchanges
- principal residence
- investment real estate
- life insurance policies
Nontaxable vs. Tax-free Transactions
Nontaxable Transaction:
- realized G/L not currently recognized
- recognition is postponed to a future date (via carryover basis)
- carryover basis
- HP for a new asset (HP of asset surrendered carries over to the asset acquired)
- depreciation recapture (potential recap from asst surrendered carries over to the new asset)
- Tax-free Transaction (non-recognition of gain is permanent)
Like-Kind exchanges
- deferred taxation of gains associated with certain transactions from a section 1031 exchange
- only real property receives 1031 treatment
- thee exchange properties must be of similar character and nature, but don’t have to have similar uses
Property exchanged for like-kind property
- no G/LL is recognized if the property is held either for productive use in a trade/biz or as an investment
Section 1031 does NOT apply to:
- personal assets
- stock in trade held primarily for sale (inventory)
- stocks, bonds, notes, interests in partnerships, CDs of trust or beneficial interests
- tangible personalty
- other securities or evidence of indebtedness or interest , or choices in action
Like-kind exchange treatment
- if it is available, it is mandatory
- taxpayer cannot choose whether to subject the transaction to current tax or defer the gain into the future
Real Estate Exchanges
- improved realty may be exchanged for unimproved realty
- US realty may NOT be exchanged for foreign realty
- foreign realty may be exchanged for foreign realty
To defer the gain on property being exchanged, these requirements need to be met to avoid current taxation
- proceeds from the sale of the original property must be held by an escrow agent
- replacement property must be identified within 45 days of the sale of the original property
- the closing on the replacement property must take place by the earlier of:
- 180 days from the sale of the original property
- due date of the tax return for the year the original property was sold
tax consequences of participating in like-kind exchanges
- if like-kind property is only received in the exchange, there is no immediate tax consequence
- non-like-kind property and cash/money received in exchanged is referred to as BOOT
Boot
- non-like-kind property and cash/money received in exchanged
Boot is received
- when taxpayer is trading DOWN, the taxpayer who is giving up a more valuable asset in exchange for a less valuable asset + boot
- when the boot exceeds the gain realized on the transaction, the remaining boot is not taxed, but is treated as a TF return of basis
- if any boot is received by the taxpayer in the exchange, the basis of the new property is reduced by the amount of the boot
Loss involving Boot
- not recognized on exchanges involving boot
-
Mortgage treated as the boot
- when mortgage is transferred with the property, the party transferring the mortgage is treated as having received boot equal to the amount of debt relief, and the party undertaking the mortgage obligation is treated as giving boot
Summary of calculating income tax consequences of a Section 1031 exchange:
- determine whether client is trading up or down
- clients who receive ONLY like-kind property in the exchange will not have any current income tax consequence
- party trading up recognizes no gains, and adds to their old basis any cash/boot given to the other party
- the party trading down will be required to recognize gain to extent of boot received
- if the boot exceeds gain, the amount of boot in excess of the gain is treated as a return of capital and reduces the basis in the new asset
- losses realized in a like-kind exchange are not recognized until the replacement property is sold
- taxpayers basis in the replacement property = FMV of the property received in the exchange + the disallowed loss
- debt relief is treated as boot, requiring gain recognition for the party no loner responsible for paying back the loan
- the party assuming the debt will increase their basis in the replacement property by a like amount
Basis adjustments in a like-kind exchange
- basis of property received = the basis of the property given
- less the amount of any money received by the tax payer
- +/- the amount of any gain or loss that was recognized on the exchange
- basis in like-kind asset received
- basis in boot received is the FMV of property
- basis in like-kind property using IRC approach
Gain Recognition from Boot
- if FMV - Adjusted Basis amount is > the boot amount: then basis remains the same
- if FMV - Adjusted Basis amount is < the boot amount (the boot amount is > the difference between FMV and basis): then the recognized gain is the difference between FMV and the adjusted basis
recognized G/L
- as of the date the property is sold
related party
- any relative
- controlled corporation (corp where the taxpayer owns more than 50% of the equity interest)
Exchanges of stock for property
- no G/L is recognized when a corp receives money or property in return for its stock
- sale of stock to investors is treated as an infusion of capital and is not subject to income tax
Involuntary conversion
- the destruction, theft, seizure, or sale or exchange under threat of condemnation of property
- often associated with eminent domain
- NOT a voluntary act by a taxpayer
Section 1033 Replacement Property
- similar in function/use as involuntarily converted property
- acquired within a specific period (starts when involuntary conversion/threat of condemnation occurs, ends 2 years from the year-end of year that gain is realized)
Replacement Property
- different for an owner-investor than for an owner-user
- for business or investment real estate that is condemned, replacement property has same meaning as for like-kind exchanges
- functional use test applies: requires the replacement property to serve the same functional use as the original property
- taxpayer use test applies: requires the replacement property to be used by the taxpayer in a similar activity as the original property
reinvestment under section 1033 related to natural disasters
- must be made by the end of the year realization + 2 years
Cash Basis Taxpayers
- recognize income when it’s earned
- most individuals and some biz
- deemed to receive income when it is credited to the taxpayers account, set apart for the taxpayer, or made available to be taken into the taxpayers possession
- include in the GI all items of income actually received during the tax year. If received property and services, must include FMV in income
- recognition of income must be consistent with constructive receipt doctrine
Accrual basis taxpayers
- recognized income when it is earned
- most biz
- taxpayers report an amount in their GI on the earliest of: (when payment is received, when income amount is due to the tax payer, when taxpayer earns the income)
Doctrine of Constructive Receipt
- states that when income is readily available to the taxpayer, and that income is not subject to limitations/restrictions, that income is deemed to be constructively received and should be taxed
Income subject to limitation or restriction
- not constructively received
- limitations/restrictions include:
- limitation on either the time or manner of payment and if the financial condition of the debtor makes payment of the income in question impossible, there is no constructive receipt
taxable year
- annual accounting period for keeping records and reporting income/expenses
- 12 mon period of the calendar year
some choose fiscal year
Fiscal year
- 12 mo period ending on last day of a month other than december
- must file form 1128 to change from calendar to fiscal year reporting and receive approval
Qulaifying widower
- can file with qualifying child for 2 years following the year in which the taxpayer’s spouse died if all apply:
- TP was eligible to file joint return with spouse in the year the spouse died
- TP has NOT remarried
- TP has a child/stepchild for whom the TP can claim as qualified
- child lived in TPs home all year
- TP paid more than 1/2 cost of keeping up a home during the year
Personal and Dependency Exemptions (repealed under TCJA)
- $4,400
Standard Deductions for those blind or 65+
- $1,750 for individuals not married and not filing as qualified widower (for single and HOH)
- $1,400 for all other taxpayers
Blind Tax Filer
- must file to receive the additional standard deduction
- IRS does NOT have this on file
Blind AND 65+
- receive 2 additional standard deductions
- $1,750 + $1,750 = $3,500
Not eligible for standard deduction
- MFS and 1 spouse files as itemized deductions (must do what other spouse does)
- non-resident aliens
- individuals filing returns for tax year < 12 months
Dependent’s Standard Deduction
- claimed as a dependent of another taxpayer
- $1,150 OR
- $400 + earned income (not exceeding normal standard deduction of $12,950)
- standard deduction is higher if the dependent is 65+ and/or blind
Personal and Dependency Exemptions
- repealed for 2018 through 2025
Qualifying Child
- Support test
- Age test
- Abode Test
- Relationship test
*children carry SAARs
Qualifying Child Rules
- for the purposes of the HOH filing status
- EITC
- child tax credit
- credit for child and dependent care expenses
Qualifying Child: Relationship Test
To qualify, a child of taxpayer must be:
- taxpayers child
- descendant of the taxpayers child
- taxpayers brother, sister, stepbro, stepsis, half bro, half sis
- descendent of all of the above bullet
- a cousin is NOT a qualifying child
- a descendant of the taxpayer, TPs sibling or a descendant of the TPs sibling
- TPs child may be a natural, step, adopted, or eligible foster child
Qualifying Child: Abode Test
- qualifying child must live with the TP for > half the year
- TP and dependent are considered to occupy the HH even during temporary absences due to special circumstances such as illness, education, business, vaca, or military service
Qualifying Child: Age Test
- FT qualifying child must be under the age of 19 as of hte end of the calendar year OR
- student under the age of 24 as of the end of the calendar year in order to satisfy the test
- student = must be FT at an educational institution during 5 months of the calendar year
- includes: primary and secondary schools, colleges, universities and similar education institutions
Qualifying Child: Support Test
- satisfied if a qualifying child does not provide more than 1/2 of their support during the year
- if the child is the TP’s child and is FT student, Scholarships are NOT considered support
If more than 1 person is eligible to claim another person as a dependent as a qualifying child, there are tie-breaker rules
Child of divorced/separated parent
- normally the qualifying child of the custodial parent
Requirements for a child to be treated as a qualifying child of the non-custodial parent
- parents are divorced/legally separated under divorce decree, or lived apart at all times during the last 6 months of the year
- child receives over 1/2 of his support for the year from his parents
- child is in the custody of the parents for more than 1/2 the year
- custodial parent signs a statement that they will not claim the child for the year, and the noncustodial parent attaches the statement to his return (form 8332)
Form 8332
- statement from custodial parent that they will not claim the qualifying child for the year, several years or future years
- attach certain pages from the decree to the tax return of the noncustodial parent
Qualifying Relative Test
- must meet the 4 tests to qualify as a dependent of a TP for the child tax credit
- Relationship test
- Gross income test
- support test
- not a qualifying child test
Relative = So Gross Right Now
Qualifying Relative: Relationship Test
the potential dependent of the TP must be:
- TP’s child or a descendant of a child
- TP’s bro, sis, step bro, step sis
- TP’s father, mother, step mother, step father, grandparent
- TP’s son (nephew), daughter (niece), of a bro or sis of the TP
- son in law, daughter in law, father in law, mother in law, bro/sis in law of TP
- any other individual (non-related person) who has the same principal place of abode as the TP for the current tax year and is a member of the TPs household
- a person who WAS married to the TP during part of the year does NOT qualify
- an unrelated person does NOT qualify in certain limited circumstances if the relationship violates the law
Qualifying Relative: Gross Income Test
- a dependents’ GI must be < the person exemption amount ($4,400 for 2022) for the year
- this contrasts with a qualifying child for whom there is no such test
- fellowships/scholarships are EXCLUDED from GI
Can be a qualifying relative if does not meet qualified child test
-can be a qualified relative if it is a son that you provide for who is 25 years old at college
Qualifying Relative
= Child tax credit
Qualifying child
= HOH filing status, EITC, child tax credit, and credit for child and dependent care expenses
Qualifying Relative: Support Test
- TP must provide more than 1/2 of the support of a dependent
- support includes: housing, food, clothing, education, and medical treatment
- income received by a dependent does not count as support provided by the dependent unless it is actually expended for that purpose
- if income earned by an elderly parent is deposited into a savings account and not used for support, then it does not count as support provided by the dependent
NOT a qualifying Child test
- to be claimed as a qualifying relative, a person cannot be a qualifying child of any TP for the tax year
Additional Tests for Qualifying Child and Qualifying Relative
- Joint Return Test AND
- Citizenship or residency test
Additional Tests for Qualifying Child and Qualifying Relative: Joint Return Test
to satisfy this test,
- a married dependent must not file a joint return with a spouse unless a tax return is filed only to claim a refund for tax withheld
- if neither spouse is otherwise required to file a tax return
- if no tax liability would exist for either TP on separate returns
Additional Tests for Qualifying Child and Qualifying Relative: Citizenship or residency Test
- dependent must be a citizen or national of the US or a resident of the US, canada, or Mexico during some part of the year
- this test does not apply for certain adopted kids
Summary of Tests for a Qualifying Dependent CHILD and a Qualifying Dependent RELATIVE
Estimated Tax Payments
- due April 15th, June 15, Sept 15, and Jan 15 of following year
if tax payment falls on Sat, Sunday or Holiday
- tax payment is considered on time if it is paid next biz day
To avoid tax penalties, TPs must pay estimated tax if the following apply
- TP expects to owe at least $1,000 in tax after subtracting w/h and credits
- TP expects his w/h and credits to be < the SMALLER of:
- 90% of the tax to be shown on your 2022 tax return
- 100% of the tax shown on prior year’s tax return. Prior year’s tax return must cover all 12 months
Form 1040
- where individual income taxes are reported
Gross Income
- all income from whatever source derived
- money, property, barter
- includes both earned and unearned income
Sources of Income
- personal services
- income from property
- income from partnerships, s corps, trusts and estates
- income in community property states
personal services
- when a TP performs services for which he is compensated, the TP has income as a result of those services
income from property
- must be included in GI of the owner of the property
Income from partnerships, Scorps, trusts, estates
- pass through entities that pass income through to the owner of the biz
- income is generally taxable to the bene unless income is not distributed, in which case it will be taxable to the trust/estate
Income in community property states
- 1/2 of each spouses income is considered owned by the other spouse
Items included in Gross Income
- annuity payments
- compensation for services
- GI from biz
- gains from dealing property
- interest and divs
- rents and royalties
- alimony and separate maintenance pmts for divorce decrees by 2018
- income from life insurance and endowment contracts
- pensions
- discharge of indebtedness
- distributive share of partnership GI
- income in respect of a descedent
- income from an interest in an estate or trust
Exclusion ratio
= what I have / what I receive in total
= [annual payment - (exclusion ratio * annul payment)] = amount excluded from gross income
Exclusion Ratio
= adjusted basis / fmv = exclusion %
(exclusion % * distribution received) = not subject to income tax
distribution received - (exclusion % * distribution received) = subject to income tax
Ratio of AB
= AB before withdrawal / FMV of account at withdrawal
Social Security Benefits Grid
Social Security Benefits Calculator 85% and 50%
Below Market Loan
- apply to term or demand loans that are gift loans or tax avoidance loans
- have special income tax treatment that requires the lender to impute the interest income that would have been earned had the lender made a bona fide interest-bearing loan
- interest is phantom
Imputed Interest on loan between 0 - >=$10,000
- $0
Imputed Interest on loan between $10,001 to >=$100,000
lesser of:
- NII or
- interest calculated using AFR less interest calculated using stated rate of the loan (interest rate * amount of loan)
if borrowers NII < $1,000, then $0 imputed interest
Imputed Interest on loan is >$100,000
- interest calculated using AFR less interest calculated using stated rate of the loan
= given interest rate * loan amount
interest
= unearned income
Below market rate loans by a corporation to a shareholder in that corporation
- treated as a div to a shareholder
- as shareholder makes loan payments, the payments are treated by the corp as interest income
Below market rate loans from an ER to an EE
- treated as paid compensation for the EE and are subject to employment taxes
- as EE makes loan payments, the ER must treat the payments as taxable interest income
Gift
- gratuitous transfer of property
- donor acted out a “detached and disinterested generosity made out of affection, respect, admiration, charity, or like impulses”
proceeds of a life insurance policy are excluded from GI when:
transferred to:
- insured
- partner of insured
- partnership in which the insured is a partner
- corp in which the insured is a shareholder/officer
- by a TF exchange or gifts
Terminally ill
- an individual who has been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 24 months or less after the date of certification
chronically ill
- unable to perform at least 2 of the 6 ADLs for at least 90 days
Activities of Daily Living (ADLs)
- BED To Chair
- bathing
- eathing
- dressing
- transferring
- toileting
- continence
MEC
- life insurance contract that fails the 7 pay test
- fails the 7 pa test by accumulating the amount paid under the contract at any time during the 1st 7 years and exceeds the sum of the net level of premiums
- W/ds = LIFO
- once a MEC always a MEC
Scholarships
- is not included in GI
- can be a fellowship
- qualified tuition and related expenses do not include amounts received fo rroom and board
- any amount received for room and board are taxable to the recipient
Gain on Sale of Personal Residence
- GI does not include up to $250,000 from the sale/exchange of property if the property has been owned and used by the TP as the TPs principal residence for at least 2/5 years.
- if MFJ, exclusion = $500,000
Reduced exclusion for the sale of personal residence:
may be available if the sale of personal residence is due to:
- change in employment
- change in health
- unforeseen circumstances
the amount excluded is based on the period of ownership between the last sale and current sale
Sale of a principal residence that was jointly owned by surviving and deceased spouse:
- allowed the $500k gain exclusion
- the sale must occur no later than 2 years after the date of death of deceased spouse
Any appreciation during non-qualified use periods
- not subject to the exclusion
compensation for injuries/sickness are excluded from GI:
- workers comp
- any damages received due to personal physical injuries/sickness
- payments from accident/health insurance personally owed by TP
Punitive Damages
- included in GI
- not excludable from income
- applies to damages after 1996
- excluded if damages were awarded in wrongful death action
Damages for emotional distress
- included in GI unless attributable to injury/sickness or are paid for reimbursement of actual medical expenses arising from emotional distress
compensatory damages for bodily injury
- excluded from GI
compensatory damages for harm to reputation
- included in GI
Group Term Life Insurance Premiums are deductible except for:
- deductions made on behalf of sole proprietors/partners
- deductions made on behalf of stockholders, unless providing substantial services
- when ER is named beneficiary
Section 79 Requirements
- DB is excluded from income tax when its provided to a group of EEs through ER policy
- individual selection of voverage outside standard multiple of salary amounts is not permitted if the DB is to be excluded from GI
Exceptions to Section 79
- if group insurance is issued to trustees of a qualified pension plan, the amount paid for by the ER is taxable to EEs
Group Term Not taxable to EEs when:
- the EE has terminated due to disability
- qualified charity is named as the beneficiary
- ER is named the beneficiary
Taxation of group term insurance
- first $50,000 of coverage is not taxable to the EE
- cost of excess coverage is per 1,000* $ over
- EE contributions are subtracted from annual costs to arrive at taxable income
Meals and Lodging
- not included in the EEs GI if they are furnished by ER
- on ER’s premises
- For convience of ER
Lodging
- EE is required to accept lodging as a condition of employment in order for the lodging to be excluded from the EEs GI
Dependent Care
- up to $5,000 of dependent care costs paid for by ER can be excluded from GI
Athletic Facilities
- use of athletic facilities located on ER premises can be excluded from GI if not offered to public
Educational Assistance Programs
- ER provided educational assistance for loan repayments
- extended to 2026
- exclusion is limited to $5,250/year
Adoption Assistance Programs
- EE expenses paid by ER are excludable from GI
- limit is $14,890
- phaseout between MAGI of $223,410 - $263,410
Cafeteria Plan
- allows EEs to choose between cash and certain nontaxable benefits
- if cash: amount received is taxable
- if nontaxable benefit: benefit remains non-taxable
Classes of non-taxable EE benefits
- no-additional cost services
- Qualified EE discounts
- Working condition fringes
- De minimis Fringe benefits
- Qualified transportation fringes
- qualified moving expense reimbursement
no-additional cost services
non-taxable if:
- EE receives services
- ER incurs no substantial add’l cost in providing services
- services offered are within line of biz in which EE works
- benefit is offered on non-discrim. basis
Qualified EE discounts
non-taxable if:
- discount is not on realty or investment personalty
- item discounted is from the same line of biz in which EE works
- discount cannot exceed gross profit on personalty or 20% on services
- benefit is offered on non-discriminatory basis
Working Condition Fringes
- not taxable
Qualified transportation fringes
- encourages use of mass transit to commute to work
- qualified parking - not ER deductible, EE can exclude from income
- can be discrimin.
- EE can choose between ER provided parking and cash w/o loss of exclusion
moving expenses
- moving household goods and personal effects from the former home to the new home
- traveling and associated lodging during the move from the home to the new home
Foreign Earned Income Exclusion
- $112,000
Foreign Earned Income
- in order to claim a foreign housing exclusion, deduction, you must have foreign earned income, your tax home must be in a foreign country, and must be:
- US citizen who is a bona fide resident of a foreign country for uninterrupted period that includes tax year
- US resident alien who is a citizen of a country where the US has an income tax treaty in effect and is a resident of a foreign country for tax year
- US citizen or resident alien who is physically present in a foreign country for at least 330 full days during 12 consecutive months
Interest on state/local gov obligations
- exempt from tax
Interest on these bonds are NOT tax exempt:
- private activity bonds that are not qualified
- arbitrage bonds
- bonds that do not meet all of the reqs of section 149
Section 1231 Assets
- business assets
- Gains = cap gains
- losses = OL
- depreciation recapture may apply on the sale of the asset
Section 1245
- depreciable business personalty
- NOT Real estate
- gains = ordinary gains to the extent of depreciation allowed on the property
- Gains above original purchase price = treated as Section 1231 gain
- If property sold at a loss = loss is ordinary loss
Section 1251
- Depreciable Business Realty (Business Real Estate)
- 1st gains = OI to the extent of accelerated depreciation taken
- 2nd gains = to the extent of SL deprec taken are unrecaptured Section 1250 deprec taxed at 25% (unrecap 1250)
- 3rd gains = any additional gain is taxed at cap gains rate (1231 gains)
- If property is sold at loss = loss is OL
Business Assets Depreciation Recapture Equation
= Original Purchase Price
- Accelerated Depreciation Amount
- Straight Line depreciation
= After Tax Basis
Selling Price
- After Tax basis
= Gain/Loss
Gain/Loss
- Accelerated Depreciation (Ordinary Income)
- Straight Line Depreciation (25% Unrec 1250)
= leftover is 1231 LTCG
Gift Tax Paid
- formula if there is a gain
- IRRELEVANT IF IN LOSS POSITION
if you are in a loss position
gift tax paid is irrelevant
Straight Line Depreciation
= Adjusted basis - Salvage Value = Depreciable amount / estimated useful life = annual depreciation deduction
Straight Line Depreciation Method
= Adjusted basis - Salvage Value = Depreciable amount / estimated useful life = annual depreciation deduction
Qualifying Widower
- status applies for the 2 years following the year of a spouse’s death
MFS
- the dead spouse’s filing status if significant other marries within same year
Commerce Clearing House Fed Tax Guide
- best source for obtaining a plain language understanding about current tax law
Revenue Rulings
based on a set of facts that are common to many TPs
Private Letter Rulings
- issued at request of an individual TP
substantial authority
- official words and rulings which can be relied on to support a tax opinion/position
Sources of substantial authority for tax research include
- IRC, Congressional Committee Reports (blue book), T regs, private letter rulings
District Court
- where a jury trial is available for tax controversies
Congressional Committee Reports
- best source for gathering info about the intent of recent changes in tax law
- provides congressional reasoning for enacting tax law
Private letter ruling
case by case basis
Increase in basis
- price of machine + sales tax + freight + installation and testing costs
Adds basis
- addition of a room and pool
Does NOT add basis
- roof repair, painting
increase in basis for land
- all costs of making property ready for use are capitalized
- acquistion cost, legal feels, rezoning costs, property improvement, installation of sewer
Adjusted Basis with Gift tax paid
= donors ATB + (appreciation / FMV) + gift tax paid
Adjusted Basis added to building sale
- acquisition costs are the only thing added to basis
Buyers Basis
- the amount the building is selling for
Individual Income Tax
- generates the largest % of gross collections for the IRS
Constructive Receipt Doctorine
Applies to a secular trust used for deferred compensation
All persons with taxable income
are subject to the “pay-as-you-go” payment procedure but not withholdings
Our tax laws encourage taxpayers to:
Sell investment assets that have declined in value, but keep those investment assets that have appreciated.
NOL
can only offset up to 80% of the current year’s income
CFP planning fees:
- deductible on the schedule C
Tax Savings generated by IRA contribution
= contribution amount * tax bracket
Net amount of LTCL can use each year against OI
- $3,000
- remaining amount of loss above this is carried over
Taxable Income for a qualified dependent
Standard deduction is greater of $1,150 or $400 + EI (but not greater than $1,150)
Taxable income = Total income - deduction
4th quarter fed income tax estimated payment
- due the following year by Jan 15th for the year the payment is made for
Max deductions for charities
Personal vs Rental vs Mixed Use Property
