Income Tax

Question 1

Types of Authority

Answer 1

Internal Revenue Code = Primary source of all law (Actual Law)
Treasury Regulations = a source for all tax law
Revenue rulings and Revenue procedures = administrative interpretation /may be cited as a precedent
Congressional Committee reports = indicate the intent of Congress/may not be cited as precedents.
Private letter ruling = apply to a specific taxpayer in a particular situation. Crummy; Rabi Trust
Judicial sources = court decisions interpret law and/or facts.

Question 2

Tax Law Doctrines

Answer 2

Step transaction: Ignore the individual transaction and instead tax the ultimate transaction. (A person steps out of transaction.)
Sham transaction: This transaction lacks a business purpose, and economic substance will be ignored for tax purpose. (ex. A sale by XYZ to ABC when both XYZ and ABC are owned by the same purpose.)
Substance over Form: The substance of a transaction and not merely its form governs its tax consequences. Form is the “loan.”
Assignment of income: Income is taxed to the “tree that grows the fruit” although it may be assigned to another prior receipt. (Who owns the tree that grows the dividend fruit.)

Question 3

Hobby Loss

Answer 3

Under Hobby Loss Rules, income is reportable. TCJA eliminated misc deductions and the opportunity to deduct hobby related expenses. The tax law set a presumptions that any activity generating net income (profit) in three out of five consecutive years is a business (not a hobby.) For horses, profit is necessary in only two out of seven consecutive years .

Question 4

Tax research sources

Answer 4

The major Tax Services are:

1. ) Federal Tax Coordinator, published by the Research Institute of America (RIA)
2. ) Federal Tax Service published by Commerce Clearing House Inc. (CCH)

*These are not Federal Tax Sources

Question 5

Filing Requirements

Answer 5

5 Basic Categories:

1. ) Individuals (US Citizens)
2. ) Dependants
3. ) Children under age 24 (kiddies tax) unearned income
4. ) Self employed
5. ) Aliens

Question 6

Min income earned for self-employment, and required to file taxes

Answer 6

$400 or more must file income tax return

Question 7

Filing Dates

Answer 7

Dates for filing estimated taxes:

1-April 15th
2-June 15th
3-Sept 15th
4-Jan 15th

Later installments may be used to amend earlier ones.

Question 8

Which form is used to Amend income tax

Answer 8

1040X

Question 9

AUDIT Representation

Answer 9

A tax payer may be represented at an audit by:

1-Attorney
2-CPA
3-Enrolled Agent
4-Enrolled Actuary
5-Any permissible designee

• However, not a CFP

Question 10

Penalties - focus on penalty amounts

Answer 10

Frivolous Return = $5000

“A return that omits information necessary to determine the taxpayer’s tax liability, shows a substantially incorrect tax, or is based on the taxpayer’s desire to impede the collection of tax.:

Negligence = 20% of the underpayment attributed to negligence

“The accuracy-related penalty is imposed if underpayment of tax is due either to negligence or to disregard of rule or regulations but without intent to defraud. Negligence includes any failure to make a reasonable attempt to comply with the law or to exercise ordinary and reasonable care in preparing a tax return, as well as failure to keep adequate books and records or to substantiate items.

Fraud = 75% of the portion of a tax underpayment attributable to fraud. (Not the interest)

Failure to Pay = The penalty Is 0.5% per month the tax is unpaid with a max of 25%

Failure to File = The amount of the penalty is 5% of the tax due each month with a max of 25%

NOTE: Best practice is to FILE. The penalties for failure to pay and failure to file coordinate with each other for the first five months, but both can be applied.

Question 11

Estimated Tax

Answer 11

To avoid the penalty for 2022, pay the lesser of the following

1-90% of the current’s year tax liability OR
2-100% of the prior year’s liability (or 110% of the prior year’s adjusted gross income exceeded $150,000)

Question 12

Gross Income

Answer 12

Schedule B:

• Ordinary Dividends
• Taxable Interest

Schedule C:
-Business Income (and Losses)

Schedule D:
-Capital Gains (and Losses)

Schedule E:
-Real Estate

Punitive Damages (except wrongful death)
Wages, salaries, tips
IRA distributions
Pensions and annuities
Alimoney received divorced before 2019
Unemployment income
Taxable Social Security

Question 13

Exclusions

Answer 13

Gifts
inheritance
Child support
Muni Bond interest
Worker Comp payments
Compensatory Damages

Question 14

Tax Calculation

Answer 14

GROSS INCOME

• less adjustments (above the line) for AGI

AGI

-less deductions (below the line) from AGI

TAXABLE INCOME

x Multiplied by appropriate tax rates

TAXABLE CALCULATIONS

• less credits plus other taxes

TAX LIABILITY

• less quarterly pmts and withholding

= NET TAX DUE or REFUND

*CREDITS are above the line (Schedule 1)
________________________________

*DEDUCTIONS below the line (Schedule A)

Question 15

Fringe Benefits

Answer 15

Tax Free

1-Occasional overtime meal money, cab fare, theater or sporting event tickets (not season tickets)

2-Discounts on services are limited to 20% of the selling price charged customers.

(refer Tax page 2-3)

Question 16

Fringe Benefits - Taxable

Answer 16

-Health Insurance premiums paid for SELF EMPLOYED, PARTNERS, and more than 2% OWNERS of an S CORP are TAXABLE INCOME.
HOWEVER, 100% is deductible as an adjustment to income on the front of the 1040 to the extent that such costs do not exceed the net income from the business (for self-employment). This can include all types of health insurance programs like medical, dental, and LTC. It does not include disability insurance premiums. This area is heavily tested.

-Insurance premiums your employer pays on a group life policy in excess of $50,000 of death benefit if the plan is NONDISCRIMINATORY ARE TAXABLE (generally per Table I.)