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CFP Extra > Income Tax > Flashcards

Income Tax Flashcards

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1
Q

Gross income

A

Ordinary dividends
Business income and losses
Cap gains
Punitive damages
Wages
IRA distributions
Pension annuity income
Unemployment income
Social security payments
Alimony received if pre 2019 divorce

DOES NOT INCLUDE: gifts, inheritance, child support, muni bond income, workers comp, compensatory damages

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2
Q

Less Above line adjustments to get to AGI

A

IRA contributions
Student loan interest
Self employment tax (.7065)
100% self employment health insurance premiums
Penalty for early withdraw
HSA contribution
$4k educational expense

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3
Q

Less deductions from AGI below the time to get to taxable income

A

Greater or standard deduction (given) or itemized deductions:
Medical dental if greater than 7.5% if AGI
State local taxes
Real estate property taxes
Home mortgage interest
Charitable gifts
Investment interest
Causality losses if federally declared

SALT - sales and local taxes limited to $10k

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4
Q

Less tax credits

A

Child dependent care: Age 13 or under, max expense $3k for one and $6k for two plus; multiple care expense by 20% so max of $1,200 for two or more kids

Child tax credit: $2k for each child under 17 (can be refunded up to $1,400)

Family credit: $500 each dependent you are providing more than 50% support

Foreign tax: deduct or credit dollar for dollar charged

Retirement savings: for low income cans deduct a certain %

Adoption credit: max $14,890 of expense claimed in year finalized
Foreign babies expense only in year finalized

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5
Q

Mortgage interest deduction

A

Itemized only if single $375k or married and mortgage on first $750k
Not on house equity loans not used for improvements on house

$1mm if taken before 2017

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6
Q

Investment income

A

Interest; royalties; non qualified dividends and short term gains

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7
Q

Causality losses

A

Deducted only if federally declared disaster

Deduction equals
Lesser or basis or fmv
Subtract insurance coverage
Subtract $100
Subtract 10% of AGI

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8
Q

Kiddie tax

A

Unearned:
Standard deduction is $1,150
Next $1,150 taxed = 115
Remaining taxed at parents level

Earned
Standard deduction is earned income plus $400 up to regular standard use the greater deduction if both unearned and earned

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9
Q

Self employment tax

A

Based on net earnings so remove expenses and 50% of working meals
Includes
Net schedule c income
General partnership k-1
Board of directors fees
Part time earnings on 1099

Taxable wage CAN NOT exceed $147k

Calc is self employment income * 14.13% the round UP

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10
Q

Internal revenue code

A

Primary source of all tax law

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11
Q

Treasury regs

A

Source of tax law

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12
Q

Revenue rulings and procedures

A

Admin interpretation can be cited

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13
Q

Congressional committee reports

A

Intent of congress can’t be cited explain law

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14
Q

Private rulings

A

Apply specific tax payer in particular situations

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15
Q

Hobby loss

A

Can’t deduct expenses
Profit 3 out of 5 years business is NOT considered hobby
Income needs to be reported as misc income

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16
Q

Qualified business income

A

May deduct 20% of pass thru income
Losses can always be carried forward
Tier 1: single $170k married $340k if less then may claim 20% no matter what class

Tier 2: single $220k married $440k if earn more than this no deduction if personal service if any other pass thru business deduction is limited

Tier 3: income between $170k -$220k single eligible for partial benefits no matter the nature of business

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17
Q

Sole proprietorship

A

Losses risk free MUST BE COVERED by additional insurance
KEOGH Sep
100% medical premiums deductible
Conduit

Disadvantages
Unlimited liability
Business dies with owner

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18
Q

Partnership

A

Losses risk free
KEOGH SEP
100% medical premiums deductible
Agreement is written or oral

Disadvantages
Unlimited liability
Dissolve at death or bankruptcy

Basis = cash contributed plus direct loans by partner

Loses up to basis

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19
Q

S corps

A

100 less shares holders
Single stock
Limited liability
Conduit

Basis = cash plus direct loans by partners NO THIRD PARTY LOANS ADDED

losses up to basis

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20
Q

LLC

A

Risky business needs limited liability
Members can be involved in faulty operations without losing limited liability

Basis is same as partnership

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21
Q

LPs

A

Risky needs limited liability
Limited partners can’t actively manager in business
General partner = unlimited liability

Losses up to basis

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22
Q

Corporations

A

Profitable
Separate tax entity
Taxed 21%
Continuity of life
Sale of stock to unlimited number of investors

Disadvantages
Corporate formalities
Dividend lid after tax
Double tax

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23
Q

Corporation deductions

A

If US corporation is invested in another US corporation than you get a deduction is
- 50% deduction if owns 20% or less
- 65% deduction if owns 20-80%
- 100% deduction if owners more than 80%

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24
Q

Personal service corporation

A

Closely held c corporation that is owned by certain individuals like attorney and accountants
Taxed at flat rate of 21%

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25
Q

Corporate accumulated earnings

A

Regular corp can accumulate $250k (150k for PSC) in earnings without establishing a business need and without being penalized a tax of 20%

(Income - taxes - dividends paid) + prior accumulated income - credit of 250 or 150 = income

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26
Q

Cash method

A

Firms realize revenue from services in the year of payment regardless of when services performed
Businesses having NO MORE then $25mm in revenue

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27
Q

Accrual method

A

Firms realize revenue when the earnings process with goods or services they provide is complete regardless of when payment was received.

Mandatory for business with inventories over $25mm

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28
Q

Inventory valuations

A

FIFO: increase earnings; greater tax; current cost of inventory

LIFO: reduced earnings; tax deferral; understated inventory

Use specific lot I’d when selling company

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29
Q

Net operating loss

A

NOL received in one year can be used to offset taxable income for future years
No carrybacks
Pre 2018 grandfathered forward for 20 years otherwise indefinite
Scorps and partnerships can’t claim NOL

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30
Q

Basis for property purchased

A

Includes legal fees; sales taxes; freight; improvement

DOESN’T include repairs; real estate taxes or normal business expenses

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31
Q

Inherited basis

A

During life:
Basis = owners basis UNLESS
if FMV date of gift is lower than basis AND you sell below FMV at date of gift then loss otherwise use donors basis

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32
Q

Amortization

A

Recovery of certain capital expenditures that are not ordinarily deductible in a manner like straight line

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33
Q

Accretion

A

Discount is earned over years as taxable income and bonds basis is increased
Phantom income

34
Q

MACRS

A

All recovery property NOT land or intangibles
Straight line offered but with half use

5 YEAR - computers, autos. Light truck (1245)
7 YEAR - office furniture and fixtures (1245)
27.5 YEAR - residential real property (1250)
39 YEAR - non residential real property (1250)

35
Q

179 deduction

A

Business expense up to $1.08 million of qualifying property in the year it was acquired
Person can’t apply
Loss can’t be created
Avoid burden of maintaining MACR
Deduction is limited by income received from any trade or business

Only section 1245 property can be 179’ed

Goodwill or franchise or any intangible property can’t be elected for 179 deduction

36
Q

1031 Exchange

A

Properties must be same in nature rental for rental
NO inventory or tax payers principal resident
Tax is deferred
No boot = 0 gain
If completed with family and they sell within 2 years then gain is recognized exchange collapses

37
Q

1245 recapture

A

Mainly for equipment
When businesses take depreciation or CRD then CRDs offset business ordinary income
1. 1245 gain = the lesser of total CRDs or gain realized
2. 1231 recovery = if CRDs are lower then gain take excess - CRDs. If gain is less then CRDs then no recovery

Taxed at ordinary income tax rates

38
Q

Installment sale recapture

A

All depreciation recapture must be reported as income in year of disposition.

39
Q

Charitable Bargain sale

A

Property sold to charity for less then FMV

Adjusted basis = (Price sold/fmv) * basis

Gain= Sale price - adjusted basis

40
Q

AMT

A

1040 income itemizing or AGI standard
Add back items
Add preference items equals AMT base
Subtract exemptions AMTI
MULITPLE BY 28%

If regular tax is greater than AMT then no AMT is due

If regular tax less than AMT then difference between the two is due

41
Q

Publicly traded partnerships PTP

A

Also known at MLP
Losses may NOT be used to offset passive income from other sources
Loss is carried forward and used ONLY against future income from that same partnership or when partnership is sold

42
Q

Non Publicly traded partnership

A

Losses can be taken up to income from any partnership
Loss is fully deductible is asset is disposed

43
Q

Passive loss exception for real estate

A

Must own at least 10% and have active material participation to
Deduct up to $25k
If AGI is between 100-150 deduction is on 2 for 1 basis

44
Q

Vacation home

A

Not deducted if owners use exceed longer of 14 days or 10% of rental period

45
Q

Oil and gas working interest

A

Not passive exempt from PAL rules
Losses deducted from active portfolio income

46
Q

Equipment leasing

A

Closely held c corp NOT Personal c corp
Passive losses to offset active income not portfolio income

47
Q

No materially participation

A

Rentals
Royalty income
Limited partnerships
Partnerships
Scorp
LLC

48
Q

Married and widowed

A

Can file jointly after spouse passes away for two years if maintain home for dependent children

Can also file married separately The year spouse dies

Can file as a widow the following year if she meets one of the following:
1. Maintains a home
2. Has dependent child
3. Filed joint return year prior
4. Does not remarry

49
Q

Pre 2019 Alimony payments

A

Payments must be in cash OR
payments to third parties to pay for spouses mortgage, rent, tax or tuition or payee your ex owns life insurance on your life

Not qualified
Non cash items including services or use of property or payments to maintain property

50
Q

Charitable giving

A

Cash is max 60% of AGI
Carry forward for five years

Longterm property: 30% of AGI
If basis is used then 50% of AGI

Short term property: 50% of AGI use basis

Non use related: same as short term
Use related - 30% of AGI

Can’t deduct more than FMV

51
Q

Gifting a vehicle

A

If value exceeds $500 must have handwritten proof of donation

If the charity doesn’t improve the car then max deduction is gross proceeds if sold

52
Q

Corporation gifts

A

May not deduct more than 10% of taxable income

If a corp makes a gift of inventory to The ill, needy or care of infants they can deduct its basis for property plus 1/2 of property’s unrealized appreciation. It can’t exceed twice the basis

53
Q

Social security

A

40 what were of coverage
No more than 4 credits per year

Currently insured is 6 credits in 13 quarters

Not covered: fed employees, Americans working abroad, tribal members, railroad workers, child under 18 etc

54
Q

Social security benefits

A

5 months waiting period

Fully insured worker 62 or older

Disability benefits if under 62 and have been disabled for 12 months and expect to be disabled for another 12 months or die

55
Q

Spousal social security benefits

A

Spouse of disabled or retired worker qualifies if:
Age 62 or older
At any age if has child under care below 16 or has older child but disabled before 22
Divorce spouse receives spouses exs benefits if they were married for at least 10 years and did not remarry

Or divorced spouse age 62 who had been divorced for 2 years

56
Q

Surviving spouse social security benefits

A

Qualifies if insured deceased worker qualifies and surviving spouse is 60 and older or at any age if caring for child under 16 or child who became disabled before 22

Gets deceased’s spouse’s full benefits

57
Q

Surviving dependent social security benefits

A

Qualifies if dependent is under 19 and full time student or 18 and older and is disabled before 22

58
Q

Social security benefits when working

A

Full retirement age: keep all benefits of working

Younger than full retirement age: income above $19,560 deduct $1 for every $2 of benefits

Reaching full retirement age that year: above $51,960 deduct $1 for every $3 of benefits

59
Q

Social security benefits taxation

A

Provisional income = earned income plus muni bond income plus 1/2 of social security income

50% of social security income is included in tax calc if provisional income is higher than $25k single; $32k more married

85% is included if income is $34k or more for single; $44k married

60
Q

Social security withdrawal request

A

You have the onetime right to withdraw from receiving benefits within 12 mos of initial claim. You MUST pay back all payments without interest. Delay means payments may be greater in the future.

61
Q

FICA tax

A

Covers both social security and Medicare

Employee and employer each pay 6.2% social security tax plus 1.45% Medicare tax for w-2 earnings of $147k

After $147k each pays Medicare taxes of 1.45% so if employee earns $150k
They individually pay 6.2% on 147k and 1.45% on $150k

People earning $200k or more pay additional .9% totaling to 2.35% of Medicare tax

62
Q

Installment sale calculation of gain

A

Profit divided by total contract price = %

Take the percentage and multiple it by the installment payment to get your LTCG

63
Q

Section 1244 qualified small business stock

A

Only applies to the first million dollars of stock
Loss of $100k per year jt or $50k per year single is ordinary loss not cap loss

64
Q

Personal exemption

A

NONE!! Can’t claim anybody

65
Q

Schedule H

A

Household employee

66
Q

Alimony pre paid in year 1 and 2

A

Take the total amount paid subtract $37,500 that amount will be recaptured

67
Q

Tax deduction vs tax credit

A

A deduction is worth more to a high bracket tax payer

A credit is worth more to a low bracket taxpayer

68
Q

Qualified business income QBI

A

Individuals who earn income through pass through businesses may qualify to deduct up to 20% of their qualified business income

Based on tiers
1. Single less than $170k and joint making less then $340k may claim full 20%

  1. Single less than $220k or joint more than $440k NO DEDUCTION
  2. For those in between the threshold receive partial
69
Q

Charitable gifts

A

Use chart

70
Q

Tax calculation

A
71
Q

Land

A

Automatically use related 30% AGI
fmv

72
Q

Charitable gifts less than 250

A

A dated receipt is necessary For purposes of income tax deduction

More than $250 need written acknowledgment from charity

73
Q

Corporate AMT

A

ELIMINATED

74
Q

Form 1040X

A

Refund from mistake on previous return

Can file this to waive excess tax from over contributing to retirement plan or forgetting to complete RMD if:
1. Missed distribution due to reasonable error
2. Appropriate steps are being taken to remedy the situation.

75
Q

SERPS

A

supplemental executive plans
Informally funded
Called top hat plans

76
Q

Non for profit charity

A

Not a public or private charity

77
Q

Income tax deferral investment

A

Rentals
Enable depreciation deduction to offset rental income

78
Q

Kiddie tax

A

Unearned income triggers kiddie tax NOT earned

Unearned = interest, non qualified dividends and short term gains

qualified dividends and LTCG are taxed at different rates and not subject to kiddie tax

79
Q

AMT and ISO basis

A

If you pay AMT related to exercise of ISOs basis increases

Basis + AMT tax

80
Q

Retirement savings contribution credit

A

For low to moderate income tax payers and matches % based on AGI of tax payers IRA, retirement plans or ABLE contributions.

Credit is for $2k single or $4k MFJ and AGI must be under $33k single and $66k MFJ

CFP Extra (8 decks)

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