Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFP Self-Study > Income Tax > Flashcards

Income Tax Flashcards

You may prefer our related Brainscape-certified flashcards:
CFP® flashcards
1
Q

Types of Authority

A

IRC
Treasury Regs
Revenue Rulings and Revenue Procedures
Congressional Committee Reports
Private Letter Rulings
Judicial Sources

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Step Transaction

A

Ignore individual transaction and tax the ultimate transaction. e.g. person sells out of something to an unrelated party, then that party sells the property to a wholly owned subsidiary of the original owner (step back in)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Sham Transaction

A

A transaction that lacks business purpose and economic substance is ignored for tax purposes. Similar to the step transaction, except the sale takes place between two related entities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Substance over form

A

The substance of a transaction governs its tax consequences, not just the form. e.g. the president of a company has it lend him or her money. He or she never intends to repay the loan. The loan is taxable income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Assignment of Income

A

Income is taxed to the tree that grows the fruit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Hobby Loss

A

Hobby losses (and all miscellaneous itemized deductions) were eliminated under TCJA of 2017. In order to qualify as a business (and take losses) an activity must generate a profit in 3 of 5 years. Horses must generate a profit in 2 of 7 years.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Tax Research Sources

A

Federal Tax Coordinator published by Research Institute of America
Federal Tax Service published by Commerce Clearing House Inc. (CCH)
Not tax law nor cited in tax court

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Tax Filing Requirements

A

Over $12,950 (standard deduction) in annual W-2 earnings or $400 in self-employed earnings in 2022

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Form used to amend a tax return

A

1040X

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Penalties

A

Frivolous return - $5,000
Negligence - 20% of the deficiency due to negligence
Fraud -75% of the deficiency due to fraud
Failure to pay - 0.5% per month, up to a max of 25%
Failure to file - 5% per month up to 25%
Note - penalties are not charged on interest attributed to deficiencies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Estimated Tax to Avoid Penalty

A

90% of this year’s tax liability
100% of prior year’s tax liability (or 110% if prior year AGI is over $150,000)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Gross Income Inclusions

A

Ordinary Dividends (schedule B)
Taxable Interest (schedule B)
Business Income/Losses (schedule C)
Capital Gains (schedule D)
Real Estate (schedule E)
Punitive Damages (except wrongful death)
Wages, salaries, tips
IRA distributions
Pensions and Annuities
Alimony RECEIVED pre 2019
Unemployment
Taxable Social Security

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Gross Income Exclusions

A

Gifts
Inheritances
Child Support
Municipal Bond Interest
Worker’s Compensation
Compensatory Damages
Alimony RECEIVED Post 2019

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Tax Calculation

A

Gross Income
Less Adjustments to income FOR AGI (above the line)=
AGI
Less Deductions FROM AGI (below the line)=
Taxable Income
Multiple by tax rate=
Preliminary tax due
Less credits, plus other taxes=
Tax Liability
Less estimated payments and/or withholding=
Net tax due or refund

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Educational Scholarships

A

Tuition and book amounts are excluded from income, but amounts attributable to room and board are taxable to the student.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Adjustments to Income (for AGI, Schedule 1)

A

IRA Contributions
Student Loan Interest (up to $2,500 annually)
Keogh or SEP Contributions
Half of the Self-Employment Tax (.07065)
Alimony Paid (pre-2019)
100% Self-Employed Health Insurance
Moving Expenses for Military only
Penalty for early withdrawal of savings
HSA contributions
$4,000 educational expense (AGI limits apply, alternative to AOC)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Itemized Deductions (Schedule A)

A

Medical, Dental, Qualified LTC expenses (7 1/2% floor)
State and Local Tax (limited)
Personal Property Tax (limited)
Real Estate Taxes (limited)
Mortgage insurance (less than $100K AGI)
Home Mortgage Interest
Charitable Gifts
Investment Interest
Casualty losses (federally declared disaster area)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Investment Interest Deduction

A

Limited to the taxpayer’s net investment income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Investment Income

A

Includes interest, non-qualified dividends, royalties and short-term gains. A taxpayer can elect to use ordinary income tax rates on qualified dividends.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Casualty Loss Calculation (Federally Declared Disaster only)

A

Lesser of basis or FMV
Less Insurance coverage
Less $100 floor
Less 10% AGI

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Home Office Deduction (Self Employed Only)

A

To deduct home office expenses if self-employed, a taxpayer must prove that he or she uses the home area exclusively and on a regular basis. In addition, both of the following requirements must be met:
* The home office must be used by the taxpayer to conduct administrative or management activities of a trade or business
* There must be no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business
Can only be used against income generated by the activity of the business, and cannot create a loss.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Meals and Entertainment Expense

A

Strict limits placed under TCJA 2017
If business is conducted and they are not lavish or extravagant
Office parties for non-highly compensated employees
Convenience meals or travel meals are 50% deductible
Tickets to sporting or cultural events are not deductible

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Marginal vs Effective tax rate

A

Marginal tax rate is the percentage applying to the last dollar of taxable income. Effective tax rate is the percentage of tax paid vs taxable income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Excess Medicare Tax Rules

A

Wages in excess of $200,000 ($250,000 married filing jointly or $125,000 married filing separately) will increase to 2.35% (1.45% plus 0.9%). Wages below these thresholds remain at the 1.45% rate.
3.8% Medicare tax is imposed on investment income for earners over $200,000 ($250,000 joint).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Kiddie Tax Earned vs. Unearned Standard Deduction

A

If a child has unearned income, they can choose between two standard deductions:
$1,150 for unearned income
OR
Earned income plus $400 (but no greater than the single person standard deduction of $12,950)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Self Employment Income

A

Net Schedule C
General Partnership (K-1)
Board of Director’s fees
Part-Time Earnings via 1099
Wages or K-1 income from S-Corp is NOT self employment income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Child Care and Dependent Care Credit Calculation

A

20% of up to $3,000 in qualifying expenses per child up to a max of 2 children.
$600 max for 1 child
$1,200 max for 2+ children

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Child Tax Credit

A

$2,000 per child under age 17. Credit is reduced by $50 for every $1,000 above $400,000 AGI (MFJ) or $200,000 (single)
$1,400 of the credit is refundable (meaning if you have no tax liability you can get $1,400 of the credit back anyway).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Retirement Savings Contributions Credit

A

Designed for low to moderate income taxpayers
50%/20%/10% of retirement plan/IRA contributions depending on AGI.
No credit over $68,000 MFJ
Max credit is $2,000 single, $4,000 MFJ

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Adoption Credit

A

Maximum $14,890 per eligible child (dollar for dollar up to qualified expense incurred). Special needs adoption qualifies for full credit, regardless of expenses.
Qualified Expenses - Adoption fees, court costs, attorney fees and the cost to adopt a foreign child (including travel).
Phased out between $223,410 to $263,410 AGI

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Tax Deduction vs. Tax Credit

A

A deduction is worth more to a high bracket taxpayer. A credit is worth more to a low bracket taxpayer.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Cash Method of Accounting

A

Firms under $25 million in revenue
Realize revenue in the year payment is received regardless of when the services were performed and match expenses against it when the expense is paid, regardless of when the firm incurred the liability.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Accrual Method of Accounting

A

Firms realize revenue when the earning process with goods or services is complete, regardless of when payment is actually received. They match expenses against revenues in the year the firm incurs the liability for the expense, regardless of when it is paid.
No longer mandatory unless over $25 million in revenue over the last 3 years

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Change of Accounting Method

A

IRS permission is generally needed to change accounting method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Long Term Contracts

A

Use a percentage of completion method of accounting

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Gross Profit Percentage (for installment sales)

A

Gross Profit divided by total contract price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

Net Operating Losses

A

Deductible expenses exceed gross income for a given tax year. No taxable income is reported. Losses are carried forward indefinitely into future years.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Qualified Business Income (QBI)

A

A pass-through business income deduction of up to 20%
Can be deducted from each pass through entity owned for a single taxpayer
Generally includes rental income, presuming the rental activity qualifies as a business
If one business has a loss, that loss can offset another business’ QBI
If net QBI is zero or less, no deduction is available, but can be carried forward to future years and deducted against QBI of that year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

Pass through business classes

A
  1. Personal Service Firms (doctors, lawyers, consulting)
  2. All other businesses
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Business Owner Tiers

A

Tier 1 - Less than $170,050 single/$340,100 joint - full 20% QBI deduction regardless of being a personal service firm or not
Tier 2 - Less than $220,050 single/$440,100 joint - no deduction for personal service firm, limited or possibly eliminated deduction for other businesses
Tier 3 - Incomes between $170,050-$220,050 single and $340,100-$440,100 joint - partial tax benefit from the QBI deduction

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

Sole Proprietorship A/D

A

Advantages:
Availability of SEP and KEOGH
100% of medical insurance premiums deductible by owner
No legal formalities
Conduit of income or loss to owner (schedule C)

Disadvantages:
Unlimited liability
Business dies with the owner
Capital structure depends on the owner’s resources

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

General Partnerships A/D

A

Advantages:
Availability of SEP and KEOGH
100% of medical insurance premiums deductible by partners
Partnership agreement can be oral (written preferable)
Conduit of income or loss to partners

Disadvantages:
Joint and several liability
Partnerships dissolve upon death, bankruptcy or incapacity of a partner
Capital structure depends on resources of partners

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

LLC

A

Can be classified as a partnership or a corporation for federal income tax purposes
To be a partnership, must have no more than two of the following characteristics:
Centralization of management
Continuity of life
Limited liability
Free transferability of interests
Contract and state law govern disbursement of funds, capital structure, and most other financial items.
Every member has limited liability for all debts or claims against the busness

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

LLP

A

A partnership in which the general partners are not personally liable for malpractice related claims arising from the professional misconduct of another general partner. Useful for converting an existing entity where one or more partners have unlimited liability, but for new entities LLC is the better answer (flexibility)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

Regular C Corporation

A

Separate tax entity (not a conduit of income)
Income is taxed twice - once at the corporate level and a second time at the owner level
Tax rate is 21%
Corporate AMT was eliminated
Advantages:
Sale of stock to unlimited investors
Dividend received deduction (50% rule)
Limited liability
Continuity of life
Disadvantages:
Corporate formalities
Dividends paid (after-tax)
Accumulated earnings beyond certain limits are subject to double taxation

46
Q

Dividend received deduction for C-Corps

A

A U.S. corporation investing in another U.S. corporation receives a deduction for dividends they receive.
50% of dividends received are excludable if the corporation has 20% ownership stake
65% of dividends received are excludable if the corporation has a 20-80% ownership
100% of dividends received are excludable if the corporation has a 100% ownership

47
Q

Section 1244 qualified small business stock

A

A section 1244 business is a C or S corp that was initially capitalized with $1MM or less.
Loss of $100,000 per year on a joint return ($50,000 otherwise) is an ORDINARY loss, rather than a capital loss.
Advantage - where a capital loss might be limited to $3,000 because of capital loss rules, a 1244 loss can go as high as $100,000 and offset other ordinary income.

48
Q

Personal Service Corporation

A

Closely held C Corp owned by certain individuals who perform services.
Taxed at 21%. Qualifies for the dividend received deduction
Health (doctors, dentists)
Accounting, Architectural, Actors
Lawyers
Engineers

49
Q

Subchapter S corporations

A

Conduit of income, deductions and tax credits
An eligible corporation becomes an S corporation by unanimous election of its shareholders. The S corporation status is immediately terminated if the corporation loses its eligibility. Files taxes on 1120S
Eligibility
Maximum of 100 shareholders
Can only issue one class of common stock (no preferred) but can be voting or non-voting
Must be a domestic corporation
Only individuals, estates, and certain trusts may be shareholders (US citizen or permanent resident alien)
Advantages:
Limited liability
Conduit of income or loss to owner, but limited losses up to basis
Basis is cash plus direct loans made by the shareholder to the corporation (no bank loans)
Excessive compensation would not be classified as dividends
Disadvantages:
Corporate formalities
Sale of stock limited by eligibility standards

50
Q

Limited Partnerships

A

Any business can operate as a limited partnership.
Has at least one general partner
Limited partners only liable for partnership debt up to their individual capital contribution
A limited partner is a passive investor
If limited partner is an active participant, they lose limited liability for partnership debt

51
Q

Sole Proprietor Taxation

A

Reported on Schedule C (essentially the business’ income statement for the year)
Losses carry that exceed other income carry forward indefinitely (like NOL for corp)
Interest paid on loans related to business purposes is deductible on Schedule C without any limit.

52
Q

Partnership Taxation

A

Files on Form 1065 for informational purposes. Owner’s share of income is reported on form K-1
Losses are deductible up to basis
Basis is cash contributed, loans made by the partner, loans made to the partnership by other sources (share of debt which partner may be held responsible for)

53
Q

S Corp Taxation

A

Files on form 1120S
Losses are deductible up to basis
Basis is cash contributed and loans made by the shareholder
Bank loans are not included in basis

54
Q

LLC Taxation

A

If treated as a partnership (pass through):
Information only return is filed
Income/losses passes through to individual members
If treated as a corporation (separate tax entity):
Files on 1120 or 1120S

55
Q

Corporation Accumulated Earnings Tax

A

Corporations are allowed to accumulate $250,000 ($150,000 PSC) without the need to establish a business need. Anything in excess of these amounts without a bona fide business need is taxed a second time (in addition to the regular 21% tax) at 20%. This is the Corporate Accumulated Earnings Tax. 20%

56
Q

Corporate Distributions (dividends)

A

Corporations cannot deduct dividends that are distributed
Profits that flow through to investors are taxed twice
The earnings are taxed at 21%, then the actual dividend is taxed to the investor
This does not apply to S Corps, LLCs or Sole props. Only regular C corps

57
Q

Trust and Estate Tax Returns

A

Both file on 1041 (Fiduciary Income Tax Return)
Estates file on 706
Trusts file beneficiary share of income on K-1
1041 must be filed by the 15th day of the 4th month after the entity’s year ends
1041 must be filed if there is any taxable income, gross income of $650 or more, beneficiary who is a nonresident alien

58
Q

Taxable year for estates or trusts

A

Estates can use any fiscal year (same as decedent’s, calendar year, etc.)
Trusts MUST use calendar year (except 501(a) or charitable trusts

59
Q

Taxable Distributions to Beneficiaries (trusts and estates)

A

Beneficiaries are taxed on the part of the income that is currently distributed
Estate estate or trust is taxed on the portion of income that it retains
If estate or trust is required to distribute all income, the beneficiary must report their share of net income regardless of whether it is received in a particular tax year.
If the trustee or fiduciary has a choice of whether or not to distribute all or part of current income, the beneficiary must report income required to be distributed (whether it is or not), all amounts actually paid or credited up to the amount of the beneficiary’s distributed net income
Beneficiary Income is reported on K-1 and filed on Schedule B of the 1040

60
Q

Grantor Trust (aka defective or tainted trust) taxation

A

Income produced by the trust is taxed to the grantor in the following situations:
Distributed or accumulated for later distribution to grantor or grantor’s spouse
Used to discharge any legal obligation of the grantor
Used to discharge legal support obligation of the grantor
Power to control beneficial enjoyment of the trust principal (corpus) or income
Used to pay premiums for life insurance on the life of the grantor or grantor’s spouse
NOTE: Beneficial because trust tax rates are condensed and increase very quickly

61
Q

Reversionary Interest

A

A reversionary interest (meaning an interest that goes to someone else, but eventually returns to the grantor or grantor’s spouse) that exceeds 5% of the trust value, is retained and taxed to the grantor.

62
Q

Simple Trust/Estate vs. Complex Trust/Estate

A

Simple Trust/Estate (conduit)
Acts as a conduit to pass through income and deductions to beneficiaries
Beneficiaries report income with the same character that it had for the trust/estate. Beneficiaries pay tax at their own marginal tax bracket.
Trust/estate is a separate entity, but operates as a conduit.
No distribution of corpus
No charitable gifts

Complex Trust/Estate (taxed as separate entity)
Taxed as a separate entity for income tax purposes
Must be irrevocable and the grantor has not retained any control.
Income must or may be accumulated
Corpus can be distributed
May make charitable gifts

63
Q

Trust Taxable Income (deductions)

A

Charitable contributions (complex trust only)
Depreciation, cost recovery and depletion are allocated between beneficiary and trust
Net Operating Loss (NOL) carry-forwards are allowed
Administration expenses are allowed
Trust is allowed a deduction for all income that is required to be distributed whether it is distributed or not

64
Q

Complex Trust Exemption amounts

A

If required to distribute all income, $300 is exempt
If not required to distribute all income, $100 is exempt

65
Q

Distributable Net Income (DNI)

A

DNI limits the amount that a trust or estate beneficiary must report as gross income for tax purposes. DNI rules allow the trust or estate to:
Claim a deduction for the amount distributed
Limit the portion of the distribution that is taxable to beneficiaries
Ensure the character of the distributions remains the same for the beneficiaries as it was for the trust/estate
This avoids double taxation on income that would otherwise be taxed to the trust/estate and beneficiary

66
Q

Non-Grantor (irrevocable trusts)

A

Should never be tainted for income tax purposes (there are exceptions for estate and gift tax purposes). The client would be better off keeping the assets in their own name, because for income tax purposes, the trust basically doesn’t exist and the costs associated with the trust make it prohibitive.

Can be useful for estate tax and gift tax purposes to get income producing or highly appreciated property of of an estate. IDIT

67
Q

Section 197 Intangible Rules (amortization)

A

Used for intangible assets like good will, franchise rights or intellectual property. Similar to straight-line depreciation for physical assets

68
Q

Accretion

A

A bond discounted at issue (like a zero or an EE) accretes value in addition to the coupon to get back to par at maturity. This value that accretes generates phantom income in that the taxpayer pays tax annually, but doesn’t receive the income until the end (maturity).

69
Q

MACRS (Modified Accelerated Cost Recovery System)

A

Used to depreciate all real and and depreciable property put into service after 1986.
Straight line is an option, but half-year convention must be used regardless of when during the year the purchase was made (for the year of acquisition)
Requires mid-quarter convention if greater than 40% of the property is put into service during the fourth quarter of its tax year
Half year and mid-quarter convention means only part of the full-year depreciation amount can be used in the first year.

70
Q

MACRS Property Classes (1245/1250)

A

5-year - computers, autos, light duty trucks (1245)
7-year - office furniture and fixtures (1245)
27 1/2 year - residential real property (1250)
39 year - nonresidential real property (1250)

71
Q

MACRS Tables

A

Recovery Year MACRS Straight Line (half of MACRS)
5-Yr 7-Yr 5 yr 7-Yr
20% 14.29% 10% 7.14%
32% 24.49% 20% 14.29%

72
Q

Expensing vs. Capitalizing (depreciation/depletion)

A

Section 179 allows a business to expense (write off) a limited dollar amount of qualified tangible property during a taxable year. 1245 property only.
$1,080,000 can be expensed dollar for dollar at which point it starts phasing out (reduced) until $2,700,000 at which point section 179 is exhausted for that tax year.
Section 179 is only usable up to taxable income derived from the active conduct of the taxpayer in ANY trade or business. However, a loss cannot be generated by 179.
Any deduction not allowed due to limitation by income can be carried forward to the next year.
Small firms can easily deduct cost of new assets without the need to maintain MACRS schedules.
Repairs to 1250 property could use 1245 property which would be eligible under 179.

73
Q

Like Kind Exchanges (1031)

A

Only Investment Type Real Estate that generates income is eligible for 1031 like kind exchange.
There is likely to be an imbalance of value between to exchanged properties. Additional consideration called boot is added to the transaction by the party with the lower valued property.
The party receiving boot must recognize a portion of the realized gain from the transaction. The recognized gain is the lesser of boot or the realized gain.
45 day time limit to identify new property. 180 day time limit to acquire new property (doesn’t have to be an actual trade)

74
Q

Shortcuts to Boot

A

Boot = recognized gain
Boot paid = add to basis
Basis carries over from last property
*If realized gain is less than boot received, the basis in the new property is the FMV (page 7-3 applying the facts income tax book)

75
Q

Related Party Like-Kind Exchange

A

Like an installment sale, if a related party disposes of a property they acquired in a like kind exchange within 2 years of the transaction, the unrecognized gain becomes fully recognized.

76
Q

Net Investment Income Tax

A

3.8% that applies to certain high earners. On the tax tables.

77
Q

Long-term collectibles tax

A

Taxed at 28%

78
Q

Real Property (1250) recapture tax

A

Taxed at 25%

79
Q

Dividend Income and IRR

A

Dividends received in cash are entered as a cash flow on the calculator.
Dividends reinvested affect shares owned and future value, so you enter 0 as a cash flow on the calculator.

80
Q

Carryforward losses and death

A

Carryforward losses can be used in the year of death, but are lost in subsequent years.

81
Q

Mini Case on 7-8 of Income Tax Book

A

Super hard. Valuing the purchase of bonds based on information given.
Purchasing a home mortgage as an investment (to receive as income) qualifies for investment income deduction.

82
Q

Sale of Residence (Code Section 121)

A

To qualify, must have owned and used the home as principal residence for 2 out of 5 years preceding the home’s sale.
$500,000 joint/$250,000 single exclusion amounts against capital gain (no losses)
Partial exemptions for sellers who don’t meet the 2-year minimum residency requirement:
Divorce, legal separation, death of spouse
Becoming eligible for unemployment compensation
A change in employment that makes it impossible to pay the mortgage
Multiple births from same pregnancy
Damage to home from natural disaster, act of war, or terrorism
Condemnation, seizure or involuntary conversion of the property
A job-related move if new home was more than 50 miles away than the distance from old home
A divorce can fall under special circumstances that allow the full $500,000 exclusion

83
Q

Like Kind Exchange (1031) with Section 121

A

You can reduce the amount of the deferred gain on a 1031 exchange using the section 121 exclusion if you meet the residency requirements (2 of 5 years for section 121) and the rental requirements of 1031.
Example - Own a house, live in it for 2 years, then rent it for 3 years, exchange it under 1031 for another rental. The actual gain realized that is deferred is reduced by the $250,000/$500,000 exclusion under 121. The amount of the exclusion is proportional to how long the property was the principal residence divided by how long they owned it.
See example 7-13 income tax

84
Q

Depreciation Recapture (1245 Property/Cost Recovery Deduction or CRDs)

A

Depreciation reduces basis. Start there to calculate the total realized gain.
The lesser of the CRDs or the total realized gains becomes the 1245 gain.
If CRDs are less than total realized gain, any excess amount is the 1231 gain.

85
Q

Installment Sale depreciation recapture

A

All depreciation recapture must be reported as income in the year the property is disposed of.
It’s the lesser of the gain or the CRD.
See examples on 7-16/17 in Income Tax book

86
Q

AMT Calculation

A

Separate tax calculation which determines what, if any AMT applies to a taxpayer. AMT owed is the difference between the AMT calculation less than the regular income tax calculation. If AMT is lower than regular calculation, there is no AMT.
Start with post-deduction 1040 income (if itemizing) or AGI (if standard deduction)
Add back any items deductible on a 1040 but not for AMT (taxes and bargain element of ISOs)
Add back preference items (IPOD) - Private Activity Muni Bonds, Oil and gas percentage depletion, Intangible Drilling costs percentage depletion over property’s adjusted basis
Depreciation (MACRS only, not straight line)
AMT Base
Subtract Exemptions (determined by filing status and may phase out completely)
AMTI (alt min taxable income)
AMT (26 or 28% depending on final number - see tax table)

87
Q

How to avoid AMT

A

Pay more in regular tax. Whatever it takes.
Charitable donations do not help with AMT and can actually cause it. This is not going to be a correct answer no matter how much you want it to be.

88
Q

Passive Activities

A

A passive activity generally means a trade or business in which a taxpayer does not materially participate.
Cannot be used to reduce portfolio income.
Losses are called PALs (passive activity losses)
Income is called PIGs (passive income generators)
Consist mainly of non-publicly traded partnerships (RELPS)
Netting process of passive activity is done on Schedule E
Active participation also shows up on schedule E
Two passive activities:
Rentals including equipment and rental real estate (exception is active participation)
Businesses in which the taxpayer does not materially participate
-Limited Partnerships (some exceptions)
- Partnerships, S-Corps (some exceptions), and LLCs in which the taxpayer does not
materially participate

89
Q

Publicly Traded Partnerships (PTP)

A

Also known as Master Limited Partnership (MLP)
PTP/MLP Income is portfolio income like dividends and is shown on Schedule B
PTP/MLP Losses cannot be used to offset passive income. They can only be used to offset income from future income from the same partnership.

90
Q

Disallowance and Disposition of Passive Losses

A

No $3,000 loss allowance like capital losses. Must be carried forward until they can be disposed of. PTPs/MLPs can only use losses by netting against future income of that partnership or by selling the partnership. Non-publicly traded partnership losses (PALs) can be offset with other non-publicly traded partnership income (PIGs).

91
Q

Phantom Income from Limited Partnerships

A

Can occur inside a tax shelter created before 1986
Zero Bonds
S-Corp K-1s with no cash distributed

92
Q

Material Participation

A

Requires involvement in the operation of the activity on a regular, continuous and substantial basis. Generally no limited partner is treated as materially participating.

93
Q

Active Participation

A

Less stringent standard than material participation. Although passive, it is an exception to the passive law rules. Merely requires bona fide involvement in management decisions. A limited partner may never be an active participant (they become a general partner). To qualify, a taxpayer must own at least 10% interest in the property.

94
Q

$25,000 loss from real estate activity

A

Qualifying taxpayers can deduct up to $25,000/year in net losses from real estate activity. This deduction is phased out 2 for 1 between AGI of $100,000 and $150,000. The deduction can be used to offset active or portfolio income.
Losses exceeding $25,000 can be carried forward.

95
Q

Tax Treatment of renting a vacation home

A

Home is treated as a residence if the owner’s use is the greater of 14 days or 10% of the rental use in a given year.
Ex - if a rental is used by the owner for 31 day and rented for 300 (1 day longer than 10%), it is considered a residence not a business (or rental) and expenses cannot be deducted.

96
Q

Low-income Housing Credit

A

Deduction-equivalent tax credit up to $25,000
Take $25,000 and multiply by the marginal tax bracket
Not to be confused with Historical Rehabilitation Credit, which phases out after $200,000 AGI and is often not productive.

97
Q

Oil and Gas working interests

A

These are not passive and are exempt from PAL rules. Losses from oil and gas are deductible (active or portfolio income) to general partners regardless of AGI. General partner has unlimited liability. Limited partners receive a passive loss. Percentage depletion may trigger AMT (preference item).

98
Q

Equipment Leasing

A

A closely held C corp that is not a PSC may use passive losses to offset Active but not Portfolio income. ONLY C corps

99
Q

Married/Widowed Filing Status

A

A widower can file married jointly in the year of death. If the widower maintains a home for a dependent child, they can file jointly for two additional years after the year the spouse dies.

100
Q

Community and noncommunity property Income Tax

A

If separate returns are filed by a married couple in a community property state, they must each report 1/2 of community property income. Separate income under community property rules is still reported separately (e.g. income from an inheritance)

101
Q

Excess Alimony Recapture

A

IRC says if alimony is reduced too quickly, it is really a property settlement. Calculation is based on the first 3 post-separation years. Add the first two years and subtract $37,500 if the 3rd year payment is $0. If the third year is greater than $0, double it and add it to the $37,500 constant.

102
Q

Child Support

A

Non-deductible to the payee, and non-taxable to the payor
Alimony payments that decrease in the future, the amount of the decrease is considered child support.

103
Q

Public Charities - 50% Organizations

A

All Churches, schools, hospitals
Charitable, religious, educational, literary or prevention of cruelty to animals
Can deduct up to 60% of AGI in cash donations

104
Q

Private Charities - 30% Organizations

A

Private nonoperating foundations
Fraternal Orders
War Veterans’ Organizations

105
Q

Charitable Contribution Deduction Limitations

A

Calculate Max Contribution (60% AGI in cash to public)
Calculate eligible amounts given to 50% charities (60% cash, 30% FMV LTG, 50% STG/UU)
Calculate eligible amounts given to 30% charities
Any excess or unused donation can be carried forward for 5 years or death

106
Q

Appreciated LT Gain Property as Charitable contributions

A

50% Organization donations of appreciated LT Gain property is 30% of AGI if using FMV or 50% of AGI if using basis.
It is RARELY advantageous to value appreciated property at basis. Remember, it’s a percentage of AGI, not the gift value

107
Q

Ordinary Income Property as Charitable contributions

A

Deduction is always limited to BASIS (50% of AGI)
Inventory
Copyright
Use-unrelated property (not stock or real estate)
A work of art created by the taxpayer
Short-Term Capital Gain property

108
Q

Non-itemizers

A

1986 Tax Act eliminated charitable deductions for non-itemizers.
Unintended consequence of TCJA is that charitable contributions may decline due to more taxpayers taking the standard deduction.

109
Q

Substantiation of Charitable deduction

A

Written receipt for cash or property over $250, or vehicle over $500. If vehicle is sold without significant intervening improvement, the taxpayer gets the full value received by the donee organization.

110
Q

Corporate Donations

A

May not exceed 10% of taxable income (C or S Corp)

111
Q

Contribution of inventory by Corporation (C Corp Only)

A

It can deduct its basis plus 1/2 of the unrealized appreciation, but cannot exceed 2X basis. Must be for ill, needy or care of infants. 10% taxable income rule also applies.

112
Q

Questions on 10-10 Income Tax are cruel and unusual punishment

A

You know I’m right.

CFP Self-Study (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions