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Income Tax Flashcards

1
Q

What are the ways property can be held?

A

Personal use, for production of income or investment, or for business purposes or trade
OR
Capital asset, ordinary income asset, or Section 1231 asset

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2
Q

All assets are capital assets except ACID. What does ACID stand for?

A

Accounts/notes receivable
Copyrights and creative works (if held by creator)
Inventory
Depreciable property used in a trade or business

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3
Q

What is the holding period for capital gains for inherited property?

A

Long-term

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4
Q

What are the rules for basis of gifted property?

A

The donee’s basis is the same as the donor’s in the gifted property, but there are two exceptions

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5
Q

What is the rule for when gifted property has FMV less than the donor’s basis?

A

When the donee sells the property at a loss, the donee’s basis is the FMV of the property on the date of the gift

When the donee sells the property at a gain, the donee’s basis is equal to the basis of the donor

When the donee sells the property at an amount between the FMV at the time of the gift and the basis of the donor, no gain or loss is recognized

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6
Q

What is the rule for when a donor gifts property and pays the gift tax on it?

A

The donee’s basis is increased by the gift tax paid

Donor’s basis + [net appreciation in value of gift / value of taxable gift, x gift tax paid]

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7
Q

What is the holding period for gifted property?

A

The holding period of the donee includes the holding period of the donor, unless it’s a double basis asset, then the holding period starts on the date of the gift

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8
Q

How are transfers incident to divorce handled?

A

The same as all gifts, but must be within one year of the termination of the marriage

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9
Q

What are the rules for selling property to a related party?

A

Only affects transactions where there is a loss.
The transferors loss is forever lost, and double basis rule takes over for donee

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10
Q

What happens when a taxpayer sells property to a charity for less than its FMV?

A

The basis of the property must be allocated between the portion of the property sold and the portion given to charity

Amount realized / FMV, x basis of property

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11
Q

What additional tax are taxpayers with AGI over 200/250 subject to?

A

Additional .9% Medicare contribution tax for AGI that exceeds the threshold

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12
Q

Are personal use assets permitted to deduct losses?

A

No

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13
Q

What is the length of time considered a wash sale?

A

30 days

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14
Q

What are the qualifications for section 121 exclusion?

A

Property must have been owned and occupied as principal residence 2/5 years
The exclusion can only be used once every 2 years

For married: both must meet use requirement, one must meet ownership requirement

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15
Q

How long can a loss resulting from a worthless security be deductible?

A

The year in which it became worthless; the artificial sale date is the last day of the year

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16
Q

How do you determine net capital gains?

A

-categorize and net gains and losses by holding period
-if excesses losses result, they are shifted to the category carrying the highest tax rate
-cannot net gains between LT and ST because of different tax rates

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17
Q

What are the ordinary loss amounts that can be deducted?

A

$3000 each year can be deducted, but remaining losses can be carried forward.

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18
Q

In regards to like kind exchanges with related parties, how long must the property be held after the transfer to avoid recognition?

A

2 years, unless death occurs or the taxpayer can demonstrate to the IRS that avoidance of taxation was not a principal purpose

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19
Q

What are the rules for section 1033 (involuntary conversions)?

A

Replacement property must be similar in function, and acquired within 2 years (3 for condemnation of realty) from year end of year that gain is realized

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20
Q

What are the qualifications for head of household filing?

A

Unmarried, paid more than half the cost of home upkeep, was the main home of the taxpayer’s child for more than half of the year, and the taxpayer can claim a credit for that child

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21
Q

What are the qualifications for qualifying widower filing?

A

Two years following the tax year of death, not remarried, taxpayer has a child they claim, taxpayer pays more than half the cost of keeping up a home

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22
Q

Who is ineligible for standard deduction?

A

-MFS filer when other spouse itemizes
-nonresident aliens

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23
Q

What is the standard deduction for a dependent?

A

The greater of $1250 or $400 plus earned income (but not exceeding the normal standard deduction)

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24
Q

What is a qualifying child?

A

Must meet all 4 tests:
Relationship, abode, age, support

Relationship: most immediate siblings and descendants, but not cousins

Abode: must live with taxpayer more than half the year except during special circumstances including education and vacation

Age: under 19 or under 24 and student

Support: child does not provide more than one half of their own support (scholarship not included)

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25
Q

What is a qualifying relative?

A

Must meet the following tests:
Relationship
Gross income
Support
Not a qualifying child

Relationship: everyone including cousin
Income: must be less than personal exemption amount (4700$)
Support: must provide more than one half of the support

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26
Q

What are the additional tests for a qualifying relative and qualifying child?

A

Joint return test: married dependent must not file a joint return

Citizenship/residency test: dependent must be a citizen or national of the US, or resident of North America

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27
Q

What are the SS hurdles?

A

32/25, and 44/34, except MFS which is 0

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28
Q

What is the annuity exclusion ratio?

A

Basis in contract / Total number of payments

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29
Q

What are the rules for below market loans?

A

The gift is equal to the interest not paid:

0-10 = $0 imputed
10-100 = if NII is less than $1k, $0 imputed, OR
lesser of NII or AFR less interest using the stated rate of the loan
Above 100 = lesser of NII or AFR less interest using the stated rate of the loan

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30
Q

Which compensations for injuries or sickness are excluded from income?

A

Workers comp

Any damages received on account of personal physical injuries or sickness, and any payments from insurance that is owned by the taxpayer

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31
Q

What amounts of reimbursed dependent care are excluded from income?

A

$5000

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32
Q

What are the requirements for the foreign earned income exclusion?

A

-Must have foreign earned income
-your tax home must be in a foreign country
-you must be one of the following:

-a US citizen or resident alien who is a bonafide resident of a foreign country for an uninterrupted tax year
-a US citizen or resident alien who is physically present in a foreign country for at least 330 full days during any period of 12 months

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33
Q

What are the three state/local bonds that are not exempt from income tax?

A

Private activity bonds, arbitrage bonds, bonds that do not meet all of section 149 requirements

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34
Q

What are the deductions FOR AGI?

A

-trade or business expenses
-losses on sale or exchange of property
-rental and royalty property
-alimony payments prior to 2019
-half of self employment tax, health insurance premiums paid by self employed individual
-penalty on premature withdrawals from time deposits
-student loan interest
-qualified account contributions
-teacher expense deduction

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35
Q

What are deductions FROM AGI?

A

-medical expenses
-state and local taxes
-charitable contributions
-casualty losses
-personal interest expenses
-QBI
-miscellaneous itemized deductions

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36
Q

What is the floor for medical expense deductibility?

A

7.5%

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37
Q

What is the cap for state and local tax deductibility?

A

$10k

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38
Q

Are foster children and step children allowed to be claimed for the child tax credit?

A

Yes

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39
Q

What interest expenses can be deducted?

A

Investment interest expense is limited to investment interest income, but may be carried over indefinitely

Personal residence interest, limited to $750k of mortgage indebtedness and limited to 2 houses

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40
Q

Can QBI be deducted without electing itemization?

A

Yes

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41
Q

What is the limit of the QBI deduction?

A

20%, but can be used with each business owned

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42
Q

What are the miscellaneous itemized deductions?

A

-Gambling losses (to the extent of gambling income)
-credit for estate taxes imposed on IRD
-loss on the disposition of an annuity contract
-repayments of income

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43
Q

What is the maximum credit for Adoption Expense and is it refundable?

A

$15950, no but it can be carried forward for 5 years

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44
Q

What are the rules for the Child Tax Credit?

A

$2k per child, $1600 is refundable

Married taxpayers must be MFJ

Includes step and foster children

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45
Q

What is the credit amount for child and dependent care?

A

20% x eligible costs, to a max of $3k for one child or $6k for two

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46
Q

What are the AMT preference items?

A

Percentage of depletion
Intangible drilling costs
Interest on private activity bonds

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47
Q

What typical deductions are lost under AMT?

A

State and local taxes, itemized deduction subject to 2% floor

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48
Q

When does the kiddie tax kick in?

A

Unearned income in excess of $2500

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49
Q

Are nonvacation rental property expenses deductible?

A

Yes, rental property is considered a trade or business and is deductible against income

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50
Q

How do you avoid hobby rules?

A

Presumptive rule of section 183:
If activity shows profit 3/5 years (2/7 for horses), it is presumed that taxpayer has profit motivation

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51
Q

What are the three types of income?

A

Active, passive, portfolio

52
Q

What is the at risk rule?

A

Losses can only be deducted to the extent of property/‘obey that is at risk

53
Q

What can offset passive gains?

A

Passive losses only

54
Q

When do rental activities count as active participation instead of passive activity?

A

Active participation requires at least 10% ownership, as well as involvement in management decisions.

55
Q

How is material participation defined for passive activities?

A

Must meet one of the following:
-Greater than 500 hours per year
-Taxpayer participation constitutes essentially all participation
-greater than 100 hours and the most of any participant
-100 hours in this activity and their total participation in all activities exceeds 500 hours

56
Q

What are the three primary sources of tax law, in order?

A

Statutory, legislative, judicial

Statutory: IRC (13, 39, 54, 86)
Administrative: US Treasury
Judicial: court system

57
Q

What are the three types of regulations issued by the Treasury?

A

Proposed, temporary, final

Proposed: preview of final and do not have legal precedence
Temporary: issued when guidance is needed quickly and have same authority as final
Final: full force and effect of the law

58
Q

Do revenue rulings have the full force and effect of the law?

A

No, but they are binding on the IRS officials and taxpayers can cite them in court

59
Q

What’s the difference between determination letters, technical advice memorandums, and private letter rulings?

A

PLRs are issued at the request of a taxpayer regarding a transaction and the IRS is bound to its determination
Determination letters are only issued with regard to completed transactions
TAMs are similar to DL but are used in regards to audits

60
Q

What is the statute of limitations for the IRS?

A

3 years for auditing a return, unless >25% AGI not included in income, then 6
10 years for collecting taxes
Unlimited if fraud

61
Q

What are the FTF and FTP penalties?

A

Failure to File: 5% per month up to 25% of net tax due
Failure to Pay: .5% per month up to 25%

If both due, subtract FTP from FTF

F five
P point five

62
Q

What is the accuracy related penalty?

A

20%, unless fraud, then 75%

63
Q

Who can represent a client during an IRS audit?

A

Attorney, CPA, EA

NOT a CFP

64
Q

Which courts are under the regional US Court of Appeals?

A

US Tax Court and US District Court

65
Q

Which court is under the federal US Court of Appeals?

A

US court of federal claims

66
Q

In which court is a trial by jury not available?

A

US Tax Court (and small claims division)

67
Q

Which court sits only in DC?

A

Federal claims

68
Q

In which courts are tax deficiencies required to be paid?

A

Federal claims and district courts

69
Q

What property can’t be depreciated?

A

Personal activity, inventory, raw land, property placed in service and disposed of in same year, equipment used to build capital improvements, section 179 intangibles

70
Q

Which system is used for most depreciation, ACR or MACR?

A

MACR

71
Q

What are the two systems used under MACRS?

A

GDS and ADS (general and alternative depreciation system)

72
Q

What are the nine property classifications under GDS?

A

3 year
5 year
7 year
10 year
15 year
20 year
25 year
27.5 year
39 year

73
Q

What are examples of 3 year property under GDS?

A

Tractors
Horses
Rent to own property

74
Q

What are examples of 5 year property under GDS?

A

Automobiles
Computers
Office machinery (not furniture!)

75
Q

What are examples of 7 year property under GDS?

A

Office furniture and fixtures (not machinery/equipment!)
Any property without a defined class life

76
Q

What are examples of 27.5 year property under GDS?

A

Residential home
Any building if 80% or more of its gross rental income is from dwelling units

77
Q

What are examples of 39 year property under GDS?

A

Office buildings
Nonresidential real property

78
Q

Which MACRS recovery period convention do nonresidential real property and residential rental property use?

A

Mid-month convention

79
Q

What can’t section 179 be used for?

A

Realty or production of income property

80
Q

What is the section 179 deduction amount?

A

Lesser of
Property placed in service
Taxable income
Threshold of $1.16m phased out for PPS >$2.89m

81
Q

What is the dividend received deduction for a less than 20% owner of a C corp?

A

50%

82
Q

What is the dividend received deduction for a less than 80% owner of a C corp?

A

65%

83
Q

What is the dividend received deduction for a greater than 80% owner of a C corp?

A

100%

84
Q

What are the requirements to claim S corp status?

A

-Less than 100 shareholders
-Ownership of stock restricted to US citizens/residents, certain trusts, estates, and charitable organization
-Must be an eligible corporation
-Insurance companies, DISCs, and certain financial institutions are not eligible
-only one class of stock (though some shares can have voting rights)

85
Q

Which business types do not require annual state filings?

A

Sole proprietorship and general partnership

86
Q

Which business type files with Schedule C 1040?

A

Sole proprietorship

87
Q

Which business type files using form 1065 K1 to Schedule E 1040?

A

General and limited partnerships, family limited partnership

88
Q

Which filing forms do C and S corps use?

A

1120S (and K1 for C corp shareholders)

89
Q

Which business types are not considered flow through entities?

A

Sole proprietorship and S corp

90
Q

What is the minimum premium to be considered a high deductible plan for HSA purposes?

A

$3000

91
Q

Does employment tax or individual income tax make up the majority of IRS collections?

A

Individual income, makes up 50%

92
Q

Are prizes and awards deductible or fully taxable?

A

Fully taxable

93
Q

Under accrual-based accounting, when does a taxpayer report an amount in their gross income?

A

The earliest of the following:
-when the income is earned, received, or due to the taxpayer

94
Q

What kind of taxpayer typically acts as a cash-basis taxpayer and what kind typically acts as an accrual-based taxpayer?

A

Typically individuals are cash-based and businesses are accrual-based

95
Q

How are LTC premiums deductible?

A

Under medical payments as a deduction from AGI

96
Q

What is the maximum amount that can be deducted for student loans, and is it for or from AGI?

A

$2500, for AGI

97
Q

How are passive activities rules different for publicly traded partnerships?

A

You can only offset deductions from passive activities of a PTP against income or gain from passive activities of the SAME PTP. Non-PTP deductions cannot be offset against the gain of a PTP.

98
Q

Can passive losses offset other gains?

A

No, passive losses can only offset passive gains

99
Q

How do suspended losses at risk work?

A

If suspended losses are from at risk activity, they are not deductible until the at risk amount is positive from additions or income

100
Q

What are the three ways to increase at-risk amount?

A

Add more capital, use of recourse debt (debt the taxpayer is liable to repay), undistributed income

101
Q

What happens to suspended losses upon disposition of the passive asset?

A

The losses are deductible

102
Q

What are the qualifications for the Earned Income Credit?

A

Must have earned income
Must have a qualifying child, unless age 25-64 with no child

103
Q

What is the Earned Income Credit amount?

A

Applicable percentage rate (determined by number of children) x earned income

104
Q

What are the amounts for the AOTC?

A

100% of the first $2000
25% of the next $2000

105
Q

What are the amounts for the LLC?

A

20% of expenses up to $10k

106
Q

Is the AOTC refundable?

A

Up to 40% or $1000

107
Q

What is the standard deduction for kiddies?

A

The greater of $400 plus earned income, or $1250

108
Q

How is unearned income taxed for kiddies?

A

First $1250 not taxed
Second $1250 taxed to child
Above $2500 faxed at the parent rate

109
Q

Is the adoption credit refundable?

A

No, but it can be carried forward 5 years

110
Q

What is the credit amount for dependent care?

A

20% x eligible care costs

Lesser of actual costs or $3k/$6k

111
Q

Who gets priority on dependent exemption?

A

The person with the higher AGI

112
Q

Describe section 1244

A

A taxpayer can deduct up to 50/100 (s/MFJ) of the loss on small business stock as an ordinary loss in any given year

113
Q

Can section 1244 be used for gains?

A

No, 1244 gains are treated as capital gains

114
Q

What happens to 1244 losses in excess of the limits?

A

They are treated as capital losses

115
Q

What happens if a corporation incurs a net operating loss?

A

If not fully utilized, it can be carried forward indefinitely (as of 2018)

116
Q

How much must a self-employed person make to have to file?

A

If income is greater than or equal to $400

117
Q

What is the effective tax rate?

A

The average rate a taxpayer pays

118
Q

What are section 1231 assets?

A

-Depreciable and real property
-used in a business or for production of income -held greater than 1 year
-includes timber, iron, coal, livestock, unharvested crops, certain intangibles

119
Q

What happens if a 1231 transaction results in a loss and what happens if it results in a gain?

A

Gain: long term capital gain
Loss; ordinary income (for AGI!)

120
Q

What happens to 1231 assets that are subject to cost recovery/depreciation recapture?

A

Gains are recharacterized according to section 1245 or 1250

121
Q

What happens when the gain on disposition of a 1245 asset is greater than the total amount of accumulated depreciation?

A

Depreciation is recaptured as ordinary income, then the excess is captured as capital gain

122
Q

What is section 1250 used for?

A

Recapturing accelerated depreciation (rather than straight line)

123
Q

Why isn’t section 1250 used very often?

A

Because all property acquired after 1986 must use straight line depreciation, and 1250 only applies to accelerated depreciation

124
Q

What is the advantage of actively managing real estate versus passively managing it?

A

If actively managed, then the taxpayer can deduct up to $25k against ordinary income, phased out at AGI $100-150k

125
Q

Which entities are not considered flow through?

A

C corp

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