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CFP - AB > Income Tax > Flashcards

Income Tax Flashcards

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1
Q

Major tax services

A

Research Institute of America (RIA) & Commerce Cleaning House 9CCH) are publishers of reference books on federal income tax & can NOT be cited

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2
Q

Hobby Loss

A

Income is reportable

Any activity generating profit 3 out of 5 consecutive years is a business and NOT a hobby

Horse profits is 2 out of 7 consecutive years

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3
Q

Filing Requirements

A
  1. Individual
  2. Dependents
  3. Children under 24 (kiddie tax)
  4. Self employed
  5. Aliens
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4
Q

Audit Representation

A

Attorney, CPA, enrolled agent/actuary

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5
Q

Gross Income (inclusions & exclusions)

A

Inclusions
- punitive damages
- alimony received divorced BEFORE 2019

Exclusions
- child support
- workers compensation
- compensatory damages

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6
Q

Investment Interest

A

Interest paid on indebtedness for property held for investment, generally margin interest.

Max deduction is net investment income

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7
Q

Investment Income

A

Interest, non qualified dividends, royalties and short term gains

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8
Q

Investment Advisor Fees

A

Repealed

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9
Q

Misc & Home Office Deduction

A

Miscellaneous: suspended 2018-2025

Home Office: suspended

  • MUST be self employed, no other fixed location and conduct administrative or management activities
  • Limited to net income, cannot create a loss
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10
Q

Child Standard Deduction
(earned/unearned income)

A

Greater of $1,250 unearned income OR earned income + $400

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10
Q

Meals & Entertainment

A

Meals: if business is actually being conducted and not “lavish or extravagant”

  • business meals convenience of employer and for employee while traveling are 50% deductible

Entertainment: tickets to sporting & cultural events no longer deductible

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11
Q

FICA Taxes

A

Employee AND employer each pay (6.2% + 1.45%) 15.3% up to W-2 earnings of $160,200

After $160,200 each pay Medicare taxes 1.45%, 2.9% total unlimited

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12
Q

Installment Sales
(calculation of gain)

A

Gain recognized = cash received x gross profit percentage

profit/total contract price = gross profit percentage

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13
Q

Inventory Valuation

A

In inflationary periods:

FIFO
- Increase earnings
- Greater tax liability
- Current cost inventory

LIFO
- Reduced earnings
- Deferral of taxes
- Understate inventory

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14
Q

Section 1244

A

Qualified Small Business Stock

  • C or S corporation initially capitalization no more than $1MM
  • Loss of $50,000 ($100,000 joint return) ordinary loss vs capital loss
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15
Q

Personal Service Corporation
(PSC)

A

Any income retained taxed flat rate of 21%

Health (doctors, dentist, etc)
Accounting, Architectural, Actors
Law
Engineering

16
Q

Conduit Entities

A

Sole Prop: Interest paid on borrowed money for business deductible unlimited

Partnership: Loss deductible up to basis

S Corp: Bank loans NOT included in basis

LLC: Treated as partnership regardless number of members

17
Q

Basis

A

Increased by
- legal fees
- commissions
- sales tax
- freight
- improvements

NOT repairs, real estate taxes or normal business expenses

18
Q

Gift/Sale Basis

A

Gain: FMV > basis, use basis

Loss: FMV < basis, use FMV

Sales price > basis = gain
Sales price between basis & FMV no gain/loss
Sales price < FMV = loss

19
Q

179 Deduction

A

Business may expense up to $1,160,000 of qualifying property in year of acquisition

Can NOT create a loss

20
Q

Tax on Passive Activity

A

Deduct loss to extent of income generated by another passive activity

2 Types
1. Rentals, real estate & equipment, and royalties
2. Do NOT materially participate (LP, Partnership, S corp, LLC)

21
Q

Material Participation vs Active Participation

A

Material: Involved in operation of activity on a regular continuous and substantial basis

Active: bona fide involvement in management decisions
- May deduct up to $25,000 from real estate. AGI phase out $100,000-$150,000

22
Q

Charitable Contribution by Business

A

Corporation may NOT deduct > 10% taxable income

Gift of inventory: deduct basis + 1/2 unrealized appreciation
- may NOT > 2x basis
- MUST be for ill, needy or care of infants

23
Q

Child Tax Credit

A

Tax credit of $2,000 for each qualifying child (son, daughter, step or foster child) under age 17.

MAGI phase out $400,000 MFJ, $200,000 single

24
Q

Refundable Tax Credits

A

Child tax credit

Earned income credit

25
Q

Business is profitable

A

C Corporation
1. Separate tax entity using flat 21%
2. Dividend-received deduction of 50%

Personal Service Corporation (PSC)
- No graduated tax rates (flat 21%)

26
Q

Risk-free entity business has losses

A

Risk-free entity
Sole Proprietorship
1. Pension plan (Keogh)
2. 100% of medical, dental & LTC insurance deductible for owner
3. Lack of continuity

Partnerships
1. Same as sole prop PLUS losses up to basis

27
Q

Risky business has losses

A

Risky entity (needs limited liability)
S Corporation
1. Pension plan
2. 100% of medical, dental & LTC insurance deductible for 2% owner
3. Losses up to basis
4. Special requirements
- no more than 100 shareholders
- must be a domestic corporation
- shareholders must be U.S. citizens or residents
- all shareholders must be consent to election

Limited Liability Corporation
1. Limited liability (like a corporation)
2. Losses up to basis (like partnership)

Limited Partnership
1. Limited partners CANNOT actively participate in business
2. Losses up to basis

28
Q

Qualified Business Income (QBI)

A

Net income (profit) from a pass-through business

Individuals who earn income through pass-through businesses may qualify to deduct up to 20% of their QBI from each pass-through business they own.

If net QBI is zero or less, then no pass-through deduction is available for that tax year. However, any loss
may be carried forward to the next year and is deducted against any QBI for that year.

ANY business less than $364,200 joint taxable income = Yes
Greater than $464,200 joint taxable income AND personal service = NO
Greater than $464,200 joint taxable income AND other business = Maybe

29
Q

Adjusted basis

A

Cost basis less cost recovery (deductions)

30
Q

Schedule H

A

Household employees

31
Q

Vacation Home

A

Personal use cannot exceed the longer of 14 days or 10% of rental days. Otherwise, treated as rental property for tax purposes

32
Q

Alimony Recapture

A

Excess alimony payment is the amount that exceeds the normal payment by $15,000

33
Q

Foreign tax credit

A

May operate either as deduction or as a credit

34
Q

Like Kind Property

A

Real estate is now the ONLY property eligible

CFP - AB (6 decks)

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