Income Tax

Question 1

Deductibility of Medical Expenses
Personal Itemized

Answer 1

• Qualified medical expenses are an allowable schedule A deduction to the extent they exceed 7.5% of the taxpayer’s AGI
• Health insurance premiums are deductible if you itemize

Question 2

Is child support included in gross income?

Answer 2

No, it is not.

Question 3

Is municipal bond interest subject to federal income tax?

Answer 3

No, it is not.

Question 4

Standard Deduction for Kids

Answer 4

Take the GREATER of earned income + $400 OR the total amount of their unearned income.

Question 5

How does one arrive at taxable income?

Answer 5

• Calculate gross income
• Subtract adjustments to arrive at AGI
• Then, subtract the GREATER of the standard deduction OR itemized deductions

Always start with standard deduction! Don’t forget.

Question 6

Accrual Method Requirements

Answer 6

• Greater than $29 million in revenues
• Carry Inventory

Question 7

Net Operating Loss Components

Answer 7

• NOL sustained in one year may be used to reduce taxable income in future years.
• Indefinite Carryforward

Question 8

How does a regular corporation report distributions to employees?

Answer 8

W2 for earned income
1099-div for dividends

Question 9

What business entity would help a business owner reduce personal taxes?

Answer 9

Corporation. It is taxed as a separate entity.

Question 10

Cost basis for S Corp, LLC, LLP, & Partnerships? Which one can you personally deduct more from?

Answer 10

• S Corp: Cash Contributions + Personal Loans
• LLC; LLP; Partnerships: Cash Contributions + Personal Loans + 3rd Party Loans

Question 11

What business entities file tax returns with the federal government?

Answer 11

All entities. However, partnerships merely file an “informational return”

Question 12

Does being the general partner in an LLP limit your liability?

Answer 12

NO, not as the general partner. Limited partners receive limited liability.

Question 13

Purpose of distributable net income in a trust`

Answer 13

DNI determines the amount of income to be distributed to the beneficiary as well as the corresponding deduction by the trust.

Question 14

Implications of selling Section 1244 stock

Answer 14

1. Losses up to $100,000 for married filing jointly ($50,000 single) can be treated as an ordinary loss
2. Losses in excess of $100,000 can be counted as a capital loss

Question 15

Can a 1031 exchange be used for equipment?

Answer 15

NO, not anymore. 1031 exchanges are reserved exclusively for real property.

Question 16

What happens to real estate, whether rental or residence, when a spouse dies in a community property state?

Answer 16

No matter if the property is a rental or residence, the basis will receive a FULL step-up in basis upon the death of one spouse.

Question 17

Are entertainment costs a deductible expense?

Answer 17

No, they are not deductible.

Question 18

What counts as the cost basis for an S-Corp?

Answer 18

Personal contributions AND personal loans.

NOT 3RD PARTY LOANS

Question 19

Gross Income Components

Answer 19

• W2 Income
• K1 Income
• Retirement Distributions
• Social Security
• Real Estate Income
• Self-Employment Income (C)

~ Dividends (B) & Interest
~Capital Gains (D)

! Punitive Damages
! Alimony received for a divorce pre 2019
! Loan Forgiveness
! Unemployment (Sch 1)

Question 20

Gross Income Exclusions

Answer 20

• Inheritance
• Gifts

~Compensatory Damages
~ Child Support
~ Muni Bond Interest
~WORKER’S COMPENSATION

Question 21

Adjustments for AGI

Answer 21

Self Employment
- 100% Health Premiums
- Keogh or SEP contributions
- 1/2 SE Income

Everyone
- Deductible IRA Contributions
- Student loan deduction (One Time $10k)
- HSA Contributions
- Alimony Paid (Pre-2019 Divorce)

Question 22

Itemized Deductions

Answer 22

• Medical, Dental, LTC Expenses (Including health premiums) in > 7.5% AGI
• SALT up to $10,000
• Home Mortgage Interest
• Charitable Gifts
• Personal Property Tax (10k)
• Real Estate Tax (10k)
• Margin Interest
  Mortgage Insurance (Only if AGI < $100k)
• Casualty Loss in Federally Declared Disaster

Question 23

What type of business entity is best for a company funded by personal contributions and loans? Business will incur losses.

Answer 23

S Corporation

Question 24

Recapture of 1245 Property

Answer 24

• Sole Proprietor must sell for a gain

1st: Lesser of CRD & Gain
2nd: Recover excess gain as a 1231 gain (Capital Gain)

Question 25

Do you subtract broker’s commission from the selling price of your current home?

Answer 25

Yes

Question 26

Casualty Loss Deduction Calculation

Answer 26

Federally Declared Disaster
1. Lesser of FMV & Basis
2. Subtract insurance coverage
3. Subtract $100
4. Subtract 10% of AGI
5. Equal deductible amount

Question 27

Is producing phantom income good for a minor?
What type of products produce phantom income?

Answer 27

No, the income will not show until maturity… At that point, the child will be subject to kiddie tax.

STRIPS & Zero Coupon Bonds

Question 28

How does one avoid underpayment penalty?

Answer 28

In the form of estimates
- Pay 100% of the prior year’s return
Or
- Pay 90% of current year

Question 29

Calculating tax for annuitized annuity

Answer 29

(Basis / Payout) x Estimated Payment = Amount Excluded from taxes

Calculate payout using life expectancy.