Income Tax Flashcards
Front of 1040
- wages, salaries, tips
- IRA distributions
- pensions and annuities
- alimony received prior to 2019 divorces
- unemployment income
- taxable social security
Gross Income Exclusions
- gifts
- inheritance
- child support
- workers compensation
- compensatory damages
- municipal bond interest
Fringe Benefits (Tax Free)
- employer paid healthcare premiums
- group life employer premiums up to $50,000 per employee
- company car
- $300/mo. vehicles/transit pass
- $5,000 for dependent care
- education assistance of $5,250/yr.
- adoption expenses up to $10,000
- parking up to $300/mo.
- discount on company products up to employers gross profit
- occasional overtime meal (no season tickets)
- discount on services limited to 20% of selling price
Fringe Benefits (Taxable)
- health insurance premiums if self-employed, partners, or more than 2% owners of S corps. 100% deductible as adjustment for self employed
- insurance premiums paid by employer over $50,000
Adjustments from Gross Income to AGI (important ones to know)
- IRA contributions
- Keogh or SEP
- self-employment (.07065)
- certain alimony paid (p. 2019 divorces)
- 100% self employed health insurance
Schedule A
- itemized deductions
Elderly of Blind Deduction
- $1,500 MFJ ($3,000 total) / $1,850 S
- extra standard deduction for each spouse married filing jointly age 65+ and/or blind
- blind has no age limit
Mortgage Interest Qualified Residence Deduction (Below the Line)
- only allowed if less than $100,000 AGI
- only interest paid on first $750k of mortgage is deductible
- must have been for home improvement
Investment Interest Deduction (Below the Line)
- ordinary investment income sources (interest, ordinary dividends, short term capital gains)
- can deduct interest up to investment income
- investor CAN elect out, but that is silly
Casualty Loss (Below the Line)
- if insurers denies nothing can be wrote off. If insurance doesn’t like claim, government won’t either.
- only for federally declared disasters
- step 1 = use lesser of FMV and basis
- step 2 = subtract out any insurance
- step 3 = subtract $100 floor
- step 4 = subtract 10% of AGI
Equivalent Tax Credit
- deduction * tax bracket
Equivalent Deduction
- tax credit / tax bracket
Gross Profit Percentage Calculation
- profit / total contract price
Installment Sale Gain Calculation
- installment * gross profit percentage = gain
- installment is the amount received for current year
FIFO vs LIFO
- FIFO = increases earnings and taxable income
- LIFO = reduces earnings and taxable income
QBI deduction
- pass through entities only
- $182,100 or less (single) gets full 20% deduction
- $232,100 or more (single) gets NO deduction
- double for MFJ
Business if Profitable
- c corporation
- personal service corporations
Business has Losses (risk-free)
- sole proprietorship
- partnership
Business has Losses (needs limited liability)
- S corp
- LLC/LLP
Sole Proprietorship
- pension plan (Keogh, SEP)
- 100% of medical, dental, & LTC insurance deductible by owner
- lack of continuity
Partnership
- pension plan (Keogh, SEP)
- 100% of medical, dental, & LTC insurance deductible by owner
- lack of continuity
- losses up to basis
S Corporation
- pension plan
- 100% of medical, dental, & LTC insurance deductible for above 2% owner
- losses up to basis
- no more than 100 shareholders
- no preferred stock
- must be domestic corporation
- shareholders must be US citizens
- all shareholders must consent to the election
Limited Liability Company
- limited liability
- losses up to basis
Limited Liability Partnership
- limited partner’s cannot actively participate else they have full liability
- losses up to basis
LLC/Partnership Conduit Calculation
- cash + direct loan + bank loan
S Corporation Conduit Calculation
- cash + direct loan
- s corps cannot have 3rd party loans
Accumulated Earnings Tax Calculation
- (taxable income - federal taxes paid - dividends paid) * 20%
Tax Forms: Corporations
- filing: 1120
- employee: W-2
- distributions: 1099 (dividends)
Tax Forms: Self Employment
- filing: Schedule C
- employee: Schedule C
- distributions: n/a
Tax Forms: Partnerships
- filing: 1065
- employee: W-2
- distributions: K-1
Tax Forms:
- filing: 1120S
- employee: W-2
- distributions: K-1 (unearned)
Administrative Power
- held by grantor or grantors spouse to deal with trust property for less than full consideration, to borrow without adequate interest or security, or right to vote
May be defective if:
- right to income or right to use
- revisionary interest exceeds 5% measured at time of death
Tainted Trust Taxation Ramifications
- income tax = fine to taint, trust isn’t taxes
- estate tax = entire irrevocable trust is in estate
Simple Trust
- income is distributed (conduit)
- income is taxed to beneficiaries
- normally no distribution of corpus
- no charitable gifts
Complex Trusts
- income must or may be accumulated
- income accumulated is taxed to trust
- income distributed is taxed to the beneficiaries
- corpus can be distributed
- may make charitable gifts
Adjusted Basis Calculation
- cost basis - cost recovery deductions
- improvements are added to basis (not expenses)
Basis of Inherited Property
- FMV at date of death or AVD
- community property is full step up
- non community property is half step up
- assume non community property
MARCS vs Section 179
- section 179 for 1245 property only
- must have income, can’t take a loss
- if no income, choose MARCS
- when section 179 can be use its better because it allows full amount to be deducted
Like-Kind Qualifying Property
- apartment complex is exchanged for shopping center
- farm is exchanged for a ranch
Non-qualifying property
- inventory of a business
- tax payers principal residence
- tangible personal property
Depreciation Recapture Calculation
- original cost - CRD = adjusted basis
- sale price - adjusted basis = gain
Section 1231 Gain
- gain - CRD
Charitable Bargain Sale Calculations
- (proceeds / FMV) * basis = adjusted basis
- sale - adjusted basis = taxable Gain
How to Avoid AMT
- defer ISO’s or disqualify them so it becomes a NSO
- accelerate taxable income or defer payment of deductible taxes / schedule A items
- purchase public purpose municipal bonds
Kinds of Passive Activities
- rental income (equipment and real estate)
- royalty income
- limited partnerships
- partnerships, S corps, llc’s which the taxpayer does not materially participate
Recapture Rules for Alimony
- excess front-loading of alimony
- during first 3 years of separation
- if no alimony in 3rd year, add what was paid in first 2 years and subtract $37,500
- if alimony is paid in 3rd year, double the payment and add it to the $37,500 before subtracting
Types of Property - ordinary income (use basis)
- inventory
- copyright
- use-unrelated
- work of art created by taxpayer
- short-term capital gain
- watch out for art work owned by college without art museum
- watch out for art work to a hospital
Activities NOT subject to self-employment tax
- real estate income or rents paid
- distributive share of income or loss of a limited partner
- wages from S-corp (FICA)
- distributions (K-1) from an S corp
- self employed individual can participate in these activities but would not be subject to the self employment tax
Tax Credits
- dependent care tax credit - non refundable- 13 and under - 20% per kid on a max of 2 kids up to $3,000/$6,000
- child tax credit - partially refundable - under 17 - $2,000, $1,600 refundable phaseouts of $200k/$400k
- family credit - non refundable - other dependents - $500 - non-child dependents cannot make more than $4,500
- adoption credit - non refundable - fees + cost of foreign child, NO surrogates or adopting spouses child. Any child under 17 or us citizen of any age with a special needs qualifies
If Business is Profitable
- choose a C corp (or PSC)
If Business have Losses but has no liabilities or limited liabilities
Choose:
- sole proprietorship
- partnership
If Business has losses but is risky
Choose:
- s corp
- LLC/LLP
Advantages of a C Corporation
- separate tax entity
- dividend-received deductions (50% exclusion)
- sale of stock to unlimited investors
- can provide Nonqualifed deferred compensation
- limited liability
- continuity for life
Disadvantage of Partnership/S corporation
- partnership - unlimited personal liability
- s corp - limit on deductions for losses
How to Postpone or Avoid AMT
- pay more taxes
- defer tax deductions
- deferring or disqualify ISOs
- purchase public purpose municipal bonds
- pay off mortgage
Active Participation Loss Deductions
- up to $25k can be deducted for losses from real estate activities
- phased out $2 for $1 between $100k and $150k AGI
- reported on Schedule E. Different than a capital loss
Rental of Principal Residence
- income is excluded if principal home is rented out for fewer than 15 days
- no deductions for rental use is allowed
- think Indy 500, spring break, etc.
Renting of Vacation Home
- personal use cannot exceed the longer of 14 days or 10% of the rental use (in days)
Low-income housing credit
- no income phase out
- claim up to only 10 years
- deduction-equivalent tax credit = $25,000 * tax bracket
- depreciation is straight-line for 27.5 years
Dividend Exclusions for C corporations
- 65% is excluded if owning more than 20% of an entity
- 50% is excluded if owning less than 20% of an entity
Is Revocable Trust Conduit?
- yes
- income is taxed at personal income levels
Gain/loss Calculations from Disposition
- 1231 gain = sale - original cost
- 1245 gain = cost recovery deduction
Adjusted Basis Calculation
- realized gain - recognized gain = x
- FMV of new property - x = adjusted basis
Active Income
- wages, etc.
Portfolio Income
- capital gains, interest, dividends, etc.
Passive Income
- RELPs and PTPs
Participation
- material = involved in operations
- active = involved in management decisions (up to $25,000 loss deduction for active real estate) - good for duplexes
- active deduction phase out $100k - $150k
Oil and Gas working interest
- general partner = can write of losses
- limited partner = cannot write of losses until dissolution of partnership
- O&G is exempt from pals rule
- loses are deductible active or portfolio income
- no limits and no AGI phase outs
