Income Tax Flashcards
Refundable vs Non-Refundable Tax Credits
Refundable:
- Earned Income Tax Credit
***only fully refundable credit
- Child Tax Credit - up to $1,600 per child
- AOTC -
Non-Refundable:
- Child Care Credit
- Adoption Expenses Credit (excess C/F 5yrs)
- Foreign Tax credit
- Credit for rehab exps
- Disabled Access Credit
Earned Income Credit (EIC)
Disregarded losses:
- Net loss from estates and trusts
- Net loss from non-business rents
- Net capital losses
Adoption Expense Tax Credit
Limited to the least of:
- $15,950 max credit
- qualifying adoption expenses
- amt of tax due
Passive Activity & Income
Passive Income:
- Rental income
Passive Income from a publicly traded limited partnership may not be offset by any other passive losses.
Material Participation Rules
- Participates > 100hrs & no one else spends more
- Participate > 500hrs
- Materially participated in any of 5/10 prior years
- Taxpayer is only one to materially participate
- The activity is a personal services activity and materially participate 3/6 prior years
Summary of Rental Property Exceptions to Passive Loss
- Customer use less than or equal to 7 days
- Customer use less than or equal to 30 days and significant personal services provided
- Extraordinary personal services are provided
- Rental activities incidental to non-rental activity
- Rental activity available during business hours for nonexclusive use of customers
- Rental property used in an activity conducted by partnership, etc. where the taxpayer is the owner and an active participant
Rental Activity
Non-taxable if:
- rented out 2 weeks or less (less than15 days)
Mixed-use:
- property rented 15 or more days AND
- personally used the greater of 15 days or 10% of rental days\
- When personal use exceeds 14 days, expenses are allocated between personal and rental use.
Employee Fringe Benefits
- After 2017, no deduction for miles/commuting with
- Meals 50% deductible
Business Travel Expenses:
- Domestic: airfare deductible if primarily business.
- Foreign: airfare fully deductible if less than 7 days or less than 25% personal time spent. Also, must not have control over timing or arrangements of trip.
Meals and lodging pro-rata.
Illegal Drug Company
- Can ONLY deduct COGS, but no other expenses
- Other illegal businesses such as gambling operations can deduct COGS and other business exp.
FICA Taxes
Federal Insurance Contributions Act (FICA) taxes
- Total FICA: 15.3%
- SSB tax: 12.4%
- Medicare: 2.9%
Net Capital Gains & Losses
- Worthless Stocks:
A fictitious sale on Dec 31st in the year of loss, which allows the stockholder to take the full loss. - Bad Debt (non-business):
treated as STCL
Kiddie Tax
- Standard Deduction:
The greater: $1,250 -OR- $400 + Earned income, not exceeding the normal standard deduction ($13,850) - Unearned Income:
$2,500:
first $1,250 excludable (subtracted from std dev)
second $1,250 taxed to child
If Unearned Income < $1,250 then do not need to calculate separately from Earned Income - include with calculating tax of Earned Income
Tax Credits
Qualifying Child:
- U19/U24 student
- lived with > 1/2 year
- child provided < 1/2 own support
Qualifying Dependent:
- either relative or live with ALL year
- not exceed $4,700 gross income
- taxpayer provide > 1/2 support of dependent
Child/Family Credits:
- Child Tax Credit: $2,000, ages U17
- Family Credit: $500 for qualifying child 17 or older and qualifying persons
- Child & Dependent Care Credit: U13 or handicap; Credit amt = (Applicable % x eligible care costs). Applicable % range 20% - 35%. **Usually 20% x Eligible costs (AGI of $43,000 and above).
$3,000 for one child or $6,000 for two or more ($6,000 is max even if have more qualifying individuals)
Education Credits:
- American Opportunity Tax Credit: $2,500; first 4yrs post secondary; 1/2 of FT courses
- Lifetime Learning Tax Credit: 20% qualifying exp up to $10,000 max.
*Phaseouts for BOTH AOTC & LTLC
Other Credits:
- Adoption Expense Credit: $15,950 limit; child U18 or handicap
- Earned Income Credit: generally, for those who have earned income and a qualifying child. Credit amt = (Applicable %) x (Earned Income). Applicable % determined by # of qualifying children.
**If no children, can still claim if age 25-64.
TEY Formula
When calculating the tax-free rate, use the algebraic equivalent of the TEY formula.
- Stupid trick to remember: If I am given the taXable rate, I need to multiple (X) in the formula.
Ex. The equivalent tax-free rate for the taxable bond is [0.05 × (1 - 0.25)] = 3.75%
where 5% is interest rate of taxable bond, 25% marginal tax rate
Qualified Dividend Requirements
if the individual meets the requisite holding period, which is more than 60 days in the 121 days surrounding the ex-dividend date.
Tax Forms
- Form 1099R: reports amount of rollover
- Form 5498 reflects contributions to the IRA.
AMT Tax
Included:
- State income taxes added back
- Real estate taxes added back
- Miscellaneous Itemized Deductions added back
- Interest on Private Activity Muni Bonds
- ISOs: exercising them increases AMT to the extent of the bargain element
Deductible:
- Charitable gifts (deductible for both regular income tax and AMT)
NUA - Net Unrealized Appreciation
- NUA of employer stock is NOT taxed if distributed as a lump-sum
- NUA taxed as LTCG
- If employer stock is rolled over into an IRA, then the benefits of NUA are lost. Hence, all distributions from the IRA will be ordinary income.
KEEP in MIND
as long as the entire balance leaves the qualified plan, employer stock can be split between the IRA and taxable account and utilize NUA on the portion rolled to the taxable account.
Assets cannot be left in the qualified plan to utilize NUA.
