Income tax Flashcards
What assets are capital assets
All assets are capital assets except ACID (accounts receivabe, copyrights, creative works, inventory, depreciable property used in a trade or business (like furniture)
What are ordinary income assets
Ordinary Income Assets
• Ordinary assets are those assets that, when sold, result in ordinary income to the owner of the asset.
• Some of the assets listed in Section 1221(a) that are not capital assets are actually ordinary income assets, including inventory, accounts receivable, creations in the hands of the creator, and copyrights in the hands of the
creator.
What are section 1231 assets
Used in trade or business eg timber, coal, iron ore
Non taxable exchange basis
Example
Mario is considering trading coin collections with his friend Arthur. Mario’s basis in his coin collection is $100 and the FMV of his coin collection is $200. Arthur’s coin collection is worth $350. Arthur will only agree to trade coin collections with Mario if Mario pays him $150 in addition to Mario’s coin collection. If Mario and Arthur trade coin collections, Mario’s basis in his new coin collection will be his carryover basis ($100) plus the boot that he paid ($150), or $250.
Is the capital gain on inherited assets short or long term
Long.
(Inherited which means someone died)
Donee’s adjusted basis when gift tax paid. (Useful for calc capital gain)
Donor basis + (net appreciation in value of gift when gifted x gift tax paid / value of taxable gift )
What is basis for stock and what is double basis rule.
Donors original basis (unless one of two exceptions).
1) lower than original basis. Get to use this. But long or short cap gain treatment is determined by when the gift made. Not original purchase date
2) current fmv is in between value on date of gift and original basis. Than no loss or gain.
When does recognition of a gain happen
When a realized gain is taxed.
Realized gain calc
Amount realized - adj basis
Adj basis is cost of property + capital additions - cost recovery
Wash sale window
30 days. It only applies to selling at a loss and then buying the shares again
Cannot recognize losses on
Personal asset like a house you live
Exclusion value for personal property and other rules
Live in house 2 of last 5 years and 250k single. 500k marries.
What is the gain if partially lived in a house and then selling it.
Pro-rate any gain for the amount of time that the property had a non-qualified use. Thus a 200k gain on a house that was occupied for 4 of the last 5 years would be 4/5 x 200k
What are gains and losses for:
1) Personal use asset
2) Capital asset
3) Trade or business asset
4) Trade ordinary income asset
How much capital loss can you deduct each year? How long can you carry forward
$3k, indefinitely (unless a small biz owner using section 1244)
ST/LT losses can offset either ST/LT losses
Should you gift an asset to a related party when the donors basis is greater than the FMV of the asset
No. Never
The donee basis for gain is higher and less for the losses. So the donee really gets hosed
How are gains and losses treated for capital assets
They are netted against each other and any losses are applied to the category that the loss still remains in
How much capital loss can be netted against AGI each year and what happens to the remaining
$3k and remaining carried over. E.g.
What is section 267
Related parties transfers disallows losses between direct or indirect sales/transfers
What is a section 1231 asset?
depreciable or real property used in a trade or business held for more than 1 year. A 1231 gain is remaining original asset value after subtracting depreciation.
What is section 1245 property
Property subject to amortization or depreciation (equipment, copyrights, patents. not real property like land)
What is the only way to have a 1231 gain on a section 1245 property
sell it for more than it was originally purchased
How to get from income to tax due
income
less exclusions
=gross income.
Less deductions
=AGI
less greater of itemized or standard deduction
less QBI x 20%
taxable income
gives the tax
less any tax credits
gives tax due
How are annuities taxed
Annuities are only taxed on the portion of income received that is beyond the principle. This is applied to the annual payments. So if invest 10k in an annuity, but expect to get total payments of 15k, then 33% of the annual annuity payment is treated as ordinary gross income
Example
Mario’s wife died in YR1. Mario has not remarried. During YR2 and YR3, Mario has continued to maintain a home for himself and his child, for whom Mario is eligible to claim as a depen-dent. In YR1, Mario is eligible to file a joint return for himself and his deceased wife (married filing jointly). For YR2 and YR3, Mario may file as a qualifying widower with a qualifying child. After YR3, Mario may file as a head of household, if he qualifies.
How are distributions from qualified plans taxed
Calculating the proportion that is gains vs initial investment. Just like annuity the amount distributed is multiplied by the ratio of adjusted basis (typically the amount put in) over the current FMV
What and when is a penalty charged for a distirbution from a qualified plan
before 59.5 years old and it is a 10% penalty
What is the additional deduction in addition to the standard deduction and for what situations
$$1950 if over 65 or blind for single or head of HH. All others is 1550. Get the additional for each criteria you meet. So if blind and over 65 get both.
How to calculate how much of SS is taxed
If MAGI plus one-half of Social Security benefits is less than 1st hurdle than no tax paid on SS income.
If between 1st and 2nd hurdle then either lesser of
50% Social Security Benefits or
• 50% [MAGI + 0.50 (Social Security Benefits) - Hurdle 1].
If above the second hurdle it’s lesser of 85% of SS benefits or 86% of the equation using hurdle 2 PLUS the lesser of $6k or 50% of the hurdle 1 equation.
What is 8 things are excluded from gross income per IRS sections 101-150
Item Specifically Excluded from Gross Income
1) Gifts and Inheritances
2) Life Insurance proceeds
3) Scholarships
4) Gain on sale of personal residence (up to specified limits)
5) Qualified distributions from Roth accounts
6) Compensation for injuries and sickness
7) Employer Payments for employer sponsored accident and health plans
8) received Child support payments
10 Deductions to get to agi from gross income (also called above the line deductions)
BRP PASS CP SHT
PPP SS BRACHT
Businesses rental property is a **premature choice for student-teacher pension, alimony **or **health savings a better choice** is double self employment
1) Business expenses
2) Losses on sale/exchange of property
3) Deductions from rental and royalty property
4) Alimony payments (prior to 12/31/2018)
5) Self-employment: One-half of tax paid
6) Self-employment: 100% of health insurance premiums paid
7) Contributions to pension, profit sharing, annuity plans, IRAs, etc.
8)Penalty on premature withdrawals from time savings accounts or deposits
8) Interest on student loans
9) Health Savings Accounts
10) up to $300 Teacher Expense Deduction
What are the 7 Itemized deductions (from AGI).
PMMS QCC
Personal interest expense (interest on mortgage of 2personal residences up to 750k)
Medical Expenses after 7.5% AGI
Miscellaneous itemized deductions not subject to the 2% floor (2017 - 2025)
State and local taxes
Qualified Business Income (20% of)
Casualty losses from fed disaster
Charitable contributions .
What is the child tax credit.
Maximum of 3k for 1 kids, $6k for two or more kids and have low AGITATION
When does kiddie tax apply
Unearned income above $2,600
3 preferences for AMT
1) **percentage depletion **(The percentage depletion is a measure of the amount of depletion associated with the extraction of nonrenewable resources. It is an allowance that independent producers and royalty owners can apply to the taxable gross income of a productive well’s property.)
2) **intangible drilling costs **
3) interest in private activity muni bonds (municipal bond issued by a state or local government to fund projects that benefit the private sector)
If someone is going to take advantage of the above “preferences”, than they should file using AMT and these are added back to gross income
Note: Some these 2 deducations cannot be used when calculating AMT: a) state/local tax and b) itemized subject to 2% deductions are lost under AMT
A tax preference item is a type of income, normally received tax-free, that may trigger the alternative minimum tax (AMT) for taxpayers. Tax preference items include interest on private activity municipal-bonds, qualifying exclusions for small business stock, and excess intangible drilling costs for oil and gas - if the amount of these items exceeds 40% of AMT income.
1
Tax preference items are added to the amount of AMT income in the IRS’ tax formula
How do you treat student loan interest for taxes
Deduct from AGI (above the line deduction)
How to treat medical expenses for taxes
Itemized deduction if use that instead of standard.
What imposed the first constitutional federal income tax?
Revenue Act of 1913 imposed the first constitutional income tax.
What are revenue rulings, determination letters and private letter rulings?
Revenue rulings are based on a set of facts that are common to many taxpayers.
Private letter rulings are issued at the request of an individual taxpayer.
Determination letters are issued prior to the completion of a transaction.
Why are above the line deductions more favorable
above the line deductions (for AGI) are more favorable since many phaseouts are based on AGI
