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CFP - Review Cards > Income Tax > Flashcards

Income Tax Flashcards

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1
Q

primary source of all tax law

A

internal revenue code

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2
Q

what can be cited as precedent besides the actual law?

A

revenue rulings and revenue procedures

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3
Q

step transaction

A

ignores the individual transactions and instead taxes the ultimate transaction

Examples: XYZ corporation sells property to an unrelated purchaser who subsequently resells the property to a wholly owned subsidiary of XYZ

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4
Q

sham transaction

A

lacks a business purpose, and economic substance will be ignored for tax purposes

example: A sale by XYZ to ABC when both are owned by the same person

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5
Q

Substance over form

A

the substance of a transcation and not merely its form governs its tax consequences

Example: the president of XYZ has the company lend him money. there is no written loan agreement. he never intends to repay the loan or take a salary. the loan is taxed to the president

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6
Q

assignment of income

A

income is taxed to the tree that grows the fruit although it may be assigned to another prior to receipt

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7
Q

business vs hobby

A

any activity generating new income (profit) in three out of five consecutive years is a business, not a hobby.
(2/7 for horses)

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8
Q

Hobby loss rules

A

you cannot deduct expenses associated with hobbies

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9
Q

an individual is required if net earnings from self employment are at least _______

A

$400

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10
Q

estimated tax payments

A

April
June
Sept
January

all the 15th

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11
Q

who can represent a taxpayer in an audit?

A

attorney
CPA
Enrolled agent
enrolled actuary

Generally not a CFP Certificant

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12
Q

form used to amend returns

A

1040X

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13
Q

frivolous return

A

omits info necessary to determine the tax liability

substantially incorrect tax

based on the taxpayers desire to impede the collection of tax

penalty is $5k

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14
Q

negligence

A

“accuracy-related” penalty
no intent to defraut

penalty is 20% of the underpayment attributed to negligence

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15
Q

fraudulent tax return

A

intent to cheat the government

penalty is 75% of the portion of tax underpayment attributable to fraud

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16
Q

Failure to pay penalty

A

.5% per month
25% max

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17
Q

failure to file

A

5% per month
25% max

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18
Q

estimated tax (to avoid the penalty)

A

lesser of the following:
1. 90% of the current year tax liability OR
2. 100% of the prior year’s liability (or 110% if the prior year’s AGI exceeded $150k)

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19
Q

insurance premiums for the self employed

A

taxable income (for self employed, partners, and more than 2% owners of an S corp)

100% is deductible as an adjustment to income on the front of the 1040 to the extent that such cost do not exceed the net income from the business

DOES NOT include disability insurance premiums

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20
Q

Self employment tax adjustment

A

= .07065

1/2 of the self employment tax

=7.65% x .9235 (1-7.65%) or 1/2 of the 14.13%

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21
Q

deduction from income for alimony

A

non deductible for divorces settled after 12/31/2018

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22
Q

student loan interest deduction cap

A

$2,500

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23
Q

MAGI

A

AGI
+ tax exempt interest
+non taxable social security income
+student loan interest
+ a few other items

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24
Q

limite on state, local, sales, real estate and personal property taxes

A

limited to $10k

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25
Q

limit on mortgage interest deductibility

A

$750k
if before 12/15/17 up to $1M

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26
Q

qualified dividends

A

taxed at the lower long term capital gains rate

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27
Q

note about qualified dividends

A

unless a question indicates a qualified dividend, treat it as an ordinary dividend

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28
Q

casualty losses

A

must be a “federally declared disaster”

Calculation
1. use the lesser of basis or FMV
2. subtract any insurance coverage
3. subtract $100 (floor)
4. Subtract 10% OF AGI

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29
Q

Home office deduction

A

must be self employed
AND
home office must be used for the business
AND
there must be no other fixed location of substantial business use

deduction is limited to the gross income derived from the activity

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30
Q

miscellaneous itemized deductions

A

repealed for 2018 to 2025

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31
Q

deductibility of business meals provided for the convenience of the employer

A

50% deductible

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32
Q

meals for employees while traveling

A

50% deductible

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33
Q

personal exemptions

A

NO personal exemptions
NO dependent exemptions

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34
Q

marginal tax rate

A

percentage applying to the last dolalr of taxable income

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35
Q

medicare tax rate applicable to wages in excess of $200k single and $250k MFJ

A

will increase to 2.35%
(1.45% + .9)

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36
Q

unearned income deduction for kiddie tax

A

$1,300

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37
Q

how does kiddie tax work?

A

child gets a $1,300 standard deduction (unearned income)
Next $1,300 is taxed at 10% (the child’s rate)
anything greater than $2,600 in unearned income is taxed at the parents rate

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38
Q

what if a child has earned income

A

if the child has earned income greater than the standard deduction, the amount of earned income plus $450 is used in the first step of calculation

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39
Q

Self employment income includessss

A

net schedule C income
general partnership income (k-1 income)
board of directors’ fees
part time earnings (1099)

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40
Q

self employment income doesn’t include

A

dividends or interest on investments
gains (or deducitons for losses ) from property, securities, or commodities
real estate income or ents paid
distributive share of income or loss of. limited partner
wages from an S corporation
distributions (K1 income) from an S corporation

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41
Q

self employment income wage base

A

$168,600

if on the exam you calculate the self employment income greater than $168,600, you did something wrong

  1. calculate the total self employment income
  2. subtract 7.65% (or multiply by .9235)
  3. multiply remainder by 15.3% (7.65% + 7.65%)
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42
Q

credit for child and dependent care expenses

A

until age 13
$3k limit for one dependent
$6k for two or more dependents

multiply by 20% on the exam

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43
Q

child tax credit

A

$2k for each qualifying child under 17
up to $1700 per child is refundable
$500 family credit for each dependent who is not a qualifying child

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44
Q

adoption credit

A

$16,810

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45
Q

when to claim the adoption credit

A

the year of claim depends on when the adoption was finalized and whether the adopted child is a US citizen, resident alien, or foreign national

if the child is a foreign national, the adoption credit is available only in the year when the adoption becomes final

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46
Q

credit for the elderly and the permanently and totally disabled

A

(1) age 65 or
(2) is under 65, is retired with a permanent and total disability, and receives disability income

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47
Q

earned income credit

A

for certain peopel who are at low paying jobs
REFUNDABLE

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48
Q

tax deduction vs credit

A

deduction is worth more to a high bracket payer

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49
Q

cash method of accounting

A

firms realize revenue from services performed in the year the payment is received, regardless of when the services were performed

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50
Q

accrual method of accounting

A

firms realize revenue when the earnings process with goods or services they provide is complete, regardless of when payment for those goods and services is received

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51
Q

installment sells and taxes

A

the installment method permits the capital gain recognized to be spread over the life of the note rather than be recognized entirely in the year of the sale

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52
Q

exceptions to installment sales

A

-if all payments are recieved in the year of sale
if property is publically traded securities
if property is sold at a loss
if property is sold to a related party who in turn sells the property within two year of the original purchase date

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53
Q

calculation for installment sale(s)

A

percentage is calculated by dividing the gain realized on the sale by the total contract price

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54
Q

during periods of rising prices it is generally typical to adopt what inventory valuation and flow methods

A

LIFO

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55
Q

NOL

A

if a firm’s business operations for a taxable year result in an excess of deductible expenses over gross income

if a business reports no taxable income, the firm obviously incurs no current year tax cost

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56
Q

advantages of sole props

A

availability of retirement plans (Keogh, SEP)

100% of medical insurance premiums are deductible by the owner

no legal formalities

conduit of income or losses to owner (files on a schedule C)

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57
Q

Disadvantages of sole props

A

unlimited liability

business dies with owner

capital structure depends on the owner’s personal resources

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58
Q

advantages of partnerships

A

availability of retirement plans (Keogh, SEP)

100% medical insurance premiums deductible by partners

partnership agreement can be oral (written preferable)

conduit of income or losses to owner

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59
Q

disadvantages of partnership

A

unlimited personal liability for acts of the partnership or a partner acting on behalf of the partnership (joint and several liability)

partnerships dissolve upon the death, bankruptcy, or incapacity of a partner

capital structure depends on resources of partners

60
Q

two classes of pass through businesses

A

personal services (law firms, medcial practices) and firms where revenues come form the talents of entertainers and athletes

and all other

61
Q

Tier 1 - pass through businesses

A

single <$191,950
MFJ < $383,900

can claim the full 20 % deduciton

62
Q

Tier 2 - pass through business

A

single >$241,950
MFJ >$483,900

NO deduction whatsoever if their business is a personal service firm

63
Q

Tier 3 - Pass through business

A

those with incomes between the thresholds are eligible for a partial benefit

64
Q

LLP

A

partnership in which the general partners are not personally liable for malpractice-related claims arising from the professional misconduct of another of another partner

65
Q

c corporations

A

function as a separate tax entity
(double taxation)

66
Q

corporation profits are taxed at what rate?

A

flat 21%

67
Q

advantages of a regular C corporation

A

separate tax entity
sale of stock to an unlimited number of investors
dividend received deduction
limited liability
continuity of life

68
Q

disadvantages of regular c corproations

A

corporate formalities
dividends paid (after tax)
accumulated earnings beyond certain limits are subject to double taxation

69
Q

Dividend received deduction (C corps)

A

US corporation investing in another US corporation receives a deduction for dividends received

70
Q

section 1244

A

business is a corporation (C or S) that was initially capitalized with no more than $1M

Loss of $100k per year on a joint return is considered to be ORDINARY, rather than capital

71
Q

discounts on services limit

A

limited to 20% of the selling price charged to customers

72
Q

value of discounts on company products

A

cannot exceed the employer’s gross profit percentage

73
Q

standard deduction for age 65 or older and/or blind

A

$1,550 for MFJ
$1,950 Single

74
Q

Mortgage insurance qualified residence

A

<$100k AGI

75
Q

Subchapter S Corporations

A

Eligibility
-limit, 100 shareholders
-must be domestic

76
Q

advantages of S corporations

A

limited liability
conduit of income or loss to owner but limited losses up to basis
basis equals cash plus direct loans made by the shareholder to the corporation

77
Q

disadvantages of S corporations

A

corporate formalities
sales of stock limited by eligibility standards

78
Q

limited partnerships

A

must have at least one general partner
limited partners are liable for partnership debt only to the extent of their capital contributions to the partnership

79
Q

conduit entities (avoid double taxation)

A

s corporations
llcs
sole proprietors

80
Q

Estate tax return form

A

1041

81
Q

grantor trusts (definition)

A

the maker holds too much control or “strings” over the property

82
Q

violations creating a defective trust for income tax purposes

A

-trust income is, or may be , distributed or accumulated for later distribution to either the grantor or the grantor’s spouse
-trust income is, or may be, used to discharge any legal obligation of the grantor
-pay premiums on life insurance on the life of either the grantor or their spouse

83
Q

simple trust

A

“conduit” for forwarding income to the beneficiaries

84
Q

complex trust

A

taxed as a distinct entity for income tax purposes if it meet both criteria:
1. irrevocable, and the grantor has not retained any “control”
2. income is accumulated

85
Q

an irrevocable trust is often ________

A

a complex trust

remember, often, but not always

86
Q

revocable living trust

A

at trustor’s death, the revocable trust becomes irrevocable and either terminates with the corpus distributed to the remainderman or continues until a later date

87
Q

gift tax consequences of funding a revocable trust

A

no gift tax consequence during the grantor’s lifetime

88
Q

irrevocable trusts

A

the grantor gives up all rights in the property transferred to the trust

89
Q

trust income

revocable
irrevocable

A

revocable - as the owner of the property, the grantor of a revocable trust will be responsible for any income tax liability

Irrevocable - can be taxed as a simple or a complex trust depending on whether all income is (or is not) distributed in a specific tax year

90
Q

charitable deduction and trusts

A

only allowed for complex trusts

91
Q

net operating carryforwards for trusts

A

allowed

92
Q

exemption for taxable income (trusts)

A

a complex trust that is required to distribute all of its income has an exemption of $300

one that isn’t required to distribute all of it’s income = $100 exemption

93
Q

Distributable net income (DNI)

A

allows
-claiming of a deduction for the amount distributed
-limit the portion of the distribution that is taxable to the beneficiaries
-ensure that the character of the distributions remain the same for the beneficiary as it was to the turst

94
Q

increases to basis

A

legal fees
commissions
sales tax
freight
improvements

95
Q

NOT increases for basis

A

repairs
real estate taxes
normal business expenses

96
Q

why don’t repairs effect basis

A

repairs are typically deducted as expenses

97
Q

adjusted basis

A

cost basis less cost recovery

98
Q

value of the gift for gift tax purposes

A

FMV at the date of the gift

If the FMV on the date of the gift is greater than the donor’s adjusted basis, then use the donor’s adjusted basis

99
Q

loss gift basis

A

if the FMV on the date of the gift is less than the donor’s adjusted basis in the gift, then the following occurs:
1. a loss is measured using the FMV on the date of the gift
2. a gain is measured using the donor’s basis
3. if the sale price of the gift is between the donor’s basis and the FMV on the date of the gift, no gain or loss is recognized

100
Q

basis of inherited property

A

FMV on the date of the decedent’s death or the alternate valuation date if selected

101
Q

basis of inherited property in community property states

A

marital property enjoys a full step up in basis if at least one half of the whole property is uncludible in the deceased spouse’s gross estate

In noncommunity property states, property only gets a half step up in basis

102
Q

MACRS must use what?

A

half year convention

103
Q

property classes for MACRS

A

5 year - computers, autos, and light duty trucks (1245 property)
7 year - office furniture and fixtures (1245 property)
27.5 year - residential rental property (1250 property)
39 year - nonresidential real property (1250 property)

104
Q

179 deduction

A

$1,220,000 of qualifying property in the year of acquisition
cannot create a loss
avoids the burden of maintaining MACRS depreciation schedules

105
Q

property eligible for like-kind exchanges

A

only real estate

106
Q

what is “like kind” property

A

the same in nature, even if they differ in grade or quality

107
Q

realized gain (like kind exchange)

A

total value received - adjusted basis of property

108
Q

recognized gain (like kind exchange)

A

lessor of realized gain or boot received

109
Q

substitute basis (like kind exchange)

A

FMV of property acquired - (realized gain - recognized gain)

110
Q

timing of like-kind exchanges

A

identified on or before 45 days
title received within 180 days

111
Q

related party transactions (like kind exchanges)

A

if within two years the related party disposes of the property, the gain not recognized in the exchange is recognized on the date of the sale
the like kind exchange collapses

112
Q

capital gain and losses netting

A

only $3,000 of net losses can be used to offset ordinary income in a single year

113
Q

short term capital gains rates

A

taxed as ordinary income

114
Q

depreciation recapture

A

25%

115
Q

1245 property (depreciation recapture)

A
  1. look back and recapture the lesser of total CRDs taken or the gain realized as 1245 gain (ordinary income)
  2. recover any excess gain as 1231 gain (capital gain)
116
Q

installment sale recapture

A

if a taxpayer makes an installment sale of tangible personal property, all depreciation recapture must be reported as income in the year of disposition

HUGE disadvantage

117
Q

AMT calculation

A
  1. regular post-deduction 1040 income (if itemizing) or AGI (if electing the standard deduction)
  2. add back any item that was deductible for the 1040 but not for AMT
  3. add preference items
  4. result equals AMT base
  5. subtract exemptions
  6. results equals AMTI
  7. then calculate AMT
118
Q

C corporations and AMT

A

no longer subject to the AMT

119
Q

passive activity

A

trade or business in which the taxpayer does not “materially participate”

120
Q

The owner of a passive activity (the limited partner) can only deduct losses up to what?

A

the extent of income generated by another passive activity

121
Q

treatment of disallowed losses

A

suspended losses are carried forward until the taxpayer can dispose of the interest
for passive investments, there is no $3,000 per year loss allowed per year (like capital loss)

122
Q

material vs active participation

A

material = involvement in the operation of the activity on a regular, continuous, and substantial basis

active = bona fide involvement in management decisions

123
Q

real estate activity loss rules

A

UP TO $25,000 of net losses from the real estate activity (deductible)

124
Q

rental of principal residence

A

when home is rented for fewer than 15 days during the taxable year, the rental income is excludable
BUT no deductions are allowed

125
Q

tax treatment of renting a vacation home

A

owner’s use of the unit for personal purposes exceeds the longer of (1) 14 days or (2) 10% of the period of rental use

126
Q

public charities

A

50 % organizations
-churches, schools, and hospitals
-all organizations organized and operated for charitable, religous, education, or literary purposes or for the prevention of cruelty to children or animals

127
Q

private charities

A

30% organizations
-private nonoperating foundations
-fraternal orders
-war veterans’ organziations

128
Q

maximum deductibility for cash gifts to public charities?

A

60% of AGI
can be carried forward as an itemized deduction for five years, or if sooner, death

129
Q

deduction for appreciated long term gain property

A

deduction ceiling for gifts of appreciated long-term capital gains property to 50% organizations is 30% of AGI unless they use basis rather than FMV
if basis, deductibility up to 50% of AGI

130
Q

charitable contributions by business entities

A

a corporation may not deduct more than 10% of its taxable income for (aggregate) charitable gifts

131
Q

Schedules and what goes on them

A

A = itemized deducitons
b - interest & dividends
c - business income or losses
d- capital gains/losses
e - passive income

132
Q

qualified dividends and long term gains

A

part of AGI

133
Q

what qualifies as investment income?

A

income from property held for investment such as interest, dividends, royalties, and short term gains

dividends will only be included if the taxpayer elects not to use reduced rates

134
Q

if a business is profitable what types should it be?

A

C corp or personal service corporation

135
Q

if a business has losses and is risk free what do you pick?

A

sole prop
partnership

136
Q

if a business has losses and is risky

A

s corp
llc
limited partnership

137
Q

what type of interest can be deducted without any limits

A

sole proprietor loans

138
Q

if borrowing money from a bank what business structure would you choose?

A

Likely LLC instead of S corp

139
Q

what entity can’t do an ESOP?

A

a partnership because there are only partnership interests, not stock

140
Q

intangibles are amortized

A

section 197 intangibles
(similar to straight line depreciation)

141
Q

179 keys

A

election expense
generally tangible personal property 1245 property (5 or 7 year)
cannot create a loss

142
Q

boot received =

A

recoginzed gain

143
Q

what to do with boot paid?

A

add to basis

144
Q

tax rate of 1245 recaptures

A

ordinary income tax rate

145
Q

Preference items for AMT

A

(excess)Intangible drilling costs
private activy muni bonds
oil and gas percentage depletion (NOT cost depletion)
depreciation

(IPOD)

146
Q

AMT add back items

A

incentive stock option bargain element
property, state and city/income taxes
home equity indebtedness unelss used for home improvements

147
Q
A

CFP - Review Cards (17 decks)

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