Income Tax Flashcards
Medical expenses are deductible only to the extent that they exceed __ of AGI
7.5%
The charitable contribution deduction for long-term capital gain property is limited to __ of AGI
30%
Internal Revenue Code
Primary source of all tax law
Treasury Regulations
Great authority, but not law
Revenue Rulings & Revenue Procedures
Administrative interpretation. May be cited.
Congressional Committee Reports
Indicate the intent of Congress. May not be cited.
Private Letter Rulings
Apply to a specific taxpayer
Judicial Sources
Court decisions interpret
Charitable Deductions
Cash - Value of donation?
Cash
Charitable Deductions
Cash - Overall write off?
Cash
Charitable Deductions
Cash - This years write off?
60% AGI
Charitable Deductions
Long Term Appreciated Property - Value of donation?
Basis or FMV
Charitable Deductions
Long Term Appreciated Property - Overall write off?
Basis or FMV
Charitable Deductions
Long Term Appreciated Property - This years write off?
Basis: 50% AGI
FMV: 30% AGI
Charitable Deductions
Ordinary Property - Value of donation?
Basis
Charitable Deductions
Ordinary Property - Overall write off?
Basis
Charitable Deductions
Ordinary Property - This year’s write off?
50% AGI
Charitable Deductions
Loss Property - Value of donation?
FMV
Charitable Deductions
Loss Property - Overall write off?
FMV
Charitable Deductions
Loss Property - This years write off?
50% AGI
Frivolous Return
$5000
Negligence
Penalty is 20% of the portion of the underpayment attributed to negligence
Civil Fraud
Penalty is 75% of the portion of the tax underpayment attributable.
State and Local Taxes (SALT) limited to
$10,000
The deduction for use-unrelated tangible personalty
The deduction for use-unrelated tangible personalty is limited to basis, with a 50% of AGI limitation.
Non business bad debts
Nonbusiness bad debts are considered short-term capital losses in the year in which they become completely worthless.
death-benefit-only (DBO) plan
The DBO plan benefit is considered compensation for services rendered, and is therefore taxable as ordinary income.
Standard deduction MFJ 2024
$29,200
Standard deduction MFS 2024
$14,600
When incident to a divorce, are qualified domestic relations orders (QDRO’s) subject to gift tax or early withdrawal penalties?
NO
Section 1231 assets
Section 1231 assets are certain assets used in a taxpayer’s trade or business that is held for the long-term. Assets include depreciable tangible and intangible personal property, real property, timber, certain livestock, and unharvested crops.
Standard deduction for a dependent
The standard deduction for a dependent is limited to the greater of (1) $1,300, or (2) earned income plus $450 (limited to the regular standard deduction).
The capital gains rate on Section 1202 stock
28%
The exclusion ratio
The exclusion ratio is the investment divided by the expected return
the at-risk rules limit
the at-risk rules limit his total losses to $100,000
FICA
7.65 %
Social security - 6.2%
Medicare - 1.45%
Child & dependent care credit
-under 13
-$3000 one child
-$6000 two or more
-both x 20%
-both parents need to work
-no MAGI phaseout (Jeff Bezos story)
Child tax credit
-under 17
-$2000 per kid
-MAGI phaseout
How much student loan interest is deductible?
Up to $2,500 annually
Tax on dividends from a life insurance policy
Dividends from a life insurance policy are not taxable income unless the aggregate dividends received exceed the taxpayer’s basis in the contract.
Bargain element of an ISO
the difference between the FMV and the option price
*an AMT preference item
LIFO recapture tax
LIFO recapture tax applies only to S corporations
material participant hours
you are a material participant if working over 500 hours
Capital asset
A capital asset is any asset that is not a copyright or creative work, accounts or notes receivable, depreciable property used in a trade or business or for production of income (such as a computer), or inventory.
tax deduction vs tax credit
a deduction is worth more to a high bracket taxpayer and a credit is worth more to a low bracket taxpayer
Sole Proprietorship risky or risk-free?
Risk-free
S Corp risky or risk-free?
Risky
Limited Liability Company risky or risk-free?
Risky
Partnership risky or risk-free?
Risk-free
Limited Partnership risky or risk-free?
Risky
Business is profitable?
C Corp
Amortization period for intangible assets
The amortization period for intangibles is generally 180 months. Other examples of Section 197 intangible assets include: goodwill, going-concern value, operating systems, patents, copyrights, formulas, and non-compete agreements.
Capital losses
Capital losses result from the sale or exchange of a capital asset
Ordinary losses
Ordinary losses result from something other than the sale or exchange of a capital asset
taxpayer-use test
In the taxpayer-use test, the owner investors’ properties must be used in similar endeavors as the previously held properties
functional-use test
In the functional-use test, the taxpayer’s use of the replacement property and of the involuntarily converted property must be the same.
For gift loans greater than ____ and less than or equal to ____, no interest is imputed if the borrower’s investment income for the year does not exceed ____ . For a gift loan of more than ____ , the prevailing federal rate of interest will be imputed.
For gift loans greater than $10,000 and less than or equal to $100,000, no interest is imputed if the borrower’s investment income for the year does not exceed $1,000. For a gift loan of more than $100,000, the prevailing federal rate of interest will be imputed.
Loan provisions employer plans
Generally, loans are limited to one-half the vested account balance and cannot exceed $50,000. When account balances are less than $20,000, however, loans up to the lesser of $10,000 or the vested account balance are available
When is the income test waived for children/students?
If the child of the taxpayer is under age 19 or if the child is a full-time student and under age 24, the income test is waived and gross income of the dependent is not an issue.
Home Office
In order to fulfill the deduction requirement using this category, the home office must be used exclusively and regularly by the taxpayer for administrative or management activities of a trade or business. There must also be no other fixed location where these activities are performed to a substantial extent.
How to qualify as a rental property
To qualify as rental property, the personal use cannot exceed the greater of 14 days per year or 10% of rental days.
The maximum deduction allowed for interest related to an investment debt
The maximum deduction allowed for interest related to an investment debt is the taxpayer’s net investment income.
Sham transaction
A sham transaction is intended for tax avoidance
Gross income exclusion
Gifts
Inheritances
Child support
Muni bond interest
Workers comp payments
Compensatory damages
Fringe benefits - employer provided parking spots
$315/month cap
Fringe benefits - excludable amount with respect to serviced
limited to 20%
extra standard deduction elderly (65 or older) or blind
$1,550
Taxable interest - what schedule?
Schedule B
Calculation of the standard deduction for a child with both earned and unearned income
the greater of $1,300 unearned income or earned income plus $450 but no more than the single person standard deduction ($14,600)
Business income or losses - what schedule?
Schedule C
Capital gains/losses - what schedule?
Schedule D
Real estate - what schedule?
Schedule E
Child unearned standard deduction
$1,300
Itemized deductions - what schedule?
Schedule A
Investment interest deduction
The maximum deduction allowed for interest incurred on investment indebtedness is limited to the taxpayers net investment income
Installment sales - calculation
Profit / total contract price = gross profit percentage
Installment x gross profit percentage = gain or loss
Net operating losses
NOL may NOT be carried back to prior years but may be carried forward indefinitely
C Corp keys
-Separate tax entity using flat 21% rate
-dividend-received deduction of 50%
-BUSINESS IS PROFITABLE
-preferred stock
Personal Service Corporation
(PSC)- HALE
-no graduated tax rates (flat 21%)
ESOP & married couple
= 1 shareholder
ESOP & married couple
= 1 shareholder
Section 1244 qualified small business stock
-only apple to first million dollars of stock (C or S) initially issued
-loss of $100,000 per year (JT) ($50,000 otherwise) is ordinary (not capital loss)
What types of interest can be deducted without any limits?
-sole proprietor loans
-nondeductible consumer or home equity interest
Partnership basis
- Cash contributed by the partner
- Direct loans made to the partnership by the partner
- Bank loans
S corp basis
- Cash
- Direct loans made by the shareholder to the corporation
NO BANK LOANS
LLC/LLP basis
Same as partnership
Section 197
Intangibles are amortized under a tax section called Section 197 intangibles
MACRS
Modified accelerated cost recovery system applies to all recovery property (not land or intangibles) placed in service after 1986.
179 property
Tangible personal property (1245 property)
CANT CREATE LOSS
Public charities
50% organizations
Private charities
30% organizations
-private nonoperating foundations
-fraternal organizations (elks)
-war veterans organizations
Cash gifts to a public charity
A taxpayer cannot deduct more than 60% of AGI for cash gifts to a public charity
Any contribution in excess is carried forward as an itemized deduction for 5 years, or, if sooner, death.
Inclusions to Gross income overlooked on exam
-punitive damages
-unemployment income
-alimony received pre 2019
Exclusions to Gross income overlooked on exam
-child support
-workers comp
-compensatory damages
QBI phaseout based on
Taxable income
Improvements basis
Improvements add to basis and cannot deduct as expense
Repairs basis
Do not add to basis and you can deduct as an expense
Preference items and add back items
Add cement to the rock
Material participation
Think full time job
Active participation
Think part time job
Passive loss exception for real estate
If there is active participation for your RE rentals, you might be able to claim a loss from this passive loss against active or portfolio income bucket
$25k max loss. Starts going down at 100k AGI, completely lost at 150k AGI.
Allowable loss goes down $1 for every $2 of income above 100k AGI.
Tax treatment of vacation home
If you use your vacation home for more than the GREATER of:
-14 days or
-10% of the period of rental use
It is treated as a home and no expenses are allowed
Itemized Deductions (Schedule A)
“My Tax Is Calculated Correctly”
Medical Expense - 7.5% AGI
Taxes I paid - 10k salt cap
Interest I paid - Mortgage & Margin
Charitable Contributions
Casualty Losses - the president
Inclusion Ratio
Inclusion ratio = (proceeds − basis) ÷ expected proceeds
Section 1245 Recapture
- purchase price − depreciation claimed = adjusted basis
- Next, the adjusted basis is deducted from the amount realized to determine the gain/(loss) realized
- Section 1245 recapture recognized as ordinary income is the lesser of the gain realized or cost recovery deductions claimed
Lowest marginal income tax rate
The lowest marginal income tax rate is 10% for all taxpayers.
