Income Tax Flashcards
Tax Law Doctrines:
Step vs Sham vs Substance over form vs Assignment of income
Step Transaction:
- Ignore ind transactions and tax the ultimate transaction
Sham Transaction:
- Transaction lacks business purpose. Transaction will be ignored for tax purposes.
Substance over form:
- The substance of a transaction and not merly its form governs the tax consequences
Assignment of income:
- Income is taxed to the “tree that grows the fruit”, even though it may be assigned to another.
What is classified as a hobby vs a business?
Any activity that generates net income (profit) in 3 out of 5 consecutive years is a BUSINESS not a hobby.
Est taxes are due on what filing dates?
1 + 2 + 3 + 4
April 15th
then add 2 months = June 15th
then add 3 months = Sept 15th
then add 4 months = Jan 15th
Penalty for frivolous return
$5,000
Penalty for underpayment due to negligence
20% of the underpayment attributed to negligence
Penalty for fraudulent return
75% of the portion of a tax underpayment attributable to the fraud.
Penalty for failure to pay and failure to file
Failure to Pay = Point 5 % /month (max = 25%
Failure to File = 5% / mo (max = 25%)
Estimated tax due to avoid penalty
1) 90% of CURRENT years tax liability
OR
2) 100% of PRIOR years liability
- If PRIOR year AGI was over $150k - then 110%
Write out Income Tax calculation
GROSS INCOME
- above the line adjustments
= ADJUSTED GROSS INCOME
- Sch A deductions or Standard Deduction
= TAXABLE INCOME
x appropriate tax rates
= TAXABLE CALCULATION
- credits
= TAX LIABILITY
- withholdings and quarterly/annual payments made
= NET TAX DUE OR REFUND
Things to remember that is included in Gross Income
Business Income AND LOSSES
Capital gain AND LOSSES (limit up to $3k!!)
Unemployment income
Punitive damages (NOT COMPENSATORY!!)
Alimony received (pre 2019 divorce)
IRA distributions
Taxable SS
Things to remember that is included in ADJUSTMENTS
IRA contributions
HSA contributions
Alimony paid (pre 2019 divorce)
IF SELF EMPLOYED:
- Self employment tax (can deduct half of the tax = .1413 / 2)
- 100% of self-employment health insurance
Itemized Deductions
“MY TAX IS CALCULATED CORRECTLY”
M = Medical ( > 7.5% of AGI)
T = State/Local/Sales taxes (limit of $10k)
I = Interest (Mortgage (limit of $750k) & Investment interest (limited to net investment income) )
C = Casualty losses (must be declared a federally declared disaster) *Calculation = lesser of FMV/Basis. Then subtract any insurance coverage. Then subtract $100. Then subtract 10% of AGI. Then can deduct the rest.
C = Charitable gifts
Are there ever any Personal Exemptions?
NO
Standard deduction for children (age 18 and under) with earned income
$450 + earned income (no more than the single person standard deduction
What income to include when calculating self employment tax
- NET Sch C income
- K1 Income from a General Partnership (not from an S corp!)
Multiply x .1413
**Can deduct 1/2 of that number on the front of the 1040!
Child and dependent care credit
Qualifying expenses are limited to $3,000 for one child or $6,000 max.
Multiply by 20%
Maximum CREDIT = $1,200
**No MAGI phaseout
Child tax credit
$2,000 per child under age 17
*Up to $1,700/child is a refundable tax credit
MAGI phase out starting at $400,000.
Retirement Savings Contribution Credit
Credit is 50% of retirement plan/IRA contributions
($2,000 Single / $4,000 MFJ)
*Not available for MAGI over $76,500 (MFJ)
Adoption Credit
$16,810
Which of the following items would have more beneficial impact?
1) A deduction for a lower bracket taxpayer
2) A deduction for a higher bracket taxpayer
3) A credit for a lower bracket taxpayer
4) A credit for a higher bracket taxpayer
2) A deduction for a higher bracket taxpayer
3) A credit for a lower bracket taxpayer
Cash Vs Accrual Method of tax accounting
Cash method = firms realize the revenue in the year the payment is received.
**Over $29M in revenue must use the Accrual method
**Taxpayer cannot change the method of account without advanced permission from the IRS
Taxation of installment sales
1) Profit / Total contract price = gross profit %
2) Installment x gross profit % = Capital gain amount
**If prop is sold to a related party and they turn around and sell it within 2 years - all payments are taxable in one year!
Can you carryback net operating losses?
No
What is QBI-199A (or just QBI)
Qualified Business Income (Aka a businesses standard deduction)
Only available for “pass-through” businesses
(NOT C corp and NOT for a personal service business)
**20% deduction
Can you used Corporate AMT?
NO! Corp AMT has been eliminated!
What is section 1244?
A corporation (C or S) can use Section 1244 to claim up to a $100,000 loss per year (joint return) and have it be a ORDINARY loss (vs cap loss)
How is income taxed if retained by a PSC (personal service corporation)?
Taxed at 21%
PSC businesses are: “HALE”
- H - Health (Dr)
- A - Accounting
- L - Law
- E - Engineering
Basis in Partnership vs S corp
Partnership:
- Cash, direct loans, and bank loans
S corp:
- Cash, direct loans
Bank loans do not add to basis!!
What does RSU stand for?
Restricted Stock Unit
What does YRT stand for?
Yearly Renewable Term (life insurance)
- Renewability is provided without new underwriting but generally the premium rises with the insured age.
Corporate Accumulated earnings tax
C corp normal tax rate = 21%
THEN - whatever they don’t distribute (over $250k) is then penalized with an additional tax of 20%!
“Piggy bank is too big - has to distribute earnings!”
What form does Trusts file?
1041
(The beneficiary’s share of income is reported on K1 (Form 1041)
Unfunded vs funded ILIT
Unfunded:
- Life insurance premium amount is a “gift”
Funded:
- Income from investments pays premium but is taxable to the grantor
Taxation of irrevocable trust income
Taxed at trust rates if held inside trust or if income is distributed, taxed at receivers rate
What is DNI?
Distributable net income
Allows the trust to deduct the income in the amount distributes.
*Up to the amount of net income.
Example: Tess Trust has DNI of $30,000. Distributions for the year are $45,000. The income distribution deduction if $30,000 (less of the two numbers)
Basis for loss gifts
“Dual basis rule”
If sale price above substituted basis = there is a gain
(If sale price falls within this range, no gain/loss)
If sale price is below FMV = there is a loss
Depreciation via MACRS
“Cat Corn”
(1245 Property)
- 5 yr: Computers Auto Trucks
- 7 yr: Office furniture
(1250 property)
- 27.5 yr: Residential RE
- 39 yr: Nonresidential RE
MACRS vs Straight Line depreciation Tables
(Years 1 and 2)
MACRS Straight Line
5 yr 7 yr 5 yr 7yr (1) 20% 14.29% 10% 7.14% (2) 32% 24.49% 20% 14.29%
What is a 179 deduction?
A business may expense up to $1,220,000 of 1245 property in one year!!
**Cannot create a business loss
**Not for 1250 property (real estate!)
Realized vs Recognized gain
Recognized is how much you pay taxes on.
Realized gain = FMV - adj basis +- boot received
Recognized = Lesser of realized or boot
3 rules to know about BOOT
1) Boot Received = Recognized gain
2) Boot paid adds to basis
3) Carryover basis from last property
Depreciation recapture rate is applied when?
When the property is sold
25% (given on exam)
What is Code Section 121?
When you sell your primary home you get to exclude cap gain.
MFJ = $500k
Single = $250k
Must own/use as primary home in 2 out of the last 5 years…other certain circumstance:
- Job move over 50 miles away
- Multiple births
- Divorce
- Unemployment
- Unemployment
What is a “1231 gain”
Capital gain
Does it make sense to do an installment loan if there has been a lot of depreciation taken?
No! Subject to recapture. Serious disadvantage!
Wash sale rules
No loss deduction is allowed for any trades within 30 days before or after - but ADDS TO BASIS
Calculation for charitable bargain sales
Remember - have to discount your basis if you sell for a discount.
Ex. Bob is selling a piece of land to his church for $300k. FMV is $500k and his basis is $100k.
1) Calculate discount:
Discount amount / FMV = % off
$200k/$500k = 40% discount
2) Basis x % off = new basis
$100k x 40% = $60k
3) Sale price - basis = realized/recognized gain
$300k - $60k = $240k
AMT Preference Items
“IPOD”
I = Intangible drilling costs
P = Private Activity muni bond
O = Oil and gas percentage depletion
D = Deprecation (ACRS /MACRS - but not straight line)
AMT Add Back Items
Property, state, city/state and sales tax (limit $10k/yr)
Bargain element (AKA Incentive stock options)
Are C corps subject to AMT?
No
Losses from non-public and publicly traded partnership can offset what?
Non public can offset other income from non public limited partnerships.
Publicly traded partnerships can only offset income/loss inside itself.
Can “comingle” in non-public places. Cannot “comingle” in public.
Losses from passive income can offset active or portfolio income in two situations…
RE activities = max of $25k loss (BRIDGE)
- MAGI phaseout between $100k-$150k
Oil & gas working interest (General partner)
- Limited partner =
Rules regarding renting out your principal residence (Agusta Rule)
If you rent your home out for less than 15 days (1-14), then the income can be excludible from gross income.
Is taxable if rented out 15+ days in a year or over 10% of the rental use period.
How does the low income housing credit work?
No MAGI phaseout
Max of $25,000.
To calculate: Take your maximum marginal tax bracket x $25k
(37% x $25,000 = $9,250 credit)
Tax filing status after a death
Example - husband dies in 2024.
Wife can file as follows:
2024: MFJ
2025: QSS (must have a dependent child)
2026: QSS
2026: Single/HOH
Who is the payor vs who is payee?
PayOR - Pay OR go to jail
PayEE - Receeeeeeeiver of the money
Alimony recapture rules
If payor makes “excess” alimony payments in the first 3 years, a special rule applies.
Add what was paid in the first two years and subtract $37,500.
Charitable deduction carry over limit
1 + 5
(1st year + 5 carry over yrs)
Charitable deduction: cash limit
60% of AGI
Charitable contribution by a business. How much can it deduct?
Max of 10% of its taxable income.
For Inventory:
- Can deduct basis + 1/2 of unrealized appreciation (max of 2x basis)
- Must be used for ill, needy, of care of infants
Charitable deduction: Limit on LT Appreciated Prop
Can use Basis or FMV
- Basis = 50% of AGI max deduction
- FMV = 30% of AGI max deduction
Collectables = if Use related
Stocks are always LT appreciated property
Charitable deduction: Limit on ordinary property
Have to use Basis
- Can deduct 50% of AGI max deduction
Charitable deduction: Limit on loss property
Have to use FMV
- But can deduct up to 50% of AGI max deduction
What qualifies as investment income? - in regards to deducting margin interest
Anything that is taxed at ordinary income rates
- short term cap gains
- interest income
*not dividends
What is included in FICA and the rates?
FICA is social security & Medicare.
Social security = 6.2. Ends after $168,000.
Medicare = 1.45%. Forever
How are PSC’s taxed?
“Personal service corporation”
Taxed as a C corp - double taxation.
Remember “HALE”
- Heath
- Accounting
- Law
- Engineering
How are dividends taxed?
Capital gains rates
