Income Tax Flashcards
What is a Capital Asset?
Most personal use and investment assets
What is Specifically Not Capital Assets?
ACID Accounts/Notes receivable Copyrights & creative works Inventory Depreciable property used in business
What are 1231 Assets?
Assets being used in trade or business.
What are the specific 1231 Assets?
Depreciable and real property Timber Coal Iron Ore Certain Livestock Unharvested Crops
The Initial Cost Basis is the Amount You Pay Plus What?
Sales/excise/real estate tax Freight Installation and testing Legal and accounting fees Revenue stamps Recording fees
What Will Increase Adjusted Basis to Property?
Capital improvements Assesments for local improvements like water connections, sidewalks, and roads Cost of restoring damaged property Legal fees Zoning costs
What Will Decrease Adjusted Basis?
Exclusions from income of subsidies for energy conservation measures
Casualty or theft loss deductions and insurance reimbursements
Depreciation
How is Inherited Property Taxed When Sold?
Long term capital gains
What is the General Basis Rule for Gifting Property?
The basis for the donee is the same as the donor
What is the Basis on Gifted Property that has FMV Less than the Donor’s Basis?
Double Basis Rule:
If donee sells for > FMV (as of date of gift), then the the donor’s basis is carried over
If donee sells for < FMV (as of date of gift), then the basis is the FMV when gifted
What is the Basis on Gifted Property that the Donor Paid a Gift Tax?
The donor’s basis is increased by the appreciated portion of the gift tax.
Basis + (appreciation / FMV x Gift Tax)
What is the Holding Period General Rule for Gifting?
The donor’s holding period carries over;
Unless the property is double basis and sold for a loss, then the holding period starts when the gift is made
What is the Related Party Transactions Rule?
When there is a loss, the transferor’s loss is forever lost and the holding period starts at the date of sale
What is the Basis Rule for Selling to a Charity for Less than FMV?
The basis must be allocated between the portion sold and given:
Amount Realized / FMV x Basis = Basis for sale purposes
How is the Holding Period Determined from The Purchase Date to Sell Date?
The day of disposition is included in the holding period, the day of acquisition is not.
What is the Difference Between Realized and Recognized Gains?
Realized gains occur at disposition of property, Recognition occurs when the gains are taxed
Is an Index Fund for Index Fund Considered a Wash Sale?
Yes, but a Large Cap Managed Fund for an Index Fund is not.
When a Wash Sale Occurs, How is the New Tax Basis Determined?
The disallowed loss must be added to the cost basis of the new purchase
What are the Requirements for the 121 Exclusion?
Must live in the home as principle residence for 2 out of the last 5 years, Can only be used every 2 years, and any appreciation during non-qualified use periods aren’t excludable
When can the 121 Requirements be excepted for Pro Rata Treatment?
A change in employment
A change in health
Other unforeseen circumstances
Can Losses from Personal Property Be Deducted?
No
What are the Steps to Determining Net Capital Gains or Losses?
- Net LTCG against LTCL
- Net STCG against STCL
- If both LT & ST gains, then you’re done
- If either LT or ST has gains and the other has losses, then net them together
What is the Annual Limit to Net Capital Losses Reducing AGI?
$3,000
The remainder is carried forward indefinitely to reduce future gains, or to deduct from other income until used up
When Can Capital Loss Be Recategorized as Ordinary Loss Up to $50k?
Loss on small business stock if the business is:
domestic
< $1 million in capital at time stock issued
Incorporated before 11/6/1978
Loss is sustained by original owner
Issued for money or exchange
For the previous 5 years to loss, >50% of income had to have been from active sources
What is Section 267?
Section 267 disallows any losses when selling or transferring between related parties. The receiving party has double basis.
What is a 1231 Asset?
Depreciable or real property used in trade or business with a LT holding period.
What is the Benefit to Gains or Losses with 1231 Assets?
Gains are treated as LTCG and Losses are treated as ordinary losses
What is 1245 Property?
Personal property used in trade or business including depreciable equipment, patents, copyrights, and other intangibles.
What are the Tax Consequences if 1245 Property is Sold for Less than the Depreciated Amount?
Ordinary Loss of the amount less than the depreciated value
What are the Tax Consequences if 1245 Property is Sold for More than the Depreciated Amount?
Ordinary Gain on the amount depreciated
What are the Tax Consequences if 1245 Property is Sold for More than the Original Amount?
The 1245 depreciation amount is ordinary gains, and the remainder is 1231 LTCG.
What Property Qualifies for 1031 Like Kind Exchanges?
Property held for productive use in trade or business or as an investment
If in a Like Kind Exchange the Replacement Property Hasn’t Been Chosen Yet, What are the Requirements to Avoid Recognizing Gains?
An escrow agent must hold the proceeds from the original property and the replacement property must be identified within 45 days, must close within 180 days or by the tax due date
In a 1031 Like Kind Exchange, which Party Must Recognize a Gain?
The party trading down will receive boot and will have to recognize a gain of that amount. The party trading up has no gains.
How Does Basis Change In a 1031 Like Kind Exchange for the Party Trading Up?
The amount paid in boot is added to their existing basis.
How Does Basis Change In a 1031 Like Kind Exchange for the Party Trading Down?
If the boot received is beyond their deferred gains, then the excess boot will reduce their basis by that much, if not then the basis stays the same.
How do 1031 Like Kind Exchanges Differ Between Related Parties?
If either party disposes of the property within 2 years, both parties are required to recognize an gain/loss that wasn’t in the year of the exchange.
How is Money or Property Received By A Corporation for it’s Stock Treated Tax wise?
It is considered an infusion of capital and not subject to income tax
What is 1033 Involuntary Conversion?
The destruction, theft, seizure, condemnation, or sale/exchange under threat of condemnation of property. Typically Eminent Domain.
How are 1033 Involuntary Conversions Taxed?
Nontaxable treatment of gains if used to reinvest
What is the Time Period to Replace Property Under a 1033 Involuntary Conversion?
2 years or 3 years for condemnation of realty from the year end of when the gain is realized
How are Transfers Between Spouses Incident to Divorce Taxed?
Tax free and the basis stays the same
How is Straight Line and Accelerated Depreciation Recapture Taxed?
Straight Line = 25%
Accelerated = Ordinary Income
What are the Requirements for Filing as Head of Household?
Paid more than half the cost of keeping his home
The spouse did not live in the home during the last 6 months of the year
The taxpayer’s home was the main home for the child for more than half the year
The taxpayer can claim the child as a dependent
What are the Requirements for Filing as a Qualifying Widower with a Dependent Child?
If the taxpayer was eligible to file jointly with the spouse when they died
The taxpayer isn’t remarried
The taxpayer has a child for whom he can claim an exemption
The child lived with the taxpayer all year and paid more than half the cost of keeping the home
Can file for 2 years
What is the 2012 Standard Deduction?
$5,950 for single and separate
double that for filing jointly and widower
around 1.75 x for head of house
Who Qualifies for the additional Standard Deduction?
If >= 65 or blind
Eg: If > 65 and blind, you get two additional standard deductions
What is a Dependent’s Standard Deduction?
The greater of $950 or $300 + earned income (not to exceed the normal standard deduction)
Which Tests Must a Qualifying Child Meet?
The relationship test
The abode test
The age test
The support test
What is the Qualified Child Relationship Test?
The qualifying child must be:
A descendant of the taxpayer, the taxpayer’s sibling, or a descendant of the taxpayer’s sibling
What is the Qualified Child Abode Test?
Must live with the taxpayer for more than half the year. Absences for illness, education, business, vacation, or military service count as living with the taxpayer.
What is the Qualified Child Age Test?
Under age 19, or under 24 if a full-time student for at least 5 months of the year.
What is the Qualified Child Support Test?
The taxpayer must provide >= half of the child’s support for the year
What are the 4 Requirements for the Non-Custodial Parent to Claim the Child as a Dependent?
- Must be legally divorced, separated, or not lived together for the last 6 months
- The child receives > half support from parents
- The child is in custody of the parents for > half the year
- The custodial parent signs form 8332, stating they will not claim the dependent
What are the Qualified Relative Tests?
Relationship test
Gross income test
Support test
Not a qualifying child test
What is the Qualified Relative Relationship Test?
Must be taxpayer's: Descendant Sibling Ancestor (Parent, Grandparent, etc) Step parent Niece or Nephew Uncle or Aunt An immediate In law NO COUSINS
What is the Qualified Relative Gross Income Test?
The dependent’s gross income must be < the exemption amount for the year
What is the Qualified Relative Support Test?
Must provide > half the support for a dependent
What is the Qualified Relative Not a Qualifying Child Test?
Can’t be a qualifying child to be a qualified relative
What is the Joint Return Test?
To claim a qualified child or relative, if that dependent is married, they can’t file a joint return unless it is to claim withheld taxes.
What is the Citizenship or Residency Test?
The dependent has to be a citizen of the US or a resident of the US, Canada, or Mexico during some part of the year to be claimed as a qualified child or relative
What is a Multiple Support Agreement?
When a dependent receives support from many sources and none of them provide > 50% individually
Who Can Claim a Dependent Under a Multiple Support Agreement?
Must provide > 10% support
2 or more people who meet the other tests provide support combine to > 50% of support
Must get signed statement from others that they will not claim dependent
When Must You Make Quarterly Estimated Tax Payments?
If taxpayer is expected to owe >= $1k after subtracting withholding and credits
If the expected withholding and credits are less than the smaller of:
90% of tax to be shown on tax return or 100% of tax shown on prior years tax return
What is MAGI?
Modified Adjusted Gross Income:
AGI + the following:
Tax exempt income earned in a foreign country, a US possession, or Puerto Rico
Tax exempt interest earned on savings bonds used for higher education
Amounts deducted as qualified tuition expense and student loan interest
Amounts excluded from income for employer provided adoption assistance
How do You Determine How Much of a Social Security Benefit to Tax?
MFJ Hurdles = $32k and $44k
Other Hurdles = $25k and $34k
Filing separately = $0
Additional amounts = $6k (MFJ), $4,500 (other filers)
If MAGI + 1/2 SS < 1st hurdle, then $0 tax
If MAGI + 1/2 SS > 1st hurdle, then:
Lesser of 50% of SS or 0.5 x (MAGI + 1/2 SS - 1st hurdle)
If MAGI + 1/2 SS > 2nd hurdle, then:
Lesser of 85% or (0.85 x (MAGI + 1/2 SS - 2nd hurdle)) + lesser of additional amount or 0.50 x (MAGI + 1/2 SS - 1st hurdle)
When is Compensation for Injury or Sickness Exempt from Gross Income?
Workers Compensation
Damages received on account of personal physical injuries or sickness
Payments from accident or health insurance that is personally owned
What is the General Rule for Employer Sponsored Accident or Health Plans for Gross Income?
Contributions made by the employer are excluded from income, but benefits received beyond the amount contributed must be included in gross income
Evaluate How Well You Know the Different Types of Income that may be Excluded?
Gifts or Inheritances Life Insurance Proceeds Scholarships Gain of Sale of Personal Residence Distributions from Roth IRAs or Roth 401ks Compensation for Injuries & Sickness Employer Sponsored Accident & Health Plans Certain Fringe Benefits Foreign Earned Income Municipal Bonds Discharge of Indebtedness
Evaluate How Well You Know the Above the Line Deductions
Trade or business expenses Losses on a sale or exchange of property Rental or royalty property expenses Alimony payments Half of self employed taxes Health insurance premiums by self employed Contributions to pension, profit sharing, annuity plans, IRAs, etc Penalty on premature withdrawals Moving expense Interest on student loans HSAs
What are the Above the Line Deductions for Self Employed?
Educational expenses
Business Gifts
Entertainment Expenses
What are the Rules for Self Employed Above the Line Deductions for Educational Expenses?
Must be to maintain or improve existing skills and/or to meet the requirements of the employer, profession, licensing, or state law
What are the Rules for Self Employed Above the Line Deductions for Business Gifts?
Limited to $25 per gift plus wrapping
If < $4 and has logo doesn’t apply because it counts as advertising
What are the Rules for Self Employed Above the Line Deductions for Entertainment Expenses?
Limited to:
50% of meals and entertainment
100% of transportation costs
Can’t be lavish
Evaluate How Well You Know the Deductions Below AGI?
Medical Expenses State and Local Taxes Contributions to qualified charitable organizations Personal casualty losses Personal interest expense Misc itemized deductions
What are the Rules for the Medical Expenses Deduction?
Limited to amount in excess of 7.5% of AGI
Expenses for taxpayers and their dependents
Transportation and lodging for doctor visits are limited to $0.23 per mile and $50 per night per person for lodging.
What are the Rules for the State/Local Taxes Deduction?
May deduct property tax and either income tax or sales tax
What are the Limits for Contributions of Cash, Ordinary Income Property, STCG Property, or all Loss Property to Charitable Organizations?
Public charity = 50% of AGI
Private charity = 30% of AGI
Must use the lesser value of FMV or adjusted basis
What are the Limits for Contributions of LTCG Property (Intangible, Real, Tangible Related Use) to Charitable Organizations?
Public charity = 50% for basis or 30% for FMV
Private charity = 20%, must use basis
What are the Limits for Contributions of LTCG (Unrelated Use) Property to Charitable Organizations?
Must use Basis
Public charity = 50%
Private charity = 20%
What if a Donor Pays More than the Limits to Charity?
Can carry forward the undeducted amounts for 5 years
What are the Rules for Personal Casualty Loss Deduction?
Deductible amount is 10% above AGI and $100 floor for each casualty
What are the Limits to the Mortgage Interest Deduction?
Limited to $1 million of mortgage debt
Limited to primary and secondary homes
HELOCs are limited to $100k of debt
What is the Limit to Misc. Deductions?
Must be in excess of 2% of AGI
What is the Adoption Expense Credit?
Max credit of $12,650 for expenses of adopting a child
Phased out with MAGI of $189,710 - $229,710
Not a refundable credit but can be carried forward
What is the Child Tax Credit?
$1,000 for each child under 17 and US citizen
Step Children and Foster Children Count
Parents must file jointly and claim each child as a dependent
What is the Kiddie Tax?
Net unearned income of a child under age 19 (24 for full time students) is taxed at the parents rate
How Much Unearned Income Must a Child Make for the Kiddie Tax to Kick In?
The amount in excess of $1,900
The first $950 is the standard deduction
The second $950 is taxed at the child’s rate
What is the Primary Source of Tax Law?
The IRC
What is the Secondary Source of Tax Law?
Administrative law sources
What are Regulations and What are the Three Types?
Interpretations By the Dept. of Treasury of the IRC
The 3 types are proposed, temporary, and final
What are Revenue Rulings?
Interpretations of tax laws by the IRS at the request of taxpayers and are published weekly in the internal revenue bulletin, can be cited as precedent
What are Private Letter Rulings?
Issued by the IRS at the request of the taxpayer, cannot be relied upon as precedent
What are Determination Letters?
Determinations issued by local District Directors for completed transactions
What is the Third Source of Tax Law?
Judicial Sources
What is the Statute of Limitation on Claiming a Refund?
3 years
What is the Statute of Limitations for the IRS to Audit and Collect Taxes?
Once a return is filed, the IRS has 3 years to audit and 10 years to collect taxes. If the return omits > 25% of gross income, the audit limitation becomes 6 years
What is the Interest Rate for Noncompliance?
The federal short term rate plus 3% compounded daily
Starts on the original due date regardless of extensions
What is the Failure to File Penalty?
5% to 25% a month
If a fraudulent failure to file then 15% to 75%
What is the Failure to Pay Penalty?
0.5 % to 25% per month
If failure to file and pay are assessed then the file penalty is reduced by the pay penalty
How Does a Taxpayer Avoid Paying an Underpayment of Estimated Tax Penalty?
Withhold 100% of the previous year’s return (Unless the previous year was a short year) or 90% of the current year’s liability
When are Estimated Tax Payments Due?
January 15
April 15
June 15
September 15
Who May Accompany a Client During an Audit?
Attorney
CPA
Enrolled Agent
No CFPs allowed
What Cases Do the Small Cases Division Cover?
< $50k
No appeals available
What is the US Tax Court?
No payment of tax is necessary to bring a claim here
Appeals to US court of appeals
What is the US Court of Federal Claims?
In Washington DC only
Taxes must be paid before bringing claim
Appeals to US Court of Appeals Federal Circuit
What is the US District Court?
Tax must be paid before bringing claim
Only court that allows a jury
Appeals to US Court of Appeals
what is the US Court of Appeals?
12 circuits
One circuit isn’t bound by the decision of another circuit
What are the Three Methods for Cost Recovery?
- Depreciation for tangible assets
- Amortization for intangible assets
- Depletion for natural resources
What are the Requirements for Property to Be Depreciable?
You must own the property
It must be used for business
It must have a determinable useful life
It must be expected to last > 1 year
How is the Annual Depreciation Amount Determined Using the Straight Line Method of Depreciation?
Adjusted Basis - Salvage Value = Depreciable amount
Depreciable amount / Estemated useful life
(Must Prorate the first year)
When Can Software Be Depreciated?
If it is:
Readily available to the public
Subject to a nonexclusive license
Not been substantially modified
What is ACRS?
Accelerated Cost Recovery System put in place in 1981 where predetermined recovery periods set by the IRS were used to depreciate. Replaced by MACRS in 1986.
What is MACRS?
Modified Accelerated Cost Recovery System
What are 3 Year Properties?
Tractors, horses, and rent-to-own property
What are 5 Year Properties?
Autos, computers, office machines, breeding/dairy cattle, rental property appliances & furniture, solar/wind property
What are 7 Year Properties?
Office furniture, agricultural machinery
What are 27.5 Year Properties?
Rental homes; uses mid month convention
What are 39 Year Properties?
Nonresidential real property; uses mid month convention
What is the Mid Month Convention?
MACRS allows only half of the first month placed in service to be depreciated
What is Section 179?
Election to expense assets, reduces depreciable basis
What are the Section 179 Limits?
The lesser of: $139k or $699k - PPS (if PPS is > $560k) Property Placed in Service Taxable Income Not available for real or production of income property
Which Assets are Subject to Amortization?
Goodwill
Trademarks
Covenants not to compete
Copyrights and patents used in trade or business
What is the Cost Depletion Method?
Asset basis / estimated total number of recoverable units x number of units sold
what is the Percentage Depletion Method?
A statutory percentage is applied to the gross income from the property (limited to 50%)
How Much Liability Does a Limited Partner Have?
Only as much as they have contributed
How Does a Limited Partner Lose His Limited Liability Status?
When his surname is in the name of the partnership, unless a general partner also has the same surname
If he participates in day to day activities
If he learns the partnership is defectively formed and fails to withdraw
How do Taxes on Earnings in a Partnership Differ for General and Limited Partners?
A general partner’s portion of earnings are subject to self employment taxes, limited partner’s portions are not
What Form do Partners Get From the Partnership for Taxes Each Year?
Form K-1
If a Partner Contributes Money or Property in Exchange for Ownership in a Partnership, What are the Tax Ramifications?
No gain or loss and the amount of cash + adjusted basis of property becomes his basis for the partnership interest
What if a Partner Contributes Services in Exchange for Ownership in a Partnership, What are the Tax Ramifications?
He would recognize ordinary income for the amount of services performed and that amount would make up his basis in the partnership interest
What Form Must a Partnership File Each Year?
Form 1065
How Does a Partner’s Basis Change Each Year?
Earnings increase basis
Losses, nondeductible expenses, and distributions reduce basis
What are the Tax Effects of Withdrawals from a Partnership?
Withdrawals are considered a return of basis and reduce basis. Once withdrawals reduce basis to zero, the rest is capital gains.
What is the Dividend Received Deduction?
A deduction only allowed to corporations when they receive dividends from other corporations.
What are the Limits to DRDs?
The amount available to deduct depends on how much the receiving corp. owns of the sending corp.
< 20% ownership = 70% deduction
20% to 80% ownership = 80% deduction
> 80% ownership = 100% deduction
What are the Tax Options for a Corporation when it Has a Loss?
Can carry back 2 years and/or forward 20 yrs
What is a Personal Service Corporation?
A C corp substantially owned by employees and most operate in either: Health Law Engineering Architecture Accounting Actuarial Science Consulting
How are PSCs Taxed?
Flat 35% corporate rate
What are the Requirements to be an S Corporation?
Domestic corporation
Max of 100 shareholders
May not be owned by nonresident aliens, C corps, partnerships, and certain trusts
What Types of Companies Aren’t Eligible to be an S Corporation?
Insurance
Domestic International Sales Corps
Financial Institutions
How Many Classes of Stocks Can an S Corp Have?
Generally only one
Two if the only difference between them is one has voting rights and the other doesn’t
What Must an S Corporation File Each Year?
Form 1120S (informational return) and provide a K-1 to shareholders and IRS
What are the Tax Ramifications of Withdrawals or Distributions from an S Corp?
Considered a return of capital to the extent of basis. Excess distributions is capital gains.
