Income Tax Flashcards
Exclusions Gross Income
- Gifts
- Inheritances
- Child Support
- Muni Bond Income
- Worker’s Comp
- Compensatory Damages
Frivolous Return Penalty
$5,000
Negligence on Return Penalty
20% of underpayment due to negligence
“Negligence” is a blatant disregard for tax law or failure to report material information
Fraudulent Return Penalty
75% of underpayment due to fraud
“Fraud” is the willful and intentional disregard for tax law in an attempt to cover information or reduce tax payment
Estimated Tax
Avoid Penalty amounts
Pay:
90% of current year’s tax liability
Or
100% of last year’s tax payment
110% if AGI > $150K
Failure to Pay Penalty
0.5% per month on tax due, up to 25% max
Failure to File Penalty
5% per month on tax due, up to 25% max.
Hobby Loss Rule
Can deduct expenses (to the extent of revenues) subject to 2% of AGI if…
Enterprise generates net income for less than 3 of 5 consecutive years
Horses - 2 of 7 consecutive years
Step Transaction
“Step-out, then Step-back-in”
XYZ inc. sells property to ABC inc. then ABC inc. sells to a subsidiary of XYZ.
Tax the ultimate transaction, ignore the individual transaction.
Sham Transaction
“Internal sale”
XYZ inc. sells property to subsidiary of XYZ inc.
Ignored for tax purposes, lacks economic substance
Substance over Form
Paying your own salary and calling it something else besides income
CEO takes a loan from the company with no intent to repay - it is really compensation
Assignment of Income
“Tax the tree that bears the fruit”
Man tries to funnel income to his son who has a lower tax bracket.
The man is taxed on the income, not his son.
Adjustments to Gross Income
“For AGI”
“Bottom Front of 1040”
- Educator Expenses
- HSA
- Moving Expenses
- 1/2 Self-Employment Tax Deduction (.07065)
- SEP/ Keogh contributions
- Alimony Paid
- penalty on early withdrawal
- IRA Contributions
- Student Loan Interest
- 100% of Self-employment health insurance
Deductions From AGI
“Below the line deductions”
Back of 1040
Standard or Itemized Deductions
Standard Deduction Amounts
Single $6,300; married $12,600; head of household $9,250
Elderly or Blind: single $1,550; married $1,250
Child unearned income: $1,050 (kiddie tax)
Itemized deductions
(Schedule A)
- Medical, dental, qual LTC > 10% of AGI (Age +65 >7.5% until 2016)
- State and Local Taxes; sales tax
- personal property tax
- Charitable Gifts
- mortgage insurance (
Itemized Deductions Limitation
Deductions are reduced by 3% of AGI above $258,250 (single) or $309,900 (joint). Cannot exceed 80% of deductions amount.
This does not apply to medical expenses, investment interest, wagering losses, or casualty and theft losses.
Qualified Residence Interest Rules
Limits on Mortgage Interest Deduction
All loans on residence +$1MM and money is used to build, buy, or improve:
Only interest on first $1MM is deductible
Any other purpose: interest on first $100K is deductible
Limit on Investment Interest Deduction
Total amount up to net investment income
Ex: Investment Income of $2,500 in 2015
Margin interest paid: $5,500
Can deduct only $2,500
Qualified Dividends
Taxed at LTCG rates; not ordinary income
Taxpayer can elect to pay ordinary income so as to boost investment income amount - higher interest expense deduction
Investment Expenses Calculation
Subtract investment expenses (advisor fees, cost of execution, etc.) from investment income
THEN subtract 2% of AGI
Tier II Miscellaneous Deductions reduced/offset by…
2% of AGI “2% calculation”
Subtract 2% of AGI from aggregate miscellaneous deductions
Exceptions (Tier I deductions): impairment-related work expenses for handicapped, gambling losses
Casualty and Theft Loss “Floor”
$100
Calculation for Deductible Casualty and Theft Loss
- Lesser of FMV or basis
- Subtract insurance coverage
- Subtract $100 floor
- Subtract 10% of AGI
Casualty and Theft loss offset by…
10% of AGI
SUBTRACT 10% of AGI from net losses after insurance coverage and floor
Home Office Tax treatment
Miscellaneous Tier II deduction
Offset by 2% of AGI
*can have no other fixed location where taxpayer conducts business
** cannot create a loss
Entertainment Expenses Deduction Limit
50% of expense…
Corporations:
Pay 100% of the amount and deduct 50% on 1120 corporate return
Self-Employed:
Pay 100%, deduct 50% on line 24 Schedule C
Salaried Employee:
Non-reimbursed expenses, deduct 50%, offset by 2% of AGI on Schedule A
Personal Exemptions
$4,000
- You; unless you are someone else’s dependent
- Spouse; filing jointly
- child under age 24 and full-time student; under 19 not student
- Parent earning above $2,000 MAGI including Social Security
Personal Exemption Phaseout
2% per $2,500 of AGI above $309,900 married, jointly
*just remember it’s subject to phaseout, no calculation necessary
Fringe Benefits - Tax Free
- Occasional use items - Company house, yacht, tickets (not season tickets)
- Health premiums paid by employer
- Group life premiums paid by employer up to $50K
- Company Car for business
- commuter pass $130/mo
- Employer provided parking spots $250/mo
- Exclude up to $5,000 ($2,500 married) for dependent care paid by employer
- Discounts on company products not exceeding employer’s gross profit %
- ## Discounts on services limited to 20% of selling price
Fringe Benefits Taxable
- health insurance premiums paid to self-employed, partners, and > 2% owners of an S-Corp
(100% is deductible on front of 1040)** - Insurance premiums on group life +$50,000 of death benefit if plan is nondiscriminatory
heavily tested!!
Not included in Self-employment income
- Dividends or interest on investments
- Gains (or deductions from losses) for property, securities, or commodities
- Real Estate income or rents paid
- Distributive share of income or loss of a limited partner
- Wages from an S-Corp
- Distributions from an S-Corp (K-1)
Self-Employment Income
- Net Schedule C income
- GP income (K-1)
- Board of directors fees
- part-time earnings (1099)
Self Employment tax Shortcut
Step 1: Calculate self-employment income
Step 2: multiply by .1413
Child Care Credit Keys
$3,000 per child up to $6,000 for two or more children.
20% credit
Ex: two kids receiving day care $10K
$6,000 x 0.2 = $1,200 credit
Child tax credit
$1,000 for each child under 17, phased out $50 for every $1,000 over $110,000 MAGI married, $75,000 single
Ex: MAGI for couple $120,000 with one child, credit is $500
($10,000 over, 10 x $50 = $500;
$1,000-500= $500 credit)
Adoption Tax Credit
Max $13,400…
Up to adoption related expenses, unless adopting a special needs child - then you get the full amount
Formula for credit equivalent to deduction
Deduction x Tax Bracket = Credit
Credit is worth more to a low bracket payer, deduction is worth more to high bracket
Inclusions Gross Income
Schedule B
- Ordinary Dividends
- Taxable Interest
- Business Income(and losses) Schedule C
- Cap G/L
- Real Estate Income Schedule E
- Punitive damages(except wrongful death)
- wages, salaries, tips
- IRA distributions
- Pension and Annuity distributions
- Alimony Received
- Unemployment Income
- Taxable Social Sec.
Deduction for Charitable Giving
Choice to elect:
FMV up to 30% of AGI
OR
Basis up to 50% of AGI
(FMV 3 letters; BASIS 5 letters)
Constant for Divorce Recapture
Add all payments together and subtract $37,500
Basis increases with
Legal fees, commissions, sales tax, freight, improvements
NOT repairs, real estate taxes, or normal business expenses - these are all deductible expenses
Gross Profit Percentage Calculation
Profit / Contract Price = GPP
Calculation of gain on installment sale (seller)
GPP x Cash Received from installment sale
*recognized in year of sale and each subsequent year
NOL Net Operating Losses
Excess loss above gross income
Reported as a loss for the year up to the gross income, the rest is carried over:
Forward 20 years or back 2 years
**NOT available to Partnerships or S-Corps
MACRS Table 1st and 2nd Year
5 year - 20%, 32%
7 year - 14.29%, 24.49%
Straight line: Half of MACRS
179 deduction
Up to $25,000 deduction on purchase of 1245 property in year of acquisition
Collectibles Cap Gain Rate
28%
Real Estate Loss Deduction and Phaseout
$25,000 on active and portfolio income
Phaseout AGI $100,000-150,000
*Same credit for low income housing, but no phaseout.
Standard Deduction for Blind or elderly
$1,250 married
$1,550 single
File Schedule ___ for nanny or caretaker in the house.
Schedule H
H is for “Household”
Charitable deduction for donation of time or service
NONE
Cannot deduct this even if charity is a qualified charity
Receipt of goods or services in lieu of charitable donation (tax treatment)
Can only deduct the excess of the donation relative to the value.
(Ex. At a charitable auction, your client bids on and wins a $2,000 TV for $2,500. The maximum charitable deduction amount is $500)
Charitable Deduction carry-forward term
5 years
ISO “bargain element”
Excess of FMV over the option price at exercise.
*AMT Add Back Item
