Income Tax concepts Flashcards
What is the primary source of tax law?
The Internal Revenue Code
Dates for paying estimated taxes?
April 15 (1), June 15 (+2), September 15 (+3), January 15 (+4)
What should a taxpayer pay to avoid a penalty?
The LESSER of 90% of the current year’s tax liability or 100% of the prior year’s tax liability. (Or 110% if the taxpayer makes more than 150K.)
What is on Schedule A? (Adjustments FROM AGI)
SHRIMP CC
State and Local Taxes (limited to 10K annually)
Home Mortgage Interest
Real Estate Taxes (limited to 10K annually)
Investment interest expense
Medical, dental, and LLC (7.5% of AGI)
Personal property
Casualty/theft losses
Charitable gifts
How do you calculate a deductible loss? (real estate)
Deductible losses can only come from federally declared disasters.
First: Use the LESSER of basis or FMV
Second: Subtract any insurance coverage
Third: Subtract $100 (floor)
Fourth: Subtract 10% of AGI.
What are itemized miscellaneous deductions (personal exemptions)?
THERE ARE NO ITEMIZED MISCELLANEOUS DEDUCTIONS ALLOWED. ZERO.
Can you deduct home office expenses?
If you are a self-employed individual, you use the home area exclusively for business, the home office is used to conduct administrative or management activities, and is no other fixed location where these activities are conducted - yes.
The deduction for an office in a home cannot create a loss.
What is considered self employment income?
Net schedule C income
General partnership income (K-1 income)
Board of directors’ fees
Part-time earnings (1099)
NOT self employment:
Real estate income or rents paid
Distributive share of income
Wages from an S Corp
Distributions (K-1) from S Corp
How do you calculate self-employment tax?
Multiply self-employment income by 14.13% (.1413)
Does FICA tax stop?
Yes, after $147,000 earnings for EMPLOYEE.
What is the child tax credit?
2K per each qualifying child under age 17. Up to 1.4K is refundable.
What is the credit for child care and dependent expenses?
20% of either 3,000 (one kid) or 6,000 (two + kids)
How do you calculate gross profit percentage?
profit / total contract price.
What is Section 121?
For sale of residence (Section 121), $500,000 can be excluded from gross income for MFJ and $250,000 for single. To claim the exclusion, the taxpayer must have used the home as a residence for 2 out of the 5 year period before the sale.
Publicly traded partnerships cannot use gains or losses.
Publicly traded partnerships cannot use gains or losses.
Real estate loss?
Qualifying taxpayers may deduct up to 25K per year of net losses from real estate activity from their active or portfolio income. This deduction is phased out for taxpayers with AGIS between $100K and $150K on a $2 for $1 basis.
How many days can a residence be rented out without tax consequences?
14 days
How many days can you use a rental home without hurting rental characteristics?
Greater of 10% of days rented or 14 days.
What are the sources of phantom income?
Insurance:
Any type of lapse with a loan.
Section 162 life and disability
Investments:
Zero/STRIP Income
TIPS
Declared but not paid dividends and CGs
Tax:
K-1 Income from LP/FLP
Recaptures
Retirement
ESOP Distribution (basis only)
Secular Trust
What are adjustments FOR AGI? (above)
KISSA
Keogh or SEP
IRA Contributions
Self-employment tax (50%)
Self-employment insurance
Alimony paid (pre-2019 divorce)
What is the maximum amount that an individual taxpayer can give a public charity and deduct in one year for income tax purposes?
60% of AGI
How much is an individual’s deduction ceiling for gifts of appreciated LTCG property?
30% of AGI, unless he/she elects to use the property’s basis rather than FMV. An individual using basis can deduct up to 50% of AGI.
What is EXCLUDED from gross income?
Gifts, Inheritances, child support, municipal bond interest, worker’s comp, compensatory damages
How do you calculate realized gain?
Realized Gain = Total Value Received (FMV of property + Boot) - Adjusted Basis of Property
How do you calculate recognized gain?
Recognized gain is the lesser of Realized Gain or Boot Received.
How do you calculate substitute basis?
Substitute basis is the FMV of the acquired property, minus (Realized Gain - Recognized Gain)
What are the advantages of sole proprietorships?
- Availability of retirement plans (Keogh, SEP)
- 100% of medical insurance premiums deductible by owner
- No legal formalities
- Conduit of income or losses to owner
What are the disadvantages of sole proprietorships?
- Unlimited liability
- Business dies with owner
- Capital structure depends on the owner’s personal resources
What are the advantages of partnerships?
- Availability of retirement plans (Keogh, SEP)
- 100% of medical insurance premiums deductible by partners
- Partnership agreement can be oral (written preferable)
- Conduit of income or losses to owner
What are the disadvantages of partnerships?
- Unlimited personal liability for acts of the partnership or a partner acting on behalf of the partnerships (joint and several liability)
- Partnerships dissolve upon the death, bankruptcy, or incapacity of a partner
- Capital structure depends on the resources of partners
What are the advantages of C Corporations?
- Separate tax entity
- Sale of stock to an unlimited number of investors
- Dividend received deduction (50% rule)
- Limited liability
- Continuity of life
- 21% flat tax rate
What are the disadvantages of C Corporations?
- Corporate formalities
- Dividends paid (after-tax)
- Accumulated earnings beyond certain limits are subject to double taxation.
What are the advantages of S Corps?
- 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
What are the disadvantages of S Corps?
- Corporate formalities
- Sale of stock limited by eligibility standards
What is 1245 Property?
Computers, autos, light duty trucks (5-year depreciation)
Office furniture and fixtures (7-year depreciation)
What is 1250 Property?
Residential rental property (27.5 year depreciation)
nonresidential real property (39 year depreciation)
What are the MACRS depreciation numbers?
5-year property: Y1 - 20%, Y2 - 32%
7-year property: Y1 - 14.29%, Y2 - 24.49%
What are straight line depreciation numbers?
5-year property: Y1 - 10%, Y2 - 20%
7-year property: Y1 - 7.14%, Y2 - 14.28%
What property is eligible for a 179 deduction?
179 - lower, real
Tangible personal property (1245 property). CATO.
Computers
Autos
Trucks
Office Furniture/Equipment
Low income housing passive income credit?
Low-income housing programs are a passive activity that can generate a deduction-equivalent tax credit up to $25,000.
Example: If at 37% tax rate, multiply 25K by .37 to get your credit of $9,250.
