Income Tax Planning Flashcards
Sources of Federal Tax Law / Authority
- Internal Revenue Code: primary source of all tax law
- Treasury regulations: great authority, but not law
- Revenue rulings and 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
Step Transaction
Ignore the individual transactions and instead tax the ultimate transaction.
Example: The XYZ corporation sells property to an unrelated purchaser who subsequently resells the property to a wholly owned subsidiary of XYZ.
Sham Transaction
A transaction that lacks a business purpose and economic substance will be ignored for tax purposes.
Example: A sale by XYZ to ABC, but both XYZ and ABC are owned by the same persons.
Substance Over Form
The substance of a transaction and not merely its form governs its tax consequences.
Example: The president of XYZ has the company loan him the money he needs. He never intends to repay the loan or take a salary.
Assignment of Income
Income is taxed to the tree that grows the fruit even though it may be assigned to another prior to receipt.
Example: Mr. Towns owns XYZ, an S corp. He directs that all income be paid to his son. Mr. T reports no income.
Dates for paying estimated taxes
- April 15
- June 15
- September 15
- January 15
IRS Penalties
- Frivolous return: $5,000
- 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 to fraud.
- Failure to file: Penalty is 5% of the tax due per month, with a maximum of 25%.
- Failure to pay: Penalty is 0.5% per month the tax is unpaid, with a maximum of 25% (pay-point).
Federal Withholding Tax Underpayment Penalty
To avoid, pay the lesser of:
- 90% of the current year’s tax liability
- 100% of the prior year’s tax liability (or 110% if the last year’s adjusted gross income exceeded $150,000)
Adjustments FOR Adjusted Gross Income (AGI)
The second step in the 1040 calculation is adjusted gross income. It is total income (or gross income) less adjustments to income. The main adjustments or deductions to income are:
- IRA contributions
- Self-employment tax
- Self-employment health insurance (100%)
- Keogh or SEP
- Alimony paid (pre-2019 divorce)
Schedule A - Itemized deductions
- Medical, dental and LTC (7.5% AGI)
- Casualty and theft losses
- Real estate taxes *
- Investment interest expense
- Home mortgage interest
- State and local taxes *
- Personal property tax *
- Charitable gifts
- limited to $10,000/year total
Casualty Losses
calculation of the deductible loss
NOTE: MUST BE A FEDERALLY DECLARED DISASTER!
First: use the lesser of basis or FMV
Second: Subtract any insurance coverage
Third: Subtract $100 (floor)
Fourth: Subtract 10% of AGI
Kiddie Tax
All net UNEARNED income of a child who has NOT attained age 18 or turns 19-23 if a full-time student and who has at least one parent alive is taxed at the parent’s rate regardless of the source of the assets.
Children under 18 are entitled (2023) to a standard deduction amount ($1,250) and an additional $1,250 of unearned income will be taxed at the child’s rate (10%)
Self-Employment Income
- Net schedule C income
- General partnership income (K-1 income)
- Board of Directors fees
- Part-time earnings (1099)
- NOT wages or K-1 distributions from an S corp
Self-Employment Tax Calculation
The taxable wage base will not exceed $160,200 (2023). If you added up the self-employed income, and you exceeded $160,200 (2023), you did something wrong!
Why? Social Security tax stops at $160,200 (2023).
Shortcut: Multiply total self-employment income by .1413
Tax Credits
- Credit for child & dependent care expenses
- Child tax credit (up to $1,500/child could be refundable
- Adoption credit
- Elderly and disabled credit
- Foreign tax credit
- Earned income credit (refundable)
