Income Tax Planning

Question 1

What is a capital asset

Answer 1

Most personal use assets and most investment assets are capital assets. Depreciable property used in a trade or business is usually a section 1231 asset and not a capital asset.

Question 2

What is not a capital asset?

Answer 2

Inventory, depreciable assets, copyrights/creative works, accounts and notes receivable.

Question 3

What are ordinary income assets

Answer 3

Assets that when sold result in ordinary income to the owner. Think inventory, accounts receivable, creations in the hands of the creator, and copyrights in hand of creator.

Question 4

What are section 1231 assets

Answer 4

Assets used in a trade or business. Does not include inventory, copyrights, or property held by the taxpayer primarily for the sale to customers in the ordinary course of his business.

Question 5

What are examples of 1231 assets

Answer 5

Specifically includes certain property such as coal, timber, iron ore, livestock, unharvested crops.

Question 6

What’s included in cost basis beyond just the purchase of the asset

Answer 6

Sales tax, freight, installation and testing, excise tax, legal and accounting fees, revenue stamps, recording fees and real estate taxes.

Question 7

What’s the special basis rule

Answer 7

The holding period for capital gains is always long term for inherited property.

Question 8

What’s the basis for gifted property

Answer 8

The basis used for gifted property is the same as the donors basis in the gifted property

Question 9

How much may single tax payers exclude of gain from the sale of their personal residence

Answer 9

$250k

Question 10

How much may married tax payers exclude of gain from the sale of their personal residence

Answer 10

$500k

Question 11

What is a section 1231 asset

Answer 11

Depreciable or real property used for business purposes

Question 12

What’s the benefit of a section 1231 asset

Answer 12

Gains generated from the sales of these assets are cap gains. Losses generated from these sales are an ordinary losses for income tax purposes.

Question 13

What is the only case where you would have a 1231 gain

Answer 13

You sell the asset for more than you bought it for.

Question 14

What is alternative minimum tax AMT

Answer 14

Changes the timing of certain tax payments. Usually a temporary change, but sometimes it’s a permanent increase in tax.

Question 15

How do you calculate AMT Income

Answer 15

AMT = Taxable income +/- adjustments + preference items (like a municipal bond AKA private activity bond)

Question 16

What’s the formula for income tax

Answer 16

Income - exclusions = gross income.

Subtract certain deductions from AGI = Adjusted Gross income.

Subtract the greater of standard decisions or itemized deductions. Then subtract personal and dependency exemptions. This give you taxable income.

Tax on taxable income minus tax credits. Plus other taxes. Minus prepayments = tax refund or tax due.

Question 17

How do you determine the cost basis of an asset

Answer 17

Take sale price and any other expenses that went into the asset. Could include sales tax, freight, installation, testing, FMV of any property given in taxable exchange.

Question 18

What are some things that could increase your cost basis after you bought the asset

Answer 18

Additions, renovating, rehab, new build

Question 19

What can decrease basis

Answer 19

Depreciation, or a section 179

Question 20

What tax rates are assets taxed at for property received as an inheritance

Answer 20

Long term capital gains.

Question 21

Who are accrual based taxpayers

Answer 21

Businesses- inventory/accounts payable. Income is reported as earned and expense reported as incurred

Question 22

What is a cash basis taxpayer

Answer 22

Income reported as received. Expenses deducted as paid.

Question 23

What is constructive receipt

Answer 23

Readily available to the taxpayer and the income is not subject to substantial limitations or restrictions

Question 24

What are the different levels for taxing SS

Answer 24

0%, up to 50% of SS, or up to 85% of SS

Question 25

What are the maximum amount of years you can carry forward charitable contributions

Answer 25

Five years

Question 26

Kiddie Tax- What are the rules for unearned income

Answer 26

Between 1150-2300 is taxed at kids rate, and above 2300 is taxed at parents rate.

Question 27

What’s the penalty for being fraudulent on your taxes

Answer 27

75% of tax bill

Question 28

If you prepare someone’s taxes and make an understatement of their income, what’s the penalty

Answer 28

The greater of $5000 or 50% of whatever you charged the client to prepare their taxes.

Question 29

What is the statute of limitations for fraud

Answer 29

Unlimited. No time frame for it

Question 30

What’s the general statue of limitation under section 6501

Answer 30

3 years

Question 31

When is income reported for accrual basis accounting

Answer 31

When the service is rendered. Right when you ship goods, you report income you’re owed.

Question 32

What percentage of your income can be deduced due to charitable contributions in cash?

Answer 32

Up to 60% of income can be written off

Question 33

How much can you deduct for donating short term capital gain property to a public charity?

Answer 33

Up to 50% of income. There is a carry forward. Use the lesser value of basis or FMV.

Question 34

What are the rules for donating long term capital gain assets to charity

Answer 34

Can take up to 30% of income on FMV, or up to 50% of basis.

Question 35

What can a scholarship cover and not have it be reported as income tax

Answer 35

Only tuition and books/supplies. Room and board or food would be taxable income.

Question 36

If you participate in a debt forgiveness program, what are the tax ramifications

Answer 36

The amount forgiven is considered taxable income

Question 37

Are punitive damages received as a result of personal injury taxable or non taxable?

Answer 37

Taxable 100%

Question 38

What is the range of unearned income for kiddie tax

Answer 38

1150-2300. First 1150 not taxed. 1150-2300 taxed to the child. Above 2300 taxed at the parents rate.

Question 39

What’s the standard deduction for kiddie tax

Answer 39

The greater of 1,150 or earned income plus 400

Question 40

How many days in a year do you have to rent something out for it to be a rental

Answer 40

14 days

Question 41

What’s the definition of a mixed use property

Answer 41

Rented for 15 days or more and personally used for the greater of 10% off rental days or 14 days

Question 42

What are the rules for deducting rental expenses

Answer 42

You can deduct 25K if you have income of 100k. Phaseout happens between 100-150k.