Income Tax Planning Flashcards
Which assets are NOT capital assets?
ACID - Accounts/Notes Receivable, Copyrights and Creative Works (held by the creator), Inventory, Depreciable Property used in a trade or business
These assets are taxed at ordinary income tax instead of capital gain tax
What is included in cost basis for property received in a sale or taxable exchange?
Property received in a sale or exchange generally has a cost basis that includes the amount paid in cash, debt obligations, other property, or services.
Cost also includes amounts paid for the following items:
- Sales tax
- Freight
- Installation and testing
- Excise taxes
- Legal and accounting fees (when they must be capitalized)
- Revenue stamps
- Recording fees
- Real estate taxes (if assumed for the seller)
How is cost basis determined in a taxable exchange?
When property is acquired in a taxable exchange, the cost is the Fair Market Value (FMV) of the property given in exchange for what is received.
How is cost basis determined for property with a mortgage?
When property is acquired subject to a mortgage, the basis of the property is the FMV of the property. It doesn’t matter that the owner borrowed money.
When property is acquired as a dividend in kind or as compensation for services, how is cost basis determined?
When property is acquired as a dividend in kind or as compensation for services, the taxpayer’s basis in the property is the FMV of the property at the time of acquisition
What items are specifically INCLUDED in gross income?
- Annuity payments,
- Compensation for services (including certain fringe benefits),
- Gross income derived from business,
- Gains derived from dealings in property,
- Interest & dividends,
- Rents & royalties,
- Alimony and separate maintenance payments for divorce decrees finalized by 12/31/18 (repealed for divorce decrees after 12/31/2018),
- Income from life insurance and endowment contracts,
- Pensions,
- Discharge of indebtedness,
- Distributive share of partnership gross income,
- Income in respect of a decedent, and
- Income from an interest in an estate or trust.
What items are specifically excluded from income?
EXCLUSIONS (IRC SECTIONS 101-150)
- Gifts and Inheritances
- Life Insurance proceeds
- Scholarships
- Gain on sale of personal residence (up to specified limits)
- Qualified distributions from Roth accounts
- Compensation for injuries and sickness
- Employer sponsored accident and health plans
- Child support payments received
Describe the rules for charitable contribution deductions
See Table Below
How are dependent children taxed on various types of income?
If child is a dependent, the standard deduction for ALL income (unearned and earned) is the greater of $1,250 OR earned income + $400. Take the greater and subtract it from unearned income, then apply remaining deduction to earned income to get taxable income. (PIC BELOW EXPLAINS BETTER)
What is the limit for Section 179 deduction and how much could be carried over to future years. How long can deduction be carried forward?
2023 Limit: Deduction can be made up to $1,160,000
Carry forward amount is limited to business income prior to deduction
Carried forward: unlimited years
What are the failure to file and failure to pay penalties? What is the penalty for filing greater than 60 days late?
Failure to file penalty: 5% of the unpaid tax balance for each month (up to 25% of the unpaid tax balance)
Failure to pay penalty: 0.5% per month (this % reduces failure to file %)
HOWEVER…
If filing more than 60 days late: Minimum failure to file penalty is the lower of $450 or 100% of tax due
Arrange the following statutes of limitation from shortest to longest:
1. Collection of deficiency by the IRS
II. Fraud.
III. General Statue of Limitations under Section 6501.
IV. Substantial Understatement of Income greater than 25%.
The statute of limitations for the collection of a deficiency by the IRS is 10 years.
There is no statute of limitations for fraud.
The general statute of limitations under Section 6501 is 3 years.
The statute of limitations for a substantial understatement of income greater than 25% is 6 years.
What is the maximum indebtedness for deducting qualified residential interest for Single and MFJ?
Per TCJA, home mortgages are limited to qualified residential interest and a maximum indebtedness of $750,000 (everyone else) and $375,000 (MFS) IF financed after 12/15/17.
For debt prior to 12/15/17, the $1 million limit applies. ($500k MFS)
What is the maximum that can be deducted for qualified education interest expense?
$2,500 (subject to AGI phaseouts on tax table)
When do accrual taxpayers recognize taxable income?
Only recognize taxable income when revenue is actually earned. See example below
