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CFP Exam Prep > Income Tax Planning > Flashcards

Income Tax Planning Flashcards

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1
Q

How are the following taxed:

Short-Term Capital Gains
Long-Term Capital Gains

A

Short-Term Capital Gains: taxed as ordinary income (think Regular income…R is near S)

Long-Term Capital Gains: taxed at 0%, 15%, or 20% (think Lower tax rates)

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2
Q

Common Tax Forms:
Schedule A
Schedule B
Schedule C
Schedule D
Schedule E
Schedule H

A

A- Abode (Itemized Deductions)
B- Bank (taxable interest, dividends)
C- Company (P/L of a sole proprieter)
D- Dealer (capital gains & losses)
E- Easy Money (passive income, real estate)
H- FICA paid for Household EEs

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3
Q

For how long can a widow/widower file MFJ?

A

For two taxable years following the year of death IF the widow(er) maintains a home for dependent children.

Otherwise, for the taxable year when spouse died.

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4
Q

Who can file Head of Household?

A

Someone who divorces their spouse and maintains the principal residence for a dependent child.

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5
Q

The main adjustments to gross income to arrive at AGI include…

A

-IRA contributions
-Keogh or SEP
-1/2 Self-employment tax
-Alimony paid (only if before 12/31/18)
-Self-employment health insurance

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6
Q

Taxes on Alimony
-Beginning with (divorces finalized in) what year did the rules change?
-Who is taxed in divorces prior to this date, and who is taxed in divorces finalized after?

A

Year: 2019 (1/1/2019)

Divorces Prior to 1/1/19: Recipient was taxed

Divorces After 1/1/19: Person who pays alimony is taxed

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7
Q

Qualified vs Ordinary Dividends

A

Qualified- taxed at lower LTCG rates

Ordinary- taxed at ordinary (higher) income rates

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8
Q

Investment Interest Max Deduction

A

Limited to taxpayer’s net investment income

NOTE: if there’s a difference left over, it can be carried forward to next year.

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9
Q

Home Office Deductions
-Available for whom?
-Limited to what amount?

A

Available for self-employed individuals.

Limited to gross income derived by the business reduced by all other deductible expenses.

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10
Q

Kiddie Tax
-Applies to what kind of income?
-What ages?
-Standard Deduction
-Amount taxed at kid’s marginal rate
-What happens from there?

A

-Applies to unearned income
-Ages: up to 18 or 19-23 if full-time students
-Standard Deduction: the first $1,300
-Amount taxed at kid’s marginal rate: the next $1,300
-What happens from there? Anything above $2,600 is child’s net unearned income taxed at PARENT’S marginal rate.

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11
Q

When child has both earned and unearned income…
-standard deduction (for earned and unearned)
-max standard deduction

A

SD (earned income)=earned income + $450

SD (unearned income)= $1,300

Max: the single person standard deduct ($14,600 for 2024)

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12
Q

Self Employment Income includes:

A
  • Net Schedule C Income
  • Board of Directors Fees
  • General Partnership Income (K-1 income)
  • 1099 earnings above $600
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13
Q

How to calculate self-employment tax…

A

Calculate net income
(gross income less expenses)

Expenses include depreciation, 50% of EE travel meals.

Multiply Net Income by 14.13%.

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14
Q

How to Calculate FICA tax…

A

6.2% up to $168,600 plus 1.45% unlimited

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15
Q

Credit for Child and Dependent Care Expenses
-up to what age?
-$/dependent?
-Credit %

A

-Up to (until) age 13
-$3,000 for one dependent or $6,000 for two or more dependents
-Credit % of 20%

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16
Q

Deduction vs. Credit: which is worth more to whom?

A

Deduction: worth more to high-bracket taxpayer

Credit: worth more to a low-bracket taxpayer

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17
Q

Who CANNOT represent a taxpayer before the IRS?

A

A CFP(r) practitioner

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18
Q

Tax Filing Penalties
-Failure to Pay
-Failure to File
-Estimated Tax

A

-Failure to Pay: 0.5% per month that tax is unpaid (max of 25%)

-Failure to File: 5% of tax due each month (max of 25%)

-Estimated Tax: to avoid penalty for this year’s payment, pay the lesser of 90% of current year’s tax liability or 100% of prior year’s liability (or 110% of prior year if AGI>$150k)

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19
Q

Basis
-Definition
-What increases
-What does not increase

A

Definition: Taxpayer’s investment in any asset or property right; think “original investment + improvements”

Increased by: legal fees, commissions, sales tax, freight, and improvements.

Not increased by: repairs, real estate taxes, or normal business expenses.

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20
Q

When calculating adjusted basis, don’t forget to subtract…

A

cost recovery deduction (if there is any)

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21
Q

Installment Method
-How is gain recognized?
-Formula for gain

A

Gain is recognized over the life of the note

Gain= installment x gross profit %

Gross profit %= (profit)/(total contract price)

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22
Q

Exceptions to Installment Method

A

Exceptions:
-If all payments are received in year of sale
-If property is publicly traded securities
-If property is sold at a loss
-If property is sold to related party (ex: child) who in turn sells the property within 2 years of original purchase

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23
Q

How are business intangibles amortized?

A

Under Section 197, ratably over 15 years

24
Q

Modified Accelerated Cost Recovery System
(MACRS)
-Places (more/less) tax deductions up front compared to straight line
-What do the 1245 and 1250 property classes cover?

A

MACRS places more tax deductions up front than straight line.

1245 Property:
5-yr: autos, light trucks, computers
7-yr: office furniture, fixtures, equipment

1250 Property:
27.5-yr: residential rental property
39-yr: non-residential real property

25
Q

Section 179 Deduction

A

Def: business can expense (rather than capitalize) a limited dollar amount of tangible property (up to $1.22 million) during a taxable year.

Property is usually 1245 Property.

Has a cap (will start being reduced) when over $3.05 million of qualifying property is placed in service in a year.

26
Q

How does Section 1244 work?
(HINT: “soft landing”)

A

-only applies to the stock of C or S corps with up to $1 million of capital at issue

-Loss of $100k/yr is ORDINARY LOSS (not capital)

-usually involves “total failure of the business”

27
Q

S corp shareholder basis adjustments
-increased by
-decreased by
-when is non-taxable return of investment at play?

A

Increased by their portion of corporate income or gain for the year.

Decreased by their share of corporate losses for the year.

Cash distributed by corporation is a non-taxable return of investment that reduces basis.

28
Q

Section 1031 Exchanges
-aka ______
-must be _____ for _____

A

-aka “like-kind” echanges
-must be real estate for real estate

29
Q

Boot
-definition
-what must be recoginzed?

A

Definition: the cash or other property that is not property of a like-kind.

The party receiving the boot must recognize a portion of the realized gain equal to the lesser of the boot or the realized gain.

30
Q

The Three Numbers to Use in 1031 Calculations

A

FMV of property received
Adjusted basis of property given up
Boot*

*When there’s no boot received, the recognized gain is zero. When boot is received, recognized gain is the boot received.

31
Q

Realized vs Recognized Gain

A

Realized: economic or inherent gain at the time of the transaction.

Recognized: the part of the realized gain that is immediately taxable.

32
Q

Capital Gains and Losses:
How to Calculate

A
  1. Net STCG and STCL; do the same for LTCG and LTCL
  2. If any gains and losses remain, net again (ex: you could net LTCG and STCL)
  3. Only $3,000 of net losses can be used to offset ordinary income in a single year.
33
Q

Tax Rates and Holding Periods:
STCG, 1245 recaptures, interest, and ordinary dividends

A

Ordinary Income Tax Rates

34
Q

Tax Rates and Holding Periods:
-LTCG
-Collectible LT gains
-Holding Period for gifts
-Holding Period for inheritances

A

-LTCG: 0/15/20%
-Collectible LT gains: 28%
-Holding Period for gifts: original purchase date of security
-Holding Period for inheritances: LT as of date of death

35
Q

What is unearned income, and what tax is it subject to?

A

Unearned income is dividends, CG, rental and royalty, non-qualified annuity, passive S corp, and gain from sale of residence. It’s subject to Medicare tax of 3.8%.

36
Q

What reinvestment can cause phantom income?

A

Reinvested dividends

37
Q

For the sale of a residence…
-How much realized gain may be excluded from gross income?
-What are the requirements to claim this exclusion?
-What about losses?

A

$250k exclusion (unmarried or single)
$500k exclusion (MFJ)

Requirements:
-taxpayer(s) must have lived in the home for an aggregate of 2 years out of the five-year period immediately preceding the home’s date of sale.
-partial exclusion available for change of employment (more than 50 miles farther from old home), health reasons, or unforeseen circumstances

Losses on the sale of a personal residence are a nondeductible expense.

38
Q

Alternative Minimum Tax
-Applies in what cases?
-How has TCJA affected AMT?

A

Applies in cases where the calculation of the AMT results in a higher tax liability than the calculations of the regular income tax.

TCJA is more generous with exemptions and raised the phaseout levels (S: $600k; MFJ: $1.2 million)

39
Q

AMT Preference Items
(HINT: IPOD)

A

I- excess Intangible drilling costs
P- Private activity muni bond interest
O- Oil & gas percentage depletion*
D- Depreciation (ACRS & MACRS; NOT straight-line)

Percentage depletion= excess depletion over the property’s adjusted basis; it usually triggers AMT because it is accelerated depletion.

NOTE: cost depletion IS NOT an AMT preference item.

40
Q

AMT Add Back Items

A

Property, state, city/income, and sales taxes

Incentive stock option bargain element (the excess of the FMV at the exercise date over the option price)

NOTE: other itemized deductions, such as medical expenses, qualified residence interest, investment interest, charitable deductions, and casualty and gambling losses are NOT add back items.

41
Q

Rules for AMT
-No AMT payment is required if…
-Otherwise, one must pay the _____ between the regular tax and the AMT.

A

No AMT payment is required if the regular tax after credits equals or exceeds the tentative AMT amount.

Otherwise, one must pay the difference between the regular tax and the AMT.

42
Q

Non-Publicly Traded Partnerships
-How can losses be used?
-What entities does this apply to?

A

Losses from PALS can only be used to offset income from PIGS. (NOTE: PALS and PIGS are PRIVATE…not public).

The netting process is done on Schedule E (which is also where Active Participation gains and losses are recorded).

43
Q

Taking Losses:
-PALS and PIGS
-PTP/MLP

A

-PALS and PIGS: losses can be taken up to income.
-PTP/MLP: income goes to portfolio income; losses carry forward to apply towards future income of the SAME partnership.

44
Q

Material vs. Active Participation

A

Material: involved on a regular, continuous, substantial basis (i.e. what you do for a living)

Active: Bona fide involvement in management decisions.

45
Q

$25,000 loss deduction from real estate activity: phases out for taxpayers with AGI between _____ and _____

A

$100k and $150k (reduces 2:1 between these two)

46
Q

Rental income from one’s principle residence is excludible if taxpayer rents home for less than _____ days during taxable year.

A

15

47
Q

A vacation home is treated as a residence in any year where owner’s use for personal purposes exceeds the longer of _____ days or _____% of the period of rental use.

A

14 days or 10% of the period of rental use

48
Q

Examples of when phantom income might occur:

A

-investing in a limited partnership that is restructuring debt (and some of the debt may be forgiven)
-investing in zero coupon bonds
-investing in dividend paying mutual fund with dividends reinvesting
-investing in an income-generating S corp where no distributions are being made.

49
Q

The transfer of property between spouses incident to divorce has what consequences for (a) taxes and (b) basis?

A

Tax free; the transferor’s basis carries over to the transferee

50
Q

Charitable Contributions to Public Charities
-Rule for Cash
-Rule for other contributions

A

For cash, cannot deduct more than 60% of AGI as an itemized deduction.

For other contributions, cannot deduct more than 50% of AGI.

NOTE: for multiple gifts to a public charity, the max is 50% of AGI.

51
Q

What are public charities?

A

-All churches, schools, and hospitals
-All universities (public and private)
-All orgs operated for charitable, religious, educational, or literary purposes or for prevention of cruelty to kids or animals (ex: United Way, Red Cross, Humane Society)

52
Q

Ordinary Income Property
-What is it?
-What are some examples?
-What is deduction limited to?

A

Property that would product ordinary income (not cap gains) if sold.

Ex: Inventory, Work of Art by taxpayer, copyright, STCG property, and use-unrelated property

Deduction is limited to basis (up to 50% of AGI).

53
Q

Rules and Limitations for Charitable Giving

A

Step 1: calculate the max amount deductible (i.e. 50% of AGI if multiple types of gifts)

Step 2: calculate the amounts to public charities
-Up to 60% AGI for cash
-Up to 30% AGI for FMV of LTCG property
-Up to 50% AGI but using basis for inventory, works of art, STCG property, use unrelated property

NOTE: charitable deduction for loss property is limited to the property’s current FMV.

54
Q

Substantiating a Charitable Deduction

A written acknowledgement is required for what threshold for…
-cash or property
-auto donation

A

cash or property: $250
auto: $500

IRS definition for auto deduction: price a willing buyer and willing seller agree to when neither party is compelled to buy or sell and both parties have reasonable knowledge of the facts.

55
Q

QCDs
-only if made on or after the date the IRA owner reaches what age?
-apply to which accounts?
-capped at _____ per person per year.
-apply only to _____ amounts (no basis transfer)

A

-age 70.5
-apply to IRAs and after-tax Roth IRAs; do not apply to ER plans
-capped at $105k per person per year
-apply only to taxable amounts

NOTE: after-tax Roth is distribution of Roth IRA growth where 5-year rule has not been met.

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