Income Tax Planning Flashcards
(34 cards)
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: administratve interpretation / may be cited
- Congressional Commitee reports: indicate the intent of congress / may not be cited
- Private letter ruling: apply to 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 reslles 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 had the comany loan him the money he needs. He never intends to repay the loan or take a salary.
Assignment of Income
Income is taxed t the tree that grows the fruit even though it may be assigned to another prior receipt
Example: Mr. Towns XYZ, an S Corporation. 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
Neglogence: 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
Failure to file: Oenalty is 5% of the tax due per month, with a maximum of 25%
Failure to PAY: Penalty is .05% 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% of 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 (after Dec 31, 2018)
Schedule A
Itemized Deductions
- Medical, dental and LTC (7.5% AGI)
- Casualty and theft losses
- Real Estate Taxes (SALT capped at $10k)
- Investment interest expenses
- Home mortgage interest
- State and local taxes (SALT capped at $10k)
- Personal Property tax (SALT capped at $10k)
- Charitable gifts
Investment Expense
(tax treatment)
Investment expenses are directly connected with the production of investment income (IE: margin interest). In determining net investment income, the 2% miscellaneous itemized deductions must be taken into account, specifically investment advisor fees. In other words, investment income offset by deductible investment advisor fees. (Advisor fees no longer decutible with new tax law 2017)
Casualty Losses
(Calculation of the deductible loss)
First: Use the lesser of basis of FMV
Second: Subtract any insurance coverage
Third: Subtarct $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 trust rates regardless of the source of the assets.
Children under 18 are entitled (2018) to a standard deduction amount of ($1,050) and an additional of $1,050 of unearned income will be taxes at the child’s rate (10%)
Self-Employment
Tax Calculation
The taxable wage base will not exceed $128,400 (2018). If you added up the self-employed income, and you exceed $128,400, you did something wrong.
Why? Social Security tax stops at $128,400 (2018)
Shortcut:
Multiply total self-employment income by .1413
Self-Employment Income
- Net Schedule C Income
- General Partnership income (K-1 income)
- Board of Directors Fees
- Part-time earnings (1099)
- NOT wages for K-1 distributions from S Corp
Tax Credits
- Credit for child & dependant care expenses
- Child tax credit (up to $1,400/child could be refundable)
- Adoption credit
- Elderly and disabled credit
- Foreign tax credit
- Earned income tax credit (refundable)
Accounting Methods
Cash: mandatory where taxpayer’s records reflect only cash transactions, and there are no inventories
Accural: mandatory for purchases and sales where there are inventories
Hybrid: combines accural for inventory portion of business and cash for cash portion of business.
Percentage of Completion: for long term contract whee the contract will not be completed within the taxable year started
Personal services businesses that should stay
away from doing regular corporation
H Health
A Account, Architectural
L Law
E Engineering
Subchapter S Corporation
(Eligibility)
- The number of sharelholders is limited to 100
- The corporation can have only single class of outstanding common stock (no preferred), but the common stock can be voting or non-voting
- Must be a domestic corporation
- Only individuals, estates and certain trusts may be shareholders. Note: Nonresident aliens (persons who are neither citizens nor permanent residents of the US) cannot be shareholders.
Tax Basis - Partnership / LLC
- Cash invested
- Direct loans made to the partnership
- Partnership debt - loans made to the partnership - not the partner (bank loans)
Note: S-Corp basis does NOT include bank loans even if the S-Corp owner personally guarentees the debt.
Property Classes
5 year: Compute, Autos, and Trucks (1245 property)
7 year: Office equipment except computers (1245 property)
27 1/2 year: Residential rental property (1250 property)
39 year: Non-residential real property (1250 property)
Boot / gain recognized / basis
- No boot received - recognized gain is zero.
- When boot is received just answer the recognized gain is the boot received.
- Boot paid is added to basis
- Basis carries over from prior property
Capital Gains & Losses
- ST capital gains and ST losses are netted / LT capital gains and LT losses are netted
- If a gain and a loss remain, they are again netted
- If a loss remains after netting capital gains and losses, only $3,000 ofo the net losses can be used to offset ordinary income
Sale of Personal Residence
(Section 121)
- $250k (single) and $500k (married filing jointly) of gain from sale is tax-free if lived in home for 2 out of the last 5 years.
- Exception available if taxpayer lives in the resident for less than two years and moves because of a new job, for health reasons, etc. receives the prorated amount.
