Individual Tax VC Flashcards
Short-term capital losses may be used to offset long-term capital gains, and would offset the gain taxed at the highest rate first.
Short-term capital loss $70,000
Long-term gain (unrecaptured Section 1250 at 25%) $56,000
Collectibles gain (28% rate) $10,000
Long-term gain (15% rate) $20,000
28% LT 10000- ST Loss 70000= (60000)
25% LT 56000- ST Loss remaining 60000 = (4000)
15% LT 20000- ST Loss 4000= 16000 (takes on character of biggest number). If left with (5000), would have STLoss5000 as final result.
But we’re Left with 16000LT Gain 15%
AMT Formula
Taxable Income Plus or minus _A\_\_\_\_\_\_\_ PLUS \_\_B\_\_\_\_\_\_\_\_\_\_ minus \_\_\_C\_\_\_\_\_\_\_ EQUALS AMTI taxable base X 26% \_\_\_\_\_\_\_or 28% less $\_\_D\_\_\_\_\_\_\_ EQUALS tentative AMT before credits less credits EQUALS AMT ($65000) Less Reg Tax ($60000) EQUALS AMT to pay ($5000)
A) Adjustments S(IM)PLE-PIE
No Std Deduction
No Interest on My home equity loans unless used to buy, improve main or second home
No Personal/Dependency exemption
No Local, state income tax, No property, sales tax
No employee biz expense, investment expense, tax prep expense (BIT 2%)
B)Preferences PIE
Add Private Activity Bond Interest
Add Incentive Stock Options. Taxed when exercised for difference between exercise price and market price
Excess depreciation on personal property
C) Minus Exemption
D) x 26% (of AMTI<=$187800 and 28% of AMTI over that) less $3726
AMT Adjustments
From Taxable Income,
Deduct Std Deduction or if you itemized….
3 Itemized Deductions you can’t take…
1) Taxes
2) Mortgage interest NOT used to build, buy, improve your primary or secondary home
3) Miscellaneous (BIT 2%) Business employee expense, Investment expense, tax prep expense)
AMT Adjustments
Itemized Deductions you can STILL Take
Can’t take std. ded, taxes, interest not used on home, misc. expense BIT 2%
COMMITT allowed for AMT return
Charitable (Limited to 50% AGI individual, 10%ATI corp…both can be carried forward 5 years
Other miscellaneous (NOT subject to 2%AGI…gambling losses to extent of winnings, IRD estate tax on income in respect of decedent)
Medical (amt over 10%AGI)
Interest (interest expense on investments up to investment income, carryforward indefinitely)
(Mortgage interest & home equity interest must be used to buy, build, improve homes). NO equity interest used to buy a car.
Theft and Casualty Losses (that exceed 10% AGI) (use the lower of drop in FMV or new basis after repairs). Loss minus $100 per event.
AMT Adjustment to Add back to Taxable Income:
DEPRECIATION when MACRS>AMT depreciation
Commercial Bld & Residential Rental
Regular tax depreciation years?
AMT tax depreciation years?
NOTE: For some years, AMT depreciation may be more than MACRS. Look at schedules.
Commercial
39 yr Reg 100000 * 2.564% = 2564
40 yr AMT 100000* 2.5 = 2500
For AMTI, must add $64 of depreciation expense back to regular TI
Residential Rental
27.5yr Reg 1000003.637%= 3637
40 yr AMT 1000002.5=2500
ADD $1137 back to taxable income for AMT adjustment
Different depreciation methods = Different gains/losses
Bought item for $6000. Sold 3 yr later for $4300. 3 years of AMT depreciation $2242. 3 yrs MACRS dep $2851. Figure gain on both amts
AMT depreciation is not always less than MACRS
Adj Basis AMT dep
6000-2242= 3758
Gain
4300-3758=542
Adj Basis Reg Dep
6000-2851=3149
Gain
4300-3149=1151
Reg gain 1151- AMT gain 542 = 609
There will be a negative adjustment to taxable income of (609) to arrive at AMTI. Sometimes this is positive
AMT & Incentive Stock Options
Stock options are meant to motivate and retain employees. Give option $200/share when trading for $150. Employee should help company push stock price higher before he exercises option.
Now stock is at $205. Employee exercises his options at $200 and has unrealized gain of $5. For regular tax, exercising option isn’t taxable.
However, for AMT tax, exercising option IS taxable. FMV of stock when exercised - amt. employee had to pay. This will be a positive AMT adjustment to regular taxable income.
2013
exercised 700 options for $80 when market price was $100 in 2013. (not in reg tax calculation but in AMT)
had interest from tax free private municipal bonds $10000(not in reg tax calc but in AMT)
Std ded 6100 + exemption 3900
AMT exemption 51900
Taxable income 82000 regular tax 16435
2013
--->Figure the AMT for this case... taxable income 82000 plus exercised options 700*20=14000 plus private bond interest = 10000 plus std ded,exemption = 10000 less AMT exemption = 51900 AMTI ---> 64100 AMT (64100*.26)= 16666
2013 amt 16666 - reg tax 16435 = $231
AMT paid in 2013 $231
2014 All 700 shares are sold. Part of the gain was included in 2013 since AMT tax had to be paid. If 2013 AMT tax had been lower than regular tax, none of the share gain would be realized yet.
For 2014, figure gain on shares….
mkt 120 - orig amt pd 80 = $40/share gain * 700 = $28000 gain. After tax is figured, take a credit against it of $231 (the amount of tax already paid on these shares in 2013 due to AMT)
Incentive Stock Option Basis
Exercise cost 1000 shares * $12 = $12000
Market value 1000 * $18 = $18000
What is Regular Tax basis of stock
What is AMT tax basis for stock
Regular tax wouldn’t tax the spread in the year of exercise, so the basis would remain what was paid…$12000
AMT would tax the spread in the year of exercise, so the basis would go up to $18000.
AMT Adjustment – Long Term Contracts
Regular tax – use completed contract method = recognize revenue at one point in time. 2013 income 0
AMT tax – use percentage completion method = recognize revenue throughout contract period. 2013 income $25000
Taxable income will be adjusted up $25000 for AMTI. A negative adjustment may occur in the last year of the contract when the contract method shows all its income and AMT percent completion method is lower.
Percentage Completion (income) Finished yr 4
Year1 Year2 Year 3 Year 4 Total
25000 25000 25000 25000 100000
Completed Contract Finished Year 4
0 0 0 100000 100000
AMT Adjustment each year (req. percentage method)
+25000 +25000 +25000 -75000 0
Already accounted for 75000 revenue in AMT, so we have to back that out in last year when regular tax accounts for total revenue.
Yr 1 regular tax income 0 + AMT Adj 25000 = AMTI 25000
Yr 4 reg tax income 100000 - AMT Adj 75000= AMTI 25000
AMT Preferences
Always add to taxable income to increase AMTI (unlike adjustments that can add to or reduce taxable income)
Preferences include
Private activity bond is not taxed on regular tax. It is taxed for AMT. This is not a muni bond….unless it says private activity muni bond
percentage depletion deduction (excess of adj. basis)
Preferences reduce the benefit received when computing regular tax
AMT exemptions
If AMTI is not over phase out levels….
MFJ 84500
MFS 42250
Single, HoH 54300
Phase outs when AMTI is over
MFJ 160900
MFS 80450
single, HoH 120700
exemption minus 25%(AMTI - phase out amt)
84500 - 25%(200000-160900)
45400 allowable exemption
When AMTI gets up to 500000, MFJ won’t get an AMT exemption anymore
AMT tentative tax rate
26% * (AMTI less exemption) that is < _____________
28% * the amount that’s over _____________
187800 MFJ
If AMTI less exemption = 200000
187800*26% + (200000-187800) * 28% = tentative AMT.
After figuring tax, consider credits
AMT Credits allowed
Foreign tax credit
Nonrefundable credits such as adoption, child & dependent care, child tax credit, contribution to IRA
NOT earned income credit
AMT Itemized deductions not allowed
Investment Interest IS allowed
> Other Misc (2%) – BIT…Biz employee expense, Investment expense, Tax prep expense.
Investment expense is NOT investment interest which is deductible on another line.
> Interest that’s not for home (home equity loan used for buying a car)
> Taxes
What would AMT adjustment be for unreimbursed employee expense of $3800 (before 2% floor)? 110000AGI
First, figure out how much was expensed from regular tax. 3800- (2%*110000) = 1600
Since this is not an allowable deduction for AMT calc, add 1600 back to Reg taxable income as an adjustment
AMT Preference example
What would you add back to regular taxable income to get AMTI…
Private activity bond interest income $5000. You borrowed money to buy it and paid $3800 interest that year.
Deduct interest on investment to find its net amount income to add back as a preference.
AMT preference = 5000-3800= 1200
AMT Credit – comes from adjustments that have timing differences
NOT from the permanent adjustments….SIMPLE-PIE… STD DED, interest not on home, pers exemptions, local and all tax, employee biz misc ded 2% BIT, Private activity bond int, incentive stock options, excess depreciation on personal property
Credits with timing differences:
Excess of AMT over AMT computed with timing differences.
Ex) Percentage of completion (AMT) vs. completed contract
Yr 1 Reg Tax is higher than AMT Tax…pay reg tax
Yr 2 AMT tax 32000 higher than reg 26000…pay AMT tax. Difference becomes AMT credit to be used in subsequent years when Reg tax is higher than AMT (to make up for timing differences such as above adjustment) 32-26= 6000AMT credit.
Yr 3 AMT tax 24000 Reg tax 28000. Have to pay reg tax 28000 but can take AMT credit up to current year AMT tax. 28000-4000= 24000 tax due. Remaining AMT credit 6000-4000=2000
IRA 10% penalty before 59.5
EXCEPT FOR…
1) Medical costs ABOVE 10% AGI
2) qualified education costs…tuition, books. NOT room board
3) death, disability of participant
4) First time home up to 10000
Itemized deduction– Theft & Casualty Loss
AGI 40000
Theft (1 occurrence) (FMV before-FMV after= amt lost) 4100
What is her itemized deduction?
Loss - 10%AGI
4100 - 4000 = 100
Less $100 per event
100 - 100 = 0 deduction
Qualified Child JARS
-No joint return
-Age: 18 & under OR 24 & under FTStudent OR any age & permanently disabled
-Residency: Lives with you at least 1/2 year in US
-Support: Child provided less than half support….Does
not say YOU provided half their support
-The dependent is one of these:
U.S. citizen
U.S. resident alien
U.S. national
Qualified Relative (dependent) C-IRS-J
-The dependent is one of these:
U.S. citizen
U.S. resident alien
U.S. national
Resident of Canada or Mexic
- Income: Earn less than $4,050
-Resident in your house for entire year (365 days) UNLESS a relative below (NO cousins):
Your child, stepchild, foster child, or a descendant of any of them
Your brother, sister, half brother, half sister, stepbrother, or stepsister or a descendant of any of them
Your father, mother, grandparent, or stepparent, but not a foster parent
Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
Your uncle, aunt, nephew, or niece
- SUPPORT: YOU PAY more than half of his or her support for the year
- Joint return…no, unless filed to get tax refund
Qualifying relative???
Parent Does not live with you $5000 dividend $4000 nontaxable Social Security received half support from you
NO…
ok that parent doesn’t live with you
Nontaxable SSec ignored for gross income test
BUT, $5000 div gross income > $4050 personal exemption
Fails Income test
Active rental losses partially deductible against ordinary income up to 25000
Active participation– at least 10% participation in the rental activity
Reduce deduction by $1 for every $____over AGI ______
No deduction if AGI is over ________
Reduce deduction $1 fore every $2 AGI over $100000
So only people with under 100000AGI can take all 25000 deduction
NO deduction if AGI over 150000. 50000/2=25000
$110000 AGI… 10000/2= 5000
25000 - 5000= 20000 deduction
Material participation required for biz losses to be deducted from ordinary income
7 tests for material participation. Need to meet 1 of them. FLIP
If tax payer qualifies as real estate person, loss from rentals may be treated as ordinary business loss. To qualify as a real estate professional, more than half of the work you perform in trades or businesses during the taxable year must be in real property activity in which you materially participate. Additionally, you must work more than 750 hours a year in these trades/businesses.
If they just actively participate in rental (10% ownership interest and some managerial decisons) they can take up to 25000 loss
- You work 500 hours or more in the activity during the year.
- You do all, or nearly all, of the work in the activity.
- You work more than 100 hours in the activity during the year, and no one else works more than you do.
- The activity is a significant participation activity (SPA), and the sum of the SPAs in which you work 100–500 hours exceeds 500 hours for the year.
- You materially participated in the activity in any 5 of the previous 10 years.
- The activity is a personal service activity and you materially participated in that activity in any three prior years.
- Based on all of the facts and circumstances, you participate in the activity on a regular, continuous, and substantial basis during that year. Note that this test only applies if you work at least 100 hours in the activity, no one else works more hours than you in the activity, and no one else receives compensation for managing the activity.
Allocate passive activity losses
Passive loss 1) -20000
2) -30000
3) -50000
4) Passive gain 25000
Total 100000 passive loss against 25000 gain. How much loss will come out of each activity (totaling to 25000)
pro rata
20000/100000=.2
30000/100000=.3
50000/100000=.5
take each percent of the total passive loss that will remain to see how much remains for each activity. 100000 loss - 25000 passive gain = 75000 passive loss left
Activity 1) .2*75000 = 15000
Leaving 15000 passive loss to be carried forward indefinitely
Same for remaining activities
Underpayment penalty
Pay 100% of last year tax liability OR
Pay 90% of this year
UNLESS prior year AGI is over
$150000
In that case must pay 110% of last year for safe harbor
Underpayment penalty $1000
If you paid in 0 but end up owing 950, will you get underpayment penalty?
NO! Bal of tax due must be over $1000 to get penalty
You can also avoid underpayment penalty by paying 100% tax due last year (110% if prior yr AGI 150000) OR paying in 90% tax due this year.
Disqualified from earned income tax credit
Married filing separately (also can’t claim child & dependent care & adoption credits)
Must have Earned income (not passive)
Don’t have to have Qualifying child but if you do…doesn’t have to meet support test
Investment income > 3450 NO EIC
Must be US citizen or resident alien. Live here entire year
Most AGI (with 3 children) 53980. AGI goes down from there
