Module 8 - Tax Implications of Financial Decisions Flashcards
Name the type of tax based on it’s description:
a) this tax is imposed by both the Fed and state gov’ts on certain estates / gifts
b) this tax is assessed by most local and state gov’ts, usually on purchases of consumer products
c) this tax is imposed by many municipalities for the right to work in that city; specifically to help pay for the services the city provides, such as city roads and bridges
d) this tax is usually based on the assessed value of a property, and imposed, usually by county gov’ts
e) this tax is assessed by the fed gov’t on gasoline, alcohol, tires, and other targeted products
f) this tax is levied by the Fed gov’t, such as SS and Medicare withholding tax
a ) transfer tax
b) sales tax
c) occupational privilege tax
d) property tax
e) excise tax
f) employment tax
Assume a married couple made $300,000 jointly, had $66,500 in itemized deductions, and has one minor child at home.
1) what is the couple’s taxable income?
2) to what other taxes are the couple subject if investment income is included in their gross income?
1) Adjusted gross income = $300,000
Less itemized deductions = ($66,500)
Taxable income = $233,500
2) The Medicare contribution tax (3.8%) would apply as well potentially AMT
A couple has a daughter who is single, made $55,200 in 2019, and was living on her own for the first time that year (she doesn’t have enough to itemize)
1) what is the daughter’s taxable income?
2) what is the daughter's tax liability and refund, after accounting for $6,000 in Fed withholding tax withheld during the year? From tax table in Ch 2, pg 36 > 10% tax ($0 - $9,700) > 12% tax ($9,700 - $39,475) > 22% tax ($39,475 - $84,200)
1) Adjusted gross income = $55,200
Less standard deduction = ($12,200)
Taxable income = $43,000
2)
> her tax liability is… $5,318.50
($9,700) x .10 = $970 \+ [$39,475 - $9,700] x .12 = $3,573 \+ [$43,000 - $39,475] x .22 = $775.50
$970 + $3,573 + $775.50 = $5,318.50
> If she has paid $6,000 in withholding, then her tax refund is…$681.50
$6,000 - $5,318.50 = $681.50
What are three provisions in which sale of an asset will not trigger taxation?
1) Gain from the sale of a principal residence
- Married homeowners may exclude up to $500,000 of gain from the sale of a principal residence, while single homeowners may exclude up to $250,000 of gain, usually predicated on being the homeowner’s principal residence for at least two of the five years prior to the sale.
2) Like-kind exchanges
- Real property held for investment or business purposes can be exchanged solely for similar property without any gain recognition
3) Property transferred pursuant to a divorce
- When ex spouses divide the marital property, they do not have to recognize gain or loss provided the property transfer is part of a divorce settlement.
Lia is retired and wants an additional $500 per month, so she wants to
purchase an annuity contract for $110,000 that provides such payments;
however, she does not know if she wants a fixed or variable annuity and
wants to see the tax ramifications of each. Her life expectancy is 25 years at
the time the payments begin this year. The total expected return on the
contract is then $150,000 ($500 per month × 12 months × 25 years).
1) For a fixed annuity, on what portion of the annuity pmts will Lia need to pay taxes?
2) For a variable annuity, on what portion of the annuity pmt will Lia need to pay taxes?
1) For a fixed annuity, the amount excluded from taxation is the investment in the contract divided by the total expected return.
$110,000 / $150,000 = 73.33%
$500 x 0.7333 = $366.67 (excluded from taxation)
$500 - $366.67 = $133.33 (subject to taxation as income
2) With a variable annuity, the exclusion amount is determined by dividing the investment in the contract by the number of expected payments.
$110,000 / (12 x 25) = $366.67
$366.67 (excluded from taxation)
$500 - $366.67 = $133.33 subject to taxation as income
How does a cafeteria plan benefit employees?
Employers often offer cafeteria plans when their employees’ benefit needs widely vary. Employees benefit because they will receive the benefit they prefer, such as life insurance, additional vacation time, or cash. These plans also may reward longtime employees with a greater benefit based on years of service.
List the type of service with each non-cash fringe benefit (nontaxable to the employee, based on these examples…
1) Nordstrom gives employees free spa time that is not scheduled by regular customers
2) An engineer gets use of a company truck so she can visit constructions ites
3) To attract employees to a small NYC busn, the owners provide free bus and train passes
4) At a company picnic, each employee receives a baseball cap and reusable water bottle
5) Tesla gives a discount on their vehicles to employees
1) No additional cost services
2) Working condition fringes
3) Qualified transportation fringes
4) De minimis fringes
5) Qualified employee discounts
Describe each type of mutual fund tax basis
1) specific identification
2) average cost
3) FIFO
1) This is generally the least advantageous method and is the one the IRS picks for shares sold if the investor does not prove another method. Under this method, the IRS takes the (presumably lower cost) first purchased mutual fund shares in figuring out which shares are sold for purposes of computing gain or loss.
2) The investor indicates to the mutual fund company the shares of the fund
that they wish to sell, based on the most advantageous purchase date. The
gain, if any, on these shares is then computed as the excess of the total
sales price over the cost of the shares identified.
3) The investor pools all purchased shares into one account and then divides
the total cost of all their shares by the number of shares held. The gain is
then computed from the sales proceeds of the number of shares sold less
this average cost times the same number of shares.
Zack has finally paid off his student loans and landed his dream job. He is currently making $95,000 and would like to lower his taxes this year and also save for retirement with the company’s 401(k). Zack can afford to save $1,000 / month and he is in the 24% marginal income tax bracket.
> How much would the yearly total cost ($12,000) actually be for Zack due to the money going directly into a company 401(k) and not being currently taxed?
Money going directly into Zack’s retirement plan only costs $.76 on the dollar (due to Zack’s income being reduced by the funding amount. So Zack has $12,000 in his account, but it only cost him $9,120 to do so
$12,000 x 0.76 = $9,120
Zack has finally paid off his student loans and landed his dream job. He is currently making $95,000 and would like to lower his taxes this year and also save for retirement with the company’s 401(k). Zack can afford to save $1,000 / month and he is in the 24% marginal income tax bracket.
> Calculate how much would be in Zack’s retirement account at the same cost ($12,000), if his employer matched 50% of employee contributions, up to a max of 10% of salary?
In this case, Zack’s $12,000 would become $18,000, still with a cost to Zack of $9,120 (a very good deal)
Zack has finally paid off his student loans and landed his dream job. He is currently making $95,000 and would like to lower his taxes this year and also save for retirement with the company’s 401(k). Zack can afford to save $1,000 / month and he is in the 24% marginal income tax bracket.
> What tax advantage could Zack use to gain a larger cost benefit than contributing to a 401(k)?
If Zack’s company offers FSA and / or HSA accounts taken directly from his paycheck pretax, he would save the 7.56% FICA tax on top of what is gained through the direct contributions.
Define and describe “sales tax”
Taxes assessed by most local and state gov’ts on purchases of consumer products.
Define and describe “property tax”
Imposed by county gov’ts on both real estate and other property like cars / boats. Based on the assessed value of the property
Define and describe “excise tax”
Assessed by the fed gov’t on gasoline, alcohol, tires and other targeted products
Define and describe “transfer tax”
Imposed by both fed and state gov’ts on certain estates or gifts
