Section 4, Tax Planning Flashcards
Are attorney fees includible in the gross income of an injured party?
It depends. To the extent that the injured party
is awarded a non-taxable judgment for physical
injuries, attorneys’ fees are not included in the gross
income of the injured party-C3-32
Attorneys’ fees are deductible under Code section
212 as an expense incurred in connection with the
production of income; how is it calculated?
Treated as miscellaneous itemized deduction subject to a 2 percent adjusted gross income floor. May also be subject to AMT since alrge misc are a preference item. C3-32
Are damages received for certain nonphysical personal injuries includible in the gross income
of an injured party?
compensatory award was not received on account
of personal physical injuries, was not exempt from
taxation pursuant to section 104(a)(2), and was, therefore, part of Murphy’s “gross income,” as defined
by Code section 61. C3-33
The kiddie tax applies to:
- a child under age eighteen; or
- a child who has attained the age of eighteen
if: (a) the child has not attained the age of
nineteen (twenty-four in the case of a fulltime student) before the close of the taxable
year; and (b) the earned income of the child
does not exceed one-half of the amount of
the child’s support for the year.11 C3-34
What are the kiddie tax rates?
The tax applies only to “net unearned income.”
“Net unearned income” is defined as adjusted gross
income that is not attributable to earned income, and
that exceeds (1) the $1,050 standard deduction for a
dependent child in 2018, plus (2) the greater of $1,050 or (if the child itemizes) the amount of allowable itemized deductions that are directly connected with the production of his unearned income. C3-34
Tax Rate Trusts and Estate
Income
10% $0 to $2,550
$255 plus
24% of the excess over $2,550 $2,550-$9,150
$1,839 plus 35% of the excess
over $9,150 $9,150-$12,500
$3,011.50 plus 37% of the
excess over $12,500 Over $12,500
IRS Section 1221 defines “capital asset” by listing types of property that are not capital assets. C4-37-38
1-Inventory 2-Depreciable property -trade or business 3-Copyright 4-A/R N/R 5-pub-US government 6-commodities derivatives 7-hedging 8-supplies
What is Section 1250 property?
C4-41
Section 1250 property is real property (buildings
and structural components) subject to depreciation
What assets are subject to a 28% capital gains?
C4-41
The maximum rate with respect to the gain
recognized upon the sale of collectibles and gain
that is not excluded from the sale of small business
stock is 28 percent.
What is Section 1231 property?
C4-41-42
Depreciable or real property used in a trade or business are not capital assets, IRC Section 1231 may characterize the recognized gain on the sale or exchange of such assets as capital gain.
How is Section 1231 taxed?
C4-42
Gains-capital gains
Losses-ordinary loss
What is Section 1245?
C4-42
Pursuant to IRC Section 1245, recognized
gain attributable to depreciation claimed with respect
to Section 1245 property must be recaptured as
ordinary income.
What is qualified business income under IRC 199A?
C5-49
Combined qualified business income is (1) the ordinary income from each qualified trade or business plus (2) 20 percent of the qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (QPTP) income.
What is the 199A deduction amount?
C5-49
The statute gives eligible taxpayers a deduction equal
to the lesser of:
• 20 percent of the combined qualified business
income (QBI) of the taxpayer; or
• 20 percent of taxable ordinary income
What is the 199A (QBI) limitation?
C5-50-51
MFJ ALL OTHERS
No limitation $0-$315,000 $0-$157,500
Phase-In $315,000- $415,000 $157,500-$207,500
Full Limitation $415,000+ $207,500+
What is a substantial underpayment?
C5-61
The greater of 5 percent of the correct tax or $5,000
What is needed to be deductible under IRC 162?
C7-94
In order for an item to be deductible under section
162(a), it must meet the following requirements:
1. It must be “ordinary”
2. It must be “necessary”
3. It must be an “expense,” (used up in 1 year or less) rather than an “expenditure”
4. It must be used to carry out a trade or business
What is IRC 162 and what does it cover?
C7-95
Code section 212 is the catchall provision for the deductibility of investment type
items —investment counsel fees, clerical help, office rent, etc
Investment expenses must be incurred in one of two contexts:
1. The production or collection of income17
2. The management, conservation or maintenance
of property held for the production of income
Code section 274 sets forth strict substantiation rules requiring the taxpayer to document the specific business purpose of any such meals or entertainment.
What the deduction limit?
C7-96
Even if the taxpayer adequately meets the
substantiation requirements, the deduction for meals is
limited to 50 percent of the cost.
What is an above-the-Line Deduction?
C7-98
“Above-the-line” deductions are deducted directly
from gross income to compute adjusted gross income.
Generally, if a deduction is specifically listed in Code section 62(a), it is an above-the-line deduction
What are below-the-Line Deductions?
C7-99
All remaining deductions are by default “below-the-line” deductions
(often referred to as “itemized deductions”). For the most part, itemized deductions are comprised of
investment and personal deductions.
There are “miscellaneous” and “regular” itemized deductions.
What are IRC 67(b) deductions?
C7-99
Any below-the-line deduction that is listed under Code section 67(b) is
referred to as a “regular itemized deduction.”
• Medical and dental expenses
• Taxes
• Interest
• Charitable contributions
What is Income in Respect to a Decedent?
C8-109
All income a decedent would have received had
death not occurred and that was not properly includible on the final return, filed by the decedent’s personal
representative for the year of death, is income in respect
of a decedent. Such income must be included in the
income of one of the following:
• The decedent’s estate, if the estate receives it.
• The beneficiary, if the right to income is passed
directly to the beneficiary and the beneficiary receives it.
• Any person to whom the estate properly distributes the right to receive it
How much is the Earned Income Tax credit?
C9-114
For 2018, the maximum credit is:5 Three or more qualifying children $6,431 Two qualifying children $5,716 One qualifying child $3,461 No qualifying children $519
How is the amount of the Child Tax Credit?
C9-115
$2,000; For 2018, the basic child tax credit is “phased out”
(i.e., reduced) for taxpayers with AGIs in excess of
$400,000
How much is Child and Dependent Care Credit?
C9-115-116
35% of qualifying expenses; under age 13, dependent, reduced 1% for each $2,000 over $15,000-to minimum 20% and maximum credit of $3,000 for 1 and $6,000 for 2 or more; not to exceed earned income
How much is the Credit for he Elderly or Disabled?
C9-116
A nonrefundable credit for the elderly and disabled is available to individuals who are at least sixty-five years
old or permanently and totally disabled. 15% of Section 22 $5,000-single $7,500-married jt
American Opportunity Tax Credit
C9-117
(1) 100 percent of the first $2,000 of qualified education expenses paid for the eligible student; and
(2) 25 percent of the next $2,000 of qualified education expenses paid for that student
Max $2,500 per student; MAGI $160K-JT phased out at $180K
Lifetime Learning Credit
C9-117
nonrefundable tax credit equal to 20 percent of up to
$10,000 of qualified tuition and related expenses paid
Limit:taxpayer’s modified adjusted gross income (MAGI) is
between $55,000 and $65,000 ($111,000 and $131,000 for joint returns)
What are the NIIT rates?
C13-149
Additional 0.9% on wages/SE income and 3.8% on NIIT the lesser of: NIIT or the amount that exceeds the AGI thresholds
What is NIIT?
C13-152
Section 1411(c)(1)(A)(i) specifically enumerates what most would consider the “traditional” types of investment income: interest, dividends, annuities, royalties and rents
Estimated tax payments.
C14-173
Lower of 90% of the tax current year or 100% of the previous year
If AGI >$150K-lesser of 90% of current year or 110% of previous year
Where are Trust powers in the IRC?
C15-175
IRC Sections 673-679
673-Reversionary interest; threshold >5%
674-power to control
675-administrative powers
676-power to revoke
677-income used for the benefit of the grantor or grantor spouse
678-person other than grantor treated as owners of the trust
What is an IDIT?
C15-178-179
aka IDGT; grantor trust for income but not estate tax
What is a simple trust?
C16-181
- It is required to distribute all trust income annually.
- Does not permit charitable contributions.
- Does not distribute corpus
What is DNI?
C16-181
The amount of trust income that can be included in the
gross income of the beneficiaries and deducted from
the gross income of the trust is called distributable net
income (DNI)
