Tax Flashcards
Can Pass Losses Through To Owners
- S-Corp
- Sole Proprietorship
- General Partner
- Limited Partner
Child Support & Alimony
- Child support can extend beyond the payee spouse death
- Alimony payments cannot extend beyond the death of the payee spouse
- Cannot live together when alimony begins
QBI
Qualified Business Income
- Individuals who earn income through pass through businesses can deduct up to 20% QBI
- QBI — net income (profit) from a pass-through.
Self Employment Tax
Multiply self employment income by .1413 & round up
Child Care Credit
- $1,200 max for credit
- $6,000 x .2 = 1,200 — two children
Child Tax Credit
- $2,000 per child
- Reduced by $50 for each $1,000 above $400,000 MAGI MFJ
- $50 reduced for each $1,000 above $200,000 single
Tax Deduction vs. Tax Credit
- Deduction worth more to high tax bracket
- Credit worth more to lower tax bracket
Basis if stock becomes worthless?
- Treated as if occurred on last day of tax year
- Holding period is long term
- $3,000 may be recognized LTCG
Family Credit
- $500 nonrefundable credit for other dependents or “family credit”
- Cannot claim credit if elderly parent has taxable income over $4,200
Calculation of deductible loss example
Lesser of basis or FMV
Bought jewlery for 100k and was lost
Flood - fed. disaster.
Insured for 60k AGI is $350,000
100,000
-60,000
-100 ———floor
- 35,000 —– 10% of AGI
= $4,900
Expenses that qualify for adoption credit
- Court costs
- Attorney’s fee’s
- Abroad
A - Attorney
A - Abroad
C - Court costs
Foreign Tax Credit
May be claimed as an itemized deduction or tax credit
The Personal Exemption
Repealed after 2017
Cannot utilize tax deduction
C-Corp
PSC - Personal Service Corp.
Any income received taxed at flat 21%
Section 1244 Qualified Small Business Stock
Loss of $100,000 per year
C-corp
- Separate tax entity
- Double taxation at owner level
- Taxes corporate profits at flat rate of 21%
- Dividend received —- 50% reduction
- Continuity for life + limited liability
Partnerships
Two or more operate a business for profit
Advantages
1. Availability of Keogh or SEP
2. 100% medical insurance premiums deductible by partners
3. Can be oral (written preferable)
4. Conduit income or losses to owner
Disadvantages
1. Unlimited liability
2. Dissolves upon bankruptcy, death, incapacity
Sole Proprietorships
Advantages
1. Availability of KEOGH or SEP
2. 100% medical insurance premiums deductible by the owner
3. No legal formalities
4. Conduit income or losses to owner
Disadvantages
1. Unlimited liability
2. Business dies with owner
3. Capital structure depends on owners personal recourses
NOL
- Not allowed in partnerships
- NOT allowed for S-Corp
- No carrybacks
- Utilize losses from prior years to offset current year income
NOL has no partners or S Corps friends
Conduit Entities
- Pass through entities
- Avoid double taxation
- S-corps, LLC’s, Sole-Proprietors
S-Corp vs. Partnership and LLC Basis
Partnership & LLC
- Debt, direct loans made by partner and cash = basis
S-Corp
- Cash, direct loans made by SHAREHOLDER
- Debt does NOT affect basis
Required Tests for Business Expense
- Ordinary
- Necessary
- Reasonable if its compensation
Increasing basis on appreciated gift tax
Shortcut
Gave property worth: $215,000
Basis: $76,000
Paid: $80,000 gift tax
215k-76k = 139k
139k x 40% = 55,600 + 76,000 = 131,600
Tax Form for S-Corp Distributions
Schedule K-1 of 1120s
Tax Schedules
Schedule 1 - Adjustments to Income
Schedule A - Itemized deductions
Schedule B - Interest & ordinary Dividends
Schedule D - Capital gains & losses
Used to compute deductions for AGI
Schedule 1
Types of Ordinary Income Property
- Inventory
- A copyright
- Use unrelated
- A work of art created by the tax payer
- STCG property
Nature of Transfer Tax System
Cumulative
Active Participation Losses
Under AGI 100k - can deduct up to $25,000 per year in losses
Remaining losses carry forward
Best Source Gathering Info on Intent of Recent Tax Law Changes?
Congressional committee reports
aka Blue Book
Effective Tax Rate
Average rate individual pays
Tax liability / taxable income = effective tax rate
Adoption Expense Credit
Limited to $14,300
Jameer Nelson (number 14 ) adopted 3 kids
Classifications of Income
Active Income
Portfolio Income
Passive Income
Accrual Method Billing
Recognize Income when seller WRITES & SENDS invoice AFTER selling goods
Investment Interest
Tax deductible up to income
Artwork created by tax payer
Limited to basis
Section 1244
Allows $100,000 Loss MFJ
$50,000 Loss MFS
C-Corp Tax Example
$1,000,000 x 40% = $40,000
50% div rec. deduction = $20,000
They had additional $30,000 of other taxable income
$50,000 total taxable income
Income taxed at 21%
$50,000 x 21% = $10,500
Personal Exemptions
Suspended after 2017
Casualty Loss Deduction
Must be declared a “natural disaster”
121 Property Example:
Selling price 750k
less basis of 100k
Realized Gain = 650k
Less MFJ exclusion 500k
Recognized Gain = $150,000
Schedule H
Household employees
A taxpayer is faced with a tax deficiency of $10,000, along with an interest deficiency of $4,200; the entire deficiency is the result of fraud from the taxpayer’s 2017 return. What is the amount of the penalty?
$10,000 x 75% = $7,500 (75% of the tax deficiency only, not the interest deficiency).
Bob Patterson, a health professional, donated 40 hours of his time to a public charity. If his time was worth $200 per hour and he also wrote a check to the charity for $2,000 out of his business account, how much could he deduct as a gift to charity?
$2,000 on his Schedule A (itemized deduction).
As an individual “sole proprietor”, any charitable contribution made through his/her business is considered by the IRS as being made by the person, not the business. Bob’s time is not deductible (answers C and D). Nothing indicates a corporation.
With regard to Sections 1245 and 1250, Section 1231 will be applied only when:
Any depreciable property is sold at a profit above its original cost.
Loretta owns a rental home in the mountains. The normal rental period is at least 180 days a year. How many days can Loretta use the vacation home and not lose its rental characteristics?
The longer of fourteen days or 10% of the rental period (eighteen days).
Mr. Litell earns $90,000 a year as a salesman. He also owns a duplex that he rents out on a regular basis. Due to unforeseen circumstances, the duplex creates $30,000 in losses. If he is eligible to itemize, can he deduct the losses?
Yes, he can claim $25,000 of losses.
A real estate owner who is an active participant can deduct up to $25,000 if his AGI is less than $100,000. The losses are reported on the Schedule E and then on the front of the 1040. There is no $3,000 limitation. Losses exceeding $25,000 can be carried forward.
Assuming an asset is sold for a gain, when would Section 1250 ordinary income occur?
Real property subject to ACRS and accelerated depreciation was used.
The best source for obtaining a plain language understanding about the current tax law?
Commerce Clearing House Federal Tax Guide.
is correct because Commerce Clearing House (CCH) provides plain language interpretation of tax law
am and Sally (both age 35) plan to retire at age 65. They estimate their annual income need in retirement will be $50,000 in “today’s dollars.”They expect to receive $30,000 (in “today’s dollars”) annually from Social Security. They expect to earn 7% after-taxes both before and after retirement. They also expect inflation to be constant at 4%. Table V (Ordinary Life Annuities One Life-Expected Return Multiples) indicates a multiple of 20 years at age 66. Table VI (Two Lives) indicates 25 years at age 65. They expect to live 30 years after retiring. What amount of money will Sam and Sally need at the beginning of the retirement period to fund an annual income need that increases with inflation?
1st Retirement deficit is $20,000 ($50,000 - 30,000).
2nd The net figure is inflated (PV of $20,000, inflation is 4%, 30 years to retirement); therefore, the income deficit in the first year of retirement (FV) is $64,868.
3rd To determine the lump sum needed:
Payment (PMT) $64,868
Inflation-adjusted yield 2.8846%
Period 30
Sum needed at beginning of retirement $1,327,848
Toby Adams has determined he needs $350,000 when he retires in 12 years. He plans to start a level savings program making payments at the beginning of each month. He estimates his pension plan will have accumulated $150,000 in 12 years. He anticipates that he will earn an average 11% after-tax return and that inflation will average 5%. What monthly payments should he make?
Begin mode
12C $200,000 FV, 11 enter 12 ÷ i, 12 enter 12 x n, PMT = $667.66
Bob and Mary expect to have $300,000 in retirement funds when they retire in 15 years (assuming a 7% investment return rate on current assets). When they retire, they expect to need $22,000 annually which will increase with inflation (3%). They can make an 8.5% after-tax return on their money. They expect their joint life expectancy to be 21 years after retirement. What would you tell them?
They are okay. The $300,000 will exceed their needs by more than $10,000.
They expect to have when they retire in 15 years $300,000
What they need
$22.00 PMT, 5.3398i, 21n = -288,438 PV
Excess $11,562
Why begin? Can they wait until the end of the year to get retirement funds? No, always use begin mode for retirement needs unless the question indicates end mode.
Luke recently inherited a parcel of land. Many years ago his parents purchased the land for $10,000.
At the time of his inheritance, it had a FMV of $100,000. Today, it is worth $200,000. The Insurance,
taxes, and maintenance are costing Luke more than the land is appreciating. He is considering various
alternatives. Which of the following is true?
If he gifts the land to the local charity (public), he can deduct its value ($200,000) up to 30%
of AGI in the current tax year.
The charitable income tax deduction for gifts of long‐term capital gain property is limited to 30%
of AGI. A gift to charity of rent‐free use of space will not entitle the donor to a charitable deduction.
Land, by nature is use‐related. Only artwork and other collectibles can be use‐unrelated relative to the
charitable income tax deduction.
Which of the following benefits are generally provided through workers compensation?
I. Disability income benefits
II. Rehabilitation benefits
III. Tax‐free benefits
Workers compensation benefits generally include medical care, disability income, death benefits,
and rehabilitation benefits. Benefits are received tax‐free. Sick pay would be a benefit provided by an
employer directly.
Your CPA asks you to assist him on a case with a wealthy client. The client has asked your CPA some difficult questions. The client is in a 32% marginal income tax bracket. He has the following investments:
$100,000 in a money market earning 5%
$100,000 in treasuries purchased some years ago (coupon 11%) now worth $140,000
$100,000 in an S&P 500 mutual fund purchased 12/31/12 that is now worth $160,000
100,000 in an aggressive growth stock purchased 12/31/12 now worth $300,000
The client wants to sell the S&P mutual fund in 2021, pay capital gains (15%), and buy treasuries similar to the ones purchased years ago. How much after-tax income will he get from these new treasuries if he sells the S&P mutual fund in 2021?
The S&P mutual fund is subject to LTCG at 15%.
Current value $160,000
Basis - 100,000 { $100,000
Gain $60,000 -15% + 51,000
Investable value $151,000
Subtract the basis first. Basis is not taxed. However, the 11% treasuries now require $140,000 to purchase, or $11,000 of income requires $140,000 of principal.
$11,000 x ($151,000 / $140,000) = $11,864.60
$11,864 x 0.68* = $8,068
*32% is his tax bracket.
Which of the following businesses must file federal tax returns?
S corporation
C corporation
General partnership
Limited partnership
S corporation
C corporation
General partnership
Limited partnership
I Got A Tattooed Geco For November
Income
Gross Income
AGI
Taxable Income
Gross Tax
Final Tax Due
Net Tax Payable or Credit
Investment Income Interest Expense Deduction
Ordinary Dividends + Interest Income + STCG
Above The Line Deductions
McGoldrick’s - Teacher $250 expense credit
BJ Business - Self Employed
Moved - (military only)
HSA’s
&
IRA’s
Student Loan Interest, No WAY!
Alimony Pre 2018
Below The Line Deductions
CG UTI
Casualty & Theft loss (Fed declared disaster)
Lesser FMV or Basis
- Insurance
- $100 Deductible
(10% of AGI Threshold; Any loss in excess are deductible)
Gifts to Charity Public & Private
Unreimbursed Medical Expense 7.5% AGI Expenses
Taxes (SALT) 10k
Interest Paid - Mortgage interest up to $750k of debt, primary and secondary residence. Investment Interest limited to net investment income
