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CFP > Tax > Flashcards

Tax Flashcards

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1
Q

credit equivalent deduction

A

Tax Credit / Tax Bracket = Deduction

hint: CBD ​

Credits are worth more to a low-bracket taxpayer Deductions are worth more to a high-bracket taxpayer

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2
Q

Exclusions to Gross Income

A

Gifts

Inheritances

Municipal Bond interest

Worker’s Comp

Child support

Compensatory damages

Hint: GIMBO and the 3 C’s

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3
Q

property classes

A

1245 Property (non real estate)

5 year: Computers, Autos, Trucks

7 year: Office Equipment except computers,

1250 Property (real estate)

27.5 year: Residential rental property

39 year: Non-residential real property

Remember: CATCORN

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4
Q

AMT preference items

A

Excess Intangible Drilling Costs (IDC)

Private Activity Municipal Bond

Oil and Gas Percentage Depletion / Excess intangible drilling costs (IDC) (NOT cost depletion)

Depreciation (ACRS/MACRS) but not straight line

Remember: I.P.O.D.

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5
Q

itemized deductions (Schedule A)

A

Medical (in excess of 7.5% AGI)

State and local taxes capped at $10k (SALT)

Home Mortgage interest (max debt $325k S/$750k MFJ)

Investment interest (limited to net investment income)

Casualty losses (federally declared disaster, $100 deductible, then in excess of 10% AGI)

Charitable gifts

HINT: MS HICC

Miscellaneous itemzied decutions:

  • gambling losses to the extend of gains
  • unrecovred investment in an annuity ceases due to death
  • death taxes attributable to income IRD
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6
Q

Charitable Deduction: Cash

A

Amount of deduciton: FMV

Public Charity max deduction: 60% of AGI

Private Charity max deduciton: 30% of AGI

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7
Q

Charitable deduction: Ordinary income property and short term cap gain property

A

Amount of deduciton: lesser adjusted basis of FMV

Public Charity max deduction: 50% of AGI

Private Charity max deduciton: 30% of AGI

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8
Q

chartiable deduciton: long term capital gain intangibles

A

Amount of deduciton: FMV or Basis

Public Charity max deduction:

  • FMV: 30% of AGI
  • Basis: 50% of AGI

Private Charity max deduciton:

  • FMV: 20% of AGI
  • Basis: 20% of AGI
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9
Q

charitable deduction: Tangible property (related use)

A

Amount of deduciton: FMV or basis

Public Charity max deduction:

  • FMV: 30% of AGI
  • Basis: 50% of AGI

Private Charity max deduciton: BASIS: 20% of AGI

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10
Q

chartiable deduction: Tangible property (use unrelated)

A

Amount of deduciton: lesser FMV or basis

Public Charity max deduction: 50% of AGI

Private Charity max deduciton: 20% of AGI

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11
Q

charitable deduction: real property

A

Amount of deduciton: FMV or basis

Public Charity max deduction:

  • FMV: 30% of AGI
  • Basis: 50% of AGI

Private Charity max deduciton: BASIS: 20% of AGI

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12
Q

charitable deduction carryover

A

5 years

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13
Q

Kiddie Tax

A

applies to

  • child under age 19
  • full time student under age 24

unearned income above $2,200 taxed at parents rate

  • Standard decuction: greater of
    • $1,100
    • or earned income + $350 (limited to regular standard deduction)
  • $1,100 taxed at child’s rate of 10%
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14
Q

Section 179

A

allows for write off amounts up to 1.05 million

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15
Q

tax credits

A

Child tax credit

American opportunity / Life time learning credit

Child and Dependent care credit

Adoption credit

Foreign tax credit

Residential energy credit

CAL DAFR

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16
Q

Tax Calculation Process

A

Gross Income

  • above the line deductions

= AGI

  • below the line (itemized or standard deduction)

= Taxable Income (use filing status to calculate tax)

  • credits

= tax payer’s liability

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17
Q

child and depedent care credit

A

to qualify must:

  • keep a home
  • have earned income
  • pay expeneses - maid, babysitting, etc
  • have a dependent younger than 13 or a spouse physically or mentally incapacitated

max credit: qualifying expenses of $3,000 for one child or $6,000 for two or more

if AGI over $43k, then 20% X expenses (max $6000) = credit allowed

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18
Q

Child Tax Credit

A

$2,000 for each child under age 17

reduced by $50 for each $50 for each $1,000 by which MAGI exceeds $200k S/$400k MFJ

refundable up to $1,400 per child

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19
Q

Adoption Credit

A

taken in year adoption is final

qualified adoption expenses: costs, court costs, attorney fees, NOT surrogatge parenting arrangements

nonrefundable credit

max credit 2021: $14,440

phased out MAGI of $216,660 and $256,660

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20
Q

S corp tax form

A

annutal income tax return: must file Form 1120S by March 15th of the following year

election: file Form 2553 by March 15th of tax year election is to take effect

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21
Q

accumulated earnings tax

A

goal: to discourage individual taxpayers from using an entity soley for tax avoidance

tax rate of 20% on amounts deemed to be in excess of corporations needs

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22
Q

Personal Service Corporation (PSC)

A

corporation where the principal activity is the performance of a personal service by owners

inome retained is taxed at 21%

professionals at risk: HAALE PSC

  • Health
  • Architects
  • Accountants
  • Lawyers
  • Engineers
  • Performing arts
  • actuarial Science
  • Consulting
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23
Q

S Corp

A

Max 100 shareholders

taxation: flow through

one class of stock only

only US citizens can be shareholdings

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24
Q

Capital Asset Definition

A

capital assets except:

  • Accounts receivable
  • Copywrites
  • Inventories
  • Depreciable Property

ACID

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25
Q

Section 1231

A

gains: capital gain tax treatment (when held long term)
losses: ordinary losses

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26
Q

Section 1245

A

depreciable personal property (furnishings, equipment)

recapture of any gain that was depreciated, taxed as ordinary income. remaining gain is section 1231 gain

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27
Q

Section 1250

A

depreciable real property

recapture: 25% tax on unrecaptured gain (unless tax bracket us lower)

section 1231 for remaining gain

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28
Q

Section 121

A

can exclude $250k S/$500k MFJ of gain on sale of home

must be owned by at least one spouse and used by BOTH over the last two of the 5 years to qualify

can only use exclusion every two years

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29
Q

rental property: personal use

A

rented less than 15 days per year

exclude income

expenses are non deductible except mortgage interest and taxes

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30
Q

rental property: rental

A

rented 15 or more days and not used for personal use the greater of 14 days per year or 10% of the rental days

losses deductible up to $25k. phase out AGI $100k-$150k - lose $1 for every $2 above $100k

report income and deduct expenses on schedule E

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31
Q

rental property: mixed use

A

rented more than 14 days and personal use exceeds rental standard

deduct expenses

cannot deduct loss

report income and deduct expenses on schedule E

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32
Q

Section 1033

A

involuntary conversion: theft, destruction, requisition, condemnation

must replace within two years (3 years for government takings)

if amount reinvested is less than the amount realized from the conversion then gain recognzied

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33
Q

Section 1031

A

gain is deffered if exchanged realty for realty. must be for trade, business, or investement

receipt of boot will result in the recognition of some gain if there is a realized gain

if boot is given will add to the basis in the new property

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34
Q

Section 1035

A

exchnages of annuities and life insurnace

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35
Q

Section 267

A

related party transactions

applies to when a loss would occur

sell for a loss to a related party: realized loss is NOT recognized

related party’s basis:

  • Original basis for gain purposes
  • FMV at time of purchase for loss purposes

holding period begins on date of purchase from related party

36
Q

inherited IRD asset basis

A

carry over basis

(pensions, annuities, installment sales)

37
Q

Gifting of appreciated property: Donee’s basis

A

Donor’s basis + [(FMV-donor’s basis) / (FMV - annual exclusion)] X gift tax paid = Donee’s basis

donors holding period carries over

if no gift taxes are paid, then carry over basis

FMV = FMV on date of gift

38
Q

tax implications of a wash sale

A

realized loss is disallowed

basis of the new stock will include the unrecovered portion of the basis of the formerly held stock

39
Q

1244 Stock

A

only applies to first $1million of stock initially issued by a C corp or S corp

loss deductible as an ordinary loss

maximum loss $50k S / $100k MFJ

remaining loss is capital loss

claimed on form 4797

40
Q

Installment sales ordering rules

A
  1. recognize 25% gain (recapture amount)
  2. then capital gain
41
Q

material participant (passive activity rules)

A
  • more than 500 hours of participation
  • more than 100 hours and at least as much as any other participant
  • participation of the tax payer ws substantially all of the participation in the activity
42
Q

passive activity

A
  • activity where the tax payer does not materilaly participate
  • rental activities, except real estate professionals, even if the tax payer does materially partipate
43
Q

passive activity loss rules

A
  1. at risk rules: amount at risk = cash and property invested + recourse debt (personally liable) + share of income
  2. passive losses can only be offset against passive income
44
Q

publically traded partnership loss rules

A

cannot be used to offset losses from nonpublically traded partnerships OR other publically traded partnerships

must be the same publically traded parternship

45
Q

AMTI

A

regular taxable income

+ positive AMT adjustments

  • AMT adjustments

+ tax preferences

= AMTI

46
Q

AMT calculation

A

AMTI

  • AMTI exemption

= minimum tax base

X AMT rax rate

= tentative tax

  • regular income tax on taxable income

= AMT

47
Q

Adjustments to income (above the line)

A
  • half of SE tax
  • SE Health insurance deduction
  • IRA deduction
  • Tuition and fees deduciton
  • certain Business expenses
  • Educator expenses
  • Alimony (pre 2019)
  • Moving expenses (members of armed forces)
  • Student loan interest deduction
  • HSA deduction
  • Qualified plans, SEPs, SIMPLES

SHIT BEAMS HQ

48
Q

Section 197

A

amortization of intangibles (ex good will and franchises)

uses straight line depreciation

49
Q

IRS penalties

A

Frivolous Return: $5000

NeGliGence: Penalty is 20% (2 g’s) 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: Penalty is 5% of the tax due per month, with a maximum of 25%.

Failure to PAY: Penalty is 0.5% per month the tax is unpaid, with a maximum of 25% (Pay-Point)

50
Q

collectible long term gains rate

A

28%

51
Q

adjusted basis

A

Basis = taxpayer’s investment in any asset or property right

Basis is increased by legal fees, commissions, sales tax, freight and improvements (hint: CLIFS)

Basis is NOT effected by repairs (deductable expense), real estate taxes, or normal business operating expenses

Improvements MUST be capitalized

52
Q

Tax Cuts and Jobs Act eliminated deductions

A
  • Miscellaneous deductions
  • Unreimbursed personal casualty losses (unless federal distater)
  • Home office deduction for employees (Self-employed individuals can still claim deduction)

Stricter limit on Meals and Entertainment Expense

  • No Entertainment deduction
  • Meals for EEs while traveling are 50% deductible
  • Travel is 100% deductible
  • Office parties still deductible
  • Tickets to sporting and cultural events NOT deductible
53
Q

casualty losses (calculation of the deductible loss)

A

First: Use the lesser of basis or FMV

Second: Subtract any insurance coverage

Third: Subtract $100 (floor)

Fourth: Subtract 10% of AGI.

*Must be a presidentially declared “natural disaster”ca

54
Q

types of phantom income

A

Insurance:

  • Lapse of Policy Loan
  • Section 162 Life/Disability

​Investments:

  • Zero/Strip Income
  • TIPS
  • Declared but not paid Dividends

Tax/Retirement:

  • K-1 Income from LP/FLP
  • Recapture
  • NUA
  • 20% withholding plan distributions, Secular Trust
55
Q

Self employment tax calculation

A

The Taxable Wage Base will not exceed $142,800 (2020).

If you added up the self-employed income, and you exceeded $142,800, you did something wrong. Why? Social Security tax stops at $142,800 (2020).

Shortcut: Multiply Self-employment Income by 0.1413

56
Q

accounting methods

A

Cash: Mandatory where taxpayer’s records reflect only cash transactions, and there are no inventories.

Accrual: Mandatory for purchases and sales over $25M where there are inventories.

Hybrid: Combines accrual for inventory portion of business and cash for cash portion of business.

Percentage of Completion: For long-term contracts where the contract will not be completed within the taxable year started.

57
Q

Boot gain / basis

A

boot received = recognized gain

boot paid = added to basis

basis carried over from last property

58
Q

Net operating loss

A

NOL = excess of deductible expenses over gross income

allowed for self-employed, corporations, estates, and trusts

CANNOT be carried back but may be carried forward indefinitely

59
Q

Federal withholding tax underpayment penalty

A

To avoid, pay the lesser of:

90% of the current year’s tax liability

100% of the prior year’s tax liability (or 110% if the last year’s adjusted gross income exceeded $150,000)

60
Q

Charitable Bargain Sale

A

Property sold to charity for less than FMV.

Calculation:

Sale Price / FMV x basis = adjusted basis

Sale Price - adjusted basis = taxable gain

61
Q

realized gain vs recognized gain

A

realized gain: economic or inherit gain at the time of transaction

  • realized gain = sale price - commissions paid on sale
  • adjusted basis = purchase price + commissions paid on purchase

recognized gain: part of realized gain that is immediately taxable

  • recognized gain = realized gain - adjusted basis
62
Q

C corp advantages and disadvantages

A

Advantages

  • Separate tax entity, taxed at flat 21%
  • Dividend-received deduction (50% exclusion)
  • Limited liability & continuity of life

Disadvantages

  • corporate formalities
  • Dividends paid (after-taxs)
  • Accumulated earnings > double taxation above $250k
63
Q

Fringe Benefits

A
  • Health Care Premiums
  • Insurance Premiums on non-discriminatory group life policy up to $50k
  • Company car for working conditions only
  • Employer-provided transit passes ($270/mo. cap) or parking ($270/mo. cap)
  • Occasional overtime meal money, cab fare, theater or sporting event tickets
  • Discounts on services limited to 20% of selling price charged to customers
64
Q

multiple 1231 gains (lookback)

A

5 year lookback

Step 1:

total gain in current year

  • current year recapture
  • unrecaptured lossses over past 5 years

= capital gain (section 1231)

Step 2:

total gain in current year

  • capital gain (section 1231)
    = gain taxed as ordinary income
65
Q

1231 adjusted basis

A

purchase price - depreciation = adjusted basis

66
Q

Losses from oil and gas working interests

A

dedcutible agaisnt active or portfolio losses without limit and without respect to AGI

67
Q

Losses from real estate activities

A

can deduct $25k of losses against active and portfolio income

reduced by 50% of the taxpayers AGI in excess of $100k.

entirely phased out at $150k

68
Q

worthless securities

A

holding period is long term

only $3,000 may be recognized in the current year, rest carried forward

69
Q

cash method of accounting

A

income reported when cash is collected and expenses are reported when cash payments are made, used when there are no inventories

can be used by:

  • individuals
  • partnerships or corporations if gross receipts for all prior years do not exceed $26 mil
  • certian farming businesses
  • qualified personal esrvice corporations: accounting, law, engineering, health, consulting architecture, acturarial science or performaing arts
70
Q

accural method of accounting

A

reporting of expenses in the same tax year that it is reported in the taxpayers financial statements and income when earned

used wen there are inventories and over $26 million

71
Q

Bad debts

A

to be deductible must have a debtor-creditor relationship

lender must have a basis in the loan

72
Q

FICA

A

FICA tax total = 7.65% EE and 7.65% ER + (additional medicare if applies)

  • Social Security tax (OASDI) 6.2% ER + 6.2% EE capped at SS taxable wage base ($142,800)
  • Medicare tax (HI) 1.45% EE + 1.45% ER
  • .9% additional medicare tax on income above $200k S/$250k MFJ
    • only paid by EE
  • net investment income tax of 3.8% on investment income over certian thresholds

SE will pay both portions

73
Q

taxation of sole proprietorship

A

taxed directly to proprietor

files schedule C with individual form 1040

74
Q

taxation of partnerships

A

flow through entity

income and deductions flow through to partners, retian their character - reported on Schedule K-1

each partner receives a K-1 for their allocation, which are then reported on the individual return 1040

75
Q

basis in partnerships

A
  • begins with contributions and is adjusted by earnings and losses
    • cash contribution = cash contributed
    • property contribution = carryover basis
  • distributions will reduce basis
  • share of liabilites assumed by partnership will reduce basis
76
Q

special taxes applicable to C corps

A

personal holding company tax

personal service corporation tax

accumulated earnings tax

77
Q

C corp: Dividends received deduction

A
  • if div receiving corp owns less than 20% of div paying corp then 50% deduction of divs recieved
  • if div receiving corp owns at least 20%, but less than 80% then 65% deduction of divs received
  • if div receiving corp 80% or more of div paying corp than 100% deduction of divs received
78
Q

personal holding company tax

A
  • GOAL: discourage people from using a corporate entity for tax avoidance
  • personal holding company if:
    • ownership test: more than 50% of the valuye of stock is owned by 5 or fewer individuals
    • AND passive income test: 60% of corps adjusted ordinary gross ncome consists of personal holding company income
  • undistributed personal holding company income = corps adjusted taxable income - divs paid decution
  • undistributed personal holding company income taxed at personal holding company tax rate of 20%
79
Q

personal service corporation tax

A
  • personal service corportations: HAALE PSC
    • Health,
    • Architechture
    • Accounting
    • Law
    • Enginerring
    • Performing arts
    • actuarial Science
    • Consulting
  • at least 95% of stock is held by active or retired employees
  • innome earned taxed to the corporation at a flat rate of 21%
80
Q
A
81
Q

Special taxes for S corps that used to be C corps

A

taxes paid by the corporation, not the shareholders

  • built in capital gains tax
  • LIFO recapture
  • Excess net passive income tax
82
Q

S Corp shareholder that owns more than 2% of stock

A

treated as partner

fringe benefits included in shareholders gross income

accident and health premiums are deductible by corporation

83
Q

gifting of loss property: if then sold for a LOSS

A

Donee’s basis = FMV on date of gift

holding period = starts on date of gift

gift tax paid at time of gift is NOT allocated to basis

84
Q

gifting of loss property: if then sold for a gain

A

donee’s basis = carryover basis

holding period = carryover

gift tax paid is NOT allocated to basis

85
Q

gifting of loss property: if sold between the donor’s basis and the FMV on the date of the gift

A

no gain or loss is recognized

CFP (7 decks)

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