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CFP > Tax > Flashcards

Tax Flashcards

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1
Q

Self Employment Tax

A

Shortcut 2-17

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2
Q

Credit for chil and dependent care expenses

A

20% of first 3k no phaseout

If you have FSA, and do 5k, you lose out of the child tax credit

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3
Q

Child Tax Credit

A

2k per kid

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4
Q

Adoption credit

A

What does it include not to include
Know what it does not include***
2-22 income tax pre study

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5
Q

Tax deduction vs tax credit

A

Credit always better

They ask what is better for certain people

Lower bracket?
Better is a credit dollar for dollar

Higher bracket?
Deduction

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6
Q

Account methods

A

Investory - accruel . Over 25M

Smaller firms cash

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7
Q

NOL

A

Have a loss, can not go back 2 years

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8
Q

Sole proprietorships

A

Risk free entity

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9
Q

Partnership

A
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10
Q

C corp

A

Preferred stock
Profitable business

If you lose money in C corp, can not write off the losses until you have gains or until it goes bankrupt

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11
Q

S Corp

A

One class of stock, only preferred
Can be voting and non voting
no Foreigners
Losses up to basis

No third party loans
if we need to borrow money from a bank, CANT BE AN S CORP

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12
Q

LLC

A

Invention gave us the opp
Liability like an S corp
Basis same for a partnership

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13
Q

Limited Partnership

A
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14
Q

Summary of tax forms used by different business entities

A

4-13

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15
Q

1250

A

Real estate

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16
Q

1245

A

Must know tax 6-6

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17
Q

179 must know

A

1245 property
Write it all off 35k office furniture
Dont have to depriciate it
CAN NOT CREATE A LOSS

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18
Q

197

A

Goodwill
Franchise fee
Trade organizations

Can be deducted over time

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19
Q

Boot for real estate

A

Boot received = recognized gain

Boot paid add to basis

Basis carries over from the last property

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20
Q

Sale of residence (code section 121)

A

Cant take a loss on personal residence

Tax 7-10

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21
Q

AMT

A

4 types of questions
If they ask 1 brett would be surprised

  1. What are preference items (flash cards) tax 8-2
  2. Add back items (flash cards) SALT, bargin element ISOs (flash card)
  3. How much do you owe? How much AMT do I need to pay
    Highest AMT is 28%
  4. How do you not pay AMT
    Pay more regular tax, pay off house, raise the water level
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22
Q

Qualified Entities

A

Public charities 50% organizations

Private charities 30% organizations

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23
Q

Deductions

A

FMV 30% (3 letters)

Basis 50% (5 letters)

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24
Q

Types of property - ordinary income

A

Tax 10-3

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25
Q

Tax compliance

A

Dates for paying estimated taxes are 4/15,6/15,9/15,1/15. (1,+2,+3,+4)
Extension of time for filing individuals tax returns is six months following the traditional filing date of April 15th

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26
Q

Audit

A

Attorney, CPA, enrolled agent, enrolled actuary, or any other person permitted to represent a taxpayer before the IRS

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27
Q

Filing penalties

A

Frivolous return - penalty is $5,000
Negligence- 20% of the portion of tax underpayment attributed to negligence
Civil fraud - 75% of the portion of the tax underpayment attributable to fraud
Failure to file - 5% of the tax due per month up to a maximum of 25%
Failure to pay - .5% per month each month the tax is unpaid with a maximum of 25%

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28
Q

Estimated tax due

A

No penalty will apply if the taxpayer pays 90% of the current year’s tax liability, or 100% of the prior year’s tax liability (or 110% if the previous years AGI exceeded 150K)

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29
Q

Gross Income inclusions

A 
Taxable interest (Schedule B)
Ordinary dividends (Schedule B)
Business income or losses (Schedule C)
Capital gains/losses (Schedule D)
Alimony received (pre-2019 divorce)
IRA distributions
Pensions/annuities/punitive damages
Real Estate (Schedule E)
Unemployment income
Taxable Social Security
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30
Q

Adjustments FOR AGI (ATL)

A 
IRA Contributions
Keogh or SEP
1/2 Self employment tax (.07065)
Alimony paid (pre-2019 divorce)
Self-employment health insurance

$2,500 student loan interest
Contributions to HSA
Penalty for early withdrawal of savings
Moving expenses (active military only)

31
Q

Deductions FROM AGI (BTL)

A

Standard/itemized deduction - whichever is greater

Itemized deduction types (Schedule A)
Medical, dental, and LTC (7 1/2%)
Casualty losses (federal disaster)
*Real estate taxes (limited to a maximum deduction of $10,000 TOTAL)
*State, local, and sales tax
Home morgage interest
Charitable gifts
Investment interest expense
32
Q

Investment interest deduction

A

The maximum deduction allowed for interest incurred on investment indebtedness is limited to the taxpayer’s net investment income.

What qualifies as investment income? Income from property held for investment such as interest, dividends, royalties, and short-term gains qualifies as investment income.
DIVIDENDS WILL BE INCLUDED AS INVESTMENT INCOME ONLY IF THE TAXPAYER ELECTS NOT TO USE THE REDUCED RATES. LONG TERM GAINS ARE INCLUDED ONLY IF THE TAXPAYER ELECTS OUT OF LONG TERM RATES ( AND ELECTS SHORT TERM CAPITAL GAIN TREATMENT)

33
Q

Calculation of deductible loss

A

must be federally declared “disaster”

  1. Use the lesser of basis or FMV
  2. subtract any insurance coverage
  3. Subtract $100 (floor)
  4. Subtract 10% of AGI
34
Q

Meal expense deductibility

A

Qualifying meal costs are deductible to a 50% limit if they are ordinary and necessary to do business
3 different ways it can be asked on the exam
1. Salaried employee (un-reimbursed business expense)
2. Corporation can pay 100% of the expense but can NOT deduct 50% of the expense on the 1120 corporate return (Entertainment)
3. The self-employed person must pay 100% of the expense but can only deduct 50% (meals only) of the expense on Schedule C

35
Q

Kiddie Tax

A

All net UNEARNED income of a child who has NOT attained age 24 AND who has at least one parent alive is taxed at the parents rate
Students under the age of 24 are entitled to a standard deduction of $1,100 AND an additional $1,100 of unearned income will be taxed at the child’s marginal rate (10%). Unearned income in excess of $2,200 is the child’s “net unearned income” and is taxed at parent’s rates.

36
Q

Self employment income DOES include the following

A

Net Schedule C Income
General partnership income (K-1 income)
Board of directors’ fees
Part-time earnings (1099)

Multiply by .1413

37
Q

Self-employment distributions that are NOT included in SE tax

A

Real estate income or rents paid
Distributive share of income or loss of a limited partner
Wages from an S corporation (FICA wages)
Distributions (K-1 income) from an S corporation

38
Q

FICA (Federal Insurance Contribution Act) taxes (US Federal Payroll tax)

A

The employee and employer each pay (6.2% + 1.45%) or a total of 15.3% up to W-2 earnings of $142,800. After $142,800 each pays Medicar taxes of 1.45% or a total of 2.9% (unlimited)

39
Q

Credit for child and dependent care expenses until age 13

A

Nonrefundable
% of expenses paid for care of a depenedent that allows the taxpayer to work and earn income.
Qualifying expenses are limited to $3,000 for one dependent or $6,000 for two or more dependents
Depending on income, a credit percentage applies. Use 20% of the allowable expense on the exam

40
Q

Child tax credit

A

$2,000 for each qualifying child under 17.
Son, daughter, stepchild, foster child
Phaseouts on the tax sheet
Up to $1,400 per child is a refundable tax credit

41
Q

Adoption credit

A

Nonrefundable

The credit can be claimed in the year that the adoption is finalized

42
Q

Refundable vs. Non refundable tax credits

A

While non-refundable credits can reduce tax-liability to zero, only refundable credits can generate a tax refund

Refundable
Child tax credit (partially)
Earned income credit

Nonrefundable
Dependent care credit
Foreign tax credit
Elderly and disabled credit

43
Q

Installment Sale

A

Profit/total contract price. = Gross profit percentage

44
Q

Related party tax trap

A

This can occur with an installment sale

If I sell property to family member in installment sale and they go ahead and sell it within 2 years, the installment sale collapses. All gain is retroactively in the first year to me althought my sister continues to pay me $100k/year

45
Q

NOL (Net Operating Loss)

A

Can not BE carried back to prior years

46
Q

Section 1244 qualified small business stock

A

This is an advantage

  • only applies to the first million dollars of stock (C or S) initially issues
  • Loss of $100,000 per year (JT)($50,000 otherwise) ir ordinary (not capital loss)

This is beneficial if a business fails, individual would take 50k or 100k loss PLUS 3k capital loss
Without 1244, can only take 3k capital loss and a (for example) 147k carry forward

47
Q

Original Basis

A

Basis is increased by legal fees, commissions, sales tax, freight, and improvments but NOT by repairs, real estate taxes, or normal business operating expenses. When the basis is increased by these incidental costs, it becomes the cost basis.

Improvements must be capitalized
Repairs are always deducted as expenses, does not effect basis

48
Q

Adjusted Basis

A

Cost recovery deductions are an allowance for the exhaustion and wear and tear of property used in a trade or business or held for the production of income

49
Q

MACRS Modified accelerated cost recovery system

A

5 year 1245 property CAT Computers Autos and light duty Trucks
7 year 1245 property O Office equipment except computers
27 1/2 year 1250 property R Residental rental property
39 year 1250 property N Nonresidential real property

50
Q

179 deduction

A

Election to expense up to $1,050,000 for qualifying property in the year of acquisition. Qualifying property generall is TANGLIBEL PERSONAL PROPERTY (1245 property). It must be for new property not used property. IT CANNOT CREATE A LOSS

51
Q

Tax consequences of like-kind exchanges (1031)

A

Qualifying Propertly must be generally the same type such as real estate for real estate (apt complex for shopping center)
Examples of NON LIKE KIND EXCHANGES: 10 acres of land for office equipment, Office equipement for office equipment

NON QUALIFYING PROPERTY: Inventory of a business, non-business tangible/personal property, personal residence, marketable securities

If they exchange a rental for non rental, they must use it in the same way as the land you are giving up

52
Q

Partially taxable exchanges

A

BOOT RECEIVED = RECOGNIZED GAIN
BOOT PAID, ADD TO BASIS, BASIS IS CARRIED OVER FROM LAST PROPERTY

No matter how many numbers are given, just use these three:
1. FMV of property RECEIVED
2. Adjusted basis of property given up
3. BOOT (anything that is not qualified or like-kind)
If there is no boot received, the recognized gain is zero
Boot rec’d, recognized gain

53
Q

Net investment income

A

Unearned income (including dividends and capital gains) is alos subject to an additinal Medicare 3.8%. It is based on the lower of the following 2 amounts:
Net investment income for the year OR
Modified adjusted income above 200K single or 250K MFJ

This is on tax table sheet

54
Q

Sale of residence (Section 121)

A

MFJ, maximum amount of realized gain may be excluded from gross income is 500k
Single 250k

Must have owned and used the home as a principal residence for an aggregate time period of 2 years out of the 5 year period immediately preceding the home’s date of sale. If the home-sale gain is entirely excluded, the transaction is not reported.

Selling expenses are reduced from selling price of the home
REALIZED gain is the amount over basis recorded on Schedule D
RECOGNIZED gain is the amount after the Setion 121 exclusion is used (Schedule D)
If a client has carryover losses, they could apply the gain against the loss

55
Q

Exception to Section 121 rule

A

If a taxpayer lives in the residence LESS than TWO YEARS and moves because of a new job, for health reasons, or “unforseen circumstances” like marriage.
The typical exception will involve “move because of a new job” A minimum 50 mile move is required. Less than 50 miles, the exception doesn’t apply. Be care with the distance

If this is the case, prorate the amount they can exclude

56
Q

AMT Preference Items

A

IPOD

Excess INTANGIBLE drilling costs (IDC)
Private-activity municipal bond
Oil and gas percentage depletion — NOT cost depletion
Depreciation (ACRS/ MACRS) — but not straight line

57
Q

AMT Add Back Items

A

Incentive stock option bargain element

Property, state and city/income taxes

Home Equity Indebtedness isn’t allowed for AMT purposes unless it is used for home improvements

Other itemized deductions such as medical expenses, qualified residence interest, investment interest, charitable deductions and casualty and gambling losses are not add back items

58
Q

Depletion

A

A deduction is allowed in determining taxable income from natural resources. The amount deduction is similar to depreciation in that it allows the taxpayer to recover the cost of an asset over the resource’s productive life.
PERCENTAGE DEPLETION TYPICALLY TRIGGERS AMTS.
Cost depletion is NOT an AMT preference item.

59
Q

Passive Activities

A

Interest received is passive for federal tax purposes if an individual owns an interest in a business and does not materially participate (like a limited partner). Can only deduct the loss to the extenet of income generated by other passive activities

Kinds of passive activities:
Limitied partnership
Equity interests in business enterprises without rendering any personal service to the business (not materially participating)

TWO EXCEPTIONS TO THE PASSIVE RULES: MATERIAL AND ACTIVE PARTICIPATION

60
Q

Active Participant deduction

A

Qualifying taxpayers may deduct up to $25,000 per year, of net losses from real estate activity from their active or portfolio income This deduction (up to $25,000) is phased out for taxpayers with AGIs between $100,000 and $150,000 on a $2 for $1 basis

61
Q

Rental of the principal residence (not normally a business)

A

Cna rent out a home for fewer than 15 days during the taxable year and pay no taxes. The rental income is excludible from the taxpayer’s gross income, but no deductions attributable to the rental use are allowed

62
Q

Renting your vacation home (normally a business)

A

Personal use cannot exceed the GREATER of

  1. 14 days OR
  2. 10% of the rental use

If higher, rental status is lost and deductions attributable to rental may be lost

63
Q

Low Income Housing programs

A

No income phaseout
Held as passive activity and may generate a deduction-equivalent tax credit up to 25K
Mutiply tax bracket (37% by your tax to get $9,250 credit)

  • **Housing CREDIT is allowed annually over a TEN YEAR “credit period”
  • **The DEPRECIATION is straight line over 27.5 years
64
Q

Oil and gas working interests

A

Way for a GP to lower taxes.. must have a working interest to take ordinary losses
Losses from oil and gas working interests for which taxpayer is personally liable are deductible against active or porfolio income without liimits and without respect to the taxpayers AGI
If you are a limited partner, you generally do not have an immediate right to take the loss. The loss becomes passive.
Upong dissolution of the partnership, you can take the loss

65
Q

Phaton Income - Insurance

A

Any type of lapse with a loan

Section 162 life and disability

66
Q

Phantom Income - Investments

A

Zero/Strip income
TIPS
Declared but not paid dividends and capital gains

67
Q

Phantom Income - Tax

A

K-1 Income from LP/FLP

Recaptures

68
Q

Phantom Income - Retirement

A 
ESOP distribution (basis only)
Secular trust
69
Q

Divorce payments

A

Before 1/1/19, deductible by payor, taxable to payee
Must be cash
Cant live together, and cant file a jt return
Any payments to maintain property owned by payor will not qualify even if required under terms of the divorce instrument
If payee spouse OWNS life insurance policy on the life of the payor, the policy payments made by the payor will qualify as alimony if the payments are made under the divorce instrument

Alimony paid is considered compensation to the payee spouse. The payee spouse can fund a deductible IRA or Rorth IRA (if not subject to phaseout)

70
Q

Child support

A

Child support payments are nontaxable to the payee and nondeductible by the payor
Any amount tied to a contingency or occurence of an event relating to a child is considered to be child support and not alimony

71
Q

Charitable contributions and decutions

A
  1. A taxpayer cannot deduct more than 60% of AGI in the contribution year. Any contribution in excess of such limit is carried forward as an itemized deduction for up to FIVE more years or, if sooner, death.
  2. Calculate the eligible amounts given to 50% organizations (public charities)
  3. Calculate the eligible amounts given to 30% organizations (private charities). 30% charities are PRIVATE NON-OPERATING FOUNDATIONS, fraternal orders, and war verterans’ organizations
72
Q

Types of donated property

A

Cash is simplest, can be carried forward for FIVE YEARS

Deduction for gifts of appreciated long term capital gains property to 50% organizations is 30% of AGI UNLESS he/she elects to use the property’s basis rather than fair market value. An individual using basis can deduct up to 50% of AGI.

73
Q

Ordinary Income property

A

This is property that, if sold, would produce ordinary income, not capital gains. The deduction for ordinary income property is limited to basis

Examples:
Short term capital gains property
Use unrelated property (watch out for artwork and collectibles)
Inventory
A work of art created by the taxpayer
A copyright
74
Q

Charitable bargain sale

A

Property is sold to a charity for less than its FMV
The gain must be allocated between the portion of property that is sold and the portion that is gifted to charity, based on the FMV of each portion

Sale price/FMV x basis = adjusted basis

Sale - adjusted basis = taxable gain

CFP (7 decks)

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