Tax Flashcards
Self Employment Tax
Shortcut 2-17
Credit for chil and dependent care expenses
20% of first 3k no phaseout
If you have FSA, and do 5k, you lose out of the child tax credit
Child Tax Credit
2k per kid
Adoption credit
What does it include not to include
Know what it does not include***
2-22 income tax pre study
Tax deduction vs tax credit
Credit always better
They ask what is better for certain people
Lower bracket?
Better is a credit dollar for dollar
Higher bracket?
Deduction
Account methods
Investory - accruel . Over 25M
Smaller firms cash
NOL
Have a loss, can not go back 2 years
Sole proprietorships
Risk free entity
Partnership
C corp
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
S Corp
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
LLC
Invention gave us the opp
Liability like an S corp
Basis same for a partnership
Limited Partnership
Summary of tax forms used by different business entities
4-13
1250
Real estate
1245
Must know tax 6-6
179 must know
1245 property
Write it all off 35k office furniture
Dont have to depriciate it
CAN NOT CREATE A LOSS
197
Goodwill
Franchise fee
Trade organizations
Can be deducted over time
Boot for real estate
Boot received = recognized gain
Boot paid add to basis
Basis carries over from the last property
Sale of residence (code section 121)
Cant take a loss on personal residence
Tax 7-10
AMT
4 types of questions
If they ask 1 brett would be surprised
- What are preference items (flash cards) tax 8-2
- Add back items (flash cards) SALT, bargin element ISOs (flash card)
- How much do you owe? How much AMT do I need to pay
Highest AMT is 28% - How do you not pay AMT
Pay more regular tax, pay off house, raise the water level
Qualified Entities
Public charities 50% organizations
Private charities 30% organizations
Deductions
FMV 30% (3 letters)
Basis 50% (5 letters)
Types of property - ordinary income
Tax 10-3
Tax compliance
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
Audit
Attorney, CPA, enrolled agent, enrolled actuary, or any other person permitted to represent a taxpayer before the IRS
Filing penalties
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%
Estimated tax due
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)
Gross Income inclusions
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
Adjustments FOR AGI (ATL)
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)
Deductions FROM AGI (BTL)
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
Investment interest deduction
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)
Calculation of deductible loss
must be federally declared “disaster”
- Use the lesser of basis or FMV
- subtract any insurance coverage
- Subtract $100 (floor)
- Subtract 10% of AGI
Meal expense deductibility
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
Kiddie Tax
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.
Self employment income DOES include the following
Net Schedule C Income
General partnership income (K-1 income)
Board of directors’ fees
Part-time earnings (1099)
Multiply by .1413
Self-employment distributions that are NOT included in SE tax
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
FICA (Federal Insurance Contribution Act) taxes (US Federal Payroll tax)
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)
Credit for child and dependent care expenses until age 13
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
Child tax credit
$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
Adoption credit
Nonrefundable
The credit can be claimed in the year that the adoption is finalized
Refundable vs. Non refundable tax credits
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
Installment Sale
Profit/total contract price. = Gross profit percentage
Related party tax trap
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
NOL (Net Operating Loss)
Can not BE carried back to prior years
Section 1244 qualified small business stock
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
Original Basis
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
Adjusted Basis
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
MACRS Modified accelerated cost recovery system
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
179 deduction
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
Tax consequences of like-kind exchanges (1031)
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
Partially taxable exchanges
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
Net investment income
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
Sale of residence (Section 121)
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
Exception to Section 121 rule
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
AMT Preference Items
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
AMT Add Back Items
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
Depletion
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.
Passive Activities
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
Active Participant deduction
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
Rental of the principal residence (not normally a business)
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
Renting your vacation home (normally a business)
Personal use cannot exceed the GREATER of
- 14 days OR
- 10% of the rental use
If higher, rental status is lost and deductions attributable to rental may be lost
Low Income Housing programs
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
Oil and gas working interests
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
Phaton Income - Insurance
Any type of lapse with a loan
Section 162 life and disability
Phantom Income - Investments
Zero/Strip income
TIPS
Declared but not paid dividends and capital gains
Phantom Income - Tax
K-1 Income from LP/FLP
Recaptures
Phantom Income - Retirement
ESOP distribution (basis only) Secular trust
Divorce payments
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)
Child support
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
Charitable contributions and decutions
- 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.
- Calculate the eligible amounts given to 50% organizations (public charities)
- Calculate the eligible amounts given to 30% organizations (private charities). 30% charities are PRIVATE NON-OPERATING FOUNDATIONS, fraternal orders, and war verterans’ organizations
Types of donated property
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.
Ordinary Income property
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
Charitable bargain sale
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
