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CWT CFP Study cards > Tax > Flashcards

Tax Flashcards

1
Q

What qualifies as Investment Interest Expense (an Itemized) deduction?

A

Interest paid on money borrowed to buy property for investment purposes.

Investments include anything expected to increase in value and sell at gain, or earns TAXABLE interest, dividends, annuities or royalties

Business investment cannot be passive; must be an active participant in running the business. Rental property is a “passive” business - not eligible (but could be a business expense)

Cannot deduct more in investment interest than you earned in investment income. Any “disallowed” investment interest can be carried over to the next year

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2
Q

What are the max % of AGI that can be deducted for a public charity donation, which can only be taken when itemizing (Schedule A)?

A

All are a percentage of AGI:

30% of AGI when take FMV election for LTCG property (FMV has 3 letters)

50% of AGI when take Basis election for LTCG property (Basis has 5 letters)

50% of AGI for STCGs, Art, Inventory

60% of AGI for Cash gifts (want 6 figure income/cash - 2x as much as FMV)

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3
Q

When taxpayers rent a property (primary residence or vacation home) for 14 days or less, they ‘pass’ the rental use test and are not required to report the income.

What are the requirements for personal use of rental property?

A

Personal use of a rental property cannot exceed the GREATER of:
14 days
or
10% of the number of days the property is rented

Additional information: If personal use of rental property meets the usage requirements, all rental property expense is allowed, and up to $25,000 in passive loss is allowed.

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4
Q

Unreimbursed medical and dental expenses exceeding what % of AGI are deductible if the taxpayer is itemizing?

A

7.5%

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5
Q

Deductible Traditional IRA contributions are recorded and claimed on which form?

A

1040 Schedule 1 (used for items of additional income and adjustments to income (i.e., deductions for AGI).

Gross Income Deducts HIS and HERS
HSA Contributions
IRA Contributions
Student Loan Interest
Health Insurance premiums for self-employed - includes dental and LTCi
Education Expenses
Retirement contributions for self-employed
Self-employment tax (50%)

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6
Q

Schedule A documents below-the-line deductions (i.e., deductions from AGI). What are they?

A

AGI Deducts Qualified MILCS
- Qualified Business Income (no matter whether claiming standard or itemized)
- Medical and Dental expenses (unreimbursed) that exceed 7.5% of AGI
- Interest on Primary/Secondary mortgage up to $750K debt; investment interest limited to Net Investment Income
- Losses (Casualty and Theft) in excess of 10% of AGE; lesser of FMV or Basis; Ins. Payments - $100 deductible
- Charity - must be qualified; different max if private or public; cash limited to 60% of AGI
- SALT Taxes limited to $10K

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7
Q

When are expenses reported by tax payers (hint: cash or accrual)?

A

Cash method - when expense was paid
Accrual method - when expense was incurred

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8
Q

If the AVD election is made, what assets do not qualify for AVD, and how are they included?

A

Depreciating assets (copyrighted musical scores, patents, and intellectual property) whose value declines over time do not qualify for AVD

They must be valued using FMV on date of death.

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9
Q

When filing MFS and one spouse wants to itemize, what must the other spouse do?

A

Either itemize deductions or claim “0” as the standard deduction.

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10
Q

What is the “failure to file tax return” penalty?

A

5% of the liability for each month, up to five months (25% max)

If both failure to pay and file are imposed for the same period, pay penalty is eliminated.

Partial months are counted as .5

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11
Q

Under the Kiddie Tax (which means they must have unearned income), what is the standard deduction?

Hint: it’s not just the standard minimum…

A

For 2023, a child’s standard deduction is the greater of $1,250 or their earned income plus $400 (not to exceed $13,850).

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12
Q

What is the Failure to Pay (tax due) Penalty?

A

0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid.

If both failure to pay and file are imposed for the same period, pay penalty is eliminated.

Partial months are counted as .5

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13
Q

SALT deductions max at $10,000 when someone itemizes. What does SALT include?

A

State and Local Taxes including:
Property tax
Sales tax

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14
Q

EVERYTHING and EVERYONE who has investment income is subject to Net Investment Income (chart found on tax table with details), with one exception. What’s the exception?

A

Tax exempt investment income is excluded.

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15
Q

What are the child’s age threshhold for “kiddie tax”? (Only relates to Unearned Income, which includes interest, dividends, cap gains, rents and royalties)

A

Child is either:
Under age 19
or
FULL TIME student under 24

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16
Q

What is considered the “kiddie tax” portion of the kiddie tax?

A

The portion that is taxed at the parent’s highest marginal rate

Exception: if income is tax-exempt, it will NOT trigger kiddie tax

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17
Q

Interest paid from a mortgage on a primary and secondary residence is deductible if the taxpayer itemizes.

The total mortgaged amount eligible to itemize interest is what $?

A

$750,000 mortgage (can be combined)

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18
Q

The recognized gain in a Section 1031 Like-Kind Exchange is the lesser of what?

A

RECOGNIZED GAIN in Section 1031 is the LESSER of:
Realized gain (the difference between the total given/received)

Boot received (any non-real estate ie: mortgage/cash)

How to remember: the gov’t wants to encourage small business so they’re giving them a break…this time!

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19
Q

What are the “wash sale” rules?

A

When a security is sold at a loss and a substantially identical security was bought 30 days before, on the date, or 30 days after the sale (total of 61 days), the loss is not recognized.

HOWEVER, the loss is added to the basis of the disallowed security.

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21
Q

What should a taxpayer do if they are subject to AMT in the current tax year?

A

Accelerate income into the AMT year
Defer tax deductions until a regular tax year

Optimal strategy would be to do as above until the AMT liability equals the regular liability.

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21
Q

An eligible educator (teaches 900+ hours/year in K-12) has approved expenses of books, supplies, software, & services.
What is the maximum amount they can expense?

A

$300

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22
Q

Section 179 is for Business Depreciation deduction.

How does it work?

A

Max deduction of depreciation (up to the purchase price, possibly) can be taken in year of purchase.

Caps at Net Income of the business (if spouse earns w-2 from business and files MFJ, gross income can be included).

Year 1 - max deduction as noted above, plus 1st year of MACRS if additional depreciation exists.

Year 2 forward - whatever is leftover based on the MACRS calculation.

23
Q

If you have dependent children and your spouse passes away and you do not re-marry, what will you claim for tax purposes?

A

Married Filing Jointly status in year of death
The next two years, Qualifying Widow(er). After that, Head of Household until dependents are no longer claimed

23
Q

Can “kiddie tax” be generated by 529s?

A

No.

What does? UGMA/UTMA and gifts that pay dividends (ie: a mutual fund from a grandparent)

24
Q

Net investment income less than what amount will not have imputed income applied, even when they meet the loan rule?

A

$1000 or less

Loans greater than $10,000 and up to and including $100,000, the imputed interest is the lesser of:
the AFR or
the borrower’s net investment income

25
Q

Self-employed contractors will receive what tax form if they earn $600+?

A

1099-NEC

26
Q

How is average tax rate found?

A

Dividing the tax payable by taxable income: ie - $59,394.50 ÷ $250,000 = 0.2376, or 23.76

27
Q

Personal loans in excess of $100,000 have an imputed interest rate based on what?

A

When loans exceed $100,000, the imputed interest is charged based on the Applicable Federal Rate (AFR).

28
Q

In a like-kind exchange the RECOGNIZED GAIN is the lesser of what?

A

realized gain, or
net boot received.

29
Q

When the taxpayer’s AGI is greater than $150,000, the estimated tax payments for the current year need to be at least what percentage of the prior year’s tax liability to avoid a penalty?

A

110%

30
Q

Where are capital gains and losses reported on your tax form?

A

Schedule D

31
Q

What is the maximum deduction available on student loan interest in 2023, subject to phaseouts?

A

$2,500

32
Q

Tax exclusions apply to educational assistance programs from one’s employer up to what amount?

A

$5,250. Any funds received beyond the $5,250 threshold are considered income.

33
Q

Taxpayers may deduct up to a $25,000 loss if they “actively participate”.

Ownership of at least 10% of the property, AND
Substantial involvement in managing the property.

What are the phase out limits?

A

Full $25K if MAGI (AGI without the rental loss) is equal to or less than $100,000.

MAGI of $100,000 to $150,000 reduces loss deduction by 50%

Filing status does NOT change the thresholds

34
Q

When is Form 8938 required to be filed?

A

When foreign financial assets are more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

35
Q

Rental test = rent for more than 14 days

Rental personal use test = 14 days or less, or rented less than 10% of the days rented

If either test fails, the property is categorized as a ‘mixed-use’ property. Therefore, the expenses must be allocated between personal use & rental use.

What is the formula?

A

Total days used (personal and rental)

Rental days/Personal days = % allowed of expense deduction

Since expenses need to be allocated between personal use and rental use, the resulting % of the total expenses are deductible, up to the gross rental income.

Can’t claim a loss!

36
Q

The annual depreciation using the straight-line method for office furniture has a 7-year useful life (based on cost - salvage value).

In the first year of service, what does the half-year convention mean?

A

Only 50% of the annual depreciation is available.

37
Q

A frivolous tax return is one that does not include enough information to verify whether the tax was correct, or contains information clearly showing that the reported tax was incorrect.

What is the penalty?

A

$5,000

38
Q

If AGI is greater than $150,000 ($75,000 MFS), no penalty if the taxpayer pays estimated tax payments in the current year equal to what?

A

110% of the prior year’s tax, or
90% of the current year’s tax

If AGI is less than $150K, there is no penalty if estimated payments are the LESSER of:
90% of current year’s tax liability
or
100% of prior year’s tax liability

39
Q

When the taxpayer intends to defraud, what penalty will apply to the amount of the deficiency?

A

75%

40
Q

What % of health insurance premiums for self-employed individuals are deductible?

A

100%

41
Q

Which tax form is a Mortgage Interest Statement that includes the amount of outstanding principal on the mortgage as of January 1, of the current year

A

Form 1098

42
Q

In a 1031 exchange, the property to be received in the exchange must be identified within how many days after the date of the transfer of the property relinquished in the exchange.

A

45 days

43
Q

How is Annual depreciation of rental property determined?

A

Purchase price - salvage price / 27.5 (years) when using the straight-line method.

44
Q

In a price environment with rising prices, inventory value using the FIFO method will be ? and inventory value using the LIFO method will be ?.

A

In a price environment with rising prices, inventory value using the FIFO method will be realistic and inventory value using the LIFO method will be understated.

45
Q

Where is income or loss from a business that a taxpayer operated, or a profession they practiced as a sole proprietor?

A

Schedule C

46
Q

If married, what are the ownership and usage requirements to exclude up to $500,000 in property gain under Section 121?

A

If married:
Both spouses must meet the usage test.
Must have owned the property for 2 out of the last 5 years.
Only one spouse needs to meet the ownership test.
Must have used the property as the personal residence for 2 out of the last 5 years.

46
Q

If a business has inventory (and earns income from it), what accounting method MUST the business use? Cash or accrual?

A

Accrual.

If they also have client facing income, they can use a hybrid (use cash accounting for that and accrual for inventory) method.

47
Q

If AGI is greater than $150,000 ($75,000 MFS), no penalty if the taxpayer pays estimated tax payments in the current year equal to what? (The lower of the two is required for $150k+ AGI)

A

110% of the prior year’s tax, or
90% of the current year’s tax.

Whichever is lower.

48
Q

If AGI is LOWER than $150,000 ($75,000 MFS), no penalty if the taxpayer pays estimated tax payments in the current year equal to what?

A

100% of the prior year’s tax, or
90% of the current year’s tax.

or you owe less than $1000.

Notice the difference between -$150K and +150K -
Lower than $150K - it’s not the lesser of the two and prior year tax drops from 110% to 100%.

49
Q

For charity events, what can a business deduct?
- entry
- auction items
- donated time
- mileage

A
  • entry - $0
  • donated time - $0
  • mileage $.14/mile
  • auction items - excess of the amount paid above the FMV
50
Q

1035 Like exchange is part of 1231. Therefore, gains are capital gains, and losses are ORIDINARY losses (so $3,000 cap for annual loss does not apply).

How many days from the date of transfer of the relinquished property must a new property be identified?

How many days are allowed to complete the exchange?

A

45 days from receipt of relinquished property, a new property must be identified

180 days are allowed to complete the exchange

51
Q

Under Section 121 (Exclusion on the Sale of a Personal Residence), if active-duty service members don’t meet the ownership and use tests (owned and used 2 out of the last 5 years) because they’ve moved or changed duty stations, they can still qualify for the exclusion, but at a reduced amount.

What is the process to determine the excludable amount?

A

Gain from sale = taxable amount

Amount of exclusion ($250/$500K) x # of days/730

Taxable amount - exclusion = reduced taxable amount

52
Q

Depreciable Section 1231 business property receives WHAT tax treatment on gain from a sale and WHAT tax treatment if the sale results in a loss?

A

LTCG on gain from a sale and ORDINARY loss from a loss from a sale

CWT CFP Study cards (9 decks)

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