Tax Flashcards
Realized Gain vs Gain recognized
Realized gain is economic transaction; Recognized gain is reportable gain on tax form
Definition of Alimony and Child Support
Alimony: Spousal support, to maintain spouse’s standard of living
Child support: pay to meet basic needs of a child
How to increase basis and decrease basis?
Increase basis:
pay for it
inherit/receive a gift
recognize a gain/tax(reinvest dividends or capital gains)
improvements/capital additions
cost to acquire(sales tax/freight) installation costs
Decrease basis: depreciation
What kind of assets are depreciable?
business assets(real estate or personal property used in business)): 1231 assets ( machinery, plant, equipment etc)
Catpial assets
Ordinary Income Assets
Section 1231 Assets
Gains and losses, good or bad?
Capital assets: “gains are good(LT,ST, OI, CG), losses are bad(capped at 3k)”
Ordinary: gains are bad (37%), losses are good (no limitation)
Depreciable Section 1231 assets: Gains are good(OI or capital gain), losses are goods(ordinary loss)
What asset type is Accounts receivable, Copyrights, Inventory?
Gains and losses, good or bad?
Ordinay Income Assets
Ordinary: gains are bad (37%), losses are good ( no limitation)
Is the 3k max loss deduction is per person or per return?
MFJ couple, 3k max loss deduction per return
STG: $5,000, STL: $12,000, LTG: $10,000, LTL: $17,000. What is the tax consequences for this year and next year?
This yr:STL=7k, LTL=7k , ONLY 3k STL could be taken this year, carryover 4k STL and 7k LTL.
Make sure to use STL first!!!
2nd yr: start with 4k STL, 11k LTL
How is section 1245 taxed?
Ordinary Income Gain. Depreciable personal property (Machinery, equipment, etc), recapture depreciation part.
How is section 1250 taxed?
25% of recapture rate of Depreciable Real Property (Real Estate and building);
What asset type is a completely useless business?
Section 1231 Asset
How is clothes being sold in a local store taxed?
Inventory. Ordinay Income Assets
Ordinary: gains are bad (37%), losses are good ( no limitation)
What asset type is Stocks, bonds, etfs, MLPs, UITs, Publicly traded partnership?
Capital assets
Client have ABC stock and want to sell their shares, how does your client decide basis when they sell their shares?
Could use Specific ID(pick and choose by client) or FIFO
Client have XYX Mutual Fund and want to sell their shares, how does your client decide basis when they sell their shares?
Could use Specific ID(pick and choose by client) or FIFO or average cost(No Calculation!)
If the price of the property drops down, what should you do?
Sell it or give away.
When is double basis rule applies and which type use what basis?
Applies for property gifted when the FMV is less than the donor’s basis.
Basis to donee is FMV for losses, donor’s basis for gains, no gain or no loss if sold between FMV and donor’s basis.
What is the holding period for gift tax paid situation?
Donee’s holding period is equal to donor’s holding period!!
Is child support taxable, deductible?
Child support is not taxable, not deductible.
How is alimony taxed?
2019 and after: Alimony no longer income to payee, no longer deductible
By 12/31/2018: payer deductible, income to payee
What is the tax consequence of divorce fee?
Not deductible, subject to 2% deduction
What is the holding period of Related party buy/sell?
New holding period for buyer!
What relatives does not belong to related party?
brother in law, uncles/aunts or cousins
Section 179
Depreciation “immediate expensing” $1,160,000, $2,890,000.
If you want to deduct $1,160,000 has 2 limitation: income, total cost requirement.
Section 179 deduction: If equipment cost $2,900,000, how much can you deduct?
$2,900,000- $2,890,000=10k, max deduction is $1,150,000.
How is rental property taxed if the client also for their own use?
Personal: rental<15 days no tax; no deduction. The mortgage interest and property taxes are treated as if on personal residence.
Rental: rental more than14 days and the client’s personal use does not exceed the greater of 14 days or 10% of the rental days; can take true loss up to 25k phaseout 100k – 150k
Others: Mixed use rental>14 days and the client used too much; cannot go negative; if you have 25k in loss, must have 25k in gain to offset
If you client plan to rent 150 days, how many days can the client use it without hurting its status of rental property?
15 days
Sale of personal residence exclusion requirements
Own and Use home as principal residence for two of the last five years, and Have not used the exclusion within the prior two years
Own: only 1 spouse need to meet
Use: each person calculate seperately
1244 Stock
Qualified small business stock.
Sold at gain— LTCG/STCG.
Sold at loss— Single the first 50k subject to ordinary loss; MFJ the first 100k subject to ordinary loss.
If give to child, child could use it.
Client, single, age 48, sold 1244 Stock at $60,000 loss on the sale. Tax consequence?
$50,000 ordinary loss, $3,000 capital loss, carryover 7k capital loss for the following year
Own it, buy more and 10 days later sell at loss. Is this transaction wash sale ?
Wash sale
XYZ stock, sell at loss, buy XYZ call option five days later in her IRA, is this transaction wash sale ?
Wash sale, does not matter if tax deferred or not
1035 Exchange
Insurance to insurance, annuity to annuity, insurance to annuity
Property transfers between ex-spouses, what is the tax consequence and holding period?
No tax, carryover basis, carryover holding period
Like Kind exchange 3 Rules
- Must recognize gain to the extent you receive BOOT
- Liabilities being assumed from you (reduced) = boot
- Related party sells within 2 years —-both pay tax on deferred gain
What is the tax consequence of section 1031 if person trade up?
Person trade up, no recognize gain, increase basis by boot
What is the tax consequence of section 1031 if person trade down?
Person trade down, recognize boot, carryover basis.
What is active income, portfolio income and passive income?
Active: W-2, 1099, Schedule C
Portfolio Income: Interest, dividends, royalty
Passive Income: LP
Passive activity loss rules
Passive losses can only be offset by passive income; Cannot offset passive losses with active income or portfolio income; only offset passive losses with passive income
Can you offset passive income with royalty income?
NO! Royalty income is portfolio income
Can investments in A public traded LP offset investments in B public traded LP?
No. Loss in Public traded limited partnership A can only be claimed if A has positive income/gain in the future.
When would the client would take all those disallowed accumulated losses in 1 year?
Sell to a unrelated third party
Cash basis vs Contructively receipt
Cash Basis: Income is reported when it is received. Expenses are deductible when they are paid.
Constructively receipt: taxable when available to the taxpayer.
Fringe Benefits: Gym. What are the requirements?
Fringe Benefits: Gym— on the premise, only for the worker and their dependents.
What is IRD? How is IRD inherited?
IRD: Income in respect of a decedent , when inherited, asset do not get step in basis— has to pay tax
Social security MAGI
MAGI=AGI + tax exempt interest + ½ social security benefit received + untaxed foreign income
If dad loans 200k to junior, charging 0% interest, AFR=4%, Dad has imputed income in his return. For estate tax purposes, what is the influence?
No gift because we could include annual gift exclusion of $17,000.
Key AGI deductions
Alimony (divorce before 12/31/2018)
IRA
Schedule A
Alimony characteristics
In cash, cannot live together, payments must cease with death of payee spouse.
Divorce before 12/31/2018, how is alimony treated? If alimony $40000, how much could contribute to traditional IRA?
Earned Income; $6500
Schedule A Itemized deductions
CCMMIT
* Charity
* Casualty losses
* Medical expenses > 7.5%
* Misc : No 2% floor of AGI
* Interest
* Taxes
Schedule A deduction - Casualty losses
Any loss unexpected and sudden, theft, flood, fire, not termite. Has to be a federally disclared Disaster area.
Schedule A deduction - Medical Expenses
Medical expenses > 7.5% If AGI $100k, hurdle is $7500, if have $10k unreimbursed expenses, then 25k is deductible
Schedule A deduction - Misc
No 2% floor of AGI — IGA
Income in Respect of a decedent;
Gambling losses to the extent of winnings(take 6k losses, must report 6k winning);
Annuity (ppl die before getting basis back)
Schedule A deduction - Interest
Mortgage interest deductible on form 1098 up to loan amount $750k ; Home equity: interest is deductible if used for acquisition or improvements ONLY.
Schedule A deduction – Taxes
Taxes: SaLT – State and Local and Real Estate Tax deduction up to $10,000
If you have a client, social gambler, won Jackpot. Took annuity as payments every year, are those payments could be used as gambling income to offset gambling losses?
Yes
Schedule A deduction - Medical 7.5% of AGI
Not include health insurance premium; but include any unreimbursed payments, copays, deductibles, LTC premiums, contact lens, weight loss program, wheelchairs, insulin, etc ( a wide list)
Your client’s basement flooded, located in federally declared disasater area. What is casualty loss amount?
Casualty loss= Loss-insurance – 10% AGI – $100(per the code)
Charity Deduction
Your client owns a clothing store. He has clothes that costs $1,000. They originally sold for $5,000, but he marked them down to $3,000. If he donates the clothes to the United Way, what is his deduction(ignoring AGI limits)?
Clothes are inventory, deduct the lesser of FMV or basis. So deduction is $1,000.
When does Kiddie Tax apply?
age of kid <19 or <24 FT student; Unearned Income>2500
Kiddie tax Standard deduction
The greater of $1250 or earned income +$400, up to $13850.
How much of kid’s total income taxed as parent’s rate?
Taxed at parent’s rate = Unearned Income - $2500
How much of kid’s total income taxed as kid’s rate?
Taxable Income = UI + EI - Standard deduction
Taxable Income - $ taxed at parent’s rate = $ taxed at kid’s rate
What is child tax credit requirement and how much can claim?
<17, 2k/kid, partially refundable up to $1,600 salary phaseout 200k(Single) and $400k (MFJ)
If a kid is age 17, is he able to get child tax credit or depent credit?
Dependent credit
Family with kid Age 16,17,18,19, how much credits could they claim?
Age 16 could claim 2k, all others claim $500/person, $3500 total.
What is the general max age could claim dependent credit?
Age 24
Child Dependent Care Credit
“Maintain a home” , age under 13.
Expenses: 1kid $3000, 2nd or more kid $3000, up to $6000 per family.
Credit = Expenses x 20%.
Max credit for 1 kid is $600, max credit for 2 or more kids $1200.
Not refundable. No phaseout on salary while low salary will limit on credit $
If you have 7 yr kid dependent care paid $8k, 5 year old twin paid $12k. How much credit can you get?
$6000 x 20%= 1200
If you have 7 yr kid dependent care paid $6k, 5 year old kid paid $6k. How much credit can you get?
$6000 x 20%= 1200
Two kid, age 5 and age 7, paid $10k in daycare, how much credit could get?
$1200
Mr. and Mrs. Sawyer send their 5 yr old son to an after school daycare center. The current cost for the center was $3400. Mr. Sawyer’s income for the yr is $84,000 and Mrs. Sawyer’s was $2100. What is the amount of dependent care credit the Sawyers can take this year?
$2100 x 20%=$420. Does not allow wife send kid to daycare and does not make money
Federally declared disaster, property trade down. What is the tax consequence?
Recognize the difference, basis carryover
Adoption expense credit
Credit for adoptions expenses incurred up to $15,950. Credit is phaseout ratably for modified AGI between $239,230 - $279,230.
What is the formula of AMT
AMT=Regular Taxable Income +/- Adjustments + Preference
AMT Adjustments
- Accelerated depreciation for real and personal property that is allowable for regular tax purposes.
- The standard deduction if itemized deductions are not used
- Taxes (State, Local, Property) capped at $10,000
- Incentive Stock Option bargain element (positive at exercise, negative at sale)
AMT preference items
Percentage depletion
Intangible drilling costs
Interest on private activity bonds
Preference items is only hurt, always add back
Mid Month conversion
Applies to Section 1250 property(depreciable real estate)
2/1 — 2/15, 2/26 —-2/15
Half Year Conversion
1245 property, July 1 start date, ovens in service on 3/1/23—depreciation actually start 7/1/23, If ovens in service on 8/1—–use 7/1/23. If >40% of asset put into service in last quarter — use 11/15 (use Mid Quarter)
Mid Quarter Conversion
If >40% of asset put into service in last quarter — use 11/15 (use Mid Quarter)
Collectible Tax Rate
28%
Hints for Choosing a Portfolio - Short time horizon (less than 5 years)
§ Fixed income, low risk (T-bills, possibly T-notes).
§ Money Market or short-term investments for less than 3
Hints for Choosing a Portfolio - Intermediate term (5-7 years)
§ Mutual funds could work for 5+ year targets.
§ Intermediate term bonds, T-Notes.
§ Small portion in equity (lower risk).
Hints for Choosing a Portfolio - Long term (10 plus years)
§ Equity (can add foreign and small cap if investor is risk tolerant).
§ Long term bonds, T-bonds.
§ Mutual Funds.
Hints for Choosing Portfolios
Under age 18 saving for college:
§ The younger the child, the more equity can be used.
§ Parents risk tolerance should be secondary to the child’s time horizon.
§ First job through age 50 - saving for retirement:
§ Time is on their side, can be heavier in equities.
§ Age 50+ saving for early retirement:
§ Start moving to more of a fixed income portfolio with some equity to keep pace with inflation
(50/50 split roughly).
§ Last 5 year before retirement should shift more into income producing assets with some equity
exposure.
OID on Zero Coupon Bonds
Shayla purchased a thirty-year zero coupon $1,000 bond at initial issue to yield 7% per year.
Shayla pays $126.93, calculated by FV=$1,000, i=7/2, n=30x2, solve for PV.
At the end of the first year, she will have taxable interest of $8.89, calculated by 126.93 x 7% =
$8.89
Year two: 135.82 (derived from 126.93 + 8.89) x 7% = $9.50
Year three: 145.35 (135.82 + 9.50) x 7% = $10.17, etc.
83b Election
You request that the IRS recognize income and levy income taxes on the acquisition of company shares when granted, rather than later upon vesting.
You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:
You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less.
If prior year AGI> $150,000, rule would be at least 90% of the tax shown on the return for the taxable year or 110% of the tax shown on the return for the prior year
ISO vs NQSO
