Tax Flashcards

Question

If less than $50,000?

Answer 1

Use Small Claims Division of Tax Court

Answer 2

Planners need to know the income tax rules so they can help clients minimize exposure to taxation while achieving their desired financial goals; 3 Primary Ways: 1. Legally avoid taxation 2. Deduct expenses to reduce taxable income & take tax credits to reduce taxes due 3. Defer income & thus defer taxation Additional methods to consider: 4. Shift income to related taxpayers in lower income tax brackets 5. Realize income in a form that is taxed at lower tax rates (LTCG or qualified dividends)

Answer 3

Income - Deductions = Taxable Income Taxable Income x Tax Rate = Tax Liability

Answer 4

broadly defined, means the total amount of money & the FMV of the property, services, or other accretion to wealth received

Answer 5

Interest income from municipal bonds Child support payments received Cash or property received by inheritance Specified employee fringe benefits Qualifying distributions from a Roth IRA during retirement Cash or property received by gift Deferral contributions to certain retirement plans Gain on the sale of a principal residence Scholarship or fellowship Life insurance proceeds received d/t death of the insured

Answer 6

Gains from the sale of assets Distributions from retirement plans Rental income Unemployment compensation benefits Royalty income Compensation (salaries, wages, etc.) Interest income Dividend income Alimony received (pre-2019 divorce) Gross income from self-employment

Answer 7

Contributions to traditional IRAs Business expenses Interest paid on student loans Rental or royalty income expenses Losses from the sale of business property Moving expenses (Armed Forces) Keogh contributions 1/2 SE tax HSA deduction

Answer 8

$1,300 or earned income plus $450 not to exceed the standard deduction amount

Answer 9

a surviving spouse will generally file MFJ in the year in which their spouse dies

Answer 10

TCJA 2017 repealed the personal & dependency exemption beginning in 2018

Answer 11

refundable up to $1,700 per child

Answer 12

MUST meet all 4 tests 1. Relationship test 2. Abode test 3. Age test 4. Support test

Answer 13

in addition to the joint return test & the citizenship or residency test, a qualifying relative MUST meet the 4 tests to qualify as a dependent of a taxpayer: 1. Relationship test 2. Gross Income test 3. Support test 4. Not a Qualifying Child test

Answer 14

1. the taxpayer provides more than 10% of the potential dependent's support 2. Two or more persons who individually provide more than 10% also provide more than 50% of the individual's total support & meets the requirements to claim person as a dependent

Answer 15

Unearned income of a child under the age of 19, or a child under the age of 24 who is a full time student & is claimed as a dependent by their parents, may be subject to income tax at the parents' tax rate if over $2,600 Earned income is always taxed to the child at the child's rate Excess unearned income > $2,600 is taxed to the child at the parents' rate

Answer 16

credits that can be carried back or forward most important are the child & dependent care, lifetime learning, AOTC, child tax, qualified adoption, & foreign tax credits

Answer 17

credits that can generate a refund most important are the AOTC (partially), earned income credit, & child tax credit (up to $1,700 per child refundable in 2024)

Answer 18

take credit or itemized deduction

Answer 19

qualifying child < 13 years old $3,000 for one child; $6,000 for 2 or more children subject to earned income, 20% general to 35% of actual expenditure ($0-$15,000 income) typical credit = $3,000 x 20% = $600, $6,000 x 20% = $1,200

Answer 20

$2,500 first 4 years post-secondary, phaseout $80k-$90k, $160k-$180k 100% first $2,000 qualifying expenses; 25% next $2,000 half-time requirement

Answer 21

$10,000 x 20% (all years post secondary) phaseout $80k-$90k, $160k-$180k

Answer 22

$2,000 for each qualifying child < 17 years old (U.S. citizen, 1/2 support, lived w/ claimant for > 1/2 year) phaseout MFJ $400k, $200k others lose $50 per $1,000 over any additional tax credit unused up to $1,700 may create a refund

Answer 23

$16,810 2024 phaseout $252,150 - $292,150

Answer 24

$7,830 max credit 2024

Answer 25

all income from whatever source derived unless it is specifically excluded by the Code

Answer 26

gains from property transactions are taxed when they can be objectively determined through a sale or exchange (realization)

Answer 27

Capital Gains Interest Income Original Issue Discount (OID) Bonds Accrued income when transferring a debt instrument (gift or sale) Dividend Income

Answer 28

an annuity contract is annuitized when regular periodic payments begin for life or for a specified period of time in excess of one year use inclusion/exclusion ratio

Answer 29

Compensatory Damages EXCLUDED Punitive Damages INCLUDED

Answer 30

Compensatory Damages INCLUDED Punitive Damages INCLUDED

Answer 31

Compensatory Damages INCLUDED Punitive Damages INCLUDED

Answer 32

Compensatory INCLUDED Punitive Damages INCLUDED

Answer 33

3.8% Medicare tax on the LESSER of NII or MAGI over threshold amounts: $250k MFJ, $200k Single, $125k MFS there is also an additional Medicare tax equal to 0.9% of the wages or self-employment income that is in excess of the same limits

Answer 34

broadly defined term that includes gross income from interest, dividends, annuities, royalties, & rents other than such income derived from the ordinary course of a trade or business, plus other trade or business income, for which the entity is a passive activity, plus net gain attributable to the disposition of property other than property held in a trade or business NOTE: NII does NOT include any distribution from a 401(k), 403(b), 457(b) plan or an IRA or Roth IRA; however such distributions may cause a taxpayer to exceed the threshold amounts

Answer 35

taxpayer can exclude up to $126,500 for 2024 of foreign earned income, OR taxpayer can claim a credit for some or all of the taxes paid to the foreign country, OR taxpayer's foreign taxes paid may be deducted as an itemized deduction

Answer 36

fringe benefits require the employer to NOT discriminate against different classes of employees, especially employees who are not highly compensated (HC)

Answer 37

hold a GREATER than 5% ownership interest or have compensation in excess of $155,000 for 2024 Individuals who may enjoy fringe benefits = worker, spouse, dependents, & retirees Health Insurance = employer premiums deductible/no inclusion

Answer 38

an employer can deduct the cost of up to $50,000 of group term life insurance for each employee employee can exclude the premiums paid by the employer from gross income premiums paid for DB in excess of $50k is taxable to employee

Answer 39

type of cafeteria plan that is funded by employee salary reductions; use it or lose it use FSA for dependent care expenses to provide more tax savings than using Child & Dependent Care Credit 2024 limit for health FSA is $3,200; limit for dependent care FSA is $5,000

Answer 40

employees can exclude the value of meals & lodging provided by the employer: - on the employer's premises - for convenience of employer

Answer 41

Exclude value of any service provided to the employee by the employer if: 1. offered for sale to customers 2. in the line of business in which the employee works 3. employer incurs no substantial additional costs

Answer 42

discounts for merchandise limited to the gross profit percentage multiplied by the retail price; discounts on services cannot exceed 20% of the regular price a working condition fringe benefit can be excluded from the employee's gross income; NOT subject to nondiscrimination requirements (e.g., company car)

Answer 43

benefit is so small as to make accounting unreasonable or impracticable

Answer 44

2017 TCJA disallows a deduction by the employer after 2017 for expenses associated w/ providing any qualified transportation fringe to employees of the taxpayer, & except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting b/t the employee's residence & place of employment

Answer 45

includes direct or indirect payment by the employer to pay for the cost of moving an employee's family & belongings 2017 TCJA suspends the deduction for moving expenses for tax years 2018 through 2025 EXCEPT for members of the Armed Forces on active duty who move pursuant to a military order & incident to a permanent change of station

Answer 46

value of the use of on-premises gyms & other athletic facilities can be excluded from an employee's income if: 1. the facilities are located on the premises of the employer 2. the employer operates the facilities 3. substantially all the use of the facilities is by employees of the employer, their spouses, & their dependent children

Answer 47

value of the educational assistance provided by the employer through an educational assistance program to employee can be excluded from employee's gross income up to $5,250 per year

Answer 48

provided by an employer through a dependent care assistance program can be excluded from the employee's gross income up to $5,000 per year ($2,500 for a married employee filing separately) dependent must be under age 13

Answer 49

Unemployment = included in gross income Workers Compensation = benefits excludable from an employee's gross income as making the taxpayer whole

Answer 50

maximum exclusion of $16,810 for 2024 phaseout starts at (MAGI) $252,150 for 2024; phaseout is complete when the employee's MAGI reaches $292,150 for 2024

Answer 51

deduction reduced based on a proportion equal to the amount by which the individual's AGI exceeds the lower limit of the phaseout range divided by the range of the phaseout

Answer 52

awards & prizes are normally includible in an individual's gross income maximum amount that an employee can exclude is $1,600 ($400 for awards that are not "qualified plan awards" awards must be "tangible personal property" & CANNOT be cash, gift cards, vacations, sporting events, etc

Answer 53

At Grant Date: NO income tax consequences if Exercise Price greater than or equal to FMV At Exercise Date: ordinary (W-2) income = FMV - Exercise Price At Sale Date: LT or ST CG/CL depending on holding period from exercise Basis = FMV at date of exercise TIP: NQSOs create W-2 income at exercise; the basis equals the FMV upon exercise

Answer 54

At Grant Date: NO income tax consequence if Exercise Price greater than or equal to FMV At Exercise Date: NO ordinary income AMT Preference = FMV - Exercise Price At Sale Date: if stock was held for 2 years from date of grant & 1 year from date of exercise gain = LTCG if holding period not met, bargain element is treated as ordinary (W-2) income

Answer 55

income tax deductions fall into two basic categories: ATL (for AGI, expenses for business & production of income activities/investments, IRA deductions, student loan interest, & educator expenses) & BTL (from AGI)

Answer 56

reported on Schedule A of Form 1040 Include = Medical Expenses (above 7.5% of AGI) Taxes Interest Charitable Contributions Casualty Losses Miscellaneous Itemized Deductions (those subject to 2% hurdle repealed) Capital expenses incurred for medical purposes that improve the taxpayer's home are deductible in an amount equal to the difference b/t the cost of the improvements & the increase in the value of the taxpayer's home Travel & lodging expenses incurred to acquire medical care also deductible; maximum deductible lodging expense = $50 per night per person, & a normal mileage allowance is permitted Taxes paid to state/local/foreign governments deductible as an itemized deduction & are deducted in the year paid (up to $10,000) Taxes do NOT include fines & fees even if paid to a state or local government Time spent volunteering for a charitable organization is NOT deductible, however a nominal mileage allowance is permitted for travel related to such volunteer activities

Answer 57

death disability equal payments QDRO Medical > 7.5% AGI birth or adoption (up to $5,000) terminal illness qualified disaster (max $22,000) domestic abuse emergency (limited)

Answer 58

NOT deductible

Answer 59

NOT deductible, mixed use real estate treated as a hobby

Answer 60

1. Interest & Taxes 2. Operating Costs 3. Depreciation (there are NO net losses)

Answer 61

no income if rented < 15 days

Answer 62

becomes mixed-use property if used personally more than the greater of 14 days or 10% of rental days

Answer 63

use cash basis

Answer 64

go to year end to determine long or short term (capital loss)

Answer 65

first $100,000 deductible as ordinary loss if MFJ ($50k if filing other) balance of loss is capital loss

Answer 66

NOT deductible

Answer 67

NO carrybacks carry forward (up to 80% of income)

Answer 68

6% = excise tax on excess contributions to IRAs 10% early distribution penalty (prior to 59.5) 25% for failure to take RMDs beginning at age 73 (for those who turn age 72 after 2022; age 75 for those who turn age 74 after 2032)

Answer 69

realized losses added to basis

Answer 70

loss is deferred & added to new basis

Answer 71

Double Basis rule

Answer 72

double basis rule (tested in estates)

Answer 73

to calculate gain or loss, the taxpayer's adjusted basis is subtracted from the amount realized

Answer 74

represents capital (or after-tax income) that a taxpayer uses to purchase an investment used to determine gain or loss on an investment used to determine depreciation deductions that an investor can take on an investment used to determine the amount an investor has "at-risk" which limits loss deductions under the at-risk & passive activity loss rules includes cash paid but also the amount of any recourse debt

Answer 75

allows the lender to pursue the borrower's personal assets for satisfaction of the indebtedness recourse debt ADDS to a taxpayer's basis

Answer 76

cannot be recovered tax-free by the taxpayer NOT added to basis

Answer 77

Purchase Price Sales Tax Freight Installation & Testing Costs "All costs to get the asset into operations"

Answer 78

additions to the investment amortization of the discount on bonds purchased below face value

Answer 79

distributions from business entities that have pass-through tax treatment (such as partnerships, LLCs, & S corporations) depreciation deductions taken

Answer 80

the FMV of the asset on the date of the decedent's death the basis of IRD (income in respect of a decedent) assets do NOT receive a step-to FMV at the death of the transferor IRD = untaxed income that a decedent had earned or had a right to receive during their lifetime IRD assets were NOT subject to ordinary income tax during the life of the transferor IRD assets examples = IRAs, annuities, installment notes, back wages payable to the decedent IRD assets are included in the gross estate of the decedent & subject to income tax when received by the beneficiary there is an income tax deduction for the estate tax attributable to IRD assets IRC 691(c) deduction

Answer 81

generally the donor's basis typically carries over to the donee 2 Exceptions = Gift Tax & donor gifts property that has a FMV less than the donor's adjusted basis as of the date of the gift (double basis rule)

Answer 82

donor pays gift tax on the transfer basis of gifts of appreciated property to the donee = donor basis + [gift tax paid x (appreciation in excess of donor basis / taxable gift)]

Answer 83

applies for property gifted when the FMV is less than the donor's basis general rule = holding period in hands of donee includes HP of the donor basis to donee is FMV for losses; holding period for donee starts on date of the gift donor's basis for gains; carryover holding period no gain or loss if sold b/t the FMV & the donor's basis EXAM TIP = never gift or sell an asset to a related party when the donor's basis is greater than the FMV of the asset

Answer 84

Section 1041 regardless of whether property is sold or given to a spouse the basis of the original owner spouse will carry over to the new owner spouse this treatment is mandatory

Answer 85

when property is sold to a related party & the sale will result in a gain to the selling party, the normal basis rules apply if property is sold to a related party at a loss, the seller is NOT permitted to deduct the loss & the double basis rule applies

Answer 86

ALWAYS use actual contribution rule, EXCEPT for spouse for spouses, use deemed (50%) contribution rule, EXCEPT for tenants in common (TIC) (use actual)

Answer 87

for qualified investors, a 60% bonus depreciation is available in the year the asset is placed in service, for new or used assets placed in service in 2024

Answer 88

depreciation method applies to most types of depreciable property placed in service after 1986

Answer 89

if real estate used for residential rental purposes property depreciated according to straight-line depreciation method over 27.5 years if real estate used for commercial purposes = depreciation occurs on a straight-line basis over 39 years

Answer 90

to calculate depreciation for personalty, under MACRS, the property must first be assigned to a class life or recovery period

Answer 91

automobiles used as taxis, hogs used for breeding, racehorses

Answer 92

most cars, trucks & airplanes, heavy construction equipment

Answer 93

office furniture, fixtures, & equipment

Answer 94

vessels, barges, tugs & water transportation equipment

Answer 95

improvements to land

Answer 96

farm buildings

Answer 97

accelerated depreciation system unlike the straight-line depreciation used for real property assets that have a 3, 5, 7, or 10 year class life are depreciated under double declining balance method but switch to SL when the SL method would produce a greater deduction property in the 15 & 20 year class lives depreciated under the 150 percent declining balance method but also switch to SL when SL would produce a greater deduction for the current tax year

Answer 98

doubles the SL percentage half-year convention permits 1/2 of deduction in first year thus for first year 33.33% of the basis will be deducted for 3-year property, 20% for 5-year property & 14.29% for 7-year property

Answer 99

intangible assets such as the goodwill of a business may be amortized on a straight-line (SL) basis over 15 years (180 months)

Answer 100

provides business owners w/ an option to elect expense property placed in service during the year instead of capitalizing the assets & depreciating them over their MACRS class life to qualify, an asset must be used more than 50% of the time in a trade or business immediately expense up to $1,220,000 as indexed (2024) reduced dollar for dollar for depreciable property placed in service during the year that exceeds $3,050,000 as indexed (2024) electing Section 179 treatment cannot result in a loss for the business so the maximum Section 179 deduction that can be taken in any year will be further limited by the income of the business

Answer 101

the maximum Section 179 expense that can be elected w/ respect to a sport utility vehicle is limited to $30,500 as indexed (2024)

Answer 102

Gain = capital gains except residence $250/$500k exemption Loss = no loss deduction

Answer 103

Gain = ordinary income treatment Loss = ordinary loss treatment

Answer 104

Gain = capital gain treatment Loss = capital loss treatment (current loss may be limited to net $3,000)

Answer 105

Gain = capital gain treatment (part or all gain may require recapture as OI) Loss = ordinary loss treatment

Answer 106

NO TAX DEDUCTION ALLOWED

Answer 107

Long-Term = MORE than 1 year Short-Term = less than or equal to 1 year

Answer 108

25 % = unrecaptured gain on 1250 assets (straight-line depreciation taken) 28% = collectibles (coins/art/guns)

Answer 109

if net ST & LT results are either both gains or both losses, no further action required if net results are of different signs (one gain & one loss) net the ST & LT together up to $3,000 of net capital losses (either ST or LT) may be recognized against other forms of income in any one tax year

Answer 110

1. ordinary (active) income 2. portfolio income 3. passive income *capital gains & losses fall into the portfolio "bucket"

Answer 111

generate gains that are taxed at ordinary income tax rates

Answer 112

personalty used in a trade or business or for the production of income depreciation recaptured as ordinary income to the extent of the gain excess gain over all depreciation is capital gain compare the purchase price to the sales price, if sales price exceeds the purchase price the difference is capital gain; any other gain is ordinary

Answer 113

LESSER of gain or difference b/t depreciation taken & straight-line (SL) depreciation = taxed as ordinary income if gain exceeds amount calculated above, LESSER of remaining gain or straight-line depreciation taken on the property taxed at 25% (unrecaptured Section 1250 depreciation) any gain in excess of the above two calculations taxed at capital gains tax rates (0% to 20%) depending on taxpayer's bracket

Answer 114

taxed at different rates for individuals taxed at the same rate for corporations

Answer 115

nontaxable exchange determine if taxpayer is trading up or down; taxpayers who receive only like-kind property (real estate only) in the exchange will NOT have any current income tax consequences; basis will be increased by any additional capital investment made Party trading DOWN = receiving less like-kind property than given up; required to recognize gain to extent of boot received; if boot exceeds gain the amount in excess of gain is treated as return of capital Party trading UP = receiving more valuable asset in exchange; generally no recognizable gain; boot paid results in increase basis Debt relief = boot; required gain recognition for party no longer responsible for paying back the loan; party assuming the debt will increase basis in the replacement property by an equal amount Losses realized in a like-kind exchange are not recognized until the replacement property is sold; taxpayer's basis in the replacement property equals the FMV of the property received in the exchange plus the disallowed loss

Answer 116

nontaxable exchange to avoid recognition of gain, taxpayer must reinvest proceeds in a replacement property that has a similar use to the property that was involuntarily converted either: 1. 2 years from the end of the year (12/31) in which realization (not the event) occurs 2. 3 years if caused by government 3. 4 years if presidentially declared natural disaster

Answer 117

nontaxable exchange ALL transactions b/t spouses or incident to a divorce result in a carry-over basis & carry-over of holding periods

Answer 118

excludes up to $500k MFJ or $250k all others of the gain from the sale of a principal residence from income tax if certain requirements are met: 1. taxpayer must have owned & used the home as their principal residence for 2 out of the last 5 years (ownership & use test) 2. to claim the exemption, taxpayer must NOT have excluded gain on the sale of a principal residence w/in the last 2 years if a principal residence is sold before the 2 year ownership & use test is met or exclusion was used during last 2 years, it may be possible to qualify for reduced exclusion reduced exclusion available when sale of principal residence caused by: 1. change of employment 2. change of health 3. unforeseen circumstance partial exclusion = (# of months of use or last exclusion / 24) x Applicable Exclusion ($250k or $500k)

Answer 119

anti-abuse provisions apply to individuals, estates & trusts, certain personal service corporations, & closely held regular corporations rules are intended to limit and/or suspend losses from businesses in which the taxpayer does NOT materially participate if a taxpayer regularly participates in the conduct of the business generating the income/loss, that income/loss will be allocated to the active income bucket if the taxpayer does NOT regularly participate in the conduct of the business activities the income/loss for that taxpayer is allocated to the passive bucket

Answer 120

income earned through the active conduct of a trade or business & earned from the provision of labor generally taxed at ordinary income rates

Answer 121

income derived from the investment of capital interest/dividends/capital gains subject to ordinary income rates or favorable capital gains rates (LTCG & qualified dividends)

Answer 122

generally includes income generated from all rental & real estate activities (unless specific exceptions are met) & income generated from trade or business activities when the taxpayer receiving the income does NOT materially participate in the conduct of that trade or business passive income is considered net investment income (NII) for the 3.8% Medicare tax

Answer 123

passive income or loss is derived from the conduct of a PASSIVE ACTIVITY Section 469 defines a passive activity as any activity: - in which the taxpayer does NOT materially participate, - that is a limited partnership interest, OR - that is a rental activity, even if the taxpayer materially participates in the activity

Answer 124

> 500 hours devoted to activity > 100 hours devoted to activity AND the most of any participant > 100 hours devoted to several activities that add to more than 500 hours

Answer 125

it is possible to group several passive activities into an "appropriate economic unit" NOTE: each private limited partnership will have to be valued individually of itself & cannot be commingled

Answer 126

passive losses subject to three primary limitations: 1. Basis Limitation 2. At-Risk Rules 3. Passive Activity Loss Rules when a taxpayer generates a LOSS that is considered PASSIVE, each of these limitations must be applied in sequence

Answer 127

first limitation maximum allowable loss that the taxpayer can deduct is equal to their basis in the investment

Answer 128

second limitation after the basis rule has been applied to the loss from the activity a taxpayer may NOT deduct in the current tax year more than the amount that they have "at risk" for the investment

Answer 129

third limitation after application of basis limitation rules & at-risk rules last test before a passive loss deduction can be claimed for income tax purposes losses falling into the passive activity bucket from a passive activity can only be offset against gains that are in the passive activity bucket unless special exceptions apply

Answer 130

suspended passive losses are fully deductible upon disposition of the trade or business When Taxpayer Dies: - if asset is stepped up, reduce the suspended losses by the amount stepped up - if asset is stepped down, deduct the full suspended loss

Answer 131

two circumstances where real estate activities can be classified as active businesses 1. Real Estate Professionals Exception 2. Individual Investor Exception = allows individual taxpayers who ACTIVELY participate in rental real estate activities to deduct up to $25,000 of losses from that activity against non-passive income for the year, some limitations In order to qualify investor must: 1. actively participate in the activity 2. own at least 10% of the value of the real estate, AND 3. have AGI equal to or less than $100,000-$150,000 (including the phaseout)

Answer 132

the standard deduction is DISALLOWED

Answer 133

Regular Tax Deduction = qualified mortgage interest only Qualified mortgage interest only deductible for AMT

Answer 134

Regular Tax = excess above 7.5% AGI deductible AMT = SAME

Answer 135

Regular Tax = property/sales/use/ad valorem taxes deductible AMT = taxes are NOT deductible EXCEPT tax on qualified motor vehicles

Answer 136

Regular Tax = NOT deductible if subject to 2% of AGI AMT = NOT DEDUCTIBLE AT ALL

Answer 137

Regular Tax = regular rules AMT = SAME

Answer 138

not taxable for regular tax taxable for AMT AMT preference item, must be added back to regular taxable income to arrive at AMTI

Answer 139

Regular Tax = no regular tax at exercise AMT = at exercise AMT income to extent FMV > strike price

Answer 140

Regular Tax = W-2 income at exercise AMT = SAME

Answer 141

1. type of property 2. type of charity 3. use of the property donated

Answer 142

Red Cross, includes operating foundations operating foundations = private foundations that spend substantially all income on its charitable purpose

Answer 143

intended to further the charitable intentions of a donor include private foundations & charitable lead trusts

Answer 144

FMV for deduction 60% public charity 30% PNOF

Answer 145

LESSER of FMV or basis for deduction 50% public charity 30% PNOF

Answer 146

Intangible: - FMV for deduction - 30% or 50% if using basis public charity - 20% of basis PNOF Tangible (related use): - FMV for deduction - 30% or 50% if using basis public charity - 20% of basis PNOF Tangible (unrelated use): - LESSER of FMV or basis for deduction - 50% public charity - 20% of basis PNOF Real: - FMV for deduction - 30% or 50% if using basis public charity - 20% of basis PNOF