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Certifications > Tax > Flashcards

Tax Flashcards

1
Q

Basic Rules of Income Taxation

A

all accretions to wealth, from whatever source derived, constitute income

for every deduction taken for income tax purposes, there must be an inclusion in income (but keep in mind there are exceptions even to these two rules)

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2
Q

3 Types of Income

A
  1. Active (Ordinary) income
  2. Portfolio income
  3. Passive income
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3
Q

3 Tax Accounting Methods

A
  1. Cash method
  2. Accrual Method
  3. Hybrid method
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4
Q

3 Key Tax Principles

A
  1. Doctrine of Constructive Receipt
  2. Economic Benefit Doctrine
  3. Doctrine of the Fruit & the Tree
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5
Q

3 Components for Classifying Gains

A
  1. Type of asset that was held
  2. Use to which the asset was put
  3. Holding period (how long the asset was held)
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6
Q

3 Types of Assets

A
  1. Capital assets
  2. Ordinary income assets
  3. IRC Section 1231 Assets
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7
Q

3 Uses of Assets

A
  1. They can use it for personal purposes (personal use assets)
  2. Active conduct of a trade or business (business assets)
  3. Production of income (production of income assets)
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8
Q

3 Types of Rental Real Estate

A
  1. Tax-Free Rental Activities
  2. Ordinary Rental Use Activities
  3. Mixed Use Activities
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9
Q

3 Anti-Abuse Provisions

A
  1. Alternative Minimum Tax (AMT)
  2. At-Risk Rule Limitations
  3. Passive Activity Rules
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10
Q

3 Types of Administrative Rulings

A
  1. Revenue Rulings
  2. Private Letter Rulings
  3. Determination Letters
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11
Q

3 Types of Final Regulations

A
  1. Procedural Regulations
  2. Interpretative Regulations
  3. Legislative Regulations
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12
Q

3 Courts to Resolve Disputes

A
  1. U.S. Tax Court
  2. U.S. District Court
  3. U.S. Court of Federal Claims
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13
Q

Rules of Law

A

Internal Revenue Code & Treasury Regulations

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14
Q

2 Parts of Federal Income Tax

A
  1. Property taxation deals w/ acquisitions, holdings, & dispositions
  2. Income taxation generally follows the Form 1040
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15
Q

Statute of Limitations (In Years)

A

In General = 3 years

Understatement of Gross Income > 25% = 6 years

Fraud = no limit

Collection of Deficiency by IRS = 10 years

Refund Claim by Taxpayer = 3 years

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16
Q

Failure to File

A

5% per month up to 25%

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17
Q

Failure to Pay

A

0.5% per month up to 25%

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18
Q

Accuracy Related

A

20% of underpayment up to 30%**

**40% if d/t substantial valuation misstatement, substantial overstatement of pension liabilities, or substantial estate or gift tax valuation understatement

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19
Q

Fraud Penalty

A

75%

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20
Q

Tax Penalties Partial Months

A

failure to file & failure to pay:

parts of months are counted as whole months

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21
Q

Tax Court

A

Tax only cases

taxpayer NOT required to pay the tax

no maximum for amount of claim

no jury trial available

located around U.S.

appeals brought to U.S. Court of Appeals

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22
Q

Tax Court - Small Claims

A

Tax only cases

taxpayer NOT required to pay the tax

maximum amount of claim = $50,000

no jury trial available

court located around U.S.

No Appeals

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23
Q

U.S. District Court

A

all types of cases

taxpayer is required to pay the tax

no maximum amount of claim

jury trial is available

court located around U.S.

Appeals brought to U.S. Court of Appeals

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24
Q

U.S. Court of Federal Claims

A

Claims against the U.S. Government

taxpayer is required to pay the tax

no maximum amount of claim

no jury trial available

located in D.C. only

Appeals brought to the U.S. Court of Appeals - Federal Circuit

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25
Q

If less than $50,000?

A

Use Small Claims Division of Tax Court

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26
Q

Three Methods of Tax Planning

A

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:

  1. Shift income to related taxpayers in lower income tax brackets
  2. Realize income in a form that is taxed at lower tax rates (LTCG or qualified dividends)
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27
Q

Taxable Income Formulas

A

Income - Deductions = Taxable Income

Taxable Income x Tax Rate = Tax Liability

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28
Q

Income Definition

A

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

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29
Q

Partial List of Gross Income Exclusions

A

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

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30
Q

Items Included in Gross Income

A

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

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31
Q

Partial List of Deductions FOR Adjusted Gross Income (ATL)

A

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

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32
Q

Standard Deduction for a dependent

A

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

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33
Q

Surviving Spouse filing status

A

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

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34
Q

Personal & Dependency Exemption

A

TCJA 2017 repealed the personal & dependency exemption beginning in 2018

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35
Q

Child Tax Credit Refund Amount

A

refundable up to $1,700 per child

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36
Q

Qualifying Child

A

MUST meet all 4 tests

  1. Relationship test
  2. Abode test
  3. Age test
  4. Support test
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37
Q

Qualifying Relative

A

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
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38
Q

Multiple Support Agreements

A
  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
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39
Q

Kiddie Tax

A

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

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40
Q

Non-Refundable Credits

A

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

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41
Q

Refundable Credits

A

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)

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42
Q

Foreign Tax Credit

A

take credit or itemized deduction

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43
Q

Credit for Child & Dependent Care

A

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

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44
Q

American Opportunity Tax Credit (AOTC)

A

$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

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45
Q

Lifetime Learning Credit (LLC)

A

$10,000 x 20% (all years post secondary)

phaseout $80k-$90k, $160k-$180k

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46
Q

Child Tax Credit

A

$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

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47
Q

Qualified Adoption Credit

A

$16,810 2024

phaseout $252,150 - $292,150

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48
Q

Earned Income Credit

A

$7,830 max credit 2024

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49
Q

Other Dependent Credit

A

$500

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50
Q

Gross Income Definition

A

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

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51
Q

Gains Normally Taxed when Realized

A

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

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52
Q

Investment Items Included in Gross Income

A

Capital Gains

Interest Income

Original Issue Discount (OID) Bonds

Accrued income when transferring a debt instrument (gift or sale)

Dividend Income

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53
Q

Qualified Dividends Tax Rate

A

LTCG

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54
Q

Income from Annuities

A

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

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55
Q

Bodily Injury

A

Compensatory Damages EXCLUDED

Punitive Damages INCLUDED

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56
Q

Personal Injuries Not Including Bodily Injury

A

Compensatory Damages INCLUDED

Punitive Damages INCLUDED

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57
Q

Lost Income

A

Compensatory Damages INCLUDED

Punitive Damages INCLUDED

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58
Q

Any other type of injury

A

Compensatory INCLUDED

Punitive Damages INCLUDED

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59
Q

3.8% Medicare Tax

A

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

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60
Q

Net Investment Income (NII)

A

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

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61
Q

Foreign Income

A

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

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62
Q

Taxation of Fringe Benefits

A

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

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63
Q

Highly-Compensated Employees (HC)

A

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

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64
Q

Group Term Life Insurance

A

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

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65
Q

Flexible Spending Account (FSA)

A

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

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66
Q

Meals & Lodging Provided by Employer

A

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

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67
Q

No-Additional-Cost Services

A

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

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68
Q

Qualified Employee Discounts

A

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)

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69
Q

De Minimis Fringe Benefits

A

benefit is so small as to make accounting unreasonable or impracticable

70
Q

Qualified Transportation Fringe Benefits

A

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

71
Q

Qualified Moving Expense Reimbursement

A

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

72
Q

Value of the Use of Athletic Facilities

A

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
73
Q

Educational Assistance Program

A

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

74
Q

Dependent Care Assistance

A

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

75
Q

Unemployment vs Workers Compensation

A

Unemployment = included in gross income

Workers Compensation = benefits excludable from an employee’s gross income as making the taxpayer whole

76
Q

Adoption Assistance Programs

A

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

77
Q

Phaseout Calculation Formula

A

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

78
Q

Employee Achievement Awards

A

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

79
Q

NQSO (Nonqualified Stock Option)

A

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

80
Q

ISO (Incentive Stock Option)

A

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

81
Q

Deductions

A

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)

82
Q

Itemized Deductions (BTL)

A

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

83
Q

10% Penalty Exceptions

A

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)

84
Q

Fines, Penalties, Political Contributions

A

NOT deductible

85
Q

Hobby Losses

A

NOT deductible, mixed use real estate treated as a hobby

86
Q

3 Tier deduction system for hobbies & mixed use real estate:

A
  1. Interest & Taxes
  2. Operating Costs
  3. Depreciation (there are NO net losses)
87
Q

Personal Home

A

no income if rented < 15 days

88
Q

Rental Property

A

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

89
Q

Bad Debts

A

use cash basis

90
Q

Worthless Securities

A

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

91
Q

1244 Stock

A

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

balance of loss is capital loss

92
Q

Personal Losses

A

NOT deductible

93
Q

NOLs

A

NO carrybacks

carry forward (up to 80% of income)

94
Q

Specific Penalties

A

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)

95
Q

1031 Tax-Free Exchanges

A

realized losses added to basis

96
Q

Wash Sale

A

loss is deferred & added to new basis

97
Q

Related Party Transactions

A

Double Basis rule

98
Q

Gifts below FMV

A

double basis rule (tested in estates)

99
Q

Calculating Gain or Loss

A

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

100
Q

Basis

A

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

101
Q

Recourse Debt

A

allows the lender to pursue the borrower’s personal assets for satisfaction of the indebtedness

recourse debt ADDS to a taxpayer’s basis

102
Q

Nonrecourse Debt

A

cannot be recovered tax-free by the taxpayer

NOT added to basis

103
Q

Items Included in Basis

A

Purchase Price

Sales Tax

Freight

Installation & Testing Costs

“All costs to get the asset into operations”

104
Q

Increases in Basis

A

additions to the investment

amortization of the discount on bonds purchased below face value

105
Q

Decreases in Basis

A

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

depreciation deductions taken

106
Q

Basis of Inherited Property

A

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

107
Q

Basis of Gifted Property

A

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)

108
Q

Basis of Gifted Property Exception - Gift Tax Paid

A

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)]

109
Q

Basis of Gifted Property Exception - Double Basis Rule

A

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

110
Q

Basis of Property Transferred Between Spouses or Incident to Divorce

A

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

111
Q

Related Party Transactions (Sales, Gifts, & Basis - IRC Section 267)

A

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

112
Q

Basis of Jointly Held Property

A

ALWAYS use actual contribution rule, EXCEPT for spouse

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

113
Q

Bonus Depreciation - For Qualifying MACRS Property

A

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

114
Q

Modified Accelerated Cost Recovery System (MACRS)

A

depreciation method

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

115
Q

Real Estate - Depreciation

A

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

116
Q

Personalty - Depreciation

A

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

117
Q

3-Year Class Life Assets

A

automobiles used as taxis, hogs used for breeding, racehorses

118
Q

5-Year Class Life Assets

A

most cars, trucks & airplanes, heavy construction equipment

119
Q

7-Year Class Life Assets

A

office furniture, fixtures, & equipment

120
Q

10-Year Class Life Assets

A

vessels, barges, tugs & water transportation equipment

121
Q

15-Year Class Life Assets

A

improvements to land

122
Q

20-Year Class Life Assets

A

farm buildings

123
Q

Depreciation method for personalty used under MACRS

A

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

124
Q

Double Declining Balance Method

A

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

125
Q

Amortization of Intangible Assets

A

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

126
Q

Section 179

A

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

127
Q

Additional Limitations to Section 179 Expense Election

A

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

128
Q

Personal Assets - Sold for Gain & Sold for Loss:

A

Gain = capital gains except residence $250/$500k exemption

Loss = no loss deduction

129
Q

Ordinary Assets - Sold for Gain & Sold for Loss:

A

Gain = ordinary income treatment

Loss = ordinary loss treatment

130
Q

Capital Assets - Sold for Gain & Sold for Loss:

A

Gain = capital gain treatment

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

131
Q

1231 Assets - Sold for Gain & Sold for Loss:

A

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

Loss = ordinary loss treatment

132
Q

Tax deduction for losses on personal use assets & ordinary losses for trade or business assets =

A

NO TAX DEDUCTION ALLOWED

133
Q

Capital Gain Holding Period

A

Long-Term = MORE than 1 year

Short-Term = less than or equal to 1 year

134
Q

LTCG Tax Rates Summary

A

25 % = unrecaptured gain on 1250 assets (straight-line depreciation taken)

28% = collectibles (coins/art/guns)

135
Q

Netting Capital Gains & Losses

A

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

136
Q

3 Types of Income

A
  1. ordinary (active) income
  2. portfolio income
  3. passive income

*capital gains & losses fall into the portfolio “bucket”

137
Q

Ordinary Income Assets - Business Assets

A

generate gains that are taxed at ordinary income tax rates

138
Q

Recapturing Depreciation on Personal Property - Section 1245

A

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

139
Q

Treatment of Gain Under Section 1231 for Real Property - Section 1250

A

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

140
Q

Ordinary Income vs Capital Gains tax rates

A

taxed at different rates for individuals

taxed at the same rate for corporations

141
Q

Like-Kind Exchanges - Section 1031

A

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

142
Q

Involuntary Conversions - Section 1033

A

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

143
Q

Section 1041

A

nontaxable exchange

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

144
Q

Sale of Personal Residence - Section 121

A

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)

145
Q

Passive Activity Rules

A

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

146
Q

Active Income

A

income earned through the active conduct of a trade or business & earned from the provision of labor

generally taxed at ordinary income rates

147
Q

Portfolio Income

A

income derived from the investment of capital

interest/dividends/capital gains

subject to ordinary income rates or favorable capital gains rates (LTCG & qualified dividends)

148
Q

Passive Income

A

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

149
Q

Passive Activities

A

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

150
Q

Material Participation

A

> 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

151
Q

Grouping of Passive Activities

A

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

152
Q

Limitations Imposed on Passive Losses

A

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

153
Q

The Basis Limitation

A

first limitation

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

154
Q

At-Risk Rules

A

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

155
Q

Passive Activity Loss Rules

A

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

156
Q

Suspended Losses - Passive Activity Rules

A

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

157
Q

Passive Activity Loss Exception

A

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)

158
Q

AMT Adjustments & Preferences & the Standard Deduction

A

the standard deduction is DISALLOWED

159
Q

Home Mortgage Interest - Regular Tax vs AMT

A

Regular Tax Deduction = qualified mortgage interest only

Qualified mortgage interest only deductible for AMT

160
Q

Medical Expense Deduction - Regular Tax vs AMT

A

Regular Tax = excess above 7.5% AGI deductible

AMT = SAME

161
Q

Tax Deduction - Regular Tax vs AMT

A

Regular Tax = property/sales/use/ad valorem taxes deductible

AMT = taxes are NOT deductible EXCEPT tax on qualified motor vehicles

162
Q

Miscellaneous Deductions - Regular Tax vs AMT

A

Regular Tax = NOT deductible if subject to 2% of AGI

AMT = NOT DEDUCTIBLE AT ALL

163
Q

Charitable Deductions - Regular Tax vs AMT

A

Regular Tax = regular rules

AMT = SAME

164
Q

Private Activity Municipal Bonds - Regular Tax vs AMT

A

not taxable for regular tax

taxable for AMT

AMT preference item, must be added back to regular taxable income to arrive at AMTI

165
Q

Incentive Stock Options ISOs - Regular Tax vs AMT

A

Regular Tax = no regular tax at exercise

AMT = at exercise AMT income to extent FMV > strike price

166
Q

Nonqualified Stock Options NQSOs - Regular Tax vs AMT

A

Regular Tax = W-2 income at exercise

AMT = SAME

167
Q

Maximum deduction for charitable contributions limited based on:

A
  1. type of property
  2. type of charity
  3. use of the property donated
168
Q

Public Charities

A

Red Cross, includes operating foundations

operating foundations = private foundations that spend substantially all income on its charitable purpose

169
Q

Private Charities

A

intended to further the charitable intentions of a donor

include private foundations & charitable lead trusts

170
Q

Charitable Contribution Deduction (Percent of Taxpayer’s AGI Limit) - Cash

A

FMV for deduction

60% public charity

30% PNOF

171
Q

Charitable Contribution Deduction (Percent of Taxpayer’s AGI Limit) - Ordinary Income Property (including STCG property)

A

LESSER of FMV or basis for deduction

50% public charity

30% PNOF

172
Q

Charitable Contribution Deduction (Percent of Taxpayer’s AGI Limit) - LTCG property

Intangible

Tangible (related use)

Tangible (unrelated use)

Real

A

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

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