Tax Flashcards
Child Tax Credit
-MAGI phase-outs, 400k MFJ
-Child under 17
-$2000 per child
-Form 8812
Child & Dependent Care Credit
-NO phase-outs (BEZOS)
-Babysitting fees
-up to $3000 expenses per kid (max $6000)
- x20% = $1200 max credit
-Form 2441
-As long as both parents are working
Which is the best source for obtaining information about the intent of a recent change in the tax law?
A. RIA Federal Tax Coordinator
B. Congressional Committee Reports
C. Treasury Regulations
D. Tax Court Reports
Congressional Committee Reports
Congressional committee reports explain the intent of tax laws.
- If a court disallowed a loss on the sale of an asset because the sale was not bona fide and was made for the sole purpose of realizing a loss, the court is applying which of the following doctrines?
A. Sham Transaction
B. Tax Benefit rule
C. Step transaction
D. Assignment of income
Sham transaction is intended for tax avoidance.
Robert is the sole shareholder, director, and president of a small, profitable corporation. Rather than take a salary, Robert arranges to have the corporation lend him money. Robert has no intention to repay the debt. Since he borrowed the money, he reports no income. The potential tax trap shown below is:
A. A sham transaction
B. Substance over form
C. A step transaction
D. An assignment of income
Substance over form
*He’s hiding income through loans like hiding a SUBSTANCE
The penalty for tax fraud is ____% of the tax due.
75%
Mike owns income-producing real estate. Mike retains ownership of the property but directs that the rental income be paid to his son. Mike does not report the income on his tax return. Identify the potential tax trap.
A. Sham transaction
B. Substance over form
C. Step transaction
D. Assignment of income
D. Assignment of income Mike illegally assigned income to his son.
Min tax payments. Last year client had $125k liability. What annual tax payment is needed?
90% of this year’s tax to be paid or $110% of the prior year. **$125k liability translates to AGI over $150k
Medical expense deduction for under age 65
7.5% of AGI floor
Not deductible if reimbursed
No deductible unless itemizing
Includes medical insurance premiums
MFJ:AGI over $200k. Last year claimed $650 credit for child care expenses. They are in 24% tax bracket. What amount of deductions for AGI would be required to equal tax benefit of $650?
$2708.33. $650 divided by 24% marginal income bracket equals $2708.33
Slade has a current year AGI well over $300,000. He has itemized deductions from property tax, mortgage interest, and charitable gifts. By what amount can his itemized deductions be reduced in the current year?
Zero The phaseout of itemized deductions is eliminated for tax years 2018 through 2025.
Tim Taxpayer has the following items of income in the current year. What amount of self-employment tax must he pay? Sole proprietorship net income $50,000 Reimbursed entertainment expenses $5,000 Subsidized parking for the year $2,000 Wages from an S corporation $20,000
$7065
$50k x .1413 = $7065. Reimb epxenses/parking are not self-emp income.
Taxable Wages will not be over $168,600
- Which of the following items of income is subject to self-employment tax?
A. Distributive share of limited partnership operating income.
B. Wages from an S corporation.
C. Distributive share of general partnership operating income.
D. Interest and dividends from investments.
Distributive share of general partnership operating income
The general partnership operating income is self-employment income. The other items of income are not subject to the self-employment tax. They are forms of unearned income rather than self-employment income. S-corporation wages are subject to FICA, not self-employment taxes.
Kiddie Tax breakdown
First $1300-0%
Second $1300-10%
Rest - Parent’s tax rate
Pat, age sixteen has earned income of $1,250 from mowing lawns and interest income of $750. What is the amount of his standard deduction in the current tax year?
$1,700
$1,250 + $450 = $1,700 earned is greater than $1,250 unearned.
The $450 is the additional standard deduction for a child with earned income.
Mr. and Mrs. Black have earned income of $100,000, qualified dividends of $2,000, and long-term gains of $3,000. For itemized deductions, they have $4,000 of real estate taxes and mortgage interest of $10,000. What is the amount of their taxable income?
75,800
Total income
$105,000
Standard deduction
-$29,200
Taxable income
$75,800
The qualified dividends and long-term capital gains are income. The question is about taxable income, not taxes due.
- Under which of the following situations can proceeds from the sale of property be recognized under the installment method?
C. The property sold is undeveloped land.
Which of the following forms of business organization cannot pass losses through to the owner(s)?
S corporation
C corporation
Sole proprietorship
General partnership
Limited partnership
C Corp
Which of the following types of businesses must file federal tax returns?
I. An S corporation
II. A C corporation
III. A general partnership
IV. A limited partnership
All of the above All of the businesses shown must file federal income tax returns. Certain entity returns are for informational purposes only.
Walter owns an S corporation. He starts it with $50,000 of cash. After a few months, business is expanding, so he lends the S corporation $100,000. As the year progresses, he needs more capital. The S corporation applies for a $100,000 loan. Before the bank will lend the money to the S corporation, it requires Walter to personally guarantee the debt. What is Walter’s basis for tax purposes?
$150,000 Cash ($50,000) plus direct loan ($100,000). The bank loan will not increase basis.
The OKA Corporation owns 25% of the stock of DEC Corporation. For the current tax year, OKA receives $10,000 in dividends from DEC. What is the amount of OKA’s dividend-received deduction?
$6,500 65% of the dividend received is excluded because OKA owns 20% or more of DEC. Otherwise, the deduction is limited to 50% of the dividend received when a company owns less than 20% of the paying company.
On what forms would the owner-employee of a regular corporation receive notice of distributed taxable income?
Schedule K-1 of the 1120
W-2
1099
Schedule C
II, III A regular corporation would report earned income to its employees on Form W-2 and dividends to shareholders on Form 1099. If the W-2 is true, the only answer is Answer C.
If irrevocable life insurance trust has bonds paying insurance premium, the grantor trust is tainted. Only a portion of the trust income is used to pay the premiums and remainder is paid to family and will be taxable to them (DNI Principle)
Sara Jane established a revocable living trust. She transferred all her income producing assets into the trust. How will the trust income be treated for tax purposes?
As Sara Jane’s personal income A revocable trust is tax-neutral (conduit).
Under a divorce settlement, Mr. O’Toole was required to establish a trust to provide support for his minor children. The income generated by the trust will be taxed to which of the following parties?
Mr. O’Toole If the trust income is used to satisfy a grantor’s legal support obligation, the trust income will be taxed to the grantor.
Lamar, a sole proprietor, purchased a light duty truck for $20,000. He pays sales tax of $1,000. To accommodate his business needs, he has it modified. The modification cost is $10,000. What is the amount of the cost recovery deduction for the first year?
$6,200 $31,000 x 20% = $6,200 (MACRS table)
- Which phrase below best describes adjusted basis?
A. A taxpayer’s investment in any asset or property right.
B. Cost basis less cost recovery.
C. Cost basis increased by incidental costs.
D. Cost basis less business expenses.
B
Shelia owns $100,000 of office furniture for use in her consulting business. The business elected a straight-line option under MACRS. What is the amount of the cost recovery deduction for the furniture in the first year?
$7,145 $100,000 x .07145 = $7,145
- The Section 179 expense election is available for purchases of which of the following properties?
1245 property
A regular corporation buys new furniture worth $100,000. At year end the corporation has taxable income of $20,000. What is the maximum amount that the corporation can expense under Section 179?
$20,000 The deduction is limited to the corporation’s taxable income ($20,000). Otherwise, the current limit is over $1million.
A company buys a light duty truck for $25,000. Under straight line method of depreciation, how much can the company claim in cost-recovery deductions in the first year?
$2,500 $25,000 x 10% = $2,500 Although the truck is depreciable over five years, only a 10% cost recovery deduction may be claimed for the purchase year.
Mr. Able owns rental property with a FMV of $500,000 and an adjusted basis of $150,000. He wants to exchange his property for a property owned by Mr. Pate. The Pate property only has a FMV of $400,000 and a basis of $200,000. The Pate property needs substantial upgrading. Mr. Able wants $100,000 in cash from Mr. Pate. What amount of capital gain will Mr. Able have to recognize?
C. $100,000
Using a flow chart like the answer to question 1 - 3 helps. Only use the following three numbers:
FMV of the property received
$400,000
Boot received
+$100,000
$500,000
Less the basis of the property given up
-$150 000
Realized Gain (Step 1)
$350,000
The recognized gain (Step 2) is always the lesser of the boot ($100,000) or the realized gain ($350,000)
MFJ, Section 1244 stock during the current year. Which of the following correctly identify the tax treatment of the sale?
Up to $50,000 of loss is treated as an ordinary loss.
Up to $100,000 of loss is treated as an ordinary loss.
Any loss in excess of the maximum annual ordinary loss is treated as a capital loss.
A gain on the sale is considered ordinary income.
Statements II and III are accurate. A gain on a sale of a small business stock is a capital gain. The $50,000 ordinary loss would apply to taxpayers other than married filing jointly. (See Income Tax Chapter 4)
A partnership trades an old piece of equipment having an adjusted basis of $10,000 plus cash of $2,000 for a new machine with a fair market value of $15,000. What is the recognized gain, and what is the basis of the new machine?
This is NOT a 1031 exchange. The old basis and the cash become the new basis. 1031 exchanges are no longer available for equipment but only for real property
- Which one of the following is true about S corporation eligibility?
A. There may be no more than two classes of stock.
B. There can be no more than seventy-five shareholders.
C. A trust cannot be a shareholder.
D. Voting or nonvoting common stock can be issued.
D. Voting or nonvoting common stock can be issued. An S corporation can only offer one class of stock (common), but it can have voting rights or be nonvoting. It can have up to 100 shareholders. A qualified trust can be a shareholder.
Mr. Gray owns and operates an interior decorating business as a sole proprietor. He purchased antique office furniture a few years ago at a cost of $6,000 to use in his business. He claimed $3,795 in cost recovery deductions on the furniture. This year he sold the furniture for $9,000. What amount of cost recovery deductions must be recaptured as 1245 (ordinary income)?
3,795
Original cost $6,000. Sells. $ 9,000
- CRD. -$3,795. -Basis. -$2,205
Basis. $2,205 Gain. $6,795
look. 1245 $3,795 (OI) (recapture)
back 1231 $3,000 (CG)
Mr. A owns a house that he rents to tenants. Mr. B owns a personal residence. Mr. A and Mr. B want to exchange properties. Under IRC Section 1031 rules, which of the following statements is true?
B. Mr. A can make a like-kind exchange if he uses the transferred property as rental property. If Mr. A uses B’s property as rental property, the property will qualify as a like-kind exchange for A. Mr. B owns a personal residence, not rental property (Chapter 7).
Sally Franklin will report an AGI of $250,000. In addition, she currently has passive income of $30,000 and passive losses of $48,000, $30,000 of which she uses to offset the passive income and $18,000 of which is subject to disallowance. Which of the following activities offers the greatest potential for reducing Sally’s income tax liability?
Investing in a newly created limited partnership involved in low-income housing that is producing passive losses and tax credits. The “active participation” deduction is eliminated at $150,000 of AGI. The oil and gas limited partnership and the equipment leasing limited partnership would produce more passive losses that are nondeductible. Equipment leasing partnerships are only effective for C corporations.
Mrs. Simm’s furniture is damaged in a federally declared disaster. She bought the furniture for $16,000. She insured it a few years ago for $8,000. She recently had it appraised for $13,000, but she did not change her insurance coverage. What is the amount of Mrs. Simm’s deductible casualty loss if her AGI is $40,000?
$900
Lesser of basis or FMV
$13,000
(FMV)
Less insurance coverage
$8,000
Less floor
$100
Less 10% of AGI
-$4,000
Casualty loss
$900
For this year, R.J. received the following K-1s in the mail:
Arizona LP $5,000 loss
Deep Hole Oil and Gas (GP) $30,000 loss
What amount of loss can be deducted against his other income?
C. $30,000 Because the oil and gas is a general partnership (GP), the loss is deductible in full. The Arizona LP loss is a passive loss.
Wash sale rule
The wash sale rule disallows a loss if substantially identical securities are purchased before 30 days after the sale that resulted in the loss. The basis of the acquired securities is increased by the amount of the disallowed loss. Securities from a different issuer are not considered to be substantially identical.
STRIPS are zero coupon treasury bonds. They would generate phantom income. The child would be subject to the kiddie tax in about four years. EEs produce deferred income. The question asks what is least suitable.
An individual’s deduction ceiling for gifts of appreciated long-term capital gain property to 50% organizations is 30% of AGI unless the taxpayer elects to use the property’s basis rather
than fair market value (FMV). An individual valuating the gift at basis can deduct up to 50% of AGI.
Long-term capital gain property is limited to 30% of AGI. A gift to charity of rent-free use of space will not entitle the donor to charitable deduction for the value of that use. Stock and real estate don’t have any usage rules.
Following his 2018 divorce, Dr. Hill made alimony payments of $50,000 in the first post-separation year, $20,000 in the second year, and nothing in the third year. Which of the following statements is true?
Dr. Hill would have to recapture $32,500 and report it as income at the end of the third year.
Payment year # 1 and year #2
$70,000
minus constant
-$37,500
Recapture
$32,500
Estimated tax
To avoid the penalty for 2024, pay the lesser of the following.
1. ___% of the current’s year tax liability or
2. ___% of the prior year’s liability (or ____% if the prior year’s adjusted gross income exceeded
$150,000)
Estimated tax
To avoid the penalty for 2024, pay the lesser of the following.
1. 90% of the current’s year tax liability or
2. 100% of the prior year’s liability (or 110% if the prior year’s adjusted gross income exceeded
$150,000)
Hobby losses
Not deductible since 2017
You must report the income of $30k race winnings, but cannot deduct the expenses.
—becomes a business if profitable 3 out of 5 consecutive years (2 out of 7 for horses)
Failure to File is:
Failure to Pay is
Fraud
Frivolous
File: F-File 5% (max 25%)
Pay: P-Point .5% (max 25%) on tax unpaid
Fraud 75% (only on tax deficiency, no the interest)
Frivolous. $5000
Estimated tax
______ current year or
______ prior year
90 - current
100 - prior
110 - prior if AGI is over $150k
Adjustments (Gross Income)
IRA contributions
100% self-employment health insurance
Student loan interest
Moving expenses (active military only)
Keogh or SEP
Penalty for early withdrawal of savings
Self-employment tax (.07065)
Health saving account (HSA)
Certain alimony paid
Self Employment tax shortcut is .xxxx
.1413 x Gross Sch C income - expenses + 1099 income
What schedule are household employees on?
Schedule H
How much 179 deduction allowed?
Up to income. Can’t create a loss, can be carried over to the next year
*Accelerated depreciation
Can deduct up to 1,220,000 million, over 3,050,000 phase outs happen
Active Participation
Qualifying taxpayers may deduct up to $25,000 per year of net losses from the real estate activity.
Phased out for taxpayers with AGIs between $100,000 and $150,000 on a 2-for-1 basis. The deduction can offset their active or portfolio income.
Low income housing program. $20,000 loss. If 35% tax bracket, what dollar amount of credit?
$7000
$20,000 x .35
Alimony recpature. What is the constant?
$37,500
1st year alimony $ 82,000
2nd year alimony +$ 42,000
Total $124,000
less constant −$ 37,500
Recapture $ 86,500
Schedule B
Ordinary dividend
Interest
Schedule C
Company - Business income
Schedule D
Capital Gains/Loss
Schedule E
real Estate
Gross Income includes
W2/salary/1040
Ord. Dividends
Interest
Business Income
Cap Gains/Loss
Real Estate
Punitive Damages
IRA distribution
Pension
Alimony Received (b4 2019)
Unemployment
Social secutiry
Elderly and/or blind, an additional amount
$1550 for blind
$1550 over age 65
Itemized Deductions (schedule A)
Med, Dental, qualified LTC expenses (>7.5%)
SALT, Real Estate, and Property Tax limited to $10,000
Mortgage insurance qual residence (<$100,000AGI)
Mortgage interest
Charitable gifts
Investment interest
Casualty losses (IF federally declared disaster area)
Mortgage interest limits
If bought after Dec 2017, interest on 1st 750k
If bought before Dec 2017, interest on 1st 1 million
Baseball card collection lost in a federally declared disaster. $30k paid, appraised $50k. Insurance $17k. What is the amount of deductible casualty loss if AGI is $80k?
$30,000 (lesser of basks or FMV)
-$17,000 less insurance
-$100 less floor
-$8000 less 10% of AGI
$4900 total
Self employment income is / isn’t
Is:
Net schedule C income
General partnership income (k-1 income)
board of director’s fees
part-time earnings (1099)
To find self employment tax: x .1413
Is NOT:
Dividends/interest gains
real estate income/rent paid
distributive share of income or loss of limited partner
wages from S corp
Distributions K1 from S Corp.
At what salary amount do you get a raise?
$168500 you get 6.2% (no more paying social security).
The 1.45% (medicare) goes to infinity. Total is 7.65%
Child tax credit
$2000, child under 17.
Reduced $50 for each $1000 over MFJ 400k, single 200k
Up to $1700 is a refundable credit
Dependent care credit
$3000 - 1 kid, $6000 - 2 kids
Multiply x 20% = $1200 max credit
Bezos..no phse out
Cash vs Accrual
29 million and under = cash method
The FIFO method of inventory valuation reflects current cost.
S corporations cannot utilize NOLs because they already pass-through annual losses.
- If a publicly held company wanted to reduce taxes in an inflationary period, which type of inventory method would they use?
LIFO
Can’t do an installment sale for:
Property sold at a loss
Pubicly traded securities
Property sold to 3rd party within 1 year.
*Remember:
Profit / Sales Price = %
% x “what I received this year” = taxable ¢
Which type of business entity cannot adjust future years’ income due to prior year(s) NOL?
S corp b/c of pass through
If a publicly held company wanted to reduce taxes in an inflationary period, which type of inventory method would they use?
LIFO
*last thing we bought cost alot so minimizing taxes. make company look attractive..do FIFO
What is the Corporate AMT?
Zero!! doesn’t exist any more
Re: AMT What is an add back item?
SALT (property tax etc)
and
Bargain element of iSO exercise
Re: AMT What is a preference item?
IPOD
I - excess intangible drilling costs
P - private activity municipal bond
O - oil and gas percentage depletion (not cost depletion)
D - depreciation (ACRS/MACRS) but NOT straight line
AMT planning strategies (reduce AMT payable)
- Make more taxable income
- Defer ISO to later date (do it next year)
- Purchase public purpose muni bonds (instead of private activity)
The AMT is a distinct (alternate) method to determine a taxpayer’s federal income tax liability.
What are the FAB 5 BELOW the line DEDUCTIONS?
MTICC (my tax is calculted correctly)
Medical/dental
Taxes you paid
Interest you paid
Charity gifts
Casualty/theft losses (federally declared disaster)
Taxpayer cannot deduct more than ____% of AGI for CASH gifts to public charity
60%
If there is excess, it can be carried over for 5 years.
*Long term cap gains appreciated property - 30% of AGI (FMV) or 50% AGI (basis). [3 letters FMV-30%, 5 letters BASIS-50%]
Review Charitable Deduction Chart
Stock and real estate is always use-related.
50% (basis)
30% (FMV)
*If you use basis, watch for the value of the gift to be less
Corporations file under Form 1120, not a Schedule C. The charitable deduction limit is ___ % of taxable income
10%
Corporation tax at flat rate of ____%
21%
- Which phrase below best describes adjusted basis?
B. Cost basis less cost recovery.
Only 1245 property qualifies for the Section 179 election.
No 1250
MACRS tables
Recovery year 1
Recovery year 2
MACRS. Straight-line
5 year 7 year 5 year 7 year
Yr. 1. 20%. 14.29%. 10% 7.14%
Yr. 2. 32%. 24.49%. 20% 14.29%
1031 Like Kind exchange. What is recognized? What is basis?
Boot received is recognized gain.
Basis is carry-over basis.
Boot paid adds to basis.
1244 qualified small business stock. What loss can you take on joint return and single return?
Joint - $100k
Single - $50k
You can net and long/short capital gain and loss. But you cannot…..
net a gain and gain
1245 gain (ordinary income) is the CRD recapture
1231 gain is the property gain (capital gain) *no equipment for 1231
Alimony Recapture rules – excess front-loading of alimony
The easiest calculation reflects no alimony paid in the third year. Add what was paid in the first two
years and subtract $37,500. The number comes from the first three years [$15,000 year 2-3 and
$15,000 + $7,500 from year 1-2].
Investment used for income tax deferral
Rental apartment bldg - can offset rental income with depreciation deduction
What is 199a?
QBI (20% deduction)
If below 192k/384, you get it
If over 241k/483k you may get unless you are service professional then you don’t
C corp tax rate is
21%
Corporate AMT
eliminated
S Corp
-no foreign shareholders
-no preferred stock
-has common that can be voting or non-voting
Corporate accumulated earnings tax
20%
$250k can be held ($150k P
SC) and that is all.
*Uness it’s a bonafide business then no limit.
Do corporations get a deduction for paying dividends?
no
Legal fees add to basis (purchase of bldg/property)
MACRS
————— 5 yr 7yr
Rec year 1 20%. 14.29%
Rec year 2. 32%. 24.49%
Straightline
5 year 7 year
10% 7.14%
20% 14.29%
Section 179 deduction
-only for 1245
-business may expense up to $1.22 mil in the year of acquisition
-
REcapture of almimony
add first 2 years and subtract $37,500
and that is the recaptured as ordinary income
if income is paid in 3rd year (double it and add it to the constant and then subtract)
Scholarship tax rules
Room board and incidental expenses are taxable.
Tuition, books, equipment are NOT
QDRO
Applies to qualified plans (not ira)
Gifts to political parties taxation
no tax
Interpolated terminal reserve plus the unearned premium.
Value for transfer tax purpose of assigned ownership of a whole life ins policy to someone else
Dividends used to buy paid up additions to the policy will / will not produce taxable interest
will not
Whole Life:
How to figure what cash you will receive?
How to know what is taxable?
Cash value - Loan = Net Cash Value
Premiums paid. - Dividends = Basis
Cash value - Basis = *Taxable amount
*Taxed at ordinary income
Basis. div. by Expected Return. = Exclusion Ratio
