Tax Flashcards
Step Transactions
Sell to friend hand he sells it back to wife to incur and loss
Substance over form
I take a loan but never intended to take it back. This would be income.
Business vs Hobby
To qualify for as a Business
profit 3/5 years
For horses … 2/7 years
Filing dates for estimated taxes
April 15, June 15, sept. 15, January 15th
2,3,4 months after the previous
Form used if resubmitting an incorrect return
1040X
Fraud Penalty
75% of underpayment (not interest)
Failure to pay
.5% per month until tax is paid with 25% max
Failure to file
5% tax due each month with max of 25%
(Always file!)
Estimated tax
90% or current years tax liability
Or 100% or 110% (if over 150k) of prior years adjusted gross income
Frivolous return penalty
5k
What items are subject to self-employment tax?
What is the tax amount?
How much can you deduct above the line?
- Net Schedule C income
- general partnership income (k-1)
- board of directors fees
- part-time earnings
Added up amounts from above * .1413
1/2 of the amount calculated above
Child tax Credit Vs Child dependent care credit
Phase outs?
Child Tax credit : 2k for kids under 17. Yes
Child dependent care credit: used for daycare expenses - 3k x 20%
Or 6k x 20% for 2 or more children
No phase out
Credits are worth more to whom?
Deductions are worth more to whom?
Lower tax bracket
Higher tax brackets
Is child support payment received included in gross income?
No
Is alimony received included on gross income?
Yes if before dec 31 2018
Qualified residence interest rules
Interest on up to 750k deductible
Max cash deduction to a public charities
60% of AGI for this year. The rest will carry forward to write off the following years.
How much can you deduct appreciated long term gain property? (Charity donation)
- Must be use related
30% of AGI if you use FMV
50% of AGI if you use Basis (rarely would you do this)
Use - Unrelated Property
Short term cap gains property (ordinary property)
Always basis and 50% of AGI
PSC
Personal Service Corp
H - Health (drs, dentists)
A - Accounting, Architectural
L - Law
E - Engineering
Flat 21% tax
S-Corps
Form, max shareholders, basis calc, stock type, taxed
-form 1120s
-common stock only
- 100 max shareholders
- Basis = Cash contributions and loans from the shareholders
- Avoids double taxation
MACRS
Depreciation
Section 179
-1,220,000 max expense deduction
-1245 property
-Cannot create loss
1031 Boot Rules
Boot paid adds to basis of boot receiver
Are Exemptions allowed?
Never!
Revisionary Interest
If grantor has more than 5% revisionary interest at time of creation of trust, then the grantor will be taxed for the income kicked off from the trust.
Failure to pay vs failure to file
File: 5% per month up to 25%
Pay: .5% per month up to 25%
What schedule should you file if you have employ someone to care for your children?
Schedule H
Would the cost traveling abroad to adopt a child qualify for the adoption credit?
Yes
What can be either an itemized deduction or a tax credit?
Foreign tax credit
Allowable use of rental property
The greater of 14 days or 10% of rental days
Low income housing loss credit formula
Loss up to 25k x marginal bracket
Over payment of alimony (recapture)
No Alimony received in third year
Year 1 + year 2 - $37,500
If Amoint paid in third year multiply amount by 2, add it to 37,500 and subtract that number from first two years added together
Donation of work of art by artist. Max deduction.
Valued at basis (cost of supplies)
What are eligibility requirements for a sub chapter s corporation?
- number of shareholders limited to 100
-the corporation can only have a single class of outstanding income in stock no preferred stock, but the common stock can be voting or non-voting.
-must be a domestic corporation. No nonresident aliens
Tax basis for partnership or LLC
– Cash invested
– Direct loans made to the partnership
– Partnership debt loans made to the partnership,
Note: S – Corp. basis does not include bank loans, even if the S – Corp. owner personally guarantees the debt.
Property classes
1245 property
– Five year: computers, autos, trucks
– Seven year: office equipment, except computers
1250 property
– 27.5 year: residential rental property
– 39 year: non-residential real property
CATCORN
Boot/gain recognized/basis
- No boot received: zero recognize gain
- Boot received: recognize gain is boot received.
- Boot paid is added to basis.
Sale of personal residence (section 121)
250K if single and 500k of sale is tax free if lived 2/5 last years
- exemption if living in residence less than two years because of new job or health reasons
Recapture (1245 Property)
When the sole proprietor sells the equipment for a gain, the sole proprietor must:
1st: Look back and recapture the lesser of the CRDs(cost recovery deduction) taken or the Gain realized as 1245 Gain (ordinary income)
2nd: Recover any excess gain as 1231 (capital gain)
Section 179
Qualifying vs. Non-Qualifying Property
Qualifying:
-Tangible Personal Property
-1245 Property
Non-Qualifying:
Real Estate
-1250 Property
-Intangible (owning a franchise)
AMT Preference Items
- Excess Intangible Drilling Costs (IDC)
- Private Activity Municipal Bond
- Oil and Gas Percentage Depletion / Excess intangible drilling costs (IDC)
- Depreciation (ACRS/MACRS) but not straight line
Remember: I.P.O.D.
AMT Add-Back Items
AMT Not-Deductible Items
Add Back:
- Incentive Stock Option Bargain Element
- Property and Income Taxes
Postponing AMT
- Increasing your taxable income by deferring payment of property taxes, state income taxes, charitable giving
-Deferring exercise of AMT Preference items: NOT exercising ISOs, buying public purpose muni bonds rather than private activity bonds
Historic Rehabilitation Programs
Historic Rehabilitation programs that are held as passive activity may generate a Deduction:
-Equivalent Tax Credit of up to $25,000.
The benefit of this Deduction:
-Equivalent Tax Credit phases out between $200- 250k of AGI.
How does the Deduction Equivalent tax credit work?
Calculate tax to determine the maximum marginal tax bracket. If it is 25%, for example, then you multiply $25,000 by 25% to get $6250.
Low Income Housing Credit
Low-Income Housing programs that are held as passive activity may generate a Deduction:
- Equivalent Tax Credit up to $25,000. There is NO phase out.
- The Low Income Housing Credit is allowed annually over a 10 year “credit period.”
- Depreciation is straight-line over 27.5 years.
How does the credit work?
For example, multiply 35% by $25,000 to get a credit of $8750.
NOTE: Because there is no phaseout, it produces a higher credit.
Types of Phantom Income (Insurance)
Insurance:
- Lapse of Policy Loan
- Section 162 Life/Disability
Types of Phantom Income (Investments)
- Zero/Strip Income
- TIPS
- Declared but not paid Dividends
Types of Phantom Income (Tax/Retirement)
- K-1 Income from LP/FLP
- Recapture
- NUA
- 20% withholding plan distributions, Secular Trust
Charitable Giving
Max deduction and types of orgs?
Calculate the Maximum Deductible - 60% of AGI
Calculate the eligible amounts given to 50% organizations (public charities) such as all churches, schools, hospitals and organizations such as United Way, Red Cross, Humane Society, etc.
Charitable Giving (Types of Property - 50% Organizations)
- Long-Term Appreciated Property, using FMV deduct up to 30% of AGI
- Use-unrelated Property, ST Capital Gain Property using BASIS deduct up to 50% of AGI
Sources of Federal Tax Law/Authority
- Internal Revenue Code: Primary Source of all tax law.
- Treasury Regulations: Great authority, but not law.
- Revenue Rulings and Revenue Procedures: Administrative
interpretation. May be cited. - Congressional Committee Reports: Indicate the intent of Congress.
May not be cited. - Private Letter Rulings: Apply to a specific taxpayer .
Judicial Sources: Court decisions interpret
Step Transaction
Ignore the individual transaction and instead tax the ultimate transaction.
Example: The XYZ Corporation sells property to an unrelated purchaser who subsequently resells the property to a wholly owned subsidiary of XYZ.
Sham Transaction
A transaction that lacks a business purpose and economic substance will be ignored for tax purposes.
Example: A sale by XYZ to ABC, but both XYZ and ABC are owned by the same persons.
Substance Over Form
The substance of a transaction, and not merely its form, governs its tax consequences.
Example: The president of XYZ has the company loan him the money he needs. He never intends to repay the loan or take a salary.
Assignment of Income
Income is taxed to the tree that grows the fruit, even though it may be assigned to another prior receipt.
Example: Mr. T owns XYZ, an S Corp. He directs that all income be paid to his son. Mr. T reports no income.
Dates for Paying Estimated Taxes
April 15
June 15
September 15
January 15
IRS Penalties:
Frivolous return, Negligence, Civil Fraud.
Frivolous Return: $5000
Negligence: Penalty is 20% of the portion of the underpayment attributed to negligence.
Civil Fraud: Penalty is 75% of the portion of the tax underpayment attributable.
Payment needed to avoid withholding Tax Underpayment
To avoid, pay the lesser of:
- 90% of the current year’s tax liability
- 100% of the prior year’s tax liability (or 110% if the last year’s
adjusted gross income exceeded $150,000)
Adjustments for Adjusted Gross Income (AGI)
- IRA Contributions
- 1/2 Self-employment Tax (.07065)
- Self-employment Health Insurance (100%)
- Keogh or SEP
- Alimony paid - divorced before 2019
Schedule A Itemized Deductions
-Medical, Dental, and LTC (7.5% of AGI)
-Casualty and Theft Losses
-Real Estate Taxes**
-Investment Interest Expense
-Home Mortgage Interest
-State and Local Taxes**
-Personal Property Tax**
-Charitable Gifts
**Limited to $10,000/yr.
Casualty Losses (Calculation of the Deductible Loss)
First: Use the lesser of basis or FMV
Second: Subtract any insurance coverage
Third: Subtract $100 (floor)
Fourth: Subtract 10% of AGI. Must be a presidentially declared “natural disaster”
Kiddie Tax
(AGE, STD Ded.)
- NOT attained age 18, or
- Turns 19-23 if a full-time student and who has at least one parent alive is taxed at parent’s rate regardless of the source of the assets.
Children under 18 are entitled (2024) to a Standard Deduction amount ($1,300) and an additional $1,300 of unearned income will be taxed at the 10% marginal tax bracket.
What is counted as Self-Employment Income
-Net Schedule C Income
-General Partnership Income (K-1 income)
-Board of Directors fees
-Part-time earnings (1099) NOT wages or K-1 distributions from an S -Corp
Self-Employment Tax Calculation
- Multiply Total Self-employment Income by 0.1413
- NO MORE THAN $168,600
Tax Credits
-Credit for child and dependent care expenses
-Child Tax Credit (up to $1,700 could be refundable)
-Adoption Credit
-Elderly and Disabled Credit
-Foreign Tax Credit
-Earned Income Credit (refundable)
Accounting Methods (Cash, Accrual, Hybrid, Percentage of completion)
-Cash: Mandatory where taxpayer’s records reflect only cash transactions, and there are no inventories.
-Accrual: Mandatory for purchases and sales over $25M+ where there are inventories.
-Hybrid: Combines accrual for inventory portion of business and cash for cash portion of business.
-Percentage of Completion: For long-term contracts where the contract will not be completed within the taxable year started.
Personal Service businesses that are also regular Corporations (C-Corp)
Health
Accounting / Architectural
Law
Engineering
Remember: H.A.L.E.
Realized Gain vs Recognized Gain
What’s the difference?
- Realized Gain is Economic or Inherent Gain at the time of the transaction.
- Recognized Gain is the part of Realized that is immediately taxable.
An individual is required to file a tax return if earnings from self employment (1099) are more than ______?
$400
Do S-Corps directly pay taxes?
NO
How does depreciation affect basis of property?
It lowers it
5 below the line deductions
My tax is calculated correctly
Medical expenses
Tax you pay
Interest
Charity
Casualty losses
Who is responsible for paying RMDs
The client!
