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Victor's Personal CFP > Tax > Flashcards

Tax Flashcards

1
Q

Major Tax Services?

A

Research institute of America (RIA) and Commercial Clearing House (CCH) publish books on federal income tax. Not regulations.

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2
Q

Estimated Tax dates

A

Remember 1+2+3+4

STARTing on tax day
April 15, June 15, September 15, January 15

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3
Q

Tax Filing Extension

A

You can file a 6-month extension until October 15th. This only applies to the filing, not paying taxes. If additional taxes are due, penalties may apply.

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4
Q

Who can represent a taxpayer at an audit?

A

Enrolled Agent, Attorney, CPA, enrolled actuary, etc.

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5
Q

You have concerns about a client cognitively, and you think they might have forgotten to file a tax return. How do you make sure?

A

Call the attorney!

Attorneys are “Priveledged” and must maintain confidentiality. They can then reach out to the CPA or something.

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6
Q

Estimated Tax Requirements

A

Lesser of

90% of current year, or 100% of prior year liability

(or 110% if AGI >150K last year)

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7
Q

Gross Income items I forget sometimes

A
  • Schedule C business income / losses
  • Alimony (old rules)
  • Unemployment income
  • Punitive damages
  • Interest, Dividends, Cap Gains/losses (all here)
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8
Q

Adjustments for AGI Items I forget

A
  • 1/2 the Self Employment tax
  • Self-employment health insurance
  • Alimony paid (old rules)
  • $2,500 student loan interest
  • Early withdrawal penalties
  • Moving expenses active military
    (of course retirement and HSA contributions here)
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9
Q

Schedules and their meanings:

A 
A- Itemized deductions
B - Interest and Ordinary Dividends
C - Business income / losses
D - Capital gains / losses
E - Real Estate
H - Nanny / household
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10
Q

Forgotten Standard Deductions

A
  • 65+ Elderly or Blind = 1,300
  • Head of HH = 18K
  • Child (unearned) = 1,050

THESE ARE ON TAX TABLES

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11
Q

Itemized Deductions Frequently forgotten!

A
  • Medical, Dental and LTC (7.5% AGI floor)
  • Casualty Losses (Federal disaster only, 10% floor + 100 bucks)
  • SALT (limited to 10K max)
  • Home mortgage interest
  • Charitable gifts
  • Investment interest expense
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12
Q

Investment Interest Expense (how-to?)

A

Max deduction limited to taxpayers’ Net Investment Income. Net investment income covers income from property held for investment such as:

  • Interest
  • Dividends (only if you elect not to use reduced rates)
  • Royalties
  • ST Gains

NOT LTCG or QUALIFIED DIVIDENDS (unless election for higher rates used)

Unused losses carry forward FOREVA

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13
Q

Casualty and Theft Losses

A

FEDERAL DISASTER ONLY

Total Loss (using LESSER of Basis or FMV)
- Reimbursements (must file a claim to be eligible)
- 10% of AGI
- $100 bucks (per loss)
———————-
Deduction

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14
Q

Does HO part 3 cover diamond rings and art?

A

No, often there are limitations in Contents coverage part C. You need to separately schedule these types of property usually.

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15
Q

Who gets Home Office deduction and where?

A

ONLY self employed individuals filing a Schedule C (limited to net business income) - Cannot create a loss otherwise

SUSPENDED by TCJA for everyone else.

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16
Q

Home office deduction requirements

A

A1 MUST BE SELF EMPLOYED (otherwise, no soup for you)

  • Must prove you use the home area exclusively for business and on a regular basis
  • Must be used by taxpayer to conduct administrative or management activities of a trade or business
  • There can be NO OTHER FIXED LOCATION where the taxpayer conducts “Substantial” administrative or management…
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17
Q

Meals and Entertainment Watch-Outs

A

Under TCJA, stricter limits created. Meals for clients where business is conducted are deductible if not “lavish or extravagant”.

Meals for employee convenience are now only 50% deductible (formerly 100%)

Tickets to sporting and cultural events permanently no longer deductible. (even with clients)

Deductability (unreimbursed only):
Hotel/Travel - 100%
Meals - 50%
Sports - 0%

Meals at nightclubs and country clubs dont’ count.

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18
Q

Meals Expense Deduction (where does it happen)

A

Formerly a miscellaneous itemized deduction. Now can only be deducted as part of Schedule C or on a business return (1120). 3 Ways this applies:

  1. Salaried employee - Not deductible anymore (misc. Item). Recommend that employee get reimbursed by company, who can now deduct 50%
  2. Corporation pays 100%, and can only deduct 50% on form 1120
  3. Self-employed person must pay 100% but only deduct 50% on Schedule C
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19
Q

Are Personal Exemptions and Dependent Exemptions Still around

A

NO NO NO. Exemptions are WRONG ANSWERS

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20
Q

When does Kiddie Tax apply?

A
  • Net unearned income of a child
  • Child not attained 24
  • Has at least 1 parent alive

Only amount over 2,100 is considered “Kiddie Tax”.

Capital Gains have different trust tax rates, and do not qualify the same way for Kiddie tax.

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21
Q

Kiddie Tax Standard Deduction

A

Standard deduction for a kid with only unearned income, is 1,050.

The next 1,050 is taxed at kid’s 10% rate, and everything over that is subject to trust rates (next 2,550 is 10%).

If the kid has earned income, take that +350 to get to standard deduction (until you get up past 12,000). Then you do the kiddie tax calculation for unearned.

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22
Q

Income Qualifying for Self Employment Tax

A

(.1413)

  • Net Schedule C income
  • General Partnership K1
  • Board of Directors fees
  • Part time eanings (1099)

Stuff that does NOT qualify:

  • Real Estate income/rents
  • S-Corporation K1 or Wages (FICA wages)
  • Limited partnership share of income/loss
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23
Q

Health Insurance Premiums for Self Employees

A

Not deductible on Schedule C, but comes off the front of the 1040 separately.

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24
Q

When is FICA tax only Medicare?

A

Above 128,400, Social Security taxes max out, and 1.45% (2.9% total with employer) Medicare tax is the only one remaining.

Additional surcharge for Medicare of .9% applies over Thresholds (ON TAX TABLES)

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25
Q

Can my employer deduct their portion of the FICA tax?

A

YES. FICA contributions are deductible by employers (just like 1/2 deductible for Self Employed)

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26
Q

Child and Dependent Care Credit (remember CDC)

A

Non-refundable, Kids eligible until age 13 (CDC Creepy, 13 creepy)

20% of allowable expenses. (depends on income somewhat)

3K for Kid 1 allowable
6K for 2+ Kids (6K * .2 = $1,200 max)

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27
Q

Child Tax Credit (Rubio)

A

Partially refundable ($1,400/child maximum refund)

2K for each qualifying child under age 17 (son, daughter, stepchild, or foster child)

Phased out above 400K MAGI JNT, 200 MAGI single (ON TAX TABLES)

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28
Q

New TCJA Credit

A

“Credit for Other Dependents” or “Family Credit”

$500 Non-refundable credit, for dependents who don’t meet the “Qualifying Child” definition. Still 50% of support required. Elderly parents are eligible, unless their taxable income is $4,150 (infl. adjusted).

Same phase-out as CTC (MAGI 400K JNT, Single 200)

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29
Q

Adoption Credit

A

Non-Refundable

Eligible children are:

  • 17 or younger
  • US Citizen or Resident alien with special needs (full credit, IGNORE EXPENSES > FULL CREDIT [13,840 in 2018])
  • Foreign national ONLY take credit in year that adoption is final

Max is $13,840 per eligible child.

Phase-out from MAGI 207,580 - 247,580

Adoption expenses incurred in the year prior to the final adoption, can be deduction in year of adoption (surrogate fees excluded)

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30
Q

Foreign Tax Credit

A

You may deduct taxes paid to foreign government OR credit them dollar for dollar against your income tax liability

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31
Q

Credit for Elderly and Permanently Disabled

A

For anyone who has reached age 65 or is under 65 and retired with a permanent and total disability (AND received disability income)

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32
Q

Education Credits

A

American Opportunity Credit (formerly HOPE) and Lifetime Learning Credit

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33
Q

Real Estate Credits (passive income)

A 
Low-Income Housing (no phase-out) 
Historic Rehabilitation (Phase-out)

Both deduction equivalent, up to 25K.

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34
Q

Earned Income Credit

A

REFUNDABLE

For certain people who work and have earned income under certain amounts.

To get people on the BOOKS

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35
Q

What taxes do a 1099 worker have to pay?

A

Must pay Self-Employment tax (.1413).

Even if he’s a young kiddie tax-eligible person, the standard deduction would cover earned income up to 12K + 350

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36
Q

Which of the following are Refundable credits:

  • Child Tax Credit
  • Dependent Care Credit
  • Foreign Tax Credit
  • Earned Income Credit
A

CTC (RUBIO) - up to $1,400 per child

Earned Income Credit

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37
Q

Installment Sales Taxation

A

Profit / Total contract price = Gross profit percentage (applied to each payment)

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38
Q

Installment Sales (when they break down)

A

For a related party (son, daughter, etc.), if they are sold the property in an Installment Sale, and then turn around and sell it within 2 years of the original purchase date, all gain is taxed retroactively to the first year of the installment. (Related party tax trap)

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39
Q

Net Operating Losses (New Rules)

A

NO MORE 2 year carry-back

Can carry forward indefinitely (instead of 20 year limit before)

Can now only offset 80% of income!

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40
Q

Corporation NOL vs. Sole Proprietorship NOLs

A

Sole Prop NOL MAY be claimed on a personal 1040, and reduce AGI and ultimately Taxable Income.

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41
Q

What business form are you most interested in if the business is profitable?

A

C Corporations or Personal Service Corporations
(Keys:)
- Separate tax entity
- Dividend received deduction of 50% (if you own <20%, if you own more it’s 35% or 100%)
- Flat tax rate at 21% (PSC used to be higher and non-graduated).
- Double taxation, and accumulated earnings tax (PSC have a smaller deduction)
- Can use NOL

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42
Q

If a business has losses, which types of entities will you focus on (for Risky and Risk-free)

A

Risk Free:

  • Sole Proprietorship
  • Partnership

Risky:

  • S-Corporation
  • LLC
  • Limited Partnership
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43
Q

Sole Prop Keys

A
  • Pension Plan (Keogh)
  • 100% of Medical, dental, LTC insurance deductible for owner
  • Lack of continuity
  • NOL can potentially offset other active income
  • If an individual borrows money for business purposes, can deduct interest paid without limit on Schedule C
44
Q

Partnership Keys

A
  • Pension Plan (Keogh)
  • 100% of Medical dental, etc. deductible
  • Lack of continuity (dissolve on bankruptcy, death, or incapacity of a partner)
  • Losses up to basis (Cash, Direct debt, bank loans)

NOL PROHIBITED

45
Q

S-Corporation Keys

A
  • Pension plan
  • Limited Liability
  • Medical, dental ,etc. 100% deductible for 2% owners
  • Losses up to basis (bank loans excluded)
  • Special eligiblility (100 SH, One class, Domestic, all SH must consent to election)
  • No FICA / FUTA taxes on distributions

NOL is not allowed.

46
Q

What entities don’t have NOL

A

Partnerships

S-Corps

47
Q

LLC Keys

A
  • Limited liability (like a corporation)

- Losses up to basis (for partnership, bank loans included)

48
Q

Limited Partnership Keys

A
  • Limited partners cannot actively participate

- Losses up to basis

49
Q

Section 1244 Stock

A

1244 Qualified Small Business Stock Keys

  • Only applies to the first 1MM of C or S corp stock issued
  • If business fails/bankrupt, a loss of 100K (jnt) or 50k / year is an ordinary, not a capital loss (and deductible against other income)

If business fails, you can take th 100K ordinary loss, and a 3K / year capital loss as ordinary (both added together if there’s excess loss). The remaining carries forward.

50
Q

What type of interest can be deducted without limit?

A

Sole Proprietorship loans ONLY

51
Q

Partnership tax return?

A

Form 1065 for informational purposes only

52
Q

How does a corporation become an S corporation?

A

Unanimous election of its shareholders. If rules broken, S status immediately terminated.

53
Q

S-Corp Basis Adjustment (need a little love here…T-18 questions)

A

Increases:
- Portion of income or gain for the year (unearned income)

Decreases:

  • Cash distributed, as nontaxable return of investment
  • Their share of corporate losses

Note: S-corporations typically pay their owners a salary, subject to FICA / FUTA.

BASIS is what we leave in the business basically. . .

54
Q

QBI Deduction uses what for its’ income thresholds?

A

TAXABLE INCOME (AKA, the deduction looks very different if you have a lot of other deductions this year)

55
Q

QBI Calculation (As complicated as it gets)

A

20% of QBI (or net income from the business) UNLESS

  • Taxable income > MFJ [315-415] or Single [157-207]
  • If ^ then deduction reduced to 50% of wages paid by the business (only for non-SSBusinesses)
  • if ^^, and SSB, then there is NO DEDUCTION

Good example on T-20

56
Q

If someone is in a high tax bracket, what is a good business form?

A

C-Corporation. 21% or Qualified Dividends rate, usually lower than their Marginal. Retained earnings rate is at 15%, with a 250K exemption for a business need, etc.

57
Q

What type of liability do LLC and other limited liability forms cover?

A

Only general liability. Professional liability (E&O or Malpractice is separate issue)

58
Q

What do limited partnerships eliminate?

A

The option for active participation, except for the general partner.

59
Q

Different Types of Basis

A

Original basis = Purchase Price

Cost Basis = improvements are added

Adjusted Basis = Cost basis adjusted for depreciation.

60
Q

What do you do with intangibles?

A

Section 197. Straight line depreciation (basically), but called AMORTIZATION, not depreciation.

61
Q

What are 197 vs. 179

A

197 is intangible amortization (goodwill, 15 year SL)

Section 179 is 1MM Deduction for new 1245 property acquition, first year cost recovery (can’t generate a loss or NOL) (Unused losses can be carried forward)

  • 197 is higher, up in the air, intangible (stretch)
  • 179 is lower, on the ground, something we can touch (tangible)
62
Q

What word am I looking for, when the question is about like-kind exchange tax calculations or Section 121 (or all the time really)?

A

Realized vs. Recognized.

Realized has nothing to do with taxes paid. Recognized is taxable.

63
Q

Section 1031 Exchanges Basics

A

No gain or loss is recognized on teh exchange of certain properties held for investment or use in trade or business.

Property that qualifies:

  • Same type (like kind) e.g. Real Estate for Real Estate
  • Non-like kind examples: Land for office equipment, Bull for 20 head of cows (livestock of different sexes are not like-kind)

Non-qualifying property:

  • Business inventory
  • Personal residence
  • Non-business tangible personal (no cows anymore)
  • Marketable securities
64
Q

Does 1031 Like-kind property need to be like-kind for both parties?

A

NO. If Mr. A exchanges his rental property for Mr. B’s home, it is still like-kind if Mr. A uses it as a rental.

Mr. B can not make a like-kind exchange though.

65
Q

Partially Taxable 1031 LIke Kind Exchanges

A
  • Boot RECEIVED = Recognized gain
  • Boot PAID = Add to basis
  • Basis carries over from last property

Only 3 relevant numbers:

  • FMV of property received
  • Adjusted basis of property given up.
  • Boot!

(T-25 Practice Qs)

66
Q

When the problem asks for Capital Gains, what tax rates should be used?

A

0%, 15% or 20%.

3.8% Medicare tax is not a cap gains tax (it is calculated differently, subject to thresholds.

67
Q

Section 121 Gain Exclusion

A
  • 500K MFJ exclusion for gain.
  • Must have owned and used as principal residence for 2/5 of most recent years from the sale.
  • Exceptions for unexpected allow pro-rata portion to be used. (50 MILE RADIUS to qualify)
68
Q

Can carry forward Schedule D losses be netted against real estate gains?

A

Yes!

On schedule D, gains and losses are netted (STCG, LTCG, etc. )

69
Q

How does Corporate AMT work

A

It doesn’t! It got eliminated!

70
Q

When to use IPOD?

A

Well I would prefer an iPod

“Preference items”

71
Q

Which type of depletion triggers AMT (as a prefernce item)

A

NOT COST DEPLETION

% depletion from Oil and Gas is a preference

72
Q

3 Buckets of Income:

A

Earned 1040

Investment Income

Passive Income (Schedule E netting)

73
Q

What makes something “Passive Income/Loss”

A

Generated by a trade or business in which the taxpayer does not materially participate. Deductions are limited.

74
Q

Non-Publically Traded Partnerships

A

Sometimes called RELP (RE Limited Partnership)

  • Netting process on Schedule E
  • Losses from RELPs and Gains from RELPs can be netted (up to PIG income)
  • Cannot be netted again against PUBLIC limited partnerships
75
Q

Publically Traded MLPs

A
  • Losses cannot be netted against other MLP or PAL/PIGs.
  • Losses can only be used against future income from same MLP, or when the asset is SOLD.
  • Publically traded partnership income is reported as portfolio income on Schedule B.
76
Q

Can $3,000 per year of passive losses be deducted against earned income?

A

NO. It is a passive loss, NOT a capital loss.

That rule only applies to capital losses.

77
Q

Types of Passive Activities

A
  • Someone who owns an interest in a business, but doesn’t materially participate (limited partner sure thing)

Typical kinds:

  • LImited partnership (with some exceptions)
  • Individuals with equity interests in business enterprises without “Material Particip”
  • May partners and S-Corp shareholders have no operational involvement of business, yet are allocated income/losses.
78
Q

Two Exceptions to Passive Rules:

A
  • Material Participation (means it is your job basically) - Involved in regular, continuous, and substantial way.
  • Active Participation! (bona fide involvement in management decisions) - Lower bar than MP. Limited Partner cannot be active.
79
Q

Active Participation Loss Rules

A

Qualifying taxpayers may deduct up to 25K per year, of NET LOSSES from real estate activity from their active or portfolio income.

TO QUALIFY must own at LEAST 10% interest in the property.

This deduction is Phased OUT, for taxpayers with AGIs between 100-150K on a 2 for 1 basis.

80
Q

Principal Residence rental rules

A

NOT normally a business;

  • < 15 days during year - EXCLUDIBLE from gross income
  • No deductions attributable to rental allowed either
81
Q

Renting your vacation home rules

A

Normall IS a business

  • Personal use cannot exceed LONGER of:
    (1) 14 Days or
    (2) 10% of Rental Use

(If you don’t break this rule, deductions for property can be taken as a business)

82
Q

Passive Activity Loss Exceptions!

A

(1) Historical Rehabilitation Programs
- Deduction equivalent credit up to 25K (phase out)
- Phases out at 200K AGI
- Not really a worthwhile investment anymore

(2) Low-income housing programs GREAT for Bezos
- 25K Deduction Equivalent Credit
- No income phase-out
- 10 Year credit period

(3) Oil and Gas Working Interests
- You’re a general partner, actually unlimited liability
- Losses are deductible unlimited against other income
- If you’re limited partner, becomes passive

83
Q

Phantom Income in a Tax Shelter

A

If loans in default get restructured at lower amounts, that becomes phantom income to limited partnership owners.

84
Q

Alimony Deductibility Requirements (divorces before 1/1/2019)

A
  • Taxpayers cannot file JNT tax return or live together at time of payment
  • Payments must be in cash
  • Payments must be received for benefit of payee spouse
  • Payments cannot extend beyond death of recipient spouse (by decree or state law)

For Cash Payments:

  • Non-cash items such as services, property, or the use of property, or promissory notes don’t count
  • Cash payments to third parties (mortgage, rent, tax, tuition) can qualify, UNLESS property is owned by Payor spouse such as mortgage, life insurance, etc.
85
Q

Any “Alimony” connected to the child

A

Not deductible as alimony, but treated as Child Support (and new alimony 2019+).

86
Q

Can Alimony payments go to a spouse’s IRA?

A

Yes, and Alimony qualifies as Earned Income (if the spouse doesn’t have any)

87
Q

Where should my client get money to hire an attorney for a divorce?

A

Maybe borrow it, if you don’t have individually owned assets which are reachable.

88
Q

Are property transfers in Divorce taxable?

A

No, these are an exception to the “Transfer for Value” rules.

Basis is transferred over.

89
Q

Divorced persons filing requirements

A

Someone divorced under final decree on last day of the year, is considered unmarried for the entire year.

They should file as single, or HOH with children.

90
Q

Alimony Recapture

A

If payments decrease too quickly over first 3 years, alimony deducted is RECAPTURED as Ordinary Income.

Calculation:
- No alimony paid in third year = Subtract $37,500 = Recapture Required

  • Alimony paid all 3 years, Take the third year and multiply it by 2, then add 37,500. Take that number, and subtract it from the first two years to get Recapture
    Y1+Y2-(Y3*2+37,500)=Recapture
91
Q

When is Alimony recapture required?

A

WHen payments in the second year esceed payments in the third year by more than $15,000

92
Q

Closely Held C-Corporation, passive exception

A

A closely held C-Corp which is not a PSC may use passive losses to offset active, but not portfolio income. Not available to S-Corporations.

93
Q

Tax Filing for widows / widowers

A

In year of death, widow can file JNT return with deceased individual.

If the widow maintains a home for a dependent child, they can continue filing MFJ for 2 remaining years.

94
Q

Dependency Exemptions

A

Valued at $0 (weird quirk)

  • Under 24 if FT students
  • Under 19 if not

(might need to know for other reasons). Might still be claimed as dependents if they meet the 50% support test.

95
Q

Charitable Contribution Maximum Deductible Amount

A

60% of AGI. Any amount greater is carried forward for 5 years (or if sooner, Death) (with the year of contribution, actually 6 years)

First step of charitable deduction problems.

96
Q

Steps in Chartiable Deduction calculations

A
  1. Calculate maximum deductible amount
  2. Calculate eligible amounts given to 50% organizations (public)
  3. Calculate eligible amounts given to 30% organizations
97
Q

Public Charities Deduction Allowable %

A 
60% 
- Cash donations only
30%
- LTCG property, using FMV
50%
- Using Basis for inventory
- Using Basis for works of art created by taxpayer
- Using basis for STCG Property
- Using basis for Use-unrelated (art work and collectibles especially... Need a museum)
98
Q

Public Charities (60%) vs. Private charities (30%)

A

Public:

  • All churches, schools, and hospitals
  • All organizations organized for charitable, religious, educational, or literary purposes or for the prevention of cruelty to children or animals

Private:

  • Nonoperating Foundations
  • War veterans’ organizations
  • Fraternal orders
99
Q

Private Charity Deduction %

A

30% AGI for Cash Donations

20% AGI for LTCG property at FMV

30% of AGI at BASIS for

  • STCG or LTCG property
  • Inventory works of art by Taxpayer
  • Use Unrelated property
100
Q

Good Charitable Questions

A

Page T-40 or Income Tax 10-5 (pre-study)

101
Q

Roy Sells land with a FMV of 500K to a charity for 300K. His basis is 100K. What is Roy’s taxable gain?

A

This is a charitable bargain sale:
300K Sale / 500K FMV = Taxable portion

Taxable Portion * Basis = Adjusted basis.

300K - 60K (AB) = 240K

102
Q

Highest Overall Tax Deduction vs. This Year Deduction

A

Watch out for this… Overall isn’t respective to just this year’s AGI limitations.

103
Q

Corporation charitable deduction

A

Limited to 10% of taxable income.

Inventory gift is limited to basis plus 1/2 of the property’s unrealized appreciation. (can’t exceed 2X basis). Inventory must be for ill, needy, or care of infants! (WTF)

104
Q

Substantiation requirements for charitable conributions

A

Not allowed unless the taxpayer can prove the right to it. $250 or more must be with written aknowledgement from donee organization.

> $500 for a car donation.

105
Q

Hobby Loss Rules

A

Under these, income is reportable. TCJA eliminated the itemized deduction allowing hobby-related expenses.

If net income in 3/5 consecutive years, it’s a business not a hobby (and you can deduct on Schedule C).

For horses, it’s 2/7 consecutive years.

106
Q

How much ownership is required for active participation?

A

TO QUALIFY must own at LEAST 10% interest in the property.

Victor's Personal CFP (7 decks)

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