Tax Flashcards
investment interest deduction
-limited to net investment income
-no investment income= no deduction for margin interest
=not for margin interest to purchase tax-exempt (muni!)
investment income includes:
interest, dividends, royalties, ST gains
*(qualified dividend only qualifies if opted-out of reduced LT gains rate)
what qualifies as investment income? (gain election)
income from property held for investment: interest, (dividends), royalties, STG
- dividends included if elected out of reduced rates
- LTG included only if elected out of long term rate (elects STCG)
Meals and Entertainment Expense
Meals travel, business 50%
NO ENTERTAINMENT- instead ask for reimburse (tax free)
Employer reimbursement:
employer can reimburse in full, but only claim deduction 50%
kiddie tax and muni bonds
muni bond income not included in unearned income bc muni bonds are federal tax-exempt
standard deduction for kiddie when both earned and unearned income
standard deduction is greater of:
$1100 unearned OR earned+$350(max) ($12,200 total max)
SE income included and not included
Included: NET schedule C, Gen partnership income (K-1), Board of directors fees, 1099
NOT included: real estate income/rent paid to you, share of income/loss from limited partner, wages from S corp (fica wages), K-1 income from S corp
FICA (Federal Insurance Contribution Act) taxes
employee and employer each pay 6.2% + 1.45% up to W-2 $132,900
over that, each pays Medicare tax of 1.45%
child dependent care credit (nonrefundable) under age 13
allowable expense $3000 one child, $6000 two or more, and take 20% ($1200 credit) (so $6000 is the max)
child tax credit (partially refundable) under age 17
under 17! $2000 ($1400 of it is refundable) credit for each child (phaseout in tax table)
ex: $4000 owed in tax, 3 kids- $2000+$2000+$1400
other tax credits
Elderly,disabled credit (nonrefundable)- 65 and disabled
Foreign tax credit (non)- take credit OR deduct
Earned income credit (refundable)
Installment sale- Gross Profit Percentage
gain recognized in each year (related party- don’t sell within 2 yrs or it’ll collapse)
Profit/Total contract price= GPP
Ex: $10k basis, $100k sale= $90k profit
$90k/$100k=90%, so for all future payments, 90% is reported as LTCG (if property owned LT) and 10% is return of basis
Section 1244 qualified small business stock (simply add to document!)- what does it do?
- applies to first million of stock (C or S)
- loss of $100,000/$50,000 (JT/single) is ORDINARY loss
- allows you to take $100,000 ordinary loss plus $3000 capital loss if business fails (instead of just $3000/yr and carry forward forever)
sole proprietorship- interest paid on business loans
unlimited deduction!
QBI (qualified business income)
up to 20% of QBI can be deducted from pass through entities like sole p, S corp, LLC, partnerships etc.
up to $421,400 (married), $160,700 (single) taxable income
if business income exceeds $421,400, lesser of 50% of W2 payments
original basis and adjusted basis
adjusted basis is original basis (includes attorney fees, title, etc)- (less) cost-recovery deduction (depreciation)
Ex: bought building for $20,000 down and $100,000 mortgage and sold for $180,000 and took $18,000 depreciation. Adjusted basis is $120,000-$18,000; gain is $180,000-$102,000=$78,000
MACRS, 179…(197?)
you can either amortize using MACRS or 179 it (election to expense up to $1 million ish- tangible (1245) property like computers- limited to taxable earned income.
197 - intangibles like franchise , goodwill
1031 like-kind exchange
business-personal ok if personal is to be used for business
real estate only
Holding period (ST, LT, collectible rates)
-ST and 1245 recaptures- ordinary
-LT:
0% for (10-12% bracket);
15% (bracket 15%-39.6%);
20% (bracket above 39.6%)
passive activities, passive loss
like non-publicly traded partnerships (RELPs- real estate limited partnerships), no material participation
$3000 loss can’t be deducted for PASSIVE loss, that’s just for capital losses
[loss from LLC where active participant- deductible up to basis]
phantom income by category (duplicate)
Insurance: any lapse with a loan; section 162 life/disability
Investments: zero/strip income, TIPS, dividends declared but not paid, CG, [dividends reinvested?]
Tax: K-1 income from LP/FLP, recaptures
Retirement: ESOP distribution (basis only), secular trust
divorce property settlements (and life insurance)
any transfer of property between spouses incident to a divorce is tax-free.
life insurance can also be transferred as nontaxable transfer of property (and not as alimony or child support)- this is exception to “transfer for value” rule
payee assumes payer spouse’s basis if property is transferred (no step up)
front-loading of alimony
too much in 1st 3 years- must be recaptured as ordinary income
- no alimony 3rd year: 1st+2nd-$37,500=subject to recap
- third year payment made: (3rd x 2) +$37,500=
then that number is subtracted from 1st 2 years
(exceeding by more than $15k is a problem- can’t decrease substantially)
- P. T38
(charitable contribution)ordinary income property- limited to BASIS
property that would produce ordinary income if sold:
Use-unrelated property (like artwork, collectibles), Short-term capital gains property, inventory, work of art by taxpayer, copyright
SS taxation; MAGI
Muni bonds added to AGi for SS tax calculation
hobby income/loss
income reportable, no miscellaneous itemized deductions anymore
get income (profit) 3 out of 5 consecutive years is a BUSINESS, not hobby (2 out of 7 consecutive for horses)
above/below the line deductions
Gross income
-“above the line” deduction (adjustment FOR AGI)
AGI
-“below the line” deductions(FROM AGI)
Taxable income….
Adjustments (front):
IRA, student loan interest, MSA, 1/2 SE tax, SE health insurance, Keogh/SEP, HSA, alimony
Itemized deductions(schedule A) [or standard]: medical, dental, qualified LTC 10%, mortgage interest, taxes up to $10,000, charitable gifts, investment interest, casualty losses
can’t deduct adviser fees anymore!
foreign tax credit
if you paid income taxes to foreign govt, you can DEDUCT or CREDIT dollar for dollar against US income tax liability
passive loss, real estate
if you own 10% interest in property, you qualify for $25,000 loss deduction from real estate activity
phaseout AGI $100,000-150,000
basis of property- fees, repairs…
basis is increased by legal fees, commissions, sales tax, freight, improvements
repairs, real estate taxes, normal business expenses like management cost are EXPENSES to be deducted. not added to basis.
NOL (net operating losses)- who can’t use?
carry back/forward years?
partnerships and S corps
NO carry back loss now (carry back loss 2 years, forward 20 years (2017 NOL rule), carry forward indefinitely
scholarships- income?
scholarships for tuition and books are excluded from income
portion attributable to room and board is taxable!
dividend-received deduction for corporations
50% deduction if company owns less than 20% of paying company
65% deduction if company owns 20% or more
cash accounting method
easiest, now available with annual revenue not exceeding $25 million
like-kind exchange problems (figuring out basis of new property)
- what’s received? (FMV + boot)
- subtract your old basis from it (subtract depreciation taken from original basis if any)–> realized gain
- subtract if boot received–> recognized gain
- whatever that number is, subtract from the FMV of property received (#1)–> adjusted basis of new property
gross income exclusions
gifts, inheritances, child support, muni bond income, workers compensation payments, compensatory damages
sale of stocks when dividends are reinvested
- what’s original investment
- figure out number of stocks added from reinvesting and total up to find total sale
- figure out new BASIS in dollars (original + amount of reinvested $)
- subtract
AGI calc involving SE and insurances
- do 1/2 SE tax first (for deduction)
- add up medical, dental, LTC (limitation-ex: up to $4220 for age 61)
- net
LIFO and FIFO are…
impact on inventory control?
inventory methods, not accounting
FIFO- company sells its lowest cost goods first, so income would increase (compared to using LIFO)
like-kind exchanges with mortgage/loan
- always, what’s received?
- what amount of loan was assumed by other person?(+$5000 for $5000 of loan taken care of)—> total received
- less your basis–> realized gain
basis of gifts through generations
original basis of gift carries through generations, no step-up along the line
ex: $1/ stock gifted to daughter when $10/ and then to her daughter at $20/ and she sells. $19/ gain
bargain sale taxable gain
FMV $500,000 sold to charity for $300,000, basis $100,000. taxable gain?
($300,000 (realized gain)/ $500,000 FMV) x $100,000 basis=$60,000 (adjusted basis)
$300,000-$60,000= $240,000 taxable gain
Publicly Traded/Non publicly traded loss offset
Non-publicly traded loss can only be used up to the gain, then carried over ( i think)
calendar year for trusts?
all trusts (except charitable, 501(a)) must use calendar year to file tax returns.
charitable contributions by business entities
deduction is limited to 10% of taxable income
corporate AMT
eliminated
transfer for value, 3 year rule
3-year rule doesn’t apply when a SALE (transfer for value) occurs
DNI (distributed net income)
conduit income
-no double taxation since trust receives deduction
- limits amount that trust beneficiaries must report as gross income
- claim deduction for amount distributed
- limit portion of the distribution that’s taxable
- ensure character of the distributions remains the same for the bene as it was to the trust
AMT add-back (not IPOD)
AMT paid increases basis of stock!
bargain element of ISO, taxes
financial advisor fees NO LONGER DEDUCTIBLE!
if basis is $100,000 and you pay $28,000 AMT on it, your basis becomes $128,000
qualifying widow status (tax)
year after death of spouse if:
1) maintains a home
2) dependent child
3) joint return prior year
4) not remarried
charitable tax deduction carry forward
5 more years (first plus 5!) total 6
corporate tax- what’s flat, graduated
C corp is graduated
PSCs are flat 21% (HALE)
bank loans-
ok for partnership,
NO for S corp
form 1120 (business corporation tax return)
no schedule K-1!
corporation distribution shown in W2 and 1099
depreciation recapture in installment sale (tangible)
all depreciation recapture must be reported as ordinary income in the year of disposition!
cost recovery 1245 property
just memorize 1st year recovery
MACRS: 5 yr, 20%; 7 yr, 14.29%
straight line: 5 yr, 10%; 7 yr, 7.14%
ex: truck $20,000 + $1000 sales tax modded for $10,000= $31,000 x 20%= $6200 cost recovery deduction
income tax exemption for ESTATE
$600
15 y/o has earned income of $3000 and $2800 interest from UTMA. How much is is subject to kiddie tax at the income tax rate for estate and trusts? (not tax payable!)
only $2800 is subject to kiddie tax
first $1100 is tax free
next $1100 is taxed at child’s personal tax rate (10%)
remaining $600 is taxed at the estate/trust rate
Private purpose municipal bonds
issued to finance a project that benefits a non-governmental entity (10% by definition)
Taxable fringe benefits
Health insurance premium (medical, dental, LTC) paid for self employed, partners, and 2%+ owners or a S Corp are taxable income but 100% deductible on front of 1040
Inheritance- calculating gain
$15,000 stock inherited and sold for $30,000 within two months:
$15,000 long term capital gain!
Selling house after divorce -taxation
Ex: wife gets house they lived in for 5 years and sells it for $400,000 after divorce and agreed to split the proceeds. How much gain is taxed?
$0. “Unforeseen circumstance” so she qualifies for $500,000 exclusion and she’ll “gift” half the value of the house, not just gain.
separate maintenance agreement deductible?
legal document, similar to a marriage settlement agreement, that contains the terms of the separation, often including child custody, alimony, child support payments, ownership of joint property and liability for debts of the opposite spouse.
deductible like alimony
charitable deduction of loss property
the lower FMV becomes basis, so use 50% AGI but it’s limited by FMV (50% AGI is $60,000 but if $70,000 property is $50,000, only $50,000 deductible)
PMI (private mortgage insurance) deduction?
borrowers with less than $100k AGI can deduct (itemized) all PMI expenses
PMI (private mortgage insurance) deduction?
borrowers with less than $100k AGI can deduct all PMI expenses
how much can corporation with $100,000 taxable income contribute and deduct to 50% public charity?
$10,000 (limit of 10% of taxable income) reported on Form 1120
schedule H
household employees
passive loss from rental (when you sell)
current year loss and passive loss carryforward becomes deductible when you sell (no agi limit)
