Tax Lingo

Question 1

What is the primary source of all tax law?

Answer 1

The IRC-Internal Revenue Code. Treasury Regulations are a great authority as the government’s explanation of law but they are not laws in themselves.

Question 2

Hobby Loss

Answer 2

Any activity generating net income (profit) in 3/5 years is a business, not a hobby.

hobby Income earned needs to be reported as misc taxable income on the 1040 even if a loss occurs

Question 3

1041

Answer 3

For estate and trust income
Due on the 15th day of the 4th month aft er the entity’s year end.

all trusts (exept charitable or 501A) must use a calendar year. estates may choose calendar tax year or any fiscal year.

a fiduciary must file a return for the estate or trust if any of the following exists:
-any taxable income for the year
-gross income of $600 or more
-a beneficiary who is a nonresident alien

Question 4

1040X

Answer 4

Used to report an amendment to tax return

Question 5

Failure to Pay Penalty

Answer 5

0.5% of the tax due each month with a max of 25%

Even if you file an extension, your estimated tax payment is still due on 4/15 and you’d still have a failure to pay problem.

Question 6

Failure to File Penalty

Answer 6

5% of the tax due each month with a max of 25%

Note that to avoid penalty, you need to either pay 90% of the current year tax liability OR 100% of the prior year’s liability. There is no failure to pay if you pay more than this amount, but interest may be due.

If you have over $150,000 AGI, you’d need to pay 110% of prior year’s liability.

Even if you file an extension, your estimated tax payment is still due on 4/15 and you’d still have a failure to pay problem.

Question 7

Penalty for Fraud

Answer 7

75% of the portion of a tax underpayment attributable to fraud (ex: it’d be 75% of the tax deficiency, not the interest deficiency)

Negligence, which is a penalty due to failure to comply with law or to exercise ordinary or reasonable care, or to keep adequate books, but with no intent to defraud has a penalty of 20%

Question 8

Penalty for Frivolous Return

Answer 8

$5000. this is a return that omits information or shows a substantially incorrect tax, or demonstrates a desire to impede the collection of tax.

Question 9

Schedule B

Answer 9

Dividends and Interest

Question 10

Schedule C

Answer 10

Business Income (and Losses)

Question 11

Schedule D

Answer 11

Capital Gains (and Losses)

Question 12

Gross Income exclusions
G I C M. wC

Answer 12

Gifts
Inheritance
Child Support
Muni Bond Interest
Workers Comp Payment
Compensatory damages

Question 13

Taxation of Health Insurance Premiums Paid for Self-Employed, Partners, Owners

Answer 13

premiums paid are taxable income!

100% is deductible as an adjustment to income on the front of the 1040 to the extent that the costs do not exceed net business income.

this can include medical, dental, LTC but NOT disability premiums.

Question 14

Fringe Benefit Tax on Parking Spots and transit passes

Answer 14

$315

Question 15

Fringe Benefit discount on services

Answer 15

limited to 20% selling price charged to customers.

Question 16

Gross Income Adjustments (to calculate AGI)

Answer 16

IRA contributions
Student Loan Interest up to $2500
Keogh or SEP
Self-Employment Tax (1/2)
Alimony paid for divorce before 2019
100% of self employment health Insurance
Moving Expenses (active Military)
Penalty for early withdrawal of savings
HSA contributions

Deductible on Schedule 1 Form 1040

Question 17

MAGI

Answer 17

adjusted Gross income (AGI) plus tax exempt interest, non-taxable social security income, student loan interst, etc.

Question 18

Itemized Deductions (Schedule A)

Answer 18

Medical, Dental, and Qualified LTC expenses that exceed 7.5% AGI
State local sales tax up to $10k
Personal property tax up to $10k
Real estate taxes up to $10k
Mortgage insurance qualified residence (<$100,000k AGI)
Home mortgage interest (up to $750k mortgage +HELOC)
charitable gifts
investment interest
Casualty losses from a federally declared disaster area.

Question 19

Deducting Investment Income

Answer 19

investment income includes interest, dividends, royalties, ST gains.

dividends qualify ONLY if investor uses Ordinary income rates

LT gains included if the investor elects ordinary income rates.

if a question does not indicate it is a qualified dividend, treat it as an ordinary dividend.

Deduct up to net investment income. anything beyond can be carried fwd.

cannot deduct interest paid on debt incurred to purchase or carry tax-exempt bonds (aka, cannot buy munis on margin and then claim a deduction_

Question 20

Casualty Losses (Schedule A)

Answer 20

complete or partial destruction of prperty from an identifiable event of sudden, expected, unusual nature (fire, hurricane, and earthquake for example, not termites)

Calculating deductible loss:
1. use lesser of basis or FMV
2. subtract insurance coverage
3. subtract $100 (floor)
4. Subtract 10% of AGI, only the aggregate loss in excess of 10% AGI is deductible.

Question 21

Personal exemptions

Answer 21

the answer is 0
personal exemptions were suspended

Question 22

medicare tax rates

Answer 22

2.35% if over 200k wages (MFJ)
1.45% if under 200k wages
additional 3.8% applied to investment income for taxpayers with annual income more than $250k for MFJ (includes LTCG and distributions from NQ Annuties)

Question 23

Kiddie Tax

Answer 23

1. $1300 Standard Deduction-no tax
2. Next $1300 taxed at child’s rate of 10% ($130 tax)
3. Amounts greater than $2600 are taxed at parents marginal rate

if a child has EARNED income greater than the standard deduction of $1300, then their deduction is the amount of income earned + $450

if its an utma, there’s kiddie tax

Question 24

Self-Employment Tax

Answer 24

since they function as both employer and employee, they pay BOTH halves of the SS and Medicare tax. This is based on their net earnings from self-employment, not their taxable income. (does not include investment dividends or interest, gains or deductions from property, security, commodities, real estate income, wages or distributions from an S-corp, etc

Self Employment income DOES include:
net schedule C income
K-1 Income (general partnership)
Part-time earnings (1099)
Board of directors fees

Calculation:
1. calculate total self-employment income
2. subtract 7.65%
3. multiply by 15.3% (7.65+7.65)

this employment tax is added to taxpayers income tax liability. then half is subtracted on the front of form 1040.

Question 25

Child and Dependent Care Expenses

Answer 25

Until age 13 point is to help parents work and pay for childcare. you can claim 20% of expenses up to a maximum of $3000 for 1 kid, and $6000 for 2 kids no matter how many kids you have, $6000 is maximum usable expense. So easy calculation to figure out the amount of credit is simply 6000x.2 (assuming they have expense over $6000)

Question 26

Child Tax Credit

Answer 26

$2000 for each qualifying child under age 17 for son, daughter, stepchild, or foster child. this is reduced by $50 for each $1000 above $400,000 for MAGI up to $1700 per child is a refundable tax credit--aka, you can get a refund even if you don't owe tax!

Question 27

Family Credit

Answer 27

Created by the 2017 TCJA $500 for each dependent not a qualifying child---so children over age 17, elderly parents, disabled child. presumes the taxpayer pays more than 50% of their supprt.

Question 28

Adoption Credit

Answer 28

qualified adoption expenses are adoption fees, court costs, attorney fees, and the cost to adopt a foreign child (including travel to that country). does not include costs of surrogate parenting arrangement or adopting your spouse's child. maximum credit is $16810 per eligible child. the full $16810 can be claimed for adopting a special needs child, even if you don't incur any other expenses. Credit gets phased out between MAGI $252,150 and 292,150 If the child is a foreign national, the adoption credit is only available in the year the adoption becomes final.

Question 29

Cash Method of Accounting

Answer 29

firms realize revenue from services performed in the year the payment is received (there is constructive receipt), regardless of when services were performed.

Question 30

1099 consultant income

Answer 30

Company is not required to pay or withhold income or FICA tax.

Question 31

Accrual Method

Answer 31

a firm realizes revenue when the earnings process with goods or services they provide is complete, regardless of when payment is recieved.

Question 32

Installment Sale

Answer 32

permits the capital gain recognized to be spread over the life of the buyer's note rather than recognized in the year of sale. only works if the sale consists of a buyers note, which is an obligation to pay cash at a future date. the payments cannot be all in the year of sale, it cannot be property sold at a loss, or sold to a related party who turns around and sells it within 2 years. if you sell your house to your daughter via an installment sale and she ends up selling it the next year, you'd then recognize capital gains.

Question 33

calculating gain recognized via installment sale

Answer 33

1. Profit/total contract price=gross profit percentage 2. installment x gross profit percentage =gain. the gain is capital gain. Normally LT but can be short term depending on how long the property has been held.

Question 34

NOL (Net Operating Losses)

Answer 34

Schedule C if attributable to a sole proprietorship it can be claimed on a proprietors personal 1040 and thus reduce AGI/taxable income can carry fwd indefinitely no carry back

Question 35

Sole Proprietors

Answer 35

owner is responsible for operating the businesss on a day-to-day basis. business operations are undistinguishable from owner's personal affairs for legal and tax purposes Schedule C advantages: -availability of retirement plans (Keogh, SEP) -100% medical ins premiums are deductible -no legal formalities -conduit of income or losses to owner Disadvantages: -unlimited liability -business dies with owner -capital structure depends on owner's personal resources.

Question 36

Partnerships

Answer 36

association of two or more owners to operate the business for profit advantages: -availability of retirement plans (Keogh, SEP) -100% medical insurance deductible by partners -partnership can be oral agreement, although written preferred -conduit of income or losses to owner disadvantages: -unlimited personal liability for acts of the partnership OR a partner acting on behalf of the partnership (joint and several liability) -partnership dissolves on death, bankrupcy, or incapacity of a partner -capital structure depends on resources of partners note: limited partners cannot actively participate in the business. losses are deductible up to basis limited partnerships can bring in additional investors. but the excess income is still taxable to him. Tax Return Form 1065 for info purposes only. each partner incudes his share on Form K-1

Question 37

LLCs

Answer 37

an LLC may be classified for federal income tax purposes either as a partnership or a corporation. it is a partnership if it has no more than 2 of the following characteristics: -centralization of management -continuity of life -limited liability -free transferability of interests

Question 38

Qualified business Income (QBI)

Answer 38

individuals who earn income through pass-through busineses may qualify to deduct 20% of the QBI from each pass-through they own. QBI is the net income (profit) from a pass-through business Tier 1: less than $383900 of total taxable income may claim 20% Tier 2: $483,900+ are allowed no deduction IF your business is a personal service firm. but will get a limited deduction otherwise Tier 3: in between the thresholds, you may get a partial benefit

Question 39

LLP (Limited Liability Partnership

Answer 39

a partnership where other partners are not personally liable for malpractice claims arising from the professional conduct of another general partner. LLC is more flexible

Question 40

Regular C Corporation

Answer 40

C Corps function as a separate tax entity. if corp distributes after-tax earnings to its owners, teh distributed income is taxed a second time at the owner level (double taxation) corporations are taxed a flat rate of 21% advantages: -separate tax entity -sale of stock to unlimited number of investors -limited liability -continuity of life -dividend-recieved deduction (50% of dividends recieved from investing in another US corporation may be excluded from income if the recipient corporation owns 20% or less of the distributing corporation. its 65% if ownership is between 20% and 80% and 100% exclusion if ownership is greater than 80%) Disadvantages: -corporate formalities dividends paid (after-tax) -accumulated earnings beyond certain limites are subject to double taxation

Question 41

S Corporations

Answer 41

elects special tax treatment and functions as a conduit for items of income, deduction, and tax credit. a Corporation can become an S corp by unanimous election of its shareholders. Files on form 1120 S Eligability: -number of shareholders is limited to 100 -can only issue a single class of outstanding common stock (not preferred) -must be a domestic corporation -only individuals, estates, trusts may be shareholders Advantages of S Corps: -Limited Liability -conduit of income or loss to owner but limited losses up to basis. -bank loans are not included in S corp owners basis. shareholders do not have personal liability for the S corps debt -basis is cash +direct loans to the corporation -owner can take a high salary and not have it classified as dividends Disadvantages of S Corps: -corporate formalities -sale of stock limited by eligiblity standards taking a limited salary from an S corp will reduce FICA and FUTA taxes because the remainder of income will be unearned income. Whereas, if this was a C-corp, compensation would be subject to unlimited medicare taxes

Question 42

Double Taxation

Answer 42

corporations cannot deduct a dividend that is distributed business profit flowing thorugh to investors as dividends is taxed at both coroporate level and again to shareholders Conduit entities avoid double taxation

Question 43

1041

Answer 43

Trusts and Estates

Question 44

1065

Answer 44

Partnerships

Question 45

1120 S

Answer 45

S Corps

Question 46

1099

Answer 46

self-employed income

Question 47

Schedule E

Answer 47

reporitng K-1 income from real estate

Question 48

K-1

Answer 48

Schedule K-1 is an IRS form used by partnerships, S corporations, and estates and trusts to declare the income, deductions, and credits that partners, shareholders, and beneficiaries have received in the tax year. Individual taxpayers transfer the financial information on their K-1s to their tax returns.

Question 49

Trust Taxable Income

Answer 49

certain deductions are available--similar to what an individual can elect. exceptions: -a charitable deduction is only allowed for complex trusts. -Net operating carryforwards are allowed -administration expenses are allowed -trust is allowed a deduction for al income it is required to distribute, regardless of whether it is actually distributed. A complex trust that is required to distribute all of its income has an exemption of $300. A complex Trust that is not required to distribute income, the exemption is $100. There is no double taxation of trust income because the trust recieves a deduction on the income that is distributed to beneficiaries, equal to the lesser of the amount distributed or the Distributable Net Income (DNI)

Question 50

Adjusted Basis

Answer 50

Cost Basis less cost recovery (deductions) cost recovery produces a deduction for depreciation. the deduction generates a tax savings and reduces the basis of the asset.

Question 51

Amortization

Answer 51

There are two general definitions of amortization. The first is the systematic repayment of a loan over time. The second is used in the context of business accounting and is the act of spreading the cost of an expensive and long-lived item over many periods.

Question 52

Basis of inherited property

Answer 52

basis of inherited property is the FV on the date of decedents death, or the alternate valuation date if so elected. in community property states-marrital property enjoys a full steo up in baisis. in non-community property states, it only gets a half step up in basis holding period is LTCG regardless of actual holding period.

Question 53

Gift tax

Answer 53

The value of the gift for gift tax purposes is it's FMV at date of gift. Gifts of appreciated property carry the donor's basis over to the donee

Question 54

MACRS

Answer 54

modified accelerated cost recovery system applies to all recovery property placed in service after 1986 includes purchase price, sales tax, shipping costs. land is not depreciable it requires half-year convention for the year of acquisition 5 years-computers, autos, light duty trucks (1245 property) 7 year-office furniture and fixtures (1245 property) 27.5 year residential rental property (1250) 39 year-nonresidential real property (1250) 5 years recovery year 1: 20% recapture recovery year 2: 32% recapture 7 years recovery year 1: 14.29% recovery year 2: 24.49% at sale, any gains is the initial basis less the adjusted basis (so subtract the amount of depreciation taken from his purchase price). This is subject to a 25% depreciation recapture tax rate.

Question 55

Expensing (section 179)

Answer 55

under TCJA a business may expense up to 1,220,2000 of qualifying property in the year of acquisition Only section 1245 business personal property qualifies ( computers etc) reduced dollar for dollar by cost of qualifying property that exceeds $3,050,000 cannot deduct more than your taxable (earned) income. For Section 179 purposes, part-time wages from another job are also included as part of his taxable income, so it's not just including the amount made at his place of business (6-9) cannot create a loss. but, any amount not allowed can be carried over. you can expense repairs to 1250 property and are fully depreciable in current tax year.

Question 56

1031 Exchanges (like Kind Property)

Answer 56

-proceeds from sale must be held by escrow -replacement property identifed within 45 days -closing of replacement property must take place by earlier of: 180 days from sale or due date of tax return -boot is taxable gain. taxpayer recognizes the lesser of boot recieved or realized gain

Question 57

Carryforward capital loss

Answer 57

$3000/yr any unused carryforward losses are lost after the year of death.

Question 58

Investment Interest tax deduction

Answer 58

deductible investment interest is interest paid/accrued on property held for investment. So treasuries, GNMAs, Zeros, investment property.... does not include interest on funds borrowed in connection with a trade or business does not include mortgage interest on a personal residence does not include muni bond interest

Question 59

1245 Property Depreciation Recapture

Answer 59

applies to all MACRES property other than real property. So mainly equipment. When a business purchases equipment and takes depreciation, it offsets the business's ordinary income. When the business sells equipment for gain, it must do the following: -look back and recapture the lesser of total CRDs taken OR gain realized as 1245 gain -recover any excess gain as 1231 (capital gain). if total CRDs taken are lower than the gain, the excess is the gain - CRDs. if gain is less than CRDs, tehre is no 1231 recovery.

Question 60

CRD

Answer 60

Cost Recovery Deduction

Question 61

Section 1231 Gain

Answer 61

difference between the gain and the CRD is 1231 gain 1231 property includes depreciable tangible and intangible personal property and real property (whether or not depreciable)

Question 62

Installment Sale Recapture

Answer 62

if a taxpayer makes an installment sale of tangible property, ALL depreciation recapture must be reported as income in the year of disposition.

Question 63

What is a sham transaction

Answer 63

Loss made for sole purpose of realizing a loss (tax avoidance)

Question 64

Substance over form

Answer 64

Not reporting income that should be reported as income (“taking a loan” from business instead of taking income)

Question 65

Penalty for tax fraud

Answer 65

75%

Question 66

Assignment of income

Answer 66

Retaining ownership but directing income elsewhere