Tax Planning

Question 1

Common deductions taken above the line

Answer 1

educator expenses, Health Savings Accounts, moving expenses, self-employed retirement plan contributions, self-employed health insurance premiums, alimony paid, IRA contributions, student loan interest, educational tuition and fees.

Question 2

Common deductions taken below the line

Answer 2

medical expenses, state and local taxes paid, sales tax, real estate tax, personal property taxes, home mortgage interest and points, charitable contributions, theft and casualty losses, gambling losses, unreimbursed employee expenses, and tax preparation fees.

Question 3

If prior year AGI was $150,000 or less, to avoid underpayment penalties

Answer 3

Pay 100% of prior year tax or 90% of current year tax, whichever is less.

Question 4

If prior year AGI was over $150,000, to avoid underpayment penalties

Answer 4

P\ay 110% of prior year tax or 90% of current year tax, whichever is less.

Question 5

Self-Employment Tax: SS Old-Age, Survivors, and Disability Insurance (OASDI) program taxed at a flat rate

Answer 5

6.20% for employee and 6.20% for employer = 12.40% for self-employed) on net earnings from SE up to maximum income level ($142,800 for 2021)

Question 6

Medicare’s Hospital Insurance (HI) program taxed at a flat rate

Answer 6

1.45% for employee and 1.45% for employer = 2.90% for self-employed) on net earnings from SE without limitation.

Question 7

Tax Credits

Answer 7

Directly reduce tax liability (dollar for dollar), more beneficial for individuals in lower tax brackets

Question 8

Tax Deductions

Answer 8

reduce taxable income which means the value of a tax deduction lies in the marginal rate which rises with additional income. More beneficial for individuals in higher tax brackets

Question 9

Tax rate on collectibles and certain small biz stock

Answer 9

28%

Question 10

Alternative minimum tax (AMT) rates

Answer 10

26% (for amounts up to $199,900 for MFJ) and 28% (for amounts above $199,900)

Question 11

Medicare Hospital Insurance Tax

Answer 11

0.9% tax assessed on earned income above: $250k MFJ, $200k Single

Question 12

Surtax on Net Investment Income

Answer 12

3.8% Tax assessed on certain net investment income when modified AGI is above: $250k MFJ, $200k Single

Question 13

Kiddie Tax

Answer 13

SECURE Act changed taxation on the so-called “kiddie taxable amount” of unearned income amounts above $2,200 for those dependents under 19 years old and full-time student dependents from 19-23 years old to be taxed at the parent’s rate

Question 14

AMT Planning Opportunities

Answer 14

• Income and Expense Planning
– Defer deductions for state income or property taxes
– Defer or accelerate receipt of income
– Reduce exposure to private activity bonds to avoid AMT
– Consider taxable bonds if subject to AMT
– Time charitable contributions
• Stock and Option Planning
– Defer or accelerate receipt of capital gains
– Consider disqualifying disposition on ISOs
– Consider tandem exercise of ISOs and NSOs

Question 15

Percentage Limitation and Deduction Rules: Public

Answer 15

Cash: 100% FMV
LTCG Prop: 30% FMV (Basis up to 50%)
Tangible Personal Prop (if held long term): 30% FMV
STCG or Ordinary Income Prop: 50% Basis

Question 16

Percentage Limitation and Deduction Rules: Private

Answer 16

Cash: 30% FMV
LTCG Prop: 20% basis unless qual appreciated stock then FMV
Tangible Personal Prop (if held long term): 20% Basis
STCG or Ordinary Income Prop: 30 basis

Question 17

Gift property with imbedded loss (ie depreciated property)

Answer 17

– General Rule: the taxpayer deducts the lesser of fair market value (FMV) or cost basis for gifts of depreciated assets
– Result: the taxpayer deducts FMV on property that has lost value since purchase

Question 18

Gift property encumbered by debt

Answer 18

– FMV of gift property is calculated net of debt
– The transfer of encumbered property to charity is considered a bargain sale (i.e., the amount of debt is considered an amount realized by the donor)

Question 19

Deducting Mortgage Interest

Answer 19

– Primary residence or second home
– Limits on deductibility
• $750k aggregate acquisition indebtedness (after 12/15/2017)
• home equity indebtedness deduction eliminated
• qualified HELOC interest is further limited in scope (“buy, build or substantially improve the taxpayer’s home that secures the loan).

Question 20

Investment Interest Deductibility

Answer 20

Interest paid to borrow money to make investments is deductible but limited to the amount of net investment income (which equals investment income minus applicable investment expenses).

Question 21

Business Activity Interest

Answer 21

• Interest paid on business loans including rental property and other real estate holdings is deducted from gross income personally or through a business entity “above the line”.
• In most cases, interest expense from passive activities is only deductible to the extent of income from these activities.

Question 22

Qualified & Non-qualified Dividends

Answer 22

• Dividends are generally taxed as ordinary income.
• Qualified dividends are taxed at capital gains rates.
• Holding period: in order to qualify for the lower rates, investors are required to hold common stock for more than 60 days in the 121-day period beginning 60 days before the ex-dividend date.
• Holding period: in order to qualify for the lower rates, investors are required to hold preferred stock for more than 90 days in the 181-day period beginning 90 days before the ex-dividend date.

Question 23

“Realized” Gains

Answer 23

Realization of gains occur upon transaction

Question 24

“Recognized” Gains

Answer 24

Recognized gains occur when triggering a taxable event

Question 25

Taxation of Incentive Stock Options

Answer 25

• Holding period requirements: hold 2 years after grant, 1 after exercise
• If holding period is met…
• • Grant – not a taxable event
• • Exercise – not a taxable event
• • Sale – taxation upon sale as appropriate
• LTCG if holding period met and sold more than one year after exercise
• STCG if hold period met and sold prior to one year from exercise
• If holding period is not met…
• -Difference between FMV at time of exercise and the option price is considered ordinary income for tax purposes.

Question 26

ISO Spread Impact on AMT

Answer 26

The holder of an ISO realizes gain or loss for AMT purposes equal to the difference between the FMV of the stock on the date of exercise and the exercise price (called the “spread”). The spread is an AMT preference item that must be added back when computing AMTI.

Question 27

Taxation of Non-qualified Stock Options

Answer 27

• Not taxed at time of grant.
• NQSO are taxed as ordinary income at time of exercise.
• First taxable event: Tax is based on the spread between market price at exercise and the exercise price actually paid by the executive.
• Second taxable event: LTCG/L if stock is sold more than one year after the exercise. STCG/L if stock is sold one year or less after the exercise.

Question 28

Flow-through Character

Answer 28

• Partnerships, LLPs, and S corporations are categorized as pass-through entities. This means that income is passed through from the entity to the individual and is taxed to the individual (as opposed to the entity).
• LLCs can elect to be taxed as a corporation, but LLC members usually elect to be taxed as a partnership. With this election, an LLC is also a pass-through entity.

Question 29

Pass-through Basis Limitations

Answer 29

• Income tax losses may not be deducted if they exceed
the owner’s basis:
– The unused loss is suspended until sufficient basis becomes available
• An individual partner/shareholder may not have a negative basis in the interest
• Distributions in excess of basis result in a taxable gain

Question 30

Recourse vs. Non-recourse Debt

Answer 30

• There are two types of debts: recourse and nonrecourse. A recourse debt holds the borrower personally liable. All other debt is considered nonrecourse.
• In general, recourse debt (loans) allows lenders to collect what is owed for the debt even after they’ve taken collateral (home, credit cards). Lenders have the right to garnish wages or levy accounts in order to collect what is owed.
• A nonrecourse debt (loan) does not allow the lender to pursue anything other than the collateral. For example, if a borrower defaults on a nonrecourse home loan, the bank can only foreclose on the home. The bank generally cannot take further legal action to collect the money owed on the debt. Whether a debt is recourse or nonrecourse may vary from state to state, depending on state law.

Question 31

“Capital Account”

Answer 31

Capital accounts may be changed only to reflect basis adjustments to the common basis of partnership property attributable to a distribution, or the reallocation of a transferee partner’s unused adjustment when his interest is liquidated. Basis adjustments made for a transferee partner when he acquires his interest are not reflected in his capital account or on the partnership’s books.

Question 32

Pass-Through At-Risk Limitations

Answer 32

• Loss deductions are also limited by the amount the taxpayer has at risk in the activity
• The simplest description is basis minus certain debt for which the taxpayer has no personal liability
• S corporations:
– Shareholders include only debt that they personally loan to the corporation
• Partnerships/LLCs:
– General partners include all partnership debt on which they have personal liability
– Limited partners and LLC members include only recourse debt for which they are personally exposed and qualified nonrecourse debt for business real estate

Question 33

Passive Activities

Answer 33

• Passive activities often involve real estate rentals, whether residential, commercial, agricultural or industrial
• Passive income does not include portfolio income such as interest, dividends, annuities and royalties
• Net income from passive activities is usually ordinary income taxed at rates of up to 37% and the 3.8% surtax on net investment income may apply

Question 34

1031 Exchanges

Answer 34

• Gain recognition is deferred on like-kind exchanges of real estate (only)
– Investment property for investment property
– Trade/business property for trade/business property
– Does not apply to personal use property or residences
• Gain recognized to the extent of “boot” received
– Boot includes cash and debt relief
• Losses are not recognized

Question 35

Section 1231

Answer 35

Depreciable and real property used in trade or business and held for more than one year are allowed cap gains treatment of gains and ordinary income treatment of losses

Question 36

Section 1244

Answer 36

Certain small company stock allowed cap gains treatment and ordinary income treatment for losses

Question 37

Section 1250

Answer 37

Re-characterization of cap gains as ordinary income to recapture accelerated depreciation on certain real property