Tax Planning Flashcards
Tax Forms and Schedules - 1040
Individual Income Tax Return
Tax Forms and Schedules - 1040X
1040 Amended Return
Tax Forms and Schedules - 1040ES
Estimated Tax for Individuals
Tax Forms and Schedules - 1041
Estates and Trusts
Tax Forms and Schedules - Form W-2
Wages and Taxes
Tax Forms and Schedules - Schedule 1
Additional Income and Adjustments to Income
Tax Forms and Schedules - Schedule A
Itemized Deductions
Tax Forms and Schedules - Schedule B
Interest and Dividend Income
Tax Forms and Schedules - Schedule C
Profit/Loss from Business
Tax Forms and Schedules - Schedule D
Capital Gains / Losses
Tax Forms and Schedules - Schedule E
Rental and Royalty Income
Tax Forms and Schedules - Schedule F
Profit or Loss from Farming
Tax Forms and Schedules - Schedule H
Household Employment Taxes
Tax Forms and Schedules - Schedule SE
Self-Employment Tax
Tax Forms and Schedules - Schedule K-1
Partnership Distributions (1041/1120-S/165)
Tax Forms and Schedules - 706
Estate + GSTT
Tax Forms and Schedules - 709
Gift + GSTT
Tax Forms and Schedules - 1098
Mortgage Interest Statement
Tax Forms and Schedules - 1099-DIV
Dividends and Distributions
Tax Forms and Schedules - 1099-INT
Interest Income
Tax Forms and Schedules - 1099-NEC
Non-Employee Compensation
Tax Forms and Schedules - 1099-MISC
Miscellaneous Income
Tax Forms and Schedules - 1099-R
Retirement Distributions
Tax Forms and Schedules - Form 4868
Extension of Time to File
Tax Forms and Schedules - Form 5498
IRA Contributions Individuals
Tax Forms and Schedules - Form 8606
Non-Deductible IRAs
Which Tax Forms are used for Roth Conversions?
Forms 1099-R and 5498
Tax Filing Statuses
Single
Married Filing Jointly (MFJ)
Married Filing Separately (MFS)
Head of Household
Qualifying Widow(er) with Dependent Child
Single
On Dec. 31 either unmarried, divorced, legally separated
MFJ
If married on Dec. 31 of calendar year, a couple can file MFJ.
If a spoused died in the current year, surviving tax payer can file a joint return for that year.
Income + deductions for both used
Not allowed if one spouse is a non-resident alien
Jointly + separately liable
MFS
Married couple can choose to file 2 separate tax returns. This may be beneficial if it results in less tax owed than if you file a joint return.
Each spouse: separate items + income, deductions, credits
If one elects to itemize, the other must also itemize.
MFS filers lose certain credits: child & dependent care credit, earned income credit, adoption credit, AOTC, LLC, student interest. Other credits are reduced: child tax credit and savers credit.
With MFS, IRS requires returns when gross income exceeds $5, regardless of age.
Head of Household
Applies to taxpayers that are single/ not married, but special rules apply:
Pay more than 1/2 of housing costs
Qualifying child: lived with you for more than 1/2 year
Qualifying relative: providing at least 50% of annual living expenses
Qualifying Widow(er)
May apply if spouse died during tax year and there is a dependent child. MFJ = year of spouse death
Not remarried
QW = year 1 + 2 years after death
50% of household expenses
Claim qualifying child as dependent
When must a tax return be filed?
When gross income exceeds standard deduction (exception: MFS, file when gross income exceeds $5!)
Estimated Tax Payments
Estimated tax payments must be made for income types that are not subject to withholding: investment income, rents, income from self-employment, capital gains.
Estimated payments must be made quarterly.
Estimated taxes are calculated on and submitted using vouchers on Form 1040-ES.
Required quarterly payment due dates
Payment period Due Date
Jan 1 - Mar 31 April 15
April 1 - May 31 June 15
June 1 - August 31 September 15
Sept 1 - Dec 31 January 15
Amount of estimated quarterly payments
To avoid penalty on the underpaid amount, the estimated quarterly payments must be 25% of the LESSER of the following amounts:
90% of the tax liability for the current year
100% of the tax liability for the prior year if the taxpayer’s AGI ≤ $150,000
If AGI ≥ $150,000 ($75,000), no penalty if taxpayer pays:
110% of prior year tax OR
90% of current year tax
NO penalty is imposed if
the estimated tax for the current year < $1,000 OR
The individual had no tax liability for the prior year.
Determining if you need to make quarterly estimated tax payments
Will you owe more than $1,000 after subtracting income tax withholding and refundable credits from your total tax?
YES → Will your income tax withholding and refundable credits be at least 90% (66 ⅔% - (2/3 = exponent!) for farmers and fishermen) of the tax on your 2022 return?
YES → no estimated tax payments needed
NO → Will your income tax withholding and refundable credits be at least 100% of the tax on your 2021 return?
YES → no estimated tax payments needed
No → Estimated quarterly tax payments MUST be made!
IRS charges a penalty for various reasons, including if the taxpayer does NOT:
- File a tax return on time
- Pay any taxes owed on time and in the right way
- Prepare an accurate return
- Provide accurate information on returns
IRS Penalties - Negligence
Negligence: Deficiency of tax liability if there was no intent to defraud - 20% penalty applied to amount of deficiency
IRS Penalties - Fraud
Intent to defraud - 75% penalty applied to amount of deficiency
IRS Penalties - Frivolous Return
Not enough information or clearly incorrect tax information - Penalty = $5,000
IRS Penalties - Failure to File
Failure to file: 5% of unpaid taxes for each month or part of a month that a tax return is late up to a maximum of 25% - a minimum of $435 is imposed if the tax return is later than 60 days
IRS Penalties - Failure to Pay
0.5% per month the tax is unpaid up to a maximum of 25%
EXAM TIP:
If both, failure to pay and failure to file penalty are applied in the same month, the failure to file penalty is reduced by the amount of the failure to pay penalty for that month, for a combined penalty of 5% for each month or part of a month that the return was late.
IRS Penalties - Understatement of Liability
If tax withheld from W-2 and/or estimated payments is less than
90% of current year liability OR
100% of prior year liability (110% if AGI above $150k MFJ)
Penalty is based on
- amount of underpayment
- period when underpayment was due and underpaid
- interest rate for underpayments that is published quarterly
IRS Penalties for Tax Preparers - Failure to furnish a copy to taxpayer
$50 for each failure of a tax preparer to give a copy of a tax return or refund claim to a taxpayer
IRS Penalties for Tax Preparers - Failure to sign return
$50 for each failure of a tax preparer to sign a tax return or refund claim
IRS Penalties for Tax Preparers - Failure to furnish identifying number
$50 for each failure of a tax preparer to include a preparer tax identifying number (PTIN) on a tax return or claim
IRS Penalties for Tax Preparers - Failure to retain copy or list
$50 for each failure of a tax preparer to keep a copy or list of a tax return or claim they prepared
IRS Penalties for Tax Preparers - Failure to file correct information returns
$50 for each failure of a tax preparer to include correct information on tax returns
IRS Penalties for Tax Preparers - Failure to be diligent in determining eligibility for certain tax benefits
$545 per failure of a tax preparer to determine a taxpayer’s eligibility for the head of household filing status and the following credits:
- any dependent credit including the Additional Child Tax Credit and Child Tax Credit
- AOC
- Earned Income Credit
- LLC
Tax Formula - 1040
Income (from whatever source derived)
Minus: Exclusions
Gross Income
Minus: Deductions FOR adjusted gross income
Adjusted Gross Income
Minus: Deductions FROM adjusted gross income
(greater of itemized or standard deduction; QBI)
Taxable Income
Times tax rate or rates (from tax table or schedule)
Gross Tax
Minus: Tax credits
Final Tax Due
Minus: Prepayments
(withholdings and estimated payments)
Net Tax Payable or Refund Due
(I Got A Tattooed Gecko For No Reason)
Exclusions from Income
Municipal bond interest
Accident & Health Plans: ER premiums
Fringe benefit
Inheritances & Gifts
Accident & Health Plans: Amounts received
Scholarships
Personal Residence Sale ($250k/$500k, 2 out of 5 years)
Adoption Assistance Programs ($14,890, AGI phaseout: $223,410 - $263,410
Death Benefits
Dependent Care Assistance Programs
Educational Assistance Program (up to $5,250)
Debt Discharged (certain circumstances)
Meals & Lodging for EEs
Interest on Education Savings Bonds (Series EE or I)
Compensatory Damage Compensation
(MAFIAS PADDED MIC)
Itemized Deductions = Below-the-line deductions / Deductions FROM AGI
Schedule A
Itemize when itemized deductions > standard deduction
When standard deduction cannot be used (MFS)
- Qualifying Medical Expenses > 7.5% of AGI
- SALT ($10,000 limit)
- Interest paid: Mortgage interest on debt up to $750,000 (primary, secondary residence); investment interest limited to net investment income
- Gifts to charity: cash up to 60% of AGI, must be qualified charity, private vs. public charity = different max deductions
- casualty and theft losses (must be federally declared disaster): lesser of FMV or basis (insurance pmts. minus $100 deductible; 10% of AGI threshold, any losses in excess are deductible
Average Tax Rate
Tax Paid / Taxable Income
Always lower than the marginal tax rate (calculated based on tax tables)
Tax credits
reduce tax liability on a dollar-to-dollar basis
lower tax under specific circumstances
adjusted after tax due is calculated
benefits all taxpayers in the same amount regardless of marginal tax rate
Tax deductions
Reduce overall taxable income
Adjusted before application of tax rates per tables
Reduce tax by marginal percentage
More valuable to higher income taxpayers than lower income taxpayers because marginal tax rate is higher
Refundable tax credits
offset taxpayer’s tax liability but if credits exceed tax liability, excess is refunded directly to taxpayer
Non-refundable credits
may only be used to offset a taxpayer’s tax liability
Examples:
Child and Dependent Care Credit
Child Tax Credit
Retirement Savings Contribution Credit
Lifetime Learning Credit
Accounting Methods
Cash Method
Accrual Method
Hybrid Method
Cash Method
Expenses are recognized when paid
Revenue is recognized when constructively received
(Constructive Receipt = funds are available without restriction)
Tax return is always cash basis!
Revenue RECEIVED, Expenses PAID
Accrual Method
- Revenue is recognized when right to receive exists (accounts receivable), not when payment is received
(Revenue determination: right to receive income is established / not contingent upon future event AND amount can be estimated with reasonable accuracy)
- Expenses are recognized when liability can clearly be established, not when payment is made (deductions)
(Expense determination: liability exists (contingent expenses not allowed), amount can be estimated with reasonable accuracy, economic performance must have occurred (was work done?))
Revenue EARNED, Expenses INCURRED
Hybrid Method
Taxpayer would prefer cash method but has inventory as a component of their business:
Accrual method must be used for
inventory purchases
sales of inventory
Cash method may still be used for the service portion of the business
!!! If inventory is involved, only the accrual method MUST be used.
!!! For cash method, income is taxed when cash received
!!! For accrual method, income is taxed even if cash has not been received
Inventory Valuations / Accounting Method
FIFO
LIFO
Specific Identification
Price Environment & FIFO vs. LIFO
Rising Prices FIFO LIFO
Profit higher lower
Tax Liability higher lower
Inventory Value Realistic Understated
Falling Prices
Profit lower higher
Tax Liability lower higher
Inventory Value Realistic Overstated
Specific Identification - when can it be used and what is an advantage?
when firm is able to differentiate inventory by purchase lot
Major advantage: both inventory valuation and amount charged to cost of goods sold (COGS) are accurate
Depreciation
annual income tax deduction for taxpayer to recover cost or other basis of certain property over the time the property is used
can be used for most types of tangible property (except land) (e.g., buildings, machinery, vehicles, furniture, equipment) and certain intangible property (e.g., patents, copyrights, computer software)
Requirements:
property must be owned by taxpayer
must be used in a business or income-producing activity
must have a determinable useful life
must be expected to last more than 1 year
Depreciation begins when property is placed in service for use in a trade or business or to produce income.
Depreciation ends when cost has been fully recovered or when it is retired from service (whichever happens first).
Depreciation Methods
- Straight-line: same amount deducted each year over useful life of property
a. determine adjusted basis, salvage value, and estimated useful life of property
b. subtract salvage value from adjusted basis (= total depreciation one can take over useful life of property)
c. annual straight-line depreciation = *(Purchase price - salvage value) / useful life
d. half-year / mid-year convention: 1/2 of full amount of depreciation can be taken in the year the asset was put into service (first year), 1/2 is taken in the last year
Accelerated Depreciation
enables taxpayer to have more depreciation in early years and less at end of asset’s useful life
Using accelerated depreciation increases cash flow
Bonus depreciation = 100% for property placed in service after September 27, 2017
Method from 1981-1986: Accelerated Cost Recovery System (ACRS)
Past 1986: Modified Accelerated Cost Recovery System (MACRS)
Self-Employment Tax
Schedule SE of 1040
SE tax rate: 15.3% - 12.4% SS, 2.9% Medicare
SE tax calculation steps:
- net earnings from SE x 92.35% (1 - 7.65%)
- multiply by 15.3% (applies to SS taxable wage base up to $147,000)
- Earnings above $147,000 are subject only to Medicare tax of 2.9%
Shortcut when net earnings from SE ≤ taxable SS wage base: 14.13% x net earnings
ONE HALF of SE tax is an adjustment to income deduction on IRS Schedule 1 in calculating “for AGI”.
1/2 of the SE tax is subtracted from net earnings from SE in the calculation of the maximum contribution to a retirement plan for a SE person.
Maximum Retirement Plan Contribution for SE Owner
- Subtract 1/2 SE tax from net earnings from SE
- Multiply adjusted employer plan contribution rate
a. adjusted rate: ER contrib rate % / 1+ER contrib rate %
b. max rate of 25% becomes 20% for owner
c. rate adjustment does not apply to EEs (if plan contrib
rate is 25%, EE receives 25% contribution)
If plan contribution rate is 25%, can use shortcut of 18.59% of net earnings from SE.
Example with SE with $100,000 net earnings:
$100,000 - 7.65% = $92,935
0.25 / (1+0.25) = 0.20
$92,935 x 0.20 = $18,587 = max contribution
Shortcut: $100,000 x 18.59% = $18,589
Above the line Deductions (For AGI)
Schedule 1, Part 2 (Adjustments to Income)
Educator expenses for classroom supplies ($250/$500)
Business expenses for govt. officials on a fee basis, performing artists, military reserve forces who traveled more than 100 miles to perform reserve services
HSA contributions with after-tax $$
Moving expenses for U.S. Armed Forces
Retirement account contributions for SE and small business owners
Health insurance premiums for SE (incl. dental & LTC)
Early withdrawal penalties of savings accounts (CD)
Alimony payments (before 2019)
Traditional IRA contributions (subject to phaseout and active participant status)
Student loan interest (up to $2,500 of interest paid on student loans)
1/2 of SE tax
Useful Life for Common Depreciable Assets
Autos - 5 years
Computers - 5 years
Heavy Machines - 7 years
Office Furniture - 7 years
Residential Real Estate - 27.5 years
Non-Residential (Commercial) Real Estate - 39 years
Section 179 Expense Election
- only for property used in a trade or business, NOT for property held for the production of income
- $1,080,000 maximum amount is reduced dollar for dollar to the extent that the firm exceeds $2,700,000 in capital spending
- deduction of any elected 179 expense is limited to the firm’s net profit, not including any 179 expensing
- any elected 179 expense that is limited by profitability can be carried over to the next year’s taxes
- a sole proprietor can aggregate net business profit with unrelated W-2 wages
Trust Filing Requirements, Taxation, Income
Fiduciary (=Trustee) must file Form 1041 for a taxable domestic trust that has
- any taxable income for the year
- gross income of $600 or more (regardless of taxable income)
- a beneficiary who is a non-resident alien
What tax treatment does a non-business bad debt receive.
Short-term capital loss treatment. Only able to use in the year the debt becomes COMPLETELY useless.
Tax consequences of viatical settlements to the insured and the viatical settlement company
Insured: Amounts received under life insurance contract on the life of a terminally or chronically ill individual are excluded from gross income. BUT if individual is only chronically ill, benefits will only be excluded from income to the extent they are used for LTC services.
Viatical Settlement Company: cash settlement amount paid to insured plus any subsequent premiums paid by company is basis. At insured’s death, amount received in excess of basis is taxable to the viatical settlement company. If the company paid any premiums after buying the policy, the premiums paid need to be added to basis!
What is NOT classified as a capital asset?
- Accounts or notes receivable acquired in the ordinary course of a trade or business for services
- Copyrights; a literary, musical, or artistic composition; a letter, memo, or similar property
- Inventory or property held primarily for sale to customers in the ordinary course of a trade or business
- Depreciable property used in a trade or business (e.g., Section 1231 assets)
Methods to determine Cost Basis
on asset-by-asset basis, once you commit to a particular method you must continue to use that method until the asset is completely sold
- FIFO: default IRS method; cost basis is determined by applying cost from shares that were purchased first
- Average Cost Method: cost basis is determined by averaging all purchases; this method is preferred by mutual fund custodians
- Specific Identification: from tax planning perspective, best and most powerful method; taxpayer selects which shares are to be reported as sold
Net capital gain
Excess of long-term capital gain over short-term capital loss
Tax rates for short and long-term capital gains
Short-term capital gain = ordinary income
Long-germ capital gain :
- capital assets: 0/15/20 (taxpayer’s taxable income determines the starting point for LTCG rates)
- unrecaptured depreciation (1250 gains): 25%
- collectibles: 28%
The 3.8% Net Investment Income (NII) tax could be triggered due to capital gains.
$3,000 capital loss per year can be claimed each year for Single, Head of Household, and MFJ
- maximum capital loss per year for MFS is limited to $1,500
- if a capital loss is more than these limits, you can carry the loss forward, indefinitely, to later years
Long-term Capital Gains
- 0% - $0 - $41,675 (single); )$0 - $83,350 (MFJ)
- 15% - $41,675 - $459,750 (single); $83,350 - $517,200 (MFJ)
- 20% - $459,750 (single); $517,200 (MFJ)
Taxpayer’s taxable income determines starting point for LTCG rates.
Calculation involves:
- subtract taxable income from next higher income level for capital gains tax rate
- subtract number from 1 from LTCG income and multiply by LTCG rate to get amount that is subject to LTCG tax
Net Investment Income - what is it, what is it not?
Net Investment Income = amount by which the sum of gross investment income and the capital gain net income exceeds allowable deductions
Investment income includes (not limited to):
- interest
- dividends
- capital gains
- rental & royalty income
- non-qualified annuities
- income from business involved in trading of financial instruments or commodities
- businesses that are passive activities to the taxpayer
Items that are NOT investment income:
- wages
- unemployment compensation
- operating income from a non-passive business
- SS benefits
- alimony
- tax-exempt interest
- self-employment income
- distributions from certain Qualified Plans
- tax-exempt interest on governmental obligations and related expenses
Net Investment Income Tax (NIIT) - 3.8%
Individuals will owe the tax if they have Net Investment Income AND have modified Adjusted Gross Income over the thresholds below:
MFJ $250,000
MFS $125,000
Single $200,000
HH (w/qualifying dependent) $200,000
Qualifying widow(er) (w/dependent child) $250,000
Individuals, estates, and trusts are subject to a 3.8% Medicare surtax on net investment income. The tax applies to the lesser of
- NII, OR
- excess of modified AGI over $250 (MFJ), $200 (Single)
Section 1231 Property
- property used in a trade or business
- property held for production of income
- BEST OF BOTH TAX WORLDS: gains taxed as capital gains, losses taxed as ordinary losses!
All 1231 property is further defined as 1245 and 1250 property
Section 1245 Property
- personalty used in a trade or business for the production of income, e.g. furniture, computers, carpet, decorative light fixtures
Example:
if sold for more than $40,000: amount over $40,000 will be 1231 taxed as capital gain AND the entire amount of depreciation must be recaptured as ordinary income under 1245
Original cost basis: $40,000
if sold for more than $27,000 but less than $40,001, entire amount over $27,000 is recaptured under 1245 as ordinary income
Less Depreciation (Cost Recovery): $13,000
Adjusted Basis: $27,000
if sold for $27,000, no tax issue
if sold for less than $27,000, reportable as ordinary loss under 1231
Section 1250 Property
- realty used in a trade or business for the production of income, e.g., warehouses, commercial buildings, barns, rental properties
Example:
if sold for more than $400,000: amount over $400,000 will be 1231 taxed as capital gain AND the entire amount of depreciation (unrecaptured gain) will be taxed at 25%
Original cost basis: $400,000
if sold for more than $280,000 but less than $400,001, entire amount over $280,000 is unrecaptured gain and taxed at special gain rate of 25%
Less Depreciation (Cost Recovery): $120,000
Adjusted Basis: $280,000
if sold for $280,000, no tax issue
if sold for less than $280,000, reportable as ordinary loss under 1231
Section 1031: Like-Kind Exchanges
allows for deferral of gain or loss recognition on realty for realty exchanges
- only applies to 1231 property (used in business to produce income)
- must exchange realty for realty
- Boot = non-qualifying property (e.g., cash, debt assumption, inventory, personalty in a realty for realty exchange)
Timing requirements:
- taxpayer has 45 days from date of transfer of relinquished property to identify potential replacement properties
- replacement property must be received, and exchange must be completed no later than 180 days after transfer of property relinquished in the exchange or the due date (with extensions) of the tax return for the tax year in which the transfer of the relinquished property occurs (whichever is earlier)
Definitions:
- Amount realized: FMV of qualifying property received plus (or minus) net boot
- Realized gain: amount realized minus basis of property transferred
- Recognized gain: lesser of realized gain or net boot received
- Deferred gain: realized gain minus recognized gain
- Substituted basis: FMV of qualifying property received minus deferred gain
Related Party Transactions
IRC Section 267 defines related persons as:
- spouse
- child
- grandchild
- parent
- sibling
- related entities: if a taxpayer owns more than 50% of the stock (corporation) or interests (LLCs, partnerships)
GAINS = treated normally (as if sold to unrelated party)
LOSSES = not recognized until the related party sells the asset to an unrelated party
Depending on subsequent sale price by the related party, the loss may be:
- allowed
- partially allowed
- totally disallowed
The RELATED PARTY PURCHASER has a chance to use the loss incurred by the related party seller.
When a loss occurs at a sale between related parties, note the amount of the loss! This amount will offset any gains realized by the related party purchaser when they sell the property to an unrelated party!!!
At-Risk & Passive Activity Rules
At-risk and passive activity rules apply to S-Corporations, Partnerships, Limited Liability Companies (LLCs) because they pass through tax items to individual shareholders, partner, and members
At-risk rules are always applied BEFORE passive activity rules
At-risk rule states that a taxpayer can only deduct losses to the extent that there is enough basis (the amount at risk); if a pass-through loss exceeds the at-risk amount, the excess amount will be suspended, and the loss will then be subject to the passive activity rules:
A taxpayer can only use passive losses to the extent they have passive income.
Any passive losses in excess of passive income will be suspended due to the passive activity rules.
2 types of interests in passive activities:
- private interest in an LLC, partnership, or S-Corp
- public interest in a publicly traded partnership (usually abbreviated as PTPs)
Private Interest vs. PTPs
- private interest passive losses are allowed to be netted against other private interest passive income
- losses can never exceed income
- passive losses cannot be netted against PTP income
- PTPs losses cannot be netted against private interest income
- PTPs losses cannot be netted against other PTPs income
- PTPs income can only be netted against PTP losses from the same PTP; the only way this can be done is with current year PTP income netted against a prior suspended loss from the same PTP.
Rental Real Estate: Active Participants
- Real estate activities are generally considered to be passive
- Taxpayers may deduct up to a $25,000 loss provided they actively participate.
- active participation requires: taxpayer ownership of at least 10% of the property AND substantial involvement in managing the property
- $25,000 loss is allowed if taxpayer’s MAGI (AGI without rental loss) ≤ $100,000
- $25,000 limit is phased out in MAGI range from $100,000-$150,000
- $25,000 loss limit, as well as phase-out ranges of $100,000-$150,000, are the same regardless of filing status
up to $100k MAGI 100% deductible
between $100-150k: every 2k = 1k reduction
over $150k $0 deduction
Example: loss of $10,000, AGI $126,420: Excess MAGI = $26,410 k / 2 = $13,210 (= disallowed portion of the loss)
Since loss is only $10,000, entire amount can be deducted
AGI does NOT matter when the property was sold in that year!!!!!
Rental Property Categories & Tax Treatment
Tax treatment of property that is rented out is based on its placement in one of 3 categories:
Personal use
- allowed to rent for 14 days or less, no income reporting required if rental usage is ≤ 14 days
- deductions include mortgage interest and property taxes as itemized deductions
- only applies to primary residence and vacation home
Rental use
- Personal use cannot exceed the greater of 14 days OR 10% of number of days property is rented
- trips made to property for maintenance and repairs do NOT count as personal usage
- all expenses allocated to rental property are allowed, property can produce passive losses subject to passive activity rules ($25k limit)
Mixed use
- taxpayer is not able to meet minimum personal use requirements
- personal use ≥ 14 days or 10% of days property is used
- expenses must be allocated between personal & rental use
- deductions limited to gross rental income (may have $0 net income but not negative income)
- any unused losses are carried forward to future years but remain subject to net income rule
Section 121 - Personal Residence Sale Exclusion
- $250k Single; $500k MFJ, owned and lived in home for 2 out of 5 years (ownership test and usage test) - if married, both spouses must meet the usage test, only one spouse must meet ownership test
- no losses allowed for personal residence sold at a loss
- exclusion is available every 2 years (730 days)
- reduced exclusion may be available for taxpayers who meet ownership or usage test or use the exclusion more than once in a 2-year period - acceptable reasons are:
- job relocation
- employment changes leaves you unable to pay your living expenses
- qualifying for unemployment benefits
- health issues
- divorce or legal separation
- birth of twins or multiples
- damage to home from disaster
- condemnation or seizure of property
- other unforeseen circumstances
Example of reduced exclusion:
Jake has owned and lived in his home for over 10 years. 18 months ago he married Laura, and she moved into his home. Now they are moving across the country due to a new job for her. How much is the allowable exclusion?
$250k for Jake
18/24 x $250k for Laura
Sum = $437,500
Charitable Contributions: Property Types
Types of property
- cash: easiest way to contribute, does not require valuation, AGI thresholds > non-cash contributions
- LTCG Property: donors elect to value asset at FMV or Basis; valuation type affects annual contribution limits
- Ordinary Income Property: capital assets held for ≤ 12 months, property created by donor (art work, literary compositions, etc.), inventory
Charitable Organization Type
- Public Charity: churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges, universities; have active fundraising program and receive contributions from many sources; receive income from conduct of activities in furtherance of organization’s exempt purposes
- Private Foundation: single major source of funding (gifts from one family or corporation); most primarily make grants to other charitable organizations and to individuals, rather than directly to charitable programs
5-year Carryovers
- contributions that exceed AGI limit in current year can be carried over to each of the 5 succeeding years
- subject to original percentage limits in carryover years
- deducted after deducting allowable contributions for current year
- when carryovers from 2 or more years exist, earliest carryover is used first
Charitable Contributions - Max Deductions
Types of Asset Public Charity Private Foundation
Cash 60% of AGI 30% of AGI
LTCGs w/FMV election 30% of AGI 20% of AGI
LTCGs w/Basis election 50% of AGI 30% of AGI
OI Property (STCG, Art,…) 50% of AGI 30% of AGI
Charitable Contributions: Use-Related & Use-Unrelated
Charitable deduction for a contribution of tangible personal property (TPP) will depend on categorization as use-related or use-unrelated:
use-related: charity makes use of donated property in a manner consistent with its exempt purpose (gift of art to art institute, books to library)
- charitable deduction: FMV 30% of AGI; Basis 50% of AGI
use-unrelated: unrelated to exempt purpose or function of qualified organization (painting to educational institution)
- charitable deduction: lesser of cost basis or FMV
Charitable Contributions additional facts
- donors must have bank record or written communication from a charity or monetary contribution before they can claim charitable contribution on federal income tax return
- donors are responsible for obtaining written acknowledgment from charity for any single contribution of $250 or more before they can claim on federal income tax return
- charitable organizations are required to provide a written disclosure to a donor who receives goods or services in exchange for a single payment of more than $75
- when taxpayer renders services to a charitable organization, he/she may only deduct unreimbursed expenses incurred incident to rendering the services: out-of-pocket transportation expenses, cost of lodging, cost of meals away from home, a deduction of $0.14/mile is permitted
- Auction Donation: Charitable contribution deduction may be claimed for excess of purchase price paid for an item over its FMV
Alimony Recapture
- only applicable to pre-2019 separation agreements/divorce decrees
- if alimony payments decrease or end during the first 3 calendar years, taxpayer may be subject to recapture rule: payor has to include income part in year 3 of previously deducted alimony payments; spouse can deduct in year 3 the part of alimony payments he/she previously included in income
- Test to determine if front-loading of alimony does not exist:
- Year 1 payment is no more than $7500 greater than year 2 payment
- Year 2 payment is no more than $15,000 greater than year 3 payment
- Calculating Recapture:
- P1 = 1st alimony payment, P2 = 2nd, P3 = 3rd
- if P2-P3 > $15,000, use P1 + P2 - 2(P3) - $37,500
- if P2-P3< $15,000, use P1 - [(P2+P3) / 2] - $15,000
Imputed Interest Income
IRS is authorized to impute interest charge if taxpayer charges less than an adequate rate of interest
- gift loans
- corporate shareholder loans
- compensation-related loans (ER to EE)
Exceptions when imputed interest does not apply:
- loans between individuals totaling $10,000 or less (except when borrowed funds are used to purchase income-producing property)
- corporate loans and compensation-related loans totaling $10,000 or less
- debt subject to original issue discount provisions
- sales of property for $3000 or less
- when all payments are due within 6 months
$1000 - NII of this amount or less is NOT imputed on loans between $10,000 and $100,000
$10,000 - loans below = NOT imputed; loans between $10,000 and $100,000 = lesser of NII or Applicable Federal Rate (AFR)
$100,000 - loans above use the AFR to calculate imputed interest
AMT
applies to taxpayers with high economic income
calculated in conjunction with regular tax system, applies to individual, corporate, and trust tax returns
tax liability = minimum amount of tax liability owed to the government; when AMT liability > regular tax liability, difference = AMT payable
preferences increase AMTI (most common: exclusion of gain on small business stock - Section 1202 - private activity bond interest)
Adjustments increase or decrease AMTI (most common: home mortgage and investment interest, ISO exercises, depreciation deduction)
AMT Formula:
Regular taxable income
Add: tax preference items
Add: standard deduction (if not itemizing)
Add/Subtract: AMT adjustments and tax preference items
AMTI
Minus exemption amount (phased out at higher incomes)
AMT base
Times AMT tax rate
Gross AMT tax
Minus AMT foreign tax credit
Tentative minimum tax
Minus regular tax liability
AMT (if tentative minimum tax > regular tax, difference = AMT)
AMT planning: if taxpayer is subject to AMT in current tax year, accelerate income into AMT year, defer deductions until next regular tax year
optimal strategy: get AMT liability equal to regular tax liability
Foreign Accounts
FBAR - Report of Foreign Bank and Financial Accounts
US persons must file an FBAR if
- they had financial interest in a signature or authority over at least 1 financial account outside US
- aggregate value of all foreign financial accounts > $10,000 at any time during calendar year reported
- must file FinCEN (Financial Crimes Enforcement Network) Form 114 by tax deadline
FATCA (Foreign Account Tax Compliance Act)
Requires certain individual US taxpayers holding financial assets outside the US that meet certain threshold reporting obligations to report those assets on Form 8938 (does not relieve taxpayer of separate requirement to file FBAR if otherwise required to do so)
Form 8938 Threshold Requirements MFJ: > $100,000 last day of the year or > $150,000 anytime during tax year
MFS or Single US Residents: > $50,000 last day of the year or > $75,000 anytime during tax year
MFS or Single Non-US Residents: > $200,000 last day of the year or > $300,000 anytime during tax year
MFJ Non-US Residents: > $400,000 last day of the year or > $600,000 anytime during tax year
Kiddie Tax
applies to children under 19 or full-time students under 24
Net unearned income > $2,300 is subject to tax at the highest marginal tax rate of child’s parents
Standard deduction for an individual who can be claimed as a dependent on another person’s tax return is limited to the larger of:
- $1,150 OR
- individual’s earned income + $350, but no more than regular standard deduction ($12,950)
Kiddie Tax Calculation:
Example: $15,000 net unearned interest income for a 17-year-old
- first $1150 tax free
- next $1150 taxed at child’s rate (generally 10%) or $115
- remaining $12,700 taxed at parent’s rate (assuming 22%) = $2794 (= Kiddie Tax)
- Final tax owed = $2794 + $115 = $2909
Example: Earned Income $7000, Unearned income $2500 15-year-old, parents’ 24% marginal tax bracket
Child’s taxable income:
Gross income - standard deduction (greater of $1150 or amount of earned income + $350): $9500 - $7350 = $2150
Amount taxed at parents’ rate: Unearned income - first $1150 - $1150 standard deduction: $2500 - $1150 - $1150 = $200
$200 x 24% = $48
Amount taxed at child’s rate:
Child’s taxable income - amount taxed at parents’ marginal rate: $2150 - $200 = $1950 x 10% = $195
$195 + $48 = $243 total tax due
Sophie has net earnings from self-employment of $130,000. How much will she pay in Social Security SE tax this year?
$19,890
$18,368
$16,964
$9,945
Sophie must pay a 15.30% SE tax on 92.35% of her net earnings from self-employment.
($130,000 x 0.9235) x 0.153 = $18,368
How is the basis of property received in a nontaxable exchange calculated?
The basis of property received in a nontaxable exchange is equal to the adjusted basis of the property exchanged increased by the gain recognized and reduced by any boot received or loss recognized on the exchange.
What is an involuntary conversion?
involuntary conversion occurs when property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. (aka involuntary exchanges)
Taxpayer-use test: applies to involuntary conversion of rental property owned by an investor; principal requirement: owner-investor must lease out the replacement property acquired.
To qualify for non-recognition of gain treatment in an involuntary conversion, converted property must be replaced within 2 years after the close of the first taxable year in which any part of the gain upon the conversion is realized.
To defer the entire gain, taxpayer must purchase replacement property with a cost equal to or greater than the amount realized from the involuntary conversion.
If replacement property is purchased for an amount less than the amount realized, that portion of the realized gain equal to the excess of the amount realized from the conversion over the cost of the replacement property must be recognized.
What happens to realized gains resulting from non-taxable exchanges?
Realized gains and losses resulting from non-taxable exchanges are deferred. This deferral is reflected in the basis of property received. Unrecognized gain might be recognized when the property is sold or exchanged in a taxable transaction because the basis of the replacement property is less than its FMV by the amount of the deferred gain.
IRC Section 469 requires taxpayers to classify their income into three categories:
- active income (e.g., wages, salaries, and active business income),
- portfolio (i.e., investment) income, and
- passive income.
What is the tax payment a partnership must make if they start operations on May 1, 2022 and elect a September 30 year-end under Section 444, if their net income on September 30 is $250,000?
They must make a required payment of $39,583 ($250,000 x 38% x 5/12) on or before April 15, 2023.
How to calculate Gross profit percentage
GPP is gross profit divided by the sale amount
By multiplying the GPP by the down payment + the principal received on the loan payments, the amount required to be reported as capital gain can be determined.
Application for permission to change accounting periods is made on Form ________-
Application for permission to change accounting periods is made on Form 1128. The application must be sent to the Commissioner of the IRS, Washington, D.C.
What are the qualifications for the Disabled Access Credit?
An eligible small business is one that earned $1 million or less or had no more than 30 full time employees in the previous year; they may take the credit each and every year they incur access expenditures.
The disabled access credit is equal to 50% of eligible expenditures that exceed $250 but do not exceed $10,000.
A donation of an appreciated asset to a CRUT allows for how big of a tax deduction?
30% of AGI (even if donated to a CRUT!)
Disability benefits of a policy with employer paid premiums are
taxable
not taxable to EE
TAXABLE
If more than 40% of a property is placed in service by a taxpayer during the last quarter of the tax year, what type of depreciation convention applies?
Mid-quarter convention
Private annuity
A private annuity is an arrangement where an individual (the “annuitant”) transfers assets to another (the “obligor”) in exchange for regular payments for the remainder of the annuitant’s life (an “annuity”).
With the transfer of the property, the property’s value and all future appreciation are thereby removed from the annuitant’s taxable estate and owned by the obligor (usually in a trust). The private annuity effectively takes possession of the property.
Difference between a Private Annuity and a SCIN
SCIN. Closely related to the private annuity is the Self-Canceling Installment Note. The principal difference between the private annuity and the SCIN is that payments for the SCIN are set for a fixed period of years. If the seller dies before completion of the payments, the note is considered paid in full.
Quarterly tax payments
To avoid a tax penalty on overdue tax payments,
pay the LESSER of 90% of CURRENT year
or 100% of PRIOR year (110% if AGI was > $150,000)
Half-year or Mid-year convention
Only 1/2 of the full depreciation amount can be taken in the year the asset was put into service (first year); Another half of the full depreciation amount is taken in the last year.
