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CFP 2022 > Tax Planning > Flashcards

Tax Planning Flashcards

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1
Q

Who pays GSTT Tax?
Direct Skip:
Taxable Termination:
Taxable Distribution:

A
  • Direct - Transferor Pays Tax
  • Taxable Termination- Trustee Pays Tax
  • Taxable Distribution-Transferee Pays Tax
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2
Q

Investment InterestDeduction limited to ____ ____ ______

A

Limited to net investment income

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3
Q

Charitable Contribution Deductions
Ceiling for Public Charities
CASH -

A

FMV, 60%

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4
Q

Charitable Contribution DeductionsCeiling for Public Charities-ORDINARY INCOME PROPERTY and STCG PROPERTY -

A

Lesser of the adjusted basis or the FMV, 50% of AGI

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5
Q

Charitable Contribution Deductions
Ceiling for Public Charities

Intangible LONG-TERM CAPITAL GAIN PROPERTY

A

FMV, 30%. OR Basis election, 50%

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6
Q

Charitable Contribution DeductionsCeiling fo private Non-operating Foundations* CASH -

A

FMV, 30%

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7
Q

Charitable Contribution Deductions
Ceiling for Private Non-operating Foundations*

ORDINARY INCOME PROPERTY and STCG PROPERTY -

A

Lesser of the adjusted basis or the FMV, 30%

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8
Q

Charitable Contribution Deductions

Ceiling for Private Foundations/Charities

Cash
Ordinary income property and short-term cap gain
LTGC PROPERTY
-Intangibles -
-Tangible property (related use)
-Tangible property (unrelated use)
- Real property

A 
Cash - 30
Ordinary income - lesser of FMV or 30
Intangibles - 20 basis
Tangible related use - 20 basis
Tangible unrelated - lesser of 20
Real - 20 basis
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9
Q

CASUALTY LOSSES—how much is deductible?

A

lesser of decline in value or basis subject to 10% AGI hurdle and $100 floor-Cash or property received as compensation for or to repair/replace damaged property reduces the amount of the loss (e.g., insurance payout). -Casualty losses are limited to losses incurred from federally declared disasters.

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10
Q

CHARITABLE GIFTS

What is the carryover?
When to use basis?
When to use FMV?

A

-carryover is 5 years for a total of 6 years

  • if spread between basis and AGI is small, use basis
  • if spread between basis and AGI is large, use FMV
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11
Q

DEDUCTIONS FOR AGI - Above the Line

A
  • Expenses related to trade/business–alimony pre 2019-50% self-employment tax paid-capital loss deduction-interest penalty for early withdrawal- of savings (CDs)-deductible IRA contributions-student loan interest-moving expenses for active duty
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12
Q

DEDUCTIONS FROM AGI - itemized deductions are?

A

Schedule A deductions- charitable contributions-medical expenses-mortgage interest,-taxes paid-casualty losses in fed declared disaster area-investment interest expense

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13
Q

IRS STATUTE OF LIMITATIONS for filed return?

A
  1. Three years from the filing date of the return or due date if later 2. Six years if 25% of gross income is unreported 3. No statute of limitations for failure to file or if a fraudulent return is filed
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14
Q

IRS FAILURE TO FILE PENALTY

What is the penalty?
If fraudulent?

A

5% per month, up to a total of 25% (or five months of penalties)If the return is filed more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $450 or 100% of the unpaid tax. If a failure-to-file penalty is for a fraudulent return, the penalty is increased to 15% per month—up to a total of 75%.

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15
Q

IRS FAILURE TO PAY

What is the
Percentage/Amount?

What is the Negligence Penalty

Example
A taxpayer files a timely tax return but fails to pay $15,000 in additional tax, of which $6,000 is attributable to the taxpayer’s negligence. What is the penalty?

A
  • Failure to pay: 0.5% per month, up to a total of 25%, or 50 months
    1. ) If both a failure-to-file penalty and a failure-to-pay penalty apply, the failure-to-file penalty is reduced by the failure-to-pay penalty.

Accuracy-related penalty—20% may be assessed for an accuracy-related penalty due to negligence or a substantial understatement of tax without intent to defraud.

The negligence penalty will be $1,200 (20% penalty is applied to the $6,000)

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16
Q

Realized gain?

Recognized gain?

A

Realized gain, though, is the total value of your profit after you subtract any associated costs and the basis from the profit you made selling the asset. Using the previous example, assume the company owes $350 in brokerage fees besides the expense of the asset’s basis of $2,500. The company calculates ($7,500) - ($2,500) - ($350) to get a realized gain of $4,650.

Recognized gain is simply the amount of money you earn when you sell an asset. You can calculate your recognized gain by subtracting the basis (initial cost) from the selling price of the asset. As an example, assume a company sells stock for $10,000. If the basis is $2,500, the recognized gain is $7,500.

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17
Q

DETERMINATION OF BASIS AND HOLDING PERIOD WHEN PROPERTY IS RECEIVED BY GIFTif donor paid gift tax

A

donee’s basis = donor’s adjusted basis + [unrealized appreciation / FMV - donor’s annual exclusion amount used for the gift] x gift tax paid

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18
Q

GAIN OR LOSS ON THE SALE OF A PROPERTY is the difference between the amount the seller realizes from the sale and the seller’s adjusted basis in the property.

A
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19
Q

FRINGE BENEFITSAre they deductible?

A

Fringe benefits are not deductible by an S corporation and the benefits are not tax free for the greater than 2% shareholders.

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20
Q

STUDENT LOAN INTEREST what is annual limit to deduction?

A

Only the student loan interest up to $2,500 annually is a deduction for AGI. You do not have to itemize.

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21
Q

AMT STRATEGIES

What will moving deductions to an AMT year do?

A

It will reduce regular taxable income and result in greater exposure to AMT. Increasing regular income decreases the possibility that the AMTI will be greater than the regular taxable income.

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22
Q

EDUCATION CREDITSstudent cannot use both the American Opportunity Tax Credit and Lifetime Learning Credit in the same tax year.

A
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23
Q

CAPITAL EXPENDITURE OR EXPENSETwo factors determine whether an item is a capital expenditure or an expense:1. If the cost enhances the value of the property2. If it will extend its useful life

A

Examples of specific items that are capital expenditures include the cost of new buildings and equipment, perfecting or defending a title, investigating a new business, obtaining business licenses, organizing a corporation, and paying an attorney when acquiring property. Lubricant for industrial machinery does not fit into these requirements. It would most likely be considered an expense item that is deductible in the current year.

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24
Q

EARNED INCOME FOR QUALIFYING CHILD

the income test is waived and gross income of the dependent is not an issue if

A

If the child of the taxpayer is under age 19 or if the child is a full-time student and under age 24,

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25
Q

TAX TREATMENT OF REVOCABLE TRUST

A

Taxed to the grantor

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26
Q

PERSONAL USE RENTAL PROPERTYHow many days?Is income taxed?What if any expenses are deductible?

A

Property rented less than 15 days a year-Exclude rental income from gross income-Expenses nondeductible except mortgage interest and taxes (Schedule A)

27
Q

MIXED USE RENTAL PROPERTY

How many days?
Are expenses deductible?
Where is it reported?

A

Rented more than 14 days and personal use exceeds the standard for rental property

  • Allocate expenses between business and personal
  • Deduct expenses (in order of interest/taxes, operating and then depreciation, up to amount of rentalincome)
  • Cannot deduct loss.
  • ***A reduced amount allowed for MFS.
  • Report income and deductible expenses on Schedule E

Mixed-use losses are nondeductible.
No carryforward of expenses that exceed income received.
Mixed-use is deemed to be not-for-profit, the same as hobby.

28
Q

RENTAL USE RENATL PROPERTY

How many days?
Are expenses deductible?
Where reported?

A

If the rental property is rented at least 15 days a year and is not used for personal use more than the greater of 14 days per year or 10% of rental days, it is classified as primarily rental use.

-Allocate expenses between business and personal

*****Losses deductible up to $25,000 (phased out at AGI between $100,000 – $150,000).

A reduced amount allowed for MFS.

-Report income and deductible expenses on Schedule E

29
Q

RELATED PARTY EXCHANGEIf the exchange occurs with a related party, if either party sold within how many years would they have to recognize the gain?

A

both parties will be required to recognize any deferred gain if either party disposes of their property within 2 years of the exchange.

30
Q

ANNUITY TAX

Payments beyond projected life expectancy are fully taxable.

(Note: if the annuity payments began on or before December 31, 1986, the exclusion ratio applies for the entire payment period).

A

Claudia, age 60, purchased an annuity this year for $25,000 that will begin paying her $1,000 each month beginning this year. Her life expectancy is 15 years. How much of the monthly payment is taxable to Claudia this year? At age 77?

1− [$25,000 initial investment ÷ ($12,000 payments per year × 15 years)] = 0.8611 taxable percentage.$1,000 × 0.8611 = $861.11

31
Q

DEPENDENT CARE EXPENSES

What is the maximum amount of qualifying expenditures on which the credit may be based?

Is there an AGI limit and how is it applied?

John and Karen will spend $7,000 on day care for their two children (ages 9 and 10) in the current tax year. These expenses were incurred to allow both John and Karen to work outside the home. Their adjusted gross income is estimated at $138,000. What is the amount, if any, of child care credit to which they are entitled?

A

$3,000 per child, or $6,000 for two or more children. This is multiplied by 20% for taxpayers with an AGI greater than $43,000.

$6,000 × 20% = $1,200.

32
Q

TAXABLE PORTION OF DISTRIBUTABLE NET INCOME (DNI)A beneficiary who receives a distribution from a fiduciary with both taxable and nontaxable DNI will only be taxed on a portion of the distribution received.

A

EXAMPLE Taxation of Distributable Net Income From a TrustABC Trust has DNI of $100,000, of which $40,000 is nontaxable. The beneficiary received a distribution of $20,000 during the year. The distribution received will be taxable in the amount of $12,000 [$20,000 distribution × ($60,000 taxable DNI ÷ $100,000 total DNI)] and nontaxable for the remaining $8,000.

33
Q

SPECIAL TAXES FOR S CORP applies to S corporations that used to be C corporations.a.) Built-in gains tax b.) Last-in, first-out (LIFO) recapture tax c.) Excess net passive income tax

A
34
Q

AMT Preference Items & Adjustments

A

IPOD Incentive Stock Option Bargain Element, Private Activity Muni Bonds, Oil & Gas Depletion, Deprecation (ARCS & MARCS)

35
Q

CASH Charitable Contribution Deductions ‘Ceiling for Other Private Non-operating Foundations*

A

FMV, 30%

36
Q

LTCG Charitable Contribution DeductionsCeiling for Public CharitiesLONG-TERM CAPITAL GAIN PROPERTYTangible property (related use)

A

FMV, 30% OR Basis election, 50%

37
Q

Charitable Contribution Deductions
Ceiling for Public Charities

LONG-TERM CAPITAL GAIN PROPERTY
Tangible property (unrelated use)
A

Lesser of the adjusted basis or the FMV, 50%

38
Q

Charitable Contribution Deductions
Ceiling for Public Charities

LONG-TERM CAPITAL GAIN PROPERTY
Real property -

A

FMV, 30% OR Basis election, 50%

39
Q

LTCG Charitable Contribution Deductions

Ceiling for Private Nonoperating Foundations*

LONG-TERM CAPITAL GAIN PROPERTY

Tangible property (related use)

A

Must use Basis election, 20%

40
Q

Charitable Contribution DeductionsCeiling for Other Private Nonoperating Foundations*LONG-TERM CAPITAL GAIN PROPERTYTangible property (unrelated use)

A

Lesser of the adjusted basis or the FMV, 20%

41
Q

Charitable Contribution Deductions
Ceiling for Private Nonoperating Foundations*
LONG-TERM CAPITAL GAIN PROPERTY
Real property -

A

Basis election, 20%

42
Q

Charitable Contribution Deductions
Ceiling for Other Private Nonoperating Foundations*

Intangible LONG-TERM CAPITAL GAIN PROPERTY

A

Basis election, 20%

in some cases FMV of 20 can be used

43
Q

Example: charitable contributions.Karen is meeting with her client, Jack, who donated his collection of impressionist paintings to a public art museum. Jack’s original purchase price of the paintings was $50,000. The FMV of the paintings when he donated them was $300,000. Jack’s AGI for this year is $1 million. He wants to know what kind of deduction he can take on his income tax return for the donation. What should Karen’s response be? A. $0 B. $250,000 C. $300,000 D. $375,000

A

Answer: C. Gifts of tangible personal property given to a charity are use-related if the gift will be used by the charity in a manner related to the purposes of that charity. The artwork given to the museum is use-related. Gifts of use-related property are tax deductible for the FMV of the property when it is donated. Jack could deduct the full $300,000 value of the gift. As with other gifts, the donation is limited to 30% of the taxpayer’s AGI for gifts to public charities. If Jack’s AGI had been less than $1 million, the deduction would have been limited, but the excess amount of the gift could have been carried over to future years. Similarly, if the museum was a private charity, the AGI limit is 20%.

44
Q

The child tax credit is refundable up to how much?

A

$1,400 per child (2022).

45
Q

What entities cannot be S Corp share holders?

A

Partnerships and corporations may not be shareholders.

46
Q

LIFE INSURANCE TAX EXAMPLEACME Corporation purchased life insurance policies on its two major shareholders. ACME pays the premiums and owns the policies, but names each of the shareholders as the sole beneficiary of the other shareholder’s policy. Who pays taxes on the death benefit that will be paid when one of the shareholders dies?a. The shareholder-beneficiary because the IRS views such proceeds as a dividend.b. The ACME Corporation because the IRS views such arrangements as transfers for value that benefit ACME.c. The shareholder-beneficiary and ACME are responsible for paying taxes on the death benefits.d. Neither the shareholder-beneficiary nor ACME has any tax liability resulting from the receipt of the death benefits.

A

A. The shareholder-beneficiary because the IRS views such proceeds as adividend.

47
Q

PROPERTY TRANSACTION EXAMPLE
Ann purchased a $200,000 business machine and expensed $140,000 of depreciation (straight-line depreciation would have been $100,000). She sold it for $240,000. Which of the following statements about the nature of her gain is CORRECT?

A. Ann will have a $180,000 Section 1231 capital gain.
B. Ann will have a $40,000 Section 1231 capital gain.
C. Ann will have a $140,000 Section 1245 ordinary gain.
D. Both b and c are correct.

A

D. Both b and c are correct.

Ann’s total gain is $240,000 – $60,000 (basis) = $180,000. The gain attributable to depreciation must be recaptured as Section 1245 gain ($140,000) and the excess is Section 1231 capital gain ($40,000).

48
Q

PROPERTY TRANSACTION EXAMPLE

Ginny sold a file cabinet used in her business for $250. She purchased it for $400 and deducted depreciation of $220. What is the amount and character of Ginny’s gain or loss recognized on this sale?

a. $70 ordinary income
b. $70 Section 1231 gain
c. $150 Section 1231 loss
d. $220 ordinary income and $150 Section 1231 loss

A

a. $70 ordinary income

The file cabinet is Section 1231 property, and will be subject to depreciation recapture upon sale. The depreciation recapture will cause some (in this case, all) of the gain to be taxable as ordinary income.

Sales price $250
Original cost $400
Less: depreciation taken (220)
Equals: adjusted basis $180 ($180)
Recognized gain $ 70
Ordinary income $ 70(lesser of recognized gain or depreciation taken)

49
Q

PROPERTY TRANSACTION EXAMPLE

Rachel sold a building this year for $100,000. She purchased the building three years ago for $75,000. Straight-line depreciation taken was $30,000. Rachael is single and her taxable income is $499,000 before the sale. What is the tax on her gain on the sale of the building without considering the Medicare net investment income tax?

a. $8,250
b. $12,500
c. $13,750
d. $14,250

A

$12,500

The character of her gain is $30,000 at 25% rate ($7,500) and
$25,000 at 20% rate ($5,000) for a total tax on the gain of $12,500.

The un-recaptured Section 1250 gain (i.e., depreciation) is taxed at 25% while the remaining long-term capital gain receives a 20% tax rate.

Note she is also subject to the 3.8% Medicare tax.

50
Q

TAX-FREE EXCHANGE, 1033 INVOLUNTARY CONVERSIONHow soon do you have to replace the property?national disaster?government?

A

2-years if national disaster3-years if government

51
Q

EXAMPLE: TAX-FREE EXCHANGE, 1033 INVOLUNTARY CONVERSIONDerek’s office building (used in his business and having adjusted basis of $300,000) is destroyedby a hurricane. AllFarm Insurance sent him a check for $450,000. What is the realizedand recognized gain and basis if:A) He acquires another office building for $460,000 (immediately). AND B) He acquires another office building for $430,000 (immediately).

A

Solution A: Replacement purchase at $460,000.Realized Gain = $150,000 ($450,000 – $300,000)Recognized Gain = $0 ($450,000 – $460,000)New Basis = $310,000 ($300,000 + $10,000)Solution B: Replacement purchase at $430,000Realized Gain = $150,000 ($450,000 – $300,000)Recognized Gain = $20,000New Basis = $300,000

52
Q

SECTION 1031 LIKE KIND EXCHANGEKey concept here.A) If boot is given, add it to the basis of the new property.B) If boot is received, recognize the boot as gain up to the realized gain and carryover the basis net of any excess boot.C) Do not recognize losses if boot received. Gain recognized is the lesser of gain realized or boot received.

A

ONLY HAVE RECOGNIZED GAIN IF BOOT IS RECEIVED

53
Q

SECTION 1031 BASIS ISSUES

Basis of like-kind property received (carryover holding period):

Adjusted Tax Basis (ATB) of property surrendered+ ATB of boot given+ Gain recognized– FMV of boot received– Loss recognized

Basis of boot.
A) FMV.
B) New holding period.

A

j

54
Q

EXAMPLE
Calculating Adjusted Basis in an Installment Sale with Recapture

Carol sells heavy machinery with an adjusted basis of $30,000 for $100,000. Carol has taken $15,000 of depreciation on the property, which is subject to recapture as ordinary income. Carol’s income is $460,000 before including the gain on the sale. She files as single and is in the 35% bracket.

  1. How much ordinary income in the year of sale?
  2. How much is return of basis?
  3. How much is capital gain?
  4. What is the percentage return of basis and capital gains on the installment payments?
A
  • Carol will include the $15,000 as ordinary income in the year of sale.
  • The $15,000 is added to her adjusted basis to determine her gross profit on the sale. Gross profit is $100,000 – $45,000 = $55,000 gain on the sale.
  • Carol’s proceeds therefore consist of a return of basis of $45,000 and capital gain of $55,000.
  • When she receives installment payments, each payment will consist of 45% return of basis and 55% capital gain.
55
Q

MATERIAL PARTICIPANT DEFINITIONHow many hours to be considered a material participant?How about in relation to other participants?

A

A) More than 500 hours of participation.B) More than 100 hours and at least as much as any other participants.C) Participation of the taxpayer was substantially all of the participation in the activity for all participating individuals.

56
Q

Example - Material ParticipationArthur, an attorney, owns and participates in a separate business (not real estate) during the current year. He has one employee who works part-time in the business.Which of the following statements is CORRECT?a. If Arthur participates for 500 hours and the employee participates for 520 hours during the year, Arthur qualifies as a material participant.b. If Arthur participates for 600 hours and the employee participates for 1,000 hours during the year, Arthur qualifies as a material participant.c. If Arthur participates for 120 hours and the employee participates for 125 hours during the year, Arthur qualifies as a material participant.d. If Arthur participates for 95 hours and the employee participates for 5 hours during the year, Arthur probably does not qualify as a material participant.

A

b. If Arthur participates for 600 hours and the employee participates for 1,000 hours during the year, Arthur qualifies as a material participant.

57
Q

FOR DEPRECIATION RECAPTURE Ordinary income (lesser of recognized gain or depreciation taken)

A
58
Q

LIKE KIND EXCHANGE - 1031How many days do you have to close in a non-simultaneous exchange?

A

In a non-simultaneous exchange or deferred exchange, the exchanger has 45 days from the date that the relinquished property closes to identify the replacement property or properties and 180 days from the closing date of the relinquished property to close on the replacement property.

59
Q

RECOGNIZED GAIN/REALIZED GAIN

Gain is recognized to the extent of the boot received. However, the amount of recognized gain is limited to the amount of the taxpayer’s realized gain. In effect, the realized gain serves as a ceiling for the amount of the recognized gain.

A

For example, Mario exchanges business equipment with a $50,000 adjusted basis for $10,000 cash and business equipment with a $65,000 FMV.

The realized gain is $25,000 ($75,000 - $50,000). Because the $10,000 of boot received is less than the $25,000 of realized gain, the recognized gain is $10,000.

Mary exchanges business equipment with a $70,000 adjusted basis for $20,000 cash and business equipment with a $65,000 FMV. Her realized gain is $15,000 ($85,000 - $70,000). Because the $20,000 of boot received is more than the $15,000 of realized gain, only $15,000 of gain is recognized.

60
Q

IRS Failure to file penalty if more than 60 days overdue, what is the minimum amount or percentage? How about for a fraudulent return?

A

If the return is filed more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $450 or 100% of the unpaid tax. If a failure-to-file penalty is for a fraudulent return, the penalty is increased to 15% per month—up to a total of 75%.

61
Q

Related Party Rules
Losses between related parties are disallowed
1.) Loss may be recovered if, at the eventual sale to an unrelated party, the property is sold for a gain.
2.) The seller (the relative who bought the property) can offset the gain with the previously disallowed loss.
3.) If the deduction is not recovered at a subsequent sale, it is lost forever.

A

EXAMPLE

62
Q

SECTION 1202

What is section 1202

A

QUALIFIED SMALL BUSINESS STOCK (QBS)

Can exclude 100% of gain if held for 5 years.

Gain exclusion is what if acquired before 9/2010?
After 9/20/10?
Any other caveats? ?(50%) for small business stock (Section 1202)
(75% for stock acquired after 2/17/09 and before 9/27/10, and
100% of the gain is excluded for both regular tax and AMT for qualified small business stock (QSBS) acquired after 9/27/10
**5 year holding period for the exclusion*

63
Q

SECTION 1244 stock treated?

A

Section 1244 losses are limited to $50,000 annually ($100,000 for joint filers).
1.) Any losses in excess of the limits are capital losses.
In order to qualify for Section 1244 treatment, the corporation must receive less than $1 million in capital for stock at time of issue.

applies to losses only
Loss can be treated as ordinary loss instead of limited by the $3K of capital gain loss
What is the loss limit for single and joint?
What about excess loss?
Any other limitation?

CFP 2022 (5 decks)

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