Tax Planning Flashcards
What are not considered Capital Assets?
ACID:
Accounts/ note receivable
Copyrights and creative works
Inventory
Depreciable property used in a trade or business
What is the only way to have a 1231 gain on 1245 property?
The only way to have a 1231 gain on 1245 property is to sell it for more than it was originally purchased for.
1231 Gain
Any sale amount in excess of the original purchase price of a 1231 asset is 1231 gain.
MACRS Property Classes
3 year: tractors, rent-to-own property
*5 year: autos, computers, office equipment
*7 year: office furniture and fixtures
27.5 year: rental home
39 year: office building
*These two categories are most likely to be tested.
What type of properties use the mid-month convention?
TIP: (Anything that is rented)
Nonresidential real property and residential rental property use the mid-month convention.
Characteristics of Section 1231 Assets
They are used in a trade or business.
They are either
(1) depreciable property or
(2) real property.
They do not include:
Inventory
Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business
Copyrights or creative works
Section 1231 specifically includes certain property, such as:
Timber
Coal
Iron Ore
Certain Livestock
Unharvested crops (under certain conditions)
Basically, personal property is everything except real property (land and buildings). Personal property for a business would include everything from the smallest stapler or calculator to a company-owned car or large piece of machinery
Estimated Taxes
A taxpayer does not have to pay estimated tax if:
the taxpayer had no tax liability for the previous year;
the taxpayer was a U.S. citizen or resident for the entire year,
and the taxpayer’s tax year covered a 12-month period.
S Corporation Requirements
Must be a domestic corporation,
May not have more than 100 shareholders, and
May not be owned by C corporations, partnerships, and certain trusts.
The corporation is allowed only one class of outstanding stock.
However, an S corporation may have shares with voting rights and shares with no voting rights.
What are some examples of items that increase the basis of an asset?
Capital improvements, such as an addition on your home, a new roof, paving your driveway, installing central air conditioning, or rewiring your home.
Assessments for local improvements, including water connections, sidewalks, and roads.
The cost of restoring damaged property after a casualty loss.
Legal fees, including the cost of defending and perfecting a title to the property.
Zoning costs.
What are some examples of items that decrease the basis of an asset?
Casualty or theft loss deductions, if applicable due to federally declared disaster.
Deduction for clean-fuel vehicles and clean-fuel vehicle refueling property
Section 179 deduction
Credit for qualified electric vehicles
Depreciation
Nontaxable corporate distributions
Exclusion from income of subsidies for energy conservation measures
What is the formula for determining the donee’s basis when a gift tax is paid?
Donor’s Basis + (Net Appreciation in Value of Gift ÷ Value of Taxable Gift) x Gift Tax Paid
Characteristics of Section 1244 Small Business Stock
A single taxpayer can deduct up to $50,000 ($100,000 for married individuals filing jointly) of the loss on small business stock as an ordinary loss in any given year if the following requirements are met:
The stock represents ownership in a domestic corporation.
The corporation was a small business corporation (less than $1 million in total capital contributions plus paid-in capital) at the time the stock was issued.
The company was incorporated after November 6, 1978.
The loss was sustained by the original owner of the stock (the person to whom the stock was issued by the corporation), who is not a corporation, trust, or estate.
Note that any loss in excess of per year limit is treated as capital loss. Furthermore, Section 1244 does not apply to gains. Any gains associated with Section 1244 stock are treated as capital gains.
What is the standard deduction for a taxpayer who is claimed as a dependent?
Greater of:
$1,150 (2022), or
$400 plus earned income (but not exceeding the single standard deduction).
Additional standard deduction if it applies.
A Qualifying Relative must meet which four tests?
Not a Qualifying Child Test - The person cannot be the qualifying child of any other taxpayer.
Relationship Test - The person either (a) must be related to the taxpayer as follows: son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them, mother, father, brother or sister of mother or father, brother/sister in law, son/daughter in law, or mother/father in law or (b) must live with the taxpayer all year as a member of their household (and the relationship must not violate local law).
Gross Income Test - The person’s gross income for the year must be less than $4,400 (2022)
Support Test – The taxpayer must provide more than half of the person’s total support for the year.
Additional tests: joint return test, and citizenship or residency test
A Qualifying Child must meet what four tests? (RASH)
Relationship Test - The child of the taxpayer must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.
Age Test - The child must be (a) under age 19 at the end of the year, (b) under age 24 at the end of the year and a full-time student, or (c) any age if permanently and totally disabled.
Homw Test - The child must have lived with the taxpayer for more than half of the year.
Support Test - The child must not have provided more than half of his or her own support for the year.
Additional tests: joint return test, and citizenship or residency test
What are the life insurance transfer for value exceptions?
The proceeds of a life insurance policy can still be excluded from gross income even if the policy is transferred for valuable consideration. These circumstances include:
If the policy is transferred to the insured,
If the policy is transferred to a partner of the insured,
If the policy is transferred to a partnership in which the insured is a partner,
If the policy is transferred to a corporation in which the insured is a shareholder or officer, or
If the policy is transferred by tax-free exchange or gift.
Which of the following are included in taxable income?
Workers’ Compensation for personal physical injury or sickness
Punitive Damages
Damages for Emotional Distress
Excluded:
Workers’ Compensation for personal physical injury or sickness are excluded from gross income.
Included:
Punitive Damages and Damages for Emotional Distress are included in taxable income.
List the deductions for AGI
Business:
- Trade or business expenses
- Deductions from losses on sale or exchange of property
- Deductions from rental and royalty property
- Penalty on premature withdrawals from time savings accounts or deposits
Family:
- Alimony payments, for divorces finalized by to 12/31/2018
- Interest on student loans
- Tuition and Fees for tax years 2018 - 2020
Self-Employed/Employment:
- One-half of self-employment tax paid
- 100% of health insurance premiums paid by a self-employed individual
- Contributions to pension, profit-sharing, annuity plans, IRAs, etc.
- Health Savings Accounts
What are eligible medical expenses that are subject to 7.5% of AGI? (continued)
(SNIPS)
Prescriptions,
Non-cosmetic surgeries,
Some qualified long-term care services,
Insurance premiums including schedule for long-term care policies,
Tuition for special, medically necessary schools (e.g., school for deaf or blind dependent).
7.5% applies to all tax years after 12/31/2020.
What are eligible medical expenses that are subject to 7.5% of AGI?
Capital Expenditures
- On the advice of a physician,
- To the extent that the fair market value of the property is not increased,
- Includes operating expenses (e.g., cost of operating a pool),
- For handicapped entrances and railings, there is no increased value test (note that this does not apply to elevators).
Transportation and lodging
- Parking, tolls, travel to and from doctor (deductible at .18 cents (2022) per mile if you drive your own car).
- Lodging limit of $50 per night per person.
- Deduction for meals not allowed.
Examples and characteristics of federally declared disaster area personal casualty losses subject to a $500 floor per casualty.
Federally declared disasters caused by fire, storm, shipwreck, or other casualty.
To be deductible the loss must be from an event that is identifiable, damaging to taxpayer’s property, and sudden, unexpected, and unusual in nature.
The deduction is limited to the net disaster loss.
For personal casualties, the loss must be related to a federally declared disaster.
Business casualties do not require a federal declaration.
Losses during an Estate Administration do not require a federal declaration.
What are the rules for taking a home office deduction?
Office must be used exclusively and on a regular basis as:
- The principal place of business, or
- A place of business used by clients, patients, or customers.
- For employees, office must also be for the convenience of the employer
A home office qualifies as a principal place of business if:
- Taxpayer conducts administrative and management activities in the home office, and
- There is no other fixed location where taxpayer conducts these activities.
- Home office expenses cannot cause net loss from the business activity.
- Home office deduction is limited to business gross income in excess of other business expenses (ordering rules apply).
- Excess is carried forward (subject to limit).
Adoption Expenses Credit
Credit for qualified adoption expenses incurred in adoption of eligible child.
Examples of expenses include adoption fees, court costs, and attorney fees.
Maximum credit is $14,890 (2022).
Credit is phased-out ratably for modified AGI in between $223,410 and $263,410.
An eligible child is one that is:
Less than 18 years of age, or
Physically or mentally handicapped.
The Adoption Expenses Credit is a nonrefundable credit, but the excess may be carried forward for five years.
Child Tax Credit
$2,000 for each dependent child under age 17 for 2022.
Includes stepchildren and foster children
Married taxpayers must file jointly to be eligible for the credit.
Eligible children are:
Under age 17, a US citizen, and claimed as dependent on taxpayer’s tax return.
Credit is phased out by $50 for each $1,000 of AGI above specified levels (2022):
$400,000 for joint filers
$200,000 for married filing separately
$200,000 for single
Up to $1,400 is refundable per child subject to limitations.
Child & Dependent Care Credit
Must have employment-related care costs for a: dependent under age 13, or handicapped dependent or spouse.
Married taxpayers must file a joint return to obtain credit.
Credit amount
Eligible care costs x applicable percentage
Applicable percentage ranges from 20% to 35%.
20% applies to AGI over $43,000.
Amount of costs that qualify is the lesser of actual costs or $3,000 for one qualified individual, and $6,000 for two or more qualified individuals.
Costs for care of qualified individual within taxpayer’s home or outside home.
If outside home, handicapped dependent or spouse must spend at least 8 hours a day within taxpayer’s home.
What are the preference items for AMT?
Percentage depletion
The amount of percentage depletion taken for regular tax in excess of the adjusted basis of the property at the end of the year is a preference item.
Intangible drilling costs
AMT requires 10 year amortization. Intangible drilling costs are currently deductible for regular tax.
Preference is excess of regular tax deduction over [AMT amortization plus (65% x net oil & gas income)].
Interest on private activity bonds
This interest is not taxable for regular tax purposes, but is included in income for AMT purposes.
Expenses incurred in carrying these bonds are not deductible for regular tax purposes, but offset the interest income in computing the AMT preference.
Summary Table for Section 1202 Small Business Stock
Summary of Fringe Benefits:
What is the different corporations used for?
