Tax Planning Flashcards

Question

What is Form 1099-NEC

Answer 1

. Non Employee Compensation for contractors, reported on schedule C as part of line 1 gross income

Answer 2

. Miscellaneous Income reported under Other Income lines 8 on Schedule 1

Answer 3

. Distributions - income from Qualified Retirement plans, reported on 1040 lines 4a and 5a

Answer 4

. Request for extension of time to file return; Must be filed before tax deadline and with anticipated amount of taxes due

Answer 5

. Partnership Distributions - (1041/1120-S/165)

Answer 6

. IRA contributions made per individual; Reported as adjustment to AGI on Schedule 1 line 16 (along with SEP and SIMPLE contributions)

Answer 7

. Non Deductible IRA contributions made per individual; Amount above annual and/or above AGI thresholds as well as Roth conversions that do not qualify for tax deduction.

Answer 8

Net investment income is the amount by which the sum of gross investment income and the capital gain net income exceeds the allowable deductions. investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer

Answer 9

$1,440 tax savings. When one spouse is an active participant and one spouse is not an active participant, each spouse has a different IRA deduction phaseout threshold. As MFJ, Megan’s threshold is $109,000 - $129,000 (2022). The couple’s MAGI exceeds the maximum, so Megan’s IRA contribution is not deductible. Paul’s threshold, not being an active participant, is $204,000 - $214,000 (2022), so Paul’s IRA contribution is fully deductible. The resulting tax savings is the marginal tax bracket 24% x $6,000 = $1,440.

Answer 10

A traditional rollover from the Section 401(k) account still held at a previous employer will require mandatory 20% withholding. This reduces the amount she will receive by $15,000. Alicia did not replace the $15,000 before redepositing the rollover into an IRA. Therefore, the $15,000 withheld will be deemed a distribution and subject to ordinary income tax and 10% early withdrawal penalty. The IRAs do not require mandatory withholding. Total tax due with penalty = $4800(15k x 0.22)+(15k x 0.1)

Answer 11

Amount Realized: FMV of qualifying property received plus (or minus) net boot.

Answer 12

Realized Gain: The amount realized minus the basis of the property transferred.

Answer 13

Recognized Gain: The lesser of realized gain or net boot received.

Answer 14

Deferred gain: The realized gain minus recognized gain.

Answer 15

Substituted basis: FMV of qualifying property received minus the deferred gain.

Answer 16

1) Qualified Expense items - Business tangible property (excluding realty or income producing property) including vehicles used +50% in the business 2) $ Limit - $1.080M deduction on property up to $2.7M, but can not create a net operating loss 3) Depreciation schedule - 100 % expensed for year placed in service only

Answer 17

- Order of operation: At risk rules applied before passive activity rules - Who applies to: All pass thru entities (S Corp, LLC, Partnership) - What is included in determining amount at risk: Only deduct losses to extent there is enough basis (at risk amount) which includes initial amount invested; If loss greater than at risk, then difference is suspended until additional at risk amounts (basis) added. - How are passive activity gains and losses identified: After passing at risk rules, then amount of any passive activity losses can only be used to offset passive activity income with any excess suspended; Also, Private Interests (LLC, Partnership,S Corp) can be netted against each other for net gain/loss not to exceed income Public Interest PTP cant be combined with Private nor with other PTP, only with same PTP

Answer 18

< $250 = receipt > $250 = donor letter > $500 = Form 8283 > $500 = Qualified Appraisal (usually, $500K for sure

Answer 19

Cash: - Public = 60% AGI - Private = 30% AGI LTCG - Use Related/Private - FMV = 30% AGI or - Basis = 50% AGI Use Related/Public - FMV = 20% AGI or - Basis = 30% AG Ordinary Income Property: - Public = 50% AGI - Private = 30% AGI

Answer 20

When loans are greater than $10,000 and up to and including $100,000, the imputed interest is the lesser of: the AFR or the borrower’s net investment income If the borrower’s net investment income is $1,000 or less, imputed income will not apply.

Answer 21

Gains = Short or Long Term capital gains based on holding period Losses = Are not recognized or deducted

Answer 22

Gains = Short or Long Term capital gains based on holding period Losses = Capital loss deductible to extent of capital gains plus $3k ordinary loss

Answer 23

Gains = Short or Long Term capital gains based on holding period Losses = Ordinary loss deductible against ordinary income

Answer 24

Gains = Ordinary Income Losses = Ordinary loss deductible against ordinary income

Answer 25

Passive investment income offset against Passive Income losses only and not carried over to net against other gains or losses

Answer 26

Solution: The correct answer is None of the Above Answer "A" is incorrect because although the Revenue Act of 1861 did impose a federal income tax, it was later found to be unconstitutional because Congress did not have the power to levy an individual income tax at that time. Answer "B" is incorrect because the 16th Amendment gave Congress the power to impose an individual income tax, but did not itself impose that tax. Answer "C" is incorrect because the Revenue Act of 1916 raised the rates previously imposed under the Revenue Act of 1913. Therefore, answer "D" is correct because the Revenue Act of 1913 imposed the first constitutional income tax.

Answer 27

Solution: The correct answer is C. The rule is that a taxpayer must file if he has greater than or equal to $400 of net earnings from self-employment. If the taxpayer does not have self-employment income there is no requirements to filing unless your income exceeds the standard deduction and personal exemption ($0 for 2018 - 2025) for that year.

Answer 28

Solution: The correct answer is D. In general, the following items are not allowed when figuring an NOL. · Any deduction for personal exemptions. · Capital losses in excess of capital gains. · The section 1202 exclusion. · Nonbusiness deductions in excess of nonbusiness income. · Net operating loss deduction. · The domestic production activities deduction.

Answer 29

- The taxpayer must file a separate tax return from the spouse. - The taxpayer must furnish over one-half of the cost of maintaining the household, not just dependents - The spouse must not be a member of the household during the last six months of the tax year.

Answer 30

The Earned Income credit is refundable; able to create a negative tax liability. The American Opportunity credit and Child tax credit may be partially refundable. There are many non-refundable credits including, but not limited to, child care. EIC is the only fully refundable credit. The IRS recognizes two categories of credits; refundable and non-refundable. The term refundable does not necessarily imply that it is fully refundable, it may be fully or partially refundable. AOTC and child tax credit are partially refundable, but the IRS will consider them in the refundable category.

Answer 31

In three situations, a taxpayer is not allowed to use the standard deduction and must itemize deductions: 1. A married individual who files a separate return (married filing separately filing status) cannot use a standard deduction if that person’s spouse itemizes deductions. 2. A nonresident alien and a dual-status alien is not allowed to use a standard deduction. 3. An individual who files a tax return for less than 12 months because of a change in annual accounting period is not allowed to use a standard deduction (not common for individual taxpayers).

Answer 32

Passive Activity rules are for taking deductions based on loss in a passive activity. Think of passive activity loss in terms of filters. Filter one you look at the At Risk Amount. Filter two, you look at the Passive Income Amount. Example: Sarah is a 10 percent owner in Canine Connection, LLC, a day-care center for dogs. She is also a 15 percent owner in Little Laughter, LLC, a successful children's clothing store. She does not materially participate in either business. Her at-risk and loss/income for the current year is as follows: Canine Connection-At-risk = $175,000; Loss of $275,000 Little Laughter-At-risk = $25,000; Income of $125,000 She also has wage income of $80,000 and capital gain income of $30,000. Which of the following statements is true? A: The loss suspended because of the at-risk rules is $100,000 and the loss suspended because of the passive activity loss rules is $50,000. Solution: She has 175k invested (at risk) in Canine Connection, she can take up to that in losses for the first filter (at risk) Of the 275k loss, only 175k of the loss can go through to the second filter (passive income offset), and the remaining 100k of loss is suspended for this year under the at-risk rules. Next we look for passive income to offset loss. Little Laughter has 125k of income we can offset with the 175k of loss that made it through the first filter. We cannot take more passive loss than passive income, so the175k loss – 125k of passive income leaves 50k of loss we cannot take and will be suspended under passive activity rules.

Answer 33

Summary of Rental Property Exceptions to Passive Categorization 1. Customer use less than or equal to 7 days 2. Customer use less than or equal to 30 days and significant personal services provided 3. Extraordinary personal services are provided 4. Rental activities incidental to non-rental activity 5. Rental activity available during business hours for nonexclusive use of customers 6. Rental property used in an activity conducted by partnership, etc. where the taxpayer is the owner and an active participant

Answer 34

- Any closely held C corporation - Any personal service corporation - Individuals, estates, and trusts - Certain publicly traded partnerships

Answer 35

Corporations with less than ~$27M are considered small business and can choose Cash or Accrual accounting methods Sec 1244 that allows for deductions of $50K Single $100K MFJ are corporations that were less than $1M in total capital at time the stock was issued (and incorporate after 1978, loss incurred by original stock owner and corp earned +50% of gross income as active income 5 yrs prior to loss)

Answer 36

The all-events test, under U.S. federal income tax law, is the requirement that all the events fixing an accrual-method taxpayer's right to receive income or incur expense must occur before the taxpayer can report an item of income or expense. Under Sec. 461(h), a three-prong-all-events test is met when (1) all events have occurred that establish the fact of the liability; (2) the amount of the liability can be determined with reasonable accuracy; and (3) economic performance has occurred such that economic performance occurs when the taxpayer receives services or property or uses property another party provided or when the taxpayer provides property or services to another party.

Answer 37

The IRS does recognize 52-53 week if the year ends on a specified day of the week (such as Friday) that occurs in the last week of the last month of the tax year.

Answer 38

75% of income tax deficiency

Answer 39

The preparer penalty for willful or reckless conduct is the greater of $5,000 or 50% of the income derived by the preparer for the return.

Answer 40

$ The failure to file penalty is 5% of the unpaid tax balance for each month or part thereof that the tax return is late (up to 25% of the unpaid tax balance). Therefore, Ford's failure to file penalty is $60 (3 months × $400 × 5%). However, if a tax return is filed more than 60 days late (as it is in Ford's case), the minimum failure to file penalty is the lower of $485 (in 2023) or 100% of the tax due. The penalty will not exceed 100% of the tax due.

Answer 41

$100 is min amount that must be deducted from difference in FMV before and after disaster, less insurance proceeds. After this floor the loss must exceed 10% of AGI floor

Answer 42

Complete Loss = Adjusted basis less insurance proceeds Partial Loss = (1) Decline in FMV after event vs before event less insurance proceeds OR (2) Adjusted basis less insurance proceeds WHICHEVER IS SMALLER

Answer 43

There is a five-year carry-over provision for charitable deductions. The total years are 6: The initial year plus five carry-over years.

Answer 44

A donation of short-term capital assets is recognized as a charitable expense at the lower of the FMV or basis. Donations of appreciated long-term assets are recognized as a charitable expense at the fair market value unless basis is chosen

Answer 45

Miscellaneous itemized deductions not subject to the 2% floor: -Gambling losses to the extent of gambling income. -Equity in an annuitized contract at the annuitants death; Loss on the disposition of an annuity contract -Repayments of income (such as repayments of Social Security income when the taxpayer fails the earnings test) -Credit for estate taxes imposed on IRD (income in respect of a decedent’s assets) All miscellaneous itemized deductions subject to the 2% AGI limit were eliminated under TCJA.

Answer 46

She can deduct up to her net investment income which = $10,000 + 3,000 + 6,000 = $19,000 without making a special election. $10,000 in interest, taxed at ordinary income rates $15,000 in qualified dividends, taxed at capital gains rates $3,000 in ordinary dividends, taxed at ordinary income rates $6,000 in short-term capital gains, taxed at ordinary income rates $11,000 in long-term capital gains, taxed at capital gains rate If she elected to treat the long-term capital gains and qualified dividends as ordinary income she could deduct it all. However, DO NOT assume that the election is made. The question would have to specify that information or ask "what is the maximum she can deduct?"

Answer 47

The correct answer is $21,200 The taxpayer's investment interest deduction is limited to the investment income. The investment income is $15,200 plus she can add the capital gains of $6,000 and deduct $21,200. The excess investment interest ($30,000 - $21,200) can be carried over to next year. Note: In order to treat the LTCG as ordinary income to allow for a greater deduction, it needs to state the special election was made or they would like to maximize the amount they can deduct.

Answer 48

Olive may deduct $0.22 (2023) cents per mile for the travel associated with Polly's medical care and may deduct up to $50 per night per person for lodging. The trip mileage is stated as 300 miles each way, you will need to multiply by 2 and use round trip mileage.Therefore, the total medical expenses are $13,480 which is calculated as follows: [(300 miles x 2 x 15 trips x $0.22 = 1,980) + (15 x ($50 x 2) = 1,500) + $10,000]. However, Olive may only deduct the amount that exceeds 7.5% of their AGI (TCTDR Act of 2020). 7.5% of Olive's AGI is $9,300. Therefore, medical expenses deductions for Polly's treatment is $4,180. Note: $100 for lodging is allowed because the rule is $50 per person per night.

Answer 49

Services provided by employer to employee at no additional cost to the employee and are within line of business in which employee works and available to all. These are non taxable employee benefits and not included in gross income

Answer 50

Loan = < 10K or NET investment income < $1k = $0; Loan = $10.01K-$100k = lesser of NET investment income or difference of Applicable Federal Rate interest and below market loan interest (ie..interest calculated via AFR minus interest calculated using stated loan rate of interest) Loan = > $100k = Difference of Applicable Federal Rate interest and below market loan interest;

Answer 51

Option I. Interest earned but reinvested in a savings account in an FDIC savings bank would be taxable in the year it was derived and paid. Option II. Unrealized gains are not taxed in the year they are derived, they are taxed when the position (or shares of the position) are sold. III. Since bonds pay in arrears and that may split tax years, this statement does not match what the question is looking for. Bonds that pay in April include interest from the prior 6 months which includes income derived from the prior year. IV. Gains in a QP are taxed as distribution. V. Increased value of personal residence would be taxed in the year the residence was sold if the gain exceeded the section 121 exclusion.

Answer 52

"Property transfer will result in the transferor's basis in the property being carried over to the transferee as if the property is acquired by gift and therefor no deduction to transferor is available and no gain or loss is recognized by transferee Transfers between divorcing spouses ALWAYS transfer their basis and their holding period, regardless of FMV at date of transfer and are therefore not included in income (pg 69)

Answer 53

Up to $5,000

Answer 54

$150,000 Cost of goods sold is the only deduction allowed for illegal drug operation activities. This is an actual IRS rule and has popped up on the CFP Board exam from time to time.

Answer 55

100% of transportation costs 50% of meals (including tip)

Answer 56

$450,000 potential gain before the transaction; $250,000 potential gain after the transaction. Reese FMV $ 500,000 ATB $ 200,000 Deferred Gain $ 300,000 New Asset $ 700,000 New Basis $ 400,000 (Old basis & mtg) Deferred Gain $ 300,000 Jake FMV $ 700,000 ATB $ 250,000 Deferred Gain $ 450,000 Recognized by Jake $ 200,000 $200,000 Assumption of Mortgage is boot New Asset $ 500,000 New Basis $ 250,000 Deferred Gain $ 250,000

Answer 57

Eli must recognize gain to the extent of the boot paid to him ($20,000) limited by his potential gain. Note: only real property is eligible for like kind treatment. You need to calculate Peyton's FMV. You can do this because you know that the values exchanged must be equal. Peyton gives Eli $20k + property in exchange for a property worth $36,000: $20,000 + x = $36,000 x = $16,000 Peyton Before Exchange After Exchange (Old Property) (New Property) FMV $16,000 FMV $36,000 Basis 40,000 New Basis 60,000 Potential Loss $24,000 Potential Loss $24,000 Boot $20,000 to Eli Peyton adds boot paid to old basis to get new basis. Eli Before Exchange After Exchange (Old Property) (New Property) FMV $36,000 FMV $16,000 Basis 10,000 Carryover Basis 10,000 Potential Gain $26,000 Potential Gain $6,000

Answer 58

Since John received boot and "traded down" his recognized gain equals the lesser of the realized gain or boot received, which is $25,000. John's basis will be his original basis ($75,000) less the boot received ($25,000) plus the gain recognized ($25,000) or $75,000. Ted's basis will increase by $25,000 because he is paying $25,000 in boot.

Answer 59

Section 165 creates an artificial sale date of December 31 for worthless securities.

Answer 60

For tax purposes, bargain sale transactions (selling to an unrelated party at a price well below FMV) cannot generate capital losses.

Answer 61

If a related party gives you property that is valued lower than what they paid for it, it is called loss property. If you then try to sell it, you can not take a loss. You must assume basis of FMV at time of gift

Answer 62

A secular trust is an irrevocable trust that you establish with a third party to hold assets for the exclusive purpose of funding your employees’ nonqualified deferred compensation (NQDC) plan benefits. A secular trust constructively belongs to the beneficiary therefore constructive receipt applies.

Answer 63

- The statute of limitations for the collection of a deficiency by the IRS is 10 years. - There is no statute of limitations for fraud. - The general statute of limitations under Section 6501 is 3 years. - The statute of limitations for a substantial understatement of income greater than 25% is 6 years.

Answer 64

Section 121 requires that to qualify for the exemption she must have 1) owned and 2) used as principal residence for two years out of the past 5 years. An exception to the rules exists where a taxpayer moved because of employment transfer. Note: The Section 121 amount is what is pro-rated, not the amount of the gain from the sale of the property. A single taxpayer has a $250,000 exemption, MFJ has a $500,000.

Answer 65

The replacement property must meet the taxpayer use test, not the functional use test, when a taxpayer does not use the property directly. The taxpayer use test requires replacement property to be used by the taxpayer in an activity which is treated the same for tax purposes in order to qualify for nontaxable exchange treatment.

Answer 66

Insurance proceeds which exceed the current basis of destroyed property will not be taxable if the taxpayer replaces that property with similar property within - a two-year period from the end of the year in which realization resumed if a natural disaster (fire) or - three years from the end of the year in which realization occurred in the event of a government taking (emminent domain).

Answer 67

Capital recovery is the expensing of certain acquisition costs. Bonds purchased at a premium are amortized over their life to expense the premium paid.

Answer 68

Your basis for depreciation is the lower of FMV or adjusted basis for depreciation.

Answer 69

According to Publication 17, “Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.”

Answer 70

Section 179 recapture rules apply when the business use of an asset drops below 50% for a given year or when the asset is disposed of before it would have been fully depreciated.

Answer 71

Solution: The correct answer is $2,650 The calculation is as follows: Start with figuring out the standard deduction. She can use her earned income plus $400 not to exceed 13,850 in 2023. Calculate Unearned Income first: 13,000 + 2,000 = 15,000 15,000 - 1,250 (standard deduction) = 13,750 remaining 13,750 - 1,250 (at the child's rate) = 12,500 remaining The remaining 12,500 will be taxed at the parent's rate. Then Calculate Earned Income: 14,000 - 12,600 (remaining standard deduction: 13,850 - 1,250 from the standard deduction used for unearned income) = $1,400 at the child's rate. Summary: Standard deduction is 1,250 + 12,600 = 13,850 At the parent's rate 12,500. At the child's rate (1,250 + 1,400) = 2,650.

Answer 72

losses from a limited partnership cannot be used to offset income from a master limited partnership.

Answer 73

The bargain element of an incentive stock option is an addback for alternative minimum tax purposes. In addition, since the addback is considered a deferral item for AMT, it would be eligible for the minimum tax credit in subsequent years. Interest income from a private activity bond is an addback for alternative minimum tax purposes, it is considered an exclusion item. Exclusion items are not eligible for the minimum tax credit. Real estate taxes are added back for alternative minimum tax purposes, they are considered an exclusion item. Exclusion items are not eligible for the minimum tax credit.

Answer 74

The first $160,200 (for 2023) of employee salary will be taxed at the partial employee FICA rate of 6.2%. All earnings will be taxed at the remaining FICA Medicare rate of 1.45%. Total Employee = 7.65% on first $160K Employer is same and for self employed or total amount paid on behalf of employee: 12.4% SS 2.9% Medicate 15.3% FICA

Answer 75

Charlie’s share of the loss is $50,000 ($200,000 total loss x 25% ownership interest). However, his deductible loss is limited to the amount Charlie has “at risk” because he is a general partner (material participant). Charlie’s “at risk” amount is equal to the amount he contributed to the partnership, plus his share of recourse loans incurred by the partnership. Recourse loans add to basis since the taxpayer is responsible for the loan, which is the opposite of a non-recourse loan. Charlie’s share of recourse loans is $5,000 ($20,000 total loan x 25%). Therefore, the total amount at risk for Charlie is $45,000 ($40,000 contributed + $5,000 recourse loan). He can take the loss without having to offset income because this is a general partnership, not a limited partnership.

Answer 76

Eligible expenses for the adoption credit include legal fees, court costs, attorney’s fees, and other fees associated with a taxpayer’s legal adoption of an eligible child or special needs child. Legal fees and court costs associated with the adoption of a spouse’s child are not eligible for the adoption credit. Costs related to a surrogate parenting arrangement are not eligible for the adoption credit. If adoption expenses are paid by an employer under an adoption assistance program, the payments can be excluded from the taxpayer’s gross income. If the payments are excluded from gross income, the underlying expenses are not eligible for the adoption credit.

Answer 77

“Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.”

Answer 78

- Receives income when the corporation declares and pays a dividend. - Votes for the Board of Directors at the annual shareholders' meeting. A shareholder in an S corporation may vote to retain or revoke S corporate status, votes, - Receives a K-1 annually in order to prepare a personal income tax return. - Reports on a personal income tax return a pro rata share of the corporate profit or loss. - Ownership of S corporation stock is restricted to individuals who are either US citizens OR US residents, estates, certain trusts (Grantor Trusts), and charitable organizations. (LLCs, partnerships, and other corporations are prohibited from becoming S corporation shareholders. Nonresident aliens and most trusts may not be S corporation shareholders.

Answer 79

Section 179 recapture rules apply when the business use of an asset drops below 50% for a given year or when the asset is disposed of before it would have been fully depreciated.