Tax Planning Flashcards
Tax Flow
“I Got A Tattooed Gecko For November”
Income
-Exclusions (MAFIAS PADDED MICS)
Gross Income
-Deductions for AGI (ME SBRHH EATS)
AGI
-Std Deduction
-Itemized Deduction (CG UTI)
-Qual’ed Biz Expenses
Taxable Income
*Tax rate
Gross Taxable
-Tax Credits
Final Tax Due
-Prepayments
Net Tax Payable/Refund
Tax Exclusions
MAFIAS PADDED MICS
Muni bond interest
Accident & health plans: employer premiums
Fringe benefits
Inheritance & gifts
Accident & health plans: amts recieved
Scholarships
Personal residence (Section 121)
Adoption assistance program ($14,890; $223,410 to $263,410 AGI phaseout)
Death benefits
Dependent care assistance program
Education assistance up to $5250
Debt discharged
Meals & lodging for employees
Interest on education savings bonds (Series EE or I)
Compensatory damages compensation
Support payments received (child support if before 2019)
Deductions for AGI
“ME SBRHH EATS”
Moving expenses
Educator expenses ($250 or $500)
Student loan interest
Business expenses (reservist)
Retirement contributions for SE
Health care premiums for SE
HSA contributions
Early withdrawal penalties of savings accounts like CDs
Alimony payments before 2019
Tradition IRA contributions
SE tax (1/2 of)
Itemized Deductions
“CG UTI” / Below the line
Casualty and theft loss for nationally declared disasters
Gifts to charity
Unreimbursed medical greater that 7.5% of AGI
Taxes state and local (SALT) up to $10k
Interest paid (mortgages up to $750k of debt)
Standard Deductions
Regardless of filing status, opportunity to add for 65+ and or blind.
If MFJ and both over 65, $1400 * 2 = $2800 added to Std Deduction amount.
Tax Deduction
Reduces the overall taxable income
Adjust BEFORE application of the tax rate tables
Reduces tax by marginal percentage
Benefit: more valuable to HIGH-INCOME taxpayers than lower because the marginal tax rate is higher.
Tax Credit
Lowers tax due under specific circumstances
Adjust AFTER the tax due is calculated
Reduces tax due on a dollar-to-dollar basis
Benefits ALL TAXPAYERS in the same amount regardless of their marginal tax rate
Refundable Credits
Refundable Credits “AAEP”
American Oppty Tax Credit (AOTC)
Addtl Child Tax Credit
Earned Income Credit
Premium Tax Credit
Nonrefundable Credits
“CCRL”
Child & Dependent Care Credit
Child Tax Credit
Retirement Savings Contrib Credit
Lifetime Learning Credit
Tax Form 1040X
Amended Tax Return
Tax Form 1040ES
Estimated Tax for Individuals
Tax Form 1041
Estate & Trusts
Tax Schedule 1
Additional Income & Adjustments to Income
Tax Schedule A
Itemized deductions
Tax Schedule B
Interest and dividend income
Tax Schedule C
Profit/loss from business
Tax Schedule D
Capital losses or gains
Tax Schedule E
Rental and royalty income
Tax Schedule F
F = Farming
Profit or loss from farming
Tax Schedule H
H = House
Household employment taxes
Tax Schedule SE
Self-employment tax
Tax Form 706
“6 for 6’ under”
Estate & GSTT
Tax Form 709
“9 for I’m on cloud nine!”
Gifts and GSTT
Tax Form 1098
Mortgage interest statement
Tax Form 1099-DIV
Dividends and distributions
Tax Form 1099-INT
Interest income
Tax Form 1099-NEC
Non-employee compensation
Tax Form 1099-MISC
Miscellaneous income
Tax Form 1099-R
Retirement Distributions
Tax Form 5498
IRA contribution individuals
Tax Form 8606
Non-deductible IRAs
Lost credits for Married filing Separately (MFS)
Child/dependent care, earned income, adoption, AOTC, LLC, student loan interest
Reduced credits for Married filing Separately (MFS)
Child tax credit and savers credit
Married filing Jointly
For a widow/er, file MFJ in year of spouses death. File as Qualified Widow/er in year 1 and 2 immediately following as long as not remarried.
Estimated Tax Payment Dates
4/15
6/15
9/15
1/15
Estimated tax (prepayment) payment formula
To avoid a penalty on underpayment, the estimated quarterly payments must be 25% of the lesser of the following:
90% of the tax liability shown on the return for the current year
100% of the tax liability shown on the return for the prior year if the taxpayer’s AGI for such prior year was $150,000 or less
If AGI is greater than $150,000 MFJ or $75,000 MFS, no penalty if the taxpayer estimated tax payments in the current year equal to:
110% of the prior year’s tax, or
90% of the current year’s tax
Tax Penalty - Negligence
“Ray Allen #20 was negligent in handling of exit from Celtics”
No intent to defraud.
20% penalty applied to amount of deficiency
Tax Penalty - Fraud
Intent to defraud
75% penalty applied to amount of deficiency
Tax Penalty - Frivolous Return
“Go pound sand” written on tax return
$5000 penalty
Tax Penalty - Failure to File
5% of the unpaid taxes for each month or part of a month that a tax return is late, up to 25% max
Minimum penalty of $435 if later than 60 days
Tax Penalty - Failure to Pay
0.5% per month the tax is unpaid up to a max of 25%
Tax Penalty - Understatement of Liability
If the tax withheld from W-2 and/or estimated payments is less than;
-90% of current year liability
-100% of the prior year
-110% if taxpayers AGI is greater than $150k MFJ
Tax Penalty - Failure to Pay & Failure to File
If both applied in 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.
Tax Entities
S Corp - Pass thru; treat dividend distro’s as tax benefit -> no income tax on them!
C Corp -
Partnership - Pass thru
Limited Liability Co - Pass thru
Sole-proprietor
Cash Method - accounting
Recognize expenses when they are actually paid and receive when they are actually or constructively received.
Constructive receipt occurs when the finds are available without restriction.
Tax return is always cash basis.
Accrual Method - accounting
Revenue recognized when the right to receive it exists (e.g. AR)
Expenses recognized when the liability can clearly be established, not when payment made (e.g. AP)
Accounting Methods
Revenue: Cash = Received. |. Accrual = Earned
Expenses: Cash = Paid. |. Accrual = Incurred
FIFO -v- LIFO
RISING PRICES. |. FIFO. |. LIFO
Profit. Higher. Lower
Tax Liability Higher. Lower
Inventory Value. Realistic. Understated
Common Depreciable Assets
“ACHORN” & 27.5 -> two 7’s, two 5’s
Autos. 5 yrs
Computers. 5 yrs
Heavy Machines. 7 yrs
Office Furniture. 7 yrs
Residential Real Estate. 27.5 yrs
Non-res Real Estate. 35 yrs
What property is not a considered a capital asset?
“ACID”
Accounts Receivable
Copyrights
Inventory
Depreciable Property used in trade or business (Sec 1231 assets)
Net Investment Income Tax
3.8%
What is the max capital loss per year amount?
$3000
Carry forward to the loss indefinitely
Section 1231 Property
Property used in trade/business. Property help for production of income
GAINS taxed as capital gains.
LOSSES taxes as ordinary income.
Section 1231 Categories
1245 Property - “Personalty” - furniture, computers, office equipment
1250 Property - “Realty” - commercial bldgs, barns, rental properties
Section 1031 - Like-Kind Exchanges
Allows for the deferral of gain or loss recognition on realty for realty exchanges.
Must exchange realty for realty
Boot is non-qualifying property (e.g. cash, debt assumption, inventory, and personalty)
Section 1031 Timing
45 days from the date of transfer of the relinquished property to id potential replacement properties.
180 days to complete the exchange from beginning to end
Related Party Transactions - who is a related party?
Spouse
Child
Grandchild
Parent
Sibling
Related entities: taxpayer owns 50% or more of a company
Related Party Transactions - situations
(1) Sold at a loss to a related party
PAUSE -> wait to see what happens when related party sells again
(2a) Sold above RP2’s basis and greater than RP1’s disallowed loss -> USE ALL OF LOSS
(2b) Sold above RP2’s basis but below RP1’s disallowed loss -> USE PARTIAL AMOUNT TO = 0
(2c) Sold below RP2’s basis -> USE NO DISALLOWED LOSS but report RP2’s loss
Rental Real Estate - Active Participant
Taxpayer may deduct up to $25,000 annually in losses if an “active participant”
Meaning…
1) Taxpayer own at least 10% of the property, and
2) Substantial involvement in managing the property
Rental Real Estate - Active Participant Phaseout
MAGI under $100k = 100% of $25k allowed
MAGI btwn $100k to $150k = 2k to 1k reduction
MAGI greater than $150k = zero allowed
Personal Use Property
Allowed to rent for 14 days or less -> DO NOT have to report income
Rental Use Property
Personal use cannot exceed the GREATER of;
-14 days, or
-10% of the number of days the property was rented
Mixed-Use Property
Personal usage is GREATER than;
-14 days or
-10% of the number of days the property was rented
Expenses are to be allocated btwn personal use and rental use
Deductions are limited to gross rental income (may have net income of $0 but not negative)
Section 121 - Personal Residence Sale Exclusion
Allows for the exclusion of gains on the sale of a person residence for up to $250k (single) or $500k (MFJ)
Section 121 Tests
Ownership Test: Must have owned the property for 2 out of the last 5 years
Usage Test: Must have used the property as the personal residence for 2 out of the last 5 years
If married; ONE spouse to meet ownership test, both to meet the usage test
Section 121 - Reduced Exclusions
Job relocation
Employment change leaves one unable to pay living expenses
Qualifying for unemployment benefits
Health issues
Divorce
Birth of twins or more
Damage to home from disaster
Condemnation or seizure
Other unforeseen circumstance
Use-Related | Charitable Contribution
Charity makes use of the donated property in a manner consistent with its exempt purpose
Donor picks;
FMV @ 30% of AGI or
Basis @ 50% of AGI
Use-Unreleated | Charitable Contribution
Unrelated to the exempt purpose/function of the qualified organization. E.g. Painted donated to a university but sold for proceeds.
Results in a deduction only for the LESSER of;
-Cost basis, or
-FMV
Imputed Interest Income - what is it?
IRS imputes an interest charge if the taxpayer charges less than an adequate rate of interest on a loan.
Imputed Interest Income - exam tip
$1,000 - Net investment income of this amount or less is not imputed on loans btwn $10k - $100k
$10,000 - Loans below this amount, no imputed interest.
$10,000 to $100,000 - Loans btwn these two amounts, lesser of borrower’s NII or AFR amounts
$100,000 - Loans greater than this amount, must use provided AFR amount
Alternative Minimum Tax - formula
“RAAG TA”
REGULAR TAXABLE INCOME
+tax pref’s
+std deduction
+/- AMT adjustments & tax pref’s
AMTI
-exemption amount
AMT BASE
*AMT tax rates
GROSS AMT TAX
-AMT foreign tax credit
TENTATIVE MINIMUM TAX
-regular tax liability
AMT
Planning for AMT
Accelerate income into the AMT year
Defer tax deductions until a regular tax year
Optimal strategy would be to do as above until the AMT liability EQUALS the regular tax liability
Foreign Bank & Financial Accounts (FBAR) - what is it
US taxpayer required to file an FBAR if:
(1) had a financial interest in or signature authority over at least one financial account outside USA
(2) aggregate value of all foreign financial accounts (FFA) exceeded $10k at any time during the year
(3) must file FinCEN (Financial Crimes Enforcement Network) Form 114 by tax day
Foreign Account Tax Compliance Act (FATCA)
Requires certain taxpayers holding financial assets outside USA that meet certain threshold reporting obligations to report those assets to the IRS on Form 8938.
-If you are required to file form 8938, you must report your financial account maintained by a foreign financial institution (e.g. savings, deposits, checking, brokerage accounts)
Form 8938 Threshold Requirements
MFJ - US Resident: Total value of foreign assets is more than $100k on last day of year or $150k at any point
Single/MFS - US Resident: Total value of foreign assets is more than $50k on last day or $75k at any point
MFJ - Non-US Resident: Total value of foreign assets is more than $400k on last day or $600k at any point
Sing/MFS-Non-US Resident: Total value of foreign assets is more than $200k on last day or $300k at any point
Kiddie Tax definition
Applies to children under age 19 or full-time students under 24. Net UNEARNED income more than $2,300 threshold amount is subject to tax at the highest marginal tax rate of the child’s parents. Net unearned income below the threshold is not subject to Kiddie Tax.
Kiddie Tax mechanics
Example: $15k net of unearned income from 17 yr old.
-First $1150 is tax-free (dependent’s std deduction)
-Next $1150 taxed at child’s rate, typically 10%, or $115,
-Remaining $12,700 taxed at parent’s tax rate (assume 22%), thus $2794 (this is Kiddie Tax)
-Final total tax owed = $2,909 (115 + 2,794)
Kiddie Tax, Earned + Unearned Example
Earned income = 7k; Unearned income = $2,500; 15 yr old; 24% parent’s tax bracket
(1) Child’s taxable income = Gross Income - (Std Deduct (greater of $1150 or Earned income + $350))
$9,500 - $7,350 (earned income + $350)
$9,500 - $7350 = $2,150
(2) Amt taxed @ parent’s highest marginal rate (24%): Unearned Income - first $1150 - $1150 Std Deduct
$2,500 (unearned) - $1150 - $1150 = $200
Parents tax due = $200 * 0.24 = $48
(3) Amount taxed at child’s rate: Child’s taxable income - amt taxed at parent’s
$2,150 - $200 = $1950
Child’s tax due = $1950 * 0.10 = $195
(4) Total tax due = $48 + $195 = $243
Net Investment Income (NII) defined
Amount by which the sum of gross investment income and the capital gain net income exceeds the allowable deductions
NII formula
Note: NII thresholds on provided Tax Tables
Individuals, estates, and trusts subject to 3.8% tax on net investment income;
Tax applies to the lesser of….
-Net Investment Income, or
-excess of MAGI over $250k for MFJ/$200k for Single
AMT: Boot, Gain & Basis details
1) If no boot received, Recognized Gain is $0
2) When boot is rcvd, answer to Recognized Gain is total of boot rcvd
3) Any boot paid is added to Basis
4) Basis carries over from prior property
Historical Rehab Programs
Historic rehab programs that are held as passive activity may generate a deduction-equivalent tax credit up to $25k. The credit phases out btwn $200k and $250k of AGI.
To calculate the credit: If marginal tax rate is 25%, multiple $25k by 25% to get a credit of $6,250
Low-Income Housing Credit
Low-income housing programs that are help as passive activity may generate a deduction-equivalent tax credit up to $25k. There is NO PHASE OUT. Thus produces a higher credit.
The low-income housing credit is allowed annually over a 10-year “credit period.” The depreciation is straight-line over 27.5 years.
Estimated Tax Payment Schedule
4/15
6/15
9/15
1/15
Estimated Tax Payment - how much?
Quarterly payment to be 25% of the lesser;
90% of current year, or
100% of previous year if AGI was $150k or less
If AGI greater than $150k (or $75k MFS);
110% of prior year, or
90% of current year
Single - tax filing
On 12/31 either unmarried or legally separated
MFJ - tax filing
As of 12/31, married
Income + deductions for both
Not allowed if one spouse a non-resident alien
Jointly and separately liable
If spouse dies in given year, living spouse to file as MFJ in that year
MFS - tax filing
2 separate returns filed
Each spouse, separate items + income, deduction, and credits
If one elects to itemize, both must
*Remember: IRS does not like MFS, thus many credits and threshold limits are unfavorable;
Lose: child & dependent care, earned income, adoption, AOTC, LLC, student loan interest
Reduced: child tax credit, savers credit
Head of Household - tax filing
Must be single or unmarried
Pay more than 1/2 of housing costs
Qualifying child: lived w/ you for more than 1/2 year
Qualifying relative: providing at least 50% annual living expenses
Qualifying Window/er - tax filing
No married
MFJ = year of spouse death
QW = year 1 and year 2 after death
50% of household expenses
Claim qualifying child as a dependent
What is a benefit to using the MACRS - Modified Accelerated Cost Recovery System
-Allows for the bigger deductions up front
-Increases cash flow
Capital gains are _____ on top of ordinary income
Stacked
Tax rate for collectibles
“JD Martinez #28 rookie card”
28%
Related Party Transactions - details
GAIN -> treat normally
LOSS -> pause and wait for sale to unrelated party
At-risk rules applied before passive losses
“A before P”
At-risk rules state that a taxpayer can only deduct losses to the extent that there is enough basis (or the amount at risk)
Example: Taxpayer as $20k at risk prior to current year’s pass-through loss of $17k. No issues as far as at-risk. $17k loss will be allowed and the taxpayer’s amount at-risk is reduced to $3k.
Only take losses to amount at-risk.
RE active participant loss deduction example
Tim (Single) owns a rental condo w/ reported loss of $10k for the current year. AGI is $126,420. How much rental loss can Tim recognize?
Step 1)
$126,420 (MAGI)
- $100k (low end of phase out)
=$26,420 (excess MAGI)
/2
=$13,210
Step 2)
$25k (Statutory loss limit)
-$13,210 (disallowed portion)
=$11,790 max allowable loss
Since Tim’s loss was $10k, he can deduce the entire amount
Section 121: Exclusion reduction formula
Step 1) Exclusion Reduction = Tax Exclusion * (# of days in home/730 days)
Step 2) Calc gain on home sale
Step 3) Exclusion Reduction - Gain = Taxable Amount
What is ordinary income property?
Property that, if sold, would result in ordinary income or short-term capital gain. Ordinary income property includes:
-Capital assets held for 12 months or less
-Property created by the donor (e.g. works of art, literary compositions, letters, etc.)
-Inventory
Three situations where the IRS looks in interest should be imputed
Gift Loan: provided out of love, affection, or generosity
Corp Shareholder Loan: From a corp to its shareholder
Compensation-Related Loans: From employer to employer
Benefit of deductions to high-income earners
Deductions are generally more beneficial to high-bracket taxpayers because there are several deductions (e.g. mortgage interest, capital gains on retirement investments) which affect the wealthier classes more than poor/middle-class
Personal Service Corporation (PSC) - a closely help C Corp
“HEAL” - Health, Engineering, Architecture, Law
Must exclusively provide services in the health, engineering, accounting, architecture, or law. They may also provides services in the fields of performing arts or consulting.
Req’s when gift of property as an income tax deduction is greater than $5k
Donor must obtain an appraisal for each item and include a copy of the appraisal with the tax return. The taxpayer must file Form 8283, “Section B Non-cash Charitable Contributions” along with her return
What is another term for proportional tax?
Flat tax
Proportional tax requires that everyone pay the same rate, no matter the individual’s income (e.g. sales tax).
With a JTWROS between spouses, how is basis treated at death?
Step up in basis for 1/2 property
When a taxpayer deducts non-business bad debts as short-term capital losses, how much can be deducted?
The taxpayer’s basis in the debt.
Penalty for Negligence is 20% of what?
The deficiency attributed to negligence.
Like-kind exchange
Takes place when a taxpayer uses gains on the sale of property to buy similar property. Personal use property includes, stocks, bonds, investors, and partnership interests.
Penalty for aiding and abetting a tax liability understatement?
$1,000
Penalty for a filed tax return but taxes have not been paid?
0.5% per month - Failure to pay - up to max of 25%
Which entity allows for pass-through taxation, limited liability, and the ability to easily sell interests in a practice in the future, assuming no general partner?
S corp
Tax Form 1065
Used to report income, gain, losses, deductions, and credits from the operation of a partnership.
Self-employment tax rate for Medicare
2.9%
In a Section 1031 Link-Kind Exchange, the recognized gain is the lesser of….
(A) the realized gain, or
(B) the net boot received
