Tax Planning Flashcards
In a 1031 like-kind exchange, a recognized gain is…?
The lesser of:
1. The realized gain
2. The net boot received
The Tax Formula
Income (from whatever source derived)
minus: exclusions
Gross Income
minus: deductions FOR adjusted gross income
Adjusted Gross Income
minus: deductions FROM AGI:
Greater of itemized deductions or the standard deduction
Qualified business income deduction
Taxable Income
times: tax rate or rates (from tax table or schedule)
Gross Tax
minus: tax credits
Final Tax Due
minus: prepayments (withholding and estimated payments)
Net tax payable or refund due
Exclusions from Income
Municipal bond interest
Accident and health plans: employer premiums
Fringe benefits
Inheritances & gifts
Accident and health plans: amount(s) received
Scholarships
Personal residence sale gains (250k/500k)
Adoption assistance program: $14,890 2022 ($223,410-$263,410 AGI phaseout)
Death benefits
Dependent care assistance programs
Educational assistance program: up to $5,250
Debt discharged (public service student loan forgiveness, etc.)
Meals and lodging for employees
Interest on education savings bonds (i.e. Series EE or Series I)
Compensatory damages compensation
Support payments received (child support & post-2018 alimony)
MAFIAS PADDED MICS
Deductions FOR AGI (above-the-line)
Educator expenses ($250 inv, $500 for two educators filing MFJ)
Business expenses (gov officials who work on fee basis, performing artists, and members of the military reserves)
HSA (after-tax money)
Moving expenses (active-duty members of US armed forces
1/2 SE Tax
Retirement account contributions (SE and small biz owners)
Cost of health insurance premiums (for SE workers, including dental and LTCi)
Early withdrawal penalties (of savings accounts, like a CD)
Alimony payments (agreements before 2019)
Traditional IRA contributions (subject to phaseouts)
Student loan interest (deduction up to $2500 of interest paid on student loans)
Rental Property Minimum Use Tests
Rental Use
> 14 days = PASS
< / = 14 days = FAIL
Personal Use
</= 14 days or < 10% = PASS
> 14 days or > 10% = FAIL
Mixed use = Pass rental use, fail personal use. Deductions limited to gross rental income
Maximum Annual Charitable Deductions
- Cash Gifts
Deduction FROM AGI
- Public Charity (PC): 60% AGI
- Private Foundation (PF): 30% AGI
Maximum Annual Charitable Deductions
- LTCGs
Deduction FROM AGI
LTCGs w/ FMV Election
- PC: 30% AGI
- PF: 20% AGI
LTCGs w/Basis Election
- PC: 50% AGI
- PF: 30% AGI
Maximum Annual Charitable Deductions
- Ordinary Income Property
Deduction FROM AGI
Ordinary Income Property (STCGs, Art, Inventory)
- PC: 50% AGI
- PF: 30% AGI
Itemized Deductions (below-the-line or FROM AGI)
Unreimbursed medical and dental expenses
SALT
Interest Paid
Gifts to Charity
Casualty and Theft Losses
Unreimbursed Medical/Dental Expenses
Deduction FROM AGI
Qualifying expenses exceeding 7.5% of AGI
Taxes you Paid (Deductions)
Deduction FROM AGI
SALT (State and Local Taxes)
$10k limit
Interest Paid (Deductions)
Deduction FROM AGI
- Mortgage interest paid on up to $750k of debt (primary and/or secondary residence)
- Investment interest limited to NET investment income
Casualty and Theft Losses (Deductions)
Deduction FROM AGI
- Must be “federally declared disaster” losses
- Lesser of FMV or Basis - insurance payments - $100 deductible
- 10% of AGI threshold; any loses in excess are deductible
Tax Penalties: Negligence
Deficiency of tax liability if there was no intent to defraud.
- A 20% penalty will apply to the amount of the deficiency.
Tax Penalties: Fraud
When the taxpayer intends to defraud, a 75% penalty will apply to the amount of the deficiency.
Tax Penalties: Frivolous Return
“Go pound sand” written across the return is an example.
- Penalty is $5,000
Tax Penalties: Failure to File
5% of the unpaid taxes for each month or part of a month that a tax return is late up to a maximum of 25%.
- A minimum penalty of $435 is imposed if the tax return is later than 60 days.
Tax Penalties: Failure to Pay
0.5% per month the tax is unpaid up to a maximum of 25%.
Tax Penalties: Understatement of Liability
If the tax withheld from W-2 and/or estimated payments is less than:
- 90% of the current year liability, or
- 100% of the prior year liability (110% if taxpayers AGI was over $150,000-MFJ).
Penalty based on:
- The amount of the underpayment,
- The period when the underpayment was due and underpaid, and
- The interest rate for underpayments that we publish quarterly.
Section 1231 Property
Property that is used in a trade or business, AND
Property held for the production of income.
Gains are taxed as capital gains.
Losses are taxed as ordinary losses.
Section 1231 Subcategories
1245 Property
- Personalty used in a trade or business for the production of income.
- Examples: furniture, computers, carpet, decorative light fixtures, etc.
1250 Property
- Realty used in a trade or business for the production of income.
- Examples: commercial buildings, warehouses, barns, rental properties, etc.
Section 1245 Dispositions w/ depreciation
Sold above original cost basis
- capital gain AND
- depreciation recaptured as ordinary income
Sold from adjusted cost basis through original cost basis
- entire amount over adjusted cost basis will be recaptured as ORDINARY INCOME
Sold at adjusted basis
- no tax issue
Sold below adjusted basis
- reportable as an ordinary loss
Section 1250 Dispositions w/ depreciation
Sold above original cost basis
- capital gain AND
- depreciation recapture taxed at 25%
Sold from adjusted cost basis through original cost basis
- entire amount over adjusted cost basis will be recaptured at special gain rate of 25%
Sold at adjusted basis
- no tax issue
Sold below adjusted basis
- reportable as an ordinary loss
Business Entities: S Corp
Limited Liability
- Yes, for all shareholders
Number of Owners
- Max of 100 (members of a family may be treated as one owner)
Classes of Ownership
- Only one, but voting and non-voting are permitted
Levels of income tax
- No generally only one, but some states will tax S corps as corporations (i.e., double tax will result)
Deductibility of Losses
- Shareholders may deduct the corporation’s losses only to the extent of their tax basis in their stock which does not include any portion of the corporation’s debt
Dissolution
- Very complex
Best Suited for
- Single or multiple owner businesses; owners need company funded benefits and liability protection
Business Entities: C Corp
Limited Liability
- Yes, for all shareholders
Number of Owners
- no restrictions
Classes of Ownership
- multiple classes are permitted
Levels of income tax
- Two
Deductibility of Losses
- Shareholders may not deduct any of the corporation’s losses
Dissolution
- Most complex
Best Suited for
- Single or multiple owner businesses; owners need company funded benefits and liability protection
Business Entities: Partnership
Limited Liability
- Generally, no; however limited partners have protection from the partnership’s debts
Number of Owners
- Must have at least two (the general partners)
Classes of Ownership
- multiple classes are permitted
Levels of income tax
- One
Deductibility of Losses
- Partnership may deduct the partnership’s losses only to the extent of their tax bases in the partnership interest, which includes their allocable share of debt for which they are liable
Dissolution
- Easy
Best Suited for
- Business with partners; taxes or product liability are NOT a concern
Business Entities: LLC
Limited Liability
- No restrictions
Number of Owners
- No restrictions
Classes of Ownership
- Multiple classes are permitted
Levels of income tax
- One
Deductibility of Losses
- Members may deduct the LLC’s losses only to the extent to their tax bases in their partnership interest, which includes their allocable share of the debt for which they are liable
Dissolution
- Complex
Best Suited for
- Single or multiple owner businesses; Owners need limited liability but partnership tax treatment
Business Entities: Sole Proprietorship
Limited Liability
- No
Number of Owners
- One
Classes of Ownership
- None
Levels of income tax
- One
Deductibility of Losses
- Losses are deducted on owner’s tax return
Dissolution
- Easiest
Best Suited for
- Single owner business; taxes or product liability typically NOT a concern
At-risk and Passive Activity Rules
S-corps, Partnerships, and LLCs
At-risk rule: a taxpayer can only deduct losses to the extent that there is enough basis (or the amount at-risk).
- at-risk rules are ALWAYS applied BEFORE passive activity rules
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.
Private Interest vs Publicly Traded Partnership (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 happen is with current year PTP income being netted against a prior suspended loss from the same PTP.
FBAR Filing Requirement
U.S. persons are required to file an FBAR if:
-U.S. person had a financial interest in or signature authority over at least one financial account located outside of the US, and
- The aggregate value of all foreign financial accounts (FFA) exceeded $10,000 at any time during the calendar year reported.
- Must file FinCEN (Financial Crimes Enforcement Network) Form 114 by tax deadline.
What is FBAR?
Report of Foreign Bank and Financial Accounts
FATCA
Foreign Account Tax Compliance Act
Requires certain individual U.S. taxpayers holding financial assets outside the U.S. that meet certain threshold reporting obligations to report those assets to the IRS on Form 8938 (due of 1040, including extensions)
Form 8938 Threshold Requirements (2022)
Joint Income Tax Return (U.S. Residents)
- more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
Unmarried or Separate Tax Return (U.S. Residents)
- more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
Unmarried or Separate Tax Return (Non-U.S. Residents)
- more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
Joint Income Tax Return (Non-U.S. Residents)
- more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.
Child standard deduction
Greater of $1,150 OR amount of earned income + $350
Rental Real Estate: Active Participant Deduction
- $25k loss is allowed if the taxpayer’s MAGI is equal to or less than $100k
- $25k limit is phased out $100k - $150k
Every $2k MAGI = $1k reduction (FORMULA: [$150k - MAGI] / 2 = Allowable Deduction) - $25k loss limit as well as phase-out ranges are the SAME regardless of filing status
Annuity Payout Exclusion Ratio (annuitization)
Investment in Contract / Annual payment x Life Expectancy*
*From IRS Table V (probably given in question)
Annuitization prior to December 31, 1986 applies the exclusion allowance for life: even after basis is recovered
Annuity Payouts: Withdrawals
Prior to 8/14/1982: FIFO
After 8/14/1982: LIFO
5 Exceptions when Imputed Income does NOT apply
- Loans between individuals totaling $10,000 or less; except when the 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 (OID) provisions.
- Sales of property for $3,000 or less.
- When all payments are due within six months.
When loans exceed $100,000, the imputed interest is charged based on…
The Applicable Federal Rate (AFR)
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.
NOTE: If the borrower’s net investment income is $1,000 or less, imputed income will NOT apply.
The Kiddie Tax applies to…
Children under age 19 or full-time students under age 24.
Net unearned income more than the $2,300 (2022) 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 the Kiddie Tax
