Tax Planning

Question 1

Gain Exclusion applies that applies to Noncorporate investors allowing them to exclude up to 100% of gain, up to $10,000,000, realized on the disposition of qualified small business stock issued after August 10, 1993 and held more than five years.
–
Gain above this amount is taxed at 28%

Answer 1

Section 1202 Stock

Question 2

These eligibility rules apply to what type of stock?

Investor must have purchased stock at issuance

The corporation’s total assets, before or immediately following stock issuance, must not exceed $50,000,000

Qualifying small business generally must be a C corporation
that conducts an active trade or business

Answer 2

Section 1202 Stock

Question 3

What code section stock allows a Reclassification of loss
deductible up to $50,000 ($100,000 for MFJ)
annually as an ordinary loss

Any excess is considered a capital loss

Answer 3

§1244 Stock

Question 4

The below requirements apply to what type of stock losses to be reclassified:
allowing for deductions up to $50,000 ($100,000 for MFJ)
annually as an ordinary loss
and excess is considered a capital loss

Requirements
Stock in C or S corporations whose total capitalization
does not exceed $1,000,000 at the time the stock is
issued

Only available to individuals who are original holders of
the stock
17

Answer 4

§1244 Stock

Question 5

Taxable Income for Regular Tax Purposes
Plus:
Personal exemptions
Standard deduction (if taken)
Miscellaneous itemized deductions (investment fees, tax preparation fees) **
State, local, sales and property taxes **
Private activity bond interest
Depreciation deduction differences
Capital gain differences
Incentive stock option spread on exercise
Equals: AMT Income
Less:
AMT Exemption
(2017 $54,300 for Single, $84,500 for MFJ)
(2021 $73,600 for Single, $114,600 for MFJ)
(2022 $75,900 for Single, $118,100 for MFJ)
Note that for 2018 and forward, the exemption is phased out for high levels of AMTI
($1 million for
Equals: AMT Taxable Income
2022 Tax is 26% on the first $206,100 and 28% thereafter

Answer 5

AMT Calculation

Question 6

Taxable Income for Regular Tax Purposes
Plus:
Personal exemptions
Standard deduction (if taken)
Miscellaneous itemized deductions (investment fees, tax preparation fees) **
State, local, sales and property taxes **
Private activity bond interest
Depreciation deduction differences
Capital gain differences
Incentive stock option spread on exercise

Answer 6

Calculation for AMT Income

Question 7

Equals: AMT Income
Less:
AMT Exemption
(2017 $54,300 for Single, $84,500 for MFJ)
(2021 $73,600 for Single, $114,600 for MFJ)
(2022 $75,900 for Single, $118,100 for MFJ)
Note that for 2018 and forward, the exemption is phased out for high levels of AMTI
($1 million for

Answer 7

Calculation for AMT Taxable Income

Question 8

AMT Taxable Income Multiplied by

2022 Tax is 26% on the first $206,100 and 28% thereafter

Answer 8

AMT

Question 9

Adjustment or preference items that affect only one tax year and cause a permanent difference between regular taxable income and AMTI. For individuals, an example is state and local income taxes. These taxes are never deductible for AMT purposes, and are added back to AMT income in the calculation of AMTI in the year they are paid (or accrued in the case of accrual taxpayers).

Answer 9

Exclusion items for AMT

Question 10

Adjustment and preference items that affect more than one tax year. These items cause a difference in regular taxable income and AMTI in two or more years, but do not cause a permanent difference over time. This commonly is referred to as a timing difference. All deferral items cause a timing difference between regular tax and AMT.

Answer 10

AMT Deferral items

Question 11

What is the relationship between the likeliness of AMT to be applicable for people in a very high regular income tax bracket?

Answer 11

Very high income bracket
Less likely AMT will apply

Question 12

What is the relationship between the likliness of AMT to be people in a very low income tax bracket?

Answer 12

Very low income bracket
Less likely AMT will apply

Question 13

How are like-kind exchanges reported for
tax purposes?

Answer 13

Taxpayers involved in a like-kind exchange
must complete and file Form 8824 in the year of
the exchange.

Question 14

If a taxpayer acquires a property in a like-
kind exchange and subsequently dies, is the deferred
gain required to be recognized in the year of death?

Answer 14

No. The deferred gain would escape income
tax just as if the taxpayer had held the relinquished
property at the time of his death. Further, the property held at death would be entitled to a step-up in basis to its fair market value as of the date of the taxpayer’s death.

Question 15

If a taxpayer acquires a property in a like-
kind exchange and subsequently uses the property
as a personal residence, can the gain exclusion rules
of section 121 be used to effectively remove the
deferred gain from taxation?

Answer 15

Yes, but with special rules. Ordinarily, a
taxpayer must use and occupy a property as a

personal residence for two of the last five years in
order to avail themselves of the section 121 gain
exclusion rules. However, a property that was acquired by a taxpayer who did not recognize gain
under the like-kind exchange rules must hold the
property for five years (in addition to meeting all
of the other requirements of section 121) in order
to qualify for the gain exclusion on the sale of a
personal residence

Question 16

When should the like-kind exchange rules
be avoided?

Answer 16

Taxpayers may want to avoid the mandatory
application of the like-kind exchange rules under
the following circumstances:

• The property has an unrealized loss that
  would benefit the taxpayer by realizing
  the loss (this is normally the case with automobiles used in a trade or business).
• The taxpayer has losses in the current year
  (or carryovers into the current year) that
  can be utilized to absorb the gain on the
  sale of the property.
• The gain is passive under Section 469 and
  would be offset by current and suspended
  passive activity losses.

The taxpayer anticipates that their personal tax rate will increase in future years and the payment of the tax on the gain in the current year would be more beneficial than if the gain were deferred

Question 17

How might a taxpayer avoid the application
of the like-kind exchange rules?

Answer 17

A desire to avoid the like-kind exchange rules
often occurs with automobiles that are subject to
luxury auto limitations. The luxury auto limitations slow down depreciation to a point that the
actual value of the car may be declining more
rapidly than the taxpayer can claim depreciation.
As a result, a taxpayer who wants to purchase
a new car would be wise to sell the used car to
a third party and recognize the loss instead of
trading in the used car in a transaction with the
dealer of the new car.
There are many requirements for a like-kind ex-
change to occur. Willfully failing any of the require-

ments will create the opportunity to recognize gain

or loss on the transaction

Question 18

Do states follow the like-kind exchange rules?

Answer 18

Taxpayers need to review their individual state
tax laws to determine if their state allows for the non-
recognition of gain and loss on transactions involving
like-kind property. While many do, some only classify
transactions involving like-kind property in their state
as a valid non-recognition event. For example, real estate in one state transferred for real estate in a neighboring state will generally qualify for like-kind treatment for federal purposes but may fail the state requirement since the new property is in a different state.