Tax Planning Flashcards
Long-term capital gains rates are determined by (taxable/adjusted gross) income
taxable
Deductions for AGI
Educator Expenses
Up to $300/individual ($600 for two educators MFJ)
Additional 0.9% Medicare tax (is/is not) deductible as Self-Employment tax
is not
Alimony paid is deductible by payor and income to recipient if the divorce happened prior to ____
2019
Self-employed health insurance deduction is limited to ____ __________ ______
self-employment income
Itemized deduction for medical expenses exceeding ___% of Adjusted Gross Income
7.5%
Itemized deduction for investment interest expense is limited to ___ __________ ______
net investment income
Itemized deduction for cash donations is limited to __% of AGI
60%
Itemized deduction for casualty and theft losses must exceed __% of AGI threshold
10%
(Marginal/Average) tax rates show the amount of tax paid on the next dollar of earned income
Marginal
(Marginal/Average) tax rates show the overall share of income paid in taxes
Average
The taxpayer’s marginal tax rate will always be (higher/lower) than their average tax rate
higher
Average Tax Rate
Formula
Tax Paid / Taxable Income
Tax (deductions/credits) are more valuable to high-income taxpayers than low-income taxpayers
deductions
Tax (deductions/credits) benefit all taxpayers in the same amount regardless of their marginal tax rate
credits
Refundable Tax Credits
- Earned Income Credit
- Additional Child Tax Credit
- American Opportunity Credit
- Premium Tax Credit
Nonrefundable Tax Credits
- Child and Dependent Care Credit
- Child Tax Credit
- Retirement Savings Contribution Credit
- Lifetime Learning Credit
If a taxpayer is legally separated, they should use the ______ tax filing status
single
If one spouse is a non-resident alien, they (can/cannot) file Married Filing Jointly
cannot
For Married Filing Separately, if one spouse elects to itemize the other (must itemize/can choose independently)
must itemize
Head of Household Qualifications
- Must be single or unmarried
- Pay more than 1/2 the housing costs for a:
- Qualifying child (lived with you more than 1/2 year)
- Qualifying relative (at least 50% annual living expenses)
When a spouse dies, the surviving spouse can claim __________ filing status in the year of death, and __________ filing status for 2 years after
married filing jointly; surviving spouse
Quarterly Estimated Payment Dates
January 1 - March 31 = April 15th
April 1 - May 31 = June 15
June 1 - August 31 = September 15
September 1 - December 31 = January 15 (following year)
The IRS charges a penalty if a taxpayer does not…
- file a tax return on time
- pay any taxes owed on time and in the right way
- prepare an accurate return
- provide accurate information returns
Negligence Penalty
- Deficiency of tax liability if there was no intent to defraud
- 20% penalty applies to amount of the deficiency
Fraud Penalty
- When a taxpayer intends to defraud
- 75% penalty applies to the amount of the deficiency
Failure to File Penalty
- 5% of the unpaid taxes for each month or part of a month that a tax return is late
- Maximum of 25%
- Minimum penalty of $435 if the tax return is later than 60 days
Failure to Pay Penalty
- 0.5% per month the tax is unpaid
- Maximum of 25%
If both a Failure to Pay Penalty and a Failure to File penalty are applied in the 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 the return was late
If a company’s gross receipts are greater than $_____, they must use the accrual method of accounting
$27 million
In the hybrid accounting method, the accrual method must be used for:
- inventory purchases
- sales of inventory
In a rising price environment, FIFO will show (higher/lower) profit than LIFO
higher
In a rising price environment, FIFO will show (higher/lower) tax liability than LIFO
higher
In a rising price environment, FIFO will show (realistic/overstated/understated) inventory value
realistic
In a rising price environment, LIFO will show (realistic/overstated/understated) inventory value
understated
In a falling price environment, FIFO will show (higher/lower) profit than LIFO
lower
In a falling price environment, FIFO will show (higher/lower) tax liability than LIFO
lower
In a falling price environment, FIFO will show (realistic/understated/overstated) inventory value
realistic
In a falling price environment, LIFO will show (realistic/understated/overstated) inventory value
overstated
Straight Line Depreciation
Half-Year (or Mid-Year) Convention
Only one-half of the full amount of depreciation can be taken in the year the asset was put into service; another half of the full depreciation amount is taken in the last year
Using accelerated depreciation (increases/decreases/does not affect) cash flow
increases
(because it decreases taxes)
Depreciation
Mid-Month Convention applies only to:
- Residential real estate (27.5 years)
- Non-Residential real estate (39 years)
Property that qualifies for Section 179
- Equipment purchased for business use
- Tangible personal property used in business
- Computers and off-the-shelf software
- Office furniture and office equipment
- Certain business vehicles
Property that does not qualify for Section 179
- Real property, including buildings, land, and land improvements
- Air conditioning and heating equipment
- Property used outside the US
- Property used to furnish lodging
- Property acquired by gift or inheritance
- Property purchased from related parties
The deduction of any elected Section 179 expense is limited to the firm’s ___ ______
net profit, not including any 179 expensing
A sole proprietor (can/cannot) aggregate net business profit with unrelated W-2 wages for purposes of Section 179
can
Property that is NOT classified as a capital asset:
- accounts or notes receivable acquired in the ordinary course of a trade or business for services
- copyrights; a literary, musical, or artistic composition; a letter, memo, or similar property, created by the taxpayer
- inventory or property held primarily for sale to customers in the ordinary course of a trade or business
- depreciable property used in a trade or business (1231 assets)
What is the IRS default method to determine cost basis?
FIFO
Methods to Determine Cost Basis
Average Cost Method
When an investor sells some, but not all, of their position in a particular asset, the cost basis is determined by averaging all their purchases
- preferred method of mutual fund custodians
Methods to Determine Cost Basis
Specific Identification
The taxpayer selects which shares are to be reported as sold
- The best and most powerful method from a tax planning perspective
Section 1231 Property
Qualifying Property
- Property that is used in a trade or business, and
- Property held for the production of income
Section 1231 Property
Tax Treatment
- Gains treated as capital gains
- Losses treated as ordinary losses
Section 1231 Property
Subcategories
- Section 1245 Property
- Section 1250 Property
Section 1245 Property
Qualifying Property
- Personalty (personal property)
- ex: furniture, computers, carpet, light fixtures, etc.
Section 1250 Property
Qualifying Property
- Realty (real property)
- ex: buildings, warehouses, barns, rental property, etc.
Section 1031 only applies to ____ property
Section 1231 - Realty for realty
In a 1031 exchange, a taxpayer has ___ days to identify potential replacement properties
45
In a 1031 exchange, the replacement property must be received and the exchange completed no later than ___ days after the transfer of the property relinquished in the exchange
180
* or the due date (with extensions) of the tax return for the tax year in which the transfer of the relinquished property occurs, whichever is earlier
1031 Exchange
5 Steps
- Amount Realized
- Realized Gain
- Recognized Gain
- Deferred Gain
- Substituted Basis
1031 Exchange
Amount Realized
FMV of property received plus (or minus) boot
1031 Exchange
Realized Gain
Amount realized less basis of property transferred
1031 Exchange
Recognized Gain
Lesser of realized gain or boot received
1031 Exchange
Deferred Gain
Realized Gain minus Recognized Gain
1031 Exchange
Substituted Basis
FMV of property received minus deferred gain
