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CFP Exam March 2023 > Tax Planning > Flashcards

Tax Planning Flashcards

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1
Q

Charitable Contributions of Cash for Public Charity

A

60% of AGI for Public Charity

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2
Q

Charitable Contributions of LTCG Property for Public Charity

A

Asset held longer than 1 year

LTCG with FMV 30% of AGI
*FMV has 3 letters LIKE 30%

OR

LTCG with basis 50% of AGI
*basis has 5 letters LIKE 50%

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3
Q

Charitable Contribution of Cash for Private Charity

A

30% of AGI for Private Charity

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4
Q

Charitable Contribution of Ordinary Income Property (STCGs, Art, Inventory) for Public Charity

A

50% of AGI

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5
Q

Charitable Contribution of Ordinary Income Property (STCGs, Art, Inventory) for Private Charity

A

30% of AGI

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6
Q

Charitable Contribution of LTGC Property for Private Charity

A

Asset held longer than 1 year

LTCG with FMV 20% of AGI

OR

LTCG with basis 30% of AGI

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7
Q

Charitable contribution deductions for public charities chart

A

cash gifts: 60%
LTCGs w/FMV election: 30%
LTCGs w/Basis election: 50%
Ordinary Income (STCGs, Art, Inventory): 50%

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8
Q

Charitable Contribution Carryover # of years

A

Contributions that exceed AGI limit in the current year can be carried over to each of the 5 succeeding years

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9
Q

Is donating to politicians a charitable deduction?

A

NO

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10
Q

Charitable use-related property

A

Used for it’s intended purpose and in a manner that is consistent with the purpose of the charity (supporting the charity’s mission)

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11
Q

Charitable use-unrelated property

A

Property not being used for the intended mission of the charity

ie: artwork that is sold at an auction, instead of displayed in the art gallery

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12
Q

Who is considered a related person under IRC 267 when there is a sale or trade of property between related parties?

A

-spouse
-sibling
-grandchild
-parent
-related entities: if the taxpayer owns more than 50% of the stock (corporation) or interests (LLCs, partnerships)

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13
Q

How is the sale or trade of property between related parties at a gain treated?

A

Normally, as if sold to an unrelated party

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14
Q

If you sell property to a related person at a loss…

A

you have losses that are temporarily suspended and the seller is unable to access it!

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15
Q

Losses can be used by the seller when that property is re-sold to…

A

an unrelated person

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16
Q

Depending on the subsequent sale price by the related party to the unrelated party the loss may be:

A
  1. allowed
  2. partially allowed
  3. totally disallowed
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17
Q

Who has the chance to use the loss incurred by the related party seller?

A

the related party purchaser

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18
Q

Related party losses are fully allowed when…

A

The related party purchaser sells to an unrelated party at a gain

$50,000 —> sold to son for $30,000 —-> sold to friend for $60,000

$30,000 gains - $20,000 loss = $10,000 recognized gain

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19
Q

Related party losses are partially allowed when…

A

The related party purchaser sells to an unrelated party at a gain between original basis and the price paid by the related party purchaser

$50,000—> sold to son for $30,000 —> sold to friend for $40,000

$10,000 gain -$20,000 loss = $0 in recognized gain

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20
Q

Related party losses are totally disallowed when…

A

The related party purchaser sells to an unrelated party at a loss

$50,000 —> sold to son for $30,000 —> sold to friend for $25,000

$5,000 loss - $20,000 loss = DISALLOWED LOSS

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21
Q

S corps, Partnerships, and LLCs are all known as

A

pass through entities because the tax entity itself does not pay taxes, but the taxes pass through to to individual shareholders, partners, and members

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22
Q

At-risk rules are always applied _____________ the passive activity rules

A

BEFORE

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23
Q

Which of the following would not be included in an at-risk amount for a tax payer?

A

A liability or debt of the pass through entity

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24
Q

If a taxpayer has an amount at-risk of $20,000 prior to the current year’s pass-through loss of $17,000 how much of the loss will be allowed?

A

All of it, $17,000 loss will be allowed and the taxpayer’s amount at-risk is $3,000 ($20,000-$17,000).

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25
Q

If the taxpayer has an amount at-risk of $20,000 prior to the current year’s pass-through loss of $28,000 how much of the loss will be allowed?

A

The at-risk rules will allow a loss of $20,000 (bringing the at-risk amount to $0) and $8,000 will be suspended due to at-risk rules

$28,000-$20,000 = $8,000 suspended loss

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26
Q

The amount of suspended loss, while that person is a partner in that pass-through entity, is carried forward until…

A

They have more at-risk

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27
Q

What are the 2 types of interests in passive activities?

A
  1. Private interest in a LLC, partnership, or S-corp
  2. Public interest in a publicly traded partners (PTP)
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28
Q

Can passive losses be netted against PTP income?

A

If you have losses being generated by private interests (LLC, Partnership, S-Corp) you CANNOT use those losses to offset PTP losses

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29
Q

What does active participant status require for rental real estate?

A
  1. Taxpayer ownership of at least 10% of the property

AND

  1. Substantial involvement in the managing of the property

BOTH!

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30
Q

Active participant taxpayers may deduct up to…

A

$25,000 losses to offset actively earned income/portfolio income

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31
Q

The $25,000 loss limit is phased out in the MAGI range from…

A

$100,000-$150,000

whether you file MFJ, S, or HOH

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32
Q

Active Participant Real Estate Loss Deduction Formula

A

Formula =

Higher Phaseout Range - AGI / 2

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33
Q

A single taxpayer owns a rental condo that has a reported loss of $10,000

AGI = $126,420

How much rental loss can they recognize?

A

$10,000

$150,000-$126,420=$23,580
$23,580/2=$11,790

$11,790 is the maximum allowable loss, but there is only $10,000 worth of loss

Cannot take more loss than you have!

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34
Q

How can you use personal use property?

A

allowed to rent for 14 days or less and NOT required to report income if rental usage is 14 days or less

*only applies to primary residence and vacation home

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35
Q

How can you use rental property?

A

Personal use CANNOT exceed the greater of 14 days or 10% of the number of days the property is rented

*trips made to the rental property for maintenance and repairs do NOT count as personal usage

**all expenses allocated to the rental property are allowed and the property can produce passive losses subject to the passive activity rules ($25,000 loss limit)

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36
Q

How can you use mixed use property?

A

Taxpayer CANNOT meet minimum personal usage requirements

Personal usage is greater than 14 days or 10% of the number of days the property is rented

Expenses must be allocated between personal use and rental use

Deductions are limited to gross rental income (may have net income of $0 but not negative income)

Any unused losses are carried forward to future years, but remain subject to the net income rule

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37
Q

IRC Section 121 allows for the exclusion of gains on the sale of a personal residence for up to…

A

$250,000 (single) $500,000 (MFJ)

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38
Q

The 121 exclusion is allowed every…

A

2 years (730 days)

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39
Q

Taxpayer must meet both tests for section 121…

A
  1. ownership test: must have owned the property for 2 out of the last 5 years
  2. usage test: must have used the property as personal residence for 2 out of the last 5 years

*does not have to be consecutive years, just in total

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40
Q

If married both spouses must meet the…

A

USAGE test

*us for usage

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41
Q

If married only one spouse must meet the…

A

Ownership test

*one for ownership

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42
Q

What are the acceptable reasons for a reduced 121 exclusion?

A

-job relocation
-employment change leaves you unable to pay your living expenses
-qualifying for unemployment benefits
-health issues
-divorce or legal separation
-birth of twins or other multiples
-damage to home from disaster
-condemnation or seizure of property
-other unforeseen circumstances
-
ie: active duty military who is going overseas and had to relocate

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43
Q

With NQSOs and ISOs what happens at stock grant?

A

Nothing!

No taxable event

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44
Q

What are the 3 important times for NQSOs and ISOs?

A
  1. Grant (no taxable event)
  2. Exercise (bargain element)
  3. Sale
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45
Q

What is the bargain element for a NQSO?

A

The difference between FMV and exercise $ at time of strike

FMV $ - Exercise $

*SUBJECT TO TAXATION, Ordinary income tax!

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46
Q

How do you calculate cost basis once you sell the NQSOs?

A

The cost basis is the exercise price (x # of shares) + W2 income recognized when you exercised

It can be ST or LT depending on the holding period AFTER exercise date!

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47
Q

With an ISO the bargain element (exercise) is…

A

NOT subject to current taxation, for ordinary income tax purposes (like the NQSO is)

The bargain element for ISOs is a preference item for AMT & going to get added back to income in the AMT calculation

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48
Q

Can AMT credits be carried over until final tax return?

A

Yes, AMT credits can be carried over!

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49
Q

The exercise of a very sizable amount of ISOs in a year could trigger…

A

An add back for AMT purposes!

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50
Q

What is the ideal scenario/favorable tax treatment for the sale of an ISO?

A

the holder of the ISO does NOT sell the ISO until:

1 year from exercise

&

2 years from grant

We get capital gain treatment because it is a qualifying disposition!

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51
Q

If the employee sells the ISO prior to 1 year after exercise and 2 years from grant…

A

it is known as a disqualifying disposition and the bargain element is taxed as an ordinary income

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52
Q

How do you calculate the tax character and gains of a qualifying disposition of an ISO?

A

sale price - grant price x # of shares = LTCG

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53
Q

How do you calculate the gains on a NQSOs at the time of sale?

A

Because you need to add the ordinary income (bargain element, which is FMV-grant price) you calculate gains by taking:

sale price - exercise price x # of shares to see the gains!

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54
Q

No more than _________ per year of ISOs may be granted

A

$100,000

55
Q

What is included in net investment income?

A

net investment income is:

-interest
-dividends
-capital gains
-rental and royalty income
-non-qualified annuities

56
Q

What is NOT included in net investment income?

A

Not net investment income

-wages
-unemployment compensation
-operating income from non-passive business
-social security benefits
-alimony
-tax-exempt interest
-self-employment income
-distributions from certain qualified plans
-tax-exempt interest on governmental obligations and related expenses

57
Q

How do you calculate gross income?

A

Income
Minus: exclusions

58
Q

How many exclusions are there to get to gross income?

A

16

MAFIAS PADDED MICS

  1. *Muni bond interest
  2. Accident & Health Plans: employer premiums
  3. Fringe benefit
  4. *Inheritances & Gifts
  5. Accident & Health Plans: Amounts received
  6. *Scholarships
  7. *Personal residence sale gains (up to $250k/$500k)
  8. Adoption assistance program ($14,890)
  9. *Death benefits
  10. Dependent care assistance programs
  11. Educational assistance program (up to $5,250)
  12. *Debt discharged (if person declared bankruptcy or participated in public student loan forgiveness program)
  13. Meals & lodging for employees
  14. Interest on education savings bonds (EE & I)
  15. *Compensatory damages compensation
  16. *Support payments received (child support + post 2018 alimony)
59
Q

What is the Tax Formula?

A

Income
Minus: exclusions
Gross Income
Minus: deduction FOR AGI
AGI
Minus: deductions FROM AGI
(Greater of itemized deductions or the
standard deduction)
Qualified Business Income
Taxable Income
Times: tax rate or rates (from tax
table)
Gross Tax
Minus: Tax credits
Final Tax Due
Minus: prepayments (withholdings &
estimated payments)
Net tax payable or refund due

60
Q

What form is the tax formula from?

A

1040

61
Q

What form has the deductions FOR AGI?

A

Schedule 1, part 2

62
Q

What are the deductions FOR AGI known as?

A

Above the line deductions

63
Q

What are the deductions FROM AGI know as?

A

Below the line deductions

64
Q

What form has deductions FROM AGI?

A

Schedule A

65
Q

For below the line deductions you take the greater of…

A

itemized deductions or the standard deduction

66
Q

Who qualifies for qualified business income deduction?

A

Owners of a pass through entity

67
Q

What do above the line deductions do?

A

Reduce AGI

*by lowering AGI there could be additional opportunities for tax savings

68
Q

What are the 5 above the line deductions (for AGI)?

A

-HSA contributions with after-tax $ ($3650/$7300)

-Self-employment tax (50% of SE tax)

-Alimony (if divorce was finalized prior to 2018)
2018: alimony paid is deductible, alimony receive is income
2019: alimony paid is NOT deductible, alimony received is NOT income

-Self-employed health insurance (100% of health insurance premiums for SE individuals)
(applies to coverage for SE individual, spouse, and dependents)
*Limited to SE income
*NOT available if other health insurance coverage options are available

-Traditional IRA contributions ($6,000 if you fall within phase out ranges)

-

69
Q

What are the 5 itemized deductions?

A
  1. Unreimbursed medical and dental expenses (7.5% of AGI)
  2. State and local taxes (property taxes) $10,000
  3. Mortgage interest paid up to $750,000 of debt & investment interest limited to net investment income (ie: margin interest)
  4. Gifts to charity (charitable contributions to a qualified charity)
  5. Casualty and theft losses (must be federally declared disaster losses)
    *10% AGI threshold, any losses in excess are deductible
70
Q

What is the standard deduction amount if you are 65+?

A

$1400

71
Q

What is the standard deduction amount if you are blind?

A

$1400

72
Q

What is the standard deduction amount if you are 65+ & blind?

A

$2800

73
Q

Average Tax Formula

A

Tax Paid / Taxable Income

*the taxpayer’s marginal tax rate will always be HIGHER than their average tax rate

74
Q

What reduces overall taxable income?

A

Tax deduction

75
Q

What lowers tax due under specific circumstances?

A

Tax credit

76
Q

Offsets a taxpayer’s tax liability but if the credits exceed the tax liability, the excess is refunded directly to the taxpayer

A

Refundable credit

77
Q

May only be used to offset a taxpayer’s liability

A

Non-refundable credit

78
Q

What are refundable credits?

A

-earned income credit
-additional child tax credit
-american opportunity credit
-premium tax credit

79
Q

What are non-refundable tax credits?

A

-child and dependent care credit
-child tax credit
-retirement savings contribution credit
-lifetime learning credit

80
Q

What are the 8 MOST IMPORTANT exclusions to calculate gross income?

A
  1. Muni bond interest
  2. Inheritances & gifts
  3. Scholarships
  4. Personal residence sale gains
  5. Death benefits
  6. Debt discharged
  7. Compensatory damages
  8. Child support & alimony (post 2018)
81
Q

Why are above the line deductions especially valuable?

A

More reliable tax savings

Above the line deductions (from Schedule 1) directly reduce AGI, while below the line deductions often point TO AGI and/or have specific thresholds before they become countable

82
Q

What form is for retirement distributions?

A

1099-R

83
Q

What form is for a tax return of a qualified plan?

A

Form 5500

84
Q

What form is for IRA contributions?

A

Form 5498

85
Q

When can you file HOH?

A

This status applies to taxpayers that are not married, but pay more than half of housing costs for a qualifying child (lives with you more than 1/2 the year) or qualifying relative (provide at least 50% of annual living expenses)

86
Q

What 6 tax credits do you lose if you file MFS?

A

-child and dependent care credit
-earned income credit
-adoption credit
-AOTC
-LLC
-student loan interest

87
Q

What credits are reduced if you file MFS?

A

-child tax credit
-savers credit

88
Q

What tax status can you file in the year of your spouse’s death?

A

MFJ

89
Q

When can you use qualifying widower tax status?

A

Year 1 & Year 2 after spouses death if you claim a qualifying child as dependent

90
Q

When are quarterly tax payments due?

A

4/15

6/15

9/15

1/15

91
Q

How do you calculate quarterly estimated tax payments if your AGI is less than $150,000?

A

the LESSER of:

100% of tax liability for prior year

OR

90% of tax liability for current year

92
Q

How do you calculate quarterly estimated tax payments if your AGI is greater than $150,000?

A

110% of tax liability for prior year

OR

90% of tax liability for current year

93
Q

What is the tax penalty for negligence, deficiency of tax liability with no intent to defraud?

A

20% penalty will apply to the amount of deficiency

94
Q

What is the tax penalty when a taxpayer intends to defraud?

A

75% penalty will apply to the amount of deficiency

95
Q

What is the tax penalty for a frivolous return?

A

$5,000

96
Q

What is the tax penalty for failing to file?

A

5% of unpaid taxes for each month or part month that the tax return is late

*maximum is 25%

97
Q

What is the minimum penalty imposed if the tax return is later than 60 days?

A

$435

98
Q

What is the tax penalty for failing to pay?

A

.5% per month the tax is unpaid up to 25% maximum

99
Q

If both failure to pay penalty and failure to file penalty are applied in the same month…

A

The failure to file penalty is reduced by the failure to pay penalty for that month

ie: Remove failure to pay penalty because failure to file penalty is higher!

100
Q

What is the maximum number of members a S Corp can have?

A

100

101
Q

What type of entity has double taxation?

A

C Corp

102
Q

When does kiddie tax apply?

A

-applies to children under age of 19 or FT students under age 24

-NET UNEARNED INCOME more than $2300 ($1150+$1150) is subject to tax at the highest marginal tax rate of the child’s parents

103
Q

What form is used to report income or loss from a business?

A

Schedule C

104
Q

Taxpayers using the ____________ method generally report expenses in the year in which they are incurred

A

Accrual accounting method
Revenue: Earned

recognized when the right to receive it exists, NOT when payment is received

Expenses: Incurred

recognized when the liability can clearly be established, not when the payment is made

105
Q

What will be used to impute interest if the loan exceeds $100,000?

A

the Applicable federal rate

106
Q

To get higher profits the ______________ account method should be used when prices are rising and the ___________ accounting method when should be used when prices are falling.

A

FIFO

LIFO

*think of this in terms of inventory, not stock pricesv

107
Q

When net investment income is $1000 or less, what is the imputed interest?

A

$0

108
Q

What is AMT Formula?

A

Regular taxable income
Add: tax preference items
Add: standard deduction (if TP does not itemize)
Add/subtract: AMT adjustments and tax preference items

AMTI (alternative minimum taxable income)
Less: Exemption amount (phased out at higher incomes)

AMT base
Times: AMT tax rate

Gross AMT tax
Less: AMT foreign tax credit

Tentative minimum tax (TMT)
Less: Regular tax liability

AMT is the DIFFERENCE!

109
Q

1031 Formula

A
  1. Amount realized
    FMV of property received + or - net boot
  2. Realized gain
    the amount realized (step 1) - basis of property transferred
  3. Recognized gain
    the LESSER of realized gain or net boot received
110
Q

What is net boot?

A

Net boot is boot that is received and transferred, it is BOTH!

mortgage that is transferred away is -
mortgage that is received is +

cash that is transferred away is -
cash that is received is +

111
Q

The property to be received in the 1031 exchange must be identified within ________ days after the date of transfer of the property relinquished in the exchange.

A

45 days

112
Q

What is the annual straight line depreciation formula?

A

purchase price of asset - salvage value / useful life

113
Q

What is the half-year or mid-year convention?

A

Only 1/2 of the full amount of depreciation can be taken in the year the asset was put into service (1st year)

Another half of the FULL depreciation is taken in the last year

114
Q

What is the useful life for common depreciable assets?

A

Autos: 5 years
Computers: 5 years
Heavy machines: 7 years
Office furniture: 7 years
Residential real estate: 27.5 years
Commercial real estate: 39 years

115
Q

What allows businesses to deduct the full cost of qualifying capital assets right away rather than depreciating over the property’s useful life?

A

Section 179

116
Q

Does stock acquired as a nontaxable stock dividend have the same holding period as the original stock owned?

A

YES!

Even if someone sells the nontaxable stock dividend it has the same holding period as the original stock owned

117
Q

When liability (mortgage) is assumed in a 1031 exchange the liability is treated as…

A

Boot received by the original debtor

118
Q

What is the maximum capital loss that can be claimed each year for taxpayers filing MFS?

A

$1,500

119
Q

When are you required to file a FBAR?

A
  1. when a US person has a financial interest or signature authority over at least 1 financial account located outside the US
  2. the aggregate value of all foreign financial accounts exceeds $10,000 at ANY time during the calendar year
  3. Must file Form 114 by tax deadline
120
Q

For a contribution to a charity valued from $250-$500 the only recordkeeping requirement is…

A

a donor letter

121
Q

What are the deduction amounts for unrelated use property?

A

the LESSER of:

cost basis

OR

FMV

122
Q

Schedule H is AKA

A

Form 1040

123
Q

Rule 415 allows up to _______ for shares to be issued in an IPO filing

A

2 years

124
Q

What is the maximum limit you can contribute to an ABLE account?

A

the annual exclusion amount $16,000

*you CANNOT gift split

125
Q

When you make a non-qualified distribution from a 529 account how do you calculate the taxes?

A

Step 1: determine the amount of gains in the account

Step 2: determine the % of gains in the account and multiply by amount distributed

Step 3: multiply answer from step 2 by tax bracket + 10% penalty

126
Q

When calculating the includible student and parent assets and income for the EFC both parents and students are offered…

A

Income protection allowance

127
Q

When calculating the includible student and parent assets and income for the EFC parents are offered…

A

Asset protection allowances

*Asset protection allowance is only available to parents to exclude certain portions of their assets from consideration when calculating the EFC

128
Q

Are contributions to 529 ABLE accounts deductible?

A

No, contributions to 529 ABLE accounts are non-deductible

*you can use the annual exclusion amount, but it is not deductible

129
Q

What is the tax penalty for non qualified HSA withdrawal?

A

20% penalty + ordinary income

130
Q

What is 1231 property?

A

-property used in trade or business
-property held for the production of income

131
Q

What is unique about 1231 property?

A

Tax treatment

gains are taxed as capital gains and losses are taxed as ordinary losses

BEST OF BOTH TAX WORLDS

132
Q

What is 1245 property?

A

Personalty property

furniture, computers, carpet, decorative lights

133
Q

What is 1250 property?

A

Realty property

commercial buildings, warehouses, barns, rental properties

134
Q

What is the 1250 formula?

A

Sale price (ceiling)
*remember special 1231 rules where this is taxed at LTCG, not ordinary income!

Purchase price (original basis)
*depreciation is taxed at 25%, special rate on tax tables

Adjusted basis (price after depreciation is removed)

CFP Exam March 2023 (7 decks)

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