Tax Planning (14%) Flashcards
Form 1040 Tax Formula “the Tax Flow”
Income from whatever source derived
Minus exclusions
Gross Income
Minus deductions for AGI (Above the Line)
AGI
Minus: i. Deductions from AGI (Below the Line)
ii. Itemized vs Standard Deduction
iii. Qualified Business Income Deduction
Taxable Income
Time Tax Rate
Gross Tax
Minus Tax Credits
Final Tax Due
Minus prepayments
Net tax payable or refund due
Tax Exclusions
Mafias Padded Mics
Muni Bond Interest
Accident and Health Plans: Employer Premiums
Fringe Benefit
Inheritances & Gifts
Accident and Health Plans: Amounts Received
Scholarships
Personal Residence
Adoption Assistance
Death Benefits
Dependent Care Assistance Programs
Education Assistance: up to $5,250
Debt Discharged (certain circumstances)
Meals and Lodging for EE’s
Interest on Series EE or I bonds
Compensatory Damages Compensation
Support Payments Received (Child Support and 2019+ Alimony)
Above the line deductions
Deductions For AGI
Education Expenses
Gov’t officials, performing artists, and reservists who travel 100+ miles - business expenses
HSA Contributions with after-tax money
Moving Expenses for active-duty military
1/2 SE Tax
SEP and SIMPLE contributions
SE Health Insurance Premiums
Early withdrawal penalties (CD’s)
Alimonypaid under 2018 & earlier agreements
Traditional IRA contribution (subject to phaseout)
Student Loan Interest (max $2,500)
HSA Contribution Guidelines
HDHP coverage on 1st day of last month
Not claimed as a dependent
Can contribute until April 15 of next year
Must be 65 or younger
Cannot be covered by Medicare
$4,150 max contribution for single
$8,300 max for MFJ
+$1,000 for 55+
Self-Employment Tax Deduction Calculations
Net self-employment profits x 0.9235.
0.9% Medicare tax NOT deductible
50% of SE Tax (after .9235 calculation)
Simplified Employee Pension Plan (SEP)
Lesser of:
i. $69,000
ii. 25% of SE Earnings
iii. (Net SE Profit - SE Tax) * 20%
Savings Incentive Match PLan for Employees (SIMPLE)
$16,000
If over 50, +$3,500
Self Employed Health Insurance Premiums
Deduction above the line for coverage on SE individual, spouse, and dependents.
Limited to SE income
*Not available if other health insurance coverage options are available.
100% deductible for qualified premiums
Traditional IRA Contributions
If covered by a workplace plan, covered person phase out limits:
Single - $77,000 - $87,000
MFJ - $123,000 - $143,000
Phase out for NON covered spouse:
MFJ - $230,000 - $240,000
MFS - $0 - $10,000
$7,000 - Contribution Limit
Over 50, +$1,000
Itemized Deductions
Below-the-Line deductions
Deductions ‘from’ AGI
Unreimbursed Medical and Dental Expenses (7.5% haircut)
SALT ($10,000 limit)
Interest Paid (up to $750k loan) (Primary and Secondary Residence)
Investment Interest limited to net investment income
Gifts to Charity (max 60% of AGI)
Casualty & Theft Losses (Federally declared disaster” losses - 10% of AGI haircut
Marginal Tax Rate
HIghest bracket you fall into
Average Tax Rate
Tax Paid / Taxable Income
Tax Deductions
Reduce Taxable Income
Adjusted before tax tables are used
Reduces by a marginal percentage
More valuable to high-income earners because reduces high marginal tax.
Tax Credit Features
Lowers tax due
Adjusted after tax due is calculated
Reduces on a dollar-to-dollare basis
Benefits all taxpayers the same regardless of their marginal tax rate.
Can be refundable or nonrefundable
Tax Credit Examples
Refundable:
Earned Income Credit
Additional Child Tax Credit
American Opportunity Credit
Premium Tax Credit
Nonrefundable Credits:
Child and Dependent care Credit
Child Tax Credit
Retirement Savings Contribution Credit
Lifetime Learning Credit
Tax Schedules A-H
A = Itemized Deductions
B = Interest & Dividend Income
C-= Self-Employment
D = Capital Gains / Losses
E = Rental Real Estate & Royalties
F = Farming profit/loss
G = N/a
H = Household
Form 8606
Nondeductible IRA’s
Form 4868
Extension of Time to File
Form 5498
IRA Contribution Individuals
5 tax filing statuses
Single
Head of Household
MFJ
MFS
Qualifying Widower with Dependent Child
Requirements to file single
On 12/31, either:
Unmarried, or
Legally separated
Requirements to file MFJ
Not allowed if one spouse is a non-resident alien.
Requirements to file Head of Household
Single
Pay more than 1/2 of housing costs
Qualifying child lived w/ you more than 1/2 year, or
Qualifying relative providing 50%+ living expenses
Requirements to file MFS
If one elects to itemize, the other must as well.
-Lose child and dependent care credits
-Lose earned income credit
-Lose AOTC credit
-Lose LLC credit
-Lose Student Loan Interest Credit
Requirements to file Qualifying Widow(er)
Not remarried
Year of Death = File MFJ
Year 1 and 2 after death = QW
must pay 50%+ of household expenses and claim qualifying child as a dependent
Dates for Estimated Payments
4/15 for Q1
6/15 for April/May
9/15 for June, July, August
January 15 of following year - for Sept, Oct, Nov. Dec.
Amounts to avoid underpayment penalty
90 % of current year
100% of prior year
If AGI = $150,000+
90% of current year
110% of prior year
Quarterly payments must be 25% of these amounts
When must accrual method be used?
-When there is inventory
-3yr avg gross receipts exceeds $30 million
3 Inventory Methods
Fifo
Lifo
Specific Identification (allowed when able to differentiate)
Sec. 179
Up to $1,220,000 of cost.
Can’t exceed net-profit - can carry-over. MACRS can go negative
Sole prop can aggregate net business profit and unrelated W-2 wages.
Useful Lives
ACHORN
Autos - 5 yrs
Computers - 5 yrs
Heavy Machines - 7 yrs
Office Furniture - 7 yrs
Residential Real Estate 27.5 yrs
Commercial Real Estate - 39 yrs
Netting Capital Gains
- Separate S-T and L-T gains
- Net each basket
- Net S-T and L-T
Can also be subject to 3.8% NIIT
Unrecaptured 1250 gains
Taxed at 25%.
It is only applicable to the sale of depreciable real estate.
Annual Capital Loss Limit
$3,000 capital loss can be claimed each year.
$1,500 is the max for MFS
Carry-forward indefinitely.
Capital Gains Tax Rates
0/15%/20%
Applies to LTCG and
Qualified Dividends.
Add LTCG to Taxable Income and stack up next to the Cap Gain brackets.
§1231 property
Umbrella over §1245 and §1250
§1231 = Property used in trade or business, and Pheld for production of income.
§1245 - personal property
§1250 - real property
Accounting for §1245 Dispositions
Sold above cost basis = Cap Gain, plus depr recapture
Sold below cost basis / Above tax basis = Depr. Recapture.
Sold below adjusted basis = Ordinary Loss
Accounting for §1250 Dispositions
Commercial Buildings, Warehouses, barns, rental properties, etc.
Sold above cost basis = Cap Gain, plus Depr recapture at 25%
Sold below cost basis / above tax basis = ‘unrecaptured gain’ and taxed at 25%
Sold below adjusted basis = ordinary loss
Loss on sale to related party
Deferred loss:
1. Sold above basis = net gain against deferred loss.
2. Sold below basis = loss only at seller’s loss.
At-Risk Loss Rules
Can only take a current year pass-through loss up to the amount at-risk. Extra loss is suspended until additional at-risk amount exists.
Passive Losses
Can only deduct passive losses against passive income. Extra passive losses will be suspended.
Private Interest vs. Publicly Traded Partnership (PTP) cannot be netted.
Publicly Traded Partnership (PTP) - netting loss rules
PTP losses can only be netted against income from the same PTP. It can only happen with prior suspended losses offsetting current year income.
R/E is passive unless what?
Investor ‘actively participates’:
Owns 10%+ of the property AND
substantial involvement in managing the property
R/E Active participant loss limits and phaseouts
$25,000 max if AGI <$100,000
$25k phased out if AGI $100,000 - $150,000
Personal Use Real Property Tax Reporting for rental
Not required to report rental income if usage is 14 days or less.
Only for primary residence and vacation home
Rental Use of Real Property tax reporting
Personal use cannot exceed greater of 14-days or 10% of days rented - or becomes mixed use property.
All expenses are allowed.
Passive losses limited to $25k (subject to phase out)
Mixed-Use Property
Allocate expenses b/w personal use and rental use.
Deductions are limited to net income - no loss allowed. Unused losses are carried forward.
IRC 121 - Rules for full exclusion
$250k/$500k.
No deduction for home sold at loss.
Available 1x every 2-years.
Owned and Used as primary for 2 of 5 years. Both spouses must meet usage, only 1 spouse needs to meet ownership
IRC 121 - Reasons for Reduced Exclusion
-Job relocation
-Job change
-Unemployment
-Health Issues
-Divorce
-Birth of twins +
-Disaster damage
-Condemnation
-Unforeseen
Charitable donation limit for LTCG property
Public Charity
Use FMV - deduct up to 30% of your AGI
Use Bais you can deduct up to 50% of your AGI
Private Foundation
FMV - 20%
Basis - 30%
Carryover excess donation for 5-years
Charitable donation limit for cash gifts
Public Charity - 60%
Private Foundation - 30%
Charitable donation limit for Ordinary Income property (STCG’s, Art, Inventory)
Public Charity - 50% of AGI
Private Foundation - 30% of AGI
Charitable Contributions - Use-Related vs. Use-Unrelated
Related = art to an art institute.
Unrelated = art to a school, which is sold and proceeds used for something else.
Charitable Donation of Use-Related Property
FMV = 30% of AGI
Basis = 50% of AGI
Same as gift of LTCG property
Charitable donation of Use-Unrelated proeperty
Tax Deduction for Lesser of Cost Basis or Fair Market Value
Charitable Record Keeping Requirements
Written acknowledgement for $250+.
Charity to provide written disclosure to donor who receives goods or services of $75+
Form 8283 for Non-Cash gift of $500+
Appraisal for $500,000+
Imputed Interest
-Net Investment Income <$1,000 - n/a
-N/a for Loans <$10,000, or due in 6-mo or less
-Loans $10,000 - $100,000 = Imputed -Interest is charged at lower of AFR or Net Investment Income
-Loans Over $100,000 = AFR
AMT Planning Strategy
Accelerate income into the AMT year.
Defer tax deductions until a regular tax year.
Until AMT liability equals regular tax liability
AMT ISO Tax Consequences
Exercise Price minus Grant/Strike Price
AMT formula
Regular Taxable Income
+Preferences
+Standard Deduction (not allowed in
AMT)
+/- Adjustments
AMTI
Less Exemption Amount
AMT Base
Times AMT Tax Rates
Gross AMT Tax
Less AMT Foreign Tax Credit
Tentative Minimum Tax
Less regular tax liability
AMT
Kiddie Tax - Who it applies to?
Children 18 and under.
Full-time students 23 and under
Net Unearned income over $2,600 subject to parents’ marginal rate.
Kiddie - Standard Deduction
$1,300 or
Earned income plus $450.
Max of $1,4600 (regular standard deduction.
Kiddie Tax Calculation for Unearned Income
first $1,300 - tax free;
Next $1,300 - 10% ($130)
Balance multiplied by parents’ tax rate. (this is kiddie tax)
Add together for total tax owed on kid’s unearned income.
Subtract kiddie tax from kid’s regular tax due
What constitutes Investment Income
Non-Qualified Annuities
Passive activities.
Interest, Dividend, cap gains
NOT:
wages, unemployment, alimony, tax exempt interest, distributions from qualified plans
When does NIIT apply
Tax applies to lesser of:
i. Net Investment Income;
ii. Excess of modified AGI over $200k single, $250k married.
