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CFP Prep > Tax Planning (14%) > Flashcards

Tax Planning (14%) Flashcards

1
Q

Form 1040 Tax Formula “the Tax Flow”

A

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

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2
Q

Tax Exclusions

A

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)

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3
Q

Above the line deductions
Deductions For AGI

A

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)

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4
Q

HSA Contribution Guidelines

A

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+

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5
Q

Self-Employment Tax Deduction Calculations

A

Net self-employment profits x 0.9235.
0.9% Medicare tax NOT deductible
50% of SE Tax (after .9235 calculation)

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6
Q

Simplified Employee Pension Plan (SEP)

A

Lesser of:
i. $69,000
ii. 25% of SE Earnings
iii. (Net SE Profit - SE Tax) * 20%

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7
Q

Savings Incentive Match PLan for Employees (SIMPLE)

A

$16,000
If over 50, +$3,500

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8
Q

Self Employed Health Insurance Premiums

A

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

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9
Q

Traditional IRA Contributions

A

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

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10
Q

Itemized Deductions
Below-the-Line deductions
Deductions ‘from’ AGI

A

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

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11
Q

Marginal Tax Rate

A

HIghest bracket you fall into

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12
Q

Average Tax Rate

A

Tax Paid / Taxable Income

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13
Q

Tax Deductions

A

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.

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14
Q

Tax Credit Features

A

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

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15
Q

Tax Credit Examples

A

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

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16
Q

Tax Schedules A-H

A

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

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17
Q

Form 8606

A

Nondeductible IRA’s

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17
Q

Form 4868

A

Extension of Time to File

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17
Q

Form 5498

A

IRA Contribution Individuals

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18
Q

5 tax filing statuses

A

Single
Head of Household
MFJ
MFS
Qualifying Widower with Dependent Child

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19
Q

Requirements to file single

A

On 12/31, either:
Unmarried, or
Legally separated

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20
Q

Requirements to file MFJ

A

Not allowed if one spouse is a non-resident alien.

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21
Q

Requirements to file Head of Household

A

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

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22
Q

Requirements to file MFS

A

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

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23
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
24
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.
25
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
26
When must accrual method be used?
-When there is inventory -3yr avg gross receipts exceeds $30 million
27
3 Inventory Methods
Fifo Lifo Specific Identification (allowed when able to differentiate)
28
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.
29
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
30
Netting Capital Gains
1. Separate S-T and L-T gains 2. Net each basket 3. Net S-T and L-T Can also be subject to 3.8% NIIT
31
Unrecaptured 1250 gains
Taxed at 25%. It is only applicable to the sale of depreciable real estate.
32
Annual Capital Loss Limit
$3,000 capital loss can be claimed each year. $1,500 is the max for MFS Carry-forward indefinitely.
33
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.
34
§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
35
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
36
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
37
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.
38
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.
39
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.
40
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.
41
R/E is passive unless what?
Investor 'actively participates': Owns 10%+ of the property AND substantial involvement in managing the property
42
R/E Active participant loss limits and phaseouts
$25,000 max if AGI <$100,000 $25k phased out if AGI $100,000 - $150,000
43
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
44
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)
45
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.
46
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
47
IRC 121 - Reasons for Reduced Exclusion
-Job relocation -Job change -Unemployment -Health Issues -Divorce -Birth of twins + -Disaster damage -Condemnation -Unforeseen
48
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
49
Charitable donation limit for cash gifts
Public Charity - 60% Private Foundation - 30%
50
Charitable donation limit for Ordinary Income property (STCG's, Art, Inventory)
Public Charity - 50% of AGI Private Foundation - 30% of AGI
51
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.
52
Charitable Donation of Use-Related Property
FMV = 30% of AGI Basis = 50% of AGI Same as gift of LTCG property
53
Charitable donation of Use-Unrelated proeperty
Tax Deduction for Lesser of Cost Basis or Fair Market Value
54
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+
55
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
56
AMT Planning Strategy
Accelerate income into the AMT year. Defer tax deductions until a regular tax year. Until AMT liability equals regular tax liability
57
AMT ISO Tax Consequences
Exercise Price minus Grant/Strike Price
58
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
59
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.
60
Kiddie - Standard Deduction
$1,300 or Earned income plus $450. Max of $1,4600 (regular standard deduction.
61
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
62
What constitutes Investment Income
Non-Qualified Annuities Passive activities. Interest, Dividend, cap gains NOT: wages, unemployment, alimony, tax exempt interest, distributions from qualified plans
63
When does NIIT apply
Tax applies to lesser of: i. Net Investment Income; ii. Excess of modified AGI over $200k single, $250k married.

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