Tax Planning Flashcards
1
Q
Recognized gain in a 1031 exchange
A
The lesser of realized gain and net boot
2
Q
Do you pay taxes on realized gains or recognized gains on a section 1031 exchange?
A
Recognized gains
3
Q
Define who is considered a related person for a related party transaction (6 total)
A
spouse, child, grandchild, parent, sibling, related entities: if the taxpayer owns more than 50% of the stock (corporation) or interests (LLCs, partnerships)
4
Q
how are gains in a related transaction treated in a related party transaction
A
normally (as if sold to an unrelated party).
5
Q
when will losses be recognized in a related party transaction
A
when the related party sells the asset to an unrelated person
6
Q
Depending on the subsequent sale price by the related party, the loss may be:
A
allowed,
partially allowed, or
totally disallowed.
7
Q
who has the chance to use the loss incurred by the related party seller
A
the related party purchaser
8
Q
what happens if a loss occurs with the sale to a related party?
A
that amount will offset any gains realized by the related party purchaser when they sell the property to an unrelated party.
9
Q
example related party transaction
A
10
Q
what happens if the related party sells ABOVE the original basis to an unrealted party
A
fully allowed use of loss to related party
11
Q
what happens if the related party sells in between o.g. basis + FMV on related party sale date
A
partially allowed use of loss to realted party; no recognized gain for related party
12
Q
what happens if the related party sells below FMV on related party sale date
A
disallowed use of loss to related party; related party recognizes losses below FMV on related party sale
13
Q
which gets applied first between at risk & passive activity rules
A
at risk
14
Q
what entities are the focus of the at-risk and the passive activity loss rules
A
S-Corporations, Partnerships, Limited Liability Companies (LLCs)
15
Q
what is at risk
A
a taxpayer can only deduct losses to the extent that there is enough basis (or the amount at-risk).
16
Q
what happens when losses pass the at risk
A
then and only then, will the loss be subject to the passive activity rules.
17
Q
when can a taxpayer use passive losses
A
only to the extent they have passive income
18
Q
what happens when losses pass passive income
A
passive income will be suspended due to the passive activity rules.
19
Q
The two types of interests in passive activities
A
Private interest in an LLC, partnership, or S-Corp.
Public interest in a publicly traded partnership (usually abbreviated as (PTPs)).
20
Q
what are Private interest passive losses allowed to be netted against
A
other private interest passive income.
21
Q
can losses exceed income
A
no
22
Q
can passive losses be netted against PTP income
A
no
23
Q
can PTPs losses be netted against private interest income.
A
no
24
Q
can PTPs losses be netted against other PTPs income.
A
no
25
what can PTPs income be netted against
PTP losses from the same
26
How can a PTP income be netted against its losses
The only way this can happen is with current year PTP income being netted against a prior suspended loss from the same PTP.
27
Passive activity examples
28
how much may Taxpayers deduct provided they “actively participate” in rental real estate
up to a $25,000 loss
29
rental real estate participation requirements to be active
Active participation requires:
Taxpayer ownership of at least 10% of the property, AND
Substantial involvement in managing the property
30
rental real estate active participation phase out limits:
The $25,000 limit is phased out in the MAGI range from $100,000 to $150,000. This applies to all filing status' (single, MFJ, HOH)
31
have is rental losses considered for real estate professionals
not passive; not the same as active participants
32
What is the max allowed to rent a personal property to not report income
14 days or less
33
Personal use property allowed deductions
include mortgage interest and property taxes as itemized deductions.
Only applies to the taxpayer’s primary residence and vacation home.
34
rental use property: personal usage cannot exceed
Personal use cannot exceed the greater of:
14 days or,
10% of the number of days the property is rented.
35
Are trips made to the rental property for maintenance and repairs count as personal usage?
no
36
Rental use property allowed expenses
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).
37
what constitutes a mixed use rental property usage?
The taxpayer is not able to meet the minimum personal use requirements:
Personal usage is greater than:
14 days or,
10% of the number of days the property is rented.
38
what deductions are a mixed rental property usage limited to
Deductions are limited to gross rental income (may have net income of $0 but not negative income).
39
what happens to any unused losses in a mixed rental property
Any unused losses are carried forward to future years but remain subject to the net income rule
40
rental property minimum use visual
41
Steps for mastering the application of the Minimum Use Tests
1 establish type of property, 2 build understanding by layering in the unique tax treatment of the gains, losses, and potential deductions available
42
Augusta Rule
rent personal-use real estate for 14 days or less; no reporting of rental income
43
where does personal-use deductions go?
schedule A; only mortgage interest, home equity loan/HELOC interest (if used to buy/build/substantially improve); available when itemizingw
44
where does rental-use deductions go?
schedule E; advertising auto/travel, cleaning, insurance, management fees, mortgage interest, repairs, supplies, taxes, utilities, depreciation and more
45
where do mixed use deductions get reported?
schedule A & schedule E; partially available deductions, varying with % of use
46
exclusion amount of gains on the sale of a personal residence
250k single; 500k MFJ
47
IRC section 121
allows for the exclusion of gains on the sale of a personal residence for up to $250,000 (Single) or $500,000 (MFJ)
48
does the tax code allow any recognized loss for personal residences sold at a loss?
no
49
How often is the section 121 exclusion available for each person?
2 years (730 days)
50
what requirements to qualify for a section 121 sale exclusion
ownership and usage test
51
Define the ownership test for section 121 sale
Must have owned the property for 2 out of the last 5 years
52
Define the usage test for section 121 sale
Must have used the property as the personal residence for 2 out of the last 5 years.
53
requirements if married to qualify for section 121 sale
Both spouses must meet the usage test.
Only one spouse needs to meet the ownership test.
54
List the following as acceptable reasons for a reduced exclusion for a section 121 sale of residence:
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 the property
Other unforeseen circumstances
55
what do taxpayers who do meet the ownership or usage test or use the exclusion more than once in a two-year period may qualify for
they may qualify for a reduced exclusion
56
Items you’ll need to find the exclusion amount or taxable amount from a sale
purchase price, time owned, time lived in the home, a reason that qualifies for a reduced exclusion, and the sale price
57
section 121
a significant tax exclusion for homeowners
58
Section 121 exclusions serve as an example of:
realized gaines vs recognized gains (primary residence is sold @ 600k gain (MFJ)- realized gain =600k)
59
owners pass ownership + use test + have not used section 121 in the previous 2 years
recognized gain =100k (600k (gain)-500k (121 MFJ))
60
121 CFP Awareness
filing status, length of ownership, length of use, use of 121 in prior 2 years, mind the question (recognized gains, excluded gains)
61
what charitable contribution is the easiest and has the highest AGI threshold?
cash
62
what is the AGI max deduction on a LTC property with FMV election for a public charity?
30% of AGI
63
what is the AGI max deduction on a LTC property with basis election for a public charity?
50% of AGI
63
what is the AGI max deduction on a cash gift for a public charity?
60% of AGI
64
what is the AGI max deduction on ordinary income property (STCGs, Art, Inventory) for a public charity?
50% of AGI
65
what happens to any amount that someone donates to a charity that is about he AGI % thershold?
Contributions that exceed the AGI limit in the current year can be carried over to each of the five succeeding years.
Subject to the original percentage limits in the carryover years.
Deducted after deducting allowable contributions for the current year.
When carryovers from two or more years exist, the earliest carryover is used first.
66
what is the AGI max deduction on a LTC property with FMV election for a private foundation?
20% of AGI
67
what is the AGI max deduction on a LTC property with basis election for a private foundation?
30% of AGI
68
what is the AGI max deduction on ordinary income property (STCGs, Art, Inventory) for a private foundation?
30% of AGI
69
what is the AGI max deduction on a cash gift for a private foundation?
30% of AGI
70
What does deducting a charitable contribution assume for a client?
that they itemize- using schedule A
71
who elects whether to use the amount of FMV or basis as the donation to a charity/private foundation?
the donor
72
Charitable use-related donated property deductions?
produces a charitable deduction equal to: FMV=30% of AGI or Basis=50% of AGI
Note: this rule is similar to the deduction limit for a gift of appreciated stock or land
73
Charitable use-UNrelated donated property deductions?
Produces a deduction only for the LESSER of: cost basis or FMV
74
What is the key difference between use-related and use-unrelated charitable property donations?
use related: donor can CHOOSE btw FMV 30% of AGI or basis at 50% of AGI
use-unrelated: donor MUST take the lower of donation/appraisal value to use for the donation
75
Are hourly rates deductible for charitable contributions?
NO
76
When are donors responsible for having a written letter of acknowledgment of a donation?
when the donation is $250 or more
77
When a taxpayer renders services to a qualified charitable organization, what may the taxpayer may deduct incidental to rendering the services?
umreimbursed expenses incurred including: out of pocket transportation expenses, cost of lodging, and the cost of meals while away from home
78
What is the cost per mile that a taxpayer may deduct for rendering charitable services?
the law permits a deduction of $0.14 cents per mile
79
What is the Auction Donations for a charitable contribution write off?
Donors who purchase items at a charity auction may claim a charitable contribution deduction for the excess of the purchase price paid for an item over its fair market value (FMV).
Example: Jonni went to a fundraiser and paid $100 for a basket of health products with a FMV of $75. She can claim a charitable contribution deduction on the excess, which is $25.
80
AMT Adjustments and Preferences
Preferences increase AMTI (Most common: Exclusion of gain on qualified small business stock (Section 1202), private activity bond interest).
Adjustments increase or decrease AMTI (Most common: certain interest (home mortgage and investment interest), Incentive Stock Option (ISO) exercises, depreciation deduction).
81
What deduction is not allowed for AMT?
Standard deduction and deduction not allowed for AMT.
82
AMT formula
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(s)
Gross AMT tax
Less: AMT foreign tax credit
Tentative minimum tax (TMT)
Less: Regular tax liability
AMT* (If tentative minimum tax exceeds the regular tax, the difference is the AMT)
83
What are AMT planning strategies?
If a taxpayer is subject to AMT in the current tax year:
Accelerate income into the AMT year.
Defer tax deductions until a regular tax year.
The optimal strategy would be to do as above until the AMT liability equals the regular tax liability.
84
What is AMT used for?
to asses tax against items that are not easily captured in the regular tax flow
85
what is AMT payable
When AMT liability exceeds the regular tax liability, the difference is known as “AMT payable.”
86
when does AMT adjustments happen in an ISO?
at exercise there is postivite AMT
87
Alternative Minimum Tax (AMT)
The AMT system is a ‘parallel tax calculation’ to the normal tax flow that is always calculated in conjunction with the regular tax system. AMT applies to individual, corporate, and trust tax returns.
The tax liability, as determined by the AMT method, is the minimum amount (a floor) of tax liability owed to the government.
Most American taxpayers still have a higher regular tax liability versus the AMT liability and therefore pay more than what is required under AMT.
88
Standard Deduction (Dependents)
The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the larger of:
$1,250; or
The individual's earned income plus $400, but not more than the regular standard deduction (generally $13,850 in 2023). (Therefore, the $13,850 serves as a ceiling)
89
the basic ‘cues’ for Kiddie Tax
a dependent age 18 at end-of-year or younger (or age 24 if a full-time student), that has unearned income that exceeds the dependent standard deduction of $1,250 and the additional $1,250 at the child’s rate of 10%.
90
When does the kiddie tax kick in
beyond the $2,500 threshold and the parent’s highest marginal rate is applied.
91
BIF kiddie tax checklist
1. is there unearned income
2. did a minor (under 19/FT student under 24) receive that income?
3. did the amount received exceedthe kidd tax limites?
if yes, then apply the calculations
92
kiddie tax calculations
1250 -> tax free
1250-> childs rate (10%)
excessed taxed at parents highest marginal rate
93
kiddie tax calculation example
Example (Unearned Income ONLY): Assume $15,000 net unearned interest income for a 17-year-old:
The first $1,250 is tax-free (dependent’s standard deduction amount),
The next $1,250 is taxed at the child's tax rate (generally, 10%) or $125, and
The remaining $12,500 is taxed at the parent's tax rate (let's assume 22%) or $2,750 (this is the Kiddie Tax!), resulting in
The final total tax owed = $2,875 ($125 + $2,750).
94
kiddie tax earned + unearned income example
Earned + Unearned Income): Earned income = $7,000; Unearned income = $3,000; 15-year-old dependent; Parent’s highest marginal bracket = 24%.
The child’s taxable income
Gross income – (standard deduction (greater of $1,250 or amount of earned income + $400))
$10,000 gross income ($7,000 + $3,000) - $7,400 standard deduction ($7,000 + $400)
$1,0000 - $7,400 = $2,600
Amount taxed at parent’s highest marginal rate (24%)
Unearned income – first $1,250 - next $1,250
$3,000 (unearned income) - $1,250 - $1,250 = $500
Parent’s tax due = $500 x 0.24 = $120
Amount taxed at child’s rate
Child’s taxable income – amount taxed at parents’ marginal rate = $2,600 - $500 = $2,100
Child’s tax due = $2,100 x 0.10 = $210
Total Tax due = $120 + $210 = $330
95
Earned Income
Salaries, wages, tips, professional fees, and other amounts received as pay for work performed.
96
Unearned Income:
Income other than earned income. This is investment-type income and includes interest, dividends, capital gains (including capital gain distributions), rents, royalties, etc. Distributions of interest, dividends, capital gains, and other unearned income from a trust are also unearned income to a beneficiary of a trust.
97
what is Net investment income
the amount by which the sum of gross investment income and the capital gain net income exceeds the allowable deductions.
98
In general, investment income includes, but is not limited to (7):
interest,
dividends,
capital gains,
rental and royalty income,
non-qualified annuities,
income from businesses involved in trading of financial instruments or commodities, and
businesses that are passive activities to the taxpayer
99
Items that are NOT investment income (7):
wages,
unemployment compensation,
operating income from a nonpassive business,
Social Security Benefits,
alimony,
tax-exempt interest,
self-employment income,
distributions from certain Qualified Plans, and
tax-exempt interest on governmental obligations and related expense
100
When will an individual owe net investment income?
Individuals will owe the tax if they have Net Investment Income AND have modified adjusted gross income over certain thresholds
101
Individuals, estates, and trusts are subject to what surtax on net investment income
a 3.8% Medicare surtax
101
investment-related
Tax applies to the lesser of:
NII, or
the excess of modified AGI over $250k for MFJ ($200k Single).
102
what income is NII?
all investment related income except ta-exempt
103
What property qualifies for section 179 property?
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
104
What is the section 179 max that one may elect to expense up to?
1,160,000
