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CFP BIF > Tax Planning > Flashcards

Tax Planning Flashcards

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1
Q

Form 1040

A

Individual Income Tax Return

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2
Q

Form 1040X

A

1040 Amended Return

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3
Q

Form 1040ES

A

Estimated Tax for Self Employed Individual

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4
Q

Form 1041

A

Estates & Trusts

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5
Q

Form W-2

A

Wages & Taxes

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6
Q

Schedule 1

A

Additional Income & Adjustments

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7
Q

Schedule A

A

Itemized Deductions

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8
Q

Schedule B

A

Interest & Dividend Income

*Retirement Income Recipient

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9
Q

Schedule C

A

Profit/Loss From Business

Self Employed

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10
Q

Schedule D

A

Capital Gains / Losses

Retirement Income Earner

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11
Q

Schedule E

A

Rental & Royalty Income

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12
Q

Schedule F

A

Profit/Loss - Farming

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13
Q

Schedule H

A

Household Employment Taxes

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14
Q

Schedule SE

A

Self Employment Tax

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15
Q

Schedule K-1

A

Partnership Distributions

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16
Q

Form 706

A

Estate & GSTT

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17
Q

Form 709

A

Gift & GSTT

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18
Q

Form 1098

A

Mortgage Interest

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19
Q

1099-DIV

A

Dividends & Distributions

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20
Q

1099-INT

A

Interest Income

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21
Q

1099-NEC

A

Non-Employment Compensation

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22
Q

1099-Misc

A

Misc. Income

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23
Q

1099-R

A

Retirement Distributions

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24
Q

Form 4868

A

Extension of time to file

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25
Q

Form 5498

A

IRA Contributions/Individuals

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26
Q

Form 8606

A

Non-Deductible IRA’s

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27
Q

Equivalent Tax Credit (formula)

A

Deduction x MTB = Equivalent Tax Credit

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28
Q

Equivalent Deduction Given a Tax Credit (formula)

A

Credit/MTB = Equivalent Tax Deduction

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29
Q

What are Tax Deductions?

A

Reduce the overall taxable income.
Adjusts BEFORE application of the tax rates per tables.
Reduces tax by marginal percentage

Taxpayer Benefit:
More valuable to high earners because marginal tax rate is higher.

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30
Q

What are Tax Credits?

A

Lowers Taxes Due under specific circumstances.

Adjusts AFTER the tax due is calculated
Reduces tax due on a dollar-to-dollar basis.

Benefits all taxpayers in the same amount regardless of their marginal tax rate.

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31
Q

Refundable Tax Credits

A

When credited, excess money goes to taxpayer…

Earned income credit
Additional Child Tax Credit
American Opportunity Credit
Premium Tax Credit

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32
Q

Non-Refundable Tax Credits

A

Child & Dependent Care Credit
Child Tax Credit
Retirement Savings Contribution Credit
Lifetime Learning Credit

These simply reduce taxes paid (reduce taxpayer liability) and do not get refunded to taxpayer.

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33
Q

Marginal Tax Rates

A

Show the amount of taxes paid on the next dollar of earned income.

Rate on tax tables

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34
Q

Avg Tax Rate

A

Shows the overall share of income paid in taxes.

taxes paid / taxable income = Avg Tax Rate

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35
Q

What is the Failure to File penalty?

A

5% of unpaid taxes for each month up to 25%

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36
Q

What is the failure to pay penalty?

A

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

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37
Q

What happens if both failure to pay and failure to file are applied in the same month?

A

The failure to file penalty is reduced by the failure to pay penalty.

The max unpaid tax + unpaid file penalty is 5% per month.

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38
Q

Head of Household

A

Single or Unmarried

Pay more than 1/2 housing costs

MUST have qualifying child living with them for 1/2 the year.
or
Qualifying relative who is providing at least 50% of expenses.

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39
Q

Married Filing Separately

A

Must file 2 separate returns

Must separate itemized and deductions. However, if one itemizes, the other must.

Cannot use these credits:
Child & Dependent Care, Earned Income, Adoption, AOTC, LLC, Student Loan Interest.

Credits Reduced:
Child Tax Credit
Savers Credit

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40
Q

Married Filing Jointly (MFJ)

A

If not remarried after death of one spouse, can use MFJ for year of spouses death.

Can use Qualifying Widower for 1st and 2nd year after death with dependent.

3rd year and beyond must use Head of Household.

41
Q

What is NOT a capital asset according to the IRC?

A

Accounts or notes receivable
Copyrights; compositions, music, literary
Inventory or property held primarily for sale to customers
Depreciable property used in trade or business (section 1231 asset)

42
Q

Methods to determining cost basis?

There are three…

A

FIFO - (default IRS method)
Avg Cost Method - averaging all of what was sold
Specific Identification - Taxpayer selects which shares are to be reported as sold. Most powerful

43
Q

Net Capital Gain

When selling investments

A

Excess of net long-term gain over net short-term gain

44
Q

Short Term Gain

A

Held under 12 months.

Taxed at ordinary income

45
Q

Long-term Capital Gain

A

Anything over 12 months.

Taxed 3 ways:
Capital Assets: [0/15/20] Tax Tables
Unrecap. Depreciation: 25%
Collectibles: 28%

46
Q

Capital Loss Carry Forward

A

$3,000 a year for Single, HoH & MFJ

$1,500 a year for MFS

If losses are more than this, you can carry them forward indefinitely

47
Q

REMEMBER… Gains are income that is taxed on top of regular taxable income.

A
48
Q

Section 1231 Property is both…

A

Property used in a trade or business, and…
Property held for the production of income

49
Q

How is section 1231 property taxed…

A

Gains are taxed as Capital Gains
Losses are taxed as ordinary losses

50
Q

What are the two subcategories of Section 1231 Property?

A

Section 1245 & 1250 Property

51
Q

Section 1245 Property is…

A

Personalty used in a trade or business for the production of income.

Examples: Furniture, computers, carpet, decorative light fixtures, etc.

52
Q

Section 1250 Property is…

A

Realty used in a trade or business for the production of income.

Examples: commercial buildings, warehouses, barns, rental properties, etc.

53
Q

Section 1031: Like-Kind Exchanges

A

Allows for the deferral of gain or loss recognition on realty for realty exchanges.

Has 45 days from the date of the transfer of the relinquished property to find a replacement.

Replacement must be received no later than 180 days after the the property was relinquished.

54
Q

1031 Boot

A

is non-qualifying property… examples are cash, debt assumption, inventory, and personalty in a realty for realty exchange.

55
Q

Like-Kind Exchange

Recognized Gain

A

The lesser of the realized gain or net boot received.

56
Q

Estimated Tax Payments

To avoid penalty on underpaid amt…

A

To avoid penalty on underpaid amt, estimated quarterly payments must be the lesser of…
* 90% of current years’ tax liability
* 100% of tax liability on prior year return IF AGI was less than 150k last year

57
Q

Estimated Tax Payments
(if AGI is over 150k)

A

If AGI is greater than 150k (75k MFS) must pay either…
* 110% of priors years tax, or…
* 90% of the current year’s tax

No penalty is imposed if the estimated tax for the year is less than $1,000 or, the individual had NO tax liability in the prior year.

58
Q

Standard Deduction for Single

A

$13,850
(plus $1,850 for 65+ and/or blind)

59
Q

Standard Deduction for HOH

A

$20,800
(plus additional $1,850 for 65+ and/or blind)

60
Q

Standard Deduction for MFS

A

$13,850
(additional $1,500 for 65+ and/or blind)

61
Q

Standard Deduction for MFJ & QW

A

$27,700
(plus $1,500 for 65+ and/or blind)

62
Q

Section 267 defines related persons as…

A
  • Spouse
  • Child
  • Grandchild
  • Parent
  • Sibling
  • Related entity (owning more than 50% of a stock in a business)
63
Q

How are gains treated when selling to a related party?

A

Normally… same as an unrelated party.

64
Q

How are losses treated when selling to a related party?

A

Losses will not be recognized until the related parted sells to an unrelated party

When you sell at a loss with a related party, that loss needs to be notaded as it will offset gains realzed when they sell to an unrelated party

65
Q

What is the at-risk rule?

A

States that a taxpayer can only deduct losses to the extent that there is enough basis (or the amount at-risk)

Example: If a taxpayer has an amount at-risk of $20,000 prior to the current year’s pass-through loss of $17,000, there is no issue as far as the at-risk rules are concerned. The $17,000 loss will be allowed and the taxpayer’s amount at-risk is therefore reduced to $3,000.

66
Q

What are the two types of interests in passive activities?

A

Private Interest: LLC, Partnership or S-Corp
* Can net losses against each other & offset gain

Public Interest: Publicly Traded Partnership (PTP)
* Can only net losses with the same, not against other PTP’s
* Must pay taxes on the total income
* All losses are suspended

PTP losses carry forward

67
Q

If a loss passes the at-risk rule, then and only then will it be subject to the **passive activity rule. **

Which is what?

A

A taxpayer can only use passive losses to the extent they have passive income.

Any passive losses in excess of passive income will be suspended due to the passive activity rules.

68
Q

Private Interest vs. PTP’s

A
  • Private interest passive losses can be netted against other private interest passive income.
  • Losses cannot exceed income
  • They cannot be netted against PTP income
  • PTP losses cannot be netted against Private Interest Income or PTP income
  • PTP income can ONLY be netted against PTP losses from the SAME entity.
69
Q

What is required to be considered an Active Participant

Rental Real Estate: Active Participant

A
  • Must have both 10% ownership of the property AND Substantial involvement in managing property

If you’re NOT an active participant, you cannot offset passive on ordinary income.

70
Q

Active Participant Phase Outs

A
  • The $25,000 loss is allowed if the tapayers MAGI (AGI without the Rental Loss) is equal or less than $100,000
  • The 25k limit is phased out from $100,000 to $150,000

Phaseout limits are the same regardless of filing status.

71
Q

Personal use property

Rental Property Categories & Tax Treatment

A

Allowed to rent for 14 days or less (not required to report income)

72
Q

Rental Use Property

A

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

73
Q
A
74
Q

Mixed Use Property

A

Personal use is greater than 14 days or 10% of the number of days rented.
- Expenses must be allocated between personal and rental use.
- Deductions are limited to gross rental income

75
Q
A
76
Q

Minimum Use Test

A

Great than 14 days rented, less than 14 days or 10% personal = PASS

77
Q

Personal Residence Sale Exclusion: Section 121

A

allows for exclusion of gains on the sale of a personal residence for up to $250,000 (single) or $500,000 (MFJ)

78
Q

How often are Section 121 exclusions available?

Gain on residence sale

A

Every two years (730 days)

79
Q

Section 121 ownership & usage test…

A

Ownership Test: Must have owned the property for 2 out of the last 5 years.

Usage Test: Must have used the property as your personal residence for 2 of the last 5 years.

BOTH spouses must meet the usage test to get MFJ.

Only ONE needs to meet the ownership test.

80
Q
A
81
Q

When can you get a reduced Section 121 Exclusion amount?

A

IRC lists the following as acceptable reasons for a reduced exclusion:
* 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

Reduced exclusion calculation… divide number of months jointly owned by 2 years and multiply that by the exclusion amount.

82
Q

When donating to a Public Charity the AGI % Ceiling is the MAX ANNUAL DEDUCTION a taxpayer can make.

A

Cash Gifts: 60% of AGI
LTCGs w/FMV Election: 30% AGI
LTCGs w/Basis Election: 50% AGI
Ordinary Income Properties (STCGs, Art, Inventory): 50% of AGI

FMV = 3 Letters = 30% of AGI
Basis = 5 Letters = 50% of AGI

Donor can elect wheter to use either FMV or Basis for Donation

5 Year Carryover for amoutns over max.

83
Q

Use-Related

A

The charity makes use of the donated property in a manner consistent with its exempt purposes.

Gift of art to an art institute. Books to a library.

84
Q

Use-Unrelated

A

Means use unrelated to the exempt purposes or function of the qualified organization.

Painting to educational facility not used for education purposes.

85
Q

Related use property produces a charitable deduction equal to…

A

FMV = 30% of AGI or…
Basis = 50% of AGI

Person sells painting to art institute with Basis of 10k and FMV of 30k. The amount of the contribution is 30k (because it was used) . If this person had an AGI of 50k the amount of deduction is 30% x 50k = 15k.

86
Q

Unrelated use property produces a deduction only for the lesser of…

A

Cost basis or…
FMV

Painting sold to a college but not used for educational purposes and has a basis of 10k and a FMV of 30k. The amount of deduction is 10k.

87
Q

Imputed Interest Income

A

When you loan money out in three situations..
- Gift Loans
- Corporate Shareholder Loans
- Compensation Related Loans

88
Q

Key numbers related to Imputed Interest Calculations

A

When Net Investment Income is less than $1,000, $0 Inputes.
$0-$10,000 = Not imputed
$10,000 - $100,000 = lesser of borrowers NII or AFR
+ $100,000 = Use AFR to calculate Imputed Interest

89
Q

Alternative Minimum Tax (AMT)

A

Tax system that runs parallel to normal tax flow.

Usually used for ISOs

90
Q

AMT Formula

A

Regular Taxable Income
+ Tax Preference Items
+ Standard Deduction
+/- AMT Adjustments
=AMTI (alt minimum taxable income)
-Exemption Amount
=AMT Base
x AMT Tax Rate
=Gross AMT Tax
-AMT foreign Tax Credit
=Tentative Minimum Tax (TMT)
-Regular Tax Liability
=AMT

90
Q

Kiddie Tax

A

Applies to children under age 18
or
Full-Time Students under age 24.

Net unearned income more than $2,500 is subject to be taxed at the highest marinal tax rate of parents.

91
Q

AMT & ISO’s

A

When ISO is Exercised
AMT positive between Strike Price and Exericise Price
AMT Negative between FMV at Exercise and FMV at Sale.

Capital Gain or Loss

92
Q

What is Net Unearned Income in regards to the Kiddie tax?

A

Income other than earned income like interest, capital gains, dividends, rents, royalties.

93
Q

Kiddie Tax Formula…

A

First $1,250 is tax free
The next $1,250 is taxed at the childs tax rate (usually 10%)
The remaining is taxed at parets tax rate.

94
Q

Standard deduction of a child…

A

Limited to the larger of…
1. $1,250; or…
2. The individuals earned income plus $400, but not more than the regular standard deduction $13,850 (which is the ceiling)

95
Q

Net Investment Income (NII)

A

The amount by which the sum of gross investment income and capital gains exceed the allowable deductions.

96
Q

What is Investment Income…?

A

Interest
Dividends
Capital Gains
Rent, rotalties
Non-Qualified Annuities
Income From Business
Passive Activity Businesses

97
Q

What is NOT Investment Income?

A

Wages
Unemployment
Operating Income from NonPassive Biz
Tax Exempt Interest
Social Security
Alimony
Self Employment Income
Distributions from Qualified Plans
Tax Exempt Interest on Gov Obligations

98
Q

NII Tax

A

3.8%

Applies to the lesser of
NII
or
MAGI over the filing status threshold.

CFP BIF (6 decks)

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