Tax Planning Flashcards
When is 1041 Filed?
1041 if filed when:
taxation at trust level - taxable income coming from the trust
600 or more of gross income
Non-US citizen that is a beneficiary on trusts
Property not classified as Cap Assets
ACID
Accounts or notes receivable acquired in the ordinary course of trade or business
Copyrights (created by or for the tax payer)
Inventory or property held primarily for sale to customers in ordinary course of a business
Depreciate property used in trade or business (sec. 1231 assets)
Net Capital Gains
Net of (Net of Short-term Gain/Loss) and (Net of Long-term Gain/Loss)
Cost Basis
it’s a base ( base camp on a mountain) from which you can compare to sale price to determine gain or lose
cost basis = cost of the asset + cost of acquiring the asset (administrative fees of the transaction)
Taxable Income
A taxpayer’s taxable income determines the starting point for the Long-Term Capital Gains (LTCG) rates of 0%/15%/20%.
How are ST Capital assets taxed?
Short-term capital assets are taxed at ordinary income
Amount of capital loss that can be claimed each year
Single/MFJ/HOH = $3000
MFS = $1,500.
If a net capital loss is more than these limits, you can carry the loss forward, indefinitely, to later years.
1231 property
Business property
Property that is used in a trade or business, and
Property held for the production of income.
The essence of §1231 property … “The BEST of both tax worlds!”
1231 property - taxation of gains/losses
Business property
1231 applies ONLY WHEN:
Net GAINS are ABOVE original basis
Net LOSSES are BELOW adjusted basis (Original basis - depreciation)
Gains are taxed as capital gains.
Losses are taxed as ordinary losses.
§1245 property
Subsection of 1231 property
‘personalty’ used in a trade or business for the production of income.
Examples: furniture, computers, carpet, decorative light fixtures, etc.
§1250 property
subsection of 1231 property
‘realty’ used in a trade or business for the production of income.
Examples: commercial buildings, warehouses, barns, rental properties, etc.
1245 Property Taxation
adjusted basis = Original basis - depreciation
If sold above original cost basis, the amount over original cost basis is taxed as 1231 CAPITAL GAINS and all depreciation is recaptured as 1245 ordinary income
If sold below original basis, but above adjusted basis; the entire amount is considered 1245 ordinary income
If sold below adjusted basis, amount is 1231 ordinary loss
1250 Property Taxation
adjusted basis = Original basis - depreciation
If sold above original cost basis, the amount over original cost basis is taxed as 1231 CAPITAL GAINS and all depreciation is taxed at 25%
If sold below original basis, but above adjusted basis; the entire amount is taxed at 25% special gains rate
If sold below adjusted basis, amount is 1231 ordinary loss
(On the tax tables)
Section 1031: Like-Kind Exchanges
deferral of gain or loss recognition ON REALTY FOR REALTY exchanges ONLY
Only applies to §1231 property (i.e., used in the ordinary course of business to produce income).
BOOT
Other “EXTRA STUFF”
Boot is non-1031 Exchange - qualifying property.
Examples include cash, debt assumption, inventory, and personalty in a realty for realty exchange.
BOOT - Debt Assumption
Applies to 1031 Like-kind Exchanges
Other “EXTRA STUFF”
When you move debt away from you, your net worth increase
1031 Link Kind Exchange Timeline
45 days from the date of the transfer of the relinquished property to identify potential replacement properties.
The replacement property must be received, and the exchange completed NO LATER THAN 180 DAYS after the transfer of the property relinquished in the exchange OR
the due date (with extensions) of the tax return for the tax year in which the transfer of the relinquished property occurs (whichever is earlier).
1031 Link Kind Exchange - Amount Realized
FMV of qualifying property received plus (or minus) net boot.
1031 Link Kind Exchange - Realized Gain
The amount realized minus the basis of the property transferred.
1031 Link Kind Exchange - Recognized Gain
The lesser of realized gain or net boot received.
1031 Deferred gain:
The realized gain minus recognized gain.
1031 Substituted basis
FMV of qualifying property received minus the deferred gain.
MORTGAGES and BOOT
MORTGAGES are BOOT
GIVE mortgage = Positive BOOT
RECEIVE mortgage = Negative BOOT
BOOT taxation
BOOT causes TAX to kick in
Recognized gain = lesser of realized gain or Net BOOT Received (cannot be lower than 0)
DST
Delaware Statutory Trust
Trust to hold business realty property
Section 179 Expenses
businesses to deduct the full cost of qualifying capital assets right away rather than depreciating over the property’s useful life.
Which Properties that qualifies for Section 179 treatment
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.
Standard Deductions For Blind and Disabled
Apply to individual level (even if MFJ)
On the CFP Tables (Bottom of 2024 Standard Deductions)
How many years does the business need to be generating profit to be considered for SE Tax
3 of last 5 years
When do QBID go away
When business is considered as Hobby
I.e. when business doesn’t generate profit in 3 of the last 5 years, it is considered a hobby
Formula for Provisional Income
Half of MAGI ????
Refundable Tax Credits
A refundable tax credit is a credit you can get as a refund even if you don’t owe any tax.
Earned Income Tax Credit (EITC)
Child Tax Credit (partially refundable) (upto $1700)
American Opportunity Tax Credit (partially refundable) (Upto $1000)
Premium Tax Credit
Default IRS method for cost-basis
FIFO (Shared bought first are sold first and thus the cost basis of shares sold is the first shares purchased)
Related Party Transactions
sale or trade of property between related parties
Related persons are defined as a:
Spouse
Child
Grandchild
Parent
Sibling
Related entities: if the taxpayer owns more than 50% of the stock (corporation) or interests (LLCs, partnerships)
Related Party Transactions - Gains/Losses
Any gain on a transaction is treated normally (as if sold to an unrelated party) - taxed as such
Losses on transactions will not be recognized until the related party sells the asset to an unrelated party.
Related Party Transactions - Calculating Loss
After identifying that a sale at a loss occurred between related parties, note the amount of the loss.
Remember that this amount will offset any gains realized by the related party purchaser when they sell the property to an unrelated party.
Loss is only allowed to be used against the gains up to the OG loss incurred by the related party seller
Tax Exclusions
MAFIAS PADDED MICS
Is On-site daycare employee benefit taxed?
The on-site daycare is an employee benefit that is excluded from taxation.
A business can provide up to $5,000 in childcare assistance to each employee and exclude it from their taxable wages reported on Form W-2.
Series EE bond interest taxation
The Series EE bond education tax exclusion permits qualified taxpayers to exclude from their gross income all or part of the interest paid upon the redemption of eligible savings bonds when the bond owner pays qualified higher education expenses at an eligible institution.
Room and board are not considered qualified education expenses for this purpose.
Taxation of gains from sale of personal residence - Single & MFJ
Gains of up to $250,000 can be excluded from the sale of a personal residence for a Single filer if the ownership and use tests are passed.
The $500,000 limit applies to qualifying individuals filing MFJ.
Net Tax Payable or Refund Due
Final Tax Due - Prepayments
Gross Tax Due - Tax Credits = Final Tax Due
Schedule 1, Part II deductions
Above-the-line’ deductions or deductions ‘for AGI.’
Gross income - Schedule 1, Part II deductions = Adjusted Gross Income (AGI)
Use-unrelated’ property
means a use unrelated to the exempt purpose or function of the qualified organization.
For a governmental unit, it means the use of the contributed property for other than exclusively public purposes.
Use-unrelated’ property Deductions
Lesser of Original Cost Basis or FMV
Related Use Property Deductions
Charitable Deduction equal to:
FMV = 30% of AGI or
Basis = 50% of AGI
same is for deduction limit for gift of appreciated stock or land
Gift of loss property
when you have a gift of property at a lost, we must apply the wait and see approach;
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