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
(Shares 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;
?????
Tax Penalties - Negligence
Deficiency of tax liability if there was no intent to defraud.
A 20% penalty will apply to the amount of the deficiency.
Tax Fraud Penalties
defraud, a 75% penalty will apply to the amount of the deficiency.
Frivolous Return Penalties
Penalty is $5,000.
Failure to File Penalty
5% of the unpaid taxes for each month or part of a month that a tax return is late up to a maximum of 25%.
A minimum penalty of $510 is imposed if the tax return is later than 60 days.
Failure to Pay
0.5% per month the tax is unpaid up to a maximum of 25%.
Understatement of Liability
If the tax withheld from W-2 and/or estimated payments is less than:
90% of the current year liability, or
100% of the prior year liability (110% if taxpayers AGI was over $150,000-MFJ).
Penalty based on:
The amount of the underpayment,
The period when the underpayment was due and underpaid, and
The interest rate for underpayments that we publish quarterly.
Penalties Applicable to Tax Preparers
$60 per each failure of a tax preparer
Failure to furnish a copy to the taxpayer
Failure to sign return
Failure to furnish identifying number
Failure to retain copy or list
Failure to file correct information returns
Failure to be diligent in determining eligibility for certain tax benefits
Constructive receipt
occurs when the funds are available without restriction.
Deduction of Sec 179 Expenses
The deduction of any elected §179 expense is limited to the firm’s net profit, not including any §179 expensing.
Any elected §179 expense that exceeds net profit can be carried over to next year’s taxes.
Pass-through Entities
S-Corporations,
Limited Partnerships,
General Partnerships
Limited Liability Companies (LLCs)
At-Risk rule
Taxpayer can only deduct losses to the extent that there is enough basis (or the amount at-risk).
You need to have enough investment (investments, gains or debt) to have basis in the company
Entity debt DOESN”T Count
Types of Interests in Passive Activities
Private interest in an LLC, partnership, or S-Corp. (gains/losses flow through)
Public interest in a publicly traded partnership (usually abbreviated as (PTPs)). (gains/losses NO Flow through)
PTP
Public Traded Partnerships (PTPS)
Amount At Risk
un-used basis in an entity
Basis is used to offset passive losses upto the amount of passive income/basis.
Personal use property - taxation
Allowed to rent for 14 days or less.
NOT required to report income if rental usage is 14 days or less!
Deductions would include mortgage interest and property taxes as itemized deductions.
Only applies to the taxpayer’s primary residence and vacation home.
Rental use property
Personal use cannot exceed the greater of:
14 days or,
10% of the number of days the property is rented.
Trips made to the rental property for maintenance and repairs do NOT count as personal usage.
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).
Mixed-use property
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.
Expenses must be allocated between personal use & rental use.
Deductions are limited to gross rental income (may have net income of $0 but not negative income).
Any unused losses are carried forward to future years but remain subject to the net income rule.
Personal Residence Sale Exclusion
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)
Personal Residence Sales Exclusion Applicability
The taxpayer must meet both the ownership test AND the usage test:
Ownership test: Must have owned the property for 2 out of the last 5 years.
Usage test: Must have used the property as the personal residence for 2 out of the last 5 years.
If married:
Both spouses must meet the usage test.
Only one spouse needs to meet the ownership test.
Personal Residence Sales Exclusion Time Frame
The exclusion is available every two years (730 days).
Personal Residence Sales Exclusion - Ownership & Usage Test
Ownership test: Must have owned the property for 2 out of the last 5 years.
Usage test: Must have used the property as the personal residence for 2 out of the last 5 years.
If married:
Both spouses must meet the usage test.
Only one spouse needs to meet the ownership test.
Personal Residence Sales - Reduced Exclusion
Taxpayers who do not meet the ownership or usage test or use the exclusion more than once in a two-year period may qualify for a reduced exclusion.
acceptable reasons for a reduced exclusion for personal residence sale
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
Section 121
exclusion of gains on the sale of a personal residence
any recognized loss for personal residences sold at a loss IS NOT ALLOWED
Charitable Contributions - max annual deductions - Limits & Timeframes
You can DONATE above the AGI% ceiling anytime
- Deduction up to AGI % Ceiling - can take max deductions this year,
- Any amount above AGI ceiling is carry forwarded up to 5 years after the date of donation
Public Charity Contra - max annual deduction For Cash gifts
60% of AGI
Public Charity Contra - max annual deduction For Ordinary Income Property (STCGs, Art, Invetory)
50% of AGI
Public Charity Contra - max annual deduction For LTGCs w/ FMV election
30% of AGI
Public Charity Contra - max annual deduction For LTGCs w/Basis election
50% of AGI
Private Charity Contra - max annual deduction for Cash Gifts
30% of AGI
Private Charity Contra - max annual deduction for Ordinary Income Property (STCGs, Art, Inventory)
30% of AGI
Private Charity Contra - max annual deduction for LTGCs w/ FMV Election
20% of AGI
Private Charity Contra - max annual deduction for for LTGCs w/Basis Election
30% of AGI
TPP
tangible personal property
Contributions of TPP to charitable orgs, the deduction for gift will depend whether the property was use-related or use-unrelated asset
Charitable Contra of TPP - Related-Use.
The charity makes use of the donated property in a manner consistent with its exempt purpose.
Charitable Contra of TPP - UNRelated-Use.
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 purpose other than exclusively public purposes.
Charitable Contra of TPP - Related-Use - max annual deduction limit
Similar to LTCGs (election choice is upto the donor)
PUBLIC Charity:
FMV election = 30% of AGI
Basis election = 50% of AGI
PRIVATE FOUNDATION
FMV election = 20% of AGI
Basis election = 30% of AGI
Charitable Contra of TPP - UN-Related-Use - max annual deduction limit
LESSER OF Cost Basis OR FMV
(No choice allowed for the donor)
Charitable Contributions - Recording Keeping Reqs for Donors
To claim charitable deductions, Donors must:
(1) have a bank record or written communication from a charity for any monetary contribution
(2) obtain a written acknowledgment from a charity for any single contribution of $250 or more
Charitable Contributions - Recording Keeping Reqs for Charities
PROVIDE a WRITTEN disclosure to a DONOR who receives goods or services in exchange for a single payment of MORE THAN $75
Charitable Contribution of Services - unreimbursed expenses
only deduct unreimbursed expenses incurred incident to rendering the services
- OOP transportation expenses (ONLY deductible if the taxpayer renders the service)
- Cost of lodging and meals while away from home
Charitable Contribution of Services - Insurance & Tires
cannot deduct general repair and maintenance expenses, depreciation, registration fees, or the costs of tires or insurance.
Charitable Contribution of Services - Non-election of actual autombile costs
can deduct $0.14 cents per mile
If taxpayer elects NOT to deduct their actual costs of operating an automobile while performing the donated services, the law permits a deduction of $0.14 cents per mile
Deduction for items purchased at Auction Donation
contribution deduction = Purchase Price - FMV
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)
Kiddie Tax
applies to children under age 19 or full-time students under age 24.
unearned income = first 1300 (no tax), next 1300 (taxed at 10%).
Remainder taxed at parent’s tax rate
Kiddle Tax - Deductions
larger of:
$1,300, or
The individual’s earned income plus $450, but not more than the regular standard deduction
(generally $14,600 in 2024). (Therefore, the $14,600 serves as a ceiling)
How are death benefits of a MEC Life Insurance Policy taxed?
MEC status does NOT CHANGE the TAX-FREE treatment of the policy death benefit paid to a beneficiary.
What type of interest rate is used under the purchasing power preservation retirement funding calculation
The inflation-adjusted rate
5 exceptions when IMPUTED INCOME does NOT apply:
Loans between individuals totaling $10,000 or less; except when the borrowed funds are used to purchase income-producing property.
Corporate loans and compensation-related loans totaling $10,000 or less.
Debt subject to original issue discount (OID) provisions.
Sales of property for $3,000 or less.
When all payments are due within six months.
Imputed Interest Charges - Calculations
When loans > $100,000, the imputed interest is charged based on the Applicable Federal Rate (AFR) (4%) of the loan amount
When loans > $10,000 and <= $100,000, the imputed interest is the LESSER of:
the AFR (4% OF THE LOAN AMOUNT), or
the borrower’s NII (net investment income), ONLY IF NII is > $1000
NOTE: If the borrower’s net investment income is $1,000 or less, imputed income will NOT apply.
Imputed Interest Income
The IRS is authorized to impute an interest charge if the taxpayer charges less than an adequate rate of interest.
IRS looks closely at three situations to determine if interest must be imputed:
Gift loans provided out of love, affection, or generosity.
Corporate shareholder loans from a corporation to its shareholder.
Compensation-related loans from employer to employee.
Imputed Interest Income Assumptions
AFR = 4%
Loan Term = 1 Yr
Net Investment Income
is the amount by which the sum of gross investment income and the capital gain net income exceeds the allowable deductions.
What does NII include?
investment income includes, but is not limited to:
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
Items that are NOT investment income
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 expenses
Equivalent Tax Credit (When given Deduction)
ETC = Tax Deduction x marginal tax bracket
Equivalent Tax Deduction (when given credit)
ETD = Tax Credit / Marginal Tax Bracket
Alimony Recapture - Front-Loading Rule
Front-loading exists IF: P1 - P2 > $7500 AND P2 - P3 > $15,000
Alimony Recapture - Tax Reporting and Year
Recaptured amount is reported as income on PAYOR’s tax return AND deduction on PAYEE’s tax return
Recaptured amount is reported on the 3rd-yr tax return for PAYOR and PAYEE
Alimony Recapture Application
Only applicable to seperation/divorce agreement signed pre-2019 (1/1/2019 and beyond)
Pre-2019 - Alimony payments were deductible to the payor and recognized as income to the payee.
Child and Dependent Care Credit - Qualification
- Child and depedent care expenses are to enable tax payer to be gainfully employed.
- Tax Payer must care of child under 13 or an incapacited dependent or spouse.
Child and Depedent Care Credit - Limits
35% of qualified expenses for AGI < 15,000
35% - 1% reduction for every $2K (or fraction there of) of AGI > 15,000 and < 43,000
20% of qualified expenses for AGI > 43,000
Max non-refendable credit is $3000 for individual and $6000 for family.
Child Tax Credit
Partially refundable - claim upto $2000 per child (for every $1K in excess of the AGI, credit is reduced by $50)
parents with depdents under the age of 17 at the end of the year (must live int he same residence for more than half the year, child cannot provide more than 1/2 of their financial support)
QBID - Qualification and Amount
For Pass-through entities only (S-Corp, Sole Propriter, Partner in LLC or Partnership)
Based on tax payer’s personal tax return (NOT Business/pass-through entity tax return)
Deduction amount is LESSER of : 20% of QBI or 20% of taxable income (NOT including capital gains, may need to deduct standard deduction if question mentions it)
QBID Phase Outs
Signle = $191,951 - $241,950
MFJ = $383,900 - $484,900
FBAR Filing Requirements
FBAR (Foreign Bank and Financial Accounts)
Must file it if:
(1) US Person had a financial interest in/authority over at least one financial account outside of US AND
(2) Total value of all foregin financial accounts (FFA) is more than $10,000 at any time during the calendar year
Must file FinCen From 114 by tax deadline
FATCA (Form 8938) Foregin Account Tax Compliance Act
Joint Tax Return (US Residents) : Must file if foregin financial assets are > $100K on last day of the tax year OR $150K anytime during the tax year
Unmarried/Seperate Tax (US Residents): Must file if foregin financial assets are > $50 on the last day of tax year OR $75K anytime during the tax year
Unmarried/Seperate Tax (NON-US Residents): Must file if foregin financial assets are > $200K on the last day of tax year OR $300K anytime during the tax year
Unmarried/Seperate Tax (NON-US Residents): Must file if foregin financial assets are > $400K on the last day of tax year OR $600K anytime during the tax year
HSA Distribution - ER Funded Contributions
Eligible Distributions from HSAs are tax-free even if the employer has funded the HSA
