Tax Planning Flashcards

You may prefer our related Brainscape-certified flashcards:
1
Q

When is 1041 Filed?

A

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

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2
Q

Property not classified as Cap Assets

A

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)

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3
Q

Net Capital Gains

A

Net of (Net of Short-term Gain/Loss) and (Net of Long-term Gain/Loss)

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4
Q

Cost Basis

A

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)

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5
Q

Taxable Income

A

A taxpayer’s taxable income determines the starting point for the Long-Term Capital Gains (LTCG) rates of 0%/15%/20%.

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6
Q

How are ST Capital assets taxed?

A

Short-term capital assets are taxed at ordinary income

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7
Q

Amount of capital loss that can be claimed each year

A

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.

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8
Q

1231 property

A

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!”

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9
Q

1231 property - taxation of gains/losses

A

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.

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10
Q

§1245 property

A

Subsection of 1231 property

‘personalty’ used in a trade or business for the production of income.

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

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11
Q

§1250 property

A

subsection of 1231 property

‘realty’ used in a trade or business for the production of income.

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

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12
Q

1245 Property Taxation

A

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

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13
Q

1250 Property Taxation

A

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)

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14
Q

Section 1031: Like-Kind Exchanges

A

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).

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15
Q

BOOT

A

Other “EXTRA STUFF”

Boot is non-1031 Exchange - qualifying property.

Examples include cash, debt assumption, inventory, and personalty in a realty for realty exchange.

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16
Q

BOOT - Debt Assumption

A

Applies to 1031 Like-kind Exchanges

Other “EXTRA STUFF”

When you move debt away from you, your net worth increase

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17
Q

1031 Link Kind Exchange Timeline

A

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).

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18
Q

1031 Link Kind Exchange - Amount Realized

A

FMV of qualifying property received plus (or minus) net boot.

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19
Q

1031 Link Kind Exchange - Realized Gain

A

The amount realized minus the basis of the property transferred.

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20
Q

1031 Link Kind Exchange - Recognized Gain

A

The lesser of realized gain or net boot received.

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21
Q

1031 Deferred gain:

A

The realized gain minus recognized gain.

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22
Q

1031 Substituted basis

A

FMV of qualifying property received minus the deferred gain.

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23
Q

MORTGAGES and BOOT

A

MORTGAGES are BOOT

GIVE mortgage = Positive BOOT
RECEIVE mortgage = Negative BOOT

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24
Q

BOOT taxation

A

BOOT causes TAX to kick in

Recognized gain = lesser of realized gain or Net BOOT Received (cannot be lower than 0)

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25
Q

DST

A

Delaware Statutory Trust

Trust to hold business realty property

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26
Q

Section 179 Expenses

A

businesses to deduct the full cost of qualifying capital assets right away rather than depreciating over the property’s useful life.

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27
Q

Which Properties that qualifies for Section 179 treatment

A

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.

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28
Q

Standard Deductions For Blind and Disabled

A

Apply to individual level (even if MFJ)

On the CFP Tables (Bottom of 2024 Standard Deductions)

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29
Q

How many years does the business need to be generating profit to be considered for SE Tax

A

3 of last 5 years

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30
Q

When do QBID go away

A

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

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31
Q

Formula for Provisional Income

A

Half of MAGI ????

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32
Q

Refundable Tax Credits

A

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

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33
Q

Default IRS method for cost-basis

A

FIFO (Shared bought first are sold first and thus the cost basis of shares sold is the first shares purchased)

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34
Q

Related Party Transactions

A

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)

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35
Q

Related Party Transactions - Gains/Losses

A

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.

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36
Q

Related Party Transactions - Calculating Loss

A

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

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37
Q

Tax Exclusions

A

MAFIAS PADDED MICS

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38
Q

Is On-site daycare employee benefit taxed?

A

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.

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39
Q

Series EE bond interest taxation

A

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.

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40
Q

Taxation of gains from sale of personal residence - Single & MFJ

A

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.

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41
Q

Net Tax Payable or Refund Due

A

Final Tax Due - Prepayments

Gross Tax Due - Tax Credits = Final Tax Due

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42
Q

Schedule 1, Part II deductions

A

Above-the-line’ deductions or deductions ‘for AGI.’

Gross income - Schedule 1, Part II deductions = Adjusted Gross Income (AGI)

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43
Q

Use-unrelated’ property

A

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.

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44
Q

Use-unrelated’ property Deductions

A

Lesser of Original Cost Basis or FMV

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45
Q

Related Use Property Deductions

A

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

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46
Q

Gift of loss property

A

when you have a gift of property at a lost, we must apply the wait and see approach;

?????

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47
Q

Tax Penalties - Negligence

A

Deficiency of tax liability if there was no intent to defraud.

A 20% penalty will apply to the amount of the deficiency.

48
Q

Tax Fraud Penalties

A

defraud, a 75% penalty will apply to the amount of the deficiency.

49
Q

Frivolous Return Penalties

A

Penalty is $5,000.

50
Q

Failure to File Penalty

A

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.

51
Q

Failure to Pay

A

0.5% per month the tax is unpaid up to a maximum of 25%.

52
Q

Understatement of Liability

A

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.

53
Q

Penalties Applicable to Tax Preparers

A

$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

54
Q

Constructive receipt

A

occurs when the funds are available without restriction.

55
Q

Deduction of Sec 179 Expenses

A

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.

56
Q

Pass-through Entities

A

S-Corporations,
Limited Partnerships,
General Partnerships
Limited Liability Companies (LLCs)

57
Q

At-Risk rule

A

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

58
Q

Types of Interests in Passive Activities

A

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)

59
Q

PTP

A

Public Traded Partnerships (PTPS)

60
Q

Amount At Risk

A

un-used basis in an entity

Basis is used to offset passive losses upto the amount of passive income/basis.

61
Q

Personal use property - taxation

A

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.

62
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.

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).

63
Q

Mixed-use property

A

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.

64
Q

Personal Residence Sale Exclusion

A

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)

65
Q

Personal Residence Sales Exclusion Applicability

A

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.

66
Q

Personal Residence Sales Exclusion Time Frame

A

The exclusion is available every two years (730 days).

67
Q

Personal Residence Sales Exclusion - 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 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.

68
Q

Personal Residence Sales - Reduced Exclusion

A

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.

69
Q

acceptable reasons for a reduced exclusion for personal residence sale

A

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

70
Q

Section 121

A

exclusion of gains on the sale of a personal residence

any recognized loss for personal residences sold at a loss IS NOT ALLOWED

71
Q

Charitable Contributions - max annual deductions - Limits & Timeframes

A

You can DONATE above the AGI% ceiling anytime

  1. Deduction up to AGI % Ceiling - can take max deductions this year,
  2. Any amount above AGI ceiling is carry forwarded up to 5 years after the date of donation
72
Q

Public Charity Contra - max annual deduction For Cash gifts

A

60% of AGI

73
Q

Public Charity Contra - max annual deduction For Ordinary Income Property (STCGs, Art, Invetory)

A

50% of AGI

74
Q

Public Charity Contra - max annual deduction For LTGCs w/ FMV election

A

30% of AGI

75
Q

Public Charity Contra - max annual deduction For LTGCs w/Basis election

A

50% of AGI

76
Q

Private Charity Contra - max annual deduction for Cash Gifts

A

30% of AGI

77
Q

Private Charity Contra - max annual deduction for Ordinary Income Property (STCGs, Art, Inventory)

A

30% of AGI

78
Q

Private Charity Contra - max annual deduction for LTGCs w/ FMV Election

A

20% of AGI

79
Q

Private Charity Contra - max annual deduction for for LTGCs w/Basis Election

A

30% of AGI

80
Q

TPP

A

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

81
Q

Charitable Contra of TPP - Related-Use.

A

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

82
Q

Charitable Contra of TPP - UNRelated-Use.

A

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.

83
Q

Charitable Contra of TPP - Related-Use - max annual deduction limit

A

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

85
Q

Charitable Contra of TPP - UN-Related-Use - max annual deduction limit

A

LESSER OF Cost Basis OR FMV

(No choice allowed for the donor)

86
Q

Charitable Contributions - Recording Keeping Reqs for Donors

A

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

87
Q

Charitable Contributions - Recording Keeping Reqs for Charities

A

PROVIDE a WRITTEN disclosure to a DONOR who receives goods or services in exchange for a single payment of MORE THAN $75

88
Q

Charitable Contribution of Services - unreimbursed expenses

A

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
89
Q

Charitable Contribution of Services - Insurance & Tires

A

cannot deduct general repair and maintenance expenses, depreciation, registration fees, or the costs of tires or insurance.

90
Q

Charitable Contribution of Services - Non-election of actual autombile costs

A

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

91
Q

Deduction for items purchased at Auction Donation

A

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)

92
Q

Kiddie Tax

A

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

93
Q

Kiddle Tax - Deductions

A

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)

94
Q

How are death benefits of a MEC Life Insurance Policy taxed?

A

MEC status does NOT CHANGE the TAX-FREE treatment of the policy death benefit paid to a beneficiary.

95
Q

What type of interest rate is used under the purchasing power preservation retirement funding calculation

A

The inflation-adjusted rate

96
Q

5 exceptions when IMPUTED INCOME does NOT apply:

A

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.

97
Q

Imputed Interest Charges - Calculations

A

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.

98
Q

Imputed Interest Income

A

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.

99
Q

Imputed Interest Income Assumptions

A

AFR = 4%
Loan Term = 1 Yr

100
Q

Net Investment Income

A

is the amount by which the sum of gross investment income and the capital gain net income exceeds the allowa­ble deductions.

101
Q

What does NII include?

A

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

102
Q

Items that are NOT investment income

A

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

103
Q
A
104
Q

Equivalent Tax Credit (When given Deduction)

A

ETC = Tax Deduction x marginal tax bracket

105
Q

Equivalent Tax Deduction (when given credit)

A

ETD = Tax Credit / Marginal Tax Bracket

106
Q

Alimony Recapture - Front-Loading Rule

A

Front-loading exists IF: P1 - P2 > $7500 AND P2 - P3 > $15,000

107
Q

Alimony Recapture - Tax Reporting and Year

A

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

108
Q

Alimony Recapture Application

A

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.

109
Q

Child and Dependent Care Credit - Qualification

A
  1. Child and depedent care expenses are to enable tax payer to be gainfully employed.
  2. Tax Payer must care of child under 13 or an incapacited dependent or spouse.
110
Q

Child and Depedent Care Credit - Limits

A

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.

111
Q

Child Tax Credit

A

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)

112
Q

QBID - Qualification and Amount

A

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)

113
Q

QBID Phase Outs

A

Signle = $191,951 - $241,950
MFJ = $383,900 - $484,900

114
Q

FBAR Filing Requirements

A

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

115
Q

FATCA (Form 8938) Foregin Account Tax Compliance Act

A

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

116
Q

HSA Distribution - ER Funded Contributions

A

Eligible Distributions from HSAs are tax-free even if the employer has funded the HSA