Tax Planning Flashcards
What is the Marginal Tax Rate?
The tax rate applied to the next dollar of income earned or deduction. Important for decision-making on incremental income.
Explain Effective Tax Rate.
The average tax rate paid on total income, calculated by dividing total taxes by total income.
What is Alternative Minimum Tax (AMT)?
A parallel tax system ensuring high-income taxpayers pay a minimum tax, adjusting taxable income for preferences and exclusions.
Describe Tax Bracket Stacking.
A strategy to allocate income across years or taxpayers, maximizing lower tax brackets to reduce the overall tax burden.
What are the 2024 AMT exemption amounts for married filing jointly?
$133,300, with a phase-out beginning at $1,218,700.
What is Distributable Net Income (DNI) in trusts?
Limits a trust’s deduction for beneficiary distributions and determines the taxable income passed to beneficiaries.
How are Incentive Stock Options (ISOs) taxed?
Not taxed at grant or exercise if held for two years from grant and one year from exercise. Gains taxed as long-term capital gains if held.
Explain the Qualified Business Income (QBI) Deduction.
A 20% deduction on qualified income for pass-through entities, subject to business type and income limits.
What is the Kiddie Tax?
Applies parents’ tax rate to a child’s unearned income above $2,600, limiting tax savings from income-shifting to children.
What is Net Investment Income Tax (NIIT)?
A 3.8% tax on the lesser of net investment income or MAGI above $250,000 (MFJ) or $200,000 (Single).
Describe a §1031 Like-Kind Exchange.
Allows tax deferral on gains from real property exchanges for similar properties, deferring taxes on gains without loss recognition.
What is a Wash Sale?
Disallows loss deduction if substantially identical securities are repurchased within 30 days before or after the sale.
Define a Crummey Trust.
A trust allowing annual gifts to qualify for the gift tax exclusion by granting beneficiaries a temporary withdrawal right.
What are above-the-line deductions?
Deductions taken before calculating AGI, including student loan interest, IRA contributions, and self-employed health insurance.
Explain the Kiddie Tax exemption threshold.
The first $2,600 of a child’s unearned income is tax-free; income above this may be taxed at the parent’s rate.
Describe capital gain tax rates for 2024.
0% up to $94,050 (MFJ), 15% for $94,051 to $583,750 (MFJ), and 20% over $583,750 (MFJ).
What is a Charitable Remainder Trust (CRT)?
A trust providing income to beneficiaries for a term with the remainder going to charity, allowing an immediate charitable deduction.
Define “basis” in partnership interest.
Basis starts with the partner’s contributions, adjusted for income, distributions, and allocated debt, affecting gain or loss on sale.
Describe Qualified Dividend Income.
Qualified dividends, from U.S. or qualified foreign companies held for a minimum period, are taxed at long-term capital gains rates.
What is Phantom Income in Partnerships?
Income allocated to a partner that is taxable even if not distributed, requiring the partner to pay tax on allocated income.
Explain capital gain tax treatment for collectibles.
Gains on collectibles are taxed at a maximum rate of 28%, different from the general long-term capital gains rates.
What are Passive Loss Limitations?
Limits deductions for passive losses to the amount of passive income, with unused losses carried forward until passive income is available.
Define Step-Transaction Doctrine.
Prevents tax avoidance through structured transactions without a business purpose by treating multiple steps as one for tax purposes.
Explain mortgage interest deduction limits.
Deductible on up to $750,000 of acquisition debt for primary and secondary homes; HELOC interest deductible if used to improve the home.
What is the Economic Substance Doctrine?
Requires transactions to have economic substance beyond tax benefits to qualify for deductions.
How is mortgage insurance treated for tax purposes?
Deductible as mortgage interest if acquired under allowable dates and phased out for higher incomes.
Describe Adjusted Gross Income (AGI).
Income after ‘above-the-line’ deductions, used to calculate further tax and eligibility for certain credits and deductions.
What is a Flow-Through Entity?
A business structure like partnerships and S-corporations where income, credits, and deductions pass through to owners’ personal tax returns.
Explain the Self-Employment Tax.
Applies a combined rate of 12.4% for Social Security and 2.9% for Medicare on net earnings from self-employment, with limits on the SS portion.
Define Realized vs. Recognized Gains.
Realized gains are calculated upon sale, but only recognized gains are taxable if they trigger a taxable event.
What are the limitations for charitable contributions of appreciated assets?
Contributions of appreciated assets held over a year are deductible at FMV, subject to AGI limits, with excess deductions carried forward.
How does AMT apply to ISOs?
The spread between FMV at exercise and exercise price for ISOs is an AMT preference item, added to AMTI for AMT calculation.
What are Deductible Investment Interest Expense Rules?
Deductible only up to the amount of net investment income, with disallowed amounts carried forward to future years.
Explain Passive Activity and Income.
Income from business activities where the taxpayer does not materially participate, often including rental activities, offset only by passive losses.
Define Estimated Tax Payments.
Estimated Tax rules prevent penalties if payments equal 100% of last year’s tax (110% for high income) or 90% of the current year’s tax.
What is Substantial Economic Effect in Partnerships?
Allocations must reflect the economic arrangement among partners and have a real economic impact beyond tax effects.
