Tax Planning Flashcards
Basis for acquired property
1) Purchase = cost + acquisition cost
2) inheritance = DMV date of death or alt valuation date,always lt holding period
3) gift = assume donors basis and donors holding period
Or if sold for less than donors basis then fmv on date of gift
Or of sold between fmv and donor basis tax payer reports neither gain or loss
Rule 179 expense election
Limited to income
$139,000 in 2012
Phased out for personalty property over $560,000
Ex: income $40,000, personalty property, $125,000= 179: $40,000 expense deduction
Income $150,000, property $600,000= 170: $99,000, $139,000-$40,000
Section 121requirements
Gain on sale of primary residence
-$250,000 single…$500,000 joint exclusion
-principle residence for 2 out of prior 5 years
-partial exclusion for health, job or unforeseen circumstances: 24 months x maximum exclusion
Example 6 mo/24 mo = 25% x $250,000 = $62,500
Section 1231, 1245 rules property used in trade or business
24k-------------sold
$4,000 cap gain 1231
20k-------------original basis
$8k. Depreciation = 1245 recovery (ordinary income)
12k------------adjusted basis
$4k capital loss 1231
8k-------------sold
**Look back 5 years
** 1231 Cap gain tax is 25%Calculating fed income tax
Adjustment to get AGI
- IRA or Keogh plan
- alimony paid
- penalty on early withdrawal of savings
- student loan interest
- job related moving expenses
- jury fees paid to employer
- hsa saving deduction
Cash vs accrual accounting
Cash recognizes income when actually paid
Accrual basis method:
must be used for inventory, unless ave annual gross < $1,000,000
Hybrid method
Percentage completion method: long term contact > 1 year
Casualty + theft loss calculation for tax deduction
Lesser of the decrease of fmv or adj basis. $10,000
Reduced by
1) insurance. $ 6,000
2) 10% AGI. $3,000
3) $100 floor per occurrence. $100
=$ 900
Income tax of Life insurance
- At death lump sum: income tax free, but maybe subject to estate tax
- At death installment payments: earnings are taxable pro rata
- prior to death lump sum: ordinary income above cost basis
- prior to death installment payments: amounts in excess of cost basis taxable pro rata over installment period
Life insurance June 1988
Law crated MEC
MEC is life insurance contract that fails 7 pay test ( greater than 7 yearly premiums over the 1st 7 years)
Distributions are LIFO and subject to 10% penalty if younger than 59 1/2
Annuity distributions, non- periodic
Pre 1982 FIFO
Post 1982 LIFO
Taxability of all Annuity distributions periodic payments
Pre 1987, pro rata distributions apply to ALL payments
Post 1987, pro rata distributions apply to payments until basis is recovered, then fully taxable
Fixed annuity installment exclusion ratio
Investment in contract / total expected return (total payments)
$20,000/$60,000=33% return of principle, tax free
Variable annuity exclusion ratio
Investment in contract / total number of payments
$20,000/60= $333 per payment is tax free ( return of principle)
Net capital gain or loss tax calculation
1) Net lt gain with lt loss
2) net st gain with st loss
3) net lt gain/loss with st gain/loss
Up to $3,000 loss against ordinary income
Long term capital gain tax rates
1) If marginal tax rate is 0-15%, ltcg rate is 0%
2) If marginal tax rate is above 15%, ltcg rate is 15%
3) Collectibles 28%
4) Ltcg on property 1231 is 25%
Investment interest expense ( margin) deductibility
Deductible up to the amount of net investment income
Investment income, less
Investment advisor fee ( only amount over 2% AGI deducted)
= net investment income
Ex if net inv income is $7,000 and margin is $9,000, then only $7,000 is deductible
Taxation of disability insurance
Employer pays pretax premium , then benefit is taxable as ordinary income
Employee pays after tax premium, then benefit is tax FREE
Payments can be pro rata
Dependent UNearned income rules
If eligible to be claimed as dependent, NO personal exemption, only standard deduction $950
Age 18 or 19-24 if full time student
Kiddie tax next $950 unearned
Over $1900 taxed at parents marginal tax rate
Dependent EARNED and unearned income rules
The greater of $950
Or
Earned income + $300, up to amount of std deduction $5,950
Charitable contribution deduction rules
Property type. Organization
Public. Private
OI: Cash, stcg, inventory 50% of. 30% of
Use Un- related personalty AGI. AGI
Fmv: ltcg, use related 30% of. 20% of
AGI. AGI
Deduction of appreciated tangible property is limited to adjusted basis, unless donated property relates to the exempt purpose of the charity
Alimony tax
Tax deductible to the payor
Taxable to the payee
Payments must be cash
Can not file joint return
Can NOT live together
Child support tax
NOT taxable, NOT deductible
Watch out for disguised alimony
AMT concept and tax rates
Tax rates 26% or 28%
Lower tax rate on a larger base
Begin with AGI, add back preferential items (iso, accelerated depreciation, tax exempt interest on private activity muni bonds, excess drilling cost)
= AMT income
Add back limited deductions (st and local tax, teir II items)
= AMT taxable income, then calculate tax
Tax due is the greater of regular tax vs AMT tax
Failure to file penalty
5% per month, maximum of 25%
Failure to pay taxes penalty
0.5% per month, maximum 25%
C corp characteristics
- Bankruptcy of a shareholder or shareholders has NO effect on the business
- shareholder liability is limited
- number of shareholders is Unlimited
S corp characteristics
- shareholder reports income when the corp has net income for a tax year
- shareholders vote for board of directors
- shareholder receives K-1 in order to prepare personal income tax return
- shareholders report personal income on a pro rata share of corp profit or loss
Repair expense vs capital improvement on real estate
- repair expense is NOT included in cost basis
- capital improvement IS included is costs basis
Straight line depreciation MACRS
100% / ?year property
Divide by 2, for half year convention in year 1
100%/7 year prop = 14.29% / 2 = 7.14% in year 1
Maximum amount of deductible capital losses
$3,000/ year
Like kind exchange rules
1) Realty to realty
2) Personalty to personalty
3) No exchange of US to foreign property allowed
Final deduction to get taxable income
1) greater of itemized deduction or standard deduction
2) personal and dependent exemptions
Substantial economic effect doctrine
Limits the use of special allocations between partners upon liquidation and distribution
Tax on stock dividends
NO tax on stock dividends, NON taxable event
Corporate accumulated earnings tax rate and rules
15% tax rate
- accumulation credit of $250,000 less accumulated earnings
Rental home income of 14 days or less is
NOT required to be reported of income
Buildings must be capitalized and ?
Depreciated
-Land must be capitalized and NOT depreciated
Income tax return Accuracy / Negligence penalty
Flat rate of 20% of faulty tax amount
Civil income tax fraud penalty
Flat 75% of the amount of fraud
Qualified historical rehabilitation expenses are a tax?
Are a tax credit
Like kind exchange recOgnized gain is?
Zero unless tax payer receives a boot
Only Passive income from Nonpublicly traded limited partnerships may be off set by?
Passive losses from other Nonpublicly traded limited partnerships
1250 Unrecaptured income on rental real estate
$350,000 - sale price
I $100,000 lt or st cap gain
$250,000 - purchase price
I $119,700 1250 recapture taxed at 25%
$130,000 - depreciated value
1250 Unrecaptured income on rental real estate
$350,000 - sale price
I $100,000 lt or st cap gain
$250,000 - purchase price
I $119,700 1250 recapture taxed at 25%
$130,000 - depreciated value
1244 stock rule
C and S corp offers advantage of ordinary loss treatment of 1244 stock
- 1244 stock is the first $1mm of stock issued after incorporation
- a loss on the sale, exchange or worthlessness of $100,000 per year on a it return ($50,000 on single) is considered ordinary loss
- gain is considered capital gain
- available ONLY to individual tax payers and only if the individual was an original owner/purchaser
