Tax Planning Flashcards
The AOTC credit (max credit, based on what, etc)
- credit amount 100% on first $2k of qual expenses, 25% for next $2k ($2,500 max credit, off of $4,000 qual expenses)
- Partially refundable up to $1,400
- per student basis, must be at least half time basis for first 4 years of Post secondary
- qual expenses are tuition/enrollment fees + “the kitchen sink” (materials, internet access, etc)
- ROOM AND BOARD NOT QUAL EXPENSE
- felony drug rule
The Lifetime Learning Credit (what, for whom, etc)
- 20% on $10k qual expenses
- per student per taxpayer basis
- unltd amount of years for anyone trying to learn/improve a skill for work
- tuition and enrollment fees only
Child & Dependent Care Credit
- TP must be employed/seeking employment and maintain a home for QC/QR
- credit is $3k max for 1 child, $6k max for 2+
- expenses are based on a chart
0-$15k expenses -> * 35%
$15k-$43k exp. in $2k increments -> N-1%
$43k+ expenses -> 20%
Dependent
- child under 13
- child/relative physically/mentally incapable of self care & lived with TP for 50%+ of the year
- certain kids of divorced parents
Child tax credit
- $2k max per child under 17
- reduced $50 per every $1000 above threshold
Threshold -> $400k MFJ, $200k others - for child, stepchild, grandchild, or eligible foster child
Adoption credit
- nonrefundable
- taken in year adoption is finalized, any unused amount can be carried forward 5 years
- $14,440 max credit per eligible child
- phaseout -> $216,660-$256,660
How are futures taxed?
Gains/losses are capital gains and capital losses
Net gains are treated 60/40 long/short regardless of holding period
Capital losses may be used to offset capital gains from other securities
Open positions at the end of the tax year are treated as if they were closed on the last day of the year
Gains/losses are reported annually
What are the major forms and schedules on Form 1040?
A - Itemized Deductions
- “An Item”
- mortgages $ stuff
B - Interest & Ordinary Dividends
- “B is for Banks”
C - Sole Proprietorship, profits/loss from biz
- “C-SP”
D - Capital Gains/Losses
- “D is Me”
E - S-Corps, Partnerships, Rental RE
- “E-Corps, E = (real) Estate”
SE - Self Employment Tax
What’s the “Head of Household” filing status?
You are single/divorced taking care of qualifying dependents
What classifies someone as a dependent?
You’re either providing them a place to live or provide at least 50% financial support for the child/relative in question
- for a qualifying child, they must have lived with you for more than half the year
- for a qualifying relative, they don’t have to reside in the same house as taxpayer
What are the required for a child to be a qualifying child under dependency laws?
Must be related to the TP
- child, step/foster child
- bro/sis, step-bro/sis
- any descendent of previously listed
There is NO income test
Must half lived with TP for more than 50% of year
Must pass the age test
- under 19 y/o @ end of tax year
- under 24 y/o @ EoTY and is a full time student
- is totally/permanently disable at any time during tax year
Dependent must NOT have provided more than 50% of own support (scholarship doesn’t count)
They cannot claim another person as a dependent
They must not have filed a joint return for tax year
Generally must also be a US Citizen/National OR a resident of US/Canada/Mexico
How does a relative (not a child) qualify as a qualifying relative under dependency laws?
Has a specified relationship w/ TP
- parents, in-laws, aunts/uncles
- nieces, nephews
- unrelated to TP but they resided in TP’s principal home during Tax Year
Must pass the income test
- GROSS income for the year must less than $4,300 (2021), excluding social security and muni bond interest
Does NOT have to reside in TP’s home & has NO age test
Dependent must NOT have provided for more than 50% of their own support during tax year (scholarships, Soc. Sec., muni int. doesn’t count)
They cannot claim any dependents, must not file a joint return, and must generally be a US citizen/National/resident of US/Can/Mex
What is the difference between taxable income and a tax liability?
Taxable Income
- the amount on which income tax is computed
Tax liability
- the amount of taxes owed after subtracting all credits
What are tax credits, exclusions, and misc deductions?
Tax credits
- a dollar for dollar offset against tax liability
Exclusions
- items received by a TP that represents an economic benefit that aren’t taxed (muni interest, gifts received, fringe benefits, etc)
Misc deductions
- reduce taxable income
What’s the correct sequence of steps in the income tax calculation?
Total income - adjustments (above the line) = AGI (the line) - the greater of standard or itemized (below the line) deductions = taxable income
What are adjustments/deductions (above the line) FOR agi?
- ordinary/necessary expenses incurred in a trade/business
- deductible portion of self employment tax paid (1/2)
- alimony paid to ex-spouse (pre-2019)
- payments to Keogh (self-EE), qualified/SEP/SIMPLE plans
- traditional deductible IRA contributions
- forfeited interest penalty for premature withdrawal of time deposits (CD’s)
- capital losses
- Self-EE’d health insurance premium
- contributions to Archer MSA’s/HSA’s
- interest on educational loans
What are the cases for ordinary/necessary expenses incurred in a T/B to be deductible?
1) when expenses are incurred in carrying on a trade/biz (Sched. C)
2) when expenses are incurred in connection w/ property held for production of rents/royalties (Sched. A or E)
- Farm income/expenses are reported in Sched. F
* unreimbursed biz expenses of an EE are not deductible *
What’s the deductible portion of self employment tax?
- 65%
- 6.2% of OASDI (soc sec) up to the taxable wage base ($142,800)
- 1.45% of Medicare (no earnings limit)
How do you calculate the amount of self employment tax of income at/below the taxable wage base?
1) calculate self employment income
2) multiply net earnings by 0.9235
3) calc that result by 0.153
OR
1) calculate amount of self employment tax by 0.1413
- 0.9235 * 0.153 = 0.1413
How do you calculate the self employment tax when net income is above the taxable wage base?
1) calc self employment income
2) multiply 0.9235
3) take result from step 2 and subtract from the wage base ($142,800) and multiply the excess by 2.9% (Medicare)
4) multiply the taxable wage base by 0.153
5) add the results from steps 3 & 4 together
* ) if TP makes above 200/250 threshold for additional Medicare tax (0.9%), take result of step 2 - threshold amount * 0.9% & add to result of step 5
- to determine DEDUCTIBLE share of SE tax when income > wage base;
- multiply wage base by 7.65%
- multiply excess over TWB by 1.45%
- add the 2 results together
Additional Medicare Tax of 0.9% also applies to SE ppl with combined incomes above $200k (s) or $250k (mfj)
How is Alimony treated for tax purposes?
Before 2019
- a deduction for AGI by payOR
- taxable income to payEE
• “2018 deducts my taxable payments”
After 2019
- NOT deductible by payOR
- NOT taxable to payEE
• “NOT after 2019”
When must Keogh and SEP plans be established for tax purposes?
Keogh
- established AND FUNDED by the extension due date
SEP
- established and funded by the extended due date of the ER tax return
How are capital loses used to deduct for AGI?
$3000 in a year against ordinary income
- $1,500 for MFS filers
Unlimited carry forward
How are self employed health insurance premiums deducted?
Self employed TP’s and wage earners who ARE MORE THAN 2% SHAREHOLDERS of an S-Corp can take a 100% deduction for amounts paid to heal ty insurance for TP’s, spouses, and dependents
- deduction cannot create a loss (must not exceed net earnings)
How is the interest on educational loans deductible FOR AGI?
Loan proceeds must have been used for
- higher education tuition & fees
- room and board
- other necessary expenses (transportation)
TP claiming deduction CANNOT be claimed as a dependent of another
Maximum allowable annual deduction is $2500
Deduction is phased out at
• $70,000-$85,000 (s)
• $140,000-$170,000 (mfj)
How are contributions to Archer MSA’s and HSA’s deductible for AGI?
If the ER makes the contributions for either, they are excluded from an EE’s income
If the EE makes the contribution, it’s deductible for AGI (above the line)
How is child support treated?
Money received for child support is;
- not includable as taxable income by payee
- not deductible by payor
How is kiddie tax determined for unearned income only?
Total unearned income - $1,100 - the greater of $1,100 or amount of allowable itemized deductions directly w/ production of unearned income
Generally just $2,200
Applies to the unearned income of a dependent child
- not 19 before end of taxable year
- or full time student not yet 24 at end of tax year
—— will be considered FT if they are FT students for at least 5 months of tax year
How is the kiddie tax determined if dependent child has unearned AND earned income?
1) Determine net Unearned Income
—- Gross UI - $2,200 = Net UI
2) Determine net Earned income
—- Gross Income (EI + UI) - (EI + $350*) = Net Taxable income
3a) Taxable income - Net UI = Amount taxed @ child’s rate
3b) Net UI is taxed at parents rate
* standard deduction is EI + $350 to limit of $12,550
How would a person qualify for an additional standard deduction?
To qualify a person must
- be age 65 or older, OR
- be blind
People who are 65+ AND blind get 2 additional standard deductions
The additional deductions are;
- $1,700 (s/HoH)
- $1,350 (mfj/mfs/QW)
What are the different itemized deductions?
“MMITCC”
• Mortgage interest
— old debt; $1m acquisition debt & $100k home equity debt
— new debt; only $750k acquisition debt
— home equity is deductible for acq/renovation only
• Medical Expenses
— in excess of 7.5% of AGI
• Misc itemized deductions
— gambling losses to extent of winnings
— impairment related work expenses
— unrecovered basis in commercial annuity
• Interest — investment interest expense — qualified residence interest — business interest — passive activity interest
• Taxes
— state income tax, RE tax
• Charitable Contributions
• Casualty losses
— must be personal & in federally declared disaster area
What are/aren’t Capital Assets?
What are Capital Assets
- personal use assets and most investment assets
- losses from personal use assets are NOT deductible, but losses from investment assets are
What aren’t capital assets - ACID — Accounts & Notes Receivable — Copyrights/creative works (ordinary asset) — Inventory — Depreciable property or real estate
What is boot?
Anything received OTHER than property
- cash / liabilities assumed
- you receive boot when they assume your liability
- “causes tax to kick in”
If either party pays taxes on boot received their basis in property increases
Recognizable gain (taxable)
- only if less than realized gain
- NO BOOT RECEIVED -> NO RECOGNIZED GAIN
What is your realized gain in 1031 like kind exchanges?
FMV of prop received (new prop) - boot received (if any) - Adj Basis of prop given up (old)
*losses cannot be recognized in 1031 like kind exchanges
What is the recognized gain in 1031 like kind exchanges?
Recognized gain is the lesser of the realized gain or boot received
Recognized gain is immediately taxable
What is the basis of like kind property RECEIVED in a 1031 exchange?
FMV of prop received (new) - (realized gain - recognized gain)
What is/isn’t property not eligible for 1031 like kind treatment
IS
- domestic real property
ISNT
- personal use property
- inventory (ordinary income property)
- any/all securities (stock/bond/etc)
- any tangible depreciable property
- livestock of different sexes
What are at risk and passive loss rules?
At risk rules
- the total amount of money/property at risk
- also the amount of debt for which the investor is liable
- can’t lose any more than what you have invested
- amount not deductible can be carried forward until there’s income to net it against
Passive loss rules
- losses from passive activities (non participating activities or rental activities) can be used offset passive income
- PTP/MLP can only offset $ from the same activity
- nonpublic/RELP can offset other NP/RELPs
How would an oil/gas partnership be considered a non passive activity?
If the investor owned the O/G activity
- in a way that involved a WORKING INTEREST; or
- owned through an entity that doesn’t limit the investors liability (partnership)
Considered not passive, can offset active and portfolio income
