Taxes Flashcards
Three tax systems
Income tax system
Estate and gift tax system
Generation skipping transfer tax system
Three types of income
Ordinary/active income
Portfolio income
Passive income
Types of accounting
Cash method
Accrual method
Hybrid method
What are Tax principals ie money received?
Constructive receipt
Economic benefit
Doctrine of the fruit and the tree
HSA is
An adjustment on the front of the 1040
Adjustments to income are above the line
Employer contributions are deductible
Not taxable income to employee
Max for individual is $4150 and $8300 for family
Aggregate of employer contribution
Disability premiums for partnership or >2% s corp owner
Can be deducted as a deductible business expense. The deduction is based on premium expense in taxable income of the partner (conduit income)
Proceeds are then excluded from taxable income (employee pays the premium)
Disability paid by bonus plan (section 162)
Benefits not taxable to employee because already taxed
A discriminatory plan paying premiums for a select few
Is still deductible for employee and taxed for employee
Ltc taxation of premiums and benefits
Since 1997, premiums paid and unreimbursed expenses for qualified Ltc services are deductible as an itemized medical expense.
Deductions are subject to 7.5% of agi floor must be met before deductible
51-60 $1760
61-70 $4710
A step transaction is
The transactions are so obliviously interdependent that the parties involved will not complete the first transaction without anticipating that the whole series of trans will take place
A hobby loss is reportable income, but you cannot deduct the business expenses. How many years would make a hobby a business?
3 out of 5 years
For horses, profit is necessary and only two out of the seven consecutive years
Income is reported on front of 1040
The five required categories of taxpayers that have to file
Individuals (us citizens)
Dependents
Children under 24 (kiddie tax)
Self-employed
Aliens
Not every citizen or alien needs to file
An individual is required to file net earnings from self-employment that are at least how much?
$400
Filing dates are
April 15, June 15, September 15, January 15. Later installments may amend earlier payments
A six month extension to file, not pay, is generally available until when?
October 15
The form must show the full amount estimated as the tax for the year, but it may not be accompanied by payment of the balance for the tax estimated that is due. An individual subject penalty of additional payment are due.
Form 1041 is for
Trusts and estates
Form 1040X
Amends or fixes mistakes
A frivolous return is one that emits information necessary to determine taxpayers liability and show substantially incorrect tax is based on taxpayer desire to impede the collection tax. What is the penalty for frivolous returns?
$5000
Tax negligence is imposed for underpayment of taxes due either to negligence or to disregard of the rules and regulations without intent of fraud. What is the penalty?
The penalty is 20% of the underpayment attribute to negligence
Tax fraud
Tax fraud in case the intent to cheat the government by deliberately under stating tax liability. It is the mission of substantial amounts of income or by the deduction of nonexistent expenses or losses. The penalty is 75% of the portion of the tax under payment tribute fraud
What is the penalty to failure to pay tax?
The penalty is .5% per month the taxes unpaid with a maximum of 25%
What is the failure to file penalty?
The failure to file penalty is 5% of the tax due each month with with a maximum of 25%
Estimate estimated tax trick, how do you avoid penalty?
Pay the lesser of the following
90% of the current years tax liability or 100% of the prior years tax liability or 110% if the prior adjusted gross income exceeded $150,000
Paying estimated taxes then owning money. Already paid $3700
but own $4100 *(90%)=$3,690.00. No penalty because paid $3700
Examples of frivolous return and fraud
Crossing out important information and writing self employment income was unearned income(dividends)
Gross income-ordinary dividends. What schedule?
Schedule B
Gross income-What schedule? taxable interest.
Schedule B
Gross income-What schedule?
Business income and losses
Schedule C
Gross income-What schedule?
Capital gains
Schedule D
Gross income-What schedule?
Real estate
Schedule E
Gross income-
Punitive damages
Gross income-wages salary and tip
Gross income-IRA distribution
Gross income-pensions and annuities
Gross income-alimony received divorced prior to 2019
Gross income-unemployment
Gross income-social security
Exclusions from gross income
Gifts
Municipal bond interest
Child support
Compensatory damages
Inheritances
Workers’ compensation payments
Tax calculation chart
Room and board scholarship taxation
Taxable to the student receiving the scholarship
Fringe benefits that are tax free
Premiums them employer pays for family
Insurance premiums pays for a group life up to 50,000 on employee
Comer highway vehicle transit pass $315 a month
The employee may exclude up to 5000 paid or incurred by the employer for dependent care assistance
An exclusion from gross income for employer provided educational assistance in an curate of amount up to 5250 per year
An exclusion from gross income for employer assistance program in the adoption credit for qualified adoption expenses
In poor provided parking spots or subsidize parking $315 cap a month
Value of discount on company product it does not exceed the employers profit percentage
Occasional overtime, meal money, cap, fair theater or sporting event tickets not season tickets
Discounts on service services are limited to 20% of the selling price charged to customers
Fringe benefits, taxable
Health insurance premiums paid for self-employed partners, and more than 2% owners of S corporations or taxable income however, 100% is deductible as an adjustment to income on the front of the 1040 to accept that such cost do not exceed the net income from the business For self-employed. This can include all types of health insurance programs like medical, dental and long-term care it does not include disability insurance premiums. This area is heavily tested.
Insurance premiums your employer pays on group life policy in excess of $5000 of death benefit if the plane is non-discriminatory are taxable
The second step in the 1040 calculation is determining the adjusted gross income. What are the main adjustments?
IRA Contributions
Student loan interest
Keogh or SEP
Self employment tax (.01413)
Certain alimony payments(before 2019)
100% self-employment health insurance
Moving expenses – active military
Penalty for early withdrawal of savings
Health savings account HSA contributions
Student loan interest max deduction is
$2500
Modified adjusted gross income is adjusted gross income plus what?
Tax exempt interest, non-taxable Social Security income, student loan interest in other items
For the exam, the most common usage of of modified adjusted gross income will be surrounding tax exempt interest in determining whether Social Security benefits are taxable
What is the extra standard deduction for each spouse, marriage filing jointly at age 65 or older and or blind?
It is $1550 and it is $1550 for single blindness has no age requirement
Being old and blind gets you to $1550 deductions
2024 itemized deductions schedule a
Medical dental and qualified long-term care expenses over 7 1/2% AGI
State and local sales tax (limited to $10k)
Personal property tax tax (limited to $10k)
Real estate taxes (limited to $10k)
Mortgage insurance qualified residence less than 100,000 AGI
Home mortgage interest
Charitable gifts
Investment interest
Casually losses, if federally declared a disaster area
Qualified residence interest rules are
After dec 15, 2017 rules for tax deductions for buying building or improving a taxpayer’s home is $750k
$375 for married filing separately
Must be itemized on schedule A
Prior to 12/15/17 $1 million was the exclusion
Ordinary dividends – qualified dividends
Qualified dividends as defined by the code or tax at the lower, long-term capital gains rate rather than at the higher rate for an individuals, ordinary, marginal, income tax bracket
Investment interest deduction
Investment interest is interest paid on a debt mess for property help for investment typically, margin account interest. The maximum deduction allowed for interest incurred on investment and is limited to the taxpayers investment income.
Investment income is all of the following
That’s a win interest non-qualified dividends royalties and short-term gains
A qualified dividend will qualify as investment income only if the taxpayer elections not to use the reduced tax rate, use ordinary income rate. The dividend then will be treated as ordinary income long-term gains are included only if the taxpayer out of long-term rates in other words, the investor must elect out of the qualified rates 0% 15% 20%
Municipal bond purchase on margin, is investment interest deduction
No deduction is allowed for interest paid on debt incurred to purchase or carry tax exempt bond
Casually losses, federally declared disaster includes fire, hurricane, earthquake, and theft losses, what is the calculation for a deductible loss?
Calculation of a deductible loss step one, use the lesser of basis or fair market value
Step two subtract any insurance coverage
Step three subtract $100 floor
Step four subtract 10% of AGI
A self employed person using a part of their home for admin or management, and not substantially doing that somewhere can deduct this expense what schedule?
C
Miscellaneous deductions, what are they?
None for 2018 through 2025 miscellaneous itemized deductions are repealed through the TCJA
Meals and entertainment expense are our deductible
Only for wooing or entertaining clients and prospects, and it’s actually conducting business the taxpayer is present in such meals are not lavish or extravagant
Meals and entertainment for employees
Expenses for recreation, social or similar activities permanently for the benefit of the taxpayers employees other than highly come to employees i.e. office parties are still deductible. Business meals provided for the convenience of employer are now only 50% deductible whereas before the act were fully deductible meals for employees while traveling remain 50% deductible
Tickets just boarding events and culture events are no longer deductible after 2017
TCJA regards this as a permit change
Personal independency exemption suspended since 2018
If the test ask question about dependency exemptions for the exam related to personal exemptions, the answer is zero
What is Medicare tax on tax liability?
Medicare tax rate applies to wage of $200,000, $250,000 for married filing jointly and $125k for married filing separately
It will increase to 2.35%. (1.45%+.9%)
Anything below $200k is 1.45%
All investment income (capital gains and distributions from non-qualified annuities) for individuals will be taxed at what percentage of someone makes $200k single or $250k joint
3.8
Qualified dividends and long term capital gains rates
0% for people between 10-12%
15% for people between 22-35% up to $583750 for mfj
20% for people between 35-37% over $583750 for mjf
Kiddie tax applies to unearned income greater than $2600 who have at least one living parent.
18 less than half of support
19 less than half of support and full-time student
If kiddie tax applies it is calculated as:
The child gets $1300 (standard deduction)-no tax
The next $1300 is taxed at the child’s income tax rate of 10% ($130)
Amounts greater than $2600 are taxed at parent’s rates
*IF THE CHILD HAS EARNES INCOME GREATER THAN THE STANDARD DEDUCTION, THE AMOUNT OF EARNED INCOME PLUS $450 is used in step 1
Self-employment tax is a tax on earnings from self-employment not on salary or taxable income. What income is not considered self-employment income?
Dividends or interest on invest investments
Gains or deductions from losses for property securities and commodities
Real estate income or rent paid
Distributed share of income or loss of a limited partner
Wages from an S corporation
Distributions from an S corporation K-1 income
What does self-employment income include?
Net schedule C income
General partnership income, K-1
Board of directors fees
Part-time earnings – 1099
Any distribution from a S corporation is what?
Not self-employed income it is either salary or investment income
The taxable wage based provided in test questions will not exceed $168,600
If you calculate the self-employment income and exceeded $168,600 you did something wrong in the calculation above $168,600 is for Medicare tax only
Calculating taxable wage base for self-employment. What are the steps?
Step one, calculate the total self-employment income
Subtract 7.65% or multiplied by .9235 (1-.0764)
Multiply remainder by 15.3% (7.65%*2)
Shortcut combined step two and three by multiplying the total self-employment income by .1413 and round up
Net schedule C income
Means that travel entertainment expenses were recalculated
Child tax credit (refundable out to $1700) independent care expenses what are the details?
Qualifying expenses is $3000 for one child, $6000 for more than one child
Credit percentage is 20%-30%. Multiply 20% for the exam
Child tax credit what are the details
People can claim $2000 for each qualifying under age 17, $500 (non refundable) for 17 or older dependent children, dependent parents
Phase out is $50 for each $1000 over $400k MAGI for mfj and $200k for unmarried individuals
Up to $1700 is a refundable credit for under 17
What is the foreign tax credit?
If a US taxpayer pays taxes to form commitment, which US enjoys friendly relations, they may deduct those taxes for US purposes or may credit them dollar dollar against income tax liability
What is the retirement savings contribution credit?
The credit is 50% 20% or 10% of retirement plan IRA contributions depending on the person‘s AGI no credit is available for taxpayers over $76,500 for filing jointly. The maximum credit is 2000 for single 4000 for a marriage finally jointly
How do you qualify for adoption credit?
The taxpayer has adopted a child and paid out of the tax expenses related to the adoption
The amount of the tax credit for which the taxpayer qualifies is directly related to the amount spent on adoption expenses
if you adopt a special-needs child, you are entitled to claim the full amount of adoption credit, even if out-of-pocket expenses are less than tax credit amount
What exceptions that wouldn’t receive the adoption credit?
Call finding expenses do not include cost of a surrogate parenting arrangement or for adopting your spouse’s child
What is the maximum credit amount for adoption credit?
$16,800 per eligible child, including both special needs and unimpaired children. A credit can be claimed in the year special needs adoption is finalized even if the tax rate did not compare any qualifying adoption expenses. The adoption credit is phased out ratably for taxpayers with modified adjusted gross income between $252,150 and $292,150
The adoption credit can be claimed at certain times, what are those times
If the child is a four national adoption, credit is available only in the year when the adoption becomes final. Any expenses paid in the year after the deductions finalized can be claimed as a credit for the tax year in which they were actually paid.
Credit for elderly and permanent and total disabled
The credit is available to any individual who reaches 65 or is under expire is retired with permanent and total disability receives disability income
Earn income credit refundable
The tax credit is for certain people who at low paying jobs work and have earned income under certain amount
Tax deduction versus tax credit
A deduction is worth more to a high bracket taxpayer and a credit is worth more to a low bracket taxpayer
Equivalent tax credit =deduction*tax bracket
Equivalent deduction= Tax credit/tax bracket
Deductions are for rich people credits are for poor people
Medical expense deductions consist of
Subject to 7.5% AGI Floor
It includes medical insurance premiums
Not deductible unless itemized
It is not deductible if reimbursement was received
There is no 10% floor, it is 7.5%
Make sure add subtract all numbers
Self employment tax number is .1413, and these are not considered self employment income expenses
Reimbursed entertainment expenses and subsidized parking are not expenses that can be deducted
Under TCJA any casualty loss must be
Declared by the federal government
A person had itemized deductions from property, tax mortgage, interest, and charitable gifts by what amount can his itemized deductions be reduced in a current year at zero
Phase out of itemized deduction is eliminated for tax years 2018 through 2025
Standardized deduction for married filing jointly is
$29200. If total itemized deduction is less than $29200 choose $29200
S corporations cannot utilize NOLs
Because they already pass-through annual losses
A large department store uses the accrual method
Because they have inventory
How will fifo reflect on the balance sheet
The fifo method of inventory reflects current cost
A person making $400k as a sole proprietor is considering limiting liability
Pete can reduce his current tax income by splitting his income between himself and a C corporation
If he gives his kids S corp stock he can shift income to his children
A person has a loss a sole proprietor
Schedule C losses can be applied against income earned in the same year
Which forms of businesses can pass losses on to owners, which can’t
S corp
General partnership
Limited partnerships
Sole proprietorship
Not C Corp
A bank loan for an s corp that is backed by an owner will do what to the basis?
Nothing. The basis is cash and direct loan to the S corp
Brothers own a company. They want to take losses for the first three years, raise capital and take out loans
An LLc. This would allow the loan to be included in the basis. An S corp would be limited to personal cash in
A year end profit of $150k retained or provided to shareholders would be taxed at what amount?
21%
What business formation could help a business owner reduce taxes?
A regular C corporation will help reduce taxes with a separate entity.
Money left in the left in the corporation is taxed at 21% and any accumulation earning exceeding thresholds will be taxed at 20%
Owner of a corporation that works will receive what tax form?
W2, possibly 1099 if dividends are issued
Similarities between estates and trusts, both have
Beneficiaries
Fiduciaries
Both are distinct tax entities
Someone has to create both entities
Transfer property
Differences between estates and trusts
An estate is order of operations. A living trust is created intentionally or voluntarily during a grantor’s life
Estate-limited time, trust-generally operates for many years
Estate moves property.
Trust can retain property
The estate is supervised by courts
Trust is operated under a private arrangement
Estate files 1041 because it can deduct the following
Administration costs
Accounting and attorney fees
Expenses for preparing the estate return
These can be taken on the income tax return 1041 or the tax return 706 as deduction
*whatever provides the most benefit
Trusts also file form 1041
Beneficiaries file
Schedule k-1 (form 1041)
The deadline to file 1041 is due on
The 15th day of the fourth month after the entity’s year ends
Form 1041 needs to be filed if one of the following exists
Any taxable income for the year
Gross income of $600 or more
A beneficiary who is a nonresident alien
Estates choice of taxable year
An estate may choose the accounting period of the deceased year. An exemption of $600 is allowed on short-period returns
All trusts must use a calendar year, other than 501(a) or charitable trusts
Trust interest payments to benies will be taxable even if they didn’t receive it. The bene will receive a k1 1040. Where will it be reported on the tax return?
Schedule B
Grantor trust (defective/tainted) rules
Grantor is taxed on the income produced
Trust income is or may be distributed to grantor or spouse
Income may be used to discharge any legal obligation of the grantor
Trust income is used to discharge a legal support obligation
Controls bene selection
Trust income is used to pay life insurance premiums on the grantor or spouse
ILIT taxes for unfunded and funded
There is an unfunded ILIT, yearly gift with crummy provisions
Funded ILIT, interest pays the premiums. Grantor is taxed on the interest that paid the premiums
A reversionary interest that exceeds 5% of the trust value at the time of creation is retained
By the grantor. Grandfather give $500k to trust. Income goes to granddaughter. The income is taxable to the grandfather.
Administrative power is held by the grantor or the spouse to
deal with the trust property for less than full consideration to burrow or vote on stock held in the trust
A trust may also be defective or tainted for estate tax purposes if the grantor retains
Right to income or right to enjoy trust property (beneficial enjoyment)
A reversionary interest that exceeds 5% measure at the time of death
Complex trust(taxed as separated entity) of
The trust is irrevocable and the grantor has retained any control
Income is accumulated (either because the trust document requires accumulation or the trustee has discretion to accumulate income)
Is an irrevocable trust always a complex trust
Often but not always
Simple trust and complex trust additional differences
Normally no distribution of the corpus for simple
Corpus can be distributed for complex
No charitable gifts for simples
May make charitable gifts for complex
Trust taxable income deductions
A charitable deduction is only allowed for complex trusts
Depreciation, cost recovery, and depletion are calculated the same for individuals
Income must be allocated to trust or beneficiaries
NOI Carryforward is allowed
Administrative expenses are allowed
The trust is allowed a deduction for all income that is required to be distributed. It does not matter if it has actually been distributed, the trust is still allowed the corresponding deduction
A complex trust that is required to distribute income has an exemption limit of X and a trust that is not required has an exemption limit of Y
X is $300 and y is $100
Distributable net income (dni) limits the amount that a trust or estate beneficiaries must report as gross income of tax purposes. DNI rules allow the following
Claim a deduction for the amount distributed
Limit the portion of the distribution that is taxable to the bene
Ensure that the character of the distribution remains the same for the bene as it was for the trust
A client should not establish a irrevocable trust that is tainted for both income and estate taxes. Why?
When your revocable trust is tainted both income tax and estate tax it serves no purpose. might as well keep the assets in his or her name. The trust would also encourage attorney in accounting fees.
A required trust is established from a divorce to support their children. Who pays the taxes?
If the trust income is used to satisfy a grants legal support obligation, the trust income will be taxed to the grantor
Basis increases are the following legal fees, sales tax, commissions,freight and improvements, not repairs, real estate taxes, or normal business expenses. What are considered improvements and what are considered repairs
Adjusted basis equals
Basis - cost recovery (deductions)
Intangible assets are generally amortized under what section?
Section 197 intangible rules
The recovery is similar to the straight line method
Accretion of zero coupon bond
Bond goes up each year. No income is received but must count income-called phantom income
In community property states, what is a married persons basis if their spouse dies?
Full DOD basis, unlike jtwros
Commonwealth state is like
Pennsylvania
Modified accelerated cost recovery system for depreciation
applies to all recovery property (not land or intangibles) placed in service after 1986. Prior to ‘86 acrs was used
Straight line is an option under MACRS but half-year convention must be used
Property classes for depreciation purposes 1245 and 1250
5 years-computers, autos and light trucks (1245 property)
7 years-office furniture and fixtures (1245 property
27.5 years residential rental property (1250)
39 years nonresidential real property (1250)
MACRS tables and straight line tables
Macres 5 year 7 year
Year 1 20% 14.29%
Year2 32% 24.49%
Only use straight-line method if stated on test and use cost basis
Straight-line 5 year 7 year
Year 1. 10%. 7.14%
Year 2. 20%. 14.29%
Section 179 and 179 deduction
A business may expense up to $1.22 million of qualifying property in the first year of acquiring said property (tangible 1245 property) for the use of trade or business.
The max cost that can annually be expensed dollar for dollar exceeding $3.3 million
Cannot create loss with section 179
Loss not allowed if carried over to the next year
By making a section 179 election mini small firms can more easily deduct the cost of new assets and avoid the burden maintaining a MACRS depreciation schedule
Amortization is the recovery of certain capital expenditure deductible in a manner that is similar to straightline method
Amounts paid to acquire membership in a trade associate could be ever drive over a 15 year period. Using the straight line method.
Repairs to 1250 property are
Expenses are fully deductible in the current tax year
Regarding 1031 exchanges
If the taxpayer assumes and is simultaneously relieved of a mortgage, only the net debt relief is considered boot
1031 like-kind exchange calculations
No matter how many numbers provided, use only these three
FMV of property received
Adjusted basis given up
Boot (anything that is not qualified or like-kind received in a transaction)
1031 like kind calculations that I will be asked to do
Realized gain (gain at the time of the transaction)
Recognized gain(the part of the realized gain that is immediately taxable)
Substitute basis of the property acquired
1031 realized gain calculation
Total value received (FMV of property acquired + Boot (if any)
Minus adjusted basis (amount will be provided
1031 Recognized gain calculation
The lessor of realized gain or boot received (if no boot is given then recognized gain is zero)
1031 substitute basis calculations
Substitute basis equals FMV of property acquired minus (realized gain- recognized gain)
Like-kind 1031 exchange review
Time limit on 1031 exchanges
On or before 45 days to find a property and/or the title of the acquired property isn’t received within
180 days of the transfer
Related party 1031 parameters
Deal must last 2 years or deal collapses and the gain not recognized is recognized on the date of the sale
Tax rates to remember
3.8% net income tax that applies to high earners
Short-term gains are taxed at ordinary income
Long-term collectible gains are subject to 28%
Real property (1250) long-term gains subject to capital gains tax rates. A special 25% depreciation “recapture” rate is applied when the property is sold
Dividend are phantom income
When doing IRR, phantom income is 0
If a person dies and has carryforward losses of $9000, what happens?
$3000 can be deducted on form 1041, the rest is lost
Investment interest can be used on the following
Securities, sans muni bonds, investment property (home mortgage not residential property)
Sale of residence (code section 121) breakdown
$500k gain can be excluded for married filing jointly
$250k for single
Must own and occupy the home for 2 out of 5 years
Not reported on tax return if entirely excluded, if included place on schedule D
Sale of residence (code section 121) exclusion if a person didn’t meet the requirements
Includes job change that is more than 50 miles further than your old home and work, health reasons, unforeseen circumstances
Divorce, legal separation,
Death of a spouse
Becoming eligible for unemployment compensation
A change in employment that makes it impossible to pay the mortgage
Having twins
Damage to home from war
Foreclosure
What is the Installment sale recapture disadvantage?
Must realize cost recovery deduction the year of the original installment payment. Sold for $800k, basis after crd is $100k- realized $700k but only receives $80k. $300k was CRD so this is ordinary income. Huge disadvantage
Charitable bargain sale calculation
($300k proceeds/$500k fmv)* $100k basis=$60k new basis
$300k sale-$60k adjusted basis. Taxable gain of $240k
$200k charitable tax deduction
A person going from a 24% tax bracket dropping to a 10-12% bracket the next year. What should they do?
The lower the marginal income tax bracket the less advantageous tax exempt income becomes. If there is a gain of $10k sell out of munis next year because cap gains will be zero and the muni (no federal tax) won’t be as impactful
Net capital gains or losses when answering on the test
Must be indicated in the answer
AMT rate is what rate?
28% vs standard 37%
Amt calculation
Start with regular post-deduction 1040 income (if itemized) or AGI (if electing standard deduction)
Add back any item that the deduction for the 1040 but not for AMT (see amt deduction)
Add preferences back
Result equals AmT
Subtract exemptions
Result equals amti (alternative minimum taxable income)
The calculate AMT (26% and 28%)
Amt preferences (bad)
Private-activity munis
Oil and gas percentage depletion
Intangible drilling costs
-percentage depletion is the excess depletion over the property’s adjusted basis
Depreciation (ACRS/Marcs but not straight line
Non-allowable amt deductions
Property, state, income and sales tax (max $10k)
Incentive stock options “bargain element” excess fmv at exercise date vs option price
Standardized deduction is allowed
Medical ,qualified residence interest, investment interest, charitable deductions, casualty and gambling losses are deductible and are not add back items
Amt preference and add back items(bad)
Not cost depletion
Qualified private activity municipalities bonds
The property tax itemized
The excess of percentage depletion over the properties adjusted basis
Passive activities is where the taxpayer…
Does not “actively participate” in
Losses from passive activities can offset what?
Only other passive activities
Can’t reduce portfolio income, compensation, or business income
Passive activities are netted on what schedule
E
Active participation is also on E
Passive activities consist of kinds
Rentals (real estate rental(not active participant) and equipment rental (royalty income-oil royalties)
Limited partnership (some exceptions )
S corp (with some exceptions) and limited liability
Publicly traded partnership netting nuance
No netting. Carry over loss can only be used on future income from same PTP
Disallowed losses (suspended losses are carried forward. What nuance exist for passive losses?
There is no $3000 loss allowed per year.
The passive activity loss limitation is not a permanent disallowance. This means what?
A future income can be offset by future losses.
If the passive investment is sold or the participant dies then the loss can be realized in the year of disposition
The other offset is buying a non-publicly traded partnership that makes income
Phantom income from limited partnerships in tax shelters that were created prior to 1986 (debt was refinanced or the debt forgiven
Income that was forgiven creates phantom income
Other phantom are tips, zero bonds s corporations k-1s with no cash distributed
A real estate owner can be an active participant (make decisions) and the activity is still considered…
Passive
$25000 loss from real estate a year from net losses from active and portfolio income. What are the nuances?
Phase out is between $100k-150k on a 2-1 basis
Tax treatment of renting a vacation home parameters, what are they
Person is in the home that exceeds the longer of 14 days or 10% of the period of rental use
If treated like a residence then the property can’t be deducted
What is the low income housing credit and how does it work?
$25,000 and there’s no phase out
What is the calculate tax *$25000=credit
The historical rehabilitation credit is still available. Phase out starts at $200k agi. How does it work
Same as low income housing credit except for the phase out. These programs really depend on credits, not the return, to make them worthwhile investments
Master limited partnerships are publicly traded and count as what type of income?
Portfolio income
Oil and gas interest are not passive participation and are exempt from PAL rules. How are losses handled?
Are deductible from active or portfolio income without limits and without respect to AGI
To qualify as a working interest, the form of interest may not limit the taxpayer’s personal liability
Public and private charitable organizations donations
50% public (operated for charitable, religious, educational or literary purposes or the prevention of cruelty to animals and children)
Private 30% (private non operating foundations, war veteran organizations, and fraternal orders)
A taxpayer cannot deduct more than what percentage for a cash gift to a public organization?
60%
Any contribution over can be carried over for five years, or sooner ie death
Appreciated long-term gain property to 50% organizations is deductible up to 30% agi unless they elect to use basis. What is the basis amount allowed?
50% agi
It’s rarely to the individual advantage to valuate the appreciated property at basis
What are some ordinary income property? Note charitable givings of these would only be limited to basis, not fmv
Inventory
A copyright
A work of art created by taxpayer
Use-unrelated property (stock and real estate are always presumed to be use related)
Short-term capital gains property
What is Unrelated property but limited to basis meaning?
An organization may have no use for the antiques and sell them
For art objects being donated, only use FMV if the organization can use it. If they can’t use it, then you can’t use fmv. What can you do when making the charitable gift
Value it at the basis
Entertainment expenses
Are not deductible
Salary paid by a s corp is employment income subject to what?
FICA (7.65%) not self employment taxes
The excess of salary are treated as K1 investment income and are not subject to self-employment taxes
Self employment tax does not include
Dividend or interest on investments
Gains or losses from property, securities, or commodities
Real estate income or rents paid
Income or loss from a limited partner
Wages from an s corp
Distributions from an s corp k1
Self employment income does include the following
Net schedule c income
General partnership income (k-1 income)
Board of directors’ fees
Part-time earnings (1099)
Self employed taxes .1413 may claim what on 1040?
Half of self employed taxes
