Taxes Flashcards
Hobby loss rules?
Income is reportable
Any activity generating net income profit in three out of five consecutive years is a business not a hobby
Five basic categories of taxpayers who may be required to file
Individuals ( U.S. Citizens.) make at least $400 a year.
Dependence
Children under age 24 ( Kiddie Tax)
Self-employed
Aliens
Penalties for a frivolous return
$5000
What is the penalty for negligence?
Accuracy related
Penalty is 20% of the underpayment attributed to the negligence
What is the penalty for fraud?
Intent to cheat
Penalty is 75% of the portion of a tax underpayment attributable to fraud
What is the penalty for failure to pay?
.5% per month of the tax due each month with a maximum of 25%
What is the penalty for failure to file?
5% of the tax due each month with a maximum of 25%
Best practice is to file
What is the estimated tax that should be paid to avoid the penalty for 2024?
Pay the lesser of the following
- 90% of current years tax liability or.
- 100% of the prior years liability. ( or 110% if the prior years adjusted gross income exceeded $150,000. )
What are exclusions from gross income?
Gifts
Inheritances
Child support
Municipal bond interest
Worker’s Compensation payments
Compensatory damages
What is the tax calculation?
What is the tax calculation?
Fringe benefits
Tax-free
Health premiums
Company car business purposes
Commuter highway vehicle and transit pass $315 a month
$5000 dependent care
Employer provided education assistance, 5250 per year
Parking spots subsidize parking $315 a month
Discount on company products cannot exceed employers, gross profit percentage
Occasional overtime, meal cab, fair Theatre or sporting event tickets no season tickets
Discount on services limited to 20%
Fringe benefits that are taxable
Health insurance premiums for self-employed partners, and more than 2% owners of S corporations
Hundred percent deductible as an adjustment to income
Does not include disability insurance premiums
Doesn’t include all types of health insurance programs like medical, dental, and long-term care
Insurance premiums your employer pays on group life policy in excess of $50,000 of death benefit if the plan is non-discriminatory
AGI is total income less adjustments. What are the main adjustments or deductions from income?
IRA contributions
Student loan interest up to $2500
Koegh or SEP
Self-employment tax
Certain alimony paid, if divorce is settled before December 31, 2018
100% self-employment health insurance
Moving expenses, active military only
Penalty for early withdrawal of savings
Health savings account HSA
What is modified adjusted gross income MAGI?
It is AGI plus tax, exempt interest, non-taxable, Social Security income, student loan, interest, and other items
What are the extra standard deductions that are added to the standard deduction?
Age 65 or older and or blind is $1550 and it is $1950 for single blindness has no age requirement
What are the itemized deductions on schedule a
Medical dental and qualified, long-term care, expenses, greater than 7 1/2% of AGI
State and local sales tax up a limit
Personal property tax up to a limit
Real estate taxes up to a limit
Mortgage insurance qualified residence less than $100,000 of AGI
Home mortgage interest
Charitable gifts
Investment interest
Casualty losses must be from a federally declared disaster area
Note: state, local, sales, real estate and personal property taxes are limited to $10,000
What are the qualified residents interest rules?
Only interest paid on the first $750,000 is deductible. Must itemize deductions on schedule a.
Includes principal mortgage and a home equity loan
Interest on a primary mortgage up to 1 million taken out before 12/15/17 is grandfathered
The maximum deduction allowed for interest incurred on investment indebtedness is…
Limited to the taxpayers net investment income
What is the calculation for a casualty loss deduction?
Step 1: use the LESSOR of basis or FMV
Step 2: subtract any insurance coverage
Step 3: subtract $100 (Floor)
Step 4: subtract 10% of AGI
Can the deduction for an office in a home create a loss?
No
For any exam questions related to personal exemptions the answer is what?
Zero
Employers are required to withhold and report Medicare tax on what for all wages over 200,000
And what Medicare tax are they to withhold for less than 200,000 of wages
2.35% all wages over $200000
1.45% all wages under $200,000
Under the kitty tax rules if the child has earned income greater than the standard deduction of $1300 what is the standard deduction?
If a child has earned income, that is less than the standard deduction for a single individual that is the child’s earned income plus $450
Self-employment income doesn’t include what?
Dividends or interest on investments
Gains or deductions for losses from property, securities, or commodities
Real estate income or rent paid
Distributive share of income or loss of a limited partner
Wages from an S corporation
Distributions (K1 income) from an S Corp.
Self-employment income does not include what?
Net schedule C income
General partnership income (K-1)
Board of directors fees
Part-time earnings (1099)
Any distribution from an S Corp. is not self-employed income it is either what?
Salary or investment income
Self-employed persons pay their own Social Security and Medicare taxes as part of their income tax. It is based off of self-employment income. How do you calculate it?
Calculate the total self-employment income then multiply by .1413 and round up
How is self-employment tax paid and how is it treated on the on the form 1040?
It is added to the taxpayers income tax liability than half is subtracted on front of the form 1040 and it is an above the line deduction
What is the credit for child and dependent care expenses?
Up until age 13
Credit is a percentage of expenses for care of a dependent
Limited to $3000 for one dependent or $6000 for two or more dependence
Depending on income a credit percentage of 20% applies
Example: $8000 in childcare for two children. Max is out the $6000. So that is $6000 x 20% =$1,200.00 that can become claimed
If had been $1000 then they do not hit the limit so it $1000 x 20% =$200.00 can be claimed
What is the child tax credit?
$2000 for each qualifying child under age 17
Reduced by $50 for each $1000 above $400,000 MAGI MFJ and $200,000 MAGI unmarried
Up to $1700 per child is a refundable tax credit
Also a $500 family credit for each dependent who is not a qualifying child such as 17 or older, elderly parents, a disabled adult, child, etc., presuming that the taxpayer provides more than 50% of their support same phase out thresholds apply
If a company maintains inventory, what accounting method cash or accrual, should it use?
Accrual
Can an S corporation adjust future years income due to prior years net operating losses?
No, because corporations cannot utilize net operating losses because they already pass through annual losses
What is a sole proprietorship and what are its advantages and disadvantages?
Distinguishable from the owners personal affairs for both legal and tax purposes
Advantages:
Availability of retirement plans (Koegh, Sep)
100% of medical insurance premiums deductible
No legal formalities
Conduit of income or losses to owner files on schedule C
Disadvantages:
Unlimited liability
Business dies with owner
Capital structure depends on the owner’s personal resources
Advantages and disadvantages of a partnership (general partnership)
Advantages: availability of retirement plans (Koegh, SEP)
100% medical insurance premiums deductible
Partnership agreement can be oral, written preferable
Conduit of income or losses to owner
Disadvantage:
Unlimited personal liability
Dissolves upon the death, bankruptcy, or incapacity of a partner
Capital structure depends on resources of partners
What is the tax deduction for certain taxpayers of income from partnerships, sole proprietorship and other pass through businesses the taxpayer must have qualified business income QBI
May qualify to deduct up to 20% of their qualified business income QBI
Depending on what tier they are in
They may also offset losses from one pass through business to another pass-through business any losses that are not used can be carried forward to the next year
What are the three tears for allowing the 20% deduction on their pass-through income?
Tier one:
Single taxpayers making less than $191,950
Joint filers making less than $383,900 in total taxable income
Does not matter whether their business is a personal service firm or not
Tier 2:
Single filers with more than $241,950 or couples more than $483,900 in taxable income no deduction it pass through business is a personal service firm if they own any other pastor business they still get a deduction will be limited
Tier 3:
Incomes between those thresholds of one and two are eligible for a partial tax benefit, no matter the nature of their business phases out for personal service firms
Limited liability company can be classified as either what
Corporation or a partnership
What is a C corporation and what is its advantages and disadvantages?
Functions as a separate entity. Distributes after tax earnings to its owners distribution income is tax a second time at the owner level double taxation.
Advantages:
Separate tax entity, sale of stock to an unlimited number of investors, unlimited liability, continuity of life, dividend received deduction (50% rule)
Disadvantages:
Corporate formalities, dividends paid (after tax), accumulated earnings beyond certain limits, subject to double taxation
What is the dividend received deduction for 50% rule for corporations?
US corporations receive deductions for dividends received
Owns 20% or less of distributing corporation. 50% of dividends received excluded from income of corporation
Ownership between 20% and 80%: 65% exclusion of dividends
Greater than 80% ownership: 100% exclusion of dividends
A closely held C corporation that is owned by certain individuals can be considered a personal service corporation (PSC). How is any income retained by a PSC text?
What businesses are classified as PSCs?
Any retained income is taxed at a flat 21%
Businesses classified as a PSC: HALE
H- heath (doctors dentist)
A- accounting, architectural, actors
L- law
E- engineering
What are subchapter S corporations?
Function as a conduit for items of income, deductions, and tax credits must be unanimously, elected by a shareholders
Files form 1120 S
What are the eligibility for an S corporation?
Limited to 100 shareholders
Single class of outstanding common stock can be voting or non-voting (no preferred)
Domestic corporation
Only individuals, states, certain trust, maybe shareholders
US citizens or permanent resident aliens
What are advantages and disadvantages of S corporations?
Advantages:
limited liability
conduit of income or loss, losses limited up to bases
basis equals cash plus direct loans made by the shareholder to the corporation (note: bank loans are not included in the S corporation’s owners basis, unlike a partnership in which they are)
Ability of an owner to take excessive compensation and not have it classified as dividends
Disadvantages:
Corporate formalities
Sale of stock Limited by eligibility standards
What is a limited partnership?
At least one general partner
Limited partners are liable for partnership debt only to extent of their capital contributions as long as the limited partners role is passive
What type of interest is deductible on a business owner’s personal tax return?
Business investment interest
What is the corporate accumulated earnings tax?
Can generally accumulate $250,000, $150,000 for personal service corporate tax anything over that is taxed at 20% unless you can establish a bona fide business need
The tax is imposed, in addition to the regular corporate tax
What tax forms must an estate file and what deductions are they allowed?
May file either form 1041 or 706
Deduction should be claimed on the return that provides the most tax advantage
The deductions are administrative, cost accounting, and attorney fees, and expenses of preparing the estate return
What tax form does a trust file on?
A 1041
What is the difference between an unfunded ILIT and a funded ILIT?
Unfunded ILIT
Yearly gift to the trust pays the life insurance premium
Funded ILIT
Investment income from investments in the trust, pays the insurance premium taxable to the grantor, all investment income earned above the premium is taxed to the trust
What is a simple trust?
a conduit for forwarding income to the beneficiaries
Beneficiaries pay taxes on it at their own marginal tax brackets
Normally no distribution of corpus
No charitable gifts
What is a complex trust?
Income must or may be accumulated
Income accumulated is taxed to the trust
Income distributed as tax to the beneficiaries
Corpus can be distributed, but does not have to be
They can make charitable gifts
Revocable living trust are also known as as what
Inter vivos or grantor trusts
Cost basis is increased by what and what is not included in cost basis?
Basis is increased by:
Legal fees, commissions, sales tax, freight, and improvements
Basis is not increased by:
Repairs, real estate taxes, or normal business expenses
Depreciation does what to cost basis?
It reduces the basis of the asset
If the FMV on the date of the gift is less than the donors adjusted basis in the gift, then what occurs?
Loss is measured using the fair market value on the date of the gift
Gain is measured using the donor’s basis
Sales price of the gift is in between the donors basis and the FMV on the date of the gift, no gain or loss is recognized
Basis of inherited property (community, and non-community)
Community property states:
Marital property enjoys a full step up in basis, if at least half of the whole property is included in the deceased spouses gross estate
Non-community property states (common law states):
Property only gets a half step up in basis
What is the modified accelerated cost recovery system (MACRS)?
Applies to all recovery property placed in service after 1986
Straight line is an option but a half year convention must be used
Requires mid Quarter convention if greater than 40% of the depreciable property is put into service by the business during the fourth quarter of its tax year
Does not apply to land or intangibles
What are the property classes for MACRS?
5 - year (1245 property):
Computers, autos, and light duty trucks
7 year (1245 property):
Office furniture and fixtures
27 1/2 year (1250 property):
Residential rental property
39 year (1250 property):
Non-residential real property
What are the depreciation rate on the MACRS tables?
What is the 179 deduction?
Business may expense up to $1,220,000 of qualifying property and the year of acquisition
Qualifying property is generally tangible personal property (1245) purchased for use in a trade or business.
Maximum cost that can be annually expensed is reduced dollar for dollar by the cost of the qualifying property that exceeds 3,050,000.
Cannot create a loss with section 179 but can be carried over to the next year
Making a section 179 election small firms can more easily deduct the cost of new assets and avoid the burden of maintaining the depreciation schedules
In order to qualify for a like kind property exchange what conditions must be met?
Exchange properties must be like kind
Taxpayer must use the acquired property in trade or business
A like kind exchange calculation on the exam no matter how many numbers are given. He’s only the following three….
FMV of property received
Adjusted basis of property given up
Boot
In a like kind exchange what are the three calculations that will be asked of you to do?
Calculation #1:
Realized again
Total value received (FMV of property acquired + Boot) minus adjusted basis of property (Amount will be provided)
Calculation #2
Recognized gain
Lesser of realized, gain or boot received (if no boot is received recognized gain is zero)
Calculation #3
Substitution basis
FMV of property required less [ realize gain minus recognized gain]
Short term gains are taxed at what?
Long-term collectible gains are taxed at what?
Real property (1250) long-term gains our tax at what?
Short-term gains are taxed at ordinary income rates
Long-term collectible gains are subject to a tax rate of 28%
Real property are subject to depreciation recapture rate when property is sold, and that has a 25%
What happens to accumulated losses at the year of death?
$3000 can be deducted on the estates 1041 tax return however any unused carry forward losses or lost after the year of death
What is the net investment income tax that applies to certain high earners?
3.8% tax is the lesser of the following their net investment income, or the amount by which they’re modified gross income extends beyond their specific income threshold
MFJ - $250,000
Single - $200,000
What are the three methods to determine cost basis with mutual funds and other securities?
First and first out
Average cost
Specific identification; this allows the investor to maximize gain, neutralize gain, or maximize loss
What is the maximum amount of realize gain from the sale of a residence that may be excluded from gross income, and what are the requirements?
$500,000 MFJ
$250,000 single
Must have lived in the residence two out of five year period
Don’t meet the minimum two year residency requirement qualify for a partial exclusion
(# of months / 24)
No deduction for loss
Both spouses must have lived in the house for two of five years , if not both are treated separately
After the death of one spouse, you have two years to sell the home and claim the $500,000 deduction
Can a taxpayer claim the sale of residence (code section 121) exclusion, and the 1031 like kind exchange?
Yes, if the requirements are satisfied
What is the difference between recognized gain and realized gain?
Recognized gain is what you report to the IRS and our tax on
Realized gain is the amount of gain that has been realized before deductions, etc.
When a business purchases equipment and takes depreciation (cost, recovery, deduction, or CRD), the CRD‘s offset the businesses, ordinary income when the business sells the equipment for a gain the business must do the following…
- Look back and recapture the lesser of the total CRD taken or the gain realized as 1245 again (ordinary income)
- Recover any excess gain as 1230 one game (capital gain) if total CRD taken are lower than the gain the excess is the gain minus the CRD‘s if the gain is less than the CRD‘s, there is no 1231 recovery
Difference between the gain and the CRD is the 1231 gain
No, 1231 gain when the gain is less than the CRD
When the amount realized is less than the adjusted basis, the resulting loss is treated as an ordinary loss
What is installment sale recapture?
Installment sale of tangible personal property, ALL depreciation recapture must be reported as income in the year of disposition serious disadvantage
Taxpayer recaptures up to the amount of cost recovery, deduction client up to the gain realized ( $15,000 CRD but $3000 gain…only $3000 of the CRD is realized)
Any access gain remains it is subject to installment sales rules
Charitable bargain sales
Charitable deduction is available, basis of the property sold to the charity, for less than fair market value must be allocated between the portion of the property sold, and the portion given to charity based on the fair market value of each portion
Proceeds / FMV x basis = adjusted basis
Proceeds minus adjusted basis = taxable gain
A 1031 exchange is only available for what type of property?
Real property not available for equipment.
Real property refers to land at any structures permanently attached to it
AMT exposure is likely to be what kind of households?
High income households, claiming large, less than typical tax breaks such as tax exempt interest on private activity bonds
What is the AMT calculation?
Post deduction 1040 income if itemizing or AGI if electing the standard deduction
Add back any item that was deductible for the 1040 but not for AMT
Add preference items
Result equals AMT base
Subtract exemptions
Result equal AMTI (alternative minimum taxable income)
Then calculate AMT (26% and 28% tax rates)
What are AMT preference items?
IPOD
P - private activity municipal bond
O & I - oil and gas percentage depletion. Excess Intangible trailing cost.
Depreciation (ACRS / MACRS) but not straight line
What are not allowable deductions for AMT? (add back items)
Property, state, city, income, and sales taxes limited to $10,000 a year
Incentive stock options, bargain element (ISO)
When is an AMT payment required?
Difference between the regular tax and the alternative minimum tax (if the alternative minimum tax is more than the regular tax)
Strategies for increasing regular income tax liability to potentially avoid AMT?
Accelerating the receipt of taxable income (more taxable income)
Deferring the exercise of an incentive stock option ISO to a later date or disqualifying the ISO so it becomes a nonqualified stock option (income taxable) note: these are not regular options
Purchasing public purpose, municipal bonds instead of private activity bonds
How are Passive losses treated?
Off set passive income in non publicly traded passive activities, sold and realize the loss
All losses are suspended until offset by income or sold
Suspended losses are fully deductible in the year of disposition
Taxpayers may deduct up to what amount for losses from a real estate activity?
$25,000 fee out for taxpayers with AGIs between 100,000 and 150,000 on a two for one basis
How many days can you rent a personal residence and what is the tax treatment of the gross income?
Less than 15 days and is excluded from gross income, but no deductions attributable to rental use
A home is treated as a residence in any tax year in which the owner uses the unit for a personal purposes, exceeds the longer of what
Longer of 14 days or 10% of the period of rental use
If treated as a residence instead of a business expenses related to the property may not be deducted as a business expense
What is the low income housing credit and how do you calculate it?
Generate a deduction equivalent tax credit up to $25,000 with no phase out
To calculate determine the maximum marginal tax bracket then multiply $25,000 times the tax bracket for the credit
Oil and gas working interest are not passive participation and thus are exempted from passive activity, loss rules, losses from oil and gas working interest for which taxpayer typically a general partner is personally liable are deductible against what
Active or portfolio income without limits and out without respect to the taxpayers AGI
Tax filing status for a married widow?
Taxable year in which a married person dies, widow or widow can file a joint return with the deceased individual
If maintains a home for a dependent child, the surviving spouse for two taxable years following the year death can use married filing jointly rates
For divorces after December 31, 2018 alimony payments are no longer what
Deductible, nor must the recipient declare the amounts as taxable income
If a pre-2019 divorce is not modified the old rules ply, the payer can deduct the payments and the recipient must pay tax on them. What are the requirements that must be met?
Finalized before December 31, 2018
Cannot file a joint tax return or live together
Made in cash
Received by or for the benefit of the payee spouse , not child support
Cannot extend beyond the death of the recipient spouse
What are the recapture rules for alimony?
Excess front loading of alimony, alimony decreases too fast, really is disguised as a proper settlement and will be recaptured as ordinary income
Take the total of the first two years of alimony and subtract $37,500
If you have a third year alimony payment double the third year alimony payment then add it to the constant 37,500 only use the first two years and subtract the total constant of $37,500 plus the double third year payment that was added to the constant
The internal revenue code treats debt relief, how?
Taxpayer received income becomes phantom income. The bank will charge the company the amount of right off as income and write the loss off.
What are all the deduction limits as a percentage of AGI?
Public charities are 50% organizations
Private charities are 30% organization
60% if a cash donation
Long-term capital gain property to a 50% organization is 30% if you use fair market value or 50% if you use basis. No basis is rarely advantageous to appreciated property.
Guess of short term capital gains property is limited to the donated properties basis and 50% of AGI
What happens to unused charitable deductions?
Five year carryover and the year of contribution the actual deduction window was six years
Property that is considered ordinary, income, donated property, property, or gifted include?
Inventory, a copyright, a work of art created by the taxpayer, short term, capital gains, and use unrelated property
Must use basis and are 50% of AGI
Half of self employment tax is an above or below the line deduction from AGI?
Above the line
Are entertainment cost for prospective clients a deductible expense
Entertainment expenses are no longer deductible
