Taxes Flashcards
Qualifying Widow(er) Rules
If a widow(er) has lost their spouse in the current year, they are eligible to file under Married Filing Jointly (MFJ) in the year of the spouse’s death.
Then, for the following two years, if the widow(er) has provided more than half of the support to a qualifying dependent and has not remarried they can file as a Qualifying Widow(er) with a Dependent Child.
After two years, if not remarried, can file as Head of Household.
Related Use Property
Charitable Deductions
FMV = 30% of AGI
Basis = 50% of AGI
Unrelated Use Property
Charitable Deductions
Lesser of Cost Basis or FMV
Net Investment Income (NII)
Individuals, estates, and trusts are subject to a 3.8% tax on net investment income
Tax applies to the lesser of NII or the excess of modified AGI over $250k for MFJ ($200k Single)
In Matilda’s case, the total Net Investment Income (NII) is $10,500 [$5,000 (LTCGs) + $2,500 (interest) + $3,000 (dividends)]. Note, alimony is not considered NII.
For a Single tax filer, the MAGI threshold is $200,000. Matilda’s MAGI exceeds the threshold by $10,000. The NIIT applies to the lesser of NII ($10,500) or excess MAGI ($10,000); The NIIT will be applied to $10,000.
$10,000 x 0.038 = $380 of NIIT
Head of Household
Filing Status Requirements
In most cases, this status applies to taxpayers who are:
* not married
* the taxpayer must have paid more than half the cost of keeping up a home for themselves and a qualifying person
The 3 Situations the IRS looks
at closely to determine if interest
must be imputed
1. Gift Loans: provided out of love, affection, or generosity
2. Corporate Shareholder Loans: from a corporation to its shareholder
3. Compensation-Related Loans: from employer to employee
What does IRC Section 121 allow for personal residence sales?
Exclusion of gains on the sale of a personal residence for up to $250,000 (Single) or $500,000 (MFJ)
MFJ stands for Married Filing Jointly.
Does the tax code allow for recognized loss on personal residences sold at a loss?
No, the tax code does not allow any recognized loss for personal residences sold at a loss.
How often can the exclusion under IRC Section 121 be claimed?
Every two years (730 days).
If married, what is required for both spouses regarding the usage test?
Both spouses must meet the usage test.
If married, what is required for the ownership test?
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Only one spouse needs to meet the ownership test.
What happens if a taxpayer does not meet the ownership or usage test?
They may qualify for a reduced exclusion.
List some acceptable reasons for a reduced exclusion under IRC Section 121.
- Job relocation
- Employment change leaves you unable to pay your living expenses
- Qualifying for unemployment benefits
- Health issues
- Divorce or legal separation
- Birth of twins or other multiples
- Damage to home from disaster
- Condemnation or seizure of the property
- Other unforeseen circumstances
What may taxpayers who do not meet their tax obligations owe?
Tax penalties
Tax penalties can arise from various failures related to tax filing and payment.
What is the penalty for failing to file a tax return on time?
5% of unpaid taxes for each month late, up to a maximum of 25%
A minimum penalty of $510 applies if the return is more than 60 days late.
What is the negligence penalty if there is no intent to defraud?
20% of the deficiency amount
This penalty applies when the taxpayer did not intend to defraud the IRS.
What is the penalty for fraud in tax filings?
75% of the deficiency amount
This penalty is applied when the taxpayer intends to defraud the IRS.
What constitutes a frivolous return and its penalty?
$5,000 for returns with phrases like ‘Go pound sand’ written on them
This penalty applies to returns deemed frivolous.
What is the failure to pay penalty?
0.5% per month unpaid, up to a maximum of 25%
This penalty accumulates monthly until the tax is paid.
What is the understatement of liability penalty based on?
The amount of underpayment, the period it was due, and the interest rate for underpayments
Underpayment occurs when withheld taxes are less than specified thresholds.
What is the penalty for a tax preparer failing to furnish a copy of a tax return to a taxpayer?
$60 for each failure
Tax preparers have specific obligations for documentation.
What is the penalty for a tax preparer failing to sign a tax return?
$60 for each failure
Signing is a requirement for tax preparers to validate the return.
What is the penalty for a tax preparer failing to include a PTIN on a tax return?
$60 for each failure
The PTIN is necessary for tax preparers to properly identify themselves.
What is the penalty for a tax preparer failing to be diligent in determining eligibility for certain tax benefits?
$600 per failure
This includes eligibility for credits like the Additional Child Tax Credit.
True or False: If both a Failure to Pay Penalty and Failure to File Penalty are applied in the same month, the Failure to File Penalty is reduced by the amount of the Failure to Pay Penalty.
True
This results in a combined penalty of 5% for that month.
Fill in the blank: The penalty for failure to file is a minimum of _______ if the tax return is later than 60 days.
$510
This minimum penalty applies regardless of the amount owed.
What types of income are not subject to withholding?
Investment income, rents, income from self-employment, capital gains
These types of income may require quarterly estimated tax payments.
How are estimated taxes calculated and submitted?
Using vouchers on Form 1040-ES
When are the quarterly estimated tax payments due for calendar-year individuals?
April 15, June 15, September 15, January 15 of the following year
These dates correspond to the payment periods: January 1 – March 31, April 1 – May 31, June 1 – August 31, September 1 – December 31.
What is the penalty avoidance requirement for estimated quarterly payments?
25% of the lesser of:
* 90% of the current year’s tax liability
* 100% of the prior year’s tax liability if AGI was $150,000 or less
What is the estimated tax AGI threshold for no penalty if greater than $150,000?
Taxpayer must pay estimated tax payments equal to:
* 110% of the prior year’s tax, or
* 90% of the current year’s tax
What conditions lead to no penalty on estimated tax payments?
If:
* Estimated tax for the current year is less than $1,000
* Individual had no tax liability for the prior year
Fill in the blank: Estimated taxes must be submitted using _______.
Form 1040-ES
True or False: All income types are subject to withholding.
False
What is the due date for the second quarter estimated tax payment?
June 15
What is the due date for the fourth quarter estimated tax payment?
January 15 of the following year
What do tax credits do?
Reduce the tax liability on a dollar-to-dollar basis
What are refundable credits?
Credits that offset a taxpayer’s tax liability, with excess refunded to the taxpayer
What are nonrefundable credits?
Credits that may only be used to offset a taxpayer’s tax liability
Name an example of a refundable credit
Earned Income Tax Credit
Other examples include Additional Child Tax Credit, American Opportunity Credit, Premium Tax Credit
Name an example of a nonrefundable credit
Child and Dependent Care Credit
Other examples include Child Tax Credit, Retirement Savings Contribution Credit, Lifetime Learning Credit
Who benefits more from tax deductions?
High-income taxpayers
Who benefits equally from tax credits?
All taxpayers regardless of their marginal tax rate
What are the 4 Refundable Tax Credits?
- Earned Income Credit
- Additional Child Tax Credit
- American Opportunity Credit
- Premium Tax Credit
What are the 4 Nonrefundable Tax Credits?
- Child and Dependent Care Credit
- Child Tax Credit
- Retirement Savings Contribution Credit
- Lifetime Learning Credit
Maximum Annual Charitable Deductions
Cash Gifts - What % is Deductable Public Charity vs. Private Foundation?
Cash Gifts
Public Charity = 60% of AGI
Private Foundation = 30 % of AGI
Maximum Annual Charitable Deductions
LTCGs w/FMV Election - What % is Deductable Public Charity vs. Private Foundation?
LTCGs w/FMV Election
Public Charity = 30% of AGI
Private Foundation = 20 % of AGI
Maximum Annual Charitable Deductions
LTCGs w/Basis Election - What % is Deductable Public Charity vs. Private Foundation?
LTCGs w/Basis Election
Public Charity = 50% of AGI
Private Foundation = 30 % of AGI
Maximum Annual Charitable Deductions
Ordinary Income Property (STCGs, Art, Invesntory - What % is Deductable Public Charity vs. Private Foundation?
Ordinary Income Property (STCGs, Art, Invesntory
Public Charity = 50% of AGI
Private Foundation = 30 % of AGI
Public Charity Deductions in Order of Category:
- Cash
- LTCGs FMV
- LTCGs Basis
- Ordinary Income (STCGs, Art, Inventory)
- Cash = 60%
- LTCGs FMV = 30%
- LTCGs Basis = 50%
- Ordinary Income (STCGs, Art, Inventory) = 50%
Private Charity Deductions in Order of Category:
- Cash
- LTCGs FMV
- LTCGs Basis
- Ordinary Income (STCGs, Art, Inventory)
- Cash = 30%
- LTCGs FMV = 20%
- LTCGs Basis = 30%
- Ordinary Income (STCGs, Art, Inventory) = 30%
What is the Medicare tax for a self-employed individual filing Single with $300,000 of net earnings from self-employment?
$8,727
For a self-employed individual, the Medicare tax is 2.9%, payable on 92.35% of net earnings from self-employment without a maximum cap. In addition, a 0.9% Additional Medicare Surtax applies to 92.35% of net earnings from self-employment on the amounts for Single filers exceeding $200,000.
Step 1: Net Earnings from SE x 0.9235
$300,000 x 0.9235 = $277,050
Step 2: Calculate Medicare Tax
$277,050 x 0.029 = $8,034
Step 3: Calculate Additional Medicare Surtax
The threshold for Single filers: $200,000
SE Earnings (post-0.9325): $277,050
Earnings to which the 0.9% tax will apply: $277,050 - $200,000 = $77,050 x 0.009 = $693
Total Medicare Taxes = Step 2 result + Step 3 result = $8,034 + $693 = $8,727
Schedule K-1 is used to document each of the following four items:
The partnership uses Schedule K-1 to report a partner’s share of the partnership’s income, deductions, credits, and other items.
The partnership is not responsible for keeping the information needed to figure out the basis of one’s partnership interest. Although the partnership does provide an analysis of the changes to a partner’s capital account in item L of Schedule K-1, that information is based on the partnership’s books and records and cannot be used to figure one’s basis.
How much Education Reimbursements are allowed as tax exlusions and not taxable income?
$5,250
Education Assistance Program
Different than Scholarships, which are 100% tax exclusions
Taxable Estate + ____________ = Tentative Tax Base for Federal estate tax.
Taxable Estate + Taxable Gifts = Tentative Tax Base for Federal estate tax.
A business can provide up to (BLANK) in childcare assistance to each employee and exclude it from their taxable wages reported on Form W-2.
A business can provide up to $5,000 in childcare assistance to each employee and exclude it from their taxable wages reported on Form W-2.
Identify the strategy that a financial planner can implement if a taxpayer is subject to AMT in the current tax year:
The optimal strategy would be to:
- accelerate income into the AMT year or
- defer tax deductions to a regular tax year until the AMT liability equals the regular liability.
Josh is an unmarried U.S. Resident. He would meet the reporting threshold only if the total value of his specified foreign financial assets is more than (BLANK) on the last day of the tax year or more than (BLANK) at any time during the tax year.
As a single-filing U.S. Resident, Josh would meet the reporting threshold only if the total value of his specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
How much is the Standard Deduction for Minors? (Individuals who can be claimed as a dependent)
The standard deduction for an individual who can be claimed as a dependent on another person’s tax return is generally limited to the larger of:
$1,300, or
The individual’s earned income plus $450, but not more than the regular standard deduction (generally $14,600 in 2024). (Therefore, the $14,600 serves as a ceiling)
What are the two requirement for Active Participation status in rental real estate?
Active participation requires that
(1) the taxpayer owns at least 10% of the property and
(2) has substantial involvement in managing the property.
For a Viatical Settlement, Terminally Ill refers to an individual who has been certified by a physician as having an illness or condition that can reasonable be expected to result in death within how long?
24 months of the date of certification
However, if the individual is only chronically ill, the benefits will only be excluded from income to the extent they are used for L/T care services.
Recent federal legislation makes all proceeds of a viatical settlement income tax-free for terminally ill individuals, irrespective of subsequent use.
For a Viatical Settlement, Chronically Ill refers to a person who is unable to perform at least two activities of daily living (e.g., eating, bathing, etc.) for a period of at least?
90 Days
A viatical settlement provider must grant a **(BLANK) ** cooling-off period during which the viator can rescind the viatical agreement.
A viatical settlement provider must grant a 15-day cooling-off period during which the viator can rescind the viatical agreement.
In a like-kind exchange the recognized gain is the lesser of:
In a like-kind exchange the recognized gain is the lesser of:
- realized gain, or
- net boot received.
In general, investment income for Net Investment Income (NII) includes, but is not limited to:
In general, investment income includes, but is not limited to:
- interest,
- dividends,
- capital gains,
- rental and royalty income,
- non-qualified annuities,
- income from businesses involved in trading of financial instruments or commodities, and
- businesses that are passive activities to the taxpayer
In general, investment income for Net Investment Income (NII) DOES NOT include:
Items that are NOT investment income:
- wages,
- unemployment compensation,
- operating income from a nonpassive business,
- Social Security Benefits,
- alimony,
- tax-exempt interest,
- self-employment income,
- distributions from certain Qualified Plans, and
- tax-exempt interest on governmental obligations and related expenses
Justine purchased a computer for her online artisan business 6 months ago for $7,000. Since beginning to use the computer, its value has been depreciated to $4,500. Currently, Justine is experiencing cash flow issues and another business owner offered to purchase the computer for $1,000. Select the CORRECT tax treatment if Justine were to sell the computer.
The computer is ‘personalty’ that is being used in a trade or business to produce income. Therefore, it is considered Section 1245 property.
The computer’s adjusted basis is $4,500 and its original cost basis was $7,000. Since the computer was sold at $1,000, there is a $3,500 loss. Since the computer was used in a business for the production of income, it is under the Section 1231 umbrella and, as a result, any losses below the depreciated basis will be treated as ordinary losses = $3,500 ordinary loss
The termination by death, the lapse of time, release of power, or otherwise of an interest in property held in a trust resulting in skip persons holding all the interests in the trust is considered a ‘taxable termination’ for Generation-Skipping Transfer Tax (GSTT) purposes.
If this occurs who is responsible for paying the GSTT?
The GSTT is required to be paid by trustees on taxable terminations.
The federal estate tax is calculated in five steps: What are they?
- Determining the value of the gross estate.
- Arriving at the adjusted gross estate.
- Determining the taxable estate.
- Calculating the federal estate tax payable before credits.
- Applying the allowable credits to arrive at the net federal estate tax.
Net Investment Income Tax (NIIT) – 3.8%: Individuals will owe the tax if they have Net Investment Income AND have modified adjusted gross income over the following thresholds:
The Net Investment Income Tax is what %?
3.8%
NII = 3 letters, 8 is great for making a lot of money
The default IRS method for determining cost basis is what?
The default IRS method for determining cost basis is first-in, first-out (FIFO).
When personal loans are greater than $10,000 and up to and including $100,000, the imputed interest is?
If the borrower’s net investment income is $1,000 or less, imputed income?
When loans are greater than $10,000 and up to and including $100,000, the imputed interest is the lesser of the AFR or the borrower’s net investment income.
If the borrower’s net investment income is $1,000 or less, imputed income will not apply.
A C Corporation income is taxed once or twice?
C Corporation income is taxed twice, at the entity level and again at the shareholder level.
Sole Proprietorships, Limited Liability Companies (LLCs), and Partnerships all have one level of income tax.
The basic needs that a Special Needs Trust can cover include what?
The basic needs that a Special Needs Trust can cover include food, shelter, and clothing.
Medical care is categorized as a supplementary need.
The standard deduction amount depends on which 3 facts?
The standard deduction amount depends on the
1. Taxpayer’s filing status
2. Dependent status
3. And whether the taxpayer is blind or at least 65
NOT THEIR GROSS INCOME
Are forgiven student loans from the Public Service Loan Forgiveness (PSLF) program taxed as income at the federal level?
NO, forgiven student loans from the Public Service Loan Forgiveness (PSLF) program are not taxable income at the federal level.
Exclusion
The IRS is authorized to impute an interest charge if the taxpayer charges less than?
The IRS is authorized to impute an interest charge if the taxpayer charges less than an adequate rate of interest.
For separation agreements finalized after ? WHAT YEAR ?, alimony paid is not deductible and alimony received is not considered gross income to the recipient.
For separation agreements finalized after 2018, alimony paid is not deductible and alimony received is not considered gross income to the recipient.
A taxpayer can only use passive losses to the extent they have passive income. Any passive losses in excess of passive income are (BLANK).
A taxpayer can only use passive losses to the extent they have passive income. Any passive losses in excess of passive income are suspended.
What are the 4 common refundable tax credits?
EAPA
R-EAPA!
- Earned Income Credit
- American Opportunity Credit
- Premium Tax Credit
- Additional Child Tax Credit
What are the 4 common nonrefundable tax credits?
CCRL
Carnival Cruises Royal Lines - Doesn’t give refunds
- Child and Dependent Care Credit
- Child Tax Credit
- Retirement Savings Contribution Credit
- Lifetime Learning Credit
If a taxpayer is subject to AMT in the current tax year, what are the 2 strategies a planner can implement?
- Accelerate income into the AMT year to increase Regular AGI and pay less AMT at 26% or 28% rates
- Defer tax deductions to the next regular tax year to increase Regular Taxable Income in AMT year, offsetting AMT
The optimal strategy would be to do the 2 strategies above until the AMT liability equals th regular tax liability.
Is the bargain element taxable for ISOs?
(the difference between the exercise price and the fair market value of the stock at exercise)
No, the bargain element (the difference between the exercise price and the fair market value of the stock at exercise) for Incentive Stock Options (ISOs) is not immediately taxable for regular income tax purposes when the option is exercised. However, it may be subject to the Alternative Minimum Tax (AMT) in the year of exercise.
Here’s how it works:
Regular Tax Treatment:
No income tax at the time of exercise.
If you hold the stock for at least two years from the grant date and one year from the exercise date, the entire gain (sale price - exercise price) is taxed as a long-term capital gain when you sell the stock.
If you sell before meeting the holding period, it becomes a disqualifying disposition, and the bargain element is taxed as ordinary income in the year of sale.
Alternative Minimum Tax (AMT):
The bargain element is included in AMT income in the year of exercise.
If AMT applies, you may owe tax even though you haven’t sold the stock yet.
You might be able to recover some AMT paid through an AMT credit in later years.
The Kiddie Tax applies to who?
The Kiddie Tax applies to children under age 19 or full-time students under age 24.
The disabled child receives which of the following from a Special Needs Trust?
Special needs trusts preserve eligibility for government benefits and pay for extra services that are not covered by public assistance programs. The trust disburses discretionary payments to the disabled child.
