Taxes Flashcards
Incorrect Q Bank: How much does the passive loss limit regarding real estate allow to be deducted? What type of income can they be deducted against? What are the phase outs?A
An exception to passive loss limits regarding real estate allows individuals to deduct up to $25,000 of losses from real estate activities against active and portfolio income. However, the annual $25,000 deduction is reduced by 50% of the taxpayer’s AGI in excess of $100,000. The deduction is entirely phased out at an AGI of $150,000.
Itemized Deductions: Medical limit and excluded items:
10%, Cosmetic, funerals, nursing home unless medical is primary reason.
Itemized Deductions: Which tax?
State, local and foreign tax
Itemized Deductions: Home interest rules
Interest on home and 1 other residence, construction and substantial improvements, 1MM max
Home equity loans can’t exceed the lesser of: $100,000 or FMV less acquisition costs.
Itemized Deductions: Investment Interest
Limited to net investment income, 2% AGI limit
Itemized Deductions: Casualty Losses value and floor
Lesser of decline in value or basis. Subject to 10% of AGI hurdle and $100 floor.
Itemized Deduction: Charitable Contribution Deduction
Intangibles, Real Property and tangible related use
FMV 30% of AGI
Basis election= 50% of AGI
Itemized Deduction: Charitable Contribution Deduction
Short term capital gain and tangible unrelated use:
Lesser of Adjusted basis or FMV 50% of AGI
Miscellaneous Itemized Deductions Subject to 2% Floor
Total all and then subtract 2% of AGI: Section 212 expenditures(asset management fees must be paid with after-tax dollars), legal fees associated with tax prep, Loss of basis in an IRA(will have basis in Roth, Traditional will have basis if nondeductible contribution is made, have to be in a loss position and take a full distribution of the account and not make a contribution back to it for that year. IRA Aggregation rule applies: Have to aggregate Traditional, SEP and SIMPLE, don’t have to aggregate these with Roth, but do have to aggregate Roth’s.
Miscellaneous Itemized Deductions NOT Subject to 2% Floor
Gambling losses: Winnings taxable, losses deductible to extent of winnings.
Unrecovered investment in an annuity contract when annuity ceases due to death(unrecovered basis)
Pro rata death taxes attributable to IRD: Example of poor planning: Single $10MM net worth all in a qualified plan, dies, owes 2-3MM in estate taxes. Estate or trust has to take 4-5MM taxable distribution from a qualified plan, pay income tax then turn around and pay estate tax.
Above the line deductions:
IRA contribution deduction,
HSA contribution,
Health Insurance premiums for self-employed, Deductible portion of self-employment tax,
Self-employed SEP, Simple, or qualified plan
Moving expenses
Alimony paid
Kiddie Tax:
Unearned income above $2,100taxed at parents rate to child.
Child is under 19 or 24 if full time student for 5 months
$1,050 unearned income standard deduction, next $1,050 taxed at child’s rate.
Standard deduction=greater of $1,050 or earned income + $350, not to exceed $6,350
EI
UE
GI
SD
TI(parent’s rate) (Child’s rate)
Section 179:
Allows to take an immediate deduction of up to $510,000 of capital expenditures or property put into service this year. Only available if total property put into service doesn’t exceed $2,030,000. If $2,040,000 is put into service then $500,000 immediate deduction is available. Can only take to extent of taxable business income.
Credits: child and dependent care credit
<13 or incapacitated spouse
Requirements: keep a home, have earned income pay expenses so they can work or attend school.
Qualifying: $3,000 ceiling for 1 child, $6,000 for 2 or more.
AGI %
0-$15,000 35%
$15,000-$43,000 34% (reduced 1% for each I $2,000 of AGI over $15,000)
$43,000-no limit 20%
Credits: Child tax credit
$1,000 if under 17 on 12/31 and dependent. Reduced by $50 for every $1,000 over limit on tax sheet
Credits: Adoption credit
$13,750 phases out
Foreign tax credit:
Credit or exclusion, after $100,000 the credit and exclusion are phased out.
Sole proprietor:
No separate entity, too much risk, red flag
General partnership
2 or more partners, can lose investment, no limited partners
Limited partnership
1 General and 1 limited(no authority over the business)
Limited Liability Partnership
Only general partners with limited liability, some states don’t recognize
Limited Liability Limited Partnership
General partners have limited liability
Taxes for partnership
Flow-through entity, an informational tax return will be filed. Form 1065 income, expenses, net income or loss for the business:
K-1 is how it is reported to partners. Something special about partnerships is that you can make special allocations of income or losses. Must be a non-tax reason for doing this. planning advantage
LLC
Limited Liability Company: Member(s) instead of partners, has flexibility to decide how it is taxed. by default it is taxed as a sole proprietorship or partnership. Sometimes called a disregarded entity(when a single member owns an LLC and chooses to be taxed as a sole proprietorship their income goes on a schedule C and it’s like the IRS is disregarding that it is even there).
If two or more own an LLC by default it is taxed as a partnership. With an election members of an LLC can be treated as an S-Corporation or a Corporation.
Corporation
Separate entity that files it’s own tax return. Double taxation is the biggest disadvantage.
Accumulated earnings tax:
If accumulated earnings grows and grows there will come appoint that the corporation will have to pay tax on it. If greater than $250,000 there is a 20% tax unless they can show a valid business reason.
S Corporation:
Taxed as a partnership
Requirements: Cannot have more than 100 shareholders,
U.S. Citizens, Resident aliens or estate or trust,
Only 1 class of stock
Income and deductions have to be reported according to the pro-rata share of ownership.
If a person owns their own Corporation, they aren’t considered:
Self employed
MEC
During life taxed as annuity, at death taxed as life insurance. A transfer for value causes the death benefit to be taxable to the beneficiary.
Exceptions to transfer for value rule:
Transfer to insured or partner of the insured
Transfer to partnership or corporation where an owner or officer
Gift
1035 Exchange Requirements
- Owner must be the same
2. Insured must be the same
Life insurance cost basis:
Premiums, Dividends, Loans
Personal Property
LOSSES ARE NOT DEDUCTIBLE
Section 1250
Realty office building, special 25% recapture capital gain rate. Depreciation is taxed as O.I.
Primary Residence:
Ownership test can be met by either spouse,
Use test must be met by both(2 out of last 5)
Job change or health are reasons for partial
3 Rental Property Scenarios: 1. Personal Residence
<15 days rented: get to exclude rental income from gross income.
Mortgage interest and taxes are deducted as itemized deductions
3 Rental Property Scenarios: 2. Rental
Rented at least 15 days per year, personal use limited to greater of 14 days or 10% of rental days.
If operated at a loss, the loss can pass through to ordinary income up to $25,000 $100,000-$150,000PO
3 Rental Property Scenarios: 3. Mixed Use
Rented for more than 14 days and personal use exceeds 14 or 10%
1031 Exchange: (Goal is to realize a gain without recognizing)
Defer the gain and transfer my basis. Like-kind: Property for productive use in trade or business or investment
Not eligible for 1031 exchange:
Inventory, stock, personal use, U.S. Real Estate for foreign Real Estate.
1031: Boot
Non-like kind portion of transaction.
Receipt of boot will result in the recognition of a gain if there is a realized gain.
The gain recognized will be the lesser of the boot received or the realized gain.
1031: 3 Questions about Boot:
- What would be the gain if the property was just sold?
- Did they receive boot?
- How much gain deferred?
1033 Exchange:
Involuntary conversion: Wanted to keep property, was forced to give it up.
If in a gain position, allows to replace and defer the gain.
2 years from the end of the year in which the gain occurred. 3 years if the government is taking.
Is it better to gift a loss or take a loss?
It is better to sell loss property and recognize the loss then to gift to a charity or a person
Related party sell:
Same as double basis, holding period starts on date of purchase.
What is the formula for Donee’s basis?
Donor’s basis+ (FMV-donor’s basis/ FMV-ann. Excl.
*gift tax paid)
1244 Small Business Stock Loss:
Rule to qualify: Business capitalized with less than $1MM in initial capitalization. If there is a loss up to $50,000S or $100,000MFJ is available to take as an ordinary loss.
Medicare Tax:
3.8% on lesser of net investment income or MAGI over threshold amount.
Netting gains and losses
Simple: If I have losses they can offset gains. If I have more losses $3,000 can go against O.I. and the rest is carried over.
Offsetting LT & ST Rule: If LT Loss and ST Loss, must use ST first
When does a Gain or loss become Long Term?
1 year and 1 day. Don’t include acquisition, do include disposition
Small Business Gains 1202:
Non Corporate investors can exclude up to 50% of realized gain. Limit: Greater of $10MM or 10 times basis
Tax preference item for AMT
Net investment income
Interest Dividends Annuities Royalties Rents Capital Gains
