Unit 13 Flashcards
What type of taxpayer can use accelerated or deferred deductions?
Cash basis only
John has AGI of 100k in current year. Sole medical expense of 7k unpaid. If he pays expense this year he will get no deduction bc only medical expense > 7.5% AGI are deductible. But next year he will make $70k. What should he do?
If he delays payment to next year he can deduct $1750. (7000 - $5250 (7.5% of 70k)) = $1750
If Mary is subject to AMT in the current year because of ISO option exercise, should she pay her state income tax this year?
Since state income tax is not deductible for AMT purposes, she should wait to pay the tax until next year.
Net investment income calculation relates to
How much investment interest is deductible.
Also to calculate imputed interest on a no/low interest loan
Beginning in 2018 gross investment income is equal to net investment income why
Due to the elimination of the investment expense deduction of advisory fees, tax preparation costs, etc.
Since 2013 individs are subject to 3.8% special medicare tax that applies to what
Lesser of net investment income or the excess of MAGI over a certain threshold
3.8% Medicare tax MAGI thresholds
MFJ: $250,000
Single/HoH: $200,000
MFS: $125,000
Spencers file a joint return with $280k MAGI including $18k of net investment income. What amount do they pay the 3.8% additional Medicare tax on?
Amount = lesser of MAGI - threshold OR net investment income so
280k - 250k = $30,000 vs $18,000 net invest income
They pay the tax on the $18k
gross investment income includes
all dividends both qualifying and nonqualifying, all capital gains both long and short, all rental income, all royalty income included in Gross investment income and thus net investment income as well as
Most significant benefit of transferring property to other family members
Wealth transfer or utilizing estate planning techniques
What has reduced the income tax benefits of intra family transfers?
The compression of tax brackets from 11-50% in 1986 to 10-37% currently
To have your child be legitimate employee they must meet 2 qualifications
-Wage must match market based rate
- child must qualify and have the skill set necessary for the job
What would be the tax advantage of employing your child?
Children have lower tax rates
Could your child be employed as a computer data analyst at your company?
As long as they have the skills and are being paid a fair wage they can have any role - the child would have to know data analysis
Biggest advantage to sale lease-back and gift lease-back
transfer wealth relatively quickly with some income tax advantages
What is the most appropriate type of property to be included in a sale lease-back or a gift lease-back?
property used in a trade or business. for example a dentist in a high tax bracket could sell or gift his office equipment to his child in lower tax bracket. Parent makes lease payments to the child which are tax deductible. Child pays income but is in a lower bracket than parent. Child can also depreciate the asset.
In a sale lease-back what is the child’s basis?
the purchase price is the child’s basis
In a gift lease-back what is the child’s basis?
the child assumes the parents basis
In a sale lease or gift lease what is the most important thing re: rates
must structure using prevailing market rates
In a sale lease-back when would 1245 recapture apply?
If the parent sold for > than their basis
Is a family limited partnership a taxable entity?
No
How is income distributed in a family limited partnership?
income is distributed to the partners in proportion to their ownership %
How do you transfer ownership to children in a family limited partnership
You would transfer shares at a significantly discounted price. Parent can maintain control as general partner with as little as 1% ownership. Would still have unlimited personal liability as GP
Family limited partnership most appropriate for income from personal service co or capital resources?
capital resources - real estate development/management. If income is from personal service corp IRS might challenge due to assignment of income doct.
Biggest advantage of installment sale
-seller can defer recognition of cap gain over several years
-prorate the gain over period of time specified in promissory note
In order for installment sale to be structured properly note must be secured how?
with underlying asset being sold. seller must receive at least 1 payment in year after asset is sold. allows seller to report gain in a year when in lower tax bracket
Self cancelling installment note works when/how
When installment seller is near death. If they die, present value of remaining installment payments are included in the deceased’s estate.
With SCIN outstanding payments not included in estate
Unrealized cap gains from remaining payments is accelerated - recognized on estate’s tax return if exceeds sellers basis
Robert has biz that is sold on July 1 of current yr for 1mil. Terms require down payment of 30% with a 7 year note at 6%. Adjusted basis in the business is $125k and was purchased 12 years ago.
What is the monthly installment payment?
N = 84 (7, 12x)
I = .5 (6, 12divide)
PV = 700,000 CHS
PMT = $10,225.99
$10,225.00
Robert has biz that is sold on July 1 of current yr for 1mil. Terms require down payment of 30% with a 7 year note at 6%. Adjusted basis in the business is $125k and was purchased 12 years ago.
What is the cashflow in year 1?
$300,000 (down payment)
N = 84 (7, 12x)
I = .5 (6, 12divide)
PV = 700,000 CHS
PMT = $10,225.99
Then 6 months of payments which were $10,225 * 6
$300,000 + $61,355.93 = 361,355.93 first year cashflow
