Unit 21 Flashcards
Tax Considerations
Alimony and Child Support
Alimony counts towards income for receiving spouse and deductions for paying spouse.
Child Support does not count towards income or as a deduction
Portfolio income
Taxed in the year it’s earned
Dividends
For test purposes, assume the dividend is qualified.
If the dividend qualifies, the tax rate is generally a maximum of 15% (this is a reduced rate)
If not qualified, it’s taxed at ordinary income rate.
Income from bond funds are not qualified and taxed at ordinary income (except muni bond funds)
Marginal Tax Rate
Highest paid rate on income for the last dollar received. (Tax brackets are like thresholds that make an earner pay more at each one)
Some factors for determining federal income tax:
Age
Citizenship
State of residence
Income on debt securities taxed how? (Except munis) of
Always at ordinary income rates (except munis)
U.S. Treasuries are exempt from state tax, not federal
Municipal bonds taxation
Munis can be exempt from state and federal tax.
Cap gains are always taxed though (sold for price higher than bought)
TIPS Taxation
Exempt from state and local tax (bc treasury securities), but annual interest is taxed federally as ordinary income and annual increase to the principal is taxed as well
Foreign security and ADR dividend and interest tax
Withholding tax of 15%. Can get tax credits. Taxed at all levels (state and federal)
Form 1099
Shows income and realized gains from investments for taxes.
Interest on interest plan
Like a savings account in a bank that compounds quarterly. Interest on interest.
DRIPS
Dividend reinvest plan
Taxed in year realized
Cost basis adjusted by dividend increase, so income is not taxed again. (KNOW THIS FOR COMPUTATIONS)
Regardless of fluctuations in the market, investors participating in the DRIP program will always have more shares in their account at the end of the year than at the beginning
Margin interest
Tax deductible
Not tax deductible on munis bc they’re already tax free
Effective tax rate
Overall tax rate you pay
Long term capital gains rate
15%
Capital losses
Capital losses that exceed capital gains can offset earned income up to $3000/year. Capital losses can be carried forward
Tax-Swapping
Although wash sales are not allowed for stocks, an investor can sell a 2035 bond at a loss and purchase a 2036 bond
Sale of primary residence tax benefits
As long as it had been lived in for 2 years…
$250k excluded from capital gains for a single person;
$500k excluded for married
AMT
To determine if you owe AMT, compute your regular taxes, the compute the AMT. You pay the higher amount.
Items that must be added back in for the purpose of AMT are called tax preference items
Life insurance taxation
Beneficiary proceeds are not taxed
Premiums are typically non-deductible. Generally exempts the beneficiary from taxation.
Whoever holds “incidents of ownership” is the one who owns the policy, or has those powers. Best to have someone else own the policy so proceeds aren’t taxed. Some people use ILITs for this.
Policy surrender of life insurance
Any gains are taxed at ordinary income
Life Insurance withdrawals
FIFO is used (unlike an annuity that uses LIFO) so no tax consequences until excess above cost basis is received.
Taxation of social security. OASDI (official name of SS)
Taxed bracket of SS income is based on base income (provisional income)
Carryover basis
How gift tax keeps cost basis and holding period
Step up provision
Inherited securities step up the basis.
Does not apply to annuities
Trust tax rates
Can get expensive if not handled properly
Taxation is based on what is earned and what is retained
If the trust estate has income it must be reported on IRS form 1041
Trust taxation Other
DNIt
DNI - distributable net income.
Taxable income to the trust or estate.
Commissions and fees subtracted from DNI. Cap gains are reinvested.
Portability of unused estate tax
Each living spouse has a tax exemption of $11.4MM.
Because of the unlimited marital deduction, if a spouse were to leave their estate to another spouse, they would not have to use any of their limit of $11.4MM. And the surviving spouse could pass on $22.8MM worth of her estate tax free.
Lifetime gifts eat into the $11.4MM lifetime limit.
Generation skipping trusts (GST)
Skips one generation (and therefore one more level) of taxation
Gross Estate
Adjustable Gross Estate (AGE)
Taxable Estate
Federal tax is calculated using formula of Gross estate.
Certain expenses are added to come to the Adjusted Gross Estate. (Ex. Funeral expenses, charitable contributions, debt of deceased)
Once deductions are made, unlimited marital and charitable deductions are made to come to Taxable Estate.
Alternative valuation date
IRS may use a value of 6 months after the death if they choose. Typically do this if the inheritance was sold at a big loss.
Computation of estate tax is done on IRS form 706. From the gross assets certain expenses such as the cost of administration of the estate funeral expenses payments of outstanding debts and charitable bequest are deducted into taxes levied on the remaining taxable estate ***
Also, estate taxes are due 9 months after death
Form # for computation of estate tax?
Form # for computation of estate income tax?
Estate tax form: 706
Estate income tax form: 1041
Gift tax
$15k/year to any individuals. Married =$30k.
***Any amount over $15k requires a gift tax return (filed on form709) and eats into 11.4mm lifetime exclusion. DUE AT THE SAME TINE AS REGULAR TAX RETURN - April 15.
Value of gift is based on current market value.
**work out all problems the long way and do all math
**Tax Documents and Due Dates
Sold Proprietorship , Single member LLC- Schedule C - April 15
Multiple member LLC, partnership, S Corp - March 15.
LLC and Partnership on 1065
SCorp on 1120s
C-Corp - April 15, or 15th day of the 4th month after end of fiscal year. Form 1120
