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CFP - Review Wrong answers > Tax > Flashcards

Tax Flashcards

1
Q

Congressional committee reports

A

Explains the intent of tax laws.

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2
Q

Sham transaction

A

Intended for tax avoidance

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3
Q

Penalty for tax fraud

A

75% of tax due

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4
Q

Step transaction

A

Ignore the individual transactions and instead tax the ultimate transaction

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5
Q

Substance over form

A

An example is a president of a company receiving a loan from said company but never intending to pay it back

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6
Q

Assignment of income

A

An example is a parent giving income to the child due to being in a lower tax bracket

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7
Q

Schedule C income

A

Business income that must be included in gross income for tax purposes.

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8
Q

Scholarships and taxable income

A

Tuition and books are excluded from income but room and board are taxable. Entitled to standard deduction.

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9
Q

Taxable fringe benefits

A

Health insurance premiums paid for self-employed, partners, and more than 2% owners of an S corporation. 100% is deductible. Does not include disability insurance premiums.

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10
Q

Group life policy

A

Taxable in excess of $50k if the plan is nondiscriminatory.

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11
Q

Adjustments

A

IRA contributions, student loan interest, Keogh or SEP, self-employment tax, certain alimony paid, self-employment health insurance, moving expenses for military, penalty for early withdrawal of savings, HSA, $4k educational expense

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12
Q

Calculation of a deductible loss

A

Step 1: Use the lesser of basis or FMV
Step 2: Subtract any insurance coverage
Step 3: Subtract $100 (floor)
Step 4: Subtract 10% of AGI

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13
Q

Personal exemption

A

Always 0

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14
Q

Marginal tax rate

A

Percentage applying to the last dollar of taxable income.

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15
Q

Kiddie tax

A
  1. $1,250 standard deduction (no tax). If earned income is greater, add $400
  2. Next $1,250 taxed at 10%. Amounts greater than $2,500 taxed at the parents’ marginal tax rate.
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16
Q

Unearned income under $2,500 re kiddie tax

A

No need to know parent’s tax rate.

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17
Q

Self-employed income

A

Either salary or investment income. Does not include distribution from an S corporation

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18
Q

Childcare credit vs. child credit

A

$6k x 20% = $1200 vs. $2k x 3 = $6,000

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19
Q

Tax deduction vs. tax credit

A

Deduction is worth more to a high-bracket taxpayer and a credit is worth more to a low-bracket taxpayer.

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20
Q

Medical expense deduction

A

Not deductible if it has been reimbursed, subject to 7.5% of AGI floor, only deductible if itemizing, includes medical insurance premiums.

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21
Q

Child support payments

A

Not included in gross income

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22
Q

Itemized and standard deductions

A

Deductions from AGI

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23
Q

Cash gift at work

A

Subject to gift tax but not income tax

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24
Q

Margin interest

A

Only deductible up to investment income

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25
Q

S corporation wages

A

Subject to FICA, not self-employment taxes

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26
Q

Value of personal casualty loss (federally declared disaster)

A

The lower of basis or FMV

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27
Q

Investment interest expense

A

Deductible up to the amount of the year’s net investment income.

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28
Q

Phaseout of itemized deductions

A

Eliminated for 2018 through 2025

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29
Q

Constructive receipt and cash method

A

Revenue from services performed in the year the payment is received, regardless of when the services were performed.

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30
Q

Accrual method

A

Realize revenue when the earnings process with goods or services they provide is complete, regardless of when payment is received.

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31
Q

How does a business increase cash flow?

A

When they collect the revenues owed.

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32
Q

Installment sales

A

Permits capital gain recognized to be spread over the life of the note rather than in the year of the sale.

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33
Q

LIFO

A

Reduced earnings, deferral of taxes, understated inventory

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34
Q

FIFO

A

Increase earnings, greater tax liability, current cost inventory. Company will sell its lowest cost goods first.

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35
Q

What does a net operating loss (NOL) accomplish?

A

Corporations can utilize losses from prior years to offset current year income. Can only carry forward.

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36
Q

NOL and Schedule C

A

Losses attributable to a sole proprietorship can be claimed on personal 1040 and reduce AGI.

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37
Q

Accounting method for $25m or more in revenues

A

Accrual

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38
Q

How will inventory be reflected with FIFO?

A

It will reflect current cost.

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39
Q

Why would a business use the accrual method?

A

It maintains inventory

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40
Q

When can the sale of property be recognized under the installment method?

A

Property sold is undeveloped land.

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41
Q

S Corporations and NOL

A

S corps can’t use NOL because they already pass-through annual losses.

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42
Q

What inventory method to use to reduce taxes in an inflationary period?

A

LIFO

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43
Q

Qualified Business Income (QBI)

A

Net income (profit) from a pass-through business

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44
Q

Difference between a C Corp and an S Corp/Partnership/Sole Proprietorship

A

C Corp is not a pass through entity, so can’t utilize a tax deduction.

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45
Q

Personal service corporation (PSC)

A

H - Health (doctors, dentists, etc)
A - Accounting, architect, actors
L - Law
E - Engineering
Taxed at 21%

46
Q

Advantage of S Corp over C Corp

A

Owner can take excessive compensation and not have it classified as dividends

47
Q

Advantage of LLP over LP

A

LP only works for passive investors.

48
Q

S Corp vs. Partnership

A

Basis in S Corp is determined up to cash contributed, so it doesn’t include loans from third party.

49
Q

C Corp vs. S Corp

A

You become a PSC as a C Corp, meaning a flat tax of 21%. S owner means excess income is taxed at personal tax bracket.

50
Q

Schedule C losses

A

Can reduce AGI

51
Q

LLC advantage over S Corp

A

Same basis as a partnership, which would take more losses. An S corp has less losses they can deduct.

52
Q

Regular corporation (Form 1120)

A

Can help reduce taxes by providing owner with a separate tax entity.

53
Q

How does a regular corporation report earned income?

A

Form W-2 for employees and Form 1099 for dividends to shareholders

54
Q

Trusts and Estates differences

A

An estate continues until all assets have been transferred and debts/taxes have been paid. A trust may benefit several generations.

55
Q

Estates filing

A

Either the income tax return (1041) or as deductions from the gross estate (706)

56
Q

Trusts filing

A

Form 1041. Share of income is reported on Schedule K-1

57
Q

When should a fiduciary file a 1041 return for the estate or trust?

A

When there is any taxable income for the year, when there is gross income over $600, or when a beneficiary is a nonresident alien.

58
Q

Taxable year for trusts and estates

A

Estates may select any calendar tax year or fiscal year. Trusts, except for a charitable (501(a), must use a calendar year.

59
Q

Unfunded ILIT vs. funded ILIT

A

Unfunded: Yearly gift to the trust pays the life insurance premium (not income taxable to grantor)
Funded: Investment income from investments in the trust pays the insurance premium (taxable to the grantor)

60
Q

Simple trust

A

Conduit for forwarding income to beneficiaries, who pay taxes on their own tax brackets (distributable net income)

61
Q

Complex trust

A

It is irrevocable, grantor has not retained any control, and income is accumulated.

Income accumulated is taxed to trust. Income distributed is taxed to beneficiary.

62
Q

Revocable trust

A

Grantor trust where grantor will be responsible for any income tax liability.

63
Q

Irrevocable trust

A

Non-grantor trust that can be taxed as a simple or complex trust depending whether income is distributed in a specific tax year.

64
Q

Complex trust exemptions

A

If required to distribute income, it is $300. If not required to distribute, $100.

65
Q

Distributable net income (DNI) rules

A

Claim a deduction for the amount distributed.
Limit the portion of the distribution that is taxable to the beneficiaries.
Ensure the character of the distributions remains the same for the beneficiary as it was to the trust.

66
Q

When is a grantor trust tainted?

A

When trust income will be used to pay life insurance premiums.

67
Q

Estate and business expenses

A

An estate is entitled to take a deduction for ordinary and necessary business expenses.

68
Q

When will trust income be taxed to the grantor?

A

If the trust income is used to satisfy a grantor’s legal support obligation.

69
Q

What does not increase basis?

A

Repairs, real estate taxes, and normal business expenses.

70
Q

Adjusted basis

A

Cost basis less cost recovery (deductions)

71
Q

Cost basis

A

The original investment plus improvements

72
Q

Modified Accelerated Cost Recovery System (MACRS)

A

Applies to all recovery property (not land or intangibles) placed in service after 1986.

73
Q

1245 property

A

Equipment that has a short depreciation schedule. Not expensed immediately, unless under Section 179.

74
Q

Repair to 1250 property

A

Trigger an immediate tax deduction

75
Q

Spouse basis in community property

A

Full step-up in basis at death of first spouse.

76
Q

AMT Preference Items

A

Private-activity municipal bond

Oil and gas % depletion / Excess Intangible drilling costs % depletion

Depreciation (ACRS/MACRS) not straight-line

77
Q

Add back items in AMT

A

Property, state, city/income and sales taxes (10k)

Incentive stock option “bargain element” (the excess of the FMV at the exercise date)

78
Q

AMT Payable

A

Difference between the AMT total and the regular tax. It is not the AMT total alone.

79
Q

Examples of reducing AMT payable

A

Increasing taxable income, selling home and renting a home, paying off current mortgage balance

80
Q

Example of how to decrease AMT exposure?

A

Increasing 1040 income tax such as a business owner paying himself a large bonus

81
Q

Difference between depreciation and straight line depreciation for AMT

A

Straight-line depreciation is not a preference item.

82
Q

AMT exemption

A

Subject to phaseout rules

83
Q

Losses from passive activities

A

May only offset profits from other passive activities

84
Q

Real estate loss deduction

A

Up to $25k

85
Q

Home rental tax consequence avoidance

A

Can be rented up to 15 days with no tax consequence

86
Q

When is a home treated as a residence?

A

Personal use exceeds the longer of 14 days or 10% of the period of rental use.

87
Q

Community property

A

If separate returns are filed by a married couple, one-half of the community income must be reported by each spouse

88
Q

Alimony requirements

A

For divorces after 12/31/18, alimony payments are no longer deductible, nor must the recipient declare the amount as taxable income.

89
Q

Non-publicly traded partnership

A

Passive activity that can be used to deduct losses

90
Q

How does STRIPS produce phantom income?

A

As zero-coupon bonds, they produce taxable income that is not received until the bond matures

91
Q

Exception to passive rules

A

Active participation in real estate

92
Q

Standard deduction and charitable deduction

A

There is no charitable deduction unless you itemize.

93
Q

Maximum charitable deduction for LTCG property

A

30% of AGI

94
Q

Charitable deduction for corporations

A

File under Form 1120 and limit is 10% of taxable income.

95
Q

What is excluded from gross income?

A

Child support

96
Q

IRA Contributions and AGI

A

IRA Contributions reduce AGI.

97
Q

Deductions FOR AGI

A

Net business losses and net capital losses

98
Q

Active participation income vs. Active participation loss

A

Income is included in gross income. Losses are limited to $25k

99
Q

Income from an S corporation

A

Not considered to be self-employment income.

100
Q

S Corp and basis

A

Limited to capital contribution and direct loans.

101
Q

Active participation deduction limit

A

Eliminated at $150,000 of AGI

102
Q

Wash sale rule

A

Disallows a loss if identical securities are purchased before 30 days after the sale that resulted in the loss.

103
Q

STRIPS and children

A

Least suitable. They are zero coupon treasury bonds that would generate phantom income. The child would be subject to kiddie tax.

104
Q

Alimony and pre-2019 divorces

A

Taxable to the payee and deductible to the payor.

105
Q

LTCG property

A

Limited to 30% of AGI

106
Q

When is an IRA contribution not deductible?

A

When already covered under a qualified retirement plan and when AGI is above the phaseout.

107
Q

What happens when no boot is received?

A

No gain is recognized.

108
Q

Section 179

A

Expenses for the purchase of business personal property are deductible up to the net income from the business. Deduction can’t create a loss.

109
Q

How is a policy classified as a MEC?

A

When it fails the “seven-pay test”

110
Q

What can increase basis in an S corporation?

A

Direct loans

111
Q

When should a business do the cash accounting method?

A

When they carry both inventory and consignment property.

112
Q

Excess earnings passed through from an S corporation

A

Treated as K-1 investment income and are not subject to self-employment tax.

CFP - Review Wrong answers (7 decks)

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