Area 1 - Tax Compliance & Planning for Individuals and Personal Financial Planning Flashcards
(27 cards)
Name the 2 types of Employee Stock Options
- Statutory Options
- Nonstatutory Options
What is an option?
Contracts that give an investor the right to purchase or sell an ivestment at an agreed-upon price
Define
Statutory Options
Options that are qualified because they meet the requirements set forth by the IRC. Because they meet the requirements, there receive special tax benefits.
Define
Nonstatutory Options
Options that are unqualified because they do not meet the requirements et forth by the IRC. Because they do not meet the requirements, they do not recieve a special tax benefit. Instead, they are taxed at ordinary income at FMV on the date the options are granted
What are the main types of statutory options?
- Incentive Stock Option (ISO)
- Employe Stock Purchase Plan (ESPP)
Define Stock Option
Incentive Stock Option (ISO)
Allows employees to purchase company stock at a predetermined price which is typically at least equal to FMV that can result in short-term and long-term capital gains/losses
Define Stock Option
Employee Stock Purchase Plan (ESPP)
Allows employees to purchase stock at a discount through payroll deductions
Compare and contrast ISOs and ESPPs
What are the similarities and differences between ISOs and ESPPS?
Similarities
* Once stock is sold, it becomes taxable
* In order to receive special tax benefits, the stock must be held for at least 2 years
Differences
* For ISOs, the options must be exercised within 10 years of grant date
Define
The Kiddie Tax Rule
Applies to dependents under the age of 18 or dependents between the ages of 18 and 23 who are full-time college students that do not provide over half of their support
Under the Kiddie Tax Rule, how much is taxed at the child’s marginal rate? How much is taxed at the parent’s marginal rate?
$2,600 - Child’s Marginal Rate
The excess of $2,600 at the Parent’s Marginal Rate
Standard Deductions
Dependent who earned more than $1,300
Earned Income + $450
If earned income + $450 exceeds the standard deduction for a single of $14,600, their deduction will be $14,600
Standard Deductions
Single
$14,600
Standard Deductions
Married Filing Jointly (MFJ)
$29,200
Define the purpose
Alternative Minimum Taxable Income (AMTI)
To ensure taxpayers pay a minimum amount of tax even after regular deductions especially for those who make a lot of money because again the more money you make the more you will have to pay to the IRS and state.
Under the AMTI calculation, what itemized deductions get added back to regular taxable income?
- Income (e.g. interest income)
- Sales
- Real estate
- Personal Property Taxes
- Casualty losses from federally declared disasters
Define
At-Risk Amount
The amount a taxpayer is at risk for losing due to investing activities
What are the rules for losses in excess of the at-risk basis?
- The loss is suspended and carried forward without expiration and are deductible against income in the future years
- Suspended losses due to insufficient at-risk basis amounts when disposing can be offset against any gain from selling the interest
Define and Identify
Active Activites
Activities that generate income in day-to-day operations in which a taxpayer materially participates in. These activities include:
* Salaries and wages
* Business income/loss
* Guaranteed income and/or services
* Other taxable income that doesn’t fall into the other categories
Losses from active activities can offset active activities income
Define and Identify
Passive Activities
Activites that generate income in which a taxpayer does not materially participate in unless the exception rule under the Mom-and-Pop Rule for rental real estate. These activities include:
* Rental real estate (unless rental real estate professional)
* Business income/loss
* Limited partner in limited partnership
Losses from passive activities can only offset passive income and the exess is suspended and carried forward to future years
Define and Identify
Portfolio Activities
Activities that generate income from investments. These investments include:
* Dividends
* Interest income
* Annuities
* Royalties
* Capital gains/losses
What are the main categories of activities?
- Active Activities
- Passive Activities
- Portfolio Activities
What is the Passive Activitiy Loss (PAL) maximum deduction for rental real estate for a taxpayer who does not materially participate in day-to-day business?
$25,000
Define
Mom-and-Pop Exception Rule
The Mom-and-Pop exception rule applies to the passive activity of rental real estate. If a taxpayer’s AGI is under $100,000, the taxpayer can benefit from a $25,000 deduction. However, if a taxpayer’s AGI is above $100,000 there deduction is reduced or eliminated completely.
Mom-and-Pop Exception Rule Scenario
Angie makes $130,000 in rental real estate and has net loss of $15,000 on rental real estate activity. What amount may be deducted and how would you solve this?
Under the Mom-and-Pop exception rule, taxpayers who make over $100,000, the deduction benefit is phased out through these two steps.
1. Determine the phase-out amount (i.e. the amount that the deduction will be reduced by
(AGI- $100,000) x .50 = Phase-out Amount
2. Determine the deductible amount based on the phased-amount
$25,000 - Phase-out amount = Deductible Amount
In this scenario, you would take ($130,000 - $100,000 ) x .50 =$15,000. Then, take $25,000 - $15,000 = $10,000 which represents the deductible amount
