Income Tax Flashcards
What are the gross income inclusions (12)
- ordinary dividends
- taxable interest
- business income and losses
- capital gains and losses
- real estate
- punitive damages, except wrongful death
- wages, salaries, tips
- IRA distributions
- pensions and annuities
- alimony received, divorce before 2019
- unemployment income
- taxable social security
Gross income adjustments to get AGI (10)
*IRA contributions
-student loan interest, $2,500, schedule one
*Keogh or SEP
*Self-employed tax (.07065)
*Certain alimony paid, divorce before 2019
*100% self-employment health insurance
-active military moving expenses
-penalty for early withdrawals of savings
-HSAs
-$4,000 education expenses. AGI limits apply and used as an alternative to AOC.
Itemized deductions (10)
Schedule A
- medical, dental, qualified LTC expenses. Less than 7.5%.
- state and local taxes*
- sales taxes*
- personal property taxes*
- real estate taxes*
- mortgage insurance residents. Less than $100,000 AGI
- home mortgage interest
- charitable gifts
- investment interest
- casualty losses from federally declared disaster areas
What are the steps for calculating a deductible casualty loss? (4)
Step one: use the lesser of basis or FMV
Step two: subtract any insurance coverage
Step three: subtract $100 (floor)
Step four: subtract 10% of AGI
What is the deductible for miscellaneous itemized deductions?
Zero, between 2018 and 2025, miscellaneous itemized deductions are repealed
What are the personal and dependency exemptions?
Personal exemptions for 2021 remain at zero, and have been that way since 2018. TCJA also suspended dependency exemptions.
What are FICA taxes?
Who pays them?
Social security tax, also known as OASDI taxes (6.2%). Medicare tax (generally 1.45%).
An employer and an employee both pay these taxes (7.65% each). A self-employed person pays both halves of the tax since they are both the employer and the employee.
What are other payroll taxes besides FICA?
Federal taxes, state taxes, local income or wage taxes, federal unemployment taxes (FUTA), and state unemployment taxes (SUTA).
What is the Medicare tax rate?
What is the SS rate?
On wages $200,000/250,000 or less, it is a 1.45% rate. Above $200,000, 0.9% is added, totaling 2.35% on wages over $200,000. Both the employee and the employer pay 1.45%, the employee will pay more based on wages.
6.2%
What are the tax rates for qualifying dividends and long-term capital gains
- 0% if the taxpayer is in the 10 to 12% bracket
- 15% if taxpayer is in the 22 to 35% bracket
- 20% when the taxpayer is in the 35 to 37% bracket.
What is kitty tax?
It is intended to discourage the shifting of income to children in a lower tax bracket. It applies to children with an *unearned* income greater than $2,200, and who have at least one living parent at the end of the year.
It is calculated as followed:
- Child gets $1,100 standard deduction, no tax applies to this amount.
- The next one $1,100 is taxed at the child’s income rate of 10%, $110.
- Anything greater than 2,200 are taxed at the parents marginal rate.
*If the child has earned income greater than the standard deduction of $1,100, the amount of earned income plus $350 is used in step one.
What is the full single taxpayer standard deduction amount?
$12,550. Standard deductions cannot go above that amount.
What is self-employment tax?
It is FICA taxes where the self-employed person pays both halves of the tax since they are both employee and employer.
This tax is based on net earnings, not salary or taxable income. To get net earnings, you take income minus business expenses.
What is included in self-employment income? (4)
- net schedule c income
- general partnership income/k1 income
- board of directors fees
- part-time earnings/1099
What is not included in self-employment income? (6)
- dividends or interests on investments
- games, or deductions for losses, from property, securities, or commodities
- real estate income or rents paid
- distributive share of income or loss of a limited partner
- wages from an s corporation
- distributions from an s corporation/k1 income
*Any distribution from an s corporation is not self-employed income. It is either salary or investment income.
How do you calculate self-employment taxes?
Step one: calculate the total self-employment income
Step two: subtract 7.65%.
Step three: multiply remainder by 15.3%. (7.65% + 7.65%)
For the test, taxable income will not exceed $142,800.
What is the self-employment tax rate?
7.65%
How does the child and dependent care expenses tax credit work?
- kids until age 13
- for the purposes of the test, multiply AGI * 20%
In real life:
- qualifying expenses are limited to $3,000 for one dependent, or $6,000 for 2+ dependents
- the credit is 35% to AGI under $15,000, 20% to AGI above $43,000
Child tax credit (4)
- $2,000 for each qualifying child under 17 years of age
- qualifying child includes son, daughter, stepchild, or foster child.
- The amount of the credit is reduced by $50 for each $1,000 above $400,000 and MAGI/$200,000 MAGI
- there is a $500 family credit for each dependent who is not a qualifying child. This includes children 17 or older, elderly parents, a disabled adult child, etc presuming that the taxpayer provides more than 50% of their support. It uses the same phase out thresholds as the child tax credit
Adoption credits (4)
- Max credit is $14,440 per eligible child, including both special needs and unimpaired children
- if special needs, the credit can be claimed in the year the adoption is finalized, not necessarily the year of the adoption expenses.
- if the child is a foreign national, the credit is available only in the year when the adoption becomes final. Any expenses paid in the year after the adoption is finalized can be claimed as a credit for the tax year in which they were actually paid.
- adoption credit is phased out rapidly for taxpayers with an MAGI between $216,660 and $256,660
Credit for the elderly and the permanently and totally disabled
The credit is available to an individual who:
- reaches 65, or
- is under 65, and retired with a permanent and total disability, AND receives disability income
What is the difference between a refundable tax credit and a (unrefundable) tax credit?
Taxpayers subtract both refundable and non-refundable credits from the taxes they owe. If a refundable credit exceeds the amount of taxes owed, the difference is paid as a tax refund. If a non-refundable credit exceeds the amount of taxes owed, the excess is lost.
Tax deduction versus tax credit
A deduction is worth more to a high bracket taxpayer and a credit is worth more to a low bracket taxpayer. Examples are in the formula notebook.
What are the accounting methods? (4)
- cash method / cash receipts and disbursements (businesses under $25m in average revenues)
- accrual method (businesses above $25m in average revenues during the prior 3 years)
- hybrid method
- installment method: permits the capital gain recognized on the sale of a property to be spread over the life of the note rather than entirely in the year of the sale. (Exceptions to this method: if all payments received are in the year of the sale, if the property is publicly traded securities, if it is sold at a loss, or if it is sold to a related party who in turn sells the property within 2 years of the original purchase state)
How are long-term contracts handled with accounting?
They use a percentage of completion method of accounting
Do you use FIFO or LIFO during a period of rising prices?
L i f o
What conduit entity does not include third-party debt in its basis?
An s corporation
Can an estate make any deductions?
Yes, it is a separate entity. Allowable deductions can include administration costs, accounting and attorney fees, and expenses of preparing the estate’s return.
What is the taxable year for trusts and estates?
Estates: they may select any tax year and accounting period. The first return might be for a short period of time to cover the unexpired term of the decedent’s regular tax year. (An exemption of $600 is allowed on a short period return.)
Trust: must use a calendar year unless it is a charitable trust or 501(a)
What violations create a defective/tainted trust for income tax purposes? (5)
- Trust income is distributed or accumulated for later distribution to the grantor or grantor’s spouse
- Trust income is used to discharge any legal obligation of the grantor
- Trust income is used to discharge illegal support obligation of the grantor
- The power to control the beneficial enjoyment of the trust principle or income is held by either the grantor or grantor’s spouse. For example retaining the right to decide who will receive and/or when a beneficiary will receive trust income or principal.
- Trust income is used to pay premiums on life insurance on the life of either the grantor or the grantor’s spouse.
What violations create a defective/tainted trust for estate tax purposes? (2)
- A right to income or the right to use or enjoy trust property. This is beneficial enjoyment.
- A reversionary interest that exceeds 5% measured at the time of death
What is the difference between a revocable and an irrevocable trust?
With a revocable trust, the grantor still has rights. It is usually used to avoid probate because upon death of the grantor, it becomes irrevocable. Funding a revocable trust has no gift tax consequences because the transfer is not complete. and while the grantor is alive, all income earned is taxable to the grantor.
With an irrevocable trust, the grantor gives up all rights in the property transfer to the trust. At this point, nothing can be modified in any material way. It becomes a non-grantor trust.
What deductions are available to a trust?
- A charitable deduction (only for complex trusts)
- Depreciation, cost recovery, and depletion are calculated in the same manner as for individuals. If income is distributed, it must be allocated between the trust and the beneficiaries.
- Net operating carry forwards are allowed
- Administration expenses are allowed
- The trust is allowed a deduction for all income that it is required to distribute. It does not matter whether or not that income is actually distributed. The trust is still allowed a corresponding deduction.
- A complex trust that is required to distribute all of its income has an exemption of $300 if not required to distribute income the exemption is $100.
What is the difference between a tax exemption and a tax deduction?
A tax exemption frees the taxpayer to any obligation to submit taxes on the tax-free amount.
A tax deduction is used to lower tax obligation by lowering gross income.
What increases basis?
Legal fees, commissions, sales tax, freight, and improvements. When basis is increased by these incidental costs, it becomes the cost basis.
Improvements versus repairs and how they impact basis
Improvements: replace roof, advents, pave driveway, replace plumbing, add room. These typically need to be capitalized. An item is capitalized when it is recorded as an asset. This means that the expenditure will appear in the balance sheet.
Repairs: repair roof, pay property tax, patch holes and driveway, pay for a lawn service, pay for property management, pay liability insurance. Repairs are typically deducted as expenses so they don’t affect basis. These appear on the income statement.
Amortization and accretion
Amortization or accretion calculations are used to adjust the cost basis from the purchase amount to the expected redemption amount.
Amortization decreases cost, decreasing basis. It is typically used for intangibles and the recovery method is similar to straight line depreciation.
Accretion increases cost, increasing basis. It is typically used for discounted bonds, often a zero coupon bond.
What is the value of a gift?
Gift text: FMV at the date of gift
Income tax: use the lesser of FMV at the date of gift, or the donors adjusted basis.
If FMV is less, then the following occurs:
- A loss is measured using the FMV on the date of the gift
- A gain is measured using the donor’s basis
- If the sale price of the gift is between the donors basis and the FMV on the date of the gift, no gain or loss is recognized
What is the basis of inherited property?
FMV on the date of death or the alternative evaluation date if elected.
In community property states, marital property gets a full step up in basis. In non-community/common law property states, property only gets a half step up in basis.
To calculate common law, the portion that is owned by the surviving spouse remains at the original basis. The portion that is the deceased spouses gets the step up in basis. Don’t forget to divide the assets in half when this is being calculated.
What is MACRS
Modified accelerated cost recovery system. It applies to The depreciation of applicable property which does not include land or intangibles. Straight line depreciation can be used under this method, but a half year convention must be used.
What are the property classes with MACRS? (4)
5-year: computers, autos and light duty trucks (1245)
7-year: office furniture and fixtures (1245)
27.5-year: residential rental property (1250)
39-year: non-residential real property (1250)
