Income Tax Flashcards

Question

Kiddie Tax Earned vs. Unearned Standard Deduction

Answer 1

If a child has unearned income, they can choose between two standard deductions: $1,150 for unearned income OR Earned income plus $400 (but no greater than the single person standard deduction of $12,950)

Answer 2

Net Schedule C General Partnership (K-1) Board of Director's fees Part-Time Earnings via 1099 Wages or K-1 income from S-Corp is NOT self employment income

Answer 3

20% of up to $3,000 in qualifying expenses per child up to a max of 2 children. $600 max for 1 child $1,200 max for 2+ children

Answer 4

$2,000 per child under age 17. Credit is reduced by $50 for every $1,000 above $400,000 AGI (MFJ) or $200,000 (single) $1,400 of the credit is refundable (meaning if you have no tax liability you can get $1,400 of the credit back anyway).

Answer 5

Designed for low to moderate income taxpayers 50%/20%/10% of retirement plan/IRA contributions depending on AGI. No credit over $68,000 MFJ Max credit is $2,000 single, $4,000 MFJ

Answer 6

Maximum $14,890 per eligible child (dollar for dollar up to qualified expense incurred). Special needs adoption qualifies for full credit, regardless of expenses. Qualified Expenses - Adoption fees, court costs, attorney fees and the cost to adopt a foreign child (including travel). Phased out between $223,410 to $263,410 AGI

Answer 7

A deduction is worth more to a high bracket taxpayer. A credit is worth more to a low bracket taxpayer.

Answer 8

Firms under $25 million in revenue Realize revenue in the year payment is received regardless of when the services were performed and match expenses against it when the expense is paid, regardless of when the firm incurred the liability.

Answer 9

Firms realize revenue when the earning process with goods or services is complete, regardless of when payment is actually received. They match expenses against revenues in the year the firm incurs the liability for the expense, regardless of when it is paid. No longer mandatory unless over $25 million in revenue over the last 3 years

Answer 10

IRS permission is generally needed to change accounting method

Answer 11

Use a percentage of completion method of accounting

Answer 12

Gross Profit divided by total contract price

Answer 13

Deductible expenses exceed gross income for a given tax year. No taxable income is reported. Losses are carried forward indefinitely into future years.

Answer 14

A pass-through business income deduction of up to 20% Can be deducted from each pass through entity owned for a single taxpayer Generally includes rental income, presuming the rental activity qualifies as a business If one business has a loss, that loss can offset another business' QBI If net QBI is zero or less, no deduction is available, but can be carried forward to future years and deducted against QBI of that year

Answer 15

1. Personal Service Firms (doctors, lawyers, consulting) 2. All other businesses

Answer 16

Tier 1 - Less than $170,050 single/$340,100 joint - full 20% QBI deduction regardless of being a personal service firm or not Tier 2 - Less than $220,050 single/$440,100 joint - no deduction for personal service firm, limited or possibly eliminated deduction for other businesses Tier 3 - Incomes between $170,050-$220,050 single and $340,100-$440,100 joint - partial tax benefit from the QBI deduction

Answer 17

Advantages: Availability of SEP and KEOGH 100% of medical insurance premiums deductible by owner No legal formalities Conduit of income or loss to owner (schedule C) Disadvantages: Unlimited liability Business dies with the owner Capital structure depends on the owner's resources

Answer 18

Advantages: Availability of SEP and KEOGH 100% of medical insurance premiums deductible by partners Partnership agreement can be oral (written preferable) Conduit of income or loss to partners Disadvantages: Joint and several liability Partnerships dissolve upon death, bankruptcy or incapacity of a partner Capital structure depends on resources of partners

Answer 19

Can be classified as a partnership or a corporation for federal income tax purposes To be a partnership, must have no more than two of the following characteristics: Centralization of management Continuity of life Limited liability Free transferability of interests Contract and state law govern disbursement of funds, capital structure, and most other financial items. Every member has limited liability for all debts or claims against the busness

Answer 20

A partnership in which the general partners are not personally liable for malpractice related claims arising from the professional misconduct of another general partner. Useful for converting an existing entity where one or more partners have unlimited liability, but for new entities LLC is the better answer (flexibility)

Answer 21

Separate tax entity (not a conduit of income) Income is taxed twice - once at the corporate level and a second time at the owner level Tax rate is 21% Corporate AMT was eliminated Advantages: Sale of stock to unlimited investors Dividend received deduction (50% rule) Limited liability Continuity of life Disadvantages: Corporate formalities Dividends paid (after-tax) Accumulated earnings beyond certain limits are subject to double taxation

Answer 22

A U.S. corporation investing in another U.S. corporation receives a deduction for dividends they receive. 50% of dividends received are excludable if the corporation has 20% ownership stake 65% of dividends received are excludable if the corporation has a 20-80% ownership 100% of dividends received are excludable if the corporation has a 100% ownership

Answer 23

A section 1244 business is a C or S corp that was initially capitalized with $1MM or less. Loss of $100,000 per year on a joint return ($50,000 otherwise) is an ORDINARY loss, rather than a capital loss. Advantage - where a capital loss might be limited to $3,000 because of capital loss rules, a 1244 loss can go as high as $100,000 and offset other ordinary income.

Answer 24

Closely held C Corp owned by certain individuals who perform services. Taxed at 21%. Qualifies for the dividend received deduction Health (doctors, dentists) Accounting, Architectural, Actors Lawyers Engineers

Answer 25

Conduit of income, deductions and tax credits An eligible corporation becomes an S corporation by unanimous election of its shareholders. The S corporation status is immediately terminated if the corporation loses its eligibility. Files taxes on 1120S Eligibility Maximum of 100 shareholders Can only issue one class of common stock (no preferred) but can be voting or non-voting Must be a domestic corporation Only individuals, estates, and certain trusts may be shareholders (US citizen or permanent resident alien) Advantages: Limited liability Conduit of income or loss to owner, but limited losses up to basis Basis is cash plus direct loans made by the shareholder to the corporation (no bank loans) Excessive compensation would not be classified as dividends Disadvantages: Corporate formalities Sale of stock limited by eligibility standards

Answer 26

Any business can operate as a limited partnership. Has at least one general partner Limited partners only liable for partnership debt up to their individual capital contribution A limited partner is a passive investor If limited partner is an active participant, they lose limited liability for partnership debt

Answer 27

Reported on Schedule C (essentially the business' income statement for the year) Losses carry that exceed other income carry forward indefinitely (like NOL for corp) Interest paid on loans related to business purposes is deductible on Schedule C without any limit.

Answer 28

Files on Form 1065 for informational purposes. Owner's share of income is reported on form K-1 Losses are deductible up to basis Basis is cash contributed, loans made by the partner, loans made to the partnership by other sources (share of debt which partner may be held responsible for)

Answer 29

Files on form 1120S Losses are deductible up to basis Basis is cash contributed and loans made by the shareholder Bank loans are not included in basis

Answer 30

If treated as a partnership (pass through): Information only return is filed Income/losses passes through to individual members If treated as a corporation (separate tax entity): Files on 1120 or 1120S

Answer 31

Corporations are allowed to accumulate $250,000 ($150,000 PSC) without the need to establish a business need. Anything in excess of these amounts without a bona fide business need is taxed a second time (in addition to the regular 21% tax) at 20%. This is the Corporate Accumulated Earnings Tax. 20%

Answer 32

Corporations cannot deduct dividends that are distributed Profits that flow through to investors are taxed twice The earnings are taxed at 21%, then the actual dividend is taxed to the investor This does not apply to S Corps, LLCs or Sole props. Only regular C corps

Answer 33

Both file on 1041 (Fiduciary Income Tax Return) Estates file on 706 Trusts file beneficiary share of income on K-1 1041 must be filed by the 15th day of the 4th month after the entity's year ends 1041 must be filed if there is any taxable income, gross income of $650 or more, beneficiary who is a nonresident alien

Answer 34

Estates can use any fiscal year (same as decedent's, calendar year, etc.) Trusts MUST use calendar year (except 501(a) or charitable trusts

Answer 35

Beneficiaries are taxed on the part of the income that is currently distributed Estate estate or trust is taxed on the portion of income that it retains If estate or trust is required to distribute all income, the beneficiary must report their share of net income regardless of whether it is received in a particular tax year. If the trustee or fiduciary has a choice of whether or not to distribute all or part of current income, the beneficiary must report income required to be distributed (whether it is or not), all amounts actually paid or credited up to the amount of the beneficiary's distributed net income Beneficiary Income is reported on K-1 and filed on Schedule B of the 1040

Answer 36

Income produced by the trust is taxed to the grantor in the following situations: Distributed or accumulated for later distribution to grantor or grantor's spouse Used to discharge any legal obligation of the grantor Used to discharge legal support obligation of the grantor Power to control beneficial enjoyment of the trust principal (corpus) or income Used to pay premiums for life insurance on the life of the grantor or grantor's spouse NOTE: Beneficial because trust tax rates are condensed and increase very quickly

Answer 37

A reversionary interest (meaning an interest that goes to someone else, but eventually returns to the grantor or grantor's spouse) that exceeds 5% of the trust value, is retained and taxed to the grantor.

Answer 38

Simple Trust/Estate (conduit) Acts as a conduit to pass through income and deductions to beneficiaries Beneficiaries report income with the same character that it had for the trust/estate. Beneficiaries pay tax at their own marginal tax bracket. Trust/estate is a separate entity, but operates as a conduit. No distribution of corpus No charitable gifts Complex Trust/Estate (taxed as separate entity) Taxed as a separate entity for income tax purposes Must be irrevocable and the grantor has not retained any control. Income must or may be accumulated Corpus can be distributed May make charitable gifts

Answer 39

Charitable contributions (complex trust only) Depreciation, cost recovery and depletion are allocated between beneficiary and trust Net Operating Loss (NOL) carry-forwards are allowed Administration expenses are allowed Trust is allowed a deduction for all income that is required to be distributed whether it is distributed or not

Answer 40

If required to distribute all income, $300 is exempt If not required to distribute all income, $100 is exempt

Answer 41

DNI limits the amount that a trust or estate beneficiary must report as gross income for tax purposes. DNI rules allow the trust or estate to: Claim a deduction for the amount distributed Limit the portion of the distribution that is taxable to beneficiaries Ensure the character of the distributions remains the same for the beneficiaries as it was for the trust/estate This avoids double taxation on income that would otherwise be taxed to the trust/estate and beneficiary

Answer 42

Should never be tainted for income tax purposes (there are exceptions for estate and gift tax purposes). The client would be better off keeping the assets in their own name, because for income tax purposes, the trust basically doesn't exist and the costs associated with the trust make it prohibitive. Can be useful for estate tax and gift tax purposes to get income producing or highly appreciated property of of an estate. IDIT

Answer 43

Used for intangible assets like good will, franchise rights or intellectual property. Similar to straight-line depreciation for physical assets

Answer 44

A bond discounted at issue (like a zero or an EE) accretes value in addition to the coupon to get back to par at maturity. This value that accretes generates phantom income in that the taxpayer pays tax annually, but doesn't receive the income until the end (maturity).

Answer 45

Used to depreciate all real and and depreciable property put into service after 1986. Straight line is an option, but half-year convention must be used regardless of when during the year the purchase was made (for the year of acquisition) Requires mid-quarter convention if greater than 40% of the property is put into service during the fourth quarter of its tax year Half year and mid-quarter convention means only part of the full-year depreciation amount can be used in the first year.

Answer 46

5-year - computers, autos, light duty trucks (1245) 7-year - office furniture and fixtures (1245) 27 1/2 year - residential real property (1250) 39 year - nonresidential real property (1250)

Answer 47

Recovery Year MACRS Straight Line (half of MACRS) 5-Yr 7-Yr 5 yr 7-Yr 20% 14.29% 10% 7.14% 32% 24.49% 20% 14.29%

Answer 48

Section 179 allows a business to expense (write off) a limited dollar amount of qualified tangible property during a taxable year. 1245 property only. $1,080,000 can be expensed dollar for dollar at which point it starts phasing out (reduced) until $2,700,000 at which point section 179 is exhausted for that tax year. Section 179 is only usable up to taxable income derived from the active conduct of the taxpayer in ANY trade or business. However, a loss cannot be generated by 179. Any deduction not allowed due to limitation by income can be carried forward to the next year. Small firms can easily deduct cost of new assets without the need to maintain MACRS schedules. Repairs to 1250 property could use 1245 property which would be eligible under 179.

Answer 49

Only Investment Type Real Estate that generates income is eligible for 1031 like kind exchange. There is likely to be an imbalance of value between to exchanged properties. Additional consideration called boot is added to the transaction by the party with the lower valued property. The party receiving boot must recognize a portion of the realized gain from the transaction. The recognized gain is the lesser of boot or the realized gain. 45 day time limit to identify new property. 180 day time limit to acquire new property (doesn't have to be an actual trade)

Answer 50

Boot = recognized gain Boot paid = add to basis Basis carries over from last property *If realized gain is less than boot received, the basis in the new property is the FMV (page 7-3 applying the facts income tax book)

Answer 51

Like an installment sale, if a related party disposes of a property they acquired in a like kind exchange within 2 years of the transaction, the unrecognized gain becomes fully recognized.

Answer 52

3.8% that applies to certain high earners. On the tax tables.

Answer 53

Taxed at 28%

Answer 54

Taxed at 25%

Answer 55

Dividends received in cash are entered as a cash flow on the calculator. Dividends reinvested affect shares owned and future value, so you enter 0 as a cash flow on the calculator.

Answer 56

Carryforward losses can be used in the year of death, but are lost in subsequent years.

Answer 57

Super hard. Valuing the purchase of bonds based on information given. Purchasing a home mortgage as an investment (to receive as income) qualifies for investment income deduction.

Answer 58

To qualify, must have owned and used the home as principal residence for 2 out of 5 years preceding the home's sale. $500,000 joint/$250,000 single exclusion amounts against capital gain (no losses) Partial exemptions for sellers who don't meet the 2-year minimum residency requirement: Divorce, legal separation, death of spouse Becoming eligible for unemployment compensation A change in employment that makes it impossible to pay the mortgage Multiple births from same pregnancy Damage to home from natural disaster, act of war, or terrorism Condemnation, seizure or involuntary conversion of the property A job-related move if new home was more than 50 miles away than the distance from old home A divorce can fall under special circumstances that allow the full $500,000 exclusion

Answer 59

You can reduce the amount of the deferred gain on a 1031 exchange using the section 121 exclusion if you meet the residency requirements (2 of 5 years for section 121) and the rental requirements of 1031. Example - Own a house, live in it for 2 years, then rent it for 3 years, exchange it under 1031 for another rental. The actual gain realized that is deferred is reduced by the $250,000/$500,000 exclusion under 121. The amount of the exclusion is proportional to how long the property was the principal residence divided by how long they owned it. See example 7-13 income tax

Answer 60

Depreciation reduces basis. Start there to calculate the total realized gain. The lesser of the CRDs or the total realized gains becomes the 1245 gain. If CRDs are less than total realized gain, any excess amount is the 1231 gain.

Answer 61

All depreciation recapture must be reported as income in the year the property is disposed of. It's the lesser of the gain or the CRD. See examples on 7-16/17 in Income Tax book

Answer 62

Separate tax calculation which determines what, if any AMT applies to a taxpayer. AMT owed is the difference between the AMT calculation less than the regular income tax calculation. If AMT is lower than regular calculation, there is no AMT. Start with post-deduction 1040 income (if itemizing) or AGI (if standard deduction) Add back any items deductible on a 1040 but not for AMT (taxes and bargain element of ISOs) Add back preference items (IPOD) - Private Activity Muni Bonds, Oil and gas percentage depletion, Intangible Drilling costs percentage depletion over property's adjusted basis Depreciation (MACRS only, not straight line) AMT Base Subtract Exemptions (determined by filing status and may phase out completely) AMTI (alt min taxable income) AMT (26 or 28% depending on final number - see tax table)

Answer 63

Pay more in regular tax. Whatever it takes. Charitable donations do not help with AMT and can actually cause it. This is not going to be a correct answer no matter how much you want it to be.

Answer 64

A passive activity generally means a trade or business in which a taxpayer does not materially participate. Cannot be used to reduce portfolio income. Losses are called PALs (passive activity losses) Income is called PIGs (passive income generators) Consist mainly of non-publicly traded partnerships (RELPS) Netting process of passive activity is done on Schedule E Active participation also shows up on schedule E Two passive activities: Rentals including equipment and rental real estate (exception is active participation) Businesses in which the taxpayer does not materially participate -Limited Partnerships (some exceptions) - Partnerships, S-Corps (some exceptions), and LLCs in which the taxpayer does not materially participate

Answer 65

Also known as Master Limited Partnership (MLP) PTP/MLP Income is portfolio income like dividends and is shown on Schedule B PTP/MLP Losses cannot be used to offset passive income. They can only be used to offset income from future income from the same partnership.

Answer 66

No $3,000 loss allowance like capital losses. Must be carried forward until they can be disposed of. PTPs/MLPs can only use losses by netting against future income of that partnership or by selling the partnership. Non-publicly traded partnership losses (PALs) can be offset with other non-publicly traded partnership income (PIGs).

Answer 67

Can occur inside a tax shelter created before 1986 Zero Bonds S-Corp K-1s with no cash distributed

Answer 68

Requires involvement in the operation of the activity on a regular, continuous and substantial basis. Generally no limited partner is treated as materially participating.

Answer 69

Less stringent standard than material participation. Although passive, it is an exception to the passive law rules. Merely requires bona fide involvement in management decisions. A limited partner may never be an active participant (they become a general partner). To qualify, a taxpayer must own at least 10% interest in the property.

Answer 70

Qualifying taxpayers can deduct up to $25,000/year in net losses from real estate activity. This deduction is phased out 2 for 1 between AGI of $100,000 and $150,000. The deduction can be used to offset active or portfolio income. Losses exceeding $25,000 can be carried forward.

Answer 71

Home is treated as a residence if the owner's use is the greater of 14 days or 10% of the rental use in a given year. Ex - if a rental is used by the owner for 31 day and rented for 300 (1 day longer than 10%), it is considered a residence not a business (or rental) and expenses cannot be deducted.

Answer 72

Deduction-equivalent tax credit up to $25,000 Take $25,000 and multiply by the marginal tax bracket Not to be confused with Historical Rehabilitation Credit, which phases out after $200,000 AGI and is often not productive.

Answer 73

These are not passive and are exempt from PAL rules. Losses from oil and gas are deductible (active or portfolio income) to general partners regardless of AGI. General partner has unlimited liability. Limited partners receive a passive loss. Percentage depletion may trigger AMT (preference item).

Answer 74

A closely held C corp that is not a PSC may use passive losses to offset Active but not Portfolio income. ONLY C corps

Answer 75

A widower can file married jointly in the year of death. If the widower maintains a home for a dependent child, they can file jointly for two additional years after the year the spouse dies.

Answer 76

If separate returns are filed by a married couple in a community property state, they must each report 1/2 of community property income. Separate income under community property rules is still reported separately (e.g. income from an inheritance)

Answer 77

IRC says if alimony is reduced too quickly, it is really a property settlement. Calculation is based on the first 3 post-separation years. Add the first two years and subtract $37,500 if the 3rd year payment is $0. If the third year is greater than $0, double it and add it to the $37,500 constant.

Answer 78

Non-deductible to the payee, and non-taxable to the payor Alimony payments that decrease in the future, the amount of the decrease is considered child support.

Answer 79

All Churches, schools, hospitals Charitable, religious, educational, literary or prevention of cruelty to animals Can deduct up to 60% of AGI in cash donations

Answer 80

Private nonoperating foundations Fraternal Orders War Veterans' Organizations

Answer 81

Calculate Max Contribution (60% AGI in cash to public) Calculate eligible amounts given to 50% charities (60% cash, 30% FMV LTG, 50% STG/UU) Calculate eligible amounts given to 30% charities Any excess or unused donation can be carried forward for 5 years or death

Answer 82

50% Organization donations of appreciated LT Gain property is 30% of AGI if using FMV or 50% of AGI if using basis. It is RARELY advantageous to value appreciated property at basis. Remember, it's a percentage of AGI, not the gift value

Answer 83

Deduction is always limited to BASIS (50% of AGI) Inventory Copyright Use-unrelated property (not stock or real estate) A work of art created by the taxpayer Short-Term Capital Gain property

Answer 84

1986 Tax Act eliminated charitable deductions for non-itemizers. Unintended consequence of TCJA is that charitable contributions may decline due to more taxpayers taking the standard deduction.

Answer 85

Written receipt for cash or property over $250, or vehicle over $500. If vehicle is sold without significant intervening improvement, the taxpayer gets the full value received by the donee organization.

Answer 86

May not exceed 10% of taxable income (C or S Corp)

Answer 87

It can deduct its basis plus 1/2 of the unrealized appreciation, but cannot exceed 2X basis. Must be for ill, needy or care of infants. 10% taxable income rule also applies.

Answer 88

You know I'm right.

Income Tax Flashcards

(112 cards)