Income tax Flashcards
(103 cards)
1
Q
What assets are capital assets
A
All assets are capital assets except ACID (accounts receivabe, copyrights, creative works, inventory, depreciable property used in a trade or business (like furniture)
2
Q
What are ordinary income assets
A
Ordinary Income Assets
• Ordinary assets are those assets that, when sold, result in ordinary income to the owner of the asset.
• Some of the assets listed in Section 1221(a) that are not capital assets are actually ordinary income assets, including inventory, accounts receivable, creations in the hands of the creator, and copyrights in the hands of the
creator.
3
Q
What are section 1231 assets
A
Used in trade or business eg timber, coal, iron ore
4
Q
Non taxable exchange basis
A
Example
Mario is considering trading coin collections with his friend Arthur. Mario’s basis in his coin collection is $100 and the FMV of his coin collection is $200. Arthur’s coin collection is worth $350. Arthur will only agree to trade coin collections with Mario if Mario pays him $150 in addition to Mario’s coin collection. If Mario and Arthur trade coin collections, Mario’s basis in his new coin collection will be his carryover basis ($100) plus the boot that he paid ($150), or $250.
5
Q
Is the capital gain on inherited assets short or long term
A
Long.
(Inherited which means someone died)
6
Q
Donee’s adjusted basis when gift tax paid. (Useful for calc capital gain)
A
Donor basis + (net appreciation in value of gift when gifted x gift tax paid / value of taxable gift )
7
Q
What is basis for stock and what is double basis rule.
A
Donors original basis (unless one of two exceptions).
1) lower than original basis. Get to use this. But long or short cap gain treatment is determined by when the gift made. Not original purchase date
2) current fmv is in between value on date of gift and original basis. Than no loss or gain.
8
Q
When does recognition of a gain happen
A
When a realized gain is taxed.
9
Q
Realized gain calc
A
Amount realized - adj basis
Adj basis is cost of property + capital additions - cost recovery
10
Q
Wash sale window
A
30 days. It only applies to selling at a loss and then buying the shares again
11
Q
Cannot recognize losses on
A
Personal asset like a house you live
12
Q
Exclusion value for personal property and other rules
A
Live in house 2 of last 5 years and 250k single. 500k marries.
13
Q
What is the gain if partially lived in a house and then selling it.
A
Pro-rate any gain for the amount of time that the property had a non-qualified use. Thus a 200k gain on a house that was occupied for 4 of the last 5 years would be 4/5 x 200k
14
Q
What are gains and losses for:
1) Personal use asset
2) Capital asset
3) Trade or business asset
4) Trade ordinary income asset
A
15
Q
How much capital loss can you deduct each year? How long can you carry forward
A
$3k, indefinitely (unless a small biz owner using section 1244)
ST/LT losses can offset either ST/LT losses
16
Q
Should you gift an asset to a related party when the donors basis is greater than the FMV of the asset
A
No. Never
The donee basis for gain is higher and less for the losses. So the donee really gets hosed
17
Q
How are gains and losses treated for capital assets
A
They are netted against each other and any losses are applied to the category that the loss still remains in
18
Q
How much capital loss can be netted against AGI each year and what happens to the remaining
A
$3k and remaining carried over. E.g.
19
Q
What is section 267
A
Related parties transfers disallows losses between direct or indirect sales/transfers
20
Q
What is a section 1231 asset?
A
depreciable or real property used in a trade or business held for more than 1 year. A 1231 gain is remaining original asset value after subtracting depreciation.
21
Q
What is section 1245 property
A
Property subject to amortization or depreciation (equipment, copyrights, patents. not real property like land)
22
Q
What is the only way to have a 1231 gain on a section 1245 property
A
sell it for more than it was originally purchased
23
Q
How to get from income to tax due
A
income
less exclusions
=gross income.
Less deductions
=AGI
less greater of itemized or standard deduction
less QBI x 20%
taxable income
gives the tax
less any tax credits
gives tax due
24
Q
How are annuities taxed
A
Annuities are only taxed on the portion of income received that is beyond the principle. This is applied to the annual payments. So if invest 10k in an annuity, but expect to get total payments of 15k, then 33% of the annual annuity payment is treated as ordinary gross income
25
Example
Mario's wife died in YR1. Mario has not remarried. During YR2 and YR3, Mario has continued to maintain a home for himself and his child, for whom Mario is eligible to claim as a depen-dent. In YR1, Mario is eligible to file a joint return for himself and his deceased wife (married filing jointly). For YR2 and YR3, Mario may file as a qualifying widower with a qualifying child. After YR3, Mario may file as a head of household, if he qualifies.
26
How are distributions from qualified plans taxed
Calculating the proportion that is gains vs initial investment. Just like annuity the amount distributed is multiplied by the ratio of adjusted basis (typically the amount put in) over the current FMV
27
What and when is a penalty charged for a distirbution from a qualified plan
before 59.5 years old and it is a 10% penalty
28
What is the additional deduction in addition to the standard deduction and for what situations
$$1950 if over 65 or blind for single or head of HH. All others is 1550. Get the additional for each criteria you meet. So if blind and over 65 get both.
29
How to calculate how much of SS is taxed
If MAGI plus one-half of Social Security benefits is less than 1st hurdle than no tax paid on SS income.
If between 1st and 2nd hurdle then either lesser of
50% Social Security Benefits or
• 50% [MAGI + 0.50 (Social Security Benefits) - Hurdle 1].
If above the second hurdle it’s lesser of 85% of SS benefits or 86% of the equation using hurdle 2 PLUS the lesser of $6k or 50% of the hurdle 1 equation.
30
31
What is 8 things are excluded from gross income per IRS sections 101-150
Item Specifically Excluded from Gross Income
1) Gifts and Inheritances
2) Life Insurance proceeds
3) Scholarships
4) Gain on sale of personal residence (up to specified limits)
5) Qualified distributions from Roth accounts
6) Compensation for injuries and sickness
7) Employer Payments for employer sponsored accident and health plans
8) received Child support payments
32
10 Deductions to get to agi from gross income (also called above the line deductions)
BRP PASS CP SHT
PPP SS BRACHT
**Businesses rental property **is a **premature** choice for **student-teacher pension, alimony **or **health savings** a better choice**** is double **self employment**
1) Business expenses
2) Losses on sale/exchange of property
3) Deductions from rental and royalty property
4) Alimony payments (prior to 12/31/2018)
5) Self-employment: One-half of tax paid
6) Self-employment: 100% of health insurance premiums paid
7) Contributions to pension, profit sharing, annuity plans, IRAs, etc.
8)Penalty on premature withdrawals from time savings accounts or deposits
8) Interest on student loans
9) Health Savings Accounts
10) up to $300 Teacher Expense Deduction
33
What are the 7 Itemized deductions (from AGI).
PMMS QCC
**P**ersonal interest expense (interest on mortgage of 2personal residences up to 750k)
**M**edical Expenses after 7.5% AGI
**M**iscellaneous itemized deductions not subject to the 2% floor (2017 - 2025)
**S**tate and local taxes
**Q**ualified Business Income (20% of)
**C**asualty losses from fed disaster
**C**haritable contributions .
34
What is the child tax credit.
Maximum of 3k for 1 kids, $6k for two or more kids and have low AGITATION
35
When does kiddie tax apply
Unearned income above $2,600
36
3 preferences for AMT
1) **percentage depletion **(The percentage depletion is a measure of the amount of depletion associated with the extraction of nonrenewable resources. It is an allowance that independent producers and royalty owners can apply to the taxable gross income of a productive well’s property.)
2) **intangible drilling costs **
3) **interest in private activity muni bonds** (municipal bond issued by a state or local government to fund projects that benefit the private sector)
If someone is going to take advantage of the above "preferences", than they should file using AMT and these are added back to gross income
Note: Some these 2 deducations cannot be used when calculating AMT: a) state/local tax and b) itemized subject to 2% deductions are lost under AMT
A tax preference item is a type of income, normally received tax-free, that may trigger the alternative minimum tax (AMT) for taxpayers. Tax preference items include interest on private activity municipal-bonds, qualifying exclusions for small business stock, and excess intangible drilling costs for oil and gas - if the amount of these items exceeds 40% of AMT income.
1
Tax preference items are added to the amount of AMT income in the IRS' tax formula
37
How do you treat student loan interest for taxes
Deduct from AGI (above the line deduction)
38
How to treat medical expenses for taxes
Itemized deduction if use that instead of standard.
39
What imposed the first constitutional federal income tax?
Revenue Act of 1913 imposed the first constitutional income tax.
40
What are revenue rulings, determination letters and private letter rulings?
Revenue rulings are based on a set of facts that are common to many taxpayers.
Private letter rulings are issued at the request of an individual taxpayer.
Determination letters are issued prior to the completion of a transaction.
41
Why are above the line deductions more favorable
above the line deductions (for AGI) are more favorable since many phaseouts are based on AGI
42
How is the gain treated on a section 1250 property
Excess depreciation (beyond straight line) is taxed as ordinary income.
- The lesser of the gain or the difference between the depreciation taken and the straight line depreciation will be taxed as ordinary income. This is the recapture of the excess depreciation.
The remaining in-recaptured depreciation is taxed at 25%
The remaining gain is taxed at capital gains rate.
Note. The adjusted basis is the original purchase price minus depreciation
43
Name 5 non-recognition transactions for tax purposes
Nonrecognition Transactions
"Realized" but not "Recognized" Income
Like-Kind Exchanges (section 1031 exchange. Cannot use for personal assets. Basis from original property Carry’s over to new property)
- Principal Residence
- Life Insurance PoliciesInvestment Real Estate
Note boot is cash used in a like for like exchange to top up one of the exchanges. Boot is taxable.
44
When will a party be forced to recognize a 1031 exchange.
If they are in a related party transaction and the other party sells within 2 years. This is because it looks like the original txn was to avoid taxes.
45
When do reinvestments under section 1033 have to happen by
End of year of realization plus 2 years.
Realization occurs when the claim was finally determined
46
What is section 1033
Involuntary conversion and use 1033 so you do not have to recognize gain
Whenever property subject to the provisions of $1033(a) is involuntarily converted, a taxpayer has two years from the end of the tax-year in which any part of the conversion gain is realized (i.e., those amounts received above basis) to replace the converted property with one of equal value.
47
Section 1035 for insurance
ordinary life --> endowment --> annuity (only in this direction)
48
section 1035 transfers for divorse
must occur within 1 year. Basis carries over and all non-taxable
49
Sources of tax law
Statuartory sources--IRS revenue code
Administrative sources (private letter rulings, determination letters)
Judicial sources
50
Statute of limitations for taxes
3 year window to claim a refund when no return filed
no time limitation to collecting taxes IF no return has been filed (3 years after date of return filed for collecting)
3-year statute of limitations for the IRS auditing a tax return and a 10-year statute of limitations for the IRS collecting (if the taxpayer omits 25% more gross income than stated on the tax return, the statute is 6 years)
51
What is failure to file and failure to pay penalty
Failture to five is five %
failure to pay is point five %
52
What estimated tax must you pay
90% of what you owe for the current year or 110% of prior year (if over 150K AGI)
53
Depreciation lifespan by type
Exam Tip
Make a flasheard of the property classes and examples.
3 year: Tractors, rent-to-own property
*5 year: Autos, computers, office equipment
*7 year: Office furniture and fixtures
27.5 year: Rental home
39 year: Office building
54
What is the mid month convention
MACRS, averaging conventions establish when the recovery period begins and ends.
The mid-month convention. Use this convention for nonresidential real property and residenti property.
• Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of.
55
Section 179
Election to immediately expense instead of depreciate. Can do up to 1.22M of business intangible property (patent, copyright) placed in service during the year (cannot use for realty or income property). Up to a cap of $3.05M--after that it is a dollar-for-dollar reduction from the $1.22M
Small businesses that have taxable income might consider this
56
What is amortized over 15 years
Assets subject to amortization include:
goodwill,
trademarks,
covenants not to compete, and
copyrights and patents used in a trade or business.
57
What date counts when a stock is considered worthless
The last day of the year it becomes worthless in (so it can become long term loss)
58
What is section 1244 stock
Section 1244 stock is a stock transaction that allows shareholders of an eligible small business corporation to treat up to $50,000 of losses (or, in the case of a husband and wife filing a joint return, $100,000) from the sale of stock as ordinary losses instead of capital losses.
59
What is IRS section 1245 about
Section 1245 is part of the Internal Revenue Code (IRC) that covers the applicable tax rate for gains from the sale or transfer of depreciable and amortizable property. It applies to certain types of real or tangible business property that have been held by that business for more than 12 months.
60
What is difference between section 1231 and 1245
Simply put, property that falls under Section 1245 (furniture) is the same property that would fall under Section 1231 (1245 propert + buildings) –
The difference between the two is that Section 1245 still has unrecaptured depreciation.
61
How much is student loan interest deductible up to?
$2500
62
What is the standard deduction
$14,600 for single filers and those married filing separately, $29,200 for those married filing jointly, and $21,900 for heads of household.
63
Is alimony included (added to) in gross income
Yes
64
Does a married person filing separately have to use the same standard/itemized deduction as their spouse
YES. A married individual who files a separate return (married filing separately filing status) cannot use a standard deduction if that person’s spouse itemizes deductions.
65
What % of a NOL can be used to offset the current years income
Net operating loss can only offset 80% of the current year's income for years after 12/31/17.
66
When do you have to file with self-employment income
over $400 of net earnings
67
Under how many days of renting out your property do you not have to pay income tax on the proceeds
A person who rents their home for less than 15 days is not required to include the income as it is considered personal property, not rental or mixed use. However, no deductions related to the expense of renting out the home are allowed other than taxes and interest associated with the property that would normally be deductible as an itemized deduction.
68
Explain Section 1231, Section 1245 and Section 1250 and how they relate?
Applicable to business owners who plan to sell property (assets) used in a business and held for more than a yeasecr.
All property used in a trade or business is considered section 1231 property and, for taxation purposes, either section 1245 or 1250 applies, depending on the property’s characteristics.
When section 1231 property is sold at a gain, the amount in excess of the property’s basis and depreciation receives capital gains treatment, which generally means lower tax rates, while the amount attributed to depreciation recapture is treated as ordinary income. When section 1231 property is sold at a loss, the loss is treated as an ordinary loss and may be deducted in full against ordinary income
Section 1231 defines the tax treatment of the gains and losses of property fitting the definitions of sections 1245 and 1250
When sold, gain is taxed as capital gains, loss is considered ordinary income (so can offset income to reduce taxes)
Section 1245: Furniture held for more than a year (1231 property on which there exists an unrecaptured allowed or allowable depreciation or amortization deduction). Use it when this is sold as a gain. amounts previously claimed as depreciation (allowed or allowable) are recaptured at ordinary income tax rates, and the remaining gain is taxed at capital gains rates.
Section 1250: Building/structure held for more than a year. When section 1250 property is sold at a gain, the difference between the straight-line depreciation and the accelerated method claimed is taxed as ordinary income, while the rest of the gain is taxed at capital gains rates.
Will want to apply these sections of the IRS code because if you don't, you are limited to $3k of capital gains loss as a small biz owner
69
What are state and local taxes deduction (if itemizing)
itemized deduction for state and local taxes are limited to $10,000 for all other tax filer or $5,000 for a married person filing a separate return
70
What are 5 ways to reduce tax?
1) Exclusions (above the line deduction)
2) Deductions to AGI (below the line)
3) Reduce marginal tax rates (get capital gains income which is taxed at lower rate)
4) Tax credits
5) Filing status (try to become a head of household if you are single :))
71
What are the 3 types of capital assets
1) Capital assets (most personal use assets (car/painting) investment assets. NOT copyrights, receivables, depreciable asset
2) Section 1231 assets (if in biz for yourself); 1245 (computers, furniture, cars); 1250 (real property)
3) Ordinary income assets (inventory)
What is not a capital asset
copyrights, receivables,
72
What are the different situations for determining basis and how do you calculate.
What does cost basis of asset include. What additional adjustments later?
What are the special basis rules?
Purchase price, sales tax, freight, installation, testing.
Do not include municipality tax
To increase the cost basis: capital improvements that extend the life of the asset
to decrease the cost basis: Section 179 and depreciation
Special basis:
1) Inherited property: FMA at d3kate or alt valuation date (holding is always long term). I inherit house upon parents death
2) Property received as a gift (carryover basis from doner and donor's holding period). parents give me the property before death. WIth 2 exceptions. A) if the gifted property is less.... insert dual basis rule here and note holding basis is based on when gift made
B) Appreciated property with gift tax paid
Divorces
Related parties
73
What is section 1245 and 1250 depreciation recapture rates
For 1245 it is at ordinary income rates
25% for 1250
74
What is taxed at ordinary income rates
1) ST capital gains
2) Section 1245 depreciation recapture
3) Ordinary income
75
How many days apply for a wash sale
30 days
Also note, new basis in a stock in a wash sale is the "disallowed loss" plus the basis at the time of the wash sales repurchase (a real punishment)
76
A realized gain can be what 3 things
Recognized in tax year
deferred
excluded
An exclusion example is if someone sells a house and you can exclude the gain up to 500k (a couple if live in first 2 of the 5 years)--if qualified use (residence) first (if less than 2 years use proportion of time stayed if moved for unforeseeable circumstance). If non-qualified use first, then can exclude a proportion based on years of of qualified use over total years
77
Section 1202
If you are a small biz owner (e.g. physical therapist) you pay zero tax on your gain for the greater of gain is under $10M or 10x your stock basis
78
Concept of double basis rule for gifts
It's about not letting you cheat the system for gifts
79
What is section 1033
80
Like kind exchanges
Has to be real estate 45 days in escrow and 180 days to identify
81
What is Section 1035
Deferral of gains if transaction went this way... life policy --> MEC / endowment -->
annuity
if not, then the gain must be recognized.
82
What is your filing status for that tax year if you are divorced during the year?
What happens if your spouse dies
Single
if spouse dies, can still file MFJ (which is the same as a qualifying widower which means you can use this table for 2 more years if have a dependent child--this is called a qualifying widower--if not must file as single)
83
Who is a qualifying child for the 2k tax credit
1) under 19 or student under 24
2) live with tax payer for 1/2 year
3)does not provide more than 1/2 their own support
child/grandchild/step-sibling/ half-sibling
84
Who is a qualifying RELATIVE for the $500 tax credit
Anyone living with you or child/parent/grandparent, aunts/uncles, that you provide over 50% of support; gross income (as defined on basic tax formula) less than 5,050
and not a qualifying child
85
How are annuity payments taxed?
Use the exclusion ratio to understand which portion is not taxed? (essentially don't pay taxes on the proportion of payment which is what you originally paid to buy the annuity). Thus only include the part of the gain in the gross income.
All annuity payments are taxable after the "term" of the annuity because by then the original investment is paid out.
If death, can deduct as an itemized "loss"
86
5/9 for every month take early
87
Amount of excludable group term life insurance that an employer pays
$50k
88
How does a unit table work for life insurance
$ per 1k of coverage per MONTH (unless tell us the annual amount from the table)
89
What is a private activity bond
A bond used to pay for a private activity (like an industrial park, in contrast to a public activity like a road, school, etc)
These are on an AMT preference, not included in gross income.
Also discharge of indebtedness in bankruptcy is not included in gross income
90
Child support
Never taxable or deductible
91
Gains and losses in divorces in property transfers
no tax consequences
92
Moving expenses
no longer deductible (except military) and if employer pays for you it is income to you
93
Above the line
Generally more biz related
4S AMISH
A alimony
M moving
I IRA
S interest on student loans
H: HSA
trade or business
94
Below the line
More personal in nature (than business)
My income tax check comes Monday
M: Medical
I: interest on mortage and investments
T: Taxes
C charitiable
C: Casualty losses
M: Misc itemized deductions
95
What are misc itemized deductions not subject to the 2% floor. Know the main 4
Income in respect to decendent (get a deduction for any estate tax paid (or proportion of), gambling losses above winning, impairment related work expenses for handicapped (braile reader), annuity losses for decedent annuitant
96
What is the 2% AGI threshold for itemized deductions
97
All below the line tax deductions is capped at what value?
$10k
98
Charitable contrib questions
1) What qualifies as a charity (no a chamber of commerce)
2) Application of the % limits for a public charity
3) Qualified charitable distributions (people 70.5)--direct from account to account
99
Kiddie tax
take unearned income, deduct the $2600.. the remainder is taxed at parent rate...
then combine all income, subtract the kids standard deduction (see below) and get total taxes paid. Of that note the earlier calc to determine the portion parent paid
Note: Standard deduction for a child who is claimed as a dependent is greater of $1300 or 450+earned income (to a max of 14,600). Use this to calculate the kids total taxes
100
What is AMT
Starts at taxable income and add back things. This is a tax on loopholes (stock options, oil/gas)
101
Where do at risk and passive loss rules most apply (and suspended loss)
LLCs
102
Publicly traded LP's cannot offset gain/losses from each other (for passive income)
They are in their "own room" but non-publicaly traded LP's can offset each other (for losses/gains) to deny rich folks who have more ownership in public companies this ability
103
Failure to file and failure to pay penalty
The Failure to File penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty won't exceed 25% of your unpaid taxes.
Failure to pay is .5% up to 25%
If both a Failure to File and a Failure to Pay penalty are applied in the same month, the Failure to File penalty is reduced by the amount of the Failure to Pay penalty for that month, for a combined penalty of 5% for each month or part of a month that your return was late.
If after 5 months you still haven't paid, the Failure to File penalty will max out, but the Failure to Pay penalty continues until the tax is paid, up to its maximum of 25% of the unpaid tax as of the due date.
If the return is more than 60 days late, the minimum Failure to File penalty is the amount shown below or 100% of the underpayment, whichever is less:
