Income Tax Flashcards
(144 cards)
1
Q
What is a Capital Asset?
A
Most personal use and investment assets
2
Q
What is Specifically Not Capital Assets?
A
ACID Accounts/Notes receivable Copyrights & creative works Inventory Depreciable property used in business
3
Q
What are 1231 Assets?
A
Assets being used in trade or business.
4
Q
What are the specific 1231 Assets?
A
Depreciable and real property Timber Coal Iron Ore Certain Livestock Unharvested Crops
5
Q
The Initial Cost Basis is the Amount You Pay Plus What?
A
Sales/excise/real estate tax Freight Installation and testing Legal and accounting fees Revenue stamps Recording fees
6
Q
What Will Increase Adjusted Basis to Property?
A
Capital improvements Assesments for local improvements like water connections, sidewalks, and roads Cost of restoring damaged property Legal fees Zoning costs
7
Q
What Will Decrease Adjusted Basis?
A
Exclusions from income of subsidies for energy conservation measures
Casualty or theft loss deductions and insurance reimbursements
Depreciation
8
Q
How is Inherited Property Taxed When Sold?
A
Long term capital gains
9
Q
What is the General Basis Rule for Gifting Property?
A
The basis for the donee is the same as the donor
10
Q
What is the Basis on Gifted Property that has FMV Less than the Donor’s Basis?
A
Double Basis Rule:
If donee sells for > FMV (as of date of gift), then the the donor’s basis is carried over
If donee sells for < FMV (as of date of gift), then the basis is the FMV when gifted
11
Q
What is the Basis on Gifted Property that the Donor Paid a Gift Tax?
A
The donor’s basis is increased by the appreciated portion of the gift tax.
Basis + (appreciation / FMV x Gift Tax)
12
Q
What is the Holding Period General Rule for Gifting?
A
The donor’s holding period carries over;
Unless the property is double basis and sold for a loss, then the holding period starts when the gift is made
13
Q
What is the Related Party Transactions Rule?
A
When there is a loss, the transferor’s loss is forever lost and the holding period starts at the date of sale
14
Q
What is the Basis Rule for Selling to a Charity for Less than FMV?
A
The basis must be allocated between the portion sold and given:
Amount Realized / FMV x Basis = Basis for sale purposes
15
Q
How is the Holding Period Determined from The Purchase Date to Sell Date?
A
The day of disposition is included in the holding period, the day of acquisition is not.
16
Q
What is the Difference Between Realized and Recognized Gains?
A
Realized gains occur at disposition of property, Recognition occurs when the gains are taxed
17
Q
Is an Index Fund for Index Fund Considered a Wash Sale?
A
Yes, but a Large Cap Managed Fund for an Index Fund is not.
18
Q
When a Wash Sale Occurs, How is the New Tax Basis Determined?
A
The disallowed loss must be added to the cost basis of the new purchase
19
Q
What are the Requirements for the 121 Exclusion?
A
Must live in the home as principle residence for 2 out of the last 5 years, Can only be used every 2 years, and any appreciation during non-qualified use periods aren’t excludable
20
Q
When can the 121 Requirements be excepted for Pro Rata Treatment?
A
A change in employment
A change in health
Other unforeseen circumstances
21
Q
Can Losses from Personal Property Be Deducted?
A
No
22
Q
What are the Steps to Determining Net Capital Gains or Losses?
A
- Net LTCG against LTCL
- Net STCG against STCL
- If both LT & ST gains, then you’re done
- If either LT or ST has gains and the other has losses, then net them together
23
Q
What is the Annual Limit to Net Capital Losses Reducing AGI?
A
$3,000
The remainder is carried forward indefinitely to reduce future gains, or to deduct from other income until used up
24
Q
When Can Capital Loss Be Recategorized as Ordinary Loss Up to $50k?
A
Loss on small business stock if the business is:
domestic
< $1 million in capital at time stock issued
Incorporated before 11/6/1978
Loss is sustained by original owner
Issued for money or exchange
For the previous 5 years to loss, >50% of income had to have been from active sources
25
What is Section 267?
Section 267 disallows any losses when selling or transferring between related parties. The receiving party has double basis.
26
What is a 1231 Asset?
Depreciable or real property used in trade or business with a LT holding period.
27
What is the Benefit to Gains or Losses with 1231 Assets?
Gains are treated as LTCG and Losses are treated as ordinary losses
28
What is 1245 Property?
Personal property used in trade or business including depreciable equipment, patents, copyrights, and other intangibles.
29
What are the Tax Consequences if 1245 Property is Sold for Less than the Depreciated Amount?
Ordinary Loss of the amount less than the depreciated value
30
What are the Tax Consequences if 1245 Property is Sold for More than the Depreciated Amount?
Ordinary Gain on the amount depreciated
31
What are the Tax Consequences if 1245 Property is Sold for More than the Original Amount?
The 1245 depreciation amount is ordinary gains, and the remainder is 1231 LTCG.
32
What Property Qualifies for 1031 Like Kind Exchanges?
Property held for productive use in trade or business or as an investment
33
If in a Like Kind Exchange the Replacement Property Hasn't Been Chosen Yet, What are the Requirements to Avoid Recognizing Gains?
An escrow agent must hold the proceeds from the original property and the replacement property must be identified within 45 days, must close within 180 days or by the tax due date
34
In a 1031 Like Kind Exchange, which Party Must Recognize a Gain?
The party trading down will receive boot and will have to recognize a gain of that amount. The party trading up has no gains.
35
How Does Basis Change In a 1031 Like Kind Exchange for the Party Trading Up?
The amount paid in boot is added to their existing basis.
36
How Does Basis Change In a 1031 Like Kind Exchange for the Party Trading Down?
If the boot received is beyond their deferred gains, then the excess boot will reduce their basis by that much, if not then the basis stays the same.
37
How do 1031 Like Kind Exchanges Differ Between Related Parties?
If either party disposes of the property within 2 years, both parties are required to recognize an gain/loss that wasn't in the year of the exchange.
38
How is Money or Property Received By A Corporation for it's Stock Treated Tax wise?
It is considered an infusion of capital and not subject to income tax
39
What is 1033 Involuntary Conversion?
The destruction, theft, seizure, condemnation, or sale/exchange under threat of condemnation of property. Typically Eminent Domain.
40
How are 1033 Involuntary Conversions Taxed?
Nontaxable treatment of gains if used to reinvest
41
What is the Time Period to Replace Property Under a 1033 Involuntary Conversion?
2 years or 3 years for condemnation of realty from the year end of when the gain is realized
42
How are Transfers Between Spouses Incident to Divorce Taxed?
Tax free and the basis stays the same
43
How is Straight Line and Accelerated Depreciation Recapture Taxed?
Straight Line = 25%
| Accelerated = Ordinary Income
44
What are the Requirements for Filing as Head of Household?
Paid more than half the cost of keeping his home
The spouse did not live in the home during the last 6 months of the year
The taxpayer's home was the main home for the child for more than half the year
The taxpayer can claim the child as a dependent
45
What are the Requirements for Filing as a Qualifying Widower with a Dependent Child?
If the taxpayer was eligible to file jointly with the spouse when they died
The taxpayer isn't remarried
The taxpayer has a child for whom he can claim an exemption
The child lived with the taxpayer all year and paid more than half the cost of keeping the home
Can file for 2 years
46
What is the 2012 Standard Deduction?
$5,950 for single and separate
double that for filing jointly and widower
around 1.75 x for head of house
47
Who Qualifies for the additional Standard Deduction?
If >= 65 or blind
| Eg: If > 65 and blind, you get two additional standard deductions
48
What is a Dependent's Standard Deduction?
The greater of $950 or $300 + earned income (not to exceed the normal standard deduction)
49
Which Tests Must a Qualifying Child Meet?
The relationship test
The abode test
The age test
The support test
50
What is the Qualified Child Relationship Test?
The qualifying child must be:
| A descendant of the taxpayer, the taxpayer's sibling, or a descendant of the taxpayer's sibling
51
What is the Qualified Child Abode Test?
Must live with the taxpayer for more than half the year. Absences for illness, education, business, vacation, or military service count as living with the taxpayer.
52
What is the Qualified Child Age Test?
Under age 19, or under 24 if a full-time student for at least 5 months of the year.
53
What is the Qualified Child Support Test?
The taxpayer must provide >= half of the child's support for the year
54
What are the 4 Requirements for the Non-Custodial Parent to Claim the Child as a Dependent?
1. Must be legally divorced, separated, or not lived together for the last 6 months
2. The child receives > half support from parents
3. The child is in custody of the parents for > half the year
4. The custodial parent signs form 8332, stating they will not claim the dependent
55
What are the Qualified Relative Tests?
Relationship test
Gross income test
Support test
Not a qualifying child test
56
What is the Qualified Relative Relationship Test?
```
Must be taxpayer's:
Descendant
Sibling
Ancestor (Parent, Grandparent, etc)
Step parent
Niece or Nephew
Uncle or Aunt
An immediate In law
NO COUSINS
```
57
What is the Qualified Relative Gross Income Test?
The dependent's gross income must be < the exemption amount for the year
58
What is the Qualified Relative Support Test?
Must provide > half the support for a dependent
59
What is the Qualified Relative Not a Qualifying Child Test?
Can't be a qualifying child to be a qualified relative
60
What is the Joint Return Test?
To claim a qualified child or relative, if that dependent is married, they can't file a joint return unless it is to claim withheld taxes.
61
What is the Citizenship or Residency Test?
The dependent has to be a citizen of the US or a resident of the US, Canada, or Mexico during some part of the year to be claimed as a qualified child or relative
62
What is a Multiple Support Agreement?
When a dependent receives support from many sources and none of them provide > 50% individually
63
Who Can Claim a Dependent Under a Multiple Support Agreement?
Must provide > 10% support
2 or more people who meet the other tests provide support combine to > 50% of support
Must get signed statement from others that they will not claim dependent
64
When Must You Make Quarterly Estimated Tax Payments?
If taxpayer is expected to owe >= $1k after subtracting withholding and credits
If the expected withholding and credits are less than the smaller of:
90% of tax to be shown on tax return or 100% of tax shown on prior years tax return
65
What is MAGI?
Modified Adjusted Gross Income:
AGI + the following:
Tax exempt income earned in a foreign country, a US possession, or Puerto Rico
Tax exempt interest earned on savings bonds used for higher education
Amounts deducted as qualified tuition expense and student loan interest
Amounts excluded from income for employer provided adoption assistance
66
How do You Determine How Much of a Social Security Benefit to Tax?
MFJ Hurdles = $32k and $44k
Other Hurdles = $25k and $34k
Filing separately = $0
Additional amounts = $6k (MFJ), $4,500 (other filers)
If MAGI + 1/2 SS < 1st hurdle, then $0 tax
If MAGI + 1/2 SS > 1st hurdle, then:
Lesser of 50% of SS or 0.5 x (MAGI + 1/2 SS - 1st hurdle)
If MAGI + 1/2 SS > 2nd hurdle, then:
Lesser of 85% or (0.85 x (MAGI + 1/2 SS - 2nd hurdle)) + lesser of additional amount or 0.50 x (MAGI + 1/2 SS - 1st hurdle)
67
When is Compensation for Injury or Sickness Exempt from Gross Income?
Workers Compensation
Damages received on account of personal physical injuries or sickness
Payments from accident or health insurance that is personally owned
68
What is the General Rule for Employer Sponsored Accident or Health Plans for Gross Income?
Contributions made by the employer are excluded from income, but benefits received beyond the amount contributed must be included in gross income
69
Evaluate How Well You Know the Different Types of Income that may be Excluded?
```
Gifts or Inheritances
Life Insurance Proceeds
Scholarships
Gain of Sale of Personal Residence
Distributions from Roth IRAs or Roth 401ks
Compensation for Injuries & Sickness
Employer Sponsored Accident & Health Plans
Certain Fringe Benefits
Foreign Earned Income
Municipal Bonds
Discharge of Indebtedness
```
70
Evaluate How Well You Know the Above the Line Deductions
```
Trade or business expenses
Losses on a sale or exchange of property
Rental or royalty property expenses
Alimony payments
Half of self employed taxes
Health insurance premiums by self employed
Contributions to pension, profit sharing, annuity plans, IRAs, etc
Penalty on premature withdrawals
Moving expense
Interest on student loans
HSAs
```
71
What are the Above the Line Deductions for Self Employed?
Educational expenses
Business Gifts
Entertainment Expenses
72
What are the Rules for Self Employed Above the Line Deductions for Educational Expenses?
Must be to maintain or improve existing skills and/or to meet the requirements of the employer, profession, licensing, or state law
73
What are the Rules for Self Employed Above the Line Deductions for Business Gifts?
Limited to $25 per gift plus wrapping
| If < $4 and has logo doesn't apply because it counts as advertising
74
What are the Rules for Self Employed Above the Line Deductions for Entertainment Expenses?
Limited to:
50% of meals and entertainment
100% of transportation costs
Can't be lavish
75
Evaluate How Well You Know the Deductions Below AGI?
```
Medical Expenses
State and Local Taxes
Contributions to qualified charitable organizations
Personal casualty losses
Personal interest expense
Misc itemized deductions
```
76
What are the Rules for the Medical Expenses Deduction?
Limited to amount in excess of 7.5% of AGI
Expenses for taxpayers and their dependents
Transportation and lodging for doctor visits are limited to $0.23 per mile and $50 per night per person for lodging.
77
What are the Rules for the State/Local Taxes Deduction?
May deduct property tax and either income tax or sales tax
78
What are the Limits for Contributions of Cash, Ordinary Income Property, STCG Property, or all Loss Property to Charitable Organizations?
Public charity = 50% of AGI
Private charity = 30% of AGI
Must use the lesser value of FMV or adjusted basis
79
What are the Limits for Contributions of LTCG Property (Intangible, Real, Tangible Related Use) to Charitable Organizations?
Public charity = 50% for basis or 30% for FMV
| Private charity = 20%, must use basis
80
What are the Limits for Contributions of LTCG (Unrelated Use) Property to Charitable Organizations?
Must use Basis
Public charity = 50%
Private charity = 20%
81
What if a Donor Pays More than the Limits to Charity?
Can carry forward the undeducted amounts for 5 years
82
What are the Rules for Personal Casualty Loss Deduction?
Deductible amount is 10% above AGI and $100 floor for each casualty
83
What are the Limits to the Mortgage Interest Deduction?
Limited to $1 million of mortgage debt
Limited to primary and secondary homes
HELOCs are limited to $100k of debt
84
What is the Limit to Misc. Deductions?
Must be in excess of 2% of AGI
85
What is the Adoption Expense Credit?
Max credit of $12,650 for expenses of adopting a child
Phased out with MAGI of $189,710 - $229,710
Not a refundable credit but can be carried forward
86
What is the Child Tax Credit?
$1,000 for each child under 17 and US citizen
Step Children and Foster Children Count
Parents must file jointly and claim each child as a dependent
87
What is the Kiddie Tax?
Net unearned income of a child under age 19 (24 for full time students) is taxed at the parents rate
88
How Much Unearned Income Must a Child Make for the Kiddie Tax to Kick In?
The amount in excess of $1,900
The first $950 is the standard deduction
The second $950 is taxed at the child's rate
89
What is the Primary Source of Tax Law?
The IRC
90
What is the Secondary Source of Tax Law?
Administrative law sources
91
What are Regulations and What are the Three Types?
Interpretations By the Dept. of Treasury of the IRC
| The 3 types are proposed, temporary, and final
92
What are Revenue Rulings?
Interpretations of tax laws by the IRS at the request of taxpayers and are published weekly in the internal revenue bulletin, can be cited as precedent
93
What are Private Letter Rulings?
Issued by the IRS at the request of the taxpayer, cannot be relied upon as precedent
94
What are Determination Letters?
Determinations issued by local District Directors for completed transactions
95
What is the Third Source of Tax Law?
Judicial Sources
96
What is the Statute of Limitation on Claiming a Refund?
3 years
97
What is the Statute of Limitations for the IRS to Audit and Collect Taxes?
Once a return is filed, the IRS has 3 years to audit and 10 years to collect taxes. If the return omits > 25% of gross income, the audit limitation becomes 6 years
98
What is the Interest Rate for Noncompliance?
The federal short term rate plus 3% compounded daily
| Starts on the original due date regardless of extensions
99
What is the Failure to File Penalty?
5% to 25% a month
| If a fraudulent failure to file then 15% to 75%
100
What is the Failure to Pay Penalty?
0.5 % to 25% per month
| If failure to file and pay are assessed then the file penalty is reduced by the pay penalty
101
How Does a Taxpayer Avoid Paying an Underpayment of Estimated Tax Penalty?
Withhold 100% of the previous year's return (Unless the previous year was a short year) or 90% of the current year's liability
102
When are Estimated Tax Payments Due?
January 15
April 15
June 15
September 15
103
Who May Accompany a Client During an Audit?
Attorney
CPA
Enrolled Agent
No CFPs allowed
104
What Cases Do the Small Cases Division Cover?
< $50k
| No appeals available
105
What is the US Tax Court?
No payment of tax is necessary to bring a claim here
| Appeals to US court of appeals
106
What is the US Court of Federal Claims?
In Washington DC only
Taxes must be paid before bringing claim
Appeals to US Court of Appeals Federal Circuit
107
What is the US District Court?
Tax must be paid before bringing claim
Only court that allows a jury
Appeals to US Court of Appeals
108
what is the US Court of Appeals?
12 circuits
| One circuit isn't bound by the decision of another circuit
109
What are the Three Methods for Cost Recovery?
1. Depreciation for tangible assets
2. Amortization for intangible assets
3. Depletion for natural resources
110
What are the Requirements for Property to Be Depreciable?
You must own the property
It must be used for business
It must have a determinable useful life
It must be expected to last > 1 year
111
How is the Annual Depreciation Amount Determined Using the Straight Line Method of Depreciation?
Adjusted Basis - Salvage Value = Depreciable amount
Depreciable amount / Estemated useful life
(Must Prorate the first year)
112
When Can Software Be Depreciated?
If it is:
Readily available to the public
Subject to a nonexclusive license
Not been substantially modified
113
What is ACRS?
Accelerated Cost Recovery System put in place in 1981 where predetermined recovery periods set by the IRS were used to depreciate. Replaced by MACRS in 1986.
114
What is MACRS?
Modified Accelerated Cost Recovery System
115
What are 3 Year Properties?
Tractors, horses, and rent-to-own property
116
What are 5 Year Properties?
Autos, computers, office machines, breeding/dairy cattle, rental property appliances & furniture, solar/wind property
117
What are 7 Year Properties?
Office furniture, agricultural machinery
118
What are 27.5 Year Properties?
Rental homes; uses mid month convention
119
What are 39 Year Properties?
Nonresidential real property; uses mid month convention
120
What is the Mid Month Convention?
MACRS allows only half of the first month placed in service to be depreciated
121
What is Section 179?
Election to expense assets, reduces depreciable basis
122
What are the Section 179 Limits?
```
The lesser of:
$139k or $699k - PPS (if PPS is > $560k)
Property Placed in Service
Taxable Income
Not available for real or production of income property
```
123
Which Assets are Subject to Amortization?
Goodwill
Trademarks
Covenants not to compete
Copyrights and patents used in trade or business
124
What is the Cost Depletion Method?
Asset basis / estimated total number of recoverable units x number of units sold
125
what is the Percentage Depletion Method?
A statutory percentage is applied to the gross income from the property (limited to 50%)
126
How Much Liability Does a Limited Partner Have?
Only as much as they have contributed
127
How Does a Limited Partner Lose His Limited Liability Status?
When his surname is in the name of the partnership, unless a general partner also has the same surname
If he participates in day to day activities
If he learns the partnership is defectively formed and fails to withdraw
128
How do Taxes on Earnings in a Partnership Differ for General and Limited Partners?
A general partner's portion of earnings are subject to self employment taxes, limited partner's portions are not
129
What Form do Partners Get From the Partnership for Taxes Each Year?
Form K-1
130
If a Partner Contributes Money or Property in Exchange for Ownership in a Partnership, What are the Tax Ramifications?
No gain or loss and the amount of cash + adjusted basis of property becomes his basis for the partnership interest
131
What if a Partner Contributes Services in Exchange for Ownership in a Partnership, What are the Tax Ramifications?
He would recognize ordinary income for the amount of services performed and that amount would make up his basis in the partnership interest
132
What Form Must a Partnership File Each Year?
Form 1065
133
How Does a Partner's Basis Change Each Year?
Earnings increase basis
| Losses, nondeductible expenses, and distributions reduce basis
134
What are the Tax Effects of Withdrawals from a Partnership?
Withdrawals are considered a return of basis and reduce basis. Once withdrawals reduce basis to zero, the rest is capital gains.
135
What is the Dividend Received Deduction?
A deduction only allowed to corporations when they receive dividends from other corporations.
136
What are the Limits to DRDs?
The amount available to deduct depends on how much the receiving corp. owns of the sending corp.
< 20% ownership = 70% deduction
20% to 80% ownership = 80% deduction
> 80% ownership = 100% deduction
137
What are the Tax Options for a Corporation when it Has a Loss?
Can carry back 2 years and/or forward 20 yrs
138
What is a Personal Service Corporation?
```
A C corp substantially owned by employees and most operate in either:
Health
Law
Engineering
Architecture
Accounting
Actuarial Science
Consulting
```
139
How are PSCs Taxed?
Flat 35% corporate rate
140
What are the Requirements to be an S Corporation?
Domestic corporation
Max of 100 shareholders
May not be owned by nonresident aliens, C corps, partnerships, and certain trusts
141
What Types of Companies Aren't Eligible to be an S Corporation?
Insurance
Domestic International Sales Corps
Financial Institutions
142
How Many Classes of Stocks Can an S Corp Have?
Generally only one
| Two if the only difference between them is one has voting rights and the other doesn't
143
What Must an S Corporation File Each Year?
```
Form 1120S (informational return)
and provide a K-1 to shareholders and IRS
```
144
What are the Tax Ramifications of Withdrawals or Distributions from an S Corp?
Considered a return of capital to the extent of basis. Excess distributions is capital gains.
