Income Tax concepts

Question 1

What is the primary source of tax law?

Answer 1

The Internal Revenue Code

Question 2

Dates for paying estimated taxes?

Answer 2

April 15 (1), June 15 (+2), September 15 (+3), January 15 (+4)

Question 3

What should a taxpayer pay to avoid a penalty?

Answer 3

The LESSER of 90% of the current year’s tax liability or 100% of the prior year’s tax liability. (Or 110% if the taxpayer makes more than 150K.)

Question 4

What is on Schedule A? (Adjustments FROM AGI)

Answer 4

SHRIMP CC
State and Local Taxes (limited to 10K annually)
Home Mortgage Interest
Real Estate Taxes (limited to 10K annually)
Investment interest expense
Medical, dental, and LLC (7.5% of AGI)
Personal property

Casualty/theft losses
Charitable gifts

Question 5

How do you calculate a deductible loss? (real estate)

Answer 5

Deductible losses can only come from federally declared disasters.

First: Use the LESSER of basis or FMV
Second: Subtract any insurance coverage
Third: Subtract $100 (floor)
Fourth: Subtract 10% of AGI.

Question 6

What are itemized miscellaneous deductions (personal exemptions)?

Answer 6

THERE ARE NO ITEMIZED MISCELLANEOUS DEDUCTIONS ALLOWED. ZERO.

Question 7

Can you deduct home office expenses?

Answer 7

If you are a self-employed individual, you use the home area exclusively for business, the home office is used to conduct administrative or management activities, and is no other fixed location where these activities are conducted - yes.

The deduction for an office in a home cannot create a loss.

Question 8

What is considered self employment income?

Answer 8

Net schedule C income
General partnership income (K-1 income)
Board of directors’ fees
Part-time earnings (1099)

NOT self employment:
Real estate income or rents paid
Distributive share of income
Wages from an S Corp
Distributions (K-1) from S Corp

Question 9

How do you calculate self-employment tax?

Answer 9

Multiply self-employment income by 14.13% (.1413)

Question 10

Does FICA tax stop?

Answer 10

Yes, after $147,000 earnings for EMPLOYEE.

Question 11

What is the child tax credit?

Answer 11

2K per each qualifying child under age 17. Up to 1.4K is refundable.

Question 12

What is the credit for child care and dependent expenses?

Answer 12

20% of either 3,000 (one kid) or 6,000 (two + kids)

Question 13

How do you calculate gross profit percentage?

Answer 13

profit / total contract price.

Question 14

What is Section 121?

Answer 14

For sale of residence (Section 121), $500,000 can be excluded from gross income for MFJ and $250,000 for single. To claim the exclusion, the taxpayer must have used the home as a residence for 2 out of the 5 year period before the sale.

Question 15

Publicly traded partnerships cannot use gains or losses.

Answer 15

Publicly traded partnerships cannot use gains or losses.

Question 16

Real estate loss?

Answer 16

Qualifying taxpayers may deduct up to 25K per year of net losses from real estate activity from their active or portfolio income. This deduction is phased out for taxpayers with AGIS between $100K and $150K on a $2 for $1 basis.

Question 17

How many days can a residence be rented out without tax consequences?

Answer 17

14 days

Question 18

How many days can you use a rental home without hurting rental characteristics?

Answer 18

Greater of 10% of days rented or 14 days.

Question 19

What are the sources of phantom income?

Answer 19

Insurance:
Any type of lapse with a loan.
Section 162 life and disability

Investments:
Zero/STRIP Income
TIPS
Declared but not paid dividends and CGs

Tax:
K-1 Income from LP/FLP
Recaptures

Retirement
ESOP Distribution (basis only)
Secular Trust

Question 20

What are adjustments FOR AGI? (above)

Answer 20

KISSA

Keogh or SEP
IRA Contributions
Self-employment tax (50%)
Self-employment insurance
Alimony paid (pre-2019 divorce)

Question 21

What is the maximum amount that an individual taxpayer can give a public charity and deduct in one year for income tax purposes?

Answer 21

60% of AGI

Question 22

How much is an individual’s deduction ceiling for gifts of appreciated LTCG property?

Answer 22

30% of AGI, unless he/she elects to use the property’s basis rather than FMV. An individual using basis can deduct up to 50% of AGI.

Question 23

What is EXCLUDED from gross income?

Answer 23

Gifts, Inheritances, child support, municipal bond interest, worker’s comp, compensatory damages

Question 24

How do you calculate realized gain?

Answer 24

Realized Gain = Total Value Received (FMV of property + Boot) - Adjusted Basis of Property

Question 25

How do you calculate recognized gain?

Answer 25

Recognized gain is the lesser of Realized Gain or Boot Received.

Question 26

How do you calculate substitute basis?

Answer 26

Substitute basis is the FMV of the acquired property, minus (Realized Gain - Recognized Gain)

Question 27

What are the advantages of sole proprietorships?

Answer 27

1. Availability of retirement plans (Keogh, SEP) 2. 100% of medical insurance premiums deductible by owner 3. No legal formalities 4. Conduit of income or losses to owner

Question 28

What are the disadvantages of sole proprietorships?

Answer 28

1. Unlimited liability 2. Business dies with owner 3. Capital structure depends on the owner's personal resources

Question 29

What are the advantages of partnerships?

Answer 29

1. Availability of retirement plans (Keogh, SEP) 2. 100% of medical insurance premiums deductible by partners 3. Partnership agreement can be oral (written preferable) 4. Conduit of income or losses to owner

Question 30

What are the disadvantages of partnerships?

Answer 30

1. Unlimited personal liability for acts of the partnership or a partner acting on behalf of the partnerships (joint and several liability) 2. Partnerships dissolve upon the death, bankruptcy, or incapacity of a partner 3. Capital structure depends on the resources of partners

Question 31

What are the advantages of C Corporations?

Answer 31

1. Separate tax entity 2. Sale of stock to an unlimited number of investors 3. Dividend received deduction (50% rule) 4. Limited liability 5. Continuity of life 6. 21% flat tax rate

Question 32

What are the disadvantages of C Corporations?

Answer 32

1. Corporate formalities 2. Dividends paid (after-tax) 3. Accumulated earnings beyond certain limits are subject to double taxation.

Question 33

What are the advantages of S Corps?

Answer 33

1. Limited liability 2. Conduit of income or loss to owner but limited losses up to basis 3. Basis equals cash plus direct loans made by the shareholder to the corporation

Question 34

What are the disadvantages of S Corps?

Answer 34

1. Corporate formalities 2. Sale of stock limited by eligibility standards

Question 35

What is 1245 Property?

Answer 35

Computers, autos, light duty trucks (5-year depreciation) Office furniture and fixtures (7-year depreciation)

Question 36

What is 1250 Property?

Answer 36

Residential rental property (27.5 year depreciation) nonresidential real property (39 year depreciation)

Question 37

What are the MACRS depreciation numbers?

Answer 37

5-year property: Y1 - 20%, Y2 - 32% 7-year property: Y1 - 14.29%, Y2 - 24.49%

Question 38

What are straight line depreciation numbers?

Answer 38

5-year property: Y1 - 10%, Y2 - 20% 7-year property: Y1 - 7.14%, Y2 - 14.28%

Question 39

What property is eligible for a 179 deduction?

Answer 39

179 - lower, real Tangible personal property (1245 property). CATO. Computers Autos Trucks Office Furniture/Equipment

Question 40

Low income housing passive income credit?

Answer 40

Low-income housing programs are a passive activity that can generate a deduction-equivalent tax credit up to $25,000. Example: If at 37% tax rate, multiply 25K by .37 to get your credit of $9,250.