Income Tax Flash Cards

Question 1

Tax Penalties

Answer 1

Frivolous Return: $5k
Negligence: 20% of underpayment
Civil Fraud: 75% of underpayment
Failure to File: 5%/month up to 25% (File Five)
Failure to Pay: 0.5%/month up to 25% (Pay-Point)
Estimated Tax: 100% of last year (110% if AGI >150k), 90% of this year

Question 2

Tax Forms

Answer 2

• 1040 • 1040X • 1065 Partnership
• 1040EZ • 1041 – Estate and Trust
• 1120 • 1120s

Schedule A – Itemized Deductions
Schedule B – Interest and Ordinary Dividends
Schedule C – Business Gains/Losses
Schedule D – Capital Gains/Losses
Schedule E – Supplemental Income/Loss – rental real estate, royalties, partnership, S-corp, estates, trusts
Schedule H – Household employement
Schedule SE – Self-employment
Schedule AMT (6251)

Question 3

Dates for Estimate Payments

Answer 3

Remember – 1, 2, 3 months in between!
• April 15th
• June 15th
• September 15th
• January 15th

• October 15th is due date for extended returns

Question 4

Adjustments FOR AGI

Answer 4

• IRA Contributions
• Self-employment tax
• Self-employment health insurance
• Keogh or SEP contributions
• Alimony Paid

Question 5

Itemized Deduction Types

Answer 5

• Medical, Dental, LTC
• Casualty and theft loss
• Real estate taxes
• Charitable gifts
• Home interest mortgage
• State, local, sales taxes
• Investment interest expense

Subject to $254,200 (Single) or $305,050 MFJ phase-out. Any deductions above this amount are phased out at 3% with 80% max

Question 6

Section 179 Qual and Non-Qual Property

Answer 6

Qual:
• Tangible personal property
• 1245 Property

Non-qual:
• Real Estate
• 1250 Property
• Intangible

Question 7

HALE Corporations

Answer 7

Personal services corps taxed at 35%
• Health
• Education
• Legal
• Engineer

Question 8

Dividend Received Deduction

Answer 8

Corp shareholders are allowed a deduction for dividends received.
• 70% of divs received from qual corp can be excluded from income if corp owns less than 20% of distributing corp
• 80% exclusion if ownership 20 - 80%• 100% exclusion if ownership >80%

Question 9

Section 1244 qualified Small Business Stock

Answer 9

• First million $ of stock (C or S) issued after incorp

* Loss of $100k (joint) or 50k (single) considered ordinary income loss

Question 10

S-Corp Advantages / Disadvantages

Answer 10

Advantages:
• Limited Liability
• Conduit of income/loss but losses only up to basis
• Basis = cash + direct loans from shareholder to corp
• Pension plans
• 100% of medical, dental, LTC deductible for 2%+ owner

Disadvantages:
• Corporate formalities
• Sale of stock limited to eligibility standards
• Cannot use NOLs

Question 11

Netting Capital Gains and Losses

Answer 11

Step 1:
STCG netted against STCL
LTCG netted against LTCL

Step 2:
If gain and loss remain, net them

Step 3:
Only $3k of net losses can be used to offset ord income

Question 12

Double Basis

Answer 12

FMV is lower, Carry-over basis is higher
• Selling above carry-over, use carry-over as basis
• Selling below FMV, use FMV as basis
• In between, no gain

Question 13

Bargain Sale

Answer 13

• Sale to charity for below FMV - client must split basis between sale of stock and gift to charity. Basis = Orig Basis * sale price/fmv
• Sold to relative, no split (amount above fmv is a gift)

Question 14

Sale of Personal Residence (Section 121)

Answer 14

• $250k (Single) or $500k (MFJ) of gain from the sale is tax-free if lived in for 2/5 years
• If taxpayer lives in house less than 2 years and has to move more than 50 miles away due to job or health, receive a pro-rated amount (# of months lived in / 24 months)
• If spouse passes away within 2 years of the sale, survivor can take $500k exemption

Question 15

Depreciation Recapture – Sale of depreciated property (1245 & 1250)

Answer 15

• Occurs when business asset is sold and any of gain is due to depreciation claimed in prior years
• Personal property – Section 1245 – taxed as ordinary income
(5 year – Computer, Auto, Truck / 7-yr Office equipment)

• Real property – Section 1250 – taxed at 25%
(27.5 yr – Residential / 39 yr – Non-residential)
CATCORN!

Above and beyond depreciation, taxed at Section 1031 rate – LTCG

Question 16

Installment Sale

Answer 16

• Income taxes due when installment payment is paid
• Each payment is return of capital, capital gain, and interest
• Sale price

Question 17

Like-Kind Exchange (Section 1031)

Answer 17

• Must be reported on tax return
• Must be property used in trade or business
• Can use 3rd party intermediary so you can’t touch cash, otherwise gain will be taxable
• 3 replacement properties within 45 days if first property falls through
• Transaction must be completed within 180 days
• If like-kind or installment sale done with relative who sells within 2 years, immediate taxation of all gain for all related parties

1. No boot received – recog gain = 0
2. 5 Realized Gain is FMV - basis
3. Boot received – Recognized gain is lesser of boot received/realized gain
4. Boot paid is added to basis
5. Basis carries over from prior property

Example:
Mr Sand wants to exchange beach house worth 400k for a ski cabin worth 350k owned by Mr. Snow.

Sand - Basis 275k, Mortgage 150k, 25k beach furniture
Snow - Basis 200k, Mortgage 125k, 50k ski equipment
Realized Gain - Sand 400k-275k = 125k
Snow 350k - 200k = 150k
Boot
Mr. Sand gets 50k boot from Mr. Snow
Substituted basis
Mr. Sand - keeps orig basis of 275k
Mr. Snow - 200k + 50k boot = new basis = 250k
Recognized Gain
Mr. Snow - gave boot, no recog gain
Mr. Sand - gets boot, 50k gain

Question 18

Inventory Cost

Answer 18

• Specific ID - i.e. artist and his work
• FIFO - results in write offs in rising cost environ
• LIFO - matches current rev and current cost• Weighted Average - Running average of cost of all inventory

Question 19

Half-year convention / Mid-quarter convention

Answer 19

• Assets put into service normally are considered put in service mid-year
• Putting > 40% of new assets in service in fourth quarter results, must use mid-4th quarter

Question 20

MACRS / Straight line Depreciation

Answer 20

MACRS
5-year 7-year
1 yr 20% 14.29%
2 yr 32% 24.4%

Straight Line:
5-year 7-year
1 yr 10% 7.14%
2 yr 20% 14.29%

Question 21

Alimony Recapture

Answer 21

Excess alimony calculated after year 3 payment (nothing in year 1 & 2!)
Year 2 max deduction - Year 3 payment + $15k
Year 1 max deduction - Avg (Yr 2 and Yr 3) + 15k(If year 2 deduction used, use lower amount)
Any amounts paid above amount are treated as taxable income to payor, deduction for payee

Shortcuts to hopefully avoid calculation:
No alimony recapture if alimony is going up!!!! (going down is ‘frontloading’)
No alimony recapture in years 1 or 2

Question 22

Donations of tangible personal property to charity

Answer 22

• Deduct basis if item is not used for charitable organization’s charitable purpose
• Deduct FMV if it is (subject to AGI limitations)

Question 23

Grantor Trust

Answer 23

All income and expenses on grantor’s tax return

Powers that cause a trust to be grantor trust:
• Income paid to grantor or spouse
• Accumulated for future use by grantor and spouse
• Used to purchase life insurance on grantor or spouse
• Used to discharge grantors obligations
• Grantor can borrow against trust
• Grantor can retains right without consent of adverse party to change terms

Question 24

Simple versus complex trust

Answer 24

Simple trust
• May not accumulate income
• $300 exemption

Complex Trust
• Can accumulate income
• Anything not distributed is taxed to trust
• $100 exemption

Question 25

AMT Thresholds

Answer 25

* 182,500 AMT is 26% up to this amount, 28% above * 156,500 MFJ Threshold for AMT / MFS is half of this per person – 78,250 * 117,300 Head of Household / Single Threshold for AMT

Question 26

AMT Preference Items (Exclusion item)

Answer 26

Favorable under regular tax, taxable under AMT • Intangible Drilling Costs • Private Activity Muni Bond Interest (except 2009 & 2010) • Oil & Gas % Depletion /Excess intangible drilling costs • Depreciation (ACRS/MACRS not straight-line) No misc deductions

Question 27

AMT Adjustments (Deferral Item)

Answer 27

Timing Difference – generate AMT carry-forward credits • Bargain element of ISOs • Depreciation (Slower under AMT)

Question 28

AMT Add-Back Items / Non-deductable

Answer 28

``` addBATH items: • Bargain element • Advisor Fees/Misc deductions • Taxes (State, Local, Property) • Home equity interest not used for home improvement ``` Non-deductable: • Standard Deduction • Personal exemption

Question 29

Passive Activities

Answer 29

• Rentals, including both equipment and rental real estate (exception: active participation) • Businesses in which the taxpayer does not materially participate include the following. – Limited partnerships (with some exceptions) – Partnerships, S-corporations (with some exceptions), and limited liability companies in which the taxpayer does not materially participate Exemptions from passive activity: • Real estate professionals are active participants if they work more than 750 hrs/yr • Rental real estate exception – if client actively participates, can claim up to $25k passive loss. This 25k phases out at > AGI100k-150k by 0.50 / $1 • Client participates > 500 hrs / year • Client is only participant in business • Client participates 100 hrs which is more than anyone else • If client is retired, but participated 5/10 years

Question 30

Publicly Traded Partnerships (PTP aka MLP) / Non-Publicly Traded partnerships

Answer 30

Public • Public if traded on public market • PTP income can only offset other PTP • PTP losses can only be offset from gains from same PTP • Losses can be suspended and carried forward and used against future gains or at time of disposition Non-public: • Losses from different partnerships can be offset against each other • Non-publicly traded that makes income = PIG • Non-publicly traded that has a loss = PAL

Question 31

Self Employment Income

Answer 31

* Net schedule C income * General partnership income (K-1 income) * Board of Directors Fees * Part-time earnings (1099) * NOT wages or K-1 dist. from S-corp

Question 32

Self Employment Tax

Answer 32

* For CFP test, If taxable wages > 117k, you did something wrong * Shortcut – multiply amount x .1413 to get self-employment tax Detail: • Self-employment wage base = all wages * .9235 (1 – .0765) • On first 117k, 6.2% = SS, 2.9% = Medicare - deductable • Above 117k, 2.9% Medicare – deductable • Above ???, 0.9 Add'l medicare tax – not deductable

Question 33

Tax Credits

Answer 33

• Subtracted from FITBAC dollar for dollar • Child and Dependent Care – 1 child – 20% of first 3000, 2+ = 20% of 6000 • Child tax credit • Adoption credit • Elderly & disabled credit • Foreign tax credit • Earned income credit (refundable) • Amer Opp Tax Credit - 1st 4 years of college, 100% of 2000, 25% of next 2000 • Lifetime Learning credit – 2000 once a year – any school (Can't use learning credits if paying from 529, so pay cash)

Question 34

Realized vs recognized gains

Answer 34

* Realized is economic or inherent gain at the time of transaction * Recognized is part of realized that is immediately taxable (cash!)

Question 35

Tax reduction & management for regular tax

Answer 35

Accelerate deductions: • Pay January 15th estimated tax in December to take deduction 1 year earlier • Pay real estate taxes before end of year • Pre-pay January mortgage (not Feb, Mar, etc) • Charitable contributions – stack 2 years payments into 1 • Buy 179 business assets before end of year • Make repairs and improvements before end of year ``` Defer income until the next year: • Sell investments later • Don't bill customers until January • Exercise ISOs • Use non-qual defer comp • Installment sale or like-kind • Buy an annuity ``` Intra-family transfers • Shift income to lower tax brackets • Installment sale

Question 36

Low Income Housing / Historic Rehab

Answer 36

Historic Rehab • Deduction-equivalent tax credit up to $250k, phases out AGI 200-250k Low Income Housing: • Deduction-equivalent tax credit up to $25k, no phase out • Allowed annually over 10 year 'credit period' • Depreciation is straight-line over 27 ½ years If you give $25k, multiply marginal tax bracket (say 39.6%) x $25k to get deduction

Question 37

Charitable Contributions

Answer 37

• Public charities – Cash: up to 50% AGI, LTCG prop: up to 30% AGI FMV • Private charities – Cash: up to 30% AGI, LTCG prop: up to 20% AGI FMV (if both, limited to private AGI limits) • Basis can be used to get higher AGI limits, esp at death when FMV = basis • Excess contribs carried forward 5 years or until death, then expires • Artists can only deduct expenses, not FMV • If tangible personal property given, can deduct basis only if not used for donees charitable purpose (i.e. art to a hospital) OR FMV if used for charitable purpose • No deduction for donating your time or to a neighbor in need • Must back out rubber chicken dinner cost • Corporations can deduct up to 10% of taxable income with 5 year carry-forward, but can be categorized as a biz expense

Question 38

Sole Proprietor

Answer 38

Undistinguishable from Owner's affairsAdvantages: • Avail of pension plans - Keogh, SEP • 100% medical insurance premiums deductable • No legal formalities - all on individuals tax return • Conduit of income/loss to owner Disadvantages: • Unlimited Liability • Business dies with owner • Capital structure depends on owner's resources

Question 39

Partnerships (General Partnerships)

Answer 39

Association of two or more owners to carry on the business for profit. Advantages: • Avail of pension plans - Keogh, SEP • 100% medical insurance premiums deductable • Partnership can be oral (written preferable) • Conduit of income/loss to owner Disadvantages: • Unlimited personal liability (joint/several) • Dissolve on death, bankruptcy, incapacity of a partner • Capital structure depends on owners' resources • No NOLs

Question 40

Limited Partnership

Answer 40

* Losses up to basis | * LPs cannot actively participate in business

Question 41

Limited Liability Company (LLC)

Answer 41

Can be classified for tax purposes as a partnership or a corporation. Partnership if no more than two of the following: • Centralized Management • Limited Liability • Continuity of life • Fee xfer of interests Governed by contract among owners Can operate like partnership, but members can be involved in day-to-day ops without losing LLC status.

Question 42

Limited Liability Partnership (LLP)

Answer 42

Partnership where members' liability is limited to their own torts. • Generally a converted partnership. In general, when forming a new entity, LLC is preferable because of its flexibility.

Question 43

Regular C Corp

Answer 43

* Separate tax entity * Double taxation * Tax return is a 1120 * Min rate is 15%, Max rate is 35% ``` Advantages: • Separate tax entity • Limited Liability • Unlimited # of investors • Continuity of life • Dividend received deduction (70%) ``` Disadvantages: • Corporate formalities (minutes, etc) • Dividends paid (after-tax) • Accum earnings beyond certain limits subject to double taxation