Indiv Tax Lesson Flashcards

Question

Holding Period for Qualified Dividends

Answer 1

* Holding period: in order to qualify for the lower rates, investors are required to hold common stock for more than 60 days in the 121-day period beginning 60 days before the ex-dividend date. * Holding period: in order to qualify for the lower rates, investors are required to hold preferred stock for more than 90 days in the 181- day period beginning 90 days before the ex-dividend date.

Answer 2

IWI says "no"

Answer 3

Net ST and LT and combine. $3,000 can go to ordinary income, excess losses can carry forward

Answer 4

Realize is just when a sale occurs. Recognized is when its a taxable event (non-IRA)

Answer 5

Holding period requirements: hold 2 years after grant If holding period is met... Grant – not a taxable event Exercise – not a taxable event Sale – taxation upon sale as appropriate LTCG if holding period met and sold more than one year after exercise STCG if hold period met and sold prior to one year from exercise If holding period is not met... Difference between FMV at time of exercise and the option price is considered ordinary income for tax purposes.

Answer 6

The holder of an ISO realizes gain or loss for AMT purposes equal to the difference between the FMV of the stock on the date of exercise and the exercise price (called the “spread”). The spread is an AMT preference item that must be added back when computing AMTI.

Answer 7

Not taxed at time of grant. NQSO are taxed as ordinary income at time of exercise.

Answer 8

First taxable event Tax is based on the spread between market price at exercise and the exercise price actually paid by the executive. Example: Executive A exercises the right to purchase 1,000 shares at $20 per share when the current market value is $30. The spread, or the amount of gain to Executive A, is $10,000 (1,000 shares × $10 stock appreciation). As subject to ordinary income tax on the $10,000, and A's company gets a tax deduction on the same amount, $10,000. Second taxable event LTCG/L if stock is sold more than one year after the exercise. STCG/L if stock is sold one year or less after the exercise.

Answer 9

Partnerships, LLPs, and S corporations are categorized as pass- through entities. This means that income is passed through from the entity to the individual and is taxed to the individual (as opposed to the entity). LLCs can elect to be taxed as a corporation, but LLC members usually elect to be taxed as a partnership. With this election, an LLC is also a pass-through entity.

Answer 10

Deduction is equal to 20% of net income from a specific type of business operated as an S corporation, a partnership, or a sole proprietorship. After income threshold, $383,900 in 2024, $394,600 MFJ in 2025, certain businesses (investment management and other services professionals) will not qualify for the deduction.

Answer 11

* There are two types of debts: recourse and nonrecourse. A recourse debt holds the borrower personally liable. All other debt is considered nonrecourse. * In general, recourse debt (loans) allows lenders to collect what is owed for the debt even after they've taken collateral (home, credit cards). Lenders have the right to garnish wages or levy accounts in order to collect what is owed. * A nonrecourse debt (loan) does not allow the lender to pursue anything other than the collateral. For example, if a borrower defaults on a nonrecourse home loan, the bank can only foreclose on the home. The bank generally cannot take further legal action to collect the money owed on the debt. Whether a debt is recourse or nonrecourse may vary from state to state, depending on state law.

Answer 12

Tax Research Consultant: Generally, an allocation of partnership income or loss is not certain to be recognized unless the partnership maintains capital accounts in accordance with partnership allocation rules. Capital accounts may be changed only to reflect basis adjustments to the common basis of partnership property attributable to a distribution, or the reallocation of a transferee partner's unused adjustment when his interest is liquidated. Basis adjustments made for a transferee partner when he acquires his interest are not reflected in his capital account or on the partnership's books. A special basis adjustment is reflected in capital accounts only if it is allocable, under the basis adjustment rules, to property the partnership currently owns, and the change in the property's tax basis also increases or decreases its book value on the partnership's records. The book value of partnership assets is their tax basis if the partnership purchases the asset. In some circumstances a partnership is permitted or required to revalue its assets so that their book value equals their fair market value. If the tax basis and book value of an asset differ following a revaluation, a basis adjustment may be reflected in the partners' capital accounts only to the extent that the adjustment exceeds the difference. The capital account changes required by a special basis adjustment are made as follows: 1. An adjustment attributable to the unused adjustment of a transferee partner whose interest is liquidated is allocated to the remaining partners' capital accounts in proportion to their interests in the partnership. 2. An adjustment attributable to a distribution in complete liquidation of a partner's interest is made to the distributee partner's capital account. 3. An adjustment attributable to a non-liquidating distribution is shared among the partners in the ratio in which they would share the unrealized income or gain displaced by the adjustment if the asset were sold immediately before the adjustment.

Answer 13

* Loss deductions are also limited by the amount the taxpayer has at risk in the activity * The simplest description is basis minus certain debt for which the taxpayer has no personal liability * S corporations: – Shareholders include only debt that they personally loan to the corporation * Partnerships/LLCs: – General partners include all partnership debt on which they have personal liability – Limited partners and LLC members include only recourse debt for which they are personally exposed and qualified nonrecourse debt for business real estate

Answer 14

* A passive activity is a trade or business in which the taxpayer does not materially participate * Passive activities often involve real estate rentals, whether residential, commercial, agricultural or industrial * Passive income does not include portfolio income such as interest, dividends, annuities and royalties * Passive activities may be conducted by individuals or any type of entity; passive activities conducted by passthrough entities retain their character when reported by the owners * Net income from passive activities is usually ordinary income taxed at rates of up to 37% and the 3.8% surtax on net investment income may apply

Answer 15

Losses from passive activities are deductible to the extent there is passive income * How to calculate passive loss limitations: – Summarize passive income from all activities for the year – Summarize passive losses from all activities for the year – If passive income exceeds passive losses, all losses are deductible – If passive losses exceed passive income, losses are only deductible to the extent there is passive income, and the excess losses are not currently deductible – Carryforward losses may be deducted in future years when passive income is generated or upon disposition of the activity that generated the losses * Form 8582 reports all passive income/loss activity

Answer 16

* Gain recognition is deferred on like-kind exchanges of real property (only) – Investment property for investment property – Trade/business property for trade/business property – Does not apply to personal use property or residences * Gain recognized to the extent of “boot” received – Boot includes cash and debt relief * Losses are not recognized

Answer 17

Re-characterization of cap gains as ordinary income to recapture accelerated depreciation on certain real property

Answer 18

Depreciable and real property used in trade or business and held for more than one year are allowed cap gains treatment of gains and ordinary income treatment of losses

Answer 19

Certain small company stock owners are allowed ordinary income (vs. capital gains) treatment for losses up $50k/individual and $100k/joint

Answer 20

AMTI AMT Base Preliminary AMT Tentative AMT AMT Due ABPTD

Indiv Tax Lesson Flashcards

(44 cards)