Pre Study Materials Flashcards
(125 cards)
1
Q
Up to what amount is student loan interest deductible?
A
Student loan interest is only deductible up to $2500
Phaseout for income on deductibility is $75,00 - $90,000
2
Q
Who can be included for the family Tax Credit?
A
- It is a $500 credit for those who would qualify as a a dependent.
- Can include children over the age of 17 who are college students, and others who meet the definition of an independent
3
Q
Who qualifies for the Child Tax Credit?
A
$2,000 credit for each dependent UNDER 17. Includes stepchildren and foster children.
-Married people must file MFJ to get credit
-Eligible children are: under 17, a US citizen, and claimed as dependent on the tax return.
-Up to $1600 is refundable
-Subject to AGI limits
4
Q
How does the Child & Dependent Care Credit work?
A
-Must have employment-related care costs for either:
*Dependendent under the age of 13, or handicapped dependent or spouse.
-Credit amount is 20% * eligible costs if AGI is over 43k.
* Expenditures that qualify are lesser of actual costs or $3,000 for one individual , $6,000 for two or more.
- Can be up to 35% if lower AGI.
5
Q
Below market Loans and Imputed Interest
A
$0-$10,000 loan = Imputed interest of $0
$10,001 - $100,000 = Lesser of
*Net Investment Income,
Interest calculated using AFR (applicable federal rate) less interest calculated using stated rate of loan
**If borrower’s Net investment income is less than $1000, $0 imputed interest.
Greater than $100,000
*Interest calculated using AFR less interest calculated using stated rate of the loan
6
Q
Business Travel Deductibility
A
For a domestic trip, the travel is only deductible if the trip is primarily for business. The hotel and meals are deductible for the days the traveller did work.
7
Q
Capital Improvements as medical deduction
A
General rule is: expense is less the increase in value to the home as an eligible deduction. Certain improvements are not reduced by increase in home value: exit ramps, widening of hallways, and lowering of bathroom fixtures but not elevators.
8
Q
Deducting Investment interest expense
A
It is limited to net investment income.
9
Q
Personal residence interest deduction limit
A
It is limited to the first $750,000 of indebtedness
10
Q
Deductions on donations to a charity for Public Charities
A
Ordinary income - lesser of basis or FMV - 50% of AGI ceiling
Cash - 60% of AGI ceiling
LTCG property - either FMV or Basis - 30% of AGI if FMV, 50% of AGI if basis
LTGC tangible property related unrelated use - Lesser of FMV or Basis - 50% of AGI
11
Q
Charitable contributions from IRAs
A
Limited to $100,000 (lessened by ira contributions after 70 1/2)
Owner myst be 70 1/2 before making them
12
Q
AMT add backs
A
*Accelerated depreciation for real and personal property
- Real property depreciation in excess of 40 year straight line
- Personal property, depreciation inexcess of 150% declining balance method
* Standard deduction if itmeized deductions are not used
* Itemized deductions not allowed for AMT
13
Q
AMT Preference Items
A
- Percentage Depletion
- Amount of % depletion taken for regular tax in excess of the adjusted basis of the property at the end of the year is a preference item.
- INtangible drilling costs
- AMT requires 10 yr amortization.
- Preference is excess of regular tax deduction over AMT amount
- Interest on private activity bonds
- This interest is not taxable for regular tax purposes, but is included in income for AMT purposes.,
14
Q
Failure to File penalty
A
accrues at 5% / month up to 25%
- if fraudulent, it increases to 15% / month up to 75%.
-If filed more than 60 days late, minimum failure to file penalty is $485 or the amount of tax due.
15
Q
Failure to pay penalty
A
accrues at a rate of .5% per month up to 25%
- If assesed failure to file and failure to pay, the failure to file penalty is reduced by thte failure to pay penalty.
16
Q
Estimated tax due dates
A
April 15th, June 15th, September 15th, and January 15th.
17
Q
Accuracy - related penalty
A
20% and applies to any underpayment due to negligence or disregard of rules, regulations, or substantial understatement of income tax.
- Substantially understated is the understatement of tax exceeds the greater of 10% of the correct tax or $5,000.
- Fraud penalty is 75% of the tax underpayment
18
Q
Private Letter Ruling
A
A ruling from the IRS on how it will reat a proposed transaction. It is binding on hte IRsa for the taxpayer that requests it.
19
Q
U. S . Tax Court
A
No payment of tax is necessaryin order to bring a claim before the US tax court.
Trial by jury not available.
Small Tax Case division handles deficiencies under $50,000 at the taxpayer’s request.
Appeals are to US court of appeals.
20
Q
US Court of Federal Claims
A
Sits only in Washington DC
ONly hears claims against the USA
Tax must be paid prior to proceed in this forum
Appeals are to US court of appeals for the Federal Court
21
Q
US District Court
A
Tax Deficiecies must be paid
US District court is only forum that allows a jury
This court is bound by decisions of its appeals court and the US supreme court
22
Q
US Court of Appeals
A
thre aere 12 Circuit courts, located throughout the US
The US court of appeals handles appeals from tax court and district court
The court of appeals of one region is not bound to follow the decisions of the court of appeals in another region
23
Q
US Supreme Court
A
Decisions are binding on taxpayers and IRS
They review cases if:
* there is a conflict btwn circuit courts
* an important and recurring problem in ta law administration is involved
* many tax payers are involved
* the decision of a lower court conflicts with long-standing practice or regulations
24
Q
Depreciation begins when…
A
You place the decpreciable property into service.
ex. A house is ready to rent out in July. House is considered placed in service in July, even if it is not actually rented at that time.
25
Property is retired from service when....
*It is sold or exchanged
* is converted to personal use
*is abandoned
*is transferred to a supplies or scrap account
* is destroyed
26
Accelerated Cost Recovery System (ACRS) and Modified...(MACRS)
Assets subject to wear, tear and obsolescense
Must have a determinable usefule life and
Are tangible personalty or realty
**MACRS may be used to depreciate most property.
27
Straight Line Method of Depreciation
Allows tax payer to deduct the same amount of depreciation each year over useful life of property
Calculation: Subtract the salvage value, if any from basis
*the balance is the total depreciation you can take over the useful life of the property.
*Divide the balance by the number of years in the useful life. This gives you the yearly depreciation deduction.
***If in first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use.
28
Section 197 intangibles
You must amortized these costs. INtangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements
29
When you can depreciate computer software
When it was not included in the larger purchase of a business.
You can depreciate it if:
It is readily available for purchase by general public
It is subject to a nonexclusive license
It has not been substantially modified.
If it meets those test, you can depreciate it using straight line method over a life of 36 months.
30
ACRS
Accelerated recover system - Depreciation based on recovery periods instead of useful life. These periods are pre-determined by IRS.
MACRS replaced this in 1986.
31
MACRS - Property you cannot depreciate
Property placed into service prior to 1987
Certain property owned or used in 1986
Intangible property
Films, video tapes, recordings
Certain corporate or partnership property acquired in a nontaxable transfer
Property you elected to exclude from MACRS
32
Two MACRS depreciation systems
General Depreciation System (GDS) and the Alternative Depreciation System ( ADS)
33
ADS must be used on ...
Listed property used 50% of less in qualified business use
Any tangilbe property used mostly outside of USA
Any tax - exempt property
Any tax-exempt bond - financed property
All property sued mostly ina farming biz and placed in service in any tax year during which an election no to apply the uniform capitalization farming rules to certain farming costs is in effect
Any property imported from a foreign country w/ trade restrictions or engages in other discriminatory acts.
34
Know the GDS property classifications
3 year, 5 year, 7 year, 27.5 year, 39 year
35
3 year property (GDS)
*Tractor Units for over the road use
*any race horse over 2 yrs old when placed in service
*any other horse (not racehorse) over 12 yrs old when placed in service
*Qualified rent to own property
36
5 Year Property (GDS)
*Autos, taxis, busses
*Computers and periperal equipment
*Any property used in research / experimentation
*Breeding Cattle and dairy cattle
*Appliances, carpet, furniture, used in residential real estate
*Certain geothermal , solar, wind energy property
37
7 Year Property (GDS)
*Office Furniture and fixtures
*Agricultural machinery
*Any property w/o class life and has not been designated in another class
*Certain motorsports entertainment complex property
*Any natural gas gathering line placed after 4/11/05.
38
10 year property (GDS)
*Vessels, barges, tugs, and similar water transportation equipment
*any single purpose agricutulral or horticultural structure
*Any tree or vine bearing fruits or nuts
39
15 year property (GDS)
*Certain improvements made to land or added to it (ex ehrubbery, fences, roads, bridges)
*Any retail motor fuels outlet, i.e. convenience store
*Any municipal wastewater treatment plant
*any qualified leasehold improvement property prior to 2008
*Any qualified restaurant property palced before 2008
*Initial clearing and grading land improvements for gas utility
*Electric transmission property after 2005
*Any natural gas distributions line after 2005
40
20 year property (GDS)
*Farm Buildings (other than single purpsoe ag or horticultural structures)
*Municipal sewers not classified as 25 yr property
*Initial clearing and grading land improvements for electric utility transmission
41
25 year property (GDS)
This class is water utility property
42
27.5 year property (GDS)
Residential rental property
*Any building or structure, like rental home, including mobile home, if 80% or more of its gross rental income for hte tax year is from dwelling units.
*If taxpayer occupies any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part the taxpayer occupies
43
39 year property (GDS)
Non residential real estate property.
*This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rentl property nor property w/ a class life of less than 27.5 years.
44
Mid Month Convention under MACRs
***Non residential real property and residential rental property use the mid-month convention***
Method used for real estate. Means that when a property begins depreciation, it counts from the midpoint of the month.
It means one half a month counts when it begins and on half month counts when it is disposed of.
44
Mid Quarter Convention
Use this if the mid-month does not apply and the total depreciable basis of MACRS property you placed in service during the last 3 months fo the tax year are more than 40% of the total depreciable bases of all macrs property.
44
Half Year convention
Under this, you treat all property placed in svc or disposed of during a tax year as placed in or disposed of at the midpoint of the year.
**This is the default for personal property placed into service.
45
Section 179 assets
Can elect to immediately expense up to $1,160,000 of business tangible property placed in service that year.
Cannot use section 179 for realty or production of income property.
Amount expensed reduces basis
Cost recovery available on remaining basis.
Deduction is the lesser of:
*Property placed in service (PPS)
*Taxable Income (TI)
*Threshold of $1,160,000 phased out for PPS > 2,890,000
46
Common forms of Legal Entities
*Sole proprietorship
* Partnership
* Limited Liability Partnership
*Corporation
*Limited Liability Corporation
47
Selecting correct entity includes considering...
*Ease adn cost of formation
*Complexity of mfmt and governance
*How transferability and dissolution are achieved
*LIability protection for owners' personal assets
*Reporting requirements and taxation
48
Sole Proprietor
*Arises when an individual engages in business for profit
*Can operate under the name of owner or it can conduct business under a trade or fictitious name
*No filings are reqd w/ Secretary of State and no annual filings are requried.
* There is no transfer of assets to the entity b/c the entity is a legal extension of the proprietor
Formation is easy and inexpensive, may be req'd to obtain a business licesense.
*If they are collecting sales tax, it must register w/ state or local taxing authority.
Proprietor has 100 % interest in the proprietorship assets and income
Capital is limited to resources of the proprietor including ability to borrow.
**LIability is an issue, proprietor is legally liable for the debts and torts of his sole prop
49
Sole Proprietor income taxation and payroll
cost is low b/c proprietor simply adds a Schedule C to his form 1040.
* Uses ssn to conduct business, unless they hire employees, then they use EIN.
*Must pay unemployment on employees, but not on himself.
*They pay self-employment tax (upt to 15.3%) on his own earnings and 1/2 fo social security taxes for employees.
*Net profit is carried over to 1040.
50
Calculation for self-employed individual's contribution to Keogh plan
1. Calculate self-employment tax: Calculate the self-employed individual's contribution rate:
Net Self-Employment Income times: 92.35 (accounts for ss and medicare)
This equals Net earnings subject to Self Employment tax
Times: 12.4% upt to 160,200
Plus: 2.9% on all income
Equals: SELF EMPLOYMENT TAX
Self Employed Contribution rate = Contribution Rate to others / 1+ Contribution rate to othters)
2. Calculate the self -employed individuals contribution:
Net Self Employement income
Less 1/2 SE tax
equals : Adjusted Net SE Income
times: SE contribution rate
equals: SE Individual's Qualified Plan Contribution
51
Advantages and Disadvantages of Sole Proprietorship
Advantages:
*Easy to form
* Simple to operate
* Easy to sell business assets
*Few administrative hurdles
*Income is generally passed through to the owner on Schedule C form 1040
Disadvantages:
*Generally have limited sources to capital
*Unlimited liability
*NO guarantee of continuity beyond the proprietor
* Business income is subject to self-employment tax
52
General Partnership
*Amount of capital usually determines ownership interest, but if a situation is different, when one partner brings ideas and the other money - there should be a written partnership agreement that clarifies interests and partner's distributive share of profits and losses.
53
GP liability
Co owner partners share the risks and rewards of the business. Partner's personal assets can be seized to satisfy partnership obligations
54
GP management / operations
The are generally managed equally by all partners; though it is possible to name a "Managing Partner".
*Employees are eligible for wide variety of tax-free fringe benefits i.e. health care - but not partners.
Partners can participate in company-sponsored retirement plan, but have the same limitations as proprietors w/ calculations
55
GP Taxation
*Not subject to entity level taxation
*Partnerships file a form 1065, including Schedule K.
Income and losses passed along on form 1065 K-1 regardless of whether the income is distributed to partners in form of cash.
*All partnership business net income is subject to SE tax up to 15.3 percent.
*Must obtain Federal Employer Id Number (FEIN)
56
GP tax ramifications on formation
When partner contributes cash or property to partnership, no gain or loss is recognized and these contributions become their basis.
If a partner contributes services, partner must recognize ordinary income for the value of their services. The amount of income recognized becomes the partner's basis in their partnership interest.
57
GP Tax ramifications on Business Operations
Partnership must file form 1065 though they still pay tax at entity level
Each partners's share of income and expense items is then reported on form 1065, schedule k1
*Partner's adjusted basis is adjusted each yearto reflect allocation of income and expense.
*Partner's basis is increased by his share of income, and decreased by his share of losses, distributions, nondeductible expenses.
58
GP Tax ramifications of withdrawals or distributions
Withdrawal is treated as a return of capital and generally is not taxable. HOwever, it does reduce their basis.
Once partner's basis is reduced to zero, any additional withdrawals will result in a capital gain for the partner.
59
Summary of Advantages and Disadvantages of Partnerships
Advantages:
* More sources of initial capital than proprietorships
*Usually have more management resources available
*Have fewer administrative burdens than corporations
*Income and losses are generally passed through to the partners for tax purposes
Disadvantages:
*Transfer of interests is more difficult than for proprietorships
*Unlimited liability
*Partnershp income tax and basis adjustment can be complex
*Business net income is subject to self - employment tax
*Partners are entitled to few tax-free fringe benefits that are generally available to employees.
60
Limited Partnerships
Associations of two or more persons as co-owners to carry on a business for profit except one or more of the partners have limited participation in management fo the venture and thus limited risk exposure.
There is usually at least one general partner.
61
Limited Partners taxation
Not usually subject to self employment tax since they are passive.
*Entity files form 1065 and issues Schedule K-1 to both its general and limited partners
62
Limited Partnership advantages and disadvantages
Advantages:
*Favorable pass -through partnership taxation status
*Flexibility in structuring ownership interests
*Limited partners are not personally liable for the debts and obligations for the limited partnership as long s they do not engage in management.
Disadvantages:
*Must file with the state to register
*In most states, general partners are liable for debts and other obligations of the limited partnership
*Losses for limited partners are generally passive losses.
63
Limited Liability Partnership (LLP)
A hybrid entity that provides partial liability protection to its members
Usually accountants, attys and doctors who practice together.
Partners enjoy liability protection from acts of partners but are liable for their own.
64
LLP Advantages and Disadvantages
Advantages:
*Favorable pass through partnership taxation status available.
*Flexibility in structuring ownership interests
* Partners can insulate themselves from the acts of other partners
Disadvantages:
*Required to file with the state to register
*Unlimited liability for own acts of malpractice.
65
Family Limited Partnerships (FLP)
A special type of partnership whose primary purpose of transferring assets to younger generations using annual exclusions and valuation discounts for minority interests and lack of marketability.
66
FLP formation
Usually a family member donates highly appreciated property and takes a small (one percent) general and a large (99 percent) limited partnership interest.
67
FLP Taxation
FLPs are taxed as a partnership and entity files form 1065 and k1 to both general and limited partners. GP may be corporation or an individual.
68
FLP ADV / Disadvantgages
Advantages:
* Control retained by senior family members
*Valuation discounts are available for minority interests
* Annual exclusion gifts are generally used to transfer interests to family members
*Some creditor protection
*Restrictions can be placed on transferability of LP intersts fo junior faimly members
*FLP is commonly used as an estate planning strategy
Disadvantages
*Atty setup fees and costs
*Periodic valuation costs
*Operational requirements
*Potential IRS challenges regarding valuations and discounts.
69
Limited Liability Companies (LLC) - Formation
Formed the same way as corporations. They are chartered entities w/ sec of state in state of organization. Charter Document is called "Articles of Organization" and state requires entity to have a resident agent. State will require annual filings.
70
LLC - liability
LLC ind owners are protected from personal liability for the LLC's debts and obligations unless they personally guarantee such obligations.
Protection is not absolute depending on courts considering "piercing the veil" and alter ego concepts
71
LLC - management
LLC is managed by virtue of an operating agreement. Similar to corporate bylaws and may be amended.
It specifies how and who will manage the LLC, how interests may be transferred, etc.
72
LLC Taxation
An LLC w a single member / owner is disregarded entity for tax purposes. The owner must file a Schedule C 1040 for the LLC
An LLC w/ 2 or more members can elect to be taxed as a partnership (1065 w K1), an S corp (1120S with K1), or a c corp (1120 w w2 income for owners)
73
C Corp
Legal entities formed by one or more individuals : there are C corps and S corps. S corps are simply C corps with a special tax election
74
C Corp formation
created by filing a charter document w/ state of incorporation called "Articles of Incorporation". The articles require a corporation to disclose its name, number of shares, and purpose of corporation.
75
C Corp dividend received deductions based on ownership percentages
Less than 20% = 50% DRD
At least 20, less than 80% = 65% DRD
At least 80% (affiliated corporations) = 100%
76
Personal Service Corporation
Defined as a C Corporation in which substantially all of the activities involve the performance of services in teh fields of health, law, engineering, architecture, accounting, actuarial science, consulting, and substantially all stock is owned by employees.
Taxed at a flat rate of 21%
77
Tax ramifications for withdrawals from a corporation
Double taxation of dividends paid by corporation to shareholders.
Double taxation occurs b/c income is taxed at the corporate level and then subsequently taxed again at the individual level b/c dividends are included in the individual's income.
78
S Corporations
Normally created by forming a C Corporation and then filing an "S" election w/ the IRS.
Cannot have more than 100 shareholders
Ownership restricted to US citizens or residents, estates, trusts, and charitable organizations
Insurance companies, domestic international sales corporations (DISCs), and certain financial institutions are not eligible for S Corporation status.
*Only allowed one class of stock - however one class my have voting rights and shares w/ no voting rights.
79
ESBT Trust (electing small business trust)
one of the trusts that can own an s corporation
80
Corporation management
Corporations are managed by one or more oficers appointed by a board of directors.
81
S Corporation income
passed through to investors and not taxed at corporate level.
82
Personal Holding Company
defined in IRC as section 452. A corporation is a personal holding company if:
1) At least 60% of the corporation's adjusted ordinary gross income for the tax year is from dividends, interest, rent, and royalties.
2) At any time during the last half fo the tax year, more than 50% in value of the corporations outstanding stock is owned, directly or indirectly by 5 or fewer people.
83
Taxation on Group Term Insurance - Section 79
The first $50,000 of coverage is not taxable to the employee (applies once per employee)
* The cost of excess coverage is determined by Uniform Premium Table 1.
* Employee contributions are subtracted to arrive at taxable income.
Ex
(150k provided gtl - $50,000) / 1,000 * .10 ( or what is provided on uniform table) * 12 (months) = taxable amount
84
Home Basis
Additions to structure or adding a pool would count.
Replacing a roof would add to the basis as well
Repairing a roof or painting a home would not increase the basis.
85
Ownership in S Corporation ...
*Can be US citizens OR US residents, estates, certain trusts, and charitable organizations
*Vote for board of directors at annual shareholder's meeting
*Receives K-1 annually in order to prepare a personal income tax return
*Reports on personal income tax return a pro rata share of corporate profit or loss
86
Investigating a New Line of Business
If a new line of business is purchased and it is in a different line of business as the current trade or business operation, the costs of investigation are recouped by capitalizing the expenses and amortizing it ratably over a 60 - month period.
If not purchased - not deductible.
It is often overlooked by taxpayers.
87
Dependent Care Credit conditions
Taxpayer must provide over 1/2 cost of maintaining the household, which is also the principal residence of the child
Child must be a dependent
If married, both parents must work or go to school
88
Section 121 Primary Home exemption
*Requires that to qualify for the exemption client has
1) Owned and
2) Used as a principal residence for two years out of the past 5 years.
$250k single, 500k MFJ
The limit is pro-rated, NOT THE GAIN from the sale of property
89
Student Loan deductibility
$2500 of the interest paid as an ADJUSTMENT TO INCOME is the limit that can be taken
90
Adoption Credit
It is limited to the least of:
1) Qualifying adoption expenses
2) Adoption credit of $15,950 for 2023
3) amount of tax due
91
Deducting State income or Sales tax
State income or sales tax (whichever is higher) and real estate taxes are deductible as itemized deductions, but are capped at $10,000 TOTAL.
92
REFUNDABLE TAX CREDITS
The Earned Income Credit is refundable.
The American Opportunity Credit and Child Tax credit may be partially refundable.
93
AMT Credit
CANNOT be used to offset a taxpayer's future alternative minimum tax liability
AMT Credit is available to corporation regardless of whether the AMT liability arose from a deferral or exclusion item.
AMT credit for INDIVIDUALS is only available for AMT liabilities created due to deferral Items.
94
Deductions For - Deductions taken from Gross to Arrive at AGI
- Trade or Business Expenses
- Deductions from Losses on Sale or Exchange of Property
-Deductions from rental and royalty property
-Alimony payments (divorces prior to 12/31/2018)
-One-half self employment tax paid
-100% of health insurance paid by a self-employed individual
-Contributions to pension, profit sharing, annuity plans, IRAs
-Penalty on premature w/ds from time savings accounts or deposits
-Interest on student loans
-Health Savings Accounts
-Teacher Expense Deductions (up to $300 deduction for qualified expenses for primary and secondary education professionals)
95
Above Line Deductions - Trade or Business Expense
These must be ORDINARY, NECESSARY, AND REASONABLE
- Incurred in conduct of business
- Not deductible since 2017
96
Above Line Deductions - Alimony
If prior to 2018...
Deduction available to payor and recipient is taxed.
Alimony is...
Payed in cash
-Pursuant to a divorce or separation instrument
-Does not extend beyond the death of payee
-Is not "excess alimony payments"
-Not between spouses filing jointly
-Alimony recieved is earnd income for IRA purposes
What is not alimony:
-Elective non-alimony payments
-Any payments that could extend beyond the recipient's life
-Child support
-Rent free occupancy of home
97
Above Line Deductions - For SELF EMPLOYED INDIVIDUALS
Education Expenses
-if incurred to imporve existing skills or
-To meet the requirements of employer, profession, licensing, or state law
**NOT deductible if they are:
-To meet minimum educational standards for existing job or
-To find a new job
Education expenses include:
-Tuition, Books, Supplies, Transportation, Travel (including lodging and 50% meals)
BUSINESS GIFTS
Gifts of a tangible personalty with a value of $25 or less plus wrapping
- If value is $4 or less and name of business appears on item, considered advertising
-Gifts to employers or superiors are not deductible.
ENTERTAINMENT EXPENSES
NO deduction for entertaintment, 50% deduction for meals.
HOME OFFICE EXPENSES
-Only deductible for self - empoloyed, no longer for W2 people.
98
BELOW LINE Itemized Items
-Deductions are allowed based on legislative grace.
Include
-Medical Expenses
-Contributions to Qualified Charitable Organizations
-Certain State or Local Taxes
-Casualty Losses
-Certail Personal Interest Expense
-Qualified Business Income
-Miscellaneous Itemized Deductions not subject to 2% floor.
99
BELOW THE LINE - Medical Expenses (in excess of 7.5% AGI)
- taxpayers can deduct expenditures for themselves or their dependents that are not reimbursed. Eligible expenses include:
*Prescriptions
*Noncosmetic surgeries
*Some Qualified LTC services
*Insurance premiums including schedule for long term care policies
*Tuition for special, medically necessary schools (school for deaf / blind)
*Capital expenditures on advise of physician
-to the extent the FMV value of property is not increased
- for handicapped entrances and railings, there is no increased value test (NOT ELEVATORS)
99
BELOW THE LINE DEDUCTIONS - Contributions to Charities
ORDINARY INCOME PROPERTY - Short Term Cap Gain Property and ALL Loss Property
Lesser of Basis or FMV
Ceiling
50% of AGI for Public Charities
30% of AGI for Private Charities
99
BELOW THE LINE DEDUCTIONS - Cash
Ceiling
60% of AGI for Public Charities
30% of AGI for Private Charities
99
BELOW THE LINE DEDUCTIONS - Certain State and Local Taxes
Taxpayers may deduct property taxes (real estate and ad valorem) - only US property
-may deduct state income tax paid, or state and local sales tax.
-Taxes are capped at $10,000 total
100
BELOW THE LINE DEDUCTIONS - Long Term Cap Gain Property
-Stocks, Bonds
-Real Property
-Tangible Personalty (related use)
Either FMV or Adjusted Basis
Public Charities:
30% ceiling of AGI if FMV
50% ceiling of AGI if Basis
For Private Charities:
20% of Basis only
101
BELOW THE LINE DEDUCTIONS - Tangible Personalty (Unrelated Use)
Lesser of Adjusted Basis of the FMV
Ceiling of 50% of AGI for Public Chariites
20% for Private
102
Trust Tax Return
-MUST BE Calendar Year
103
Royalties
in general are taxed as ordinary income, but royalties in connection with any publicationof the person;s work are earned income.
104
Section 1231 5-year Look-Back Rule:
The 5 year lookback rule essentially forces taxpayer to net 1231 losses and gains over a five - year period.
104
Dependent Rules
Must meet relationship requirement as a qualifying relative and must provide more than 10% of support. If more than one person provides more than 10% of support, then for one of them to claim, the otehr must sign a statemetn agreeing not to claim exemption on dependent in that year.
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Choosing entity S vs C Corp
C Corporations retain income.
S Corporations hold no retained earnings since all profits or losses are passed through to its owners.
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Insurance reimbursements of Casualty losses
Can reduce the loss amount to the taxpayer.
They aren't included in AGI , and the losses cannot be deducted
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5 dependency tests
1) Gross Income Test
2) Support Test
3) Not a Qualifiying Child
4) Citizenship test (US, Canada, or Mexico
5) Joint Filing TEst
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Active Real Estate Deduction Rules
For active participants, up to $25,000 of passive losses from real estate may be deducted form nonpassive income.
The limit of $25,000 is reduced by ONE HALF of the maount the taxpayer's AGI exceeds $100,000.
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Adjustments to Income
Consider them an addition to income.
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Bargain Element on NQSOs
Bargain element is reported as w2 income, and employer receives deduction.
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Cash Basis vs Accrual
Companies beneath 27 mm in gross receipts can use either. Companies over must use accrual
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Qualified Dependent Test
Five Elements:
Gross income
Support
Member of household / family
Citizenship or residence
Joint return
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Constructive Reciept
- The cash method of accounting recognized income when recieved. Contsructive reciept is whene the taxpayer has the right to the money, although they are not in possession thereof.
A secular trust constructively belongs to the beneficiary therefore constructive reciept applies
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Child care Credit
Applies to expenses not to exceed $3000 onr one and $6000 for two or more children.
BAsed on AGI, the max allowable credit is 20% of total costs (up to 6k max)
$6,000 x 20% = $1200
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Losses from limited partnership cannot be used to offset income from a master limited partnership
true
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Deducting Long Term Care Insurance
Amount of premiums paid is included in the medical expense deduction for total expenditures exceeding 7.5% of AGI
Policy must be gguaranteed reneweable or non cancelable.
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Section 1250 Gain
applies to the realized gain on real property where the accelerated method was used. The gain is the excess of acclerated over Straight ling (ACRS). Section 1250 gain is taxed as ordinary income. Under current law, MACRS only straight line depreciation of real property is used.
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Passive losses where there is no material participation
Are governed under the passive loss rules. There needs to be other passive activity income to offset the loss. If not, it is not currently deductible.
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