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CFP > Tax > Flashcards

Tax Flashcards

1
Q

Can Pass Losses Through To Owners

A
  1. S-Corp
  2. Sole Proprietorship
  3. General Partner
  4. Limited Partner
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2
Q

Child Support & Alimony

A
  1. Child support can extend beyond the payee spouse death
  2. Alimony payments cannot extend beyond the death of the payee spouse
  3. Cannot live together when alimony begins
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3
Q

QBI

A

Qualified Business Income

  1. Individuals who earn income through pass through businesses can deduct up to 20% QBI
  2. QBI — net income (profit) from a pass-through.
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4
Q

Self Employment Tax

A

Multiply self employment income by .1413 & round up

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5
Q

Child Care Credit

A
  1. $1,200 max for credit
  2. $6,000 x .2 = 1,200 — two children
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6
Q

Child Tax Credit

A
  1. $2,000 per child
  2. Reduced by $50 for each $1,000 above $400,000 MAGI MFJ
  3. $50 reduced for each $1,000 above $200,000 single
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7
Q

Tax Deduction vs. Tax Credit

A
  1. Deduction worth more to high tax bracket
  2. Credit worth more to lower tax bracket
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8
Q

Basis if stock becomes worthless?

A
  1. Treated as if occurred on last day of tax year
  2. Holding period is long term
  3. $3,000 may be recognized LTCG
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9
Q

Family Credit

A
  1. $500 nonrefundable credit for other dependents or “family credit”
  2. Cannot claim credit if elderly parent has taxable income over $4,200
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10
Q

Calculation of deductible loss example

A

Lesser of basis or FMV

Bought jewlery for 100k and was lost

Flood - fed. disaster.

Insured for 60k AGI is $350,000

100,000
-60,000
-100 ———floor
- 35,000 —– 10% of AGI

= $4,900

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11
Q

Expenses that qualify for adoption credit

A
  1. Court costs
  2. Attorney’s fee’s
  3. Abroad

A - Attorney
A - Abroad
C - Court costs

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12
Q

Foreign Tax Credit

A

May be claimed as an itemized deduction or tax credit

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13
Q

The Personal Exemption

A

Repealed after 2017

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14
Q

Cannot utilize tax deduction

A

C-Corp

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15
Q

PSC - Personal Service Corp.

A

Any income received taxed at flat 21%

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16
Q

Section 1244 Qualified Small Business Stock

A

Loss of $100,000 per year

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17
Q

C-corp

A
  1. Separate tax entity
  2. Double taxation at owner level
  3. Taxes corporate profits at flat rate of 21%
  4. Dividend received —- 50% reduction
  5. Continuity for life + limited liability
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18
Q

Partnerships

A

Two or more operate a business for profit

Advantages
1. Availability of Keogh or SEP
2. 100% medical insurance premiums deductible by partners
3. Can be oral (written preferable)
4. Conduit income or losses to owner

Disadvantages
1. Unlimited liability
2. Dissolves upon bankruptcy, death, incapacity

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19
Q

Sole Proprietorships

A

Advantages
1. Availability of KEOGH or SEP
2. 100% medical insurance premiums deductible by the owner
3. No legal formalities
4. Conduit income or losses to owner

Disadvantages
1. Unlimited liability
2. Business dies with owner
3. Capital structure depends on owners personal recourses

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20
Q

NOL

A
  1. Not allowed in partnerships
  2. NOT allowed for S-Corp
  3. No carrybacks
  4. Utilize losses from prior years to offset current year income

NOL has no partners or S Corps friends

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21
Q

Conduit Entities

A
  1. Pass through entities
  2. Avoid double taxation
  3. S-corps, LLC’s, Sole-Proprietors
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22
Q

S-Corp vs. Partnership and LLC Basis

A

Partnership & LLC
- Debt, direct loans made by partner and cash = basis

S-Corp
- Cash, direct loans made by SHAREHOLDER
- Debt does NOT affect basis

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23
Q

Required Tests for Business Expense

A
  1. Ordinary
  2. Necessary
  3. Reasonable if its compensation
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24
Q

Increasing basis on appreciated gift tax

A

Shortcut
Gave property worth: $215,000
Basis: $76,000
Paid: $80,000 gift tax

215k-76k = 139k

139k x 40% = 55,600 + 76,000 = 131,600

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25
Q

Tax Form for S-Corp Distributions

A

Schedule K-1 of 1120s

26
Q

Tax Schedules

A

Schedule 1 - Adjustments to Income
Schedule A - Itemized deductions
Schedule B - Interest & ordinary Dividends
Schedule D - Capital gains & losses

27
Q

Used to compute deductions for AGI

A

Schedule 1

28
Q

Types of Ordinary Income Property

A
  • Inventory
  • A copyright
  • Use unrelated
  • A work of art created by the tax payer
  • STCG property
29
Q

Nature of Transfer Tax System

A

Cumulative

30
Q

Active Participation Losses

A

Under AGI 100k - can deduct up to $25,000 per year in losses

Remaining losses carry forward

31
Q

Best Source Gathering Info on Intent of Recent Tax Law Changes?

A

Congressional committee reports

aka Blue Book

32
Q

Effective Tax Rate

A

Average rate individual pays

Tax liability / taxable income = effective tax rate

33
Q

Adoption Expense Credit

A

Limited to $14,300

Jameer Nelson (number 14 ) adopted 3 kids

34
Q

Classifications of Income

A

Active Income
Portfolio Income
Passive Income

35
Q

Accrual Method Billing

A

Recognize Income when seller WRITES & SENDS invoice AFTER selling goods

36
Q

Investment Interest

A

Tax deductible up to income

37
Q

Artwork created by tax payer

A

Limited to basis

38
Q

Section 1244

A

Allows $100,000 Loss MFJ

$50,000 Loss MFS

39
Q

C-Corp Tax Example

A

$1,000,000 x 40% = $40,000

50% div rec. deduction = $20,000

They had additional $30,000 of other taxable income

$50,000 total taxable income

Income taxed at 21%

$50,000 x 21% = $10,500

40
Q

Personal Exemptions

A

Suspended after 2017

41
Q

Casualty Loss Deduction

A

Must be declared a “natural disaster”

42
Q

121 Property Example:

A

Selling price 750k
less basis of 100k
Realized Gain = 650k

Less MFJ exclusion 500k

Recognized Gain = $150,000

43
Q

Schedule H

A

Household employees

44
Q

A taxpayer is faced with a tax deficiency of $10,000, along with an interest deficiency of $4,200; the entire deficiency is the result of fraud from the taxpayer’s 2017 return. What is the amount of the penalty?

A

$10,000 x 75% = $7,500 (75% of the tax deficiency only, not the interest deficiency).

45
Q

Bob Patterson, a health professional, donated 40 hours of his time to a public charity. If his time was worth $200 per hour and he also wrote a check to the charity for $2,000 out of his business account, how much could he deduct as a gift to charity?

A

$2,000 on his Schedule A (itemized deduction).

As an individual “sole proprietor”, any charitable contribution made through his/her business is considered by the IRS as being made by the person, not the business. Bob’s time is not deductible (answers C and D). Nothing indicates a corporation.

46
Q

With regard to Sections 1245 and 1250, Section 1231 will be applied only when:

A

Any depreciable property is sold at a profit above its original cost.

47
Q

Loretta owns a rental home in the mountains. The normal rental period is at least 180 days a year. How many days can Loretta use the vacation home and not lose its rental characteristics?

A

The longer of fourteen days or 10% of the rental period (eighteen days).

48
Q

Mr. Litell earns $90,000 a year as a salesman. He also owns a duplex that he rents out on a regular basis. Due to unforeseen circumstances, the duplex creates $30,000 in losses. If he is eligible to itemize, can he deduct the losses?

A

Yes, he can claim $25,000 of losses.

A real estate owner who is an active participant can deduct up to $25,000 if his AGI is less than $100,000. The losses are reported on the Schedule E and then on the front of the 1040. There is no $3,000 limitation. Losses exceeding $25,000 can be carried forward.

49
Q

Assuming an asset is sold for a gain, when would Section 1250 ordinary income occur?

A

Real property subject to ACRS and accelerated depreciation was used.

50
Q

The best source for obtaining a plain language understanding about the current tax law?

A

Commerce Clearing House Federal Tax Guide.

is correct because Commerce Clearing House (CCH) provides plain language interpretation of tax law

51
Q

am and Sally (both age 35) plan to retire at age 65. They estimate their annual income need in retirement will be $50,000 in “today’s dollars.”They expect to receive $30,000 (in “today’s dollars”) annually from Social Security. They expect to earn 7% after-taxes both before and after retirement. They also expect inflation to be constant at 4%. Table V (Ordinary Life Annuities One Life-Expected Return Multiples) indicates a multiple of 20 years at age 66. Table VI (Two Lives) indicates 25 years at age 65. They expect to live 30 years after retiring. What amount of money will Sam and Sally need at the beginning of the retirement period to fund an annual income need that increases with inflation?

A

1st Retirement deficit is $20,000 ($50,000 - 30,000).

2nd The net figure is inflated (PV of $20,000, inflation is 4%, 30 years to retirement); therefore, the income deficit in the first year of retirement (FV) is $64,868.

3rd To determine the lump sum needed:

Payment (PMT) $64,868
Inflation-adjusted yield 2.8846%
Period 30
Sum needed at beginning of retirement $1,327,848

52
Q

Toby Adams has determined he needs $350,000 when he retires in 12 years. He plans to start a level savings program making payments at the beginning of each month. He estimates his pension plan will have accumulated $150,000 in 12 years. He anticipates that he will earn an average 11% after-tax return and that inflation will average 5%. What monthly payments should he make?

A

Begin mode
12C $200,000 FV, 11 enter 12 ÷ i, 12 enter 12 x n, PMT = $667.66

53
Q

Bob and Mary expect to have $300,000 in retirement funds when they retire in 15 years (assuming a 7% investment return rate on current assets). When they retire, they expect to need $22,000 annually which will increase with inflation (3%). They can make an 8.5% after-tax return on their money. They expect their joint life expectancy to be 21 years after retirement. What would you tell them?

A

They are okay. The $300,000 will exceed their needs by more than $10,000.

They expect to have when they retire in 15 years $300,000
What they need
$22.00 PMT, 5.3398i, 21n = -288,438 PV
Excess $11,562
Why begin? Can they wait until the end of the year to get retirement funds? No, always use begin mode for retirement needs unless the question indicates end mode.

54
Q

Luke recently inherited a parcel of land. Many years ago his parents purchased the land for $10,000.
At the time of his inheritance, it had a FMV of $100,000. Today, it is worth $200,000. The Insurance,
taxes, and maintenance are costing Luke more than the land is appreciating. He is considering various
alternatives. Which of the following is true?

A

If he gifts the land to the local charity (public), he can deduct its value ($200,000) up to 30%
of AGI in the current tax year.

The charitable income tax deduction for gifts of long‐term capital gain property is limited to 30%
of AGI. A gift to charity of rent‐free use of space will not entitle the donor to a charitable deduction.
Land, by nature is use‐related. Only artwork and other collectibles can be use‐unrelated relative to the
charitable income tax deduction.

55
Q

Which of the following benefits are generally provided through workers compensation?

A

I. Disability income benefits
II. Rehabilitation benefits
III. Tax‐free benefits

Workers compensation benefits generally include medical care, disability income, death benefits,
and rehabilitation benefits. Benefits are received tax‐free. Sick pay would be a benefit provided by an
employer directly.

56
Q

Your CPA asks you to assist him on a case with a wealthy client. The client has asked your CPA some difficult questions. The client is in a 32% marginal income tax bracket. He has the following investments:

$100,000 in a money market earning 5%
$100,000 in treasuries purchased some years ago (coupon 11%) now worth $140,000
$100,000 in an S&P 500 mutual fund purchased 12/31/12 that is now worth $160,000
100,000 in an aggressive growth stock purchased 12/31/12 now worth $300,000
The client wants to sell the S&P mutual fund in 2021, pay capital gains (15%), and buy treasuries similar to the ones purchased years ago. How much after-tax income will he get from these new treasuries if he sells the S&P mutual fund in 2021?

A

The S&P mutual fund is subject to LTCG at 15%.

Current value $160,000
Basis - 100,000 { $100,000
Gain $60,000 -15% + 51,000
Investable value $151,000
Subtract the basis first. Basis is not taxed. However, the 11% treasuries now require $140,000 to purchase, or $11,000 of income requires $140,000 of principal.

$11,000 x ($151,000 / $140,000) = $11,864.60

$11,864 x 0.68* = $8,068

*32% is his tax bracket.

57
Q

Which of the following businesses must file federal tax returns?

S corporation
C corporation
General partnership
Limited partnership

A

S corporation
C corporation
General partnership
Limited partnership

58
Q

I Got A Tattooed Geco For November

A

Income
Gross Income
AGI
Taxable Income
Gross Tax
Final Tax Due
Net Tax Payable or Credit

59
Q

Investment Income Interest Expense Deduction

A

Ordinary Dividends + Interest Income + STCG

60
Q

Above The Line Deductions

A

McGoldrick’s - Teacher $250 expense credit
BJ Business - Self Employed
Moved - (military only)
HSA’s
&
IRA’s
Student Loan Interest, No WAY!
Alimony Pre 2018

61
Q

Below The Line Deductions

A

CG UTI

Casualty & Theft loss (Fed declared disaster)
Lesser FMV or Basis
- Insurance
- $100 Deductible
(10% of AGI Threshold; Any loss in excess are deductible)

Gifts to Charity Public & Private

Unreimbursed Medical Expense 7.5% AGI Expenses

Taxes (SALT) 10k

Interest Paid - Mortgage interest up to $750k of debt, primary and secondary residence. Investment Interest limited to net investment income

CFP (16 decks)

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