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CFP > Tax > Flashcards

Tax Flashcards

1
Q

What is the primary source for all tax law?

A

Internal Revenue Code

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2
Q

What are treasury regulations?

A

A source of tax law

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3
Q

Revenue rulings and revenue procedures

A

Administrative interpretation/may be cited as precedent

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4
Q

Congressional Committee reports

A

Indicate the intent of Congress/may not be cited as precedent

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5
Q

Private letter rulings

A

Apply to a specific taxpayer and situation (ex. Crummey)

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6
Q

Judicial sources

A

Court decisions interpret law and/or facts

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7
Q

Estimated taxes due dates

A

April 15, June 15, September 15, January 15

1, +2, +3, +4

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8
Q

Frivolous return penalty

A

$5000

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9
Q

Negligence penalty

A

20% of the portion of the tax underpayment attributable to negligence (not the interest!)

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10
Q

Civil fraud penalty

A

75% of the portion of the tax underpayment attributable to fraud

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11
Q

Failure to file penalty

A

5% of the tax due per month with a maximum of 25%

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12
Q

Failure to pay penalty

A

0.5% per month each month the tax is unpaid with a maximum of 25%

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13
Q

Estimated tax due

A

No penalty if taxpayer pays 90% of the current year’s tax liability or 100% of prior year’s tax liability (or 110% of previous year’s AGI exceeded $150,000)

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14
Q

How much self-employment tax is deductible for AGI?

A

1/2 of self-employment tax (.07065)

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15
Q

How much health insurance premiums are deductible for AGI?

A

All premiums for self-employment only

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16
Q

How to calculate deductible loss

A

Federally declared disasters only!

1st: Use lesser of basis or FMV
2nd: Subtract any insurance coverage
3rd: Subtract $100 (floor)
4th: Subtract 10% of AGI

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17
Q

Deductible meal expenses

A

Deductible to a 50% limit if they are ordinary and necessary to a business

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18
Q

What does self-employment income include?

A
  • Net schedule C income
  • General partnership income (K-1 income)
  • Board of directors’ fees
  • Part-time earnings (1099)
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19
Q

Do wages and distributions from an S-corp count as self-employment?

A

No

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20
Q

Does real estate income count as self-employment income?

A

No

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21
Q

Does limited partner income and loss count as self-employment income?

A

No

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22
Q

Calculation for self-employment tax

A

Multiply NET self-employment income by .1413

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23
Q

Does general partnership income (K-1 income) count as self-employment income?

A

Yes

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24
Q

Credit for child and dependent care expenses

A
  • Until age 13
  • Not refundable
  • Limited to $3000 for one dependent or $6000 for 2+ dependents
  • 20% credit percentage
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25
Q

Child tax credit

A
  • Partially refundable
  • $2k for each child under age 17
  • Phased out at $400k MAGI MFJ and $200k single
  • Up to $1600 per child is a refundable tax credit
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26
Q

What business entity can receive a dividend-received deduction?

A

C-Corps are eligible for 50% dividend-received deduction

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27
Q

How are personal service corporations taxed?

A

Flat 21% tax rate (C-Corp)

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28
Q

S Corp basis

A

1) cash plus
2) direct loans made by the shareholder to the corporation

No bank loans factor into basis

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29
Q

Deductibility of interest paid for business purposes for a sole proprietorship

A

Deductible without limit on Schedule C

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30
Q

General partnership basis

A

1) cash contributed by the partner
2) direct loans made to the partnership by the partner
3) loans made to the partnership

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31
Q

5-year 1245 property

A

Computers, autos, and light duty trucks

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32
Q

7-year 1245 property

A

Office equipment except computers

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33
Q

27.5-year 1250 property

A

Residential rental property

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34
Q

39-year 1250 property

A

Nonresidential real property

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35
Q

179 deduction

A

Election to expense up to $1,160,000 of qualifying property int he year of acquisition. Generally 1245 property. It cannot create a loss

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36
Q

AMT preference items

A

IPOD

  • Excess Intangible drilling costs
  • Private-activity municipal bond
  • Oil and gas percentage depletion - NOT cost depletion
  • Depreciation (ACRS/MACRS) - but not straight-line
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37
Q

AMT add back items

A
  • Incentive stock option bargain element
  • Property, state and local taxes
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38
Q

Excludible rental income for principal residence

A

If rented for under 14 days a year, income is excludible from gross income, but not deductions attributable to the rental use are allowed

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39
Q

Low-income housing program deductions

A

May generate deduction-equivalent tax credit up to $25k, no income phaseout

Credit is allowed annually over a 10-year “credit period”

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40
Q

Maximum charitable deduction

A

60% of AGI

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41
Q

How is appreciated LTCG property deducted for charitable contribution?

A

30% of AGI when using FMV
50% of AGI when using basis

42
Q

How is ordinary income property deducted for charitable contribution?

A

50% of AGI
Limited to basis

43
Q

What is included as ordinary income property as it relates to charitable donations?

A

Inventory
Works of art created by taxpayer
Use-unrelated property
Short-term capital gains property
A copyright

44
Q

Net loss deduction for active participants in real estate activity

A

Net losses from real estate activity can be deducted (up to $25k)

Phased out for taxpayers with AGI between $100k and $150k on a $2 for $1 basis

45
Q

Step transaction

A

Ignore the individual transactions and instead tax the ultimate transaction

46
Q

Sham transaction

A

This transaction lacks a business purpose, and economic substance will be ignored for tax purposes

47
Q

Substance over form

A

The substance of a transaction and not merely its form governs its tax consequences

48
Q

Assignment of income

A

Income is taxed to the “tree that grows the fruit” although it may be assigned to another prior to receipt

49
Q

Hobby loss

A

Any activity generating net income in 3 out of 5 consecutive years is a business (not a hobby)

For horses, it’s 2 out of the last 7 years

50
Q

What is a frivolous return?

A

One that omits information necessary to determine the taxpayer’s liability, shows a substantially incorrect tax, or is based on the taxpayer’s desire to impede the collection of tax

51
Q

Are scholarships considered taxable income?

A

No if they are used for tuition, but scholarship used towards room and board are taxable income

52
Q

What are the taxable fringe benefits?

A
  • Health insurance premiums paid for self-employed, partners, and more than 2% owners of S corps are taxable income. However, 100% is deductible on form 1040 to the extent that costs do not exceed net income from the business (for self-employment). Can include all types of health (medical, dental, LTC), but NOT disability.
  • Insurance premiums your employer pays on a group life policy in excess of $50k of death benefit if the plan is nondiscriminatory are taxable
53
Q

Adjustments from gross income to get to AGI (above the line deductions on Schedule 1)

A
  • IRA contributions
  • Student loan interest
  • Keogh or SEP
  • Self-employment tax (.07065= half of .1413)
  • Alimony paid before 2019
  • 100% self-employment health insurance
  • Moving expenses (active military only)
  • Penalty for early withdrawal of savings
  • HSA
  • $4000 education expense (AGI limits apply and used as an alternative to AOC)
54
Q

S Corp stock keys

A

Only one class of stock, no preferred
No more than 100 shareholders

55
Q

Corporate accumulated earnings tax

A

Penalty tax of 20% of “accumulated taxable income” in additional to regular corporate tax

A regular corp can accumulate $250k ($150k for PSC) without needing to pay

Tax is meant to coerce corporations to pay dividends

56
Q

Tax forms used by C corporations (filing, employee, and distributions)

A

Filing: 1120
Employee: W-2
Distributions: 1099 (dividends)

57
Q

Tax forms used by self-employed (filing, employee, and distributions)

A

Filing: Schedule C
Employee: Schedule C
Distributions: N/A

58
Q

Tax forms used by partnership (filing, employee, and distributions)

A

Filing: 1065
Employee: W-2
Distributions: K-1

59
Q

Tax forms used by S Corps (filing, employee, and distributions)

A

Filing: 1120S
Employee: W-2
Distributions: K-1 (unearned)

60
Q

What type of tax returns do trusts file?

A

Form 1041, AKA the Fiduciary Income Tax Return

61
Q

What type of income tax returns do estates file?

A

Form 1041, AKA the Fiduciary Income Tax Return

62
Q

What type of depletion triggers AMT?

A

Percentage depletion, not cost depletion

63
Q

Alimony recapture rules

A

Excess front-loading of alimony

Add first two years alimony then deduct constant ($37,500) to get recapture amount – for alimony paid in first two years but none in the third

64
Q

When to use cash method of accounting

A

Most business having no more than $29MM in average revenues

Realize revenue from services performed in the year the payment is received (constructive receipt), regardless of when the services were performed

65
Q

Section 121

A

Exclusion of $500k of realized gain (MFJ) or $250k (single)

Taxpayer must have used the home as a principal residence for 2 years out of the last 5 years immediately preceding the home’s date of sale

66
Q

Below the line deductions (Schedule A)

A
  • Standard deduction
  • Medical, dental, and LTC (above 7.5%)
  • Casualty losses (federal disaster)
  • Real estate taxes (up to $10k)
  • SALT (up to $10k combined w/ real estate)
  • Home mortgage interest
  • Charitable gifts
  • Investment interest expense
67
Q

Can publicly traded MLP income be netted?

A

No! Losses must remain in partnership

68
Q

Can nonpublicly traded MLP income be netted

A

Yes! Can be netted with other nonpublicly traded MLP income

69
Q

Realized gain calculation

A

Total value receieved (FMV of property + boot) - adjusted basis of property

70
Q

Recognized gain calculation

A

Boot received, or zero

71
Q

Substitute basis calculation

A

FMV of property acquired - (realized gain - recognized gain)

72
Q

3 methods of mutual fund sells

A
  • FIFO
  • Specific identification
  • Average cost
73
Q

What form is partnership income or loss reported on?

A

Form K-1

74
Q

Are bank loans included in partnership basis?

A

Yes

75
Q

Are bank loans included in S corp basis?

A

No

76
Q

Are bank loans included in LLC basis?

A

Yes, same as partnerships

77
Q

What tax filing form do partnerships file?

A

1065, but for informational purposes only

78
Q

NOLs

A

An NOL sustained in one year may be used to reduce the taxable income for a future year.
Tax Cuts and Jobs Act (TCJA) limits the amount of net operating losses (NOLs) that can be utilized in a given tax year while allowing for an indefinite carryforward.

Carrybacks of NOLs are no longer permitted for losses after 2017.

79
Q

Who can file as qualifying widower?

A

If spouse dies and home is maintained for dependent child, surviving spouse can file as qualifying widower and pay MFJ tax rates for two years (plus current year) but only if remains unmarried and maintains home for child.

If no child, can file jointly in year of death but then as single the following year

80
Q

Ordinary dividends are on which tax form?

A

Schedule B

81
Q

Business income/losses are on which tax form?

A

Schedule C

82
Q

Child (unearned) standard deduction

A

$1250

83
Q

Home office deduction for employees

A

Repealed

84
Q

How much are meals deductible by a business for employees?

A

50%

85
Q

How much of meals are deductible for entertaining clients?

A

100% as long as they are not lavish or extravagent

86
Q

Is entertainment deductible for a business?

A

No, not for clients or employees

87
Q

How do improvements affect basis in property?

A

Increases basis by amount of improvements (capitalized)

88
Q

Do repairs to a property increase its cost basis?

A

No, they are deducted as expenses

89
Q

How do legal fees, commissions, and sales tax affect cost basis of property?

A

Increases cost basis

90
Q

How does cost-recovery deduction affect basis of property?

A

Decreases basis

91
Q

Self-employment tax calculation

A

Multiply self-employment income by .1413 and round up

92
Q

Losses for LLCs

A

Up to basis (like a partnership)

93
Q

How is hobby income reported on taxes?

A

Misc. Income, not a Schedule C

94
Q

What can investment interest be deducted against?

A

STCG and portfolio income, cannot deduct against LTCG and qualified dividends

95
Q

NOLs were allowed in which types of entities prior to 2018?

A

Estates, Self-employed, and Corporations

S Corps and partnerships are not allowed

96
Q

How to calculate charitable bargain sale deduction

A

(Sale price / FMV) x basis

97
Q

Is self-employment tax paid on income from an S-Corp?

A

Nope!

98
Q

Is self-employment tax paid on income from a general partnership?

A

Yes!

98
Q

Is self-employment tax paid on income from a rents receieved?

A

No!

99
Q

Self-employment income will not exeed what amount?

A

$160,200

CFP (6 decks)

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