Tax

Question 1

What is the donee’s basis if property is gifted to a tax payer?

Answer 1

1) Gain basis = adjusted basis of donor
2) Loss basis = lower of
a. FMV at date of gift
b. adjusted basis of donor
3) Depreciable basis = gain basis
4) Basis is increased for any portion of the gift tax paid by the donor due to appreciation on the property

Question 2

Five items to know for every property transaction

Answer 2

1) Realized gain or loss
2) Recognized gain or loss
3) Character of the gain or loss
4) Holding period of the retained asset (could be zero)
5) Basis in the retained asset, if any (could be zero)

Question 3

What is the net capital loss limitation for individuals and where is reported on the tax form?

Answer 3

Net capital loss for an individual is limited to $3,000 per year.
- Deduction for AGI and is limited to taxable income (excess loss carries forward indefinitely).

Question 4

What is the net capital loss limitation for corporations?

Answer 4

A net capital loss can only be used to offset net capital gains. If there is no gain to offset, the loss can be carried back three years and forward five years.

Question 5

What are the tax rates for Long Term Capital Gains?

Answer 5

• Usually LTCG taxed at 15%, 20% for higher income tax payers in the 39.6% income bracket. Also a 3.8% surtax can be added to the higher income in the 200k-250k (married)
• For CG attributable to straight line depreciation claimed on real estate is taxed at a maximum of 25%
• CG from collectibles is taxed at a mamium of 28%

Question 6

When netting short term or long term losses against a net long term capital gain, which gain is offset first?

Answer 6

The group of long-term gains taxed at the highest rate (15%, 25% depreciation, 28% collectibles) is offset first.
** Works in the taxpayers benefit

Question 7

What is the trade date of a stock/bond?

Answer 7

The day the sale of the stock/bond actually occurs. You use the trade date to measure the holding period of the stock/bond.

Question 8

What forms are capital gains and losses recorded on?

Answer 8

Form 8949 then transferred to form Schedule D (summaary from the computation on 8949 then the scheule D page two walks through the netting process)

Question 9

What are the three categories of assets?

Answer 9

1) Ordinary - Inventory & A/R, Depreciable property used in a trade/business and realty owned for ONE YEAR or less, copyrights or musical works if held by the creator
2) Section 1231 - Depreciable property used in a trade/business and realty owned for MORE than one year
3) Capital - Anything that is not ordinary or section 1231. Most other types of property, including property held for investment use and personal use, are capital assets. Goodwill of a corporation is also a capital asset.

Question 10

What is section 1244 stock and the tax treatment for gains/losses?

Answer 10

Gains from the sale of Section 1244 stock are treated as regular long-term capital gains, but losses are treated as ORDINARY losses (maximum characterized as ordinary is $100,000 for married filing jointly and $50,000 for others).
Section 1244 stock is stock of a domestic small business corporation meaning that the capital receipts of the corporation do not exceed $1,000,000 at the time the stock is issued. Also, at least 50% of the corporation’s gross receipts have to be generated from sources other than investment income during the previous five tax years. Additionally, the seller of the stock had to be the original holder of the stock for Section 1244 to apply.

Question 11

What does Section 1245 and 1250 Recapture apply to?

Answer 11

Applies only to section 1231 assets because only assets used in a business are depreciable.

Section 1245 Recapture - PERSONALTY (assets other than realty)
Section 1250 Recapture - REALTY (land and assets permanently attached to land)

Question 12

What is the treatment for Section 1231 long term gains and losses?

Answer 12

Net just like you do for capital assets, then if it is a net long term gain then you treat as a LONG TERM CAPITAL GAIN. If it is a net long term loss, is it treated as an ORDINARY LOSS.

Question 13

Gains and losses from the sale of business property are reported on which form?

Answer 13

Form 4797

Question 14

What does Section 1245 recapture do?

Answer 14

Recharacterizes gains on personalty as ORDINARY INCOME to the extent of accumulated depreciation.

Question 15

What is Section 1250 recapture?

Answer 15

• Recapture of accumulated accelerated depreciation on buildings in excess of straight-line depreciation as ORDINARY INCOME.
• For buildings owned by individuals “unrecaptured Section 1250 gains” recharacterizes gains on realty as eligible for a special (25%) tax rate to the extent of accumulated straight-line depreciation.

Question 16

What is the lookback provision?

Answer 16

The net Section 1231 gains must be offset by net Section 1231 losses from the five preceding tax years that have not previously been recaptured.

Question 17

What is depreciation recapture?

Answer 17

When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules.

Question 18

Explain cost recovery rules.

Answer 18

Cost recovery rules – Cost recovery is computed under a uniform method using the class life period (MACRS). The IRS provides tables (MACRS Tables) that show the percentage of the asset’s cost basis that can be depreciated each year, based on the asset’s classification.

1. Only business property and income-producing property (e.g., rental real estate) is depreciable.
2. 200% declining balance or 150% declining balance is used for personalty; straight-line is used for realty.

Question 19

What is section 179?

Answer 19

Taxpayers can elect to expense a certain amount of TANGIBLE PERSONALTY used in a trade or business instead of capitalizing it. Limitations applied.

2013 - $500,000 max deduction for personal property of max $2,000,000
2014 - $25,000 max deduction for personat property of max $250,000

Question 20

What form is depreciation and amortization recorded?

Answer 20

Form 4562

Question 21

What is the tax benefit rule?

Answer 21

The tax benefit rule provides that if an item deducted in a previous year is recovered in the current year, the recovery is included in income only to the extent that the deduction provided a tax benefit in the year of deduction. (TP itemized in previous tax year so they received a benefit from this, need to include in income)

Question 22

What types of interest income are taxable?

Answer 22

In general, all interest income is taxable except for municiple interest, which is interest paid on bonds owned by state and local governments.

Question 23

Are gains from sales of municple bonds taxable?

Answer 23

Yes because this is a property transaction. Only the interest on the bonds is excluded from tax.

Question 24

What are some of the sources of taxable interest income?

Answer 24

• United States Treasury notes and bonds
• Federal and State tax refunds
• Mortgages (you extending a mortgage to someone and you get paid interest income)

Question 25

When can interest at maturity or redemption be excluded on a Series EE Bond?

Answer 25

1. If the owner of the bond is at least 24 years old 2. Proceeds used to pay higher education expenses (tuition and fees) of the taxpayer, spouse, or dependent that are not reimbursed by scholarships. 3. The exclusion is phased out for higher income levels.

Question 26

What are the tax rates for qualified and non qualified dividends?

Answer 26

Qualified dividends are taxed at the same rates as long term capital gains. Unqualified dividends are taxed at the ordinary income tax rate. To be qualified, dividend has to be received from a DOMESTIC corporation (if foreign, still qualifies if it is on the stock exchange)

Question 27

What are the process of taxing a qualified dividend?

Answer 27

1) Take the dividend income minus the shareholder's share of E&P 2) Then reduced by the basis in stock 3) If any leftover, either a STCG or LTCG

Question 28

What tax form are interest and dividends reported on?

Answer 28

Schedule B (Form 1040)

Question 29

What is the constructive receipt doctrine?

Answer 29

Constructive receipt requires a cash basis taxpayer to include the value of property in income in the period in which the right to (or control of) the property is acquired. The income is not constructively received if substantial restrictions exist on the taxpayer's use of the funds. For example, if the taxpayer would have to forfeit future bonuses to receive the funds then a substantial restriction exists.

Question 30

What has to be present to qualify as alimony?

Answer 30

1. Payments must be made via cash or expense (such as a mortgage payment) 2. Payments must be contingent upon the LIFE of the recipient (payments cease upon the recipients death) 3. Payments must be required by a written agreement or decree 4. Payment is not child support or specifically identified as 'non alimony'

Question 31

What is provisional income and the formula?

Answer 31

Generally social security benefits are not included in income. However, if the taxpayers PI exceeds a specific amount, up to 85% of the benefits may be included in income. PI = AGI + tax exempt interest + 50% Social Security Benefit If PI is less than 25,000 (single) usually not taxable. If over 44,000 (married) usually 85% taxable. Inbetween 50% may be taxable

Question 32

What is the uniform capitalization method?

Answer 32

Require manufactures and certain retailers & wholesalers to capitalize all the direct and indirect costs allocable to property they produce and for property bought for resale.

Question 33

Who cannot use the cash basis method of accounting?

Answer 33

- Corporations, unless a qualified personal service corporation with gross receipts of not more than $5,000,000. - Partnership which has a C corporation as a partner - A tax shelter

Question 34

What is the formula for computing the taxable portion of an annuity?

Answer 34

Each payment is part income/part return of capital Excluded portion = cost of annuity / expected return (monthly payment x # of months in policy) x total payments received in year Take this number minus the total payments received for the year, and that is the taxable amount.

Question 35

What are some costs included under the uniform capitaliztion method?

Answer 35

- storage costs if off-site - quality control - taxes (except income taxes) - utilites, repairs, rent, depreciation NOT INCLUDED: - marketing & selling, research, advertising, distribution, general & administrative expenses

Question 36

List items that are taxable income.

Answer 36

- Interest income - Bond premiums & discounts - (amortization offsets interest income) - Series EE bond interest (if do not meet education exclusion requirements) - Dividends - Alimony - Tip income - Punitive and emotional damages - Jury duty pay - Annuities - Prizes and Awards (can be excluded if send directly to charitable organization) - Forgiveness of debt (unless TP is bankrupt or insolvent) - Whole life insurance premiums paid by employer for TP - Benefits received by a TP from a policy paid for by the employer are included in income - Premiums paid by TP

Question 37

List items that are non-taxable income.

Answer 37

- Stock dividends (common stock given to common stockholders) - Child support - Property transfers (under a divorce decree) - Damages received for physical injury or illness - Gifts & Inhertences (taxed under federal estate & gift tax law, not to the recepient) - Scholorships that paid only for tuition and fees - Life insurance proceeds due to death or accelerated death benefits for the terminally ill - Social Security (taxable if PI is too high) - First $50,000 on a group term life insurance (after is taxable) - Premiums paid by TP's employer are excluded from TP income and deductible by employer (health insurance & long term care premiums) - Benefits received by a TP from a policy paid by TP - Short/long term disability coverage, Section 401k plans (qualified benefits under cafeteria plans)

Question 38

When is a stock option taxable under an incentive stock option?

Answer 38

Grant date - none Exercise date - none (except alternative minimum tax) Sale date - ordinary income/capital gain (alternative minimum tax adjustment reverses) Sale date - is a LTCG if: 1) held more than one year and 2) not sold until after 2 years from the grant date

Question 39

When is a stock option taxable under a non-qualified stock option?

Answer 39

Grant date - none Exercise date - ordinary income (below calc) Sale date - capital gain (FMV of stock - Exercise price) x # of shares exercised

Question 40

What is the computation to compute the realized gain/loss?

Answer 40

Amount realized (what you received for selling) - Adjusted basis (costs plus/minus any improvements/depreciation, and plus any income recognized) = Realized gain/loss

Question 41

What is the main difference between traditional and Roth IRA's?

Answer 41

Contributions to Roth IRAs are never deductible whereas contributions to traditional IRAs are deductible if certain requirements are met.

Question 42

What are the consequences of withdrawing IRA contributions before retirement?

Answer 42

The distribution is taxable at the taxpayer's marginal tax rate for federal income tax purposes. If the funds are withdrawn before the taxpayer reaches the age of 59 1/2 and if none of the exceptions for early distrubtion are met, the distribution is also subject to a 10% penalty tax.

Question 43

What form is used to record IRA distributions?

Answer 43

Form 8606 - Nondeductible IRAs reported here because you need to calculate the basis.

Question 44

All transactions can be divided into what three categories??

Answer 44

1) Trade or business 2) Investment 3) Personal