Tax Flashcards
(106 cards)
1
Q
Major Tax Services?
A
Research institute of America (RIA) and Commercial Clearing House (CCH) publish books on federal income tax. Not regulations.
2
Q
Estimated Tax dates
A
Remember 1+2+3+4
STARTing on tax day
April 15, June 15, September 15, January 15
3
Q
Tax Filing Extension
A
You can file a 6-month extension until October 15th. This only applies to the filing, not paying taxes. If additional taxes are due, penalties may apply.
4
Q
Who can represent a taxpayer at an audit?
A
Enrolled Agent, Attorney, CPA, enrolled actuary, etc.
5
Q
You have concerns about a client cognitively, and you think they might have forgotten to file a tax return. How do you make sure?
A
Call the attorney!
Attorneys are “Priveledged” and must maintain confidentiality. They can then reach out to the CPA or something.
6
Q
Estimated Tax Requirements
A
Lesser of
90% of current year, or 100% of prior year liability
(or 110% if AGI >150K last year)
7
Q
Gross Income items I forget sometimes
A
- Schedule C business income / losses
- Alimony (old rules)
- Unemployment income
- Punitive damages
- Interest, Dividends, Cap Gains/losses (all here)
8
Q
Adjustments for AGI Items I forget
A
- 1/2 the Self Employment tax
- Self-employment health insurance
- Alimony paid (old rules)
- $2,500 student loan interest
- Early withdrawal penalties
- Moving expenses active military
(of course retirement and HSA contributions here)
9
Q
Schedules and their meanings:
A
A- Itemized deductions B - Interest and Ordinary Dividends C - Business income / losses D - Capital gains / losses E - Real Estate H - Nanny / household
10
Q
Forgotten Standard Deductions
A
- 65+ Elderly or Blind = 1,300
- Head of HH = 18K
- Child (unearned) = 1,050
THESE ARE ON TAX TABLES
11
Q
Itemized Deductions Frequently forgotten!
A
- Medical, Dental and LTC (7.5% AGI floor)
- Casualty Losses (Federal disaster only, 10% floor + 100 bucks)
- SALT (limited to 10K max)
- Home mortgage interest
- Charitable gifts
- Investment interest expense
12
Q
Investment Interest Expense (how-to?)
A
Max deduction limited to taxpayers’ Net Investment Income. Net investment income covers income from property held for investment such as:
- Interest
- Dividends (only if you elect not to use reduced rates)
- Royalties
- ST Gains
NOT LTCG or QUALIFIED DIVIDENDS (unless election for higher rates used)
Unused losses carry forward FOREVA
13
Q
Casualty and Theft Losses
A
FEDERAL DISASTER ONLY
Total Loss (using LESSER of Basis or FMV)
- Reimbursements (must file a claim to be eligible)
- 10% of AGI
- $100 bucks (per loss)
———————-
Deduction
14
Q
Does HO part 3 cover diamond rings and art?
A
No, often there are limitations in Contents coverage part C. You need to separately schedule these types of property usually.
15
Q
Who gets Home Office deduction and where?
A
ONLY self employed individuals filing a Schedule C (limited to net business income) - Cannot create a loss otherwise
SUSPENDED by TCJA for everyone else.
16
Q
Home office deduction requirements
A
A1 MUST BE SELF EMPLOYED (otherwise, no soup for you)
- Must prove you use the home area exclusively for business and on a regular basis
- Must be used by taxpayer to conduct administrative or management activities of a trade or business
- There can be NO OTHER FIXED LOCATION where the taxpayer conducts “Substantial” administrative or management…
17
Q
Meals and Entertainment Watch-Outs
A
Under TCJA, stricter limits created. Meals for clients where business is conducted are deductible if not “lavish or extravagant”.
Meals for employee convenience are now only 50% deductible (formerly 100%)
Tickets to sporting and cultural events permanently no longer deductible. (even with clients)
Deductability (unreimbursed only):
Hotel/Travel - 100%
Meals - 50%
Sports - 0%
Meals at nightclubs and country clubs dont’ count.
18
Q
Meals Expense Deduction (where does it happen)
A
Formerly a miscellaneous itemized deduction. Now can only be deducted as part of Schedule C or on a business return (1120). 3 Ways this applies:
- Salaried employee - Not deductible anymore (misc. Item). Recommend that employee get reimbursed by company, who can now deduct 50%
- Corporation pays 100%, and can only deduct 50% on form 1120
- Self-employed person must pay 100% but only deduct 50% on Schedule C
19
Q
Are Personal Exemptions and Dependent Exemptions Still around
A
NO NO NO. Exemptions are WRONG ANSWERS
20
Q
When does Kiddie Tax apply?
A
- Net unearned income of a child
- Child not attained 24
- Has at least 1 parent alive
Only amount over 2,100 is considered “Kiddie Tax”.
Capital Gains have different trust tax rates, and do not qualify the same way for Kiddie tax.
21
Q
Kiddie Tax Standard Deduction
A
Standard deduction for a kid with only unearned income, is 1,050.
The next 1,050 is taxed at kid’s 10% rate, and everything over that is subject to trust rates (next 2,550 is 10%).
If the kid has earned income, take that +350 to get to standard deduction (until you get up past 12,000). Then you do the kiddie tax calculation for unearned.
22
Q
Income Qualifying for Self Employment Tax
A
(.1413)
- Net Schedule C income
- General Partnership K1
- Board of Directors fees
- Part time eanings (1099)
Stuff that does NOT qualify:
- Real Estate income/rents
- S-Corporation K1 or Wages (FICA wages)
- Limited partnership share of income/loss
23
Q
Health Insurance Premiums for Self Employees
A
Not deductible on Schedule C, but comes off the front of the 1040 separately.
24
Q
When is FICA tax only Medicare?
A
Above 128,400, Social Security taxes max out, and 1.45% (2.9% total with employer) Medicare tax is the only one remaining.
Additional surcharge for Medicare of .9% applies over Thresholds (ON TAX TABLES)
25
Can my employer deduct their portion of the FICA tax?
YES. FICA contributions are deductible by employers (just like 1/2 deductible for Self Employed)
26
Child and Dependent Care Credit (remember CDC)
Non-refundable, Kids eligible until age 13 (CDC Creepy, 13 creepy)
20% of allowable expenses. (depends on income somewhat)
3K for Kid 1 allowable
6K for 2+ Kids (6K * .2 = $1,200 max)
27
Child Tax Credit (Rubio)
Partially refundable ($1,400/child maximum refund)
2K for each qualifying child under age 17 (son, daughter, stepchild, or foster child)
Phased out above 400K MAGI JNT, 200 MAGI single (ON TAX TABLES)
28
New TCJA Credit
"Credit for Other Dependents" or "Family Credit"
$500 Non-refundable credit, for dependents who don't meet the "Qualifying Child" definition. Still 50% of support required. Elderly parents are eligible, unless their taxable income is $4,150 (infl. adjusted).
Same phase-out as CTC (MAGI 400K JNT, Single 200)
29
Adoption Credit
Non-Refundable
Eligible children are:
- 17 or younger
- US Citizen or Resident alien with special needs (full credit, IGNORE EXPENSES > FULL CREDIT [13,840 in 2018])
- Foreign national ONLY take credit in year that adoption is final
Max is $13,840 per eligible child.
Phase-out from MAGI 207,580 - 247,580
Adoption expenses incurred in the year prior to the final adoption, can be deduction in year of adoption (surrogate fees excluded)
30
Foreign Tax Credit
You may deduct taxes paid to foreign government OR credit them dollar for dollar against your income tax liability
31
Credit for Elderly and Permanently Disabled
For anyone who has reached age 65 or is under 65 and retired with a permanent and total disability (AND received disability income)
32
Education Credits
American Opportunity Credit (formerly HOPE) and Lifetime Learning Credit
33
Real Estate Credits (passive income)
```
Low-Income Housing (no phase-out)
Historic Rehabilitation (Phase-out)
```
Both deduction equivalent, up to 25K.
34
Earned Income Credit
REFUNDABLE
For certain people who work and have earned income under certain amounts.
To get people on the BOOKS
35
What taxes do a 1099 worker have to pay?
Must pay Self-Employment tax (.1413).
Even if he's a young kiddie tax-eligible person, the standard deduction would cover earned income up to 12K + 350
36
Which of the following are Refundable credits:
- Child Tax Credit
- Dependent Care Credit
- Foreign Tax Credit
- Earned Income Credit
CTC (RUBIO) - up to $1,400 per child
Earned Income Credit
37
Installment Sales Taxation
Profit / Total contract price = Gross profit percentage (applied to each payment)
38
Installment Sales (when they break down)
For a related party (son, daughter, etc.), if they are sold the property in an Installment Sale, and then turn around and sell it within 2 years of the original purchase date, all gain is taxed retroactively to the first year of the installment. (Related party tax trap)
39
Net Operating Losses (New Rules)
NO MORE 2 year carry-back
Can carry forward indefinitely (instead of 20 year limit before)
Can now only offset 80% of income!
40
Corporation NOL vs. Sole Proprietorship NOLs
Sole Prop NOL MAY be claimed on a personal 1040, and reduce AGI and ultimately Taxable Income.
41
What business form are you most interested in if the business is profitable?
C Corporations or Personal Service Corporations
(Keys:)
- Separate tax entity
- Dividend received deduction of 50% (if you own <20%, if you own more it's 35% or 100%)
- Flat tax rate at 21% (PSC used to be higher and non-graduated).
- Double taxation, and accumulated earnings tax (PSC have a smaller deduction)
- Can use NOL
42
If a business has losses, which types of entities will you focus on (for Risky and Risk-free)
Risk Free:
- Sole Proprietorship
- Partnership
Risky:
- S-Corporation
- LLC
- Limited Partnership
43
Sole Prop Keys
- Pension Plan (Keogh)
- 100% of Medical, dental, LTC insurance deductible for owner
- Lack of continuity
- NOL can potentially offset other active income
- If an individual borrows money for business purposes, can deduct interest paid without limit on Schedule C
44
Partnership Keys
- Pension Plan (Keogh)
- 100% of Medical dental, etc. deductible
- Lack of continuity (dissolve on bankruptcy, death, or incapacity of a partner)
- Losses up to basis (Cash, Direct debt, bank loans)
NOL PROHIBITED
45
S-Corporation Keys
- Pension plan
- Limited Liability
- Medical, dental ,etc. 100% deductible for 2% owners
- Losses up to basis (bank loans excluded)
- Special eligiblility (100 SH, One class, Domestic, all SH must consent to election)
- No FICA / FUTA taxes on distributions
NOL is not allowed.
46
What entities don't have NOL
Partnerships
S-Corps
47
LLC Keys
- Limited liability (like a corporation)
| - Losses up to basis (for partnership, bank loans included)
48
Limited Partnership Keys
- Limited partners cannot actively participate
| - Losses up to basis
49
Section 1244 Stock
1244 Qualified Small Business Stock Keys
- Only applies to the first 1MM of C or S corp stock issued
- If business fails/bankrupt, a loss of 100K (jnt) or 50k / year is an ordinary, not a capital loss (and deductible against other income)
If business fails, you can take th 100K ordinary loss, and a 3K / year capital loss as ordinary (both added together if there's excess loss). The remaining carries forward.
50
What type of interest can be deducted without limit?
Sole Proprietorship loans ONLY
51
Partnership tax return?
Form 1065 for informational purposes only
52
How does a corporation become an S corporation?
Unanimous election of its shareholders. If rules broken, S status immediately terminated.
53
S-Corp Basis Adjustment (need a little love here...T-18 questions)
Increases:
- Portion of income or gain for the year (unearned income)
Decreases:
- Cash distributed, as nontaxable return of investment
- Their share of corporate losses
Note: S-corporations typically pay their owners a salary, subject to FICA / FUTA.
BASIS is what we leave in the business basically. . .
54
QBI Deduction uses what for its' income thresholds?
TAXABLE INCOME (AKA, the deduction looks very different if you have a lot of other deductions this year)
55
QBI Calculation (As complicated as it gets)
20% of QBI (or net income from the business) UNLESS
- Taxable income > MFJ [315-415] or Single [157-207]
- If ^ then deduction reduced to 50% of wages paid by the business (only for non-SSBusinesses)
- if ^^, and SSB, then there is NO DEDUCTION
Good example on T-20
56
If someone is in a high tax bracket, what is a good business form?
C-Corporation. 21% or Qualified Dividends rate, usually lower than their Marginal. Retained earnings rate is at 15%, with a 250K exemption for a business need, etc.
57
What type of liability do LLC and other limited liability forms cover?
Only general liability. Professional liability (E&O or Malpractice is separate issue)
58
What do limited partnerships eliminate?
The option for active participation, except for the general partner.
59
Different Types of Basis
Original basis = Purchase Price
Cost Basis = improvements are added
Adjusted Basis = Cost basis adjusted for depreciation.
60
What do you do with intangibles?
Section 197. Straight line depreciation (basically), but called AMORTIZATION, not depreciation.
61
What are 197 vs. 179
197 is intangible amortization (goodwill, 15 year SL)
Section 179 is 1MM Deduction for new 1245 property acquition, first year cost recovery (can't generate a loss or NOL) (Unused losses can be carried forward)
- 197 is higher, up in the air, intangible (stretch)
- 179 is lower, on the ground, something we can touch (tangible)
62
What word am I looking for, when the question is about like-kind exchange tax calculations or Section 121 (or all the time really)?
Realized vs. Recognized.
Realized has nothing to do with taxes paid. Recognized is taxable.
63
Section 1031 Exchanges Basics
No gain or loss is recognized on teh exchange of certain properties held for investment or use in trade or business.
Property that qualifies:
- Same type (like kind) e.g. Real Estate for Real Estate
- Non-like kind examples: Land for office equipment, Bull for 20 head of cows (livestock of different sexes are not like-kind)
Non-qualifying property:
- Business inventory
- Personal residence
- Non-business tangible personal (no cows anymore)
- Marketable securities
64
Does 1031 Like-kind property need to be like-kind for both parties?
NO. If Mr. A exchanges his rental property for Mr. B's home, it is still like-kind if Mr. A uses it as a rental.
Mr. B can not make a like-kind exchange though.
65
Partially Taxable 1031 LIke Kind Exchanges
- Boot RECEIVED = Recognized gain
- Boot PAID = Add to basis
- Basis carries over from last property
Only 3 relevant numbers:
- FMV of property received
- Adjusted basis of property given up.
- Boot!
(T-25 Practice Qs)
66
When the problem asks for Capital Gains, what tax rates should be used?
0%, 15% or 20%.
3.8% Medicare tax is not a cap gains tax (it is calculated differently, subject to thresholds.
67
Section 121 Gain Exclusion
- 500K MFJ exclusion for gain.
- Must have owned and used as principal residence for 2/5 of most recent years from the sale.
- Exceptions for unexpected allow pro-rata portion to be used. (50 MILE RADIUS to qualify)
68
Can carry forward Schedule D losses be netted against real estate gains?
Yes!
On schedule D, gains and losses are netted (STCG, LTCG, etc. )
69
How does Corporate AMT work
It doesn't! It got eliminated!
70
When to use IPOD?
Well I would prefer an iPod
"Preference items"
71
Which type of depletion triggers AMT (as a prefernce item)
NOT COST DEPLETION
| % depletion from Oil and Gas is a preference
72
3 Buckets of Income:
Earned 1040
Investment Income
Passive Income (Schedule E netting)
73
What makes something "Passive Income/Loss"
Generated by a trade or business in which the taxpayer does not materially participate. Deductions are limited.
74
Non-Publically Traded Partnerships
Sometimes called RELP (RE Limited Partnership)
- Netting process on Schedule E
- Losses from RELPs and Gains from RELPs can be netted (up to PIG income)
- Cannot be netted again against PUBLIC limited partnerships
75
Publically Traded MLPs
- Losses cannot be netted against other MLP or PAL/PIGs.
- Losses can only be used against future income from same MLP, or when the asset is SOLD.
- Publically traded partnership income is reported as portfolio income on Schedule B.
76
Can $3,000 per year of passive losses be deducted against earned income?
NO. It is a passive loss, NOT a capital loss.
That rule only applies to capital losses.
77
Types of Passive Activities
- Someone who owns an interest in a business, but doesn't materially participate (limited partner sure thing)
Typical kinds:
- LImited partnership (with some exceptions)
- Individuals with equity interests in business enterprises without "Material Particip"
- May partners and S-Corp shareholders have no operational involvement of business, yet are allocated income/losses.
78
Two Exceptions to Passive Rules:
- Material Participation (means it is your job basically) - Involved in regular, continuous, and substantial way.
- Active Participation! (bona fide involvement in management decisions) - Lower bar than MP. Limited Partner cannot be active.
79
Active Participation Loss Rules
Qualifying taxpayers may deduct up to 25K per year, of NET LOSSES from real estate activity from their active or portfolio income.
TO QUALIFY must own at LEAST 10% interest in the property.
This deduction is Phased OUT, for taxpayers with AGIs between 100-150K on a 2 for 1 basis.
80
Principal Residence rental rules
NOT normally a business;
- < 15 days during year - EXCLUDIBLE from gross income
- No deductions attributable to rental allowed either
81
Renting your vacation home rules
Normall IS a business
- Personal use cannot exceed LONGER of:
(1) 14 Days or
(2) 10% of Rental Use
(If you don't break this rule, deductions for property can be taken as a business)
82
Passive Activity Loss Exceptions!
(1) Historical Rehabilitation Programs
- Deduction equivalent credit up to 25K (phase out)
- Phases out at 200K AGI
- Not really a worthwhile investment anymore
(2) Low-income housing programs GREAT for Bezos
- 25K Deduction Equivalent Credit
- No income phase-out
- 10 Year credit period
(3) Oil and Gas Working Interests
- You're a general partner, actually unlimited liability
- Losses are deductible unlimited against other income
- If you're limited partner, becomes passive
83
Phantom Income in a Tax Shelter
If loans in default get restructured at lower amounts, that becomes phantom income to limited partnership owners.
84
Alimony Deductibility Requirements (divorces before 1/1/2019)
- Taxpayers cannot file JNT tax return or live together at time of payment
- Payments must be in cash
- Payments must be received for benefit of payee spouse
- Payments cannot extend beyond death of recipient spouse (by decree or state law)
For Cash Payments:
- Non-cash items such as services, property, or the use of property, or promissory notes don't count
- Cash payments to third parties (mortgage, rent, tax, tuition) can qualify, UNLESS property is owned by Payor spouse such as mortgage, life insurance, etc.
85
Any "Alimony" connected to the child
Not deductible as alimony, but treated as Child Support (and new alimony 2019+).
86
Can Alimony payments go to a spouse's IRA?
Yes, and Alimony qualifies as Earned Income (if the spouse doesn't have any)
87
Where should my client get money to hire an attorney for a divorce?
Maybe borrow it, if you don't have individually owned assets which are reachable.
88
Are property transfers in Divorce taxable?
No, these are an exception to the "Transfer for Value" rules.
Basis is transferred over.
89
Divorced persons filing requirements
Someone divorced under final decree on last day of the year, is considered unmarried for the entire year.
They should file as single, or HOH with children.
90
Alimony Recapture
If payments decrease too quickly over first 3 years, alimony deducted is RECAPTURED as Ordinary Income.
Calculation:
- No alimony paid in third year = Subtract $37,500 = Recapture Required
- Alimony paid all 3 years, Take the third year and multiply it by 2, then add 37,500. Take that number, and subtract it from the first two years to get Recapture
Y1+Y2-(Y3*2+37,500)=Recapture
91
When is Alimony recapture required?
WHen payments in the second year esceed payments in the third year by more than $15,000
92
Closely Held C-Corporation, passive exception
A closely held C-Corp which is not a PSC may use passive losses to offset active, but not portfolio income. Not available to S-Corporations.
93
Tax Filing for widows / widowers
In year of death, widow can file JNT return with deceased individual.
If the widow maintains a home for a dependent child, they can continue filing MFJ for 2 remaining years.
94
Dependency Exemptions
Valued at $0 (weird quirk)
- Under 24 if FT students
- Under 19 if not
(might need to know for other reasons). Might still be claimed as dependents if they meet the 50% support test.
95
Charitable Contribution Maximum Deductible Amount
60% of AGI. Any amount greater is carried forward for 5 years (or if sooner, Death) (with the year of contribution, actually 6 years)
First step of charitable deduction problems.
96
Steps in Chartiable Deduction calculations
1. Calculate maximum deductible amount
2. Calculate eligible amounts given to 50% organizations (public)
3. Calculate eligible amounts given to 30% organizations
97
Public Charities Deduction Allowable %
```
60%
- Cash donations only
30%
- LTCG property, using FMV
50%
- Using Basis for inventory
- Using Basis for works of art created by taxpayer
- Using basis for STCG Property
- Using basis for Use-unrelated (art work and collectibles especially... Need a museum)
```
98
Public Charities (60%) vs. Private charities (30%)
Public:
- All churches, schools, and hospitals
- All organizations organized for charitable, religious, educational, or literary purposes or for the prevention of cruelty to children or animals
Private:
- Nonoperating Foundations
- War veterans' organizations
- Fraternal orders
99
Private Charity Deduction %
30% AGI for Cash Donations
20% AGI for LTCG property at FMV
30% of AGI at BASIS for
- STCG or LTCG property
- Inventory works of art by Taxpayer
- Use Unrelated property
100
Good Charitable Questions
Page T-40 or Income Tax 10-5 (pre-study)
101
Roy Sells land with a FMV of 500K to a charity for 300K. His basis is 100K. What is Roy's taxable gain?
This is a charitable bargain sale:
300K Sale / 500K FMV = Taxable portion
Taxable Portion * Basis = Adjusted basis.
300K - 60K (AB) = 240K
102
Highest Overall Tax Deduction vs. This Year Deduction
Watch out for this... Overall isn't respective to just this year's AGI limitations.
103
Corporation charitable deduction
Limited to 10% of taxable income.
Inventory gift is limited to basis plus 1/2 of the property's unrealized appreciation. (can't exceed 2X basis). Inventory must be for ill, needy, or care of infants! (WTF)
104
Substantiation requirements for charitable conributions
Not allowed unless the taxpayer can prove the right to it. $250 or more must be with written aknowledgement from donee organization.
>$500 for a car donation.
105
Hobby Loss Rules
Under these, income is reportable. TCJA eliminated the itemized deduction allowing hobby-related expenses.
If net income in 3/5 consecutive years, it's a business not a hobby (and you can deduct on Schedule C).
For horses, it's 2/7 consecutive years.
106
How much ownership is required for active participation?
TO QUALIFY must own at LEAST 10% interest in the property.
