Tax Planning Flashcards
(37 cards)
Common deductions taken above the line
educator expenses, Health Savings Accounts, moving expenses, self-employed retirement plan contributions, self-employed health insurance premiums, alimony paid, IRA contributions, student loan interest, educational tuition and fees.
Common deductions taken below the line
medical expenses, state and local taxes paid, sales tax, real estate tax, personal property taxes, home mortgage interest and points, charitable contributions, theft and casualty losses, gambling losses, unreimbursed employee expenses, and tax preparation fees.
If prior year AGI was $150,000 or less, to avoid underpayment penalties
Pay 100% of prior year tax or 90% of current year tax, whichever is less.
If prior year AGI was over $150,000, to avoid underpayment penalties
P\ay 110% of prior year tax or 90% of current year tax, whichever is less.
Self-Employment Tax: SS Old-Age, Survivors, and Disability Insurance (OASDI) program taxed at a flat rate
6.20% for employee and 6.20% for employer = 12.40% for self-employed) on net earnings from SE up to maximum income level ($142,800 for 2021)
Medicare’s Hospital Insurance (HI) program taxed at a flat rate
1.45% for employee and 1.45% for employer = 2.90% for self-employed) on net earnings from SE without limitation.
Tax Credits
Directly reduce tax liability (dollar for dollar), more beneficial for individuals in lower tax brackets
Tax Deductions
reduce taxable income which means the value of a tax deduction lies in the marginal rate which rises with additional income. More beneficial for individuals in higher tax brackets
Tax rate on collectibles and certain small biz stock
28%
Alternative minimum tax (AMT) rates
26% (for amounts up to $199,900 for MFJ) and 28% (for amounts above $199,900)
Medicare Hospital Insurance Tax
0.9% tax assessed on earned income above: $250k MFJ, $200k Single
Surtax on Net Investment Income
3.8% Tax assessed on certain net investment income when modified AGI is above: $250k MFJ, $200k Single
Kiddie Tax
SECURE Act changed taxation on the so-called “kiddie taxable amount” of unearned income amounts above $2,200 for those dependents under 19 years old and full-time student dependents from 19-23 years old to be taxed at the parent’s rate
AMT Planning Opportunities
• Income and Expense Planning
– Defer deductions for state income or property taxes
– Defer or accelerate receipt of income
– Reduce exposure to private activity bonds to avoid AMT
– Consider taxable bonds if subject to AMT
– Time charitable contributions
• Stock and Option Planning
– Defer or accelerate receipt of capital gains
– Consider disqualifying disposition on ISOs
– Consider tandem exercise of ISOs and NSOs
Percentage Limitation and Deduction Rules: Public
Cash: 100% FMV
LTCG Prop: 30% FMV (Basis up to 50%)
Tangible Personal Prop (if held long term): 30% FMV
STCG or Ordinary Income Prop: 50% Basis
Percentage Limitation and Deduction Rules: Private
Cash: 30% FMV
LTCG Prop: 20% basis unless qual appreciated stock then FMV
Tangible Personal Prop (if held long term): 20% Basis
STCG or Ordinary Income Prop: 30 basis
Gift property with imbedded loss (ie depreciated property)
– General Rule: the taxpayer deducts the lesser of fair market value (FMV) or cost basis for gifts of depreciated assets
– Result: the taxpayer deducts FMV on property that has lost value since purchase
Gift property encumbered by debt
– FMV of gift property is calculated net of debt
– The transfer of encumbered property to charity is considered a bargain sale (i.e., the amount of debt is considered an amount realized by the donor)
Deducting Mortgage Interest
– Primary residence or second home
– Limits on deductibility
• $750k aggregate acquisition indebtedness (after 12/15/2017)
• home equity indebtedness deduction eliminated
• qualified HELOC interest is further limited in scope (“buy, build or substantially improve the taxpayer’s home that secures the loan).
Investment Interest Deductibility
Interest paid to borrow money to make investments is deductible but limited to the amount of net investment income (which equals investment income minus applicable investment expenses).
Business Activity Interest
- Interest paid on business loans including rental property and other real estate holdings is deducted from gross income personally or through a business entity “above the line”.
- In most cases, interest expense from passive activities is only deductible to the extent of income from these activities.
Qualified & Non-qualified Dividends
- Dividends are generally taxed as ordinary income.
- Qualified dividends are taxed at capital gains rates.
- Holding period: in order to qualify for the lower rates, investors are required to hold common stock for more than 60 days in the 121-day period beginning 60 days before the ex-dividend date.
- Holding period: in order to qualify for the lower rates, investors are required to hold preferred stock for more than 90 days in the 181-day period beginning 90 days before the ex-dividend date.
“Realized” Gains
Realization of gains occur upon transaction
“Recognized” Gains
Recognized gains occur when triggering a taxable event
