Tax Planning Flashcards
(245 cards)
1
Q
What 4 things are not classified as capital assets?
A
ACID
1. Account receivable
2. Copyrights
3. Inventory
4. Depreciable property (Section 1231 assets)
2
Q
What is the default IRS method for determining Cost basis?
A
FIFO
3
Q
What are the 3 methods for determining cost basis?
A
- FIFO
- Average cost
- Specific identification
4
Q
What is net capital gain?
A
Excess of Net LT cap gain over NEt short term capital loss
5
Q
what are the 2 characters for capital assets along with their holding period, type, and tax rates?
A
- Short term
Holding period - less than 1 year
Type - capital assets
tax rate - ordinary income - Long term-
Holding period - Greater than 1 year
Type - capital asset, Unrecaptured Depreciation, collectables
Tax rate - Capital assets - 0/15/20
Unrecaptured depreciation - 25%
Collectables - 28%
6
Q
What are the 3 steps for netting capital gains?
A
- Separate ST and LT
- Net each basket
- Net capital gains and losses
7
Q
What are the ST and LT capital gains tax rates?
A
ST- ordinary income
LT - 0/15/20
8
Q
What rate is unrecaptured 1250 gains taxed at
A
25%
Original cost basis < 1231 on capital gains and 25% on depreciation
Between original cost basis and adjusted basis - 25% on unrecaptured depreciation
equal to adjustable basis - no tax issue
Less than adjustable basis - ordinary loss
9
Q
What is the max tax rate for collectible items held long term?
A
28%
10
Q
What is the max capital loss that can be claimed each year and how long can you carry excess forward?
A
$3,000 except if MFS ($1500)
Carry forward indefinitely
11
Q
What is 1231 property and what are gains and losses taxed at?
A
1231 property is property used in business and property used for producing income
Gains - Capital gains
Losses - ordinary income losses
12
Q
What are the 2 subcategories of 1231 property?
A
- 1245 - personalty
Furniture, computers, carpet, decorative
2.1250 -reality
Commercial buildings, warehouses, barns, rental properties
13
Q
How is gain recapture (depreciation deductions) taxed for section 1245 property?
A
As ordinary income
If gain > depreciation - 1231 treatment and 1245 treatment on depreciation
14
Q
What is the main purpose of section 1245?
A
eliminate advantage taxpayer would have reducing income by depreciate and receive section 1231 capital gain treatment
15
Q
Does section 1245 apply to losses?
A
No, ordinary income loss
16
Q
What is the difference between section 1245 and 1250?
A
1250 applies solely to additional depreciation
excess of ACRS over straight line
property held less than one year = total depreciation
Non- corporate - not required on real property
17
Q
What is 1250 taxed at?
A
25% for amount of depreciate
18
Q
What allows for the deferral of gain or loss recognition on realty for realty excahnges?
A
Section 1031
19
Q
What are the 3 section 1031 rules?
A
- Only applies to 1231 property (used in business for income production)
- Exchange realty for realty
- Boot is non-qualified property
Boot= cash, debt assumptions, inventory and personalty
20
Q
What are the 2 timing requirements for a 1031 exchange?
A
- 45 days - must find replacement property
2.180 days - must gain possession of that property - receive property
21
Q
What are the 5 definitions and calculations in a 1031 exchange?
A
ARRDS
1. Amount realized: FMV +/- net boot
2. Realized gain: Amount realized - basis
3. Recognized gain: Lesser of realized gain or net boot
4. Deferred gains: realized gain - recognized gain
5. Substituted basis: FMV of qualifying property - deferred gain
22
Q
What is the recognized gain in a 1031 exchange?
A
Less of realized gain or net boot
23
Q
What is realized gain in a 1031 exchange?
A
Amount realized - basis
24
Q
What is the amount realized in a 1031 in a 1031 exchange?
A
FMV +/- net boot
25
What is deferred gain in a 1031 exchange?
Recognized gain - realized gain
26
What is the substituted basis of 1031 exchange?
FMV of the property - deferred gain
27
Does depreciation reduce basis?
yes
28
What are 3 examples of constructive receipt not considered income due to substantial limitations?
1. Funds in escrow
2. Granted stock shares not available until after a specific date
3. Retirement funds in a Rabbi trust
29
What type of trust is used by businesses or other entities to defer the taxability to the person or entity receiving such payments as employee compensation or purchase payments in the acquisition of another business.
Rabbi trust
30
What are the 3 steps at the top of the Estate formula?
I G.A.T This
1.Gross estate
- deductions
2.Adjusted Gross Estate
- charitable and martial deductions
3. Taxable estate
31
What are 3 strategies for charitable giving if unable to itemize?
1. Donor advised fund
Tax deduction
2. Qualified Charitable distribution
Taking an RMD with it (no taxes)
3.Bundling of donations
small donations over several years to be able to itemize as one big donation
32
What did the TCJA do?
Nearly doubled the standard deduction
Sunsets in 2026
33
What tax form are adjustments to income on?
Schedule 1, part 2
34
What are the 11 adjustments to income? (above the line)
HEATSMHERBS
1. HSA contributions
2. Educator expenses ($300/600)
3. Alimony payments pre-2019
4. Traditional IRA contributions (Below AGI Phaseout)
5. Self employment tax 1/2 (employer portion)
6.Moving expenses for active duty military
7. Health insurance premiums for self employed (includes dental and LTCi)
8. Early withdrawal penalties from Savings accounts
9. Retirement contributions for self employed
10. Business expenses for fee only government employees, performing artists, and military reserve traveling 100+ miles
11. Student loan interest - up to $2,500
35
What tax form are itemized deductions on?
Schedule A
36
What are the 3 potential self employment above the line deductions?
1. 1/2 self employment tax
2. Retirement plan contributions
3. health insurance premiums
37
What 2 things should you review of a client for the standard deduction?
Their age and if they are blind
38
What are the 8 nuance of the tax exclusions? (These exclusions are tax free but...)
1. Muni bond interest is provisional income for Social Security
2. Gifts could be taxed if over lifetime exclusion
3. Inheritances transferred property in Decedents estate
4. Scholarships - coordination of benefits with 529 plans
5. Sale of Residence - Fulfill ownership and use test for full exclusion
6. Death benefit - tax component if income or held instead of lump sum
7. Debt discharge - If PSLF plan or insolvency, treated as Ordinary income if not
8. Support payments - pre 2019 received is taxable
39
What is the tax formula?
Income from all sources
- exclusions
=Gross income
-Deductions for AGI
=AGI
-Deduction from AGI (standard or itemized deduction)
=Taxable income
x tax rate
= Gross taxes owed
-Credits
= Final Taxes due
- prepayments/withholdings
= net tax payable or refund
40
What form is the tax formula incorporate in to?
Form 1040
41
What are the exclusions from income?
MAFIAS PADDED MICS
Muni Bond interest
Accident and health - Employer premiums
Fringe benefits
Inheritances and gifts
Accident and health - benefits received
Scholarships
Property sale gain- $250,000/$500,000 gain
Adoption assistance
Dependent care
Death benefit
Education -$5250
Discharge of debt - Certain circumstance
Meals and Lodging
Interest on EE and I Bonds
Compensatory damages compensation
Support - Post 2018 alimony
42
What are the 5 itemized deductions?
MICGS
Medical and dental expenses above 7.5% of AGI
Interest on mortgage payment - on loan value up to 750,000
primary and secondary residence.
Investment interest limited to NII
Casualty and losses
must be federal declared disaster zone
Calculation = lesser of (FMV or basis) - insurance
payments- $100 - 10% AGI
Gifts to charity - cash 60% AGI - lowest other is 20%
State and local taxes - Up to $10,000
43
What portion of the child tax credit is refundable and what is it called?
Additional Child tax credit - $1,500 of $2,000
44
What are the 5 1099 tax forms and their functions?
1. 1099 - INT
2. 1099- DIV
3. 1099 - NEC- non employee compensation
4. 1099 - MISC
5. 1099 - R - retirement distributions
45
What are the 4 tax forms that start with 104 and their function?
1. 1040 - individual income tax
2. 1040es - estimated taxes for individuals
3. 1040x - 1040 amended tax return
4. 1041 - estate and trusts
46
What is the tax form 1098 used for?
Mortgage interest statement
47
What is the max amount for the child and dependent care credits?
3k/6k single/MFJ
48
What are the 3 tax filing status requirements for married filing separately?
1. 2 separate returns
2. Each spouse, separates items and incomes, deductions and credits
3. If one itemize, the other must
49
What are 3 tax years used for annual accounting?
1. Calendar
2. Fiscal
3. Short tax year
50
What 6 property types do not qualify for section 179?
1. Real property - buildings, land, land improvements
2. Air conditioning and heating
3. Property used outside the U.S.
4. Property used to furnish lodging
5. Property acquired by gift or inheritance
6. Property purchased from related party
51
What is the three pronged all events test for expense determination in the accrual method?
1. Determine liability exist
2. Amount estimated with accuracy
3. Economic performance occurred (was the work done?)
52
What 3 intangible properties can be depreciated?
1. patents
2. copyrights
3. computer software
53
What 4 requirements must be met for property to be depreciable?
1. Owned by taxpayer
2. Used in business or income producing
3. Must have determinable useful life
4. Must be expected to last more than 1 year
54
What is the useful life of the 6 common depreciable assets?
ACHORN
Automobiles - 5 years
Computers - 5 years
Heavy equipment - 7 years
Office furniture - 7 years
Residential property - 27.5 years
Non-residential property - 39 years
55
What section of the IRC allows businesses to deduct the full cost of qualifying capital assets right away?
Section 179
56
What is the max expense under section 179 that can be deducted in the year of purchase?
$1,160,000
57
What 5 properties qualify for section 179 treatment?
1. Equipment for business use
2. tangible personal property used in business
3. Computers and off shelf software
4. Office furniture and office equipment
5. Certain business vehicles
58
What is the Avg annual gross receipt for the 3 taxable years period ending with prior year the requires corporations (other than S-corps) to use accrual method?
$29,000,000
59
What is the most common tax year?
Calendar
60
What are the 3 accounting methods?
1.Cash method
2. Accrual
3. Modified cash/ hybrid
61
What accounting method recognized expenses when actually paid and revenue when actually or constructively received?
Cash method
62
What type of receipt occurs when funds are available without restrictions?
Constructive receipt
63
What method of accounting recognizes revenue when the right to receive exists not when payments is received?
Accrual method
64
What is the 2 part all events test to determine revenue in the accrual method?
1. Right to receive income established, not contingent upon future events
2.Amount can be estimated with reasonable accuracy
65
What method is always used for individual tax returns?
Cash method
66
What method of accounting is used when expenses are recognized when liabilities can be established, not when payment is made?
Accrual method
67
What is the revenue and expense recognition of the accrual mehtod?
Revenue is recognized when right to receive exist
Expense is recognized when liability is established
68
When inventory is necessary to account for income, what accounting method must be used for purchases and sales?
Accrual method
69
What accounting method would a taxpayer use that prefers cash method but has inventory as component of business?
Hybrid method
70
What 2 things must accrual method be used for in the hybrid method?
Sales of inventory
purchase of inventory
71
In the hybrid accounting method, what may the cash method be used for?
Service portion of buisness
72
What are the 3 methods of inventory valuation?
1. FIFO
2. LIFO
3. Specific identification
73
In a rising price environment, what are the effects on profit, tax liability, and inventory value using FIFO and LIFO methods
FIFO
Profits - Higher
Tax - Higher
Inv - realistic
LIFO
Profits - lower
Tax - lower
Inv - Understated
74
In a falling price environment, what are the effects on profit, tax liability and inventory value using FIFO vs LIFO?
FIFO
Profits - lower
tax - lower
Inv - realistic
LIFO
Profits - higher
tax- higher
Inv - Overstated
75
What inventory method can only be used when the firm is able to differentiate Inventory by purchase lot?
Specific identification
76
What is the major advantage of specific identification for inventory valuation?
Inventory valuation and amount charged to COGS are accurate
77
What allows a taxpayer to recover cost or basis of certain property over time property is used?
Depreciation
78
What tangible property cannot be depreciated?
Land
79
When does depreciation begin and end?
Begins - property placed in to service
Ends - cost fully recovered or retired from service
Whichever comes first
80
What are the 2 depreciation methods?
1. Straight Line
2. MACRS - Accelerated
81
What depreciation method is the same amount deducted each year over the useful life of property?
Straight line
82
What 2 steps do you take to determine the deduction for straight line depreciation?
1. Determine adjusted basis, salvage value, and estimated useful life
2. subtract salvage value, if any from the basis
Cost/ useful life
Half/mid year - 1/2 of full taken in first year and 1/2 in last year
83
What depreciation method enables taxpayers to have more depreciation in early years and less at end of assets useful life?
MACRS - accelerated
84
What are the 2 accelerate methods based on when property placed into service and the years?
1.ACRS 1981- 1986
2. MACRS 1986 - present
85
What type of property does section 179 pertain to and when must the property be placed into business?
Property used for business, not to produce income.
Current year
86
What is the deduction of section 179 expense limited to and what is done with the expense?
The net profit , excess uses MACRS
87
Who would use MFS?
A higher earner with lots of student debt working in public service role (PSLF)
88
What must estimated quarterly tax payments be to avoid a penalty on the underpaid amount?
25% of the lesser of :
AGI under 160k:90% of the current year tax liability or 100% of the prior year tax liability
AGI over 160k: 90% of current years or 110% of prior year
no penalty if current year less than $1,000 or no tax liability in the prior year
89
Who are each of the business entities best suited for?
S - Corp - Single/multi owner business who need company funded benefits and liability protection
C-Corp - Same as S-Corp
Partnership - Business with partners where taxes or product liability is not a concern
LLC - Single/multi owner business owners need Limited liability but partnership tax treatment
SP - Single owners, taxes or product liability is not a concern
90
What are some examples of each of the 5 business entities?
S-Corp - Pizza parlor, interior designer
C-Corp - Software company
Partnership - Land development
LLC - real estate investment
SP - mom and pop bike shop
91
What tax form is estimated taxes calculated on?
1040es
92
What are the payment periods and due dates for estimated tax payments?
1. Jan 1st - March 31 Due April 15th
2. April 1st - May 31st Due June 15th
3. June 1st - August 31st Due Sept 15th
4.September 1st - December 31st Due Jan 15th
93
What are the cons of MFS?
Lose certain credits and reduce others
Lose: child and dependent care, earned income, adoption, AOTC, and LLC
Reduce: Child tax credit and savers credit
94
What are the tax filing status requirements for single?
Dec 31st either unmarried or legally seperated
95
What are the 5 tax filing status requirements for widow(er)?
1. Not remarried
2. MFJ = year of spouse
3. QW = year 1 and 2 after death of spouse
4. 50% of household expenses
5. Claim qualifying child as dependent
96
For section 179, what amount in excess capital spending does the $1,160,000 max amount start to be reduced by the excess dollar for dollar?
$2,890,000. Still limited to net profits
97
What is the maximum number of owners for each business entity?
S-Corp- 100 max, families count as 1
C-Corp - no restrictions
Partnership - minimum two
LLC - no restrictions
SP - 1
98
What are the 5 tax filing status?
1.Single
2.MFJ
3. MFS
4.Head of Household
5. Qualifying widower with dependent child
99
What are the levels of income tax for each business entity?
S-Corp- 1, some states tax as corporations
C-Corp- 2
Partnership- 1
LLC- 1
SP- 1
100
What are the 4 tax filing status requirements for head of household?
1.Single or unmarried
2.Pay more than 1/2 housing cost
3. Qualifying child - lived with you more than 1/2 year
4. Qualifying relative - providing at least 50% annual living expenses
101
What are the 6 tax penalties?
1. Negligence - 20%
2. Fraud - 75%
3. Frivolous return - $5,000
4. Failure to file - 5% per month, up to 25%
Min penalty of $485 if later than 60 days
5. Failure to pay - .5% per month up to 25%
6.Understatment of liability
if less than 90% cy or 100% of py, penatly absed on amount, period, interest rate
102
Are section 457b deferrals aggregate with other salary deferrals annual max?
No
103
What is the complexity for dissolution for each business entity?
S-corp - very complex
C-corp- most complex
Partnership - easy
LLC - complex
SP- Easiest
104
What are the different deductibility of losses for each business entity?
S-corp- Deduct corporate losses to extent of tax basis
C-corp- Can't deduct corporate losses
Partnership- deduct to extent of tax basis
LLC- deduct losses to extent of tax basis
SP- Losses deducted on owners tax return
105
What are the classes of ownership interest for each business entity?
S-Corp- 1- but can have voting and non voting
C-corp- multiple
Partnership- multiple
LLC- multiple
SP- None, only 1 owner
106
What is limited liability for each of the 5 business tax entities?
S-corp- yes for all shareholders
C-corp- yes for all shareholder
partnership- No - but limited partners have protection from partnerships debt
LLC- no restrictions
SP- None
107
What are the 5 types of business tax entities?
S-corp
C-corp
Partnership
LLC
SP
108
If both a failure to pay and file penalty are applied in the same month, what happens?
The failure to file is reduced by failure to pay, down to 5%
109
What are 4 reasons the IRS charges a tax penalty?
1. does not file a return on time
2. Does not pay taxes owed on time
3. Does not prepare an accurate return
4. Does not provide accurate information on returns
110
What is tax form 4868 ?
Extension of time to file
111
What is tax form 8606 used for?
Nondeductible IRAs
112
What is tax form 5498 used for?
IRA contributions individuals
113
How do you calculate tax using a margininal tax table?
1.Placetaxable income within marginal bracket
2. Find base amount
3. Calculate excess amount (taxable income level)
4. Apply marginal rate and add base
114
How do you solve for an equivalent deduction given a tax credit?
Credit/marginal tax bracket
115
How do you solve for an equivalent tax credit given a deduction?
Deduction x marginal tax bracket
116
What is the function of tax form 706 and 709?
From 706 - Estate and GSTT
From 709 - Gift and GSTT
117
What is the tax schedule H, SE, and K-1 used for?
H- Household employment tax
SE - self-employment tax
K-1 - partnership distribution
118
What are the functions of tax schedules A-F?
Schedule A - Itemized deductions
Schedule B - interest and dividend income
Schedule C - profit/loss from business
Schedule D- Capital gain/losses
Schedule E - Rental and royalty income
Schedule F - Profit or loss from farming
119
What is schedule 1 tax schedule use for?
Additions and adjustments to income
120
What is form W-2 used for?
Wages and taxes
121
How do you calculate average tax rate?
Taxes paid/ taxable income
122
What are the calculations for the child and dependent care credit?
35% of qualifying expenses (up to 3/6k) reduced by 1% over $2k AGI of $15k, no lower than 20%
123
What are the 2 rules for the child and dependent care tax credits?
1. Care must incurred to keep gainfully employed
2. Must maintain household for dependent under 13 or incapacitated dependent or spouse
124
What is the AGI phaseout ranges for the lifetime learning credits?
Single 80k-90k
MFJ - 160k-180k
125
How many years is the lifetime learning credit available?
Unlimited
126
How is the lifetime learning credit calculated
20% of $10,000 in tuition
127
What are the 4 most likely tested nonrefundable tax credits?
Child and dependent care - 35% after ceiling
Child tax
retirement savings contribution
lifetime learning
128
For the premium tax credit, what level of poverty do you get a full refund of premiums paid?
poverty level up to 150%
129
For the child tax credit, what is the dollar over Agi and what is it reduced by?
For everyone $1000, $50 reduction
MFJ 400k
Single 200k
130
What happens to the child and dependent are credit if an employee excludes up to 5k for dependent care assistance?
Credit is reduced by amount assisted
131
What are the 4 tax filing status requirements for married filing jointly?
1. Married
2. income and deductions for both used
3. not allowed if one spouse is a non-resident alien
4. jointly and separately liable
132
What are the 4 tax forms a self-employment earner uses?
1. Schedule SE
2. 1099 NEC
3. Schedule C
4. Form 1040ES
133
What are the 6 penalties to tax preparers who fail to follow rules and regulations?
1. Failure to furnish a copy to taxpayer
2. failure to sign return
3. Failure to furnish identifying number
4. Failure to retain a copy
5. Failure to file correct information
1-5 = $55 per incident
6. Failure to be diligent in determining eligibility for certain tax benefits $560
134
What is the AGI level for the child tax credit?
$200k single, $400k MFJ
135
What are the 2 things that the earned income credit is determined by?
1. Income
2. Number of kids 0,1,2,3 or more
136
How is the American opportunity tax credit calculated?
100% of the first $2000, 25% of the second $2,000
If it brings taxes to 0, can do refund 40% up to $1000
137
What type of income is not subject to withholding? (4 types)
1. Investment income
2. Rents
3. SE
4. Capital gains
138
What are the 4 refundable tax credits?
1. AOTC
2. Additional child tax credit
3. earned income credit - welfare
4. Premium tax credit - Premiums -% HI
139
What are the 2 classifications of tax credit?
1. Refundable
2. unRefundable
140
Is a tax deduction more beneficial to a higher or lower income tax payer?
Higher income
141
What reduces tax by marginal percentage?
Tax deduction
142
What reduces tax liability on a dollar to dollar basis?
Tax credit
143
Will the marginal tax rate always be higher than the average rate?
yes
144
What are marginal and average tax rates best used to compare?
Marginal - strategies
Average - people and proportion of tax to taxable income
145
What is the max number of years per student the AOTC can be used?
4 years
146
What is the max dollar amount per qualified student for the American opportunity tax credit?
$2500
147
Is the lifetime learning credit used per taxpayer or per student?
Per taxpayer
148
Are itemized deductions below or above the line?
below the line
149
For married filing separate status do they have to itemize?
yes
150
For tax purposes what are the two alimony rules?
Pre2019 tax deductible and taxable income
post 2018 not either
151
Can net boot received be lower than 0?
no
152
If a 1031 exchange is uneven, what can it lead to?
taxes
153
What is the treatment of mortgages as boot in a 1031 exchange?
Give mortgage= positive boot
Receive mortgage = negative boot
154
What does boot cause in a section 1031 exchange?
taxes
155
What does section 1231 apply to gains and looses in relationship to basis?
Gains>basis
Depreciation - cost recovery - section 1245 or 1250 pending property type
Losses < adjusted basis
156
For 1231 property, what is the taxation for amounts sold under adjusted basis?
Ordinary loss
157
Why is ordinary loss on 1231 so beneficial?
Not capped at 3k of capital losses, unlimited losses can be used against income
158
What are 2 tax planning opportunities with capital gains/losses?
Gains harvesting - filing up 0% capital gain bracket
Loss harvesting - sell capital loss up to 3k each year to offset income or gains
159
is capital gains stacked on taxable income?
yes, taxable income is the floor
160
What is the special rule for sale or trade of property between related parties?
IRC section 267
161
Under IRC section 267 what are the 6 related parties?
1. Spouse
2. Child
3. Grandchild
4. Parent
5. Sibling
6. Related entities - own more than 50% of stock or interest
162
Under section 267 related party transactions, how are gains and losses treated?
Gains are realized as normal when sold to related party. Losses are not realized until the property is sold again to a non-related party
163
Under IRC section 267, related party transactions, who can use loss?
The person who originally purchased the related party, when they sell to an unrelated party
164
What amount of loss/Gain can be recognized on related party transactions?
Can only use loss up to gain when sold
165
What are the 3 "pass through" entities?
1. S-copr
2. LLC
3. Partnership
166
What comes first, at-risk rules or passive activity rules?
At risk rules
167
What rule states that a taxpayer can only deduct losses to the extent there is enough basis?
At risk rule
168
A taxpayer can only use passive losses to the extent they have what?
Passive income
169
What happens to passive losses in excess of passive income?
Suspended
170
What are the loss vs income rule for private interest vs public interest (publicly traded partnerships)?
Private interest can be netted against other private interest, losses can never exceed gains.
Public interest can only be netted against public of the same company. Only happens when current year netted against prior suspended
171
In general what are rental activities considered?
Passive activities
172
what are the two rules for active participation in rental real estate and what amount can be deducted?
1. Ownership of at least 10% of property
and
2. Substantial involvement in managing property
Up to 25k in loss
173
What are the 2 MAGI limits for 25k loss on active participation in rental real estate?
MAGI (AGI without rental income)
1.less than or equal to $100k - full 25k
2. 100k to 150k - phaseout - every 2k, 1k reduction
Take 150k - MAGI then divide by 2. This is the allowable deduction
174
What are the 3 uses of rental property?
1. personal property
2. Rental Property
3. Mixed use
175
For rental property that is considered personal property, how many days can you rent it out, what do deductions include, and what property does it apply to?
14 days or less
Itemized deductions for mortgage interest and property taxes
Primary and vacation home
176
For rental use property, what can personal use not exceed and what are passive losses produced?
Cant exceed the greater of 14 days or 10% of the days rented out
All expenses allocated to the rental property can be passive losses up to 25k
177
For mixed use property, how must expenses be allocated and what are deductions limited to?
must be allocated between personal and rental use
deductions are limited to gross rental income - can be 0 but not negative. Unused losses can be carried forward to future years
178
What IRC section allows for exclusions of gains on the sale of a personal residence and what is the gain limit?
IRC Section 121
250k/500k
179
For section 121 exclusion of gains on sale of personal residence, what 2 tests must he taxpayer meet?
1. Ownership test - own property for 2 of 5 years
2. usage test - used property as personal residence for 2 out of 5 years
180
How often is the section 121 gain exclusion available?
Every 2 years
181
For section 121, if you're married, what are the rules for the 2 tests?
1. Both have to meet the USage test
2. One needs to meet the Ownership test
If not, only 250k gain available ( so long as the original owner passed the tests
182
If a taxpayer does not meet the ownership/usage test or uses the 121 exclusion more than once every 2 years, what can they have?
a reduced exclusion
183
What are the 9 IRC acceptable reasons for a reduced exclusion on section 121 gain?
1. Job relocation
2. Employment change - unable to pay for current house
3. Qualify for unemployment benefits
4. health issues
5. Divorce or legal separation
6. Birth of twins or other multiple
7. Damage to home from disaster
8. Condemned or seized property
9. Other unforeseen circumstances
184
How is a reduced section 121 gain on sale of property calculated?
250k x (number of months lives in / 24 months)
or can use number of days lived in / 730
185
For real estate professionals, are rental losses passive?
No can offset other income
186
What are the 5 ways suspended losses can be released ?
1.Sold in a taxable transaction - full amount of loss can offset gain
2. Gift - losses can be added to basis
3. Sold to related taxpayer - related party to unrelated can realize up to gain
4. Divorce - Added to basis of spouse receiving the property
5. Inheritance - deductible on final tax return to extent exceeds step - up basis
187
For the 3 different rental property categories, what tax form do deductions go on?
Personal use - Schedule A
Rental use - Schedule E
Mixed use - both
188
What are the 3 charitable contribution types of property?
Cash
LTCG property
ordinary income property
189
For charitable contributions what 3 properties are considered ordinary income property?
Capital Assets held less than 1 year
Property created by the donor
inventory
190
For charitable contributions of LTCG property, what can the donors elect to value the asset at?
FMV or basis
191
What are the 2 charitable organization types?
1.Public- churches, hospitals, schools
2.private- single major source of funding
192
What is the 5 year carryover rule for charitable contributions?
Contributions that exceed AGI can be carried over to each of the succeeding 5 years
Subject to original % limits
deducted after current year deduction
earliest carryover is used first
193
What are the 3 asset types and max annual charitable deduction for each?
Public-private % of AGI
1. Cash 60-30
2. LTCG
FMV 30-20
BASIS 50-30
3. Ordinary income 50-30
194
For Charitable contributions what are the 2 tangible personal property categories?
1. Use-related - charity uses in manner exempt purpose
2. Use-unrelated - unrelated to exempt purpose of charity
195
For charitable related use property what is the deduction?
FMV = 30% of AGI or Basis = 50% of AGI
196
For unrelated use property what is the deduction?
Lesser of basis or FMV
197
What must a donor have from a charity before claiming any deductions for monetary contributions?
Bank record or written communication
198
What must a donor obtain from a charity for single contribution of $250 or more?
written acknowledgement
199
What are charities required to provide donors who receive goods or services in exchange for $75
written disclosure
200
When making a contribution of services, what may a taxpayer deduct?
Unreimbursed expenses incurred incident to rendering services
1. our of pocket transportation - .14 cents per mile
2. cost of lodging
3. cost of meals while away
201
What can donors who purchase items at a charity auction claim a deduction on?
excess of purchase price over FMV
202
For charitable gifts under $250, what is needed for a dedcution?
a receipt
203
For charitable gifts over 500k what is needed?
qualified appraisal
Can also be for $500-5000 and $5000 plus
204
What section of form 8283 is required for gifts of $500-$5000, $5000+, and $500k+?
Section A
Section B
Section B
205
What is imputed interest used for?
If a taxpayer charges less than an adequate rate of interest
206
What are 3 situation the IRS looks at to determine if interest must be imputed?
1. Gift loan - out of love
2. Corporate shareholder loan- corporation to shareholder
3. Compensation related loans - employer to employee
207
What are the 5 exceptions to imputed interest?
1. Loans between individuals of less than or equal to $10k (unless used to purchase income producing property)
2. Corp and comp loans of less than or equal to 10k
3. Debt subject to original issue discount
4. Sales of property for less than $3000
5. When all payments are due within 6 months
208
For imputed interest income what is it based on for loans over $100k?
Applicable federal rate
209
If borrowers net investment income is $1k or less, does imputed income apply?
no
210
When loans are 10k to 100k, what is used for imputed interest?
The lesser of Applicable federal rate (AFR) or the Net investment income
211
What applies to taxpayers with high economic income by setting a limit on tax benefits?
Alternative minimum tax
212
What is AMT used to determine?
the minimum amount of tax liability a taxpayer owes
Most people still have higher regular tax liability
213
What is it called when AMT exceeds regular tax liability?
AMT payable
214
What can adjustments do to AMTI (alternative minimum taxable income)?
increase or decrease
(certain interest (home mortgage, Investment interest; ISO exercises, depreciation deduction)
215
What do preferences do to AMTI?
Increase it (exclusion of gain on qualified small business stock, private activity bond interest)
216
Is the standard deduction and deduction allowed for AMT?
No
217
What is the AMT Formula?
Regular taxable income
+ Tax preference items, standard deduction
+/- AMT adjustment and tax preference items
= AMTI
- exemption amount
=AMT base x AMT tax rate
=Gross AMT
-AMT foreign tax credit
= Tentative minimum tax
- regular tax liability
= AMT
218
For AMT planning, if a taxpayer is subject to AMT in the current year, what should they do?
1.Accelerate income into AMT year
2. Defer tax deductions until regular tax year
Optimal strategy AMT=Regular tax liability
219
What tax applies to children under age 19 or full time students under 24?
Kiddie tax
220
What type of income is kiddie tax calculate off of?
unearned income
221
What is the standard deduction for dependents?
Greater of $1250 or earned income +$400
Never more than normal standard deduction of $13850
222
What is the kiddie tax calculation?
1st $1250 tax free
2nd 1250 Childs tax rate - 10% typically
Remaining amount taxed at parents rate
223
What are the 4 steps to finding taxes due using kiddie tax?
1. Find Childs taxable income = GI(earned+unearned income)-Dependent Standard deduction
2. Amount taxed at parents highest (only use unearned income)
3.Amount taxed at childs tax rate(step 1-amount taxed at parents income) x childs tax rate)
4.Parents tax due + child tax due = total taxes due
224
What is the amount by which the sum of gross investment income and capital gain exceeds allowable deductions?
Net investment income
225
What 7 items are investment income?
1. Interest
2. Dividends
3. Capital Gains
4. Rental and royalty income
5. NQ annuities
6. income from business invested in trading financial instruments
7. Passive activity businesses
226
What is the net investment income tax and who owes it?
3.8%
If individuals have net investment income and have MAGI over thresholds
227
What does the 3.8% Medicare surtax on NII apply to?
lesser of
NII
Excess of Modified AGI over limits
228
What tax credit provides relief for taxpayers who incur child and dependent care expenses because of employment activities?
Child an dependent care credit
229
What are the two requirements for the child and dependent care credit?
Care expenses must be incurred to enable the taxpayer to be gainfully employed and taxpayer must maintain a household for a dependent under the age of 13 or incapacitated dependent or spouse
230
What is the child and dependent care credit %?
35% of qualifying expenses
231
What is the dollar limit for the child and dependent care credit ?
3k/6k
232
What is the credit reduced by for the child and dependent care credit and what is the $ amount over AGI that it is reduced?
1% for each 2k of AGI in excess of 15k. Goes no lower than 20%
233
What is the $ per child amount for the child tax credit?
$2k
234
Is the child tax credit refundable?
Partially refundable - $1500 - the additional child tax credit
235
What is the AGI limit for the child tax credit?
200k/400k
236
For every 1k in excess of the AGI thresholds for the child tax credit, what is the credit reduced by?
$50
237
What is % deduction for the qualified business income deduction? (QBID)
20%
238
What is net income from a qualified trade or business know as?
Qualified business income (QBI)
239
What are 3 types of qualified businesses?
SP
S-Corp
Partner in LLC or partnership entity
240
What is the QBID deduction based on?
taxpayers personal tax return
241
What is the calculation for the Qualified business income deduction?
Lesser of
20% of QBI
20% taxable income (not including capital gains)
242
What is a FBAR?
Report of foreign bank and financial accounts
243
When is a US person required to file an FBAR?
1. Financial interest in or signature authority over at least on financial account located outside of the US
2. Aggregated value of all foreign financial accounts exceeded 10k at any time during calendar year
3.Must file FinCEN form 114 by tax deadline
244
What is FACTCA
Foreign account tax compliance act
245
What does FATCA require?
Must file form 8938 if over thresholds
