Tax Planning

Question 1

The Tax Formula

Answer 1

Income - exclusion = Gross income
Gross income - above the line deductions= AGI
AGI - below the line deductions (itemized or standard deductions = Taxable income
TI * Rate rate = Gross Tax
GT - tax credits = Final Tax Due
FTD - prepayments = Net tax payable or refund due

Question 2

Exclusions

Answer 2

Sources of income that are omitted from the tax base and tax law treats as non-taxable

Question 3

Above the Line Deductions

Answer 3

Educators Expenses- up to $300 per individual
Business expenses for government employees, reservists who travel more than 100 miles to perform duties and performing artists
HSA- after tax contributions
Moving expenses- active duty military
Retirement contributions for self employed
Health insurance premiums
Traditional IRA contributions
Student loan interest, up to $2,500

Question 4

HSA Contributions

Answer 4

Must have a HDHP to contribute
Not be claimed as a dependent
Not be over 65
Not be covered by medicare

Maximum contributions
$3,850 - single
$7,750 - MFJ
+$1,000 if over the age of 55

Question 5

Self Employment Tax

Answer 5

Applies to employer’s Part of FICA
Net SE profit * .9235
.9% of medicare tax is not deductible
2023- 50% of self employment tax is tax deductible

Question 6

SEP Tax deductions

Answer 6

Lesser of:
$66,000
25% of Self Eployment earnings
(Net SE - SE tax ) * .20

Question 7

Simple IRA Tax Deduction

Answer 7

Deduction for both employer and employee contributions

$15,5000
50+ - additional $3,500
3% match is also deductible

Question 8

Alimony Tax Deduction

Answer 8

2018 and before- deductible to payor
Gross income to recipient

2019 to present - not deductible to payor
Not included in gross income to recipient

Question 9

Self-Employed Health Insurance

Answer 9

Coverage for self, spouse and dependents
Limited to self employment income
Not deductible if other health insurance coverage was available
100% of premiums deductible

Question 10

Traditional IRA Contribution deductions

Answer 10

Full deductible below phase out ranges
File single - 73-83k if covered by a workplace plan
MFJ - 116-136k when individual making contributions is covered by a workplace plan
218-228 k when individual is not covered by workplace plan but spouse is
MFS- 0-10k
Contribution limit is $6,500 plus $1,000 if 50 or older

Question 11

Above vs Below the line deductions

Answer 11

Above the line deductions are typically preferred since they lower AGI allowing you to qualify for other programs and deductions

Question 12

Itemized Deductions

Answer 12

Below the line deductions
Only itemize if it is greater then the standard deduction (Single/MFS $13,850, HoH $20,800 MFJ- $27,700)
or they must because they are MFS and spouse is itemizing

Question 13

When Itemizing Helps

Answer 13

Large uninsured medical/dental event
Mortgage interest or real property taxes are high
Large “other itemized deductions”
Large uninsured casualty or theft losses from a federally declared disaster
Made large contributions to a qualified charity

Question 14

List of itemized deductions

Answer 14

Medical expesnses in excess of 7.5% of AGI
State and Local taxes ($10,000 limit)
Interest paid on 1st and 2nd homes, up to $750,000 of debt
Charity- Cash up to 60% AGI
Casualty and Theft losses- must be federally declared
lessor of FMV or Basis -Insurance PMTS - $100 deductible (in excess of 10% of AGI)

Question 15

Standard Deduction

Answer 15

Single - 13,850
HoH 20,800
(+ 1,850 if 65+, blind or both or both above)

MFS- 13,850
MFJ - 27,700
QW - 27,700
(+ 1,500 if 65+, blind or both or all above)

Question 16

Marginal Tax Rate vs. Average Tax Rate

Answer 16

Marginal tax rate is the amount of tax you will pay on the next dollar earned

Average tax rate is the overall share of income paid in taxes
ATR= Total tax paid/Total income

Marginal tax rate is always higher

Question 17

Tax Credit

Answer 17

Lower Tax due
Adjusted after tax due is calculated
Reduced tax due on a dollar to dollar basis
Benefits all taxpayers the same regardless of marginal tax rate

Question 18

Tax Credit Classification

Answer 18

Refundable
Non-Refundable

Question 19

Refundable Taxes

Answer 19

If a tax credit exceeds liability excess is refunded to the taxpayer

i.e. Earned income, additional child tax credit, American opportunity, and Premium tax credits

Question 20

Non-Refundable Tax credits

Answer 20

May only be used to offset liability

i.e. child and dependent care credit, child tax credit, retirement savings contributions, lifetime learning credit

Question 21

Tax Filing Status

Answer 21

Single
Married Filing Jointly
Married Filing Separately
Qualifying Window(er) with a dependent child
Head of Household- must be unmarried, pays at least 1/2 of housing cost and qualifying child lives with you at least 1/2 the year

Question 22

Estimated Tax Payments

Answer 22

Use form 1040-ES
To avoid penalty you must either pay 90% of this years liability or 100% of last years (AGI must be less then 150K)
No penalty is imposed if current years tax is less then $1,000 or had no tax liability last year

Question 23

Estimated Tax Payment Due Dates

Answer 23

Payment Period Due Dates
Jan 1-Mar 31 Apr 15
Apr 1-May 31 Jun 15
June 1-Aug 31 Sept 15
Sept 1-Dec 31 Jan 15

Question 24

Tax Penalties for

Answer 24

Not filing a return on time
Not paying any taxes owed on time and in the right way
Not preparing an accurate return
Not providing accurate information on your return

Question 25

Tax Penalties and How Much

Answer 25

Negligence- 20% to the amount deficient Fraud- 75% to the amount deficient Frivolous return- $5,000 Failure to file- 5% of unpaid taxes each month for a maximum of 5 months (minimum of $485 if 60 days or more late) Failure to pay- 0.5% up to 25% Failure to file and failure to pay together max out at 5% for the first 5 months

Question 26

Tax Penalties for Tax Preparers

Answer 26

$55 Failure to furnish a copy to tax payer Failure to sign return Failure to furnish ID number Failure to retain a copy or list Failure to file correct information on return Failure to be diligent in determining eligibility for certain tax benefits $560 per failure

Question 27

Tax Entities: Limited Liability

Answer 27

S-Corp- yes for all shareholders C-Corp - Yes for all shareholders Partnerships- No except limited partners from partnership debts LLC- Yes, always Sole proprietorship- None

Question 28

Tax Entities: Number of owners allowed

Answer 28

Sole - 1 Partnership at least 2 S-Corp- Maximum of 100 (members of a family may count as 1) C-Corp- No restrictions LLC- No restrictions

Question 29

Tax Entities: Class of Ownership Interest

Answer 29

Sole- None. only 1 owner S-Corp- 1- but voting and non-voting shares permitted C-Corp- Multiple classes permitted LLC- Multiple classes permitted Partnership - Multiple classes permitted

Question 30

Tax Entities: Level of Income Tax

Answer 30

Sole- 1 Partnership - 1 LLC- 1 S-Corp- Generally 1, some states tax corporation as well (double tax will result) C-Corp - 2

Question 31

Tax Entities: Deductiblity of Losses

Answer 31

C-Corp- No Sole - Losses deducted on owners tax return S-Corp- Yes, up to tax basis; not including any part of corporations debt Partnership/LLC- Yes up to tax basis; includes allocable shares of debt for which they are liable

Question 32

Tax Entities: Dissolution

Answer 32

Easiest Sole Proprietorship Partnership LLC S-Corp C-Corp Most Complex

Question 33

Accounting Methods

Answer 33

Each taxpayer, individual or business, must use a consistent accounting method The most common are the cash method and the accrual method There is also a hybrid method

Question 34

Cash Method

Answer 34

Recognizes expenses when they are actually paid and revenue when they are actually or constructively recieved

Question 35

Accrual Method

Answer 35

Revenue is recognized when the right to receive it exists (completed construction) Expense is recognized when liability can clearly be established, not when paid Corporations, other then s-corps, must use accrual if gross receipts for 3 taxable years prior to current year exceeds $29MM When inventory is used, accounting for income accrual method must be used

Question 36

Hybrid Accounting Method

Answer 36

Used if taxpayer would prefer cash method but sell inventory The accrual method must be used for inventory purchased and sale of inventory Cash method may still be used for the service portion of the business

Question 37

Pricing Environment (rising prices) FIFO LIFO Profits Tax Liability Inventory Value

Answer 37

FIFO LIFO P- Higher Lower TL Higher Lower IV Realistic Understated

Question 38

Pricing Environment (falling prices) FIFO LIFO Profits Tax Liability Inventory Value

Answer 38

FIFO LIFO P- Lower Higher TL Lower Higher IV Realistic Overstated

Question 39

Inventory Accounting Methods

Answer 39

FIFO- First in First out LIFO- Last in First Out Specific Identification- can only be used when you can differentiate inventory by purchase lot Inventory valuation and amount charged are always accurate when using specific identification

Question 40

Depreciation

Answer 40

Is an annual income deduction that allows taxpayer to recover the cost over the time the property is used It is an allowance for the wear and tear, deterioration or obsolescence of the property

Question 41

To depreciate the property must...

Answer 41

be owned by the tax payer be used for business or an income producing activity have a determinable useful life It must be expected t last more than 1 year

Question 42

Depreciation: Straight Line

Answer 42

The same amount of depreciation is deducted each year over the useful life of the property Formula = (Purchase Price-Salvage Value) / Useful life Half year is used for the first and last year

Question 43

Depreciation Accelerated Modified accelerated cost recovery system (MARCS)

Answer 43

Enables Taxpayers to have more depreciation in the early years and less at the end of the asset's useful life Increases cash flow

Question 44

Useful Life of Depreciable Assets

Answer 44

Auto- 5 years Computers - 5 years Heavy Machines - 7 years Office Furniture - 7 years Residential Real Estate- 27.5 years Non-residential (Commercial) real estate- 39 years

Question 45

Section 179 Does qualify

Answer 45

Equipment purchased for business Tangible Property used for business Computer and off the shelf software Office Furniture and Office equipment certain business vehicles

Question 46

Section 179 does not qualify

Answer 46

Real property HVAC equipment Property outside the US Property used to furnish lodging Property acquired by gift or inheritance Property purchased from related party

Question 47

Section 179

Answer 47

Allows businesses to deduct the full cost right away rather than depreciate over time Must be used in trade or business not income producing property Up To 1,160,000 in 2023, for up to 2,890,000 in capital spending reduced dollar for dollar after limited to firms net profit; excess carries over to future years

Question 48

Depreciation "Rules"

Answer 48

Straight line- Predictible deductions over the usable life MACRS- Larger (accelerated) deductions in early years of the usable life Section 179- Full deduction in the year it was put into service

Question 49

Capital assets are not . . .

Answer 49

ACID Accounts Receivable Copyrights Inventory Depreciable Property

Question 50

Cost Basis accounting methods

Answer 50

FIFO- Default method Average cost method- Cost basis is determined by averaging all purchases of the item Specific Identification- the taxpayer selects which shares are to be reported as sold Once you commit to a particular method you must continue to use that method until the asset is completely sold

Question 51

Capital Gains Rates

Answer 51

Short term rates are based on ordinary income rates Unrecaptured 1250 gains are taxed at 25% 3.8 NII (net investment income) could be triggered due to capital gains Up to $3,000 capital losses can be claimed each year for Single, Head of Household and MFJ; MFS is $1,500. Additional looses can carry over indefinitely

Question 52

Section 1231/1245/1250 property

Answer 52

1231 property is used in trade or business and held for production of income 1245 is property that is used in a trade or business such as furniture, computers, carpet 1250 is realty that is used in trade of business 1245 recapture is ordinary income 1250 recapture is 25% tax rate

Question 53

Section 1031

Answer 53

Exchange of property where the gains are not recognized and losses are not deducted must be a 1231 property Must exchange realty for realty Boot is non-qualified property

Question 54

1031 Timing Requirement

Answer 54

45 days from date of sale of relinquished property to identify potential replacement properties 180 days after the date of sale of the original property to complete transaction or due date (with extensions) of the tax return for the year the property was sold, which comes first)

Question 55

Order and explain at-risk and passive activity rules

Answer 55

At Risk always comes first Your basis is all you can lose. Once some amount is at risk of loss you look at passive activity rules. Passive activity- Losses can only be used to offset other passive gains Publicly traded partnerships (PTP) can only offset the same PTP

Question 56

Real Estate Active Participant Losses

Answer 56

Up to a $25,000 deduction Fully deductible if MAGI in under $100,000 Not deductible at all after $150,000 Reduced $1 for every $2 made between phase out range

Question 57

Rental Property Categories: Rental use property

Answer 57

Not the greater of 14 days or 10% of the number of days the property is rented can it be used for personal use Trips made for maintenance and repairs do not count as personal use Expenses are allowed as passive losses

Question 58

Rental Property Categories: Personal Property

Answer 58

Rented for 14 days or less does not need to report income

Question 59

Rental Property Categories: Mixed Used Property

Answer 59

Personal use is greater than 14 days or 10% of the days the property is rented Expenses must be allocated between personal and rental use Deductions are limited to gross rental income

Question 60

Personal Residence sale exclusion: Reasons for reduced Exclusion

Answer 60

Job Relocation Employment Change (reduced income) Qualifying for unemployment benefits health issues divorce or legal separation Birth of twins or multiples Damage to home from disaster Condemnation or seizure of the property other unforeseen circumstances

Question 61

Personal Residence sale Exclusion

Answer 61

Single- $250,000 MFJ- $500,000 Can be claimed once every two years Reduced exclusion is possible if you qualify

Question 62

Personal Residence Sale Exclusion: Ownership and Usage test

Answer 62

Owner 2 of the last 5 years Used 2 of the last five years In filing MFJ only one spouse needs to pass the ownership test but both must meet the usage test to receive the full benefit

Question 63

Charitable Contributions: Cash

Answer 63

Does not require valuation AGI thersholds are generally higher than non-cash contributions Max 60% of AGI for donations to public charities and 30% of AGI for private foundations

Question 64

Charitable Contributions: Long term Capital Gain Property

Answer 64

Must be a capital asset help for more than 1 year Donor can elect to value at FMV or Basis FMV- 30% AGI for public charities 20%AGI for private foundations Basis- 50% AGI for public Charities and 30% for private foundations

Question 65

Charitable Contributions: Ordinary Income Property

Answer 65

Property that if sold would result in ordinary income or short term capital gains Capital asset held less than 12 months, property created by the donor (works of art, literary compositions etc) or inventory Max 50% AGI for public charities and 30% AGI for public foundations

Question 66

Charitable contribution Carry-Over

Answer 66

Can be carried over to each of the next 5 succeeding years Only used after the current years deductions If 2 or more years carry over exists, use the oldest first

Question 67

Charitable Contributions: Public Charities

Answer 67

Churches, hospitals, medical research centers affiliated with a hospital, schools colleges and universities Have an active program of fundraising Receives income from the conduct of activities in furtherance of the organizations exempt purpose

Question 68

Charitable Contributions: Private Foundations

Answer 68

Have a single major funding source (gifts from a single family or corporation) Most primarily make grants to other charitable organization and to individuals

Question 69

Charitable Contributions: Use Related

Answer 69

The Charity makes use of the donated property in a manner consistent with it's exempt purpose Can deduct up to... FMV- 30% of AGI Basis- 50% of AGI

Question 70

Charitable Contributions: Use Unrelated

Answer 70

A use unrelated to the exempt purpose or function of the qualified organization. For governmental units it is anything other than exclusively public purpose Produces a deduction only for the lesser of Cost basis or FMV

Question 71

Charitable Contributions: Record Keeping Requirements

Answer 71

Donor must have a bank record for monetary contributions Donor must obtain a written acknowledgement for a single contribution of $250 or more

Question 72

Charitable Contributions: Contributions of Service

Answer 72

Can only deduct unreimbursed expenses (i.e. out of pocket transportation, cost of lodging, cost of meals when away from home) Law permits $0.14 per mile deduction instead of actual cost of operating an automobile

Question 73

Charitable Contributions: Auction Donations

Answer 73

Taxpayer may only claim a deduction for the excess of the purchase price over its fair market value

Question 74

Imputed Interest

Answer 74

IRS imputes interest charges if a taxpayer charges less than an adequate rate of interest

Question 75

3 types of Imputes interest

Answer 75

Gift Loans Corporate shareholder loans Compensation related loans (from employer to employee)

Question 76

4 Exceptions to Imputed Interest

Answer 76

Loans of $10,000 or less unless between individuals and used to purchase income producing property Debt subject to original issue discount (OID) provisions Sale of property for $3,000 or less When all payments are due within 6 months

Question 77

Imputed Interest calculations

Answer 77

If Net Investment Income (NII) is $1,000 or less- no imputed interest if loan is $100,000 or less If loan is $10,000 or no imputed interest If $10,001-$100,000 imputed interest is the lesser of NII or loan* AFR If loan is above $100,000 use AFR to impute interest Assume AFR is 4%

Question 78

AMT Preferences

Answer 78

Increase AMTI- Exclusions of gain on qualified small business stock or private activity bond interest

Question 79

AMT Adjustments

Answer 79

Can Increase of decrease AMTI Home mortgage interest and investment interest, incentive stock options exercised and depreciation deduction

Question 80

AMT Formula

Answer 80

Regular taxable income + Tax Preferred items + Standard deduction (if TP does not itemize) +/- Amt adjustments and tax preferenced items = AMTI AMTI - Exemption amount =AMT base AMT base*Tax Rate = AMT tax AMT Tax- AMT foreign tax credit = Tentative minimum tax TMT- regular tax liability = AMT

Question 81

Kiddie Tax

Answer 81

Applies to Children UNDER age 19 or full time students UNDER 24 Net unearned income more then $2,500 threshold amount subject to tax rate at parents highest marginal tax rate

Question 82

Kiddie Tax: Standard deduction

Answer 82

The greater of $1,250 or amount of earned income + $400 (up to $13,850, regular standard deduction)

Question 83

Kiddie Tax: Unearned income calculation

Answer 83

First $1,250 is tax free Second $1,250 is taxed at the child's rate (Typically 10%) Remaining is taxed at the parents highest rate rate

Question 84

Net Investment Income (NII)

Answer 84

Is the amount by which the sum of gross investment income and the capital gain net income exceed the allowable deduction NII tax is 3.8%

Question 85

Net investment Income Thresholds

Answer 85

MFJ- 250,000 MFS- 125,000 Single - 200,000 HoH - 200,000 Qualifying Widow(er)- 250,000

Question 86

Calculating Net Investment Income Tax

Answer 86

Tax Applies to the lesser of: Net investment income or The excess of MAGI over the threshold limit * 3.8%= NII tax