Tax, Retirement, Estate Flashcards
when is self employed individual required to file taxes
when net earnings are over $400
what’s excluded from income relating to education?
excluded: scholarship for books and tuition
included: room and board
qualified dividends
taxed at lower cap gains rate
not ordinary income
excludable amount w respect to services for employees
20% off purchase price
max deduction allowed for interest incurred on investment debt
NOI!
you have to opt out of LTCG treatment
deductions mean more to ______ taxpayers and credits mean more to _______ taxpayers
deductions= wealth
credits= lower
1099 worker
you don’t need to pay or withhold income or FICA tax
FIFO
company is selling their lowest cost goods first
NOLs and biz entities
S Corps and Partnerships CANNOT claim NOLs
what happens if you sell to a family member via an installment sale
entire gain is reportable
which biz entities are eligible for QBI
pass-thru entities
trusts that are required to distribute all of their income
receive income tax exemption of $300
tainted to estate AND trust purposes
a client should not establish an irrevocable trust that is tainted for BOTH estate and income tax purposes
recovery deduction
cost + taxes + modification
reinvested dividends and IRR
NOT included
when you’re in the 32% tax bracket, you multiply WHAT times the taxable income?
.68
1244
small biz stock
cost recovery deduction is to ______property as 1031 exchanges is to ______ property
cost recovery= 1245 (personal property)
1031 exchanges= 1250 (real property)
what is the exception for passive activity rules (meaning you can deduct)
active real estate
phaseout for being able to deduct 25k losses for passive investments
150k
if pearce court rents for 90 days, you can’t use it for over ____ days
9
Joan is self-employed. She has provided you with the following information for the current year.
Net Schedule C Income $100,000
Keogh Contribution 18,000
Health Insurance Premium 5,000
Charitable Contributions 10,000
Property Tax 5,000
1/2 Self-employment Tax (given ) 7,065*
*Based on $100,000 net income.
What amount is Joan’s adjusted gross income?
B. $69,935
The self-employment tax is $100,000 x .07065. Health insurance premium paid by self-employed persons are deductible as an adjustment for AGI on the front of the 1040
Mr. and Mrs. Able have active income of $250,000. They also have portfolio income of $10,000 (interest), $5,000 (qualifying dividends), $10,000 (short-term capital gains) and $15,000 (longterm capital gains). They have been margining their stock portfolio and have incurred $35,000 of investment interest. How much of the investment interest can they deduct?
A. $20,000
B. $25,000
C. $30,000
D. $35,000
Answer: A $20,000
Unless the question says they opted out of the qualifying dividend tax rates and long-term gains, they are not usable.
Cathy is self-employed. She operates her business from her home. Her gross income is
$100,000. Expenses associated with her business are $30,000. How much of her home office expense of $20,000 can she deduct on her Schedule C form?
Answer: $20,000
The deduction is on the Schedule C not the Schedule A.
Mr. and Mrs. X have an AGI of $150,000. They have 3 children under 13. How much dependent care credit can they take if it costs $10,000 in dependent care for both of them to work?
A. $0
B. $1,200
C. $3,000
D. $6,000
Answer: B $1,200
Dependent care expenses are limited to $6,000 for 2 or more children. The credit percentage that applies is 20%. They have to be under age 13.
Steve owns and operates a large group of retail appliance stores. The store has an extensive selection of appliances for sale. He uses LIFO. He also repairs appliances both under warranty and out of warranty. What method of tax accounting is most appropriate for Steve’s business?
A. Cash
B. Accrual
C. Hybrid
D. FIFO
Answer: C Hybrid
They hybrid method combines the accrual method for purchases and sales of inventory with the cash method for all other transactions. “Large group” implies over $25M of revenue.
Henry bought a beachfront condo for $200,000. He paid an attorney $1,000 to read and review legal documents associated with the condo. He also paid $12,000 for kitchen improvements. During the year repairs totaled $2,000 and property taxes $4,000. He claimed $7,280 for first year cost recovery deductions. What is the adjusted basis of the condo?
A. $192,720
B. $199,720
C. $205,720
D. $213,000
Answer: C $205,720
Cost $200,000
plus legal fees +1,000
plus improvements +12,000
less CRD -7,280
$205,720
Olivia Celeste Leporace F**ks Ian Shore but not really really normally
* Original basis: ADD commissions, legal fees, freight, improvement (capitalized) , sales tax
* NOT: DONT DO ANYTHING: repairs (always deducted), real estate taxes, normal business operating expenses
Sam owns a small duplex that he rents out. The duplex generated $12,000 of losses. His
earnings from his regular job were $150,000 and his investment income was $22,000. What is his AGI?
A. $138,000
B. $150,000
C. $160,000
D. $172,000
Answer: D. $172,000
His AGI is above $150,000 ($150,000 + 22,000 = $172,000). The loss can only be taken if his AGI was under $150,000. (Max would’ve been 25k too)
Larry bought a limited partnership interest in a low-income housing development. He is in a
35% income tax bracket. If the development generated a deduction-equivalent tax credit of
$20,000, how much of a tax credit can he use?
A. $0, limited partnerships cannot take losses
B. $3,000
C. $3,500
D. $7,000
E. $20,000
Answer: D $7,000
Multiply $20,000 times 35% to get the credit.
Paul Williams invested in an oil and gas working interest as a limited partner. The oil and gas
program produced a $30,000 loss. How much of the loss can he take this year?
A. $0
B. $25,000
C. 50% of $30,000
D. $30,000
Answer: A, $0
If he is a limited partner, he cannot take the loss. The loss becomes a passive loss subject to the passive loss rules.
Do separate maintenance agreements (pre-2019) qualify as a tax deduction for a payor spouse?
A. No, they are income to the payor spouse
B. No, it must be alimony
C. Yes, they are deductible
D. Not enough information to answer the question
C. Yes, they are deductible
The law reads “alimony and separate maintenance payments are deductible.”
David and Sally are divorcing. Their two children will live with Sally. She will have custody. He will pay alimony and 100% of the support for the two children. Who will get the dependency exemption?
A. Sally
B. David
C. Sally for one child; David for one child
D. Neither
Answer: D, neither
Exemptions are eliminated starting in 2018.
Mrs. Peters (AGI $120,000) wants to gift a stock purchased this year for $75,000 now worth
$50,000 to the United Way. What is the amount of allowable charitable deduction she can
receive in the current year?
A. $36,000
B. $50,000
C. $60,000
D. $75,000
B. $50,000
Loss property is limited to FMV, but FMV is treated as basis. The maximum is 50% of AGI, but limited by FMV.
If Sam and Lana itemize deductions using a Schedule A, how much margin interest expense can they deduct this year? (what are you looking for here)
First, determine what their investment income is
Dividends $5,000
CD Interest (2% of $50,000) 1,000
Net Capital Gains 20,000 (short-term)
$26,000
The dividends are non-qualified and taxed as ordinary income. Short-term Capital Gains must be netted against the Long-term Capital Losses. Municipal bond interest can never be used.
How much self-employment income (Schedule C net income) will Sam have this year, based on Sam’s estimations in the case data? (what do you generally do?)
Schedule C Gross Receipts ($100,000)
-BR Expenses (20,000)
=Schedule C Net Income ($80,000)
How much self-employment tax will Sam have to pay this year? (what do you generally do?)
Schedule C net income x .1413
Based on the case data, should Sam change his business entity? (what are you generally looking for?)
Age limit?
Profitable?
Risky? (needs limited liability?)
taxation?
Calculating AGI for:
- self employed
- spouse on social security
- contributes to their SEP
CD Interest $1,000.00
+ Dividends 5,000.00
+Schedule C Net Income 80,000.00
+ Net Capital Gains 20,000.00
($25,000 STCG - $5,000 LTCL)
+85% of Lana’s Social Security Benefits 9,180.00
Less one-half of Self-Employment Tax -5,652.00
Less Self-employed Health Insurance -7,100.00*
Less SEP -9,695.00 (given)
AGI $92,733.00
*The hardest part of this question is the self-employed health insurance. Income tax law says a selfemployed individual can deduct as a business expense 100% of the amount paid during the tax year for medical insurance on himself and spouse. The Medicare supplement is insurance, and the LTC is insurance. Amounts paid as voluntary premiums under Part B of Medicare are deductible as medical care on the
Schedule A. There is no answer using $780 x 2. Part B of Medicare is deductible on the Schedule A is subject to 7½% of AGI, not on the front of the Schedule 1040. Medicare supplements ($1,500 + $1,600) + long-term care ($1,500 + $2,500) = $7,100. Degree of difficulty is nasty.
Sam is considering buying a new computer to make his business dealings simpler. If the computer costs $8,000, what do you suggest?
The present value of money is worth more than a future deduction. Under current law, he can deduct the entire cost of the computer and avoid the burden of maintaining an MACRS depreciation schedule
should he take losses? what are you looking for?
are there STCG of ordinary income to offset losses?
would that eliminate taking deductible margin interest?
If Sam surrenders the variable universal life policy, what will be the tax result?
All life insurance gains upon surrender are considered ordinary income.
If Sam annuitizes his annuity, his insurance carrier indicated Sam could get $2,800 life payout with a 10-year certain feature. The life insurance company used a life expectancy of eighteen years. How much of the monthly payment would be excludable from ordinary income taxes?
calculate the exclusion ratio
x the exclusion calculation by payment
x 12 x life expectancy
hobby losses
not deducitable after 2017
A client had a tax LIABILITY last year of $100k. What is the required annual minimum annual tax payment to avoid an underpayment penalty tax?
90% of this year’s tax
if you employ someone to care for your children or a disabled sibling, which tax schedule below would you recommend that your client file?
schedule H- household employees
if a client wants to adopt a foreign child, what would you recommend the client do first?
hire an immigration attorney
Which expenses qualify for the adoption credit?
court costs
attorney fees
cost of going aboard to adopt a foreign child
NOT: adopting spouse or using surrogate
what can be used as either an itemized deduction or a tax credit?
foreign tax credit
**Mr Pate owns an expensive rental home (FMV $600k). He has taken depreciation on the Home of $100k. He originally paid $300k for it. He has agreed to exchange it for a parcel of land worth $500k. He plans to develop the land.
What will be the adjusted basis after the exchange?
$200,000
His adjusted basis before the exchange was $200k ($300-100). There was no boot exchange! His basis after the exchange is unchanged (no recognized gain)
Harry is a 20% owner of an apartment building. His active income is $100k. His portfolio income is $80k. The building generated $15,000 of losses. Which is true?
A. He can deduct the losses in full
B. He can only deduct the losses against active income.
C. He can only deduct the losses against portfolio income
D. He cannot deduct the losses
D. He cannot deduct the losses
His AGI phaseout (150k) for active participation losses
low income housing credit and losses
still get the credit
paying too much for alimony
when there is no alimony paid in the third year, subtract $37,500 from the total alimony paid in both years 1 and 2.
(year 1 + year 2) - 37,500= recapture
a work of art created by the taxpayer is valued at
basis
schedule c write offs?
travel- 100%
meals- 50%
entertainment- 0%
of 10k
