TCP Deck #1

Question 1

Alternative minimum tax (AMT)
Tax preferences (ALWAYS ADD/increase AMTI)

Answer 1

• Private activity bond interest
• Excess intangible drilling costs
• Excess percentage depletion
• Small business stock gain exclusion (7%)

Question 2

Alternative minimum tax (AMT)
Adjustments (Add or deduct)

Answer 2

+ Local & state income taxes or general sales tax, property taxes
+ Incentive stock options (exercise price - market price)
+/- Excess depreciation on personal property*
- Refunds of local and state income taxes included as income
+ Standard deduction

*If the depreciation deduction allowed for regular tax is greater than the amount for AMT, the excess tax depreciation is added back for AMTI.

Question 3

Calculations initial contribution (or amount paid, if purchased)

Answer 3

Increased by:
- Additional contributions
- Share of increase in partnership liabilities
- Share of partnership income/other income

Decreased by
- Cash and property distributions
- Share of reduction in partnership liabilities
- Share of partnership losses/other deductions.

Do not include nonrecourse debt

Question 4

Kiddie tax

Answer 4

Applies to all children who are under 18, or if their earned income does not exceed 50% of their total support for the year, are 18 or between 19 and 23 and are full time students.

Question 5

Flexible spending account (FSA) vs Health Savings Account (HSA)

Answer 5

-FSA: Can be used with low deductible insurances plans
-HSA: Require a qualified high-deductible plan

Question 6

Estimated tax payments

Answer 6

A) 100% of prior year tax if your AGI is <= $150,000

B) 110% of prior year tax if your AGI >= $150,000

C) 90% of current tax year

*The lesser of A or B and C

Question 7

Active participation exception for rental real estate

Answer 7

• A taxpayer who actively participates is permitted to deduct up to $25,000 of the loses (after offsetting passive income) against non passive income.
• Its reduced by 50% for AGI over $100,000
• Eliminated for AGI over $150,000

Question 8

Selling of an entire interest passive activity – Losses being deductible

Answer 8

Current or suspended losses are used to offset active, portfolio and passive income, including any gain on the sale

Question 9

Foreign tax credit limitation calculation

Answer 9

• The amount of foreign tax credit is limited if the U.S. effective tax rate exceeds the foreign effective tax rate.
• Tax payers may claim the lesser of the foreign tax paid or the calculated limitation

Limit = U.S. tax on worldwide income X Foreign source taxable income / Worldwide taxable income

Question 10

Allocation of suspended losses

Answer 10

The allocation formula is: [Net passive loss x (Loss from activity / Total losses]

Question 11

Bargain element

Answer 11

The FMV of any property received is included in compensation.

The difference between the FMV on the date of exercise and the exercise price is the bargain element

Question 12

Future interest gift

Answer 12

• Must be reported as a taxable gift, regardless of size, at the present value of the future interest, not the gift’s value at the time it was given.
• No annual exclusion is allowed for the gift of future interest.

Question 13

Real estate professional – actively participate MAGI over $100,000

Answer 13

• Special deduction up to $25,000 to offset nonpassive income
• Deduction reduced by 50% of MAGI over $100,000

No special deduction if MAGI > $150,000

Question 14

Probability

Answer 14

• The ability of a surviving spouse to take advantage of any unused portion of their deceased spouse’s unified transfer exemption
• To take advantage of this exemption, the estate is required to file an estate tax return on Form 706 on a timely basis.

Question 15

Present interest gifts

Answer 15

-Current transfer of wealth that can be accessed by the recipient immediately (i.e. cash)
-Subject to gift taxes for the year the taxpayer transfers property to the recipient

Question 16

Passive income

Answer 16

• Trade or business activities in which the taxpayer does not materially participate (ie. partnerships, S corporations)

Question 17

Foreign earned income exclusion

Answer 17

Only earned income (not passive or investment income) is eligible for the foreign earned income exclusion.

Question 18

ISQs (qualified stock options)

vs.

NQSOs (non qualified stock options)

Answer 18

Employees often prefer ISOs to NQSOs because taxation is deferred until the stock acquired through option exercise is sold, rather than when the options are exercised. If statutory holding periods are met gain is recognized on the sale of stock is taxed at preferential rates.

Question 19

Employee tax treatment of nonqualified stock options (NQSOs)

Answer 19

Grant date - not taxable

Exercise date - taxable as ordinary compensation
FMV - Exercise price

Sales date - Taxable as capital gain/loss*
Sales price - FMV on exercise date

Question 20

Employee tax treatment of incentive stock options (ISOs)

Answer 20

Grant date - not taxable

Exercise date - not taxable

Sales date - Taxable as long-term capital gain/loss
Sales price - Exercise price

Question 21

Joint tenancy

Answer 21

• The ownership of property by two or more persons with each having an undivided interest in the property.
• Upon the death of one of its owners, a property owned in joint tenancy automatically goes to the survivors and bypasses the estate of the decedent.

Question 22

Calculating the net tax savings

Answer 22

Multiple the expense/contribution by the applicable tax rates

Question 23

Coverdell Education Savings Account - Education IRA

Answer 23

• Contributions are not deductible
• Withdrawals of earnings will be tax-fee if used to pay the qualified education expenses of the designated beneficiary
• Max annual amount to contribute is $2,000
• Contribution is phased if AGI is $95,000 - $110,000 (single); $190,000 - $220,000 (married)

Question 24

Tenants in common

Answer 24

Each owners interest goes into the estate to be distributed to the heirs

Question 25

Joint tenancy with rights of survivorship

Answer 25

When one owner dies, that owners share of the property passes directly to another owner(s), does not form a part of the state and is therefor not distributed according to the decedents will

Question 26

Tenancy by the entirety

Answer 26

• Each owner has undivided interest in the property.
• Available only to married couples
• When the owner dies, the property passes to the other (i.e. Dave) without entering probate

Question 27

Whole life insurance

Answer 27

• Premiums: fixed, not tax deductible to insured
• Cash value: grows with premium payments and interest, may be cashed out if policy is canceled; goes to beneficiary if insured dies
• Benefit : usually tax free to beneficiary
• Covered period : permanent (or until canceled)

Question 28

In a like-kind exchange, how is the basis of the asset received determined?

Answer 28

The basis of the new asset in a like-kind exchange is the original cost (or adjusted basis) of the asset given up, adjusted for any deferred gain or loss.

Question 29

Charitable Contribution deduction for individual taxpayer

Answer 29

Type of property:
-Ordinary income producing (includes STCG);
-STCL property (i.e. held less than equal to a year);
-LTCL property (i.e.. held greater than a year)
*use the lower of adjusted basis or FMV on date contributed

• LTCG property : used FMV on date of contribution

Question 30

Stock redemptions

Answer 30

-Taxed to the shareholder as either dividend income or as a ale (to the extent that proceeds stock basis).

-If the shareholder’s ownership percentage remains the same relative to the other shareholders (i.e. proportionate), the redemption is treated as dividend income.

-Any redemption representing a liquidating distribution (including a complete termination) is considered a sale and is taxable as capital gains to the extent that the proceeds exceed the shareholder’s basis in the stock.

Question 31

Type of recognized gain or loss

Answer 31

Capital assets - investments in land, marketable debt securities, generate capital gains and losses

Ordinary income producing assets - inventory result in ordinary income or loss

Section 1231 assets (equipment) are subject to ordinary income depreciation recapture with the remaining balance classified as a capital gain or an ordinary loss