Series 65: Unit 21

Different filing statuses

1) Single 2) married filing jointly 3) married filing separately 4) head of household 5) qualifying widower with dependent child

Items that must be added back to taxable income to arrive at alternative minimum taxable income

1) accelerated depreciation on property placed in service after 1986 2) certain cost associated with limited partnership programs like research, development cost and drilling cost 3) local tax and interest on investment that do not generate income 4) tax exempt interest on private purpose municipal bonds 5) Incentive stock options when the market price is above the strike price

Which corporation must pay their own taxes?

A C corp is required to file their own tax return on which it must pay. It files Form 1120 and pay usually not more than 21%

Form 1099

A form sent to investors of a mutual fund after the close of the year to detail tax info related to income distribution for the year.

Calculating tax liability

Add all short term capital gains and losses for the year. Then all long term capital gains and losses are added. If there are more long term capital gains then it is taxed at the capital gains rate at about 15%

Factors to consider when looking at taxes

Age, state of residence and citizenship

Bypass trust

Allows a surviving spouse to take advantage of the unused lifetime exclusion of the first to die and add it to their exclusion. No longer used since 2010

Alternative valuation date

An executor of an estate can choose to value assets in the estate at date of death or six months later. This is beneficial if the value of the assets have substantially dropped

Martial deduction

An individual can pass their estate onto their spouse, who is a US citizen, without being federally taxed

When are taxes due for partnerships and multiple member LLCs?

An information return is filed using Form 1065 that is due March 15 then tax returns are due April 15

Wash Sale

An investor can not use capital losses to offset gains or income if they sell the security then purchase it 30 days before or after the sell transaction

What is qualified dividend income?

Any dividend from a US corporation, including stock mutual funds

What makes a security substantially identical?

Any stock rights, call options, warrants and convertible securities of the same issue

When are gift taxes due?

At the same time as individual tax returns (April 15)

Effect of reinvestments on cost basis

Because reinvested dividends have already been taxed (dividends are taxed in the year they are received), the cost basis is increased so that income is not taxed again after selling the stock

Taxation of reinvested capital gains

Because they have already been taxed during the sale of the asset, they are not taxed again like interest or dividend payments

How do you determine if you owe ANT?

Calculate your regular tax and your AMT then you pay whichever is higher

Taxation of municipals

Capital gains are always fully taxable but income from munis are tax free

Capital loss tax deductions

Capital losses that exceed capital gains are deductible against earned income up to a maximum of $3,000 annually. Capital losses that are not deducted in a taxable year can be carried forward indefinitely as a deduction against future capital gains

Dividend Reinvestment plans (DRIPS)

Corporation will sometimes allow shareholders the opportunity to purchase additional shares of the company's stock using their cash dividend. Under most drip programs, the shareholder automatically purchases the additional shares directly from the issuer paying little or no commission and often at a discount to market price. Reinvested dividends increases the investors cost basis and thus reduces capital gains

Taxation of death benefits

Death benefits from a life insurance policy will be included in the federal estate taxes on the insured individual's estate

How is income from foreign issuers taxed?

Dividends and income from foreign securities, including ADRs, is subject to withholding tax around 15% by the issuer's country. This withholding tax can be credit against taxes owed. Income from foreign securities is taxed in the US at all levels

Dividend exclusion rule for C corp

Dividends paid from one corporation to another are 50% exempt from taxation.

IRS assumption of how shares are liquidated

FIFO

Most important factor besides income in determining an individuals taxes?

Filing status

What is the form used for estate income tax computation?

Form 1041

What is the form used for estate tax computation?

Form 706

Form used for donor income tax return and gifts over $15K

Form 709

Gift tax limit

Gifts up to 11.4M in a lifetime may be made without incurring gift tax. Individuals can also give up to $15K per year to any number of individuals without generating federal gift tax. Gifts are valued at the current market price on the date of the gift

Federal estate tax calculation

Gross estate minus certain expenses (funeral expenses, charitable contributions and debts of decedent) minus marital and charitable deductions

What should a single parents with dependent children file themselves as?

Head of householder

Taxation on sale of primary residence

If a couple sells their house that has been their primary residence for at least 2 out of the past 5 years, there are special tax benefits. For a couple, the first $500,000 of profit is tax exempt and for a single person the first $250,000 is tax exempt

Tax levels on social security income

If a single person makes $25k or more or a married couple makes $32,000 or more in social securities as much as 50% of their social security can be taxed. It increases to 85% for income greater than $34K (Single) and $44K (married)

State of residence tax deductions

If a taxpayer lives in a state with an state income tax, it may be used as a deduction against federal taxes

Taxation on a surrendered policy

If a variable life insurance policy is surrendered, any cash value in excess of the basis in the policy is taxed as ordinary income

Dividend Income

If the dividend qualifies, the tax rate is usually a max of 15%. Otherwise, if it doesnt qualify, then it would be taxed at ordinary income rate

What makes a bond substantially identical?

If the maturity, coupon and issuer of the bond are all the same

Taxation on withdrawing cash value from variable life insurance policy

If you withdraw cash it will not be taxed until it exceeds the cost basis of the policy. The tax method used is FIFO

Share identification accounting method

In this method, the investor keeps track of the cost of each share purchased and uses the information to liquidate the shares that would provide the lowest capital gain.

Earned income

Includes salary, bonuses, tips and income derived from active participation in a trade or business

Portfolio Income

Including dividends, interest and net capital gains derived from the sale of securities. Portfolio income is taxed in the year in which it is earned.

Passive income/loss

Income that comes from rental properties, limited partnership and enterprises in which an individual doesnt actively participate. Passive income is netted against passive losses to determine net taxable income which is then taxed at ordinary income rates

How is interest income taxed?

Interest on any debt securities is always taxed at ordinary income rate. It is important to note that interest on US Treasury Securities (Not GNMA or FNMA debt) is exempt from state tax but not federal

Taxation of margin interest

It is a tax deductible expense unless its margin interest on a muni

How is filing status determined?

It is determined by your marital status as of the last day of the year

How to calculate DNI

It is dividend income + interest income + realized capital gains + transaction cost

What must a trust or estate do if it has income?

It must report it on an IRS Form 1041

Taxation of revocable trust

It will all be taxed to the grantor

Do C corps pay federal taxes on munis?

Like individual tax payers, corporations dont pay taxes on interest received from muni bonds

Tax filing status with the lowest income tax?

Married filing jointly

Does a step up provision apply to annuities?

NO!

Can you deduct municipal interest expenses from your taxes?

NO! Income from munis are federally tax exempt and thus margin interest from purchasing them is not a deductible

Do partnerships pay taxes?

No they use a form 1065 to state how much income should be insert in an investors personal form 1040

Does the federal government recognize LLC for tax purposes?

No, they must file as a corporation, partnership or sole proprietor

Alimony

Payment made under a divorce court order to an ex-spouse. Alimony payments are generally deductible for the spouse making them and includable income for tax purposes by the spouse receiving them

Taxation of life insurance premiums and proceeds

Premiums are nondeductible for income taxes purposes and proceeds are exempt from federal income tax

What is the tax form investors in partnerships, members of LLCs and shareholder of S corps use?

Schedule K-1

What is the tax form sole proprietors and single member LLCS use?

Scheduled C

Which is the most advantageous tax treatment method

Share identification but most accountants prefer the convenience of the averaging method for mutual funds. Share ID is most commonly used with stock sales

Tax filing status with the highest income tax?

Single

What does the IRS require cost basis to be adjusted for?

Stock splits and stock dividends

When are tax return for sole proprietorships and single member LLCs due?

Tax returns are due on April 15th.

Regressive taxes

Taxes that apply to most consumer good and are constant no matter your income. Represent a larger fraction of income for low income families than high income families

Progressive taxes

Taxes where the tax rate increase depending on income level

Tax deductions based on age

Taxpayers 65 or older receive a $1,300 tax deduction in married and filing a joint return or $1650 if single. This additional amount is available to those who are blind or disabled as well

Cost basis when someone dies and passes on securities to their heirs

The cost basis would be the fair market value on the date of the owner's death. All gains will be treated as long term regardless of when the security was purchased. This is known as the step up provision. Doesnt apply to annuities

Generation skipping trust

The estate is only taxed once when it is passed from one generation to another two below it

Marginal tax rate

The highest rate paid on income for an individual

Taxation of estate income

The income generated from an estate will be taxed just the same as the income from a trust is taxed

Child support

The legal obligation of a parent to provide financial support for a child, typically occurring when a parent doesnt live or help raise a child. Child support is not deductible by the parent who pays it and it is not included in income by the one who receives it

Effective tax rate

The overall tax rate you pay on your total taxable income. It is a combination of the tax you pay on the majority of your income and the tax you pay on income that is in a higher tax bracket

What constitutes incidents of owners?

The right to designate a beneficiary, transfer ownership of an insurance policy, choose how dividends or policy proceeds are paid out, borrow money from the policy the person has incidents of ownership in the policy

Distributable net income(DNI)

The taxable income of a trust or estate

Taxation of trust and estates

The taxation is based on what is distributed and what is retained. Non distributed income can have quite severed tax implications as the tax brackets are compressed

Alimony taxes effective after Jan 1, 2019

The taxes are reserved so that an ex paying alimony wont get to deduct the payment and an ex receiving the alimony wont report it as income

Taxation of sole proprietorships

There is no separate tax return for a sole proprietorship

Gifts between spouses

There is usually an unlimited exclusion for these gifts but if your spouse is not a US citizen there is a $155,000 limit

When are estate taxes due?

They are always due nine months after the death. Any amount that is owed with incurred interest

When are taxes due for C Corps?

They are due on the 15th day of the fourth month after the company's fiscal year ends

Taxation of TIPS

They are exempt from state and local taxes as they are Treasury securities. The annual interest payments received on them is taxed as ordinary income on a federal level.

How are capital gains from mutual funds taxed?

They are reported as a long term gained and are usually taxed as a qualified dividends

Retirement plan distribution taxation

They are taxed at the investors ordinary income tax when withdrawn from such accounts. If you withdraw from a retirement plan before the age of 59.5 there is a 10% penalty. After the age of 70.5, you must start taking distributions.

S corporation taxation

They are taxed the same as an LLC and partnership as the taxes flow through to the owners.

Average cost basis method

This is a redemption method that can only be used on shares of mutual funds. An investor calculates the average basis by dividing the total cost of all shares owned by the total number of shares. The shareholder can not change the decision to use average basis method without IRS permission

Interest on interest plan

This term refers to a typical bank savings account where you receive interest on interest. The interest is taxed in the same year it is received just like dividends

Carryover basis

When can individual donates an asset, the cost basis of the donater is transferred to the donee

Differences in taxes when gifting securities to someone or as a result of death

When gifting, the amount of the gift is determined using the fair market value on the date of the gift. When it is from an estate, the value of the gift is determined at the date of the death or using the alternative valuation date

When would someone not be able to deduct margin expenses?

When they exceed the amount of their net investment income (includes income, dividends and all capital gains)

Policy loans

When you borrow cash from your life insurance policy, the funds received are nontaxable

How is income from mutual funds taxed

Whether it is taken as cash or reinvested in the mutual fund, the issuer must disclose whether each distribution comes from income or realized capital gains. Dividends from income will be taxed as ordinary income or as qualifying dividends

Difference in taxes when inheriting or receiving a gift

With a gift, the cost basis for determining if there is taxable income is that of the donors. The recipient is assumed to have purchased the security at the donors purchase date and price. With an inheritance, the cost basis is determining through looking at fair market value as of the date of death. Any gains are considered long term!

When do C corps pay dividends?

they pay out dividends after paying income taxes and the dividends are then taxable for the shareholder, thus the term double taxation.