Book 4 Tax Planning
For donations if the spread between agi and adj basis is big use _______. If the speard between agi and adj basis is small use ______.
1. FMV 2. BASIS
If business is heavily reliant on inventory which method of accounting must be used?
Accrual method (avg annual receipts must be under 27 million to qualify for an exception)
How long does 1231 depreciable property used in the trade of business need to be held to qualify?
12 months
standard student loan interest deduction is?
2,500
What is the continuing EDU requirement annually?
28 hours of general CE + 2 hours of CFP Board-approved ethics CE
Carryover for charitable deduction carryover period ?
5 years
How does insurance and a federal disaster interact when the event is a federally declared disaster but eh client can take out a claim?
Any reimbursement received by the taxpayer will offset the casualty loss that can be claimed. The offset would include any amount that would have been received had a claim been filed.
Taxation in a partnership GP v. LP?
As long as the limited partnership is classified as a partnership (and not a C corporation) for tax purposes, the taxation is no different than it would be if the organization were a general partnership, that is, the partnership issues a K-1 to all of the partners for their distributive share of items of income and loss. Limited partners generally must treat net income or loss from the partnership as passive.
Refundable Tax Credit
Can reduce a taxpayer's tax liability to below zero, resulting in a refund. ex: Child Tax Credit, Earned Income Credit, the American Opportunity Credit, and Premium Credit are refundable tax credits.
Public Charity Deductions
Cash = 60% OI Property & STCG Property = 50% (Lesser of Adjusted Basis or FMV) Tangible Property (unrelated Use) = 50% (Lesser of ADJ basis or FMV) Intangibles / Tang Property (Related Use) / real property -FMV= 30% -Basis Election= 50%
Cash vs Accrual Method
Cash is not included in income until it is received. So if a client is in cash method with accts receivable and moves to accrual method his income is increased by the amount that was "Accounts Receivable"
Alimony options?
Cash payment of the payee spouse's mortgage, rent, tuition, or tax liability made by the payor spouse as required by the divorce or separation instrument may qualify as alimony.
Elasticity indicates_____________________?
A lower price will generate higher revenue. (proportion of price drop to change in revenue does not indicate anything, if they move in the same direction, it is considered elastic)
Amt tax preference items
A tax preference item is a type of income, normally received tax-free, that may trigger the alternative minimum tax (AMT) for taxpayers. Tax preference items include interest on private activity municipal-bonds, qualifying exclusions for small business stock, and excess intangible drilling costs for oil and gas - if the amount of these items exceeds 40% of AMT income.
Material Participant Definition
-An individual who participates for more than 500 hours is a material participant regardless of how much the employees of the business participate. - If Arthur participates for more than 100 hours, it would have to be more than the participation of any other individual for him to be a material participant. -If Arthur's participation constitutes substantially all of the participation, even though it is less than 100 hours, he is a material participant.
SE tax w/ income above twb
-SE tax is applied all the way up to the TWB, cannot tax on SE income past the TWB -Medicare tax still applies over the twb
Oil and Gas working interest
-allowed for unlitlited tax deduction against active income -losses are deductible regardless of agi -unlimited liability
Categories of Exclusions
-characterized by love affection or assistance -Return of capital -make a taxpayer whole(insurance proceeds) -socially desirable or matter of legislative grace(ssi) -Benes provided by your emplyer
If an employee makes above a certain threshold they pax an additional medicare payroll ___% tax. in addition to the regular 1.45 medicare tax paid.
0.9%
If a client cannot determine basis on stock sales for stock bought at different times over a period, how will the ira determine the basis?
FIFO
What happens if a stock becomes worthless within a year of acquiring?
If a security becomes worthless during the tax year, the loss is treated as if it occurred on the last day of the tax year. The holding period is long term.
How are proceeds form a viatical settlement taxed if the insured is terminally ill (expected to die within 24 months)?
If the insured is terminally ill (expected to die within 24 months), proceeds received from a viatical settlement by the insured are not taxable.
Workers COmp
In exchange for benefits, an employee gives up the right to sue the employer. Workers' compensation is funded through premiums paid solely by the employer. The injured employee is not required to prove negligence on the part of the employer. The benefits payable under workers' compensation are periodic payments.
When people are not eligible for the GTL up to 50k tax free paid by the employer?
It should be noted that partners, proprietors, and greater than 2% S corporation owners are not considered employees and are ineligible for the employer-paid group term life insurance of $50,000.
What document do S Corp shareholders receive annually?
K-1
Lowest marginal income tax rate vs the lowest capital gains tax rate?
Marginal Income tax: 10% Capital Gains Tax: 0%
Bad debt mis is deductible? and why?
No loss is allowed for the business bad debt; the charge for services was never included in Buddy's income because he is a cash-basis taxpayer. Generally to be deductible a true debtor-creditor relationship must have existed. The lender must have a basis in the loan before it can be deducted as a bad debt.
Who is allowed to use the AOTC (american opportunity tax credit?
Only eligible for expenses paid on behalf of a taxpayer, spouse, ordependent
PAL
Passive losses can only be deducted on passive income Every PIG needs a PAL
What is a more favorable tax status filing if eligible.... HOH vs. Qualifying Widower?
Qualifying Widower
What is tactical asset allocation?
Reallocating a portfolio frequently to take advantage of perceived under- or overvaluations in a particular market is tactical asset allocation, which is akin to market timing.
What method of accounting do c corps use?
Regular C corporations with gross income greater than $27 million for their most recent three years are prohibited from using the cash and hybrid method. aka Accrual Method
Tax Sources of Authority Hierarchy
Regulations (full effect and weight of the law) Revenue Rulings Private Letter Rulings (private ruling provided to a taxpayer backing up what they're doing ex: confirming the establishment of a trust has been done correctly for tax purposes) Technical Advice Memorandums Notices Announcements
Ruth and Doug divorced last year. They have two children ages seven and nine. Their divorce decree states that Ruth has custody of both children. There is no written agreement for listing the children as dependents on Ruth's or Doug's income tax returns. However, Doug provides 75% of the child support, amounting to $15,000 per year. Based on this information, which parent is entitled to list the children as dependents for income tax purposes?
Ruth, because she has custody and there is no written agreement stating Doug could list the children on his return
Net Earninings formula for SE
SE income - (se income x 7.65%)
What is included for the efc calculation as far as student income?
The previous years income for the student is included i this calculation.
Passive Activities are?
Trade or business activity without material participation OR all rental activities except (hotel/st property rental aka blockbuster dvds/material participation in real property trades or businesses/active participation in rental real estate)
If VEBA income meets section 501 c 9 requirements it is exempt from regular income tax? T/F
True
Taxable limitations to rental property
When a vacation home is used as a residence in any tax year, there are limitations on the deductions attributable to the rental use. The owner's use for personal reasons can't exceed the longer of 14 days or 10% of the period of rental use for the vacation home to be considered to be primarily for rental use.
How do isos opertates when exercised and then sold?
When an incentive stock option is exercised, the bargain element (the difference between the FMV and the option price) on the date of exercise is an AMT preference item. On exercise, the bargain element is $7,500 [($125 − $50) × 100 shares]. The exercise of an incentive stock option has no effect on regular taxable income.
How long are 1231 losses looked at when selling the asset for a gain after depreciation or taking a loss?
When determining how much of the gain is treated as capital gain and how much must be treated as ordinary gain, the taxpayer is looking back to the 5 previous taxable years, not including the current taxable year.
If I gift a friend a house, and they die and I inherit the same house, do I receive a stepped-up cost basis? (assuming fmv of house is greater than my basis @ time of inheritance)
Yes, as long as the house had been owned by the friend for more than a year after receiving it as a gift
Taxable income
amount in which income tax is computed (after decuductions)
Tax liability
amount of taxes owed after subtracting all tax credits
Private charity deduction %'s
cash & OI Property & STCG Property = 30% LTCG Property = 20% -Intangibles: FMV / basis election -Tangible Property(related): FMV / basis election -Tangible Property (unrelated use): lesseer of adj basis or FMV -Real Property: FMV / Basis Election
Formula to Calculate the equivalent tax credit that would provide the same tax benefit as a $___ itemized deduction.
deduction × marginal tax rate
Tax Credit
dolloar for dollar offset against tax liability
Gift Loans, taxation?
if the gift loan exceeds 10k but less than 100k, imputed interest is not applied UNLESS the recipient has > 1k in nii. if the loan is >$100k, the interest is imputed. @ the prevailing federal rate of interest.
miscellaneous deductions
itemized deductions not subject to the 2% agi floor
How are cap gains/losses calculated?
ltcg offset ltcl stcg offsets stcl any remaining stcl or ltcl can offset eachother's CG any remaining loss can be dudcted against OI up to 3k in 1 year
SE tax below the twb
net earnings x 15.3% = SE Tax
Exclusions
non taxed intems ex muni bond interest
Are the proceeds from a buy-sell agreement taxable?
not, the premiums paid are not deductible, and the proceeds received are not taxed
When receiving dividends "return of premium" from a life insurance company what happens if the dividends received surpasses the basis in the life insurance contract?
tax must be paid on the portion of dividends received that surpasses the basis, even if it is reinvested into the policy. this is because of constructive receipt rules.
In a grantor trust who is responsible for the tax liability of income generated whether it is disbursed or not?
the grantor, even if some of the income disbursed goes to a different person
Alimony facts....
the payments are made in cash (and not property); the decree does not specify that the payments are not alimony for federal income tax purposes; the payor and payee are not members of the same household at the time that the payments are made; and there is no liability to make the payments for any period after the death of the payee.
for a home office to qualify for a tax exemption, you need 2 things
this office is exclusively for the trade or business in which yourwe emplyed. you cannot have another office you also use elsewhere, this is your main office
When are clients eligible for coverage?
whe. The slim period has cpmpleted
are punitive damages included in income?
yes, it is over and above what was needed to make the recipient whole