CFP - Tax

Tax Filing Schedules: A B C D E Compensatory vs punitive

A - 1040 tax return B - Dividends and Interest C - Business Income D - Capital gains and losses E - Real estate Punitive is income (unless from wrongful death) and Compensatory is excluded (unless is w/out an injury) (puny people get taxed!)

Substance over Form

A business owner takes a "loan" from a company and never intend to repay the informal agreement

C - corps can't write off loses until?

A gain is produced or company is sold (just like a Publicly Traded Partnership) (all other losses are deductible for different types of partnerships)

Form 1040X is? Form 1041 is? Form 1120(s) is? Form 1065 is? 10K vs 10Q?

Amended Tax return Trust and Estate Tax return C-Corp or S-Corp tax return Partnership tax return Firm reports sent into the SEC annually or quarterly with audited statements for the annuals and unaudited for the quarterly

Why should a company not file as a C-Corp or PSC if the business won't be profitable?

Because you'd want the losses to flow to your personal tax bracket (conduit entity like S-Corp, Sole Proprietorship, Partnership, S-Corp)

Self employment tax %? Also stops at what point? What is deductible from AGI above the line?

.1413 (Pi backwards) $147,000 (no more FICA / FUTA tax after this in wages) half of self employment tax is deductible above the line (so really on half of the .1413 is the tax liability)

If no boot is given in a 1031 transaction, then the recognized gain is?

0

Medicare Part A has additional ____% penalty on income and _____% on investments, if income is higher than $______ for MFJ or $______ for single

0.9% and 3.8% for income higher than $250K MFJ or $200K for single (the 3.8% is not included for muni bonds and qualified (IRA) income)

Revocable living trust is also known as Irrevocable living trust is also known as Which one is creditor protected?

inter vivos trust OR grantor trust non-grantor trust Irrevocable Trust

S-corp are limited to how many shareholders? Can issue one round out outstanding stock (non-preferred stock) that has ___ rights?

limited to 100 shareholders voting or non-voting rights

Margin interest is tax deductible against

ordinary investment income (STCG, interest, ordinary dividends) and whatever is leftover carries forward margin interest does not discount qualified dividends

Kiddie Tax: Unearned limits Earned Income limits Standard Deduction for kid

$0 to $1,250 then 10% to $2,500 —- Standard deduction (for less than 18, half support for 18, half support for 19 -23) Adds in $400 to standard deduction plus earned income For the Standard Deduction for a kid, you can either use the $1,250 unearned or the earned income deduction (earned income plus $400 up to regular standard deduction of $13,850)

Under section 121 If lived in a home for 1 year and then sale, how much of tax deduction is considered for single and MFJ? What if one spouse in the home for 4 years and the other in the home for 1 year?

$125K single and $250K MFJ $375 MFJ (100% deduction for one tax payer, 50% deduction for the other)

Trust taxation is at 37% for over $___

$13K (also 3.8% Medicare tax and 20% LTCG) (this is when income is accumulated and retained within the irrevocable trust)

Partnership A has QBI of $30K Partnership B has QBI of $40K What is the combine deductible QBI? Person has AGI of $120K so QBI deduction against income is? Tax payer can take deductible QBI or QBI deduction against AGI?

$14K $24K Tax payer must take the lesser, so the $14K (deductible QBI)

Rental Properties can have losses up to $____ or can be considered what what type of participation? Rental vacation homes have a can write off losses but must include income if renting out a house for o/u ____ days (if the opposite then can't include income/expenses) Tax payer can stay in vacation rental for ___ days during the year without losing status of a vacation property

$25K and active participants (phased out at $100K) 14.5 days 14 days or 10% of days the property was rented out

Child care Tax Credit Child Tax Credit Dependent Care Tax Credit Low income housing credit max? How to calculate

$3,000 of child care expenses per child up to two kids, multiplied by 20% so $1,200 total. For kids 12 or younger (non-teenager) $2,000 per child under the age of 16 or younger $500 — for dependent care of another (usually an elder) $25,000 x tax bracket (spread over 10 years)

Complex trust have standard deduction of $___ for mandatory distributions OR $___ for optional distributions

$300 for mandatory distributions $100 for optional distributions

Disallowed losses (suspended losses) are capped at $___ and can be carried forward for ___ years

$3K and carried forward indefinitely (ironically the same as portfolio losses)

An individual is required to file a tax return if earnings from self employment (1099) are more than ______?

$400

Frivolous Penalty amount? Negligence penalty? Fraud Penalty? Failure to pay vs failure to file?

$5,000 (substantial incorrect tax amount) 20% of UNDERPAYMENT (accuracy related) 75% of UNDERPAYMENT (deliberate understating tax liability) Failure to pay: 5% penalty & failure to file: 0.5% penalty (both accumulate to max of 25%) ***If fail to file and pay then total can only be 5% each month for the first 5 months

Above the Line deductions

-One-half of self-employment taxes -Self-employment health insurance, home office expense, and meals expense -Alimony payments (pre 2019) -IRA/HSA contributions -Student loan interest (up to $2,500) -Penalty on early withdrawal of savings -Higher education tuition deduction -K-12 teacher expenses

itemized deductions

-medical, dental, qualified LTC expenses (>7.5%)* -state, local, and real estate taxes and personal property tax (limited to $10K) - charitable gifts (limited) -home mortgage interest -investment interest -casualty, fire, storm and theft loss (federally declared disaster)

Conduit business (QBI) income deduction rate? Above the line or Below the line Corporation or Personal Service Corporation (PSC) tax rate?

20% Below the line 21%

Corporate earnings (kept internally and not redistributed back into the the business or out to shareholder's as dividends) intended to avoid income tax to shareholders is subject to a ___ penalty? If business does distribute earnings as dividends then allows the Corporation a deduction of $______ or a PSC a deduction of $______

20% penalty in addition to the 21% corporate tax $250K - Corporation $150K - PSC

C-Corps enjoy a tax rate of __% and are considered a ___ tax entity. Business that are considered a Personal Service Corporation (PSC) will have that same flat tax rate. Exceptions to PSC?

21% and considered a separate tax entity (non-conduit) Examples: (HALE) Healthcare provider, Accountant, Law, Engineer (great for a owner that would be in a high income bracket if they were to have the business income included in their income, but that money has to stay within the business)

How long are marital gifts allowed after divorce?

3 years

Statute of Limitations

3 years 6 years for omission of 25% of income Unlimited if fraud or return not submitted

FICA Tax

7.65% total Medicare - 1.45% SS - 6.2%

Annuity exclusion ratio formula

= basis / expected return

Social Security MAGI calculation = SS tax brackets

AGI + tax free interest + 50% of SS benefit MFJ- $32K & $44K Single - $25K & $34K (brackets taxable at 0%, 50%, and 85%) *middle bracket calculates lesser of 50% of SS benefit OR 50% of SS MAGI - 1st bracket (just know that if the tax payer is close to the bracket, then the amount of SS that is taxable may actually be less than the actual tax bracket %)

Which accounting method is mandatory for over $25 million of inventory, cash or accrual?

Accrual would be best to keep track of large amount of inventory (accounts for AR and AP whereas Cash accounts for dollars in and out)

Qualified Child must meet what 4 requirements Qualified relative has what 2 requirements

Age, Adobe, A relationship, Support A relationship & Support

Home office deduction Requirements?

Allowable after all of net business income/expenses and cannot create a loss for the business Must be only location for the business and used for admin/management (is only a business deduction, not a itemized 1040 deduction)

Filing Dates for estimated taxes Estimated % payments

April, (+2) June, (+3) September, (+4) January 90% of current year tax liability 100% of previous year liability 110% of previous year liability if over $150K AGI

Which takes precedent at-risk losses or passive losses? (money at-risk aka basis is only amount of loss that can be reported, then any amount of losses past the at-risk can only be used to offset gains) Any losses not used for either at-risk or passive are considered?

At-risk Disallowed losses

Grantor Trust (for questions below): The Trust is "tainted" or defective if Trust income is us for _______ _______ to the grantor/spouse? What are those types of income The Trust is "tainted" for estate income tax purposes? In the scenarios above, the tax responsibility for income is due to ______ and upon death is due to _____

Beneficial Enjoyment >income distributed to now or later >legal obligations >life insurance premiums with an ILIT >right to income remains at death >revisionary interest exceeds 5% at death Income tax responsibility to the Grantor of the Trust, Estate tax responsibility to the Trust upon death (there's really no purpose to a Grantor Trust other than to remain in control of assets while being able to avoid probate)

Irrevocable Trust can be tax as a Simple or Complex Trust?

Both depending on distribution of income for the year

When corporations, partnerships, or s-corporations distribute dividends, what tax form is received by investors?

C-Corps investors receive 1099 S-Corps and Partnership investors receive K-1

1245 Property 1250 Property

CAT - cars (auto/trucks) --- 1245 Property O - office furniture --- 1245 Property R - real estate --- 1250 Property N - non real estate (intangible) --- 1250 Property

Publicly Traded Partnerships rules on netting gains/losses? Non-Publicly Traded Partnerships rules on netting gains/losses?

Can only offset within the same partnership, otherwise can carry forward losses within same partnership Can be used to offset gains from any Non public partnerships

A $3,000 on going capital loss from a "lifetime of losses" is carried forward until when?

Can use for first year of estate 1041 tax return, and then all leftover losses are unusable

LLCs can't have more than 2 of the following characteristics

Centralized management Continuity of life Limited Liability Free transferable interest

What type of Trust must have it's "calendar year" tie to the normal calendar? What amount of income is exempt for any Trust?

Charitable Remainder Trust $650

Inherited property basis for death in a community state vs non community state for spouses

Community gets full step-up in basis Non-community gets half step up in basis (holding period automatically become long-term)

Net Operating Loss is allowed for? (reporting an net loss) NOLs can now offset ___% of income and can be brought forward for ____ years and carried back for ____ years?

Corporations, Self-employed, Trusts, Estates (not S-Corps or partnerships because can't report a loss beyond basis in the business) 80% of future income indefinitely, but can't be carried back (updates with TCJA) (meaning that losses from previous years can be carried forward to offset current income, but can't use current losses to offset previous income)

Grantor trust is also know as

Defective or Tainted Trust (also considered a revocable living trust)

How are dividends for a C-corp advantageous / disadvantageous

Dividends received receive a phased in exclusion of income Dividend paid with after-tax dollars

Section 179 deduction? Can it create a loss? Amortization for intangible goods like Goodwill is done under Section?

Dollar for dollar immediate deduction for 1245 property and can NOT create a loss beyond company profits (avoiding the MARCS depreciation) (this is available for repairs which are fully deductible in the year that occurred) Section 197 (think that Section 197 are "way up in the air" whereas Section 179 items are on the ground aka 1245 property)

Which (trust or estates) can choose their tax year (fiscal or calendar)

Estates can choose tax year Trust must use calendar year (other than charitable trusts) (Neither have to report income of less than $500)

Casualty Loses are only applicable if? Calculation? Above the line or Below the line deduction?

Federally declared = Lesser of basis or FMV - insurance paid - 10% AGI - $100 Below the line

Which tax credit has a MAGI phaseout limitation: Historic Rehab Programs or Low Income Housing Program

Historic Rehab Program

Preference items added back into AMT calculation Other itemized deductions that are Add Back items:

IPOD Intangible drilling cost Private activity muni bonds Oil/gas depletion Depreciation (MARCS) (accelerated depreciation) SALT taxes ISOs "bargain element"

What is the primary source of all tax law? Other sources of tax law? Types of regulations

IRC Administrative (US Treasury regulations) and Judicial Proposed (a preview, not legally binding) Temporary Final

Improvements vs. Repairs. Which receives an increase in basis? Which increases basis or does not? (legal fees, sales tax, property tax) What reduces basis?

Improvements (repairs are expensed) Legal fees and sales taxes are considered improvements (increasing the basis) Property tax and utilities are considered normal business expenses (don't affect basis) Deductions (depreciation)

Difference between simple and complex (irrevocable) trust? >income >taxation >corpus >charitable gifts

Income: simple - distributed complex - accumulated or distributed Tax: simple - taxable to beneficiaries complex - taxable to the trust or beneficiary Corpus: simple - no distribution of corpus until death complex - can distribute corpus Charitable gifts: simple - no complex - can make gifts (all of the simple characteristics have one option; all of the complex characteristics have multiple options)

Accretion does what to basis?

Increase in basis (discount bond) which is taxed each year and then add to basis

What is revisionary interest? Reversionary interest exceeding 5% at time of creation is retained taxable to?

Interest that is paid out from a Trust with the beneficiary of the corpus going to the Grantor's spouse Grantor

Qualified dividends are taxed as ______

LTCG (unless question asks for qualified dividend, then assume ordinary dividends taxed as ordinary income)

Why is land not covered under MACRS?

Land can't be depreciated

Can you take a loss on your home? Home improvements in for the sale are added to?

No Basis

Can 1245 property create a loss for the business?

No (but can be carried forward)

Are personal exemptions allowed?

No (old exemption pre TJCA 2017)

Do gifts have a step up in basis?

No (only for death)

If there's a loss on a stocks a loss and is gifted, then if sold again by beneficiary between original owner's FMV and the basis, then ________ is recognized? If sold above original basis then is considered a ___ If sold below original FMV then is considered a ___

No gain/loss is recognized (image in tax - chapter 6) Gain Loss (Long term / Short term clock restarts at time of gift)

Are 1031 exchanges applicable for personal property? In what length of time must the 1031 exchange occur?

No, but can included investment properties 6 months

Can Net Operating Losses (NOL) offset personal income for a sole proprietor, Partnership, S-Corp, or C-Corp? Phased out at what levels? How much of the Qualified Business Income (QBI) can be offset by the conduit entities?

Not C-Corps since all of these others are "pass through entities". These losses can be carried forward indefinitely Phased out at $170K single and $340K MFJ 20%

Constructive Reciept Docturine

Not including all income like the interest from a savings account

1245 property sold is taxed at?

Ordinary Income

***add this to the appropriate sections deck***

P. 59 in investments (Kaplan) Supplemental Executive Retirement Plan (SERP) P. 60 in investments (Kaplan) Excess benefit plan (a plan that pays in addition to DB max pension amounts) P. 59 in investments (Kaplan) has chart on different between rabbi trust and secular trust P. 62-70 in investments (Kaplan) ISOs, NSOs, and Employee stock option plans

What type of business doesn't offer stock?

Partnership (technically the partner's investment is call "partnership interest" and not "stock")

For oil and gas partnership interest what happens to losses? what happens if a limited partner?

Partnership interest (material participant) - has GP responsibilities (and liabilities, like possibility to be sued) and is exempt from the PAL rules, so can use the loses to offset any type of income Limited partnership interest - limited to the PAL loss rules

Which kind of depletion triggers as an AMT add back item: cost or percentage?

Percentage depletion because it's accelerated

S-corps can not issue?

Preferred Stock (can only have a single class of common stock)

Installment sale calculation Ex.) Land of $200K, sold for $500K, payments of $100K

Profit / Sale Price = % of gross profit for each installment payment ex. ) 200/500 = 40% = installment payment of $40K gain (this is a way to spread the capital gain over installments)

Exceptions to installment sale

Public security Sold at a loss A related party sells within 2 years (same for a 1031 exchange)

When filing MFJ, an individual can file how so for the next 2 years

Qualified widower

Boot formulas: Realized gain Recognized gain Substitute basis

Realized gain = (FMV + Boot) - basis of previous property Recognized gain = lesser of Realized Gain or Boot Substitute basis = FMV - (realized - recognized)

Which entities are usually risk free and which are risky? Sole Proprietor S-Corp Partnership LLC Limited Partnership What type of business is best if profitable?

Risk free - Sole Proprietor and Partnership Risky - S-corp, Limited Partnership, LLC (these can easily be sued, so need liability protection) C-corp or Personal Service Corporations (PSC)

What are the 2 types of passive income? (often times these are non-public traded partnerships)

Rs (rentals real estate and royalties) & Ps (passive partners)

For conduit taxation (business types that have flow throughs; sole propriotorship, partnership, LLC, and S-corps) which is the only one to not have basis increased from a bank loan? S-Corps and Partnerships can take NOLs up to ______?

S-corp loans are NOT included in personal basis (think of this more like a corporation than a partnership) Basis

Realized and Recognized gains in the investment world are ___ Realized and Recognized gains in the 1031 exchange world are ___ Which (realized or recognized) are the same for both worlds?

Same Different Realized (think about it, in investments we always look at realized and unrealized gains)

Self Employment Tax includes

Schedule "C" income, 1099, board of director fees, and K-1s from GP (not included: dividends & interest, capital gains/loss, real estate, K-1s from partnerships, wages from S-Corp)

Assignment of Income

Someone has a high salary and so to reduce their income, create a W2 for their kid to receive income

Business purpose doctrine

Someone in a high tax bracket mingling assets with a business to achieve a lower tax status

Muni bonds issued out-of-state still have what tax?

State income tax

Step Transaction vs. Sham Transaction

Step - ABC Business sells to XYZ and then sells back to ABC Sham - ABC Business sells services to XYZ which are owned by the same person

The difference between Realized gain and recognized gain is what becomes ___ ___?

Tax Deferred as part of a 1031 exchange (In the basis part of the boot calculation, it's what's subtracted away from the FMV of the new property)

Foreign Earned Income Exclusion

The ability for a U.S. citizen or resident alien working abroad to exclude up to$120K foreign earned income (must be abroad for 330 days or US alien)

Boot is for a 1031 exchange and is defined as?

The amount of money or other assets received in trading two for a property with a lower value

What is Section 121? (Yes/No) 121 exclusion looks back to before marriage if MFJ What happens to the recognized gain once the of a home when using the section 121 and section 1031 Must be in the home for? Exclusions the taxable gain under section 121?

The exclusion for a primary residence sale ($250K for single and $500K for MFJ) No The the gain above the primary residence exclusion is tax deferred under the 1031 section exclusion 2 out of 5 years >death/divorce >unemployed/unable to afford mortgage/foreclosure >having twins >natural disaster >job move of 50 miles away

Boot can also be calculated with a personal loan, what would be considered the boot?

The loan amount

What type of taxes do S-Corps pay?

They don't pay taxes because the business profits are distributed as K-1 income to the owners

adoption tax credit

Up to $15,950 for cost of adopting a child

For the Itemized deduction of 7.5% AGI for medical expenses. Spouse can deduct for themselves and ___?

Wife and kids (or just kids if divorced)

Can personal property be exchange as a 1031?

Yes to the purchaser if the home is used as a investment/rental property BUT Not to the home owner that sold the home (all 1031s must be domestic property)

Revenue Rulings and Revenue Procedures Private Letter Rulings

administrative interpretation/ may be cited as a precedent specific taxpayers or organizations that request an interpretation of the law

When a C - corp receives ____ it then receives a 50% tax deduction?

preferred stock

fringe benefits

tax free fringe benefits: meals (50% limit), discounts on employer services limited to 20% discount, education, adoption, company car, health premiums, commuter / parking pass $300 each taxable fringe benefits: >health premiums paid by S-corp (but are then deductible on 1040 filing) for all insurance premiums besides disability >entertainment expensed by employer

Scholarship funds not used towards books and tuition is considered

taxable income