CFP Course 3 - Tax Planning

In March of the current year, Susan sold her principal residence for $408,000. Susan sold the house due to a job transfer out of state. Susan received the house as a gift 18 months ago when its fair market value was $375,000, and the donor's basis was $50,000. She made $20,000 of improvements to the house. She paid real estate broker commissions of $23,000. What amount, if any, must be recognized on the sale of Susan's residence?

$127,500 is the correct answer, and is computed as follows. Note: We use the donor's basis of $50,000 as Susan's basis, because the fair market value on the date of the gift was greater than the donor's basis. The $50,000 was increased by the $20,000 of improvements to equal the $70,000 basis. Gain realized:Amount realized: Sale price $408,000 Less selling expenses (23,000)Total amount realized$385,000Less adjusted basis(70,000)Gain realized$315,000Gain recognized:Gain realized$315,000Less allowable exclusion(187,500)Gain recognized$127,500The allowable exclusion is the full exclusion of $250,000 multiplied by 75%—18 months of use divided by the 24-month requirement.

Miguel, a shareholder in ABC Corporation, received a cash distribution from the corporation in the amount of $22,000. The corporation had $8,000 of accumulated earnings and profits and $5,000 and current earnings and profits. Miguel had basis in the stock of $6,000. Which one of the following correctly identifies the proper treatment of the distribution from the corporation?

$13,000 ordinary dividend; $6,000 return of capital; $3,000 capital gain The distribution from a corporation is determined in a three-step manner. To the extent of current and accumulated earnings and profits, the distribution is an ordinary dividend, subject to long-term capital gain rates. Next, the distribution is treated as a nontaxable return of capital until the basis in the stock is exhausted. Any distribution after that is considered long-term capital gain.

The active participation deduction is eliminated at

$150,000 of AGI. Phase Out Formula = 25,000 - (.5 x overage)

maximum amount of SE earnings subject to 15.3% tax(137,700)

$21,068

Regulations can be classified into three groups:

(1) legislative, (2) interpretive, and (3) procedural.

If the fair market value on the date of the gift is greater than the donor's adjusted basis

, the donor's adjusted basis is used as the recipient's basis. Note that the donor's holding period would be tacked to the donee's holding period.

Excess investment interest expense can be carried forward into succeeding tax years

. Investment interest expense is deductible up to the amount of net investment income. The interest on funds borrowed to purchase tax-exempt investments is not deductible. The net investment income is typically interest, nonqualified dividends, and short-term capital gains. Long-term capital gains and qualified dividends may be included at the taxpayer's election, but the taxpayer must forgo the preferential tax rates on these items.

dividends received deduction limits:

0-20%: deduct 50%21-80%: deduct 65%

not subject to self-employment tax

1. Distributive share of limited partnership operating income 2. Flow-through of S corporation income / distributive share of S corporation income 3. Interest or dividends from investments; 4. salary paid to an S corporation shareholder.

Rules to Determine Dependent Status

1. Income Test (dependent may not have more than 4300 in income) and 2. Support Test (the tax payers provide more than 50 pct of her support)

AMT Preference Items

1. Interest from qualified private-activity municipal bonds issued in 2008; 2. Bargain element on the exercise of an incentive stock option 3. mining, oil & gas % depletion / excess intangible drilling costs 4. Excess of percentage depletion over the property's adjusted basis; 5. passive farm losses; 6 pct of excluded gain from qualified small business stock;

AMT Adjustments

1. Standard deduction 2. SALT taxes 3. investment interest expense related to passive activity bond; 4. exercise of ISO; 5. tax benefit for state income tax refund; 6. depreciation of post 1987 property; 7. passive activity losses; 8. adjusted gain/loss

Section 1245 Assets

1. Tangible and Intangible Personal Property which has been subject to the depreciation allowance includes equipment and machinery 2. Nonresidential real property placed into service between 1981 and 1986

Trusts

1. admin efficiency, 2. probate avoidance 3. creditor protection 4. intergenerational gifting

AMT Strategies

1. move income into an AMT year. 2. Move deductions and real estate taxes into a non-AMT year 3. time the recognition of certain AMT adjustments and tax preference items. 4. if AMT will be payable in the current year, it is generally advantageous to increase the amount of regular taxable income (e.g., by accelerating ordinary income into the current year) because the total tax payable will likely not be affected by doing so.

Premarital Agreement

1. must be in writing and signed by both parties. Some states require two witnesses, notarized signatures, or 10 days before the wedding, 2. full and complete disclosure of net worth 3. must not be intended to facilitate or promote the procurement of a divorce 4. willingly executed by both parties; It may not be used to regulate an award of alimony.

regular medicare tax

1.45

AOTC

2.5K tax credit for 4K of expense: qualified expense does not include room and board. 4 years only

Student Loan Interest Deduction

2.5K, MFJ 140 - 170K, Single 70-85K

Negligence penalty

20 pct

Corporate Net Income

21 pct

Capital gains on Section 1250 Real Estate

25 pct

Active Participation deductible loss

25K under 100K of AGI, 150K upper limit

Fair Market Value Property - LTCG, use-related tangible personality

30 Public, 20 Private

Use Related

30 or 20 pct of AGI if using FMV, 50 or 20 pct if using basis

Tuition and Fee Deduction

4K for qualified and related expenses for higher education paid in that tax year

Excess Contribution Carry Forward (Charitable Giving)

5 years

Ordinary income property deduction - STCG, self constructed, inventory or use unrelated property

50 public; 30 private; includes: cash, short- term cap gains property, works of art, inventory; limited to the lesser of basis or FMV

Frivolous return

5K per occurrence

Cash Deduction for Charitable Donation

60 public, 30 private

OASDI (Old Age, Survivors, and Disability Insurance)

7.65 pct of 1st 137.7K and 1.45 pct above base; refundable credit

Civil Fraud

75 pct

Hybrid Method of Accounting

A combination of accounting methods, usually of the cash and accrual methods.

A dependent

A dependent may not have more than $4,300 (2020) of gross income. Social Security income is excluded from the test if that is the elder's only source of income. The taxpayer must also provide over 50% of the dependent's support to claim them. Coincidentally, as long as all the tests are met, a person who dies during the year may still be identified as a dependent.

S Corp

A legal entity that offers limited liability with single taxation. 100 shareholders max. Flow through income; S corporations do not have corporate income tax rates. As an S corporation, all income would flow through to taxpayer to be taxed at his individual rates. In addition, the death of a shareholder in an S corporation does not create a need to reorganize the business. the corporation must elect S status by filing a Form 2553—the treatment is not automatic. Nonresident aliens may not be shareholders in an S corporation.

Which of the following statements regarding limited partnerships is CORRECT?

A limited partner is subject to the passive activity rules when accounting for income and losses from the limited partnership. The limited partner is liable to the creditors of the partnership only to the extent of that partner's contributed or promised cash or property.

Accural Method

A system of accounting based on the accrual principal, under which revenue is recognized (recorded) when earned, and expenses are recognized when incurred. Required if the business keeps inventory unless income is less than 26 million

Lifetime Learning Credit

A tax credit for all years of college or graduate school. It also applies to working adults taking classes to improve their work skills; 20 pct of 10K for qualified expense; unlimited number of years; includes graduate and postgraduate courses; tuition only

MAGI

AGI before IRA deductions

installment sale

An installment sale is a form of revenue recognition where revenue and expenses are recognized at the time of cash exchange. Installment sales require the buyer to make regular payments—i.e. installments. This method is useful for taxpayers looking to defer capital gains to future years. These types of sales are common with real estate.

Which of these are techniques of income shifting or splitting?

An installment sale of an income-producing asset from a parent to a child / Valid employment of a child in the parent's business

Which of the following statements is an advantage to the S corporation form of business ownership?

Ans. Both The S corporation election avoids double taxation of a corporate income upon the payment of dividends. The S corporation election avoids the problems of a penalty on accumulated earnings as well as the personal holding company tax.

Phillip's personal automobile was almost destroyed in an accident. The insurance company paid $6,000 on the claim. The auto's fair market value before the accident was $16,000, and the value after the accident was $1,000. His basis in the automobile was $12,000. Phillip's AGI is $42,500. What is the amount of Phillip's deductible casualty loss?

As a result of the Tax Cuts and Jobs Act (TCJA), casualty losses are only allowed for damages sustained within a federally declared disaster area. Thus, there is no deduction for this loss. If the loss had been incurred in a federally declared disaster area (as a result of the disaster), the deductible casualty loss computation would begin with the lesser of the decrease in fair market value ($15,000 decrease in FMV) or the adjusted basis in the property. In this situation, the adjusted basis of $12,000 must be reduced by a $100 floor, the insurance of $6,000, and further reduced by 10% of the adjusted gross income. Thus, $12,000 reduced by $100, $6,000 insurance, and further reduced by $4,250, equals $1,650.

Under the installment sale method, immediate recognition of remaining gain occurs with the following:

At the time an installment sale is canceled When there is a gift of an installment sale to the obligor-debtor when there is a sale of the installment note to another party when an installment note is pledged as collateral for a loan If an installment obligation is canceled, it is treated as a disposition. To discourage sham transactions between related parties, when an installment sale is canceled, gain is immediately recognized.

Which one of the following types of investors derives the greatest tax benefit from investing in preferred stocks?

Because 50% of the preferred dividends received by a corporation are exempt from federal income taxes, a corporation gains a tax advantage

home office deduction

Both the relative square footage of the home office area and the relative number of rooms may be used in determining the business part of a home. The amount of utility use can be a deduction, but is not used in determining the business part of a home. There is no recognized method known as the relative use method of allocation. the home office expense deduction can generally neither create nor add to a loss

S Corp Taxes

Built in gains tax - captures unrealized gains attributable to any appreciation of an the disposed asset prior to conversion to S Corp. 5 year window. LIFO Recapture Tax; net passive income penalty tax

Caleb earns a salary of $190,000. This year, he also received dividends and interest of $60,000. Caleb had previously invested $50,000 to purchase a 15% interest in a passive activity. Operations of the activity this year resulted in a loss of $400,000, of which Caleb's share is $60,000. How is Caleb's loss for the current year characterized for income tax purposes?

Caleb invested $50,000 in the passive activity which becomes his at-risk amount. Because his share of the loss from the activity is $60,000, Caleb will be allowed to deduct only $50,000, which is his amount at risk. In addition, $10,000 of the loss ($60,000 total - $50,000 deductible under at-risk rules) has been suspended because of the at-risk rules and must be carried forward until Caleb either has $10,000 of income from the passive activity or invests $10,000 in the activity. Caleb has a $50,000 loss after applying the at-risk rules, but he is still not permitted a deduction for the loss because he has no passive income to offset the passive activity loss.

Mod 9

Case Study

Life Insurance Test

Cash Value Accumulation Test and the Cash Guideline premium and Corridor Test, 1 of 2 must be met

Public 50 pct Charities

Churches, schools, hospitals, medical research orgs, governmental units; operating, conduit, pass through, distributing, community and pooled fund foundations

Personal Service Corporation

Closely held corporation owned by individuals who perform services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting for the corporation's clientele. Personal service corporations are subject to a flat 35 percent tax rate.

Section 1231 Property

Depreciable assets and real estate used in trade or business and held for the required long-term holding period. § 1231(b).

Dividends Not Eligible for Reduced Tax Rates

FCU, Mutual Insurance, REITs, Farmers Coops, tax-exempt entities, deductible dividends from ESOPs, dividends on stocks owned less than 61 days

Life Insurance Distributions

FIFO

suspended loss calculation

FMV - current basis = X Suspended Loss - X = Freed up loss

Intangible Property

FMV 30 and 20 or basis 50 and 20

The Section 179 expense election is limited to the taxable (earned) income of the taxpayer.

For purposes of Section 179, salary or wages received as an employee, even from a completely unrelated source, are also considered to be from the active conduct of the trade or business. Thus, the total taxable (earned) income in this situation is $122,000. The maximum Section 179 expense election is $1.04 million (for 2020), but for Bob, it is limited to his earned or taxable income of $122,000 (increased by the Tax Cuts and Jobs Act, or TCJA).

An office building with an adjusted tax basis of $120,000 was destroyed by fire on January 2 of last year. On January 15 of the current year, the insurance company paid the owner $200,000. The owner reinvested $190,000 in a new office building. What is the basis of the new building under Section 1033 (the involuntary conversion rules)?

Gain realized equals $80,000 (200K reimbursed - original basis), and gain recognized equals $10,000 ($200,000 amount reimbursed − $190,000 amount reinvested). This is a net postponed gain of $70,000 ($80,000 − $10,000). The basis of the new building equals $120,000 ($190,000 amount reinvested − $70,000 net postponed gain).

Max is selling a truck that he uses in his business. He has taken $5,000 of depreciation on the truck and wants to use the installment sale method to sell the truck to Jerry for a down payment and an installment note over 36 months. He paid $40,000 for the truck and is selling it for $38,000. What are the tax consequences of this transaction?

Gain recaptured under Section 1245 (depreciable personal property used in a trade or business) is taxed as ordinary income and is not eligible for installment sale treatment. Therefore, these amounts are fully recognized (taxable) as ordinary income in the year of sale. Unrecaptured Section 1250 depreciation occurs only on depreciable real property (real estate) used in a trade or business.

Grantor Trust

Grantor pays all taxes, revocable trust is treated as a grantor trust

adjustments

IRA contributions; student loan interest

Schedule K - 1

IRS form 1065, Schedule K-1 is an Internal Revenue Service (IRS) tax form issued annually for an investment in a partnership. The purpose of the Schedule K-1 is to report each partner's share of the partnership's earnings, losses, deductions, and credits.

AMTI

IRS notes that the starting point for determining AMTI is taxable income as reported for regular income tax purposes on a taxpayer's IRS Form 1040

Underpayment Penalty

If a taxpayer did not pay enough tax on a timely basis during the year, he may be required to pay an underpayment penalty. 20 pct

Personal Use: Income from rentals for fewer than 15 days during the year are not required to be included in gross income. However, no deductions attributable solely to the rental are allowed, either.

If property is rented fewer than 15 days per year, the full amount of home mortgage interest, taxes, and casualty losses are permitted as an itemized deduction (not expenses, though); in addition, rental income can be excluded from gross income.

In a situation where the donee uses the FMV as the basis, there is no tacking of the holding period.

If the donee uses the donor's basis, then the holding period is tacked. In other words, the donor's holding period is added to ("tacked") the donee's holding period.

Dependents -

If you can be claimed as a dependent by another taxpayer, your standard deduction for 2020 is limited to the greater of: (1) $1,100, or (2) your earned income plus $350 (but the total can't be more than the basic standard deduction for your filing status).

at-risk rules

In the Tax Code, the at-risk rules are defined as the maximum deductible loss for an investment limited to the amount that the taxpayer-investor has at risk at the end of the current year (i.e., the amount of potential economic loss). A partner may deduct losses only to the extent of the amount that they have "at risk." The amount at risk equals the sum of the following: The money invested (except to the extent the money invested was borrowed and was secured only by the investment) The adjusted basis of other property contributed to the partnership Amounts borrowed for use in the activity, but only to the extent that the partners are personally liable for repayment of the debt (recourse indebtedness) The partner's share of income, less the partner's share of losses or withdrawals from the partnership The proportionate share of qualified nonrecourse financing in a real estate activity ONLY Essentially, the only difference between the amount at risk and the basis in a partnership interest is the treatment of nonrecourse financing.

Dave owns equipment that has an adjusted basis of $10,000 and a fair market value of $75,000. Through an exchange, he acquires new equipment from Rachel that has a fair market value of $60,000 and an adjusted basis of $35,000. In the exchange, Dave receives $15,000 from Rachel. What is the amount of gain or loss, if any, recognized by Dave in the exchange?

In the exchange, Dave received new equipment with a fair market value of $60,000 and cash of $15,000. He gave up an adjusted basis in his property of $10,000. The difference between $75,000 and $10,000 is the gain realized, $65,000. Because this is not realty, it is not eligible for 1031 exchange treatment as determined by the 2017 Tax Cuts and Jobs Act). Thus, the transaction is treated as a sale and subsequent purchase. The entire gain of $65,000 is recognized and taxable. (FMV of property received + boot) - minus adjusted basis of property given away = gain or loss recognized

A partner's tax basis in a partnership interest is affected by items of income or loss, which are passed through to the partner on a proportionate basis.

Items of income, as well as capital contributions, increase basis; deductions, as well as distributions, decrease basis.

Jimmy will have an adjusted gross income of $275,000 for the current tax year. He would like to reduce his tax liability without exposing himself to personal liability. Which of the following investments would be appropriate for Jimmy?

Jimmy should invest in a newly formed low-income housing limited partnership. Active participation in real estate, historic rehabilition, and investing in oil and gas are subject to personal liability.

This year, Laura's Schedule C reflected a profit of $44,500. Assume that the related total self-employment tax was $6,288. What is Laura's AGI?

Laura will deduct the employer share of the total self-employment tax in arriving at AGI: $44,500 × 0.9235 × 0.0765 = $3,144; $44,500 − $3,144 = $41,356.

Income Exclusions

Life Insurance Proceeds due to death; gift or inheritance; child support payments received; worker's comp; employee fringe benefits

AMT itemized deductions allowed include:

Medical and dental expenses more than 7.5% of the regular tax AGI Charitable donations Investment interest expense to the extent of qualified net investment income Qualified housing interest Casualty losses in excess of 10 pct of AGI Miscellaneous deductions not subject to the 2% of AGI limitation; estate taxes paid on decedent income; property taxes are not allowed and SALT taxes are not allowed

Taxes

Mod 2

Trusts and AMT

Mod 3

Tax Implications of Special Circumstances

Mod 4

Business Entity Taxation

Mod 5

Passive Activity

Mod 7

IRS

Mod 8

Nondeductible Property

Money or property given to foreign organizations except Canadian, Israeli or Mexican charities; individuals; political groups or candidates; money given to the cost of raffle or lottery; tuition; value of person's time or services donated to the charity.

Which of the following are requirements in order for a taxpayer who materially participates in a real property trade or business to be able to deduct any losses from the business?

More than 50% of the individual's personal services during the tax year are performed in the real property trades or businesses in which the individual materially participates. // The individual performs more than 750 hours of service in the real property trades or businesses in which the individual materially participates.

Self Employment Income

Net Schedule C income; Part-time earnings of an individual (e.g., a professional); Board of directors fees

Net income from rental of personalty is subject to the self-employment tax

Net income from the rental of realty and flow-through S corporation income are both excluded from the self-employment tax. Less than $400 of self-employment income is not subject to the self-employment tax.

Patty has a $10,000 passive loss carryforward from Beta limited partnership, which is publicly traded. She also has a $15,000 passive loss carryforward from Alpha limited partnership, which is nonpublicly traded. In the current year, she has $6,000 of income from Beta. She also has $11,000 of income from Gamma LP. Gamma is not publicly traded. What is the total amount of passive losses that Patty may deduct during the current year?

Of the $10,000 passive loss carryforward from the Beta limited partnership, only $6,000 may be utilized in the current year due to the $6,000 of current year passive income. A total of $11,000 in losses from the Alpha limited partnership may be utilized against the $11,000 of income from the Gamma limited partnership in the current year because both are nonpublicly traded. Thus, the total of passive losses that are allowed for the current year is $17,000.

Mortgage Interest Deduction

Old Debt: max 1 million (500 for MFS) New Debt: max 750K (375K MFS)

A shareholder's basis in an S corporation includes funds that are

Only funds loaned directly to the corporation by the shareholder establish shareholder basis in an S corporation.

Adjusted Basis

Original purchase price less an depreciation taken

Rental Minimal Personal Use

Property is rented for at least 15 days, and is not used for personal use for more than 14 days or 10 pct of rental days. 1. allocate expenses between rental and personal 2.deduct loss up to 25K 3. report income and expense on Schedule E

Which of the following activities is treated as a rental activity under the passive activity rules?

Property rental where average customer use is more than 30 days and no significant services are provided. If a rental is 30 days or less and significant personal services are provided, the activity is a service rather than a rental activity.

Which one of the following employee benefits is NOT currently deductible by a C corporation?

Qualified employee discounts

Section 1202

Qualified small business stock QSBS held for more than 5 years; the amount of gain eligible for exclusion from tax is 10 times the basis or 10 million of gain; must be a C Corp, must have have gross assets above 50 mil, 80 pct of assets must be used to preform a trade (non-PSF); stock must be original issue acquired after 1993, it must be acquired for cash or property other than stock; it must be acquired as compensation for services other than underwriting. 50 - 75 pre sept 27 2010, subject to max cap gain of 28 pct and a 7 pct AMT preference item. If 100 pct then no AMT preference item is generated

Kiddie Tax Net unearned income calculation

Reduce AGI by standard deduction; reduce unearned income by 2200, arrive at net unearned income

Schedule E

Rents and royalties

Which of the following statements is CORRECT regarding a minority non-employee shareholder in an S corporation?

Reports income when the corporation has net income for a tax year Votes for the board of directors at the annual shareholders meeting Receives a K-1 annually to prepare a personal income tax return Reports on a personal income tax return a pro rata share of corporate profit or loss; All of the statements are correct.

Which of the following dispositions of Section 1245 property would result in the immediate recapture of some or all of the previous depreciation deduction taken by the taxpayer?

Section 1245 property includes all depreciable tangible personal property used in a trade or business. Section 1245 of the Tax Code requires any recognized gain to be treated as ordinary income to the extent of depreciation taken on the property and occurs when there is a taxable event regarding such property. An installment sale is an example of a triggering taxable event for purposes of Section 1245 recapture. A) Disposition in a tax-free transaction B) Installment sale C) Disposition by gift D) Distribution by bequest

Section 1250 Assets

Section 1250 assets consists of real property used in a trade or business over 12 months subject to depreciation which is not, nor has ever been Section 1245 property Sec 1250 property includes all real property which is not Section 1245 property.

Sam has the following items of income: Self-employment earnings$45,000Interest income$ 4,000Gain on the sale of a capital asset$12,000 What is the amount of self-employment tax Sam owes? Round your answer to the nearest dollar.

Self-employment income $45,000.00 Less 7.65% of $45,000(3,442.50) = $41,557.50 Times tax rate 15.3% =Self-employment tax$6,358.30 Neither the interest income nor the capital gain is subject to the self-employment tax.

Dependent Status

Simply not living with Joseph does not preclude him from listing his sister as a dependent. If Joseph provided more than half of the support for his sister, he would be allowed to list her as a dependent and take any tax credits that may be available.

AMT Calculation

Step 1. AGI + any tax preference items and adjustments; Step 2. subtract allowable itemized deductions, = AMTI, Step 3. subtract AMT exemption from AMTI = AMT Base; Step 4. apply 26 pct up to 197.9K and 28 pct on any income over 197.9K, Step 5. Compare against regular tax liability if greater than AMT then no AMT liability is due, if less than AMT then the difference is the AMT liability due

The steps to calculate self-employment tax for 2020 where net income from self-employment is above the taxable wage base are as follows:

Step 1: Calculate self-employment income. Step 2: Subtract 7.65% Step 3: From Step 2, subtract the taxable wage base and multiply the excess over the taxable wage base by 2.9% (Medicare portion of the tax). Step 4: Multiply the taxable wage base by 15.3%. Step 5: Add the results of Steps 3 and 4 together to arrive at the total self-employment tax.

Section 1244 Stock

Stock upon the sale of which (at a loss) receives favorable tax treatment and is taxed as an ordinary loss. 100K for MFJ, 50K for Single. total capital contributions do not exceed 1 million. Any Section 1244 loss in excess of the annual limits is treated as a capital loss—long term or short term, depending on the holding period.

Jim owns an apartment building with a fair market value of $225,000 and an adjusted basis of $85,000. He wants to acquire Frank's duplex, which has a fair market value of $240,000 and an adjusted basis of $130,000. In the exchange, Jim will pay Frank $15,000 in cash. What is Jim's substitute basis in the acquired duplex?

Substitute Basis: FMV of Property Received minus (FMV minus Adjusted Basis plus boot given minus boot received) Jim is receiving an FMV of $240,000 for the duplex. He is giving up an adjusted basis of $85,000 plus $15,000 cash. The difference between the $240,000 received and the $100,000 given up is the realized gain of $140,000. The gain recognized (the taxable amount reported on the income tax return) in a like-kind exchange is the lesser of gain realized ($140,000) or boot received ($0). The substitute basis in an asset acquired in a like-kind exchange is the FMV of the qualifying property received ($240,000) reduced by the gain realized, but not recognized ($140,000 - $0 = $140,000). Thus, $240,000 - $140,000 = $100,000.

equivalent tax benefit formula

TC = d x m ; d = TC / M; d for deduction, m for tax rate, TC for tax credit

Direct Participation Program Benefits

Tax Conduits, Special Allocations, Accelerated Deductions, Tax Credits, Borrowing

Accumulated Earnings Tax

Tax penalty imposed on corporations that retain earnings beyond reasonable business needs. 250K safe harbor, 20 pct on excess; 150K for personal services corporation; 60K credit

During the current tax year, Riley, a single taxpayer, has a $10,000 short-term capital loss and a $10,000 long-term capital gain, both from the sales of securities. Riley also has a $15,000 long-term capital gain from the sale of collectibles. Riley is in a 37% marginal income tax bracket. What is the income tax result from these transactions?

The $10,000 short-term capital loss is first used against the collectibles gain—the gain that would be taxed at the highest rate (28%). This leaves $5,000 of collectibles gain, taxed at 28%, and $10,000 of long-term capital gain from the sale of securities, taxed at 20%. The long-term gain from the securities is taxed at 20% because Riley is in the 37% marginal income tax bracket. That gives him taxable income in excess of the breakpoint for the 20% rate—taxable income in excess of $441,450 (for 2020).

Which of the following statements concerning the passive activity loss rules are correct?

The $25,000 offset allowance for the small real estate investor is not available to taxpayers whose AGI is $150,000 or more. //Losses from one master limited partnership activity may only offset income from that particular activity; they cannot be used to offset income from any other passive activities.// Losses from passive activities may not offset portfolio or active income except under limited circumstances. // NOT CORRECT: The passive activity loss rules limitation is a permanent disallowance rule.

What is the approximate net loss/gain that the Turners will report regarding their rental real estate on Schedule E for 2020? (Assume mortgage interest of $12,594 in 2020.)

The Turners would report a $6,394 loss on Schedule E for 2020, calculated as follows: Income net of management fees$14,000Mortgage interest*($12,594)Operating costs($1,400)Taxes($1,000)Association dues($4,400)Insurance premiums($1,000)Net loss($6,394)

The building and land sold when Blake's business moved to a new location qualify under Section 1231 as depreciable personal or real property used in business or for the production of income.

The building portion of the property was depreciable property. While they are not considered capital assets, under Section 1231 they are taxed using capital gain rates, subject to the Section 1245 and 1250 rules for depreciation recapture rules. Losses are always ordinary and not subject to the $3,000 ($1,500 for MFS) ordinary loss limitation.

Three years ago, Mort purchased equipment for use in his business at a cost of $26,000. He claimed a Section 179 deduction in the year of acquisition of $10,000, and has since claimed cost recovery deductions totaling $7,604. The equipment was sold for $18,000. What is the amount of cost recovery deductions that must be recaptured?

The cost basis of the property, $26,000, would be reduced by the Section 179 and cost recovery deductions taken, $17,604. This leaves an adjusted basis of $8,396. When the property is subsequently sold for $18,000, the difference between the sales price ($18,000) and the adjusted basis of $8,396 is the gain realized of $9,604. The recapture is the lesser of the gain realized of $9,604 or the cost recovery deductions taken of $17,604.

Four years ago, David purchased a condominium to use as a rental property. The cost of the property was $165,000. He paid an attorney $1,800 to draft the legal documents required for the purchase of the property. He paid $6,500 to replace the wiring and patio before he could rent the property. Last year, he paid $2,200 to repair damage caused by the former tenants. He has claimed cost recovery deductions of $24,600. What is David's adjusted basis in the condo?

The cost of the condominium of $165,000 is increased by the capitalized costs. The capitalized costs would include $1,800 for the attorney's fees and $6,500 for improvements. Even if the $6,500 for wiring and patio replacement were considered repairs, they would be capitalized in this situation because they were incurred before placing the property in service (making it available to rent).This amount would be reduced by the cost recovery deductions of $24,600, to leave an adjusted basis of $148,700. The repairs of $2,200 represent a current deduction and therefore do not impact the basis of the property.

Your client, Sally, is considering investing in real estate as a way to diversify her investments. She has heard of active participation rental real estate, but is unsure of the requirements that must be met. What can you accurately tell her with respect to active participation rental real estate?

The deduction for active participation rental real estate requires that the taxpayer participate in management in a bona fide sense; making the major management decisions. To qualify, the interest may not be held through a limited partnership, and the taxpayer must have at least a 10% or greater ownership interest in the property. The loss is deductible when computing the gross income. Active participation rental real estate generates an above-the-line deduction of up to $25,000 annually, not a credit.

Self-employed taxpayers may deduct qualifying home office expenses when calculating AGI.

The deduction is taken as a line item on Schedule C. The home office deduction cannot create a loss from the taxpayer's business. Unused home office expenses may be carried forward.

qualified education interest deduction

The deduction may only be claimed by the taxpayer legally obligated to make the loan payments. If the loan is in the student's name, the parents may not claim the deduction, even if they make the payments. The deduction is taken as an adjustment to income. There is a $140,000 to $170,000 AGI phaseout for a married couple filing jointly. An individual who is eligible to be claimed as a dependent may not take the deduction.

Documentation of Donation

The donor-taxpayer must have a canceled check, bank record, or a receipt from the donee organization to substantiate the deduction. The documentation must have the amount of cash or description of property, the name of the receiving charitable organization, the date of the contribution, and the amount of the donation. An appraisal is not required for noncash property over $500 and less than or equal to $5,000. However, taxpayers may wish to get an independent appraisal to support the deduction claimed. A qualified appraisal is not required for closely held stock if the amount donated is less than $10,000. The appraisal itself is not attached to the tax return.

Steven owned a duplex that he rented to tenants. He acquired the property several years ago for $296,000. He used the straight-line method of cost recovery, which totaled $75,000. Steven sold the property in February of the current year for $330,000. Steven is in the 32% marginal income tax bracket. What is the amount and nature of the gain on the sale?

The entire gain of $109,000 is treated as Section 1231 gain. $75,000 of the gain is created by the cost recovery deductions, and is subject to a maximum rate of 25% as unrecaptured Section 1250 income. The remaining $34,000 of gain is created by actual appreciation of the duplex, and is subject to the regular long-term capital gain rate of 15%.

A client sold an apartment building last year for $100,000, paying a sales commission of $5,000 plus $2,500 in closing costs. The building originally cost $80,000 20 years ago. Total straight-line depreciation of $40,000 had been taken. The building had a mortgage of $60,000 that was assumed by the buyer. The client is in the 32% marginal income tax bracket. What is the amount and nature of the gain resulting from the sale?

The gain on the sale is $52,500; the $100,000 sale price reduced by the commissions and closing costs to leave a $92,500 amount realized. The adjusted basis of the property is subtracted from the amount realized to give us a gain of $52,000. The gain attributable to the straight-line depreciation is unrecaptured Section 1250 gain—taxed at a maximum LTCG rate of $25%. The gain attributable to actual appreciation—$12,500—is regular LTCG, taxed at a 15% rate for a single taxpayer with taxable income between $38,600 and $425,800.

Three years ago, Zhong purchased specialized manufacturing equipment (seven-year property) at a cost of $56,000. He paid an additional $4,000 to have the equipment installed in his plant. Cost recovery deductions total $40,935. This type of specialized equipment became more and more scarce, and this year, Zhong sold the equipment for $73,000. What is the amount and character of the gain resulting from this sale?

The gain realized and recognized is the difference between the $73,000 amount realized from the sale and the adjusted basis of $19,065. Thus, the total gain is $53,935. The Section 1245 cost recovery recapture is the lesser of the cost recovery deductions taken ($40,935) or the gain realized ($53,935). Thus, the Section 1245 income (cost recovery recapture) is $40,935. The remaining $13,000 of gain is attributable to actual appreciation of the asset; therefore, there is $13,000 of Section 1231 gain. The other way to look at this—the gain created by the depreciation deductions ($40,935) is treated as ordinary income, and the gain attributable to the actual appreciation of the asset ($13,000) is potential long-term capital gain under Section 1231. Remember that the installation is a cost associated with the acquisition of an asset and must be capitalized (added to basis). Thus, the original cost basis was $60,000.

Cara has a basis of $6,000 in a classic Mercedes that she purchased several years ago. This year, she sold the Mercedes to a business associate for $18,000. The buyer made the first of six annual installments of $3,000 this year. What is the amount of gain recognized in the current year?

The gross profit percentage is the profit on the sale ($12,000) divided by the contract, or sale, price of $18,000, or 66.67%. The gross profit percentage is multiplied by the payment received in the current year ($3,000) to give a gain recognized of $2,000.

Francisco operates a sole proprietorship from his apartment. His gross income for the current tax year is $24,000. Business expenses not associated with his home office total $22,000. Expenses associated with the home office total $2,750. How much of the home office expense, if any, may Francisco deduct for the current year?

The home office expense deduction is limited to the earned income from the business. In other words, the home office expense deduction, in general, can neither create nor add to a loss. The only expenses that may create or add to a loss are the allocated amounts of home mortgage interest and property taxes. In this situation, the $24,000 of gross income is reduced by the $22,000 of business expenses not associated with the home office, to leave $2,000 of earned income. Thus, of the $2,750 of home office expenses, only $2,000 would be deductible in the current year. Note that the remaining $750 of home office expenses would be subject to a carryforward.

For a qualifying child, a taxpayer may claim an individual as a dependent if the individual satisfies all of the following requirements:

The individual must meet one of the following relationships:Child, stepchild, foster child, or adopted child of the taxpayerBrother, sister, stepbrother, or stepsister of the taxpayerDescendants of any of the individuals listed above The individual must live with the taxpayer for more than half of the taxable year. The individual must pass an age test by meeting one of the following:Individual is under age 19 at the close of the tax year.Individual is a full-time student and under the age of 24 at the close of the tax year.Individual is totally and permanently disabled at any time during the tax year. The individual must not have provided more than half of her own support during the tax year. The individual cannot claim any other individual as a dependent. The individual may not file a joint return for the tax year (unless the only reason a return was filed was to obtain a refund of tax withheld). The individual generally must also be a US citizen, US national, or a resident of the United States, Canada, or Mexico. The child must be younger than the taxpayer.

Frank owns and operates a business as a sole proprietor. On August 7, 2020, he purchased equipment (seven-year property) at a cost of $1,165,000 to use in his business. He qualifies for and elects the maximum Section 179 expense deduction. Frank elects out of the bonus depreciation provision. What is the total amount of deductions that Frank can claim in 2020? Use the Modified Accelerated Cost Recovery System (MACRS) table found in the module.

The maximum Section 179 expense is $1.04 million for 2020. This leaves $125,000 of remaining basis that is subject to depreciation, $125,000 times 14.29% equals $17,863. The Section 179 expense of $1.04 million combined with the $17,863 equals $1,057,863. (The MACRS table will be provided on the end-of-course exam.)

To which of the following do the passive activity loss rules apply?

The passive activity loss rules specifically do not apply to C corporations that are not closely held.

John owns a classic automobile that had a cost basis of $32,000. John paid $38,000 to have the automobile fully restored. John sells the automobile through an installment sale for $100,000. John is to receive a $25,000 down payment in the current year, and $15,000 per year for five years, beginning this year. What amount of gain must John recognize during the current year?

The profit on the sale was $30,000 divided by the $100,000 contract price, which equals a 30% gross profit percentage. This is multiplied by the $40,000 of payments received during the year to calculate the amount of gain recognized, $12,000. The $38,000 of restoration costs are capitalized, added to basis, to give us the $70,000 basis.

Sheila, a single taxpayer, has taxable income of $460,000. Included in the taxable income is $50,000 of qualified dividends. At what rate(s) will her qualified dividends be taxed?

The qualified dividends straddle the $441,450 breakpoint (for 2020). Thus, a portion fall into the $40,001 to $441,450 range and are taxed at 15%. The dividends above the $441,450 breakpoint are taxed at 20%.

Judy's rental real estate was completely destroyed by a fire in June of 2020, and she received the reimbursement check from the insurance company later that month. If there were a gain on the conversion, when would the replacement period end?

The replacement period for a casualty or theft begins on the date the property was damaged, destroyed, or stolen and ends on the last day of the second taxable year following the year in which the taxpayer realizes a gain with respect to the property. If this was a condemnation of business or rental real estate, the replacement period would end on the last day of the third taxable year following the year in which the taxpayer realizes a gain from the property. December 31, 2022 Ans

CASH CONTRIBUTIONS TO OTHER CHARITABLE ORGANIZATIONS

The second category of charitable contributions includes cash gifts made to any charitable organization not included in the list described under IRC Section 170(b)(1)(A). In other words, any charity that is not a 50%-limit organization. Deductions to these organizations for cash contributions are generally limited to 30% of a taxpayer's AGI instead.

Sales of goods and purchases of inventory are generally accounted for under the accrual method when the taxpayer uses a hybrid method of accounting.

The service side of the business typically uses the cash method of accounting to increase the flexibility of the overall accounting method. The inventory side of the business typically will use the accrual method of accounting to comply with the general requirement that the accrual method be used when inventory is a material income-producing factor.

During the current tax year, Robin has a short-term capital loss of $13,000 from the sale of mutual funds. She also has a long-term capital gain of $6,200 from the sale of an antique clock and has unrecaptured Section 1250 income of $17,000. Robin is in the 35% marginal income tax bracket. What is the tax result from these transactions?

The short-term capital loss is first used to offset the collectibles gain of $6,200. This leaves a short-term capital loss of $6,800. This is next used to offset the 25% gain. The $17,000 is offset by the $6,800 remaining capital loss. This leaves $10,200 of unrecaptured Section 1250 income, taxed at a maximum 25% rate. This is the most favorable manner of offsetting the capital losses against the capital gains.

Willis has an active participation rental real estate activity. Last year, he had losses of $15,000 from the active participation real estate, and his AGI was $225,000. The $15,000 of losses were suspended due to his AGI. In the current year, Willis has an AGI of $90,000 and $6,000 of current losses from his real estate rental activity. What amount of loss may Willis deduct in the current year?

The suspended losses of $15,000 from a former year plus the current losses of $6,000 equals $21,000.

Bob passed away during the current year. He had suspended losses from a limited partnership activity of $25,000. Bob's basis in the partnership was $1,000 and the fair market value at the time of his death was $18,000. What amount of passive losses, if any, is deductible on Bob's final income tax return?

The suspended passive losses are "freed up" and deductible only to the extent that the losses exceed the step-up in basis. In this situation, the step-up in basis equals $17,000 (from $1,000 to $18,000). The losses of $25,000 exceed the step-up amount by $8,000.

Which of the following forms of business could NOT be a direct participation program (tax conduit)?

The tax advantages provided by direct participation programs are founded upon the principle that most types of business organizations function as tax conduits. Therefore, a closely held C corporation cannot qualify, as there is no flow through of gains and losses.

Jim purchased a limited partnership interest many years ago for $50,000. He has $26,000 of suspended losses from the partnership. His basis in the partnership was $15,000 and he recently sold his entire partnership interest for $20,000. Which one of the following statements correctly describes the proper tax treatment of the sale?

There is a $5,000 gain resulting from the sale of the partnership interest, and the suspended losses are deductible in full. The gain or loss is the difference between the sale price and the adjusted basis of the partnership interest—$5,000 in this instance. Upon the taxable disposition (typically the sale) of the passive activity, all suspended losses are deductible in full against any other income.

Which one of the following statements is CORRECT regarding the effect of the taxpayer's death on suspended passive losses?

They are nondeductible up to the amount of the step-up in basis of the activity.

There is no loss recognized in a like-kind exchange.

This exchange is simply treated as a sale of the asset.

Kiddie Tax with Earned Income

Total Income - standard deduction (12400) + 350 not to exceed 12400. Earned income is not subject to taxation at the parental rate. (standard deduction 1100 or total income + 350)

Kiddie Tax - unearned Income

Unearned Income - 2200, if unearned income is less than 2200 then void

Alice, age 16, claimed by her parents as a dependent, had investment income of $4,000 last year (2020) and earned $1,000 babysitting. How much of Alice's income will be taxed at her individual tax rate?f

Unearned income (UI)$4,000 plus Earned income (EI)$1,000 = Gross income$5,000 --- Subtract Standard deduction($1,350)(earned income plus$350) = Taxable income$3,650 subtract UI taxed at estates and trusts rate($1,800) ($4,000 - $2,200) = Income taxed at child's rate$1,850

Under the installment sale method, when must a seller-lender recognize all of the gain remaining in an installment note?

When an installment sale is canceled When the lender makes a gift of the installment note to the debtor When the lender sells the installment note to a third party

When does the alternative minimum tax (AMT) apply to a taxpayer?

When the AMT calculation results in a tax liability that is greater than that resulting from the regular income tax calculation

Alimony Recapture calculation

Year 2 minus year 3 = year 2 decrease - 15K safe harbor = amount that reduces year 2 alimony. next take year 2's revised alimony + year 3 alimony and divide by 2. next take year 1 and subtract from year 2 and 3 average. subtract answer by 15K safe harbor, add all combined recapture amounts

Passive Activity

a business or trade in which the investor does not materially participate: it is not regular, nor continuous and insubstantial

Personal Holding Company

a corporation owned by a small number of individuals that receives taxable income consisting primarily of nonbusiness income such as dividends, interest, rents, and royalties; 1. ownership test: last half of the taxable year more than 50 pct of company is owned by 5 or fewer individuals 2. passive income test; 60 pct of the AGI consists of passive income from securities and other income producing property. additional 20 pct on top of regular corporate income tax

three types of tax audit performed by the IRS are as follows:

a correspondence audit, which is usually performed through the mail because the disputed tax issue is minor; an office audit, which is usually restricted in scope to a specific item or items and is performed at the IRS office by an office auditor; and a field audit, which is an examination of numerous items and is usually performed on the premises of the taxpayer (such as a business office) by a revenue agent.

50 pct election

a election for LTCG property donated to 50 pct orgs, where 50 pct of AGI may be deducted up to the basis of the property

Family Limited Partnership

a partnership of family members in which one or more family members are general partners and one or more family members are limited partners. 1 pct general and 99 pct limited

A notice is

a public pronouncement that contains official guidance about regulations or interpretations of the Code. The guidance is often substantial but again, ultimately it only points to higher regulations. Notices in and of themselves do not carry the weight of law.

Life insurance dividends are considered

a return of premium paid (provided the cumulative dividends received over the life of the policy do not exceed the basis in the policy) and thus are not taxable.

Child and Dependent Care Credit

a tax credit that offsets your taxes in a direct dollar-for-dollar manner for child and dependent care expenses, 3K for single eligible dependent, 6K for two our more eligible depends; sliding scale credit pct: 35 pct for AGI 15K or less, 20 pct for 43K or more

LLC

able to use the initial losses from the business against their spouses' incomes. share the management responsibilities equally. able to have the business borrow funds to provide operating funds

Because one of the partners is a C corporation and the partnership's average annual gross receipts for any three-year preceding period do not exceed $26 million, the partnership must use the

accrual method of accounting.

Alimony Recapture Rules

aka excess front-loading rules if there is a decrease of more than 15K in alimony payments between any of the first 3 years when Alimony is paid, recapture may result

The limit applicable to the amount of a charitable deduction

allowed for gifts of appreciated property is applied before applying the percentage of AGI limitation.

Section 2503c trust

allows a donor to gift to a minor but retain control until age 21; For income tax purposes, the income of a IRC Sec. 2503(c) trust will not be taxable to the grantor unless it is actually utilized to defray support obligations of the grantor. Until the beneficiary attains age 21, ordinarily, income accumulates and is taxed to the trust as a separate income taxpayer. After the beneficiary reaches 21, the lapse of the withdrawal right by the beneficiary will cause the beneficiary to be treated as a grantor, and the trust as a grantor trust, with the result that all income, ordinary as well as capital gains, will be taxable to the beneficiary whether or not the income is actually distributed.

A special allocation

allows an allocation of items in a manner that differs from the "normal" pro rata allocation of deduction, income, credit, etc.

The individual casualty loss deduction,

an itemized deduction, is based on the lesser of the decrease in FMV or the adjusted basis of the asset. This amount is then reduced by insurance coverage, a $100 floor per occurrence, and 10% of AGI. Remember that, as a result of the Tax Cuts and Jobs Act (TCJA), the casualty loss deduction is allowed only for damage sustained in a federally declared disaster area.

Passive loss rules

apply to all passive activities, not just real estate transactions. Passive losses may be deducted against passive gains. If the investor has excess passive losses, the losses are carried forward and may be used in future years to offset future passive gains.

Private Letter Rulings

are taxpayer guidance from the IRS that apply only to the particular taxpayer(s) asking for the ruling; they are not applicable to all taxpayers. The primary purpose of the regulations is to explain and interpret particular IRS Code sections.

The land may not be depreciated,

as only "wasting" assets are subject to depreciation. The cost of the building may not be currently deducted; it must be capitalized and depreciated because it has a useful life of over one year.

Net earnings from self-employment are determined under the same accounting method

as that used for income tax purposes.

AMT Credit

available for years after an AMT liability occurred; based on deferral but not exclusion preferences or adjustments.

Passive losses cannot

be deducted against portfolio or active income

The installment sale method cannot

be used for inventory or securities traded in the secondary market.

doubling up - wash sale

buying an equal number of shares and waiting 31 days, then disposing of the original shares.

Complex Trust

can accumulate income, principal can be distributed, trust pays taxes on income

PTP Publicly Traded partnership

cannot be used to offset income from non-PTO cannot be used to offset income from other PTP. losses from a PTP that are disallowed may be carried forward as a a deduction when the same PTP has net income or the tax payer's interest in the activity is sold.

Any cost associated with the acquisition of an asset must be

capitalized (added to basis). This would include both the shipping charges and the sales tax. Any cost associated with the acquisition of an asset may not be currently deducted.

CASH CONTRIBUTIONS MADE TO 50% LIMIT ORGANIZATIONS

cash gifts made to aptly named "First Category Organizations," as described in IRC Section 170(b)(1)(A), which are more commonly known as "50% Limit Organizations." Common examples of 50% Limit Organizations include churches and other houses of worship, educational institutions, hospitals, the Federal and/or state and local governments, and publicly supported charities organized for charitable, religious, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. So why are these organizations called '50% Limit Organizations'? It's simple. In general, per IRC Section 170(b)(1)(A), cash contributions made to 50% Limit Organizations are deductible to the extent that they do not exceed 50% of a taxpayer's AGI. Charitable contributions in excess of their respective deduction limits can generally be carried forward and deducted for up to five years.

Capital Loss does not qualify for

charitable deduction, only the lower of FMV or basis may be used; the donor should sell the property to a third person to recognize the capital loss if ordinarily allowed and donate the cash

The kiddie tax applies to:

children under 19 years of age. It also applies to children under age 24 if they are full-time students. The kiddie tax does not apply if the child's earned income exceeds one-half of the child's support. it doe snot apply if they are 19 but not full time students. The kiddie tax does not apply to a child who is married and files a joint return for the tax year, or if the child has earned income that exceeds half of his support. Also, the kiddie tax applies only where the child has at least one living parent.

Difficulty of Care Income; Full time care to a parent their own home

client may receive wages from a qualified medicaid facility to do so.

Loss on the sale, exchange, or worthlessness of Section 1244 stock is

deductible as an ordinary loss up to $50,000 per year, and $100,000 per year on a jointly filed return. Any excess loss in a given year is treated as a capital loss. In this case, the capital loss is long term, due to the more than one-year holding period.

Spouses anticipating divorce must use the same type of

deductions

itemized deductions

do not affect AGI

adjustments to income

do not affect total income: Adjustments to Income include such items as Educator expenses, Student loan interest, Alimony payments or contributions to a retirement account.

the transfer-for-value rule

does not apply when a life insurance policy is transferred from one spouse to the other under a property settlement incident to divorce.

Investment interest in excess of net investment income

does not exist

donee's basis

donor's basis+(appreciation / FMV−gift tax exclusion) ×gift tax paid

C Corp

double taxation, shareholders pay capital gains on distributions; limited liability; files Form 1120.

Joint and Several Liability

each partner is responsible for the liability and not merely half

Higher earning ex-spouse may

experience a higher tax liability even if their income has not changed; due to tax brackets being compressed

a tax return preparer's failure subject to a tax penalty:

failure to provide a taxpayer with a copy of their return, failure to keep a copy of all returns prepared for at least the last three years or to maintain a list of returns prepared, and failure to sign a return as preparer and give their tax identification number on the return.

1041

fiduciary return or trusts and estates

injured spouse relief

filed when refund is frozen due to some past judgement

The pre-August 14, 1982, annuity retains

first-in, first-out (FIFO) treatment.

The personal service corporation (PSC) classification

for a C corporation was effectively repealed with the Tax Cuts and Jobs Act (TCJA).

Currently, Section 121 allows

for a gain exclusion, of up to $500,000 for taxpayers married filing jointly, to any taxpayer who satisfies certain tests, known as the ownership test and the use test. To satisfy the ownership test, the home must have been owned and used as a principal residence for at least two of the five years preceding the date of sale. (Note: These years do not have to be consecutive; they only have to add up to at least two years.) Either spouse can meet the ownership test, but both must meet the use (two-out-of-five-year) test. This is likely not difficult for most married couples (applies even to those living in the house and then getting married), but it can be burdensome for individuals who are divorced or in the process of a divorce.

Net Operating Losses

for cyclical businesses: self employed, regular corps and estate and trusts. Limited to 80 pct of total taxable income

The Section 1245 income is treated as ordinary income, while the Section 1231 income

generally receives long-term capital gain treatment.

Section 162 trade or business

good faith intention to earn a profit; participate in the activity on a regular and continuous basis

Nonresidents

if married to a resident or US citizen can elect to file as a resident. Couple must pay US taxes on their worldwide income. nonresident spouse must obtain ITIN

Elder Care Credits, Deductions and Exclusions

if taxpayer provides 50 pct of the elder's support the client may claim their elderly parent as a qualifying relative and receive a 500 credit, if the parent is incapable of self-care the child and dependent care credit may also be claimed and the credit is 600; medical expenses paid on the parents behalf can be taken as an itemized deduction

grantor is taxed

if the grantor can directly or indirectly retain powers that can be exercised for the benefit of the grantor, such as the right to purchase, exchange, borrow or deal with trust assets w/o adequate interest or security.

Court ordered life insurance

if the spouse owes alimony, premiums paid to the policy can be used to satisfy alimony obligation

The items included in the computation of self-employment income are the Schedule C income and the flow-through of general partnership operating income

income from a sole proprietorship; net Schedule F income; net Schedule C income. a. Self-employment income,b. Schedule C net income,c. Distributive share of partnership net income,d. Flow-through of LLC income to the managing member,e. Schedule F farm income,f. Net income from rental of personalty (but not realty)

three main sources of federal tax revenue are

individual income taxes, corporate income taxes, and payroll taxes

Disability Insurance are not taxed if

individually owned or it is a paid up policy

IRC 671-679

intentionally defective grantor trust: contributions are deemed completed, but income tax liability is retained by the grantor

SSTB

is any trade or business involving the performance of services in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees; or, any trade or business that involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities. Thus, the medical practice would be an SSB, but none of the other businesses would. Engineering and architecture are specifically excluded from the definition of SSB.

child support

is not deductible

The general partnership operating income

is self-employment income

non-SSTBs

lesser of 20 pct of QBI or the greater of 50 pct of tax payer's share of W-2 wages or 25 pct of allocable share of W-2 wages + 2.5 pct of tax payer's allocable share of the unadjusted basis of all qualified property of the business

Use-Unrelated Property

lesser of FMV or basis in property limited to AGI 50 and 30

C Corp Charitable Deduction

limited to 10 pct of total income

A loss on a Section 1231 asset

may be recognized in the year of the loss.

The taxpayer use test provides

more flexibility than the functional use test.

pre-TCJA alimony

must be made in cash; includes payments for spouses medical expenses, life insurance premiums, housing costs tuition, etc

Simple Trust

must distribute all income to beneficiaries, no charitable donations, no principal distribution

Specified Service Trade or Business (SSTB)

no QBI deduction above the phase outs; $163,300 to $213,300 (single 2020)

The payment of a personal property tax has

no impact on the basis.

QBI

non-C Corp; 20 pct deduction to flow through income; excludes any investment income; the lesser of 20 pct of QBI or 20 pct of taxable income in excess of net capital gains

Technical Advice Memoranda

normally take place during an audit or during the appeals process of the audit; they give both the taxpayer and the revenue agent an opportunity to resolve a dispute over a technical question.

An exchange of U.S. realty for foreign realty is

not considered like-kind. The like-kind requirements were changed under TCJA and now limits exchanges to realty for realty. The like-kind requirement does not mean that the property transferred must be identical to the property received; it merely requires that realty be exchanged for realty.

Payments that fluctuate because of a continuing liability to pay a fixed portion of income from business, property, or services are

not subject to the excess front-loading rules.

The Section 1245 cost recovery recapture is the lesser

of the cost recovery deductions taken or the gain realized

Amounts borrowed on a single premium whole life policy issued on or after June 21, 1988 (a MEC), are taxable

on a last-in, first-out basis; thus, the earnings would be taxable

exceptions to the imputed interest rule

on loans between individuals less than 10K unless the loan was used to purchase interest producing property; on loans between individuals between 10 and 100K, the imputed interest cannot exceed the investment income generated by the borrower, if total investment income is less than 1K than no interest is charged

Note that Section 1250 recapture (ordinary income treatment) applies

only to excess depreciation—in other words, the excess of an accelerated method over what would have been deducted if straight-line had been used. All realty placed in service after 1986 is depreciated using straight-line, and there is NO recapture (ordinary income) where straight-line depreciation was used.

Accounts receivable, inventory, and copyrights and other creative works held by the creator are all

ordinary assets that would result in ordinary income tax (not capital gain) if sold at a gain.

Annuity Exclusion Ratio - Variable Annuity

original investment / number of expected payments (life expectancy x # of payments per year)

Annuity Exclusion Ratio - Fixed Annuity

original investment / total expected return (payment per month, number of months, life expectancy factor)

General Partnership

partnership in which partners share equally in both responsibility and liability, IRS Form 1065

For an owner-user, the replacement property must

pass the functional use test.

Self Employment Income

pay FICA Taxes which is 15.4 pct, aka SE Tax on taxable wage of up 137.7K, and an additional medicare tax of 0.9 pct above 200K if single or 250K if MFJ

Alimony categories

payments under a support decree, written separation agreement payments, payments under a separate maintenance or divorce decree or under a written instrument incident to divorce / separation

Limited Liability Partnerships

personal liabilities are limited for actions of other partners, designed for professionals, partner who commits wrongful act is still held liable, as well as the supervisor. most common among accounting firms

income not subject to self-employment income

portfolio income (interest, dividends, and capital gains)f

non-periodic distribution from an annuity

pre-1982: FIFO, post-1982: LIFO

The holding period of an asset acquired from a decedent is

presumed to be long term.

Private 30 pct Charities

private nonoperating foundations, vet groups fraternal associations and other not-for-profits

Form 4868

provides an automatic six-month extension of time to file the Form 1040. The return would be due April 15 without regard to extensions. With the six-month extension, the due date is October 15.

The parent with custody for a greater portion of the year is treated as

providing more than one-half of a child's support. In these circumstances, however, the parent could potentially sign IRS Form 8332 which would constitute a written agreement that would allow the other parent to claim their two children as dependents on their tax return in the current year.

The 10 pct penalty for education expenses does not apply to

qualified plans

Not AMT Preference Items

qualified private-activity municipal bonds issued in 2009 and 2010 is not a preference item; investment interest expense in excess of net investment income; qualified housing interest are not preference items; Tax-exempt income from a general obligation municipal bond is not a preference for AMT. 2007 muni bonds ARE a preference item

The exclusion for EE bond interest

redeemed to pay for qualifying higher-education expenses applies only to bonds purchased by an individual age 24 or older, and held in that person's name, or jointly with a spouse.

Mixed Use vacation status

rented for at least 15 days and used for personal use more than 14 days or 10 pct of rental days. 1. allocate expenses between rental and personal 2. deduct expenses 3. cannot deduct loss currently but can carry forward 4. report income and expenses on schedule E apply hobby rules.

Community Property states

retirement plan benefits must be split even if assets are not fully vested

When there is a transfer of property incident to divorce, the basis

simply carries over to the other spouse. The transfer is not a taxable event.

The purchaser's cost basis is

simply what the purchaser paid for the property

bargain sale to charity

step 1 allocated basis: (original basis x (sale price to charity / appraised FMV)). step 2 taxable gain: sale price to charity - allocated basis; step 3 FMV of gift: appraised value - sale price to charity; step 4 basis of gift : original basis - allocated basis

Capital assets are (section 1221)

stocks bonds; jewelry art; primary residence; depreciable property are IRC 1231 assets;

When incident to a divorce, domestic relations orders (DROs) are not

subject to gift tax or early withdrawal penalties.

Series I and EE

tax exempt redemption: age 24 or older, held in his name, or jointly with spouse, must be redeemed to pay for expense of him the spouse or dependent. Cannot be in a UGMA / UTMA

Punitive damanges

taxable except for wrong death lawsuits as permitted by the state

The zero Treasury produces

taxable income each year as the amortized discount is added to taxable income, even though no cash income is received.

Tax brackets and marginal tax rates are based on

taxable income, not gross income.

relief by separation of liability

taxpayer may allocate his portion of underpayment if he meets these conditions: the taxpayer filed a joint return and the individual is no longer married or separated, the individual was not a member of the same household as the spouse with whom the jt return was filed.

Qualifying child

taxpayer's child, stepchild, foster, sibling, stepsibling, descendant of the previous listed, resided with taxpayer for more than half of the tax year. Age test: under 19 at close of year, a full time student under 24 at close of year, permanently and totally disabled at any time during the tax year; the child must provide less than 50 pct of his own support, the child can claim no other dependents

Investment interest expense is limited to the

taxpayer's net investment income of $3,500.

One of the requirements to have qualifying alimony is

that the taxpayers must not be living together at the time of payment. The payments do not need to be equal each year. However, unequal and declining payments can trigger the alimony recapture (excess front-loading) rules.

Remember that the first step in computing the self-employment tax is always

the 7.65% subtraction.

When the fair market value on the date of the gift is less than the donor's basis in the asset, FMV < Donor Basis = Donee basis is FMV FMV > Donor Basis = Donee basis is Donor basis

the donee's basis in the asset for purposes of determining a loss is the asset's FMV on the date of the gift.

If a corporation owns the annuity contract,

the earnings are not tax deferred.

When Section 1231 property is sold for more than the purchase price,

the gain is afforded capital gain treatment and taxed using capital gain tax rates.

to qualify as a separate tax paying entity

the grantor has to give up all rights in and to the property to the trust

Standard deduction for dependents with unearned and earned income

the greater of 1100 or the total income + 350

equitable relief

the individual does not qualify for relief by separation of liability nor innocent spouse relief; no assets were transferred between the two parties fraudulently; the individual did not seek to file the return with the intent to defraud; after all of the facts and circumstances it would be unfair to hold the individual responsible; the tax liability must be attributable to the former spouse

When buying mutual fund shares

the investor should not buy into the fund immediately prior to a distribution

The AGI is reduced by the greater of

the itemized deductions or the standard deduction ($24,800 in 2020)

During a period of declining prices,

the last-in, first-out (LIFO) method treats the later-purchased, lower-priced inventory items as those first sold. This, therefore, decreases the cost of goods sold (COGS). Conversely, during a period of rising prices, the first-in, first-out (FIFO) method matches the earlier-purchased, lower-priced inventory items against income. This naturally decreases the COGS. Rising prices FIFO > decrease COGS Falling prices FIFO > increases COGS Falling prices LIFO > decreases COGS Rising prices LIFO > increases COGS

In a like-kind exchange, the gain recognized is always

the lesser of the gain realized or the boot received. If there is no boot received, there is no gain recognized. Inventory is not eligible for like-kind exchange treatment—thus, gain would be recognized. The basis in the acquired property is the FMV of the acquired property, reduced by the gain realized but not recognized (the deferred gain).

When Section 1231 property is sold at a loss,

the loss is treated as an ordinary loss, not a capital loss.

Cash Method

the method of accounting that recognizes income in the period in which cash, property, or services are received and recognizes deductions in the period paid; average annual gross receipts are under $26 million for the prior 3 tax years; disadvantage: Constructive receipt, which serves to accelerate income, is not considered an advantage of the cash method of accounting.

The client least likely, in this case, to have an AMT exposure is

the one with no itemized deductions.

If a partner or S corporation shareholder/owner has a different taxable year than the business entity,

the owner must report his share of the entity's income in the same taxable year within which the entity's taxable or fiscal year ends.

In the taxpayer use test,

the owner-investor's properties must be used in similar endeavors as the previously held properties.

Payments to former spouses are no longer deductible and are considered alimony only if

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.

If there is an obligation to continue to make payments after the death of the ex-spouse...

the payments are not treated as alimony. If there is no obligation that payments continue after death, the payments are treated as alimony

If the amount reinvested in the replacement property equals or exceeds the amount realized,

the realized gain is not recognized. Normally, the taxpayer has two years from the end of the taxable year in which any gain is realized from an involuntary conversion (e.g., theft) to replace the property. However, if a condemnation of real property by a governmental authority is the reason for the conversion, this period is extended to three years from the end of the taxable year in which any gain is realized. Because this was a personal use item, Marcus will apply the functional-use test, not the taxpayer-use test.

Upon the disposition of a passive activity by gift,

the suspended losses are added to the basis of the activity.

if the hobby rules do not apply,

the tax payer can report his income and expenses on Schedule C.

In the functional use test,

the taxpayer's use of the replacement property and of the involuntarily converted property must be the same.

If the trust income is, or may be, used to purchase insurance on the life of the grantor or the grantor's spouse,

then the trust is a grantor trust.

personal casualty losses are deductible if

there is damage to the property, and the event was sudden unusual and unexpected. An insurance claim must be filed in a timely manner for the insured property

The statutes of limitations are as follows:

three years from the filing date of the return or due date if later, six years if 25% of gross income is unreported, and no statute of limitations for failure to file or if a fraudulent return is filed.

Section 1231 assets

timber, coal, iron, livestock, crops goodwill and intangibles

The Section 179 expense election generally applies

to personalty only, and is not available for most real estate.

Only taxable items, such as net capital gains, net rental income, annuity income and dividends, for example, are subject

to the Medicare contribution tax. 2.9 pct total

Itemized deductions do not affect

total income

Code Section 1041

transfer of property incident to a divorce is tax free. Basis is passed on to the transferee so long as the transfer is within one of your of a marriages' termination

Innocent Spousal Relief

understatement due to erroneous items of the spouse; the individual did not know and had no reason to know of the understatement of taxes; after all of the facts and circumstances it would be unfair to hold the individual liable

Trusts with more than 5 pct reversionary interest

will be taxed to the grantor, unless the reversion is due to the death of a lineal descendent before the age of 21

grantor with control over the benefits of the trust

will be taxed, if he can exercise a power of disposition over either the income or corpus w/o consent of an adverse party; an adverse party is a beneficiary of the trust whose benefit might be diminished by the actions of the grantor; unless the beneficiaries are charities; legal disability of a beneficiary; or a beneficiary under age 21

A sale of Section 1245 property at a gain

will result in Section 1245 recapture.

Deductible Taxes

State and local and foreign income taxes; state and local personal property taxes; and state, local and foreign real estate taxes; and state and local sales tax SALT taxes

Gift Loan

between individuals 1. no interest is imputed on total outstanding gift loans in the aggregate of 10K or less, unless proceeds are used to purchase income producing property. 2. for loans greater than 10K less than 100K, the imputed interest cannot exceed the borrowers NII 3. if the borrower's NII is less than 1K, no interest is imputed on loans of 100K or less

Qualifying Widow(er)

can file using this status within the 3 years of death,must have children

The wage base is adjusted annually for

cost of living increases.

Investment Interest Expense

interest paid by an individual on debt incurred to purchase or carry investment property, ex margin account; deductible up to the amount of the taxpayer's investment income; qualified dividends and LTCG are not included

Capital assets are not (section 1221)

inventory; property subject to depreciation; a copyright; a patent; accounts receivable; US publications; supplies;

Qualifying Dividends

less than 80K - 0 pct 80K to 496K - 15 pct 496K and above - 20 pct

The following are required to file a tax return

taxpayers 1. with self employment income over 400; 2. wages of 110 or more from a church that is exempt from paying the employer portion of Social Security taxes; 3. subject to special taxes like AMT tax or self employment taxes

investment losses for refund annuity policy

the annuitant may surrender the policy and claim a deductible loss if he receives less than the adjusted basis

In a compensation-related below-market loan of

the corporation has interest income and compensation expanse for the amount of imputed interest. Same for the borrower. unless the amount is less than 10K

Certain deductions are allowed in the computation of total income, such as

the deduction for sole proprietorship losses or net capital losses up to $3,000.

Charitable Contributions can be deducted if

the taxpayer can itemize

Transfer for Value

-If a policy is sold, the death benefit in excess of the amount paid for the transfer, including subsequent premiums, is received as ordinary income. They do not create a problem when made to the following persons or entities: --The insured (ER buys key-person on you) --A company in which the insured is an officer of shareholder (buy-sell agreement) --A partnership in which the insured is a partner (buy-sell agreement) --A business partner of the insured (buy-sell agreement) --Anyone who received the policy with the same basis as the insured (gift to a spouse or a child and a property settlement in a divorce)

Residential Energy Credits

30 pct of the expenses paid for a residential energy efficient property; unlimited qualified solar electric property, solar water heating property, small wind energy property, geothermal heat pump property; Congress has deemed it socially desirable to provide solar energy, so there is a credit provided to taxpayers who invest in such activities.

Capital loss offset

3K MFJ, 1.5K MFS, Schedule D

Total income allows for

3K in net capital loss; allowable rental losses; and losses from a sole proprietorship

Employee Education Assistance

5250 excluded under code section 127

medical expense deductions

7.5 pct of AGI

A working interest in an oil and gas partnership can provide unlimited loss deductions against other income. Congress considers this socially desirable to encourage investment in the industry. The caveat is investors in these instruments must also assume unlimited liability. Therefore, a working interest must be a general partnership rather than a limited partnership.

A working interest in an oil and gas partnership

Clawback

Code 1341. Bonuses clawbacked by the employer entitles the employee to a tax credit. No tax filing amendment needed

Above the line deduction (Adjustments to income)

Domestic Production Activities: Retirement Plan Contributions: HSA, MSA Contributions; Health Insurance premiums: Self-Employed Business Expenses, SE Tax: Educator Expenses; Early Withdrawal Penalties; Student Loan Interest; Tuition and Fees Alimony payments Early withdrawal penalties on savings Educator expenses Employee business expenses for armed forces reservists, qualified performing artists, fee-basis state or local government officials, and employees with impairment-related work expenses (Form 2106) Health savings account (HSA) deductions (Form 8889) Moving expenses for members of the armed forces (Form 3903) Self-employed SEP, SIMPLE, and qualified plans Self-employed health insurance deduction Self-employment tax (the deductible portion) Student loan interest deduction Tuition and fees (Form 8917)2

Wage earners pay half of

FICA Taxes. Employer covers the other half

S Corp

Form 1120S, Schedule K-1. Does not pay FICA

Schedule C

self employment form

Deductible IRA phaseout for active participants

MFS: 65 to 75K, MFJ both spouse covered: 104 to 124K, MFJ one spouse 104, - 124K, non-covered 196 to 206

Schedule E

(Form 1040 or 1040-SR) to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs

Wash Sale Rule

- cannot declare a loss on a security if you purchase the identical security within 30 days before or after the sale; basis of the newly acquired position is increased by the amount of the disallowed wash sale; holding period of the newly acquired position takes on the holding period of the original position

other itemized deductions

1. gambling losses and expenses; 2. impairment related work expenses for handicapped tax payers 3. unrecovered investment in an annuity contract if the taxpayer dies 4. federal estate tax that is attributable to items included in the taxpayer's estate as income in respect of a decedent

Exclusions from Income

1. items characterized by love affection or assistance, 2. return of capital, 3. items that indemnify a client, 4. items that are socially desirable or a matter of legislative grace. 6. items provided by an employer

Computing SE Income Tax

1. reduce by 7.65 pct 2. multiply result by 15.3 3. if wage base exceeds 137.7K subtract by 137.7K then multiply difference by additional 2.9, 4. if wage base exceeds 200K for MFS or 250K for MFJ, multiply by another 0.9 pct the difference between the two

Situations where Stock Dividends are taxable

1. shareholder my elect cash or stock 2. stock dividends are issued disproportionately and affects the ownership structure 3. stock dividends that include both common and preferred stock 4. preferred stock 5. convertible stock

deductible casualty loss for non-qualifying event

1. take the lesser of the taxpayer's adjusted tax basis or the difference between the FMV before and after the loss. 2. subtract any insurance amounts reimbursing the loss 3. subtract 100 USD per claim, subtract 10 pct of AGI 4. equals the amount that can be deducted

casualty loss deductions

10 pct of AGI

unrecaptured Section 1250 income on realty

25 pct

1250 assets

28 pct CG ceiling: Collectibles Gold and silver exchange traded funds are taxed as collectibles. 25 pct on real estate

Capital Gains on collectibles are taxed at:

28%: coins, artwork, etc

Child Tax Credit

2K per child, 1400 refundable; reduced by 50 for each 1K or part thereof above 400K for MFJ or 200K for other filing status; additional 500 for each dependent who is not a qualifying child

Net Investment Income Tax

3.8% tax imposed on lesser of: Net investment income (e.g., interest, dividends, annuities, royalties, rents, passive activity income, net gains from disposing of property, less related allowed deductions) or Excess of modified AGI over $250,000 (MFJ), $125,000 (MFS), and $200,000 (all others)

Qualifying relative

A person who bears a certain relationship to the taxpayer for whom the taxpayer provides more than one-half support for the year, whose gross income for the year is less than the exemption amount, and who is not claimed as a qualifying child of any taxpayer. Gross income must be less then 4300

Social Security Income Tax

Provisional Income = MAGI + Muni Bond Interest + 1/2 of Social Security

Gross Income

Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income

related party sales

IRC Section 267; no loss deduction is allowed from sale or exchange between related taxpayers: members of the family, in-laws are excluded; controlled corporations; certain business organizations is one person owns 50 pct or more of each; estate and beneficiary; certain trustees, grantors, and beneficiaries. The disallowed loss increases the basis of the acquired property.

deductible miscellaneous itemized deductions.

Impairment-related work expenses of a handicapped individual, gambling losses to the extent of gambling winnings, and the deduction for unrecovered basis in a commercial annuity

Deductions Lost Because of TCJA

Mortgage interest: loan amounts from $750,000+ to $1 million State and local income, sales, and personal property taxes beyond $10,000 Alimony payments for divorce agreements after Dec. 31, 2018 Moving expenses (except active-duty military) Unreimbursed employee expenses Tax-preparation expenses Natural disaster losses (unless in an area designated by the president); personal and dependent exemptions.

Net Investment Income Tax

Tax of 3.8% on interest, dividends, capital gains, rental and royalty income, and non-qualified annuities on the lesser of net investment income, or the amount by which their MAGI exceeds $250,000 MFJ, QW / $200,000 / $125,000

income tax computation:

subtracting adjustments to income from total income to get AGI, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income.

Imputed Interest Rule

applicable federal rate, minimal interest the IRS allows for private loan; applies to gift loans, compensation related loans, and tax-avoidance loans

tax calculation step

Total (gross) income minus adjustments to income equals adjusted gross income (AGI). AGI minus standard or itemized deduction(s) equals federal taxable income.

Itemized Deductions

Unreimbursed Medical and Dental Expenses; Interest Expenses. Home-equity loan/line of credit interest; Taxes Paid. Charitable Donations; Casualty and Theft Losses.

property dividend

When a corporation distributes a dividend of an asset other than cash to the stockholders. A gain may be recognized but not a loss

investment losses for IRAs

are deductible if the contributions were nondeductible and all IRAs have been liquidated. Applies in the year of death

Gambling winnings and interest on federal obligations

are includible in an individual's gross income for income tax purposes.

The costs of an appraisal

are not deductible for charitable donations

Qualified adoption exenses include

adoption costs; court costs; legal fees; does not include costs of a surrogate parenting arrangement, or costs related to adopting a spouse's child. Phased out between MAGIs of 214520 and 254520

Acquisition Indebtedness

any debt secured by a qualified residence that is incurred in acquiring, constructing, or substantially improving the residence and one other home

Self-employed taxpayers are not subject to

employer withholding.

Tax liability minus tax credits

equals total tax liability or refund.

important tax credits

excess Social Security taxes; child and dependent care credit; child tax credit; adoption expense credit; foreign tax credit; American Opportunity Tax Credit; Lifetime Learning Credit; residential energy credits

Schedule F

farming and fishing income

The calculation of federal tax is on

federal taxable income.

additional standardized deduction

for blind or 65+ single 1.65K, MFJ and MFS and qualifying widow 1.3K; Head of household 1.65K

7 pay test

if premiums paid during the first 7 years exceed the net level premium that should have been paid, it is a MEC (Modified Endowment Contract), a material change re-triggers the 7-pay test: the exchange of one policy for another, an exchange of insured, increase or addition of riders, conversion of term to whole life; an increase in future benefits; an increase of more than 150K for the death benefit

Compensatory Damages

income tax free except for cases of age sex or racial discrimination

Property inherited from a decedent

long term capital gains

S Corp Income

not subject to SE tax

A taxpayer may deduct one-half (50 pct)

of his self-employment tax liability as an "above the line" adjustment to income.

Municipal bond interest is not taxable

on your federal return and is not included in your adjusted gross income.

Total tax liability minus withholding and/or estimated tax payments equals

refund or tax owed.