2Nd Test, Taxes, Accounting 324

Front 1

Define Passive Activity Income

Back 1

investments in a trade or business in which you DON'T materially participate

Front 2

What are the rules of material participation?

Back 2

1. Work at least 500 hours
2. Work at least 100 hours more then any other person.
3. Work any # of hours that is more then the total of all other people working
4. You have met the material participation rule in 5 of the past 10 years

Front 3

How are passive activities taxed and how are loses treated?

Back 3

Income is taxed to the investor.
Loses are NOT tax deductible against any other sources of income.
Must carry forward loses and offset them against future profits.

Front 4

If you meet a material participation rule...

Back 4

Losses can offset any other income.

Front 5

What happens when passive activity is disposed of?

Back 5

Turns into a passive loss carried forward. Must use passive loss carried forward in certain order.

Front 6

What order must passive loss carried forward be used in?

Back 6

1st-Offset any gain on disposal
2nd-Offset any other passive activity income
3rd-Offset remaining PLCF against other income

Front 7

What is the rental property 14 day rule? What deductions are permitted if rule is broken?

Back 7

if property is rented out for 14 days or less, no income is reported. No schedule E is filed, no deductions permitted EXCEPT property tax and interest if you can itemize.

Front 8

What is the rental property rule on leasehold improvements?

Back 8

If tenant makes improvements, not in leiu of rent, the FMV of improvments are not GI

Front 9

Factors of a good legal tax shelter?

Back 9

1. Generates a loss that can offset other income right away (because of depreciation).
2. generate positive cash flow
3. When you dispose of it, have a capital gain.

Front 10

How do you find the value of savings?

Back 10

marginal tax rate * loss or deduction

Front 11

What is a middle income taxpayer and how much of rental real estate losses can they deduct against other income?

Back 11

Middle income has AGI of $100,000 or less. Can deduct up to $25,000. Excess is a passive loss carried forward.

Front 12

How is the statutory loss deduction for rental real estate phased out for higher AGI taxpayers?

Back 12

loss allowed = ($25,000) - .50(AGI-100,000)
In effect, lose .50 of ever $1 above 100,000
Any loss not deduct is PLCF

Front 13

What is the rule for taking a loss on vacation property?

Back 13

You can take a loss as long as there is not too much enjoyment. Use P.U.T. test.

Front 14

What is the effects of two much enjoyment on vacation property?

Back 14

No loss deduction is permitted.. you only bring net income to $0. Must follow IRS order of taking deductions.

Front 15

What is the P.U.T. Test?

Back 15

violated if personal use is more then the greater of 14 days or 10% of rental time. Must keep a log.

Front 16

What is considered personal use of vacation property?

Back 16

Any use by you or any family member, use that is for less then fair rental value, and reciprocal use.

Front 17

What is the vacation property rule for maintenance?

Back 17

Any day that you spend more than half the day doing maintanence is not personal use.

Front 18

If PUT test is violated.. what is the IRS order of deductions?

Back 18

1st-Interest and property tax * # of rental days / (# of rental days + personal use)
remaining balance = itemized deduction
2nd - insurance, maintance, utilities, rental agent fee * formula. remaining balance is lost.
3rd-depreciation * formula. Remaining balance carried forward.

Front 19

In general, all interest income is _____?

Back 19

Gross Income
Examples: CD's, savings, checking, bonds, orignal issued discount...

Front 20

What is municipal bond interest and how is it taxed?

Back 20

It is tax exempt.
Issued by states, counties, cities, political subdivisions. Muse be U.S.

Front 21

What are U.S. Savings bonds and how are they taxed?

Back 21

They are bought at a discount (50%). Can elect to wait untill you cash in to report interest = cash received - your cost

Front 22

What is a U.S. savings bond used for education?

Back 22

Must be at least 24 to purchase. Interest is tax free to extented used for tution & fees.
Interest * (tuition & fees/cash rec'd from bond) = exclusion
Scholarships reduce tuition and fees.

Front 23

What are the rules for a family loan?

Back 23

Must have a note and charge market rate interest.
Loan up to $10,000 without charging interest.
Amount above $10,000 must charge market rate interest.
Maximum int. reported as GI by lender is limited to amount income borrower earned on the funds.
Ex. borrowed 30k w/ no interest.
MRI = 5%. parents imputed $1500. you earn $600 on investment, parents imputed $600

Front 24

What are dividends?

Back 24

Distributions paid on corporate stock.

Front 25

What are the three sources of dividends and how are they taxed?

Back 25

1st - Distributions from corp's earnigns and profits, taxed as dividend; current or accumulated earnings & profits
2nd-Distributions are next a Return of Capital, tax free; reduce adjusted basis of the stock.
3rd-Distributions are next a Capital Gain

Front 26

Dividends are taxed at a max rate of ____%?
Dividends are taxed at ____% for taxpayers in the 10-15% bracket
Must own stock for at least ____ days to get the lower rate.

Back 26

15%
5%
61 days which must be within 60 days before and 60 days after ex_div date.

Front 27

How much is the dividend amount for property distributions?

Back 27

Dividend amount is the FMV of distribution less liabilities.

Front 28

When are stock dividends tax free and how do you calculate it?

Back 28

When there is no change in % ownership.
% ownership = (# shares owned/# shares outstanding) $0 GI

Front 29

When are stock dividends NOT tax free? What are the 2 ways of having them NOT tax free?

Back 29

When there is actual change or potential to change ownership.
GI = FMV of stock on date received.
1. Give some common S/H common stock & other common S/H preferred stock.
2. Give S/H choice b/n stock, cash, or property.

Front 30

What is constructive dividends?

Back 30

Distribution disguised as being tax-free that upon and it are recharacterized as a dividend.

Front 31

Why do corporations use constructive dividends?

Back 31

Corporations try to disguise non-tax deductible divdend payments as a tax deductible expense.
S/H don't want additional income, use a loan.

Front 32

What is a Mutual Fund?

Back 32

The fund itself is a tax-free entity.

Front 33

How are dividends of a Mutual Fund treated? What about reinvested dividends?

Back 33

Dividends are GI to fundholder.
Reinvested dividends are still GI but also increase investment in fund.

Front 34

How are Distributed Capital Gains of Mutual Funds treated?

Back 34

Distributed CG = GI

Front 35

How are Undistributed Capital Gains of Mutual Funds treated?

Back 35

1. Increase AB of investment
2. Fund must pay tax on undistributed CG.
3. Tax paid by fund is tax credit for fundholder.
4. Investment in fund is reduced by taxes paid in the fund.

Front 36

What is an annuity?

Back 36

A contract that promises to pay a specific amount, for specific period beginning on a specific date (could be fore rest of life).

Front 37

When do you calculate an exclusion ratio for an annuity and how do you calculate it?

Back 37

Calculate on the 1st payment.
exclusion ratio = (cost/expected benefits) x amount received during year = exclusion
GI = amount received - exclusion

Front 38

If the annuity is being paid for life, how do you calculate exclusion ratio?

Back 38

Use the IRS annuity table.
(cost/expected # of payments) = $ exclusion per payment
Exclusion for year = (# months received for year * $ exclusion)

Front 39

During a lifetime annuity, what happens if the taxpayer dies before the end of his/her expected life?

Back 39

Any unrecovered costs (cost-exclusion used so far) is deducted on his/her final tax return that is filed by their executor.

Front 40

During a lifetime annuity, what happens if the taxpayer lives longer then expected life?

Back 40

Exclusion ends for tax purposes once you've reached the # of months indicated in the annuity tables.

Front 41

What are capital gains/losses?

Back 41

Gains or losses on the sale, exchange, or involuntary conversion of a capital asset.

Front 42

What is considered an involuntary conversion? What does NOT qualify?

Back 42

sudden unusual unexpected events, storms, thefts, accidents, eminent domain.
Intentional destruction and gradual deterioation does NOT qualify.

Front 43

How do you calculate a gain/loss?

Back 43

Amount realized - AB of capital asset = gain/loss or $0

Front 44

All assets are capital assets except...

Back 44

Inventory or stock in trade, any accounts or notes receivable from ordinary course of business, any literary/artistic/musical/education item you create or have created for you.
Any real or depreciable asset USED in a trade or business like bldgs, land, machinery, cars, trucks, office furniture, computers, equipments...

Front 45

If any real or depreciable assets being USED in a business are held for more then 1 year and sold at a gain, how are they treated?

Back 45

Long Term Capital Gain

Front 46

How do you find the amount realized?

Back 46

amount realized = (cash + FMV property received + FMV services + any liability of seller assumed by the buyer) - selling expenses = amount realized

Front 47

What is the Adjusted Basis of an asset purchased?

Back 47

Cash paid + liability assumed + improvements made - depreciation taken on tax return - losses deducted on return

Front 48

What is the Adjusted Basis of asset received from service?

Back 48

FMV on date received. If $0 income is reported, AB=$0

Front 49

What is the Adjusted Basis of an asset inherited?

Back 49

AB = FMV on date of death.
Can elect alternative valuation made by executor ONLY if it will save estate taxes. State taxes DO NOT increase basis of inherited property.

Front 50

When calculating Adjusted Basis of an inherited asset, and you elect alternative valuation, what does that mean?

Back 50

It must save estate taxes.
FMV on the EARLIER of 6 months after death or date property was distributed to beneficiaries.

Front 51

What is the Adjusted Basis of an asset received by gift? What is donor pays a gift tax?

Back 51

Must use donor's AB for your AB.
If donor pays gift tax, part of gift tax is added to AB of the recipient.
Gift tax * {(FMV-AB)/FMV} = amount added to AB

Front 52

What is the Adjusted Basis of an asset received by exchange/trade?

Back 52

If taxable trade then AB = FMV of property received.
recognized gain/loss = (FMV property received - AB property given)
For Like Kind exchange, AB of property rec'd = AB property given.
Must be trade of meal for meal, depreciable for depreciable.

Front 53

What is the Adjusted Basis of an asset received from converted property?

Back 53

AB = less of your AB when asset was held personally or FMV on date of conversion.
If partial business use, prorate AB according to business use. amt. of time, mileage, square footage....

Front 54

What is the 1st step in the taxation of capital gains/losses? How do you determine it?

Back 54

Must determine if gain or loss are short term or long term depending on holding period.
Short Term = asset held for 1 year or less.
Long Term = asset held for more than 1 year.

Front 55

How do you determine the holding period for taxation on capital gains and losses?

Back 55

Generally - start counting the day after asset aquired untill asset is diposed of.
Inherited property is always long term.
Gift property - donor's holding period bcomes recipients holding period.
Like Kind exchanges - holding period of asset given becomes the holding period of asset received.

Front 56

What and how to you determine the tax effect?

Back 56

1st - net short term capital gains against short term capital losses to get NSTCG, NSTCL, or $0.
2nd - net Long term capital gains against long term capital losses to get NLTCG, NLTCL, or $0.
3rd - net results of step one against step 2 to get NSTCG, NLTCL, NSTCL, NLTCG, NSTCG & NLTCG, NSTCL & NLTCL.

Front 57

How are Net short term capital gains taxed?

Back 57

Added to ordinary income and taxed at marginal rates.

Front 58

How are Net long term capital gains taxed?

Back 58

Maximum rate imposed is 15% unless in 10-15% brackets which is 5%.

Front 59

How are net long term capital gains of collectibles taxed?

Back 59

taxed at marginal rate, but never higher then 28%.

Front 60

How are net long term capital gains of Buidlings taxed?

Back 60

taxed at 25% to extent of depreciation taxen on building. Balance is taxed at 5% or 15% depending on tax bracket.
Amount realized - (AB - Depreciation) = LTCG. Depreciation taxed at 25%, rest taxed at 5% or 15%

Front 61

What if you have a NSTCL or NLTCL?

Back 61

can deduct $3000 of net capital losses against Ordinary Income. Balance carried forward and used in next years netting. NSTCL is ALWAYS used first.

Front 62

What do you do if a personal capital asset is sold or exchanged at a loss? What is considered personal capital?

Back 62

The loss is denied recognition. Personal is NOT used for business and NOT held for investment. Examples your house, car, boat, furniture...