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62 Cards in this Set

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  • Back
Define Passive Activity Income
investments in a trade or business in which you DON'T materially participate
What are the rules of material participation?
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
How are passive activities taxed and how are loses treated?
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.
If you meet a material participation rule...
Losses can offset any other income.
What happens when passive activity is disposed of?
Turns into a passive loss carried forward. Must use passive loss carried forward in certain order.
What order must passive loss carried forward be used in?
1st-Offset any gain on disposal
2nd-Offset any other passive activity income
3rd-Offset remaining PLCF against other income
What is the rental property 14 day rule? What deductions are permitted if rule is broken?
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.
What is the rental property rule on leasehold improvements?
If tenant makes improvements, not in leiu of rent, the FMV of improvments are not GI
Factors of a good legal tax shelter?
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.
How do you find the value of savings?
marginal tax rate * loss or deduction
What is a middle income taxpayer and how much of rental real estate losses can they deduct against other income?
Middle income has AGI of $100,000 or less. Can deduct up to $25,000. Excess is a passive loss carried forward.
How is the statutory loss deduction for rental real estate phased out for higher AGI taxpayers?
loss allowed = ($25,000) - .50(AGI-100,000)
In effect, lose .50 of ever $1 above 100,000
Any loss not deduct is PLCF
What is the rule for taking a loss on vacation property?
You can take a loss as long as there is not too much enjoyment. Use P.U.T. test.
What is the effects of two much enjoyment on vacation property?
No loss deduction is permitted.. you only bring net income to $0. Must follow IRS order of taking deductions.
What is the P.U.T. Test?
violated if personal use is more then the greater of 14 days or 10% of rental time. Must keep a log.
What is considered personal use of vacation property?
Any use by you or any family member, use that is for less then fair rental value, and reciprocal use.
What is the vacation property rule for maintenance?
Any day that you spend more than half the day doing maintanence is not personal use.
If PUT test is violated.. what is the IRS order of deductions?
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.
In general, all interest income is _____?
Gross Income
Examples: CD's, savings, checking, bonds, orignal issued discount...
What is municipal bond interest and how is it taxed?
It is tax exempt.
Issued by states, counties, cities, political subdivisions. Muse be U.S.
What are U.S. Savings bonds and how are they taxed?
They are bought at a discount (50%). Can elect to wait untill you cash in to report interest = cash received - your cost
What is a U.S. savings bond used for education?
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.
What are the rules for a family loan?
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
What are dividends?
Distributions paid on corporate stock.
What are the three sources of dividends and how are they taxed?
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
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.
61 days which must be within 60 days before and 60 days after ex_div date.
How much is the dividend amount for property distributions?
Dividend amount is the FMV of distribution less liabilities.
When are stock dividends tax free and how do you calculate it?
When there is no change in % ownership.
% ownership = (# shares owned/# shares outstanding) $0 GI
When are stock dividends NOT tax free? What are the 2 ways of having them NOT tax free?
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.
What is constructive dividends?
Distribution disguised as being tax-free that upon and it are recharacterized as a dividend.
Why do corporations use constructive dividends?
Corporations try to disguise non-tax deductible divdend payments as a tax deductible expense.
S/H don't want additional income, use a loan.
What is a Mutual Fund?
The fund itself is a tax-free entity.
How are dividends of a Mutual Fund treated? What about reinvested dividends?
Dividends are GI to fundholder.
Reinvested dividends are still GI but also increase investment in fund.
How are Distributed Capital Gains of Mutual Funds treated?
Distributed CG = GI
How are Undistributed Capital Gains of Mutual Funds treated?
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.
What is an annuity?
A contract that promises to pay a specific amount, for specific period beginning on a specific date (could be fore rest of life).
When do you calculate an exclusion ratio for an annuity and how do you calculate it?
Calculate on the 1st payment.
exclusion ratio = (cost/expected benefits) x amount received during year = exclusion
GI = amount received - exclusion
If the annuity is being paid for life, how do you calculate exclusion ratio?
Use the IRS annuity table.
(cost/expected # of payments) = $ exclusion per payment
Exclusion for year = (# months received for year * $ exclusion)
During a lifetime annuity, what happens if the taxpayer dies before the end of his/her expected life?
Any unrecovered costs (cost-exclusion used so far) is deducted on his/her final tax return that is filed by their executor.
During a lifetime annuity, what happens if the taxpayer lives longer then expected life?
Exclusion ends for tax purposes once you've reached the # of months indicated in the annuity tables.
What are capital gains/losses?
Gains or losses on the sale, exchange, or involuntary conversion of a capital asset.
What is considered an involuntary conversion? What does NOT qualify?
sudden unusual unexpected events, storms, thefts, accidents, eminent domain.
Intentional destruction and gradual deterioation does NOT qualify.
How do you calculate a gain/loss?
Amount realized - AB of capital asset = gain/loss or $0
All assets are capital assets except...
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...
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?
Long Term Capital Gain
How do you find the amount realized?
amount realized = (cash + FMV property received + FMV services + any liability of seller assumed by the buyer) - selling expenses = amount realized
What is the Adjusted Basis of an asset purchased?
Cash paid + liability assumed + improvements made - depreciation taken on tax return - losses deducted on return
What is the Adjusted Basis of asset received from service?
FMV on date received. If $0 income is reported, AB=$0
What is the Adjusted Basis of an asset inherited?
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.
When calculating Adjusted Basis of an inherited asset, and you elect alternative valuation, what does that mean?
It must save estate taxes.
FMV on the EARLIER of 6 months after death or date property was distributed to beneficiaries.
What is the Adjusted Basis of an asset received by gift? What is donor pays a gift tax?
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
What is the Adjusted Basis of an asset received by exchange/trade?
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.
What is the Adjusted Basis of an asset received from converted property?
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....
What is the 1st step in the taxation of capital gains/losses? How do you determine it?
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.
How do you determine the holding period for taxation on capital gains and losses?
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.
What and how to you determine the tax effect?
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.
How are Net short term capital gains taxed?
Added to ordinary income and taxed at marginal rates.
How are Net long term capital gains taxed?
Maximum rate imposed is 15% unless in 10-15% brackets which is 5%.
How are net long term capital gains of collectibles taxed?
taxed at marginal rate, but never higher then 28%.
How are net long term capital gains of Buidlings taxed?
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%
What if you have a NSTCL or NLTCL?
can deduct $3000 of net capital losses against Ordinary Income. Balance carried forward and used in next years netting. NSTCL is ALWAYS used first.
What do you do if a personal capital asset is sold or exchanged at a loss? What is considered personal capital?
The loss is denied recognition. Personal is NOT used for business and NOT held for investment. Examples your house, car, boat, furniture...