Cfp Exam Prep Cards - Section 5 - Income Tax Planning - Jmr

Front 1

The Internal Revenue Code of 1986:

Back 1

the main source of tax law

Front 2

Taxpayer Relief Act of 1997:

Back 2

includes over 300 provisions and 800 changes to code of 86

Front 3

The process of tax ligeslation goes from: (5)

Back 3

1) House Ways and Means Committee
2) House of Representatives
3) Sentate Finance Committee
4) Senate
5) President

Front 4

Treasury regulations are:

Back 4

-the official interpretations of statutory tax rules
-published by the US Treasury

Front 5

Revenue rulings:

Back 5

-stand for the official position of the Internal Revenue Service
-Have less authority than Code and regulations

Front 6

Revenue procedures:

Back 6

-official positions of the IRS on matters of tax tables, inflation-indexed amounts and asset class lives

Front 7

Letter rulings:

Back 7

-more specific interpretations offered by the IRS

Front 8

Individuals who are claimed as a dependent do not have to file a claim unless their unearned income is more than:

Back 8

$750

Front 9

Individuals (not claimed as dependant) will have to file a tax return:

Back 9

-even if their gross income is below the required amount if they make more than $400 from self-employment

Front 10

taxpayers who are involved in a tax-related dispute may always bring their claim to:

Back 10

-the level of the regional appeals office of the IRS

Front 11

When tax dispute cases are unresolved, the taxpayer can take it to one of three Federal courts: (3)

Back 11

1) US Tax Court
2) US District Court
3) US Court of Federal Claims

Front 12

When the case still remains unresolved (after using 1 of 3 Federal courts) the taxpayer can take it to:

Back 12

First - US Circuit Court of Appeals

Second - US Supreme Court

Front 13

US Tax Court

Back 13

-taxpayer refuses to pay deficiency
-no jury trial

Front 14

US District Court

Back 14

-taxpayer pays deficiency
-sues for a refund
-recieves jury trial

Front 15

US Court of Federal Claims

Back 15

-taxpayer pays deficiency
-sues for a refund
-no jury trial

Front 16

When taxpayers are late in filing their returns:

Back 16

-penalized 5% of the balance of the tax due for each month return is late
-after 5 months penalty increases 0.5% each month

Front 17

Govt has up to (?) years to examine a return for mistakes:

Back 17

3 years

Front 18

If the taxpayer has ommited an amount of gross income exceeding 25% statute of limitations goes to (?) years?

Back 18

6 years

Front 19

The only individuals who have the authority to represent someone else before the IRS are: (3)

Back 19

1) CPAs
2) Atty's
3) Enrolled agents (passed a tax exam administered by IRS)

Front 20

Discriminate Functions System (DIF):

Back 20

-screens all of the returns and assigsn them a score of assessing their auditworthiness

Front 21

Taxpayer Compliance Measurement Program:

Back 21

-calculates the norms that will be used by DIF and helps pinpoint where taxpayers are likely cheating

Front 22

A Taxpayer can file as head of household if: (4)

Back 22

1) not married at end of year
2) pays more than half cost of house
3) home was main home for one or more family members
4) US citizen or resident for entire year

Front 23

When a taxpayer is found to have committed civil fraud:

Back 23

- penalized 15% every month return is late up to 75%

Front 24

If the tax preparer understates the amount of tax:
1)How much if unintentional?
2)How much if intentional?

Back 24

1) $250

2) $1000

Front 25

Following sources of income may be excluded from gross income: (16)

Back 25

1) gifts and inheritance
2) interest on TF bonds / MFD
3) returns of capital
4) reimbursements of biz exp
5) gain in sale of home (up to $250k)
6) some or all of soc. sec bene's
7) compensation for illness & sickness (workers comp)
8) employer-paid helath cvrg.
9) employer-paid edu asst up to $5250
10) qualified foster care pmts
11) life ins proceeds
12) payments recieved via, accidental, health & LTC policies
13) amts contrib to HSAs
14) employer provided child or dependant care coverage
15) scholarships / fellowships
16) employer-paid group life ins up to $50k

Front 26

Gross income that must be included in an income tax return includes: (14)

Back 26

1) wages, salaries, commisions and fees
2) taxable noncash fringe benefits
3) unreported tips
4) gains from real estate, securities, and other properties
5) rents
6) int from banks, CDs, securities, loans
7) Accrued int from zero coup bonds
8) dividends
9) alimony & seperate maintenance pmts
10) royalties
11) annuity, pension & ira dist
12) income from estate or trust (but not from gift or bequest)
13) prizes and awards
14) for some tax payers up to 85% of soc sec

Front 27

Can dependants claim the regular standard deduction on their tax returns?

Back 27

NO

Front 28

Individuals are allowed to make the following deductions from their gross income to arrive at a figure for ADJUSTED GROSS INCOME (AGI): (12)

Back 28

1) trade or biz exp
2) self-emp medical ins premiums (up to a limit)
3) moving exp for work
4) 50% of self-emp tax
5) amts forfeited to a bank for premature withdrawal of funds from savings vehichle
6) alimony and separate maint payments
7) employee expenses reimbursed by employer
8) contribs to IRAs
9) deductions in connection with property held for the production of rents or royalties
10) int on qualified edu loans
11) contributions to MSA / HSA
12) losses from the sale or exch of property

Front 29

What taxes are deductible? State? Local? Federal?

Back 29

State and local may be. Federal is not

Front 30

Real estate taxes:

Back 30

-deductible even in cases where they are paid to a foreign country
-deductible for all properties owned by the taxpayer (mortgage deduction limited to two homes)

Front 31

Personal Property taxes deductibility:

Back 31

-deductible if based on the value of the property

Front 32

What is found on Schedule A

Back 32

Itemized deductions

Front 33

Deductions subject to 2% limit: (2)

Back 33

1) unreimbursed employee expenses
2) tax preparation fees

Front 34

Deductions not subject to 2% limit: (4)

Back 34

1) amoritizable premium on taxable bonds
2) federal estate tax on inc respect to a decedent
3) gambling losses
4) unrecovered losses in annuity

Front 35

Non-deductible expenses include:

Back 35

1) brokers commissions
2) hobby losses
3) home repairs
4) lobbying expenses
5) capital expenses
6) insurance & rents

Front 36

Mortgage int on primary & secondary home for aquisition debt is limited to:

Back 36

First million dollars on qualified debt

Front 37

Mortgage int on home equity loan debt is limited to:

Back 37

first $100,000 for first & second homes combined

Front 38

Steps for calculating tax liability:

Back 38

1) Determine total Gross Inc
2) Subtract deductions from GI to find AGI
3) Deduct greater of itemized deductions or standard deduction
4) Determine how many personal exepmtions can be claimed and subtract from total
5) Find tax amount from tables
6) Subtract out tax credits if any

Front 39

Earned income tax credit:

Back 39

-may be claimed if the individual has not earned a certain amount in the taxable year
-percentage of earned income that quilifies for the tax credit depends on the number of children taxpayer has

Front 40

Adoption credit avaliable for:

Back 40

taxpayer who has adopted a child that is either younger than 18 or unable to care for themself

Front 41

Foreign tax credit:

Back 41

-allowed so that individuals do not have to pay double tax (foreign & domestic)
-taxpayers can treat the amount of tax paid as either a deduction from income or as a refundable tax credit

Front 42

Difference between tax credits and deductions:

Back 42

Credits: one-for-one reductions

Deductions: limit the amount of income subject to tax

Front 43

Cash method of tax accounting:

Back 43

-taxpayer recognizes income when it is received
-regonize all expenses when paid
-expenses paid in advance are deducted when they apply
-method most often used by service business with little or no inventory

Front 44

Accrual method of accounting:

Back 44

-An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur.
-The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received).
-Method used by most business (carry inventory)

Front 45

Kiddie Tax

Back 45

A tax on children under 14 years old who earn income over $1,700. The extra income is taxed at the guardian's rate.

Front 46

Rules for imputed interest were created to:

Back 46

-to keep taxpayers from transferring income from high to low tax brackets
-or from shifting interest income to capital gains income by raising purchase price and charging less interest

Front 47

If businesses what to change their accounting method:

Back 47

They must obtain permission from the IRS

Front 48

Long-term contracts:

Back 48

-for the building, installation, construction or manufacture of buildings or products that are not completed in the year which they begin

Front 49

Installment sales:

Back 49

-occur when payemts are recieved in a year other than the year of the sale.
-payments include interest, gain on the sale, and recovery of the basis
-minimum interest required by IRS

Front 50

Installment sales offer the advantages of: (3)

Back 50

1) deferring tax
2) making property easier to sell
3) notes that carry higher interest rates than a bank

Front 51

Constructive dividend:

Back 51

-distribution made by a corporation to shareholders that the corporation calls salary, interest or rent, but that the IRS calls a dividend

Front 52

What type of entity is often used as a tax-shelter?

Back 52

-Closely held business
-offer lower tax rates
-undistributed accumulation of earnings can avoid double taxation

Front 53

What is the only organization that pays tax on an entity level?

Back 53

-Corporation
-report taxable income on form 1120
-not subject to passive activity loss

Front 54

Who has the more favorable tax rates? individuals or corporations?

Back 54

-Corporations

Front 55

Taxation of dividends by corp recieved from another corp

Back 55

-if corp recieved dividend from other corp it is entitled to deduction

Front 56

How are net operating losses calculated by corporations:

Back 56

-can be carried back 2 years
-carried forward for as many as 20 years

Front 57

How are capital gains / losses taxed at corporate tax level?

Back 57

-taxed at same rate as ordinary income
-not subject to reduced cap gain rate
-Net capital losses can be carried back 3 years and forward 5 years to offset capital gains (cannot used to offset income)

Front 58

In a parternership basis will be increased by:

Back 58

-ordinary biz income
-capital gains
-dividend income

Front 59

In a partership basis will be decreased by:

Back 59

-ordinary biz loss
-capital loss
-business distributions

Front 60

When partners are given taxable income but no cash distribution:

Back 60

-from that income, they are essentially making a larger investment in the partnership any future cash distribution can be considered as a return on investment

Front 61

In an S Corporation, the basis of a shareholder will increase / decrease by:

Back 61

-his share of the orporations income and gain (inc) or losses (decrease)

Front 62

In an S Corporation cash distributions are considered:

Back 62

-as a nontaxable return of investment that decreases the basis

Front 63

In an S Corporation losses are deductible:

Back 63

-as far as the owners equity investment and debt obligation

Front 64

In a partnership, a partners initial tax basis will equal:

Back 64

-his or her initial investment of property plus the share of partnership dent for which the partner may ultimately be held responsable

Front 65

In an S corporation the shareholders initial basis in stock equals:

Back 65

-cash plus the adjusted basis of any property transferred in exchange for the stock

Front 66

Both partnerships and S Corporations are not considered:

Back 66

-taxable entities
-taxable income is measured at the entity level and then taxed directly to shareholders or partners

Front 67

The shareholders of an S corporation will need to fill out:

Back 67

-a Schedule K-1 and add it to their individual tax form
-calculation of their cash flow from the corporation will not affect their tax liability

Front 68

As for using losees, partners and shareholders are allowed to:

Back 68

-deduct any losses that are passed through against income from other sources.
-basis, however, cannot be reduced below zero

Front 69

A personal service corporation is subject to a flat tax rate of

Back 69

-flat tax rate of 35%
-limitations on passive losses