Cfp - Tax - March 2012

Front 1

AMT Calculation

Back 1

1) Start with regular post-deduction 1040 income (if itemizing) or AGI (for standard deduction)
2) Add back items
3) Add preference items
4) Result equals AMT base
5) Subtract exemptions
6) Result equals AMTI
7) Then calculate AMT (26% or 28% tax rate)

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AMT Preference Items

IPOD

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1) Excess Intangible drilling Rights
2) Private Activity Muni-bonds
3) Oil and gas percentage depletion (which is the excess depletion over the property's adjusted basis)
4) Depreciation (ACRS/MACRS) but not straight line

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AMT Add back-items

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1) Property, state, city income and sales taxes
2) Misc Deductions (specifically advisor fees)
3) ISO's (bargain element)

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What is the exemption for corporate AMT?

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if a 'Small business operation' has gross revenue < than $7.5M, then corporate AMT doesn't apply. Also doesn't apply to S-Corp's as they're pass-through entities.

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Which types of life insurance policies affect corporate AMT?

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1) Buy/sell/entity purchase
2) Deferred comp
3) Key person
4) Endorsement method / split dollar

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How can AMT be post-poned or avoided? (1 of 2)

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1) By accelerating the receipt of taxable income or deferring payment of property taxes, state income taxes, deductible medical expenses or charitable giving - regular tax may exceed AMT

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How can AMT be post-poned or avoided? (2 of 2)

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2) By deferring exercise of ISO's or disqualifying ISO's so they're NSO
3) By purchasing public-purpose muni's
Remember also that charitable contributions can cause AMT by reducing taxable income

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Refundable Minimum Tax Credit
(In effect for 2008 - 2013)

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For AMT payers, the MTC allows you to recoup some of the AMT tax paid in future years. It's for 50% of the unused long-term min tax credit. This is a refundable credit. Long term is defined as ≥3 yrs.

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Two General Types of Passive Activities

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1) Rentals, incl equipment & rental real estate (excl active participation)
2) Biz in which tax-payer doesn't materially partcipate incl LP's, LLC's, S-corp's & partnerships

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Tax Penalties

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Frivolous return - $5K
Negligence - 20% of underpayment attributed to negligence.
Fraud - 75% of the portion of the tax underpayment attributed to fraud.
Failure to file - 5% of the tax due per month (max 5%)
Failure to pay - 0.5% per month (max 25%)

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Estimated Tax Liability Payment to Avoid Underpayment Penalty

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No penalty if filer pays 90% of current year liability OR 100% of PY liability (OR 110% of PY liability if AGI >$150k)

Front 12

Form 1040 Waterfall

Back 12

Gross Income >> less adjustments
= AGI >> less deduction & exemptions
= Taxable Income >> times applicable tax rate
=Taxable Calculation >> less credits + other taxes
= Tax Liability >> less qtrly payments & withholding
= Net Tax Due/Refund

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Gross Income Sources (top of 1040)

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-Wages, salaries & tips - Taxable interest (Schedule B) - Ordinary dividends (Schedule B) - Alimony received - Biz income/loss (Schedule C) - Taxable SocSec - Cap Gains/Losses - IRA distributions - Pensions & annuities - RE income - Unemployment income - Punitive damages

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Excluded Income Sources

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Gifts, Inheritances, Child support, Muni bond income, Workers comp, Compensatory damages

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Adjustments TO AGI (bottom of 1040)

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IRA contributions, KEOGH or SEP, Self-employment tax, alimony paid, self-employment health insurance, $2.5K of student loan interest, HSA contributions, Penalty for early withdrawal of retirement savings, moving expenses

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Self Employment tax

Back 16

Multiply Self-employment income by 7.065

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Standard Deductions

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Single: $5800
MFJ: $11,600
MFS: $5,800
HoH: $8,500
Elderly or blind: +$1150
Child - $950

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Itemized Deduction Types

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- Medical, dental, LTC - Casualty and theft losses - RE taxes
- Charitable gifts - Home mortgage interest - State, local and sales taxes - Investment interest expense

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Investment Interest Deduction

NOTIG

Back 19

Max deduction allowed for interest incurred in investment debt is ltd to filer's net investment income.
Net
Ordinary
Taxable
Investment
Gain

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What qualifies as investment income?

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Interest, dividends, royalties & short-term gains qualifies as investment income.

Front 21

Election of ST rates for Tax Management of Investment Interest

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Dividends will be incl in Investment Income only if filer elects not to use the reduced qual div rates. LTCG are incl only if filer elects STCG treatment - which you would do if you had a lot of investment interest >> giving you more deductible interest

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Deductibility of Interest Expense

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1) Investment income is reduced by deductible Investment advisor fees.
2) The deduction for investment interest expense is reduced by investment advisor fees (which itself is reduced by 2% of AGI)

Front 23

Calculation of a Deductible Casualty and Theft Loss

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1) Use basis or FMV
2) Subtract any insurance coverage
3) Subtract $100
4) Subtract 10% of AGI

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Schedule A
Misc Expenses Not subject to 2% AGI

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1) Impairment related expenses of disabled workers
2) Gambling losses up to gambling winnnings

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Schedule A
Misc Expenses - Subject to 2% AGI

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1) Fees to Investment advisors
2) Tax advice and prep
3) Hobby losses
4) Employee home office exp
5) Unreimbursed emp biz expense

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Personal and Dependency Exemptions for Children

4 Part Test

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You (unless dependent of another) & your spouse (unless MFS)
4 Part Test
1) Relationship:
2) Age: <24 (at year end) for FT students, or <19 if not student
3) Principal place of abode: same abode as filer for > 1/2 of year
4) Support: child mustn't provide > 1/2 of support

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Personal and Dependency Exemptions for Parents

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Parent cannot have gross taxable income >=$3.7K even if child provides 100% of support.
BUT
Excl's Muni's & if only other source of income SSoc, then OK. The limit is based on earned income >> SSec not earned.

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Kiddie Tax

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All unearned income of child <24 WITH 1 parent alive is taxed at the marginal rate rate of the parent. Children withn no earned income given $950 exemption and then first $950 taxed at 10%

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Standard Deduction for Child with Earned Income

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Greater of $950 (for no unearned income) or earned income +$300 (but <= single person standard deduction of $5800)

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Self Employment Tax

What it does not include

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Doesn't include;
1) Real estate income or rents paid
2) Distributive share of loss/income from a ltd partner
3) Wages from an S-Corp
4) Distributions (K-1 income) from an S Corp

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Self Employment Income

What it DOES include

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1) Net schedule C income
2) General partnership income (K1 income)
3) BoD fees
4) PT earnings (1099)

To get SE tax due multiply by .1228

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FICA Taxes

(Federal Insurance Contributions - used to fund SocSec (OASDI) & Medicare)

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The employee (5.65%) and employer (7.65%) pay 13.3% to W-2 earnings of $106.8K.

After $106.8K, each pay Medicare taxes of 1.45% or a total of 2.9%

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Tax Credits

Child and Dependent Care Expenses

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Nonrefundable.
Credit is a % of expenses paid for care of a dependent.
Ltd to $3K for 1 dependent or $6K for >=2. Use 20% of these amounts.

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Tax Credits

Child Tax Credits

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Nonrefundable.
Individuals may claim a $1K child tax credit for EACH qualifying child <17.
Phased out for MAGI > $110K MFJ.

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Tax Credits

Adoption Credit

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Refundable.
Incl adoption fees, court costs, attorney fees & adoption costs. Credit = $13,170 with AGI phaseout of $185 - $225.
Claimed in year FOLLOWING when adoption finalized.

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Misc Credits

Elderly & disabled
Foreign Tax
Earned income
Residential energy
Qualified electric vehicle

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Elderly & disabled: nonrefundable & no carry-forward, to qualify, person must be >65 & totally disabled.
Foreign Tax: nonrefundable but carry-forward. Filers choose btwn taking a credit or deduction annually for foreign taxes paid.
Earned income: Refundable but subject to phaseout.
Residential energy efficient property
Qualified electric vehicle

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Net Operating Losses (NOL)

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If biz deductible expenses > income labelled NOL & reported as such.
NOL's allowed to self-employed, Corp's, Estates & trusts. Not allowed to S-Corp's or partnerships.
May be carried back 2 yrs or forward 20.

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Section 1244 Stock

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First $1M of stock (C or S) issued after incorporation.
Loss of $100K p.a. on a joint-return ($50K otherwise) considered ordinary, not capital loss

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What things increase basis

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1) Legal fees
2) commissions
3) Sales tax
4) Freight
5) Improvements

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Amortization of Intangible Assets

Back 40

Covered under Sec.197 intangibles. Recovery method is similar to straight line.

Front 41

MACRS

Back 41

Straight line is an option.
Half-year convention must be used unless mid-quarter convention applies.
Mid-quarter convention = if >40% of the depreciable personal property placed in service during final 3months of yr, must use mid-qtr.

Front 42

MACRS Property Classes

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1245 - 5 Yr: Computers, autos & light duty trucks
1245 - 7yr: Office equipment (excpt computers)
1250 - 27.5yr: Residential rental property
1250 - 39yr: Nonresidental/commerical property

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179 Deduction

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Election to expense up to $500K of qualifying (tangible personal) property in year of acquisition for use in acquisition in trade or biz. Amount of deduction is ltd to taxable income from active conduct of biz. You can't creat a LOSS with 179

Front 44

Like-kind Exchanges

Can someone exchange property not currently used in a trade/biz?

Back 44

Yes, as long as the taxpayer utilizes the acquired property in a trade/biz then the exchanged property will not be taxable to that taxpayer.

Front 45

Like-kind Exchanges - Recognized Gain where boot involved

Back 45

Only have to ID three numbers...
1) FMV of property received
2) Adjusted basis of property given up
3) Boot (anything that is not qualified/like kind).
When no boot received - recognized gain is 0.
When boot is received, recognized gain is most likely boot received.

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Depreciation Recapture

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Applies to MACRS property.
When biz sells depreciated equipment for a gain, the biz must;
1) Look back and recapture the < of the CRD taken OR the gain realized as 1245 gain (ordinary income)
2) Recover any excess gain as 1231 gain (capital gain)

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Installment Sale recapture

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If you make an installment sale of depreciated 1245 property, ALL CRD's taken are reported as ordinary income in the year of sale (Only applies to 1245 property not 1250). I.e. Joe bought an oil rig for $300K and took $100K of CRD's. He sold it in an installment sale for $500K payable over 5 yrs. He owes $100K or OI in first year and $40K LTCG.

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Passive Activities

Non-publicly Traded Partnerships

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A passive activity loss may not be used by a taxpayer to reduce portfolio income, compensation or biz income.

Front 49

3 Types of Income Defined and Deductibility of Losses on Nonpublicly Traded Partnerships

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1) Active income (wages, commissions)
2) Portfolio income (dividends, interest, capital gains)
3) Passive Income (nonpublic limited partnerships). Losses from NPLP's (aka PAL's) can ONLY be used to offset income from other NPLP (aka PIG's) programs.

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Publicly Traded Partnerships (aka MLP's)

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Readily traded on secondary market/exchanges. Income or losses from a PTP/MLP may NOT be sheltered by passive income/losses from any other source. A loss from a PTP/MLP may be carried forward but offset ONLY by gains from the same PTP/MLP. PTP/MLP income is portfolio income (not passive income).

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Deductibility of Income from a Business with non-material Participation (e.g. LP or S-Corp with non-material participation)

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Same PIG/PAL approach applies. Income only deductible to the extent of losses from other passive activities.

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Two kinds of Passive Activities

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1) Limited partnerships (with some exceptions)
2) Ownership of biz without material participation.

Two exceptions to the passive rules: material and active participation

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Exception to Passive Rules #1:

Material Participation

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Defined as activity on a regular, continuous or substantial basis. Thus, no LP in a Limited Partnership is treated as materially participating.

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Exception to Passive Rules #2:

Active Participation

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Less demanding standard than 'material' participation. Requires bona fide involvement in management decision making. An LP may never be an active participant. To qualify, the taxpayer must own >10% interest. Active participation can produce income/loss (schedule E)

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Special Loss allowed for Active participation in Real Estate Management

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A $25,000 loss is allowed for qualifying taxpayers from either their active (ordinary) or portfolio income. This deduction is phased out for taxpayers with AGI between $100 - $150.

Front 56

Historic Rehabilitation Program >> Income Tax Credit

Back 56

Generates up to $25K credit.
Phased out between AGI of $200-$250K (can be for personal use).

Front 57

Low Income Housing
>> Income Tax Credit

Back 57

Sec.42. Low income housing credit of $25K available - no AGI phaseout.

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Oil and gas working interests

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Exempted from PAL rules.
Losses from oil and gas working interests where the taxpayer is personally liable are deductible against active or portfolio income without limits & without respect to AGI. Only for GP not LP. LP's treat these losses as passive losses.

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Sources of Phantom Income

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1) Insurance: a) lapsing of policy with a loan. b) Sec 162 life and disability
2) Investments: a) Zero/Strip Income b) TIPS c) Declared but not paid dividends & cap gains.
3) Tax a) K-1 income from LP/FLP. b) Recapture
4) Retirement a) ESOP distribution (basis only) b) 20% withholding plan distributions c) Secular trust

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Calculation of Excess Alimony

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Yr 1 +2 - (2 x Yr3 - $37,500). If positive number results, then recapture due OR between years 2 and 3, look for decreases of more than $15K.

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Charitable Contributions and Deductions - Introduction

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Cannot deduct > 50% of AGI. Any excess deduction is carried forward for 5yrs or death, if sooner.

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Charitable Contributions and Deductions - 50% Organizations

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1) All churches, schools and hospitals
2) All org's operated for charitable, religious educational or literary purposes. Or for the prevention of cruelty to children, animals etc (United Way, Red Cross, Humane Society)

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Charitable Contributions and Deductions - 30% Organizations

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Private charities
1) Private, non-operating foundations, fraternal orders and war-veterans organizations.

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Charitable Contributions and Deductions - Formula for Determining Deduction

Back 64

1) Identify AGI
2) Calculate amount given to 50% org's
3) Calculate amount given to 30% org's

Front 65

Charitable Contributions and Deductions - Types of Donated Property

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1) Gifts of appreciated property
- to 50% Org's = 30% of AGI if FMV used or 50% if basis used.

2) Gifts of Ordinary income property - deduction limited to basis. E.g's OI property incl life insurance, inventory, STCG property, copyrights or use-unrelated property.

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Charitable Contributions and Deductions - Donations by Business Entities

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Donation to a charitable organization is limited to 10% of its taxable income.

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Charitable 'Bargain' Sale

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Property sold for <FMV. Gift amount = Difference between selling price and FMV.

Calculation of gain = Selling Price / FMV x basis.

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Basis of appreciated gift property where gift tax paid

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appreciation amount + gift tax paid / taxable gift (remember to deduct $13K).
E.g. gift of property with basis of $40K, FMV of $100K and gift tax paid of $30,450.
$60K + $30.45K / $87K = $21K (increases basis by $21K to $61K

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Basis of appreciated gift property where gift tax paid

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appreciation amount + gift tax paid / taxable gift (remember to deduct $13K).
E.g. gift of property with basis of $40K, FMV of $100K and gift tax paid of $30,450.
$60K + $30.45K / $87K = $21K (increases basis by $21K to $61K