Tax Planning

Types of Assets

1. Capital Assets

2. Section 1231 Assets 1245 and 1250 Depreciable Business Property used in a trade or business

3. Ordinary Income Assets: Non Capital Assets or 1231 Assets

Non Capital Assets

Account and Notes Receivable, Copyrights and Creative Works, Inventory, and Depreciable Property (Memory Aid: ACID)

Original Cost Basis

Purchase Price, FMV of any property in taxable exchange, Sales Tax, Freight, Installation, Testing

Cost Basis of Inherited Property

The FMV at date of death or the alternative valuation date. Holding period is always long-term. (Step-Up)

Cost Basis of Gifted Property

The donee’s basis in the gifted property is the same as the donor’s basis in the gifted property.

Exception 1: Cost Basis of Gifted Property

Loss Property:

If Sales Price > Donor’s Basis then Donee’s Basis = Donor’s Basis

If Sales Price < FMV then Donee’s Basis = FMV at Date of Gift

Exception 2: Cost Basis of Gifted Property

Appreciated Property with Gift Tax Paid:

Formula: Donor’s Basis + (Net Appreciation in the Gift / Taxable Gift) X Gift Tax Paid

Note: Not on Formula Sheet

LTCG and Ordinary Dividends

20% / 15% / 0%

Ordinary Income

Ordinary Income / Section 1245 Recapture / STCG

Section 1245 Recapture

Personal Property (Machinery, Equipment, Furniture, Vehicles) taxed at Ordinary Income

Section 1250 Recapture

Real Property (Office Buildings) taxed at 25%

Long Term Capital Gains

Held for at least 1 year and 1 day

Personal Use Property

Losses are not allowed to be claimed (vehicles)

Wash Sales

Taxpayer disposes of securities at a loss and acquires substantially identical securities within 30 days, before or after, the date of the loss sale

Capital Gains & Losses: Personal Residence Gain Exclusion

Owned and Used the home for 2 out of the last 5 years and have not used the exclusion in the last 2 years.

Maximum Exclusion: $250K for Single Owners and $500K for Joint Owners

Personal Residence Gain Exclusion (Non-Qualified Use)

Before 2009: If you owned the property, but did not use it for a qualified purpose, the full exclusion will still apply if the taxpayer met the other tests.

Starting in 2009: Any appreciation attributed to a non-qualified use period does not qualify for the Section 121 exclusion if the non-qualified use period preceded the qualified use period.

Personal Residence Gain Exclusion (Non-Qualified Use) Exceptions

Reduced Exclusion For: Change in Employment or Change in Health

Formula: Available Exclusion X (Number of Months Met/24)

Note: Not on Formula Sheet

Capital Gains & Losses: Worthless Securities

Deductible in the year in which the securities become completely worthless.

Netting Capital Gains and Losses

Net LTCG & LTCL and Net STCG & STCL. Then put the two together and use the higher absolute value to create either short-term or long-term loss.

Section 1244 Stock Loss

A single taxpayer can deduct up to $50,000 ($100K for MFJ) of the loss on small business stock as ordinary loss if:

1. The Stock represents ownership in a domestic corporation

2. The corporation was a small business corporation (less than $1M in total cap contributions plus paid-in cap)

3. The loss was sustained by the original owner of the stock.

Section 1202: Qualified Small Business Stock

Taxable gain associated with QSBS is excluded at 100% (if acquired after Sept 27, 2010) and the remaining amount was taxed at 28%, if the holding period is at least five years.

Section 1033: Involuntary Conversions

Deferral of gain on an involuntary conversion of property due to destruction, theft, seizure, or condemnation. Defer gains to the extent the proceeds received are reinvested in replacement property within the appropriate time period.

Section 1035: Nontaxable Exchanges

Life Insurance → Life Insurance

Annuity → Annuity

Life Insurance → Annuity

NOT FOR Annuity → Life Insurance

Qualifying Child

Tax Credit of $2,000 (Child does not provide more than 50% of their support, child is under age 17, child lived with taxpayer for more than 50% of the year.)

Qualifying Relative

Tax Credit of $500 (Dependents Gross Income must be less than $5,200 and cannot be a cousin unless in the same household)

Gross Income: Inclusion → Annuity Payments

The Exclusion Ratio determines the portion of each payment excluded from taxation and is calculated at the starting date of the annuity.

Formula: Investment in the Contract / Expected Total Return

Note: NOT on Formula Sheet

Gross Income: Inclusion → Social Security Benefits

MAGI plus ½ of the taxpayer’s SS benefits must be compared to the hurdle amounts:

MFJ: $32,000 & $44,000

Single: $25,000 & $34,000

0% below First Hurdle, 50% between the hurdles, 85% above the hurdles.

If exceeds the first hurdle, the taxable amount would be lesser of 50% SS Benefits or 50% [MAGI + 0.50(SS Benefits) - Hurdle 1]

If exceeds the second hurdle, the taxable amount would be lesser of 85% SS Benefits or 85% [ MAGI + 0.5 (SS Benefits) - Hurdle 2]

Gross Income: Inclusion → Below Market Loans

$0 <= $10K → $0 Imputed Interest

$10K <= $100K → The lesser of: Borrower’s Net Investment Income or Interest calculated using AFR less interest calculated using standard rate of the loan

> $100K → Interest calculated using AFR less interest calculated using stated rate of the loan

Gross Income: Specifically Excluded

Gifts and Inheritances, Life Insurance Proceeds, Scholarships, Gain on Sale of Personal residence, Qualifying Distributions from Roths, and Compensation for Injuries or Sickness

Gross Income: Exclusions → Employee Benefits

Meals and Lodging furnished for the convenience of the employer and on the employer’s premises, Employer Sponsored Medical, and the cost of the first $50,000 of coverage of Group Term Life Insurance (Excess coverage taxable based on the Uniform Premium Table)

Also any Employee Fringe Benefits (Athletic Facilities, educational assistance programs, etc)

Gross Income: Exclusions → Muni Bonds and Bankruptcy

Interest on certain state and local government obligations (Munis) and discharge of indebtedness in bankruptcy

Deductions: Above the Line (For AGI)

Deductions from losses on sale or exchange of property, deductions from rental and royalty property, ½ of Self-Employment Tax Paid, 100% of health insurance premiums paid by a self-employed individual, contributions to pensions, profit sharing, annuity plans, and IRAs, and penalty on premature withdrawals from time savings accounts or deposits.

Deductions: Above the Line (For AGI)

Interest on Student Loans ($2,500) (Phaseouts: Single - $85,000-$100,000; Joint - $170,000 - $200,000)

Health Savings Accounts

Trade or Business Expenses (Must be Ordinary, Necessary, and Reasonable)

Business Gifts: Limited to $25 each plus shipping

Entertainment Expenses: 50% Meal Expense Deduction and 100% Transportation Costs

Above the Line Deductions: Alimony

Pre 2019 - Alimony Paid is a deduction FOR AGI & Alimony received is earned income

Post 2019 - Alimony is no longer deductible or taxable

Above the Line Deductions: Moving

Moving expenses are no longer deductible (Except for armed services relocating to a permanent duty station) If employer pays for moving costs, the employee must be included in the employee’s income.

Below the Line Deductions (FROM AGI)

Greater of sum of Itemized deductions or Standard Deduction

Itemized Deductions

Charitable Contributions (Cash: up to 60% of AGI, LTCG Property: 30% FMV or 50% of Basis)

Limited casualty losses (must be FDD declared)

Medical expenses in excess of 7.5% of AGI

Interest on mortgage (2017 and Before: Up to $1M on primary residence and one other property; Post 2017: Up to $750K on primary residence and one other property; HELOC: Interest is deductible if used for the property that secures the loan)

Interest on investments to the extent of Net Investment Income Taxes (capped at $10K)

Itemized: Miscellaneous Itemized Deductions

Not subject to the 2% AGI Threshold: IRD, Gambling losses to the extent of Gambling Winnings, Impairment related work expenses for handicapped, and annuity losses for decedent annuitant.

Tax Credits: Refundable

Credit may eliminate all tax and provide additional payments to taxpayer

Tax Credits: Nonrefundable

Credit may only reduce tax to zero

Tax Credit: Adoption Credit

A credit for adoption expenses incurred up to $17,280 (Phaseout: $259,100 - $299,190)

Child Tax Credit

A partially refundable child tax credit of $2,000 is available to an individual taxpayer for each qualifying child under the age of 17. Child must have not provided over half of own support for the tax year or receive Social Security. $1,700 is refundable. AGI Phaseouts are $400K MFJ and $200K Single.

Qualifying Dependent Tax Credit

$500 nonrefundable credit. Qualifying relatives and qualifying children age 17 and over are eligible. SSN is not required.

Kiddie Tax

Applies to unearned income of dependent children under age 19 living with parent, or under age 24 and a full-time student. Unearned income over $2,700 is taxed at the parent’s rate. Standard Deduction rules for a dependent is Greater of $1,350 or Earned Income Plus $450 ($15,000 limit)

Taxable Income: AMT Adjustments

Accelerated Depreciation, The Standard Deduction, Taxes, and ISOs

Taxable Income: AMT Preference

Interest on Private Activity Bonds, Percentage Depletion, Oil and Gas Intangible Drilling, Costs, Depreciation, and Stock.

Taxable Income: Hobby Losses

To be classified as a business activity and not a hobby, the taxpayer must have a profit motive. No profit in 3 years out of 5 years, then presumed a hobby (Horses: Expanded to 2 out of 7 years.

Tax Deductions for Pass Through Entities

Qualified Business Income deduction creates a 20% deduction based on qualified business income

Taxable Income Flow Through Entities

At Risk Rules: Losses can only be deducted to the extent of property/money that is at risk. Taxpayer can deduct up to $25,000 from ordinary income (Active and Portfolio), subject to a phase out of $1 for every $2 AGI that exceeds $100,000