TCP 1 Module

What are the key tax rates and contribution limits?

Capital gains: 15% (assumed). Gift/estate top rate: 40%. Annual gift exclusion: $19,000 (2025). 401(k)/403(b): $24,500 combined elective deferral (2026). IRA: $7,500 + $1,100 catch-up age 50+ (2026), limited by compensation.

What is the difference between passive and active activities?

Passive: TP does not materially participate. Material participation means regular, continuous, substantial involvement. Active participation is a lower standard used for the rental real estate exception.

When are ISOs, NSOs, and restricted stock taxed?

ISO: generally no regular income at grant/exercise; qualifying sale produces capital gain, but exercise may create AMT adjustment. NSO with readily ascertainable FMV: generally taxed at grant if vested. Other NSOs: generally at exercise. Restricted stock: generally at vesting unless an 83(b) election applies.

What are the NSO equations?

Ordinary income = (FMV − exercise price) × shares. Adjusted basis = exercise cost + compensation income. Amount realized = selling price × shares − selling costs. Capital gain = amount realized − adjusted basis.

What is added back when calculating AMTI?

State income taxes, deductible real estate taxes, and deductible personal property taxes. Interest on certain private activity bonds is an AMT preference item.

What deductions are generally allowed for AMT?

Eligible HSA deductions, charitable contributions, qualifying medical deductions, and qualifying federally declared disaster casualty losses.

What are the key 529 plan rules?

Earnings withdrawn for qualified education expenses are tax-free. Certain beneficiary changes to eligible family members are tax-free. Some unused funds may qualify for other tax-free rollovers, subject to restrictions.

What payments qualify for unlimited gift-tax exclusions?

Tuition paid directly to an educational institution and qualifying medical expenses paid directly to a medical provider.

What is the unified transfer tax system?

Federal estate and gift taxes share a unified lifetime exemption and credit. The 40% rate is the top rate.

How is imputed interest calculated?

Simplified: Loan principal × (AFR − actual interest rate). Certain loans of $10,000 or less qualify for exceptions, but not all loans are automatically exempt.

What are the two foreign earned income qualification tests?

Bona fide residence: genuine foreign residence for an uninterrupted period including an entire tax year. Physical presence: at least 330 full days in foreign countries during any consecutive 12-month period; days need not be consecutive.

What is the foreign earned income exclusion formula?

Maximum annual exclusion × (qualifying days in tax year ÷ total days in year). Your notes use $132,900 (2025).

How do you compare taxes paid now versus next year?

Current tax = gain × marginal rate. Current after-tax gain = gain − current tax. PV of future tax = future tax × discount factor. Deferred after-tax gain = gain − PV of future tax. Compare results.

How is AGI calculated?

AGI = gross income − above-the-line adjustments. Gross income includes taxable income items and allowable losses. Adjustments include eligible traditional IRA, HSA, student loan interest, self-employed health insurance, deductible half of SE tax, and SE retirement contributions

How do you calculate a dependent's standard deduction?

Greater of statutory dependent minimum OR earned income + statutory addition, capped at the basic standard deduction. Your notes use a $450 addition; verify the applicable tax year.

How does kiddie tax work?

Applies to qualifying children's unearned income, such as interest, dividends, rent, and royalties. First statutory amount sheltered by standard deduction; next portion generally taxed at child's rate; excess net unearned income taxed at parents' rate. Your notes use $1,350 + $1,350 = $2,700; verify tax year.

How is simplified HSA net tax savings calculated?

Qualified distribution × marginal tax rate − nonqualified distribution × 20% additional tax. Nonqualified amounts can also be subject to ordinary income tax. The 20% additional tax generally does not apply after age 65, disability, or death.

How do you determine filing status and deduction method?

Marital status generally determined on December 31. Single: compare each person's allowable itemized deductions to standard deduction. MFJ: compare combined itemized deductions to MFJ standard deduction, including applicable age/blindness additions.

What deductions are included in itemized deductions?

Eligible SALT + qualifying interest + medical expenses above 7.5% of AGI + deductible charitable contributions. Certain 2026 itemizers face a 0.5% AGI charitable floor. Use only facts supplied in the problem.

What is the general passive activity loss rule?

Passive losses generally offset passive income only. Suspended passive losses carry forward. Upon qualifying fully taxable disposition of the entire activity to an unrelated party, remaining suspended PALs may offset other income.

What are the requirements for the $25,000 rental real estate loss exception?

Active participation, at least 10% ownership by value, and eligible filing status. Phaseout generally starts at modified AGI of $100,000 and ends at $150,000.

What is the rental real estate passive loss deduction formula?

Allowance = max[$0, $25,000 − 50% × max($0, MAGI − $100,000)]. Deductible loss = lesser of eligible rental loss or available allowance.

How do you allocate suspended PALs among activities?

Suspended PAL allocated to Activity X = total disallowed passive loss × (Activity X loss ÷ total losses of affected activities).

What is the order of partnership loss limitations?

1. Tax basis limitation → 2. At-risk limitation → 3. Passive activity limitation. Apply in that order.

How do you calculate partnership tax basis versus at-risk amount?

Tax basis = contributed cash + adjusted basis of contributed property + allocated liabilities, adjusted for subsequent activity. At-risk = qualifying amounts economically at risk, generally including personally liable debt and certain qualified nonrecourse real estate financing.

How do you calculate losses allowed and suspended under the basis limitation?

Basis-allowed loss = min(total otherwise allowable loss, available tax basis). Basis-suspended loss = total loss − basis-allowed loss.

How do you calculate losses allowed and suspended under the at-risk limitation?

At-risk-allowed loss = min(loss surviving basis limitation, available at-risk amount). At-risk-suspended loss = basis-allowed loss − at-risk-allowed loss.

What happens to suspended losses upon disposition?

Passive losses: generally released after qualifying full taxable disposition. At-risk losses: may become deductible if sufficient at-risk amount arises, subject to remaining limits. Basis-suspended losses are not automatically released simply because an interest is sold.

How do you calculate estate tax in a simplified bequest scenario?

Modeled estate transfer tax = taxable transfer value × assumed effective estate tax rate. Actual estate tax depends on the taxable estate, lifetime gifts, exclusions, and credits.

How do you calculate capital gains tax on inherited property?

Inherited basis = generally FMV at death. Capital gain = sale proceeds − inherited basis. Capital gains tax = gain × applicable capital gains rate.

How do you calculate taxable gifts and gift tax?

Taxable gift = FMV at gift date − available annual per-donee exclusion. Simplified gift tax = taxable gift × assumed effective transfer-tax rate, after accounting for applicable exemptions and credits.

How do you calculate capital gains tax on gifted property?

Gain basis = generally donor's adjusted basis, subject to exceptions. Capital gain = sale proceeds − applicable gift basis. Capital gains tax = gain × applicable rate.

How do you compare total taxes for inheritance versus lifetime gift?

Inheritance = modeled estate tax + tax on gain above inherited basis. Gift = modeled gift tax + tax on gain above gift basis. Compare total amounts under the problem's assumptions.

What key conceptual facts should you remember?

Defined contribution plan: employee generally bears investment risk. Long-term care insurance: severe cognitive impairment may trigger benefits. Life insurance: provides estate liquidity for debts, expenses, and taxes. Student-owned custodial accounts: generally weighted more heavily for federal financial aid. Municipal bonds: often relatively low credit risk but not risk-free.

What is the after-tax rate of return formula?

ATRR = [(Expected return − initial investment) ÷ initial investment] × (1 − tax rate), assuming the investment return is fully taxable at that rate.

What are the three types of income?

Active: Income from work or a business with material participation. Passive: Income from activities without material participation. Portfolio: Interest, dividends, annuities, royalties, and capital gains/losses.

How is income from a limited partnership generally classified?

Passive activity income under the passive loss rules.

How is municipal bond interest treated when calculating AGI?

Generally excluded from AGI because it is tax-exempt.

What happens to losses exceeding the at-risk amount?

Suspended and carried forward indefinitely. Generally deductible when sufficient at-risk amount becomes available, subject to other loss limitations.

What do the at-risk rules limit for S corporation shareholders?

Deductible losses are limited to the amount the shareholder could personally lose, after applying the stock and debt basis limitations.

How are suspended passive activity losses carried forward?

Carried forward, not backward, until they can offset passive income or qualify for release upon disposition.

What happens to suspended PALs when the entire passive activity is disposed of?

Upon a qualifying fully taxable disposition to an unrelated party, current and suspended PALs may offset active, passive, and portfolio income.

How do you calculate AGI when active income and passive losses are involved?

Salary + ordinary business income (material participation) − allowable business losses − allowable suspended PALs = AGI. Passive losses are excluded until deductible.

How do you allocate suspended passive activity losses between activities?

Total loss = Loss A + Loss B. Allocation to A = (Loss A ÷ Total Loss) × total amount being allocated, including gain when applicable under the problem.

What is the Mom & Pop rental real estate exception?

With active participation, up to $25,000 of qualifying rental losses may offset nonpassive income, subject to ownership, income, and filing-status rules.

When does the $25,000 rental loss allowance phase out?

Generally between modified AGI of $100,000 and $150,000. Allowance = $25,000 − 50% × (MAGI − $100,000), floored at $0.

What is the order of business loss limitations?

1. Tax basis → 2. At-risk → 3. Passive activity → 4. Excess business loss, if applicable.

How do you calculate partnership tax basis and suspended losses?

Tax basis = cash contributed + share of recourse debt + share of nonrecourse debt. Basis-suspended loss = total loss − loss allowed by available tax basis.

How do you calculate at-risk basis?

Simplified: cash contributed + recourse debt for which the taxpayer is personally liable. Certain qualified nonrecourse financing can also count.

How do you calculate deductible and suspended losses under the at-risk limitation?

Deductible at-risk loss = MIN(loss passing tax-basis limitation, available at-risk amount). At-risk suspended = loss passing tax basis − deductible at-risk loss.

Which transfers are generally excluded from gift tax?

Direct tuition payments to educational institutions, qualifying medical payments to providers, qualifying political contributions, and eligible marital transfers.

Is reimbursement to a grandchild for medical school tuition excluded from gift tax?

No. Reimbursement is a gift subject to gift-tax rules before applying the annual exclusion. Tuition must be paid directly to the institution for the unlimited exclusion.

Can the standard deduction reduce taxable gifts?

No. The IRC does not allow the individual income-tax standard deduction when determining taxable gifts.

What happens when a taxpayer forgives a family member's debt?

Debt forgiveness is generally treated as a gift equal to the amount forgiven, subject to applicable exclusions.

How do you calculate taxable gifts?

Taxable gifts = total gift value − qualifying exclusions − available annual per-donee exclusions − applicable deductions.

What is the annual gift-tax exclusion rule?

The annual exclusion applies only to qualifying present-interest gifts. Your notes use $19,000 per donee.

What is a future-interest gift, and does it qualify for the annual exclusion?

A future-interest gift, such as a remainder interest, generally does not qualify for the annual exclusion.

When does a gift to a minor's trust qualify for the annual exclusion?

Under the Section 2503(c) framework, property and accumulated income must generally be available to the child at age 21, with other requirements.

How are marital transfers treated for gift-tax purposes?

Qualifying transfers to a spouse generally receive an unlimited marital deduction, subject to special rules for noncitizen spouses.

How do you calculate a deemed gift in a below-market related-party sale?

Gift = FMV of property at transfer − consideration paid. Identify FMV, subtract the child's payment, and calculate the difference.

How do you calculate realized and recognized gain in a corporate property contribution?

Realized gain = amount realized − adjusted basis. Recognized gain = lesser of realized gain or boot received, under the simplified Section 351 rule.

How do you calculate shareholder stock basis after contributing property?

Stock basis = adjusted basis of property transferred + recognized gain − boot received − liabilities treated as money received, subject to Section 351 rules.

How do you calculate the corporation's basis in contributed property?

Corporation's basis = transferor's adjusted basis + gain recognized by the transferor.

How is earned income calculated for a SEP IRA?

Earned income = net self-employment earnings − deductible one-half of self-employment tax.

Do 401(k) and 403(b) employee contributions share a limit?

Yes. Employee elective deferrals generally share one combined annual contribution limit.

How are traditional IRA and Roth IRA contributions taxed upon distribution?

Deductible traditional IRA contributions: taxable when distributed. Nondeductible traditional IRA contributions and Roth contributions: not taxed again when returned.

How are Trump Account distributions taxed?

Contributions for which no deduction was allowed are not taxed again when returned. Accumulated earnings distributed are generally taxable.

When can Trump Account distributions begin?

No distributions before the calendar year in which the beneficiary turns 18, including withdrawals for qualified education expenses.

How are nondeductible Trump Account contributions treated when distributed?

Returned nondeductible contributions are nontaxable to the eligible beneficiary. Earnings are treated separately.

Which type of bond is generally considered lowest risk?

Municipal bonds are often considered relatively low risk, although credit and interest-rate risks remain.

Can leftover Section 529 funds be transferred to an IRA tax-free?

Direct transfer to a traditional IRA is not a tax-free option. Certain qualifying 529-to-Roth IRA rollovers are permitted.

What limits a Section 529-to-Roth IRA rollover?

The Roth IRA annual contribution limit applies, along with other eligibility requirements and rollover restrictions.

What is the primary tax advantage of a Section 529 savings plan?

Earnings can be withdrawn tax-free when used for qualified education expenses.

What is a subsidized Stafford loan?

A federal higher-education loan based on the student's demonstrated financial need.

When is risk retention an appropriate risk management strategy?

When expected losses have low frequency and low severity, making them manageable without transferring the risk.

How can life insurance proceeds benefit an estate?

They can provide cash to pay estate taxes, debts, and other expenses upon the insured's death.

How do you calculate the taxable portion of an annuity?

1. Monthly exclusion = investment in contract ÷ expected payments (years × 12). 2. Nontaxable portion = monthly exclusion × payments received. 3. Taxable portion = total payments received − nontaxable portion.