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INDIVIDUAL 1040 TAX PLANNING
I. Filing Requirements - Standard deduction ($6,100, $12,200, $8,950) + Exemptions ($3,900).
a. Non-dependent - Marital Status, Age (day before birthday, date of death), Gross Income, cannot be claimed as dependent, over 65yrs or blind $1,200 (MFJ, QW, MFS), $1,500 (Single, HOH). II. Dependent Exemptions - $3,900.
a. Qualified Child: Relationship (blood / adopted), Age (u19, full-time student u24, disabled), Residency (>6mos), Support (>50%), Joint Return (no, except for refund). III. Interest, Dividend - year earned.
a. Form 1099-INT payer >$10, nominee interest >$10 taxpayer must issue Form 1099- INT and can exclude. Foreign investment interest included. IV. Capital Assets.
a. Real property - Real Estate, Form 1099-S, land. V. Child and EIC - custodial parent.
a. Child Tax Credit, $1,000/per dependent child, u17yrs old, worksheet, Form 1040 line 51, phaseout. VI. Wages, Income, Taxes - W2.
a. Gross Income, Earned / Unearned income. Excluded Income: Gifts, Federal Tax refunds, Government Social benefits, Awards for physical injuries. Statutory employee, no tax withholding Sch C expenses. Accountable plan reimbursements not included but Non-Accountable plan payments are income. VII. Adjustments.
a. Eligible Educator, $250 (MFJ $500), 900hrs, qualified expenses. VIII. Itemized Deductions - Schedule A.
a. Married: one spouse itemizes, then the other spouse's Standard Deduction is $0. Non-Resident and Dual-Status Aliens must itemize. IX. Self-Employed Income - Schedule SE / C / F.
a. Form 1099-MISC, 3rd party network payments (i.e. Paypal), >$600, Line 1b. X. Depreciation.
a. MACRS/ACRS, Real and Personal property, half-year convention, not land, Form 4562, worksheet. XI. Credits.
a. Child and Dependent Care credit, $3,000 (or $6,000 2 or more), Form 2441, nonrefundable, caregiver cannot be claimed by taxpayer as a dependent. QC u13yrs or disabled, >50% household maintenance, qualified expenses while at work or seeking employment, disabled or student. Compute eligibility at 250/per month, MFS spouse must be absent last 6mos., excludes transportation. Employer Dependent Care Assistance up to $5,000 (MFS $2,500). XII. Education Credits - only claim expenses once.
a. AOC / HOPE Credit, $2,500, Form 8863, dependent, qualified expense, when loan payments disbursed, non-deductible and up to 40% deductible. MFS cannot claim. Refunded expenses recaptured, phaseout XIII. Retirement.
a. IRA/ROTH IRA, $5,500 ($6,500 50yrs old, 2013) by April 15. Qualifying non-passive income (alimony and combat pay), Spousal Active Participant, phaseout, worksheet. MFS contributions up to each's earned income (higher phaseout if "living apart" during tax year), MFS ROTH IRA phaseout $0-10K. XIV. Non/Passive Income.
a. Non/Passive Income, Portfolio management, Personal service and other Income. A. Estate.
a. Decedent 1040 Income tax in final year. B. 1040 AMT
a. Alternative Minimum Tax Individuals Form 6251, Tax 26/28%, AMT exemption amounts S or HOH $51,900, MFJ $80,800. AMT annual inflation indexing. Phaseout Levels $115,400 S, HOH; $153,900 MFJ, Widow/ers; and $76,950 MFS. AMTI in excess of threshold phaseout exemption 25¢ for each excess dollar. C. ITIN
a. ITIN for 5yrs, or before 1/1/13 indefinite. ITIN (begins with 9..) paper request file W7 and 1040 with supporting documentation, with ITIN you can efile. Foreign passport is only stand-alone document. Dependent birth certificate required if no passport. MFS
a. Community property States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Puerto Rico, Texas, Washington, Wisconsin, Alaska (allows spouses to elect). Louisiana, Texas, and Wisconsin apply “Spanish” rule characterizes income from separate property during marriage as community property. Form 1041 Income tax return for trusts and estates (for individuals, partnerships and corporations)
a. 1041 Simple or Complex Domestic Trusts: Gross income >$600, any Taxable income, or a NR Alien beneficiary. Due 15th day of the 4th month (or end of fiscal year) after the close of the Estate’s tax year. Bankruptcy Estates gross income >$9,750 when an individual files a Chapter 7 or 11.
b. Dependent's Standard deduction, Unearned income >$950 or Gross income >($5,800) + $300, not more than Standard deduction.
c. Self-Employed must file >$400 or church employee >$108.28.
d. MFJ, on Dec 31, dies during the year. Form 8379 Injured Spouse / Form 8857 Innocent Spouse. Annulment must amend in open years. Decedent can change from MFJ to MFS.
e. Failure to File >60 days $135 penalty or
f. Failure to Pay <90% or >$1,000 or 110% of AGI >$150k (MFS $75k). Form 4868 extension.
g. Resident Alien with Green card or Substantial Presence Test. U.S. citizen married to a Non-resident Alien can file MFJ w/ ITIN and W-7 if both sign. Dual-status enter and leave the U.S. in tax year.
b. Qualified Relative: Relationship (lived with taxpayer all year), Gross Income (<$3,900), Support (>50%), not a Qualified Child.
c. QC & QR, Taxpayer cannot be claimed as dependent, Joint return cannot claim spouse except no tax liability or refund, U.S. Citizen/Canada/ Mexico.
d. Support - Food, Housing (FRV), Education, etc. - not Health Insurance, Scholarships, worksheet.
e. Multiple Support Agreements, Form 2120.
f. HOH - dependent must be related, unmarried / for tax purposes or files MFS, >50% dependent resides, >50% household maintenance (rent, interest, taxes, utilities, food, etc.). Married dependent only if taxpayer can claim dependent exemption, spouse does not live in home any part of last 6 months of year, worksheet.
g. Form 8332 Release, spousal dependent exemptions waiver.
h. Qualified Widow(er), dependent, >50% household maintenance, filed MFJ/MFS in year of death, 2 years as Widow(er).
i. Tie-Breaker - child's parent, more time, parent's >AGI, person's >AGI, no parent claims then person's >AGI.
b. Form 1099-DIV payer >$10. Qualified >60 days (capital gains rates or Non-Qualified dividend at ordinary income rates) / 90 days (Preferred stock) / 1yr LTCG, basis. Retained Undistributed capital gains Form 2439. Non-taxable distributions reduces basis, if cash option available (even if not taken) then taxable.
c. Schedule B >$1500. QDCGT worksheet - 0%, 15%, 20%.
d. Foreign Investment, Form 8938, Form TD F 90-22.1, Form 3520. Foreign Tax Credit or Sch A deduction, Form 1099-T, Form 1116. Deductible directly on Form 1040 Ln 47 if <$300 ($600 MFJ).
e. Penalty for early Savings Withdrawal, W2 box 2, Form 1040 line 30.
f. Muni Interest not taxed, tax-exempt interest. Treasury interest not taxed by States.
g. Kiddie Tax, Form 8814 Parent (<$9,500). Form 8615 Child (>$2,000) parent must complete 1040 first.
b. Personal property - Tangible (incl. precious metals), Intangible.
c. Use: Personal, Investment, Business, Inventory.
d. Schedule D, Form 1099-B, Form 8949 tax worksheet. Basis (FMV), Adjusted basis pluses/minuses. Securities trade date. §1231 long-term Business gains or losses.
e. Restricted Stock (NQSO) generally ordinary income, in year vested minus exercise price, on W2. If stock is held (i.e. ISO) capital gains when sold, basis is FMV when vested, report on Sch D.
f. Capital Gains rates 0%, 15%, 20%, 25%, 28%, 33%, 35%, 39.6%. If sale is >gift's FMV but
g. $3,000 capital loss/yr, carryover. STGG / LTCG (>1yr) Form 8949. 7 yrs for worthless securities. Wash Sales 30 days before or after sale disallowed loss, but loss carry-forward added to basis. Installment sale to a relative, resold within 2yrs of original sale, installment sales reporting lost.
h. Business, Real Estate up to 25% or marginal rate, whichever is lower. Collectibles (excluded precious metals), QSBS business stock up to 28% or one's ordinary income (marginal) rate, whichever is lower.
i. §121, residence, 2yrs owned of 5yrs used (excl. temporary absences) $250k (MFJ $500k). Unequal non-like-kind exchanges "boot" is taxable. Reduced Exclusion for unforeseen circumstances. 1033 Involuntary Conversion 2,3,4,5 years. 1031 Exchange excludes inventory conversions.
j. Net Investment Income Tax, additional 3.8% on high-income taxpayers.
k. Rollover of gain from publicly traded securities Pub 550 ch 4 Specialized Small Business Investment Company, limit $50,000 and $500k lifetime, Sch D Form 8949.
b. Additional Child Tax Credit, refundable, earned income >$3,000, u17yrs old, Form 8812, phaseout.
c. EIC, refundable, max $487, $3,250, $5,372, $6,044, cannot file MFS and/or investment income >$3,300, Schedule EIC, Checklist Form 8867, phaseout. EIC prior disallowance Form 8862.
d. EIC /wo QC, AGI max $14,340/19,680, 25-65 yrs, cannot be dependent or QC, phaseout.
e. EIC QC, AGI max $37,870/43,210, $43,038/48,378, $46,227/51,567 (1,2,3 children), blood QC dependent (custodial parent) only claimed once, u19, student u24, disabled. Taxpayer must claim QC exemption, QC cannot file MFJ except for refund.
f. EIC worksheet - $500 Preparer penalty, Form 8867, records.
b. Employer fringe benefits: Parking reimbursement <$240/mo, Employer-provided Mass Transit benefits <$125/mo, Qualified Educational assistance <$5,250/yr. not taxable. Qualified Employer Plan awards <$1600 and NQ awards <$400 not taxable.
c. Substitute W2 Form 4852. Other taxes W2 box 12, Form 1040 line 60.
d. Unemployment, taxable, Form 1099-G.
e. Prior year State Tax Refunds taxable if itemized in prior year.
f. Tip, Form 4137, >$20 Employer reportable, allocated tips, Employees report <$20.
g. Independent contractor - no SS and Medicare taxes, Form 8819. Independent Contractor or Employee (IRS 3320-120) file SS-8.
h. Foreign Income excluded up to $97,600 (each) and Foreign Cost Exclusion (or deduction) Form 2555, but must pay SS taxes.
i. Alimony cash (or payments on their behalf), taxable by Recipient Form 1040 line 11, deducted by Payer Form 1040 line 31a. Not alimony payments if contingencies tied to child.
j. Child Support (not deductible nor income), payments recognized before Alimony.
k. Scholarships and Fellowships, fully / partially / not taxable, Form 1040 Line 7. Excluded (qualified) tuition, fees, books, supplies, equipment, etc.
l. LT Disability Income, Form 1040 line 7 (before retirement age), Form 1040 line 16a,b (retirement age).
m. Gambling, Form W-2G, losses (Sch A) up to winnings (Form 1040 Line 21), diary.
n. Awards and Notary wages exempt from SE tax, Form 1040 line 21.
o. 1099-C, Canceled debt 1040 Line 21, except if insolvent (liabilities exceed assets) worksheet.
p. Household Worker paid >$1800 must pay SS and Medicare tax. Household Employer files Sch H with FICA and FUTA taxes.
q. Clergy generally self-employed income, except otherwise or vow of poverty (includes foreign income). Lower of housing/parsonage allowance (or paid/FMV) included for self-employment income and tax (excess is income), excluded if for retirement and excluded from gross income. Exempt from SE tax for religious members Form 4361, religious sects Form 4029. Expenses on Sch A, (Form 2106), C if housing allowance then calculate non-deductible (percentage/allocate) expenses with worksheet.
r. Domestic Production Activities Deduction (small business in a single line of business) deduction cannot exceed AGI or taxable income, Form 8903.
b. Penalty for early Savings Withdrawal, Form 1040 line 30.
c. Student Loan Interest (not loaned from related person), deductible $2,500, eligible student, qualified college, >50%, degree program, Form 1098-E, Form 1040 line 33, worksheet.
d. Moving Expense, Form 3903, 50mi farther away, work-time 39 weeks 1yrs (or 78 weeks 2yrs self- employed), either spouse, 1yr from job start (temporary <1yr, not indefinite), travel, lodging, standard mileage rate ($0.24), not meals. Employer's excess payments are W2 income.
e. HSA deductible contributions, IRA funding transfers, Form 8889, Form 1040 line 25, qualified medical expenses, excess contributions 6% penalty, taxable distributions Form 1040 line 21. 20% penalty non-medical before 65 distributions, 60 day rollover, annual limitations.
f. Reservists, Government officials, Performing artist: deductible business expenses, Form 1040 line 24.
g. Write-in Adjustments, Form 1040 line 36, deductible "MSA", "JURY PAY", Rental of personal property (non-Real estate) "PPR", Amortization and expenses for Reforestation "RFST", Repayment of supplemental unemployment benefits "Sub-pay TRA", deductible Pension plan contributions "501(c)918)(D)", deductible Clergy contributions "403(b)", Unlawful Discrimination deductible court fees "UDC", deductible court fees for IRS awards "WBF".
b. Medical expenses, above 7.5% AGI, year paid, deductible Insurance premium (incl. LTC), medically necessary programs and procedures, capital expenditures (construction), standard mileage rate ($0.24) transportation, meals and lodging, wages for nursing care, aid and equipment. Excluded medical expenses paid with before-tax dollars (incl. group plan coverage) and reimbursements, DI premium, AD&D premium and P&C Auto Medical benefits premium.
c. State, Local, Real (Estate) property, Personal Property, Foreign Income Taxes, paid during the tax year, General sales tax table plus additions for vehicles and home-building materials taxes. Resided in more than 1 State prorate. Deductible escrow, vehicle registration fees, Schedule A Line 8.
d. Real Estate property taxes paid during the tax year, >2 homes allowed. Paid by "equitable owners" (occupying and maintaining, not on title). Home-Equity debt up to $100,000 ($50,000 MFS) to acquire, construct or substantially improve a qualified residence (not to exceed FMV), Sch A Line 8.
e. Mortgage Interest for 2 homes and late fees, up to $1M, >$600 Form 1098. Points in year paid or life of loan. Paid by "equitable owners" (occupying and maintaining, not on title). Qualified Mortgage Insurance premiums phaseout. Refinance fees limited to points (amortize).
f. Charitable Gifts, deductible to qualified organizations. Cash >$250 receipt, partly deductible if >$75 taxpayer receives good and/or services, deductible Volunteer work transportation ($0.14), deductible $50per school month Exchange student. FMV of property >$500 Form 8283 >$5,000 appraisal >$20,000 art qualified appraisal, records. 50% AGI private 30%, 20% (5 yr carry forward). Excluded not-for-personal or individual benefit, games of chance, or Gifts >FMV, records.
g. Business loan interest, Investment loan interest, Form 4952 Schedule A line 14, limited Personal loan interest.
h. Casualty Theft Losses, Form 4684, above $100 and 10% AGI, proof of loss, reduced by Insurance claim. FMV, year loss occurred, Federally Declared Disaster Area, Form 4684 Line 15 losses to Sch D, Form 4684 Line 18 losses to Sch A. Insurance deductible is a loss (claimed or unclaimed).
i. Miscellaneous deductions, >2% AGI incl. tax on Decedent's estate, Pension and Annuities. Deductible travel expenses away from "tax home".
j. Gambling, Form W-2G, losses (Sch A) up to winnings (Form 1040 Line 21), diary.
k. Hobby losses (Sch A Line 23) up to income, income (Form 1040 Line 21). IRC §183 Activities not engaged in for profit.
l. Tax Preparation, Sch A Line 22. Investment Advice, Sch A Line 23.
m. Job Expenses including driving between Work/Temporary locations, Form 2106, standard mileage rate ($0.565) or optional method.
n. Educational Employment expenses improving skills, other Employment Related Expenses including Job-Seeking and Disabled expenses, Schedule A Line 21.
o. Recovery of State tax refund from prior year Sch A, Form 1099-G Form 1040 Line 10. Recovery of itemized prior losses Form 1040 Line 21.
p. Disabled Impairment-related Work expenses, Schedule A line 28, above 2% AGI.
q. AMT, Form 6251, Credit for paid AMT in prior year Form 8801. AMT does not help those with Standard deduction, who may want to itemize though can effect their State return (conform with Federal filing).
b. Schedule C Payroll taxes 6.2%/12.40%, Medicare 1.45%/2.90%, FUTA 0.8-6.2%.
c. Cost of Goods Sold, hybrid method (accrual for inventory and receipts, cash for expenses).
d. Business Expenses, Sch C list (Line 8-27) and other Expenses (Part V 5). Business miles ($0.565). Health insurance deductible if not eligible in an employer's plan. Statutory employees can use Sch C.
e. Home-Office Expenses, daycare footage of home used, Form 8829.
f. Net Operating Loss, NOL option 2,3,5 yrs back (eligible farm or disaster) and 20 yrs forward. At-Risk Activities, Schedule C Line 32.
g. SE tax >$400 13.3% Sch SE Line 4, recover 50% 5.65% Form 1040 Line 27.
h. Health Insurance, Form 1040 Line 29, remainder on Schedule A.
i. Self-Employed auto loan interest to Sch C interest deduction.
j. Farming, Schedule F, not pet breeding.
b. CLADR listed property, Straight-line, Alternative method.
c. Bonus Depreciation in first year.
d. Mid-Quarter MACRS convention for >40% purchased in 4th quarter.
e. Rental (Residential) property 27.5yrs, Nonresidential property 39/31.5yrs, Mid-month convention.
f. §179, Form 4562, >50%. Not eligible for Held-for-Investment (rental property) improvements, annual limitations.
g. Depreciation flows to Schedule C Business, Schedule F Farming, Schedule E Rental, Schedule A Investment/Business.
b. Adoption credit, Form 8839, $12,970, qualified expenses in year finalized (or U.S. Citizen following year). Eligible child u18yrs, disabled and special-needs (full credit), phaseout. Employer Adoption assistance W2 box 12 T, includes never finalized adoptions.
c. General Business Credit, Form 3800, Form 1040 Line 53.
d. Small Employer Health Insurance Credit, up to 35% of employee's premium, Form 8941, phaseout.
e. Foreign Tax credit, Form 1116 (>$600), Form 1040 Line 47 or deductible on Sch A taxes.
f. Credit for the Elderly or Disabled, Schedule R, low income.
g. Minimum Tax Credit, non-refundable, AMT in prior year, Form 8801.
h. Residential Energy-Efficient Property credit, Solar, $1,000per 1 KW, Form 5695.
i. Non-business Energy Property Credit, 10% improvements, $500, Form 5695.
j. Health Coverage Tax Credit for PBGC beneficiary or trade adjustment allowance, Form 8885.
k. First-Time Home-buyers and Long-time Resident Credit, repayment due to sale purchased in 2008 15 years, 2009-2011 3 years, Form 5405.
l. Mortgage Interest Credit, MCC certificate, Form 8396.
b. Lifetime Learning Credit, 20% of $10,000 or $2,000 (no drug felony restriction), Form 8863.
c. School's Tuition payment/expenses (less non-gift assistance), Form 1098-T.
d. Scholarships taxable for payment of room, board and/or travel.
e. Qualified Tuition Program (QTP, 529), 1099-Q Form 709. Non-education distributions 10% penalty, Form 5329.
f. Education Savings Account (ESA) $2,000 per child year, but distributions for K-12, phaseout.
g. Savings Bond Interest (partial) exclusion to pay qualified education expenses, not MFS, Form 8815 worksheet, phaseout.
h. Savings Bond Interest (partial) exclusion to pay qualified education expenses, not MFS, Form 8815 worksheet, phaseout.
i. Employee Education work-related, 1) Sch A Misc. deduction or 2) Tuition and Fees or 3) Sch C, E or F.
b. DC (ERISA) Plans ($51k 2013), Employer-Matching, contribution limits. 10% 59½ penalty, 50% 70½ penalty, limitations.
c. Self-Employed Retirement plans, Form 1040 Line 28.
d. Deferred-Compensation contributions, W2 box 12.
e. Retirement Savings Contribution Credit, first $2,000 contributions, Form 8880, phaseout.
f. Required Minimum Distributions begin April 1 of year following the year when taxpayer turns 70½yrs. IRA distributions, Form 1040 Line 11, 15.
g. Non-deductible IRA distributions (and ROTH) not taxable (but 10% penalty before 59½) Form 8606. ROTH IRA and Non-deductible IRA losses deductible Sch A Misc.
h. Qualified Charitable Distributions from retirement accounts up to $100k.
i. §72(t)(2)(A)(iv) series of substantially equal periodic payments for the longer of 5yrs, or until age 59½, Life Expectancy, Amortization, or Annuity Method.
j. Pensions and Annuities, Form 1099-R, actuarial tables Form 4972, simplified method / general rule. After-tax contributions not taxable, NUA of company stock at Capital Gains rates.
k. SS Retirement, Form SSA-1099 and Form RRB-1099 up to 0%, 50%, 85% taxable, Form 1040 Line 20 a,b, worksheet. SSDI not taxable, Form SSA-1099. Excess RRB >SS taxable.
l. Reverse Mortgage payments not taxed.
m. Children's Form SSA-1099 support.
n. 1035 Life to Annuity, Endowment or LTC ok. 1035 Annuity to LTC ok. Ordinary Taxes on Gain for 1035 Annuity to Life or endowment.
b. Professional Real Estate >50% time and 750hr. Real Estate dealer rent (personal services) is business earned income Sch C; if only occasionally Form 1040, line 21. Materially participate (not passive) no limit to losses against other income.
c. Rent (business investment income) deduct expenses from Rental income Sch E. Gross rent (year received, not security deposit) deduct expenses (in year used, prorate) when "available for rent".
d. Rental Income includes security deposits (not returned), early Cancellation fees, advanced Rent, insurance Payments for lost income, direct Payment of property expenses by tenants, prepaid Rents received as part of a property sale, and tenant Services or Property provided as a rent payments.
e. Rental Expenses: Auto and Travel, related to rental activity, outside of area 50% meal expenses (or standard meal allowance), expenses for improvement projects are not deducted (incl depreciable basis). Insurance, Prorate the premium. Legal and other professional fees. Mortgage interest, points amortized (loan origination fees, maximum loan charges, premium charges), for refinanced only interest allocable to rental activity purposes (non-investment not deductible). Repairs, deductible (improvement costs to add value to property, prolong useful life, adapt to new uses, are depreciable). Taxes, (special assessments added to the basis of the property). Depreciation. Other (contract labor).
f. Rental (expenses without income), expenses are either added to the basis of the property (property not in service, mortgage interest on Sch A investment interest expense and real estate taxes on Sch A taxes) or deducted (in service) on Sch E.
g. Rental (less than fair rental value) is a not-for-profit activity (Hobby) Form 1040, line 21 and expenses line 36 "PPR". Rental expenses are reported on Sch A Misc and are limited to rental income.
h. Basis of purchased property is purchase price plus certain costs of acquisition (points amortized, a §179 cannot be taken). Residential rental (incl. structural components, improvements) 27½yrs depreciation, SL method and mid-month conventions. Rental depreciation, FMV or basis whichever is lower. Personal use property converted to Rental use, whichever is lower: FMV appraisal (land and improvements, date of conversion) or adjusted basis.
i. Acquisition costs, allocate between land (not depreciable) and improvements (buildings, pavements, fencing, etc) based on ratio of land (costs) to total purchase price. Acquisition costs added to basis: assessment paid by seller (reimbursed by buyer), real estate taxes owed by seller (paid by buyer), assessment owed by seller (paid by buyer), utilities owed by seller (paid by buyer), sales commissions paid by buyer, title, transfer, and recording fees. Acquisition costs deductible in year of purchase: real estate taxes paid in advance by seller (reimbursed by buyer), interest for the period from settlement date to first mortgage payment, insurance premiums for the current year. Acquisition costs amortized over life of loan: charges paid by buyer to obtain a mortgage loan.
j. Part Residential property rented and Part for Personal purposes (vacation homes), treated as 2 separate properties (business, personal use >15 days or >10%). Direct expenses entirely allocable to rental use and fully deducted from rental income. Indirect expenses allocable to entire property must be prorated between business and personal expenses, worksheet. Personal-use property expenses, mortgage interest, real estate taxes, and casualty losses, etc. are deductible up to income on Sch A.
k. De Minimus Rent residential property <15 days, rental income is not taxable (excluded from gross income) and rental expenses are not deductible
l. Passive Loss Rules, Active Participation Rental Activities deduct up to $25,000 per tax year (MFS $12,500) loss against income, carry-forward, phaseout from $100-150k.
m. Rental interview: Is real estate your main business? When did you purchase the property? How much did you pay for the property? How much of that cost was for the lot? Did the purchase price include any personal property, such as furniture or appliances? What was the FMV of the property when placed in service as rental property? How much value was allocable to the land at that time? Did you use any part of the property for personal purposes? If yes, for what period? Was the property occupied or available for rent the entire year? What operating expenses did you pay? Did you drive or take public transportation to collect rent or maintain the property? Did you prepay any expenses that apply for a period longer than the current tax year? Did you get a mortgage to buy this property? Have you ever refinanced the original mortgage?
n. Personal-type Property rental (i.e. cars), Schedule C and SE.
o. Royalties, Form 1099-MISC.
p. Depletion, up to basis, Timber Form T, percentages.
q. Partnerships LLC, Form 1065, K-1.
r. Sub-chapter-S Corporation, Form 1120, K-1.
b. 1041 Simple or Complex Domestic Trusts: Gross income >$600, any Taxable income, or a NR Alien beneficiary. Due 15th day of the 4th month (or end of fiscal year) after the close of the Estate’s tax year. Bankruptcy Estates gross income >$9,750 when an individual files a Chapter 7 or 11.
c. 709 Gift Tax return, April 15th or with 1040 (or Estate Tax return) extension, gratuitous transfer >$14k (split gift), future interest or partial interest in a property to a charity. If donor fails to pay tax IRS can collect from donee. Exempt: unlimited marital deduction, transfer of property to a non-citizen spouse <$143k, direct payments for Medical expenses and/or Tuition (529 plans, 5yrs) and Political contributions (no deductions or credits). Unlimited charitable contribution deductions (i.e. CLT/CRT) recapture and 10% penalty if gift is not distributed, possessed, or used within 10yrs by charity. Penalty 20/40% for undervaluation (ex. FLP) less FMV on transfer. Disclaimer within 9mo by beneficiary. Crummey letter gift of present interest rights 30 days. Married split gift reported even if no tax. GST to skip person (not child of deceased parent) 40% of $5.25M and opt-in or opt-out of exclusion, §2701 valuing intra-family interest (qualified payment rights). Unified credit $2,045,800 (40% of $5.25M) for Estate, Gift or GST. If deceased spouse elects portability (file 706 return) then surviving spouse's exclusion is increased by Deceased Spousal Unused Exclusion (DSOE). Credit for Foreign Gift tax. QPRT (Qualified Personal Resident Trust) irrevocable, remainder taxed as present gift, residence sold/exchanged for greater FMV converted to GRAT, or residence exchanged for less FMV excess distributed to donor, if donor dies before transfer then gift reverts to Estate. GRIT (nephew, niece or unrelated) donor receives income stream as a GRAT or GRUT. Gifts to Expatriates (or Foreign Trust ) taxed. Mail Cincinnati, Ohio.
d. 706 Estate (GST) Tax return, gross>$5.25M 40%, due 9mo after death or with 6mo extension by executor, administrator, personal representative, beneficiary or heir. Installment payments §6166, Form 4768 in a closely held business, up to 14 years. States may impose a tax apportionate rule on liability of each asset to pay tax. Included life insurance (other property transfers) gifted < 3yrs from death. Alternative (all) valuation 6mo after death (or date of sale) if it decreases basis and tax. Special-use valuation for farms and property used in a trade or business. Deductions: Administration expenses, Debts of the decedent, Losses of the estate, Gifts to charity, Transfers to or for the benefit of a surviving spouse, State Death taxes. Credits: Unified credit, Gift taxes paid, Federal Estate tax paid on prior transfers, Foreign death taxes, Remainder or a reversion on which an election was made to postpone tax. Net Estate tax is gross minus credits. Power of Attorney Form 2848. Portability of Deceased Spousal Unused Exclusion (DSOE) elected on filing. Executor attaches a copy of the will to the decedent’s federal estate 706. Mail Cincinnati, Ohio.
b. No deduction is allowed for personal and dependency exemptions. Itemizers use taxable income. Non- itemizers use taxable income not reduced by the standard deduction. Taxable income plus specified tax preference items, add or subtract adjustment items, then subtract the NOL for AMT purpose, is AMTI. AMTI subtract an exemption amount (S, HOH, MFJ, Widow/ers, MFS). “AMT base” <$179,500 ($89,750 MFS) taxed at 26%, >$179,500 ($89,750 MFS) taxed at 28%. Tax reduced by the AMT foreign tax credit (unused AMT foreign tax credits that exceed annual limits may be carried back or forward). Lower (regular) tax rates apply to net long-term capital gain and to qualified dividends. Compare to regular tax the excess is the AMT liability.
- Medical expenses are deductible when >10% AGI.
- State Tax refund (not added) reduces AMT income, because not deductible.
- State or local income, sales, real property, and personal property taxes not deductible.
- Shareholders in cooperative housing corporations cannot deduct their share of the co-op’s taxes.
- Home mortgage expense for a motor home or boat not deductible.
- Home equity interest is not deductible unless to acquire, construct, or substantially improve the residence.
- Miscellaneous itemized deductions: unreimbursed employee business expenses, attorneys’ fees paid to obtain a taxable award, investment expenses, and other miscellaneous itemized deductions not deductible.
- Interest on private activity bonds added to AMTI not deductible.
- Interest on indebtedness incurred or continued to purchase or carry tax-exempt obligations, or other expenses related to tax-exempt obligations not deductible.
- Excess FMV of the stock on the ISO exercise date over the exercise price is income added to AMTI not deductible.
- Depreciation adjustment differ between MACRS and AMT Alternative Depreciation System (ADS, generally over longer periods).
- Additional adjustments and preferences: intangible drilling costs, long-term contracts, circulation expenses, mining costs, passive farming activities, depletion, and other items.
- Allowed Misc Gambling losses to the extent of gambling winnings, Misc Federal Estate tax paid on income in respect of a decedent items, and Misc Amortization of bond interest deductible.
- Allowed Misc Trade or Business expenses, such as Legal fees incurred in recovering lost business income, are Schedule C deductible.
- Deductible Investment interest adjustment is limited to net investment income.
c. Prior-year AMT credit is allowed only for AMT deferral items: depreciation, ISO, and others.
d. Strategy: itemize because can't use standard deduction, reduce State Tax refunds, adopt HD health insurance with deductible contributions to pay unreimbursed medical costs, employers can adopt accountable plans for unreimbursed employee business expenses, no AMT adjustment if exercise of ISO and sale occur within the same year.
b. Substantial Presence Test: 183 days physically present in the U.S. during the current year. Or 183 days within 3yrs: at least 31 days during the current year (or total), plus 1/3 days in preceding year, plus 1/6 in second preceding year.
c. Dependent (QR for exemption) includes Canada and Mexico (S. Korea, and India for 1040NR). NR Alien visas B1, B2, F2, H4, J2, O3, WB, WT (H1 work visa eligible for SS#).
d. U.S. citizen (or resident) married to a NR Alien may elect NR Alien spouse to be considered Resident spouse status if signed by both spouse with NR spousal exemption.
e. 5 exceptions for NR Aliens and no 1040 (no filing requirements) and need an ITIN Form W-7: Third-party withholding on passive income; Wages, salary, compensation, and honoraria payments with tax treaty benefits claimed; Third-party reporting of mortgage interest; Third-party withholding, disposition by a foreign person of U.S. real property interest; Treasury Decision (TD) 9363 (requirement for corporations to efile).
b. Community property is all property acquired during marriage that is not separate property. Creditors can reach into community property to satisfy debt incurred by either spouse. MFS combine incomes and report 1/2 of income on each separate return. Is the marriage legal? Is couple's domicile a community property state? Were spouses subject to community property rules? Domicile is where an individual has their true, fixed, permanent home and principal establishment, and returns to whenever absent.
c. California, the community ends when the couple are separate with no intention of reuniting. California Civil Code §771 earnings of a spouse, “while living separate and apart” from the other spouse, are separate property. Not necessary to be legally separated or to have filed for separation or divorce.
d. MFS if one spouse itemizes, the other must itemize (cannot take standard deduction). Child and Dependent Care Credit, Earned Income Credit, and Credit for Adoption expenses cannot be taken. U.S. Savings Bonds interest income used for higher education cannot be excluded. More SS benefits (incl. RR benefits) received may be taxable than MFJ. Education credits (Hope and Lifetime Learning credits) and Qualified Student Loan interest paid cannot be deducted.
e. Annulment, amended returns should be filed for all MFJ/MFS open years to Single.
f. Common (separate property) law, each spouse is a separate individual with separate legal and property rights, joint assets may be split equally or divide as deemed best.
g. Joint tenancy (separate property) deceased spouse's share of basis changed to FMV on death (surviving spouse's basis not changed).
h. Annuities payable under the Civil Service Retirement Act (CSRA) or Federal Employee Retirement System (FERS) are community property.
i. EITC is not characterized as community property, the injured spouse’s share of the EITC is separate property.
j. MFS "community funds" provide >50% support and >1 dependent, spouses may share dependent exemptions, otherwise the spouse who provides >50% support.
k. Spouse dies, step-up FMV of the community property (incl. surviving spouse's) is basis for entire property.
l. Community business or Investment income (generally) divided equally between spouses. Each deducts 1/2 of expenses on separate returns. Separate business or Investment expenses are deductible by the spouse who earns the income. Expenses paid from "community funds", deductions are divided equally.
m. Home and Rental property are characterized as community property (even if owned, bought and titled separately before marriage) if "community funds" were used to pay the mortgage, etc. Community right to reimbursement (asset) follows any appreciation, interest, or profits that attaches to "community funds".
n. Relief from separate tax return liability for community income: Separate return is filed. Community income not included in gross income on the separate return. Taxpayer did not have knowledge of community income. Unfair to include the item/s of community income in the taxpayer's gross income.
o. Form 8379 Injured Spouse Allocation (MFJ concurrently), refund claim by “non-obligated spouse” of their share of the joint overpayment when the obligated spouse has past due obligations (Federal tax, State income tax, Child or Spousal support, or Federal non-tax debt).
p. Don't file Injured Spouse if "obligated spouse" owes Federal income taxes and all income is community property. Debt other than Federal income taxes (ex. child support) IRS refunds the Injured Spouse's share of overpayment. When all items (on return) are community property, each spouse is entitled to 1/2 of tax refund.
q. Form 8857 Request for Innocent Spouse Relief (after-the-fact, 2 years from IRS collection). In CA, IRS takes community property of either spouse to satisfy a debt. Relieves taxpayer of liability attributable to spouse’s omission of income, claim of false deductions, or credits (and unfair to hold taxpayer liable): General Innocent Spouse relief, Separation of liability, and/or Equitable relief (more than one is allowed).
r. Form 8958, Allocation of Tax in Community Property States, MFS spouses, California or Washington RDP (opposite sex >62) and SSMC with community property rights.
b. Income retained by the Trust or Estate is taxed to the entity (income tax return). Income that is distributed to a beneficiary is taxed to that beneficiary (information return). Sch D (special) for 1041 to recognize gains or losses on property that is distributed-in-kind. Income is required to be distributed in the year received.
c. Decedent’s Estate consists of only assets subject to probate administration.
d. Multiple trusts can be treated as 1 trust for income tax purposes (income and expenses of trusts are aggregated) with the same grantor, beneficiary, and principal purpose, as well as, created for tax avoidance purposes.
e. Foreign Trusts and NR Alien Estates file 1040NR with U.S. source income. File TD F 90-22.1, Report of Foreign Bank and Foreign Financial Accounts, if foreign account(s) >$10,000 or if the entity owns >50% of the stock of any corporation that owns a foreign bank account. Foreign Trusts file an annual information return on 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner.
f. Foreign Trust transfers from an Estate or Domestic trust (as grantor) must be noted on 1041 “Other Information” section and 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, may have to be completed.
g. 7004, Application for Automatic Extension, automatic 5 month filing extension. Certain special trusts still have a 6 month extension.
h. Form 56, Notice Concerning Fiduciary Relationship, fiduciary filing on behalf of entity with allocations of income and principal that conform to the grantor/decedent’s wishes. Fiduciary (trustee, executor, administrator, or personal representative or corporation like a bank trust dept.) has personal liability, liability also follows assets distributed to beneficiaries (heir, legatee, devisee, or beneficiary of a trust or estate). Remainderman is a beneficiary who receives all property remaining after income beneficiary.
i. Discharge from personal liability of a decedent’s income taxes by making written application to the IRS (Code Sec. 6905) filed with 706 or decedent's 1040.
j. Uniform Principal and Income Act (UPAIA), fiduciary income tax return has unique taxing (allocation of income, and principal/corpus) where entity reports some items and some are passed through to beneficiary, the tax preparer must use special accounting rules. 1041 Sch K-1s for each beneficiary required to be informed of trust or estate income. Employer Identification Numbers (EINs) are needed on 1041. UPAIA reasonable apportionment >3% and <5% of the trust's principal (income), a "fair share" to the income beneficiary. Trustee may have discretion to convert a trust to a non-charitable unitrust with beneficiary approval. Allocations of income and expenses are based on the governing instrument (trust) and local law with special rules for allocating depreciation, depletion, and amortization. Allocation between tax-exempt and other income, determine the percentage of tax-exempt income to gross income, and allocate deductions proportionately. Tax-exempt income expenses that cannot be deducted on the fiduciary’s income tax return may be deductible on 706.
k. Distributable Net Income (DNI) is the taxable income of a trust or estate (with modifications, and limits the income distribution deduction) at the beneficiary level. Accumulation distribution is unique to Complex trusts that allows the trustee to accumulate income rather than distribute it annually to the beneficiary, not taxable. "Corpus and res" is the principal (property) of the entity from which the income flows.
l. Income in Respect of a Decedent (IRD) is income the decedent is entitled at death but is not includible on decedent’s final 1040 (all accrued income with a contingent claim at the time of death): Deferred salary payments payable to decedent’s estate, Uncollected interest on U.S. savings bonds, Proceeds from the completed sale of farm produce, Traditional IRAs and Qualified retirement plan benefits (ex. 401k), Pro rata share of any income item of an S corporation.
m. Simple trust 1) requires the current distribution of all income, 2) prohibits the distribution or use of trust funds for charitable purposes, and 3) does not distribute amounts attributable to corpus. Simple trust will become a Complex trust in any year it distributes principal.
n. Complex trust, an election can be made to treat income distributed in the first 65 days of a tax year as being made in the preceding tax year (indefinite, unless revoked) distribution on Sch B (“other amounts paid” and check box 6 “other information”).
o. Complex trusts (not Grantor trusts or Simple trusts): CRT and Discretionary Trusts that do not mandate current distribution of income.
p. CRT (CRUT/CRAT) with income for life or a term of years (<20yrs). Charitable Remainder Unitrust (fixed percentage >5% payment) or Charitable Remainder Annuity Trust (fixed amount annual payment). Income beneficiaries are not exempt from taxation of income, determined by using the ordering rules. CRT with unrelated business taxable income (UBTI) is subject to a 100% excise tax on its UBTI, 4720, Return of Certain Excise Taxes. Charitable Lead Trust (CLT), charity has an income interest for a term of years, with the reversion to the grantor, property then passes to beneficiary.
q. Qualified Revocable Trust (QRT) when grantor dies, a special election to treat the trust as part of the decedent’s estate for income tax purposes, no 1041 filed.
r. Qualified Terminable Interest Property Trust (QTIP, simple trust) where current distributions of all income go to surviving spouse.
s. Qualified Disability, Supplemental Needs, or Special Needs Trusts <65 beneficiaries are disabled (by the SS Admin). Grantor a parent, grandparent, legal guardian, or court for the benefit of the disabled person using the funds of the disabled person (disabled person cannot be grantor).
t. 8855, Election to Treat a Qualified Revocable Trust as Part of an Estate, filed no later than due date of 1041 (irrevocable election, 6 months after 706 due, or, 2 years after the date of death if not required to file 706).
u. Revocable Grantor Trust (incidents of ownership, living trusts after 1980) and Irrevocable Grantor trust does not have to file 1041 as they are not recognized as separate taxable entities. File 1041 final return, write "Pursuant to Section 1.671-4(g), this is the final Form 1041 for the grantor trust". Trustee provides: recipient of income (or proceeds) the name of the grantor or trust, or, the Trustee can provide 1099 for each type of income or gross proceeds.
v. Grantor Retained Income Trusts (GRITs) for fixed terms: Grantor Retained Annuity Trust (GRAT) members of the family, Grantor Retained Unitrust (GRUT) members of the family, Grantor Retained Income Trust (GRIT) person not a family member, Qualified Personal Residence Trust (QPRT) with personal residence (or qualified vacation home) designed to pass the residence to beneficiaries at a reduced transfer tax cost. Grantor trusts do not have to file a separate income tax return.
w. Family Limited Partnerships (FLP) and Family Limited Liability Companies (FLLCs) have replaced Family estate trusts disallowed by the IRS as assignment of income and tax avoidance schemes.
x. Qualified Sub-chapter S Trust (QSST, simple trust) to hold S Corporation stock, only 1 income beneficiary and corpus (if distributed) to that beneficiary.
y. Electing Small Business Trusts (ESBTs) provide more flexibility than QSSTs holds S Corporation stock but >1 current income beneficiary, trustee can have discretion of distribution, or accumulation of income. No item relating to S Corporation stock is allocated to the beneficiary, the ESBT cannot use the $600 exemption, and taxed at the highest marginal rate.
z. Alaska Native Settlement Trusts established under the Alaska Native Settlement Claims Act of 1971. Section 646 election the trust pays a flat tax rate on ordinary income of lowest Federal tax rate for unmarried individual taxpayers, currently 10%.
aa. Abusive Trusts include those that lack economic substance or otherwise attempt to skirt tax rules disallowed.
bb. Strategy: 1. Select a Fiscal Year End for the Estate, 2. Elect to Include Income Earned in the Decedent's Trust on the Estate's Income Tax Return, 3. Manage Distributions to Minimize Overall Tax, 4. Prepare Form 1041 on the Accrual Basis, 5. Prepare a "First and Final" Return When Possible, 6. Update Basis of Assets, 7. Claim an Estate Tax Deduction for IRD, 8. Claim DRD on Estate Tax Returns, 9. Set Aside Income From Charitable Assets, 10. Allocate Estimated Taxes From the Final Return.
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