Tax Considerations

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Terms in this set (...)

Marginal Tax rate
The rate of taxation on any additional taxable income received.
It is sometimes referred to as the tax on the "next" dollar or the "last" dollar of income.
Regressive tax rate
Everyone pays the same rates.
Effects lower income families and individuals and more than than higher income families and individuals.
Effective tax rate
The overall rate of tax you pay on your total taxable income.
Alternative minimum tax
The excess of this tax over the regular tax is added to the regular tax amount.
Earned Income
Includes salary and bonuses.
It does not income as an owner of a limited partnership.
Distributable net income (DNI)
This includes interest plus capital gains that have not been reinvested back into the trust.
Portfolio income
Dividends, interest, and capital gains derived from the sale of securities.
What are the items that are added back in for the purpose of the AMT computation called?
Tax preference items
What are the tax preference items?
Accelerated depreciation on property placed in service after 1986.
Certain costs associated with limited partnership programs, such as research and development costs and excess intangible drilling costs.
Local tax and interest on investments that do not generate income.
Tax-exempt interest in private purpose municipal bonds issued after August 7, 1986.
Incentive stock options to the extent that the fair market value of the employee's stock is in excess of the strike price of the option, even when the stock is not sold in that year.
Capital gain
Occurs when the security is sold for a price higher than its cost basis (total cost of investment).
Default method of IRS - FIFO
Example: you have 100 shares of ABC for $50 per share. ABC issues a 2:1 stock split.
100 shares x $50 = $5,000
X 2 : 1
________________________
200 shares x $50
/ 1 : 2
________________________
200 shares x $25 = $5,000
Wash sale
Sell at a loss. Establish substantially identical position within 30 days prior or 30 days after. Loss is disallowed for tax purposes.
Sole proprietorships (business taxation)
The owner computes the earnings of the business on the Schedule 1040 so anything made by the business is reflected directly on her tax return.
Partnerships
These pay no taxes.
They file an information return, a Form 1065, and attach to that Schedule K-1 indicating the amount of income to be inserted on the investor's personal Form 1040.
C corporation
Has to pay income tax.
File their income on a Form 1120.
Estate tax
This is imposed on the transfer of substantial amount of property.
An individual may transfer unlimited amount to a spouse who is a US citizen without the imposition of this tax.
An individual may transfer unlimited amounts of money and other property to an eligible charity with none of this tax.
For heirs other than spouses, this tax credit will offset this tax on transfers of up to $5.45 million in 2016, indexed for inflation of property.
Estate tax computation is Filed under form 706.
Estate income tax computation is done on form 1041.
Maximum tax rate is 40%.
This tax is due nine months after death.
Gift tax
A federal tax imposed on the transfer of property during the lifetime of the donor; up to $5.45 million in lifetime gifts may be made without incurring this tax.
An individual may give up to $14,000 per year to any number of individuals without generating this tax.
Maximum tax rate is 40%.
This tax is due at the same time as the individual tax return.
When securities are the subject of a gift, the recipient acquires the donor's cost basis and holding period.
How is corporate bond interest taxed?
By ordinary income.