©2013, college for financial planning, all rights reserved. module 8 tax law research & special...

©2013, College for Financial Planning, all rights reserved.

Module 8Tax Law Research & Special Income Tax Considerations

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning

Learning Objectives

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8–1: Identify the purpose of a given provision of the federal tax law.8–2: Identify characteristics of the audit process.8–3: Identify the sources of authority for reliance on tax-related

issues.8–4: Identify the steps necessary to research a tax problem properly.8–5: Identify tax preference items or adjustments for the alternative

minimum tax for noncorporate taxpayers.8–6: Analyze a situation to calculate the alternative minimum tax for

noncorporate taxpayers.8–7: Analyze a situation to calculate the self-employment tax.8–8: Identify characteristics or consequences of tax traps or tax

penalties.8–9: Analyze a situation to calculate tax penalties or penalty taxes.8–10: Analyze a situation to identify tax traps present.8–11: Analyze a situation to identify the potential for the imposition of

a tax penalty.8–12: Identify ethical considerations in tax planning.

Questions to Get Us Warmed Up

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Learning Objectives



minimum tax for noncorporate taxpayers.8–6: Analyze a situation to calculate the alternative minimum tax, or

Medicare contribution tax, for individual taxpayers.8–7: Analyze a situation to calculate the self-employment tax.8–8: Identify characteristics or consequences of tax traps or tax



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Purposes of the Federal Tax Law

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IRS Audit Systems

• Discriminant Function Systems Program (DIF)

• Taxpayer Compliance Measurement Program (TCMP)

• Targeted Programs Audit• Document Matching

Program• National Research

Program (NRP)

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Research of a Tax Problem

• Assemble the facts• Identify the problem• Locate authority on the issue• Evaluate authority in terms of the issue• Develop one or more solutions • Communicate the solutions

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Authority for Reliance on Tax-Related Issues

• The Internal Revenue Code and Regulations: source of all federal tax law and highest statutory authority

• Treasury Department Decisions: authorized by law and having the full force and effect of law

• Revenue Rulings and Revenue Procedures: may be cited as precedents but do not have the force and effect of Treasury Department Regulations

• Congressional Committee Reports: indicates congressional intent when a law is enactedo not precedential

• IRS Private Letter Rulings: indicate the probable

approach of the IRS in a particular situation

• Court Decisions: judicial decisions interpret tax law or facts related to a particular case

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Learning Objectives

8-9







Alternative Minimum Tax

• Enacted in 1969• Parallel tax system• Designed to ensure that

“high-income” taxpayers pay at least a minimum amount of taxes

• Good news—ATRA indexes exemption and phaseout numbers, and start of 28% bracket

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Items of Tax Preference & Adjustments of the AMT for Noncorporate Taxpayers

Accelerated cost recovery deductions •on real property in excess of the straight-line method

•on leased property in excess of the straight-line method

•for personalty placed in service after 1986 to the extent the deductions exceed the 150% declining-balance method

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Items of Tax Preference & Adjustments of the AMT for Noncorporate Taxpayers•Excess intangible drilling costs (IDC)•Percentage depletion in excess of adjusted basis•The bargain element on the exercise of an incentive stock option•Rapid amortization of a certified pollution control facility in excess of the alternative depreciation method

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Items of Tax Preference & Adjustments of the AMT for Noncorporate Taxpayers•Tax-exempt interest on qualified private-activity municipal bonds (but not for bonds issued in 2009 and 2010)•Passive farm losses are treated as a preference item•A portion (generally 7%) of the gain excluded from sale of some qualified small business stock•Research and experimental costs, circulation expenses, and mining exploration and development costs

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Calculation for Noncorporate Taxpayers


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Calculation for Noncorporate Taxpayers


AMT & Itemized Deductions

Many itemized deductions disallowed:• state and local income taxes• property taxes• Tier-II miscellaneous itemized deductionsItemized deductions treated

differently:• medical expenses

exceeding 10% of AGI• qualified housing interest

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Learning Objectives

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Self-Employment Tax• Self-employment income—from trade or

business as sole proprietorship, general partner or independent contractor, or rental of personalty

• Self-employment income reduced by 7.65% prior to computation of self-employment tax

• 15.3% up to wage base of $113,700 (2013)• 2.9% Medicare with no ceiling• One-half of the self-employment tax deductible

as adjustment to income• Additional Medicare tax of 0.9% on self-employment

income over $200,000 for single taxpayers, or $250,000 (combined self-employment income) for joint returns

- no adjustment to income for this portion of S/E tax 8-18

Medicare Contribution Tax

• The tax is 3.8% of the lesser of the o net investment income, or o the excess of the modified AGI (MAGI)

over the specified threshold amount

• Net investment incomeo investment income reduced by• penalty on the early withdrawal of savings• investment interest expense• Tier II investment expenses after 2% of AGI

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Filing Status Threshold

Single $200,000

Head of household $200,000

Married filing jointly $250,000

Medicare Contribution TaxInvestment income includes gross income from:ointerest, substitute interest odividends, substitute dividends oannuitiesonet capital gains, net royalties, net rental incomeopassive business incomeSpecifically not included in investment income:omuni bond interestoincome from active trades or businessesoincome from qualified plans—including 401(k)s, 403(b)s, IRAs, Roth IRAs, and 457 plans.

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Learning Objectives

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Tax Traps

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Tax Traps

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Tax Penalties

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Penalty Calculation

Negligence 20% of the income tax deficiency attributable to negligence

Fraud (civil) 75% of the income tax deficiency attributable to fraud (not interest)

Failure to file 5% of the tax due for each month the return is late, up to a maximum of 25%

Minimum of the lesser of $135 or 100% of the tax if more than 60 days late

Failure to pay ½% per month of unpaid tax; maximum of 25%

Accumulated Earnings Tax

• $150,000 accumulation limit for PSC• $250,000 accumulation limit for non-PSC• Must prove valid business purpose for

additional accumulations:o bond sinking fundo expansion of businesso other reasonable need of the business

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Accumulated Earnings Tax Computation

• C Corporation taxable income

• MINUS: o federal income tax paido dividends paid o accumulated earnings

credit*• EQUALS:o excess accumulations

(taxed at 20%)

*$250,000/$150,000 minus the prior accumulations

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Estimated Taxes

• To avoid underpayment penalty, pay the lesser of:o 90% of the current year’s tax liability, oro 100% of the prior year’s tax liability.

• If prior year AGI exceeded $150,000, then payo 90% of the current year’s tax liability, or o 110% of the prior year’s tax liability.

• Safe harbor of $1,000

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Review Question 1

Assume a taxpayer is faced with a tax deficiency of $15,000, along with interest on the deficiency of $2,200. The entire deficiency resulted from an honest error in applying the tax law from the taxpayer’s 2011 return.What is the amount of the penalty?a. $1,500b. $3,000c. $4,100d. $11,250

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Review Question 2

Which one of the following is not a step in the tax research process?a. obtaining all the factsb. diagnosing the problem from the factsc. obtaining a letter ruling from the IRS if

the issue is noveld. communicating the answer

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Review Question 3

Which one of the following is not a step in the calculation of the alternative minimum tax?a. Adjusted gross income is decreased by any

net operating losses and tax preference and adjustment items.

b. Adjusted gross income is increased by any net operating losses and tax preference items and increased or decreased by the adjustment items.

c. The net amount of alternative minimum taxable income is reduced by an appropriate exemption amount to arrive at the AMT base.

d. The AMT payable is reduced by any refundable credits.

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Review Question 4

Which one of the following is not an allowable itemized deduction against alternative minimum taxable income?a. medical expenses in excess of 10% of

adjusted gross incomeb. charitable contributionsc. qualified housing interestd. state and local income taxes

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Review Question 5

Which one of the following statements is true with regard to self-employment taxes?a. A taxpayer is allowed to deduct a

portion of his or her self-employment tax liability as an adjustment to income.

b. The wage base is not adjusted annually for cost of living increases.

c. Net earnings from self-employment must be calculated under the accrual method of accounting.

d. Self-employed taxpayers are subject to employer withholding.

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Review Question 6

Which one of the following rules or doctrines deals with determining whether or not a taxpayer retains control over the “tree” and is thus taxed or not taxed on its “fruit”?a. the constructive receipt doctrineb. the tax benefit rule doctrinec. the assignment of income doctrined. the sham transaction doctrine

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Review Question 7

Which one of the following statements correctly defines negligence as it applies to imposition of the penalty?a. Negligence is bad faith conduct by a taxpayer

who has an intent to evade paying income tax.

b. Negligence is intentional conduct by a taxpayer to avoid paying income tax.

c. Negligence is a failure to make a reasonable attempt to comply with provisions of the Internal Revenue Code.

d. Negligence is an intentional disregard of the provisions of the Internal Revenue Code that results in a substantial underpayment.

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Review Question 8

Which one of the following is not a primary objective of the federal tax law system?a. raising revenueb. economic growth and developmentc. social objectivesd. political stability

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Review Question 9

A Treasury regulation isa. a general administrative interpretation

of statutory tax law.b. the source of statutory tax law.c. an administrative interpretation of

statutory tax law that is generally related to specific circumstances of fact.

d. an administrative interpretation of statutory tax law that is generally related to compliance issues.

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Review Question 10

All of the following are preference items for purposes of the individual alternative minimum tax excepta. interest on qualified private-activity

municipal bonds issued in 2008.b. the bargain element on exercise of an

incentive stock option.c. the excess of percentage depletion

over the property’s adjusted basis.d. investment interest in excess of net

investment income.e. excess intangible drilling costs.

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Review Question 11

Sandy McVey has Schedule C net income of $40,000. Sandy also has a general partnership interest from which she received a flow-through of operating income of $5,858. She also has a flow-through from an S corporation of $15,000. What is the amount of self-employment tax that Sandy must pay for the current tax year?a. $6,480b. $7,016c. $8,599d. $9,311

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Review Question 12

ABC Corporation has the following items of income and expense:

Assume ABC is not a personal service corporation and cannot establish a valid business purpose for its excess accumulations. What is the amount, if any, of accumulated earnings tax payable?

a. $0b. $16,200c. $28,000d. $28,200

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Taxable income $210,000

Federal income tax $59,000Accumulated earnings and profits at the end of the preceding tax year

$190,000

Dividends paid in current year $10,000

Review Question 13

Which one of the following is not a relief provision that applies to federal income taxation?a. exclusion for life insurance proceeds b. Section 179 expense electionc. child care creditd. additional standard deduction for the

elderly or blind

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Review Question 14

Jerry Nelson has Schedule C net income of $150,000. He also has a flow-through from an S corporation of $10,000. What is the amount of self-employment tax that he must pay for the current tax year?a. $17,396b. $18,116c. $18,384d. $22,607

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©2013, college for financial planning, all rights reserved. module 8 tax law research & special...

Documents

tax penalties

tax problem

tax penalty

federal tax law

alternative minimum

taxrelated issues

consequences of tax

tax traps present