Tax Planning & Preparation Flashcards

What is the 'step-up in basis' rule and how does it benefit heirs?

Answer: It increases the cost basis of inherited assets to their fair market value at the date of the decedent's death, eliminating built-in gains

The step-up in basis resets an inherited asset's cost basis to its fair market value at death, so heirs owe no capital gains tax on pre-death appreciation.

A business owner uses their home office exclusively and regularly for business. Which form is used to calculate the home office deduction for a self-employed person?

Answer: Form 8829

Form 8829 (Expenses for Business Use of Your Home) is used by self-employed taxpayers to calculate and report the home office deduction on Schedule C.

Which IRS safe harbor allows small business owners to avoid underpayment penalties by paying at least 100% of last year's tax liability?

Answer: Prior-year safe harbor for estimated taxes

The prior-year safe harbor lets taxpayers avoid underpayment penalties by paying estimated taxes equal to 100% of the prior year's tax liability (110% if prior-year AGI exceeded $150,000).

What is a Roth conversion, and what is its primary long-term tax planning benefit?

Answer: Moving pre-tax retirement funds to a Roth account by paying taxes now in exchange for tax-free growth and withdrawals later

A Roth conversion moves pre-tax money into a Roth IRA, triggering tax now, but all future growth and qualified withdrawals are permanently tax-free.

Under the SECURE 2.0 Act, what is the required minimum distribution (RMD) starting age for individuals born in 1951 or later?

Answer: Age 73

SECURE 2.0 raised the RMD starting age to 73 for individuals born between 1951 and 1959, and to 75 for those born in 1960 or later.

Which alternative minimum tax (AMT) preference item most commonly triggers AMT liability for individual taxpayers?

Answer: Large state and local tax (SALT) deductions and incentive stock option (ISO) exercises

Large SALT deductions (disallowed for AMT) and the spread on ISO exercises are the most common triggers for AMT liability among individuals.

A taxpayer receives a 1099-C for $15,000 of cancelled credit card debt. Under what circumstance is this amount NOT taxable?

Answer: If the taxpayer was insolvent immediately before the cancellation to the extent of insolvency

Cancelled debt is excluded from income to the extent the taxpayer was insolvent (liabilities exceeded assets) immediately before the cancellation.