Ch10. Tax Law Comprehensive Review — Comparing Federal Taxes and Exam Pitfalls

Major Federal and State Tax Comparison Table

┌──────────────────┬────────────────────┬──────────────────┬─────────────────────────────┐
│ Tax              │ Taxpayer           │ Rate             │ Filing / Payment Deadline   │
├──────────────────┼────────────────────┼──────────────────┼─────────────────────────────┤
│ Individual       │ Individual         │ 10–37%           │ April 15 (Form 1040)        │
│ Income Tax       │                    │ (ordinary income)│ Extensions to Oct 15        │
├──────────────────┼────────────────────┼──────────────────┼─────────────────────────────┤
│ Corporate        │ C Corporation      │ 21% (flat, TCJA) │ 15th day of 4th month       │
│ Income Tax       │                    │                  │ after tax year end          │
├──────────────────┼────────────────────┼──────────────────┼─────────────────────────────┤
│ Self-Employment  │ Self-employed      │ 15.3% on net SE  │ April 15 with Form 1040     │
│ Tax              │ individuals        │ earnings         │ (Schedule SE)               │
├──────────────────┼────────────────────┼──────────────────┼─────────────────────────────┤
│ Capital Gains    │ Individual         │ 0%, 15%, 20%     │ April 15 (Schedule D)       │
│ Tax (LTCG)       │                    │ (based on income)│                             │
├──────────────────┼────────────────────┼──────────────────┼─────────────────────────────┤
│ Estate Tax       │ Estate of decedent │ 18–40%           │ 9 months after date of death│
│                  │                    │                  │ (Form 706)                  │
├──────────────────┼────────────────────┼──────────────────┼─────────────────────────────┤
│ Gift Tax         │ Donor              │ 18–40%           │ April 15 of following year  │
│                  │                    │                  │ (Form 709)                  │
├──────────────────┼────────────────────┼──────────────────┼─────────────────────────────┤
│ Property Tax     │ Owner (varies      │ ~1–3% (varies    │ Varies by state/county;     │
│                  │ by state)          │ by jurisdiction) │ typically semiannual        │
├──────────────────┼────────────────────┼──────────────────┼─────────────────────────────┤
│ Sales Tax        │ Consumer/retailer  │ 0–10.25%         │ Varies by state; typically  │
│                  │                    │ (varies by state)│ monthly or quarterly        │
└──────────────────┴────────────────────┴──────────────────┴─────────────────────────────┘

Real Estate Tax Lifecycle

Acquisition:
Transfer Tax (deed tax, varies by state/county — typically 0.1–2.2%)
Sales Tax: Typically not applicable to real property (varies by state)

Holding:
Property Tax (varies widely by state, ~1% national average)
Net Investment Income Tax (3.8%) — applies to rental income if above threshold
Ordinary Income Tax — on net rental income (Schedule E)

Disposition:
Capital Gains Tax — on gain realized (0/15/20% for long-term; ordinary rates short-term)
Depreciation Recapture — IRC § 1250 unrecaptured gain taxed at max 25%
Net Investment Income Tax (3.8%) — may apply to gain if passive activity

Gratuitous Transfer:
Estate Tax — on date of death FMV included in gross estate (Form 706)
Gift Tax — on inter vivos transfers exceeding annual exclusion (Form 709)
Stepped-Up Basis — heirs receive FMV basis at death, eliminating built-in gain (IRC § 1014)

Annual Tax Calendar

January:
- Employers send W-2s to employees (due Jan 31)
- 1099 information returns due to recipients (Jan 31)
- Q4 estimated tax payment due (Jan 15 — individuals)

February–March:
- Begin gathering documents for individual returns
- Corporate returns due: March 15 (calendar-year S corps and partnerships)

April:
- Individual income tax returns due: April 15 (Form 1040)
- C corporation returns due: April 15 (calendar-year; extension to Oct 15)
- Q1 estimated tax payment due: April 15

June:
- Q2 estimated tax payment due: June 17

September:
- Q3 estimated tax payment due: September 16
- Extended partnership and S corp returns due: September 15

October:
- Extended individual returns due: October 15
- Extended C corp returns due: October 15

December:
- Year-end tax planning: accelerate deductions, defer income
- Complete charitable contributions for current year
- Review retirement account contributions — maximize before year-end

Commonly Missed Exam Points

① Confusing individual vs. corporate tax rates
   → Individual: 10–37% (progressive/graduated brackets)
   → Corporate: 21% flat rate (since TCJA 2017)
   → Both are still "income" taxes but the rate structures differ

② Exclusion vs. Exemption vs. Deduction — not the same
   → Exclusion: amount never enters gross income (e.g., employer health insurance,
     life insurance death benefit, qualified § 121 home sale gain)
   → Exemption: older concept (personal exemptions suspended 2018–2025 under TCJA)
   → Deduction: reduces income that was already included in gross income

③ Estate tax filing deadline
   → 9 months from date of death (6-month extension available)
   → "Within 1 year" is WRONG

④ Gift tax taxpayer
   → The DONOR pays the gift tax, not the recipient
   → Exception: if the donor cannot pay, the IRS can collect from the donee

⑤ Property tax assessment date
   → Varies by jurisdiction — know the rule for the jurisdiction you're testing
   → In many states, ownership on January 1 determines that year's tax liability
   → Selling after the assessment date typically does NOT relieve the seller of liability

⑥ Long-term capital gains holding period and rates
   → More than 1 year = long-term (0%, 15%, or 20% depending on taxable income)
   → Exactly 1 year or less = short-term (ordinary income rates up to 37%)
   → 1 day can make a significant rate difference — the "held for more than" language matters

⑦ Passive vs. Active income — loss limitation rules
   → Passive activity losses (PAL) can only offset passive income
   → Real estate professional exception: can treat rental as non-passive if >750 hrs/year
   → $25,000 rental loss allowance: phases out $150,000–$250,000 MAGI (MFJ)

⑧ Assessment statute vs. collection statute
   → Assessment: IRS generally has 3 years to assess additional tax (IRC § 6501)
   → Collection: IRS generally has 10 years from assessment to collect (IRC § 6502)
   → These are two separate, independent clocks

Estate and Gift Tax Unified Rate Schedule ★★★★★ : Both use the same graduated rate table (18–40%), but the applicable exclusion amount shields most estates. 2024 lifetime exemption: $13,610,000 per person ($ 27,220,000 per couple). Memory tip: Estate = Gift = same rates; the exemption is what makes most estates tax-free

Real Estate Tax Lifecycle: Acquire → Hold → Dispose ★★★★★ : Acquire = transfer tax + closing costs (add to basis); Hold = property tax + income tax on rents; Dispose = capital gains + depreciation recapture. Memory tip: Basis matters from day one — keep every receipt for capital improvements

LTCG Rate 0% / 15% / 20% ★★★★★ : 0% for taxable income up to $47,025 (single) /$ 94,050 (MFJ) in 2024. 15% for most taxpayers. 20% for high earners. Net Investment Income Tax (3.8%) may stack on top. Memory tip: Most taxpayers pay 15% LTCG — only the highest earners hit 20%

Practice Quiz (Comprehensive)

Q. An individual taxpayer sold investment real estate held for 8 years for a $300,000 gain, which includes$ 50,000 of unrecaptured depreciation. How is the gain taxed?

The $50,000 of unrecaptured Section 1250 depreciation is taxed at a maximum rate of 25% (IRC § 1(h)(1)(D)). The remaining$ 250,000 is long-term capital gain taxed at 0%, 15%, or 20% depending on the taxpayer’s income level. Additionally, the 3.8% Net Investment Income Tax may apply if the taxpayer’s MAGI exceeds the applicable threshold ( $200,000 single /$ 250,000 MFJ).

Q. A taxpayer has $1,800 of interest income and$ 1,000 of qualified dividend income. How is this taxed?

Total investment income: $2,800. Interest income of$ 1,800 is taxed as ordinary income (up to 37%). The $1,000 of qualified dividends is taxed at preferential long-term capital gain rates (0%, 15%, or 20% depending on income). The entire$ 2,800 is below the $200,000/$ 250,000 NIIT threshold for most taxpayers, so the 3.8% NIIT likely does not apply.