Final Note Sheet Flashcards
Qualifying Child Tests
relative abode >1/2 of year age < 19 and < 24 for a full time student support > 1/2 US citizen Joint return
Qualifying Relative Test
relative GI < 3800 support > 1/2 US citizen or Canada or mexico joint return
Tax Equation
Income (broadly conceived) Less: Exclusions Gross income Less: Deductions for adjusted gross income Adjusted gross income Less: The greater of— Total itemized deductions or standard deduction Less: Personal and dependency exemptions Taxable income Tax on taxable income Less: Tax credits Tax due (or refund)
Income
all income
exclusions
Accident insurance proceeds Annuities (cost element) Bequests Child support payments Cost-of-living allowance (for military) Damages for personal injury or sickness Gifts received Group term life insurance, premium paid by employer (for coverage up to $50,000) Inheritances Interest from state and local (i.e., municipal) bonds Life insurance paid upon death Meals and lodging (if furnished for employer’s convenience) Military allowances Minister’s dwelling rental value allowance Railroad retirement benefits (to a limited extent) Scholarship grants (to a limited extent) Social Security benefits (to a limited extent) Unemployment compensation (to a limited extent) Veterans’ benefits Welfare payments Workers’ compensation benefits
gross income items
Alimony Annuities (income element) Awards Back pay Bargain purchase from employer Bonuses Breach of contract damages Business income Clergy fees Commissions Compensation for services Death benefits Director’s fees Dividends Embezzled funds Employee awards (in certain cases) Employee benefits (except certain fringe benefits) Estate and trust income Farm income Fees Gains from illegal activities Gains from sale of property Gambling winnings Group term life insurance, premium paid by employer (for coverage over $50,000) Hobby income Interest Jury duty fees Living quarters, meals (unless furnished for employer’s convenience) Mileage allowance Military pay (unless combat pay) Partnership income Pensions Prizes Professional fees Punitive damages Rents Rewards Royalties Salaries Severance pay Strike and lockout benefits Supplemental unemployment benefits Tips and gratuities Travel allowance (in certain cases) Treasure trove (found property) Wages
deductions for AGI
• Expenses incurred in a trade or business.
• One-half of self-employment tax paid.
• Unreimbursed moving expenses.
• Contributions to traditional Individual Retirement Accounts (IRAs) and certain
other retirement plans.
• Fees for college tuition and related expenses(education).
• Contributions to Health Savings Accounts (HSAs).
• Penalty for early withdrawal from savings.
• Interest on student loans.
• Excess capital losses.
• Alimony payments.
Itemized Deductions
Medical expenses in excess of 7.5% of AGI
State and local income or sales taxes
Real estate taxes
Personal property taxes
Interest on home mortgage
Investment interest (to a limited extent)
Charitable contributions (within specified percentage limitations)
Casualty and theft losses in excess of 10% of AGI
Miscellaneous expenses (to the extent the total exceeds 2% of AGI)
Union dues
Professional dues and subscriptions
Certain educational expenses
Tax return preparation fee
Investment counsel fees
Unreimbursed employee business expenses (after a percentage reduction
for meals and entertainment)
Nondeductible Expenses
• Personal living expenses, including any losses on the sale of personal use property. • Hobby losses. • Life insurance premiums. • Expenses incident to jury duty. • Gambling losses (in excess of gains). • Child support payments. • Fines and penalties. • Political contributions. • Certain passive losses. • Funeral expenses. • Expenses paid on another’s behalf. • Capital expenditures.
Standard Deduction
Filing Status 2012 2011 Single $ 5,950 $ 5,800 Married, filing jointly 11,900 11,600 Surviving spouse 11,900 11,600 Head of household 8,700 8,500 Married, filing separately 5,950 5,800
Standard Deduction of a Dependant
limited to the greater of 950 or the sum of the individuals earned income plus 300 unless it exceeds the standard deduction
Surviving Spouse rules
The joint return rates also apply for two years following the death of one spouse, if
the surviving spouse maintains a household for a dependent child. The child must
be a son, stepson, daughter, or stepdaughter who qualifies as a dependent of the
taxpayer.
abandoned spouse rules
taxpayer can files as head of household or single if
•The taxpayer does not file a joint return.
• The taxpayer paid more than one-half the cost of maintaining his or her
home for the tax year.
• The taxpayer’s spouse did not live in the home during the last six months of
the tax year.
• The home was the principal residence of the taxpayer’s son, daughter, stepson,
stepdaughter, foster child, or adopted child for more than half the year,
and the child can be claimed as a dependent.
assignment of income doctrine
says that income earned from personal services must be attributed to the person who earned it
annuity table is on
pg 4-32
Exclusion of annuity formula
(Investment/expected return) * annuity payment = exclusion amount
note: expected return = monthly pmt * 12 * annuity table factor
accrual basis
if checks are received in the current year but are deposits for future services then it isn’t included in income until next year
constructive receipt doctrine
income isn’t recognized unless it is:
• The amount is made readily available to the taxpayer.
• The taxpayer’s actual receipt is not subject to substantial limitations or
restrictions.
Interest on bonds
is allocated to the owner based on the time that they owned it during the year
child support payments
payments from child support are not reported as income or are they deductible
group term life insurance
first 50000 in protection is excluded and anything over is taxed per 1000 multiplied by the monthly factor in the uniform premium table on 4-34
ex: 250000 is covered 250000-50000=200000/1000=200.3=6012=720 is taxable
medical insurance premiums
from the employer and employee are excluded
gift
given out of love affection
scholarship income
portion used for books and tuition is nontaxable, but part used for room and board is taxable
completely destroyed property
if it is completely destroyed then you can deduct the basis of a business use asset
personal use losses
non deductible
partial destruction of property(damaged)
A different measurement rule applies for partial destruction of business property
and income-producing property and for partial or complete destruction of personal
use property. In these situations, the loss is the lesser of the following:
• The adjusted basis of the property.
• The difference between the fair market value of the property before the event
and the fair market value immediately after the event.
Punitive damages
punitive damages are thus included in gross income.
Taxation of damage awards
Breach of contract (generally loss of income) Taxable.
Property damages Recovery of cost; gain to the extent of the excess over basis. A loss
is deductible for business property and investment property to
the extent of basis over the amount realized. A loss may be
deductible for personal use property (see discussion of casualty
losses in Chapter 7).
Personal injury
Physical All compensatory amounts are excluded unless previously
deducted (e.g., medical expenses). Amounts received as
punitive damages are included in gross income.
Nonphysical Compensatory damages and punitive damages are included in
gross income.
no-additional-cost service
• The employee receives services, as opposed to property.
• The employer does not incur substantial additional cost, including forgone
revenue, in providing the services to the employee.
• The services are offered to customers in the ordinary course of the business
in which the employee works.53
qualified employee discount
• The exclusion is not available for real property (e.g., a house) or for personal
property of the type commonly held for investment (e.g., common stocks).
• The property or services must be from the same line of business in which the
employee works.
• In the case of property, the exclusion is limited to the gross profit component of
the price to customers.
• In the case of services, the exclusion is limited to 20 percent of the customer
price.55
qualified transportation fringes
- Transportation in a commuter highway vehicle between the employee’s residence
and the place of employment. - A transit pass.
- Qualified parking.
- Qualified bicycle commuting reimbursement.
qualified parking
• Parking provided to an employee on or near the employer’s business premises.
• Parking provided to an employee on or near a location from which the
employee commutes to work via mass transit, in a commuter highway vehicle,
or in a carpool.
tax benefit rule
the taxpayer must include the reimbursement
in income up to the amount of the deductions that decreased taxable
income in the earlier year.
investigation expenses
If the taxpayer is in a business that is the same as or similar to that being investigated,
all investigation expenses are deductible in the year paid or incurred.
When the taxpayer is not in a business that is the same as or similar to the one
being investigated, the tax result depends on whether the new business is acquired. If
the business is not acquired, all investigation expenses generally are nondeductible.38
E X A M P L E 1 9 Lynn, a retired merchant, incurs expenses in traveling from Rochester, New York, to
California to investigate the feasibility of acquiring several auto care centers. If no acquisition
takes place, none of the expenses are deductible. n
If the taxpayer is not in a business that is the same as or similar to the one being
investigated and actually acquires the new business, the expenses must be capitalized
as startup expenses. At the election of the taxpayer, the first $5,000 of the
expenses can be immediately deducted. Any excess expenses can be amortized
over a period of 180 months (15 years). In arriving at the $5,000 immediate deduction
allowed, a dollar-for-dollar reduction must be made for those expenses in
excess of $50,000.
Hobby Losses
If an individual can show that an activity has been conducted with the intent to
earn a profit, losses from the activity are fully deductible. The hobby loss rules
apply only if the activity is not engaged in for profit.
Hobby expenses are deductible
only to the extent of hobby income
The Regulations stipulate that the following nine factors should be considered
in determining whether an activity is profit-seeking or is a hobby:41
• Whether the activity is conducted in a businesslike manner.
• The expertise of the taxpayers or their advisers.
• The time and effort expended.
• The expectation that the assets of the activity will appreciate in value.
• The taxpayer’s previous success in conducting similar activities.
• The history of income or losses from the activity.
• The relationship of profits earned to losses incurred.
• The financial status of the taxpayer (e.g., if the taxpayer does not have substantial
amounts of other income, this may indicate that the activity is
engaged in for profit).
• Elements of personal pleasure or recreation in the activity.
presumptive rule of 183
The Code provides a rebuttable presumption that an activity is profit-seeking if the
activity shows a profit in at least three of any five prior consecutive years.
hobby loss deduction order
Amounts deductible under other Code sections without regard to the nature
of the activity, such as property taxes and home mortgage interest.
• Amounts deductible under other Code sections if the activity had been
engaged in for profit, but only if those amounts do not affect adjusted basis.
Examples include maintenance, utilities, and supplies.
• Amounts that affect adjusted basis and would be deductible under other
Code sections if the activity had been engaged in for profit.43 Examples
include depreciation, amortization, and depletion.
These deductions are deductible from AGI as itemized deductions to the extent
they exceed 2 percent of AGI. If the taxpayer uses the standard deduction rather
than itemizing, all hobby loss deductions are wasted.
primarily personal use rental home
If the residence is rented for fewer than 15 days in a year, it is treated as a personal
residence. The rent income is excluded from gross income, and mortgage interest
and real estate taxes are allowed as itemized deductions, as with any personal residence.
Primarily Rental Use
If the residence is rented for 15 days or more in a year and is not used for personal
purposes for more than the greater of (1) 14 days or (2) 10 percent of the total
days rented, the residence is treated as rental property.46 The expenses must be
allocated between personal and rental days if there are any personal use days during
the year. The deduction of the expenses allocated to rental days can exceed
rent income and result in a rental loss. The loss may be deductible, subject to the
at-risk and passive activity loss rules
Personal/Rental Use
If the residence is rented for 15 days or more in a year and is used for personal purposes
for more than the greater of (1) 14 days or (2) 10 percent of the total days
rented, it is treated as a personal/rental use residence. The expenses must be allocated
between personal days and rental days. Expenses are allowed only to the
extent of rent income.
and the remaining loss is carried forward as a passive loss
losses between related parties
The Code provides for the disallowance of any “losses from sales or exchanges of
property … directly or indirectly” between related parties.
Freida sells common stock with a basis of $10,000 to her son, Bill, for its fair market E X A M P L E 3 5
value of $8,000. Bill sells the stock several years later for $11,000. Freida’s $2,000 loss is
disallowed upon the sale to Bill, and only $1,000 of gain ($11,000 selling price −
$8,000 basis − $2,000 disallowed loss) is taxable to him upon the subsequent sale.
personal casualty loss floor
The amount of the loss for personal use property must be further reduced by a
$100 per event floor and a 10 percent-of-AGI aggregate floor.
Calculation of the Domestic Production Activities Deduction
9%*lesser of Qualified activities income (QPAI) or
Taxable (or modified adjusted gross) income
or alternative minimum taxable income
modified
adjusted gross income
substituted for taxable income.34
The taxable income limitation is determined after the application of any net
operating loss (NOL) deduction for the tax year
Moving expenses
deductible for moves in connection with the commencement
of work at a new principal place of work.19 Both employees and self-employed individuals
can deduct these expenses. To be eligible for a moving expense deduction,
a taxpayer must meet two basic tests: distance and time.
distance:
To meet the distance test, the taxpayer’s new job location must be at least 50 miles
farther from the taxpayer’s old residence than the old residence was from the former
place of employment.
time:
To meet the time test, an employee must be employed on a full-time basis at the
new location for 39 weeks in the 12-month period following the move. If the taxpayer
is a self-employed individual, he or she must work in the new location for 78
weeks during the next two years. The first 39 weeks must be in the first 12 months.
The time test is disregarded if the taxpayer dies, becomes disabled, or is discharged
Qualified Moving expenses
• Moving household goods and personal effects.
• Traveling from the former residence to the new place of residence.
traveling includes lodging, but not meals, for the taxpayer and members
of the household.20 The taxpayer can elect to use actual auto expenses (no depreciation
is allowed) or the automatic mileage method. In this case, moving expense mileage is
limited in 2012 to 23 cents per mile for each car. The automatic mileage rate for 2011 was
divided between 19 cents (for the first six months) and 23.5 cents per mile (for the last six
months).
not included:
In addition to meals while en route, the moving expense deduction does not
include the following costs:
• New car tags and driver’s licenses.
• Loss on the sale of a residence or penalty for breaking a lease.
• Forfeiture of security deposits and loss from disposing of club memberships.
• Pre-move house-hunting expenses.
• Temporary living expenses.
education expenses
ordinary and necessary business expenses provided the expenses are incurred for
either of two reasons:
• To maintain or improve existing skills required in the present job.
• To meet the express requirements of the employer or the requirements
imposed by law to retain his or her employment status.
not deductible these are not deductible:
• To meet the minimum educational standards for qualification in the taxpayer’s
existing job.
• To qualify the taxpayer for a new trade or business.
classification of education expenses
Education expenses include books and supplies, tuition, and transportation (e.g.,
from the office to night school) and travel (e.g., meals and lodging while away from
home at summer school).
deduction for qualified tuition and related expenses.
A deduction for AGI is allowed for qualified tuition and related expenses involving
higher education (i.e., postsecondary). The deduction is the lesser of the qualifying
amount spent or the maximum amount allowed by
table:
Single $ 65,000
& $4,000
Married 130,000
Single 65,001
to 2,000
80,000*
Married 130,001
to 2,000
160,000*
Qualified tuition and related expenses include whatever is required for
enrollment at the institution. Usually, student activity fees, books, and room
and board are not included.30
• The expense need not be employment related, although it can be.
• The deduction is available for a taxpayer’s spouse or anyone who can be
claimed as a dependent and is an eligible student.
• The deduction is not available for married persons who file separate returns.
• To avoid a “double benefit,” the deduction must be coordinated with other
education provisions (e.g., American Opportunity and lifetime learning credits).
Along this same line, no deduction is allowed for a taxpayer who qualifies
as another’s dependent.31
• The deduction for AGI classification avoids the 2 percent-of-AGI floor on miscellaneous
itemized deductions. As noted later in the chapter, this is the fate
suffered by other education-related employee expenses.
