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Flashcards in Federal Income Tax Deck (69):

What is the equation for computing income tax?

Gross Income - deductions = Taxable Income
Taxable Income x Rates = Tax
Tax - Credits = Tax liability


What counts as income?

accession to wealth, clearly realized, over which the taxpayer has complete dominion

All income, "from whatever source derived."


How is noncash income valued?



Are employee health insurance and life insurance excluded in income?

-health insurance premiums paid by employer and benefits paid by plan
-life insurance premiums on first $50,000 of coverage; death benefits always excluded


Is child/elder care for employees excluded?

Yes, up to $5,000


Are employee pension plan contributions excludable?

Yes, w/in complicated limits. Penalties for withdrawal before age 59.5.


Is tuition assistance for employees excludable?

Yes, up to $5,250/year


What are the excludable limits on employee discounts?

Goods: at cost
Services: 20%


Are de minimis items excludable?



Are on premises meals and lodging for employees excludable?

Yes, if for the convenience of the explorer.


Are commuting allowances for employees excludable (parking spot, free transit pass, etc.)?

Yes, within dollar limits.


Are employee achievement awards excludable as income?

Yes, w/ a $400 limit usually, but can be up to $1600 if there is a big ceremony and stuff.


What are the general nondiscrimination rules regarding fringe benefits?

Many benefits are only excludable if the employer's plan does not discriminate in favor of highly compensated emloyees


Is a gift income?



Is income from a gift property taxable?



What counts as a "gift" for tax purposes?

transfer from "detached and disinterested generosity."


Can transfers from employers to employees be gifts?

Almost never.


Do life insurance proceeds following death count as income?

No, except for interest component if the payments are spread over time.

Also, proceeds from selling a life insurance benefit are not taxed either.


Are lawsuit damages and settlement money taxable income?

If replacing lost PROFITS, then yes.

If replacing lost property, treat as the sale of property.

If restoring damage to property, treated as a partial sale, nontaxable up to the property's FMV.

Punitive damages - ALWAYS taxable


Are personal injury damages includable as taxable income?

Not for physical injuries.

Emotional damages are taxable, but reimbursement for treatment of emotional damages is not.

Also, if there are emotional damages ACCOMPANYING physical damages, then it is all excludable.


Are scholarships excludable as income?

Yes, up to the cost of tuition, fees, books, and supplies.

Also, taxpayer must be a degree candidate for the scholarship to be excludable.


Is receipt of a loan gross income?

No. Also can't deduct the principal payments in repaying the loan.


What are the exceptions to Discharge of Indebtedness (Cancellation of Debt) Income?

(1) Forgiveness of debt as a gift
(2) adjustment of purchase price of property
(3) forgiveness of debt used to buy taxpayer's principal resident
(4) Forgiveness of student loans for public interest work, and


Is alimony included in gross income?



What is the definition of "alimony" for purposes of figuring out whether income is taxable?

Alimony =
(1) Payments in CASH to or for the benefit of ex-spouse
(2) Pursuant to a written instrument (court decree or settlement agreement)
(3) Payor and Payee DON'T live together
(4) Deal is, if payee dies before payments are complete, payor's obligation to pay ENDS.


Even if a payment meets the official definition of alimony, how can it be excludable as income?

Agreement by the Payor and Payee that:
(1) Payor doesn't deduct and
(2) Payee doesn't count as income


Is child support gross income? Is it deductible for the Payor?

No, it is not gross income.

No, it is not deductible by the Payor.


What is the test for payments counting as "child support"?

Even if the definition otherwise counts as alimony, payments are child support if:

they may be reduced upon the occurrence of an event relating to a child.


What is the Tax Benefit Rule?

(1) Taxpayer took legitimate deduction in prior year, and
(2) something happens in the current year that is "fundamentally inconsistent" with the premise of the deduction
Taxpayer must report as income in the current year the amount of the previous year's deduction.


When is gain/loss on property realized?

Typically when it is sold or exchanged.


What is the basis of property you receive as a gift?

Carryover basis from the donor, if they gave it to you while they were alive.

If property is a gift from decedent, then FMV at the time it is received is the basis.


What are the rules regarding gains on sale of principal residence?

Taxpayer can exclude all or part of the gain on sale of principal residence IF:
(1) used it as such for 2 out of the last 5 years preceding the sale.

Maximum amount of gain excludable = $250k, or $500k for a married couple filing jointly


Are divorce property settlements recognition events?



What is the rule of like-kind exchanges?

No gain/loss is recognized IF:
(1) business/investment property is exchanged
(2) for other business/investment property of "like-kind"

Like-kind = trucks are trucks, computers are computers, all real-estate is like-kind with all real-estate


If an investor trades stocks, bonds, notes for other stocks, bonds, notes, does this count as a like-kind exchange?

No, these are disqualified assets.


If, due to an involuntary conversion (theft, destruction, condemnation), taxpayer gets cash in replace of an asset, is this a recognition event?

Yes, unless the taxpayer replaces the property that was given up within the statutory period.

In this case the basis would carried over from the lost asset to the replacement asset

Any money not used for replacement is effectively a "boot" and will be taxed accordingly


What is the statutory period for replacing involuntarily converted assets, thus avoiding a recognition event?

Period begins when conversion takes place and ends two years after the end of that year

(so between 2 and three years, depending on what part of the year conversion takes place)


What counts as a long-term capital gain?

Gains from sale or exchange of capital asset held for more than one year, and
Dividends on corporate stock


Can capital losses be deducted?

Yes, but only to the extent of:

Capital gains + 3,000 ordinary income.

Any capital losses in excess of $3,000 must be carried over to deduct against future capital gains.


If you sell personal property, can this count as a capital gain or loss?

Loss - NO.
Gain from profit, YES.


What are the two types of assets where a taxpayer could take an ordinary loss, but in the case of a gain, can take a capital gain (best of both worlds)

(1) Real estate used in business (rental properties, etc.)

(2) Copyright on music created by the taxpayer


Who takes the tax for income from providing a personal service?

Personal service income must be taxed to the service PROVIDER, no matter whom it is actually paid to.


Do gifts of present income interests shift the income onto the donee's tax return and off of the donor's?

No, not if the donor retains the future interest (reversion, etc.)


How does income from gifts in trust get recorded on tax returns?

If there are still grantor-retained powers, the gifts in trust do not shift the income from the property to the donee's return.


What is the "kiddie" tax?

All unearned income of children under the age of 18 (or 24 if full-time student not providing more than half of own support) is taxed to children at the parents' HIGHEST MARGINAL tax rate.

Unearned = all income other than compensation that child earns from his or her own services (ex: interest accumulation in savings account)


Are the costs of making a living deductible?

Yes, all ordinary and necessary expenses of business or investment activity are generally deductible.


What is the personal exemption deduction?

Standard deduction just for being alive.

Typically $4,000 per person, including all dependents


Is there a child credit available for parents?

Yes, $1,000 for dependent qualifying child under age of 17, BUT:

Credit is phased out as AGI exceeds certain thresholds.


Are casualty losses generally deductible?

Deduction for uninsured loss:

limited by annual "floor" of 10% AGI + $100 per event; meaning loss has to be pretty big to be deductible

Also, the most that can be deducted is the property's basis, so no basis, no deduction.

*Below the line*


Are medical expenses deductible?

Uninsured medical bills and insurance premiums, yes.

Cosmetic surgery and drugs other than prescription drugs or insulin are disallowed, AND

"Floor" = 10% AGI


Are charitable contributions deductible?

Yes, up to 30-50% AGI.

Taxpayer needs written proof.


Is interest paid on debts deductible?

(1) Business debts, yes.
(2) Personal debts, NO except:
-(a) home mortgage interest, and
-(b) student loan interest (up to $2500 per year, depending on AGI)


What are the two types of home mortgage interest, and how do deductions work with each?

(1) Home Acquisition Indebtedness: money used to buy or improve the house
-(a) Interest on first $1M of debt deductible

(2) Home equity indebtedness: money borrowed using house as collateral, but used for other purposes
-(a) interest deductible on $100,000 debt.


Are state and local taxes deductible?

Yes, generally.

If state has both sales tax and income tax, taxpayer gets to choose one to deduct.


Are hobby expenses deductible?

Only to the extend of hobby income.


Are attorney's fees deductible?

Depends on Nature of the Claim:

For ∆: If business or profit-motivated transaction was reason for lawsuit, then yes.

For π: look @ the damages being sought; If the damages are for something taxable, then yes, attorney's fees are deductible.


Is tax advice tax deductible?



What are the requirements for deducting the expense of a home office?

(1) Home office EXCLUSIVELY for business use, AND

(a) is taxpayer's principal place of business, or
(b) meeting place with clients/customers, or
(c) structure detached from house


Is child or elder care deductible?

Not deductible, but there is a limited credit:

Up to $2100, depending on income and how many dependents.


What is the test for whether travel expenses are deductible?

Primary purpose of the trip- business or personal?

Also, stay must be temporary (less than one year) for it to be deductible.


Are meals deductible while traveling for business?

(1) 50%, and
(2) only if taxpayer stays overnight or does business over the meal


Are business meals and entertainment deductible?

Yes, but only up to 50%.


Are work clothes deductible?

Work clothing is not adaptable for general wear.


Is the cost of education deductible?

Only if maintaining or improving skills needed for a job the taxpayer already has.

"Hope credits" are also available for some lower income people's learning.


Is the cost of lobbying deductible?

No, except if lobbying local government.


What are some guidelines for determining whether something is a current expense or a capital expenditure to be gradually deducted through depreciation?

Likely Capital Expenditures:
(1) Cost of anything that will last more than a year
(2) Costs incurred while buying or selling property (including attorney's fees)
(3) Improvements to property are capital expenditures
(4) Items that generate a long-term benefit
(5) Start-up expenses for a business, except for $5,000 current expenses deduction for small businesses.

Famous examples: outside writers hired by publisher to write a book; costs incurred by taxpayer building its own facilities


What are the two basic categories of businesses, for tax purposes?

(1) Corporations (pay their own taxes)
(2) Partnerships (Profits flow through to owners)


Is money paid in exchange for ownership interest of a company taxable as income?

No, generally not.

But, transfers of personal services for ownership interests are generally taxable to the service provider.


For flow-through entities, when do owners have to pay tax?

(1) Each year the entity computes its taxable income, then each shareholder/partner must report his share of the entity's taxable income on his own individual tax return.
(2) He must pay tax on this share as soon as the business earns it, EVEN IF the entity doesn't pay it out to shareholders.