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What is Gross Income?
- All Income from whatever source derived, including:
- 1. Compensation for services
- 2. Gross income derived from business
- 3. Gains derived from property dealings
- 4. Interest
- 5. Rents
- 6. Royalties
- 7. Dividends
- 8. Alimony and separate maintenance payments (amounts specified as child support only are not in this category-or specific to the child can be separated) If alimony is included in income, it is deductible by the payor.
- 9. Annuities (Exclusion ratio = total amount paid -total expected return)
- 10. Income from life insurance K
- 11. Pensions
- 12. Income from discharge of indebtedness
- 13. Partnership gross income
- 14. Income in respect of a decedent
- 15. Income from illegal activities
- 16. Treasure trove.
Prizes and Awards are not taxable income if:
1. Qualified scholarships or fellowship grants.
2. Prizes made to recognize past achievements—i.e. charity, science, lit, ect.
3. Employee achievement awards
What is the difference between an “item excluded from income” and a “deduction”?
Both lessen the amount of income upon which a tax is due; however, deductions must still be reported.
What items are specifically excluded from income?
- 1. Death benefits (like life insurance)
- 2. Gifts and inheritances (from an employer doesn’t count unless family)
- 3.Compensation for injuries or sickness (this
- excludes punitive damages)
- 4. $ received from accident and health plans
- 5. scholarships and fellowships
- 6. improvements to property by lessor
- 7. meals and lodging furnished for convenience of the employer.
- 8. Gain from the sale of a principal residence
- aggregating 2 yrs or more w/in 5 years of the sale, and had not used this exception in the past 2 years I.R.C. 121
- 9. Educational assistance plans up to $5,250 per year
- 10. Certain “fringe benefits” to employee – like no additional cost service, qualified employee discount, ect
- all income received by the taxpayer, minus
Adjusted Gross Income
- gross income less expenses necessary (business
- deductions) to produce that income.
- AGI minus itemized
- or standard deductions
What is the difference between Business and Personal Expenses?
Business expenses are deductible to calculate AGI.
Certain personal expenses can be used for itemized deductions.
When is the business use of a home tax deductible biz expense?
- If a portion is used exclusively and regularly
- for business purposes.
- As an employee: if the use of the employee’s residence is for the convenience of the
Is business use of an
automobile deductible biz expense?
Yes—in proportion to the car’s use for business purposes.
Is clothing for a job tax deductible biz expense?
Yes—if cannot be readily used during off-business hours
Educational Expenses tax deductible biz expense?
- Yes—if used to maintain or improve skills required for
- employment, or to meet requirements of an employer
- Not—to meet minimum requirements for qualification in a
- taxpayer’s employment, trade or business; or if qualifies the taxpayer for a
- new trade or biz
tax deductible biz expense?
- Entertaining business clients to promote business, 50% is
- tax deductible if some business discussion is closely associated with the
- · expenses relating to country clubs, yachts,
- vacations are not tax deductible
- · hunting, golf, or meals would probably be
- deductible—because biz discussions would be made there; lodging, however would
- not be deductible.
- · Expenditures for tickets to events are not
- deductible in excess of face value unless a charity event.
Travel expenses tax deductible biz expense?
Yes – if motivated by the exigencies of the taxpayer’s business.
Are losses tax deductible biz expense?
Yes – if actually incurred during the tax year and not compensated by insurance
Must be incurred in business or for profit.
are Personal or non-business deductions
A person whose itemized deduction are equal or less than the standard deduction would use the standard deduction.
When can interest be used as an itemized deduction?
If the debt is secured by the taxpayers principal or 2nd residence
Acquisition Indebtedness – loans incurred to aquire, construct, or improve residence – can deduct up to $1 mil indebtedness.
- Home Equity Indebtedness – anything else (still
- secured by the home)– up to $100,000 indebtedness.
* Not – non business or consumer interest.
When can taxes be used as an itemized deduction?
They can't unless Local taxes – such as real estate, state income tax, personal property tax.
When can contributions be used as an
Charitable contributions are limited to 50% of AGI
Remainder can be carried over for up to 5 years.
If not cash – use fmv of the gift.
When can medical expenses be used as an itemized deduction?
If expenses exceed 7.5% of AGI.
When can casualty losses be used as an itemized deduction?
If the loss exceeds $100 and is more than 10% of AGI
Examples: auto accident, fire, real theft, vandalism, explosion, disaster
Not included if reimbursed from insurance.
Value – at the time of the casualty
How is a Tax Credit applied?
Subtracted from the full tax liability, not on income, like a deductible.
What are some Examples of Tax Credits?
- · Child and dependent care expenses
- · Rehabilitation of historic structures
- · Research and experimentation
- · Energy property
- · First year wages of disadvantaged
- * Low income rental housing
What are the 4 filing statuses?
- 1. married filing separately
- 2. married filing jointly
- 3. Heads of households – unmarried, not filing a joint return, maintaining a household with dependant(s)
- 4. Single individuals
What is needed to qualify as a dependent?
- · Relationship: must be child, stepchild,
- sibling, or descendant of one
- · Residence: Must have the same principle
- residence as the taxpayer
- · Age: Under the age of 19; or 24 if full
- time student
- · Support: did not provide more than ½ of
- his own support.
How to compute gains or losses from the sale of property.
Gain or loss equals the difference between the amount realized
and the adjusted basis
Amount realized – The amount of money or FMV of property received in exchange for property.
- Adjusted Basis– original value adjusted by
- depreciation or improvements
What is the difference between capital and ordinary assets?
Defined by the tax code.
- Ordinary assets are:
- · stock, bonds
- · inventory
- · property primarily held for sale to customers in the ordinary course of business
- · copyrights
- · accounts or notes receivable.
- Capital assets are:
- · any other property that is not ordinary (above)
- · patents
- · leaseholds
How are capital gains and losses taxed?
- · First they are netted against each other, to
- produce a net capital gain or loss.
- · They are taxed at lower rates than ordinary
- income is taxed.
· Up to a $3000 loss can be offset against ordinary income for the same year.
· A capital loss greater than $3000 can be carried forward to future years.
What is the tax accounting “cash receipts and disbursements method”?
This is the most common method for individual taxpayers and smaller businesses.
1. taxpayer recognizes income when she gets paid in cash or equivalent
- 2. then he deducts income for those expenses
- incurred in the year
What is the tax
accounting “accrual method”?
Not based on payment.
- Item is considered income when the right to receive it is
- unconditionally fixed.
What is a gift w/ respect to estate taxes?
· completed irrevocable transfer
· for less than full consideration
· donative intent not required
What is a federal
- · imposed at death upon the property included w/in the decedent’s gross estate
- · and upon taxable gifts made after 1976
- · payable by the decedent’s executor or administrator
Unlike individual taxpayers, corporations cannot receive deductions for:
1) personal exemptions
- 2) Expenses for the production of income (like
- investment activities… biz expenses ok)
3) Medical expenses
5) Cooperative housing deductions
6) Moving expenses
Qualification for an S corp (not double taxed):
1. Fewer than 100 shareholders
2. All shareholders must be individuals
3. No nonresident alien shareholders
4. Only one class of stock