Federal Income Tax
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Any econonomic benefit or any clearly realized accession to your wealth
Increased or decreased value of an asset not taken into account for tax purposes until realized through a sale or other disposition of the assets
Claim of right
Property or funds received without restriction as to use or disposition; in otherwords, if you are free to use the proeprty or funds and, in the case of funds, commingle them with your assets. DOES NOT INCLUDE if held in escrow.
- Property or funds received under a claim of right must be reported for
- tax purposes even though the taxpayer may later be required to return
- the property, funds or their equivalent.
This is taxable
to the receiving
spouse and deductible
to the paying
- -writing: must be pursuant to a written divorce or separation agreement
- -living together disallowed: cannot be members of the same household
- -cease at or before death: liability to make payments must cease at or before death
- -cash: payments must be cash
This is non-taxable to the receiving spouse and non-deductible to the paying spouse.
If alimony payments conditioned on some event related to the children then the amount conditioned will be deemed child support.
Exceptions to cancellation of indebtedness income
Reduction in purchase price
Insolvency or bankruptcy of the taxpayer
Gift: Foregiven as a gift
Excluded from income
Life insurance: gross income does not include proceeds paid by reason of death of the insured. It DOES include interest paid if payment in installments
Inheritances: gross income does not include amounts received by bequest, device, or inheritances. WATCH FOR inheritances in lieu of fees
Gift: gross income does not included amounts by gift
Tort awards: Gross income does not include damages receiveed on account for physical injury or sickness. DOES include emotional distress, but not if related to a physical injury.
Employee related exclusions
Transfer made out of detached and disinterested generosity.
Gross income does not include amounts by gift
Donee receives a carryover basis from the donor
Employee related exclusions:
Receipts from Health and Accident Insurance: exclude the value of hte insurance coverage from gross income
Life insurance provided: this excludes premiums on the first $50,000
Meals and lodging: if 1) provide for the conveniece of hte employer, 2) in-kind, 3) employer's premises
Other Tax-Free Fringe Benefits: de minimis, no additional cost to employer, qualified employee discounts, contributions to qualified pension plans, employee safety or lenght of service awards.
Deductions (above the line)
Ordinary and necessary business expenses
Depreciation of business assets
Capital losses up to $3,000
Limited deduction for school loan interest
Itemized deductions (below the line)
Home mortgage interest: deduct interest for the first $1 million on principal and secondary personal residence
Home equity loan: up to $100,000 mortgage taken out on equity of home
State and local taxes: does not apply to sales tax
Unreimbursed casualty losses:
Unreimbursed medical expenses:
Personal v. business expenses:
Investment fees or expenses:
Personal exemption or dependent exemption:
Unreimbursed casualty losses
1) if loss is greater than $100
2) loss is sudden and unexpected
3) only to the extent the loss exceeds 10% of AGI
Unreimbursed medical expenses
To the extent that they exceed 7.5% of AGI
Personal v. business expenses
Personal expenses are not deductible
Legal fees are deductable only if for business or investment settings.
Legal fees in divorce are personal UNLESS for 1) tax advice for divorce or 2) recipient spouse incurs fees to generate taxable alimony income
Who earns income?
Assignment of income rule: Income must be taxed to he or she who earned it.
Ownership rule: income from proeprty is taxed to he or she who owns the property
When is it income? (cash method)
Income is when she receives paymend and takes deductions for eligible expenses when payment is made.
Constructive receipt: when funds or proeprty are credited to her account, set apart, or otherwise made available so that she may draw upon them.
When is it income? (accrual method)
Income is 1) when all events have occurred that fix the right to receive it, and 2) when the amount can be determined with reasonable accuracy.
Deduction is 1) when all events have occurred that establish the fact of laibility, and 2) whent he amount can be determined with reaosnable accuracy
Realization vs. Recognition
Realization: this happens at the sale, disposition or exchange of an asset
Recognition: when the income is reported to teh government
Generally recognize income when realized.
Gain/loss from sale of property
Amount realized - adjusted basis = gain/loss
Amount realized = cash + property + mortgages/liabilities assumed by buyer
Cost basis: taxpayer has a basis in the cost of the proeprty included money paid and borrowing incurred in connection with the purchase
Special basis and gain/loss issues:
Divorce property settlements: transfer of property incident to divorce is not taxable to either party. Take a substituted basis
Gifted property: donee takes a substituted basis
Inherited property: Take a basis of FMV at the date of decedent's death
Like-kind exchanges: no gain or loss recognized when a taxpayer exchanges property held for productive use in a business or for investment for like-kind property also held for productive use in business or for investment.
Sale of principal residence:
No gain is recognized if property is involuntarily lost due to theft, fire, seizure, requisition or condemnation is converted to proeprty that is similar or related in service or use.
If converted to money, gain or loss is not recognized if the purchaser repaces the property with that which is similar or related in service or use within two years fromt he date of involuntary conversion.
Gain or loss will be recognized to the extent that money received exceeds the cost of the replacemetn property.
Sale of principal residence
Up to $250k ($500k for joint returns) of gain form the sale of a principal residence can be excluded if the proeprty has been used and owned as the taxpayer's principal for a period aggregating two years during the fire year period ending on the date of the sale.
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