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AGI: GI - Deductions (ATL)
Taxable Income: AGI - (Personal exemptions and either standard OR itemized deductions)
Tax Liability: Tax rate x Takeable income
Tax Due: Tax liability - credits
- GEN: Payee income, Payor deduction
- BUT: Parties can decide who bears the tax burden.
- REQS FOR ALIMONY:
- (1) Writing
- (2) Parties not living together
- (3) Ends at or before death
- (3) Cash or its equiv.
WATCH: Watch for portion of child support payment disguised as alimony.
NOTE: Neither deduction for payor or income to payee.
ALSO: Must meet child support obligations BEFORE satisfying alimony opbligations.
Discharge of Indebtedness Income
NOTE: Receipt of borrowed money is NOT a taxable event, but DII is often taxable income.
- DII: Amount paid in satisfication of a debt relieves party of debt obligations, even though full amount isn't paid.
- CONSEQ: Amount retained (not paid off) is TAXABLE unless (1) Reduction in indebtedness is actually an adjustment of the purchase price.
- (2) Insolvency: insolvency or bankruptcy -- Gen TP needs to be insolvent at B proceeding.
- (3) Gift: If intended as a gift/bequest, not taxable.
- ALSO: Qualified principal residential indebtedness -- joint TP.
- Life Insurance: Proceeds from death -- excluded from beneficiary's GI.
- >> BUT: If installments with interest, the interest is taxable.
- >> ALSO: Exclusion lost if policy sold for valuable consideration.
- Inheritance: Bequests/devises excluded from GI, but income from such property is included.
- >> NOTE: "Inheritance" cannot merely be compensation for work -- that's taxable.
- Gift: Key is detatched and disinterested generosity. If true, no tax.
- >> FOCUS: intent of donor.
- >> NOTE: Employers cannot give fits to their employees -- all taxable (unless de minimus)
- >> NOTE: No limit of gifts/inheritance for the purposes of the bar.
- Bonds: state/local exempt, BUT federal are taxable.
- Injury: Award from a personal physical injury is excludable, but non-injury awards need to be included.
- >> Emotional distress alone is NOT excluded (ie. defamation).
- >> NOTE: Doesn't matter if results from lump sum or is paid out over time if payment results from a physical injury.
- Insurance Payments: Excludable IF all premiums are paid.
GEN: FMV for property and services.
DEFINED BY TAX CODE: All income from whatever source derived.
GI: Property/Funds Received Under a Claim of Right
- GEN: Must be reported in YR1 even though tou may ultimately have to forfeit them.
- >> If forfeit them, take a tax deduction (amount of repayment in the year of repayment).
- >>>> Do NOT amend YR1 return.
- CLAIM OF RIGHT: Without restriction for use/disposition.
- >> If awarded straight from a judgment, claim of right.
- >> BUT: If held in escrow pending appeal, no claim of right.
GI: Illegal Income
GEN: I.I. is gross income.
GEN: Income from gambling is gross income, but losses are deductible only to the extent they offset income. Otherwise, not deductible.
Tax Benefit Rule
- GEN: If you receive a tax benefit and make a deduction, only later to recover the property that gave rise to the deduction, then you have taxable income and must report the amount of the previous deduction as income.
- ASSUMPTION: In YR1, the deduction actually reduced tax liability (most cases true).
- >> "Assuming x got a tax benefit in YR1, he received income in YR2."
- >> State: Deduction taken in YR1, receive the benefit in terms of a refund check in YR2.
- >>>> Check is tax-benefit income. Over-deduction in YR1.
- >> FED: Federal tax refund check is NOT taxable.
- >>>> Not deductible in the first place. Cannot deduct federal taxes.
GEN: Taxable and included.
GI Exemptions: Fringe Benefits
KEY: If the fringe benefits provided are compensation, then they are taxable to the recipient. If not, not taxable.
- (1) Premiums paid for health insurance by an employer are excludable from GI.
- (2) Life Insurance: excludable for the first $50K.
- >> Any excess is GI.
- (3) Meals/Lodging: Excludable if for the convenience of the employer.
- >> Must be provided actual food, not just compensation.
- >> Must be on the premises.
- (4) De Minimus Exception
- (5) No Additional Cost FB: excess service/good from employer to employee.
- (6) Qualified Employee Discount:
- (7) Qualified Pension Plan
- (8) Qualified Scholarship: excludable if for tuition and required books/materials, BUT NOT room/board.
- >> Cannot be conditional on future services.
- >> Recipient must be a degree candidate.
- (9) Employee safety or length of service awards.
Deductions (Above the Line)
**Step 2 After Calculating GI**
- GEN: While everyone gets ATL deductions, can only get BTL deductions if you itemize.
- NOTE: ATL deductions are to be deducted from GI to get the AGI.
- ATL -- ORDINARY DEDUCTIONS (1) Biz Expenses (ordinary/necessary): For Business Owners. >> Can deduct rent for portion of space used for broader purpose. IE. Home office -- deduct office space.
- >> Compensation is deductible.
- >> Biz. interests (ie. loans) are deductible AND so are business taxes (except fed taxes).
- (2) Depreciation
- >> Items having a life of greater than a year, including real estate and biz items, can be depreciated.
- >> NOTE: Personal Assets CANNOT be depreciated.
- (3) Capital Losses: capital losses (net losses) may be deducted by to $3K/yr. After that, must carry over.
- (4) Alimony: ATL Deduction; need not itemize.
- (5) Moving Expenses: 50 miles away and work 39/50 weeks of the 12 month period following the move.
- (6) Limited Deduction for School Loan Interest: $2.5K on interest. Phased out at certain income levels.
- ENTERTAINMENT: Entertainment expenses ARE DEDUCTIBLE (50%) so long as intended only if directly related to the conduct of the TP's trade/biz.
- >> If to promote GW alone, not deductible.
- LEGAL FEES: Only deductible for business purposes.
- >> IE. Divorce fees not deductible EXCEPT for expert tax advice.
- >>>> ALSO: Legal fees necessary in generating taxable alimony = DEDUCTIBLE.
Deductions (Below the Line)
- Below the Line Deductions (1) Home Mortgage ("Quaified Residence)" Interest: can deduct home mortgage interest up to $1 million (up to two homes).
- (2) Home Equity Loans: Can deduct all interest up to $100K (can do anything w/ money).
- (3) State and Local Taxes (but not sales tax): deductible.
- >> NOTE: Fed taxes NOT deductible.
- (4) Unremibursed Casualty Losses -- non-business losses.
- >> Loss has to be sudden and unexpected -- AND MUST EXCEED -- in aggregate -- 10% AGI.
- >> Statutory Floor: $100.
- >> NOTE: Gambling losses AREN'T casualty losses.
- (5) Medical Expenses: Must exceed -- in aggregate -- 7.5% AGI to be deductible (can include transport essential to care).
- (6) Charitable Contributions: TP may deduct FMV of cash/donations.
- >> NOTE: No deduction for services.
- >> AND: If you receive premium in return for a donation, you must subtract-out the value.
- >> QUID PRO QUO: If qpq results from donation, then no deduction.
- (7) Miscellaneous: Must exceed 2% of AGI. Include --
- >> Profit-seeking ventures (more than mere hobbies)
- >> Employee-related meals/lodging: must be away from home (lodging/meals 50%)
- >> Educational expenses: only deductible if to maintain or improve one's trade/business (ie. CLE).
- >> Transportation: but not ordinary commuting.
NOTE: Personal -- consumer -- interest is not deductible.
NOTE: Fed taxes are NOT deductible, but state taxes -- with the exception of sales tax -- ARE deductible.
Passive Activity Losses: Only deductible to the extent they offset income from passive activity losses.
- GEN: One for oneself ($3.6K) and one for his spouse, his children, and his other dependents.
- NOTE: Deduction phases out at upper income legels.
- DEPENDENT: One who derives more than one hald of his support from the TP and whose GI is less than the personal exemption amount.
- DIVORCE W/ CHILDREN:
- Child of Divorced Parent: Parent that has custody of child for the greater portion of the year gets the exemption.
- NOTE: Can contract otherwise.
Allocation of Income
- Earned Income: Earner is taxed.
- Investment Income: Owner is taxed.
Cash Method of Accounting
GEN: Year in which you make payment is the year in which you take the deductions -- and report income.
- CONSTRUCTIVE RECEIPT: Report income when paid (funds or property are paid to one's account, set aside, otherwise made available), even though a check might be cashed later.
- >> KEY: You have control.
- >> NOTE: Can't delay reporting just to save money.
Accural Method of Accounting
- GEN: Reports income when all events have ocurred that fix the right to receive it.
- >> Must be able to determine the amount with reasonable accuracy.
NOTE: Most corps required to use the accrual method.
NOTE: Need not have, as TP, immediate right to payment.
BENEFIT: Can take deductions on an accellerated basis.
Gains/Losses on Dispossession of Property
** Realization and Recognition **
- Realization: sale, disposition or excahnge/
- Recognition: When reported on a tax return.
- GEN: When a gain is realized, it should also be recognized.
- >> If delay in receipt of payment, assume interest (may be imputed).
AR - AB = Gain/loss.
- AR: Money received PLUS FMV for property/services recieved PLUS cash and/or the amount of the release of a mortgage liability.
- AB: Adjusted basis in the property.
GEN: TP basis in property acquired by purchase is generally the basis of the property, including money paid and debt incurred in connection with the purchase.
Divorce Property Settlements, Gifts and Inherited Property
- GEN: Transfer between ex-spouses incident to divorce NOT a taxable event.
- >> Recipient: assumes basis as donor spouse (substituted basis).
- >> Later Sale: use donor's basis.
- GEN: Recipient of a gift takes the donor's basis -- substituted basis.
- EXCEPTION: LOSS PROPERTY -- recipient of gift takes the FMV rather than the substituted basis.
- >> NOTE: Does NOT apply to spouses.
- INHERITED PROPERTY (stepped up basis preferable over gifts)
- GEN: Recipient's basis in inherited property is the FMV of the property at death.
- >> Stepped Up Basis: For tax purposes, not only gets property tax free, but with a stepped up basis so that no one has to pay for the difference in basis.
Non-Recognized Transactions: No Gain/Loss
- Like-kind Exchanges: No gain/loss recognized when a TP exchanges property held for productive use in a business or for investment for like-kind property also held for productive use in biz or for investment.
- >> KEY: Either for biz or investment purposes.
- Involuntary Conversion: No gain recognised where property is lost due to theft, fire, seizure, requisition or condemnation is converted (ie. through insurance) into property that is similar or related in service or use.
- >> Money is not recognized if the recipient uses it for replacement purposes within two years from the date of the voluntary conversion.
- >> NOTE: Gain realized to the extent that the money received exceeds the replacement property (adjusted basis).
- Sale/Exchange of Principle Residence Up to $250K ($500K for joint returns) of gain from the sale of a principal residence can be excluded if the property has been used and owned as the TP's principal residence for periods aggregating two years during the 5yr period ending on the date of the sale.
- >> NOTE: Exclusion not available if TP has used it within the last two years.
- >> NOTE: If NOT principle residence, taxable event ((amount received + FMV of property received, if any) - (adjusted basis + improvements)).