Pa fed tax

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  1. Gross income
    Gross income includes any economic benefit or any clearly realized accession to wealth

    • *Types:
    • 1) Realization
    • 2)Non-cash receipts
    • 3)Claim of right
    • 4) Illegally Acquired Propety
    • 5) Tax benefit rule
    • 6) Federal income tax
    • 7)Alimony
    • 8)Child support
    • 9)Prizes and awards
    • 10)Life Insurance Provided by Employer
    • 11) Cancelation of Indebtedness
  2. Realization
    Increased or decreased value of an asset is not taken into account for tax purposes until it's realized through the sale or other dispositionof the asset
  3. Non-cash Receipts
    Gross incomes includes fair market value of any property received and services received
  4. Claims of Right
    Property received w/out restriction as to use or disposition- free use of the propety or funds

    *Must be reported for tax purposes even though the taxpayer may later be required to return the propety, funds or its equivalent

    Example: Judgment in Year 1 for 100,000. Report it. D plans to appeal. Doesn’t matter. If judgment is reversed in Year 2, you get a deduction.
  5. Illegally acquired property
    Must be reportd as taxable income
  6. Tax Benefit Rule
    Where a taxpayer deducts in one year and later recovers the amount deducted, the recovery is a tax benefit income (e.g. state income tax refund)
  7. Alimony
    Unless otherwise provided in the written agreement, alimony is taxable to the receiving spouse and deductible to the paying spouse

    • *Reqs:
    • 1) Writing- divorce or separation agreement
    • 2) Not living together
    • 3) Liability to pay ceases at or before death
    • 4) Payments must be cash or its equivalent
  8. Child Support
    Child support is not taxable to the receiving spouse and not deductible to the paying spouse
  9. Child Support in disquise
    Payment reduced upon a contingency relation to a child, the amount of the deduction is considered child support

    Example: Agreement provides that H will pay W $100,000 until Child reaches 21. At that time, support reduced to $70,000.

    Result: The $30,000 reduction is considered child support—not taxable to W and not deductible by H.
  10. Combination of Alimony & Child Support
    Where payments for both fall short, the payments are considered first to meet child support obligation. (not taxable or deductable)
  11. Prizes and Awards
    Gross income includes the value of cash, property or services received as a prize, award or windfall (raffel prizes, gambling or lottery winnings and treasure trove)
  12. Life Insurance Provided by Employer
    Taxpayer may exclude the value of the first $50gs. Gross income includes the value of the excess.
  13. Cancelation of Indebtedness
    Borrower: Borrower has no gross income upon the initial receipt or borrowed funds.

    *If debt is canceled or discharged at less than full amount, taxpayer has income to extent of the difference btw the full amount of the obligation and the amount paid in satisfaction of the debt

    Lender: Lender has no income from principal. Lender has income from interest.

    • 1) Reduction in purchase price: Discharge of debt is reduction in purchase price w/ the sale of goods.

    • * Ex: $20,000 car; defects; dealer agrees to take
    • $15,000 in full satisfaction. No income.

    2)Insolvency: Discharge occurs when taxpayer is insolvent or bankrupt, no income

    • *Ex: $20,000 car; Buyer goes bankrupt; dealer
    • agrees to take $15,000 in full satisfaction. No income.

    3) Gift: If the lender intends to discharge as a gift, no income.

    • *Ex: Parents give you a school loan for $30,000.
    • As a gift, they agree to take 20,000. No income.

  14. Exclusions From Gross Income
    • 1)Life insurance proceeds
    • 2)Inheritance
    • 3)Gifts
    • 4)Tort Awards
    • 4)Receipts from Health & Accident Insurance
    • 5)Other tax-free fringe benefits
    • 6)Qualified scholarships
    • 7) Meals and lodging
  15. Life insurance proceeds
    Gross income doesn't include proceeds paid by reason of death of the insured.

    *If procedds are paid in installments, any interest paid will be taxable.
  16. Inheritance
    Gross income doesn't include amounts received by bequest, devise or inheritance
  17. Gift
    Transfered made out of detached and disinterested generosity (*employer to employee is never a gift)

    *Gross income doesn't include amounts received by gift
  18. Tort Awards
    Gross in does not include damages received on account of physical personal injury or sickness

    *Punitive damages received in connection w/ personal injuries are taxable.
  19. Receipt from Health and Accident Insurance
    Premiums paid by the employer are excluded
  20. Other tax-free fringe benefits to employees
    1) De minimus (value so small as to make accounting for it unreasonable)

    2) No additional cost to the employer (if service is type offered by employer or reciprocal agreements for service)

    3) Qualified employee discounts (services offered for sale to customers in the oridnary course of business)

    4) Contributions to qualified pension plans

    5) Employee safety or length of service award
  21. Qualified Scholarships
    Qualified: Not payment for past or future services (i.e. employer sends employee to school)

    *QUALIFIED scholarships for tuition and related expenses are excluded from gross income
  22. Meals and Lodging
    Employer provides meals and lodging excluded if if convenience to the employer, in kind; and on the employer's premises
  23. Deductions
    • 1)Personal expenses
    • 2) Legal Fees for Divorce
    • 3)Business Expenses
    • 4)Exemptions
  24. Deductions: General Rules
    • Above the line: deductions allowed to subtract from gross income
    • 1) Alimony
    • 2) Ordinary and necessary business expenses
    • -Business interest
    • -Business taxes except fed taxes
    • -Bad debts
    • 3) Depreciation
    • 4)Capital Loses
    • 5)Moving expenses
    • 6)School loan interest

    • Choice of Itemized or Standardized Reductions
    • 1) Mortgage interest on mortgages up to $1 million on principal personal residence and second residence
    • 2) State and local losses (great losses)
    • 3)Unreimbursed casualty losses (great losses)
  25. Personal Expenses
    Personal expenses are not deductable

    *Legal fees in the personal setting are not deductable
  26. Legal Fees for Divorce
    Legal fees in the divorce setting are personal and not deductible

    Recipeint spouse can exclude legal fees necessary in generating taxable alimony
  27. Business expenses
    Legal fees in the business setting are deductible
  28. Exemptions
    Taxpayers are entitled to one exemption for themselves and one for each dependent

    *Divorce: custodial parent gets the exemption for children of marriage
  29. Allocation of Income
    Income must be taxed to he or she who ears the income (assignment of income rule)

    *Income from property investments (investment income) is taxed to he or she who owns the property
  30. Accounting (What tax year)
    • Cash Method of Accounting
    • -Reports--> when payment is received
    • -Deduction--> when payment is made

    • Constructive receipt: when funds or property are
    • -credited
    • -set apart
    • -Otherwise made available so that she may draw upon them

    • Accural Method (Businesses)
    • - When all events have occurred
    • -Fix the right to receive
    • - Amount can be determined w/ reasonable certainty

    • Deduction:
    • -All events have occurred
    • -Establish the fact of liability
    • - Amount can determined w/ reasonable certainty
  31. Gains and losses of disposition of property
    • Realization- sale, disposition or exchange for asset
    • Recognition- Reporting of gain or loss for tax purposes

    Rule- wherever a gain is realized it must be recognized

    • FORMULA: AR (amount realized)- AB (Adjusted basis)= Gain (or loss)
    • * Amount realized= money received, + fair market value of property or services received, + mortgages or liabilities to which the property sold is subject or which buyer assumes

    *Cost basis rule- total cost of the propety (including any loans to purchase the property)
  32. Divorce Property Settlements
    Transfer btw ex-spouses inciednt to divorce is not taxable. Recipient will always have the sames basis as the donor spouse. (no loss exception)
  33. Basis in Gift property
    Gain rule: Recipient of a gifts takes the donor's basis

    Loss exception: When property has lost value in the donor's hands, the recipient takes the fair market value on the date of the gift as basis
  34. Basis in inherited property
    Fair market value of propety @ the date of decedent's death
  35. Like-Kind Exchanges
    No gain or loss is recognized when a taxpayer exchanges business or investment property for like kind propety held for productive use in business or for investment
  36. Involuntary conversion:
    No gain when lost damaged or stolen property is replaced w/ similar or related property
  37. Sale of Principal Residence
    Up to $250gs of gain from sale of principal residence can be excluded if property has been used an owed as principal residence for a total of two years in the first five years after sale
  38. Ordinary income vs Capital gains
    capital gains= investment assets

    ordinary income= salary, rents, interest, royalties or dividends
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Pa fed tax
2011-06-23 16:50:02
Pa fed tax

Pa fed tax
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