Pa Federal Income Taxation

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  1. Gross income
    All income from whatever source derived including:
  2. Gross Income: Compensation for services
    Includes bonus, fees, commissions, fringe benefits , and in-kind (FMV)
  3. Gross Income: Derived from Business
    Calc of Gross income: total sales - cost of goods sold

    Gains derived from dealings in property: (homes, autos, boats etc...)

    • *Gain:
    • 1) Purpose price ("basis")- Sale price= gain (or loss)

    2) Basis is usually purchase price

    3) Basis can be higher if extensive improvements made on property : Basis= purchase price + cost of improvements
  4. Other types of income
    • -interest
    • -rents
    • -royalties
    • -dividends
    • -Innities
    • -pensions
    • -distribution share of personal service GI
    • -Income in respect of a decendent (earned, but not received b4 death)
    • - income from an interest in an estate or trust
    • - income from illegal activities
  5. Gross Income: alimony & separate maintenance payments
    • A payment will qualify as alimony if:
    • 1) Is made in cash and is received by a spouse under a divorce/seperation instrument

    2) The instrument doesn't qualify payment as something other than alimony

    3) The spouses don't live together @ the time of payment

    4) The payment is terminable @ death of payee/remarriage

    * Child support NOT treated as alimony or a separate maintenance payment
  6. Income from discharge of indebtedness
    Borrowing money is not income bc of the liability to pay the money back

    *If D's can't pay back loan, and loan is forgiven (bank cancels loan), it's considered income.

    *Receiving money back from borrower isn't income to lender (only interest!)

    *NOTE: Think of the underlying reason for the loan (could be a gift, so look @ the relationship i.e. parental- might be gift; EE/ER- could be compensation or gift)
  7. Gross Income: Treasure trove/ good fortune
    Ex: finding burried treasure, a bag of money, antique in trash)

    • *Distinguished from bargain purchase
    • - Buying an antique for a bargain is not gross income until you sale the antique
  8. Gross Income: Prizes & Awards
    All prizes & awards are taxable income

    *EXCEPTION: Qualified scholarships limited to portion used for tuition. (fees, books, supplies & equipment --> NOT R & B)

    • *EXCEPTION: Scholarships made to recognize past performance in field of religion, charity, science, education, art, literature and civis if:
    • 1) recipient didn't enter a contest
    • 2 )the award didn't require any future service
    • 3) the recipient assigns the price to a tax exempt charitable org
  9. Gross Income: Uncharged Interest on Loans
    Uncharged interest on certain interest- free or below market loans will be imputed as income

    *Free or below market loans will be imputed as income

    *Below-market loans: Demand loans which interest payable at a rate less than the Fed Rate on which the amt loan exceeds the present value of all payments due under the loan

    • *Interest will be imputed on any loan that is a:
    • -gift loan
    • -compesation related loan
    • -loan btw a corp & shareholder
    • -loan that has tax avoidance as one of its principal purposes
    • -
  10. Items specifically excluded from income
    1) Life benefits paid when insured dies

    2) Exclusion of death benefits

    • *Sale of insurance policy:
    • - If an insurance policy is sold, then value amount - purchase price = income

    *Insurance policy can be given away w/out adverse income tax consequences

    • *Insurance payment by installments
    • -BUT interest from installment is income

  11. Items specifically excluded from income: Gifts & Bequests
    Is not income to the donee & is not taxable

    • ***Determining whether a transfer is a gift or bequest
    • -"Duberstein Test": look to see if donor has a detached & disinterested generosity

    • EXCEPTION: amt transferred by an ER to an EE can't qualify for the gift exclusion unless the EE is a:
    • 1) Close relative of the ER
    • 2)the transfer is related to the famlial relationship (check to see if all family memebers are treated the same, if not probably related to compensation and must be taxed)
    • *EE achievement awards for property less than $400 & exludable fringe benefits are excludeable from income
  12. Interest on Governmental Obligations
    Regardless of whether interest on Gov bond is taxable, gain sale is taxable

    *US gov bonds are taxable, but not MUNICIPAL bonds
  13. Compensation for Injuries or Sicknes
    Generally excluded from taxable income

    • Injuries/Sicknness include:
    • -worker's comp
    • -physical injuries

    *Punitive damages is included in income (also slander, libel and K)

    -Compensation for non-physical is included in GI
  14. Amounts Received under Accident and Health Plans
    Injuries covered by worker's comp excluded from taxable income

    *Lost wages are taxable
  15. Improvements by Lessee on Lessor's Property
    Excluded from GI

    *BUT, improvements in lieu of rent are included in GI
  16. Meals and lodging furnished for the convenience of the ER
    The value is excluded from EE's GI

    • Reqs:
    • 1) Meals & lodging are furnished on the premises of the Er
    • 2) Furnished for the convenience of the ER, and

    3) Must be an employment req that EE must live on site

    *Where EE is req to pay a fixed charge for meals furnished by ER for ER's conveinence, EE may excluded the amount of the fixed charge from GI (but not straight up cash reimburstments for meals)
  17. Exclusion of Gain on the Sale of Residence
    • Gain from sale/exchange doesn't have to be included in GI if:
    • 1)During 5yr period ending on date of transaction

    2)The property had been

    3)And used by the TP as his principal residence for periods aggregating 2yrs or more (need not be continuous- seasonable absences etc.. can be added together)

    • Limits:
    • 1) single= up to $250gs, married= up to 500gs

    2) exclusion may be used once every 2 years
  18. Educational assistance plans
    Up to $5250 per year of ER provided edu assistance can be excluded from EE's income, provided it's paid thru a plan that's not discriminatory

    *If the educational expense is job-related, it may be excluded as a working condition fringe benefit, even if it doesnt satisfy the rule above.
  19. Fringe Benefits: No additional cost service
    *Seems like this is always a "check"

    • The value of service provided by ER to EE may be excluded from EE GI if the service is:
    • 1) the type offered in the ER's course of business in which the EE works

    2) the ER incurs no substantial additional cost (including declining business) in providing that service to EE (can't increase expenses or lose profits)

    • *Reciprocal Agreements: Where the services is provided by another provider, the exclusion applies if the Er and other provider have engaged in a reciprocal agreement to provide such service
    • - ex: Airline flight attendant is given a free seat on ER's competitors plane
  20. Fringe Benefits: Qualified EE Discount
    • An EE discount on things offered to reg customers in ordinary course of biz, in which the EE is perfroming services can be excluded up to the following amounts:
    • 1) Services= 20% of price @ which the service is offered to customers.

    2) Property: price- cost / sale price (gross profit percentage)
  21. Fringe Benefits: De Minimis
    A benefit provided by ER to EE can be excluded from GI if its value is so small as to make accounting for it unreasonable or impractical (free coffee, doungnuts, picnics etc...)
  22. Three Levels of Income of the Internal Revenue Code
    • 1. GI (gross income)
    • 2. AGI (adjusted gross income)
    • 3. TI (taxable income)

    *Every person is entitled to standard deduction. (they can elect to take individualized deductions)
  23. Trade or business Expenses
    Can deduct all the "ordinary and necessary expenses" paid or incurred in carrying on a trade or business

    Ordinary= common and acceptable in the TP's field of business

    Necessary= those that are helpful to TP's business (need not be essential or indespensable)

    Typical deductions: labor, advertising, telephone, whips.....overhead type stuff
  24. Trade or business Expenses: Above the line deductions
    • *Subtracted from gross income toarrive @ AGI (TP can take these + standard or itemized)
    • 1) Expenses ( ordinary & necessary)

    • 2) Non-deductable expenses:
    • -kickbacks
    • -illegal payments
    • -charitable contributions >170 limits
    • -fines
    • -contributions to policitcal campaigns

    3) Business meals & business entertainment deductions---> Only 50% deduction

    4) Unreimbursed EE expenses (travel, cost away from home are deductible)
  25. Trade or business Expenses: Expenses for the Production of income
    Generally, investment activities are not considerd trade or business, unless a "trader" (ordinary & necessary maintenance)

    • *Individuals can deduct O & N expenses for the:
    • -production & collection of income
    • -management or maintenance of property held for the production of income
    • -expenses incurred in connection w/ the determination, collection or refund of any tax

    *NOTE: These deductions are limited by the 2% floor; the aggregate of miscellaneous limited deductons must exceed 2% of AGI
  26. Trade or business Expenses: Business vs. Personal Expenses- Use of Home
    *Personal expenses are NOT deductible

    • *Business use of home
    • - TP is not permitted to deduct any expense related to the use of his home for business purposes, except to the extent that portion of the home is used exclusively and on a regular basis :

    • -as principal place of business
    • -as place where people deal w/ TO in the normal course of TB
    • -seperate structure attached to dwelling

    • *Limited on deduction:
    • 1) exclusive/regular basis
    • 2) allocation of area used for exclusive/regular business use (sq ft)
    • 3) deductions cannot exceed the amt of income earned from TB
  27. Trade or business Expenses: Business vs. Personal Expenses-use of automobile
    TP entitled to deduct auto expenses in proportion to the car's use for business purposes (deduction for use of very expensive car limited)
  28. Trade or business Expenses: Business vs. Personal Expenses-Clothing
    Clothing that is uniform or distinctive that can't be really be used off business hours is deductible (ex: shirt w/ company logo, security uniform etc...)
  29. Trade or business Expenses: Business vs. Personal Expenses-Educational Expenses
    • May deduct expenses that either:
    • 1) Maintain or improve skill required for his employment, trade or business

    2) Meet the express requirements of ER or law needed to retain position/pay rate/status

    • *Limitations: Not deductible if:
    • 1) EE meets the min reqs for qualification in TP's employment TB, or
    • 2) Qualified TP for a new TB
  30. Trade or business Expenses: Business vs. Personal Expenses-Entertainment Expenses
    Both business and personal expense

    *Congress requires that some business discussion be closely associated / the expense (only 50% of expense deducted)

    • Generally not deductible:
    • -country clubs
    • -yachts
    • -vacation homes
  31. Trade or business Expenses: Business vs. Personal Expenses- Hobby losses (scrutinized)
    Activities that are both recreational & income producing

    *Limited to the income produced - personal deductions such as interest

    *If activity produced a profit 3 out of 5 yrs (or 2 out of 7 for horse breeding) is presumed to be a business and no limits are imposed.

    • *If activity not profitable, "Facts & Circumstances test", reqs:
    • 1)Manner
    • 2) Expertise
    • 3) Time & effort
    • 4) expectation of appreciation of assets
    • 5) success of TP in carrying out similar/ dissimilar activities
    • 6) amt of occasional profits
    • 7) financial status of TP
    • 8)elements of personal pleasure or recreation
  32. Trade or business Expenses: Business vs. Personal Expenses- Hobby losses (scrutinized)

    Both business and personal expense

    *Congress requires that some business discussion be closely associated / the expense (only 50% of expense deducted)

    • Generally not deductible:
    • -country clubs
    • -yachts
    • vacation homes
  33. Capitalization & Depriciation of Property Used in TB or Held for production of income
    • Basic Test:
    • 1) Expenditures that relate to purchases of supplies consumed immediately or to rent or wages can generally be deducted in full yr of the expenditure

    *EXCEPTION: Expenditure for an asset that will have a determinable useful life of >1yr and that will wear out or become obsolete, must be capitalized

    2)Depriciation: Once an item is capitalized the cost is recovered as an expense during its useful life by depriciation (cost of an item should be recovered during the period it's being used)

    -allowed for property used for TB or investment (not allowed for property for personal purposes, land or invetory or stock inventory)

    • -Intangible assets- amortization of cost over 15 years
    • - "straight line depreciaton" = amount paid for expense- amount expense was sold
  34. Loses
    TP who suffers pecuniary ($) losses can take a tax deduction for such losses

    • *Limitations:
    • 1) Law permits deduction of any loss sustained during the tax year & not compensated by insurance or other forms of compensation

    2) Individual & non-corps TP can deduct only losses incurred in business or in a transaction entered into for profit
  35. Loses: Gambling//Wagering
    Can take losses up to extent to gambling gains. So, if no gains, then no deductions entitled
  36. Loses: Casualty/Theft
    If property destroyed/stolen, TP entitled to deduction even if person use property.

    *Deduction is limited to coast of property (exception to personal propety)

    *"Groetzinger Test":"if one's gambling activity is pursued full time, in good faith, and w/ regularity, to the production of income for livelihood, and is not a mere hobby" it is a trade or business
  37. Standard Deductions
    1) SD or any excess itemized deductions are - AGI

    2) SD of TP who may be claimed as dependent on another's tax return cannot exced the lesser of $500 or his earned income

    • 3) For tax year 2008, the standard deduction was:
    • -$5700 for single or married filing seperately
    • -$11400 for married filing jointly or qualifying widower
    • -$8350 fo head of household

    * Married TP filing separately may not claim his SD if his spouse has itemized her deductions
  38. Itemized deductions
    Include all deductions except those allowable in arrignving @ AGI and personal exemption deductions

    • *TP may deduct the following:
    • -interest paid on non-businesss and consumer debt
    • -taxes (generally not fed)
    • -contributions
    • -medical expenses
    • -casualty loses
    • -non-business bad debts
    • -unreimbursed EE business expense
  39. Itemized deductions: Interest
    The deduction for interest paid on non--business & consumer debt is limited.

    *Non-business & consumer interest: Generally not deducted (not attributed to TB)

    • **********Mortgage Debt Exception:
    • - interest on a debt secured by a principal residence & certain vacation homes (used @ least 14 days a year) is deductible if it's either "aquisition indebtedness" or "home equity indebtedness"

    -aquisition= Incurred to acquire, construct or substantively improve a residence (limit $1 mil, points on loan considered interest)

    -home equity= debt other than AI, up to the amt of TP's equity in the residence (FMV-AI)- such $ can be used to buy/invest in anything [limit $100k]

    *Precondition of debt: There must be an enforceable debt for this deduction to apply!!!
  40. Taxes
    Generally, fed taxes are not deductible

    *Local taxes (real estate, state income & personal property) taxes are deductible
  41. Contributions
    Charitable donations made to qualified charitable orgs are deductible to specified limits.

    • *Limitations:
    • 1) Limits deduction: Generally, up to 50% of donor's AGI (and the remainder can be carried over for up to 5yrs) (deduction capped @ half of AGI)
    • 2) Apreciated property: FMV of gift (only up to 30% of donor's AGI) (20% for private orgs) (probable gain deduction disallowed)

    *Charity= groups organized & operated exclusively for religion, charitable science, literary and education (cannot be an individual)

    *Record-keeping: If contribution over $250, TP must obtain by time of filing, an acknowledgment from charity described property received & value
  42. Medical Expenses
    Deductible if incurred by TP, spouse or dependent to the extent that expenses exceed 7.5% AGI (can deduct only if 7.5% of TP AGI)

    • *Medical expenses include:
    • -any payment for diagnosis
    • -cure
    • -treatment
    • -mitigation or prevention of disease
    • -for the purpose of affecting any bodily any bodily -function or structure
    • -premiums paid for accident & health insurance
    • -transportation expenses primarily for and essential to medical care

    • *Typically not deductible:
    • -trips for "rest"
    • -fees paid directly by insurance company
    • -vitamins or cosmetic drugs
    • -cosmetic surgery
    • -cost of installing pool/sauna deductible in full, if the item doesn't increase the market value of the house (it's deductible to the extent the cost of the improvements exceeds the increase in value)

    *kid dependent to both parents if divorced/ separated or lived apart for 6 months of a calender year for purposes of medical expenses
  43. Casualty Losses
    TP can deduct if loss in excess of $100 that she incurs as property owner and as a result of caualty (an event due to some sudden, unexpected or unusual cause" (can be theft too) but only to the extent that aggregate amount of all such losses exceed 10% of AGI)

    *Losses unreimbursed by insurance are deductible

    *amount of lost= (value of the property b4)-(value of the property after)
  44. Non-business bad debts
    TP can deduct a non-business loan it made out, if the loan became worthless, only as a short-term capital loss

    *TP must show bona fide loan

    *Voluntary forgiveness is not considerd a loss
  45. Unreimbursed EE Business Expenses
    Unreimbursed EE expenses are deductible only if the EE itemizes them & only to extend that these and other specified deductions exceed 2% AGI
  46. Limitations on Itemized Deductions
    *For high income TP, the total amt of certain itemized deductions to which are entitled is reduced

    *Reduction is equal to 3% of TP's AGI in excess of $100gs for 1991

    *Total reduction cannot exceed 80% of the amt of itemized deductions (not counting medical, investment, casualty or wagering)
  47. Tax Credits
    A tax credit is subtracted from the actual liability & saves the TP the full amt in dollars (contrast w/ deductions, which is subtracted from income and saves TP an amt equal to deduction x TP's marginal tax rate)
  48. Personal Income Tax Credits
    1) gainfully employed TP & unable to provide the services to young child or disabled dependent

    2)20% credit for qualified research & experimentation

    3) 10% credit for energy property & reforestation expenses

    4) 40% credit for 1st year wages (up to $6gs) paid to disadvantaged individuals

    5)a credit for newly constructed or substantially rehabilitated low income rental housing
  49. Gains or losses from the sale or disposition of property: Computation of amount
    Amount realized: amt of $ and FMV of all property received in return from property

    - if not cash, then FMV

    -Assume encumberances are included in calc of amount realized (even if non-recourse, and exceeding FMV of property)

    Adjusted Basis: Usually the original cost adjusted upward for improvements & adjusted downward for depreciation

    *TP "basis" is the cost of the property

    • -inherited property-FMV
    • -gifted propety- the basis in property acquired by gift is generally the same as the donor's basis

    *The amount of gain is determined by subtractiong the AB from the AR
  50. Important non-recognition situations: Transfer of property btw spouses or incident to Divorce
    No gain or loss is recognized when property is transferred to a spouse or former spouse if the transfer is incident to divorce

    -incident to divorce= occurs w/in 1yr after date of divorce or is related to the divorcce
  51. Important non-recognition situations: Business Losses
    Losses incurred in TP's TB or in the production of income are recognized in the year they occur, but many losses are not recognized, even though gain from the same transaction would be recognized

    1) Personal losses- not recognized for tax purposes

    2) sales to relatives- to prevent TP from obtaining a present loss in security before he ceases to own it. (not recognized)

    3)wash sales: If stock holder sells stock at loss and buys the same stock w/in 30 days prior to or after the sale, the loss will not be recognized.
  52. Capital gains and losses
    Generally, capital gains are taxed @ rates lower than the rates @ which ordinary income is taxed.

    • -capital asset= property, except for:
    • -stocks, inventory or property primarily held for sale to customers in the ordinary course of business

    -copyrights, literary, musical or artistic compositions

    -patents and leaseholds
  53. Answering a Tax Question Involving Sale, Exchange, or Other Disposition of Assets
    1. Determine if a sale, exchange or other disposition has occurred (check to see if something happend happend to TP assests w/out her knowledge or consent- or where she doesn't receive cash in return for a transfer)

    2. determine the amount realized (remeber assumption of mortgage by buyer is considered an amount realized by the person relieved of the debt)

    • 3. compute the amount of gain or loss
    • -gain= ar-basis
    • -loss= basis-ar
    • *use these words to get points

    4. check if any of the non-recognition sections apply (if not, determine if the gain or loss is capital, ordinary or a combination of both)
  54. Tax accounting
    An individual tax rate is base on TP annual income.
  55. Tax Accounting methods: cash receipts and disbursments methods
    Simplest, used by most individual TPs and small businesses. Under this system, TP recognizes income when she gets paid in cash or the equivalent and is allowed to take a deduction when she pays for an item

    -accounts receivable= not income, doesn't give rise to deductions

    - deductions can be taken when express incurred in the year payment of such expenses is actually made

    -constructive receipt- to prevent unwarranted deferral of income (so TP doesn't have physical possession of income by it is set apart so that she can draw on it @ any time, she will be deemed to have received it)

    -money or property that a taxpayer receives under claim of right (can dispose w/out restriction must be included in income yr of receipt, even if TP may have to return all or part in a future yr)
  56. Tax Accounting methods: Accrual method
    Allocate income and expenses accurately in order to match the cost of producing income w/ the recognition of AI in a given time period
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Pa Federal Income Taxation
2011-06-24 01:25:09
Pa Federal Income Taxation

Pa Federal Income Taxation
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