chapter 1 Flashcards
Novation:
A three-party agreement where the creditor agrees to release the debtor and take some third party as a substitute. The novation discharges the contractual obligation of the original debtor.
Accord and satisfaction
a. Accord: Agreement between the two contracting parties where some different performance will replace the original performance. An accord by itself does not discharge the contractual obligation.
b. Satisfaction: Carrying out the accord.
c. An accord and satisfaction discharges the contractual obligation.
Itemized deductions include nonbusiness casualty and theft losses and qualified personal expenditures incurred for such items as the following:
Medical and dental care in excess of 10% of AGI. For 2013 through 2016, if the taxpayer or spouse is age 65 or older before the close of the tax year, they may continue to apply the 7.5% threshold for regular tax purposes. The deduction for medical expenses is the amount of unreimbursed qualifying medical expenses paid during the year regardless of when the services were provided. Medical expenses are considered paid when the credit card charge is made regardless of when the credit card is paid.
(2) State and local taxes or state and local general sales tax deduction (Note: This expired in tax year 2014, and must be renewed by Congress to be claimed in 2015.)
(3) Mortgage interest expense, limited to two residences
(4) Charitable contributions
(5) Casualty losses that exceed 10% of AGI
(6) Investment expenses, including investment interest
(7) Unreimbursed employee expenses that exceed 2% of AGI
(8) Tax preparation fees
(9) Hobby losses:
(a) Expenses incurred in pursuit of a hobby are generally deductible only to the extent of hobby income.
(b) Some expenses are deductible regardless of hobby income. These would include all expenses to which the taxpayer is normally entitled to a personal deduction, such as interest, taxes, and casualty losses.
(c) A hobby may be treated as a business if it meets the following profitability tests:
i. A profit is generated in three out of five consecutive years.
ii. A profit is generated in two out of seven consecutive years for breeding, training, showing, or racing horses.
(d) If facts and circumstances can prove an intent to make a profit, the activity may still be considered a business after failing test (c)i. However, the burden of proof is on the taxpayer.
(10) Other miscellaneous deductions
Foreign tax credit:
A taxpayer may apply income taxes paid to a foreign country or U.S. possession as a credit against United States income tax liability, or may use such taxes as an itemized deduction.
a. This treatment is available for taxes paid to a foreign country on income that is taxable in the United States when no foreign income exclusion is taken.
b. The election to use the credit or the deduction is made annually.
c. The taxpayer cannot split foreign taxes between a credit and a deduction.
d. The overall limit for the credit on taxes paid to all foreign countries is restricted to that portion of the U.S. income tax which relates to the taxable income from all foreign countries.
Total foreign taxable income
—————————— x U.S. income tax
Total worldwide taxable income
e. Excess credits may be carried back 1 year and forward 10 years.
Health insurance costs
Self-employed taxpayers may deduct 100% of the medical insurance premiums paid for themselves and their families. Included are premiums for certain long-term care insurance contracts. This deduction cannot exceed the net earnings from the business. IRC Section 213(d)(10)(A) provides for limitations on the amount of eligible long-term care insurance premium deduction allowed per person based on age at the end of the year. The limits are indexed for inflation. The 2015 limitations are as follows:
Age 40 or younger: $ 380
Age 41 to 50: 710
Age 51 to 60: 1,430
Age 61 to 70: 3,800
Age 71 or older: 4,750
b. No deduction is available to those self-employed taxpayers who are eligible to participate in an employer’s subsidized health insurance program. The employer may be the employer of the taxpayer or the spouse.
c. The remainder of the medical insurance premiums is available as an itemized medical expense deduction.
d. If an S corporation in which an employee holds 2% or more ownership pays health insurance for the employee/owner and/or his or her family, the health insurance coverage is fully taxable to the 2% + owner/employee and can be used as a self-employment health insurance deduction by the owner/employee.
e. New for 2015 is a “shared responsibility payment” for taxpayers without health insurance and who do not meet certain provisions. For 2015, the payment consists of 2% of taxable income or a flat fee of $325 per uninsured adult and $162.50 per child (maximum of $975 per family), whichever amount is higher.
itemized deductions for a 1040.
Medical expenses (in excess of 10% AGI)
Taxes (specified types of taxes, never federal income tax)
Interest expense (primarily mortgage and home equity loan interest within limits)
Charitable contributions (within limits)
Casualty losses (in excess of $100 for each incident and in excess of 10% of AGI in total, after reducing each incident by the $100 floor)
Miscellaneous deductions, most of which are deductible only to the extent that they exceed 2% of AGI, including the following:
Unreimbursed employee expenses (travel, meals, entertainment, dues, subscriptions, uniforms, special tools)
Tax preparation fees
Investment expenses (expenses to produce or collect taxable income, or to manage or protect property held for income)
SurvivingSpouse
A surviving spouse is a taxpayer whose spouse died during either of the two taxable years immediately preceding the current taxable year and who remains unmarried and who maintains the home as the household (i.e., provides over 50% of the support) of a dependent child for the entire year. A surviving spouse will qualify for the special filing status of qualifying widow or widower, which uses the same tax rate schedule as married, filing jointly.
Qualifying relative
Passes the relationship test of qualifying child
Gross income is less than the exemption amount
The taxpayer has provided over one-half of the individual’s support for the year.
Is not a qualifying child of the taxpayer or any other taxpayer
qualifying child
Pass the relationship test:
Child or descendant of a child
Brother, sister, stepbrother, or stepsister
Father, mother, or ancestor of either
Stepfather or stepmother
Niece or nephew
Aunt or uncle
Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister in law
An individual who at no time during the year was the taxpayer’s spouse, who has the same principal place of abode as the taxpayer, and is a member of the taxpayer’s household
Has the same principal place of abode as the taxpayer for more than one-half of the year
has not attained the age of 19 as of the close of the year,
is a student who has not attained the age of 24 as of the close of the year, or
is permanently and totally disabled
Meets the age requirement; is younger than the taxpayer and:
Has not provided over one-half of their own support for the year
Has not filed a joint return (other than to claim a refund) with their spouse
Group Life Insurance- Employer deduction
An employee must include in income the cost (based on an IRS uniform premium cost table) of more than $50,000 of group-term life insurance provided by his employer.
Charitable Contributions- Property
Property which is long-term capital gain property may be eligible for deduction of its fair market value rather than its lower cost basis. However, in this case, the property has only been owned for four months. Therefore, it is short-term capital gain property and the deduction is limited to the basis of $1,500.
Simplified Employee Pension Plan
Qualifying contributions to a simplified employee pension plan (SEP) are fully deductible on Form 1040 to arrive at adjusted gross income.
Annual contributions of an employer under a SEP are excluded from the participant’s gross income to the extent that they do not exceed the lesser of 25% of the participant’s compensation (not exceeding $250,000) or $52,000 for 2014. Contributions limits were increased effective 2002 by the Job Creation and Work Assistance Act of 2002.
Work Opportunity Credit
An employee must work at least 120 hours for the employer to qualify for the credit. The employee must be a member of certain targeted groups, such as ex-felon, high-risk youth, etc. The credit is 40% of wages paid for employees working over 400 hours (25% for employees working between 120 and 400 hours). The work opportunity credit generally is not available for any amount paid to an employee who begins work for the employer after January 1, 2015.
Leasehold Improvements
Leasehold improvements are costs incurred to increase the benefit derived from property which is under an operating lease, e.g., additions, finish-out, parking areas, upgrades to facilities, etc.; are intangible, identifiable, inseparable assets (because the property to which the improvements are attached does not belong to the entity); and are amortized, usually straight-line, over the shorter of the useful life of the improvement or the remaining lease term.
For tax purposes, under MACRS rules the recovery class of the improvement is the same as that of the underlying property. The recovery period that applies to the class is used, without regard to the remaining term of the lease. (For leasehold improvements placed in service from October 22, 2004 to December 31, 2011, a recovery life of 15 years is allowed.)
Non Residential Real Property
Nonresidential real property is rental property not used as a residence. It has a recovery period of 39 years under MACRS. Typical examples include office buildings and warehouses.
