Chapter 3 In Class Notes

Question 1

Includes all the taxpayer’s income, both taxable and nontaxable
Essentially equivalent to gross receipts
It does not include a return of capital or receipt of borrowed funds
�

Answer 1

Income-broadly conceived

Question 2

Partial List of Exclusions from Gross Income�

Answer 2

Accident insurance proceeds
Annuities (cost element)
Bequests
Child support payments
Cost-of-living allowance (for military)
Damages for personal injury or sickness
Gifts received
Group term life insurance, premium paid by employer (for coverage up to $50,000)
Inheritances
Interest from state and local (i.e., municipal) bonds
Life insurance paid on death
Meals and lodging (if furnished for employer’s convenience)
Military allowances
Minister’s dwelling rental value allowance
Railroad retirement benefits (to a limited extent)
Scholarship grants (to a limited extent)
Social Security benefits (to a limited extent)
Unemployment compensation (to a limited extent)
Veterans’ benefits
Welfare payments
Workers’ compensation benefits
�
�

Question 3

The Internal Revenue Code defines gross income broadly as�

Answer 3

as ‘‘except as otherwise provided . . . , all income from whatever source derived’’
Gross income does not include unrealized gains
�

Question 4

Partial List of Gross Income Items �

Answer 4

Alimony
Annuities (income element)
Awards
Back pay
Bargain purchase from employer
Bonuses
Breach of contract damages
Business income
Clergy fees
Commissions
Compensation for services
Death benefits
Debts forgiven
Director’s fees�
Dividends
Embezzled funds
Employee awards (in certain cases)
Employee benefits (except certain fringe benefits)
Estate and trust income
Farm income
Fees
Gains from illegal activities
Gains from sale of property
Gambling winnings
Group term life insurance, premium paid by employer (for coverage over $50,000)
�Hobby income
Interest
Jury duty fees
Living quarters, meals (unless furnished for employer’s convenience)
Mileage allowance
Military pay (unless combat pay)
Notary fees
Partnership income
Pensions
Prizes
Professional fees
Punitive damages
�Rents
Rewards
Royalties
Salaries
Severance pay
Strike and lockout benefits
Supplemental unemployment benefits
Tips and gratuities
Travel allowance (in certain cases)
Treasure trove (found property)
Wages
�

Question 5

Individual taxpayers have two categories of deductions:

�

Answer 5

Deductions for adjusted gross income (AGI)
Deductions from adjusted gross income
�

Question 6

Deductions for AGI include:

�

Answer 6

Ordinary and necessary expenses incurred in a trade or business
One-half of self-employment tax paid
Alimony paid
Certain payments to an IRA and Health Savings Accounts
Unreimbursed moving expenses
Fees for college tuition and related expenses
Interest on student loans
The capital loss deduction, and
Others
�

Question 7

AGI is an important subtotal
Serves as the basis for computing percentage limitations on certain itemized deductions such as
�( 3 of them)

Answer 7

Medical expenses
Charitable contributions
Certain casualty losses
�

Question 8

The basic standard deduction (BSD) amount depends on �

Answer 8

filing status of taxpayer�

Question 9

Taxpayer is single, blind, and age 65 or older

�What is the standard deduction?

Answer 9

SD = $5,950 (BSD) + $1,450 (ASD) + $1,450 (ASD) = $8,850

�

Question 10

Taxpayers are married, filing jointly, one blind, and both age 65 or older
�What is the standard deduction?

Answer 10

SD = $11,900 (BSD) + $1,150 (ASD) + $1,150 (ASD) + $1,150 (ASD) = $15,350
�

Question 11

Certain taxpayers cannot use the SD:

�(List 3 cases)

Answer 11

Married, filing separately, when either spouse itemizes deductions
Nonresident aliens
Individual filing return for tax year of less than 12 months because of change in annual accounting period
�

Question 12

Individual claimed as dependent has a BSD in 2012 limited to the greater of:
�

Answer 12

$950 or
$300 plus earned income (but not exceeding normal BSD)
�

Question 13

A blind child who earns $200 and is claimed by parents as a dependency exemption
�What is the standard deduction

Answer 13

SD = $950 (BSD) + $1,450 (ASD) = $2,400

�

Question 14

A child who earns $1,500 and is claimed by parents as a dependency exemption. What is standard deduction?
�

Answer 14

SD = $1,800 [BSD equal to greater of $950 or ($300 + $1,500 earned income)]
�

Question 15

A child who earns $6,000 and is claimed by parents as a dependency exemption. What is standard deduction
�

Answer 15

SD = $5,950 [BSD limited to normal amount]

�

Question 16

: Individual claimed as dependent by another taxpayer does not receive a �

Answer 16

personal exemption

Question 17

Tom and Betty were married in 1990. Tom dies on February 1, 2012�. Can Betty claim an exemption for Tom.

Answer 17

A personal exemption may be claimed for Tom on the taxpayers’ 2012 joint return.
�

Question 18

To pass the qualifying child test what is the requirement for the relative section.

Answer 18

-The child must be the taxpayer’s: 
Son or daughter
Stepson or stepdaughter
Brother or sister
Stepbrother or stepsister
Half brother or half sister, or 
A descendant of such individual (e.g., grandchildren, nephews, nieces)
-A child who has been adopted, or whose adoption is pending, qualifies
-A foster child may also qualify
�

Question 19

Dependent’s gross income must be less than the�

Answer 19

exemption amount ($3,800 for 2012)
�

Question 20

Dependent cannot file a joint return with spouse unless: ( 3 things)
�

Answer 20

Filing solely for refund of tax withheld
No tax liability exists for either spouse
Neither spouse required to file return
�

Question 21

$1,000 tax credit is allowed for each �

Answer 21

dependent child under the age of 17
Qualifying child includes stepchildren and eligible foster children
�

Question 22

Tax return must be filed if gross income is ≥�

Answer 22

the sum of the standard deduction and exemption amount
ASD for blind does not apply for this determination
�

Question 23

single filing status

Answer 23

Includes a taxpayer who is unmarried or separated from spouse by a divorce decree or separate maintenance agreement and does not qualify for another filing status
�

Question 24

Marital status is determined as of the�

Answer 24

last day of the tax year
When a spouse dies during the year, marital status is determined as of the date of death
�

Question 25

Surviving Spouse Filing Status�

Answer 25

Same tax rate brackets as married, filing jointly
File as surviving spouse for 2 years after death of spouse if taxpayer maintains a home in which a dependent child lives
For the year of death, surviving spouse is treated as being married
Thus, a joint return can be filed if the deceased spouse’s executor agrees
�

Question 26

Head of Household (HH) Filing Status�

Answer 26

Must be unmarried as of end of year or an abandoned spouse
Must pay > half the cost of maintaining a household which is the principal home of a dependent for more than half of tax year
A dependent must satisfy either the qualifying child or the qualifying relative category
A qualifying relative must also meet the relationship test
�

Question 27

Tax liability is computed using either the Tax Table method or the Tax Rate Schedule method
Most taxpayers must use �

Answer 27

the tax table

Question 28

Certain taxpayers may not use the Tax Table method including: (3 of them)
�

Answer 28

An individual who files a short period return
Individuals whose taxable income exceeds the maximum (ceiling) amount in the Tax Table
The 2011 Tax Table applies to taxable income below $100,000
An estate or trust
�

Question 29

Net unearned income (NUI) of child is taxed at �

Answer 29

parents’ rate
�Child must be under age 19 at end of year (or under age 24 if a full-time student)
NUI generally equals unearned income less $1,900 (2012 tax year)
�

Question 30

How to compute the NUI for Kiddie Tax 2012

Answer 30

Unearned income
Less: $950
Less: The greater of:
	 i) $950, or 
	ii) Allowable itemized deductions connected with production of unearned income
Equals: net unearned income
�

Question 31

Net unearned income taxed at parents’ rate

Remainder of taxable income taxed at �

Answer 31

childs rate

Question 32

Two options for computing the tax

�

Answer 32

-A separate return may be filed for the child
The tax on net unearned income (referred to as the allocable parental tax) is computed as though the income had been included on the parents’ return
Form 8615 is used to compute the tax
-The parents may elect to report child’s income on their own return
Certain requirements must be met
�

Question 33

In order for gains (losses) to be recognized (included in gross income), they must be �

Answer 33

realized

Question 34

Realized gain (loss) =�

Answer 34

amount realized - adjusted basis

�

Question 35

Amount realized =�

Answer 35

selling price - costs of disposition�

Question 36

Adjusted basis = �

Answer 36

cost + capital additions - cost recovery �

Question 37

Generally, losses on the sale or disposition of

personal use property are

Answer 37

not recognized

Question 38

Once recognized gains or losses have been

determined, they must be classified as

Answer 38

ordinary or capit

Question 39

Ordinary gains are fully taxable

Ordinary losses are fully deductible

Answer 39

true

Question 40

Capital assets are defined as any property other than: 3 of them

Answer 40

Inventory,
Accounts Receivable, and
Depreciable property or real property used in a
business

Question 41

Most personal use assets owned by individuals are
capital assets
Losses on these assets are

Answer 41

not deductible

Question 42

Polly’s sale of her wedding rings resulted in a realized
capital loss of $7,000
[$8,000 (selling price) ‑ $15,000(cost basis)].
Because they were personal use property, Polly

Answer 42

cannot deduct the loss

Question 43

Polly’s major concern is her filing status.
If she qualifies as an abandoned spouse, she is
entitled to file as

Answer 43

head of house hold