Chapter 3 In Class Notes Flashcards by Paul, Cannon

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
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Income-broadly conceived

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Partial List of Exclusions from Gross Income�

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
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The Internal Revenue Code defines gross income broadly as�

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

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
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Individual taxpayers have two categories of deductions:

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Deductions for adjusted gross income (AGI)
Deductions from adjusted gross income
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Deductions for AGI include:

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

Medical expenses
Charitable contributions
Certain casualty losses
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The basic standard deduction (BSD) amount depends on �

filing status of taxpayer�

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Taxpayer is single, blind, and age 65 or older

�What is the standard deduction?

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

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

SD = $11,900 (BSD) + $1,150 (ASD) + $1,150 (ASD) + $1,150 (ASD) = $15,350
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Certain taxpayers cannot use the SD:

�(List 3 cases)

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
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Individual claimed as dependent has a BSD in 2012 limited to the greater of:
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$950 or
$300 plus earned income (but not exceeding normal BSD)
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A blind child who earns $200 and is claimed by parents as a dependency exemption
�What is the standard deduction

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

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A child who earns $1,500 and is claimed by parents as a dependency exemption. What is standard deduction?
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SD = $1,800 [BSD equal to greater of $950 or ($300 + $1,500 earned income)]
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A child who earns $6,000 and is claimed by parents as a dependency exemption. What is standard deduction
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SD = $5,950 [BSD limited to normal amount]

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

personal exemption

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

A personal exemption may be claimed for Tom on the taxpayers’ 2012 joint return.
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To pass the qualifying child test what is the requirement for the relative section.

-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
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Dependent’s gross income must be less than the�

exemption amount ($3,800 for 2012)
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Dependent cannot file a joint return with spouse unless: ( 3 things)
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Filing solely for refund of tax withheld
No tax liability exists for either spouse
Neither spouse required to file return
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$1,000 tax credit is allowed for each �

dependent child under the age of 17
Qualifying child includes stepchildren and eligible foster children
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Tax return must be filed if gross income is ≥�

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

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
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Marital status is determined as of the�

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

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 �

Head of Household (HH) Filing Status�

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 �

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

the tax table

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

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 �

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

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) �

How to compute the NUI for Kiddie Tax 2012

``` 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 � ```

Net unearned income taxed at parents’ rate | Remainder of taxable income taxed at �

childs rate

Two options for computing the tax | �

-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 �

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

realized

Realized gain (loss) =�

amount realized - adjusted basis | �

Amount realized =�

selling price - costs of disposition�

Adjusted basis = �

cost + capital additions - cost recovery �

Generally, losses on the sale or disposition of | personal use property are

not recognized

Once recognized gains or losses have been | determined, they must be classified as

ordinary or capit

Ordinary gains are fully taxable | Ordinary losses are fully deductible

true

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

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

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

not deductible

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

cannot deduct the loss

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

head of house hold