Chapter 4 In Class Notes Flashcards
If you have an increase in net worth it is usually
taxable
emunciple bond. Is the interest taxable.
no it’s an exclusion
Is income from life insurance when your spouse dies taxable
no its an exclusion
Is a gain on stock taxable.
Yes
Is a loss on sale of residents deductible.
No
Most losses are deductible.
True
Are both accounting methods good for tax. (Cash & Accrual based)
Yes it is for tax. GAAP only allows accrual though
Is it easier to defer income in the cash or accrual based.
Cash because you can have your customers pay cash after december 31st
If you get a check in the mail and you don’t want to have the check taxed until next year can you wait till next year to open it.
No if you’ve received it before the end of the year even if you don’t open it you have to tax it in the same year.
If you have A/R of 150,000 and A/P of 10,000 is it better to use cash or accrual
Cash because if you use cash it will allow you to wait until next year to be taxed on the A/R, which is higher than the A/P
If you have a higher A/P than A/R would you choose cash or accrual.
You would use accrual so you can recognize the expenses this year and you will be taxed less.
Explain constructive receipt
Means that some credit has been put on your account. It’s available to you. If it’s been made available to you and there’s no constraints on it it is taxable income.
IF you rent out a building and you receive a pool of money without any restrictions and it’s your’s to use, is it taxable income. Why or why not
It is because of the claim of right.
Two things under claim of right
physically received
no restrictions
If you have prepaid income that will be earned next year, is it taxable this year under the cash basis
Yes because you received the cash. You haven’t earned it yet, but you received the income.
If you have prepaid income (unearned income) this year, is it taxable this year if your using the accrual based.
Yes because the government doesn’t care. They want the tax now. GAAP doesn’t apply here.
If you received 200,000 cash in year one, but only earned 20,000 in year one. 20,000 is earned each year for 10 years Under accrual accounting how much would be taxed this year.
20,000.
How much is taxed in year 2.
180,000 because your only allowed to defer the cash you received under accrual for one year.
If your under the cash method and you have prepaid expenses of 200,000 and the expenses is incurred 50,000 for the next 4 years. How much will be deducted each year.
50,000 will be deducted each year. It’s as if they were in the accrual base. It favors the tax payer too much to deduct the whole 200,000 so it defers.
What about under the accrual method.
It’s the same thing as if it was cash basis.
If you own property and you have income from that property and you give the income to someone else, who is the income taxable under.
Under the person that owns the property. Even though they gave it to the other person, it is still taxed on the person that earned the income.
explain the assignment of income doctrine
Income from property and income from worker is taxed on the owner or worker. They can’t just give the income away and not be taxed on it.
How much is capital gains taxed at
20%
How much are dividends taxed
20%
What is the tax rate on Taxable exempt income
0%
Interest is taxable based on what?
What your marginal rate is. (10%-39.5%)
What are the different flow through entities or conduits? ( 5 of them
S corp, partnership , LLC, LLP, Proprietorship.
Do the flow throughs pay tax.
No they recognize that tax needs to be paid, but the tax goes through the owners.
In the case of a divorce, what things are important
alimony
child support
property transactions
dependency exemptions
has no tax consequence
child support and property transactions. no deductions, no taxes.
dependency exemptions usually go to wife or husband.
Custodial parent, which is usually the wife. The person that supports the kids.
What does alimony say
says the husband gets deduction and wife gets income
What does alimony mean
a legal obligation to support the other spouse
a taxpayer at age 55 pays 100,000 to insurance company. At age 65 the insurance agency gives him 10,000 a year for 15 years. How is the 10,000 taxed.
(Investment/Expected Return) * PMT
(100,000/150,000) * 10,000 = 6666.67
Amount taxed is 10,000 - 6666.67 = 33333.33
Would if the annuity paid you for life? How would you find tax on the 10,000.
You look at the table on 4-32 or 4-33
If the person dies at 67 what happens.
The leftover amount is deductible
Is unemployment compensation taxable
Yes
Taxability of income follows the realization principle from accounting
Income is recognized (taxed) when �
realized
Mere appreciation in wealth (economic income) is considered realized income
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False
There are 3 primary methods of accounting for tax purposes:
�
Cash receipts and disbursements method
Accrual method
Hybrid method
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On December 31, Dr. Payne has $10,000 in patients’ checks that have not been deposited.
One check for $3,000 is from a patient who asked him not to deposit it until after January 4th , because her account did not contain sufficient funds to pay the debt.
�Under the cash method, Dr. Payne must �
recognize $7,000 income from the checks on hand
The checks are a cash equivalent that is actually received�
Assume Dr. Payne elected to use the cash basis of accounting.
If he accepted credit cards, Dr. Payne would receive immediate credit in his bank account for 96% of the charge.
The other 4% would be retained by the credit card issuer.
To avoid the 4% charge, Dr. Payne chose not to accept credit cards.
Instead, his policy required all bills to be paid within 30 days after dental services were provided.
�
At year end, several patients owed a combined $2,000.
They offered to pay with credit cards, but his office rejected their offers.
The $2,000 was not constructively received at the end of the year.
Dr. Payne could have received payment by credit card, he contracted to receive payment at a later date before the dental services were performed.
Moreover, the 4% charge by the credit card company would be a ‘‘substantial limitation.’’
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Income is recognized in the year it is actually or�
constructively received in cash or cash equivalent
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Original Issue Discount (OID) interest is taxable when�
earned rather than when interest is received
�
Determine the taxpayer’s gross income for tax purposes in each of the following
situations:
a. Deb, a cash basis taxpayer, traded a corporate bond with accrued interest of $300 for
corporate stock with a fair market value of $11,000 at the time of the exchange.
Deb’s cost of the bond was $10,000. The value of the stock had increased to $12,000
by the end of the year.
Deb must recognize $300 interest income and $700 gain ($10,700 – $10,000) when she exchanged the bond for stock. Of the value of the corporate stock she received, $300 was for her accrued interest. The remaining $10,700 was in exchange for the bond whose cost was $10,000.
Deb needed $10,000 to make a down payment on her house. She instructed her
broker to sell some stock to raise the $10,000. Deb’s cost of the stock was $3,000.
Based on her broker’s advice, instead of selling the stock, she borrowed the $10,000
using the stock as collateral for the debt. Deb needed $10,000 to make a down payment on her house. She instructed her
broker to sell some stock to raise the $10,000. Deb’s cost of the stock was $3,000.
Based on her broker’s advice, instead of selling the stock, she borrowed the $10,000
using the stock as collateral for the debt.Deb needed $10,000 to make a down payment on her house. She instructed her
broker to sell some stock to raise the $10,000. Deb’s cost of the stock was $3,000.
Based on her broker’s advice, instead of selling the stock, she borrowed the $10,000
using the stock as collateral for the debt. Determine the taxpayer’s gross income for tax purposes
Deb did not realize income when she borrowed on the property. Her net worth did not increase – assets and liabilities increased by an equal amount.
Prepaid Income under the cash method is taxed when.
current year
prepaid income under accrual is taxed when?
You recognize the amount you earn this year, this year. You recognize everything the next year even if you don’t earn it all next year.
Prepaid expenses under the cash basis is taxed when.
It is deferred to when the expenses is recognized.
If you have prepaid expenses under accrual basis, when do you recognize it.
You defer it until the expenses is incurred.
constructive receipt
It’s available to her and she has knowledge of it and she has access to it.
No tax consequence for child support.
True
If its a qualified plan. You use a different table. Either 4-32 or 4-33. Figure it out
.
What happens when you have an annuity and you live longer than your tax expectancy.
You are taxable on the income after you’ve recovered all of your capital if you live longer than expected.
The only time a gift is not taxable is when?
educational, civilary, literary & you have to donate it to a charity
Fruit and tree metaphor
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Income from personal services is taxable to the person who performs the services
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Income from property is taxable to the �
owner of the property
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Dividends are generally taxed to the party who �
is entitled to receive them
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Dividends on stock transferred by gift after declaration date but before record date is generally taxed to�
the doner
Recent legislation has provided partial relief from double taxation of corporate dividends
Generally, dividends received in taxable years beginning after 2002 are taxed at the same marginal rate that is applicable to a net capital gain
Thus, individuals otherwise subject to the 10% or 15% marginal tax rates in 2012 pay�
0% tax on qualified dividends received
Individuals subject to the 25, 28, 33, or 35 percent marginal tax rates pay a 15% tax on qualified dividends
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The following dividends are not eligible for the reduced tax rates
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Dividends from certain foreign corporations,
Dividends from tax-exempt entities, and
Dividends that do not satisfy the holding period requirement
Stock on which the dividend is paid must have been held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date to qualify for the reduced tax rates
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Dividends from foreign corporations are eligible for qualified dividend status only if:
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The foreign corporation’s stock is traded on an established U.S. securities market, or
The foreign corporation is eligible for the benefits of a comprehensive income tax treaty between its country of incorporation and the United States
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Income received by the taxpayer’s agent is considered to be received by �
the taxpayer
Income received by the taxpayer’s agent is considered to be received by the taxpayer
A cash basis principal must recognize the income at the time it is �
received by the agent
A small business corporation may elect to be taxed similarly to a partnership
Referred to as an S corporation
The _____________rather than the corporation, pay the tax on the corporation’s income
�The shareholders�
Beneficiaries of estates and trusts
Generally, taxed on the income earned by the estates or trusts that is actually distributed or required to be distributed to them
Any income not taxed to the beneficiaries is taxable to the�
estate or trust
Community income is allocable�
equally to each spouse�
Payments may qualify as alimony if: (4 things)
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Payments are in cash
Agreement or decree does not specify that the payments are not alimony
Payor and payee are not members of the same household at the time the payments are made
There is no liability to make the payments for any period after the death of the payee
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Alimony is:
Deductible by �
Payor
Alimony is:
Deductible by payor
Includible in gross income of�
recipient
Property settlements
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Transfer of property to former spouse
No deduction or recognized gain or loss for transferor
No gross income and carryover of transferor’s basis for transferee
Front-loading of alimony payments
-Alimony recapture (gross income) for payor
-Deduction from gross income for recipient
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Child support payments
�
Payments made to satisfy legal obligation to support child of taxpayer
Nondeductible by payor and not taxed to recipient (or child)
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May be difficult to determine whether an amount received is alimony or child support. How do you know?
If amount of payment would be reduced due to some future event related to the child (e.g., child reaches age 21), such reduction is deemed child support
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Imputed interest = �
the difference between the amount that would have been charged at the Federal rate and the amount actually charged
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Imputed interest applies to Applies to:
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Gift loans Compensation-related loans Corporate-shareholder loans Tax avoidance loans �
Gift loans
Exemption for loans of ≤ �
$10,000 between individuals
If loan proceeds are used to purchase income-producing property, the following limitation applies
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Gift loans
Exemption for loans of ≤ $10,000 between individuals
If loan proceeds are used to purchase income-producing property, the following limitation applies
On loans of $100,000 or less between individuals
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Imputed interest is limited to borrower’s net investment income for year
No imputed interest if net investment income is $1,000 or less
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$10,000 exemption also applies to compensation-related and corporation-shareholder loans
No exemption if principal purpose of loan is �
tax avoidance
Makes practically all loans of this type suspect
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Interest expense imputed to borrower may be �
deductible
Annuity Income�
Purchaser pays fixed amount for the right to receive a future stream of payments
Generally, early collections and loans against annuity ≤ increases in cash value are included in �
gross income�
For collections on and after the annuity starting date
The exclusion ratio is applied to annuity payments received under contract to determine amount excludable:
Exclusion ratio =�
Investment in contract/
Expected return under contract
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Examples:
Taxpayer pays $10,000 for annuity that will pay $1,000 a year
A: For a term of 15 years
B: For lifetime (life expectancy = 15 years)
Exclusion ratio for A & B =
�
$10,000/15,000 = .667
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Example (cont’d)
A: 15 years of annuity payments
Years 1-15:� What is taxable amount and what is excludable
: $333 taxable and $667 excludable�
Example (cont’d)
B: Lifetime payments and taxpayer lives 18 years: What is taxable and what is excludable each year.
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Years 1-15: $333 taxable and $667 excludable
Years 16-18: $1,000 taxable each year
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B: Lifetime payments and taxpayer lives 10 years. What is taxable and excludable each year.
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Years 1-10: $333 taxable and $667 excludable, and $3,330 deduction on final return
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Annuity Income. The simplified method is required for annuity distributions from a qualified retirement plan
Exclusion amount is �
investment in contract divided by number of anticipated monthly payments (table amount based on age)
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Social Security Benefits �its. Up to how much is taxable?
Up to 85% of benefits may be taxable
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Taxability of social security benefits based on taxpayer’s modified adjusted gross income (MAGI)
MAGI =�
AGI (excluding Social Security) + foreign earned income exclusion + tax exempt interest
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Determine the gross income of the beneficiaries in the following cases:
a. Justin lost his job when his employer moved the plant to China. His employer gave
Justin $15,000 to help him in his transition to a new job, even though the employer
was not legally obligated to make the payment.
Income
Trina was injured while working. She collected $1,200 in workers’ compensation and
$1,500 on a loss of income policy she had purchased.
Not Income
The money capital doctrine
Says that money that restores what you lost is not considered income.
If you buy your own disability insurance is it tax free?
Yes
If the employer buys the disability insurance for you is it taxable.
Yes
Coral Corporation collected $1 million on a key person life insurance policy when its
chief executive died. The corporation had paid the premiums on the policy of $77,000.
Tax free because it’s a death benefit
Sally was an all-state soccer player during her junior and senior years in high
school. She accepted an athletic scholarship from State University. The scholarship provided
the following:
Tuition and fees $15,000
Housing and meals 6,000
Books and supplies 1,500
Transportation 1,200
a. Determine the effect of the scholarship on Sally’s gross income.
Tuition and fees and books and supplies are excludable. The others are taxable.
Sally’s brother, Willy, was not a gifted athlete, but he received $8,000 from their
father’s employer as a scholarship during the year. The employer grants the children
of all executives a scholarship equal to one-half of annual tuition, fees, books, and
supplies. Willy also received a $6,000 scholarship (to be used for tuition) as the winner
of an essay contest related to bioengineering, his intended field of study. Determine
the effect of the scholarships on Willy’s and his father’s gross income.
No excludable to the father because it’s discriminatory because it’s favoring the son. The son won’t be taxed on it though.
Determine the effect on gross income in each of the following cases:
a. Eloise received $150,000 in settlement of a sex discrimination case against her former
employer.
It is taxable because the personal recovery doctrine only excludes things like this on physical personal injury.
4 personal injury damage awards
Personal injury
loss of business reputation
loss of personal reputation
loss of wages
Group Term Life Insurance
For every 1,000 over 50,000 you time by the number in the table. So for a guy that has a 12 on the table that had a 250,000 life insurance it would be ((250,000-50,000)/1,000) * 12
