Federal Income Tax Flashcards
Federal Income Tax law is…
statutory law from Internal Revenue Code
What type of tax rates apply to federal income tax?
Progressive tax rates
Tiered system
Taxable Years
Calendar year (generally personal/uses cash basis)
Fiscal (common business/uses accrual accounting)
What does income tax depend upn?
Income tax due depends on filing status and taxable income
Taxpayer is…
person who performs services OR owns property
Filing status
unmarried, married filing jointly, married filing separately, head of household
Taxable Income Formula
Gross Income
– Above line deductions
Adjusted Gross Income
- standard or itemized deductions
– qualified business income deductions
taxable income
Deductions
things that reduce taxable income
Above - the line or Below - the line (itemized deduction)
Credits
credits reduce tax liability
example: tax already paid through wage deductions
Gross Income
all income from whatever source derived
use Glenshaw Glass to determine
Glenshaw Glass
an accession to wealth clearly realized over which the taxpayer has complete dominion
Exceptions to Gross Income
contributions to retirement plans, unemployment compensation
employee service awards, employer provided benefits
security deposits by tenant
gifts, inheritances, prizes donated straight to charity
debt on residence, gain from sale of principal residence(limited to $250,000/$500,000 jt)
loans, bankruptcy
alimony, child support, property transfer due to divorce
proceeds from physical injury suit
life insurance proceeds
qualified scholarships
growth of qualified tuition program
Basis
value used to determine tax due at later date (cost basis)
carry-over basis - used for gifts - basis of donor carries-over to donee
stepped-up basis - used for decedent estate gifts - basis is fair market value
Deductions
any payment or expense MIGHT be deduction
Analyze by:
Type of activity then by type of expense
Types of activities as related to expenses
Personal
Business - regular, continuous, and substantial basis
Investment - profit motive but not taking taxpayer’s own time
Types of expenses for deduction analysis
Capital expenditures or expenses
Capital Expenditure
costs that produce a benefit that extends beyond one year
Not deductible, but cost adds to basis of asset
Many can be depreciated or amortized
Depreciable assets
Capital Expenditure that is tangible property that is subject to wear and tear
Amortization is used
for capitable expenditure that is for intangible property
Can amortize for 15 years
Deductible Business Expenses
ordinary and necessary paid in carrying on a trade or business
above-the-line deduction in year expense incurred
Exceptions: education expenses to qualify for new business, clothing suitable for general use, entertainment expenses, fines paid, illegible bribes
Deductible Investment Expenses
ordinary and necessary paid in production of income
generally, an itemized deduction
Deductible Personal Expenses
generally–not deductible unless express statutory authority
loan secured by residence – buy, build, or improve the home
state and local taxes paid
casualty losses – loss realized from theft or casualty event (presidentially declared disaster)
charitable contributions
medical expenses
Tax consequences for Property Disposition
Tax will be due based on realized gain or loss
Realized Gain or Loss
Amount realized – adjusted basis = realized gain or loss
Amount realized
cash received or fair market value of property + debt relief = AR
Adjusted basis
basis + cost of improvements – depreciation taken = adjusted basis
Realized gain or loss analysis
TWO PART ANALYSIS
- Is gain recognized?
- What is character of gain?
What gain is recognized?
All gain is recognized except as provided elsewhere.
NO gain for:
like-kind real property exchanges
involuntary conversion of property as long as used to purchase replacement property in a short period of time
transfer to a spouse or former spouse incident to divorce
What loss is recognized?
No loss is recognized except as provided elsewhere
Loss recognized:
business losses
investment losses
theft and casualty losses
like-kind exchange of real property
transfer to a spouse or former spouse incident to divorce
What is the character of realized gain that is taxable?
Must be a long-term capital gain to receive preferential tax rate of 20%
What is the character of realized loss?
Capital losses up to $3,000 a year with remainder carried over to next tax year
PA Bar exam question with this fact pattern:
Receive gift from person or estate and then SELL gift…..
1) State gross income rule and that gift is exception
2) State basis applied to gift
3) Disposition of property - do amount realized analysis
Amount realized – adjusted basis = realized gain or loss
Amount realized = cash received or fair market value of property + debt relief = AR
Adjusted basis = basis + cost of improvements – depreciation taken
Realized gain or loss: Recognized and character?
