Federal Income Tax

Question 1

Federal Income Tax law is…

Answer 1

statutory law from Internal Revenue Code

Question 2

What type of tax rates apply to federal income tax?

Answer 2

Progressive tax rates

Tiered system

Question 3

Taxable Years

Answer 3

Calendar year (generally personal/uses cash basis)

Fiscal (common business/uses accrual accounting)

Question 4

What does income tax depend upn?

Answer 4

Income tax due depends on filing status and taxable income

Question 5

Taxpayer is…

Answer 5

person who performs services OR owns property

Question 6

Filing status

Answer 6

unmarried, married filing jointly, married filing separately, head of household

Question 7

Taxable Income Formula

Answer 7

Gross Income

– Above line deductions

Adjusted Gross Income

• standard or itemized deductions

– qualified business income deductions

taxable income

Question 8

Deductions

Answer 8

things that reduce taxable income

Above - the line or Below - the line (itemized deduction)

Question 9

Credits

Answer 9

credits reduce tax liability

example: tax already paid through wage deductions

Question 10

Gross Income

Answer 10

all income from whatever source derived

use Glenshaw Glass to determine

Question 11

Glenshaw Glass

Answer 11

an accession to wealth clearly realized over which the taxpayer has complete dominion

Question 12

Exceptions to Gross Income

Answer 12

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

Question 13

Basis

Answer 13

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

Question 14

Deductions

Answer 14

any payment or expense MIGHT be deduction

Analyze by:

Type of activity then by type of expense

Question 15

Types of activities as related to expenses

Answer 15

Personal

Business - regular, continuous, and substantial basis

Investment - profit motive but not taking taxpayer’s own time

Question 16

Types of expenses for deduction analysis

Answer 16

Capital expenditures or expenses

Question 17

Capital Expenditure

Answer 17

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

Question 18

Depreciable assets

Answer 18

Capital Expenditure that is tangible property that is subject to wear and tear

Question 19

Amortization is used

Answer 19

for capitable expenditure that is for intangible property

Can amortize for 15 years

Question 20

Deductible Business Expenses

Answer 20

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

Question 21

Deductible Investment Expenses

Answer 21

ordinary and necessary paid in production of income

generally, an itemized deduction

Question 22

Deductible Personal Expenses

Answer 22

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

Question 23

Tax consequences for Property Disposition

Answer 23

Tax will be due based on realized gain or loss

Question 24

Realized Gain or Loss

Answer 24

Amount realized – adjusted basis = realized gain or loss

Question 25

Amount realized

Answer 25

cash received or fair market value of property + debt relief = AR

Question 26

Adjusted basis

Answer 26

basis + cost of improvements – depreciation taken = adjusted basis

Question 27

Realized gain or loss analysis

Answer 27

TWO PART ANALYSIS

1. Is gain recognized?
2. What is character of gain?

Question 28

What gain is recognized?

Answer 28

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

Question 29

What loss is recognized?

Answer 29

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

Question 30

What is the character of realized gain that is taxable?

Answer 30

Must be a long-term capital gain to receive preferential tax rate of 20%

Question 31

What is the character of realized loss?

Answer 31

Capital losses up to $3,000 a year with remainder carried over to next tax year

Question 32

PA Bar exam question with this fact pattern:

Receive gift from person or estate and then SELL gift…..

Answer 32

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?