Federal Income Tax Flashcards

Question

Gifts

Answer 1

A gift proceeds from a **detached and disinterested generosity out of affection, respect, admiration, charity, or like impulses.** Family members? * Presumption of gift Tips? * NOT gifts → not detached and disinterested generosity **Employer gifts?** * NOT gifts | if you have multiple intents then we need know what your primary. ## Footnote Case * Duberstein, the taxpayer, was given a Cadillac by Mr. Burman. They knew each other personally and had done business together. Duberstein had given Burman some successful business leads, and that was valuable to Burman. * The most critical consideration is the transferor’s primary intention and motive. * Donor’s characterization of his action is not determinative. * Totality of the facts determination Duberstein loses – you did not get the cadillac out of detached disinterested generosity . . . He transferred the Cadillac to you because you gave him business leads. A recompense at the very least, or inducement for more leads

Answer 2

weird words? * A bequest is the transfer of personal property by will * devise is the transfer of real property by will * inheritance is the receipt of something via the intestacy laws (someone dies without will) **NOT EXCLUDED:** * if its income from property received as a gift, bequest, dives, inheritance ## Footnote Case: Lyeth v. Hoey → settlement = inheritance * Inheritances gained through the contesting a will in court also excluded

Answer 3

Amount of damages received on account of personal physical injury or sickness (not punitive damages) * On account of → due to (broad) * So if you lose wages because of your physical injury, being awarded those wages is excluded Emotional distress not excluded * but emotional distress ON ACCOUNT OF physical injury is excluded If you get medical treatment for your emotional distress, then that is excluded * (regardless if on account of physical injury or not) Punitive damages is not excluded * BUT if civil action in wrongful death, then the punitive damages apply as long as state law says only punitive damages can be awarded in a wrongful death action

Answer 4

108: Income from discharge of indebtedness * Will be excluded IF: * Discharge occurs in bankruptcy * Discharge occurs when taxpayer is insolvent 101: Life insurance * Proceeds of life insurance payable by reason of death: Excluded 103: Interests in any State or Local Bonds * Receiving any interest on a state or local or municipal bond = excluded * Except: Private activity bonds that are not “qualified bonds”, arbitrage bonds, bonds not in registered form

Answer 5

Analysis * Allowed? * Above the line/Below the line? * Limits? Deductions are worth cents on the dollar depending on your marginal rate * A $100 deduction does not put a $100 in your pocket * If you had to pay tax at $100, the tax would be $100 x (your marginal rate.) Remember, deductions are worth more to people in higher tax brackets. * $1,000 deduction if someone in the 37% tax bracket = Is worth $370 to them * $1,000 deduction to someone in the 12% tax bracket = is only worth 120 bucks. * same idea for exclusions ## Footnote Big picture * Business expenditures → generally many deductions allowed * Expenditures for income producing activities that do not rise to the level of being business → in between, restricted by TCJA * Personal expenditures → generally disallowed, subject to limited exceptions

Answer 6

Elements * Ordinary * Necessary * Expense * Paid or incurred during the taxable year = when question * Carrying on any trade or business

Answer 7

Ordinary Rule: Common and accepted in the business circumstances; business norm standard * Does NOT need to be habitual, common, or frequent for the *taxpayer* * It just has to be the kind of thing that people do under common and acceptable business principles in this industry. Not tantamount to purchasing a long-lived asset * Is this kind of like a regular outlay or is this kind of like an investment in the enterprise? * If the taxpayer essentially makes a “capital expenditure,” the payment is NOT ordinary – overlaps with expense prong ## Footnote Rule * Appropriate and helpful for the Taxpayer’s trade or business, generally deferring to the taxpayer’s business judgment

Answer 8

Rule * NOT a capital expenditure; Not tantamount to purchasing a long-lived asset Expenditure = outlay of money → Tells us nothing about tax treatment * We need to determine whether the expenditure is an expense (may be able to be deducted in the current year), or is it a capital expenditure (which must be capitalized, added to basis) * So we must be able to distinguish!

Answer 9

Any amount paid for new buildings or permanent improvements or betterments to increase the value of any property Betterment * is something that ameliorates a material condition or defect existing at the time of the acquisition or that arose during a production, or * making a material addition to the property, or * expenditure that's reasonably expected to materially increase the productivity, efficiency, strength, quality or output of the property. Restoration * A restoration is something where you pay to restore property to its ordinary, efficient operating condition after deterioration to such a state of disrepair, such that it was no longer functional for its intended use. * Restoration is also like the replacement of a major component, the failure of which now means that nothing's working Adaptation of property to a new or different use ## Footnote Safe Harbor * Routine maintenance is not a capital expenditure * recurring activities that you've undertaken to keep the property in ordinary, efficient operating condition. * Ex – changing oil in your delivery trucks

Answer 10

Easy * Buy land → capital expenditure * Build a building on the land → capital expenditure * Buy a share of stock → capital expenditure * Pay lawyers to facilitate purchase of land → capital expenditure Hard * Repairs (deductible expense) vs. Replacement/improvement (capital expenditures that must be capitalized) Midland Empire Packing * Fixed oil seepage in basement. the court concluded that's an expense. It just kept the building in regular operating condition. * So repairs were done so that they continue to operate the plant as usual. didn't operate on a larger scale or kind of in a really changed way. Mt. Morris Drive in * Install drainage system * A whole ass system! Court concluded it was capital expenditure – significantly added to the value of the property. ## Footnote Examples * An amount paid to acquire or produce a unit of real or personal tangible property = When you buy a building, widget machine, car, buying a unit of property! * An amount paid to **improve** a unit of real or personal tangible property (betterment, restoration, adaptation) * An amount paid to acquire or create intangibles = bought a patent * An amount paid or incurred to facilitate an acquisition of a trade or business, a change in capital structure of a business entity, and certain other transactions == the facilitation costs = Lawyer fees that you paid to help you buy the building Examples = Landlord incurs the following expenses during the current year on a 10 unit apartment complex $500 for painting three rooms of one of the apartments * Repainting 3 rooms = Repair aka expense = Common thing to do to kind of keep the space in kind of regular condition * Whole apartment = Capital Expenditure = Betterment – a material improvement to the property materially increases the value of the property. $4000 for replacing the roof over one of the apartments. The roof had suffered termite damage. * Replace a couple shingles v. replace the whole roof == Shingles = expense; Whole roof = capital expenditure * The dollar amount is relevant to figuring out whether it's material, but you know, it's not determinative $3000 for adding a carport to an apartment * Making a material addition to the property (betterment) – added a permanent structure $100 for advertising for tenant to occupy an empty apartment * Expense! Does this seem like the kind of paying of regular ongoing costs, or is this like a big investment, kind of big investment? * as opposed to → kind of prepaying for five years worth of use of a billboard = This is more of a long-lived asset Delivery business and I run a bunch of trucks – replace the spark plugs in one of them v. overhauling the whole engine in one of them * Spark plugs = ordinary maintenance = expense * Overhaul engine = capital expenditure

Answer 11

if you're paying money to acquire, create or enhance an intangible asset = that's a capital expenditure * amounts paid to facilitate the acquisition of an intangible asset = capital expenditure Examples My business is going to do a big acquisition of another biz * So for one set of my costs is I pay the regular salaries to the people who work in the HR department = It's an ongoing cost. Regular course of business. That's an expense. * Compare that to the legal fees that I paid to outside counsel to help me do this acquisition of this other business. That's a capital expenditure because that's facilitating the acquisition of another business We pay this month's rent vs. I'm going to prepay three years worth of rent. * This month's rent, even this year's rent is an expense. That's the cost of doing my regular business. That's the current cost. * long lived = lives kind of materially beyond the end of the year * But if I prepay three years worth of rent, that is a capital expenditure. ## Footnote Pay $500 to take 4 hour baking class to improve skills * Expense = A little tricky because the learned skills could last a long time but it is a cost that is for this year and learning that happened this year * It is not like it is a class that will be taken for the next 10 years

Answer 12

If it's an ongoing business, it's an existing business. * Getting ready to start a new business? No, you're not in the business yet. And it has to be a business expense as opposed to a personal expense * there may also be limits | Ongoing business examples ## Footnote Tycoon, a doctor, decided to invest a part of her fortune in the development of industrial properties and she incurred expenses in making a preliminary investigation * She's a doctor and she wants to go into the industrial properties world → These are different! Deductible under 162? NO Same, but, Tycoon, rather than having been a doctor, was a successful developer of residential and shopping center properties → now doing development activity * So now it is retail v. industrial → argue it * **The idea is that the expenditures have to be connected to the type of business that you're already in.** * If so, 162 could apply. If not, then no, try 195

Answer 13

MUST ELECT INTO 195 → **if you never start the business you never get a deduction under section 195** Rule: Any amount paid or incurred in connection with: * investigating the creation or acquisition of an active trade or business (investigatory); * or creating an active trade or business (pre-opening); or * any activity engaged in profit before the date it actually begins If these paid or incurred would have been allowable as a deduction had the trade or business been made already, then this applies * AKA what 195 does is that if you otherwise meet all the requirements of 162 (ordinary, necessary…) but failed on the “active” trade or business part * but if you fail like expense, this won't work. MATH → How much is the deduction? * The amount of the start-up expenditure * or * 5k (but if the start-up expenditure is over 50k, reduce 5k by the amount its over 50k (not below 0) * Whichever of (a) or (b) is smaller, choose that. * If you choose (b), take whatever is left of the start-up and divide it by 15 to get your yearly (over 180-month period) * AKA you take the amount in (a) or (b) in your first year, and whatever is left-over you take over a 15-year period | Example ## Footnote Assume biz started Jan. 1 this year, with start-up expenditures 20k * So two numbers (1) amount of expenditure or (2) 5k – (extent over 50k) → Here, do not extend over 50k, so just 5k for (2) ⇒ Pick lesser of → we pick (2) [of 1 or 2] → THEN → it says the remainder of such startup expenditures → 15k (20k – 5k). Divided by 15 ⇒ 1k * So in the first year, we get 5k deduction under part A → Plus 1k deduction under part B for a total of $6,000 of a startup expenditure deduction under section 195 in the first year * Then 1k each year for subsequent 14 years What if 150k? * 150k for (1) and for (2) 5k - (extent over 50k = 100k) so just 0 = 5k * So we pick lesser of → so (2) aka 0 → so nothing in first part * Then we just do 150k/15 = 10k a year that's all What if 54k? * (1) 54k | (2) 5k - (4k) = 1k → we pick lesser of → (2) * Then we do 54k/15 = 3,533 per year | year 1 = 4,533 then do yearly 3,533 This is called a phase out; that is, as you have more startup expenditures, the benefit goes down → you’re rich! Your benefit goes down

Answer 14

TRAVEL COSTS * Allowed as a deduction (including meals and lodging other than amounts which are lavish under the circumstances) while away from home in carrying on a trade or business * This must include sleep/rest → So if I drive to LA for work and come back home that does not count * (must be O,N,E,Pity,Cotb) * Substantiation requirement for travel expenditures: you must keep all your receipts. You must document everything (cab receipt, food receipt) LIMITS * Business meals are NOT entertainment: 50% deductions for the meal * Traveling: Food expenses while traveling only 50% ENTERTAINMENT * No deductions for facilities used for entertainment facilities or an activity generally constituting entertainment, amusement, or recreation * This is an objective test ⇒ The question is: is this the type of activity generally considered to be entertainment? Because if it is, it's not deductible. * in applying the test the taxpayer's trade or business is considered = Sports writer watching the game for example * Substantiation requirement | Example ## Footnote Businessperson incurs the following section 162 business deductions. To what extent does section 274 limit their deductibility? Business person takes client to lunch at a restaurant and then to a ball game and, to client’s dismay, discusses business most of the time * Ballgame tickets → Under 274, the cost of the ballgame tickets is a form of entertainment * Lunch? → Deductible under 274 → 50% → business meal is treated not as entertainment so it is not precluded

Answer 15

Allowed to the extent not compensated by insurance or otherwise. The losses shall be limited to: * Losses incurred in a trade or business * Losses from income producing activity (buying/selling stock) * Losses from fire, storm, shipwreck, other casualty, or theft = Must be a federally declared disaster, And you itemize, And exceeds 10% of AGI Other losses generally not allowed ## Footnote T has a car used exclusively in taxpayer's business ⇒ purchased for $40,000 ⇒ depreciation deductions AB = $22,000 ⇒ When the car was worth $30,000, it was totally destroyed in an accident ⇒ T received $15k of insurance proceeds * deductible loss under section 165? * Loss? 22k AB | 15k from insurance | = 7k tax loss * Allowed? Yes → loss incurred in a trade or business * ATL or BTL? ATL

Answer 16

Sometimes you cannot do a 162 business expense deduction because it is a capital expenditure or you are not in business yet * THUS depreciation Why depreciation deductions? Stimulates the economy * Accelerated deduction: larger deduction earlier, reduces TI by more earlier, reduces TL by more earlier, makes money in pocket earlier, makes investments cheaper/easier, incentivizes businesses to make more investments/grow their businesses, stimulates the economy Depreciation is an adjustment for basis → basis drops and capital expenditure increases basis * Lower basis means if you sell it later you’ll pay tax on more gain * But it is almost always the case that you'd rather take a deduction now and lower basis rather than have basis and get a better tax benefit later * Time value of money! A deduction now is more money in your pocket now

Answer 17

Tangible property * Business goodwill is not depreciable because it is intangible * Certain intangibles allowed if amortizable Wasting with an ascertainable useful life * Land + artwork NOT depreciable * Building IS depreciable, land is not Used in a trade or business or income producing activity * Personal-use assets are not depreciable (personal car) ## Footnote Yes to all 3? Depreciable

Answer 18

Otherwise, depreciable * Real property NOT eligible for § 168k (buildings) Recovery period is 20 years or less * Certain property with recovery period over 20 years may be recoverable * Real property NOT eligible for § 168k because greater than 20 years New property * Used property eligible in limited circumstances Places in service in current taxable year ## Footnote FULL EXPENSING 100% depreciable for property placed in service 2018-2022 TY * After 2022, 80% (2023) 60% (2024), 40% (2025), 20% (2026) * If ANY adjusted basis left over, go to § 179 analysis (step 3) AB declines by 168k deduction * If any AB remains, go to next step

Answer 19

Deductions spread out based on recovery period * If property has X year life, the recovery period is X = (3 year property = 3 year recovery period) * Residential Rental Property = 27.5 years * Non-residential real property = 39 years How do you divide up the deductions over the recovery period? Straight-line method * Must be opted into * Divide total adjusted basis by recovery period = annual depreciation Double Declining Balance method (accelerated schedule) * Default * Same total deductions as straight-line BUT the earlier year deductions are larger and the later year deductions are smaller * Double declining balance puts more money in my pocket earlier and I like more money in my pocket.

Answer 20

Go straight to last step because not depreciable under any of the other provisions → Straight-line depreciation ## Footnote Depreciator purchases a piece of new improved real property at a cost of $130,000 of which $100,000 is attributable to the building and $30,000 to the land * Just the building is depreciable! (100k) because of an ascertainable useful life! * Land is not a wasting asset * The building is an apartment building? 100k/27.5 * Office building? 100k/39 year = 2,564 year

Answer 21

Amortization = depreciation deduction for certain intangible property * What is amortizable? Things with a wasting ascertainable useful life Including * Goodwill = basically the value of your business in excess of the value of the hard assets * Going concern value * License * Covenants not to compete * Trademark BUT NOT * Stock in a corporation * Interest in partnership Must be: * Acquired: not self-created * Held in connection with the conduct of a trade or business or income-producing activity Amount of deduction? * Per month, starting with month acquired = AB/180 months ## Footnote Heather’s Gluten Free cupcake store! Becomes very well known (Goodwill). Heather’s business might be worth a lot because she has a reputation for making really delicious gluten free baked goods * That is goodwill BUT NOT AMORTIZABLE! SHE CREATED IT!!! * But then let us imagine her sister buys the business! The goodwill that she purchased is amortizable because she has purchased it.

Answer 22

163(a) → interest generally deductible Limitations on Personal Interest = Personal interest defined ⇒ any interest except: * Interest paid/accrued for debt in a trade or business * Any investment interests (from property held for investment) * Interest from passive activity (income/loss) under sec. 469 * Qualified residence interest (home mortgage interest) * Student loan interest ## Footnote If it’s on the list, then it’s deductible since it is not a personal interest. * Whatever is not on the list is not deductible because it IS a personal interest

Answer 23

The following taxes allowed as a deduction shall be allowed for the year in which paid or accrued * State and local, and foreign, real property taxes * State and local personal property taxes * States and local, and foreign income, war profits, and excess profits taxes = 164(a)(3) allows for state income tax to be deductible * State and local, and foreign taxes paid or accrued within the taxable year in carrying on a trade or business == in carrying on a trade/business (canon of construction) ⇒ 10k SALT Cap does not apply to business property taxes SALT CAP (state and local tax cap) * Aggregate amounts of 1, 2, 3, shall NOT exceed 10k (single; married filing jointly) * 5k if married filing separately * Not applicable to foreign taxes in 3. ATL or BTL? * ATL → if business tax (as a sole proprietor) = Not capped by the 10k SALT Cap * BTL → personal tax | NO DEDUCTIONS FOR FEDERAL INCOME TAXES ## Footnote If Taxpayer elects, can apply state and local sales tax INSTEAD of state and local income tax * Cannot have both state income and state sales tax. You have to choose * Some states do not have state income taxes, so they can get this

Answer 24

Home Mortgage Interest * Acquisition indebtedness * Incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and * Secured by such residence * Up to 750k Qualified residence: * Principal residence, and one other residence ## Footnote Charitable Donation * Bottom line here is that you can get a deduction for a charitable donation.

Answer 25

How does it work? * SO you have an ATL deduction if it is listed in section 62 = Which means it affects AGI * All other deductions (aside from the standard deduction) are referred to as BTL (i.e., itemized deductions) * So anything not listed in 62 goes BELOW THE LINE (BTL) 62 above the line → **listed** and thus ATL **Trade or business deductions:** deductions above the line in carrying on a trade or business * if your performance is **not based on your role as an employee** Certain employee deductions: * If an employee and reimbursed = ATL * Expenses paid or incurred in the taxable year in connection with the performance of him of services as an employee → **If reimbursed by employers** (or some other arrangement the employer allowing the expense) * Performance/artist → expenses paid or incurred by a qualified performing artist in connection with the performance by him of services in the performing arts as an employee * Expenses paid or incurred with respect to services performed by an official as an employee of a State or a political subdivision thereof Losses from sale or exchange of property * As allowed in part VI of the code (trade or business expenses) * E.g. loss from buying stock. Income producing activity and loss is allowed under §162, and therefore above the line under §62(a)(3) since loss from sale/exchange in property as allowed in §162 Depreciation deductions are ATL IF not in taxpayers capacity as an employee * (needs to be sole proprietor or employer) * Basically anything in §162, depreciation deductions, amortization depreciations Interest on Student Loan deductions ## Footnote Example of second certain employee deductions * The benefit you get that was reimbursed → working condition fringe (so if you go to a training at no cost, it is a working condition fringe since the deduction is otherwise allowable) * If you pay $200 and your employer reimburses you $200, then it’s just a wash no GI * Employer would get a § 162 deduction (above the line)

Answer 26

What happens if you do not itemize? What if you just take the standard deduction? * Does he get a deduction? No. **Itemized deductions are only available to people who itemize**. Section 67 imposes a limitation on miscellaneous itemized deductions * BUT (g) say **no miscellaneous itemized deductions allowed AT ALL** through the end of 2025 * So if you have an itemized deduction, you always must ask, is my itemized deduction a miscellaneous itemized deduction? How do I know if something is a miscellaneous itemized deduction? * Here it says miscellaneous itemized deductions are itemized deductions other than these. * If it's any of the following, you can take an itemized deduction * (if not on the list → MID and NO DEDUCTION at all) ## Footnote Dan is an employee. Employer did not reimburse Dan for the $200 registration fee for the conference. * Allowed per 162 → BTL: incurred in capacity as employee and not defined in 67 → MID and no deduction at all Same as above except reimbursed $200 by the employer. * LISTED IN 62 → ATL * So 200 GI plus 200 deduction = 0 * Those cancel out. Which makes sense → If you've ever gotten a reimbursement from an employer, you've never thought, oh, I have to pay tax on that, right?

Answer 27

First → ATL deductions **get taken into account when determining AGI** * BTL do not **AGI floors** * Like if you have a big section 62 deduction – imagine 20k → if it is ATL, it will take AGI down → it might make your AGI 80k rather than 100k → which means the AGI floor is lower → which means you can take more of your deduction Some **benefits that phase out based on AGI** (there will be exam question on phase out language) * Lower AGI → more you will be under the point where the benefit goes away affects your **eligibility for several non-tax benefits**. * Medicaid, Fed student aid, etc * AGI too high, you do not get it **ATL available to everyone** regardless of whether you itemize * BTL you have itemized and you have a choice of whether itemized or standard There are **extra limits imposed on itemized deductions** that aren't imposed on above the line deductions. * Section 67: Does not apply to ATL because it applies to itemized deductions ## Footnote T has 1000 deduction → what would T prefer? * Make the deduction ATL! == going to get it regardless of whether I itemize, because it is going to reduce my AGI and get all those benefits * NOT BTL == itemized deductions that MID suspended and standard deduction might be higher * Treat the deduction as capital expenditure? NO === Cap ex must be capitalized and added to basis == meaning I don't get any tax benefit for that expenditure this year. I got more basis, but more basis doesn’t lower my tax bill === More basis will put more money in my pocket whenever in the future I sell that thing because i’ll have higher basis, meaning lower gain to pay tax on === Whereas a deduction is today and it reduces my taxable income So if you see a problem where employer pays for employees work conference travel → a lot of tax issues there * For the employee, the question is, do they have gross income because they got something of value == Remember, gross income is the question when you get something * For the employer, the question is → is there a deduction? === Deduction is the question when you pay that money out

Answer 28

Section 199A deduction = 20% times QBI * Tax rate cut for people who operate businesses as sole proprietors/partnerships (not corporations) * Employees cannot take the QBI deduction for earnings as an employee. * Providing services as an employee is not a QTB * Domestic businesses only Qualified Business Income? * Net income (gain, deduction, and loss) from a qualified trade or business (QTB) QTB does NOT include: * capital gains, dividends, interests, and certain other investment-type income * Being an employee NOT a QTB * Certain other compensation/exceptions

Answer 29

Limit: QBI deduction limited to 20% of Taxable Income * Applies to **ALL TAXPAYERS** * QBI deduction is limited to 20% of: Taxable income: * Reduced by net capital gain (including qualified dividends) and with TI determined without regard to any potential 199A deduction Two Limits for **High-Income Taxpayers ONLY** Limit #1: Specified Service Trade or Business (SSTB) * if you're a high income taxpayer, then If you operate a specified service, trade or business, we're not going to treat that as a qualified trade or business = = their QBI deduction phases out and can end up at being zero * We want to help businesses that CREATE jobs, but if i am being a lawyer, investment advisor, I am not really creating other jobs, I am just doing my service Limit #2: W-2 Wages & Unadjusted Basis in Qualified Property * Same policy as above → So we have a limit that kind of takes into account the wages that you pay to employees. ## Footnote High-income taxpayer? High-income taxpayer limits are phased in for * TI above a certain threshold * So we have a phase in/out range == Whereas → if X goes up, the benefit goes down. High-income taxpayers are limited in full * TI above a certain threshold Do not have to memorize but I want you to know that high income taxpayers are subject to these limits, low income taxpayers not subject to these limits, and that there's a phase in * So, for example, if you encounter a taxpayer who makes $1 million, they're going to be a high income taxpayer. * it doesn't matter what the exact numbers are, right? If your taxpayer makes $100,000 → You know that they're not a high income taxpayer. T is an employee and earns 100k. T has a side business and is the sole proprietor. She earned a net of 30k (40k gross income, less 10k deductions) from side business. T only person who worked in the side-business and the only asset was her car * No 199A deduction for 100k cause she is an employee * 199A deduction on the 30k cause sole proprietor == 20% x 30k=6k * Limitation that applies to everyone = cannot be more than 20% of her taxable income * Other two limitations do not apply because not a high-income taxpayer

Answer 30

Deduction allowed for expenses paid or incurred in the taxable year for medical care of the taxpayer, spouse, or dependent **to the extent such expenses exceed 7.5% of AGI** * Below the line * NOT a MID. So when we talk about medical care * Co-pays, Insulin, Prescriptions * Things that are not compensated for by insurance. Gerard case = Something that is a capital expenditure (addition to home) but also a medical expense * The portion that exceeded the increase in value to the home = the medical expense ## Footnote In a taxable year, T has AGI = 100k and medical expenses of $10.5k. Assuming T itemizes, how much of T’s medical expense can T deduct? * You only get the deduction to the extent these costs exceed 7.5% of your AGI. * So if your AGI is $100,000 → 7.5% of that is ⇒ $7,500 * So if your medical expenses for the year are 10.5k → You get to deduct 3k This is a floor

Answer 31

Fixed flat amount * 2024 → 14,600: single, 29,200: MFJ Default unless taxpayers elect to itemize ## Footnote Policy? * Simplicity * Ensures taxpayer have some amount of income that is not taxed

Answer 32

Questions to ask * Does the limit apply? = A limitation is only relevant if a deduction might otherwise be allowed * What is the limit? = (how much of the deduction/loss can be used?) * What happens to the remaining deductions/losses? = (forever barred? deferred for possible future use? With the limitations so far → they're permanently disallowed → It's not like they get to hang around and you can use them next year when something else is true * Section 67 → deductions for MiDs completely disallowed through 2025 * Section 274 → limit on deductions for entertainment & travel expenses * Section 164 SALT Cap is also a limit (if not in trade/business) * Section 163 Interest deductions → personal interest deductions not allowed

Answer 33

Does the limit apply? * The deduction is **normally allowed** if in carrying on a trade or business, but the limit applies → meets elements 162 What is the limit? (how much of the deduction/loss can be used?) * **NO deduction or credit allowed** for any amount paid or incurred during the taxable year in carrying on a trade or business if it consists of trafficking controlled substances What happens to the remaining deductions/losses? (forever barred? Differed for possible future use? * They disappear forever This is for deductions (e.g salary…) * But if you have a sale or disposition event, you buy and sell marijuana, you have gross income (from the gain), there are no deductions in that scenario * You can distinguish between deductions of costs of doing business and the basis you have in the product ## Footnote Example = Sole Proprietor where T sells Weed in compliance with state law. T pays salary. What is true? * 162 allows the deduction for salary, but 280E says no and prohibits * NOTICE = We figured out a deduction could be allowed, and then a limit applied to take the deduction away. Example = Sole Proprietor where T sells Weed in compliance with state law. T purchased Weed for $100 and sold it for $125. * T has 25 GI, and 280E limitation is not relevant * Bases and deductions are different! * 162 doesn't provide a deduction for your basis, it doesn't provide a deduction for the cost of inventory that you buy → you have basis in your inventory so here when you sell for 125 → that's a gains from dealings in property question * Now if we had a catastrophic loss of the inventory and we tried to take a business loss under 165, that would be a deduction * property is property Also you can segregate/bifurcate businesses * Hospice that sold CBD on the side

Answer 34

Limits arising from public policy * bribes, kickbacks etc * lobbying and political expenditures * fines, penalitie * sexual misconduct expenditures At risk limitation * Taxpayers should not be able to take deductions on expenditures made with other people’s money if the taxpayer may never be on hook for those amounts * non-recourse

Answer 35

Taxpayer can only use passive losses to the extent of their passive gains * Passive activity = activity in which the taxpayer does not “materially participate” Materially participation * “regular, continuous, AND substantial” involvement in the operations of the activity Safe Harbor: if you meet this bright line rule, not passive * Participate over 500 hours/year in an activity = materially participate = If you do not participate 500 hours, you can still materially participate if it is regular, continuous, and substantial * Participate over 100 hours/year + that participation is not less than the participation of anyone else * Participation is substantially all of the participation (no one else is doing more) * The activity requires significant participation and individual participation in all significant participation activities exceeds 500 hours * Materially participated in the 10 tax years immediately preceding * Personal service activity and materially participated in the 3 preceding years PRESUMPTION: Limited partners DO NOT materially participate in the activity * Limited partnerships = passive Certain income treated as NOT passive activity income * Portfolio income = Gross income from future interests, dividends, annuities, or royalties from things that are NOT in the ordinary course of a trade or business * Gain or loss derived from things that are NOT in the ordinary course of a trade or business from the disposition of property that produces income (portfolio income) or held for investment When you sell your interest, you exit the activity that frees your suspended loss. * Now you can use your suspended loss because we know the loss is real → So if you sell your interest at a gain then you can use your loss against that gain * If the loss is bigger than that gain, then we know you've had a real loss and then the rules that say you can use that loss against other income as well ## Footnote You can use passive losses to offset passive income. * If no passive income, you cannot use the losses (this year) * Can carry them forward and use them in the future if you have passive income * If you sell it, then you can use all the loss WHY this rule? To curtail deferral * You get the time value of money in year 1 if there was no this provision and you do not know when they would pay the tax (and it would be an interest free loan from the government)

Answer 36

**Assignment of income (AOI)** * The reason they're called assignment of income questions is because the most common situation in which this issue comes up is when somebody is earning income of some sort and they're trying to have it get taxed to someone else. * Why would someone try to do that? Being in a lower tax bracket! **Analytical approach** Attempted assignment of income from services * Earned income – e.g., wages, tips, bonuses, etc. Attempted assignment of income from property * Income from investments – e.g, rent (income from owning a building); interest (income from owning debt/bond); dividend (income owning stock)

Answer 37

Income from services is taxed to the service provider. * The party that **earned** the income E.g. Ali works for Shayan. Ali asks Shayan to pay income Ali earns to Tristan. * Ali still pays tax on that income even though he did not receive it, he earned the income Result? Tax the income to the service provider (Ali), make a deemed transfer from the service provider (Ali) to ultimate recipient (Tristan) and **tax the recipient in accordance to the nature of the transfer (ask why was the money given)** * If Ali deemed transfer to Tristan as a gift, Tristan has income, but it is excluded as a gift. * If no exclusions apply, Tristan has Income which is GI and Tristan has to pay tax on that | Example ## Footnote Executive has a salaried position with a corporation under which she earns $80,000 each calendar year. Who is taxed if the executive, at the beginning of the year, directs $20,000 of her salary be paid to her aged parents? * Executive will be taxed on the 60k because they are the one who earned it but the 20k will also get taxed from the executive (80k overall) How does the money get to the parents? * based off of all the facts we have, it seems like it would be regarded as a gift from the executive So deemed transfer from parents (use these words) * So parents have income but it is excluded as gift and thus no gross income

Answer 38

Key: identify which taxpayer owns the income-producing property * If you own the property & attempt to assign/transfer away the income from the property, the income is still taxed to you * E.g. Ali owns income-producing rental property and Ali assigns the rent to Shayan. Ali still pays tax on that income even though he did not receive it, he owns the property Result? Tax the income to the owner of the income-producing property (Ali), make a deemed transfer from the owner (Ali) to ultimate recipient (Shayan) and tax the recipient in accordance to the nature of the transfer (ask why was the money given) * If Ali deemed transfer to Shayan as a gift, Shayan has income, but it is excluded as a gift. * If no exclusions apply, Shayan has Income which is GI and Shayan has to pay tax on that If X transfers half of property to Z. both taxed on half * If X transfers the full property to Z halfway through the pay period. Both taxed on half for the next pay period **Sham gift** * Income from sale is generally taxed to the proper owner, but if Ali transfers to Shayan and Shayan sells soon after, likely taxed to Ali (and Shayan AoI fail) because too close * The form of a transaction cannot be permitted to prevail over its substance (Salvatore) * Whether something is a bonafide gift or not → facts and circumstances determination

Answer 39

What is the taxpayer’s taxable year? * Majority use: Calendar year = Jan 1 – 12/31 * Can use any 1-year period. Ends on the last day of the year = E.g.: 9/1-8/31 What is the taxpayer’s accounting method? * Cash method = income is included when received; deductions are taken when paid * Accrual method = Income is included when earned; deductions are taken, when they're incurred (When the liability arises) Why does the timing of an inclusion or deduction matter? * Time value of money = income side (people prefer to delay taxation of those dollars) | Deduction side (we want to take those deductions for those dollars, asap) * Substantive tax law may change from year to year * Tax rates may change * Taxpayer’s filing status may change * Affects when the statute of limitations will expire * Bunching together of deductions = Into a single year to exceed standard deduction for example

Answer 40

Income is included when it is **received** * Received = **form** of payment (cash/property) does not matter * Check = generally treated as receipt of cash in the year you got the check even if not cashed until later **UNLESS** the check is subject to substantial restrictions Actual or Constructive receipt * Constructive receipt = When the amounts are credited to T’s account or otherwise made available and **can draw upon them at any time without substantial limitations or restrictions** * If it is available to you = constructively received income then **Prepayment:** entire prepaid amount is included in the taxable year received * Irrelevant when you were to provide the service **Late payment:** included in the taxable year received (amounts not included until year you actually or constructively received the payment) * Due date is irrelevant * If someone pays you late → no income until you actually get it ## Footnote Example of constructive receipt * E.g. A offers a check to B in Y1, but B says hold on to it and give it to me in Y2. A does so * Even though B did not actually receive actual payment until Y2, he had constrictive payment in Y1 since it was offered to him and he was allowed to draw on them whenever he wished

Answer 41

Deductions are taken when they are paid * Expenditures are to be deducted in the taxable year actually paid * ACTUAL payment. **No constructive payment**. Must actually pay in order to take the deduction * Form of payment (cash/property) does not matter Payment by check → deductible **upon delivery** * Once you send the check, you paid and can take the deduction (regardless of if it was actually received or cashed later) * unless check is subject to substantial restrictions **Late payment:** amounts NOT deductible until actually paid * Due date of payment is irrelevant **Prepayment:** * material prepayments are treated as capital expenditures → assets with a useful life extending (substantially) beyond the close of the taxable year = Deducted ratably over the period which the prepayment applies * AKA prepayment must be capitalized to get the deduction = You can take the deduction when the thing you prepaid for comes to life ## Footnote Why the cash method? Administratively easier * All you need is W-2 form and checkbook/CC statement * Maybe a mismatch but tolerable for individuals (less so for business taxpayers) E.g. A provides a service to B in year 1 and incurs deductible payments for that service in Y 1 but does not get paid till Y 2. So, you include in Y 1 but deduct in Y 2. * There is a mismatch * Income earned and the cost of earning that income should be reported together but here it is not.

Answer 42

Income is included when it is earned * Earned = when you provided the service/did the thing that allowed you to get paid. * Earned = when is the right to receive income established 2-prong test: Income earned in the taxable year when: * 1. All events have occurred that fix the right to receive the item = Income in TY you deserve it cause you did what you were asked * 2. The amount of the item can be determined with reasonable accuracy. ALSO need to do this for it to be in the TY Prepayment: Include in the year RECEIVED * Not earned. * In order to clearly reflect income Late payments: irrelevant. * Include the income in the year you earn it, not the year you receive payment * time of receipt does not matter

Answer 43

Deductions are taken when liability arises (when they are incurred) * When you incur the obligation to pay = When did you purchase the thing/service that you can take a deduction on * Only get a deduction for the amounts if you’ve gotten what you are supposed to be paying for * Incurred: when is the obligation to pay established? 3 prong test to incurred * 1. All events have occurred that established the fact of liability giving rise to the deduction = You did the thing that allows you to get the deduction = Be confident that the taxpayer really is obligated to pay * 2. the amount of liability must be established with reasonable accuracy = We have to know how much the obligation is to really deduct it * 3. Economic performance has occurred with respect to the liability Prepayment: if you prepay you can only take a deduction for the current year’s liability * Because generally, all events test not satisfied, and economic performance not satisfied = If future has not happened yet, you have not gotten your future entitlement yet * Can generally deduct only this year’s liability * Remainder of the amount’s deductible in later years when all events have occurred that establishes liability arises and economic performance has been satisfied. Late payments: irrelevant * Once liability has been incurred according to 3 prong test, the amount is deductible * Irrelevant when taxpayer pays ## Footnote Economic performance: if you have gotten what you bought * Only give a deduction once you’ve gotten what your actual money has entitled you to * Services are in fact provided to the taxpayer * If property, then economic performance form when the property is actually provided to the taxpayer

Answer 44

Default: Ordinary income/Ordinary loss * Income from services (wages, tips, bonuses), income from sales of inventory, discharge of indebtedness, found money ⇒ OI * Business expense deductions, depreciation deductions, interest expense deductions, deductions for taxes, 199A deductions ⇒ Ordinary deductions (offsets OI) * Taxed under progressive rate structure Capital Gain/Capital Loss * LTCG/LTCL * STCG/STCL * Mostly dispositions of property, sometimes business casualty events or conversions of business property

Answer 45

Not progressive rate structure * Individuals only Rate structure * Generally: 15% * High income taxpayers: 20% (+3.8% on net investment income) * Collectibles: 28% = collectible watches and wines and stamps and antiques * Low-income taxpayers: 0% = Collectibles taxed at marginal rate * STCG: no rate preference and will be taxed at ordinary income rates

Answer 46

CL can be used without limits to offset CG → But **net within Holding Period category first** Example * 40K LTCG | 10K LTCL = That nets out to $30,000 of net long term capital gain = Taxed at rate preference * 40K LTCG | 10K LTCL & 2K STCG | 20K STCL = First nets out 30K net LTCG = Second nets out 18k net STCL = Now → CL can be used without limits to offset CG = So I can use this entire $18,000 capital loss to offset this capital gain, which leaves me with $12,000 of net LTCG subject to the rate preference However many capital losses you have can offset however many gains you have. BUT if you have excess CLs (beyond CGs)? OI = ordinary income * Corp? Cannot offset OI at all. * Individuals? Can use excess CL to offset up to 3K OI. Remaining CL is carried forward * the remaining capital losses get carried forward and can be used in the future to offset capital gain when you have it * and $3,000 of ordinary income each year. | Example ## Footnote 10k LTCG | 30k STCL * I can use the short term capital loss to offset the $10,000 of long term capital gain, which leaves 20k of net STCL → So what can I do with that? * Well, I can use $3,000 of it to offset ordinary income and the rest is carried forward (17k) into the next year For the next year? * First you have to say, do I have any capital gain? And if you have any capital gain ⇒ you apply the capital losses to the capital gain. * If you still have excess capital losses then you can use 3k against ordinary income and carry the rest forward

Answer 47

**Sale/exchange** of a **capital asset** → CG/CL * LT/ST depends on **holding period** Special rule * Recapture * Section 1231 ## Footnote Characterization is the last step of Gains from dealings in property analysis Rational taxpayers generally prefer? * Gains to be capital and losses to be ordinary rational taxpayers prefer their gains to be capital → lower rates * Short term is taxed by ordinary income rates BUT it’s better than ordinary because it can be offset to an unlimited extent by capital loss → LTCG is the best though They want their losses to be ordinary → because capital losses are limited, you can only have capital losses to the extent of your capital gain + 3k * if you have $100,000 of capital losses and no capital gains, you can only use $3,000 of those losses this year.

Answer 48

Capital asset is any property held by the taxpayer but DOES NOT INCLUDE: * Stock (inventory) in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; * Property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business; * Accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1); * Supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer. A patent, invention, model, or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by— * A taxpayer whose personal efforts created such property, * In the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or * A taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B); ## Footnote YES = Factors * Amount of time = The longer time that has passed since you were in the business → The more likely it's going to be a capital asset rather than an inventory item * What else is he doing = Does he look like he's trying to continue to be a car dealer just for someone else so he doesn't have to worry about all the administrative nonsense of owning his own business = **What kind of other activities that the taxpayer is undertaking that kind of indicate whether the sale is in furtherance of the taxpayer's occupation?** = How do you appear to an outsider? So keep in mind * So what was the purpose of the acquisition? * What's been the continuity and frequency of sales? * how is the individual treating the asset → Are they treating it like a dealer or not? Are they advertising soliciting sales? How much effort are they putting into selling activities?

Answer 49

Sale: * Transfer for cash or cash equivalent * If property is transferred subject to a liability, the amount of the liability transferred is included in your amount realized = It is as if you got cash equal to the amount of the liability transferred away with the property → that is a sale. Exchange: * Transfer for another piece of property | Example ## Footnote Taxpayer’s property is subject to a recourse mortgage. T transfers the encumbered property to A. A pays no cash but does assume the mortgage. * because it is a transfer of property in exchange for assumption of liability. * It is not a cancellation, it is an assumption → The debt is being transferred * So it's as if our taxpayer received cash in an amount equal to the liability that was transferred to the acquirer. So when we're talking here about the general rule → sales or exchanges of capital assets, we're only talking about sales or exchanges → **not gifts, not casualties, not condemnation, not eminent domain** * when a storm or a fire burns down your house or destroys your house and you get insurance money, that's not a sale or you're not taking your property and transporting to someone in a **consensual transaction**

Answer 50

Rule * Long term: MORE THAN 1 year * Short term: 1 year or less * HP begins the DAY AFTER acquisition T bought 100 shares of stock on January 15 of year one at a cost of $50 per share. T sold them on January 16th of year 2 at $60.00 per share = **Holding period?** * If you buy on Jan 15 year 1 and sell on Jan 16 year 2 * If I buy on January 15th of year one, when does my holding period start? **JAN 16 of year one** SO, we have exactly one year THUS * **Note → The year begins on January 1st. When does it end? December 31st → The next january 1 is more than 1 year (one day more)** if our holding period starts on January 16th year 1 and we sell on January 16th of year two, is that exactly one year or more than one year? * MORE THAN 1 YEAR THUS, this will be a long term holding period. So we have long term capital gain. * These questions are about when does your holding period start. And **basically that same day, the next year, is a year and a day.** ## Footnote T bought 100 shares at $50 per share on February 10 of year one and another 100 shares at $50 per share on March 10 of year 1. T sold 100 shares on February 15th of year 2 for $60.00 per share * So we bought some: On 2/10 AND 3/10 of year 1 and Sell on → 2/15 year 2 * If only selling what we bought on 2/10? LT * If only selling what we bought on 3/10? ST The problem doesn't tell us which ones are selling, what do we do? * if you're selling from a tranche of shares and it's not specified which ones you're selling from, we assume that you're selling from the earliest purchased set. * FIFO approach → first in first out * So here we get the LT T’s father bought 100 shares of stock on January 10th of year one at $30 per share. On March 10 of year one when they were worth $40.00 per share he gave them to T who sold them on January 15 of the year 2 for $60.00 per share. **Tacking period.** * If X has property and then gave them to Z and X and Z have the same basis (gift) –? then you can tack the holding period. * Aka you can add X holding period + Z holding period Taxpayer’s father purchased 1000 shares of stock for $10 per share several years ago. The stock was worth $50 per share on March 1 of year one, the date of father's death.The stock was distributed to taxpayer by the executor on January 5 of year two and taxpayer sold it for $60 per share on January 15 of year two * If you inherit a capital asset (form a decedent) you get step up basis (FMV at time of death) and if you sell it before you have it for a year then you are deemed to have held it for a year

Answer 51

This rule characterizes gain from dispositions of depreciable assets as **ordinary income** to the extent of prior depreciation deductions * **Only applies to gains** * **Only applies to depreciable personal property (Section 1245 property)** Portion of gain treated as ordinary income = (lower of RB or AR) – AB * RB = recomputed basis in the property * Adjusted basis recomputed by adding all adjustments on basis of deductions for depreciation or amortization * RB = Basis + all your depreciation deductions AR = amount realized (for sale exchange or involuntary conversion) OR FMV if any other disposition * AB = adjusted basis (lower of RB or AR) – AB = Characterized as ordinary income. * Whatever is left over from the Ordinary income and the amount realized → §1231 ## Footnote depreciable personal property (Section 1245 property)? * PERSONAL PROPERTY (not land & buildings) * With an ascertainable useful life Recap, a calendar year taxpayer, owns a piece of equipment that recap uses in business. The equipment was purchased in year 1 for $100,000, and is five year property, within the meaning of section 168c. In year 1, recap deducted 100% of the cost of the property under 168k. * (e) What result if as a result of a scarcity of equipment, recap is able to sell the equipment to desperate for $110,000? * Sale/disposition? Yes * AR? 110k | AB? 0 * Gain/loss? 110k gain realized and recognized * Characterize? No capital asset so no general rule Recapure * Depreciable personal property so 1245 applies * Portion of gain treated as OI = (lower of RB or AR) - AB * RB = AB + depreciation = 0 + 100k = 100k * AR = 110K | Lower of = RB = 100k * SO → Portion of gain treated as OI = 100k - 0 = 100k * BUT there is more gain!!! Remember our AR = 110k = SO ⇒ 100k OI * 10k which will be characterized under 1231 → this captures the real economic gain that is not subsidized by depreciation deductions

Answer 52

What type of EVENT occurred? Conversions (2 types) * Involuntary casualty conversion (e.g., fire, storm, shipwreck, theft) (Step 1 → Congress had special concern for casualty) * Other compulsory or involuntary conversion (e.g., condemnation, gov exercise eminent domain) (Step 2) Certain sales or exchanges * (only for section 1231(b) property) * Step 2 What type of PROPERTY is involved 2 categories Section 1231(b) property – generally * Depreciable property used in a trade/biz held for >1 year * Real property used in a trade/biz for >1 year * Subject to some familiar exceptions * NOT CAPITAL ASSETS Capital assets held for >1 year in a trade/business or in transaction entered into profit * (only if the asset is subject to a conversion) * If a capital asset was sold/exchanged. Falls under general rule. But if no sale or exchange then you can still apply it here

Answer 53

If there is a step 1 event. Only compare gains and losses from step 1 * If there is only 1 step 1 “event” then the g/l will be from that transaction and the other g/l to compare will be 0 If there is a step 2 event. Only compare gains and losses from step 1 * If there is only 1 step 2 “event” then the g/l will be from that transaction and the other g/l to compare will be 0 Compare Step 1 gains against Step 1 losses * If L>G, gain is OI AND Loss is OL * One does not offset the other. You have both OI and OL * If G>=L gains AND losses get included in the step 2 calculations Compare step 2 gains against step 2 losses * If G>L, Gains are LTCG AND losses are LTCL * One does not offset the other. You have both LTCG and LTCL * If L>=G Gains are ordinary gains AND losses are OL ## Footnote Master the graph!

Answer 54

Not recognized if: * Exchange * Of Real property held for a productive use in a trade or business or investment * Solely for * Real property of like kind (held for productive use in a T/B or for investment) Deferral. You do not recognize when you do the like-kind exchange, however that realization will be preserved for when you do sell the land * If solely = full G/L * If not solely = Take the G/L – recognized = what’s left unrealized How to determine the basis for deferral purposes? Step 1: What is the total basis of everything received? * Total basis in the property surrendered + amount of money paid – amount of money received + gain recognized – loss recognized = TOTAL BASIS IN THE NON-MONETARY PROPERTY RECEIVED * You will always know the basis of the cash received cause that’s just the cash * This is the total basis of everything received except for the cash Step 2: allocate the total non-cash basis to first the boot, then the LKE * First look at the boot received. = What is the FMV of the boot received? = Basis in boot is FMV of the boot * Next, look to the LK property received = Whatever is left over from the total basis that did not already cover the boot becomes the basis of the property received Technical way: for basis of the property * Gain realized – Gain recognized = amount of gain you are preserving * FMV of the property = AR * If you know the AR, and you know the Gain, what must the basis in the property be? ## Footnote IF IT IS NOT SOLELY FOR: * You recognize gain to the extent of boot * Boot = all the other stuff you got (cash + fmv of other property received in exchange) * In other words, you do recognize, but that is capped at the boot amount

Answer 55

Step 1: what is taxable income? (combine OI and Capital gains into GI) * GI - § 62 deductions – (std/itemized deductions) – 199A deductions = TI * Taxable Income x Tax rate = Tax liability (before credits) Step 2: separate TI subject to preferential rates * Net LTCG = TI – LTCG | Taxed at 15% (20% for high income) * Qualified Dividends = Taxed at LTCG rates = To be qualified, recipient of the dividend must hold the stock for at least 60 days Step 3: Take whatever is left of the TI (after you remove net LTCG and qualified dividends) * Taxed at the progressive rates * Brackets depend on filing status (e.g., single, MFJ) Step 4: Credits ## Footnote How much federal income tax would a married couple filing a joint return owe if they had a total of $100,000 of taxable income for the taxable year in which the tax rates in section 1a applied? * So we have a married couple filing jointly. Use the chart 100k, so what rate bracket? * 31% rate bracket Do they pay 31% tax on all 100k of their income? * NO, they only pay tax at 31% on the portion of their income above $89,150 How do we calculate this? * The chart says “$20,165, plus 31% of the excess over $89,150” * 20,165 + .31(100k-89,150) = $23,528.50 = That is our tax

Answer 56

Tax liability divided by taxable income * In a progressive system, your marginal tax rate will always be higher than your effective tax rate. * Why? Because your marginal tax rate only applies to a little piece of your taxable income ## Footnote How much federal income tax would a married couple filing a joint return owe if they had a total of $100,000 of taxable income for the taxable year in which the tax rates in section 1a applied? * “$20,165, plus 31% of the excess over $89,150” * 20,165 + .31(100k-89,150) = $23,528.50 23,528.50/100k = .235 = 23.5% average rate

Answer 57

So tax credits apply after you get to taxable income, after you apply rates and then calculated tax liability and then you apply credits * TI x Tax rate = Tax Liability – Tax credits = Tax due * It's hey I would have otherwise owed $14,000 in taxes, but I have a $1,000 tax credit = So actually I only owed $13,000 in tax. They reduce tax liability! Meaning? * A dollars worth of tax credit is worth a dollar to you. * But credits are after the rate multiplication THUS Credits, on the other hand, are worth dollar for dollar regardless of your marginal rate. * Does not depend on which tax bracket you are in Credits can be refundable or nonrefundable * Refundable – if credit exceeds your tax liability, excess is paid to the taxpayer * so if you would have otherwise owed a hundred bucks in taxes and you have $1,000 tax credit, you're going to get a check for 900 bucks * Non-refundable – if credit exceeds your tax liability your tax liability is 0 * can't give you money back so if you otherwise owed a $100 in tax liability, you're entitled to a $1,000 nonrefundable tax credit. Well, now you owe nothing. But you're not getting anything either Non-refundable credits gets applied before refundable credits ## Footnote Examples of credits Refundable * Credits on withholding wages * Earned income tax credit (for low income tax payers) = Generally refundable, but phases out as income increases * Pandemic recovery rebates Non-refundable * Child-tax credit

Answer 58

Credits allowed for each qualifying child equal to $2,000 per kid * Qualifying child = dependents, under 17 The amount of the credit will phase out * Amount of the credit allowed will be reduced (but not below zero) by $50 for each $1,000 by which your AGI exceeds the threshold amount * $400,000 for joint return and $200,000 for other types of returns ## Footnote 2017 and before = 1000 bucks ; 2017 - 2025 = 2000; 2021 (pandemic rules) = 3k for qualifying child; 3.6 child under 6

Answer 59

Prefer above the line deduction → reduces AGI * You are guaranteed cause everyone gets ATL * If it were BTL you might not get it if you chose to standardize Do not want capital expenditure * You have to wait until it is capitalized (meaning added to basis) meaning you cannot use that money to reduce your tax bill since you can only add it when you have a realization event (sale or disposition)

Answer 60

I pay out of pocket + no reimbursement because I will get deduction * WRONG. If you are employee and do it in T/B and no reimbursement MID and NO DEDUCTIONS Pay out of pocket + get a deduction, but only if law is changed and allows MIDS in the same manner as before * WRONG. It would be BTL, so not guaranteed (unless you itemize) AND you can only get a deduction to the amount that exceeds 2% of your AGI, so if 2% of your AGI or less than that, you get no deduction Employer pays for my travel costs, but no deduction * YES. You do not need a deduction since you did not pay for it. * Employer gets a deduction * And the benefit of going to the conference is excluded (so you don’t pay tax on that) since it would have been allowable as a deduction if applied

Answer 61

You have to wait for it to be capitalized (added to basis, so when you sell or disposition) to get the capital expenditure. But you want money now

Answer 62

AGI is used in other places (determining phase-outs. If your AGI is above a certain threshold you only get part of the benefit, and if your AGI is above the second threshold, you get none of the benefit) High AGI, likely to be phased out, lower AGI less likely to be phased out * E.g. can only take certain medical expenses to the amount that exceeds 7.5% of your AGI. If your AGI is lower, the more likely you are to get that BTL deductions AGI is used to measure your eligibility for other benefits (food stamps…)

Answer 63

Gains to be capital and losses to be ordinary * CG ⇒ tax rate preference * Ordinary ⇒ you can get full loss (no limitation)

Answer 64

Defer income inclusion and accelerate deduction ## Footnote Cash method may cause a mismatch (you take a deduction in Y1 for a service you got paid for in Y 2). * Administratively easy for individuals. Business taxpayers however want to avoid this mismatch and have the deduction in the same year of the income so they use accrual

Answer 65

Taxpayers with marginal rates above 25% prefer 4k deduction * Taxpayers with marginal rates below 25% prefer 1k credit