Income/Income Tax Flashcards
This type of income includes:
Includes earnings from wages, salaries, commissions, bonuses, and other payments for services. Also includes profit from a trade or business, gain on the sale or disposition of assets used in trade or business, and income from intangible property.
Active income
This type of income includes:
Earnings derived from any trade or business or income-producing activity in which the taxpayer does not materially participate (e.g., rental property). Includes rental activities, with some exceptions.
Passive
This type of income includes:
Includes earnings derived from interest, dividends, annuities, and royalties not derived from the ordinary course of business. Also includes gains or loss from the disposition of property that produces portfolio income or is held for investment purposes.
Portfolio
AGI
Adjusted gross income
Gross income minus the deduction
Taxable Income x Tax Rate =
Tax
Tax – Non-refundable Credits – Refundable Credits =
Tax Due or Refund Owed
The government counts all income from the following sources as part of an individual’s gross income:
C-U-P-I-D-S -W-C-A-P
Commissions
Unemployment compensation
Profit from a business
Interest
Dividends
Social Security income
Wages
Capital gains
Alimony received
Pensions
These expenses can be deducted from income…
T-E-A-M-I-S-H
Tuition
Early withdrawal penalties
Alimony paid
Moving expenses
IRA contributions
Student loan interest
Half of self-employment taxes
Homeowners may also be able to deduct the following allowances from AGI:
They can enjoy a S-I-P
Standard deductions
Itemized deductions
Personal and dependent exemptions
Home improvements, home repairs, and home maintenance costs are generally
not deductible
The profit received from the sale or exchange of property, including real estate.
The difference between the acquisition cost and the adjusted sale price (selling priceminus expenses incurred from selling and expenses related to capital improvements)
Capital Gains
Provides some relief to taxpayers eliminating most, if not all, of the gain. Specific conditions include
Taxpayer Relief Act of 1997: Section 121
Conditions of Taxpayer Relief Act of 1997: Section 121
The taxpayer must have owned and used the property as a principal residence for at least two of the last five years prior to the date of sale.
Under what general circumstances and how often can Taxpayer Relief Act of 1997: Section 121 be invoked.
Once every two years except under these specific circumstances:
Change in place of employment
Health considerations
Unforeseen circumstances
A loan that does not qualify as home acquisition debt but is secured by a qualified home. The amount of debt is limited to the smaller of $100,000 or the home’s fair market value, reduced by the amount of home acquisition debt and grandfathered debt.
Home Equity Debt
A mortgage taken out by a taxpayer to buy, build, or substantially improve a qualified home.
Home Acquisition Debt
Total income received from an investment before expenses are paid; assumes no vacancies
Gross income
Losses associated with empty units
Vacancy
The estimated rental income anticipated (also called gross operating income)
Effective gross income
The measurement of cash inflow and outflow from an investment.
Cash flow
Cash flow model
Total gross income -Vacancy /occupancy loss \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Effective gross income -Expenses \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Net operating income (NOI) -Debt service \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Cash flow before taxes
The repayment of the mortgage loan(interest and principal only)
Debt service
The ratio of income generated by a cash investment
Cash Flow / Purchase Costs =
Cash-on-Cash Return
The loss of value to a property over the time during which it is expected to be useful
Improvements can depreciate, not the land on which the building sits
When considering investment property, determined for tax purposes only
Annual statutory amount of depreciation (cost recovery):
Residential property – 27 1/2 years
Commercial property – 39 years
Improvement Value / Recovery Period = Annual Amount of Depreciation
Straight-line depreciation
Appreciation – Increase in the value of the property
Equity build-up – Mortgage loan balance is reduced
Leverage – Using other people’s money to finance investments
Capital Growth
The exemptions on capital gains tax for personal residential property
do not apply to income-producing property
Step one in calculating the capital gains on an investment property
Purchase Price
+ Closing Costs
+ Capital Improvements
– Accrued Depreciation
——————————–
Adjusted Basis
To find the adjusted sales price
Sales Price
- Closing Costs
————————–
Adjusted Sales Price
To find The amount of capital gains
Adjusted Sales Price
- Adjusted Basis
—————————-
Capital Gains
Basis (original cost) of property, plus gains and minus losses.
Adjusted Basis
Accounting procedure used to determine the capital gain or loss after the sale of property. It is equal to purchase price, plus capital improvements, less depreciation.
Basis
Extra, non-like-kind property that can be a part of a like-kind exchange to make up for pricing disparity between like-kind properties.
Boot
Money used to create income, either as investment in a business or income property.
Capital
Assets of a permanent nature used to produce income, such as machinery, buildings, equipment, land, etc. Must be distinguished from inventory. A machine that makes pencils, for example, would be a capital asset to a pencil manufacturer, but inventory to the company whose business is to sell such machines.
Capital Assets
A loss resulting from an investment’s decrease in value.
Capital Loss
The rate of interest that is considered a reasonable return on the investment. Commonly used in the process of determining value based upon net income.
Capitalization Rate
- A loss in value of a piece of property for any reason. 2. For taxes, the expensing of the cost of business or investment property over a set number of years, determined by the IRS to be an asset’s useful life.
Depreciation
An accelerated method of depreciation that allows for an asset to be expensed more at the beginning of its life.
Double declining balance
The use of credit to enhance speculative capacity
Leverage
The ability to convert an asset into cash quickly without the loss of principal.
Liquidity
The cost and complexity of monitoring an investment.
Management
Tax structure implemented by the IRS in which individuals with higher incomes pay a higher income tax.
Progressive Tax
The rate at which an investor recaptures his investment in income-producing property.
Rate of Return
Occurs on a personal asset used for business purposes when that asset is sold.
Recaptured Depreciation
Exchanges where taxable gain is deferred until a later date.
Tax-Deferred Exchange
Any method used to reduce taxable income, thereby reducing the amount of tax paid to a government.
Tax Shelter
Credits for dependent and childcare expenses Education credits Child tax credits Credit for elderly or disabled Retirement savings contribution credits
Non-refundable credits
Earned income credit
Additional child tax credit
Refundable credits
Price paid for the property
Basis
