Individual Taxation Flashcards
Accounting method
rules used to determine the tax year in which income and expense are reported for tax purposes (cash and accrual)
Accounting period
period of time, usually 12 months, used by a taxpayer for the determination of taxable income. Taxpayers who do not keep records must use a calendar year.
Adjusted gross income
unique to individual taxpayers, generally represents an individual’s gross income less business expenses, expenses attributable to rents & royalty, capitol losses, and certain personal expenses
Amount realized
amount received by a taxpayer from the sale or other disposition of property (sum of cash and property received, plus debt assumed by the buyer)
there must be a transaction which gives rise to the income
At-risk limitation
taxpayer’s deductible loss from an activity is limited to the amount the taxpayer has at risk in the activity at the end of the taxable year. (sum of cash and property contributed, plus amounts borrowed for use in the activity)
Cash method
method of accounting under which the taxpayer generally reports income for the taxable year in which payments are actually and constructively received. Expenses deductible when paid
- Constructively received = payment is available to recipient
- prepaid interest is not deductible, whether cash-basis or not
Gross income
all income from whatever source derived
Material participation
level of participation by a taxpayer in an activity that determines whether the activity is a passive activity or an active trade or business.
Passive loss
loss generated from a passive activity (generally not allowed to offset trade or business income)
Realized gain or loss
gain or loss determined by taking the amount realized from the sale or exchange of property and subtracting the property’s adjusted basis
Statute of limitations
period of time after which a taxpayer’s return is no longer subject to assessment, and the taxpayer can no longer file a claim for refund. Normal stature of limitations is generally three years from the alter of the date the tax return is filed, or its due date
Stock redemption
acquisition by a corporation of its own stock from a shareholder in exchange for property
Tax benefit rule
recovery of an item that was deducted in a prior year (state income tax refund) must be included in gross income for the year of recovery
Annuity exclusion
(net cost of annuity/expected total annuity payments) x Payment received
expected total annuity payments = annual return x # of years receivable or life expectancy
Exclusions from Taxable Income
Child Support
Property Settlement (divorce division of capital)
Annuity payment (return of capital)
Life insurance proceeds (installment payments exceeding face amount are taxable)
Employer paid group-term life ins premiums
Employer paid health ins premiums
Employer paid accident & health benefits
Employer contributions to and earnings in MSA
Employer furnished meals & lodging (if for the benefit of the employer)
Employer-provided educational assistance
Employer dependent care assistance
Employer paid qualified adoption expenses
Employee fringe benefits
Sickness or Injury compensation
Damages for physical injury or sickness
State municipal bond interest
Interest on US savings bonds if spent on higher education
Scholarships & fellowships
Political contributions received
Parsonage rental assistance
Incentive stock option
If held for two years, total realized gain is treated as long-term capital gain
If not held for two years: employee has ordinary income to the extent that FMV (when exercised) exceeds option price
nonqualified stock option
If FMV is determinable: Included in ordinary income when received
FMV not determinable: Included in income when exercised (extent that FMV exceeds option price
Employee stock purchase plan
If held for two years after option and one year after exercise: ordinary income = FMV (lessor of grant or disposition date) - option price
If not held: ordinary income = FMV when exercised - option price
Installment method (gains)
calculate annual gain reported:
(Gross profit/total contract price) x amount received
Alternative Depreciation System
Taxpayer can elect to use straight-line depreciation over the property's ADS class life (12 years if unknown Must be used for foreign use property, property used 50% or more for personal use
Averaging convention
Half-year
Mid-quarter (if 40% of new assets were purchased in last quarter of the year)
Mid-month: for real property
Depreciating Leasehold Improvements
- generally recovered over the MACRS recovery period of the underlying property without regard to the lease term
- for qualified leasehold improvements place in service between 10/2004 - 12/2011: 15 year, straight-line recovery
Section 179 Depreciation
electing to expense the cost of property rather than capitalize
- Qualifying property: new or used
- Qualifying real property (2010 - 2013): qualified leasehold improvements, restaurant property
Maximum cost deductible = $500,000 with dollar for dollar reduction for assets exceeding $2mill in cost
Cafeteria Plan
employer-sponsored benefit packages that offer employees a choice between taking cash and receiving qualified benefits.
If employee chooses cash, it is included as gross income
Group-term life insurance
cost (premiums paid) of the first $50,000 of coverage can be excluded from gross income during the employees life.
Death benefits are generally tax free
Basis in Inherited Stock
- FMV at date of death
2. Alternative method: FMV at date of distribution
When are dividends taxable
If paid by mail, taxable when received
Stock Dividends
- common stock: dividend is nontaxable, basis for original stock is allocated to the dividend stock in proportion to FMVs
- preferred stock: dividend is taxable for FMV on date of distribution
Alimony
Must be paid in cash or equivalent, (can be paid on behalf of spouse, college tuition, etc)
Must terminate upon death or remarriage
Recapture:
First year: (1st year payment - average 2nd & 3rd year payments less 2nd year recapture) - 15,000
Second year: (2nd year payment - 3rd year payment) - 15,000
Add 1st & 2nd year recapture for total
Provisional income
AGI + tax-exempt income + 50% of SS benefits
Tip Income
if over $20, must be reported to employer by 10th day of the following month. Taxable to employee in the month reported.
Lease payments received
must be reported and taxable in the period received, regardless if taxpayer is accrual-based
Uniform capitalization
all costs incurred (direct and indirect) in manufacturing or constructing real or personal property, or in purchasing or holding property for sale, must be capitalized as part of the cost of property.
- indirect costs include: factory repairs and maintenance, factory administration and officers’ salaries related to production, taxes (other than income taxes), costs of quality control and inspection, service costs of pension and profit-sharing plans.
- indirect costs do not include (immediately deductible) service costs such as marketing, selling, advertising, and general management.
- Rule does not apply to a “small retailer or wholesaler” who acquires personal property for resale if three-year average annual gross receipts are less than $10 mill
deductible business gifts
limited to $25 per recipient of git
Net Operating Loss
NOL = business loss reduced by business income (wages, rental income, etc).
Personal exemptions and standard deduction are left out of the calculation.
Rental real estate losses
passive loss regardless of participation: up to $25,000 can be deducted against ordinary income if AGI is below $150,000 (phase out calculation = 50% of AGI in excess of $100,000)
Passive activity limitation
applies to individuals, estates, trusts, closely held C-corps and personal service corporations.
does not apply to partnerships, S-corps, widely held C-corps
*portfolio income in partnerships passes through to partners (is not offset against passive loss)
MACRS conventions
half-year: personal property is treated as placed in service or disposed of at the midpoint of the taxable year.
mid-quarter: if 40% of all personal property is placed in service during the last quarter of the tax year, property is treated as placed in service in the middle of the last tax quarter.
half-month: real property treated as placed in service in the middle of the month
MACRS categories
3-year, 200% 5-year, 200%: computers, office machinery 7-year, 200%: furniture & fixtures 10-year, 200% 15-year, 150% 20-year, 150% 27.5-year, straight line: residential real property 39-year, straight line
Roth IRAs
maximum contribution subject to to reduction if AGI exceeds certain thresholds
contributions can be made even after age 70.5
contributions must be made by tax return deadline not including extensions
no AGI limit for rolling traditional IRA over to Roth
Educational IRA
contributions are not deductible, limited to $2,000, and cannot be made after beneficiary is age eighteen or older
withdrawals of earnings are tax free if spent on qualifying educational expenses
IRA contributions
can be made for each joint filer, even if one is not working (contribution cannot exceed earned income)
$5,500 for 2012, catch up of $1,000 if over 50
If employer plan is available, deductible contributions out between $59,000 and $69,000 for single filers, $95,000 and $115,000 for covered spouse, and $178,000 to $188,000 for spouse not covered under employee plan
defined contribution plan
2013 maximum contribution is $51,000 (or 100% of self-employed income if less)
Standard deduction
Single: 6,100 Joint: $12,200 HOH: $8,950 Dependent: lesser of (1) $6,100 or (2) greater of $1,000 or earned income + $350
Additional standard deduction (65+ or blind):
Single: 1,500
Married: 1,200 each
Qualifying child
- taxpayer’s child, grandchild, sibling
- younger than taxpayer and under 19 (24 if enrolled in school)
- live with taxpayer
- cannot provide more than 1/2 their own support
- cannot file joint return
Qualifying relative
- cannot file joint return
- must live with taxpayer or be a relative closer than a cousin
- cannot have gross income over $3,900
- cannot provide more than 1/3 of their own support
Qualified residence interest
deductible if loan does not exceed $100,000 or FMV of residence - regardless of what the loan proceeds were used for
Casualty loss
$100 floor per loss, limited to 10% of AGI
lesser of reduction in FMV or adjusted basis
AMT
Adjustments:
depreciation recapture,
incentive stock option benefits (FMV over amount paid at exercise),
no deductions allowed for: qualified residence interest, state & local taxes and 2% itemized deductions, personal exemption, standard deduction
Preference items (added back to income): tax-exempt interest on private activity bonds, accelerated depreciation on real and leased property over straight line, etc.
General Business Credit
ex: investment credit, work opportunity credit, alcohol fuels credit, research credit, low income housing credit, disabled access credit, renewable resources electricity credit, empowerment zone employment credit, Indian employment credit, employer social security credit, orphan drug credit, new markets tax credit, small-employer pension plan startup cost credit, employer-provided child care credit
dependent care credit
maximum allowed expense ($3,000 per child) x 20-35%
% decreases 1 point for every $2,000 AGI exceeds $15,000
Foreign tax credit
can choose whether to take tax as a deduction or credit. If credit, calculate limit by:
(Foreign Income/All Income + Exemptions) x US Tax
*compute passive and business credits separately
American Opportunity Credit
maximum is $2,500 ) 100% of first $2,000 of expenses and 25% of second $2,000 expenses
available per student
Lifetime Learning Credit
20% of $10,000 expenses
available per taxpayer
