Individual Taxation Flashcards
Includes all income from whatever source derived, unless specifically excluded
Must be:
-realized
-recognized
Gross Income
Income items which are not inlcuded in gross income, as specified by law—may be taxed under other tax rules, but excluded from income tax
Exclusions
Amounts that are subtracted from income to arrive at adjusted gross income or taxable income
Deductions
Amounts deducted from gross income to arrive at adjusted gross incomde
“Above the line” deductions
Amounts deducted from adjusted gross income to arrive attaxable income
Itemized deductions (“below the line deductions”)
Amounts subtractedfrom the computed tax to arrive at taxes payable
credits
An employer-sponsored benefit package that offers employees a choice between taking cash and receiving qualified benefits, of which they can pick and choose
“cafeteria plan”
Refers to a taxpayer’s annual accounting period (period that the taxpayer uses to compute income in keeping his books)
Taxable year
A period of 12 months ending on December 31–must be used if a taxpayer doesn no keep books (ex. most people)
Calander Year
A period of 12 months ending on the last day of a month other than december
Fiscal year
Annual period always ending on the same day of the week (i.e. last Sundy of a month)
52-53 week year end
Accounting method htat recognizes income when first received or constructively received; expensea re deductible when paid
Cash method
Method of accounting in which income is recognized when “all events” have occurred that fix the taxpayer’s right to receive the item of income and the amount canbe determined with reasonable accuracy and same for expenses
Accrual method
Accounting method that applies to gains (NOT losses) from the disposition of prperty whereat least one payment is to be receiveda fter the eyar of hte sale; CANNOT be used for property held for sale in the ordinary course of business or for sales of securities traded on established markets
Installment method
In an installment payment, the selling price reducedby the seller’s liabilities that raassumed by the buyer, to the extent not in excess of the seller’s basis in theproperty
Contract price
Accounting method that can be used for contracts thatare not completed within the year they are started–taxpayer may elect nto to recognize income/costs from a contract for a tax year if less than 10% of the estimated total contract costs have been incurred as of the end of hte year
Percentage of completion method
Rule that requires that all costs incurred (both 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 the property–*Do not apply to “small retailers or wholesalers” who acquire personal property for reseale if hte retailer’s average annual gross receipts for 3 preceding years do not exceed $10 mil
Uniform capitalizaiton rules (UNICAP)
A bad debt that is incurred in the trade or business of hte lender–is deductible against ordinary income and deductions are allowed for partial worthless
Business baddebt
A bad debt not incurred in trade or business that can only be deducted if it is totally worthless (not partially) and is treated as a short-term capital loss
Non-business bad debt
Generally considered a business loss, but may occur even if an idnividual is not engaged in a separate trade or business (i.e. due to a personal casualty loss)
–may be carried back 2 years and carried forward 20 years to offset taxable income in those years
Net Operating Loss (NOL)
An incorporated service business with more than 10% of its stock owned by shareholder-employees
Personal service corporation
Any activity that involves the conduct of a trade or business in which the taxpayer does “not materially participate”, any rental activity, and any limited partnership interest
Passive activity–losses from these activities may only be deducted against income from other passive activities, with the remainder being carried forward indefinitely
A special rule permits losses from passive activities of this type to offset up to $25,000 of income that is NOT from passive activities if the individual actively participates in this activity
Rental real estate –$25,000 reduced by 50% of AGI in excess of 100,000
Includes all property other than land, intangible assets, and property the taxpayer lects t odepreciate under a method not expressed in terms of years (i.e. units of production)
Recovery property
A depreciation method that provides for straight-line depreciation over hte property’s ADS class life, and MUST be used for:
- foreign use property
- property used 50% or more for personal use
- For purposes of computing earnings and profits
Alternative Depreciation system (ADS)
Depreciation method used for personal property in the year acquired and disposed of
Half-year convention
Additional depreciation equal to 50% of the adjusted basis of qualified property that is avalable for qualifying property acquired after December 31 2007 and PLACED IN SERVICE before Jan 1, 2013
Bonus (additional first-year) depreciation
Property eligible for Bonusdepreciation that includes MACRS proeprty with a recovery period of 20 years or less (most tangible personal property), off-the shelf computer softward and qualified leasehold property
Qualified property
Allos a taxpayer (other than a trust or estate) to annually elect to treat the cost of qualifying depreciable property as an expense rather than a capital expenditure
Sec. 179 expense election
Consists of qualified leasehold improvements, qualified restaurant property, and qualifeid retail improvement property
Qualified real property—may use Sec. 179 expense election
Allows for most acquired intangible assets to be amortized over a 15-year period, beginning with the month it’s acquired–and includes any qualifiying intangible asset which is acquired by thetaxpayer, and held in connection with the conduct of a trade or business
Sec. 197 intangibles
A retirement plan for self-employed individuals that limits maximum contribution and dudections to the lesser of $50,000 or 100% of earned income
H.R.-10 or Keogh Plan
Deductions that reduced adjusted gross income; “below the line” deductions
itemized deductions–will elect these only if total itemized deductiosnexceed applicable tandard deduction that is available to the taxpayer
Interest paid or acrued on acquisition indebtedness or home equity indebtedness secured by a security interest perfected under local law on the taxpayer’s principal residence or a second residence owned by the taxpayer
Qualified residence interest
Interest on loans secured by the residence used to acquire, construct, or substnatilly improve hte loan–deductible up to $1M
Acquisition indebtedness
Interest of loans secured by the residence (other than acquisition indebtedness) regardless of how the loan proceeds are spent–deductible up to $100k
Home equity indebtedness
Interst paid or accrued on indebtedness properly allocable to property held for investment—deductible up to amount of investment income
Investment interest
An agreement that may be used in determining qualifying relative if no one person furnishes more than 50% of the support–if one person furnishes more than 10% of the support, and gets all other supporters to sign a written agreeement that they will not also claim the deduction, will be able to claim the deduction
Multiple support agreement
A refundable tax credit for low-income workers
Earned income credit
The 3 courts that a taxpayer may begin tax litigation
1) US Tax court
2) US district courts
3) US court of Federal claims
A court of national jurisdiction that hears only tax cases; composed of 19 judges who are specialists in the tax area
Major advantage: taxes do not need to be paid before hearing, but jury trial not available
Tax court
A policy adopted by the IRS for regular Tax Court deicsions that it loses in which the IRS will follow the decision in future situations, involving similar facts and issues
Acquiescience policy
A policy adopted by the IRS for regular Tax Court decisions when it loses in which the IRS does not expect to follow the decisiona nd can be excpected to litigate in sutations involving simialr facts and issues
Nonacquiescence policy
Rule that states that the Tax Court will follow the law of he circuit to which a case is appealable
Golsen Rule
A taxpayer may make a claim in this court if the disputed amount is less than $50,000
Small Tax Case Division
An indepndent court in each state that hears all types of cases and is the only court in which a jury trial is available; but, taxpayers have to first pay the disputed amount
US district court
A court of national jurisdiction in which a jury trial is not available and taxpayers must first pay tax and then file suit for refund
US Court of Federal Claims
Lower court decisions are appealable to this court
Circuit Court of appeals
Where appeals made to decisions made by Appelate Courts appeal to
US Supreme Court
A penalty of 20% if the underpayment of tax is attributable to at least one:
1) negligence or disregard of rules
2) substantial understatement of income tax
3) substantial valuation overstatement
4) substantial overstatement of pension liabilities
5) substantial gift or estate tax valuation understatement
Accuracy related penalty
A tax penalty that applies to any careless, reckless, or intentional disregard of rules or regulations and any failure to make a reasonable attempt to comply with the provisions of hte tax law
Negligence penalty
A penalty that pplies if hte understatement exceeds the greater of:
1) 10% of taxes due
2) $5,000
Substantial understatement of income tax penalty
Penalty that may be imposed if the value of property stated on the return is 150% or more of the amount correct
Substantial valuation misstatement penalty
Tax penalty that applies if the amount of stated pension liabilities is 200% or more of hte amount determined to be correct; not applicalbe if underpayment is <$1,000
Substantial overstatement of pension liabilities penalty
Penalty that applies if the value of property on a gift or estate return is 50% or less of the amount correct
Gift or estate tax valuation misstatement penalty
Penalty that results if taxpayer failts to disclose a listed transaction wit a significatn tax avloidance purpose of 30% penalty (20% if there was disclosure)
Tax shelter penalty
A penalty of 75% of the portion of underpayment attributate to fraud
Cival fraud penalty
