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59 Cards in this Set
- Front
- Back
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Definition of Gross Income
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Gross income includes any economic benefit or any clearly realized accession to you wealth
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Four Basic Principles of Gross Income
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Realization
Non-Cash Receipts Claim of Right Tax Benefit Rule |
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Realization
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The increased or decreased value of an asset is not taken into account for tax purposes until it is realized through the sale or other disposition of the asset
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Non-Cash Receipts
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Gross income includes the FMV of any property received and the fair market value of any services rendered
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Claim of Right (Rule)
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Property or funds received under a claim of right must be reported for tax purposes even though the taxpayer may later be required to return the property, funds or their equivalent
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Claim of Right (definition)
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The taxpayer has received property or funds under a “claim of right” when they are without restriction as to use or disposition
In other words – if you are free to use the property or funds, and, in the case of funds, commingle them with your other assets |
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Stolen, Embezzled or Otherwise illegally obtained goods
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Taxable income
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Tax Benefit Rule
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If a taxpayer takes a deduction in one year and recovers the property that gave rise to the deduction in a later tax year, the taxpayer has tax benefit income to the extent that the earlier deduction provided a tax savings or a tax benefit
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Alimony (General Rule)
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Unless otherwise provided in the written agreement, alimony is taxable to the receiving spouse (as ordinary income) and deductible to the paying spouse
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Alimony (elements)
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1. Writing: must be pursuant to a written divorce or separation agreement
2. Living together disallowed: can’t be members of same household 3. Cease at or before death: liability to make payments must cease at or before death 4. Cash – payments must be in cash (or its equivalent) |
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Child Support Rule
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Child Support is not taxable to receiving spouse and not deductible to paying spouse
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Child Support in Disguise Rule
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If a payment is reduced upon a contingency relating to a child (e.g. if he reaches certain age, etc.), the amount of the reduction is considered child support
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Where Alimony and Child Support payments fall short
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The payments are considered first to meet the child support obligation
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Prizes and Awards
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Gross income includes the value of cash, property, or services received as a prize, award or windfall. Examples of taxable prizes or awards: raffle prizes, gaming or lottery winnings, and treasure trove
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Cancellation of Indebtedness
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The borrower has no gross income upon the initial receipt of borrowed funds. However, a taxpayer whose debt is cancelled or discharged at less than the full amount has discharge of indebtedness income to the extend of the difference between the full amount of the obligation and the amount paid in satisfaction of the debt – Exceptions on next card
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Exceptions to Cancellation of Indebtedness
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This debt is RIGed
1. Reduction of the purchase price (or renegotiation). If the apparent discharge of debt is really a reduction in purchase price in connection with the sale of goods, discharge of indebtedness rules will not apply 2. Insolvency – if the discharge occurs when the taxpayer is bankrupt or insolvent, there is no immediate discharge of indebtedness income 3. Gift – if the lender intends to discharge as a gift, the discharge of indebtedness rules will not apply. |
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Exclusions
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Life Insurance Proceeds
Inheritances Gifts Tort Awards |
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Life Insurance Proceeds
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Gross income does not include proceeds paid by reason of death of the insured. However, when proceeds are paid in installments, any interest paid will be taxable
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Inheritances
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Gross income does not include amounts received by bequest, devise, or inheritance
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Gifts
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Gross income does not include amounts received by gift (no dollar limit)
A gift is a transfer made out of detached and disinterested generosity |
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Tort Awards
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Gross income does not include damages received on account of physical personal injury or sickness
By themselves, damages for emotional distress are not considered damages received on account of physical injury Punitive Damages received in connection with personal injuries are taxable |
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Employee-Related Exclusions
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Receipts from Health and Accident Insurance
Life Insurance Provided By or Through an Employer Meals and Lodging Other Tax-Free Fringe Benefits to Employees Qualified Scholarships |
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Receipts from Health and Accident Insurance
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Value of employer provided health or accident coverage, i.e., the premiums paid by the employer, are excluded from gross income
Health insurance reimbursements for medical expenses actually incurred are also excluded from gross income |
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Life Insurance Provided by or Through an employer
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Taxpayers may exclude the value of the first 50k of employer-provided group term life insurance. Gross income includes the value of any excess life insurance coverage provided by the employer
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Meals and Lodging
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Employer provided meals and lodging excluded if:
1) Provided for the convenience of the employer 2) In-kind 3) On the employer’s premises |
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Other tax-free fringe benefits to employees
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1. De minims
2. No additional cost to the employer (airlines good example – free seats – something that it offers to general public that it can offer you for no additional cost) 3. Qualified employee discounts 4. Contributions to qualified pension plans (amts your employer puts aside) 5. Employee safety or length of service award |
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Qualified Scholarships
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Qualified scholarships for tuition are excluded from gross income. To be “qualified,” must not be payment for past or future services. Must also be primarily for the benefit f the individual. Generally need based or merit based.
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Deductions (Two Types)
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Above the Line
Choice of Itemized or Standard Deduction |
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Above-the-Line Deductions
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Ordinary and Necessary Business Expenses (NOTE: Excessive portion of excessive salaries is not deductible) – includes business interest and business taxes (except federal taxes)
Depreciation Capital Losses (up to a max of 3k) Alimony Moving Expenses Limited Deduction for school loan interest |
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Itemized (Non-business) deductions
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Home Mortgage Interest
State and Local Taxes Unreimbursed Casualty Losses Unreimbursed Medical Expenses Charitable Contributions Miscellaneous Deductions |
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Home Mortgage Interest
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Taxpayers may deduct home mortgages of up to a million (in the aggregate) on a principal and a second personal residence
Taxpayers may also deduct interest on a “home equity loan” of up to 100k NOTE: Personal, i.e., consumer, interest is not deductible |
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State and Local Taxes
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Taxes paid to state and local governments are deductible, with the exception of sales tax
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Unreimbursed Casualty Losses
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Unreimbursed casualty losses are deductible 1) if the loss is greater than 100
2) If the loss is sudden and unexpected and 3) Only to the extent that losses (in the aggregate) exceed 10% |
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Unreimbursed Medical Expenses
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Unreimbursed Medical Expenses are deductible to the extent that they (in the aggregate) exceed 10% of AGI
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Charitable Contributions
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Taxpayers may deduct the FMV of property and the amount of cash contributed to qualified charities
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Miscellaneous Deductions
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Taxpayers may deduct eligible miscellaneous deductions to the extent (in the aggregate) they exceed 2% of AGI
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Personal Expenses
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Not deductible
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Legal Fees (In General)
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Legal Fees incurred in a personal setting are not deductible. Legal fees incurred in a business or investment setting are deductible
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Legal fees (Divorce Setting)
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Legal fees incurred in a divorce or separation matter are generally considered personal. Consequently these fees are not deductible. Exceptions
1. The portion of the legal fee to either party in a divorce or separation case that is attributable to tax advice will be deductible 2. The recipient spouse may deduct legal fees necessary in generating taxable alimony |
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Investment Fees or Expenses
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Taxpayers may deduct the fees or expenses that were necessary to generate taxable income.
E.g. broker fees, settlement expenses in a successful lottery dispute |
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Allocation of Income – To Whom is it income?
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Income must be taxed to he or she who earns it. This is sometimes referred to as the “assignment of income” rule
Income from property (investment income) is taxed to he or she who owns the property |
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Cash method Accounting
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A cash method taxpayer reports income when she receives payment and takes deductions for eligible expenses when she makes payment
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Constructive Receipt
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A taxpayer has “constructive receipt” when funds or property are credited to her account, set apart, or otherwise made available so that she may draw upon them
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Income in Respect of a Decedent (IRD)
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If a cash basis taxpayer is entitled to income, and payment is received by the estate after the decedent’s death, the executor must report the income on estate’s tax return
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Accrual Method of Accounting
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An accrual method taxpayer reports income when all events have occurred that fix the right to receive it, and when the amount can be determined with reasonable accuracy
An accrual method taxpayer takes deductions when all events have occurred that establish the fact of liability and when the amount can be determined with reasonable accuracy |
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Gains and Losses Terminology
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Realization – sale, exchange, disposition of an asset
Recognition – reporting gain or loss on tax return |
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General Rule on Realization and Recognition
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Unless a specific statutory or common law exception applies, whenever a gain is realized, it must also be recognized for tax purposes
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Basic Sale Formula
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Amount Realized (AR) less Adjusted Basis (AB) = Gain (or loss)
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Amount Realized
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Includes money received plus the FMV of property or services paid, plus mortgages or liabilities to which the property sold is subject or which the buyer assumes
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Cost basis Rule
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A TP’s basis in property acquired by purchase is generally the cost of the property, including money paid and borrowing incurred in connection with the purchase
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Divorce Property Settlements
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A transfer of property between spouses or ex[spouses that is incident to divorce is not a taxable event to either party. The spouse receiving the property will have the same basis that the donor spouse had. This is known as a substituted (as opposed to cost) basis rule
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Basis in Gift Property
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The Gain Rule: The recipient of a gift takes the donor’s basis. This is also known as the substituted basis rule
Only applies to gains. For loss the basis is the FMV at the date of the gift |
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Basis In Inherited Property
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The recipient’s basis in inherited property is the FMV of the property at the date of decedent’s death (or, upon executor’s election, the date 6 months following decedent’s death)
FMV is the basis of the property even if it’s a loss |
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Like-kind Exchanges
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No gain or loss is recognized when a taxpayer exchanges property held for productive use in a business or for investment for like=-kind property also held for productive use in business or for investment
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Involuntary Conversion
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No gain is recognized if property involuntarily converted due to theft, fire, seizure, requisition or condemnation is converted into property that is “Similar or related in service or use”
If the property lost or damaged is converted to money, gain or loss is not recognized if the taxpayer purchases replacement property that is “similar or related in service or use” within two years from the date of involuntary conversion. Gain or loss will be recognized, however, to the extent that the money received exceeds the cost of the replacement property |
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Sale of a Principal Residence
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Up to 250k (500k for joint returns) of gain from the sale of a principal residence can be excluded if the property has been used and owned as the TP’s principal residence for period aggregating two years during the five-year period ending on the date of the sale
This exclusion generally is not available if the TP has used it within two years |
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Ordinary Income v. Capital Gains
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The top marginal tax rate on most long term capital gains (15% for assets held for more than 12 months) is lower than the top marginal rate on ordinary income. The top marginal rate on ordinary income is 39.6%.
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Capital Assets
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Generally investment assets. Capital assets do not include inventory, property held primarily for sale to customers, depreciable property, copyrights
Ex. Stock or real estate held for investment NOTE: Most dividends to shareholders of domestic corporations are eligible for tax at capital gains rates at least through end of 2012 |
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Ordinary Income Examples
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Salary, Rent, Interest, Royalties
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