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70 Cards in this Set
- Front
- Back
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definition of gross income |
gross income includes any economic benefit or any clearly realized accession to wealth |
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realization definition |
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 definition |
gross income includes the fair market value of any property received and the fair market value of any services received |
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claim of right rule |
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 [taxpayer would then get a deduction in that amount] |
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claim of right definition |
taxpayer has received property or funds under a claim of right when they are received without restriction as to use or disposition |
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is stolen, embezzled or illegally obtained property considered taxable income? |
yes, gross income is any economic benefit |
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tax benefit rule |
if a taxpayer takes a deduction in one year and recovers the property that gave rise to the deduction in a later tax year, taxpayer has tax benefit income to the extent that the earlier deduction provided a tax savings or a tax benefit. |
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underlying assuption of tax benefit rule |
when the taxpayer paid out a tax benefit, he reduced his tax liability within the same year; state "assuming he received a tax benefit from the year one deduction, he has tax benefit income when he gets the property back..." |
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4 basic principles of gross income |
1) realization
2) non-cash receipts
3) claim of right
4) tax benefit rule |
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alimony rule |
unless otherwise provided in the written agreement, alimony is taxable to the receiving spouse and deductible to the paying spouse |
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4 elements for alimony |
1) written, must be purusant to a written divorce or separation agreement
2) living together disallowed; cannot be members of the same household
3) ceases at or before death
4) cash or its equivalent; payments must be cash |
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child support rule |
child support is not taxable to the receiving spouse and not deductible to paying spouse |
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child support in disguise rule |
if a payment is reduced upon a contingency relating to a child, the amount of the reduction is considered child support |
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child support and alimony rule |
where total payments for alimony and child support fall short, the payments are considered first to meet the child support obligation |
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prizes and awards rule |
gross income includes the value of cash, property, or services received as a prize, award or windfalls [taxable prices or awards include: raffle prizes, gambling, lottery, treasure trove] |
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arms length bargain purchase |
if you purchase something at arms length and it is severely undervalued, that's still ok; get basis for whatever you paid [ex. if you purchase something worth $3 million at a flea market for $1, basis for $1] |
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cancellation of indebtedness rule |
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 extent of the difference between the full amount of the obligation and the amount paid in satisfaction of the debt |
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cancellation of indebtedness exceptions memorizer: RIG |
1) reduction in purchase price
2) insolvency
3) gift |
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reduction in purchase price exception |
if apparent discharge of debt is really a reduction or renegotiation of purchase price in connection with the sale of goods, discharge rules do not apply
-ex. if you negotiate down the price of a car, its a discount not a discharge |
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insolvency exception |
if the discharge occurs when the taxpayer is insolvent or bankrupt, there is no immediate discharge of indebtedness income |
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gift exception |
if the lender intends the discharge as a gift, the discharge of indebtedness rules will not apply |
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life insurance proceeds |
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 rule |
gross income does not include amounts received by bequest, devise, or inheritancec [any amount!]
-income from inheritance [like a rental property] is taxable
-watch out for belated compensation which is taxable [if you ask your nurse to stay with you and you will write her in the will, ex.] |
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gifts rule |
gross income does not include amounts received by gift [any amount!]
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gift definition |
a gift is a transfer made out of detached and disinterested generosity
-an employer can NEVER give an employee a gift |
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tort awards rule |
gross income does NOT include money received on account of physical personal injury or sickness
-a purely emotional injury is taxable though unless it is connected to an underlying physical tort claim [IIED v. IIED and hip fracture] |
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is lost income from a physical personal injury tort taxable? |
no
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are punitive damages received in connection with personal injuries taxable? |
yes |
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receipts from health or accident insurance |
value of employer provided health or accident insurance coverage [premiums paid by the employer] are excluded frm gross income
health insurance reimbursements for medical expenses actually incurred are also excluded |
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life insurance provided by or through an employer rule |
taxpayers may exclude the value of the first $50,000 of employer-provided group term insurance; gross income include the value of any excess life insurance coverage provided by the employer |
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meals and lodging rule |
employer provided meals and lodging excluded if: 1) provided for the convenience of the employer; 2) in kind [not cash]; and 3) on the employer's premises |
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other tax free fringe benefits to employees |
1) de minimus 2) no additional cost to the employer [airline employees flying in empty flight seats] 3) qualified employee discounts 4) contributions to qualified pension plans 5) employee safety or length of service awards [cant be in cash, must be an object, must be at or less than $400 in value] |
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qualified scholarships rule |
qualified scholarships for tuition are excluded from gross income; to be qualified it must not be payment for past or future services; must also be for the primary benefit of the individual [typically include merit- and need-based scholarships] |
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2 sets of deductions |
above the line and choice of itemized or standard deduction |
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examples of above the line deductions |
-ordinary and necessaru business expenses -depreciation -[net] capital losses up to $3000 -alimony -movng expenses -lmited deduction for school loan interest |
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AGI |
adjusted gross income
subtotal reached after subtracting the above hte line deductions |
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home mortgage interest rule |
taxpayers may deduct home mortgage interest on mortgages of up to $1 million [i the aggregate] on principal and a second personal residence
taxpayers may also deduct interest on a home equity loan up to $100,000 |
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is personal or consumer interest deductible? |
no you idiot |
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state and local taxes rule |
taxes paid to the state and local governments are deductible [except for sales tax]
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UNreimbursed casualty losses rule |
unreimbursed casualty losses are deductible:
1) if the loss is greater than $100
2) if the loss is sudden and unexpected
3) and only to the extent that the losses in the aggregate exceed 10% of AGI |
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UNreimbursed medical expenses rule |
unreimbursed medical expenses are deductible to the extent that in the aggregate exceed 10% of AGI |
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charitable contributions deductible rle |
taxpayers may deduct the FMV of property and the amount of cash contributed to qualified charities [but you must subtract any premium or benefit you receive in exchange] |
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misc. deduction rule |
taxpayers may deduct eligible misc. deductions to the extent that in the aggregate they exceed 2% of AGI |
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are personal expenses deductible? |
no |
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are legal fees deductible? |
no not in general if incurred in a personal setting;
if incurred in a business or investment setting, they are deductible |
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are divorce proceeding legal expenses deductible? |
no they are considered personal and therefore not deductible |
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exceptions to the divorce proceedings deductibility rule |
1) the portion of hte 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 in generating taxable alimony [like profit] |
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investment fees or expenses deductibility rule |
taxpayers may deduct fees or expenses that were necessary to generate taxable profit [ex. broker fees and advertising] |
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exemptions rule |
taxpayers are entitled to one exemption for themselbes and one for each dependent
-custodial parent in a divorce gets the child's exemption |
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income is taxed to: |
the person who earns it |
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assignment of income rule |
income is taxed to the person who earned it |
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income from property is taxed: |
to the person who owns it |
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2 methods of accounting |
1) cash method
2) accrual method |
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cash method of accounting rule |
taxpayer reports income when she receives payment; takes deductions for eleigible expenses when she makes payment |
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constructive receipt definition |
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 rule |
if a cash basis taxpayer is entitled to income and payment is received by the estate after decedent's death, the executor ust report the income on the estate's income tax return |
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accrual method of accounting rule |
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
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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realization definition |
sale, disposition or exchange of property; realization event |
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recognition definition |
reporting a gain or loss |
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general rule of realization and recognition timing |
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 |
amount realized - adjusted basis = gain or loss |
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amount realized definition |
includes any money received plus the FMV of any property or services received plus mortgages or liabilities to which the property sold is subject to or assumed by the new buyer |
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cost basis rule |
a taxpayer'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 settlement rule |
a transfer of property between spouses or ex-spouses incident to divorce is not taxable to either party; spouse receiving the property will have the same basis that the donor spouse had [substituted basis rule] |
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basis in gift property rule |
recipient of a gift takes the donor's basis [substituted basis] |
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basis in inherited property rule |
recipient's basis in inherited property is fair market value of hte property at the time of the decedent's death |
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like-kind exchanges rule |
no gain or loss is recognized when a taxpayer exchanges property held for productive use in a business or investment for like-kind property also held for productive use in a business or investment
-deferral of tax consequences |
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involuntary conversion rule |
no gain is recognized if property is involuntarily due to theft, fire, seizure, erquisition or condemnation is converted into property that is similar or related in service or use
if property is converted into money, no gain or loss is recongized if the owner buys property that is similar or related in service or use within 2 years of the date of involuntary conversion |
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sale of a principal residence rule |
up to $250,000 [$500k if combined with spouse] of gain fromt eh sale of a principal residence can be excluded if the property has been used and owned as the taxpayer's principal residence for periods aggregating 2 years during the 5 year period ending on teh date of sale
-exclusion generally not available if taxpayer has used it within last 2 yrs |
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capital assets definition |
generally investment assets
do not include: inventory, property held primarily for sale to customers, depreciable property, copyrights
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