Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
44 Cards in this Set
- Front
- Back
|
Above the line deductions |
Typically the cost f earning income, such as business or investment expenses Subtracted from gross income to arrive at adjusted gross income (AGI) |
|
|
Below the line deductions |
Measure personal expenses includes standard deduction or itemized deductions (ex. home mortgage interest deduction, charitable contributions) |
|
|
Credits |
dollar for dollar reductions in tax liability |
|
|
Difference between deductions and credits |
Deductions: reduce one's income before tax liability is calculated Credits: reduce one's liability only by a specific dollar amount after the liability is calculated |
|
|
Income |
Income derived from whatever source |
|
|
Examples of common forms of income |
Compensation for services --Wages, salary, retirement plan contributions, property, business operations, gains from sale of property, retirement plan distributions, interest, dividends, rent, royalties |
|
|
Examples of special forms of income |
-alimony payments are included in income of recipient, deductible by payor -prizes and awards -illegal income -gambling winnings (Steelers 12/1 to win Super Bowl) -cancellation of indebtedness -Partnership income -income earned during life but paid after death |
|
|
Exclusions from income |
-Employer provided benefits -non-taxable family transfers -personal injury recoveries |
|
|
Annuities |
nontaxable, but interest is taxable |
|
|
Loans
|
Excluded from income because of offsetting obligation to repay -exception: if obligation to repay is contingent, proceeds would be included in gross income |
|
|
Qualified scholarships |
Exclusive if for tuition, books, supplies, but not for room and board/travel |
|
|
Earnings on 529 plan (college savings) |
Not taxable |
|
|
Gain from sale of principal residence |
Up to $250K (or $500K for married individuals filing jointly) of the gain from the sale or exchange of a principal residence is excluded from gross income |
|
|
Two types of business expenses |
Capital expenses and currently deductible expenses |
|
|
Capital expenses |
expenses that have useful life for more than one year (not deductible) |
|
|
Currently deductible expenses |
expenses that expire within the year. must be: -ordinary and necessary and -incurred while carrying on a business ex. employee compensation/benefits, rent, taxes (state and local, not federal), home office, travel, educational, clothing expenses, net operating losses |
|
|
Home office expenses
|
IRS cares about mixing of personal/business expenses Only portion that is regularly/exclusively used for business is deductible |
|
|
Clothing expenses |
deductible only if clothing is condition of employment and not suitable for general use (ex. uniforms) |
|
|
Nondeductible business expenses |
Fines for violating the law treble damages illegal payments |
|
|
Hobbies |
Expenses associated with activities that are not engaged in for profit be deducted against income from those activities
Profit-making activity = profit in 3 of last 5 years |
|
|
Passive activity losses |
Losses associated w/ business in which individual does not participate losses from passive activities may only be deducted against gains from passive activities |
|
|
Capital expenses |
useful life of more than one year must be deducted over time |
|
|
Personal expenses |
Personal, living, or family expenses are generally are not deducible |
|
|
Personal expenses - above the line exceptions |
alimony, business related moving expenses (full time, more than 50 miles away), interest on student loans (up to $2,500) |
|
|
Personal expenses - below the line exceptions |
home mortgage, state and local taxes, casualty losses, charitable contributions, unreimbursed medical and dental expenses (only catastrophic expenses)
|
|
|
Floor for unreimbursed misc. business expenses
|
2% ex. employer won't pay for WSJ, not clear that it's required for work. First 2% is on you!!! |
|
|
Realization |
Sale or exchange of property
amount realized - basis = realized gain or loss |
|
|
amount realized |
revenue from selling property |
|
|
basis |
cost basis (cost of acquiring piece of property) |
|
|
Taxation of capital assets |
Gains from sale of capital assets - held for one or more year, subject to preferential tax rate
capital losses - only can be used to offset capital gains and ordinary income of $3,000 |
|
|
Excluded from capital assets
|
Inventory, depreciable/real property, self-created work |
|
|
Who's the proper taxpayer? (income from services) |
Whoever earns that income, even if paid directly to someone else |
|
|
Who's the property tax payer? (income from property) |
Whoever owns the property is taxed on the income from the property |
|
|
Horizontal interest
|
Owner transfers entire right in the property to someone else, without any reversion -can be fractional interest -shifts the income |
|
|
Carved out vertical interest
|
temporary transfer of an ownership interest -considered a transfer of the income from the property rather than a transfer of the property itself -does not shift the income |
|
|
Children's tax
|
Kiddie tax
children under age 18 may be taxed at their parent's higher rate only applies to unearned income |
|
|
Cash method accounting rules |
Most individual taxpayers use this Income must be reported when received (hot little hands ;) deductible when it leaves person's hands |
|
|
Constructive Receipt Doctrine |
Payment is deemed to be income of the taxpayer at the time the taxpayer has unconditional right to receive income and the value is ascertainable |
|
|
Economic Benefit Doctrine
|
Money that is irrevocably held in trust for benefit of taxpayer is taxed at the time of depost |
|
|
Prepaid Income Doctrine
|
taxable currently even if taxpayer has not yet performed services |
|
|
Accrual method of accounting |
earning of income, rather than receipt, is when income must be reported |
|
|
All Events Test |
Has the taxpayer performed all services that fix amount of tax and determine liability of taxpayer?
|
|
|
Installment sale |
Under cash method, taxpayer would have received a note, so all income would be immediately recognized Under accrual method, may delay recognizing gain until payment is received |
|
|
Tax year vs. Fiscal year |
Tax year - 1/1 - 12/31 Fiscal year - ends on last day of any month other than December |
