Federal Personal Income Tax

Front 1

What is gross income?

Back 1

Gross income means all income from whatever source derived. The source of the receipt of income is irrelevant; there merely must be a clearly realized accession to wealth.

Front 2

When does a "bargain purchase" give rise to income?

Back 2

If an employer sells property to an employee for less than its fair market value, the difference is income unless the discount qualifies as a tax-free fringe benefit.

Front 3

What is the rule for "claim of right?"

Back 3

If a taxpayer asserts a claim to money and uses it as if it were her own, the amount is includible in her gross income for the year in which she asserts the claim, regardless of the fact that she must repay the amount in a later year. (Example: an erroneously paid bonus is income when received, and gives rise to a deduction in the year in which the erroneous sum is repaid.

Front 4

What is the tax benefit "inclusion rule"?

What is the tax benefit "exclusion rule"?

Back 4

If a taxpayer takes a deduction in a prior year that produces a tax benefit, and the property that led to the deduction is later recovered, the value of that property will be includible in gross income in the year of recovery. Any differential in the applicable tax rates in the two years is ignored.

However, if an expenditure or loss deducted in a prior year did not give rise to a tax benefit, the recovery of that amount in the current year will not be includible in gross income.

Front 5

What is the rule for Alimony or separate maintenance payments as gross income?

Back 5

Cash payments received by a spouse or former spouse pursuant to a divorce or separation instrument are income to the recipient and deductible by the payor. For this rule to apply, there must be no liability to make such payments after the death of the recipient. This rule applies only if there is a decree of divorce or separate maintenance, or if there is a written separation agreement.

Front 6

What is the rule for "excessive front-end loading" of alimony payments?

Back 6

If alimony payments in the first post-separation year exceed the average payments in the 2nd and 3rd post-separation years by more than $15,000, the excess amount is "recaptured" (deducted by the recipient and included in the income of the payor) in the 3rd year.

Front 7

What is the rule for child support and gross income calculation?

Back 7

If any portion of alimony payments are fixed by the decree or agreement as being for the support of the payor's children, such payment is not deductible by the payor and is not includible by the recipient in his/her gross income. If any amount specified in the instrument will be reduced on the happening of a contingency relating to a child, the amount of the reduction will be treated as child support rather than alimony. If the decree or agreement specifies that payments are to be made both for alimony and for child support, but the payments subsequently made fall short of fulfilling theses obligations, the payments will be allocated first to child support and then to alimony.

Front 8

How are annuity contracts treated for purposes of calculating income?

Back 8

An annuity contract is one in which the taxpayer invests a fixed sum, which is later paid back, with interest, in installments for a set period or for life. The part of each annuity payment that represents the taxpayer's investment in the policy is excluded as a return of capital. The interest portion, however, is taxable as income.

Front 9

How are payments for child's services counted as income?

Back 9

Amounts received in respect of services of a child are included in the child's income and not in the parents' income, even if the amounts were not received by the child and were paid over directly to the parents.

Parents may elect to include in their own return the unearned income of a child under 18, provided the child's income is between $850 and $8500 (2006) and consists solely of interest and/or dividends. If this election is made, the child is treated as having no gross income and need not file a return.

Front 10

How are "recognition awards" treated for purposes of calculating gross income?

Back 10

While virtually all prized and awards are includible in gross income, awards may be excluded from gross income where:
1. the award was made in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement;
2. The recipient was selected w/out any action on her part.
3. The recipient is not required to render substantial future services; and
4. The award is turned over by the payor, pursuant to the recipient's direction, to a governmental or charitable organization.

Front 11

When are employee achievement awards excluded from gross income?

Back 11

An award from an employer to an employee may be excluded from gross income if:
1. The award is tangible property with a value not exceeding $400.
2. The award is for length of service or safety achievement;
3. The award is presented as part of a meaningful presentation; and
4. The award is not presented under circumstances suggesting disguised compensation.

Front 12

What is the rule for inclusion of group term life insurance purchased for employees in gross income?

Back 12

The cost of group term life insurance purchased by an employer for his employees is included in the gross income of the employee, except to the extent of :
1. The cost of $50,000 of such insurance; plus
2. Any amount paid by the employee toward the purchase of such insurance.

This rule applies only to group term life insurance provided by an employer. The employer-provided cost of an ordinary life insurance policy is includible in full.

Front 13

How is "deferred compensation" treated as gross income?

Back 13

Generally, payments made by an employer to a qualified pension, stock purchase or incentive stock option plan are not income to the employee at the time of contribution. Rather the amount that is exempt from tax (plus any income earned on such amount) is taxable to the employee in the year in which the amount is distributed or made available to the employee. To be deemed a "qualified" plan, stringent tests as to non-discrimination, vesting and funding must be satisfied.

Front 14

How are "incentive stock options" treated in gross income calculation?

Back 14

An incentive stock option is an option granted under a written plan adopted by an employer for the benefit of one or more employees, usually executives. An employee exercising such an option is not subject to tax at the time of exercise and, instead, will report her entire profit as long-term capital gain at the time she ultimately disposes of the stock, provided that certain requirements are met. Most importantly, the option must be held at least one year and exercised w/in 10 years after it is issued, and the option price must not be less than the FMV of the stock on the date the option is granted.

Front 15

How are "employee stock purchase plans" treated in gross income calculation?

Back 15

Employees who purchase stock w/ option acquired under an employee stock purchase plan will be subject to capital gain on part of the gain upon the ultimate disposition of the stock, provided that certain requirements are satisfied. Most importantly, the option price must be at least 85% of the market value either when the option is granted or when it is exercised, whichever is lower, and the option must be exercisable w/in five years from the date of the grant, if the option price is to be not less than 85% of the FMV at the date of exercise.

Front 16

What is the rule for "cancellation of indebtedness" income?


When is cancellation of indebtedness income excludible from a taxpayer's income?

Back 16

A debtor whose debt is discharged or canceled at less than the full principal amount has taxable income to the extent of the difference between the full principal amount of the debt and the amount paid in satisfaction of the debt.

The taxpayer can exluded cancellation of indebtedness income if the discharge occurs in bankruptcy or when the taxpayer is insolvent. However, she will be required to reduce certain favorable tax attributes (basis of depreciable property) to counterbalance the benefit of the exclusion from income.

Front 17

How are dividends to shareholders treated in the taxpayer's gross income?

Back 17

Dividentds paid to shareholders are included in the shareholders' gross income. A dividend is a payment made to a shareholder out of the corporation's current or accumulated earnings and profits. Any payments in excess of earnings and profits will be treated as tax-free to the extent of the shareholder's basis in the stock. Any remaining excess will be treated as sale or exchange gain.

Front 18

Are life insurance proceeds included in a taxpayer's gross income?

Back 18

The proceeds of a life insurance policy paid by reason of the death of the insured are excluded from the gross income of the beneficiary. In a deferred payout arrangement, a prorated portion of the proceeds will be exempt from tax, but the interest element will be taxable. Such exclusion no longer applies if the insurance contract is transferred, unless the transfer is to the insured, her partner or partnership, or a corporation in which she is a shareholder or an officer.

Where a terminally ill or chronically ill person who draws on the proceeds of her life insurance policy or sells or assigns her life insurance contract, such amounts received by the insured will be considered "paid by reason of death of the insured" and thus excluded from gross income.

Front 19

Are inheritances included in a taxpayer's gross income calculation?

Back 19

Gross income does not include bequests, devises, or inheritances. However, the exclusion does not apply to the income from any property received as a bequest, devise, or inheritance, nor when the bequest, devise, or inheritance is of income from property.

Front 20

Are gifts included in a taxpayer's gross income?

Back 20

Gifts are excluded from gross income, but not the income from such a gift, or where the gift is of income from property. The gift must stem from "detached and disinterested generosity" and must not be business-related. The determination of whether a gift has been made is essentially a factual question that must be decided by the trier of fact based on the donor's intent.

Front 21

Is interest from bonds included in a taxpayer's gross income?

Back 21

Interest on state and local bonds is exempt. Interest on federal bonds or on bonds issued by a corporation is taxable. Gain realized upon the sale of any of these bonds is includible in income.

Front 22

Are damages recovered for personal physical injury or sickness included in a taxpayer's gross income?

Back 22

Damages received as compensation for a physical personal injury are excluded from gross income. This rule applies even though a portion of the payments represents compensation for earnings lost because of the injury. "Personal Injury" includes any physical tort or tort type claim. Damages for non-physical injuries such as Defamation, libel, slander, and employment-related discrimination are not excluded from gross income, although damages for emotional distress, when combined w/ damages for physical personal injury, are excluded.

Front 23

Are punitive damages included in a taxpayer's gross income?

Back 23

Punitive damages, whether received in a business or personal injury context, are generally fully taxable as ordinary income.

Front 24

Are "business recoveries" included in a taxpayer's gross income?

Back 24

To determine whether a business damage recovery is excludible, one must determine "in lieu of what were the damages paid." If a damage award is compensation for lost profit, the award is income. If the award is for damage to an asset, the recovery is applied against the basis of the asset damaged, reducing the basis of the asset. If the award exceeds the basis of the asset involved, the excess is taxable gain and the basis of the asset thereafter is zero.

Front 25

Are receipts from health and accident insurance included in a taxpayer's gross income?

Back 25

If the individual paid all premiums for the insurance, all payments received are excludible-- even multiple recoveries.

IF the employer paid the insurance premiums, the premiem payments are excludiable from the employee's income, and amounts paid to the employee under the policy generally are excludible to the amount they represent:
1. reimbursement for medical expenses actually incurred by the employee; or
2. compensation for the permanent loss or loss of use of a member or function of the body.

Front 26

What is the rule for exclusion of gain from sale of principal residence from gross income?

Back 26

Taxpayers can exclude up to $250,000 in gain (or $500,00 for qualifying joint returns) from the sale or exchange of a principle residence. To qualify, the taxpayer must have owned and used the property as her principle residence for at least two of the five years preceding the sale or exchange. This exclusion can be used once every two years.

Front 27

How are improvements made in lieu of rent treated?

Back 27

If improvement are made to the lessor's property in lieu of rent, the value of the improvements is treated as rental income to the landlord, reportable in full in the year in which the improvement is placed on the property. The LL will acquire a basis in the improvement = to its FMV and, if the imp

Front 28

How are scholarships treated for purposes of calculating gross income?

Back 28

In the case of an individual, gross income does not include any amount received to cover tuition, fees, books, supplies, and equipment required for courses at an educational institution. To determine if a grant is excludible, the test is whether the primary purpose is to further the education and training of the recipient in her individual capacity. The scholarships must not be compensation for past or future services.

Front 29

How are funds received from an educational assistance program treated for purposes of calculating gross income?

Back 29

An employee may exclude up to $5,250 annually received from an employer under a written, nondiscriminatory educational assistance program for graduate or undergraduate education. The employee must not have a choice between educational assistance and other remuneration. Not more than 5% of amounts paid or incurred by the employer can go to a group of individuals who each own more than 5% of the stock, capital, or profits interest of the employer.

Front 30

How are Education I.R.A.s treated for purposes of calculating gross income?

Back 30

Individuals can contribute up to $2,000 annually to an education individual retirement account "education IRA". Although there is no deduction for the contribution, the retirement account itself will be exempt from taxation. In other words, income generated by the account is not subject to tax. Later distributions from the account are also excluded from gross income to the extent that they do no exceed qualified educational expenses incurred by the beneficiary during the year the distribution is made.No that the maximum amount that can be contributed to such an education IRA is phased out for certain taxpayers whose modified adjusted gross income exceeds 95,000.

Front 31

How are contributions to capital treated for purposes of calculating gross income ?

Back 31

Contributions to the capital of a corporation are not taxable to the corporation even if made by nonshareholders, as long as the payments do not represent compensation for past, present, or future services.

Front 32

How are employer-furnished meals and lodging treated for the purposes of calculating gross income?

Back 32

The gross income of an employee does not include the value of meals or lodging furnished to her in kind by the employer, for the convenience of the employer, and on the employer's premises. The lodging must be required as a condition of employment.

Front 33

How are living expenses paid under a home insurance contract treated for purposes of calculating gross income?

Back 33

If a taxpayer's principal residence is destroyed and her insurance contract reimburses her for living expenses incurred by her and her family because of such destruction, she can exclude from gross income the amount paid under the contract that exceeds her normal living expenses.

Front 34

How are social security benefits treated for purposes of calculating gross income?

Back 34

Although many taxpayer's social security benefits are exempt from tax, there is a two-tiered system for taxing the benefits of those taxpayers whose incomes exceed a certain level. If a single taxpayer's adjusted gross income plus tax-exempt interest, plus 50% of her Social Security benefits , exceeds a threshold of $25,000 ($32,000 for married taxpayers filing jointly), up to 50% of that taxpayer's Social Security benefits will be included in her taxable income. If the threshold of $34,000 ($44,000 for married taxpayers filing jointly) is reached by the above formula, up to 85% of the taxpayer's Social Security benefits could be taxable.

Front 35

What employee fringe benefits are tax-free?

Back 35

1. No-additional-cost services
2.Qualified employee discounts
3. Working condition fringes
4. De minimis fringes
5. Qualified transportation fringes
6. Qualified moving expense reimbursement. -- To the extent that the employee would have been entitled to a moving expense deduction if she had paid for moving expenses herself, she will incur no tax liability if the employer pays or reimburses her moving expenses.

Front 36

What items are deducted from gross income to determine adjusted gross income?

Back 36

1. Non-employee trade or business deductions, and reimbursed trade or business deductions of employees.
2. Capital losses from the sale or exchange of property.
3. Deductions attributable to rents and royalties.
4. Contributions to approved pension plans of self-employed individuals, retirement savings plans, health savings accounts, and medical savings accounts
5. Alimony
6. Qualified moving expenses and
7. Qualified higher education expenses and eligible interest on higher education loans.

Front 37

What are "ordinary and necessary" expenses that are deductible from gross income to determine adjusted gross income (AGI)?

Back 37

All of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a business are deductible to determine AGI. "Ordinary and Necessary" means that the expenses are common or accepted in the particular business or profession and that they relate to producing the currents year's income. Reasonable salaries, office rentals, office supplies, and traveling expenses are all deductible when incurred for business purposes.
Deductible:
Business interest paid or accrued during the taxable year on indebtedness incurred for business purposes

Taxes -- State and local

Business Losses or casualty losses related to business -- as long as incurred in the taxable year and not compensated by insurance or otherwise

Business debts that become wholly or partially worthless during the taxable year are fully deductible.

Front 38

What is the rule for business use of a personal residence?

Back 38

Ordinarily, homeowners are not entitled to business deductions w/ respect to use of a personal residence. Thus, homeowners typically cannot take deductions for depreciation, maintenance, repairs, and the like. However, if a homeowner regularly uses a portion of his home exclusively as a principal place of business, or to meet w/ patients, clients, or customers in the normal course of business, the homeowner can deduct business expenses allocable to that portion of the home. Note that the definition of "principal place of business" includes a home office if there is no other fixed location where the taxpayer conducts substantial administrative or management activities.

Front 39

What is the rule for deductibility of a "business bad debt?"

Back 39

Business debts that become wholly or partially worthless durign the taxable year are fully deductible from gross income to determine AGI. A business bad debt is one 1. acquired in connection w/ a trade or business or 2. where the loss was incurred in connection w/ a trade or business. "Trade or business" means more than engaging in a profit-seeking activity.

Front 40

What deductions may an individual taxpayer deduct as an EMPLOYEE to determine AGI?

Back 40

Although an employee is considered to be in a trade or business, he is allowed only very limited deductions in determining his AGI. He may deduct only reimbursed expenses incurred on behalf of his employer. (Reimbursements are included in gross income). All other business expense deductions of employees must be itemized and may be deducted only in arriving at taxable income.

Front 41

What is the rule for deducting capital losses for determining AGI?

Back 41

An individual taxpayer may deduct his net losses from the sale or exchange of capital assets, up to the sum of $3,000.

If any security that is a capital asset becomes totally worthless during the taxable year, the resulting loss is treated as a capital loss incurred on the last day of the taxable year.

Nonbusiness bad debts are deductible only as short-term capital losses. A shareholder's uncollectible loan to his controlled corporation usually falls in this category.

Front 42

What is the rule for deductions attributable to a vacation home?

Back 42

Where a taxpayer owns a vacation home (2nd home) which she uses personally part time and rents part time, the taxpayer may deduct all mortgage interest, taxes and casualty losses from her gross income to determine AGI. All other expense deductions must be prorated between personal and rental use. If the dwelling is used during the year for personal purposes by its owners or their relatives for more than 14 days for more than 10% of the days it was rented out (whichever is greater), it is deemed to have been used as a residence." When a rental dwelling is used as a residence, business and investment deductions are limited to the amount of income generated by the property less the mortgage and tax deductions. If the dwelling is rented for fewer than 15 days during the year, no deductions are allowed and income from the rental is not included in gross income.

Front 43

What is the rule for deductions of self-employed individuals?

Back 43

Subject to some limitations, self-employed individuals may deduct certain health insurance costs and contributions to pension, profit-sharing, and annuity plans from gross income to determine AGI.

Front 44

What is the rule for moving expense deductions from gross income to determine AGI?

Back 44

A taxpayer may deduct moving expenses paid or incurred during the taxable year in connection w/ the commencement of work by him as an employee or as a self-employed individual at a new principal place of work. The deduction is allowed only if the employee's new place of business and his old residence is at least 50 miles greater than his old residence was from his former principal place of work. IF no former principal place of work, the new place of business must be at least 50 miles from his former residence.

The taxpayer must remain a full-time employee in the new location at least 39 weeks of the 12-month period immediately following the move. If the 39 weeks have not run at the time the tax return is due, the employee may deduct the moving expenses, but must include the amount deducted as income in the following year if he moves before the 39 weeks have expired.

Front 45

What is the rule for deduction of education related expenses?

Back 45

Individual taxpayers can deduct from gross income to determine AGI up to $2,500 for interest paid during the year on any "qualified education loan." Note, however that the deduction is phased out for certain taxpayers whose modified AGI exceeds $50,000 ($105,000 for a joint return.)

Front 46

How is taxable income determined?

Back 46

Taxable income is the figure to which the applicable tax rate is applied to determine the actual tax. In determining taxable income, a taxpayer subtracts from AGI the greater of the standard deduction or itemized deductions. Additionally, a taxpayer is allowed further deduction in the form of a personal exemption.

Front 47

What items are "itemized deductions?"

Back 47

1. Interest: a. Interest incurred in purchasing investment property, up to the amount of net investment income included in gross income in that year.
b. Mortgage interest -- on loans up to $1 million; home-equity indebtedness of up to $100,000, as long as it does not exceed the property's FMV
c. Taxes -- State and local income, real property, and personal property taxes are deductible.
d. Nonbusiness losses
d. charitable contributions
e. medical expenses
f. misc. itemized deductions

Front 48

What is the rule for nonbusiness casualty and theft losses as an itemized deduction?

Back 48

--Casualty and theft losses to nonbusiness property are deductible only to the extent they exceed 10% of the taxpayer's AGI, and may only be deducted to the extent they exceed $100 per each casualty loss event.
The amount regarded as a casualty loss is the difference between the market value of the property immediately before the casualty and its value immediately afterward. The loss may not exceed the adjusted basis of the property, and the amount used must be reduced by the amount of any insurance recovery.
To be a casualty loss, the loss must be sudden or unexpected.

Front 49

What is the rule for wagering losses as an itemized deduction?

Back 49

Wagering losses are allowed only to the extent of that year's reported gains from such transactions.

Front 50

what is the rule for itemized deduction of charitable contributions?

Back 50

To qualify for deduction, gifts must be to a qualifying organization, not to a specific individual, and must be in the form of cash or property. The maximum allowable deduction for an individual is 50% of his AGI.
A 30% maximum applies to gifts of "long-term capital gain" property if given to a public charity; no more than 20% may be deducted if such a gift goes to a private foundation. The max. deduction for a corporation is 10% of its taxable income. Contributions in excess of the maximum allowable in a given year may be carried over and deducted in the five succeeding years.

Front 51

What is the rule for deducting medical expenses as an itemized deduction?

Back 51

Medical expenses are deductible only to the extent they exceed 7.5% of the taxpayer's AGI. Medical insurance premiums may be included along with the taxpayer's medical expenses for this purpose. In determining total medical expenses, the taxpayer may aggregate the amount spent for himself, his dependents, and his spouse if a joint return is filed. The deduction is allowed only for items that are not compensated for by insurance or otherwise, such as a tortfeasor.

Front 52

When may an employee-taxpayer include educational expenses in her itemized deductions?

Back 52

An individual may deduct education expenses if they either 1. maintain or improve the skills needed by her in her trade or business; or 2. meet the express requirements of her employer for retention of her job. Such expenses are not deductible if they are used to meet the minimum educational requirements for qualification in her trade or employment, or qualify the taxpayer for a new trade or business.

Front 53

What is the rule for "miscellaneous itemized deductions? What are included in "miscellaneous itemized deductions?"

Back 53

Miscellaneous itemized deductions are only deductible to the extent that they exceed 2% of the taxpayer's AGI. They include:
1. Expenses incurred for the production of income
2. Employee educational expenses
3. Employee Meals and lodging
4. Employee transportation expenses

Front 54

What is the "overnight rule"?

Back 54

The expenses incurred for meals and lodging while away from home may be deducted by an employee traveling on business. "Away from home" means away overnight. A taxpayer's home for tax purposes is the city in which one carries on his principal trade or business.

Front 55

What is the rule for deductibility of employee transportation expenses?

Back 55

All transportation expenses incurred in furtherance of the employee's business are deductible except ordinary commuting expenses. This includes both out-of-town and local travel and automobile expenses.

Front 56

What is the rule for the deductibility of entertainment expenses?

Back 56

Generally no deduction is allowed for any item with respect to an activity that constitutes amusement, entertainment, or recreation unless the taxpayer establishes that the item is directly related to the conduct of the taxpayer's trade or business. If the item immediately precedes or follows a substantial business discussion, it is sufficient if it is "associated with" the business of the taxpayer.

Front 57

What is the rule for the deductibility of "passive activity losses"?

Back 57

Losses from passive activities are deductible only to offset income from passive activities for the taxable year. A "passive activity" is a trade or business in which the taxpayer does not materially participate.

Front 58

To whom is investment income allocable?

Back 58

Income derived from property is taxable to the one who owns the property. The income cannot be split off from the property that produced it and shifted to another. If income-producing property is assigned, any income accrued before the transfer of the property is taxable to the assignor. Income earned after the date of transfer to the donee will be taxable to the donee.

Front 59

What is the rule for taxation of the unearned income of minor children?

Back 59

For children who are under 19, or 24 in the case of a full-time student, any unearned income will be taxed at the parent's top bracket rate, if higher than the child's rate.

Front 60

To whom is income from a trust allocated?

Back 60

A trust is a separate taxable entity. IF property is irrecvocably transferred to a trust, normally either the trust or its beneficiaries will be taxed on the trust's income. If the trust income benefits the grantor or his spouse, he will be treated as the owner of the corpus and will be taxed on the income thereof without regard to the terms of the trust.

Front 61

What is "realization"?

Back 61

Gains and losses are given effect only when they are realized. Realization of gain or loss ordinarily occurs at the time an asset is sold or otherwise disposed of.

Front 62

How is a gain or loss on the disposition of property calculated?

Back 62

Gain or loss on the disposition of property is measured y the difference between the amount realized and the adjusted basis.

Front 63

What is the "amount realized?"

Back 63

The amount realized equals the amount of cash received, plus fair market value of any property or services received or obligation satisfied.

Where a mortgage is assumed by a purchaser, or to which the property is subject at the date of the property's sale, is treated as part of the seller's proceeds.

Front 64

What is typically the basis of property?

Back 64

Generally, the basis of property is the cost of the property to the taxpayer.

Front 65

What is the basis of a gift?

Back 65

Property acquired as a gift generally retains the same basis as it had in the hands of the donor (a transferred basis). However, if the property's basis is greater than the property's fair market value at the time of the gift, then solely for purposes of determining loss, the basis is the property's FMV.

The basis of gift property is increased (but not beyond FMV at time of gift) by the amount of gift tax paid wirth respect to the net appreciation in the value of the gift, ie, the excess of the value of the gift property over its basis in the hands of the donor.

Front 66

What is the basis of inherited property?

Back 66

Property acquired by bequest or inheritance takes as its basis the FMV at the date of the decedent's death or, if elected by the executor, its FMV six months from the date of death or its value at the time of disposition if disposed of w/in six months after the decedent's death.

Front 67

For what purpos(es) is basis adjusted upward?

Back 67

Basis is adjusted upward for expenditures chargeable to the capital account, for instance, the cost of a new wing for a factory is added to the factory's basis.

Front 68

For what purposes is basis adjusted downward?

Back 68

The basis is adjusted downward in the amount of any depreciation deducted by the taxpayer with respect to that asset.

Front 69

What happens to gain or loss realized in a "like kind exchange"

Back 69

Nonrecognition treatment is accorded to a "like kind" exchange of property used in the taxpayer's trade or business or held for investment (except stock and securities.) "Like kind" means the same type of investment, eg realty for realty/personalty for personalty.

Front 70

What happens when property not qualifying for like-kind exchange is received in a like-kind exchange transaction?

Back 70

If property other than property qualifying for a like kind exchange is received, such as cash, the transaction, while not qualifying for complete nonrecognition, produces recognized gain only to the extent of the value of the other property.

The basis of property received in a like-kind exchange is usually the same as the property given up. However, this basis is decreased by the mt of any money or non-qualifying property received an increased by any gain recognized.

Front 71

When are involuntary conversions given nonrecognition treatment?

Back 71

Non-recognition treatment is given to gin realized on involuntary conversions of property (destruction, theft, condemnation) if hte proceeds realized by the taxpayer are reinvested in similar property, on the rationale that the taxpayer's reinvestment of the involuntarily received proceeds restores him to the position he held prior to the conversion. The reinvestment must occur w/in 2 years after the close of hte taxable year in which any art of the gain was realized, and be in property "similar or related in service or use".

Front 72

What is the rule for deduction of losses incurred on sales to family?

Back 72

Under IRC Section 267, no deduction is allowed for losses incurred on sales to members of the taxpayer's family, a corporation controlled by the taxpyaer, or other related parties.

Front 73

How are taxes due calculated?

Back 73

Determining the taxes due in a given year requires several steps. First, the taxpayer must determine her taxable income for the year, taking into account gross income, deductions, and exemptions. Second, the taxpayer must apply the appropriate tax rate; the result is a determination of her tax liabaility. Finally, the taxpayer can subtract any tax credits she may have from her tax liability; the result is her tax due.

Front 74

When is filing of an income tax return not required?

Back 74

An individual need not file an income tax return if her gross income (and that of her spouse if a joint return could be filed) does not exceed:
1. The standard deduction (5,350 ind. 10,700 jt); plus
2. her personal exemption ($3,400; plus same for spouse if applicable)
3. Plus any additional standard deduction allowable on account of age ($1,300 ind; $1,050 per taxpayer jt.)

Front 75

Who may file joint returns, other than taxpayers married for the entire taxable year?

Back 75

To file a joint return, the parties must be mmarried at the end of the year. If parties marry during the year, they may file a jt return for the entire year so long as they are married at the year's end. If one spouse dies during the year, a jt return may still be filed.However, if the parties are divorced during the year, they may not file a joint return. A spouse who lives apart from the other spouse for the last 6 mos of the taxable year, files a separate return, and supports one or more dependent children is treated as not being married and would file as a head of household.

Front 76

What is the rule for partnership taxation?

Back 76

A partnership is not a taxpaying entity. The parters as individuals pay tax on their pro rata share of the partnership income. This "pass through" of income from the partnership to its partners is the key concept in partnership taxation.

Wile a partnership does not pay income tax, it is required to file an annual information return . The taxable income of the partnership is computed in the same manner as that of an individual. However, a partnership is not permitted to take itemized individual deductions, charitable deductions, and capital loss and net operating loss carryovers (these deductions are instead claimed by the partners in their individual returns.)

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What must be included in a partner's income?

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Each partner must include in her income her pro rata portion of the partnership income, regardless of whether the partnership actually distributes the income. Such income is includible in the partner's taxable year within which the partnership's taxable year ends. The various items of income and loss realized by the partnership will retain their same character in each of the partner's hands. A partner's ratable share of partnership losses may be deducted, subject to 3 limitations.

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hat are the limitations for the deductibility of a partner's ratable share of partnersihp losses?

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A partner's ratable share of partnership losses may be deducted, subject to 3 limitations:
1. Partners can deduct losses only to the extend of their basis in the partnership.
2. Partners can deduct losses only to the extent that they are "at risk." Finally, if the partnership involves a trade or business in which the partner does not materially participate, the partner is involved in a passive activity. Losses from passive activities can be deducted only to the extent of gains from passive activities. Unused passive activities losses may be carried into the next taxable year.

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How is sale of a partner's interest taxed?

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SAn interest in a partnership is a capital asset and generally a partner will realize capital gain or loss on disposition of her interest. However, gain on the sale of a partnership interst is taxed as ordinary income to the extent that the gain is attributable to :
1. Unrealized receivables
2. Inventory income

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What is a partner's basis in her partnership interest?

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The partner's basis in her partnership interest is her cost if money was contributed in return for the partnership interest. If property was contributed, the partner will have the same basis in her partnership interest as she had in the property contributed. This figure is then increased by the amount of the partner's pro rata portion of partnership income and increases in partnership liabilities, and decreased by the amount of any distribution made to the partner, the amount of the partner's pro rata portion of parnership losses and decreases in partnership liability.

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What deductions are not permitted for a corporation?

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While a corporation's gross income is determined by the same methods as is an individual's, a corporation may not deduct any personal exemptions or: 1. expenses for the productions of income 2. Medical expenses 3. expenses for the care of dependents 4. Alimony 5. moving expenses.

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What special deductions are permitted for corporations?

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* A corporation is permitted a deduction from gross income of 80% of divideds received from other domestic corporations. This deduction is limited to 70% if the shareholder corporation owns less than 20% of the stock of the distributing coporation.
* Dividends from affiliated corporations that do not file consolidated returns qualify for 100% deductions.
* A 100% deduction is allowed for dividends received by a small business investment company operating under the Small business investment act.

Corporate organizational expenses ordinarily are not deductible because they are capital expenditures attributable to the corporate charter, which has a perpetual life. However, if such expenses are less than $55,000, a corporationmay elect to deduct up to $5,000 ofthe expenses in the year in which the corporation is formed and may ratably deduct any amount remaining over a 180 month period.

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When is the organization of a corporation a nonrecognition transaction?

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The organization of a corporation is essentially a nonrecognition transaction. Recognition of gain or loss on the property transferred to it is deferred on the theory that the transfer is onlya change in the form of ownership and not substance. However, to receive nonrecognition reatment, the person or persons transferring the property to the corporation must be incontrol of the corporation after the transaction is completed. Control is defined as having at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock.

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What happens when an individual meeting the requirements for non-recognition treatment for transfer of property to the corporation receives something in addition to stock for the transfer?

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If an individual receives something in addition to stock from the corporation, any gain on the transfer will be recognized to the extent of the money or other property received by the individual("boot"). Non-qualified preferred stock that is essentially a transfer of debt will also be treated as "boot".

No loss is ever recognized on the transfer of boot.

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What transfers are subject to gift taxation?

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The federal gift tax applies to any completed, irrecvocable transfer of property for less than full and adequate consideration in money or money's worth. Donative intent is not required.

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When are marital/divorce transfers not subject to gift taxation?

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The release of marital rights such as dower or curtesy is not consideration in money or money's worth. Accordingly, a transfer of property in exchange for the relese of such rights is treated as a gift. However, the release of rights of suport and maintenance, however, is consideration, and is therefore not a gift.

Property settlements included in a divorce are not a gift because it is a judically forced transfer of property.

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What is the "annual exclusion" for gifts?

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A donor is entitled to exclude the 1st $12,000 of the total gifts made during any calendar year to each donee. the exclusion is denied in the case of a gift of future interest, which is defined as an interest i which the donee does not have a present immediate right to enjoy or possess. IN addition to the basic $12,000 exclusion, any amount paid as school tuition or medical expenses on behalf of any individual will not be regarded as a gift.

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How are gifts to a spouse treated for gift tax purposes?

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A gift from one spouse to another is generally not subject to gift taxation, by reason of the 100% gift tax marital deduction; to be eligibile for the marital deduction, the gift ordinarily cannot be of a terminable interest.

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What is "gift splitting"?

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If a husband or wife makes a gift to a third party, the gift mya be conisdered as being made one half by each spouse. For gift splitting to occur:
The husband and wife must both be citizens or residents of the US
2. The husband and wife must be married at the time of the gift, and the donor spouse cannot remarry during the remainder of the calendar year and:
3. Both spouses must cosent to the "gift splitting".