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77 Cards in this Set
- Front
- Back
Steps in determining tax liability
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(1) determine Gross Income (GI)
(2) subtract "above the line" deductions to determine Adjusted Gross Income (AGI) (3) subtract standard deductions OR itemized deductions to determine taxable income (TI) (4) Multiply by tax rate (tentative tax liability) (5) subtract any available credits (final tax liability) |
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Gross Income - def
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Any economic benefit or any clearly realized accession to your wealth.
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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:
(1) property received (2) AND any services received |
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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 - def
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The taxpayer has received property or funds under a "claim of right" when they are received w/o restriction as to use or distribution
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If a taxpayer later returns funds, what does he do?
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Take a deduction on the year returned
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Are stolen, embezzled, and illegally-acquired funds/property taxable income?
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Yes
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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 Rule
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Unless otherwise provided in the written agmt, alimony is taxable to the receiving spouse and deductable to the paying spouse.
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Elements for Alimony
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(1) Writing (must be pursuant to a written divorce or separation agmt)
(2) Living together disallowed (cannot be members of the same household) (3) Cause at or before death (liability to make pymts must cease at or before death) (4) Cash (pymts 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 deductable to paying spouse.
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"Child Support in Disguise" Rule
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Where total payments for alimony and child support fall short, the payments are considered first to meet the child support obligation.
If a pymt (i.e., "alimony") is reduced upon a contingency relating to a child, the amount of the reduction is considered to be child support. |
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Prizes and awards
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RULE: GI includes the value of cash, property, or services received as a prize, award, or windfall.
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Bargain Purchase
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RULE: if you happen to purchase something for far less than its FMV (i.e., at a flea market), you have no greater tax liability until you sell it later for the higher amount.
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Cancellation of Indebtedness - rule
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The borrower has no GI 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.
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Cancellation of Indebtedness - exception
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The debt is RIGed
REDUCTION in purchase price (if the apparent discharge of debt is really a reduction in purchase price in connection with the sale of goods, discharge of indebtedness rule does not apply) INSOLVENCY (if the discharge occurs when the taxpayer is insolvent or bankrupt, there is no immediate discharge of indebtedness income) GIFT (if the lender intends the discharge as a gift, the rule will not apply) NEW - RESTRUCTURE OR CANCELLATION OF HOME MORTGAGE (if the reason was taxpayer financial distress or economic downturn) |
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Exclusions
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(do NOT have to be reported)
(1) Life insurance proceeds (2) Inheritances (3) Gifts (4) Tort awards (5) Reimbursement for property damage (6) qualified scholarships |
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Life Insurance Proceeds exclusion
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RULE: GI 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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Inheritance exclusion
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RULE: GI does not include amounts received by bequest, devise, or inheritance.
BUT: -Income from property received IS taxable. -Inheritance that was really belated compensation for work IS taxable. |
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Gifts exclusion
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RULE: GI does not include amounts received by gift (NO dollar limit).
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What is an excludable "gift"?
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A transfer made out of detached and disinterested generosity. (love, affection, charity)
NOTE: employers do NOT make gifts to employees. |
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Tort Awards exclusion
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RULE: GI does NOT include damages received on a account of PHYSICAL PI OR SICKNESS (both lump-sum and structured pymts)
RULE: by themselves, damages for EMOTIONAL DISTRESS are not considered damages received on account of PI. RULE: Punitive damages received in connection w/ PI ARE taxable |
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Reimbursement for Property Damage exclusion
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RULE: excludable from GI to the extent of the basis/investment in the property.
NOTE: damages to business for LOST PROFITS are taxable (anti-trust, tortious interference suits) |
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Qualified Scholarships exclusion
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RULE: qualified scholarships for tuition and related expenses are excluded from GI. Must be primarily for the individual's benefit.
QUALIFIED: must not be payment for past or future services. EXPENSES: NOT personal expenses like room and board. BENEFIT OF THE INDIVIDUAL: tuition paid by your employer IS taxable. |
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Employee-Related Exclusions
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(1) Receipts from health and accident insurance
(2) Life insurance provided by or through an employer (3) meals and lodging (4) other tax-free fringe benefits to employees |
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Receipts from health and accident insurance
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RULE: Value of employer-provided health or accident insurance coverage, i.e., the premiums paid by the employer, are excluded from GI.
RULE: health insurance reimbursements for medical expenses actually incurred are excluded from GI |
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Life Insurance provided by or through an employer
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RULE: taxpayer may exclude the value of the first $50k of employer-provided group term life insurance coverage provided by the employer.
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Meals and lodging
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RULE: employer-provided meals and lodging excluded if:
(1) Provided for the convenience of the employer (2) In-kind (actually give you the meals or lodging, not cash for these things) (3) AND on the employer's premises |
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Other tax-free fringe benefits to employees
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-De minimus (coffee, pens, etc)
-No additional cost to the employer (e.g., airline employees who fly standby for free) -Qualified employee discount (e.g., discounts at the retail store where you work -contributions to qualified pension plans -employee safety or length of service awards |
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2 types of deductions
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(1) "Above the Line" everyone takes
(2) choice of "itemized" OR standard deduction |
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Above the Line deductions
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(1) Ordinary and Necessary Business expenses
(2) Depreciation (3) Capital Losses (up to $3k) (4) Alimony (can take regardless of whether payer otherwise itemizes) (5) Moving expenses (NOT indirect expenses like house-hunting trips) |
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Adjusted Gross Income (AGI)
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The "subtotal" reached after subtracting above-the-line deductions
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Ordinary and Necessary Business Expenses deduction
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(1) Employees' salaries, rent for office space, cost of office supplies [anything used up within 1 year] (NOTE: excessive portion of excessive salaries is not deductible [>$1m])
(2) Business Interest (on money borrowed for business. NOTE: prepaid interest not deductible) (3) Business taxes, except fed taxes (4) Business bad debts (unpaid credit accts of customers) |
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Depreciation deduction
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only for business or investment assets (wear and tear over time; something that cannot be used up in 1y)
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Capital Losses deduction
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Net loss from the sale of capital assets (stock)
Includes NON-business bad debts |
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Itemized (non-business) deductions
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(BAR will ask: "is X an itemized deduction?")
(1) Home mortgage interest (2) State and Local Taxes (3) Unreimbursed casualty losses (4) Unreimbursed medical expenses (5) Charitable contributions (6) Miscellaneous Deductions (7) Investment fees or expenses |
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Home Mortgage Interest deduction
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RULE: taxpayers may deduct home mortgage interest on mortgages of up to $1m (in the aggregate) on a principal and a second personal residence.
RULE: Taxpayer may deduct interest on a "home equity loan" of up to $100k. |
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Is personal/consumer interest deductable?
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NO
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State and Local tax deduction
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RULE: taxes paid to state and local govts re deductible with the exception of sales tax.
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Unreimbursed Casualty Losses deduction
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RULE: deductible:
(1) if loss > $100 (2) if loss is sudden and unexpected (3) AND only if losses (in aggregate) > 10% of AGI (can only deduct the portion > 10% of AGI) |
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Unreimbursed Medical Expenses deduction
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RULE: deductible to the extent that they (in aggregate) > 7.5% of AGI
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Charitable Contributions deduction
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RULE: taxpayer may deduct the FMV of property and the amount of cash contributed to qualified charities.
LESS premium received for the donation (i.e., meal at restaurant in exchange for large donation) QUID PRO QUO should raise red flags (parent builds dorm to get child into college) |
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Miscellaneous Deductions
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RULE: taxpayers may deduct eligible miscellaneous deductions to the extent that (in the aggregate) they > 2% of AGI.
Ex: unreimbursed employee business expenses (trade journal subscription, bar dues), certain educational expenses (CLE course) |
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Investment Fees or Expenses deduction
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RULE: taxpayer may deduct the fees or expenses that were necessary to generate taxable income.
ex: broker fees |
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Are personal expenses deductible?
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NO
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Are legal fees deductible?
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RULE: deductible if they occurred in a business or investment setting.
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Are legal fees for a divorce or separation matter deductible?
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RULE: generally considered personal and therefore not deductible.
EXCEPTIONS: (1) the portion of legal fee to either party in a divorce/separation that is ATTRIBUTABLE TO TAX ADVICE is deductible. (2) The RECIPIENT spouse may deduct legal fees necessary in generating taxable alimony. |
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Exemptions
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RULE: taxpayers are entitled to one exemption for themselves and one exemption for each dependent.
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Dependent exemption
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Anyone in household for whom you provide more than 1/2 of their support.
Children and elderly parents. |
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Exemption of dependent after divorce
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Custodial parent gets the exemption for children of the marriage, unless written release otherwise.
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Allocation of Income (to whom is income allocated?)
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RULE: Income must be taxed to he who EARNS it. (Assignment of Income Rule)
RULE: Contingent fees paid to the atty to cover the PL's legal expenses in connection with civil litigation that would otherwise have been taxable to the PL are taxable to the PL as well as to the atty. RULE: Income from property (investment income) is taxed to he who OWNS the property. |
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Cash Method of Accounting
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RULE: cash method taxpayer reports income when she receives payment and takes deductions for eligible expenses when she makes payment.
NOTE: paying by check is considered payment. |
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Constructive Receipt
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When funds or property are credited to the taxpayer's account, set apart, or otherwise made available so that she may draw upon them.
*focus on CONTROL |
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Accrual Method of Accounting
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RULE: 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.
Usually used by businesses |
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Realization on disposition of property
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Sale, disposition, or exchange. The event, moment in time.
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Recognition on disposition of property
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Reporting for tax purposes
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Gains and losses on disposition of property
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RULE: unless a specific statutory or CL exception applies, whenever a loss or gain is realized it must also be recognized for tax purposes.
When in doubt, taxable. |
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Involuntary v. voluntary sale
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RULE: taxable under same principles.
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Realized gain on an installment sale
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RULE: reported as payments are received.
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Seller fails to charge interest on installment sale
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RULE: interest will be imputed at the "applicable federal rate."
RULE: seller will be treated as receiving interest. RULE: buyer will be treated as paying interest. |
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Basic Sale Formula
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Amount Realized
MINUS Adjusted Basis EQUALS Gain/Loss |
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Amount Realized
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(1) Money received
(2) FMV of the property or services received (3) AND 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 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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"Tax Cost" Basis
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If the taxpayer receives property in a taxable transaction, basis in the property received is the FMV of the property that was reported for tax purposes.
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What is the gain/loss if taxpayer only sells a portion of his property?
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Only that portion's allocatable basis is subtracted in computing gain/loss
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Sale at a discount
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A bargain sale of property may be treated as part sale/part gift
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Divorce Property Settlements
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RULE: a transfer of property btwn spouses or "ex-spouses" that is contributed 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.
Substituted Basis Rule |
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Basis in Gift Property
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RULE: the recipient of a gift takes the donor's basis. (Gain Rule / Substituted Basis Rule)
EXCEPTION: when property has lost value while in the donor's hands, the recipient of the gift takes the FMV as her basis for purposes of determining loss. (The Loss Exception) NOTE: exception does NOT apply btwn spouses - receiving spouse ALWAYS takes the donor's basis. |
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Basis in Inherited Property
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RULE: the recipient's basis in inherited property is the FMV of the property as of the date of the decedent's death.`
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Basis for property held by H&W as joint property
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RULE: when spouses hold joint title to property, the surviving spouse will get the FMV basis only on the half of the property received through inheritance or intestacy. The half originally owned by the surviving spouse will retain its basis.
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Basis in Like-Kind exchanges
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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 business or for investment.
-USUALLY real estate -NOT stocks, other highly liquid assets |
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Involuntary Conversion
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RULE: no gain or loss 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."
(1) If converted into money, and taxpayer then purchases replacement within 2y, no gain or loss reported. (2) If money received exceeds replacement cost, then reported. |
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Sale of a Principal Residence
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RULE: 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 taxpayer's principal residence for periods aggregating 2y during the 5y period ending on the date of the sale.
Only use once within a 2y period. |
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Ordinary Income v. Capital Gains
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RULE: the top marginal tax rate on most long-term capital gains (15% for assets held for more than 12y) is lower than the top marginal rate on ordinary income (35%).
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Capital Assets
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Generally investment assets. (stock, real estate held for investment, most dividends to shareholders of domestic corps)
NOT: inventory, property held primarily for sale to customers, depreciable property, copyrights. |
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Ordinary Income
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salary, rent, interest, royalties
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