Indiana Tax And Fed. Income Tax

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Definition of Gross income

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(i) all income

(ii) from whatever source derived

(iii) including economic benefit

(iv) or any clearly realized accession to 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 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 & FMV of any services recieved

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claim of right

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Definition: TP has received property or funds under "claim of right" when they are received without restriction as to use or disposition

Rule: Property or funds received under a claim of right must be reported for tax purposes EVEN THOUGH the tax payer may later be required to return the property, funds or their equivalent

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illegally aquired funds

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are considered taxable income

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Tax Benefit Rule

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If a TP 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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Alimony is taxable to the receiving spouse and deductible to the paying spouse

Elements for alimony

(i) writing

(ii) not members of same household

(iii) ceases at or before death

(iv) payment are cash or equivalent

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Child Support Rule

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Child support is NOT taxable to receiving and NOT deductible to paying spouse

note: if a payment is reduced upon contingency relating to a child, then the amount of the reduction is considered child support

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Prizes and Awards rule

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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, gambling or lottery winnings, and treasure trove.

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cancellation of indebtedness

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There is no gross income on borrowed funds. However, a tp whose debt is discharged / cancelled as less than the full amount, has discharge of indebtedness income to the extent of the difference between full amount of the obligation ad the amount paid in satisfaction

ex; school loans 20K , bank agrees to accept 15K - THUS cancellation was 5K so 5K is taxable income

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Exceptions to cancellation of indebtedness

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debt is RIGed = NO cancellation of indebtedness

R: if apparent reduction of debt is really a reduction in purchase price = "purchase price adjustment"

I : Insolvency: if the discharge occurs when the taxpayer is insolvent or bankrupt

G: If lender intends to discharge as a gift

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EXCLUSIONS

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1. life ins. proceeds

2. Inheritances

3. Gifts

4. tort awards

5. reimbursement for prop. damage

6. scholarships

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Exclusion: Life Ins. Proceeds : RULE

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Gross income does not include proceeds paid by reasons of death of the insured. However, when proceeds are paid in INSTALLMENTS than, ANY INTEREST paid will be taxable

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Exclusion: Inheritances: RULE

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gross income does not include amounts recieved by bequest, devise, or inheritance

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Exclusion: Gifts: Rule

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Gross income does not include amounts received by gift.

Gift - a transfer made out of detached and disinterested generosity

services provided by ER to EE for personal use are not taxable if:

1. services are ordinarily offered for sale to non-ee customers in course of business

2. ER incurs no substantial additional cost

3. special non discrimination rules are satisfied

ex; southwest airline gives ee's free flights

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Exclusion: Tort Awards: Rule

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Rule 1: Gross income does not include DAMAGES received on account of PHYSICAL PERSONAL INJURY or SICKNESS

Rule 2: By themselves damages for EMOTIONAL DISTRESS are not considered damages unless received on account of physical injury

Rule 3: Compare punitive damages received in connection with personal injuries are taxable

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Exclusion: Reimbursement for property damage: Rule

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Amounts received to compensate for damage or loss to property are excluded from gross income to the EXTENT of the BASIS OR INVESTMENT in the property.

Note: damage to a business for lost profits are taxable

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Exclusion: Qualified Scholarships: Rule

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Qualified scholarships for tuition & related expenses are excluded from gross income. To be "qualified" must not be payment for past or future services. Must also be primarily for the benefit of the individual.

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EMPLOYEE RELATED EXCLUSIONS

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1. Receipts from Health and Accident Ins.

2. Life ins. provided by/through ER

3. Meals and lodging

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EE Related EXCLUSION: Receipts from health and accident ins. RULE

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value of ER provided health or accident ins. coverage i.e. premiums paid by ER are excluded from gross income

note: health ins. reimbursements are also included

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EE Related EXCLUSION: Life ins. provided by or through an ER. RULE:

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taxpayers may Exclude the value of the 1st $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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EE Related EXCLUSION: MEALS and LODGING : RULE

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ER provided means and lodging are EXCLUDED if

1. provided for convenience of ER

2. in-kind

3. on ER premises

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Other TAX FREE Fringe Benifits to EE's that are EXCLUDED meaning NOT TAXABLE

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1. de minimus - occasional donut or cracker

2. No additional cost to ER - airline EE benefit

3. Qualified EE discounts -

4. Contributions to qualified pension plans

5. EE safety or length of service award

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DEDUCTIONS two types:

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1. ABOVE THE LINE

2. CHOICE of "ITEMIZED" aka STANDARD DEDUCTION

note: subtract deductions from gross income to reach AGI (adjusted gross income)

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Examples of "above the line" deductions

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1. ordinary and necessary business expenses

2. Business interest

3. Business taxes, except federal taxes

4. Business bad debts

5. depreciation

6. capital losses (ex: stock) up to 3k

7. Alimony

8. moving expenses to principle place of work

9. Limited deduction for school loan interest

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Examples of "below the line" deductions : AKA standard/ itemized deductions

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1. Home mortgage Interest

2. State and local taxes

3. Unreimbursed Casualty losses

4. Unreimbursed medical expenses

5. charitable contributions

6. miscellaneous deductions

7. personal expenses

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Below the line deductions: Home Mortgage Interest

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Rule: Taxpayers may deduct home mortgage interest on mortgages of 1 million on a principle and a second personal residence.

Taxpayers may also deduct interest on a "home equity loan" of up to $100,000.

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Below the line deductions: State and Local Taxes

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Rule: Taxes paid to state and local governments are deductible, with the exception of sales tax.

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Below the line deductions: Unreimbursed Casualty Losses

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Rule: Unreimbursed casualty losses are deductible

1) if loss greater than $100

2) if loss is sudden and unexpected

3) only to extent losses in the aggregate exceed 10% of AGI

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Below the line deductions: Unreimbursed Medical Expenses

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Rule: unreimbursed medical expenses are deductible to the extent that they exceed 75% of AGI

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Below the line deductions: Charitable contributions

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Rule: Taxpayers may deduct the FMV of property and the amount of case contributed to qualified charities. (but no deduction for services)

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Below the line deductions: Miscellaneous Deductions

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Rule: taxpayers may deduct eligible miscellaneous deductions to the extent that (in the aggregate) They exceed 2% of AGI

ex: unreimbursed employee business expenses

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Below the line deductions

personal v. business expenses

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Rule: personal expenses = NOT DEDUCTIBLE

ex: Legal fees from divorce = not deductible

Legal fees from business setting = deductible

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Below the line deduction : Note - Investment Fees or Expenses

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Rule: Taxpayers may deduct the fees or expenses that were necessary to Generate Taxable Income

ex: broker fees, settlement expenses in a lottery dispute

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EXEMPTIONS : RULE

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Taxpayers are entitled to one exemption for themselves and one for each dependent

note: after divorce custodial parent gets the exemption

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Allocation of Income : 2 RULES

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1. income must be taxed to he or she who earns it. This is sometimes referred to as the "assignment of income" rule

2. Income from property (ex: rents from madonna to donald trump) also called investment income is taxed to he/she who owns it.

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Accounting : When is it income? - Cash method

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Rule: A cash method taxpayer reports income when she receives PAYMENT and takes deductions for eligible expenses when she MAKES PAYMENT

note: constructive receipt: 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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Accrual method of Accounting

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Rule: an "accrual method" taxpayer reports income when all event have occurred that fix the rights to receive it, and when the amount can be determined with reasonable accuracy.

ALSO: an accrual method taxpayer takes deductions when all events have occurred that establish the fact or liability and when the amount can be determined with reasonable accuracy.

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Gains and losses on disposition of property

(REALIZATION AND RECOGNITION RULE)

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Realization: sale disposition or exchange of an assett

Recognition: Reporting the gain for tax purposes

Rule: unless a specific statutory or common law exception applies whenever a gain is REALIZED it must also be RECOGNIZED (reported) for tax purposes

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BASIC SALE FORUMLA

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Amount realized - adjusted basis = gain or (loss)

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AMOUNT REALIZED : RULE

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amount realized includes money received PLUS the FMV of property or services received to which the property sold is subject or which buyer assumes

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COST BASIS : RULE

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A taxpayers 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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rule: a transfer of property between spouses or "ex spouses" this is transferred 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 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 as substituted basis rule

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example of basis in gift property

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don purchases stock at 10K its now worth 100K , he gives the stock to his daughter Ivanka .

Her adjusted basis is = 10K

But she sells it for 100K

So her Taxable gain is = 90K

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LOSS EXCEPTION : RULE

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when property has lost value while in donor's hands, the recipient of the gift takes for the FMV of the gift at the time the gift is made as her BASIS for purposes of determining loss

note: does not apply to transfers of prop between spouses at divorce

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BASIS IN INHERITED PROPERTY: RULE

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RULE: The recipient's basis in inherited property is the FMV of the property at decedents death.

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example of basis in inherited prop.

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if don died leaving the stock to ivanka as part of her inheritance

amount realized: 100K

Adjusted basis: 100K

taxable gain: 0

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property held by Husband and WIFE as joint property : Rule

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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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example of prop. held by wife and husband

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Jim and Jay purchase their prop. at 200K . they took title as joint tenants. Jay dies leaving her estate to Jim. At time of death home was worth 300K. what is jims basis in the home after Janes death?

basis inherited: 1/2 of 300K = 150K

basis in jim original portion: 1/2 of original 200K =100K

total basis: 150K plus 100k = 250K

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like and kind exchanges: Real estate : RULE

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Rule: 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 a business or for investment

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Involuntary conversion

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rule: No gain or loss is recognized if property INVOLUNTARILY CONVERTED do to theft, fire, seizure, requisition or condemnation is converted into property that is SIMILAR or RELATED in service or USE

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sale of principle residence

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rule: up to 250K (500K for joint returns) of gain from the sale of a principle residence can be excluded if the property has been used and owned as the taxpayer's principle residence for periods aggregating two years during the five year period ending on the date of the sale.

note: this exclusion is generally NOT available if the taxpayer has used it within 2 yrs.

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character of income:

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Ordinary income vs. Capital gain

long term capital gain - 15% for assets held longer than 12 months

Ordinary income - 35%

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capital assets include:

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generally investment assets ! such as stock or real estate held for investment

then DO NOT INCLUDE: inventory, property held primarily for sale to customers, depreciable prop. or copyrights

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Ordinary income examples include

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salary, rents, interest, royalties