Tax

Front 1

Steps in determining tax liability?

Back 1

1. Determine Gross Income

2. Subtract above the line deductions to determine Adjusted Gross Income

3. Subtract Standard Deduction or Itemized Deductions to deterine Taxible Income

4. Multiple Taxible Income by Tax Rate = Tentative Tax Liability

5. Subtract any available credits = Final Tax Liability

Front 2

Definition of taxable income?

Back 2

any economic benefit or any clearly realized accession to your wealth.

when in doubt, it's taxable

Front 3

Money received from winning a lawsuit, but you anticipate an appeal. Taxable?

Back 3

Yes - claim of right income.

Funds received under a claim of right must be reported even though taxpayer may later be required to return the property, funds, etc.

If its in escrow then there is restriction as to use or distribution so you don't have a claim of right (not taxable).

Front 4

Donate something to a charity...years later they give it back?
Tax Benefit Rule?

Back 4

Must recognize tax benefit income - your income in the year the property was returned is the amount of the tax benefit you received the year you donated.

(However much you deducted when you gave is what you recognize as income when you get it back.)

Front 5

Alimony Rule?

Back 5

Unless otherwise provided in the written agreement, alimony is taxable to the receiving spouse and deductible to the paying spouse.

Front 6

What is Alimony for tax purposes?

Back 6

1. Pursuant to a written divorce or separation agreement

2. Can't be members of the same household

3. Agreement must explicitly states is ceases at or before death

4. Payment must be cash (or equivalent)

Front 7

Child support rule?

Back 7

Child support is not taxable to the receiving spouse and no deduction to paying spouse.

Front 8

Recognizing Child Support ?
(child support in disguise rule?)

Back 8

If a payment is reduced upon a contingency relating to a child, the amount of the reduction is considered child support.

Front 9

Total payments for alimony and child support fall short?

Back 9

First consider child support paid in full, then go to alimony.

Front 10

Is a bargain purchase a taxable windfall / prize?

You purchase a genuine Van Gogh for $1 at a flea market?

Back 10

No, not a windfall.

You would have a $1 basis in the Van Gogh.

Front 11

Exceptions to cancellation of indebtedness income rule?

Back 11

1. Reduction in purchase price.

2. Insolvency or Bankruptcy (taxpayer is insolvent).

3. Gift (if the discharge of the debt was intended as a gift)

Front 12

Exclusions from Gross Income?

Back 12

1. Life insurance proceeds
*Except when proceeds are paid in installments, any interest paid is taxable.

2. Inheritances

3. Gifts (transfers made out of detached and disinterested generosity)

4. Compensatory Tort Awards: are damages received on account of physical personal injury (emotional damages by themselves are taxable) (punitive damages always taxable)

5. Employee Related Exclusions (fringe benefits)

6. Qualified Scholarships for tuition - must not be payment for past or future services, must be to primarily benefit the individual

Front 13

Exclusions from Gross Income: employee related exclusions?

Back 13

1. Receipts from Health and Accident Insurance (premiums paid and medical expenses reimbursements actually incurred)

2. Life Insurance Provided By or Through an Employer (value / premiums for up to $50k coverage)

3. Meals and Lodging if:
a) provided for the convenience of the employer
b) in-kind
c) AND on the employer's premises

4. de minimus (donuts)

5. No additional cost to employer (fly standby)

6. qualified employee discount (Macy's clerk)

7. Contributions to qualified pension plan (not taxed till you take it out at retirement)

8. Employee safety or length of service award presented at a ceremony (gold watches; not cash)

Front 14

Sets of decutions?

Back 14

1. Above the line (avail. even to those who take standard deduction)

2. Choice: Itemized or Standard

Front 15

Above the line Deductions?

Back 15

1. Ordinary and Necessary Business Expenses (not excessive portions of excessive salaries)
Includes Business interest and nonfederal business taxes

2. Depreciation

3. Capital Losses (max of $3000)

4. Alimony

5. Moving Expenses

6. School loan interest (limited)

Front 16

Home Mortgage Interest

Back 16

Itemized Deduction up to $1,000,000 in the aggregate on a principal and a second personal residence

also may deduct a home equity loan of up to $100,000 (regardless of what it is actually used for)

Front 17

State and Local Taxes

Back 17

Itemized deduction, except for sales tax

Front 18

Unreimbursed Casualty Losses

Back 18

Itemized Deduction if
1. loss is >$100
2. SUDDEN AND UNEXPECTED
3. only to the extent the loss exceeds 10% of AGI

Facts and Circumstances Test

Front 19

Unreimbursed Medical Expenses

Back 19

Itemized Deduction to the extent exceeds 7.5% of AGI

Front 20

Gambling Losses?

Back 20

Can't deduct them but can offset your winnings.

Front 21

Charitable Contributions

Back 21

Itemized Deduction: taxpayers may deduct the FMV of property and the amount of cash contributed to qualified charities (can't deduct value of time or service)

Front 22

Miscellaneous Deductions?

Back 22

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

Examples: unreimbursed employee business expenses, certain educational expenses

Front 23

Personal v. Business Expenses?

Legal Fees?

Divorce Legal Fees?

Back 23

(Itemized Deductions)
Can't deduct personal expenses.

Legal Fees, generall legal fees incurred in a personal setting are not deductible and those incurred in a business or investment setting are deductible

Divorce Legal Fees: incurred in a divorce or separation matter are personal and therefore generally NOT deductible EXCEPT:
1. portion attributable to tax advice
2. recipient spouse may deduct legal fees necessary in generating taxable alimony

Front 24

Business Meals?

Back 24

Itemized Deduction

can deduct 50%

Front 25

Investment Fees or Expenses?

Back 25

Itemized Deduction

may deduct the fees or expenses that were necessary to generate taxable income (broker fees for example)

Front 26

Exemptions

After divorce?

Back 26

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

After divorce?
Unless other parent signs a written release, the general rule after divorce is that the CUSTODIAL PARENT gets the exemption for children of the marriage

Front 27

Allocation of income?

Back 27

Income must be assigned to he or she who earns it.

Front 28

Taxation of Contingency Fees?

Back 28

Taxable to the lawyer (income) and also taxable to the plaintiff (who won the payment of the contingency fee)

Front 29

Income from property is taxed to ____?

Back 29

the property owner - even if they only have a life estate

Front 30

Cash Method of Accounting

Back 30

Report income when you receive payment and deduct eligible expenses when you make payment.

Front 31

Accrual Method of Accounting

Back 31

Report income when all events have occurred that fix the right to receive it and when the amount can be determined with reasonable accuracy.

Take deductions when all events have occurred that establish the fact of liability and when the amount of liability can be determined with reasonable accuracy.

Use the all events test: take deductions when all events have happened.

Front 32

When does realization of a gain or loss occur?

Back 32

sale, disposition, or exchange

Front 33

When do you report income?

Back 33

Unless a specific statutory or common law exception applies,
When gain is realized or constructively realized, it must also be recognized for tax purposes.

Front 34

How to calculate gain or loss?

Back 34

Amount Realized - Adjusted Basis

Front 35

How to calculate basis?

Back 35

The cost of the property including money paid and borrowing incurred in connection with the purchase.

Front 36

Tax consequences of a divorce property settlement?

Back 36

Transfer of property between spouses or ex-spouses that is incident 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).

Front 37

Basis in gift property?

Back 37

Substituted basis (take the donor's basis).

Front 38

Basis in inherited property?

Back 38

FMV at the date of decedent's death (or upon executor's election the date 6 months following decedent's death)

Front 39

Like Kind Exchanges?

Back 39

No gain or loss recognized when taxpayer exchanges property held for productive use in a business or for investment for like-kind property also held for productive use in business or investment.

Applies only to property - not stocks, bonds, etc.

Take a substituted basis in like kind exchanges and don't recognize event.

Front 40

Involuntary conversion?

Back 40

No gain recognized on property involuntarily lost due to theft, fire, seizure, requisition or condemnation is converted into property that is similar or related in service or use.
*must convert w/in 2 years

Gain or loss will be recognized however to the extent that the money received exceeds the cost of the replacement property.

Front 41

Sale of a principal residence?

Back 41

$250,000 ($500,000 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 2 years during the 5 year period ending on the date of the sale.

Can't use more than once w/in 2 years.

Front 42

Ordinary Income v. Capital Gains

Back 42

top marginal tax rate on long-term capital gains = 15% (v. up to 35% on ordinary income)

Capital assets = investment assets (do not includes inventory, property held for sale to customers, depreciable property, copyrights)