Tax Final

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Gross income, what is considered and what is not

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everything is subject to income tax that increases and individuals net worth. Prizes and awards are taxable so they are subject to income tax. Scholarships are excluded to the extent of tuition, fees, books, supplies, and equipment. All gifts, inheritances, and insurance death benefits are excluded from gross income. So basically prizes and awards are taxable and the stuff outside of scholarship.

Front 2

Medical expenses deduction

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is limited to the excess of total unreimbursed expenses over 7.5 percent of AGI.

Front 3

A casualty loss..

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is the lesser of the tax basis in the property or the decrease in value from the casualty or theft.

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A casualty or theft loss is

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reduced by any insurance proceeds so that only the unreimbursed loss is deductible. The loss is reduced by a 500 dollar floor. Finally, only 10% of AGI is deductible

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hobby loss

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allowed a deduction for expenses but only to the extent of revenues. Subject to the 2 percent AGI limit

Front 6

One of the greatest economic advantages of home ownership

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is that the tax law treats owner-occupied real property as a nonproductive personal asset. Rent payments are nondeductible personal expeneses, encouraging people to buy homes

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Required filing dates

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most individuals are required to file for the current year by april 15 of the follwing year. The few that have adopted a fiscal year must file returns by the 15th day of the 4th month following the close of tax year. Corporations must file by the 15th day of the 3rd month. Both individual and corporate tax payers may file for a six month extension of the time to file their tax return. No explanation necessary. BUt doesnt extend time for payment of any tax

Front 8

tax payment requirements

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Taxpayers must pay their tax liability during the year
Individuals pay in the form of withholding (from salary and wages) or through quarterly estimated tax payments
Corporations pay through quarterly estimated tax payments
Any unpaid balance of tax must be paid by the unextended filing date of the return for the year
Automatic extension of filing date does not extend payment date for any balance of tax due
The government charges interest on delinquent tax payments

Front 9

late filing and late payment

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taxpayers who can't pay on due date with no good excuse must pay a late filing and late payment penalty. This penalty equals 5 percent of the balance of tax due with the return for each month that the reurn is delinqent. after 5 months (25 percent) then penalty rate drops to one-half percent of the balance of tax due. This can run for an additonal 45 months

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One type of audit, correspondence examinatioin

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may be handled entirely by telephone or through mail

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2nd type audit, office examination

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take place at the IRS office and are limited in scope

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3rd type audit, field examination

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take place at the taxpayers place of business and are broader in scope with a complete analysis of the taxpayer’s books and records

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noncompliance penalty-negligance

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Applies when the IRS determines that the taxpayer did not make a good faith effort to compute the correct tax
Penalty = 20% of any underpayment attributable to negligence. Based on the complexity of issues, taxpayer’s education and experience, cooperation with IRS, and advice from professionals

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Noncompliance Penalties - Civil Fraud

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Penalty = 75% of any underpayment attributable to fraud
IRS must show clear and convincing evidence.
Fraud is the willful intent to cheat the government by deliberately understating tax liability
Systematically omitting income
Deducting nonexistent expenses
Keeping two sets of books

Front 15

Noncompliance Penalties - Criminal Fraud

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Tax evasion = criminal fraud = felony offense!
Penalty = up to $100,000 for individuals, $500,000 for corporations
Prison time may result
Government must demonstrate guilt beyond a reasonable doubt

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Disposition by Abandonment

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Taxpayer may abandon worthless property by disclaiming any ownership interest in the property
Loss recognized equals adjusted basis of abandoned property
Loss is characterized as ordinary regardless of the type of asset because there is no sale or exchange

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Disposition by Foreclosure

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If property is foreclosed to settle a recourse debt (debtor is personally liable), the foreclosure is treated as a sale of the property for FMV
If the creditor forgives any amount of recourse debt, the debtor recognizes ordinary cancellation-of-debt income
If property is foreclosed to settle a nonrecourse debt (debtor is not personally liable), the foreclosure is treated a sale for the full amount of the debt

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Disposition by Casualty or Theft

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Business assets may be disposed of because of a casualty or theft
Amount realized equals any insurance proceeds
If proceeds are less than the asset’s basis, the recognized loss is ordinary
If proceeds are more than the asset’s basis, recognition of the gain may be deferred (See Chapter 9)

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Substituted Basis

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Nonrecognized gain or loss is deferred until the qualifying property received is disposed of in a taxable transaction
Deferred gain or loss is embedded in the tax basis of the qualifying property received
If no boot is involved, the tax basis equals:
Basis of property surrendered
FMV of property received - deferred gain/+ deferred loss