Taxation

Front 1

What are the 4 filing statuses?

Back 1

A. Married filing separately
B. Married filing jointly
^If married at end of year or divorce decree not final.
^Both must sign and include all income of both in tax return
C. Head of Household
Unmarried, not filing jointly, and have dependents.
D. Single individuals
Do not qualify for HOH or married filing separately.

Front 2

What is Gross Income?

Back 2

1. Gross income is all income from whatever source derived including but not limited to ...

Front 3

What are some of the G.I. Categories?

Back 3

* Compensation for services, fringe benefits, fees, commission, and similar items.
^Compensation for child services goes to the child
* G.I. derived from business
^ Total sales – Cost of goods = G.I.

* dealings in property
^amount realized from sale includes different btwn FMV and sale price .
^ sale prop worth 1,000 for 850 to satisfy 1,000 debt= 150 realized

* interest
* rents
* royalties
* dividends
* Alimony and separate maintenance – any child support payments
* Annuities (lump sum for return)
Exclusion ratio- Amount paid: expected. Put in 70 to get 100= 7:10 so $7 on every $10 given back= $3 of income.

* income from life insurance and endowment contracts
* pensions
* distributive share of partnership G.I.
* Income from Illegal activities
* Treasure Trove.

Front 4

Are prizes and awards taxable income?

Back 4

Yes, Prizes and awards are taxable income except
* qualified scholarship includes- tuition, fees, books, supplies, and equipment (NOT room and board.)
* Recognition of past achievement in Religion, art, literature, education, charity, science, and civic. (NOT include employee awards)
*As long as contest not entered, did not require future services, or award was assigned to tax exempt charity.

Front 5

Is uncharged interest included in GI?

Back 5

Yes, Uncharged interest on loans- Included

Front 6

Is life insurance a part of Gross income?

Back 6

Group- Term Life Insurance- Included if cost exceeds 50,000 and employee pays toward insurance

Front 7

What do items excluded from income do?

Back 7

Items Specifically Excluded from Income
^ An exclusion from income lessens the amount of income upon which a tax is due. However, a taxpayer is not obligated to report those items excluded from income, but he must report deductions

Front 8

Are death benefits, gifts and bequests excluded from income?

Back 8

^ death benefits- recipient can exclude. If sold to person they can only exclude amount that represents their purchase price.

^ gift and bequests= gift or inheritance= not included.
* if from employer to ee not a gift and is included unless ee is relative and was a family gift.
* transfers from er to ee excluded if given during ceremony and less than $400

Front 9

Is compensation ofr injuries and sickness excluded from GI?

Back 9

Yes,
(1)generally excluded for income for taxation
(2) Compensation for personal injuries or sickness includes:
(a) worker’s compensation;
(b) recoveries for personal injuries that are physical ex. Tort for broken neck.
(c) payments under accident or health insurance.
Limited to policies purchased
(3) Punitive damages are: not excluded even if injury is physical
(a) A payment for injuries may be allocated for physical (excluded from taxation) and non-physical (taxable) injuries
N/A reimbursement of medical costs to the extent that those costs were deducted as a medical deduction for any prior taxable year.

Front 10

Are contributions by the Employer to accident and health benefits excluded?

Back 10

# Policies paid by taxpayer and reimbursement for permanent physical loss is excluded.

# Payment for loss wages included unless from self-financed plans.

#Benefits to employers Included in Employee’s income.

Front 11

Are improvements by the lessee on the lessor's property excluded?

Back 11

# excluded unless in lieu of rent.

Front 12

Is Scholarship and fellowship included?

Back 12

# room and board not included.

# if required to work then FMV or work is included.

Front 13

Are Meals and lodging for the convenience of the employer excluded?

Back 13

Excluded if
^ On premises
^ convenience of er
^ Lodging is a condition of work (necessary for EE to live at job site)

Front 14

How much is excluded on the Gain on sale of Residence?

Back 14

#Single homeowner- 250,000 Married 500,000
Must be
^ Ownership principal residence
^ Use
Aggregating 2 years or more in 5 year period.
Short Temp absences ok (abt 3 mons or less) Extended not ok

^ frequency
Can only use every 2 years.
Ex. 400,000 price house was bought. 550,000 price of house sold. 150,000 gain is excluded (amt less than 250,000 or 500,000)

Front 15

What are the 3 levels of income tha tax code uses to deal with Individual taxation?

Back 15

1.Three levels of income are used in the Internal Revenue Code dealing with the taxation of individuals.

a.The highest of these is GROSS INCOME, which includes all income received by the taxpayer, except that which is excluded.

b.The second is ADJUSTED GROSS INCOME, which is gross income less the expenses necessary to produce that income.

c.Adjusted gross income less the taxpayer’s itemized deductions, or standard deduction and personal exemption deductions, is the taxpayer’s TAXABLE INCOME.

Front 16

Define the above the line trade and business expenses.

Back 16

Trade or Business Deductions
a. deductible to extent ordinary and necessary to the business involved

(1) ORDINARY expenses are those that are common and acceptable in the taxpayer’s field of business.
(2)NECESSARYexpenses are those that are helpful to the taxpayer’s business. They need not be essential or indispensable to it.
(3)Kickbacks and illegal payments: Not deductible ex. Criminal activities
(4)Although most business expenses are deductible in full, the allowable deduction for business MEALS AND BUSINESS ENTERTAINMENT is only 50%.
(5)Unreimbursed employee expenses:
Deductible to a limited extent.
Other than employee are above the line expenses- trade or business expenses

Front 17

What is a de minimus fringe benefit?

Back 17

benefit so small accounting is impracticable

Front 18

Explain VIRGINIA ESTATE AND GIFT TAX.

Back 18

A.Virginia Gift Tax

1.Virginia does not impose a gift tax for transfers made on or after January 1, 1980.

B.Virginia Estate Tax

1.There is no applicable Virginia estate tax through at least January 1, 2013.

Front 19

How are Expenses incurred in the production of income treated?

Back 19

Expenses incurred in the production of income are excluded

These deductions are limited by the 2% floor; the aggregate of miscellaneous limited deductions must exceed 2% of adjusted gross income.

EXAMPLE: A is a lawyer. While in law school, A opened up an online investment account to manage her loans. Upon graduation, A took a job with a big firm. A now puts part of her earnings in the investment account to save for her retirement. In an effort to further grow her investment portfolio, A subscribes to several investment strategy magazines. Although investing is not A’s trade or business, A can deduct the costs of these magazines, as they are ordinary and necessary for the production of income in regards to her investment activities, provided that the costs exceed 2% of her adjusted gross income.

Front 20

What may be excluded pertaining to Business?

Back 20

^ Business Use of Home

# excluded if EXCLUSIVELY AND REGULARLY USED FOR BUSINESS
MUST BE PRINCIPAL PLACE OF BUSINESS. Deduction limited to net income of business.

^ Business use of auto- commuting – included, driving FOR job excluded.

^ clothing- uniform or distinct= excluded nothing else.

Front 21

How does the tax code treat Educational expenses?

Back 21

Educational Expenses
(a)An individual may deduct education expenses that either:
1)maintain or improve skills required by his employment, trade or business

2)meet the express requirements of his employer, or applicable law, necessary to retain his established employment relationship, status, or rate of compensation.

(b)An education expense is non-deductible if the education received either:
1)meets the minimum education requirements for qualification in the taxpayer’s employment, trade, or business; or

2) meet the express requirements of his employer, or applicable law necessary to retain his established employment relationship, status, or rate of compensation.

Front 22

Are entertainment expenses deductible?

Back 22

Entertainment expenses

# Expenses to gain or keep clients

- SOME BUSINESS DISCUSSION REQUIRED

- Entertainment facility costs non deductible
-Other activities and Meals are deductible
Ex. Hotel no, food yes, cost of activity- yes

# Deductible up to 50% but not more than face value.

Front 23

How is Capitalization and Depreciation of Property Used in Trade or Business or Held for Production of Income deductible?

Back 23

^Expenditures for Supplies IMMEDIATELY CONSUMED, RENTS, AND WAGES are deducted in full IN THE YEAR of the expenditure.

^ Asset with a useful life of MORE THAN A YEAR must be CAPITALIZED and amt recouped in depreciation value.

^ Cannot depreciate
% Property used for personal purposes
% Land, or
% Inventories or stock in trade

Front 24

What are Hobby Losses?

Back 24

Activities both income producing and recreational

Front 25

Is Hobby Loss deductible?

Back 25

* Deductible to extent income producing.

*Profitability is not a factor. But need some profit in 3 of 5 years or 2 of 7 if breeding or racing.

Front 26

Are Lossess deductible?

Back 26

$ LOSSES
Incurred in TAXABLE YR. and NOT covered by insurance is deductible
Covers losses incurred in BUSINESS NOT PERSONAL LOSS

Front 27

Do both spouses include ALIMONY in income?

Back 27

No, If payee spouse includes in income the payor spouse may deduct

Front 28

Compare standard and itemized deductions.

Back 28

$ Standard Deductions
Standard deductions or any excess deductions are subtracted from adjusted gross income.

$ Itemized deductions
Include all deductions except those used in determining adjusted gross income and personal exemption deductions. ( i.e. non-business, non personal)

* tax payer elects to itemize. Regardless of their relation to business.

Front 29

What are some Itemized deductions?

Back 29

1. Interest
2.Taxes
3. Contributions
4.Medical Expenses
5.Casualty losses
6. Non-Business Bad Debts
7. Un reimbursed Employee business expenses

Front 30

What is the limitation on Itemized deductions?

Back 30

for high income tax payers reduction is equal to 3% of their AGI in excess of a defined threshold (100,000 for 1991 adjusted for inflation

Front 31

Interest

Back 31

^Non-Business, non-consumer = not deductible
These are expenses not attributable to trade or business
BUT Principal and Second Residence (used 14 days or more) = deductible IF

^Acquisition of indebtedness AOI (less than $100,000,000 or 500,000 if married filing sep.
( Debt to Acquire, Construct or Improve residence) ACI or

Home Equity Indebtedness ( Debt other than AOI up equity in home = (FMV- ACI cost). Can’t exceed 100,000 or 50,000 MFS (married filing separately)

Front 32

Taxes

Back 32

- Generally fed income tax= Not deductible

- Local- Real estate, state income, Personal Prop= Deductible.

- Person who pays another’s taxes= Not deductible.

Front 33

Contributions

Back 33

(a)Charitable donations are deductible up to specific limits.


1)All charitable deductions are subject to a percentage limitation. This limitation is generally 50% of the donor’s adjusted gross income, and the remainder can be carried over for up to five years.

EXAMPLE: B, a taxpayer, has an adjusted gross income of $4 million a year. Feeling generous, B gives his alma mater a $3 million donation to renovate the ground floor of the university library. B can only take a charitable deduction of $2 million on this year’s return. His deduction is capped at $2 million as this is 50% of his adjusted gross income of $4 million. The other $1 million of the charitable donation can be carried over for up to five years.

(b)Generally, charities are defined as groups organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, and other charitable purposes enumerated in the Code.
(c)The donation must be made with no expectation of benefit: if benefit given must subtract value from deduction.

(d)For contributions that exceed $250, the taxpayer must obtain, by the time he files his return, a written acknowledgment from the charity describing the property received and the value of goods or services, if any, provided to the donor in return.

Front 34

Medical Expenses

Back 34

A taxpayer can deduct medical expenses incurred by HIM, his SPOUSE, or his DEPENDENT to the extent that such expenses exceed 7.5% of his adjusted gross income. Will be raised to 10% in 2013

Front 35

Casualty Loss

Back 35

- Theft, fire, storm (sudden loss NOT gradual)

- May deduct if loss is more than $100 and exceeds 10% of adjusted Gross income.

Front 36

What is the amount realized?

Back 36

^ Amount received and FMV in return for property. (what you get in exchange for property. )

^ When taxpayer disposes of property encumbered by mortgage. Amount Realized is cash received + mortgage.

Front 37

What is the adjusted basis?

Back 37

Original cost adjusted upward for such items as improvements and downward for depreciation. SOO adjusted basis is the original cost that has been adjusted. If $5 increases to $13 due to a rise in stock price. Adjusted basis is $5

Front 38

When are property dispositions treated as gifts?

Back 38

when btwn spouses

Disposition of property not treated as taxable- spouse to spouse or former spouse incident to divorce (if 1 yr after date or related to divorce)- treated as gift.

Front 39

Are personal losses deductible?

Back 39

Personal losses- exception theft and fire. Are NOT recognized for tax purposes- NOT deduction for loss

Front 40

Are sales to relatives taxable?

Back 40

Sales to relatives- gains will be recognized but losses will not be.

Front 41

How does the tax code treat capital loss?

Back 41

•Netting Capital Loss against gain. Losses that exceed 3,000 may be carried over to be deducted in future years. The 3,000 will be offset.
•General Capital Gains are usually taxed lower.
•Capital Assets – Property except
A. stock in trade, inventory or prop held for sell in ordinary course.
B. Copyrights; or artistic compositions
C. Accounts or notes receivable.

These categories will be taxed as ordinary income.

Patents and Leaseholds receive Capital Loss Treatment- Over life of or Success of Patent.

Front 42

How do you go about Answering a Tax Question Involving Sale, Exchange, or Other Disposition of Assets?

Back 42

a.In order to answer a question involving a sale, exchange, or other disposition of assets:
(1)determine if a sale, exchange, or other disposition has occurred;
(2)determine the amount realized;
(3)determine the taxpayer’s basis in the assets disposed of;
(4)compute the amount of gain or loss; and
(a)Gain = amount realized - basis
(b)Loss = basis - amount realized

(5)check if any of the non-recognition sections apply.

Front 43

WHAT ARE THE 2 TYPES OF TAXABLE YEARS?

Back 43

• Tax Payer’s Taxable year – 12 Month CALENDAR YEAR (ending Dec 31st) or 12 month FISCAL YEAR ending on the last day of any month other than Dec.

Front 44

How is the tax rate determined?

Back 44

•Tax rate = Based on annual income

Front 45

What are the two methods of accounting in tax?

Back 45

•Methods
A. Cash Receipts and Disbursement methods.

- Taxpayer recognizes income when paid in cash or equivalent. And gets deduction when she pays for an item. Accounts receivable not income. Accts payable not deduction. Constructive receipt- NO physical possession of income but it’s set apart and can draw upon at any time then = received.
Ex. Savings bank and interest.

B. Accrual
- allocate income and expenses and match cost of producing with recognition of actual income. item is considered income when the right to receive it is unconditionally fixed.

Deferral is under accrual- with this method although payment has actually been received or an expense has actually been paid, it is not recognized if it relates to afuture period. ex. paying tuition 1 yr in advance.

Front 46

How does VA tax income

Back 46

1.Introduction
a.Virginia imposes an annual tax on the Virginia taxable income of every individual.

b.Virginia taxable income is defined as the resident individual's federal adjusted gross income for the taxable year, subject to specific statutory modifications.

Front 47

How does VA tax non residents?

Back 47

2.Taxable Income of Nonresidents

a.The Virginia taxable income of a nonresident is an amount bearing the same proportion to the individual's Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss, and deductions from Virginia sources bears to the net amount of his income, gain, loss, and deductions from all sources.

Front 48

Explain Federal Gift and Estate Tax?

Back 48

A.Introduction

1.Federal gift and estate tax law presents a unified transfer tax system whereby all taxable transfers made by an individual after 1977 are aggregated and, for the most part, taxed at the time of death.
NOTE: In 2001, Congress passed legislation to gradually repeal the estate tax by 2010. Since then, estate tax rates have steadily decreased and exemptions have steadily increased. From 2006 through 2008, only taxable estates of more than $2 million were subject to the tax. In 2009, the exclusion amount rose to $3.5 million. However, the legislation that repealed the estate tax itself expired at the end of 2011. The 2010 Tax Relief Act provides special rules for the 2010 year and, among other changes, it reduces estate, gift, and generation-skipping transfer (GST) taxes for 2011 and 2012. It preserves estate tax repeal for 2010, but offers executors a choice: estates wanting zero estate tax for 2010 must elect that option, along with modified carryover basis rules that were set to apply for 2010. Otherwise, by default, the estate tax is revived for 2010, with a $5 million exemption, a top tax rate of 35%, and a step-up in basis. Also, for estates of decedents dying after Dec. 31, 2010, a deceased spouse's unused exemption may be shifted to the surviving spouse. After 2012, the top rate is slated to be 55%, and the exemption will be $1 million, though many observers expect additional legislation to address 2013 and beyond.

Front 49

How is Federal Estate Tax imposed?

Back 49

1.The federal estate transfer tax is imposed at death upon the property included within the decedent's gross estate and upon taxable gifts made after 1976. The tax is payable by the decedent's executor or administrator or by anyone coming into possession of the assets of the estate.

Front 50

What is included in the decedent's gross estate?

Back 50

The starting point in computing the estate tax is to determine the value of the decedent's gross estate, which includes all of the property owned by the decedent at his death, real or personal, tangible or intangible, wherever situated.

Front 51

How is the decedent's taxable estate taxed?

Back 51

Decedent's Taxable Estate

a.The decedent's taxable estate is determined by subtracting deductible items from the gross estate.
b.Marital Deduction
(1)If the decedent is survived by a spouse, section 2056 allows the estate an unlimited deduction for the net value of property included in the gross estate that passes or has passed to the surviving spouse.
c.Payment of the Estate Tax
(1)Ordinarily, estate taxes must be paid in full within nine months after the decedent’s date of death.

Front 52

What constitues a gift for the purpose of gift tax?

Back 52

A gift is a completed irrevocable transfer for less than full and adequate consideration in money or money's worth. Donative intent is not required.

Front 53

Which gifts are exempt for taxation?

Back 53

Exemptions from Taxable Gifts
a.The Annual Exclusion
(1)A gift or gifts of up to $13,000 made to any one individual qualify for an annual exclusion from taxation (beginning in 2011).
b.Gift Tax Exemption
(1)Prior to 2011, a $1 million gift tax exemption was available to taxpayers for gifts given over their lifetime. Beginning in 2011, the lifetime exemption is the applicable estate credit which would be applicable were the donor to die as of the end of the calendar year, reduced by the sum of the credits under this provision for previous calendar years. This exemption is in addition to the $13,000 annual exclusion.

Front 54

Which gifts are deductible for taxation purposes?

Back 54

Gifts Made to a Spouse
(1)Qualification of Gifts for Gift Tax Purposes
(a)A donor's transfer of an interest in property to her spouse qualifies for the gift tax marital deduction, provided the transfer is of a "deductible interest".
(2)Amount of the Gift Tax Marital Deduction
(a)Any gift to a spouse that qualifies under the rules is within the gift tax marital deduction regardless of the dollar amount.

Front 55

Are damages receuved for personal injury taxable?

Back 55

Damages recoverable from a personal injury lawsuit are not taxable. However, damages received from various other kinds of lawsuits are not excludable from taxable income. These include monies received from tort actions such as slander, libel, and also from contract actions.

Front 56

What may not be taken as an itemized deduction for federal income tax purposes?

Back 56

A taxpayer can not deduct federal taxes as an itemized deduction on his/her federal income tax return. However, that taxpayer can deduct itemized deductions such as local taxes including real estate and personal property taxes, as well as limited charitable deductions.

Front 57

What may be deductied from a decedent's gross estate?

Back 57

Deductions from the decedent's taxable estate include claims against the estate, all funeral expenses, one hundred percent of the value of property left to the surviving spouse and death taxes actually paid.

Front 58

How are partnerships taxed?

Back 58

pass through taxation. The partnership as an entity is not taxed but the individual partners pay their pro rata share of partnership income.

Front 59

How does a partner determine his income tax?

Back 59

each partner shall take into account separately his distributive share of the partership's

-gains and losses from sales, exchanges of capital assets held for more than a yera, held for less than a year, in relation to prop used in trade or business, dividends, charitable contributions, and other income.

Front 60

What are the tax rates for corporations?

Back 60

- 15% for the 1st 50,000
- 25% 50,000-75,000
- 34% 75,001-10,000,000
35% 10,000,001+

if corp amt is in excess of 100,000 then = above plus 5% of excess or 11,750

If 15,000,000+ then above plus 3% or 100,000

Front 61

Are stock dividends GI?

Back 61

No, as a general rule GI will not include amt of any distribution a corp makes of its own stock to its shareholders

Front 62

How are corp distributions of mony or property to shareholders taxed?

Back 62

Dividend= GI

No dividend= reduces the AB of the stock

If not a dividend and exceeds AB of the stock= gain