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  Computation of Income Tax    
  1. Gross Income – Deductions = Taxable Income
  2. Taxable Income x Rates (10% - 35%) = Tax
  3. Tax – Credits = Tax Liability
         
    Gross Income: Definition  
Gross income is any accession to wealth, clearly realized, over which the taxpayer has complete dominion.  
  1. All economic benefits obtained by the taxpayer
  2. Any income, from whatever source derived
  3. Non-cash income = FMV of property or services received
 
  Gross Income: Exclusions for employees Discrimination Rule    
  Big ticket items will not be excluded if R discriminates in favor or high rank Es    
  Gross Income: Exclusions for employees  
  1. Health Insurance
  2. Life Insurance
  3. Child/Elder care
  4. Pension Plan Contributions
  5. Tuition Assistance
  6. No-Additional Cost Items
 
  1. Employee Discounts
  2. Working Conditions
  3. De minimus items
  4. On-Premises meals and lodging
  5. Commuting Allowances
  6. Employee Achievement Awards

Gross Income: Exclusions for employees Health Insurance  
Premiums and benefits paid by the employer are excluded        
Gross Income: Exclusions for employees Life Insurance  
  Premiums paid by the employer on first $50K excluded. Any additional premium is gross income.   Death benefits are excluded completely.
Gross Income: Exclusions for employees Child/Elder care
  Child care up to $5K/year excluded        
Gross Income: Exclusions for employees Pension Plan Contributions  
  Paid by employer on qualified retirement plans are excluded (taxed upon withdrawal)    
Gross Income: Exclusions for employees Tuition Assistance  
  Employer’s contribution up to $5250/yr are excluded      
Gross Income: Exclusions for employees No-Additional Cost Items  
Items that R sells to public that R allows E to have for free and costs R nothing are excluded.   Example: airline employer flying stand-by, movie theater employees, etc.
Gross Income: Exclusions for employees Employee Discounts  
  Goods: Discounts up to the employer’s cost of the goods are excluded. Any excess is gross income.   Services: Discounts up to 20% excluded.
Gross Income: Exclusions for employees Working Conditions    
  Items that E could deduct if she bought them herself.   Example: business expenses.    
Gross Income: Exclusions for employees De minimus items  
  Little things, including occasional cab fare or meals      
Gross Income: Exclusions for employees On-Premises meals and lodging    
  If meals and lodging is provided for E for the convenience of R, it is excluded.   Example: meals on site for doctors on-call  
  Gross Income: Exclusions for employees Commuting Allowances  
Parking, transit, etc.   Commuting costs excluded.      
Gross Income: Exclusions for employees Employee Achievement Awards  
  Only for longevity at work or safety achievement. There must be meaningful ceremony.        
Gross Income Other Exclusions    
  1. Gifts
  2. Life insurance proceeds
  3. Damages/Settlements
  4. Scholarships
  5. Loans
   
Gross Income Exclusion: Gifts  
  1. Def: Transfer from detached and disinterested generosity.
  2. Income arising from the gift is not excluded (gross income)
  3. Employer to Employee is never a gift (irrebuttable presumption)
    1. Unless close relative
Gross Income Life insurance proceeds  
  All benefits are excluded. However, interest from the payments are income  
Gross Income Exclusion Damages/Settlements    
  1. Lost profits: included
  2. Property: treated as sale of property
  3. Restoring damage to property: non-taxable up to the property’s basis
    1. Excess is gain on sale
  4. Punitive: Always included
  5. Personal Injury
    1. Account of physical injury: excludable even if it included lost earnings
    2. Other torts (IIED): income except medical expenses
                                            i.     But if physical injury is present, IIED damages are excludable
  Gross Income Exclusion Scholarships    
Applies to Tuitions, fees, books. But must be a degree candidate    
Gross Income Exclusion Loans    
  1. Unless discharged for less than full balance, difference is gross income
    1. Discharge of indebtedness (DOI) income; or
    2. Cancellation of Debt (COD) income
  2. Exceptions
    1. Forgiveness of loan as a gift
    2. Adjustment of purchase price of property sold
    3. Forgiveness of debt used to buy taxpayer’s principal residence
    4. Forgiveness of student loans for public interest work
    5. Borrower is bankrupt or insolvent.
  Gross Income Alimony: Definition
Payments in cash to or for benefit of ex-spouse, pursuant to a written instrument, where two do not live together, and obligation terminates upon death of payee.    
  Gross Income Alimony: Rules  
  1. Generally, it is income to payee and deductable to payor (Unless agreed upon otherwise).
  2. Child Support or Property Settlement = not income; not deductible
  3. Child support disguised as alimony:
    1. If agreement is reduced upon the occurrence of an event relating to a child = child support
  4. Property Settlement disguised as alimony:
    1. Payments are loaded unevenly into the first 2 years following divorce = property settlement
  Gross Income: Tax benefit rule    
Correction of past year’s deductions to reflect changed circumstances if
  1. Taxpayer took a legitimate deduction in a prior year, and
  2. Something happens in the current year that is fundamentally inconsistent with the premise of the deduction, then
  3. Taxpayer must report as income in the current year the amount of the previous year’s deduction.
Gross Income Gains from Dealings (sales, etc) General Rule    
When property is sold or exchanged, gain or loss is realized  
  1. Gain/loss is not triggered until there is a realizing event, such as a sale or exchange of the property
   
Gross Income Gains from Dealings (sales, etc) Formula  
    Amount realized – Basis = Realized gain/loss        
  Gross Income Gains from Dealings (sales, etc) Gifts  
 
  1. Inter Vivos: Basis carries over to donee
    1. Can’t carry over losses
  2. From decedent: donee takes basis at FMV on date of death
   
Gross Income Gains from Dealings (sales, etc) Gambling
  1. Gains = income
  2. Losses = deductable only against gains for the year
     
Gross Income Gains from Dealings (sales, etc) Loans and Property    
  1. Assignment of debt pursuant to sale = realized gain
  2. Depreciation
    1. If property is producing income and is depreciable, the taxpayer can reduce the basis each year
  3. Exclusion of gain on sale of principal residence
    1. Gain excludable up to $250,000 ($500,000 per couple) if sale of residence that taxpayer has lived in for 2 out of 5 years
                                            i.     Sliding scale from 2-5 years.
  Gross Income: When Reportable Accounting Methods    
  1. Cash Method
  2. Accrual Method
  3. Installment Method
     
Gross Income: When Reportable Accounting Methods Cash Method    
  Reported when taxpayer actually or constructively receives it.    
Gross Income: When Reportable Accounting Methods Accrual Method  
  1. Reported when
    1. all the events have occurred which fix the taxpayer’s right to it, and
    2. the amount can be determined with reasonable accuracy,
  2. Deductions are taken when
    1. All events have occurred which fix the taxpayer’s obligation to pay,
    2. The amount can be determined with reasonable accuracy, and
    3. Economic performance occurs
Gross Income: When Reportable Accounting Methods Installment Method  
 
  1. When property is sold for a series of payments, seller can sometimes wait until payments are received to report gain on the sale
  2. Exclusions
   
  Gross Income: When Reportable Claim of Right  
  1. Income is realized when the taxpayer received it under a claim of right, with no restrictions on spending it, even though there is some possibility that she may have to return it in the future.
    1. Disputed rights to income are not taxable
  2. Corrections: 2 options of reporting payback
    1. Deduct the payment in current year, or
    2. Reopen the prior year and take the amount as credit against tax in the current year.
Gross Income Recognition: Exclusions    
  1. Any transfer between living spouses
  2. Divorce settlements (except alimony)
  3. Like-kind exchanges
  4. Involuntary conversion
         
Gross Income Recognition: Exclusions Like-kind exchanges    
  1. Def: Biz or investment property is exchanged for other biz or investment property of like kind.
  2. Rules
    1. Real Props: Always like kind
    2. Real /Personal Prop: Never like kind
    3. Personal Props: common sense
  3. Exclusions
    1. Stocks, bonds, notes, etc.
    2. Inventory for sale
    3. Boot: if the exchange includes non-like kind or cash, that amount is “boot” and is recognized
                                             i.     But can’t recognize more than realized.
Gross Income Recognition: Exclusions Involuntary conversion    
Rollover provision: if the received compensation is used to replace lost property, it is not recognized   Any proceeds not reinvested for replacement is “boot”        
Gross Income – How Taxed Capital Gains (and Losses)    
  1. Two possibilities
    1. Dividends on corporate stock
    2. Gain or loss on the sale or exchange or capital asset
                                            i.     Rents and interest are not capital gains
  1. General Rule: capital gains are better than ordinary gains; ordinary losses are better than capital losses
   
Gross Income – Whose      
  1. Rule 1: Personal service income is taxed to service provider, no matter who is paid
  2. Rule 2: Income from property can be taxed to someone else, but only in narrow circumstances
    1. Outright gift or gift in trust with no retained interest
                                            i.     Gifts with reversion or revocable trust = not effective to shift income  
Gross Income – Whose Kiddie tax  
  All unearned income of children under 18 taxed to parent at their highest marginal tax rate.   “unearned” = anything other than compensation for work        
  Deductions General Rules    
  1. Cost of Living – No deduction for personal, family, or living expenses
  2. Cost of making a living – All “ordinary & necessary” expenses of business or investment activities are generally deductable.
 
Deductions Personal Deductions      
  1. Personal Exemptions
  2. Alimony
  3. Casualty Losses
  4. Medical Expenses
  5. Charitable Contributions
  6. Interest
  7. State and Local Taxes
   
  Deductions Personal Deductions Personal Exemptions      
  1. $3,800 per self, spouse, and “qualifying child.”
    1. Qualifying child: (1) lives with the taxpayer, (2)  is under 19 (or 24 if full time student), and (3) doesn’t provide more than ½ of own support
  2. A relative or member of taxpayer’s household who has gross income of less than $3800 can be dependent if the taxpayer provides more than ½ of person’s support.
  3. Only 1 person can claim a dependent
  4. Child credit or $1000 is also available for children under 17 if lower AGI
  Deductions Personal Deductions Medical Expenses    
  7.5% of Adjusted Gross Income = floor. i.e., can start deducting after 7.5%.      
  Deductions Personal Deductions Charitable Contributions
  1. Up to 30-50% AGI (ceiling)
  2. Contribution of property = FMV
    1. Unless vehicles = amount charity sold it for
  3. Benefit received for donation reduces deduction
   
Deductions Personal Deductions Interest    
  1. Home mortgage
    1. Acquisition indebtedness
                                            i.     Money used to buy or improve the house                                           ii.     Limit: $1Mil of debt
  1. Home equity indebtedness
                                            i.     Money borrowed with house as collateral                                           ii.     Limit: $100K of debt
  1. Student Loan
    1. Up to $2,500/year
  Deductions Profit Motivated vs. Personal  
  1. Hobbies: Only if there’s objective evidence of profit motive
  2. Attorney fees
  3. Home offices
  4. Vacation Homes
  5. Child/Elder Care
  6. Travel
  7. Business Meals:
  8. Work Clothes:
  9. Education
  Deductions Profit Motivated vs. Personal Hobbies    
Must show objective evidence of profit motive        
  Deductions Profit Motivated vs. Personal Attorney fees    
 
  1. D: if origin of claim = personal, no deduction
  2. P: if type of relief is non-taxable = no deduction
 
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