Federal Income Tax

  1. Gross income
    Any econonomic benefit or any clearly realized accession to your wealth
  2. Realization
    Increased or decreased value of an asset not taken into account for tax purposes until realized through a sale or other disposition of the assets
  3. Claim of right
    Property or funds received without restriction as to use or disposition; in otherwords, if you are free to use the proeprty or funds and, in the case of funds, commingle them with your assets. DOES NOT INCLUDE if held in escrow.

    • Property or funds received under a claim of right must be reported for
    • tax purposes even though the taxpayer may later be required to return
    • the property, funds or their equivalent.
  4. Alimony
    This is taxable to the receiving spouse and deductible to the paying spouse.

    • Requirements:
    • -writing: must be pursuant to a written divorce or separation agreement
    • -living together disallowed: cannot be members of the same household
    • -cease at or before death: liability to make payments must cease at or before death
    • -cash: payments must be cash
  5. Child support
    This is non-taxable to the receiving spouse and non-deductible to the paying spouse.

    If alimony payments conditioned on some event related to the children then the amount conditioned will be deemed child support.
  6. Exceptions to cancellation of indebtedness income
    Reduction in purchase price

    Insolvency or bankruptcy of the taxpayer

    Gift: Foregiven as a gift
  7. Excluded from income
    Life insurance: gross income does not include proceeds paid by reason of death of the insured. It DOES include interest paid if payment in installments

    Inheritances: gross income does not include amounts received by bequest, device, or inheritances. WATCH FOR inheritances in lieu of fees

    Gift: gross income does not included amounts by gift

    Tort awards: Gross income does not include damages receiveed on account for physical injury or sickness. DOES include emotional distress, but not if related to a physical injury.

    Employee related exclusions
  8. Gifts
    Transfer made out of detached and disinterested generosity.

    Gross income does not include amounts by gift

    Donee receives a carryover basis from the donor
  9. Employee related exclusions:
    Receipts from Health and Accident Insurance: exclude the value of hte insurance coverage from gross income

    Life insurance provided: this excludes premiums on the first $50,000

    Meals and lodging: if 1) provide for the conveniece of hte employer, 2) in-kind, 3) employer's premises

    Other Tax-Free Fringe Benefits: de minimis, no additional cost to employer, qualified employee discounts, contributions to qualified pension plans, employee safety or lenght of service awards.
  10. Deductions (above the line)
    Ordinary and necessary business expenses

    Depreciation of business assets

    Capital losses up to $3,000


    Moving Expenses

    Limited deduction for school loan interest
  11. Itemized deductions (below the line)
    Home mortgage interest: deduct interest for the first $1 million on principal and secondary personal residence

    Home equity loan: up to $100,000 mortgage taken out on equity of home

    State and local taxes: does not apply to sales tax

    Unreimbursed casualty losses:

    Unreimbursed medical expenses:

    Charitable contributions:

    Miscellaneous duductions:

    Personal v. business expenses:

    Investment fees or expenses:

    Personal exemption or dependent exemption:
  12. Unreimbursed casualty losses
    Itemized deduction

    1) if loss is greater than $100

    2) loss is sudden and unexpected

    3) only to the extent the loss exceeds 10% of AGI
  13. Unreimbursed medical expenses
    Itemized deduction

    To the extent that they exceed 7.5% of AGI
  14. Personal v. business expenses
    Itemized deduction

    Personal expenses are not deductible

    Legal fees are deductable only if for business or investment settings.

    Legal fees in divorce are personal UNLESS for 1) tax advice for divorce or 2) recipient spouse incurs fees to generate taxable alimony income
  15. Who earns income?
    Assignment of income rule: Income must be taxed to he or she who earned it.

    Ownership rule: income from proeprty is taxed to he or she who owns the property
  16. When is it income? (cash method)
    Income is when she receives paymend and takes deductions for eligible expenses when payment is made.

    Constructive receipt: when funds or proeprty are credited to her account, set apart, or otherwise made available so that she may draw upon them.
  17. When is it income? (accrual method)
    Income is 1) when all events have occurred that fix the right to receive it, and 2) when the amount can be determined with reasonable accuracy.

    Deduction is 1) when all events have occurred that establish the fact of laibility, and 2) whent he amount can be determined with reaosnable accuracy
  18. Realization vs. Recognition
    Realization: this happens at the sale, disposition or exchange of an asset

    Recognition: when the income is reported to teh government

    Generally recognize income when realized.
  19. Gain/loss from sale of property
    Amount realized - adjusted basis = gain/loss

    Amount realized = cash + property + mortgages/liabilities assumed by buyer

    Cost basis: taxpayer has a basis in the cost of the proeprty included money paid and borrowing incurred in connection with the purchase
  20. Special basis and gain/loss issues:
    Divorce property settlements: transfer of property incident to divorce is not taxable to either party. Take a substituted basis

    Gifted property: donee takes a substituted basis

    Inherited property: Take a basis of FMV at the date of decedent's death

    Like-kind exchanges: no gain or loss 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 business or for investment.

    Involuntary conversion:

    Sale of principal residence:
  21. Involuntary conversion
    No gain is recognized if property is involuntarily lost due to theft, fire, seizure, requisition or condemnation is converted to proeprty that is similar or related in service or use.

    If converted to money, gain or loss is not recognized if the purchaser repaces the property with that which is similar or related in service or use within two years fromt he date of involuntary conversion.

    Gain or loss will be recognized to the extent that money received exceeds the cost of the replacemetn property.
  22. Sale of principal residence
    Up to $250k ($500k for joint returns) of gain form the sale of a principal residence can be excluded if the proeprty has been used and owned as the taxpayer's principal for a period aggregating two years during the fire year period ending on the date of the sale.
Card Set
Federal Income Tax
Federal Income Tax