2
Q
Qualifying Child Tests
A
relativeabode >1/2 of yearage < 19 and < 24 for a full time studentsupport > 1/2US citizenJoint return
3
Q
Qualifying Relative Test
A
relativeGI < 3800support > 1/2US citizen or Canada or mexicojoint return
4
Q
Tax Equation
A
Income (broadly conceived) Less: Exclusions Gross income Less: Deductions for adjusted gross income Adjusted gross income Less: The greater of—Total itemized deductionsor standard deductionLess: Personal and dependency exemptions Taxable income Tax on taxable income Less: Tax credits Tax due (or refund)
5
Q
Income
A
all income
6
Q
exclusions
A
Accident insurance proceedsAnnuities (cost element)BequestsChild support paymentsCost-of-living allowance(for military)Damages for personal injuryor sicknessGifts receivedGroup term life insurance,premium paid by employer(for coverage up to $50,000)InheritancesInterest from state and local(i.e., municipal) bondsLife insurance paid upon deathMeals and lodging (if furnished foremployer’s convenience)Military allowancesMinister’s dwelling rental valueallowanceRailroad retirement benefits (to alimited extent)Scholarship grants (to a limited extent)Social Security benefits (to a limitedextent)Unemployment compensation (to alimited extent)Veterans’ benefitsWelfare paymentsWorkers’ compensation benefits
7
Q
gross income items
A
AlimonyAnnuities (income element)AwardsBack payBargain purchase from employerBonusesBreach of contract damagesBusiness incomeClergy feesCommissionsCompensation for servicesDeath benefitsDirector’s feesDividendsEmbezzled fundsEmployee awards (in certain cases)Employee benefits (exceptcertain fringe benefits)Estate and trust incomeFarm incomeFeesGains from illegal activitiesGains from sale of propertyGambling winningsGroup term life insurance,premium paid by employer(for coverage over $50,000)Hobby incomeInterestJury duty feesLiving quarters, meals (unlessfurnished for employer’sconvenience)Mileage allowanceMilitary pay (unless combat pay)Partnership incomePensionsPrizesProfessional feesPunitive damagesRentsRewardsRoyaltiesSalariesSeverance payStrike and lockout benefitsSupplemental unemploymentbenefitsTips and gratuitiesTravel allowance (in certain cases)Treasure trove (found property)Wages
8
Q
deductions for AGI
A
• Expenses incurred in a trade or business.• One-half of self-employment tax paid.• Unreimbursed moving expenses.• Contributions to traditional Individual Retirement Accounts (IRAs) and certainother retirement plans.• Fees for college tuition and related expenses(education).• Contributions to Health Savings Accounts (HSAs).• Penalty for early withdrawal from savings.• Interest on student loans.• Excess capital losses.• Alimony payments.
9
Q
Itemized Deductions
A
Medical expenses in excess of 7.5% of AGIState and local income or sales taxesReal estate taxesPersonal property taxesInterest on home mortgageInvestment interest (to a limited extent)Charitable contributions (within specified percentage limitations)Casualty and theft losses in excess of 10% of AGIMiscellaneous expenses (to the extent the total exceeds 2% of AGI)Union duesProfessional dues and subscriptionsCertain educational expensesTax return preparation feeInvestment counsel feesUnreimbursed employee business expenses (after a percentage reductionfor meals and entertainment)
10
Q
Nondeductible Expenses
A
• Personal living expenses, including any losses on the sale of personal useproperty.• Hobby losses.• Life insurance premiums.• Expenses incident to jury duty.• Gambling losses (in excess of gains).• Child support payments.• Fines and penalties.• Political contributions.• Certain passive losses.• Funeral expenses.• Expenses paid on another’s behalf.• Capital expenditures.
11
Q
Standard Deduction
A
Filing Status 2012 2011Single $ 5,950 $ 5,800Married, filing jointly 11,900 11,600Surviving spouse 11,900 11,600Head of household 8,700 8,500Married, filing separately 5,950 5,800
12
Q
Standard Deduction of a Dependant
A
limited to the greater of 950 or the sum of the individuals earned income plus 300 unless it exceeds the standard deduction
13
Q
Surviving Spouse rules
A
The joint return rates also apply for two years following the death of one spouse, ifthe surviving spouse maintains a household for a dependent child. The child mustbe a son, stepson, daughter, or stepdaughter who qualifies as a dependent of thetaxpayer.
14
Q
abandoned spouse rules
A
taxpayer can files as head of household or single if •The taxpayer does not file a joint return.• The taxpayer paid more than one-half the cost of maintaining his or herhome for the tax year.• The taxpayer’s spouse did not live in the home during the last six months ofthe tax year.• The home was the principal residence of the taxpayer’s son, daughter, stepson,stepdaughter, foster child, or adopted child for more than half the year,and the child can be claimed as a dependent.
15
Q
assignment of income doctrine
A
says that income earned from personal services must be attributed to the person who earned it
16
Q
annuity table is on
A
pg 4-32
17
Q
Exclusion of annuity formula
A
(Investment/expected return) * annuity payment = exclusion amountnote: expected return = monthly pmt * 12 * annuity table factor
18
Q
accrual basis
A
if checks are received in the current year but are deposits for future services then it isn’t included in income until next year
19
Q
constructive receipt doctrine
A
income isn’t recognized unless it is:• The amount is made readily available to the taxpayer.• The taxpayer’s actual receipt is not subject to substantial limitations orrestrictions.
20
Q
Interest on bonds
A
is allocated to the owner based on the time that they owned it during the year
21
Q
child support payments
A
payments from child support are not reported as income or are they deductible
22
Q
group term life insurance
A
first 50000 in protection is excluded and anything over is taxed per 1000 multiplied by the monthly factor in the uniform premium table on 4-34ex: 250000 is covered 250000-50000=200000/1000=200.3=6012=720 is taxable
23
Q
medical insurance premiums
A
from the employer and employee are excluded
24
Q
gift
A
given out of love affection
25
Q
scholarship income
A
portion used for books and tuition is nontaxable, but part used for room and board is taxable
26
completely destroyed property
if it is completely destroyed then you can deduct the basis of a business use asset
27
personal use losses
non deductible
28
partial destruction of property(damaged)
A different measurement rule applies for partial destruction of business propertyand income-producing property and for partial or complete destruction of personaluse property. In these situations, the loss is the lesser of the following:• The adjusted basis of the property.• The difference between the fair market value of the property before the eventand the fair market value immediately after the event.
29
Punitive damages
punitive damages are thus included in gross income.
30
Taxation of damage awards
Breach of contract (generally loss of income) Taxable.Property damages Recovery of cost; gain to the extent of the excess over basis. A lossis deductible for business property and investment property tothe extent of basis over the amount realized. A loss may bedeductible for personal use property (see discussion of casualtylosses in Chapter 7).Personal injuryPhysical All compensatory amounts are excluded unless previouslydeducted (e.g., medical expenses). Amounts received aspunitive damages are included in gross income.Nonphysical Compensatory damages and punitive damages are included ingross income.
31
no-additional-cost service
• The employee receives services, as opposed to property.• The employer does not incur substantial additional cost, including forgonerevenue, in providing the services to the employee.• The services are offered to customers in the ordinary course of the businessin which the employee works.53
32
qualified employee discount
• The exclusion is not available for real property (e.g., a house) or for personalproperty of the type commonly held for investment (e.g., common stocks).• The property or services must be from the same line of business in which theemployee works.• In the case of property, the exclusion is limited to the gross profit component ofthe price to customers.• In the case of services, the exclusion is limited to 20 percent of the customerprice.55
33
qualified transportation fringes
1. Transportation in a commuter highway vehicle between the employee’s residenceand the place of employment.2. A transit pass.3. Qualified parking.4. Qualified bicycle commuting reimbursement.
34
qualified parking
• Parking provided to an employee on or near the employer’s business premises.• Parking provided to an employee on or near a location from which theemployee commutes to work via mass transit, in a commuter highway vehicle,or in a carpool.
35
tax benefit rule
the taxpayer must include the reimbursementin income up to the amount of the deductions that decreased taxableincome in the earlier year.
36
investigation expenses
If the taxpayer is in a business that is the same as or similar to that being investigated,all investigation expenses are deductible in the year paid or incurred.When the taxpayer is not in a business that is the same as or similar to the onebeing investigated, the tax result depends on whether the new business is acquired. Ifthe business is not acquired, all investigation expenses generally are nondeductible.38E X A M P L E 1 9 Lynn, a retired merchant, incurs expenses in traveling from Rochester, New York, toCalifornia to investigate the feasibility of acquiring several auto care centers. If no acquisitiontakes place, none of the expenses are deductible. nIf the taxpayer is not in a business that is the same as or similar to the one beinginvestigated and actually acquires the new business, the expenses must be capitalizedas startup expenses. At the election of the taxpayer, the first $5,000 of theexpenses can be immediately deducted. Any excess expenses can be amortizedover a period of 180 months (15 years). In arriving at the $5,000 immediate deductionallowed, a dollar-for-dollar reduction must be made for those expenses inexcess of $50,000.
37
Hobby Losses
If an individual can show that an activity has been conducted with the intent toearn a profit, losses from the activity are fully deductible. The hobby loss rulesapply only if the activity is not engaged in for profit.Hobby expenses are deductibleonly to the extent of hobby incomeThe Regulations stipulate that the following nine factors should be consideredin determining whether an activity is profit-seeking or is a hobby:41• Whether the activity is conducted in a businesslike manner.• The expertise of the taxpayers or their advisers.• The time and effort expended.• The expectation that the assets of the activity will appreciate in value.• The taxpayer’s previous success in conducting similar activities.• The history of income or losses from the activity.• The relationship of profits earned to losses incurred.• The financial status of the taxpayer (e.g., if the taxpayer does not have substantialamounts of other income, this may indicate that the activity isengaged in for profit).• Elements of personal pleasure or recreation in the activity.
38
presumptive rule of 183
The Code provides a rebuttable presumption that an activity is profit-seeking if theactivity shows a profit in at least three of any five prior consecutive years.
39
hobby loss deduction order
Amounts deductible under other Code sections without regard to the natureof the activity, such as property taxes and home mortgage interest.• Amounts deductible under other Code sections if the activity had beenengaged in for profit, but only if those amounts do not affect adjusted basis.Examples include maintenance, utilities, and supplies.• Amounts that affect adjusted basis and would be deductible under otherCode sections if the activity had been engaged in for profit.43 Examplesinclude depreciation, amortization, and depletion.These deductions are deductible from AGI as itemized deductions to the extentthey exceed 2 percent of AGI. If the taxpayer uses the standard deduction ratherthan itemizing, all hobby loss deductions are wasted.
40
primarily personal use rental home
If the residence is rented for fewer than 15 days in a year, it is treated as a personalresidence. The rent income is excluded from gross income, and mortgage interestand real estate taxes are allowed as itemized deductions, as with any personal residence.
41
Primarily Rental Use
If the residence is rented for 15 days or more in a year and is not used for personalpurposes for more than the greater of (1) 14 days or (2) 10 percent of the totaldays rented, the residence is treated as rental property.46 The expenses must beallocated between personal and rental days if there are any personal use days duringthe year. The deduction of the expenses allocated to rental days can exceedrent income and result in a rental loss. The loss may be deductible, subject to theat-risk and passive activity loss rules
42
Personal/Rental Use
If the residence is rented for 15 days or more in a year and is used for personal purposesfor more than the greater of (1) 14 days or (2) 10 percent of the total daysrented, it is treated as a personal/rental use residence. The expenses must be allocatedbetween personal days and rental days. Expenses are allowed only to theextent of rent income.and the remaining loss is carried forward as a passive loss
43
losses between related parties
The Code provides for the disallowance of any “losses from sales or exchanges ofproperty … directly or indirectly” between related parties.Freida sells common stock with a basis of $10,000 to her son, Bill, for its fair market E X A M P L E 3 5value of $8,000. Bill sells the stock several years later for $11,000. Freida’s $2,000 loss isdisallowed upon the sale to Bill, and only $1,000 of gain ($11,000 selling price −$8,000 basis − $2,000 disallowed loss) is taxable to him upon the subsequent sale.
44
personal casualty loss floor
The amount of the loss for personal use property must be further reduced by a$100 per event floor and a 10 percent-of-AGI aggregate floor.
45
Calculation of the Domestic Production Activities Deduction
9%*lesser of Qualified activities income (QPAI) or Taxable (or modified adjusted gross) incomeor alternative minimum taxable income
46
modifiedadjusted gross income
substituted for taxable income.34The taxable income limitation is determined after the application of any netoperating loss (NOL) deduction for the tax year
47
Moving expenses
deductible for moves in connection with the commencementof work at a new principal place of work.19 Both employees and self-employed individualscan deduct these expenses. To be eligible for a moving expense deduction,a taxpayer must meet two basic tests: distance and time.distance:To meet the distance test, the taxpayer’s new job location must be at least 50 milesfarther from the taxpayer’s old residence than the old residence was from the formerplace of employment.time:To meet the time test, an employee must be employed on a full-time basis at thenew location for 39 weeks in the 12-month period following the move. If the taxpayeris a self-employed individual, he or she must work in the new location for 78weeks during the next two years. The first 39 weeks must be in the first 12 months.The time test is disregarded if the taxpayer dies, becomes disabled, or is discharged
48
Qualified Moving expenses
• Moving household goods and personal effects.• Traveling from the former residence to the new place of residence. traveling includes lodging, but not meals, for the taxpayer and membersof the household.20 The taxpayer can elect to use actual auto expenses (no depreciationis allowed) or the automatic mileage method. In this case, moving expense mileage islimited in 2012 to 23 cents per mile for each car. The automatic mileage rate for 2011 wasdivided between 19 cents (for the first six months) and 23.5 cents per mile (for the last sixmonths).not included:In addition to meals while en route, the moving expense deduction does notinclude the following costs:• New car tags and driver’s licenses.• Loss on the sale of a residence or penalty for breaking a lease.• Forfeiture of security deposits and loss from disposing of club memberships.• Pre-move house-hunting expenses.• Temporary living expenses.
49
education expenses
ordinary and necessary business expenses provided the expenses are incurred foreither of two reasons:• To maintain or improve existing skills required in the present job.• To meet the express requirements of the employer or the requirementsimposed by law to retain his or her employment status.not deductible these are not deductible:• To meet the minimum educational standards for qualification in the taxpayer’sexisting job.• To qualify the taxpayer for a new trade or business.
50
classification of education expenses
Education expenses include books and supplies, tuition, and transportation (e.g.,from the office to night school) and travel (e.g., meals and lodging while away fromhome at summer school).
51
deduction for qualified tuition and related expenses.
A deduction for AGI is allowed for qualified tuition and related expenses involvinghigher education (i.e., postsecondary). The deduction is the lesser of the qualifyingamount spent or the maximum amount allowed bytable:Single $ 65,000 & $4,000Married 130,000Single 65,001to 2,00080,000*Married 130,001to 2,000160,000*Qualified tuition and related expenses include whatever is required forenrollment at the institution. Usually, student activity fees, books, and roomand board are not included.30• The expense need not be employment related, although it can be.• The deduction is available for a taxpayer’s spouse or anyone who can beclaimed as a dependent and is an eligible student.• The deduction is not available for married persons who file separate returns.• To avoid a “double benefit,” the deduction must be coordinated with othereducation provisions (e.g., American Opportunity and lifetime learning credits).Along this same line, no deduction is allowed for a taxpayer who qualifiesas another’s dependent.31• The deduction for AGI classification avoids the 2 percent-of-AGI floor on miscellaneousitemized deductions. As noted later in the chapter, this is the fatesuffered by other education-related employee expenses.
52
charitable contribution
gift made to a qualified organization.
53
Benefit Received Rule
When a donor derives a tangible benefit from a contribution, he or she cannotdeduct the value of the benefit.An exception to this benefit rule provides for the deduction of an automatic percentageof the amount paid for the right to purchase athletic tickets from collegesand universities.39 Under this exception, 80 percent of the amount paid to or forthe benefit of the institution qualifies as a charitable contribution deduction.
54
non deductible items, for charitable contributions
• Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similargroups.• Cost of raffle, bingo, or lottery tickets.• Cost of tuition.• Value of blood given to a blood bank.• Donations to homeowners associations.• Gifts to individuals.• Rental value of property used by a qualified charity.service
55
unreimbursed charitable expenses
deductible. For example, the cost of a uniform (without general utility) that isrequired to be worn while performing services may be deductible, as are certain outof-pocket transportation costs incurred for the benefit of the charity. In lieu of theseout-of-pocket costs for an automobile, a standard mileage rate of 14 cents per mile isallowed.40 Deductions are permitted for transportation, reasonable expenses forlodging, and the cost of meals while away from home that are incurred in performingthe donated services. The travel expenses are not deductible if the travel involvesa significant element of personal pleasure, recreation, or vacation.
56
qualified organizations
To be deductible, a contribution must be made to one of the following organizations:42• A state or possession of the United States or any subdivisions thereof.• A corporation, trust, community chest, fund, or foundation that is situated inthe United States and is organized and operated exclusively for religious,charitable, scientific, literary, or educational purposes or for the preventionof cruelty to children or animals.• A veterans’ organization.• A fraternal organization operating under the lodge system.• A cemetery company.
57
time of deduction
A charitable contribution generally is deducted in the year the payment is made.
58
property donated valued
at fair market value
59
documentation for charitable contributions included classification of contributions
Documentation and Substantiation Requirements for Charitable ContributionsCash gifts : A deduction is allowed only if the taxpayer has a proper receipt (e.g., bankrecord such as a canceled check or written statement from the charity)showing the name of the charitable organization and the date andamount of the contribution.: A written statement from the charity is required if a payment is for morethan $75 and is partly a contribution and partly for goods or services. Thestatement must provide an estimate of the value of the goods and servicesreceived by the donor.Noncash gifts (e.g., household items) : A receipt from the charity must be kept for any gift of property other thanmoney. Clothes or other household items are deductible if they are in“good used condition or better” at the time of the gift.: If the items are not in good used condition or better and their value is $500or more, a deduction is allowed if a “qualified appraisal” is included withthe return.Used automobiles : The deduction is generally limited to the amount the charity receives onthe sale of the car. The taxpayer should obtain a statement from thecharity documenting the sales price of the automobile. However, FMV maybe deducted if it is $500 or less.Cash or noncash gifts of $250 or more : Written acknowledgment from the charity (or certain payroll records in thecase of gifts made by payroll deductions) is required to deduct a single cashor property contribution of $250 or more. The acknowledgment mustinclude the amount of money and a description of any other propertycontributed, whether the charity provided any goods or services in returnfor the contribution, and a description and estimated value of the goods orservices provided.Noncash gifts of more than $500 : Additional substantiation (e.g., how the property was acquired and itsbasis) is required on the tax return if donated noncash property is valued atmore than $500. Qualified appraisals may be required if noncashcontributions exceed $5,000 in value.Antiques, paintings, jewelry, and other“tangible personal property”: The deduction is equal to the property’s appreciated FMV only if the charityputs the property to “a use related to its tax-exempt purpose.” Otherwise,the deduction is limited to the property’s cost. The taxpayer should obtain astatement from the charity documenting the property’s use.
60
Limitations on Charitable Contribution Deduction
• If the qualifying contributions for the year total 20 percent or less of AGI, theyare fully deductible.• If the qualifying contributions are more than 20 percent of AGI, the deductibleamount may be limited to 20 percent, 30 percent, or 50 percent of AGI,depending on the type of property given and the type of organization towhich the donation is made.• In any case, the maximum charitable contribution deduction may not exceed50 percent of AGI for the tax year.
61
Ordinary income property
any property that, if sold, will result in the recognitionof ordinary incomededuction is equal to the fairmarket value of the property less the amount of ordinary income that would havebeen reported if the property were sold.
62
Capital gain property
any property that would have resulted in the recognition oflong-term capital gain or § 1231 gain if the property had been sold by the donor.46As a general rule, the deduction for a contribution of capital gain property is equalto the fair market value of the property.
63
exceptions for charitable contributions
If capital gain property is contributed to a private nonoperating foundation, thetaxpayer must reduce the contribution by the long-term capital gain that wouldhave been recognized if the property had been sold at its fair market value. Theeffect of this provision is to limit the deduction to the property’s adjusted basis.A second exception applying to capital gain property relates to tangible personalty.Tangible personalty is all property that is not realty (land and buildings) and doesnot include intangible property such as stock or securities. If tangible personalty iscontributed to a public charity such as a museum, church, or university, the charitablededuction may have to be reduced. The amount of the reduction is the longtermcapital gain that would have been recognized if the property had been soldfor its fair market value. In general, the reduction is required if the property is putto an unrelated use.A third exception applying to capital gain property disallows a deduction for theappreciation on several types of intellectual property. Patents, certain copyrights,trademarks, trade names, trade secrets, know-how, and some software are subjectto this rule, which limits the contribution to the lesser of the taxpayer’s basis in theproperty or the property’s fair market value.
64
50% ceiling on contributions
Contributions made to public charities may not exceed 50 percent of an individual’sAGI for the year. Excess contributions may be carried over to the next fiveyears. The 50 percent ceiling on contributions applies to public charities such aschurches; schools; hospitals; and Federal, state or local governmental units. The 50percent ceiling also applies to contributions to private operating foundations andcertain private nonoperating foundations.
65
Thirty Percent Ceiling
A 30 percent ceiling applies to contributions of cash and ordinary income propertyto private nonoperating foundations that are not 50 percent organizations. The 30percent ceiling also applies to contributions of appreciated capital gain property to50 percent organizations unless the taxpayer makes a special election (see below).In the event the contributions for any one tax year involve both 50 percent and 30percent property, the allowable deduction comes first from the 50 percent property.
66
Twenty Percent Ceiling
A 20 percent ceiling applies to contributions of appreciated capital gain propertyto private nonoperating foundations that are not 50 percent organizations.
67
contribution carry over
Contributions that exceed the percentage limitations for the current year can becarried over for five years.
68
Deductibility of Personal, Student Loan, Mortgage, and Investment Interest
Personal (consumer) interest No Includes any interest that is not qualified residence interest, qualifiedstudent loan interest, investment interest, or business interest.Examples include interest on car loans and credit card debt.Qualified student loan interest Yes Deduction for AGI; subject to limitations.Qualified residence interest onacquisition indebtednessYes Deductible as an itemized deduction; limited to indebtedness of$1 million.Qualified residence interest onhome equity indebtednessYes Deductible as an itemized deduction; limited to indebtedness equalto lesser of $100,000 or FMV of residence minus acquisitionindebtedness.Investment interest (not relatedto rental or royalty property)Yes Itemized deduction; limited to net investment income for the year;disallowed interest can be carried over to future years. SeeChapter 11 for a complete discussion of investment interest.Investment interest (related torental or royalty property)Yes Deduction for AGI; limited to net investment income for the year;disallowed interest can be carried over to future years. SeeChapter 11 for a complete discussion of investment interest.
69
investment interest
expense is now limited to netinvestment income for the year.
70
Investment income
gross income from interest, dividends (see below), annuities,and royalties not derived in the ordinary course of a trade or business.not includedThe following types of income are not included in investment income unless thetaxpayer elects to do so.• Net capital gain attributable to the disposition of (1) property producing thetypes of income just enumerated or (2) property held for investment purposes.• Qualified dividends that are taxed at the same marginal rate that is applicableto a net capital gain.
71
Unreimbursed Employee Expenses
Unreimbursed employee expenses are treated in a straightforward manner. Mealsand entertainment expenses are subject to the 50 percent limit. Total unreimbursedemployee business expenses are usually reported as miscellaneous itemizeddeductions subject to the 2 percent-of-AGI floor
72
investment interest
expense is now limited to netinvestment income for the year.
73
Investment income
gross income from interest, dividends (see below), annuities,and royalties not derived in the ordinary course of a trade or business.not includedThe following types of income are not included in investment income unless thetaxpayer elects to do so.• Net capital gain attributable to the disposition of (1) property producing thetypes of income just enumerated or (2) property held for investment purposes.• Qualified dividends that are taxed at the same marginal rate that is applicableto a net capital gain.
74
Unreimbursed Employee Expenses
Unreimbursed employee expenses are treated in a straightforward manner. Mealsand entertainment expenses are subject to the 50 percent limit. Total unreimbursedemployee business expenses are usually reported as miscellaneous itemizeddeductions subject to the 2 percent-of-AGI floor
75
domestic travel
If the business/pleasure trip is from one point in the United States toanother point in the United States, the transportation expenses are deductible onlyif the trip is primarily for business. If the trip is primarily for pleasure, no transportationexpenses qualify as a deduction.
76
Foreign Travel
Transportationexpenses must be allocated between business and personal unless (1) the taxpayeris away from home for seven days or less or (2) less than 25 percent of the time wasfor personal purposes. No allocation is required if the taxpayer has no substantialcontrol over arrangements for the trip or the desire for a vacation is not a majorfactor in taking the trip.
77
Ticket Purchases for Entertainment
A deduction for the cost of a ticket for an entertainment activity is limited to theface value of the ticket. This limitation is applied before the 50 percent rule. Theface value of a ticket includes any tax. Under this rule, the excess payment to ascalper for a ticket is not deductible. Similarly, the fee to a ticket agency for thepurchase of a ticket is not deductible.Expenditures for the rental or use of a luxury skybox at a sports arena in excessof the face value of regular tickets are disallowed as deductions. If a luxury skyboxis used for entertainment that is directly related to or associated with business, thededuction is limited to the face value of nonluxury box seats. All seats in the luxuryskybox are counted, even when some seats are unoccupied.The taxpayer may also deduct stated charges for food and beverages under thegeneral rules for business entertainment. The deduction for skybox seats, food,and beverages is limited to 50 percent of cost.
78
reimbursed expenses
The classification of employee expenses depends on whether they are reimbursedby the employer under an accountable plan. If so, then they are not reported bythe employee at all.
79
nonaccountable plan
reimbursement is reported as income
80
Placed in Service Requirement
The key date for the commencement of depreciation is the date an asset is placedin service.
81
Personalty depreciation life classification
3-year Tractor units for use over the road.Any horse that is not a racehorse and is more than 12 years old at the time it is placed in service.Any racehorse that is more than 2 years old at the time it is placed in service.Breeding hogs.Special tools used in the manufacturing of motor vehicles, such as dies, fixtures, molds, and patterns.5-year Automobiles and taxis.Light and heavy general-purpose trucks.Buses.Trailers and trailer-mounted containers.Typewriters, calculators, and copiers.Computers and peripheral equipment.Breeding and dairy cattle.Rental appliances, furniture, and carpets.7-year Office furniture, fixtures, and equipment.Breeding and work horses.Agricultural machinery and equipment.Railroad track.10-year Vessels, barges, tugs, and similar water transportation equipment.Assets used for petroleum refining or for the manufacture of grain and grain mill products, sugar andsugar products, or vegetable oils and vegetable oil products.Single-purpose agricultural or horticultural structures.15-year Land improvements.Assets used for industrial steam and electric generation and/or distribution systems.Assets used in the manufacture of cement.Assets used in pipeline transportation.Electric utility nuclear production plant.Municipal wastewater treatment plant.20-year Farm buildings except single-purpose agricultural and horticultural structures.Gas utility distribution facilities.Water utilities.Municipal sewer.
82
half-year convention
MACRS views property as placed in service in the middle of the first year
83
additional first-year depreciation
The provision allows for an additional 50 percent cost recovery inthe year the asset is placed in service for qualified property:all new property except for buildings
84
mid-quarter convention
If more than 40 percent of the value of property other than eligible real estate (seeRealty: Recovery Periods and Methods for a discussion of eligible real estate) is placedin service during the last quarter of the year, % are shown in table 8.22012Mid-Quarter Convention Depreciation Total DepreciationFebruary 15 $200,000 × .35 (Table 8.2) $ 70,000July 10 $400,000 × .15 60,000December 5 $600,000 × .05 30,000$160,0002013Mid-Quarter Convention Depreciation Total DepreciationFebruary 15 $200,000 × .26 (Table 8.2) $ 52,000July 10 $400,000 × .34 136,000December 5 $600,000 × .38 228,000$416,000
85
mid-month convention
Regardlessof when during the month the property is placed in service, it is deemed to havebeen placed in service at the middle of the month.
86
Section 179 (Election to Expense Certain Depreciable Business Assets)
permits thetaxpayer to elect to write off up to $139,000 in 2012 of the acquisition cost of tangiblepersonal property used in a trade or business.Two additional limitations apply to the amount deductible under § 179. First, theceiling amount on the deduction is reduced dollar for dollar when § 179 propertyplaced in service during the taxable year exceeds $560,000 in 2012. Second, theamount expensed under § 179 cannot exceed the aggregate amount of taxableincome derived from the conduct of any trade or business by the taxpayer.
87
Order of Depreciation
1. 179 Exp2. 50% basis3. MACRS
88
Listed property
includes the following:• Any passenger automobile.• Any other property used as a means of transportation.• Any property of a type generally used for purposes of entertainment, recreation,or amusement.• Any computer or peripheral equipment, with the exception of equipment usedexclusively at a regular business establishment, including a qualifying home office.• Any other property specified in the Regulations.
89
Automobiles and Other Listed Property Used Predominantly in Business
For listed property to be considered as predominantly used in business, its businessusage must exceed 50 percent.
90
passenger automobile
any four-wheeled vehicle manufactured for use on publicstreets, roads, and highways with an unloaded gross vehicle weight (GVW) rating of6,000 pounds or less.
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cost recovery deductions for passenger automobiles:
Date Placedin Service First Year Second Year Third Year Fourth and Later Years2012*2010–2011 $3,060 $4,900 $2,950 $1,7752009 $2,960 $4,800 $2,850 $1,775Also an extra 8000 can be used for new property in the first year
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Special Limitation on vehicles that aren't passenger automobiles 6000-14000 lbs
The American Jobs Creation Act of 2004 (AJCA) placed a limit of $25,000 on the§ 179 deduction for certain vehicles not subject to the statutory dollar limits on costrecovery deductions that are imposed on passenger automobiles.
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Property that fails the 50% business use test must be depreciated over
straight line
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selling half year convention property requires you to only take half of the years depreciation
10000*.1152*.5
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alternative depreciation system (ADS)
• Used predominantly outside the United States.• Leased or otherwise used by a tax-exempt entity.• Financed with the proceeds of tax-exempt bonds.• Imported from foreign countries that maintain discriminatory trade practicesor otherwise engage in discriminatory acts.• To compute depreciation allowances for earnings and profits purposes
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disposal of assets using the mid month convention
if it is in February you would take original basis * table * 1.5
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passive losses
deducted against passive income
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aggregate losses
allocate them according to the percentage of loss from each passive activity
99
suspended passive losses
are carried over to be deducted the next year, but they reduce the basis
100
Refundable and Non refundable credits
Refundable CreditsTaxes withheld on wagesEarned income creditNonrefundable CreditsCredit for child and dependent care expensesCredit for elderly or disabledAdoption expenses creditChild tax credit*Education tax credits**Credit for certain retirement plan contributionsForeign tax creditGeneral business credit, which includes the following:• Tax credit for rehabilitation expenditures• Work opportunity tax credit• Research activities credit• Low-income housing credit• Disabled access credit• Credit for small employer pension plan startup costs• Credit for employer-provided child care*The credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of$13,000 for 2012. Parents with three or more qualifying children may compute the refundableportion using an alternative method.**Forty percent of the American Opportunity credit is refundable.
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child tax credit
To be eligible for thecredit, the child must be under age 17, a U.S. citizen, and claimed as a dependenton the taxpayer’s return. A portion of the credit is refundable.The maximum credit available is $1,000 per child.34 The available credit is phased outfor higher-income taxpayers beginning when AGI reaches $110,000 for joint filers($55,000 for married taxpayers filing separately) and $75,000 for single taxpayers. Thecredit is phased out by $50 for each $1,000 (or part thereof) of AGI above the thresholdamounts.35 Because the maximum credit amount available to taxpayers dependson the number of qualifying children, the income level at which the credit is phasedout completely also depends on the number of children qualifying for the credit.
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credit for child and dependent care expenses
To be eligible for the credit, an individual must have either of the following.• A dependent under age 13.• A dependent or spouse who is physically or mentally incapacitated and wholives with the taxpayer for more than one-half of the year.Generally, married taxpayers must file a joint return to obtain the credit.In addition, out-of-thehomeexpenses incurred for an older dependent or spouse who is physically ormentally incapacitated qualify for the credit if that person regularly spends at leasteight hours each day in the taxpayer’s household.Child care payments to a relative are eligible for the credit unless the relative isa child (under age 19) of the taxpayer.In general, the credit is equal to a percentage of unreimbursed employment-relatedexpenses up to $3,000 for one qualifying individual and $6,000 for two or moreindividuals.if your expenses exceed the allowed credit then you must take the allowed credit and multiply it by your percentageOverBut NotOverApplicable Rateof Credit$ 0 $15,000 35%15,000 17,000 34%17,000 19,000 33%19,000 21,000 32%21,000 23,000 31%23,000 25,000 30%25,000 27,000 29%27,000 29,000 28%29,000 31,000 27%31,000 33,000 26%33,000 35,000 25%35,000 37,000 24%37,000 39,000 23%39,000 41,000 22%41,000 43,000 21%43,000 No limit 20%
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American Opportunity credit
The American Opportunity credit permits a maximum credit of $2,500 per year (100percent of the first $2,000 of tuition expenses plus 25 percent of the next $2,000 oftuition expenses) for the first four years of postsecondary education.To be eligible for the American Opportunity credit, a student musttake at least one-half of the full-time course load for at least one academic term ata qualifying educational institution.credit amount is phased out, beginning when thetaxpayer’s AGI (modified for this purpose) reaches $80,000 ($160,000 for marriedtaxpayers filing jointly). The reduction is equal to the extent to which AGI exceeds$80,000 ($160,000 for married taxpayers filing jointly) as a percentage of a $10,000 phaseout range ($20,000 for married taxpayers filing jointly). As a result, the creditis eliminated completely when modified AGI reaches $90,000 ($180,000 for marriedtaxpayers filing jointly)can be calculated per dependant
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The lifetimelearning credit
permits a credit of 20 percent of qualifying expenses (up to $10,000per year) incurred in a year in which the American Opportunity credit is not claimedwith respect to a given student.is phased out, beginning when the taxpayer’sAGI (modified for this purpose) reaches $52,000 ($104,000 for married taxpayersfiling jointly).43 The reduction is equal to the extent to which AGI exceeds$52,000 (or $104,000) as a percentage of a $10,000 ($20,000 for married filingjointly) phaseout range. The credit thus is eliminated when AGI reaches $62,000($124,000 for married filing jointly).calculated per taxpayer
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Gift Basis Rules if No Gift Tax Is Paid
• If the donee disposes of gift property in a transaction that results in a gain, thebasis to the donee is the same as the donor’s adjusted basis.36 The donee’s basisin this case is referred to as the gain basis. Therefore, a realized gain results if theamount realized from the disposition exceeds the donee’s gain basis.• If the donee disposes of gift property in a transaction that results in a loss, thebasis to the donee is the lower of the donor’s adjusted basis or the fair marketvalue on the date of the gift. The donee’s basis in this case is referred to asthe loss basis. Therefore, a realized loss results if the amount realized from thedisposition is less than the donee’s loss basis.
