Module 4: Tax Planning

Section 132 Fringe Benefits

*may be excluded from an employees gross income. -no additional cost benefits (ex: a hotel employees use of a vacant hotel room) -qualified employee discounts (ex: discounts on merchandise sold by the employer) -working condition benefits (ex: membership fees in professional organizations paid by an employer) -De minimis benefits (ex: coffee provided by the employer) -qualified transportation and parking fringes (ex: transit passes, tokens & vouchers) -athletic facilities (ex: employer owned tennis courts used by employees)

Depreciation and cost recovery systems

*taxpayers must use specific depreciation methods depending on when an asset is placed into service PRIOR TO 1981: taxpayers must use rules contained in section 167 and these rules follow financial accounting principles. DEC 31 1980 - JAN 1 1987: taxpayers must follow the accelerated cost recovery system (ACRS) as provided in section 168 AFTER DEC 31 1986: Taxpayers must follow the Modified Accelerated Cost Recovery System (MACRS) as provided in Section 168.

Any payment pursuant to a divorce or legal separation must be classified as one of the following for tax purposes:

-Alimony: taxable or tax deductible UNTIL 2019. Must be made in cash, be made pursuant to a divorce, terminate at the death of the payee, not be designated as being other than alimony (such as child support), must live in separate households. -Child Support: no tax ramifications. Any payment that benefits children during/after divorce/separation and that is labeled by both sides as child support. payment made my a parents (usually the one that doesn't have custody) -Property Settlement: Division of property pursuant to a divorce. A division of property does not result in any income to either spouse, nor does either spouse receive a tax deduction.

Tax filing deadlines for trusts and estates

-For calendar year estates and trusts, Form 1041 and schedule K-1 must be filed on or before 4/15. -For fiscal year estates and trusts, Form 1041 must be filed by the 15th day of the 4th month following the close of that tax year.

Tax trap: Substance over form

-IRA ignores legal formalities to determine the economic substance of a transaction -violation penalty: taxpayer must pay 75% of the deficiency amount attributable to fraud

Certain transfers of partial interests in property do qualify as contribution of property. These are:

-The contribution of certain remainder interests to a trust. -The transfer of a remainder interest in a personal residence or a farm, or a gift of a remainder interest in land for conservation purposes. -Contribution of an undivided interest in property. -A gift of a partial interest if transferred in trust.

private non-operating foundation

-an org that does not receive funding from the general public. -distribute funds to various charitable organizations that actually perform the charitable services -Spends LESS THAN 85% of its adj. net income on activities related to the exempt purpose

original issue discount

-any bond originally offered at a price below its par value -the excess (if any) of the stated redemption price at maturity over the issue price

Allocation of Basis

-based on the FMV of the portions of property and is applicable to the different portions of the property when property is obtained in one transaction and portions of the property are subsequently disposed of at different times. -Gain or loss is computed at the time of disposal for each portion.

Itemized deductions allowed for AMT adjustment are:

-charitable contributions -medical expenses in excess of 10% AGI -qualified housing interest -estate tax deduction on income in respect of a decedent -gambling losses, to the extent of gambling winnings

Charitable trusts

-charitable remainder trusts: set up by the taxpayer and usually maintained by a private trustee of the taxpayer's choosing. -charitable lead trusts: set up by the taxpayer and usually maintained by a private trustee of the taxpayer's choosing. -pooled income funds: a trust that is generally created and maintained by a public charity rather than a private donor. charitable gifting vehicle that allows money to be set aside for charity. main difference between these three types of charitable trusts is who receives income from the trust and who eventually inherits the assets in it *One of the nice things about all of these trusts is that you do not have to name the charity when you set up the trust; this can be done even after your death.

the following transactions are exempt from the imputed interest rules

-debt subject to OID provisions -sales of property $30K or less -any sales where all of the payments are due within 6 months -sales of patents to the extent the payment is contingent on the use or disposition of the patent -certain carrying charges for personal property or educational services covered by section 163(b), when the interest cannot be ascertained -charges for the purchase of personal-use property (purchaser only)

Publicly traded partnership (PTP)

-in many cases is treated for tax purposes as a corporation. -defined as any partnership where interest in the partnership is either traded on an established securities market or readily available for trading on a secondary market. -if treated as a corp, the passive loss rules generally don't apply, but not the case if it's treated as a partnership. -partners may deduct suspended losses from PTPs only in the year the partner disposes of his or her interest in the PTP. Partners do not recognize a loss in the year that the PTP itself has passive activity.

Passive Loss Limitation rules apply to:

-individuals, estates and trusts -any closely held C corp: only on a limited basis. -any personal service corporation -certain publicly traded partnerships

passive loss limitations: closely held c corp

-only on a limited basis -closely held c corp = where 5 or fewer individuals own more than 50% of the stock at any time during the last half of the corporations taxable year. -the passive loss rules prevent passive activity losses from offsetting portfolio income, which is income from dividends, int and other investments. -HOWEVER a closely held C corp's passive losses may offset its income from active business operations. portfolio income cannot be offset with business activity.

Property Converted from Personal to Business

-requires determining the property's basis. -The basis for computing depreciation is the lower of the FMV or the adjusted basis of the property at the time that the asset is transferred from personal use to an income-producing use or for use in a trade or business.

tax planning considerations to help reduce taxes

-shifting income: a family can reduce its taxes by shifting income from family members who are in high tax brackets (parents), to fam members with lower tax brackets (children). example would be shifting ownership of property. have to watch for gift taxes though. -alimony: NO LONGER GROSS INCOME FOR DIVORCES AFTER JAN 1 2019. -prepaid income: can defer recognizing income -bonds: when choosing a bond, you have to think about current interest rates, and the taxpayers current and future tax brackets. looking for highest int rate with lowest interest rate. invest in tax-exempt bonds if: return on tax-exempt bond > return on the taxable bonds X (1-margin tax bracket) -reporting bond interest: example would be purchasing series EE bonds in a child's name so interest is not taxable as long as their income is low enough.

conditions that qualify for the foreign-earning income exlusion

-taxpayer must be a bona fide resident of one or more foreign countries for an entire taxable year -taxpayer must be present in one or more foreign countries for 330 days during a period of 12 consecutive months

carryover basis

-the basis of transferred property in the hands of the recipient equal to the basis of the property in the hands of the transferor -is the basis in the hands of a transferee that is the same as the basis of the transferor.

Steps in the tax research process

1. determine the facts 2. identify the issues (questions) 3. locate the applicable authorities 4. evaluate the authorities and choose with the ones to follow where the authorities conflict 5. analyze the facts in terms of the applicable authorities 6. communicate conclusions and recommendations to the client

4 requirements common to all dependents

1. have a qualifying identification number 2. Meet a citizenship test 3. meet a separate return test 4. not themselves claim another person as a dependent AS OF JANUARY 1, 2018 THERE IS NO LONGER A DEPENDENCY EXEMPTION. THESE RULES WILL ONLY HELP WITH CHILD TAX CREDIT ELIGIBILITY.

In general, these three conditions must be met for amounts to be taxable:

1. there must be economic benefit 2. the income must be realized 3. the income must be recognized

six tax brackets applicable to individual taxpayers:

10%, 15, 25, 28, 33 & 35

Alimony Recapture

1st Year + 2nd Year - ($37,500 + 2 x 3rd Year) The amount of alimony that previously has been included in the gross income of the recipient and deducted by the payor that now is deducted by the recipient and included in the gross income of the payor as the result of front-loading.

how do closely held C corps differ from Personal Service Corporations (PSC)?

A PSC is a regular C Corporation where the owner-employees carry on personal services. However, a corporation is not a PSC unless owner-employees own more than 10% of the value of the stock.

Mid-Quarter Convention

A cost recovery convention that assumes that property placed in service during the year is placed in service at the middle of the quarter in which it is actually placed in service. The mid-quarter convention applies if more than 40 percent of the value of property (other than eligible real estate) is placed in service during the last quarter of the year.

Modified Accelerated Cost Recovery System (MACRS)

A depreciation method that is used for tax purposes. features: -salvage val isn't considered -Specific asset classes are used. Both tangible personal property and real property must be placed into specific asset classes, based on the type of property. Asset classes merely refer to the number of years over which the asset must be depreciated. -Fewer depreciation methods are used and the methods are built into the MACRS tables. Both accelerated and straight-line methods are used in MACRS, however, accelerated methods are not permissible for real property. -The term "convention" in tax law refers to the assumption as to when an asset is either placed in service or disposed of and is used extensively in the MACRS system. **most depreciable personal property is classified as 7-year property under MACRS

Adoption Credit

A nonrefundable credit for qualified adoption expenses incurred for each eligible child. The credit cannot exceed $13,810 (2018) per child. The limit is a per-child limit, not an annual limit, and can be carried forward for up to five years or until used. Allowable in the year the child is adopted.

Tax law for Admin, legislative and Judicial

Administrative: IRS rulings and treasury regulations Legislative: Internal Revenue Code Judicial: judicial doctrines and judicial interpretations

adjusted basis

Basis is adjusted depending on whether the property is acquired by purchase, gift or inheritance. The initial basis for a property acquired by purchase is the cost of the property. However, if property is acquired from a decedent, its basis to the estate or heir is its FMV either at the date of death or, if the alternate valuation date is elected, six months from the date of death. After the initial basis is determined, it may be adjusted upward or downward.

Credits that reduce the AMT

Foreign tax credit & nonrefundable tax credits. nonrefundable credits: child and dependent care credit, elderly and total disabled credit, adoption expense credit, child tax credit, and the American Opportunity and lifetime learning credits

types of Grantor Trusts

Grantor Retained Trust: irrevocable trust into which the grantor places assets and retains an interest for a fixed number of years. The principal, at the end of the specified period of years, will pass to a non-charitable beneficiary, such as a child or grandchild of the grantor. benefit: will have a high value which can be transferred using a low valuation method which limits the amount of gift or estate tax payable on these gifts. grantor is essentially making a current gift of the right to trust assets to the remainder person at a specified date in the future. Until the grantor's interest expires, such a trust is income taxable to the grantor. Grantor Retained Annuity Trust GRAT: the grantor retains a right to payment of a fixed amount for a fixed number of years. Grantor Retained Income Trust GRUT: the grantor retains the right to payment of a fixed percentage of the value of the trust property (determined annually) for a number of years. Qualified Personal Residence Trust GRIT: transfers of a personal residence or certain tangible property, such as a painting, in situations where the grantor retains the use of the property during the term of the trust. Qualified Personal Residence Trust QPRT: In the case of the personal residence GRIT, the trust will be a QPRT

Types of Trusts

Grantor Trusts: the grantor has retained too much control for the IRS to consider the trust to have independent existence for tax purposes. Income is taxed to grantors SSN. Created not for tax purposes Simple Trusts: trust instrument must require that all income be distributed currently, does not provide that any amounts are to be paid, permanently set aside, or used for charitable purposes, and does not distribute amounts allocated to the corpus of the trust. Complex Trusts: Accumulate income, may have a charitable beneficiary, or may distribute principal.

objective of tax planning

NOT to minimize taxes, but to maximize the after tax return

Citation numbering for tax research

Number General Subject Matter 1 Income tax 20 Estate tax 25 Gift tax 301 Administrative and procedural matters 601 Procedural rules

Deduction Limitations:

Overall 60% Limitation: applies to individuals. The general overall limitation applicable to public charities is 60% of the taxpayers AGI for the year. Contributions in excess can be carried forward in the subsequent five tax years and deducted. 30% Limitation applies to contributions of capital gain property, which are subject to 30% of AGI instead of 60%. The capital gain property is generally valued at the property's FMV. The 30% limitation does not apply if the property donated is not subject to related use or if the taxpayer elects to reduce the amount of charitable contribution deduction by the capital gain that is recognized if the property is sold. It applies to all types of property other than capital gain property such as cash and ordinary income property to a private non-operating foundation. 20% Limitation applies to contributions of capital gain property to private non-operating foundations. Contributions for Athletic: Events are only 80% deductible if the right to purchase sports tickets is a benefit given for the contribution.

suspended losses

Passive losses that cannot be used in the current year are suspended for use in future years or at the time of sale.

Tax Form 1310

Statement of Person Claiming Refund Due a Deceased Taxpayer.

Five dependency tests an individual has to meet if he wants to claim dependency exemption:

Support: the taxpayer must provide over 50% of the dependents support Gross Income: dependents gross income must be less than the amount of the exemption. However, a taxpayers children who are either 1. full time students and under age 24 or 2. under the age of 19, are exempt from this requirement Joint return: in general, a taxpayer may not claim a dependency exemption for a married dependent who files a joint return. Relationship: dependents must either be related to the taxpayer or reside with the taxpayer. Citizenship: dependents must be US citizens, US nationals, or they must reside in Canada or Mexico.

Types of Property

Tangible property: physical property. The cost of tangible property other than land is systematically written off through depreciation or depletion. Intangible property: such as goodwill, patents, stocks and bonds. The cost of intangible property is written off through amortization.

Estate Income Tax

The estate tax is scheduled to be phased out on the federal level, but the current status of the estate tax is unclear.

tax filing requirements for trusts and estates

The fiduciary (or one of the joint fiduciaries) must file form 1041 for a domestic trust taxable under Section 641 that has: -any taxable income for that year -gross income of $600 or more (regardless of taxable income) or -A beneficiary who is a nonresident alien

rules governing charitable contributions made by corporations

The rules are categorized as: -Pledges made by an accrual method corporation: Such corporations may elect to claim a charitable deduction for the year in which a pledge is made as long as the actual contribution is made by the fifteenth day of the third month following the close of the year in which the pledge is made. -Limitations applicable to corporations: Corporate charitable deductions are limited to 10% of the corporation's taxable income for the year.

Representing clients before the IRS (there are certain rules)

Who may rep the client: In any serious matter, the client should be represented by an attorney, accountant or enrolled agent. Small matters: family member, employee, partner, trustee or personal rep, accountant -Must provide all necessary information required by the IRS. If an accountant knows of a client omission it is their duty to report.

unrelated use property

a capital gain property that is also a tangible personal property, contributed to a public charity and used by the organization for purposes unrelated to charity functions. *in such situations, the amount of the contribution deduction is equal to the property's FMV minus the capital gain that would be recognized if the property were sold at its FMV (the property's adjusted basis)

Lifetime Learning Credit

a credit of 20% of a maximum of $10K per year of qualified tuition and fees paid by the taxpayer for one or more eligible students. *available for an unlimited amount of years and can be used not just for undergrad edu

Qualified Domestic Relations Order (QDRO)

a judgement decree or court written order (including an approved property settlement agreement) issued under a domestic relations law that covers retirement plan benefits paid to a child/spouse/former spouse.

The child and dependent care credit

a tax credit that offsets your taxes in a direct dollar-for-dollar manner for child and dependent care expenses credit applies to: dependent children under the age of 13 and disabled dependents or a disabled spouse, regardless of age.

Form 1040

a tax form used by people that have other types of income such as royalties, alimony, or prizes; also called the long form *report your charitable contribution deductions on schedule A of this form.

Trust Taxable Income

a trust's or estate's share of all taxable income that was received during the tax year that must be reported.

Trust Accounting Income

accounting income refers to the income and expense items that are used to determine the amount the income beneficiaries are entitled to receive from the trust or estate each year. *items of income and expense that are allocated to PRINCIPAL are not used in calculating accounting income. *things that are used: stock dividends, interest

Contribution of Ordinary Income Property to a charitable org.

allows a deduction equal to the property's FMV minus the amount of gain that would be recognized if the property were sold at its FMV on the date of the contribution. In most cases, this deduction is equal to the property's adjusted basis.

Distributable Net Income (DNI)

an estimate of the actual benefit available to the beneficiaries and is the maximum amount that can be taxed to beneficiaries.

Passive activity

any rental activity or any trade or business in which the taxpayer does not materially participate. the definition is based on two critical elements: -identification of exactly what constitutes an activity -determination of whether the taxpayer has materially participated in that activity *"at-risk" rules: The amount of adjusted basis in a business that an owner has at a particular point in time Identification of an activity: grouping activities together and then categorizing them into either active or passive based on factors such as material participation of taxpayers in particular activity. Material participation: participation level for a particular activity undertaken by taxpayers. The base of material participation rests on either number of hours spent on the activity or the participation of the taxpayer in the prior years. Taxpayers materially participate in an activity if they meet one in a list of tests pursuant to the Treasury Regulations, which includes participation in the activity for more than 500 hours during the year. Limited partners: most likely passive in the activities of a limited partnership, as they do not meet the material participation test. Income and deductions from limited partnerships are also considered passive. Working interest: deals with the type of interest that is responsible for the cost of development or operation of an oil and gas property. This activity is not considered as passive even though a taxpayer does not materially participate in the activity and passive loss rules also are not applicable to them.

AMT Computation (individual AMT)

basic steps of AMT computation: 1. adjust regular taxable income with preference adjustments 2. subtract an exemption amount to arrive at the AMT base 3. multiply the AMT base by AMT rates to compute the AMT (but using the lower rates of 15% and 5% for certain capital gains and dividends) 4. Pay the greater of the two: the regular income tax or the AMT

AMT Adjustments due to timing differences

caused by deferring income or accelerating deductions include the following: -real property placed in service after 1986 -personal property placed in service after 1998 -research and experimental expenditures -value of stock options under ISO plan when exercised

Tax preferences under Individual AMT

certain items where special considerations are given to taxpayers according to the tax law they include: -excess depreciation over straight line depreciation -tax-exempt interest on certain private activity bonds -exclusion of gain on the sale of section 1202 small business stock

Charitable remainder trusts

charitable remainder annuity trust (CRAT): permits a fixed payment amount annually to a noncharitable beneficiary with a remainder going to charity (an institution pays an individual and a charity) charitable remainder Unitrust (CRUT): permits payment of a periodic sum to a noncharitable beneficiary with a remainder to charity Charitable remainder lead trust (CLT): permits taxpayer a deduction for the value of annuity or unitrust interest given to charity in trust, remainder going to donor or beneficiary.

allocating income between married people

common law: income is generally taxed to the individual who earns the income either through labor or capital. the only joint income in a common law state is income jointly owned community property states: income may be separate or community. community is considered to belong equally to the spouses.

Interest and taxable interest

compensation for the use of money. taxable interest: includes interest on bank deposits, corporate bonds, mortgages, life insurance policies, tax refunds, most US gov't obligations, and foreign gov't obligations.

Internal Revenue Code

contains provisions dealing with income taxes (subtitle A), estate and gift taxes (subtitle B), employment taxes, alcohol and tobacco taxes, and other excise taxes regulation changes: made by treasury regulations department, public comment period, organizational comments (american bar association), treasury department makes modifications based on comments...classified as proposed, temporary or final -Temporary regulation changes are made immediately and must be issued along with a proposed regulation Treasury regulations can also be categorized as interpretative or legislative = serves as the highest legislative authority for tax research, planning and compliance activities.

Private charity

controlled by a group of individuals receives support from limited sources such an an ind, family or corporation -Federal law limits the deductions for charitable contributions to private charities to 30% of an individual's AGI

Passive Losses: Credits

credits generated in a passive activity are also limited and may be used only against the portion of the tax liability that is attributable to passive income. *This amount is determined by comparing the tax liability on all income for the year with the tax liability on all income excluding the passive income.

Children tax credit

currently a $2000 child tax credit for each child under 17. Credit is reduced to $500 for other dependents (such as college students) The credit phases out when the taxpayer's modified AGI reaches $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers at a rate of $50 for every $1,000, or fraction thereof, that modified AGI exceeds the above thresholds.

complete interest

defined as the donor's entire interest in a property

Basis for a security

denoted face value of an asset for calculating tax liability -original cost plus out of pocket expenses that must be reported to the IRS when an investment is sold.

When is income taxable?

depends on the taxpayer's accounting method cash receipts and disbursements method: income is reported in the year the taxpayer actually or constructively receives the income rather than in the year the income is earned. the accrual method: income is reported in the year it is earned. the hybrid method: some items of income or expense are reported under the cash basis and others are reported under the accrual method. **once an accounting method has been adopted, it cannot be changed without permission of the IRS.

Which concept of income adjusts for inflation?

economic. in economics, income is defined as the amount that an individual could consume during a period and remain as well of at the end of the period as he or she was at the beginning of the period. unrealized gains, as well as gifts and inheritances are income. *in accounting, income is measured using a transnational approach (recognize income, expenses, gains and losses that have been realized as a result of a completed transaction) income tax law has adopted the accountants concept of income

Penalty for not filing returns

from 5% to 75% of the taxes owed can be imposed for failure to comply with the regulations while filing returns.

transactions involving related parties whose taxes are lower as a result of low interest or interest-free loans. These situations include:

gift loans: loans provided out of love, or generosity corporate shareholder loans: loans from a corporation to its shareholder compensation related loans: loans from employer to employee other tax avoidance loans: other low interest or interest free loans that significantly affect either the borrowers or lender's tax liability

Major statutory exclusions of gross income

gifts & inheritances: because you'll pay taxes on that gifted property for owning it, so don't tax on the gift. life insurance proceeds: because this closely resembles inheritances public assistance programs qualified adoption expenses: tax credits or exclusions are allowed (adoption fees, court costs, attorney fees, etc.) payments for personal physical sickness and injury: discharge of indebtedness during bankruptcy (unlikely to be able to pay tax) partial exclusions for social security benefits alimony for divorces after 1.1.19 awards and merit achievements: made for religious, charitable scientific, educational, etc. (donate winnings) various employee fringe benefits partial exclusions for scholarships: tuition, fees, books...housing is not included. interest on state and local government obligations

Section 61(a)

gross income is defined in this area of the tax code. -The fact that an item of income is listed in Section 61(a) does not necessarily cause it to be taxable. Rather, the condition that causes an item of income to be taxable is that it is not specifically excluded. *in general, prize and gambling money is subject to tax. gambling losses are allowable as an itemized deduction. ex: if you purchase a piano for $15 and find $4K in the piano, you have to report that as income in that year. *income from illegal activities is taxable *unemployment income is taxable *beginning in 1994, 85% of social security benefits may be taxable - the portion that is taxable depends on a persons provisional income *have to pay taxes on money that may be repealed in the future

who is responsible for initiating new tax legislation?

house of representatives

Passive Losses

in the past, taxpayers were able to reduce their income tax liability on income from business or investment activity with deductions, losses, and credits arising in another activity by investing in tax shelters. To restrict such abuse, congress enacted Section 469 to restrict the current use of passive losses and credits *there are restrictions or limitations on passive losses because if not many taxpayers would engage in passive activities for a tax shelter. These tax shelters would create deductions and credits from passive activities to offset and sometimes eliminate income from active business activities *setion 469 makes you divide income into 3 categories: active, portfolio and passive income.

social security benefits

inclusions: disability benefits, basic monthly retirement, retirement benefits. does NOT include medicare

American Opportunity Tax Credit

is a tax credit of up to $2,500 per year for the first four years of college. *does not include room and board, student activity fees and other expenses unrelated to an individuals academic course of instruction

Interpretative Regulations

issued under the general authority of Sec. 7805 and make the statutory language easier to understand and apply. They often provide illustrations as to how to perform various computations

IRS issues Revenue Rulings

letter rulings or published rulings -revenue procedures, information releases & technical advice memoranda

Form 1040

lists various types of income: wages, tax refunds, alimony, pensions and annuities, unemployment compensation, social security benefits, and other income) are listed directly on the form.

Five different filing statuses (four different rate schedules)

married filing jointly: two people can file a joint return only if they are legally married before the end of the tax year, and if both spouses are US citizens or residents. This is the most favorable rate married filing separately: filers must use separate rate schedules. This is the least favorable rate. surviving spouse: can file a joint return only in the year of the death of the spouse and if he or she does not remarry. He or she can file as a surviving spouse in the two tax years following the year of death of the first spouse if certain conditions are met. head of household: can only be claimed by a taxpayer who is unmarried on the last day of the tax year and pays more than half the costs of maintaining a household in which a dependent relative lives for more than 6 months of the tax year. an ABANDONED SPOUSE can claim head of household if they meet certain requirements provided by congress to give relief to taxpayers in this situation. single: a single person who does not qualify as a surviving spouse or head of household has to file as a single taxpayer.

Gross Income

means all income from whatever source derived, some examples: compensation, income derived from business, interest, rents, royalties, dividends, annuities, pensions, *helps a tax planner remember that all income is taxable unless there is a specific exception in the tax law. *income may be received in money, transactions, property, or services **in general, if a tax payer benefits from an item, it is taxable

are losses used to calculate gross income?

no. losses are not offset against gains in computing gross income. Most losses are DEDUCTIONS against adjusted gross income

capital gain property

property held over one year on which a capital gain would be recognized if it were sold at its FMV on the date of the contribution. *if a capital loss or a short-term capital gain is recognized on the sale of the property, the property is considered to be ordinary income property for purposes of the charitable contribution deduction. **The tax law provides an exception to this general rule for contributions of capital gain property to private non-operating foundations.

Public charity

receives support from the public rather than a small group of individuals. example: red cross, boy scouts. -churches, edu institutions, hospitals, med schools, gov't supported orgs, qualifies gov't unit, certain private operating foundations *federal law limits contributions to public charities to 60% of AGI

Individual AMT adjustments

represent: -itemized deductions that are not allowed in computing AMTI -timing differences relating to the deferral of income or acceleration of deductions

step-up in basis

results when the basis of property received from a decedent is generally the FMV of the property at the date of the decedent's death or an alternate valuation date. This can result in either a step-up (increase) or step-down (decrease) in basis.

reasons for creating statutory exclusions

social policy, indebtedness during bankruptcy, economic incentive

Depreciation

systematic allocation of the cost of an asset over its estimated economic life. -Using depreciation, taxpayers can deduct a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property. -The purpose of allowing a depreciation deduction is to enable taxpayers to recover the cost of an asset.

Alternative Minimum Tax

tax laws give preferential treatment to certain types of income and allow special deductions on some kinds of expenses. Many individuals benefit from these tax advantages. AMT regulation attempts to ensure that all individuals will pay at least a minimum amount of tax.

Cost of Acquired Property

the amount paid for the property in cash or the FMV of other property given in exchange.

Original Basis

the cost or purchase price of the property that is adjusted by deductions, such as depreciation, or by additions, such as capital improvements.

tax research

the process of solving a tax-related problem by applying tax law to a specific set of facts.

Total or Gross Income

the sum of all taxable income from all sources. Includes wages, salaries & tips, in addition to any taxable income and dividends.

Judicial Decisions - tax law

they are an important source of tax law. -judges decide questions of law & in the absence of a jury questions the fact -judges do not always agree on the tax consequences of a transaction. -tax advisers reach conclusions against conflicting judicial authorities.

The Court System: Tax Laws

three trial courts: US Tax court (don't pay until case has been decided), US court of federal claims, US District court (first pay the deficiency before decided in court) US Tax Court: hears only tax related cases; all people can litigate, doesn't matter which state you live in US District Court: each state has one (some more than one) and each are free to issue its own decisions. not just tax cases are heard here. only forum that taxpayer may have a jury decide questions of fact US Court of Federal Claims: nationwide jurisdiction

if non-cash property is donated, contribution amounts isn't as easy to identify

two factors: 1. type of property donated 2. type of qualifying org a charitable contribution of less than a donor's entire interest in property is not deductible.

Common Law & Community Income

under COMMON LAW, income is taxed to the individual who earns the income, either through labor or capital. COMMUNITY PROPERTY is any property acquired during a marriage, assuming both husband and wife share equally in the ownership of any assets acquired during the marriage. COMMON LAW: 41 STATES COMMUNITY PROPERTY: 9 STATES...Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington & Wisconsin.

Gross Income Exclusions

unrealized income: taxpayer who owns a stock in a company and the stock increases in value but the taxpayer does not sell the stock. self-help income: do it yourself type jobs instead of hiring, or swapping skills with someone else (painting someone's wall if they fix your car) rental value of personal use property: not taxed on rental property if you own it gross selling price of property: if property is sold at a gain, only the gain is taxable because a portion is considered return of capital

half year convention

used in the year of acquisition and zero salvage value is assumed -Half-year convention is required for all tangible personal property and assumes that all asset acquisitions or dispositions are made at the midpoint of the tax year, regardless of when the actual acquisition or disposition is made. ex: Bob, a calendar-year taxpayer, purchases a building for his business on March 5. For depreciation purposes, under the mid-month convention, the building is treated as if it were placed into service on March 15, and 9 ½ months of depreciation is allowable in the current year.

Legislative regulations

written whereby congress delegates its rule making authority to the treasury department The Secretary shall prescribe such regulations as he may deem necessary" or "under regulations prescribed by the Secretary,"