Acct 381 Federal Income Tax Individuals

which is the only court that provides for a jury trial

U.S. District Court

alternative minimum tax (AMT) exemption

a deduction to determine the alternative minimum tax base that is phased out based on alternative minimum taxable income.

doctrines used by the IRS to examine transactions where it expects taxpayer abuse

step-transaction doctrine business purpose doctrine economic substance doctrine substance-over-form doctrine

investment interest expense that was not deductible for regular taxable income will be deductible for AMTI to the extent it was attributable to interest income that was_____________________ for regular tax purposes, but is __________ for ATMI

tax exempt taxable

timing of transactions for tax deductions when tax rates are constant

tax deductions result in tax savings, and should be deducted in an earlier period (accelerated) when possible

nonrecognition provisions

tax laws that allow taxpayers to permanently exclude income from taxation or to defer recognizing realized income until a subsequent period

which of the following deductions may be subtracted from tax liability? a) itemized deductions b) dependency exemptions c) standard deduction d) tax prepayments e) tax credits

tax payments tax credits

income effect

tax rate increase will cause taxpayers to work more to generate the same after tax dollars as before

timing of deductions is most beneficial when?

tax rates are high high rate of return tax deductions can be accelerated without accelerating cash outflow transaction is large

withholdings

taxes collected and remitted to the government by an employer from an employees wages

fringe benefits

noncash benefits provided to an employee as a form of compensation. As a general rule, fringe benefits are taxable. certain fringe benefits are excluded from gross income

individuals who qualify as dependents of another taxpayer may not claim a(n)_____________________ on their own tax return

personal exemption

gross income business

sales of inventory minus cost of goods gold gross profit from inventory sales income from renting property income form services provided

Qualified Retirement Accounts

plans meeting certain requirements that allow compensation placed in the account to be tax deferred until the taxpayer withdraws money from the account

preferential tax rate

tax rates lower than the tax rate applied to ordinary income.

passive activity loss (PAL) rules

tax rules designed to limit taxpayers' ability to deduct losses from activities in which they don't materially participate against income from other sources.

support test (qualify relative)

taxpayer must pay more than half of the qualifying relatives support/living expenses

constructive receipt doctrine

taxpayer must recognize income when it is actually or constructively received (restricts income deferral for cash-method taxpayers - timing strategy)

taxable income

the base used to compute the tax due before applicable credits

independent contractor

a person who provides services to another entity, usually under terms specified in a contract the independent contractor has more control over how and when to do the work than does an employee

same day sale

a phrase used to describe a situation where a taxpayer exercises stock options and then immediately sells the stock received through the option exercise

qualified transportation fringe benefit

a nontaxable fringe benefit provided by employers in the form of mass transit passes, parking, or vanpool benefits.

working condition fringe benefit

a nontaxable fringe benefit provided by employers that would be deductible as an ordinary and necessary business expense if paid by an employee (e.g., reimbursement for professional dues).

educational assistance benefit

a nontaxable fringe benefit that allows an employer to provide a certain amount of education benefits on an annual basis

De minimis fringe benefits

a nontaxable fringe benefit that allows employees to receive occasional or incidental benefits tax-free

Flexible Spending Account (FSA)

a plan that allows employees to contribute before tax dollars that may be used for reimbursement medical expenses or dependent care

Traditional 401(k)

a popular type of defined contribution plan with before-tax employee and employer contributions and taxable distributions

trade or business

a profit-motivated activity characterized by a sustained, continuous, high level of individual involvement or effort.

business activity

a profit-motivated activity that requires a relatively high level of involvement or effort from the taxpayer to generate income.

settlement statement

a statement that details the monies paid out and received by the buyer and seller in a real estate transaction.

market discount

the difference between the amount paid for a bond in a market purchase rather than at original issuance when the amount paid is less than the maturity value of the bond.

specific identification method

an elective method for determining the cost of an asset sold. Under this method, the taxpayer specifically chooses the assets that are to be sold.

cafeteria plan

an employer plan that allows employees to choose benefits from a menu of nontaxable fringe benefits or receive cash compensation in lieu of the benefits

Nontaxable Fringe Benefits

an employer provided benefit that may be excluded from an employees income

accountable plan

an employer's reimbursement plan under which employees must submit documentation supporting expenses to receive reimbursement and reimbursements are limited to legitimate business expenses

ordinary and necessary

an expense that is normal or appropriate and that is helpful or conducive to the business activity.

qualified employee discout

a nontaxable fringe benefit that provides a discount on employer goods (not to be discounted below employer's cost) and services (up to a 20 percent discount) to employees

No additional cost services

a nontaxable fringe benefit that provides employer services to employees with little cost to the employer (e.g., airline tickets or phone service).

wages

a payment by an employer to an employee in exchange for the employee's services; typically expressed in an hourly, daily, or piecework rate

late filing penalty

a penalty assessed if a taxpayer does not file a tax return by the required date (the original due date plus extension).

realized gain or loss

the difference between the amount realized and the adjusted basis of an asset sold or otherwise disposed of

imputed interest

the difference between the amount that would have been charged at the Federal rate and the amount actually charged

Constructive Receipt Doctrine

the judicial doctrine that provides that a taxpayer must recognize income when it is actually or constructively received. Constructive receipt is deemed to have occurred if the income has been credited to the taxpayer's account or if the income is unconditionally available to the taxpayer, the taxpayer is aware of the income's availability, and there are no restrictions on the taxpayer's control over the income.

business purpose doctrine

the judicial doctrine that allows the IRS to challenge and disallow business expenses for transactions with no underlying business motivation.

Tax Return Extension

an extension to file is granted automatically at the request of the taxpayer only postpones the due date of the tax return, not the payment of tax liability if any is owed

capital asset sale - amount realized includes

cash received by seller fair market value of any other property received by the seller brokers fees and other selling costs are deducted

losses resulting from involuntary conversions of business property are deductible immediately as ________________

casualty losses

Ann and Andy live in a state where all of the income earned from the services of Ann are included only in her gross income. They live in a state with _______________ system

common law

earned income

compensation and other forms of income received for providing goods or services in the ordinary course of business

when tax rates are constant or _____________ taxpayers should accelerate tax deductions into earlier years and defer taxable income later years

decreasing

regressive tax system

decreasing marginal tax rate as the tax base increases as tax base increases, the taxes paid increases, but the marginal tax rate decreases social security, state and federal unemployment taxes are examples

Timing Strategy

exploits the variation in taxation across time (the real tax costs of income decrease as taxation is deferred) The real tax savings associated with tax deductions increase as tax deductions are accelerate two basic timing strategies: deferring taxable income recognition (to minimize the present value of taxes paid) and accelerating tax deductions (maximize the present value of tax savings from the deductions) particularly effective for cash method taxpayers because the deduction year for cash method taxpayers depends on when the taxpayer pays the expense (which the taxpayer controls)

All events test for deductions

everything necessary to establish the liability giving rise to the deduction must have occurred, and the business must be able to determine the amount of the liability with reasonable accuracy

excess business loss

excess of aggregate business deductions for the year over aggregate business gross income or gain of an individual taxpayer plus a threshold amount depending on filing status

significant rental activity tax court method of allocating mortgage interest and property taxes

expense x (total rental days / 365)

research and experimentation (R&E)

expenses for research including costs of research laboratories (salaries, materials, etc). can elect to capitalize the cost and amortize costs over not less than 60 months from the time benefits are first derived from the research or capitalize the costs and amortize them over the determinable useful lie expense the costs immediately

Investment Expenses

expenses such as safe deposit rental fees, attorney fees, and accounting fees that are necessary to produce portfolio income. (ordinary and necessary expenses incurred to produce investment income) Investment expenses are allowed for individuals as miscellaneous itemized deductions subject to the 2 percent of AGI floor limitation. can not be carried forward

organizational expenditures

expenses that are (1) connected directly to the creation of a corporation or partnership, (2) chargeable to a capital account, and (3) generally amortized over 180 months (limited immediate expensing may be available).

start-up costs

expenses that would be classified as business expenses except that the expenses are incurred before the business begins. These costs are generally capitalized and amortized over 180 months, but limited immediate expensing may be available. up to 5,000 of each (total 10,000) can be expensed immediately includes: patents, copyrights, research and experimentation costs, start-up expenditures and organizational costs

melinda invests 200,000 in a city of Heflin bond that pays 6%. Alternatively, melinda could have invested the 200,000 in a bond recently issued by Surething inc. that pays 8% with similar risk and other nontax characteristics to the City of Heflin bond. Assume melinds's marginal tax rate is 25% How much explicit tax and implicit taxdoes she pay on the city of Heflin bond?

explicit tax: 0 because the city of Heflin bond in tax exempt implicit tax on city of Heflin bond: Melinda earns 12,000 interes on city of heflin bond (6% x 200,000). The Surething bond would have paid 16,000 (8% x 200,000). Melinda pays 4,000 of implicit tax on the city of heflin bond (16,000 - 12,000) pretax implicit tax if she would have invested in Surething bond: Melindas marginal tax rate is 25%, she would have paid 4000 of explicit tax (16,000 25%) on the interest earned from Surething bond after tax rate of return on surething bond: $12,000 (16,000 interest income - 4000 tax). her after tax rate of return on the Surething bond would be 6% (after tax income of 12,000 / 200,000)

income shifting strategies

exploits the differences in tax rates across taxpayers by shifting income from high-tax-rate taxpayers to low-tax-rate taxpayers or shifting deductions from low-tax-rate taxpayers to high-tax-rate taxpayers moving income and deductions to more tax favorable jurisdictions moving income form taxpayers in one rate bracket to taxpayers in a different rate bracket

civil penalties

failure to file a tax return (5 percent of tax due per month with a maximum of 25% of net tax due), failure to pay tax owed (0.5 percent of tax due per month with a maximum of 25% of net tax due), failure to make estimated tax payments (rate varies on federal short-term interest rate and underpayment), substantial understatement of tax (20 percent of understatement), underpayment of tax due to transactions lacking economic substance (20 percent or 40 percent of understatement), providing false withholding information ($500), and fraud (75 percent of liability attributable to fraud).

depreciable assets used in a trade or business are classified as capital assets true/false

false capital assets do not include accounts receivable from the sale of goods and services, inventory or assets used in trade or business

In order to meet the support test for a qualifying child, the taxpayer must provide more than half of the individuals support for the year true/false

false the child may be receiving support from someone other than the taxpayer. The rule is that the CHILD cannot provide over half of his/her own support

married filing separately

filing status for married taxpayers that who chose to fill out separate income tax returns if one spouse deducts itemized deductions, the other spouse is required to deduct itemized deductions even if their standard deduction amount is more than the total itemized deductions

imputed income

income from an economic benefit the taxpayer receives indirectly rather than directly. The amount of the income is based on comparable alternatives.

unearned income

income from property that accrues as time passes without effort on the part of the owner of the property.

business tax credits

nonrefundable credits designed to provide incentives for taxpayers to hire certain types of individuals or to participate in certain business activities.

rental property income and expense allocation

nonrental percentage of property tax is deductible as an itemized deduction, but nonrental % of mortgage interest is not deductible owner includes rental income and deducts allocated expenses from gross income. If loss results, it offset ordinary income subject to passive activity limitations

in general, life insurance proceeds are ______________ to the beneficiary of the policy

nontaxable

for the convenience of the employer benefits

nontaxable benefits employers provide to employees and employee spouses or dependents in the form of meals or lodging if provided on the employer's premises and provided for a purpose that is helpful or convenient for the employer.

writ of certiorari

a document filed to request the U.S. Supreme Court to hear a case

qualified business income

net business income from a qualified trade or business conducted in the united states. This is the tax base for the deduction for qualified business income

Andy filed a fraudulent 2018 tax return on May 1, 2019. The statute of limitations for IRS assessment on Andy's 2018 tax return should end: A. May 1st, 2015 B. April 15th, 2015 C. May 1st, 2016 D. April 15th, 2016 E. none of these

none of these are correct

direct write-off method

Recording bad debt expense at the time we know the account is uncollectible

earmarked tax

a tax that is assessed for a specific purpose

discharge of indebtedness

debt forgiveness

gift

a transfer of property where no, or inadequate, consideration is paid for the property

general purpose tax

to fund the operations of the government (raise revenue)

reasonable amount business expense

when it it not extravagant

if a section 1250 asset is sold by an individual taxpayer at a gain of $14,000 and has accumulated depreciation of $8000 using the straight-line method, $________ of the gain will be recaptured as ordinary income. If section 1245 asset is s old at a gain of $14,000 and has accumulated depreciation of $8000. ______________ will be recaptured as ordinary income

$0 when an individual sells sec 1250 property that has been depreciated using straight-line, the gain is not subject to depreciation capture $8000 section 1245 property is subject to depreciation recapture. lessor of: actual gain depreciation recapture amount

cindys ceramics engaged in a like-kind exchange that resulted in a $3000 realized gain. In addition to the like-kind property received in the transaction, Cindy also received $1000 cash. Cindy will have to recognize _______ of her realized gain.

$1000 the gain realized is the lesser of the gain realized or the boot (in this case the $1000) of cash

Daniel is considering selling two stocks that have not fared well over recent years. A friend recently informed Daniel that one of his stocks has a special designation, which allows him to treat a loss up to $78,000 on this stock as an ordinary loss rather than the typical capital loss. Daniel figures that he has a loss of $93,600 on each stock. If Daniel's marginal tax rate is 35% and he has $187,200 of other capital gains (taxed at 15%) what is the tax savings from the special tax treatment?

$15,600 Special Tax Savings: Ordinary Savings - $78,000 X 35% = 27,300 Capital Loss Savings - (93,600 - 78,000) X 15% = 2,340 27,300 + 2,340 = 29,640 Normal Tax Savings: Ordinary Savings - $0 Capital Loss Savings - $93,600 X 15% = 14,040 $29,640 - 14,040 = $15,600

Zach received a gift of stock from his uncle on June 20 of the current year. Zacks uncle had a basis of $4000 in the stock, fair market value at time of gift was $1500. Zack held the stock for 3 months and then sold it for $1200. What basis in the stock will Zack use to determine his gain or loss on the sale of the stock?

$1500

Alpha sold machinery, which it used in its business, to Beta, a related entity, for $39,550. Beta used the machinery in its business. Alpha bought the equipment a few years ago for $50,450 and has claimed $29,550 of depreciation expense. What is the amount and character of Alpha's gain?

$18,650 ordinary income under section 1239

Wills whitewater rafting sold 3 acres of land used in the business. The sales price was $6000 and the adjusted basis of the land was $4200. Will received a down payment of $4000 at time of sale and the remaining $2000 early next yr. The realized gain on the sale is ______________. Will recognized gain for the current yr is $_______ and the gain recognized next year will be ____________

$1800 1200 (1800/6000 = 30%; 4000 x .30 = 1200) 600 (30% x 2000 = 600)

bard sold a parcel of land for $21,000. He paid a real estate agent a commission of $1500 for assisting with the sale. Bard had purchased the land several years earlier for $20,000. What is the amount realized on the sale of the land?

$19,500 21,000 - 1,500 = 19,500

liona invested $100,000 in an 18 month certificate of deposit. she needed to cash in the CD to meet some unexpected expenses. Liona earned $2000 in interest income from the CD, but she only received $188 because the amount was reduced by a $200 penalty for early withdrawal. How will these amounts be treated for tax purposes?

$2000 reported as gross income and $200 deduction for AGI

bruce is a part time student (more than half time) enrolled at a qualified postsecondary educational institution. he files as a single taxpayer and coannot be claimed as a dependent on any other tax return. He paid $3000 in qualified education expenses during the year. what is the amount of his American Opportunity credit?

$2250 100% of first 2000 then 25% of the next 2000

Nancy sold three capital assets that were held for investment. She sold stock in ABC corp for a gain of $10,000; stock in XYZ Corp for a gain of $2,000; a corporate bonds for a loss of $20,000. Assuming all of the investments had a long term holding period, how will the transactions be treated for tax purposes?

$3000 deduction against ordinary income with a $5000 capital loss carried forward to offset income next year

In 2016, Jessica retired at the age of 65. The current balance in her traditional IRA was $200,000. Over the years, Jessica had made $20,000 of nondeductible contributions and $60,000 of deductible contributions to the account. If Jessica receives a $50,000 distribution from the IRA, what amount of the distribution is taxable?

$45,000. 10% of the distribution is not taxable ($20,000 nondeductible contributions divided by balance in account of $200,000). Taxable portion is 90% so taxable amount is $45,000 ($50,000 × 90%).

IRS simplified method for home office expense

$5 x business use square feet with a max. of $1500 deduction in addition, can deduct 100% of mortgage interest and property tax as itemized deductions Not allowed to deduct expenses carried over to the current year from the actual expense method

Frank purchased land containing oil reserves for $425,000. He has calculated his cost depletion for the year to be $20 per barrel for a total of $120,000 in depletion expense. He now needs to calculate his % depletion in case it is larger. His gross income from the oil extraction is 600,000 and he has 520,000 in operating expenses before depletion expense. Assuming this is domestic production, the amount of % depletion expense is ________. If he uses this method he can deduct _________ for tax purposes. He should use the ________ depletion method to maximize his deduction.

% depletion: 90,000 600,000 x .15 = 90,000 he could deduct: 80,000 600,000 - 520,000 = 80,000 cost depletion - there are no income limitations on cost method

Common Law tax system

income earned from one spouses services are included only in that spouses income

the city of metropolis sold tax-exempt bonds that pay interest of 6% annually. Anderson, Inc. sold taxable bonds comparable to the city bonds that pay 8.5% annually. What is the implicit tax associated with investing $2000 in city bonds

$50 Anderson bonds: 2000 x 8.5% = 170 City bonds 2000 x 6$ = 120 170 - 120 = 50

Patrick has an adjusted gross income of $120,000 in the current year. He donated $50,000 in cash to a public charity; capital gain property with a basis of $15,000 but fair market value of $35,000 to a public charity; and publicly traded stock with a basis of $12,000 and a fair market value of $25,000 to a private nonoperating foundation. What is deductible as a charitable contribution for the current year?

$50,000 in cash $10,000 in capital gain donation Patrick is limited to a total deduction of $60,000 (120,000 x 50%).

net investment income

(for determining deductibility of investment interest expense) gross investment income reduced by deductible investment expenses.

allen green is a single taxpayer with an AGI (and modified AGI) of $216,000, which includes $173,000 of salary, $26,800 of interest income, $10,600 of dividends, and $5,600 of long-term capital gains. What is allen's net investment income tax liability this year, rounded to the nearest whole dollar?

$608

Nancy donated an antique desk to her church. Nancy paid $800 for the desk six years ago. An appraisal of the desk reported the fair market value to be $1,000. The church officers decided to donate the desk to a family whose home had been destroyed in a fire. Nancy will be able to deduct $___________ of her contribution

$800 since the church did not use the desk, and it is tangible personal property, the deduction is the lesser of adjusted basis or FMV

arnold has a tax liability of $700. He has a nonrefundable tax credit of $1000, and his employer withheld $900 in federal income tax from Arnolds pay. what is the amount o arnolds tax refund

$900 the credit will offset the the tax liability but Arnold Cannot collect the excess of a nonrefundable credit. He will receive a refund only for the amount withheld

bridget sold a building used in her business during the current year. the realized gain on the sale was $135,000. Of this amount, $95,000 is unrecaptured Section 1250 gain. How will bridget be taxed on this gain assuming her marginal tax rate is 33%

$95,000 tax at 25%, and $40,000 taxed at 15%

bridget sold a building used in her business during the current year. the realized gain on the sale was $135,000. of this amount $95,000 is unrecaptured Section 1250 gain. How will bridget be taxed on this gain assuming her marginal tax rate is 33%?

$95,000 taxed at 25% and $40000 taxed at 15%

community property systems

-Nine states implement community property systems -Half of the income earned from the services of one spouse is included in the gross income of the other spouse -Half of the income from property held as community property by the married couple is included in the gross income of each spouse. -Property that a spouse brings into a marriage is treated as that spouse's separate property. How income from separate property is treated varies across states (either treated as earned solely by spouse that owns property or equally by each spouse).

Angie's cupcake shop replaced the tables and chairs in the shop. The old furniture was 7-year property and was in its third year of depreciation when it was sold in May. The original cost of the furniture was $8200 and was depreciated using the half-year convention. Angie will be able to deduct $717 in depreciation during the year of sale

.1749 x 8200 x .5 = 717

sandy sold 2 acres of land to her daughter, Tara. Sandys basis in the land was $800 and she sold the land for $500. After owning the land for a year, Tara sold it to an unrelated party for $700. What is Tara's recognized gain on the land?

0 Tara's gain of $200 can be offset by her mother's unrecognized loss of $300, but Tara can only use the loss to the extent of her gain

Additional Medicare Tax

0.9% Medicare tax on wages exceeding $250,000 MFJ / $200,000 HH, QW, S / $125,000 MFS

tyler has a 28% marginal tax rate. His employer is willing to provide health insurance coverage for Tyler if he will agree to a salary reduction. The insurance will cost the employer $5040. If Tyler pays that same amount for health insurance he will need $7000 in order to pay the premiums and the taxes on the compensation. How much of a cash flow savings is available to the company i f it pays $5040 for Tylers health insurance, rather than $7000 in compensation assuming the company has a 35% tax rate

1,274 (7000 - 5040) x (1-.35)

Kaelyn's mother, Judy, looks after Kaelyn's four-year-old twins so Kaelyn can go to work (she drops off ad picks up the twins from Judy's home every day). Since Judy is a relative, Kaelyn made sure, for tax purposes, to pay her mother the going rate for child care ($6.350 for the year). What is the amount of Kaelyn's child and dependent care credit if her AGI for the year was $36,500?

1,440

Maren received 12 NQOs (each option gives her the right to purchase 12 shares of stock for $7 per share) at the time she started working when the stock price was $8 per share. When the share price was $17 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $22 per share. What is the amount of Maren's bargain element? A. $0. B. $1,440 C. $1,296 D. $2,448. E. None of these.

1,440

Zekes Zipline adventure sold a small customized bus used in the business. the sale price was $16000 and the adjusted basis of the bus was 13,600. The original cost of the bus was $15,000. Zeke will receive a down payment of $4000 at the time of sale, $8000 next year, and the remaining $4000 in the following year. How much gain will zeke recognize in the current year?

1,650 gain: 2400; depreciation recaptures = 1400; $1000 eligible for installment reporting 1000/16000 = .0625 4000 x .0625 = 250 1400 + 250 = 1650

rant the courts in descending order of authoritative rank or weight of decision

1. U.S. Supreme Court 2. Circuit Courts of Appeal 3. U.S. Tax Court 4. U.S. Court of Federal Claims 5. U.S. District Courts

starting with the highest authoritative weight, rank the authorities in descending order

1. internal revenue code 2. treasury regulations 3. revenue rulings and revenue procedures 4. letter rulings

Ajax Computer Company is an accrual method calendar year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1.5 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $1 milion for advertising time during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year? a) $1 million. b) $500,000. c) $1.5 million. d) $1.5 million only if the professional golf tournament is played before April 15. e) No deduction can be claimed this year.

1.5 Million

discount factor

1/(1+r)^t

If Jack earns an 8% after tax rate of return, $10,000 received in three years is worth how much today (rounded)

10,000 x .794 = 7,940

Butte sold a machine to a machine dealer for $51,900. Butte bought the machine for $53,100 several years ago and has claimed $11,550 of depreciation expense on the machine. What is the amount and character of Butte's gain or loss?

10,350 ordinary gain

Baker is single and earned $225,800 of salary as an employee in 2018. How much should his employer have withheld from his paycheck for FICA taxes?

11,467 6.2% x 128,400 1.45% x 225,800 .9% x (225,800 - 200,000)

Faith, a resident of Florida (11th circuit), recently found a circuit court case that is favorable to her research questions. Which two circuits would she prefer to have issued the opinion?

11th circuit or federal circuit because they would potentially hear her case to have issued the opinion

Frank purchased land containing oil reserves for $425,000. He estimates the value of the land without the oil is $25,000. He also estimates that he can extract 20,000 barrels of oil from the property. In the first year of his endeavor, the property produced 6,000 barrels of oil. Assuming Charlie uses the cost depletion method, his depletion expense for the year is:

120,000 (425,000 - 25,000)/20,000 x 6,000

Landshark Inc sold a warehouse with an original cost of $150,000 for $230,000. The warehouse had accumulated depreciation of $40000. The recognized gain on the sale was ___________. Due to Section 291 depreciation recapture, $_________ will be taxed as ordinary income and $____________ will be section 1231 gain

120,000 (230,000 - 150,000 - 40,000) 8,000: 20% of the lessor o f depreciation or the gain is recaptured under 291 112,000 (120,000 - 8000)

Julie transferred a building with an adjusted basis of $240,000 for another building with a fair market value of $350,000 and $25,000 in cash. The exchange qualified as a like-kind exchange. The realized gain on the exchange was $__________. The recognized gain on the exchange was $___________.. Julies adjusted basis in the building received is $__________

135,000 (350,000+25000)-240,000 = 135,000 25,000 recognized gain is equal to the lesser of the realized gain or boot received. In this case, the boot received $25,000 is less 240,000

Kathy is 48 years of age and self employer. During 2018 she reported $130,000 of revenues and $52,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute to a simplified employee pension (SEP) IRA for 2018? (round final answer to nearest whole number)

14,498

Ethan (single) purchased his home on July 1, 2008. On July 1, 2015 he moved out of the home. He rented the home out until July 1, 2017 when he moved back into the home. On July 1, 2018 he sold the home and realized a $184,500 gain. What amount of the gain is Ethan allowed to exclude from his 2013 gross income? A. $0 B. $147,600 C. $174,500 D. $184,500

147,600

annette is currently in the 25% marginal tax bracket. She had a long-term capital gain from the sale of stock and another capital gain from a coin collection. Assuming that the combined gains are not large enough to push her into a higher marginal bracket, she will be taxed____________% on the gain from the sale of stock and _____% on the gain from the coin collection

15% - long term capital gains on stock sales are taxed at 15% to the extent they would be taxed about 15% and below 39.6% if they were classified as ordinary income 25% - long term capital gains on collectibles are taxed at a maximum rate of 28%. If the taxpayers marginal rate is lower than 28% they will be taxed at the lower marginal rate

Barbara's Bakery purchased furnishings (7 yr property) 4 years ago. During the current year, she sold the furnishings. Her original cost in these assets was $15,000 and she did Not use bonus depreciation or Section 179 expensing in the year she purchased them. Due to other asset purchases that year, she has been using the mid-quarter convention when calculating the depreciation, and the furnishings were purchased in the second quarter of the year. If Barbara sold the furnishings in October of the current year (recovery period 4) how much depreciation will she be able to deduct this year?

1571 (15000 x .1197) x .875

arlene is single and has taxable income of $34,000. Her tax liability is currently $4636. She has the opportunity to earn an additional $6000 this year. Her tax liability will grow to $5771 if she receives the additional income. What is Arlene's marginal tax rate for the additional $6000

18.92% 1136/6000 = 18.92%

Ed is a self-employed heart surgeon who has incurred the following reasonable expenses. $1,760 in air fare to repair investment rental property in Colorado. $690 in meals while attending a medical convention in New York. $395 for tuition for an investment seminar "How to pick stocks." $118 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day. How much can Ed deduct? a) $2,105 "for AGI." b) $2,155 "for AGI" and $404 "from AGI." c) $584 "for AGI." d) $98 "for AGI" and $2,105 "from AGI." e) None of these.

2,105 "for AGI"

Harmony reports a regular tax liability of $17,000 and tentative minimum tax of $19,200. Given just this information, what is her alternative minimum tax liability for the year?

2,200

Mario transferred a building with an adjusted basis of $140,000 for a similar building with a fair market value of $100,000 and cash of $60,000. The e xchange qualified as a like-kind exchange. The realized gain on the exchange was $____________. The recognized gain on the exchange was $___________. Mario's adjusted basis in the building received is $___________

20,000 20,000 100,000 (140,000 + 20,000 - 60,000)

sandy sold 2 acres of land to her daughter, Tara. Sandys basis in the land was $800 and she sold the land for $500. After owning the land for a year, Tara sold it to an unrelated party for $1000. What is Tara's recognized gain on the land?

200 (1000 - 800)

santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Sante Fe paid $712,250 for extraction rights. A geologist estimates that Sante Fe will recover 9,250 pounds of turquoise. During the current year, Sante Fe extracted 2,775 pounds of turquoise, which it sold for $455,000. What is Sante Fe's cot depletion expense for the current year?

213,675

luxury automobile depreciation In April of the current year, Bill purchased a new automobile for $90,000 that will be used 100% for business. If Bill did NOT have to consider the limitations for depreciation on automobiles, he would be able to deduct __________ in regular MACRS depreciation and bonus depreciation in the first year. However, he will only be able to deduct ___________ due to the luxury limitations (considering allowable bonus depreciation)

24,400 (90,000 - 8,000) x 20% = 16,400 + 8000 bonus = 24,400 18,000 max. allowed for luxury vehicles 8000 + 10,000 = 18,000

darlene plans to purchase furniture for her office. the cost of the furniture is $3000. She is currently in the 20% tax bracket so her after tax cost of the furniture is ________ if she purchases it in December of the current year. She believes that her marginal rate will increase to 25% next year. If she waits until early January of next year to purchase the furniture and her after tax rate of return is 7&, the after-tax cost of her furniture is $________.

2400 (3000 x (1-.20) = 2400 2299 (3000 x .25 x .935 = 701) 3000 - 701 = 2299

statute of limitations for noncompliances:

3 years if the taxpayer misreports income (not exceeding 25% if gross income) or deductions 6 years if the taxpayer omits items of gross income that exceed 25% of gross income no limitations if the taxpayer commits fraud or doesn't file a tax return

Wheeler LLC purchased two assets during the current year. It placed in service computer equipment (5-year property) on November 16 with a basis of $17,500 and furniture (7-year property) on April 20 with a basis of $12,500. Calculate the maximum depreciation expense, rounding to a whole number (ignoring §179 and bonus depreciation): A. $1,677 B. $3,106 C. $4,964 D. $5,592 E. None of these

3,106

Patrick has an adjusted gross income of $150,000 in the current year. He donated $30,000 in cash to a public charity; capital gain property with a basis of $15,000 but fair market value of $40,000 to a public charity; and publicly traded stock with a basis of $20,000 and a fair market value of $35,000 to a private nonoperating foundation. What is deductible as a charitable cont

30,000 in cash 40,000 in property (up to 160,000 x 30%) 8,000 in stock (AGI x 30%) - 30% contributions subject to 30% limit

On November 1, year 1, Jamie (who is single) purchased and moved into her principal residence. In the early part of year 2, Jamie was laid off from her job. On February 1, year 2, Jamie sold the home at a $59,000 gain. She sold the home because she found a new job in a different state. How much of the gain, if any, may Jamie exclude from her gross income in year 2?

31,250

Owen is considering giving a large charitable contribution to an organization in the current year. Owen's adjusted gross income for the year will be $150,000. He wants to contribute either cash or property. If he contributes cash to a public charity, he can deduct ________________ from his adjusted gross income this year. If he contributes capital gain property that is worth $80,000 to a public charity, he can deduct __________________ from his adjusted gross income. Or, if he contributes the publicly traded stock to a private nonoperating foundation, he can deduct _______________ from his adjusted gross income this year.

90,000 (150,000 x 60%) 45,000 (150,000 x 30%) 30,000 (150,000 x 20%)

Riley operates a plumbing business and this year the 3-year old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $21,800 and the adjusted basis was $5,575 at the time of the accident. Although the van was worth $6,180 at the time of accident, insurance only paid Riley $1,425 for the loss. What is the amount of Riley's casualty loss deduction?

4,150

Tom recently received 2,130 shares of restricted stock from his employer, Independence Corporation, when the share price was $11 per share. Tom's restricted shares vested three years later when the market price was $15. Tom held the shares for a little more than a year and sold them when the market price was $13. What is the amount of Tom's income or loss on the vesting date? A. $0. B. $2,130 loss C. $4,260 gain D. $4,260 loss

4,260 loss

Caden is 62 yr old and started taking annual distributions from his traditional IRA. A portion of Caden's IRA consists nondeductible contributions that he made while working. At the time of the current years distribution, Caden has a total balance in his account of $220,000. Of the amount, $66,000 is from nondeductible contributions. Earnings on the nondeductible contributions equal $39,600. During the current year, Caden withdrew $15,000 from his IRA. How much of his distribution will NOT be subject to taxation?

4,500 66,000 / 220,000 = .30 .30 x 15000 = 4500

Angelena files as head of household. In 2018, she reported $52,500 of taxable income, including a $10,600 qualified dividend. What is her gross tax liability, rounded to the nearest whole dollar amount?

4,876

excess charitable contributions can be carried over for how many years

5

charitable contributions can be carried over for ___________ before expiring?

5 years

Jessica retired at age 65. On the date of her retirement, the balance in her traditional IRA was $211,000. Over the years, Jessica had made $21,100 of nondeductible contributions and $65,500 of deductible contributions to the account. If Jessica receives a $61,000 distribution from the IRA on the date of retirement, what amount of the distribution is taxable?

54,900

Randy owns and rents a residential duplex that he purchased 17 years ago in the month of May. The purchase price was $250,000. During August of the current year, Randy sold the duplex. What is the amount of depreciation that can be deducted in the current year?

5681 full years depreciation adjusted for the period of time Randy owned the duplex 9090 x (7.5/12)

tyler earns $80,000 per year and has a 22 percent marginal tax rate. his employer is willing to provide health insurance coverage for Tyler if he will agree to a salary reduction. The insurance will cost the employer $4680. How much salary should Tyler be willing to forgo to receive the $4680 in health insurance?

6,000 4680/(1-.22) = 6000

If Lucy earns a 6% after-tax rate of return, $8,000 received in four years is worth how much today? (round present and future value amounts to 3 places)

6,336

Lax, LLC purchased only one asset during the current year (a full 12-month tax year). Lax placed in service computer equipment (5-year property) on August 26 with a basis of $37,000. Calculate the maximum depreciation expense for the current year? (ignoring section 179 and bonus depreciatiion)

7,400

Dean has earned $70,750 annually for the past five years working as an architect for WCC Inc. Under WCC's defined benefit plan (which has a 7-year graded vesting schedule) employees earn a benefit equal to 3.5% of the average of their three highest annual salaries for every full year of service with WCC. Dean has worked for five full years for WCC and his vesting percentage is 60%. What is Dean's vested benefit (or annual retirement benefit he has earned so far)?

7,429

In the current year, Bill purchased a new automobile for $88,000 that will be used 80% for business. If Bill did NOT have to consider the limitations for depreciation on automobiles, he would be able to deduct $________ in regular MACRS depreciation and bonus depreciation the first year. However, he will only be able to deduct $________ due to luxury limitations (assuming 2018 limitations)

70,400 (88,000 x 80% = 70400; bonus depreciation = 70,400 x 100% 14,400 max bonus depreciation adjusted for business use: 8,000 x 80% = 6400 max depreciation for luxury cars adjusted for business use: 10,000 x 80% = 8000 8000 + 6400 = 14,400

Arlene is single and has taxable income of $18,000. Her tax liability is currently $2,236. She has the opportunity to earn an additional $5,000 if she accepts and completes a special project at work. There are no additional expenses to offset the $5,000 income. Consequently, Arlene will have a tax liability of $2,986 if she accepts the special project. Arlene has a marginal tax rate of?

750/5000 = .15 or 15%

Basu received a letter from the IRS that gave him the choice of (1) paying a proposed deficiency or (2) filing a petition with the U.S. Tax Court. Basu received the:

90 day letter

covenant not to compete

A contractual promise to refrain from competing with another party for a certain period of time and within a certain geographic area. deduct % depletion when they sell the natural resource deduct cost depletion in the year they produce or extract the natural resource

social security tax

A federal tax paid for old-age, survivors, and disability insurance Old Age, survivors, and disability insurance (OASDI) provides basic pension coverage for the retired and disabled Employees and employers both pay 6.2% of employees wages up to a ceiling self employed taxpayers pay the entire 12.4% on net earnings from self-employment

production of income

A for-profit activity that doesn't rise to the level of a trade or business

passive loss

A loss incurred through a rental property, Limited partnership, or other enterprise in which the individual is not actively involved. Passive losses may be used to offset passive income only, not wage (active) or port- folio income. Related item(s): passive income.

private operating foundation

A privately sponsored foundation that actually funds and conducts charitable activities

Which of the following statements regarding traditional IRAs is true? a) once a taxpayer reaches age 55 years of age she is allowed to contribute an additional $1000 a year b) taxpayers with high income are not allowed to contribute to traditional IRAs c) taxpayers who participate in an employer-sponsored retirement plan are allowed to deduct contributions to a traditional IRA regardless of their AGI d) a single taxpayer with no earned income is not allowed to deduct contributions to traditional IRAs

A single taxpayer with no earned income is not allowed to deduct contributions to traditional IRAs. The limit for deductible contributions to traditional IRAs is the lesser of $5,500 or earned income. A taxpayer with no earned income would not be allowed to make a deductible contribution to an IRA.

lifetime learning credit

A tax credit for all years of college or graduate school. It also applies to working adults taking classes to improve their work skills married couples may claim a maximum of $2000 per year credit is phased-out for higher income taxpayers

sales tax

A tax on a sale of merchandise or services assessed by a state or local government

topical tax service

A tax service arranged by subject (i.e., topic). For each topic, topical services identify tax issues that relate to each topic, and then explain and cite authorities relevant to the issue (code sections, regulations, court cases, revenue rulings, etc.).

AMT Charlies regular tax liability is $43,695. his tentative minimum tax is $58,304. he doesnt have any tax credits. what is the amount of charlies alternative minimum tax (AMT) and how much will he actually pay in tax for the current year?

AMT: 14,809 Tax 58,304 AMT is the tentative minimum tax less the regular tax liability $58,304 - 43,695 = 14,609). Charlie will actually have to pay the regular tax liability + the alternative minimum tax...which is the tentative minimum tax

deductions

Amounts subtracted from gross income in calculating taxable income not allowed unless a specific tax law allows them matter of legislative grace generally reduces taxable income dollar for dollar (from AGI deductions might not) tax savings in the amount of the deduction times the marginal tax rate

charitable contribution deduction

An itemized deduction for contributions of cash or property to a qualified tax-exempt organization. Taxpayers deduct the fair market value of property (noncash) donations when they donate: (1) a capital asset that has appreciated in value (the value is greater than the basis of the property) and the taxpayer has owned the asset for more than a year before donating it (but see exceptions below), or (2) appreciated business assets (value greater than basis) the taxpayer owned for more than a year before donating but only to the extent that the gain on the asset would not be treated as ordinary income if it had been sold. However, the deduction for an appreciated capital asset that is tangible, personal property is limited to the adjusted basis of the property if the charity uses the property for a purpose unrelated to its charitable purpose. Taxpayers donating ordinary income property (or capital loss property) deduct the lesser of (1) the fair market value of the property and (2) the adjusted basis of the property. Thus when the value of ordinary income property (or capital loss property) is less than the basis, taxpayers deduct the value. Thus, taxpayers deduct the basis of the property when they contribute: ordinary income property that has appreciated in value. capital gain property donated to private nonoperating foundations (other than stock). capital gain property consisting of tangible personal property and the charity uses the property (and the taxpayer should have reasonably expected that) for a purpose unrelated to the reason it is a charity. appreciated business assets held more than a year to the extent that the gain would be recaptured as ordinary income under the depreciation recapture rules.

new tax legislation process

As required by the US Constitution (Article 1, Section 7), "All bills for raising revenue shall originate in the House of Representatives." The Senate may propose tax legislation, but the first to formally consider a bill will be the House, typically within its Ways and Means Committee. After the committee debates the proposed legislation and drafts a bill, the bill is sent to the House of Representatives for debate and ultimately a vote (either yea or nay without modification). If the bill is approved, it becomes an act and is sent to the Senate, which refers the act to the Senate Finance Committee. Not to be outdone by the House, the Senate Finance Committee typically amends the act during its deliberations. After the revised act passes the Senate Finance Committee, the act is sent to the Senate for debate and vote. Unlike the process in the House of Representatives, senators may modify the proposed legislation during their debate. If the Senate passes the act, both the House and Senate versions of the legislation are sent to the Joint Conference Committee, which consists of members of the House Ways and Means Committee and the Senate Finance Committee. During the Joint Conference Committee deliberations, committee members debate the two versions of the proposed legislation. Possible outcomes for any specific provision in the proposed legislation include adoption of the Senate version, House version, or some compromise version of the two acts. Likewise, it is possible that the Joint Conference Committee will simply choose to eliminate specific provisions from the proposed legislation or fail to reach a compromise on the proposed legislation, thereby terminating the legislation. After the Joint Conference Committee approves the act, the revised legislation is sent to the House and Senate for vote. If approved by both the House and Senate, the act is sent to the president for his or her signature. If the president signs the act, it becomes law and is incorporated into the Internal Revenue Code of 1986 (i.e., Title 26 of the U.S. Code, which contains all codified laws of the US). If the president vetoes the legislation, Congress may override the veto with a two-thirds positive vote in both the House of Representatives and Senate.

qualifying widow or widower

Available for the two years following the year of spouse's death (in year of spouses death - file as married filing jointly) Surviving spouse does not qualify if remarries during two-year period. Surviving spouse must maintain household for dependent child

randy deducted a high level of itemized deductions two years ago relative to his income level. He recently received an IRS notice requesting documentation for his itemized deductions. What audit procedure likely identified his tax return for audit?

Discriminant function system probably reported a high DIF score because his high level of itemized deductions relative to his income

FICA

Federal Insurance Contributions Act taxes is a term used to denote both the social security and medicare taxes upon earned income. for self-employed taxpayers, the terms FICA and self employment tax are the same

Fergie has the choice between investing in a State of New York bond at 5 percent and a Surething bond at 8 percent. Assuming that both bonds have the same nontax characteristics and that Fergie has a 30 percent marginal tax rate, in which bond should she invest?

Fergie's after tax rate of return on the tax-exempt State of New York bond is 5 percent. The Surething bond pays taxable interest of 8 percent. Fergie's after tax rate of return on the Surething bond is 5.6 percent (i.e., 8% interest income - (8% x 30%) tax = 5.6%). Fergie should invest in the Surething bond.

health and accident insurance

Fringe benefits often offered through employers including health insurance, group-term life insurance, and accidental death and dismemberment policies.

Failure to File Penalty

Generally 5% for each month or part of a month the return is late, but not more than 25% of the tax not paid.

GASB

Governmental Accounting Standards Board has standard setting authority for state and local governments and their component units it also sets the standards for governmentally related not-for-profit universities

With respect to the preparation of fund basis financial statements, enterprise funds are considered to be major when

Governmental funds, other than the general fund, are considered to be a major fund when both of the following conditions are met: 1) Total assets, liabilities, revenues or expenditures of that individual government fund constitute 10% of the total for the governmental funds category and 2) Total assets, liabilities, revenues or expenditures of that individual government fund are 5% of the total of the governmental and enterprise categories, combined.

adjusted gross income

Gross income less adjustments

Hugh has the choice between investing in a City of Heflin bond at 6 percent or a Surething bond at 9 percent. Assuming that both bonds have the same nontax characteristics and that Hugh has a 40 percent marginal tax rate, in which bond should he invest? what interest rate does Surething Inc. need to offer to make Hugh indifferent between investing in the two bonds?

Hugh's after tax rate of return on the tax-exempt City of Heflin bond is 6 percent. The Surething bond pays taxable interest of 9 percent. Hugh's after tax rate of return on the Surething bond is 5.4 percent (i.e., 9% interest income - (9% x 40%) tax = 5.4%). Hugh should invest in the City of Heflin bond. Surething needs to offer 10% interest rate to generate a 6% after tax return equal to the return of city of Heflin 6% = pretax return x (1-40%) pretax return = 6% / (1-40%) = 10%

private letter rulings

IRS pronouncements issued in response to a taxpayer request for a ruling on specific issues for the taxpayer. They are common for proposed transactions with potentially large tax implications. For the requesting taxpayer, a private letter ruling has very high authority. For all other taxpayers, private letter rulings have little authoritative weight.

tax tables

IRS-provided tables that specify the federal income tax liability for individuals with taxable income within a specific range. The tables differ by filing status and reflect tax rates that increase with taxable income.

UNICAP

Inventory (purchased or produced) must be accounted for using tax version of "full absorption" rules. generally capitalize the inventory costs in one period and deduct them is subsequent period Indirect costs are allocated to inventories (not expensed). (a portion of the compensation paid to employees in production and supporting departments) Costs of selling, advertising, and research need not be capitalized. Exception for "small" businesses (average annual gross receipts < $25 million).

Josh and Michael are related for tax purposes. Josh is self-employed and has an accrual-basis sole proprietorship. Michael is a cash-method taxpayer. Josh hired Michael to help him complete a construction project. At the end of the year, Josh owed Michael $700 for work performed during December. Josh paid Michael the $700 on January 2. When will Josh be able to deduct the wage expense and when will Michael have to include the $700 in gross income?

Josh must wait to deduct the expense until Michael includes it in gross income. Michael will include the $700 in the year he receives it. since Josh and Michael are related parties, Josh must wait to deduct the expense until Michael included the revenue in gross income

letter rulings

Less authoritative but more specific than revenue rulings and regulations (e.g., applied to a specific taxpayer)

Suspended passive losses

Losses remaining after the disposition of an income property that can be used to offset outside income. loss may be deducted against active or portfolio income when the taxpayer sells or divests of the passive activity loss may be deducted when a taxpayer generates passive income from that activity or another passive activity

partnership tax return due date, assuming the date does not fall on a Saturday, Sunday or holiday

March 15

MACRS

Modified Accelerated Cost Recovery System Under MACRS real property recovery rates are based on straight line method using Mid-month convention office furniture ad fixtures 7 yrs light general purpose trucks 5 yrs computer 5 yr oven 7 yr residential rental property 27.5 yr nonresidential property placed in service: after May 13, 1993- 39 yrs after Dec 31, 1986 before May 13, 1993- 31.5 yrs

drake purchased a second home this year. he lived in the home for 12 days and rented the home for 70 days. Is the home considered a residence?

No, drake did not use the residence for more than the greater of 14 days or 10% of retal days

Economic Performance Test

One of the requirements that must be satisfied for an accrual basis taxpayer to deduct an expense. The accrual basis taxpayer first must satisfy the all events test. That test is not deemed satisfied until economic performance occurs. This occurs when property or services are provided to the taxpayer (the expenses incurred are deducted as the service is provided or costs incurred), or in the case in which the taxpayer is required to provide property or services, whenever the property or services are actually provided by the taxpayer. generally requires that underlying activity generating the liability has occurred in order for the associated expense to be deductible rent and lease agreements are deducted over the rental period often prevents the use of the 12 month exception to all events test because the underlying activity must have occurred in order to deduct the expense. (with some exceptions)

Ophra is a cash basis taxpayer who is employed in the publishing industry. This year her employer informed her that because of her outstanding performance she is entitled to a free world cruise. Ophra asked her employer to issue the cruise tickets to her parents, and he complied with this request. Identify the principle that will determine whether Ophra or her parents are taxed on the value of the cruise tickets:

Ophra cannot assign earned income

Present Value Formula

PV=FV/(1+r)^n

Qualified Business Income

Qualified business income means the net amount of qualified items of income, gain, deduction, and loss with respect to the taxpayer's qualified trade or business conducted within the United States. Qualified items do not include specified investment-related income, deductions, or loss (e.g., capital gains or losses, dividends, interest income not allocable to a trade or business, etc.). A qualified trade or business means any trade or business other than a specified service trade or business and other than the trade or business of being an employee. A specified service trade or business means any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities. Architecture and engineering services are specifically excluded from the definition of specified service trade or business. For any year in which the taxpayer's taxable income (before the deduction for qualified business income) is less than $157,500 ($315,000, in the case of a joint return), the exclusion for specified service trades or business will not apply (the business will be deemed a qualified trade or business). For taxpayers with taxable income above $157,500 ($315,000, in the case of a joint return), the exclusion from the definition of a qualified business for specified service trades or businesses phases in over a $50,000 range ($100,000, in the case of a joint return). The exclusion from the definition of a qualified business for specified service trades or businesses is fully phased in for taxpayers with taxable income in excess of $207,500 ($415,000 in the case of a joint return).

Rambo manufacturing co. purchased $2,825,000 in new production equipment during the current year. All of the equipment was purchased in June. What is the maximum depreciation deduction Rambo can take this year (assuming elected out of taking bonus depreciation)?

Sec. 179 - $675,000, MACRS - $307,235 the ceiling is reduced by $325,000 (2,825,000 - 2,500,000) for a total of $675,000. then apply MACRS at .1429 to the residual $2,150,000

self-employment taxes

Social Security and Medicare taxes paid by the self-employed on a taxpayer's net earnings from self-employment. For self-employed taxpayers, the terms "self-employment tax" and "FICA tax" are synonymous.

income tax

Tax paid to the state, federal, and local governments based on income earned over the past year.

A budgetary comparison schedule is required for?

The General fund and each special revenue fund that has a legally adopted annual budget.

three committees that debate tax legislation

The House Ways and Means Committee, Senate Finance Committee, and Joint Conference Committee each produce a committee report that explains the current tax law, proposed change in the law, and justification for the change. These committee reports are considered "statutory" sources of the tax law and may be very useful in interpreting tax law changes and understanding Congressional intent. This is especially important after new legislation has been enacted because, with the exception of the Code, there will be very little authority interpreting the new law (i.e., no judicial or administrative authorities because of the time it takes for the new law to be litigated or for the IRS to issue interpretative guidance - e.g., regulations, etc.).

capital asset under what circumstances would you expect the after-tax return from an investment in a capital asset to approach that of tax-exempt assets (assuming equal before-tax rates of return)

The after-tax return from capital assets approaches the after-tax return of tax-exempt assets (assuming equal pre-tax rates of return) the longer the taxpayer holds the capital asset. The longer the taxpayer holds the capital asset before selling, the less the tax costs in present value terms. In the extreme, a taxpayer who holds an appreciated capital asset until death escapes income tax on the gain entirely. In this circumstance, the pretax and after-tax return on the capital assets would be the same just as it is with tax exempt assets.

age test for qualifying child

The child must be under age 19 or under age 24 in the case of a student. --A student is a child who, during any part of five months of the year, is enrolled full time at a school or government-sponsored on-farm training course --Individuals who are disabled are not subject to the age test

personal exemption

The dollar amount that each individual taxpayer (and spouse) is able to deduct for him or herself or a dependent each year. individuals who qualify as dependents of another taxpayer may NOT claim a personal exemption on their own tax return

Net Long-Term Capital Gain

The excess of long-term capital gains for the taxable year over the long-term capital losses for such year.

interest income

The income a person receives from certain bank accounts, or from lending money to someone else. taxed at ordinary rate

internal research memo

The memo has five basic parts: (1) facts, (2) issues, (3) authority list, (4) conclusion, and (5) analysis.

strike price

The price at which holders of stock options may purchase stock in the corporation issuing the option

legislative regulations

The rarest type of regulation, issued when Congress specifically directs the Treasury Department to create regulations to address an issue in an area of law. In these instances, the Treasury is actually writing the law instead of interpreting the Code. Because legislative regulations actually represent tax law instead of an interpretation of tax law, legislative regulations have more authoritative weight than interpretative and procedural regulations.

investment income

The result of earnings from dividends, interest, and rent net short term capital gains interest income nonqualified dividends

types of investments that generate taxable income

U.S. savings bonds corporate bonds certificate of deposits

single

Unmarried unless qualify for head of household

Capital loss carryover

Unused losses can be carried over to later years until they are completely used up. they retain their character as short-term or long term when carried forward The carryover losses are combined with the gains and losses that actually occur in the next year.

van winkle received nonqualified stock options (NQOs) from his employer, RiP, Inc. The options entitled van to purchase 100 s hares of RiP common stock at an exercise price of of $20 per share. The options vested when the market price of the stock was $32 per share. Van exercised his options on the vesting date. He sold the stock two years later for $48 per share.

Vans gain on the sale will be $1600 long-term capital gain recognized on the sale date 48 -32 = 16 x 100 On the exercise date, van would have recognized ordinary income of $1200 32 - 20 = 12 x 100 assuming he meets the required holding periods to qualify for the tax treatment afforded incentive stock options: van's gain on the sale will be a $2800 long-term capital gain 48-20 = 2800

Tawana owns and operates a sole proprietorship and has a 37% marginal tax rate. She provides her son, Jonathon, $7,500 a year for college expenses. Jonathon works as a pizza delivery person every fall and has a marginal tax rate of 15 percent.

What could Tawana do to reduce her family tax burden? she could employee her son in her sole proprietorship, shifting income taxed at 37% to 15% How much pretax income does it currently take Tawana to generate the $7500 (after taxes) given to Jonathon? after-tax income = pretax income x (1-marginal tax rate) 7500 = pretax income x (1-.37) pretax income = 7500 / .63 = 11,905 If Jonathon worked for his mother's sole proprietorship, what salary would she have to pay him to generate $7500 after taxes (ignoring any soc sec, medicare, or self-employment tax issues) after-tax income = pretax income x (1-marginal tax rate) 7500 = pretax income x (1-.15) pretax income = 7500 / .85 = 8,824 How much money would this strategy save? Save Tawana $3,081 and save the family $1,941 Tawana pays her son 8,824 (saves tawana 3,265 in taxes because the payment is deductible) 8,824 x 37% = 3,265 Her son receives 8,824. this costs her son $1,324 in taxes because he must pay tax on the compensation (8,824 x 15% = 1,324) The family unit is paying taxes on the 8,824 at 15% instead of 37%. 8,824 x (37% -15%) = 1,941

Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $37,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $37,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 40$ this year and next year, and that she can earn an after-tax rate of return of 115 on her investments.

What is the after-tax cost if Isabel pays the $37,000 bill in December? 22,200 37,000 x (1-.40) = 22,200 What is the after-tax cost if Isabel pays the $37,000 bill in January? 23,665 37,000 x 40% = 14,800 14,800 x .901 (discount factor for 1 year at 11%) = 13,335 37,000 - 13,335 = 23,665 paying in December is the clear winner. Accelerating her payment from January to December will increase the present value of the cash outflow by a few days. Thus, there is a minor present value cost associated with accelerating her payment

Hank, a calandere-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December, he performed $29,000 of legal services for a client. Hank typically requires his clients to pay his bills immediately upon receipt. Assume his marginal tax rate is 32% this year and will be 37% next year, and he can earn an after tax-rate of return of 12% on his investments.

What is the after-tax income if Hank sends his client a bill in December? 19,720 29,000 x (1-.32) = 19,720 What is the after-tax income if Hank sends his client the bill in January? 19,419 29,000 x 37% = 10,730 10,730 x .893 (discount factor, 1 yr, 12%) = 9,582 29,000 - 9,582 = 19,419 Sending bill in December is clear winner. Accelerating the invoice will also increase the present value of the cash inflow slightly. There is a minor present value benefit associated with accelerating the income

child tax credit

a $2000 tax credit, subject to AGI phase-out, for each qualifying child under 17 at the end of the year and claimed as a dependent of the taxpayer and a $500 credit, also subject to the AGI phase out, f or other qualified dependents claimed as dependents of the taxpayer

net investment income tax

a 3.8% tax on the lesser of (a) net investment income or (b) the excess of modified adjusted gross income over $250,000 for married-joint filers and surviving spouses, $125,000 for married-separate filers, and $200,000 for other taxpayers.

qualified equity grant

a broad-based grant of either stock options or restricted stock units by a private corporation eligible employees may make an inclusion deferral election that may defer the income attributable to the qualified equity for up to five years

Bunching Itemized Deductions

a common planning strategy in which a taxpayer pays two year's worth of itemized expenses in one year to exceed the standard deduction in that year.

Full-Month Convention

a convention that allows owners of intangibles to deduct an entire month's amortization in the month of purchase and month of disposition.

mid-month convention

a convention that allows owners of real property to take one-half of a month's depreciation during the month when the property was placed in service and in the month it was disposed of

C Corporation

a corporate taxpaying entity with income subject to taxation. Such a corporation is termed a "C" corporation because the corporation and its shareholders are subject to the provisions of Subchapter C of the Internal Revenue Code.

treasury bond

a debt instrument issued by the U.S. Treasury at face value, a discount or a premium, with a set interest rate and maturity date that pays interest semiannually Treasury bonds have terms of 30 years

treasury note

a debt instrument issued by the U.S. Treasury at face value, at a discount, or at a premium, with a set interest rate and maturity date that pays interest semiannually. Treasury notes have terms of 2, 5, or 10 years.

bond

a debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing

All-inclusive income concept

a definition of income that says that gross income means all income from whatever source derived.

Mid-Quarter Convention

a depreciation convention for tangible personal property that allows for one-half of a quarter's worth of depreciation in the quarter of purchase and in the quarter of disposition. applied before the section 179 expense is deduction for an assets basis, and before bonus depreciation is taken This convention must be used when more than 40 percent of tangible personal property is placed into service in the fourth quarter of the tax year.

half-year convention

a depreciation convention that allows owners of tangible personal property to take one-half of a year's worth of depreciation in the year of purchase and in the year of disposition regardless of when the asset was actually placed in service or sold.

involuntary conversion

a direct or indirect conversion of property through natural disaster, government condemnation, or accident that allows a taxpayer to defer realized gain if certain requirements are met.

dividend

a distribution to shareholders of money or property from the corporations earnings and profits

mutual fund

a diversified portfolio of securities owned and managed by a regulated investment company

stare decisis

a doctrine meaning that a court will rule consistently with (a) its previous rulings (unless interpretation of the tax law changes over time, or it decides to overturn an earlier decision) (b) the rulings of higher courts with appellate jurisdiction (courts to which its cases are appealed)

standard deduction

a fixed amount that may be deducted from adjusted gross income the amount of the standard deduction depends on the filing status special rules may alter the allowable standard deduction for certain taxpayers

dependency exemption

a fixed deduction allowed for each individual who qualifies as a "dependent" of the taxpayer.

standard deduction

a fixed deduction offered in lieu of itemized deductions. The amount of the standard deduction depends on the taxpayer's filing status.

salary

a fixed regular payment, typically paid on a monthly or biweekly basis but often expressed as an annual sum, made by an employer to an employee, especially a professional or white-collar worker.

form W-2

a form filed by the employer for each employee detailing income, Social security and medicare wages and taxes withheld. Additionally, state income, state taxes withheld, dependent care benefits and man other tax-related items are reported

from W-4

a form used by a taxpayer to supply her employer with the information necessary to determine the amount of tax to withhold from each paycheck

escrow account (mortgage related)

a holding account with a taxpayers mortgage lender. The taxpayer makes mortgage payments to the lender that include payment for property t axes. The lender maintains the payments for property taxes in the escrow account and uses the funds in the account to pay the property taxes when the taxes are due

which of the following assets are classified as capital assets? a) inventory held for sale in a business b) supplies used in a business c) a house owned and used by a taxpayer c) stock held for investment

a house owned and used by a taxpayer stock held for investment

income shifting factors

a legitimate method of shifting income that will withstand IRS scrutiny and either: related parties (family members or businesses and their owners, who have varying marginal tax rates and are willing to shift income for the benefit of the group) OR taxpayers operating in multiple jurisdictions with different marginal tax rates

recovery period

a length of time prescribed by statute in which business property is depreciated or amortized.

deferred like kind exchange

a like-kind exchange where the taxpayer transfers like-kind property before receiving the like-kind property in exchange. The property to be received must be identified within 45 days and received within 180 days of the transfer of the property given up.

casualty loss

a loss arising from a sudden, unexpected, or unusual event such as a "fire, storm, or shipwreck" or loss from theft.

accrual method

a method of accounting that generally recognizes income in the period earned and recognizes deductions in the period that liabilities are incurred.

cost depletion

a method of recovering the cost of a natural resource that allows a taxpayer to estimate or determine the number of units that remain in the resource at the beginning of the year and allocate a pro rata share of the remaining basis to each unit of the resource that is extracted or sold during the year

percentage depletion

a method of recovering the cost of a natural resource that allows a taxpayer to recover or expense an amount based on a statutorily determined percentage

floor limitation

a minimum amount that an expenditure (or credit or other adjustment to taxable income) must meet before any amount is allowed.

U.S. Tax Court

a national court that only hears tax cases and where the judges are tax experts. The U.S. Tax Court is the only court that allows tax cases to be heard before the taxpayer pays the disputed liability and the only court with a small claims division (hearing claims involving disputed liabilities of $50,000 or less). example: a taxpayer feels very confident in her position and lacks the funds to pay the assessment

nonrecaptured net sec 1231 loss

a net sec 1231 loss that is deducted as an ordinary loss in one year and has not caused subsequent sec 1231 gain to be taxed as ordinary income

taxable fringe benefit

a noncash fringe benefit provided by employers to an employee that is included in taxable income (e.g., auto allowance or group-term life over $50,000). subject to both federal income tax and FICA tax cost o the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee

Like-Kind Exchange

a nontaxable (or partially taxable) trade or exchange of assets that are similar or related in use. property transferred and received must be used in a trade or business or held for investment. Personal property does not qualify

investment activity

a profit-seeking activity that is intermittent or occasional in frequency, (does not require a high level of effort from the taxpayer) including the production or collection of income or the management, conservation,or maintenance of property held for the production of income

Information Matching Program

a program that compares the taxpayer's tax return to information submitted to the IRS from other taxpayers (banks, employers, mutual funds, brokerage companies, mortgage companies). Information matched includes w-2 submitted by employers, 1099-INT submitted by banks, 1099-DIV submitted by brokerage companies, etc

document perfection program

a program under which all tax returns are checked for mathematical and tax calculation errors.

cliff vesting

a qualified plan provision allowing for benefits to vest all at once after a period of time has passed for defined contribution plan: longest vesting period is 3 yrs

graded vesting

a qualified plan rule that requires an increasing percentage of plan benefits to vest with each additional year of employment

tax bracket

a range of taxable income taxed at a specified rate

Accrued Market Discount

a ratable amount of the market discount at the time of purchase (based on the number of days the bond is held over the number of days until maturity when the bond is purchased) that is treated as interest income when a bond with market discount is sold before it matures.

earned income credit

a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children designed to help offset the effect of employment taxes on compensation aid

Earned Income Credit (EIC)

a refundable tax credit that may be claimed by workers with a qualifying child and in certain cases by childless workers individuals with at least one qualifying child are eligible for the credit regardless of age the credit is designed to offset the effect of employment taxes on compensation paid to low income taxpayers individuals who are dependents of other taxpayers are not eligible for the credit

sin tax

a relatively high tax designed to raise revenue and reduce consumption of a socially undesirable product such as liquor or tobacco

question of fact

a research question that hinges upon the facts and circumstances of the taxpayer's transaction.

question of law

a research question that hinges upon the interpretation of the law, such as interpreting a particular phrase in a code section.

citator

a research tool that allows one to check the status of several types of tax authorities. A citator can be used to review the history of the case to find out, for example, whether it was subsequently appealed and overturned, and to identify subsequent cases that cite the case. Citators can also be used to check the status of revenue rulings, revenue procedures, and other IRS pronouncements.

installment sale

a sale for which the taxpayer receives payment in more than one period.

tax rate schedule

a schedule of progressive tax rates and the income ranges to which the rates apply that taxpayers may use to compute their gross tax liability.

schedule c

a schedule on which a taxpayer reports the income and deductions for a sole-proprietorship.

alternative minimum tax system

a secondary or parallel tax system calculated on an alternative tax base that more closely reflects economic income than the regular income tax base. The system was designed to ensure that taxpayers generating economic income pay some minimum amount of income tax each year.

Alternative Minimum Tax (AMT)

a separate income tax code that began in 1969 to prevent the rich from not paying income taxes. It was not indexed to inflation and is now an extra tax burden on many upper middle class families starting point for determining the AMT is regular taxable income the additional tax paid when the tentative minimum tax (based on alternative minimum tax base) exceeds the regulal tax (based on the regular tax base).

SEP IRA (simplified Employee Pension Plan)

a simplified employee pension (SEP) that is administered through an individual retirement account (IRA). Available to self-employed taxpayers characteristics: low admin costs easy to set up sole proprietors age 50 or older cannot make "catch up" contributions sole proprietor must contribute to employees SEP IRAs based on their respective compensation levels contribution limit- lesser of: 55,000 or 20% of Schedule C income, after reducing net income by the deduction for the employers portion of self employment taxes paid

flat tax

a single tax applied to an entire base

83 (b) election

a special tax election that employees who receive restricted stock or other property with ownership restrictions can make to accelerate income recognition from the vesting date when restrictions lapse to the date when the restricted stock was granted. The election also accelerates the employers compensation deduction related to the restricted stock or other property the market value of the stock is taxed at the lower capital gains rate on the grant date when the election is made (nothing is taxed on vesting date)

face value

a specified final amount paid to the owner of a coupon bond on the date of maturity. The face value is also known as the maturity value

Income Recognition

a statutory concept that determines whether realized income is going to be included in gross income during the period -Cash-method taxpayers recognize income when it is received. -Income is realized regardless of whether payments are received in money, property, or services. -Income is taxed in the period in which a cash-method taxpayer has a right to receive payment without substantial restrictions.

annuity

a stream of equal cash payments made at equal time intervals

alimony

a support payment of cash made to a former spouse. The payment must be made under a written separation agreement or divorce decree that does not designate the payment as something other than alimony, the payment must be made when the spouses do not live together, and the payments must cease no later than when the recipient dies.

Individual Retirement Account (IRA)

a tax advantaged account in which individuals who have earned income can save for retirement

use tax

a tax charged on the use, storage, or consumption of a good that was purchased in one state but used in another state (goods purchased over the internet)

charitable deduction

a tax deduction allowed on federal income taxes for contributions or gifts made to tax-exempt charitable organizations, which have been approved by the IRS. Charitable contributions are only deductible if substantiated with written records such as a cancelled check, bank record, or a written communication from the charity showing the name of the charity and the date and amount of the contribution. § 170(a)(1) and Reg § 1.170A-13(a)(1). Additional substantiation is required for: contributions of $250 or more (§ 170(f)(8)), non-cash contributions exceeding $500 (§170(f)(11)(B)), and contributions of cars, boats and planes (§ 170(f)(12)). For donations of property, including clothing and household items, taxpayers should keep a written record of the donation that includes a description of the property and its condition. Deductions are not allowed for used property unless the property is in good condition. Taxpayers must keep a contemporaneous, written acknowledgement from a charity for each deductible donation (either money or property) of $250 or more. For contributions of property in excess of $500, a description of the property must be attached to the tax return. A qualified appraisal of the property must be attached with the return for donations of property with a value in excess of $5,000

explicit tax

a tax directly imposed by a government and easily quantified

tax expert

a tax expert in a particular area will typically be able to identify quickly the specific tax issues that relate to transactions in that area

Kiddie Tax

a tax imposed at the parent's marginal rate on a child's unearned income. unearned income is equal to or less than $2100

capital gains tax

a tax levied on profit from the sale of property or of an investment. if the capital asset was held for a yr or less - taxed at ordinary tax rates if held for over 1 year - generally taxed at a maximum of 15% (could be as high as 20% for high income taxpayers - or as low as 0% for low income tax payers)

gift tax

a tax on a gift by a living person in 2018, you can give up to $15,000 per person without being taxed

real property tax

a tax on the fair market value of land and structures permanently attached to land is tax deductible for all personal property owned (up to the itemized deduction limit) If own 3 house, can deduct the property tax on all 3 houses deductible when paid (not when incurred, or not when put into escrow account with lender)

excise tax

a tax on the production, sale, or consumption of goods produced within a country usually based on the quantity of a product sold, rather than the selling price

late payment penalty

a tax penalty equal to .5 percent of the amount of tax owed for each month (or fraction thereof) that the tax is not paid.

1231 look-back rule

a tax rule requiring taxpayers to treat current year net 1231 gains as ordinary income when the taxpayer has deducted a 1231 loss as ordinary loss in the five years preceding the current tax year

annotated tax service

a tax service arranged by code section. For each code section, an annotated service includes the code section; a listing of the code section history; copies of congressional committee reports that explain changes to the code section; a copy of all the regulations issued for the specific code section; the service's unofficial explanation of the code section; and brief summaries (called annotations) of relevant court cases, revenue rulings, revenue procedures, and letter rulings that address issues specific to the code section.

basis

a taxpayer's unrecovered investment in an asset that provides a reference point for measuring gain or loss when an asset is sold.

cashless exercise

a technique where options are exercised and at least a portion of the shares are sold in order to facilitate the purchase

flipping

a term used to describe the real estate investment practice of acquiring a home, repairing or remodeling the home, and then immediately, or soon thereafter, selling it (presumably at a profit).

Facts and Circumstances Test

a test used to make subjective determination such as whether the amount of salary paid to an employee is reasonable. The test requires the taxpayer and the IRS to consider all the relevant facts and circumstances surrounding the situation in order to make a decision. The relevant facts and circumstance are situation specific.

Nonrecognition Transactions

a transaction where at least a portion of the realized gain or loss is not currently recognized

rollover

a transfer of funds from a qualified retirement plan to another qualified retirement plan, fro a qualified retirement plan to a Roth or traditional IRA, or from a traditional IRA to a Roth IRA to avoid penalty from rolling over from traditional IRA to a Roth IRA, the rollover must be completed within 60 days for the full amount of the funds

inheritance

a transfer of property when the owner is deceased (transfer is made by the decedents estate)

Unrecaptured 1250 gain

a type of 1231 gain derived fro the sale of real estate held a noncorporate taxpayer for more than one year in a trade or business or as rental property attributable to tax depreciation deducted at ordinary tax rates. This gain is taxed at a higher capital gain rate maximum 25% capital gains rate, none of the gain is taxed at ordinary income

Original Issue Discount (OID)

a type of bond issued for less than the maturity or face value of the bond.

zero coupon bond

a type of bond issues at a discount that pays interest only at maturity

Roth 401(k)

a type of defined contribution plan that allows employees to contribute on an after-tax basis and receive distributions tax free (not required to take minimum distributions) qualified distributions do NOT increase AGI for employer matching - matching funds must be put in a traditional 401(k) for the employee because employers can NOT contribute to a Roth 401(k) nonqualified distribution penalty: before 59 1/2 yrs old or 55 if separated from employment 10% penalty and tax on account earnings only nonqualified distributions deemed order of the funds distributed: first from taxpayer contributions, second form account earnings (no

character of income

a type of income that is treated differently for tax purposes from other types of income. determines how the income is treated for tax purposes (including the tax rate) Common income characters (or types of income) include ordinary, capital, and qualified dividend, tax exempt

collectibles

a type of investment that includes rare coins, works of art, antiques, stamps, rare books, comic books, sports memorabilia, rugs, ceramics, paintings, and other items that appeal to collectors and investors maximum capital gains tax rate is 28%

nonqualified stock option (NQO)

a type of stock option requiring employees to treat the bargain element from options exercised as ordinary income in the tax year options are exercised. Correspondingly, employers may deduct the bargain element as compensation expense in the tax year options are exercised

Incentive Stock Options (ISO)

a type of stock option that allows employees to defer the bargain element for tax purposes until the stock acquired from option exercises is sold. the bargain element is taxed at capital gains rates provided the stock is retained long enough to satisfy certain holding period requirements. employers cannot deduct the bargain element as compensation expense

ordinary asset

an asset created or used in a taxpayer's trade or business (e.g., accounts receivable or inventory) that generates ordinary income (or loss) on disposition.

capital asset

an asset other than an asset used in a trade or business or an asset such as an account or note receivable acquired in a business from the sale of services or property artwork, corporate stock, bonds, personal residence, iphone, raw land, rare coins, precious gems or metals, ventage cars

adjusted basis

an assets carrying value for tax purposes at a given point in time, measured as the initial basis (for example cost) plus capital improvements less depreciation or amortization also called adjusted tax basis

spousal IRA

an IRA account for the spouse with the lesser amount of earned income. Contributions in this account belong to this spouse no matter where the funds for the contribution came from.

luxury automobile

an automobile on which the amount of annual depreciation expense is limited because the cost of the automobile exceeds a certain threshold. The definition excludes vehicles with gross vehicle weight exceeding 6,000 pounds.

correspondence examination

an IRS audit conducted by mail and generally limited to one or two items on the taxpayer's return. Among the three types of audits, correspondence audits are generally the most common, the most narrow in scope, and least complex. The IRS typically requests supporting documentation for one or more items on the taxpayer's return (e.g., documentation of charitable contributions deducted).

action on decision

an IRS pronouncement that explains the background reasoning behind an IRS acquiescence or nonacquiescence.

First-in, first-out (FIFO) method

an accounting method that values the cost of assets sold under the assumption that the assets are sold in the order purchased (i.e., first purchased, first sold).

increasing tax rates

accelerate income and defer deductions need to consider after-tax rate of return and the amount of the tax rate increase

what is the minimum level of participation required in order for a taxpayer to be able to deduct up to $25,000 in rental losses against other types of income?

active participation

determine amount and timing fro recognizing interest income

actual interest payments received are included in gross income if bonds were issued at a premium, may amortize the premium over the life of the bond resulting in a decrease in interest income if bonds are purchased at a discount in the secondary market, the discount is recognized as interest income at maturity

bonus depreciation

additional depreciation allowed in the acquisition year for new tangible personal property with a recovery period of 20 years or less.

The income tax base for an individual tax return is:

adjusted gross income minus from AGI deductions.

alternative minimum tax adjustments

adjustments (positive or negative) to regular taxable income to arrive at the alternative minimum tax base.

If John invested $20,000 in a stock paying annual qualifying dividends equal to 4% of his investment, what would the value of his investment be 5 years from now? Assume John's marginal ordinary tax rate is 15% (Do not round intermediate calculations)

after tax rate of return = 20000 x (1 + .04)^5 = 24,333

tax treaties

agreements negotiated between countries that describe the tax treatment of entities subject to tax in both countries The U.S. president has the authority to enter into a tax treaty with another country after receiving the Senate's advice

personal property

all tangible property other than real property

Tax Court allocation method

allocates expenses associated with rental use of the home between rental use and personal use. Property taxes and mortgage interest are allocated to rental use of the home based on the ratio of the number of rental use days to the total days in the year. All other expenses are allocated to rental use based on the ratio of the number of rental use days to total days the property was used during the year.

IRS allocation method

allocates expenses associated with rental use of the home between rental use and personal use. The percentage of total expenses allocated to rental use is the ratio of the number of rental use days for the property to the total days the property was used during the year.

proportional tax system

also known as flat tax constant tax rate applied to all tax basis sales tax is an example

taxes imposed in addition to individual income tax and are calculated on tax basis other than the regular taxable income

alternative minimum tax self-employment tax

alternative minimum tax (AMT) base

alternative minimum taxable income minus the alternative minimum tax exemption.

carly sold land that she purchased 10 years ago for $3000. The selling price of the land was $7000 a nd carly paid brokers fees of $420. When she originally purchased the land, she paid $1000 to clear some of the brush in order to make a walking path down to a nearby lake. In the ten years since the purchase, carly paid $200 per year to keep the path maintained. carly's amount realized on the sale was __________ and her tax basis was ___________ resulting in a capital gain of _________ for the year

amount realized: 7000 - 420 = 6580 tax basis: 7000 - 3000 = 4000 capital gain: 6580 - 4000 = 2580

darla owns a dress shop. During the past yr, she traded her current location for a building a little farther out of town. Her current location had an original cost of $150,000 and a FMV of $225,000 at the time of trade. Depreciation on the facility totaled $37,500. She received a building and lot worth $200,000 and $25,000 in cash in the exchange. She paid sales commissions to the real e state broker of $10,000. Darla's a mount realized on the sale is ______________ and the adjusted basis in the assets sold is $___________ producing a realized ___________ on the sale of $_____________

amount realized: 215,000 adjusted basis: 112,500 (150,000 - 37500 = 112,500) gain of $102,500 (215,000 - 112,500)

179 expense

an incentive for small businesses that allows them to immediately expense a certain amount of tangible personal property placed in service during the year. for 2018 - 1,000,000 for assets completely or partially expensed, must reduce the basis of the asset before computing MACRS depreciation expense straight line depreciation is mandatory and Section 179 expensing is Not eligible for listed property when the business use is equal to or less than 50%

qualifying relative

an individual who is not a qualifying child of another taxpayer and who meets a relationship, support, and gross income test may qualify to be a dependent of another taxpayer.

active participant in a rental avtivity

an individual who owns at least 10% of a rental property and participates in the process of making management decisions, such as approving new tenants, deciding on rental terms, and approving repairs and capital expenditures

active participant in a rental activity

an individual who owns at least 10% of a rental property and participates in the process of making management decisions, such as approving new tenants, deciding on rental terms, and approving repairs and capital expenditures.

qualifying child

an individual who qualifies as a dependent of a taxpayer by meeting a relationship, age, residence, and support test with respect to the taxpayer.

Traditional IRA

an individually managed retirement account with deductible contributions and taxable distributions

Roth IRA

an individually managed retirement plan permitting individuals to contribute on an after-tax basis and receive distributions tax free qualified distributions: must own account for more than 5yrs distribution made to a beneficiary after the death of the taxpayer distribution made when taxpayer is over 59 1/2 distribution made because taxpayer is disabled distribution used for first-time home purchase distributions made to pay for higher education expenses are not qualifying distribution

Certificate of Deposit

an interest-bearing debt instrument offered by bans and savings and loans. Money removed from the CD before maturity i s subject to a penalty

tax shelter

an investment or other arrangement designed to produce tax benefits without any expectation of economic profits.

at-risk amount

an investor's risk of loss in a worst-case scenario. In a partnership, an amount generally equal to a partner's tax basis exclusive of the partner's share of nonrecourse debt.

National Research Program (NRP)

analyzes randomly selected returns to ensure that the DIF scorings are representative of the population of tax returns.

andrew invested in a U.S. savings bond. He paid $500 for the initial investment one year ago. The redemption value of the bond increased by $25 in the current year. What are his options for reporting the income?

andrew could elect to recognize the $25 as interest in the current year andrew may recognize no interest in the current year, but recognize the total interest accumulated the year the bond is redeemed andrew may permanently exclude all interest if the savings bonds are Series EE or Series I bonds and the proceeds are used for educational expenses

Business Activities

any activity engaged to make a profit. includes: operations, marketing, production, administration sustained, continuous, high level of profit-seeking activity

capital gain property

any asset that would have generated a long-term capital gain if the taxpayer had sold the property for its fair market value.

specified service trade or business

any trade or business involving they performance of services in the fields of health,law, consulting, athletics, financial services, brokerage services or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, o r dealing in securities,partnership interest, or commodities. Architecture and engineering services are specifically excluded from the definition of specified service trade or business

annotated tax services

are arranged by code section (for each code section, an annotated service includes the code section, a listing of the code section history, copies of congressional committee reports that explain changes to the code section, a copy of all the regulations issued for the specific code section, the service's unofficial explanation of the code section, and brief summaries (called annotations) of relevant court cases, revenue rulings, revenue procedures, letter rulings, etc. that address issues specific to the code section)

prepaid rent and prepaid interest

are taxed immediately upon receipt

listed property

assets that are often used for personal purposes. Depreciation on listed property is limited to the business-use portion of the asset if business use drops to 50% or below, the business must recapture any excess accelerated depreciation over the straight line depreciation for all prior years

intangible assets

assets that do not have physical characteristics (goodwill,, covenants not to compete, organizational expenditures, research and experimentation expenses)

dynamic forecasting

attempt to account for possible taxpayer responses to the tax law change

DIF system (Discriminant Function)

basically a scoring system that assigns a score to each tax return that represents the probability that the tax liability on the return has been underreported (higher score, higher likelihood) the IRS derives the weights assigned to specific tax return attributes from historical IRS audit adjustment data from the National Research Program

Three years ago, Sydney remodeled her home. Rather than discarding some shelving units that were in her home, she moved them to the employee lounge of the business that she owns. Her original cost (basis) in the shelves was $3500. The fair market value when she converted them to business use was $1500. Sydney has taken depreciation on the shelves of $300. She sold the shelving units this year for $1000. What is the amount of her basis and the amount of the gain or loss recognized on the sale of the shelves?

basis: $1200 loss: $200 upon the sale, t he proceeds are compared to the gain basis and the loss basis. The $1000 is compared to $3200 (3500 - 300) and $1200 (1500 - 300). Since she has a loss in both cases, the loss basis is the fair market value at the date of conversion, less depreciation

Three years ago, Sydney remodeled her home. Rather than discarding some shelving units that were in her home, she moved them to the employee lounge of the business that she owns. Her original cost (basis) in the shelves was $3500. The fair market value when she converted them to business use was $2000. Sydney has taken depreciation on the shelves of $300. She sold the shelving units this year for $1900. What is the amount of her basis and the amount of the gain or loss recognized on the sale of the shelves?

basis: $1900 no gain or loss upon the sale, the proceeds are compared to the gain basis and the loss basis. The $1900 is compared to: 3200 (3500 - 300) and 1700 (2000 - 300). Since she has a loss in one case and a gain in the other calculation, the basis is deemed to be the selling price resulting in no gain or loss

Three years ago, Sydney remodeled her home. Rather than discarding some shelving units that were in her home, she moved them to the employee lounge of the business that she owns. Her original cost (basis) in the shelves was $3500. The fair market value when she converted them to business use was $2500. Sydney has taken depreciation on the shelves of $300. She sold the shelving units this year for $3600. What is the amount of her basis and the amount of the gain or loss recognized on the sale of the shelves?

basis: $3200 gain: $400 upon the sale, the proceeds are compared to the gain basis and the loss basis. $3600 is compared to $3200 (3500 - 300) and $2200 (2500 - 300). since she has a gain in both cases, the gain basis is the original cost basis less deprectiation

Nicole inherited several acres of land upon the death of her grandmother. Nicole's grandmother had owned the land for 20 yeas and had a basis in the property of $8000. At the date of death, the land was valued at $38,000. Nicole sold the property eight months after receiving it from the estate. What is the amount of Nicole's basis in the land and her holding period?

basis: $38,000 long-term holding period inherited property is deemed to have a long-term holding period. the basis of inherited property is generally the fair market value at the date of death

why is the treatment of section 1231 gains and losses for individual taxpayers more advantageous than the treatment of gains and losses from other assets?

because the gains receive preferential tax rates, while the losses are fully deductible rather than restricted

bargain element

difference between the fair market value of stock and the exercise price on the exercise date

capital losses for individuals

carried forward indefinitely, but not carried back $3000 annual deduction of net capital losses against ordinary income can be used to fully offset capital gains

capital losses for corporate taxpayers

can be used to fully offset capital gains no offset against ordinary income net capital losses carried back three years and forward five years

If the president vetoes tax legislation, Congress:

can override the President's veto with a 2/3rd positive vote in the House and Senate.

in general, when contributing long term property to charity, taxpayers are allowed to deduct the fair market value of _________________ property on the date of the donation

capital gain

which of the of following amounts is not added back to regular taxable income to arrive at AMTI (alternative minimum taxable income) a) student loan interest b) IRA contributions c) stdd deduction d) capital losses

capital losses

for AGI deductions

certain for AGI deductions may not have an effect on taxable income despite the taxpayer incurring the expense deduction for AGI reduce AGI thus reducing the limitations on other tax benefits that are decreased or phased out for higher income taxpayers rental and royalty activities expenses business activities expenses

itemized deductions

certain types of expenditures that Congress allows taxpayers to deduct as from AGI deductions. must exceed the standard deduction before taxpayers receive any benefit from deducting itemized deductions subject to to many mechanical limitations including ceilings and floors includes: medical/dental expenses, state, local and foreign income taxes paid, mortgage interest expense and investment interest, charitable contributions, real estate taxes on property held for investment, personal property tax on the value of a boat state and local sales taxes may also be deducted but only in lieu of state and local income taxes (based on either the amount paid or the amount published in the IRS tables in publication 600)

Marginal Tax Rate (MTR)

change in tax / change in taxable income (new total tax -old total tax)/(new taxable income - old taxable income) the tax rate that applied to the taxpayers additional taxable income or deductions (indicates the rate of tax on the next additional increment of income) useful in tax planning because it represents the rate of taxation or savings that would apply to additional taxable income

which of the following individuals would be considered as an eligible relative to meet the relationship test for being a qualifying child of the taxpayer? (check all that apply) a) father b) child c) brother (younger than taxpayer) d) cousin (younger than taxpayer) e) grandchild f) niece (younger than the taxpayer)

child brother grandchild niece

in general, when a taxpayer cashes out a life insurance policy before death, taxable income may result. However, if the taxpayer is ________________ ill, the portion of the income required for long-term care is excluded from gross income. If the taxpayer is _____________ ill, the proceeds are not taxable

chronically terminally

when a tax payer cashed out a life insurance policy before death, taxable income may result. However, if the taxpayer is ______________ ill, the portion of the income required for long-term care is excluded from gross income. If the taxpayer is ____________ ill, the proceeds are not taxable

chronically terminally

Chuck, a single taxpayer, earns $75,000 in taxable income and $10,000 in interest from an investment in City of Heflin bonds. Using the U.S. tax rate schedule, how much federal tax will he owe? What is his average tax rate? What is his effective tax rate? What is his current marginal tax rate? if chuck earns an additional 40,000 of taxable income, w hat is his marginal tax rate on this income? what if instead he had $40,000 of additional deductions?

chuck willows $12,439.50 in federal income tax 4453.50 + 22%(75,000 - 8,700) = 12,439.50 average tax rate 12439.50 / 75000 = 16.59% effective tax rate 12439.50 / (75000 + 10000) = 14.64% marginal tax is 22% up to $7500 increases in income and deductions from income up to 36,300 marginal tax rate on additional 40,000 income: (21889.50 - 12439.50)/(115,000 - 75,000) = 23.63% marginal tax rate on additional 40,000 deductions (4009.50 - 12439.50)/(35,000 - 75000) = 21.08%

in order to identify issues in the tax research process, the tax preparer should get a good understanding of the ________________________. Then, the tax preparer can combine that information with his knowledge of the tax laws

clients facts

Nonqualified Deferred Compensation

compensation provided for under a nonqualified plan allowing employees to defer compensation to a future period for the employee, receive same tax treatment as traditional defined contribution plans employee contributions to the plans are tax deductible (paid with before-tax dollars) distributions are taxed as ordinary income employer benefit: if employer has low marginal tax rates in current year, deferring compensation expense to a year with higher tax rates is beneficial employer can discriminate in favor of the more highly compensated employees employer is not required to fund the plan

Present Value (PV)

concept that $1 today is worth more than $1 in the future

certainty of a tax system

considering that taxpayers should be able to determine when, where, and how to calculate and pay the tax

equity

considers how the tax burden should be distributed across taxpayers

sufficiency (when judging a tax system)

considers whether tax revenue generated are adequate to meet the financial needs of the government

Jack has $1,000 to invest. He has a choice between municipal bonds with an interest rate of 4% or corporate bonds with an interest rate of 6%. Jack has a marginal tax rate of 25%. Given this information, Jack should invest in the ___________ bonds. The after-tax rate of return on municipal bonds is _______ and the after tax rate of return on corporate bonds is ______. the difference in the rates of return is known as ___________ taxes.

corporate municipal: 4% (no income tax on municipal bonds) corporate: 4.5% 1,000 x 6% = 60 interest income 60 x .25 = 15 income tax after tax income = 60 - 15 = 45 after tax rate of return 45/1000 = 4.5% implicit taxes

andy is %.considering investing $5000 into one of three investments. He can invest in corporate stock that will pay dividends of 5% per year. He can purchase corporate bonds that pay 6%, or he can invest in tax-exempt securities that will pay 4% per year. Andy is in the 33% marginal tax bracket and the dividends will be taxed at 15%

corporate stock [5 x (1-.15)] = 4.25 corporate bonds [6 x (1-.35)] = 4.02 tax-exempt securities = 4%

rental days

counted as rental days: a friend of the taxpayer stays in the home and pays a fair market rental rate a taxpayer stays in the home while making repairs and maintenance on the unit

minimum tax credit

credit available in certain situations for the alternative minimum tax paid. The credit can be used only when the regular tax exceeds the tentative minimum tax.

savers cedit

credit is provided in addition to any deduction taken on the contribution must be 18 yrs old, not a dependent on someone elses tax return, and not a full time student in any 5 months of the year

Randy rents commercial warehouses to various businesses. He purchased a warehouse in May of the current year. The cost of the warehouse was $250,000. The depreciation for the current year will be __________ (rounded to the nearest dollar). If Randy continues to rent the warehouse for the next 40 years, the depreciation in the 40th year her owns the warehouse will b e $___________

current year: 4012.50 250,000 x .01605 = 4013 or 4012.5 40th year 250,000 x .00963 = 2407.50

when tax rates are constant or ___________, taxpayers should accelerate tax deductions into earlier years and defer taxable income to later years

decreasing

U.S. savings bonds

debt instruments issued by the U.S. Treasury at face value or at a discount, with a set maturity date. Interest earned from U.S. bonds is paid either at maturity or when the bonds are converted to cash before maturity.

Acquisition Indebtedness

debt secured by a qualified residence that is incurred in acquiring, constructing, or substantially improving the residence can be increased by additional debt used to substantially improve the residence principal payments on the loan reduce acquisition indebtedness

The following are Fiduciary Funds except: a) pension trust funds b) debt service funds c) investment trust funds d) private-purpose trust funds

debt service funds

home office deductions

deductions relating to the use of an office in the home. A taxpayer must meet strict requirements to qualify for the deduction. tier 1 - mortgage interest and real property tax allocated to the business tier 2- all other expenses allocated to the business except for interest, taxes and depreciation tier 3 - depreciation

From AGI deductions

deductions subtracted from AGI to calculate taxable income. (dependency exemptions, itemized deductions, standard deduction)

For AGI deductions (adjustments to income)

deductions that are subtracted from gross income to determine AGI gross income - for agi deductions = AGI (adjusted gross income) generally more valuable to taxpayers because they reduce AGI which may allow taxpayers to claim more tax benefits for things that are subject to AGI limitations include: alimony paid for divorces finalized before 1/1/2019, student loan interest, contribution to qualified retirement accounts, and business expenses for self-employed persons, capital losses, health insurance for self-employed, may be able to deduct more medical expenses as itemized deductions, may allow them to claim more child tax credit or more Aerican Opportunity credit

For AGI deductions

deductions that are subtracted from gross income to determine AGI.

statute of limitations

defines the period in which the taxpayer can file an amended tax return or the IRS can assess a tax deficiency for a specific tax year. for both amended tax returns filed by a taxpayer and proposed tax assessments by the IRS,the statute of limitations generally ends three years from the later of (1) the date the tax return was actually filed or (2) the tax returns original due date

tax base

defines what is actually taxed and is usually expressed in monetary terms

1231 assets

depreciable or real property used in a taxpayers trade or business owned for more than one year Net section 1231 losses are fully deductible against all types of income includes: land held more than a year used in a business or trade machine held more than a year used in a trade or business apartment building held more than a year NOT a type of section 1231 asset: personal use property held more than one year investment property held more than one year

A(n) _____________ involves a taxpayer receiving a property replacement for the involuntarily converted property, while a(n) _______ involves the taxpayer receiving a cash settlement to use toward replacing the involuntarily converted property

direct conversion indirect conversion

passive investments

direct or indirect investments (other than through a C corporation) in a trade or business or rental activity in which the taxpayer does not materially participate.

Passive Investments

direct or indirect investments (other than through a C corporation) in a trade or business or rental activity in which the taxpayer does not materially participate. operating income

Qualified Dividends

dividends from corporations if dividend meets the qualified dividend requirements, generally taxed at 15% (20% for high income taxpayers and 0% for low-income taxpayers) if dividend does not qualify, it is taxed at ordinary rates

Mindys marble shop has a net sec 1231 gain in the current year of $18,000. In the previous five years, there are $13,000 in unrecaptured section 1231 losses. How will mindys gain be taxed in the current year?

due to the unrecaptured losses, 13,000 will be recharacterized as ordinary income, and 5,000 will be characterized as long-term capital gain

dynamic forecasting in order to raise revenue in the city of Hamlet, the city considered assessing a local tax on food served in restaurants. When forecasting the amount of revenue that would be generated by the new tax, the budget officials suggested that about 10% of current customers would likely quit eating out in Hamlet and drive to the nearest town. this is an example of

dynamic forecasting (attempts to account for possible taxpayer responses)

arms-length transactions

each transacting party negotiates for his or her own benefit

accelerated death benefits

early receipt of life insurance proceeds that are not taxable under certain circumstances, such as the taxpayer is medically certified with an illness that is expected to cause death within 24 months.

IRA contributions nondeductible

earnings grow tax-free until a distribution is received, then earnings are taxed but not the contributions formula for determining how much of a distribution from a traditional IRA consisting of nondeductible and deductible contributions is nontaxable? nondeductible contributions / total account balance at the time of distribution

investments that generate tax-exempt income

educational savings plan municipal bonds life insurance policy

defined contribution plan

employer provided qualified plans that specify the maximum annual contributions employers and/or employees may contribute to the plan employers must maintain separate accounts for each employee participating in the plan employees may contribute more to the plan than the employer employee bears the investment risk and funding responsibility employer matching usually with 401(k) plans for 2018 contributions limits - lessor of: (employer/employee combined) 55,000 -under 50 100% of employee compensation employee contributions are limited to $18,500 to avoid penalty when withdraw: 59 1/2 yrs old 55 if separated from employment for a given before-tax rate of return, taxpayer increases the after tax rate of return the longer he waits before taking distributions because deferring the distribution decreases the present value of the taxes paid on the distribution

defined benefit plan

employer provided qualified plans that spell out the specific benefit employees will receive an retirement all distributions are taxable as ordinary income characteristics: funding costs typically more a significant amount of work is required to keep track of employee benefits and calculate required contributions

qualified retirement plan

employer sponsored retirement plans that meet government imposed funding and anti-discrimination requirements

timing of employer deductions for compensation

employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method

equity based compensation

employers use in part to motivate their employees to take a share of ownership in their companies compensation is more directly tied to the fortunes of their employer and its shareholders

treatment of salaries and wages

employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation

filing status

filing status places taxpayers into one of five categories (married filing jointly, married filing separately, qualifying widow or widower, head of household, and single) by marital status and family situation as of the end of the year. Filing status determines whether a taxpayer must file a tax return, appropriate tax rate schedules, standard deduction amounts, and several deduction and credit limitation thresholds.

Related Party Transactions

financial activities among family members, among owners and their businesses, or among businesses owned by the same owners. much more willing to negotiate for the common good of the related parties and to the detriment of the IRS

deductions ___________ (for/from) AGI cause a reduction in AGI, which increases the deductibility of ____________ (for/from) AGI deductions subject to AGI limitations

for from

Deductions above the line

for AGI deductions or deductions subtracted from gross income to determine AGI.

qualified trade or business

for purposes of the deduction for qualified business income, any trade or business other than a specified trade or business

Individual 401(k)

for sole proprietorship contribution limits - lessor of: 55,000 or 20% of Schedule C net income minus the self employment tax deduction for the employers portion of the self-employment taxes paid, PLUS $18,500 contributed personally (considered employee potion)

Fruit and the Tree Analogy

for the owner to avoid being taxed on the fruit of the tree (income), the owner must transfer the tree (ownership)

deductions for taxes paid

from AGI deductions as itemized deductions state and local income taxes personal property tax on the value of a car real estate taxes on a primary residence

Deductions below the line

from AGI deductions or deductions subtracted from AGI to calculate taxable income. deducted after AGI has been determined deducted on page 2 of form 1040

long-term capital loss or gain

gains or losses from the sale of capital assets held for more than 12 months

short-term capital gains or losses

gains or losses from the sale of capital assets held for one year or less.

capital

gains or losses on the disposition or sale of capital assets in general, capital assets are all assets other than: accounts receivable from the sale of goods or services inventory and other assets held for sale in the ordinary course of business assets used in a trade or business, including supplies

deductions that reduce both regular taxable income and AMTI

gambling losses casualty and theft losses home equity interest (loan used to substantially improve the house) charitable contributions

incentive stock options and nonqualified stock options, there are no tax consequences on either the _________ date or the _________ date

grant vesting

what criteria determine whether an individual must file a tax return?

gross income age filing status

closed facts

have already occurred

if an individual qualifies as a dependent of another taxpayer, which of the following statements is true? a) he may still claim the standard deduction on his own return b) he is NOT required to file a tax return of his own regardless of his income level c) he may NOT use a standard deduction on his own tax return d) he must list his income on the tax return with the taxpayer who is claiming him as a dependent

he may still claim the standard deduction on his own return

if an individual qualifies as a dependent of another taxpayer:

he may still claim the standard deduction on his own return

taxpayers prefer

higher present values when considering cash inflows lower present values when considering cash outflows

accelerating deductions or deferring income benefits (timing strategy)

higher tax rates, higher interest rates, larger transaction amounts and the ability to accelerate deductions by two or more years increase the benefits of accelerating deductions and increase the benefits of income deferral the longer the tax is deferred, the less it costs on an after-tax basis (selling an investment after 5 year instead of 3 yrs) the lower the tax cost, the higher the after tax return

tax benefit rule

holds that a refund of an amount deducted in a previous period is only included in income to the extent that the deduction reduced taxable income

the term ___________ equity means that two taxpayers in similar situations pay the same tax, while ___________ equity means that taxpayers with the greater ability to pay tax, pay more tax that taxpayers with less ability to pay

horizontal vertical

medical expenses deduction

includes transportation and lodging floor limit for 2017 and 2018 = 7.5% of AGI after 2018 - floor is 10% of AGI

key word search

ideal keyword search typically includes: the relevant area of law 1) a fact or two that describes the transaction

Dennis is currently considering investing in municipal bonds that earn 9.20% interest, or in taxable bonds issued by Coco-Cola that pay 12% interest.

if Dennis's tax rate is 22%, which bond should he choose? Coco Cola after tax rate of return on municipal bond (tax exempt) = 9.20% after tax rate of return on Coco Cola: .12 - (.12 x .22) = .0936 x 100 = 9.36% Which bond should he choose if his tax rate is 32%? .12 - (.12 x .32) = .816 x 100 = 8.16% At what tax rate would he be indifferent between the bonds? after-tax return = pretax return x (1 - marginal tax rate) .0920 = .12 x (1 - marginal tax rate) .0920 = .12 - (.12 x marginal tax rate) .12 x marginal tax= .12 - .092 marginal tax = .028 / .12 marginal tax = 23.33% what strategy is this decision based on? Conversion planning strategy

bonds issued at a discount

if bond was purchased in secondary market at a discount, the discount is recognized as interest income at maturity

A tax practitioner can avoid IRS penalty relating to a tax return position:

if the position has a reasonable basis and is disclosed on the tax return

a taxpayer can avoid substantial understatement of tax penalty

if there is substantial authority to support the position

static forecasting

ignores how taxpayers may alter their activities in response to a proposed tax law change and bases projected tax revenues on the existing state of transactions.

IRC sec 6694

imposes a penalty on tax practitioners for an position that is not supported by substantial authority

self employment tax

includes the employer and employee portion of FICA taxes

realized income

income generated in a transaction with a second party in which there is a measurable change in property rights between parties. income is realized when: a taxpayer engages in a transaction with another party the transaction results in a measurable change in property rights realization of income is a judicial concept that determines the period in which income is generated

ordinary income

income or loss that is taxed at the ordinary rates provided in the tax rate schedules, or offsets income taxed at these rates, and is not capital in character

the assignment of income doctrine most likely limits what tax strategy?

income shifting

which of the following choices are forms of tax payments? a) a tax credit used to reduce the tax liability in the current year b) a tax refund received in the current year for the prior year c) income tax withheld from a taxpayers salary or wages by an employer d) estimated tax payments the taxpayer made directly to the IRS e) an overpayment of taxes in the prior year that was applied as an estimated payment for the current year

income tax withheld from a taxpayers salary or wages by an employer estimated tax payments the taxpayer made directly to the IRS an overpayment of taxes in the prior year that was applied as an estimated payment for the current year

Preferentially taxed income

income taxed at a preferential rate such as long-term capital gains and qualified dividends.

Todd operates a business using the cash basis of accounting. At the end of last year, Todd was granted permission to switch his sales on account to the accrual method. Last year Todd made $421,000 of sales on account and $64,400 was uncollected at the end of the year. What is Todd's §481 adjustment for this year? a. increase income by $421,000. b. increase income by $16,100. c. increase expenses by $64,400. d. increase expenses by $421,000. e. Todd has no §481 adjustment this year.

increase income by $16,100

progressive tax system

increasing marginal tax rate as the tax base increases (as tax base increases, both the marginal tax rate and the taxes paid increase) involves higher tax rates on those earning higher incomes federal individual income tax is an example

certain charitable contributions of capital gain property do not quality for a fair market value deduction. Which of the following characteristics of capital gain property will definitely cause it to qualify for a fair market value deduction? a) it has appreciated in value b) it is personal property c) it is not used by the charity for a related purpose d) it is tangible property e) it is intangible property

intangible property

types of income included as net investment income for purposes of assessing the net investment income tax

interest income income from trade/business that is a passive activity net gain from disposing of property dividend income net grain from disposing of property tax that is not held in a trade or business

investment interest expense

interest paid on borrowings or loans that are used to fund portfolio investments. is deductible as an itemized deduction in the interest expense category interest deduction is limited to the taxpayers net investment income for the year any amount of this expense that is not deducted in the current year due to the investment income limitations may be carried forward indefinitely interest incurred on loans used to acquire investments

which of the following has the highest authoritative weight? a) internal revenue code b) regulation c) revenue ruling d) revenue procedure d) private letter ruling

internal revenue code

treasury regulations have different purposes. ___________ regulations represent the Treasury's understanding of the code. __________ regulations explain Treasury's policies as they relate to administering the Code. And ________ regulations are issued when the Treasury has been instructed to address an issue in an real of law.

interpretative procedural legistlative

Uniform cost capitalization rules

inventory costs include the purchase price of any raw materials, shipping costs, and any indirect costs the business allocates to inventory

portfolio investment

investments producing dividends, interest, royalties, annuities or capital gains Certificates of deposit, savings accounts, corporate bonds (if issued for a period of more than 1 year with the purpose of raising capital by borrowing), government bonds interest taxed at ordinary rates dividends and long-term capital gains taxed at lower capital gains rates

Dominic earned $1,500 this year, and his employer withheld $200 of federal income tax from his salary. Assuming that Dominic will have zero tax liability this year, he: A. is required to file a tax return B. is not required to file a tax return but should file a return anyways C. is required to file a tax return but should not file because he owes no tax. D. is not required to file a tax return and should not file a return. E. None of these

is not required to file a tax return but should file a return anyway

nonacquiescence

issued after the IRS loses a trial-level or circuit court case when the IRS has decided to continue to litigate this issue. alerts taxpayers that the IRS plans to continue to litigate this issue.

acquiescence

issued after the IRS loses a trial-level or circuit court case when the IRS has decided to follow the court's adverse ruling in the future. It does not mean the IRS agrees with the court's ruling - it means the IRS will no longer litigate the issue

when a new tax law is passed, how is it incorporated into the Internal Revenue Code?

it is incorporated with other code sections addressing similar transactions it is placed within a specific subtitle, chapter, subchapter, part, subpart, and section of the Code where it is most appropriate

under what circumstances may a cash-method business be allowed to use the cash method to account for gross profit

it is primarily a service business or retail business and average gross receipts for the past three years have NOT exceeded $25 million annually

which of the following deductions may be subtracted "from" adjusted gross income to arrive at taxable income for tax years 2017 and prior? a) itemized deductions b) dependency exemptions c) standard deduction d) tax prepayments e) tax credits

itemized deductions dependency exemptions standard deductions

Miscellaneous Itemized Deductions

itemized deductions such as gambling losses, casualty and theft losses on investment property, and the unrecovered cost of a life annuity (if the taxpayer died before recovering the full cost of the annuity)

tax credits

items that directly reduce tax liability reduce the taxpayers taxes payable dollar for dollar credits are more valuable than deductions specifically granted by congress and narrowly defined directly reduces taxes payable

step-transaction doctrine

judicial doctrine that allows the IRS to collapse a series of related transactions into one transaction to determine the tax consequences of the transaction.

substance-over-form doctrine

judicial doctrine that allows the IRS to consider the transaction's substance regardless of its form and, where appropriate, reclassify the transaction according to its substance.

claim of right doctrine

judicial doctrine that states that income has been realized if a taxpayer receives income and there are no restrictions on the taxpayer's use of the income (for example, the taxpayer does not have an obligation to repay the amount).

economic substance doctrine

judicially based doctrine that requires transactions to meaningfully change a taxpayer's economic position and have a substantial purpose (apart fro a federal income tax purpose) in order for a taxpayer to obtain tax benefits

real property

land and structures permanently attached to land

Flow-through entities

legal entities like partnerships, limited liability companies, and S corporations that do not pay income tax. Income and losses from flow-through entities are allocated to their owners.

married filing jointly

legally married as of the end of the year (or one spouse died during the year and the surviving spouse did not remarry) and both spouses agree to jointly file. the couple combines their income and deductions and share joint and several liability for the resulting tax

the gross income test requires that a qualifying relative's gross income for the year be _________ than the personal exemption amount

less

Constructive Receipt Doctrine

limitation of time strategy because it often restricts the income deferral for cash-method taxpayers the judicial doctrine that provides that a taxpayer must recognize income when it is actually or constructively received. Constructive receipt is deemed to have occurred if the income has been credited to the taxpayer's account or if the income is unconditionally available to the taxpayer, the taxpayer is aware of the income's availability, and there are no restrictions on the taxpayer's control over the income.

ceiling

limitation that is the maximum amount for adjustments to taxable income (or credits). The amounts in excess of the ceiling are either lost or carried to another tax year

qualified educational loans

loans whose proceeds are used to pay qualified education expenses.

business expenses not allowed

lobbying expenses political contributions interest expense paid on loans to purchase tax-exempt securities bribes and kickbacks

bart sold a parcel of land for $21,000. he paid a real estate agent a commission of $1500 for assisting with the sale. bart had purchased the land several years earlier for $20,000. what is the gain or loss on the sale of the land?

loss of $500 21000 - 1500 - 20000 = -500

IRA contribution deductions

maximum amount of deduction applied as for AGI deduction: under age 50 - 5,500

inheritance tax

may be subject to federal estate tax which is paid by the estate of the person who died

civil penalties

monetary penalties imposed when tax practitioners or taxpayers violate tax statutes without reasonable cause—for example, as the result of negligence, intentional disregard of pertinent rules, willful disobedience, or outright fraud.

197 intangibles

must be amortized over 180 months regardless of their actual useful life include: trademarks, covenants not to compete, goodwill

Residence test (qualifying child)

must have same principle address as taxpayer for "more" than half the year

primary authorities

official sources of the tax law generated by the legislative branch (statutory authority issued by congress), judicial branch (rulings by US District Court, US Tax Court, US Court of Federal Claims, US Circuit courts of appeals or US supreme court), and executive/administrative branch (Treasury or IRS pronouncements) does not include IRS forms and publications

U.S. Court of Federal Claims

one of the three trial-level courts. It is a national court that only hears monetary claims against the federal government. example: the taxpayer knows that the Circuit Court of Appeals in the circuit in which they reside has ruled against a similar tax return position in the past

U.S. District Court

one of three trial-level courts. It is the only court that allows a jury trial. There is at least one district court in each state. example: the tax return position is low on technical support, but high on emotional appeal in reseaching tax questions, U.S. District Court is one you l east prefer tohave heard the case because these decisions are often considered less authoritative and are likely rendered by a district court outside of the taxpayers jurisdiction (Vs. the U.S. Tax Court or U.S. Court of Federal Claims which have jurisdiction over all taxpayers regardless of their residence)

point

one percent of the principal amount of a loan. A home buyer might pay points to compensate the lender for services or for a lower interest rate

all gains and losses are eventually characterized as ______________ or ___________ gains or losses

ordinary capital

when donating ____________ ______________ property as a charitable contribution, taxpayers can only deduct the lesser of (1) the property's fair market value or (2) the property's adjusted basis

ordinary income

barter clubs

organizations that facilitate the exchange of rights to goods and services between members.

tax bill

originates in the House of Representatives

qualified dividends

paid by domestic or certain qualified foreign corporations that are eligible for lower capital gains rates

tax prepayments

payments already made towards tax liability include income taxes withheld from salary by employer, estimated tax payments paid directly to IRS, and amounts from prior year overpayment that were applied to current year's tax liability reduce the net tax owed or refund due

criminal penalties

penalties commonly charged in tax evasion cases (i.e., willful intent to defraud the government). They are imposed only after normal due process, including a trial. Compared to civil cases, the standard of conviction is higher in a criminal trial (beyond a reasonable doubt). However, the penalties are also much higher, such as fines up to $100,000 for individuals plus a prison sentence.

third party intermediaries

people or organizations that facilitate the transfer of property between taxpayers in a like-kind exchange. Typically, the intermediary receives the cash from selling the property received from the taxpayer and uses it to acquire like-kind property identified by the taxpayer.

tiebreaking rules

person who has priority for claiming the child as a dependent is based on the following tiebreaking rules: 1) the parent is entitled to claim the child as a dependent (if child lives with mother and grandparents) 2) if child is a qualifying child to both parents, the parent with whom the child has resided for the longest period of time during the year has priority for claiming the person as a d dependent. However, the custodial parent may sign a form allowing noncustodial parent to claim the child 3)the child resides with each parent for equal amounts of time during the year, or the qualifying child resides with a taxpayer who is not the childs parent, the taxpayer with the highest AGI has priority for claiming the child as a dependent

for tax years prior to 2018, the category of exemption deductions allowed for the taxpayer and the taxpayer's spouse are referred to as ____________ exemptions. The deductions the taxpayer is allowed to take for other persons he is supporting are called ___________ exemptions.

personal dependency

Revenue Procedures

primary authorities, official sources of the tax law generated by the administrative branch of the Government Second in administrative authoritative weight after regulations. Revenue procedures are much more detailed than regulations and explain in greater detail IRS practice and procedures in administering the tax law. Revenue procedures have the same authoritative weight as revenue rulings.

revenue rulings

primary authorities, official sources of the tax law generated by the administrative branch of the Government second in administrative authoritative weight after regulations. Revenue rulings address the specific application of the Code and regulations to a specific factual situation. Revenue rulings have the same authoritative weight as revenue procedures.

private nonoperating foundations

privately sponsored foundations that disburse funds to other charities

In order to defer the gain on an involuntary conversion, the taxpayer must reinvest the amount of the _________ from the conversion into replacement property within the prescribed time limit

proceeds

net sales business

proceeds from sales less returns and discounts

total business revenue

proceeds from sales of inventory

qualified replacement property

property acquired to replace property damaged or destroyed in an involuntary conversion. It must be of a similar or related use to the original property even if the replacement property is real property (rental real estate for rental real estate).

boot

property given or received in an otherwise nontaxable transaction such as a like-kind exchange that may trigger gain to a party to the transaction. The term boot derives from a trading expression describing additional property a party to an exchange might throw in "to boot" to equalize the exchange

ordinary income property

property that if sold would generate income taxed at ordinary rates.

dwelling unit

property that provides a place suitable for people to occupy (live and sleep).

open facts

provide opportunities for tax planning those that have yet yet occurred can be altered, and are more flexible allow a taxpayer to arrange a transaction to achieve the most advantageous outcome

safe-harbor provision

provision of the tax law that reduces or eliminates a taxpayer's liability under the law if the taxpayer meets certain requirements.

portfolio investments, _________________ dividends generally are taxed at capital gains rates and __________ dividends are taxed at ordinary rates

qualified nonqualified

support test (qualifying child)

qualifying child must not have provided more than half of his or her own support (living expenses) for the year such support generally includes: food, school lunches, toilet articles and haircuts clothing recreation (toys, summer camp, entertainment and vacation expenses) medical and dental care child care expenses allowances and gifts wedding costs lodging education (including board, and tuition) the child may be receiving support from someone other than the taxpayer. The rule is that the child cannot provide over half of his/her own support

estimated tax payments

quarterly tax payments that a taxpayer makes to the government if the tax withholding is insufficient to meet the taxpayer's tax liability

which of the issues will focus on understanding how the various components and circumstances of the transaction affect the research answer and look for authorities with fact patterns similar to the clients?

question of fact

what two factors increase the difference between present and future values?

rate of return and the investment period

1250 property

real property subject to cost recovery deductions.

gross income

realized income reduced for any excluded or deferred income. all realized income that taxpayers are not allowed to exclude from gross income or are not permitted to defer to a later year income that taxpayers actually report on their tax returns and pay taxes on any income included in gross income can be considered taxable income because gross income is income that is taxable and causes an increase in the taxes that a taxpayer is requried to pay gross income increases taxable income

exclusions

realized income that is exempted from income taxation preferred to deferring (excluded income they are never taxed on - while deferring income still taxed on the income but taxed in a later year)

deferrals

realized income that will be taxed as income in a subsequent year

Conversion Strategies

recasting income and expenses to receive the most favorable tax treatment based on the understanding that the tax law does not treat all types of income or deductions the same taxpayer must have some ability to alter the nature of the income or expense to receive the more advantageous tax treatment Internal Revenue Code contains specific provisions that prevent the taxpayer from changing the nature of expenses, income, or activities to a more tax-advantaged status Implicit taxes may reduce or eliminate the advantages of conversion strategies

netting section 1231 gains and losses

recharacterize all or part of the gain as ordinary income as deemed by sed. 1245, 29 or 1239. The combine remaining 1231 gains and losses net gains are treated as long-term capital gains net losses are treated as ordinary losses

Cash Method of Accounting

recognizes revenue when property or services are actually, or constructively received and recognizes deductions when the expense is paid when contract extends beyond the end of the following year and the effective date doesnt start until after this year end, prepayment for advertising can not be deducted in current year

sheila and joe wells are married with two dependent children. during 2018, they have gross income of $159,800, deductions for AGI of $5500, itemized deductions of $10,000 and child tax credits of $4000. The wells had $22,000 withheld by their employer for federal income tax. They have a tax ___________ (due/refund) of $__________

refund of 5455 159,800 - 5500 (for AGI) - 24,000 (std ded) = 130,300 taxable income (130,300 -77400) x 22% + 8907 = 20,545 tax = 20,545 - 4000 (credits) = 16,545 - 22,000 (prepayments) = -5,455 refund

circular 230

regulations issued by the IRS that govern tax practice and apply to all persons practicing before the IRS. There are five parts of Circular 230: Subpart A describes who may practice before the IRS (e.g., CPAs, attorneys, enrolled agents) and what practicing before the IRS means (tax return preparation, representing clients before the IRS, etc.). Subpart B describes the duties and restrictions that apply to individuals governed by Circular 230. Subparts C and D explain sanctions and disciplinary proceedings for practitioners violating the Circular 230 provisions. Subpart E concludes with a few miscellaneous provisions (such as the Circular 230 effective date).

proposed regulations

regulations issued in proposed form; they do not carry the same authoritative weight as temporary or final regulations. All regulations are issued in proposed form first to allow public comment on them.

temporary regulations

regulations issued with a limited life (three years for regulations issued after November 20, 1988). During their life, temporary regulations carry the same authoritative weight as final regulations.

Procedural Regulations

regulations that explain Treasury Department procedures as they relate to administering the Code.

final regulations

regulations that have been issued in final form, and thus, until revoked, they represent the Treasury's interpretation of the Code.

Qualifying Relative Tests

relationship, gross income, support

Residence with significant rental use

rental expenses are deductible against rental income, but only to the extent of the income, losses are not deductible against ordinary income the taxpayer uses the home personally for more than the greater of 14 days or 10% of the days rented all rental income is included in gross income the taxpayer rents the home for 15 days or more the expenses maintaining the home allocated between rental and personal days

for both personal and real property, qualified _____________ property for an involuntary conversion must be similar and related in service or use to the property that was involuntarily converted

replacement

criteria for a payment to be considered a tax

required by a governmental body payment made is not directly related to any specific benefit received by the taxpayer

economy (when evaluating a tax system)

requires that the system should minimize compliance and administration costs

technical advice memorandum

ruling issued by the IRS national office, requested by an IRS agent, and generally for a completed transaction

determination letter

rulings requested by the taxpayer, issued by local IRS directors, and generally not controversial. An example is the request by an employer for the IRS to rule that the taxpayer's retirement plan is a "qualified plan"

Unrecaptured Section 1250 Gain

section 1231 gain derived from the sale of real estate held by a noncorporate taxpayer for more than one year in a trade or business or as rental property attributable to tax depreciation deduction at ordinary tax rates. this gain is taxable at a maximum 25% capital gains rate

This year Norma paid $1,200 of real estate taxes on her personal residence. Norma's other itemized deductions (state income taxes) only amount to $3,100. If Norma files single with one personal exemption ________

she should claim the standard deduction

disability insurance

sometimes called sick pay or wage replacement insurance. It pays the insured for wages lost due to injury or disability. is taxable to individual and should be included in gross income

substantial authority

standard used to determine whether a tax practitioner may recommend and a taxpayer may take a tax return position without being subject to IRS penalty under IRC 6694 and IRC 6662. A good CPA evaluates whether supporting authority is substantial or not based upon the supporting and opposing authorities weight and relevance suggests that the probability that the taxpayers position will be sustained upon audit or litigation is the in the 35-40% range or above

Statements on Standards for Tax Services (SSTS)

standards of practice for tax professionals issued by the AICPA. Currently, there are seven SSTS that describe the tax professional standards when recommending a tax return position, answering questions on a tax return, preparing a tax return using data supplied by a client, using estimates on a tax return, taking a tax return position inconsistent with a previous year's tax return, discovering a tax return error, and giving tax advice to taxpayers.

which of the following is NOT a computer initiative that helps the IRS identify tax returns that may have an understated tax liability? a) discriminant function system b) information matching program c) statistical percentage program d) document perfection program

statistical percentage program

restricted stock

stock employees receive as compensation that may only be sold after the passage of time or after certain performance targets are achieved. Because employees are not entitled to immediately sell the restricted stock they receive, the value of the stock is generally not taxable to employees or deductible by employers until the selling restrictions lapse. employees are taxed at ordinary rates on the full market value of the shares on the date the restricted stock vests employers deduction amount equals the ordinary income that is recognized by the employees the deduction equals the ordinary income recognized by the employee and the timing is based on whether or not Sec. 83(b) is elected

deduction for qualified business income

subject to limitations, equal to 20% of the taxpayer's qualified business income

meeting ___________________ standards for tax return positions would allow both taxpayers and tax practitioners to avoid a penalty with respect to a tax return position

substantial authority

convenience (when evaluating a tax system)

suggests that the system should be designed to facilitate the collection of tax revenue without undue hardship on the taxpayer or the government sales tax is one example

what is the gross income threshold for most taxpayers to determine whether a return is required?

sum of standard deductions and additional deductions for taxpayers age 65 or older

1245 property

tangible personal property and intangible property subject to cost recovery deductions.

the impact of the __________ rate level on a transaction must be considered along with the present value of the transaction to determine if the benefits of accelerating the transaction outweigh the disadvantages

tax

ad valorem taxes

tax base for each property is the fair market value of that property

graduated tax

tax base is divided into a series of monetary amounts, or brackets, and each bracket is taxed at a different rate

nonrefundable credits

tax credits that reduce a taxpayer's gross tax liability but are limited to the amount of gross tax liability. Any credit not used in the current year is lost.

transfer taxes

taxes on the transfer of wealth from one taxpayer to another. The estate and gift taxes are two examples of transfer taxes. based on fair market value of the assets being transferred at death or as a gift

how should a taxpayer evaluate whether it is advantageous to accelerate a tax deduction in a period of tax rate increases

taxpayer needs to compare the tax-savings at the current tax rate to the present value of the tax-savings at the projected rate projected tax savings must be adjusted to the present value in order to make a good comparison. Must determine if the benefit of deferral is worth the time and risk that tax rates will decrease

Relationship Test

taxpayer's son, daughter, stepchild, an eligible foster child, brother, sister, half brother, half sister, stepbrother, stepsister or a descendant of any of these relatives.

In a direct conversion, where a taxpayer defers the recognition of gain on the exchange of property, the adjusted basis in the property received is equal to the ______________ of the property involuntarily converted

taxpayers basis

which of the following is not a factor that determines whether a taxpayer is required to file a tax return? a) filing status b) taxpayers gross income c) taxpayers employment d) taxpayers age d) none of the above

taxpayers employment

Bonds issued at a premium

taxpayers may amortize the premium over the life of the bond resulting in a decrease in interest income actual interest payments received are included in gross income

Legislative Grace Concept

taxpayers receive certain tax-benefits only because Congress writes laws that allow taxpayers to receive the tax benefits

Group Term Life Insurance

term life insurance provided by an employer to a group of employees.

business deductions

that are deductible for AGI reduce taxable income without being subject to an overall floor limit

DIF (Discriminant Function) system

the DIF system assigns a score to each tax return that represents the probability that the tax liability on the return has been underreported (a higher score = a higher likelihood of underreporting). The IRS derives the weights assigned to specific tax return attributes from historical IRS audit adjustment data from the National Research Program. The DIF system then uses these (undisclosed) weights to score each tax return based on the tax return's characteristics. Returns with higher DIF scores are then reviewed to determine if an audit is the best course of action.

90 day letter

the IRS letter received after an audit and receipt of the 30-day letter that explains that the taxpayer has 90 days to either (1) pay the proposed deficiency or (2) file a petition in the U.S. Tax Court to hear the case. The 90-day letter is also known as the statutory notice of deficiency.

30 day letter

the IRS letter received after an audit that instructs the taxpayer that he or she has 30 days to either (1) request a conference with an appeals officer or (2) agree to the proposed adjustment.

medicare tax

the Medical Health Insurance (MHI) tax, that pays for medical care for qualifying individuals The t ax rate for employees and employers is 1.45% of wages each. An additional .9% is assessed on wages over $200,000 ($125,000 for married filing separate, $250,000 married filing joint) self employed pay both the employee and employer medicare tax and the additional medicare tax

regulations

the Treasury Departments official interpretation of the Internal Revenue Code (not a legislative source of authority). Regulations are the highest weight among regulations, revenue rulings and private letter rulings

Wherewithal to pay

the ability or resources to pay taxes due from a particular transaction

market premium

the difference between the amount paid for a bond in a market purchase rather than at original issuance when the amount paid is greater than the maturity value of the bond.

AMT depreciation when comparing depreciation rules for regular tax purposes to those for alternative minimum tax purposes:

the allowable recovery periods and conventions are the same for AMT, the difference between regular tax depreciation and AMT depreciation is an adjustment used to calculate AMT base Section 179 and bonus depreciation expense is deductible for both tax purposes

tax basis

the amount of a taxpayer's unrecovered cost of or investment in an asset

Net earnings from self-employment

the amount of earnings subject to self-employment income taxes. The amount is 92.35% of the net income from a taxpayer's Schedule C (for self-employed taxpayers).

maturity

the amount of time to the expiration date,or maturity d ate,of a debt instrument. The maturity of a debt instrument is generally t he life of the instrument,at which point a payment of the face value is due or the instrument terminates

maturity value

the amount paid to a bondholder when the bond matures and the bondholder redeems the bond for cash

operating income

the annual income from a trade or business or rental activity

operating loss

the annual loss from a trade or business or rental activity

exchanged basis

the basis of an asset received in a nontaxable exchange. An exchanged basis is generally the basis of the asset given up in a nontaxable exchange. Exchanged basis may also be referred to as a substituted basis.

a business purchased a new delivery truck at the end of March during the current year. The truck was the only asset purchased during the year. Which of the following statements is correct regarding the depreciation that can be taken on the truck?

the business will deduct one-half o f a full year's depreciation on he truck in the current year

If a business purchases $3,180,000 in equipment during a given year, what is the impact on the Sec. 179 election?

the ceiling amount will be reduced by $680,000 to a max. eligible deduction of $320,000 for t he current year with a $0 carry forward. Sec. 179 deduction is eliminated when purchases exceed $2,500,000 in 2018

In order to meet the support test for a qualifying child _____________________________

the child cannot provide over half of his/her own support

first personal income tax was enacted in 1861 to fund ____________

the civil war

municipal bond

the common name for state and local government debt

depreciation recapture

the conversion of sec 1231 gain into ordinary income on a sale (or exchange) based on the amount of accumulated depreciation on the property at the time of sale or exchange

andrew volunteered for the American Red Cross after a recent hurricane. He traveled 200 miles and helped the victims of the disaster in the clean up for five days. He donated $1500 to the American Red Cross, but charged the amount to his credit card. He plans to pay $300 plus interest each month, so he will pay $900 of the $1500 by the end of the year. What amounts will Andrew be able to deduct for his charitable contributions?

the cost of lodging while he is volunteering mileage for the 200 miles he drove the 1500 charged to his credit card

when seeking medical treatment, which of the following travel expenses would NOT be deductible? a) transportation costs, such as mileage or airfare b) the cost of lodging for the taxpayer if away from home overnight (with restrictions) c) the cost of lodging for a caregiver if away from home overnight (with restrictions) d) the cost of meals if the taxpayer is required to be away from home overnight

the cost of meals if the taxpayer is required to be away from home overnight

depletion

the cost recovery method to allocate the cost of natural resources as they are removed

depreciation

the cost recovery method to allocate the cost of tangible personal and real property over a specific time period

Modified Accelerated Cost Recovery System (MACRS)

the current tax depreciation system for tangible personal and real property calculated by finding the depreciation method, recovery period and the applicable convention

exercise date

the date employees use their stock options to acquire employer stock at a discounted price.

grant date

the date on which employees receive stock options to acquire employer stock at a special price

vesting date

the date on which the taxpayer becomes legally entitled to receive a particular benefit without risk of forfeiture.

capital loss

the difference between a lower selling price and a higher purchase price resulting in a financial loss to the seller these capital losses are NOT deductible: sales to related parties sales of personal-use assets wash sales for AGI deduction up to 3,000 of net capital loss against ordinary income (allowed to carry over indefinitely)

Net long-term capital loss

the excess of long-term capital losses for the taxable year over the long-term capital gains for such year.

net capital gain

the excess of net long-term capital gain for the taxable year over net short-term capital loss for such year

net short-term capital gain

the excess of short-term capital gains for the taxable year over the short-term capital losses for such year.

Net short-term capital loss

the excess of short-term capital losses for the taxable year over the short-term capital gains for such year.

how are the proceeds from a life insurance policy treated if the policy is cashed in early for its surrender value when there is no chronic or terminal illness present?

the excess of the cash surrender value over the premium paid is included in the taxpayers gross income

marriage penalty

the extra tax cost a married couple pays by filing a joint return relative to what they would have paid had they each filed as single taxpayers. This typically occurs when both spouses earn approximately the same amount of income.

U.S. Circuit Court of Appeals

the first level of appeals courts after the trial-level courts. there are 13 U.S. Court of Appeals, 1 for the Federal Circuit and 12 assigned to hear cases that originate from a specific circuit

U.S. Constitution

the founding law of the U.S., ratified in 1789

recognized gain or loss

the gain or loss included in gross income on a taxpayer's tax return. This is usually the realized gain or loss unless a nonrecognition provision applies.

U.S. Supreme Court

the highest court in the United States hears only a few tax cases a year with great signifiance to a broad cross-section of taxpayers or cases litigating issues in which there has been disagreement among the circuit courts. For most tax cases, the Supreme Court refuses to hear the case (writ of certiorari is denied) and thus, litigation ends with the circuit court decision

vertical equity

the idea that taxpayers with a greater ability to pay taxes should pay larger amounts taxable purchases typically increase as taxpayers total income increase, total incomes typically increase at a much faster rate than taxable purchases. The gap between taxable purchases and total income widens as total income increases. Then end result is that the effective tax rates for those with a greater ability to pay are lower than those taxpayers with a lesser ability to pay

horizontal equity

the idea that taxpayers with similar abilities to pay taxes should pay the same amount

time value of money

the increase of an amount of money due to earned interest or dividends

assignment of income doctrine

the judicial doctrine holding that earned income is taxed to the taxpayer providing the service, and that income from property is taxed to the individual who owns the property when the income accrues. in order to shift income to a taxpayer (income shifting strategy) that taxpayer must actually earn the income

field examination

the least common audit. The IRS conducts these audits at the taxpayer's place of business or the location where the taxpayer's books, records, and source documents are maintained. Field examinations are generally the broadest in scope and most complex of the three audit types. They can last many months to multiple years and generally are limited to business returns and the most complex individual returns.

principal residence

the main place of residence for a taxpayer during the taxable year

Internal revenue code of 1986

the main statutory tax authority the codified tax laws of the United States. Although the Code is frequently revised, there have only been three different codes since the Code was created in 1939 (i.e., the IRC of 1939, IRC of 1954, and IRC of 1986).

cost recovery

the method by which a company expenses the cost of acquiring capital assets. Cost recover can take the form of depreciation, amortization or depletion

full inclusion method

the method for accounting for advance payments for goods that requires that businesses immediately recognize advance payments as taxable income.

cash method

the method of accounting that recognizes income in the period in which cash, property, or services are received and recognizes deductions in the period paid.

amortization

the method of recovering the cost of intangible assets over a specific time period

interpretative regulations

the most common regulation; they represent the Treasury's interpretation of the Code and are issued under the Treasury's general authority to interpret the Code.

lucky started a new business last year. Since it was first yr of operation, the business purchased $10,000 in machinery and used the straight line method for depreciation. Business is booming, so lucky purchased $15,000 in equipment during the current year to help meet production demands.

the new machinery can be depreciated using the same method or a different method than the previously purchased machinery

underpayment penalty

the penalty that applies when taxpayers fail to adequately prepay their tax liability. The underpayment penalty is determined by multiplying the federal short-term interest rate plus 3 percentage points by the amount of tax underpayment per quarter. to protect from incurring an underpayment penalty, taxpayers should meet one of the safe harbor provisions for estimated tax payment requirements

employee

the person who is hired to provide services to a company on a regular basis in exchange for compensation and who does not provide these services as part of an independent business

291 depreciation recapture

the portion of a corporate taxpayers gain on real property that is converted from 1231 gain to ordinary income portion recognized as ordinary income: 20% of the lesser of the recognized gain or the accumulated deprecation

when an installment sale involves section 1245 depreciation recapture, ow is the gain recognized?

the portion of gain due to recapture is recognized immediately. Any remaining section 1231 gain can be recognized on the installment method

Return on Capital

the portion of proceeds from a sale (or distribution) representing a return of the original cost of the underlying property.

return of capital

the portion of proceeds from a sale (or distribution) representing a return of the original cost of the underlying property.

exercise price

the price at which holders of stock options may purchase stock in the corporation issuing the option

vesting

the process of becoming legally entitled to receive a particular benefit without risk of forfeiture, gaining ownership

realization principle

the proposition that income only exists when there is a transaction with another party resulting in a measurable change in property rights

federal short-term interest rate

the quarterly interest rate used to determine the interest charged for tax underpayments (federal short-term rate plus 3 percent).

indirect conversion

the receipt of money or other property as a replacement for property that was destroyed or damaged in an involuntary conversion

implicit taxes

the reduced before-tax return that a tax-favored asset produces because of its tax-advantaged status the lower pretax rate of return earned by tax exempt municipal bonds difficult to quantify - usually not considered when calculating average and effective tax rates (leads to the conclusion from many that taxpayers investing in tax advantaged assets (subject to implicit tax) do not pay their fair share of tax as represent by a low effective tax rate

ex-dividend date

the relevant date for determining who receives a dividend from a stock. Anyone purchasing stock before this date will receive current dividends. Otherwise, the purchaser must wait until subsequent dividends are declared before receiving them

accrual method of tax reporting vs accrual method of financial reporting

the reporting rules tend to be structured to recognize less accrued expenses for tax purposes than for financial accounting purposes

bond discount

the result of issuing bonds for less than their maturity value.

bond premium

the result of issuing bonds for more than their maturity value

golsen rule

the rule that states that the U.S. Tax Court will abide by the circuit court's rulings that has appellate jurisdiction for a case.

wash sale

the sale of an investment if that same investment (or substantially identical investment) is purchased within 30 days before or after the sale date. Losses on wash sales are deferred. The loss generated by a wash sale is NOT deductible The unrecognized loss is added to the basis of the newly acquired stock

Disqualifying disposition

the sale of stock acquired using incentive stock options prior to satisfying certain holding period requirements. Failing to satisfy the holding period requirements converts the options into nonqualified stock options.

office examination

the second most common audit. As the name suggests, the IRS conducts these audits at the local IRS office. These audits are typically broader in scope and more complex than correspondence examinations. Small businesses, taxpayers operating sole proprietorships, and middle- to high-income individual taxpayers are more likely, if audited, to have office examinations.

Shane has never filed a tax return despite earning excessive sums of money as a gambler. When does the statute of limitations expire for the years in which Shane has not filed a tax return?

the statute of limitations remains o pen indefinitely for years in which the taxpayer fails to file a return

kiddie tax

the tax on a child's unearned income based on the child's parents' marginal rate a tax imposed at trusts and estates tax rates on a childs unearned income restricts the amount of a child's investment income that can be taxed at the child's lower tax rate instead of a higher tax rate

tentative minimum tax (TMT)

the tax on the AMT tax base under the alternative minimum tax system.

marriage benefit

the tax savings married couples receive by filing a joint return relative to the tax they would have paid had they each filed as single taxpayers. This typically occurs when one spouse is either not working or earns significantly less than the other spouse.

how should a tax payer evaluate whether it is advantageous to accelerate a tax deduction in a period of tax rate increases?

the taxpayer needs to compare the tax-savings at the current tax rate to the present value of the tax savings at the projected rate

qualified residence

the taxpayer's principal residence and one other residence

option exercise

the use of a stock option to acquire employer stock at a specified price.

tax evasion

the use of illegal actions to reduce one's taxes or willful failure to pay taxes rewards: civil and criminal penalties, including large monetary fines and sentencing to federal prision

tax avoidance

the use of legitimate methods to reduce one's taxes legal act of arranging one's transactions to minimize taxes paid maximize taxpayers wealth

amount realized

the value of everything received by the seller in a transaction (cash, FMV of other property, and relief of liabilities) less selling costs.

maximum 15 percent rate amount

threshold for the 15% rate to apply to long term capital gains. Any 0/15/20% capital gains included that results in taxable income above the maximum zero rate amount and up the the maximum 15% rate amount are taxed at 15% the threshold is based on a taxpayers filing status and income

maximum zero percent rate amount

threshold for the zero percent rate to apply to long-term capital gains. an 0/15/20% capital gains included in taxable income up to the maximum zero % amount are taxed at 0%. the threshold is based on a taxpayers filing status and income

Which of the following tax planning strategies is based on the present value of money? a) timing b) tax avoidance c) income shifting d) conversion

timing

Average Tax Rate (ATR)

total tax / taxable income measures the average level of tax on only taxable income often used in budgeting tax expense as a portion of income (what % of taxable income earned is paid in tax)

Effective Tax Rate Formula

total tax/total income average rate of taxation on each dollar of total income (taxable and nontaxable income) a depiction of the tax burden because it depicts the total tax paid as a ratio of the sum of both taxable and nontaxable income earned

Arm's Length Transaction

transactions among unrelated taxpayers, where each transacting party negotiates for his or her own benefit.

personal property can be business property or personal-use property true/false

true

the tax advantages of holding an asset for more than a year overrides the risk of declining values in the investment true/false

true

Patent or copyright that is purchased should be amortized over the remaining useful life of the intangible, while a self-created patent or copyright should be amortized over their legal lifes True/false

true legal life of a self-created patent is up to a max of 17 yrs copyright max is 28 yrs

child tax credit eligibility

under 17 at year end a qualifying child fo dependent purposes the credit is subject to phase out based on taxpayer Agi

term used to refer to income from property

unearned income

net unearned income

unearned income in excess of a specified threshold amount of a child under the age of 19 or under the age of 24 if a full-time student

Head of Household

unmarried taxpayer (or abandoned spouse) as of the end of the year and pays more than half of the cost to maintain a household for a qualifying person who lives with the taxpayer for more than half of the year, or pays more than half the costs to maintain a household for a parent who qualifies as the taxpayers dependent dependent parent is not required to live with the taxpayer

Secondary Authorities

unofficial tax authorities that interpret and explain the primary authorities, such as tax research services, tax articles, newsletters, and textbooks. secondary authorities may be very helpful in understanding tax issue, but they hold little weight in a tax dispute

rental property losses

up to 25,000 in losses from rental activity may be used to offset nonpassive income rental losses are classified as passive losses in order to deduct a loss from a rental activity, the owner must be a material participant in the rental activity the maximum exception amount for active owners starts phasing out for taxpayers with AGI in excess of $100,000

value of a tax deduction, or the tax cost of income

varies with the marginal tax rate

automobile depreciation

weighing over 6,000 pounds can be depreciated using regular MACRS % bonus depreciation of up to $8000 is allowable in addition to Sec. 179 and MACS regular depreciation Sec. 179 expense for SUVs and trucks weighing over 6000 pounds is $25,000 Sec. 179 deduction plus the regular MACRS depreciation is limited to $10,000 in the first year

Hyuandai is considering opening a plant in two neighboring states. Option 1: has a corporate tax rate of 10%. If operated in this state, the plant is expected to generate $1,310,000 pretax profit Option 2: has a corporate tax rate of 2%. If operated in this state, the plant is expected to generate $1,260,000 pretax profit

what is the after state taxes profit in option 1: 1,310,000 x (1-.10) = 1,179,000 what is the after state taxes profit in option 2 1,260,000 x (1-.02) = 1,234,800 Option 2 generates the most profit

Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $40,000 of legal services for a client. Manny typically requires his clients to pay his bills immediately upon receipt. Assume Manny's marginal tax rate is 37% this year and next year, and that he can earn an after tax rate of return of 5$ on his investments.

what is the after tax income if manny sends his client the bill in December? 40000 x (1-.37) = 25,200 what is the after tax income if manny sends his client the bill in January? 40000 x .37 = 14800 14800 x .952 = 14089.60 40000 - 14089.6 = 25910.4 or 25910 Based on requirement a and b, should Manny send his client the bill in December or January? January

refinance

when a taxpayer pays off a current loan with the proceeds of a second loan

direct conversion

when a taxpayer receives noncash property rather than a cash payment as a replacement for property damaged or destroyed in an involuntary conversion.

cumulative difference

when changing accounting methods, it is difference between the amount of income (or deduction) recognized under the old accounting method and the amount that would have been recognized for all prior years if the new method had been applied prevents the duplication or omission of items of income or deductions due to the change in accounting method if the 481 adjustment increases taxable income, the income is recognized over 4 years by adding 25% of the increase each year if the adjustment decreases taxable income, it is recognized in its entirety in the year of the change

substitution effect

when consumers react to an increase in taxes by engaging in more leisure activities since the after tax value of additional work has decreased

Abandoned Spouse Rules

when couples are legally married at the end of the year but living apart - their only option is to file married filing separately must meet these requirements: tax payer is married at end of year (not legally separated) tax payer does not file a joint tax return with the other spouse taxpayer pays more than half the costs of maintaining his or her home for the entire year, and this home is the principal residence for a child (who qualifies as the taxpayers dependent) for more than half the year (the child must be a child of the taxpayer, including adopted child, stepchild, or eligible foster child) lived apart from spouse for the last six months of the year if taxpayer meets these requirements, they meet the head of household filing status requirements and may file as head of the household for the year

time strategy changing tax rates

when tax rates change,the timing strategy requires a little more consideration because the tax costs of income and the tax savings from deductions will vary. the higher the tax rate, the higher the tax savings for a tax deduction (recognize deductions during high-tax-rate years) the lower the tax rate, the lower the tax costs for taxable income (recognize income during low-tax-rate years)

which of the following situations will result in an award being excluded from gross income? a) when the award is noncash item valued at less than $400, and given for either safety or years of service by an employee b) when the award is given for scientific, literary, or charitable achievement and meets certain other requirements c) when the award has a charitable component, such as a TV giveaway, where guests are given needed items d) when the award is given during the holidays, such as a Christmas cash bonus, since the intent of the award is to be a gift

when the award is noncash item valued at less than $400, and given for either safety or years of service by an employee when the award is given for scientific, literary, or charitable achievement and meets certain other requirements

married filing jointly or married filing separately

when the taxpayers are married as of the last day of the tax year when one spouse died during the year and the surviving spouse has not remarried

timing strategy limitations

whenever a taxpayer is unable to accelerate a deduction without also accelerating the cash outflow, the timing strategy will be less beneficial the constructive receipt doctrine,, which provides that taxpayers must recognize income when it is actually or constructively received, also restricts income deferral for cash method taxpayers

tax novice

would likely identify broader issues first and then more specific issues as he researched the relevant tax law

Molto Stancha Corp had zero earnings this fiscal year; in fact, it lost money. Must the corporation file a tax return

yes, all corporations are required to file an income tax return regardless of their taxable income