Exam 1 Terms

Correspondence examinations

-Most common audit -Conducted by mail and are generally limited to one or two items on the return

Static revenue forecasting (Sufficiency)

forecasting revenue ignores how taxpayers might alter their activities in response to a tax law change and to base projected tax revenues on the existing state of transactions

Dynamic revenue forecasting (Sufficiency)

forecasting which tries to predict possible responses by taxpayers to new tax laws

Head of Household (HH)

-Unmarried or considered unmarried at end of year -Not a qualifying widow(er) -Pay more than half the costs of keeping up a home during the year -Lived in taxpayer's home with a "qualifying person" for more than half of the year

Taxpayers recognize gross income when

-they receive an economic benefit -they realize the income -the tax law does not provide for exclusion or deferral

Individuals report taxable income to the IRS on

... Form 1040

For divorce or separation agreements executed before January 1, 2019,

... alimony is included in gross income of the recipient and deductible for AGI by the payor

For divorce or separation agreements executed after December 31, 2018,

... alimony is not taxable to the recipient or deductible by the payor

U.S. tax laws use

... all inclusive gross income concept

Failure to comply with statutes can result in

... being admonished, suspended, or barred from practicing

The US Supreme Court takes cases particularly if it's an issue where

... different states take different decisions on similar items, like internet sales

Capturing income in the correct tax year is important due to changes in

... facts, rates, laws

If capital asset is held more than a year

... gain or loss is long-term

Employers computing taxable income under the cash method of accounting

... generally deduct salary and wages when they pay the employee

Employers computing taxable income under the accrual method of accounting

... generally deduct wages payable to employees as the employees earn the wages

The answer to a question of fact

... hinges upon the facts and circumstances of the taxpayer's transaction

The answer to a question of law

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

The type of income will impact when

... it's taxed (if taxed at all), and at what rate

Salary, bonus, and wages are taxed as

... ordinary income

Short-term capital gains are taxed at

... ordinary rates

Net long-term capital gains and qualified dividends are taxed at

... preferential rates ... 0 percent, 15 percent, or 20 percent depending on the taxpayer's taxable income

The United States uses a

... progressive tax rate schedule -rates range from 10 percent to 37 percent

Character determines

... rates applicable to income or loss in current tax year

A taxpayer's return is selected for audit because

... the IRS believes the tax return has a high probability of being incorrect. -and less than 1% of returns are audited

When the researcher identifies that different authorities have conflicting views,

... they should evaluate the "hierarchy," jurisdiction, and age of the authorities

Gifts and Inheritances

Individuals may receive property as gifts or from a decedent's estate (an inheritance) -are excluded from gross income because these transfers are subject to the Federal Gift and Estate tax

A married taxpayer, age 48, received the following in Year 1: Interest earned on federal Treasury bills $1,000 Interest earned on municipal bonds 2,500 Interest earned on state income tax refund 50 Interest earned on Series EE savings bonds, used to help pay for room and board for dependent in college 1,500 Given these facts, what total amount from the above should be included in gross income on the taxpayer's Year 1 tax return?

Interest earned on federal Treasury bills $1,000 Interest earned on state income tax refund 50 Interest earned on Series EE savings bonds 1,500 Total $2,550

Jim purchased 100 shares of stock this year and elected to participate in a dividend reinvestment program. This program automatically uses dividends to purchase additional shares of stock. This year Jim's shares paid $350 of dividends, and he used these funds to purchase additional shares of stock. These additional shares are worth $375 at year-end. What amount of dividends, if any, should Jim declare as income this year? Explain.

Jim is taxed on $350 of dividend income because under constructive receipt he had the ability or power to obtain or control the dividend income. That is, the tax laws treat the dividend as though Jim received the dividend and then used it to acquire the new stock. The value of the stock at the end of the year is not relevant, because Jim has not realized the appreciation on the stock he purchased.

Form W-4

supplies an employee's withholding information to employer

Tax =

tax base * tax rate

Tax period

usually 12 months

Writ of Certiorari

where the US Supreme Court refuses to hear the case from the US Court of Appeals

XYZ Inc. paid one of its employees $80,000. The company is in the 21 percent tax bracket. What is the after-tax cost of the salary to XYZ Inc.?

•Before-tax cost = Salary = $80,000 •After-tax cost = $80,000 × (1 − 21%) = $63,200

NQO example

•Facts: -Employee receives options to buy 1,000 shares -Grant date = 2.1.18 share price @ grant = $20 -Two year vest period; vesting date 1.31.20 -Exercise date = 3.31.21 & stock price = $45 -Grant price = $20; Bargain element = $25 -Cash to exercise = $20,000 •Employee recognizes $25,000 of compensation. Basis in shares = $45,000 •Employer recognizes $25,000 tax deduction

Public Company

-$1,000,000 maximum annual compensation deduction per person -Usually in the 21% tax bracket -Applies to CEO, CFO, three other highest compensated officers, and all covered employees from prior years.

Net capital losses (losses in excess of gains for year)

-$3,000 deductible against ordinary income for year -Losses in excess of $3,000 are carried forward indefinitely

Brady recently graduated from SUNY−New Paltz with his bachelor's degree. He works for Makarov & Company CPAs. The firm pays his tuition ($10,000 per year) for him so that he can receive his Master of Science in Taxation, which will qualify him to sit for the CPA exam.How much of the $10,000 tuition benefit does Brady need to include in gross income?

(1)Tuition benefit $10,000 (2)Excludable amount$(5,250)Statutory limit Taxable amoun t$4,750 (1) + (2)

Estate and Gift Tax (Transfer Tax) (federal)

-Levied on the fair market values of wealth transfers upon death or by gift

Employment and Unemployment Taxes (federal)

-2nd largest group of taxes imposed by the U.S. government -Employment taxes include the Social Security tax and the Medicare tax. -Unemployment taxes are imposed on businesses based on employees' wages that if the employee were to let go, they can collect unemployment benefit

Excise Tax (federal)

-3rd largest group of taxes imposed by the U.S. government -Levied on the quantity of products purchased

Relationship test (Qualifying Relative)

-A descendant or ancestor of the taxpayer (e.g., child, grandchild, parent, or grandparent), -A sibling of the taxpayer including a stepbrother or stepsister -A son or daughter of the taxpayer's brother or sister (not cousins) -A sibling of the taxpayer's mother or father -An in-law (mother-in-law, father-in-law, sister-in-law, or brother-in-law) of the taxpayer, or -An unrelated person who lives in taxpayer's home entire year

Alimony

-A transfer of cash made under a written separation agreement or divorce decree -The decree does not designate the payment as something other than alimony (e.g. child support) -The spouses do not live together when the payment is made -The payments cannot continue after the death of the recipient

Tax professionals are subject to various statutes, rules, and codes of conduct

-AICPA Code of Professional Conduct -AICPA Statements on Standards for Tax Services -IRS Circular 230 -State board of accountancy statutes

Other Taxes

-AMT (Alternative Minimum Tax) -NIT (Net Investment Income Tax) -Medicare tax -self-employment tax

Common Deductions for AGI

-Alimony paid (pre-2019 divorce decree) -Rental and royalty expenses -Contributions to qualified retirement accounts

Annuities

-An investment that pays a stream of equal payments over time -The tax law deems a portion of each annuity payment as a non-taxable return of capital and the remainder as gross income. --Applies Return of Capital Principle -For annuities over a life, taxpayers must use IRS tables to determine the expected value based upon the taxpayer's life expectancy

Payments Associated with Personal Injury

-Awards that relate to physical injury or sickness or are payments for the medical costs of treating emotional distress are excluded from gross income. -Other payments like punitive damages are fully taxable.

Examples of Taxable Fringe Benefits

-Bonuses -The value of the personal use of an employer-provided vehicle -Group-term life insurance in excess of $50,000 -Vacation expenses -Frequent-flyer miles earned during business use, converted to cash -Amounts paid to employees for relocation in excess of actual expenses -Usually represent a luxury perk

Imputed Income (II)

-Certain fringe benefits, like excessive employee discounts, bargain purchases or low interest loans, generate income via indirect benefits --For low interest loans, the amount of II is the difference between the amount of interest using the applicable federal interest rate and the amount of interest the taxpayer actually pays -The borrower is deemed to pay imputed interest and then the lender is deemed to have returned the imputed amount -II rules do not apply to aggregate loans of $10,000 or less between the lender and borrower

Dependency Requirements

-Citizen of U.S. or resident of U.S., Canada, or Mexico -Must not file joint return with spouse Exception - if no tax liability filing jointly or separately -Must be qualifying child or qualifying relative of taxpayer

Determining whether compensation is reasonable in amount is a "facts and circumstances test" that involves

-Considering the duties of the employee -Complexities of the business -Amount of salary compared with the income of the business among other things

Deductions for AGI

-Deductions "above the line" -Deducted in determining adjusted gross income -Always reduces taxable income dollar for dollar

Deductions from AGI

-Deductions "below the line" -Deducted from AGI to determine taxable income -Greater of standard deduction or itemized deductions

Tax Return Due Date

-Due dates on a Saturday, Sunday, or holiday are extended to the next business day. -Individuals, corporations, and partnerships are allowed to apply for automatic extensions

Examples of nontaxable fringe benefits

-Employee discounts -Employee stock options -Group-term life insurance up to $50,000 -Health flexible spending accounts -Retirement planning services -Job-related tuition assistance reimbursements

Determining who qualifies as a taxpayer's dependent is relevant for determining

-Filing status -Eligibility for the child tax credit and the American opportunity credit

3 forms of regulations

-Final -Temporary -Proposed

Community Property Systems

-Half of the income earned from the services of one spouse is included in the gross income of the other spouse. -Applicable is only 9 states; NOT WV)

3 purposes of regulations

-Interpretative -Procedural -Legislative

Field examinations

-Least common audit -Held at the taxpayer's place of business and can last months to years

Types of excluded income

-Municipal Bond Interest -Gain on the Sale of Personal Residence -Education-Related Exclusions (College Scholarships, Section 529 plans, U.S. Series EE Bonds) -Gifts and Inheritances -Life Insurance Proceeds -Sickness and Injury-Related Exclusions (Workers' Compensation, Payments Associated with Personal Injury, Health Care Reimbursement)

Married Filing Jointly

-Must be married on the last day of the year --If one spouse dies, the surviving spouse is considered to be married to decedent spouse at year end. ---Exception - The surviving spouse remarries before year's end -Joint and several liability for tax -Same sex married couples - 2015 USSC decision

U.S. Tax Court (Small Cases Division)

-National court; Tax experts; Do not pay tax first, no jury

Nonqualified options (NQO) - Most common form

-No tax consequences on grant date -On exercise date, bargain element is treated as ordinary (compensation) income to employee -Employee holds stock with holding period beginning on date of exercise -Employers deduct bargain element as compensation expense on exercise date

Incentive stock options (ISO)

-No tax consequences on grant date and exercise date if the employee holds for two years after grant date and one year after exercise date Employers typically don't view ISOs as favorable as NQOs, because: -ISOs don't provide them with the same tax benefits (no tax deduction) -IRS regulatory requirements for ISOs can be cumbersome

Compensation expense accrued at the end of year is deductible in year accrued if

-Paid to an unrelated party -Paid within 2½ months of year-end -applies to related parties Related Party Rule

Custody Agreement

-Parent having custody of the child for the greater part of the year or -Custodial parent issues a waiver in favor of the noncustodial parent

Tiebreaking rules

-Parents first -Days living with each parent if parents living apart -AGI - higher AGI gets exemption

Key components of a tax

-Payment required -Payment imposed by government agency (federal, state, local) -Payment not tied directly to benefit received by the taxpayer

Payment that do not qualify as alimony

-Property divisions -Child support payments fixed by the divorce or separation agreement

Office examinations

-Second most common audit -Conducted in the local IRS office and tends to be broader in scope

Excise Tax (state and local)

-States typically impose excise taxes on items subject to federal excise tax -Sin taxes are often excise taxes

Sales and Use Tax (state and local)

-Tax base for a sales tax is the retail sales of goods and some services. -Tax base for the use tax is the retail price of goods owned, possessed, or consumed within a state that were not purchased within the state

Realization Principle

-Taxpayer engages in a transaction with another party -Transaction results in a measurable change in property rights "wherewithal to pay"

Married Filing Separately

-Taxpayers are married but file separate returns. --Typically not beneficial from tax perspective ---Tax rates and other tax benefits --May be beneficial for non-tax reasons ---No joint and several liability

Property Dispositions

-Taxpayers usually realize a gain or loss when disposing of an asset -Taxpayers are allowed to recover their investment in property (tax basis) before they realize any gain

Tax Evasion

-The illegal minimization of tax liabilities -Suggests fraud as a means to avoid paying tax -Can lead to fines and jail

Tax Avoidance

-The legal minimization of tax liabilities -Also call "tax planning" -Consider exceptions and elections available

Restricted Stock

-The stock can't be sold or otherwise treated as owned by employees until employee legally have the right to sell the shares on the vesting date -Employees receive restricted stock on the vesting date without having to pay for it; after vesting they can either sell it immediately or retain it -Restricted Stock recipients are taxed on the full fair market value of the shares on the date the restricted stock vests as ordinary income -Employer gets tax deduction on vesting date

College Scholarships

-Tuition, fees, books and supplies required for courses can be excluded from gross income -Any excess such as room and board is taxable

Trial-level courts

-U.S. District Courts -U.S. Court of Federal Claims -U.S. Tax Court

Age test (Qualifying Child)

-Under age 19 at the end of the year, -Under age 24 at the end of the year and a full-time student, or -Permanently and totally disabled.

Discharge of Indebtedness

-When a taxpayer's debt is forgiven by a lender, the taxpayer must usually include the amount of debt relief in gross income --Exceptions exist for certain types of loans -To provide tax relief for insolvent taxpayers (taxpayers with liabilities, including tax liabilities, exceeding their assets),a discharge of indebtedness is not taxable. --If the discharge of indebtedness makes the taxpayer solvent, the taxpayer recognizes taxable income to the extent of his solvency.

Property Tax (state and local)

-ad valorem taxes, where the tax base is the fair market value of the property -Real property taxes consist of taxes on land and structures permanently attached to land -Personal property taxes include taxes on all other types of property, both tangible and intangible

Gross Income

-all income from whatever source derived -includes income realized in any form, whether in money, property, or services like fees, commissions, fringe benefits, and similar items "

Partnerships & S-Corporations

-all must file returns but do not pay income tax -are Flow Through entities -due on the March 15th following end of tax year

Income Tax (federal)

-approximately 56.5% of all tax revenues collected (individuals 47.3%; corporations 9.2%) -levied on individuals, corporations, estates, and trusts

Standard deduction amounts

-based on an individual's filing status -additional standard deduction amounts for age (65+) and eyesight (blindness)

Types of Income

-earned income -unearned income -annuities -property dispositions -income from flow-through entities -prizes and awards (with exceptions) -alimony -social security benefits (SSB) -imputed (phantom) income -discharge of indebtedness (DI)

Nontaxable Fringe Benefits

-employee excludes benefit from taxable income for public policy reasons -employer deducts cost when benefit is paid

Individuals

-filing is determined by taxpayer's filing status, age, and gross income -file tax returns for a calendar-year period -primarily use cash method; Self employed may use accrual on Schedule C

Equity

-how the tax burden should be distributed across taxpayers -a tax system is considered fair or equitable if the tax is based on the taxpayer's ability to pay

Proportional Tax Rate

-imposes a constant tax rate throughout the tax base -examples are sales taxes, excise taxes, and federal corporate income tax

Regressive Tax Rate (less common)

-imposes a decrasing marginal tax rate as the tax base decreases -examples are Social Security tax and federal employment tax

Progessive Tax Rate

-imposes an increasing marginal tax rate as the tax base increases -examples are federal and state income taxes and federal estate and gift taxes

Income from property (unearned income)

-includes gains or losses from sale of property, dividends, interests, rents, royalties, and annuities -depends on type of income and type of transaction generating income --Interest accrues and is earned daily --Dividends are taxed to the shareholder of record

Income from services (earned income)

-income from labor -most common source of gross income -generated by the efforts of taxpayer

Realized income

-measurable change in property rights -all realized income included in gross income unless specifically excluded or deferred

Corporations

-must file regardless of taxable income -may use a calendar or fiscal year-end -primarily use the accrual method; small corporations may use the cash method

Fringe benefits

-payments to employees other than wages or salary -taxable unless specifically excluded from gross income

Tax Benefit Rule

-refunds of expenditures deducted in a prior year are included in gross income to the extent that the refund reduced taxes in year of the deduction -commonly applies to state tax refunds and recovery of bad debts

Recognized income

-reported on tax return -May not equal realized income.

Form 1099-MISC

-summarizes non-employee taxable income -generated by the party paying the compensation

Personal use assets

-taxed on capital gains -Home sale capital gains may be excluded -Losses on personal use assets not deductible

Constructive Receipt Doctrine

-taxpayer must recognize income when it is actually or constructively received -deemed to occur when the income is credited to the taxpayer's account

Return of Capital Principle

-the tax basis is excluded when calculating realized income -taxed on gain or loss

Assignment of Income Doctrine

-the taxpayer who earns income from services must recognize the income -Income from property such as dividends and interest is taxable to the person who actually owns the income-producing property -To shift income from property to another person, a taxpayer must also transfer the ownership in the property to the other person

Statute of Limitations

-the time in which the taxpayer can file an amended return or the IRS can assess a tax deficiency -Generally ends 3 years from the later of (1) the date the tax return was actually filed or (2) the tax return's original due date. -SOL can be extended to 6 years if taxpayer omits over 25% of gross income. -No SOL in cases of fraud or failure to file

History of Taxation (1913)

16th amendment ratified (gave Congress the right to impose tax on income for individuals and corporations)

Tax Research Process

1: Understand facts 2: Identify issues 3: Locate relevant authorities 4: Analyze tax authorities 5: Document and communicate the results

History of Taxation (1909)

1st federal corporate income tax

History of Taxation (1861)

1st federal individual income tax (around the time of the Civil War)

Dewey is a lawyer who uses the cash method of accounting. Last year Dewey provided a client with legal services worth $55,000, but the client could not pay the fee. This year Dewey requested that in lieu of paying Dewey $55,000 for the services, the client could make a $45,000 gift to Dewey's daughter. Dewey's daughter received the check for $45,000 and deposited it in her bank account. How much of this income is taxed, if any, to Dewey? Explain.

A cash method taxpayer recognizes income on the value of property received, so $45,000 of income will be recognized in this year. The assignment of income doctrine holds that earned income is taxed to the taxpayer providing the goods or services. Hence, Dewey and not his daughter is taxed on the entire amount of service income. Because the money went to Dewey's daughter, his daughter will be treated as though she received a gift from Dewey.

What nontax reasons explain why a corporation may choose to cap its executives' salaries at $1 million?

A corporation may choose to cap its executives' salaries at $1 million, even if it is not concerned about the loss of the tax deduction, to send a signal to shareholders. Not exceeding the limit signals to the shareholders that the corporation is being fiscally responsible by (1) not overpaying executives, and (2) ensuring that all compensation paid to executives is tax deductible.

Capital Assets

All assets except: -Accounts receivable -Inventory -Assets used in trade or business, including supplies

Dontae stated that he didn't want to earn any more money because it would "put him in a higher tax bracket." What is wrong with Dontae's reasoning?

Although earning additional taxable income may increase Dontae's marginal tax rate (i.e., put him in a higher tax bracket), the additional income earned does not affect the taxes that Dontae will pay on his existing income. Moving to a higher tax bracket simply means that Dontae will pay a higher tax rate on the additional income earned (not income that he already has).

Facts: In 2019 Courtney paid $3,500 in Ohio state income taxes, and she included this payment with her other itemized deductions when she filed her federal income tax return in March of 2020. Courtney filed her 2019 federal return as a head of household and claimed $20,100 of itemized deductions (including $3,500 state income taxes, $2,500 of real estate taxes, $8,000 of mortgage interest expense, and $6,100 of charitable contributions). She also filed an Ohio state income tax return in March of 2020 and discovered she only owed $3,080 in Ohio income tax for 2019. Hence, Courtney received a $420 refund of her Ohio income tax in June of 2020. Her 2019 standard deduction was $18,350. Under the tax benefit rule, how much of the $420 refund should Courtney include in her gross income in 2020?

Answer: Courtney is required to include the entire $420 refund in her 2020 gross income because her itemized deduction for the $420 of state income taxes that she overpaid last year reduced her taxable income by $420.

Qualifying Widow(er)

Available for the two years following the year of spouse's death -Surviving spouse does not qualify if remarries during two-year period. -Surviving spouse must maintain household for dependent child.

Lynette is the CEO of publicly traded TTT Corporation and earns a salary of $200,000 in the current year.What is TTT Corporation's after-tax cost of paying Lynette's salary excluding FICA taxes?

Before tax cost = Salary = $200,000 After tax cost = $200,000 × (1 − 21%) = $158,000

Why do employers use stock options in addition to salary to compensate their employees? For employers, are stock options treated more favorably than salary for tax purposes? Explain.

Because stock options reward employees for making choices that increase the share price of the corporations where they are employed, this form of compensation is considered to be superior to salary in terms of motivating employees to behave more like owners. In addition, employers may use stock options to compensate their employees without a cash outlay. For tax purposes, NQOs are treated the same as salary and wages. The employer receives a deduction equal to the bargain element (FMV of shares on exercise date less the strike price).

Exclusion Provisions

Congress allows certain types of income to be excluded or deferred -To subsidize or encourage particular activities -To mitigate inequity e.g. double taxation

Yost received 300 NQOs (each option gives Yost the right to purchase 10 shares of Cutter Corporation stock for $15 per share). At the time he started working for Cutter Corporation three years ago, Cutter's stock price was $15 per share. Yost exercised all of his options when the share price was $26 per share. Two years after acquiring the shares, he sold them at $47 per share. (Input all amounts as positive values. Leave no answer blank. Enter zero if applicable.) b. What are Cutter Corporation's tax consequences (amount of deduction and tax savings from deduction) on the grant date, the exercise date, and the date Yost sold the shares?

Cutter has no tax consequences on the grant date or sale date. Cutter does receive a deduction equal to the $33,000 (line (6) from part a) bargain element on the date Yost exercises the options. Cutter's taxes are reduced by $6,930. (1)Bargain Element $33,000 (6) from part a (2)Marginal Tax Rate × 21% (3)Tax benefit in year of exercise$6,930 (1) × (2)

Relationship test (Qualifying Child)

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, niece, grandchild

On January 1, year 1, Dave received 1,000 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $7 per share. Dave's restricted shares will vest at the end of year 2. He intends to hold the shares until the end of year 4, when he intends to sell them to help fund the purchase of a new home. Dave predicts the share price of RRK will be $30 per share when his shares vest and will be $40 per share when he sells them. (Leave no answer blank. Enter zero if applicable. Input all amounts as positive values.) a. If Dave's stock price predictions are correct, what are the taxes due on these transactions to Dave if his ordinary marginal rate is 32 percent and his long-term capital gains rate is 15 percent?

Dave has no tax consequences on the grant date. On the vesting date he will recognize ordinary income of $30,000 and pay taxes of $9,600: (1)Shares acquired $1,000 (2)FMV at vesting date $30.00 (3)Ordinary income on vesting date $30,000 (1) × (2) (4)Ordinary Marginal Tax Rate 32% (5)Tax due when shares vest $9,600 (3) × (4) Dave will owe $1,500 on the sale date: (6)Amount realized $40,000 (1,000 shares × $40 per share) (7)Adjusted basis $30,000 From line 3 above (8)Long-term capital gain$10,000 (6) - (7) (9)Capital Gain Tax Rate 15% Tax due when shares sold$1,500 (8) × (9)

Deduction for qualified business income (QBI)

Deduction = Qualified business income × 20%

IRS computer programs utilized

Discriminant Function (DIF) system (scoring system) Document perfection program (checks for math errors, etc.) Information matching programs (compares tax return data with other IRS information)

Bessie is a partner in SULU Enterprises LLC. This year SULU reported that Bessie's share of rental income was $2,700 and her share of municipal interest was $750.

Economic Income = $2,700 Amount included in Gross Income = $2,700

Asia owns stock that is listed on the New York Stock Exchange, and this year the stock increased in value by $20,000.

Economic Income = $20,000 Amount included in Gross Income = $0

Ben sold stock for $10,000 and paid a sales commission of $250. Ben purchased the stock several years ago for $4,000.

Economic Income = $5,750 (gain from the sale minus the original cost commission; 10,000 - 4,000 - 250) Amount included in Gross Income = $5,750

Many years ago a famous member of Congress proposed eliminating federal income tax withholding. What criterion for evaluating tax systems did this proposal violate? What would likely have been the result of eliminating withholding?

Eliminating withholding would violate the convenience criterion. Eliminating withholding would most likely have slowed collection of taxes and increased taxpayer aggressiveness (or tax evasion). Prior research suggests that taxpayers are more likely to take more aggressive tax positions when they owe additional taxes when filing their return.

U.S. Series EE Bonds

Taxpayers can elect to exclude interest earned on EE bonds when proceeds are used to pay higher education expenses. -Exclusion is phased out based on modified AGI

What is the tax base for the Social Security and Medicare taxes for an employee or employer? What is the tax base for Social Security and Medicare taxes for a self-employed individual? Is the self-employment tax in addition to or in lieu of federal income tax?

Employee wages is the tax base for the Social Security and Medicare taxes. Net earnings from self-employment is the tax base for the self-employment tax. The self-employment tax is in addition to the federal income tax.

How is the tax treatment of restricted stock different from that of NQOs? How is it similar?

Employees with nonqualified options are taxed at ordinary rates on the bargain element of the shares received on the date of exercise by the employee. In contrast, employees receiving restricted stock are taxed at ordinary rates on the fair market value of the shares on the date the restricted stock vests. The tax treatment of the two is similar in that both income elements are taxed at ordinary rates.

Tax Memo Layout

Facts Issues Authorities Conclusion Analysis

True or false: The federal estate tax is the MOST significant tax assessed by the U.S. government because it generates more revenue for the government than other types of federal taxes.

False

Individual Income Tax Formula

Gross income - For AGI deductions = Adjusted gross income (AGI) - From AGI deductions -Greater of (a) Standard deduction or (b) Itemized deductions -Deduction for qualified business income (QBI) = Taxable income * Tax rates = Income tax liability + Other taxes = Total tax - Credits - Prepayments = Taxes due or (refund)

Gross Income Test (Qualifying Relative)

Gross income < $4,300 in 2020

his year Jorge received a refund of property taxes that he deducted on his tax return last year. Jorge is not sure whether he should include the refund in his gross income. What would you tell him?

If the refund is made for an expenditure deducted in a previous year, then under the tax benefit rule the refund is included in gross income to the extent that the prior deduction produced a tax benefit. In this case, if Jorge deducted the property taxes (and received a tax benefit or tax savings from the deduction) on his prior year tax return, he must include the refund in his gross income this year to the extent the property taxes resulted in a tax benefit. If he did not deduct property taxes on his tax return last year, he is not required to include the refund in his gross income.

U.S. District Court

Local court; Possible jury trial; Generalists; Pay tax first

For tax purposes, why is the married filing jointly tax status generally preferable to the married filing separately filing status? Why might a married taxpayer prefer not to file a joint return with the taxpayer's spouse?

Married couples filing joint returns combine their income and deductions and agree to share joint and several liability for the resulting tax. Filing a joint return generally results in a lower tax liability than does filing separately due to more favorable tax rate schedules and higher phase-out thresholds for various tax benefits. However, a couple may prefer to file separate returns in certain circumstances for nontax reasons. For example, when a married couple is separated but the couple does not want to have anything to do with each other or when one spouse does not want to be liable for the tax liability of both parties, the couple may choose to file separately.

Common itemized deductions

Mortgage interest State income + property taxes = $10,000 max Charitable contributions Medical and dental expenses Casualty and Theft Losses

Residence test (Qualifying Child)

Must reside with the taxpayer for more than half the year (Aka "abode test")

U.S. Court of Federal Claims

National court; Generalists; Pay tax first; Appeals to U.S. Circuit Court of Appeals for the Federal Circuit

History of Taxation (1894)

New federal individual income tax

Devon owns 1,000 shares of stock worth $10,000. This year he received 200 additional shares of this stock from a stock dividend. His 1,200 shares are now worth $12,500. Must Devon include the dividend paid in stock in income?

No, dividends paid in stock are generally not included in gross income.

If a person meets the qualifying relative tests for a taxpayer, is that person automatically considered to be a dependent of the taxpayer?

No, taxpayers may claim a qualifying relative as a dependent only if the qualifying relative is a citizen of the United States or a resident of the United States, Canada, or Mexico. Further, the qualifying relative must meet the joint tax return test if the person is married (no joint return with spouse unless there is no tax liability (positive taxable income) on the joint return and there would have been no tax liability on either separate tax return if the spouses had filed separately).

Are taxpayers required to include all realized income in gross income? Explain.

No. Taxpayers are allowed to permanently exclude certain types of income from gross income or defer certain types of income from taxation (gross income) until a subsequent tax year.

History of Taxation (1987 - 2016)

Numerous revenue acts

Primary Authorities

Official sources of tax law -Statutory sources (e.g., Internal Revenue Code) -Judicial sources (the courts) -Administrative sources (IRS pronouncements)

Tax Prepayments

Payments already made toward tax liability, including: -Income taxes withheld from wages by employer -Estimated tax payments made during the year -Taxes overpaid in prior year and applied toward current year's liability

What tax reasons explain why a corporation may choose to cap its executives' salaries at $1 million?

Publicly-traded corporations may cap their executives' salaries at $1 million to ensure that the company is able to deduct the compensation expense for the full amount of the compensation. This is important because the government no longer subsidizes salary for covered employees over $1 million. This means for a corporation with a 21 percent marginal tax rate that the government would effectively be paying $210,000 for the first $1 million in salary.

On January 1, year 1, Dave received 1,000 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $7 per share. Dave's restricted shares will vest at the end of year 2. He intends to hold the shares until the end of year 4, when he intends to sell them to help fund the purchase of a new home. Dave predicts the share price of RRK will be $30 per share when his shares vest and will be $40 per share when he sells them. (Leave no answer blank. Enter zero if applicable. Input all amounts as positive values.) b. If Dave's stock price predictions are correct, what are the tax consequences of these transactions to RRK?

RRK will receive a tax benefit of $6,300 on the vesting date: (1)Shares acquired $1,000 (2)FMV at vesting date $30.00 (3)Ordinary deduction on vesting date $30,000 (4)Ordinary Marginal Tax Rate 21% (5)Tax benefit when shares vest $6,300 (3) × (4) RRK receives no benefit on the grant date or when Dave sells the shares.

Compare and contrast realization of income with recognition of income

Realization is a judicial concept that determines the period in which income is generated, whereas, recognition is a statutory concept that determines whether realized income is going to be included in gross income during the period. Realization is a prerequisite to recognition, and absent an exclusion or deferral provision, recognition is automatic.

All else being equal, should taxpayers prefer to exclude income or to defer it? Why?

Taxpayers should prefer to exclude income rather than defer income. When they exclude income, they are never taxed on the income. When they defer income, they are still taxed on the income but they are taxed in a subsequent tax year.

Client Letter Layout

Salutation and Social Graces Research Question and Limitations Facts Analysis Closing

Bill and Mercedes file their 2016 federal tax return on September 6, 2017, after receiving an automatic extension to file their return by October 16, 2017 (October 15 fell on a Sunday). When does the statute of limitations end for their 2016 tax return?

September 6, 2020 (three years after the later of the actual filing date and the original due date)

Income Tax (state and local)

most state taxable income calculations largely conform to the federal taxable income calculations, with a limited number of modifications

To help pay for the city's new stadium, the city of Birmingham recently enacted a 1 percent surcharge on hotel rooms. Is this a tax? Why or why not?

The 1 percent surcharge is a tax. The 1 percent surcharge is an earmarked tax - i.e., collected for a specific purpose. The surcharge is considered a tax because the tax payments made by taxpayers do not directly relate to the specific benefit received by the taxpayers.

Economy

should minimize the compliance and administration costs associated with the tax system

Qualifying Child

The Person must satisfy all four tests: -Relationship test -Age test -Residence test -Support test

Qualifying Relative

The Person must satisfy all three tests: -Relationship test -Support test -Gross income test

The ____ ____ tax pays the monthly retirement, survivor, and disability benefits for qualifying individuals, whereas the ____ tax pays for medical insurance for individuals who are elderly or disabled.

social; security; medicare

Explain how state and local governments benefit from the provisions that allow taxpayers to exclude interest on state and local bonds from their gross income.

State and local governments benefit because it allows them to pay a lower interest rate on the debt because investors are willing to accept the lower rate since they are not taxed on the interest income.

History of Taxation (2017)

Tax Cuts and Jobs Acts

History of Taxation (1986)

Tax Reform Act of 1986 (significant reform to the way individuals and corporations were taxed

Marlon and Latoya recently started building a house. They had to pay $300 to the county government for a building permit. Is the $300 payment a tax? Why or why not?

The building permit is not considered a tax because $300 payment is directly linked to a benefit that they received (i.e., the ability to build a house).

The state of Georgia recently increased its tax on a pack of cigarettes by $2. What type of tax is this? Why might Georgia choose this type of tax?

The cigarette tax is an excise (sin) tax. Georgia may choose this type of tax to discourage smoking and because sin taxes are often viewed as acceptable ways of increasing tax revenues.

Support test (Qualifying Child)

The dependent must not provide >50%of his / her own support.

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 open indefinitely for years in which the taxpayer fails to file a return

Meg works for Freedom Airlines in the accounts payable department. Meg and all other employees receive free flight benefits (for the employee, family, and 10 free buddy passes for friends per year) as part of its employee benefits package.If Meg uses 30 flights with a value of $12,350 this year, how much must she include in her compensation this year?

The flight benefits qualify as a no additional cost service and may be completely excluded from gross income under §132(a)(1). The Treasury Regulations (§1.132-2) specifically exclude airline benefits from gross income.

Brad purchased land for $45,000 this year. At year-end Brad sold the land for $51,700 and paid a sales commission of $450. What effect does this transaction have on Brad's gross income? Explain

The sale increases Brad's gross income by $6,250. The selling expenses reduce the amount realized on the sale from $51,700 to $51,250 and the $45,000 cost of the land is a return of capital. The excess of the amount realized over the cost is included in his gross income ($51,700 − $450 − $45,000 = $6,250).

A taxpayer reported the following items this year: Net investment income $4,500 Investment interest expense 1,400 Fees paid for investment advice 2,000 Safe deposit box rental fee (used for investments) 300 What amount, if any, may the taxpayer deduct on Schedule A related to investment expenses for the current year?

This taxpayer may deduct only $1,400 of investment interest as investment expenses. The investment interest expense is limited to the lesser of the $1,400 or the NII of $4,500. The other $2,300 ($2,000 fees paid for investment advice + $300 safe deposit box rental) of investment expenses is nondeductible.

Regulations (Administrative Sources)

Treasury Department's official interpretation of the IRC

Paula could not reach an agreement with the IRS at her appeals conference and has just received a 90-day letter. If she wants to litigate the issue but does not have sufficient cash to pay the proposed deficiency, what is her best court choice?

U.S. Tax Court

Describe some ways in which taxes affect the political process in the United States

U.S. presidential candidates often distinguish themselves from their opponents based upon their tax rhetoric

Single

Unmarried on December 31 unless qualify for head of household

Secondary Authorities

Unofficial tax authorities -Tax services -Tax articles

What are some aspects of business that require knowledge of taxation? What are some aspects of personal finance that require knowledge of taxation?

What organizational form should a business use? Where should the business locate? How should business acquisitions be structured? How should the business compensate employees? What is the appropriate mix of debt and equity for the business? Should the business rent or own its equipment and property? How should the business distribute profits to its owners? Common personal financial decisions that taxes influence include: choosing investments, retirement planning, choosing to rent or buy a home, evaluating alternative job offers, saving for education expenses, and doing gift or estate planning

Yost received 300 NQOs (each option gives Yost the right to purchase 10 shares of Cutter Corporation stock for $15 per share). At the time he started working for Cutter Corporation three years ago, Cutter's stock price was $15 per share. Yost exercised all of his options when the share price was $26 per share. Two years after acquiring the shares, he sold them at $47 per share. (Input all amounts as positive values. Leave no answer blank. Enter zero if applicable.) c. Assume that Yost is "cash poor" and needs to engage in a same-day sale in order to buy his shares. Due to his belief that the stock price is going to increase significantly, he wants to maintain as many shares as possible. How many shares must he sell in order to cover his purchase price and taxes payable on the exercise?

Yost must sell 2,175 shares to pay the $56,550 ($45,000 to exercise plus $11,550 of tax) to complete the same day sale: (1)Cash needed to exercise $45,000(3) from part a (2)Tax due at exercise $11,550(8) from part a (3)Cash needed for same-day sale $56,550(1) + (2)(4)Market price $26 (5)Shares needed to be sold 2,175(3)/(4)

Yost received 300 NQOs (each option gives Yost the right to purchase 10 shares of Cutter Corporation stock for $15 per share). At the time he started working for Cutter Corporation three years ago, Cutter's stock price was $15 per share. Yost exercised all of his options when the share price was $26 per share. Two years after acquiring the shares, he sold them at $47 per share. (Input all amounts as positive values. Leave no answer blank. Enter zero if applicable.) d. Assume that Yost's options were exercisable at $20 and expired after five years. If the stock only reached $18 during its high point during the five-year period, what are Yost's tax consequences on the grant date, the exercise date, and the date the shares are sold, assuming his ordinary marginal rate is 35 percent and his long-term capital gains rate is 15 percent?

Yost would not have exercised the options because the market price never exceeded the strike price. As a result, the options would expire unexercised and there will be no tax consequences for either Yost or Cutter.

Judicial doctrine of stare decisis

a court will rule consistently with its previous rulings and the rulings of higher courts with appellate jurisdiction

Accrual Method

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

Tax

a payment required by a government that is unrelated to any specific benefit or service received from the government

Sin Tax

a tax on goods that are deemed to be socially undesirable

Latoya filed her tax return on February 10th this year. a) When will the statute of limitations expire for this tax return? b) When will the statute of limitations expire for this tax return if Latoya understated her income by 40 percent? c) How would your answer change if Latoya intentionally failed to report as taxable income any cash payments she received from her clients?

a) 3 years from April 15th b) 6 years from April 15th c) Indefinitely

Campbell, a single taxpayer, earns $400,000 in taxable income and $2,000 in interest from an investment in State of New York bonds. (Use the U.S. tax rate schedule.) -How much federal tax will she owe? -What is her average tax rate? -What is her effective tax rate? -What is her current marginal tax rate?

a. $114,795 = $47,367.50 + 35% × ($400,000 − $207,350) b. Average tax rate=(Total tax/Taxable income)=($114,795/$400,000)=28.70% c. Effective tax rate=(Total tax/Total income)=($114,795/$402,000)=28.56% d. Campbell is currently in the 35 percent tax rate bracket. Her marginal tax rate on deductions up to $192,650 will be 35 percent. However, her marginal tax rate on the next $118,400 of income will be 35 percent, and income earned over $518,400, will be taxed at 37 percent.

Campbell, a single taxpayer, earns $400,000 in taxable income and $2,000 in interest from an investment in State of New York bonds. (Use the U.S. tax rate schedule). -If Campbell earns an additional $15,000 of taxable income, what is her marginal tax rate on this income? -What is her marginal rate if, instead, she had $15,000 of additional deductions?

a. Marginal tax rate=Change in tax/Change in taxable income=($120,045 − $114,795)/($415,000 − $400,000)=35% $120,045 = $47,367.50 + 35% ($415,000 − $207,350). b. Marginal tax rate=Change in tax/Change in taxable income=($109,545 − $114,795)/($385,000 − $400,000)=35% $109,545 = $47,367.50 + 35% ($385,000 − $207,350).

Wally is employed as an executive with Pay More Incorporated. To entice Wally to work for Pay More, the corporation loaned him $20,000 at the beginning of the year at a simple interest rate of 1 percent. Wally would have paid interest of $2,400 this year if the interest rate on the loan had been set at the prevailing federal interest rate. a. Wally used the funds as a down payment on a speedboat and repaid the $20,000 loan (including $200 of interest) at year-end. Does this loan result in any income to either party? b. Assume instead that Pay More forgave the loan and interest on December 31. What amount of gross income does Wally recognize this year?

a. Pay More has actual interest income of $200 and imputed interest income of $2,200 (the market amount of interest on the loan). (Note that Pay More will also be entitled to a compensation deduction of $2,200). Wally has compensation income from the loan of $2,200, the amount of the imputed interest. The imputed interest expense is not deductible because he used the loan proceeds for personal purposes. b. Wally must include $2,200 in gross income from the discounted interest rate he received on the loan ($2,400 interest at federal rate minus $200 he actually was required to pay). Also, Wally must include the $20,000 in gross income because Pay More forgave the $20,000 loan, and he must include $200 in gross income because Pay More forgave the $200 interest Wally owed.

Judicial Sources: The Courts

authority to interpret the IRC and settle disputes between tax payers and the IRS -Supreme Court (the highest judicial authority; same authority level as the IRC) -Court of Appeals (13 circuit courts; the next level of judicial authority)

Lanny and Shirley divorced in 2018 and do not live together. Shirley has custody of their child, Art, and Lanny pays Shirley $22,000 per year. All property was divided equally. a. How much should Shirley include in income if Lanny's payments are made in cash but will cease if Shirley dies or remarries? b. How much should Shirley include in income if $12,000 of Lanny's payments is designated as "nonalimony" in the divorce decree? c. How much should Shirley include in income if Lanny's payments drop to $15,000 once Art reaches the age of 18?

a.$22,000 is included in Shirley's gross income as alimony. The payments do not continue after Shirley's death. b. $10,000 is included in Shirley's gross income as alimony. Amounts designated as "nonalimony" in the divorce agreement are not treated as alimony for tax purposes. c.$15,000 is included in Shirley's gross income as alimony. The additional $7,000 in payments is treated as child support.

Yost received 300 NQOs (each option gives Yost the right to purchase 10 shares of Cutter Corporation stock for $15 per share). At the time he started working for Cutter Corporation three years ago, Cutter's stock price was $15 per share. Yost exercised all of his options when the share price was $26 per share. Two years after acquiring the shares, he sold them at $47 per share. (Input all amounts as positive values. Leave no answer blank. Enter zero if applicable.) a. What are Yost's taxes due on the grant date, exercise date, and sale date, assuming his ordinary marginal rate is 35 percent and his long-term capital gains rate is 15 percent?

a.Yost has no tax consequences on the grant date. Yost recognizes $33,000 of ordinary income and pays tax of $11,550 in the year of exercise: (1)Shares acquired 3,000 (300 × 10 shares)(2)Exercise price $15.00 (3)Cash needed to exercise $45,000 (1) × (2)(4)Market price $26.00 (5)Market value of shares $78,000 (1) × (4) (6)Bargain Element $33,000 (5) − (3) (7)Marginal Tax Rate 35% (8)Tax due in year of exercise$11,550 (6) × (7) He also recognizes $63,000 of capital gain and pays tax of $9,450 in the year of sale: (9)Shares acquired with NQOs 3,000 (1) (10)Market price at sale $47.00 (11)Amount Realized $141,000 (9) × (10)(12)Basis $78,000 (5) (13)Long-term capital gain $63,000 (11) − (12)(14)Capital Gain Tax Rate 15% Tax due in year of sale $9,450 (13) × (14)

Tax Treaties (Statutory Authorities)

agreements negotiated between countries that describe the tax treatment of entities subject to tax in both countries

Stock Options

allows employees to purchase stock at a definitive price

Exercise price

amount paid to acquire shares with stock options

Life Insurance Proceeds

amounts received due to the death of the insured are excluded from the income of the recipient (the beneficiary of the policy)

Substitution Effect (Dynamic revenue forecasting)

as tax rates go up, people will substitute nontaxable activities because the marginal value of taxable ones has decreased

Income Effect (Dynamic revenue forecasting)

as tax rates go up, people will work harder to maintain same after-tax income

Sufficiency

assessing the aggregate size of the tax revenues that must be generated and making sure that the tax system provides these revenues

Municipal Bond Interest

bonds issued by state and local US governments

Economic Benefits

borrowed funds represent a liability, not gross income

Who cares about taxes?

businesses, politicians, individuals

Grant date

date on which employees are initially allocated stock options

Exercise date

date that employees purchase stock using their options

Tax base

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

Bargain element

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

Individuals and C-corporations

due on April 15th following end of tax year

Joint and Several Liability

each taxpayer is legally responsible for the entire liability. Thus, both spouses on a married filing jointly return are generally held responsible for all the tax due even if one spouse earned all the income or claimed improper deductions or credits.

Section 529 plans

earnings on invested assets are distributed tax free to the extent used for qualified education expenses

Prizes and Awards

excluded only if -made for scientific, literary, or charitable achievement and transferred to a qualified charity -for employee length of service or safety achievement

Revenue Procedures (Administrative Sources)

explain in great detail IRS practice and procedures in administering tax law

Income from Flow-Through Entities

if the entity is a flow-through entity, the income and deductions of the entity "flow through" to the owners of the entity

Deferred income

income included/taxed in a subsequent tax year eg: installment sales; like-kind exchanges; qualified retirement plans - 401(k); traditional IRA; involuntary conversions

Excluded income

income never included in taxable income eg: municipal bond interest; gain on sale of personal residence; gifts, inheritance, life insurance proceeds

Claim of Right Doctrine

income recognized when there are no restrictions on use of income (no obligation to repay)

Letter Rulings (Administrative Sources)

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

Revenue Rulings (Administrative Sources)

less authoritative weight, but they provide a much more detailed interpretation of the Code (e.g., application to a specific factual situation)

Related Party Rule

more than 50% direct and/or indirect ownership

Tax-exempt

no tax

Tax-deferred

no tax in current year (current-year tax rate is zero)

Ordinary

ordinary rates from tax rate schedule

Workers' Compensation

payments from workers' compensation plans are excluded from gross income

Form W-2

provides annual earnings, federal and state withholding information and much more.

Recognition

realized income is recognized absent a deferral or exclusion provision

Tax credits

reduce tax liability dollar for dollar

If total tax < credits and payments =

redund

Modified AGI

regular AGI (including 50% of SSB) plus tax-exempt interest income, excluded foreign income and certain other deductions for AGI

Health Care Reimbursement

reimbursements by health and accident insurance policies for medical expenses paid by the taxpayer are excluded from gross income

Estates and Trusts

required to file if gross income exceeds $600

Convenience

tax system should be designed to be collected without undue hardship to the taxpayer

Social Security Benefits (SSB)

taxable up to 85% of SSB in gross income depending on the taxpayer's filing status, SSB, and modified AGI

If total tax > credits and payments =

taxes due

Support Test (Qualifying Relative)

taxpayer must provide>50%

Gain on the Sale of Personal Residence

taxpayers may exclude up to $250,000 ($500,000 if married filing jointly) of gain on the sale of their principal residence

Certainty

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

Income-shifting tax planning strategy

taxpayers will try to shift income to a party that has a lower rate; lot of limitations on taxpayers to do it

Vertical Equity

taxpayers with greater ability to pay tax, pay more tax relative to taxpayers with a lesser ability to pay tax

U.S. Constitution (Statutory Authorities)

the 16th Amendment provides Congress the ability to tax income directly, from whatever source derived, without apportionment across the states

Tax Basis

the cost of an asset

Tax rate

the level of taxes imposed on the tax base, usually expressed as a percentage

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

Marginal Tax Rate

the tax rate that applies to the next additional increment of a taxpayer's taxable income

Average Tax Rate

the taxpayer's average level of taxation on each dollar of taxable income

Effective Tax Rate

the taxpayer's average rate of taxation on each dollar of total income (both taxable and non-taxable)

Vesting date

time when stock options granted can be exercised

Horizontal Equity

two taxpayers in similar situations pay the same tax

Abandoned Spouse

•Married individuals treated as unmarried (abandoned spouse) if individual: 1.Is married at end of year (or is not legally separated from the other spouse) 2.Does not file a joint tax return with the other spouse 3.Pays > ½ the cost of maintaining a household that serves as principal abode for a qualifying child for more than half the year and 4.Lived apart from the other spouse for the last six months of the year (other than temporary absences) •If the taxpayer meets these requirements he or she may file as head of household for the year.

HH - Qualifying relative who is not the taxpayer's parent

•Person must have lived with taxpayer for more than half the year •Must qualify as taxpayer's dependent •Must be related to taxpayer through qualified family relationship -If related only because lived with taxpayer for entire year, not a qualified person

HH - Qualifying person

•Qualifying child •Qualifying relative who is taxpayer's parents -Parent need not live with taxpayer -Taxpayer must pay > ½ cost of maintaining separate household for taxpayer's parents -Parent must qualify as taxpayer's dependent

Tax Policy Objectives

•Raising revenue is the major objective •Economic: to regulate the economy and encourage certain activities or sectors •Social: encourage socially desirable behavior •Equity: accounting periods, wherewithal to pay •Political •Ease of administration

Dividends

•Taxable to the extent of E&P (Earnings and Profits) -Dividend reinvestment plans •Distributions in excess of E&P are treated as: -Nontaxable return of capital to the extent of stock basis. -Capital gain if in excess of stock basis •Stock dividends are generally not taxable Exception: Taxpayer has a choice of receiving stock or cash