Texas - Federal Income Taxation
Limitations on business deductions - Businesses may not deduct fines paid to a _____________________ for _____________ of a law, such as fines for polluting or fines for violating highway safety laws such as driving trucks with loads in excess of the maximum weight allowed. Starting in 2018 entertainment expenses are NOT deductible
government; violation
Itemized Deductions - Trade or Business Deductions - Special Circumstances - Travel: Special circumstances: 1) Travel Rule: Must be all of the above plus must be (1) away from________, (2) in pursuit of a ________________, (3) not _________ or____________. Meals are only deductible if work requires ________________________ (the "overnight rule").
home; trade or business; lavish or extravagant overnight stay Example: An executive from Chicago flies to New York on business. He leaves at 5 a.m. and returns at 11 p.m. the same day. He is not entitled to deduct the cost of his meals while in New York. If he was required to spend the night in New York and fly home the next morning, his meals would be deductible.
Cost basis Rule (§1012): Cost basis is the amount of money used to purchase the property. This includes any ____________________ incurred in purchasing the property.
liabilities
Hypo: John purchases White Acre for $20,000 cash and an $80,000 non-recourse loan. What is John's adjusted basis in the property?
$100K - cash + loan. (Would be same if recourse)
Example: Jack purchases stock for $10,000 in Year 1. In Year 5, when the stock is worth $30,000 he gifts it to Jill. Jill's basis in the stock is _______________.
$10K - same as Jack's
Carol purchases a house in Year 1 for $80,000. In Year 8, Carol dies and leaves the property to her friend Erwin when the FMV of the house is $200,000. Example: Same as above, except that Carol and Erwin are married and hold the home as community property. After Carol dies, both Carol's and Erwin's 1/2 share of community property receives a FMV basis. Therefore, just as in Example #1, Erwin has a ________________ basis in the property.
$200K
Example: Carol purchases a house in Year 1 for $80,000. In Year 8, Carol dies and leaves the property to her friend Erwin when the FMV of the house is $200,000. Erwin takes a ___________________ adjusted basis in the property.
$200K
Example: Carol purchases stock for $20,000. Later, Carol transfers the stock to her spouse, Erwin. Erwin takes a __________________ basis in the stock.
$20K (a) Carol has no gain recognized on the transfer (b) Erwin treats the transfer as a gift
Student loan interest [§221] Rule: Deduction allowed:
(1) Indebtedness incurred by the taxpayer, (2) paid during the year, (3) for higher education expenses, (4) deduction limited to $2,500, (5) deduction phases out in ______2018_________ for taxpayer with AGI's over $___65K__________________ ($___________135K____________ for married couples filing a joint return).
"Income" Defined: "Income" is 1, 2, 3
(1) undeniable accessions to wealth, (2) clearly realized, and (3) over which the taxpayers have complete dominion. Commissioner v. Glenshaw Glass
Jack borrows $25,000 from Betty. The loan is evidenced by a two-year note bearing an appropriate interest rate. Does Jack have any income? In a subsequent year Jack is unable to pay Betty the money he owes her, and she tears up the note and cancels the debt. Jack is solvent. Same as above, except that Jack is insolvent when Betty tore up the note.
- No: no accession to wealth. - Yes: discharge of indebtedness. GI. - No: exclusion if Jack is insolvent by at least $25K, excluded in whole.
"Incident to divorce" Rule: Transfers between former spouses are "incident to divorce" if (1) done within _______ year of the cessation of the marriage or (2) _________ to the cessation of marriage. A transfer of property is related to the cessation of the marriage if the transfer is pursuant to a ________________________ and it occurs within ____ years after the date on which the marriage ceases.
1 related divorce or separation instrument 6
In the current year, Joe graduates from law school, and his aunt gives him a diamond watch worth $30,000. Years ago, his aunt had paid $4,000 for the watch. His uncle also dies, and gives Joe his house, worth $500,000, in his will (his uncle had originally purchased the house years before for $50,000). 1) Gift of $30,000 watch: 2) Devise of $500,000 house:
1) $30K watch excluded bc gift. Transfer Basis of $4K 2) Excluded bc devised. FMV Basis of $500K
This year, Jack, a lawyer, has the following events. What are the tax consequences of each? 1) $30,000 cash for services provided to clients. 2) A car worth $10,000 received for services Jack provided since the client was low on cash. 3) Jack borrows $25,000 from Betty. The loan is evidenced by a two-year note bearing an appropriate interest rate. 4) In a subsequent year Jack is unable to pay Betty the money he owes her, and she tears up the note and cancels the debt.
1) Income - included in GI 2) Income - does not matter that it's property not money 3) Not income - no accession of wealth 4) This is a "discharge of indebtedness" and "income" to Jack. Now Jack does have an "accession to wealth" since he has the cash, but is not obligated to repay. Link with the exclusion under §108 before including in gross income.
Sandra, a movie star, and her husband Jesse, divorce. Upon divorce, Sandra agrees to pay Jesse $10,000 a month in cash for his support and maintenance pursuant to a written divorce agreement. The payments are to cease when Jesse dies. What are the tax consequences of the payments to Sandra and Jesse?
1) Jesse: alimony - include in GI 2) Sandra: can deduct
Suppose the agreement fails to designate payments as alimony or child support, but requires Sandra to pay $15,000 each month. The payments are permanently reduced $5,000 per month when their child attains the age of majority, dies or marries.
1) Jesse: contingency - 10k GI 2) Sandra: 10K deduct 5K non-deduct child support
This year Trevor has the following sales or other dispositions of property, all resulting in realized and recognized losses. Are the losses deductible by Trevor? 1) Loss on selling his home 2) Loss on the sale of stock
1) Not deductible 2) Yes, since these were investment losses (losses on a "transaction entered into for profit").
Depreciation computation for 1) Real property 2) Tangible property 3) Intangible property 4) Oil & Gas property
1) Real property [§168] Rule: Compute with straight-line method and longer recovery periods than for tangible property. 2) Tangible property [§168] Rule: Depreciate the basis of the property using the appropriate (1) depreciation method, (2) recovery period and (3) applicable convention. Till 2023 have 100% deductibility for most items. See Barbri outline. 3) Intangible property Rule (§197): Generally intangible property cannot be amortized (what depreciation is called when taken on an intangible asset), but certain "§197 intangibles" are allowed to be amortized over a 15-year period. 4) Oil and Gas property: The deduction due to the exhaustion of natural resources is called depletion. There are two types of depletion, cost and percentage depletion. a) Cost depletion Rule: Deductions are allowed under cost depletion by taking into account the adjusted basis of the property, the number of units of the resource sold within a taxable year, and the number of units of the resource estimated to remain at the end of the taxable year. (i) Example: Oil field cost $100,000 to develop and has 10,000 barrels of oil ($10 per barrel). If the taxpayer extracts 1,000 barrels of oil and sells them, the taxpayer receives a cost depletion deduction of 1,000 times $10 or $10,000. b) Percentage depletion Rule: The deduction is computed by multiplying the gross income from the property by a percentage which varies according to the type of mineral. The percentage depletion for oil is 15%. (i) Example: Ewing Oil extracts $100,000 of oil from one of its wells. The percentage depletion deduction is equal to 15% of $100,000 or $15,000. (ii) Large oil companies (Shell, Exxon, etc.) are only allowed to use cost depletion. Percentage depletion, which is generally more valuable since it is not restricted to the actual cost of the oil properties, may be used by small, independent producers of oil. (p. 14 of handout)
Personal Deductions
1. Expenses for the Production 2. Alimony [§213] [BEFORE 2019] ---(child support) 3. Alimony [§213] [After 2018] (see handout for more detail)
Deductions Not Limited to Business
1. Interest: May deduct (1) all interest, (2) paid or accrued during the taxable year, (3) unless "personal interest." Qualified residence interest and interest on educational loans are not "personal interest" and are therefore deductible. a. To determine if the interest is deductible or not, follow what the taxpayer does with the borrowed funds. Interest expense may be deductible if the loan is used for business purposes, to purchase investments, to purchase a principal residence and up to one vacation home, or to pay for certain educational expenses. 2. Taxes: For tax years from 2018 to 2025 a deduction is allowed for (1) State and local real property taxes, (2) State and local personal property taxes, (3) State income taxes, and (4) State sales tax. The deduction for individuals is limited to $10,000 ($5,000 married filing separately). Federal taxes are NOT deductible 3. Losses: Must be (1) a "loss" (realized/recognized from above) (2) that is not compensated for by insurance or otherwise. If an individual suffers losses, those losses are deductible only if related to (a) a trade or business, (b) transaction entered into for profit or (c) due to fire, storm, shipwreck, other casualty or theft. Loss is limited to the adjusted basis of the property.
C. Exclusion sections: The general presumption for any "income" is that it is included in gross income. However, the rule states this is true "except as otherwise provided." Even though the following items are "income," Congress has provided statutory exceptions so they are excluded from gross income. This means they are never taken into account in computing tax liability, unlike a deduction which is subtracted out.
1. Life Insurance - payment must be by reason of death of the insured - doesn't count if transfer life insurance for money OR if payment of LI proceeds at date later than death 2. Gifts, Bequest, Devise, Inheritance: Gross income does not include property or services received by gift, bequest, devise, or inheritance (was the transfer made with "detached and disinterested generosity"?) - er-to-ee gift doesn't count 3. Personal injury - damages other than punitives 4. Income from Discharge of Indebtedness IF insolvent (up to amount insolvent), Title II, gift, purchase price adjustment, or some student loans 5. Certain fringe benefits - usually fringe bens are GI, but some are not: (1) No-additional-cost services, (2) some employee discounts, (3) working condition fringe, (4) De minimis fringe, (5) some transportation fringe, and (6) some retirement planning
Community Property: by state statute the income from services of one spouse are treated as ________ property interest in each spouse.
1/2
Characterization (Step 4) Generally: This is the qualitative aspect to income/deductions. There is a rate preference as to capital gains from capital assets held for more than one year. Generally, the highest rate on long-term capital gain is _______________, while the highest rate on ordinary income is _______________.
20% 37%
Rates A. Capital Gains Rates/Ordinary Income Long-term capital gain is taxed at a maximum rate of _______ (generally ________ ), as opposed to ordinary income, which is taxed at a maximum rate of _________. To qualify for long-term capital gain, you must have a sale or exchange of a capital asset held for more than one year. If your income is low enough such that you pay a maximum of ____________ on ordinary income, then you would pay __________ on long-term capital gains. Short-term capital gain is taxed at a maximum rate of ________, which is the same as ordinary income. Short-term capital gain is recognized when you have held the capital asset for 12 months or less
20; 15 37 12 0 37
Standard Deduction [§63] Rule: Compare the standard deduction amount to a taxpayer's itemized deduction and take which is larger. The standard deduction is made up of two parts: the basic and additional standard deductions. Amounts almost increased 200% by Tax Cuts and Jobs Act of 2017. A. Basic Standard Deduction Amounts (2018): The basic standard deduction amount for any taxpayer is based on their filing status. 1. Married filing jointly/Surviving spouse: __________________ 2. Married filing separately: __________________ 3. Head of household: __________________ 4. Single: __________________ B. Additional Standard Deduction Amounts (_______): Rule: There is an additional standard deduction of _____________ for taxpayers 65 or older and/or "blind" (20/200 vision or worse). These amounts increase to ___________ if the taxpayer is unmarried.
24k 12k 18k 12k 1300 1600
A. Hope and Lifetime Learning Credits [§25A] 1. Hope Education Credit (currently called the "American Opportunity Tax Credit") Rule: Up to _______________ credit in ________ for (1) first 4 years of postsecondary education, (2) student not convicted of felony drug offense, (3) phased out in _________ for taxpayers with AGI over ___________ (singles)/___________ (joint return). a. Can have multiple Hope credits on one return b. If married must file a joint return
2500; 2018 80k; 160; 2018 57k; 114k
Which of the following statements is FALSE regarding a Subchapter S corporation? A Shareholders generally must be individuals (e.g., a partnership may not be a shareholder). B There may be no more than 100 shareholders. C There may be only one class of stock. D None of the above (all are true).
A Subchapter S corporation may not have more than 100 shareholders. The shareholders generally must be individuals; a partnership or another corporation may not be a shareholder), and a Subchapter S corporation may not have more than one class of stock (although stock having differing voting rights does not create a second class for purpose of this rule—it is classification by distribution rights that are key).
Which of the following states a condition sufficient to allow a taxpayer to take a business deduction with respect to use of her personal residence? A The taxpayer uses a specific area of her home exclusively as her principal place of business. B The taxpayer occasionally meets with patients, clients, or customers in the home. C The taxpayer works at least one day a week in the home. D The taxpayer is the president or primary shareholder of the business.
A. If a homeowner regularly uses a portion of her home exclusively as a principal place of business, or to meet with patients, clients, or customers in the normal course of business, she can deduct business expenses allocable to that portion of the home. However, this use has to be regular, not sporadic, so an office only used to occasionally meet with patients, clients, or customers is not sufficient. Neither is it sufficient to work at least one day a week in the home if the area in which the work is done is not used exclusively for business. There is no requirement that the taxpayer be the president or primary shareholder of the business.
How are punitive damages treated under the Internal Revenue Code? A They are fully taxable as ordinary income to the recipient. B They may be excluded from gross income if they are awarded in conjunction with a physical personal injury. C They are included in gross income for an individual, but excluded from gross income for a business. D They are fully excluded from gross income.
A. Punitive damages are intended to punish the wrongdoer, not to compensate the victim. Therefore, they generally represent a windfall to the recipient and are included in the recipient's taxable income. While damages for emotional distress may be excluded if awarded in conjunction with a physical injury, this rule has not been extended to punitive damages.
All of the following statements are true regarding the exclusion of gain from the sale of one's principal residence EXCEPT: A A single taxpayer can exclude up to $500,000 in gain from the sale or exchange of a principal residence. B To qualify, the taxpayer must have owned and used the property as his principal residence for at least two of the five years preceding the sale or exchange. C The exclusion may be doubled for taxpayers filing a joint tax return. D The exclusion can be used once every two years.
A. The deduction is $250,000 in gain for a single taxpayer.
Paul and Jane, a married couple, borrow $800,000 to purchase their principal residence and borrow $200,000 to purchase a vacation home on the coast. How much interest may they deduct on the loans?
After Dec. 2017, only able to deduct interest on 750K bc qualified residential interest not trade or business
Inclusion sections: The following are items which are specifically included in gross income. While the definition of gross income in §61 would suffice, Congress wanted to make sure the following items were included.
Alimony and Separate Maintenance Payments [§71-REPEALLED after 2018] Prizes and Awards Employer Provided Group Term Life Insurance [§79]
Hypo: In Year 1, Titus purchased Greyacre for $100,000, paying $30,000 in cash and taking a mortgage with the bank for the remaining $70,000. In Year 3, when the outstanding balance on the mortgage was $60,000, Titus sold Greyacre to Paula. Paula paid $50,000 cash, and assumed the mortgage. What is the gain or loss realized/recognized to Titus on this transaction?
Amount Realized - Adj. Basis = Gain 50K cash + 60K liability = 110K 100K (70 + 30) basis Gain of 10K
Property acquired by bequest or inheritance may take as its basis the fair market value on any of the following dates EXCEPT: A The date of the decedent's death. B The date the decedent obtained the property. C Six months from the date of the decedent's death. D At the time of disposition, if disposed of within six months after the decedent's death.
B
Which of the following items may NOT be excluded from a taxpayer's gross income? A Proceeds from a life insurance policy. B A $500 gift card given as an employee achievement award. C Gifts made from detached and disinterested generosity. D Gain from the sale of the taxpayer's principal residence (up to $250,000).
B. Cash and gift cards do not qualify as an employee achievement award and must be included in gross income. None of the other items are includible in income.
Which of the following will not be considered to be gross income to the recipient? A A $1 million Nobel Peace Prize. B A plaque valued at $250, given at an awards dinner, recognizing an employee's 20 years of service. C A record breaking home-run baseball caught by a fan and worth an estimated $250,000. D $1,000 proceeds from a charity's 50-50 raffle (a raffle in which the charity sells raffle tickets and splits the proceeds of the sale with the holder of a randomly selected ticket).
B. Virtually all prizes and awards are includible in gross income. The only exceptions are for certain recognition awards and some modest employee achievement awards. The achievement award here—the plaque—falls within the exception, which applies when the award is worth less than $400, is for length of service or safety, it is presented at a meaningful ceremony, and it is not disguised compensation. Recognition awards, such as the Nobel Peace Prize, are not taxable if the recipient is not required to render future services and the award is turned over by the payor, pursuant to the recipient's direction, to a governmental or charitable organization. Here, the Nobel Peace Prize choice says nothing about it being turned over to a charity or government. There is no particular exemption for a prize merely because it is given by a charity. Finally, coming into possession of a valuable baseball is a taxable event because receipt of property (other than by gift) constitutes the realization of wealth.
How is a transfer of property between former spouses treated upon divorce? A As a forced sale; fair market value at the time of the transfer determines the transferor's gain or loss and the transferee's basis. B As a forced sale; the transferee's basis is fair market value at the time of the transfer, but the transferor does not recognize any gain or loss. C As a nontaxable exchange; the transferor recognizes no gain or loss and the transferee takes the transferred basis. D As a taxable exchange if the transferor receives cash or property as consideration for the transfer.
C. A transfer of property between divorcing spouses is treated as a nontaxable exchange. The spouse receiving the property takes it with a transferred basis (the same basis the property had when the couple was married), so any unrecognized gain or loss will be recognized at the time the recipient sells or exchanges it. This is true even if the transferor receives cash or property as consideration for the transfer.
Which of the following statements is true regarding damages for emotional distress? A Damages for emotional distress are excluded from gross income to the extent they exceed 10% of the taxpayer's gross income. B When damages are awarded for emotional distress in the amount of $50,000 or less, they are excluded from gross income. C Damages for emotional distress are not excluded from gross income if they are paid in conjunction with damages for defamation or libel. D Damages for emotional distress are not excluded from gross income unless they are paid by an employer to an employee.
C. Damages for emotional distress are not excluded when awarded for nonphysical injuries such as defamation or libel. There is no 10% floor or $50,000 ceiling, and it does not matter whether the damages are paid by an employer.
Which of the following statements is NOT true regarding alimony payments: A For divorce or separation instruments entered after 2018, alimony payments are not deductible by the payor. B The parties to a separation agreement entered before 2019 may modify the agreement to determine who bears the tax burden on the payments. C Portions of alimony payments that are designated for the support of the payor's children are includible as gross income by the recipient. D For divorce or separation instruments entered after 2018, alimony is not included the recipient's gross income.
C. If any portion of an alimony payment is fixed by the decree or agreement as being for the support of the payor's children, that portion is not deductible by the payor, nor is it includible by the recipient. After 2018, alimony payments are excludible to the recipient and not deductible by the payor. However, the parties to a separation agreement entered before 2019 may modify the agreement to determine who bears the tax burden on the payments.
If a Subchapter S corporation has earnings but does not distribute them, which of the following statements is correct? A The earnings are not taxed to the shareholders until distributed. B The earnings are taxed to the shareholders in the current year and each shareholders' basis in corporate shares is reduced by his or her proportionate undistributed share. C The earnings are taxed to the shareholders in the current year and each shareholders' basis in corporate shares is increased by his or her proportionate undistributed share. D None of the above.
C. Shareholders in a Subchapter S corporation are taxed on their pro rata portion of earnings regardless of whether the earnings are distributed. If the earnings are not distributed, the shareholder's basis for his or her stock is increased in the amount of the earnings attributed to the shareholder. If the earnings are distributed to the shareholder in subsequent years, the shareholder's basis in the corporate stock is decreased by the amount distributed.
Taxpayer recently came into some money and would like to give her three children $6 million each. Neither Taxpayer nor her deceased spouse had ever made a taxable gift before. Putting aside the annual gift exclusion, will Taxpayer owe any federal gift tax? A Yes, on the full $18 million. B Yes, on the portion of the gift beyond her inflation-adjusted $10 million unified credit amount. C No, because she and her husband have an inflation-adjusted $20 million unified credit. D No, because a taxpayer can apply an inflation-adjusted $10 million unified credit to each gift she makes.
C. Taxpayer and her husband have an inflation-adjusted $20 million unified credit. Taxpayers have a unified credit against gift and estate taxes that shields the first $10 million (adjusted annually for inflation) in gifts beyond the annual exclusion amount. Moreover, a spouse may use any unused portion of the credit of a deceased spouse. Thus, (A) is incorrect. (B) is incorrect because Taxpayer can use her deceased spouse's credit as well. (D) is incorrect because it gives the wrong rationale—there is not a $10 million exemption for each gift.
If a cash basis taxpayer receives a check for services rendered, in what year must the taxpayer recognize the income? A In the year in which the taxpayer completes the work for which the check was given. B In the year the taxpayer cashes the check. C In the year the taxpayer receives the check. D It depends on factors not raised by the other choices.
C. Under the cash method of accounting, income is reported in the same year that it is received. The rule usually applies when a check is given as payment. It is the time the check is received that matters and not when the check is cashed, even if the check is post-dated. Disbursements follow a similar rule—they are expenses in the year they are paid.
personal deductions - alimony - child support
Child Support Rule: If any portion of the payments is fixed by the decree or agreement as being for the support of the payor's children, the portion is not deductible by the payor and is not includible by the recipient. 1) Any reductions in payments due to a contingency relating to a child (such as reaching the age of majority) are treated as child support rather than alimony. 2) Payments are first allocated to non-deductible child support and then to alimony.
How are child support payments treated under the Internal Revenue Code? A As income to the recipient and an exclusion from income for the payor. B As an exclusion from income for the recipient and not deductible by the payor. C It depends on which spouse has physical custody of the child or children. D In the same manner as alimony payments.
Child support payments are excluded from the recipient's income and not deductible by the payor. This rule applies regardless of the custody arrangement between the ex-spouses. Child support payments are distinguished from alimony and treated differently.
A taxpayer owns a business with his spouse. The business is valued at $7 million. The couple have two children to whom they plan to leave the business when they die. Neither the taxpayer nor his spouse has ever made an inter vivos gift subject to the gift tax. Taxpayer dies and leaves his $3.5 million share of the business to his spouse. What are the federal estate tax consequences of this gift? A The $3.5 million gift is taxable to the taxpayer's estate, but the tax will be offset by the taxpayer's unified credit. B The $3.5 million gift is taxable to the receiving spouse, but she can offset the tax with her unified credit. C The gift tax is subject to the generation skipping tax because the taxpayer skipped making a gift to his children. D There is no estate tax consequence at this time.
D There is no estate tax consequence at this time. All amounts given between spouses are exempt from the estate tax. Thus, there is no need to rely on the unified credit. The unified credit is available to a donor to offset taxable gifts made during life or at death; the gift tax is levied on the donor and not the donee. Generation skipping taxes do not apply under the facts here.
Which of the following statements is true regarding the charitable contribution deduction? A The deduction is limited to 50% of the taxpayer's adjusted gross income. B The deduction is available for donations of property and the donor's services as well as for cash donations. C A deduction is not available if the taxpayer receives anything of value in exchange for the donation. D None of the above.
D. None of the statements about the charitable donation deduction is true. Generally, the deduction is limited to 60% of a taxpayer's adjusted gross income. The deduction is available for gifts of money or property, but the value of one's services cannot be deducted. A taxpayer can take a deduction if the taxpayer receives something in exchange for the donation, but only to the extent that the value of what was given exceeds the value of what was received. (For example, if a box of girl scout cookies has a fair market value of $2 but costs $4, the $2 difference is deductible.)
Which of the following statements is true regarding taxation of a regular (Subchapter C) corporation? A Earnings of the corporation flow through it to be the personal income of the shareholders in proportion to their ownership interests in the corporation. B A corporation is taxed on its earnings, and the earnings are taxed again as income of the shareholders if distributed to them. C Earnings are taxed to the corporation but are not taxed to the shareholders when distributed to them. D Corporations earning more than $15 million effectively are taxed at a rate of 25%.
Earnings of a Subchapter C corporation are said to be subject to double taxation: they are taxed to the corporation (at corporate tax rates) when earned and they constitute taxable income of the shareholders if distributed to them. Earnings in a Subchapter C corporation do not flow through the corporation to the shareholders automatically—that is what happens in a Subchapter S corporation. Choice (D) is incorrect because corporate tax is 21% for all corporations, regardless of earnings.
Mr. Giannini works for a bank. After working for 2/3 of a year and earning a salary of $200,000 he tells the bank he does not want any more payments and instructs that something "worthwhile" be done with the money. His salary for the last 1/3 of the year would have amounted to $100,000. How much gross income does he have for the year?
Effective disclaimer- could have done anything with the money- and did it before the work was provided
Property Acquired from a Decedent General rule (§1014): The basis of property acquired from a decedent is the ______________ at the date of decedent's death. If an alternate valuation date is used, the basis is the FMV on that date. The rule applies to both appreciated and depreciated property. Since property generally appreciates, this is called the "stepped-up basis" rule. Wills and Trust cross-over.
FMV
Community Property Twist Rule: Property which represents the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State will also receive the _________________.
FMV basis
Jock plays for Pro Corporation. Pro purchases Jock's $1 million life insurance policy for $20,000. What are the tax consequences to Pro when Jock dies? Same facts as above, but Jock is a shareholder in Pro.
Here, $1m life paid by reason of death, but because it was a transfer for valuable consideration, so it's included. So $980,000 excluded from GI If J is a shareholder, $1m excluded because transfers for money exception doesn't apply if party is a SH of recipient
Insured dies leaving Beneficiary her $100,000 life insurance policy. What result if Beneficiary has a 25-year life expectancy and receives $12,000 annually for life?
If the life insurance proceeds are paid out over time, the amount excluded equals the excluded amount divided by the beneficiary's life expectancy. $100K excluded. $100/25 = $4K per year excluded; $8K included
If a professional agrees to be compensated for his services with property instead of cash, does the professional need to report the value of the property on his tax return? A Yes, because the property served as compensation for services rendered, and therefore is income. B Yes, unless the professional and the client have a friendship outside of their business relationship. C No, unless the property has a value of more than $1,000. D No, unless the property has a fair market value equal to or greater than the professional's normal fee for such services.
In cases of non-cash income, the taxpayer must include the fair market value of the property or services rendered on his tax return. If the property serves as payment for professional services, it qualifies as income, not a gift. It does not matter if the value of the property is less than the professional's normal fee; if he accepts the property as compensation there is no loss to report.
Duberstein is in the business of supplying raw materials to manufacturers. In gratitude for tips about new customers, Berman "gives" Duberstein a Cadillac, taking a deduction for the car as a business expense. Is this a gift and excluded from gross income?
Income, accession of wealth clearly realized, and not a gift- not given with detached disinterest and generosity.
Jeannie owns stocks and is entitled to receive $2,000 in dividends on the stocks in Year 1. Before the dividend is declared, Jeannie assigns her rights to the dividends to Larry in repayment of a debt. Later that year the dividends are paid and the amount is paid to Larry. Whose gross income is it?
Jeannie's gross income; she owns the stock.
To what extent are an individual's medical expenses deductible if the expenses were not compensated for by insurance or otherwise? A To the extent they exceed 7.5% of the taxpayer's adjusted gross income, but insurance premiums cannot be counted as part of the expense. B To the extent they exceed 7.5% of the taxpayer's adjusted gross income, and insurance premiums can be counted as part of the expense. C Fully, but insurance premiums cannot be counted as part of the expense. D Fully, and insurance premiums can be counted as part of the expense.
Medical expenses are deductible to the extent that they exceed 7.5% of the taxpayer's adjusted gross income ("AGI"), provided they are not compensated for by insurance or otherwise. Deductible expenses include insurance premiums paid by the taxpayer, home care, and prescription drug costs in addition to hospital costs.
Snooki and Jionni are married. Snooki sells Blackacre, originally purchased for $20,000, to Jionni for $50,000. How much gain is recognized by Snooki?
None, even though gain realized is $30K. Because between spouses. Jionni takes $30k basis in blackacre
Connor receives a gold watch worth $300 in a raffle. What are the tax consequences to Connor on receipt of the watch?
Prize or award - $300 of GI. Basis of $300
For purposes of capital gains, what is a taxpayer's basis for property given to the taxpayer as a gift during the donor's life? A The value the property had on the date of the gift. B The value the property has on the date the taxpayer sells it. C The basis the property has on the date six months after the taxpayer receives the property. D The basis the property had in the hands of the donor.
Property acquired by an inter vivos gift generally retains the basis it had in the hands of the donor. The value the property had on the date of the gift may be quite different from the property's basis, since the value of the property may have increased or decreased since the donor obtained the property. Therefore, the property's value on the date of the gift is not used for the purpose of determining gain.
Dependents
Rule (§152): There are two types of dependents, qualifying child and qualifying relative. Need for other deductions (i.e., medical expenses). 1. Qualifying child Elements: Must have (1) proper relationship, (2) meet the age requirements (under 19 or a full time student under the age of 24), (3) must reside with the taxpayer for more than 1/2 of the taxable year, (4) child must not provide more than 1/2 of their own support, and (5) has not filed a joint return with their spouse for the taxable year. Proper relationship: child of the taxpayer or spouse (and adopted children), any descendants of the child, brother, sister, stepbrother, stepsister or any descendants of those individuals. 2. Qualifying relative Elements: Must have (1) proper relationship, (2) make less gross income than exemption amount, (3) the taxpayer must provide over 1/2 the support, (4) is not a qualifying child. a. Proper relationship: children and their descendants, brother, sister, father, mother, niece, nephew, uncle, aunt, in-laws, and any individuals (other than spouse) who share the same principal place of abode as the taxpayer.
Itemized Deductions - Qualified Trade or Business Deductions
Rule: For taxable years from 2018 through 2025, non-corporate taxpayers can take a deduction of up to 20 percent on qualified business income. This deduction is new in 2018 and is designed to reduce the tax rate on non-corporate business income. The deduction can be used regardless of whether a taxpayer itemizes or uses the standard deduction.
Which of the following statements is true regarding the annual gift tax exclusion? A Spouses may combine gifts to give twice as much to a single recipient. B Each taxpayer is allowed only one annual exclusion per year. C The donor may not exclude a gift given to the same recipient in subsequent years. D The amount of the gift is deducted from the donor's unified lifetime credit.
Spouses may make a combined gift and so may exclude a gift to a single recipient that is twice as much as what a single donor could exclude. The annual gift tax exclusion is a "per donee" exclusion; a taxpayer is not limited to one donee annually. Moreover, there is no prohibition against taking an exclusion for gifts made to the same recipient in subsequent years. Finally, the whole point of the exclusions is that the gifts are excluded from the requirement that they be deducted from the lifetime credit; the opposite of choice (D).
Gains from Property Steps: For any "sale or other disposition of property" you must complete the following steps. (3)
Step 1: Determine gain (or loss) realized Step 2: Determine if gain (or loss) is recognized Step 3: Determine if gain is excluded (for losses must determine if deductible) Step 4: Characterize gain (or loss)
Recourse loan:
The lender has a recourse against the borrower's other assets, not just the property purchased with the loan.
Non-recourse loan:
The lender's only recourse is against the security for the loan. If the borrower defaults, the lender can only take the security interest, not any of the borrower's other assets.
If spouses are divorced and they have one or more children who are under the age of 19 or under the age of 24 and a full-time student, which parent is entitled to claim the child(ren) as dependents? A Each parent is entitled to take one half of the dependent deduction available. B The parent with the highest income. C The parent making child support payments. D The parent having physical custody of the child(ren) for the greater part of the year.
The parent having physical custody of the child(ren) for the greater part of the year is generally entitled to claim the child as a dependent (assuming the parents provide more than half the support for any child claimed as a dependent).
Non-recognition (of gain) sections
Transfers Between Spouses and Former Spouses Incident to Divorce: No gain recognized on these transfers. Like-kind Exchanges: No gain or loss is recognized when (1) real property used in a trade or business or held for investment (other than stock or securities) (2) is exchanged solely for other real property of a "like kind" (3) which is to be held either for productive use in a trade or business or for investment.
Debra paints Ray's house for $2,000. After she completes the work she instructs Ray to pay Larry the $2,000 instead of paying her. Does Debra have any gross income?
Yes - accession of wealth clearly realized; it's D's income; she performed the services
Fairmont takes out a loan and uses the money to purchase a new truck for his business. Is the interest deductible on the loan?
Yes - interest used in trade or business
After finding a deduction section and applying any limitations to the expenditure, it must be determined where to take the deduction -- either from gross income in computing adjusted gross income (aka, _______________________), or from adjusted gross income in computing taxable income (aka, ______________). The proverbial "line" is that which separates adjusted gross income from taxable income in the computation of federal tax liability.
above the line deductions below the line deductions Would rather have your deductions ABOVE THE LINE.
Realization of Gain (Step 1) Rule (§1001(a)): For all "sales or other dispositions of property" you must determine the amount of gain realized. This is computed by taking the "______________________________" less the "________________________" of the property.
amount realized; adjusted basis
"Itemized" Deductions Generally: In the tax code the presumption is that expenditures [are/are not] deductible
are NOT: require a specific Code section allowing for a reduction in either adjusted gross income or taxable income.
Adjusted Basis Rule (§1011(a)): The adjusted basis is the basis under the applicable section (based on how the property was acquired), adjusted for capital expenditures or depreciation. Conceptually, adjusted basis is the amount of _____________ (money) that a taxpayer has in any given piece of property.
capital
Characterization - You need to look at three different issues in determining if an amount is a long-term or short-term capital gain/loss. Must determine: (1) if you are dealing with a ______________________________________, (2) involved in a __________________________________________, (3) determine the ____________________________________________. Only assets held for "more than one year" receive the rate preference.
capital asset sale or exchange holding period
Characterization as Sale or exchange a) Sale: _____________________ b) Exchange: _____________________
conversion of property into cash transfer of one property for another
Mortgage Transactions Rule: Treat debt as _______________________ to cash. When a person purchases property and borrows to finance the purchase, the amount of debt is ________________________ in the basis. When a person sells property, and the buyer assumes debt of the seller, it's treated like the buyer paid additional cash.
equivalent; included
Itemized Deductions - Depreciation Deductions Depreciation deductions allowed if (1) property suffers from _________________ and (2) either used in (a) trade or business or (b) held from the production of income (investment property). Till 2023 have 100% deductibility.
exhaustion, wear and tear
Rule (§61): Except as otherwise provided, gross income includes all _______________ from whatever source derived.
income
Adjustments to Basis Rule (§1016): The basis of the property may be ___________________ (for capital expenditures/improvements made to the property) or _______________ (for depreciation or losses). Think of basis as tracking the amount of capital a taxpayer has in any given piece of property
increased; decreased
Recognition of Gain (Step 2) Rule (§1001(c)): Unless otherwise provided, the gain or loss realized [is/is not] recognized.
is
Deductions save tax liability by a taxpayer's _____________________________________. Example: For a taxpayer with a 35% marginal rate, a deduction of $100 saves ________ in tax liability.
marginal rate (highest rate of tax); $35
Amount Realized Rule (§1001(b)): The amount realized is the sum of _________________ and the FMV of property other than money received. The amount realized includes any ________________ relieved.
money liabilities
Business Deductions - Trade or Business Deductions Rule: There shall be allowed as a deduction all (1)________ and _____________ (2) expenses (3) paid or incurred during the taxable year (4) in carrying on (5) any trade or business.
ordinary, necessary Elements in more detail: Elements: 1) Ordinary and Necessary "Ordinary": Of common or frequent occurrence in the type of business involved. "Necessary": Appropriate and helpful. "Necessary" does NOT require "necessity" in the sense that it is absolutely required for the business. 2) Expenses Rule: Property used in a trade or business or in the production of income that has a useful life of more than a year may not be "expensed" (its cost deducted in the year of purchase). Instead, the taxpayer must "capitalize" the cost (i.e., add the cost to basis). The consequences of this depend on the type of asset.
Assignment of Income from Property Rule: Income from property is taxable to the person who _______________ the property.
owns
Assignment of Income from Services Rule: Income from services is includible in the gross income of the person _______________________________ the services. An exception exists if a person (1) makes a complete disclaimer (2) before services are performed.
performing
3. Is the gain excluded? A taxpayer may exclude the gain on the sale or exchange of property if (1) such property has been owned and used as the taxpayer's ________________ (2) for __ out of the last 5 years. (3) May use the exclusion only once every ___ years. Caps on exclusion: a) Single person: ________________ b) Married, filing joint return: ________________
principal residence 2 2 $250,000 $500,000
Assignment of Income (Whose income is it?) Generally: A taxpayer may not avoid income from services or property generally by merely assigning the right to the item of income to another taxpayer either directly or through an entity. Since the income tax is _______________________ (the greater a taxpayer's taxable income, the higher the rate of taxation) there is an incentive to assign income to others in a lower tax bracket. Courts, not the Code, have dealt with this in the following manner.
progressive
Characterization as Capital assets - Elements: Any ___________________________ held by the taxpayer which is NOT
property (1) inventory, (2) depreciable trade or business property, (3) real property used in a trade or business, (4) accounts receivable, (5) literary copyrights in author's possession a) Any property interest qualifies (real, personal, tangible or intangible). b) Examples: (i) Stock -- capital assets (unless you are a stock broker) (ii) Car used for personal purposes -- capital asset (iii)Car used for business purposes -- not a capital asset since this is depreciable trade or business property
As part of their divorce settlement Sandra also agrees to give Jesse some stock. The stocks have a basis to Sandra of $1 million and a fair market value of $3 million. What are the tax consequences of the transfer?
property transfer incident to divorce 1) Jesse: treated as gift; 1m basis 2) Sandra: neutral; no deduction or gain
Holding period Rule: The holding period starts on the date after ____________ and ends on the date of _________. For stocks use the ________ to determine the holding period.
purchase sale trade date
Upon a sale or other disposition of property, generally, except for a _________ situation, a taxpayer must compute gain (or loss). This is because there is a "realization event."
pure gift
Gift basis Rule (§1015): The transferee's adjusted basis is the ________________ as the transferor's basis. It is said that the transferee "steps into the shoes" of the transferor
same
By definition, if something is income it will be includible in gross income unless _______________. Therefore, you need to analyze first if something is "income," then determine if there are any exclusions.
specifically excluded
IX. Credits Generally: Credits are a dollar-for-dollar reduction of ____________________________. Example: If tax liability before credits is $1,000, and credits are equal to $100, the amount of tax due is __________________. A credit of $100 will save __________________ in taxes, regardless of your marginal tax rate
tax liability 900 100 rather credits than deductions
Property Transfers Between Spouses and Former Spouses if "Incident to Divorce" [Property settlements] Rule (§1041): Straight _______________________________________
transferred basis
