Tax mid term

Correspondence examinations

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

Dependency Requirements

Must be a citizen of the United States or a resident of the United States, Canada, or Mexico. Must not file a joint return with the individual's spouse unless there is no tax liability on the couple's joint return and there would not have been any tax liability on either spouse's tax return if they had filed separately.13 Must be considered either a qualifying child of the taxpayer or a qualifying relative of the taxpayer.14

Tax Professional Responsibilities

Tax practitioners are subject to a variety of statutes, rules, and codes of professional conduct. The AICPA's seven Statements on Standards for Tax Services (SSTS) recommend appropriate standards of practice for tax professionals. Many state boards of accountancy have adopted similar standards to the SSTS standards. Circular 230 provides regulations governing tax practice and applies to all persons practicing before the IRS. There is a good bit of overlap between Circular 230 and the AICPA SSTS.

Due dates for corporations, partnerships, and S corporations

Tax returns for taxable corporations ("C" corporations) are generally due on the fifteenth day of the fourth month following the corporation's year-end. The exception is for tax returns for C corporations with a June 30 year-end, which are due on the fifteenth day of the third month (September 15th).For both partnerships and S corporations (generally nontaxable corporations), tax returns must be filed by the fifteenth day of the third month following the entity's year-end (March 15 for calendar-year partnerships or S corporations).

Return on Capital

Taxpayers are allowed to recover the capital invested in property tax free. Payments from purchased annuities are part income and part return of capital. When property is sold or disposed, the realized gain or loss equals the sale proceeds reduced by the tax basis of the property.

Statutory Authorities

U.S. Constitution (16 Amendment) Internal Revenue Code (The house ways and means committee and senate finance committee) Treaties

Education Expenses

Up to $4,000 of qualified education expenses can be deducted for AGI. Qualified education expenses include tuition and related costs for postsecondary or higher education. The deduction is reduced for taxpayers with modified AGI over $65,000 ($130,000 married filing jointly) and eliminated for taxpayers with modified AGI exceeding $80,000 ($160,000 married filing jointly).

Casualty Loss

loss arising from a sudden, unexpected, or unusual event such as a "fire, storm, or shipwreck" or loss from theft The first floor is $100 for each casualty event during the year. This floor eliminates deductions for small losses. The second floor limitation is 10 percent of AGI, and it applies to the sum of all casualty losses for the year (

Primary authorities

official sources of the tax law generated by the legislative branch (i.e., statutory authority issued by Congress), judicial branch (i.e., rulings by the U.S. District Court, U.S. Tax Court, U.S. Court of Federal Claims, U.S. Circuit Court of Appeals, or U.S. Supreme Court), or executive/administrative branch (i.e., Treasury or IRS pronouncements).

Ordinary income property.

only deduct the lesser of (1) the property's fair market value or (2) the property's adjusted basis. Assets the taxpayer has held for a year or less. Inventory the taxpayer sells in a trade or business. Business assets held for more than a year to the extent the taxpayer would recognize ordinary income under the depreciation recapture rules if the taxpayer had sold the property.37 Assets, including investment assets and personal-use assets, with a value less than the taxpayer's basis in the assets (assets that have declined in value).

Medical Expenses

payments for the care, prevention, diagnosis, or cure of injury, disease, or bodily function that are not reimbursed by health insurance or are not paid for through a "flexible spending account. is limited to the amount of unreimbursed qualifying medical expenses paid during the year (no matter when the services were provided) reduced by 10 percent of the taxpayer's AGI. 65^ 7.5

Business activities

profit motivated are sometimes referred to as a trade or business, and these activities require a relatively high level of involvement or effort

Claim of right doctrine

that income has been realized if a taxpayer receives income and there are no restrictions on the taxpayer's use of the income

Constructive receipt doctrine

the judicial doctrine that provides that a taxpayer must recognize income when it is actually or constructively received.

Field examinations

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

Office examinations

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

capital

these are gains or losses on the disposition or sale of capital assets. In general, capital assets are all assets other than Accounts receivable from the sale of goods or services. Inventory and other assets held for sale in the ordinary course of business. Assets used in a trade or business, including supplies. long term capital gain = 15% loss limit = 3000 carried over indefinitely

Secondary Authorities

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

Interest on Education Loans

up to $2,500 of interest on education loans is deductible for AGI. A loan qualifies as an education loan if the proceeds are used to fund qualified education. The interest deduction is phased-out for taxpayers with AGI exceeding $65,000 ($130,000 married filing jointly).

Tax evasion

willful attempt to defraud the government by not paying taxes legally owed.

miscellaneous itemized deductions

Employee business expenses not reimbursed by an accountable plan. Investment expenses if not in a rental or royalty activity. Tax preparation fees and allowable hobby expenses. Total miscellaneous itemized deductions are subject to a 2 percent of AGI floor limit.

Gross Income

gross income means all income from whatever source derived (emphasis added). must receive economic benefit

Community Property Systems

he income earned from services by one spouse is treated as though it was earned equally by both spouses

Unearned income

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

Qualifying Relative

(1) a relationship test, (2) a support test, and (3) a gross income test. RELATIONSHIP: 1) has a qualifying family relationship with the taxpayer or 2) meets the qualifying relative "member of the household" test. SUPPORT: The support test generally requires that the taxpayer pay more than half the qualifying relative's living expense GROSS INCOME: The gross income test requires that a qualifying relative's gross income for the year be less than the personal exemption amount

Realization Principle

(1) a taxpayer engages in a transaction with another party, and (2) the transaction results in a measurable change in property rights.

Alimony

(1) a transfer of cash made under a written separation agreement or divorce decree, (2) the separation or divorce decree does not designate the payment as something other than alimony, (3) in the case of legally separated (or divorced) taxpayers under a separation or divorce decree, the spouses do not live together when the payment is made, and (4) the payments cannot continue after the death of the recipient. included in gross income

Research memo

(1) facts, (2) issues, (3) authority list, (4) conclusion, and (5) analysis.

Qualifying Child

(1) relationship, (2) age, (3) residence, and (4) support. Relationship test.A qualifying child must be an eligible relative of the taxpayer. Eligible relatives include the taxpayer's Child or descendant of a child. For this purpose, a child includes a taxpayer's adopted child, stepchild, and eligible foster child. Sibling or descendant of sibling. For this purpose, a sibling includes a taxpayer's half-brother, half-sister, stepbrother, or stepsister. AGE: (1) under age 19 at the end of the year or (2) under age 24 at the end of the year and a full-time student. RESIDENCE:A qualifying child must have the same principal residence as the taxpayer for more than half the year. SUPPORT: A qualifying child must not have provided more than half his or her own support (living expenses) for the year.

5 steps tax research

(1) understand the facts, (2) identify issues, (3) locate relevant authorities, (4) analyze the tax authorities, and (5) document and communicate research results.

From AGI after

- interest - charitable contributions

Jonah has the choice of paying Rita $5,000 today or $15,000 in 10 years. Assume Jonah can earn a 5 percent after-tax rate of return. Which should he choose?

5000 today

Juanita, a Texas resident (5th Circuit), is researching a tax question and finds a 5th Circuit case ruling that is favorable and a 9th Circuit case that is unfavorable. Which circuit case has more "authoritative weight"?

5th Circuit.

For AGI deductions

Deduct in determining AGI. Deduction "above the line." Generally more valuable than from AGI deductions. tend to be deductions associated with business activities and certain investing activities

From AGI deductions

Deducted from AGI to determine taxable income. Deduction "below the line." Generally less valuable than for AGI deductions. personal in nature itemized deductions, the standard deduction, and exemptions.

Deductions for AGI

Deductions directly related to business activities. Deductions indirectly related to business activities. Deductions subsidizing specific activities.

Moving Expenses

Distance test - 50 miles more than the distance from the old residence to the old place of work Time test - the taxpayer must either be employed full-time for 39 of the first 52 weeks after the move or be self-employed for 78 of the first 104 weeks after the move -transportation -lodging -cost of moving stuff - NO MEALS & house hunting trips

Tax penalties

Failure to file a tax return, the penalty equals 5 percent of the tax due for each month (or partial month) that the return is late. However, the maximum penalty is generally 25 percent of the tax owed, and the failure-to-file penalty does not apply if the taxpayer owes no tax.

exceptions to gifts/ prizes

First, awards for scientific, literary, or charitable achievement such as the Nobel Prize are excluded from gross income, but only if (1) the recipient was selected without any action on his part to enter the contest or proceeding, (2) the recipient is not required to render substantial future services as a condition to receive the prize or award, and (3) the payer of the prize or award transfers the prize or award to a federal, state, or local governmental unit or qualified charity such as a church, school, or charitable organization designated by the taxpayer The second exception is for employee awards for length of service or safety achievement.22 These nontaxable awards are limited to $400 of tangible property other than cash per employee per year

Exclusions to Mitigate Double Taxation

Gifts and inheritances are subject to federal transfer taxes and are, therefore, excluded from the income of the recipient. A maximum of $101,300 (2016) of foreign earned income can be excluded from gross income for qualifying individuals. To be eligible for the foreign earned income exclusion, the taxpayer must live in the foreign country for 330 days in a consecutive 12-month period.

Single taxpayer Social Security

If modified AGI + 50 percent of Social Security benefits ≤ $25,000, Social Security benefits are not taxable. If $25,000 < modified AGI + 50 percent of Social Security benefits ≤ $34,000, taxable Social Security benefits are the lesser of (a) 50 percent of the Social Security benefits or (b) 50 percent of (modified AGI + 50 percent of Social Security benefits − $25,000). If modified AGI + 50 percent of Social Security benefits > $34,000, taxable Social Security benefits are the lesser of (a) 85 percent of Social Security benefits or (b) 85 percent of (modified AGI + 50 percent of Social Security benefits − $34,000), plus the lesser of (1) $4,500 or (2) 50 percent of Social Security benefits.

Due Dates

Individual tax returns are due on April 15 for calendar-year individuals. Due dates that fall on a Saturday, Sunday, or holiday are automatically extended to the next day that is not a Saturday, Sunday, or holiday. Any taxpayer unable to file a tax return by the original due date can request an extension to file. An extension allows the taxpayer to delay filing a tax return but does not extend the due date for tax payments.

Interest and Dividend Income

Interest is taxed at ordinary rates. Cash interest payments are taxed annually. Accrued market discount is taxed at sale or maturity. Savings bonds are taxed at sale or maturity. Original issue discount is taxed annually. Dividends Dividends are taxed annually. Qualified dividends are taxed at preferential rates.

Common exclusions

Municipal interest Gains on the sale of personal residence (250000, owned more than 2 years and principal residence) Fringe benefits

Filing Status for Married Taxpayers

Married filing jointly Taxpayers are legally married as of the last day of the year. When one spouse dies during the year the surviving spouse is still considered to be married for tax purposes during the year of the spouse's death. Both spouses are ultimately responsible for paying the joint tax. Married filing separately Taxpayers are legally married as of the last day of the year. Generally no tax advantage to filing separately (usually a disadvantage). Each spouse is ultimately responsible for paying own tax. Couples may choose to file separately (generally for nontax reasons). Qualifying widow or widower When a taxpayer's spouse dies, the surviving spouse can file as qualifying widow or widower for two years after the year of the spouse's death if the surviving spouse remains unmarried and maintains a household for a dependent child.

The estate of Monique Chablis earned $450 of income this year. Is the estate required to file an income tax return?

No, because the estate's gross income is less than $600, the estate is not required to file an income tax return

Exclusions Related to Sickness and Injury

Payments from workers' compensation plans are excluded from gross income. Payments received as compensation for a physical injury are excluded from gross income, but punitive damages are included in gross income. Reimbursements by health and accident insurance policies for medical expenses paid by the taxpayer are excluded from gross income. Disability payments received from an employee-purchased policy are excluded from gross income.

Taxes

State, local, and foreign income taxes, including state and local taxes paid during the year through employer withholding, estimated tax payments, and overpayments on the prior year return that the taxpayer applies to the current year (the taxpayer asks the state to keep the overpayment rather than refund it). Real estate taxes on property held for personal or investment purposes. Personal property taxes that are assessed on the value of the specific property

Education Exclusions

Students seeking a college degree can exclude scholarships that pay for required tuition, fees, books, and supplies. Taxpayers can elect to exclude interest earned on Series EE savings bonds when the redemption proceeds are used to pay qualified higher education expenses. The exclusion of interest on Series EE savings bonds is restricted to taxpayers with modified AGI below specific limits.

IRS Audit Selection

The IRS uses a number of computer programs and outside data sources to identify tax returns that may have an understated tax liability. Common computer initiatives include the DIF (Discriminant Function) system, document perfection program, and information matching program. The DIF system assigns a score to each tax return that represents the probability the tax liability on the return has been underreported. The document perfection program checks all returns for mathematical and tax calculation errors. The information matching program compares the taxpayer's tax return to information submitted to the IRS from other taxpayers.

additional doctrines

The business purpose doctrine allows the IRS to challenge and disallow business expenses for transactions with no underlying business motivation. The step-transaction doctrine allows the IRS to collapse a series of related transactions into one transaction to determine the tax consequences of the transaction. The substance-over-form doctrine allows the IRS to reclassify a transaction according to its substance.

IRS Audits

The three types of IRS audits are correspondence, office, and field examinations. After the audit, the IRS will send the taxpayer a 30-day letter, which provides the taxpayer the opportunity to pay the proposed assessment or request an appeals conference. If an agreement is not reached at appeals or the taxpayer does not pay the proposed assessment, the IRS will send the taxpayer a 90-day letter. After receiving the 90-day letter, the taxpayer may pay the tax or petition the U.S. Tax Court to hear the case. If the taxpayer chooses to pay the tax, the taxpayer may then request a refund of the tax and eventually sue the IRS for refund in the U.S. District Court or the U.S. Court of Federal Claims.

The timing strategy

The timing of when income is taxed or an expense is deducted affects the present value of the taxes paid on income or tax savings on deductions. The tax costs of income and tax savings of deductions vary as tax rates change. When tax rates are constant, tax planners prefer to defer income and accelerate deductions. When tax rates are increasing, the taxpayer must calculate the optimal tax strategies for deductions and income. When tax rates are decreasing, taxpayers should accelerate tax deductions into earlier years and

Molto Stancha Corporation had zero earnings this fiscal year; in fact, they lost money. Must they file a tax return?

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

Hyundai is considering opening a plant in two neighboring states. Option 1: One state has a corporate tax rate of 10 percent. If operated in this state, the plant is expected to generate $1,385,000 pretax profit. Option 2: The other state has a corporate tax rate of 2 percent. If operated in this state, the plant is expected to generate $1,320,000 of pretax profit. a. What is the after state taxes profit in the state with the 10% tax rate? b. What is the after state taxes profit in the state with the 2% tax rate? c. Which state should Hyundai choose?

a. 1,246,500 b. 1,293,600 c. Option 2

Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $45,000 of legal services for a client. Manny typically requires his clients to pay his bills immediately upon receipt. Assume Manny's marginal tax rate is 40 percent this year and next year, and that he can earn an after-tax rate of return of 10 percent on his investments. a. What is the after-tax income if Manny sends his client the bill in December? b. What is the after-tax income if Manny sends his client the bill in January? Use Exhibit 3.1. c. Based on requirement a and b, should Manny send his client the bill in December or January?

a. 27,000 b. 28,638 c. January

Dennis is currently considering investing in municipal bonds that earn 4.50 percent interest, or in taxable bonds issued by the Coca-Cola Company that pay 6.0 percent. a. If Dennis's tax rate is 20 percent, which bond should he choose? b. Which bond should he choose if his tax rate is 30 percent c. At what tax rate would he be indifferent between the bonds? d. What strategy is this decision based upon?

a. Taxable Bonds b. Municipal Bonds c. 25% d. Conversion Planning Strategy

Conversion Strategy

is based on the understanding that the tax law does not treat all types of income or deductions the same. To implement the conversion strategy, one must be aware of the underlying differences in tax treatment across various types of income, expenses, and activities and have some ability to alter the nature of the income or expense to receive the more advantageous tax treatment. The Internal Revenue Code contains specific provisions that prevent the taxpayer from changing the nature of expenses, income, or activities to a more tax-advantaged status. Implicit taxes may also reduce or eliminate the advantages of conversion strategies.

Tax avoidance

legal act of arranging one's transactions to minimize taxes paid.

Capital gain property

are allowed to deduct the fair market value of capital gain property on the date of the donation

after tax return =

before tax return * (1-marginal tax rate)

Earned Income

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

statute of limitations

defines the period in which the taxpayer can file an amended tax return or the IRS can assess a tax deficiency for a specific tax year ends three years from the later of (1) the date the tax return was actually filed or (2) the tax return's original due date. for fraudulent returns or fail to file = open indefinitely

dividend income

direct equity investments in corporate stocks or investments in mutual funds that invest in corporate stock.

Life insurance

excluded, except when payments interest is gross income

Income Shifting Strategy

exploits the differences in tax rates across taxpayers or jurisdictions. Common examples of income shifting include high-tax-rate parents shifting income to low-tax-rate children, businesses shifting income to their owners, and taxpayers shifting income from high-tax jurisdictions to low-tax jurisdictions. The assignment of income doctrine requires income to be taxed to the taxpayer who actually earns the income. The IRS also closely monitors related-party transactions.

Gifts

federal transfer tax; not included in income