Federal Income Tax

Paul is an accountant for an employer that provides medical insurance premiums and group term life insurance for all its employees. He receives the following compensation and fringe benefits from his employer the year: Salary 60,000 Year-end bonus 20,000 Medical insurance premiums (for Paul and his family, paid by his employer) Group term life insurance premiums paid by Paul's employer for a $50,000 policy Allowance paid for moving expenses What portion must he include in his gross income for the year?

Salary, year-end bonus, and moving expenses must be included in income. Med and group life term for 50,000 policy is excluded from income.

What is the difference between adjusted gross income and taxable income?

Adjusted gross income taken after account from income to all sources derived (some sources you may not get money on that in that year). Taxable income is your adjusted gross income minus below the line itemized or standard deductions. The taxable income is the amount you use for determining your tax rate.

August 1 of Year 1, Rev. Jackson became the pastor of a local Baptist Church. He receives a salary of $2,000 per month plus a housing allowance of $900 per month to pay for the house where he and his family reside. What is the reverend's gross income for the year?

2000 x 5=10,000. A rental allowance paid to a duly ordained member of the clergy to the extent used to provide home during the year, is not taxable income. Only his salary is deductable. In 2017, WI district court held that this was unconstitutional. Appealed in 2018/

Carol was out of work for the 6 mos of the year. She received $3200 in unemployment benefits from Commonwealth of PA. In June of this year she started a new job as a sales rep involving extensive travel. She earned a salary of $8,000 plus the use of a company car (used solely for company business with use valued at $2500). What is Carol's GROSS INCOME for the year?

3200 (state unemployment benefits) + 8,000 salary. Since her car was used solely for company purposes, excluded.

After computing gross income, how do you get to the taxable income?

Calculate the adjustable gross income, which the gross income minus certain costs associated with earning income and other items like alimony. From there, you subtract the taxpayer's personal exemptions and standard or itemized deductions, whichever is greater. The resulting number is the taxable income

David receives $50,000 of life insurance from his employer. He names his long-time companion Fred as the beneficiary. Is David subject to tax on the life insurance? If David dies, is Fred taxed?

David is not taxed on life insurance and Fred is not taxed if David dies. Section 79 excludes from income the premiums that finance the first $50,000 of group life insurance.

Donald earns $40,00 a year at Sea Air Hotel. A year round residency at the hotel would be 50K. Under what condition would Donald be entitled to reside at the hotel and not be taxed? Would his wife and children be entitled to the same benefit?

Donald would not be taxed on his meals or lodging as manager, they would be excluded from his gross income b/c 1. meals are provided for the convenience of the employer 2. meals are furnished on the premises of the employer 3.employee is required to accept such lodging as a condition of his employment Yes, wife and children would be entitled to same benefit

Jan is a sales representative for Bike Line bicycle shops. Bike Line enjoys a healthy gross profit percentage of 28% on all of its bikes. As an employee Jan receives a 20% courtesy discount on anything that she purchases. Jan purchased a $500 Lotus racing bike for $400. Must Jan include the $100 employee discount in her gross income?

Employees may exclude from gross income the value of courtesy discounts on items purchased from their employer, as long as the discount does not exceed the lesser of 20% or the employer's gross profit percentage on goods in the employer's line of business

T pays tax rate of 25% of their taxable income (gross income-deductions) up to their first $20,000. The income ABOVE $20,000 is taxed at 50%. T has $50,000 in taxable income. What is average rate of taxation?

Find the total tax liability for both marginal and average rate in dollar amount (previous problem). From previous problem, we know 25% of 20K plus 50% of 30K equals 20,000. Divide 20,000/50,000 to get .5 which equals 50 percent. Formula: Total Tax Liability/Total Taxable Income=Average Rate of Taxable Income

In year one, Tina, an unmarried woman with no dependants, has 100,000 of gross income, $15,000 of Section 62 deductions and $7,000 in itemized deductions. The standard deduction for year one is $6,000 and the personal exemption for year one is $4000. What is her adjustable income? What is her taxable income?

Her adjustable income is 100,000-15000-85K (Section 62 deductions). Her taxable income is $74,000. She would choose the itemized deductions of $7,000 since it is a larger deduction AND her $4,000 personal exemption.

Betsy buys an apartment with a limited useful life for $400,000. She sells the property for 2 million in year 10. She has been allowed to take a total of $100,000 in depreciation deductions for her apartment.

Her original basis was $400,000. You would subtract her total deductions each year for depreciation from the original basis (100K), which total $300,000. You would then subtract 300,000 from the amount realized in the sale, 2 million. The result is 1.7 million. You would report this in your income.

Teresa owns land in Hilton Head Island. The land is worth 1 million and held for investment. Her investment in the land (what she paid for it) is $300,000. She exchanges this land for land in Tampa worth the same amount (1 million). She will also hold this land for investment. What is her realized gain on the property? When can she report this on her income taxes?

Her realized gain on the property (the amount of money when property is exchanged or sold) is the difference between the amount she paid for it 300K and what she sold it for, 1 million. This totals 700K. She will not be able to report this on her taxes the year she exchanged the property, she will have to wait until she sells the Tampa property.

Audit

IRS examines and varies your return or any other transaction

T pays tax rate of 25% of their taxable income (gross income-deductions) up to their first $20,000. The income ABOVE $20,000 is taxed at 50%. T has $50,000 in taxable income. What is the marginal rate of taxation?

Last dollar amount of income, the income above the "up to first 20,000 amount." Here, it is 50%

Barton Industries is located in a rural area where there are no nearby restaurants. On rainy days, Mr Barton brings lunch in for the employees so they will not have to leave the building. They may go out if they wish. Must the value of these catered lunches be included in the employees' gross income?

Meals are provided for employees convenience; no fringe benefit for the employer's convenience.

Alice is the manager of the Traveltime Motel. As a condition of her employment, the motel requires her to live in a home owned by the motel located 1/2 mile away so that she will close enough to arrive quickly in an emergency. The motel can contact her anytime by calling her cell phone. Is Alice entitled to exclude the lodging?

Must be on the business premises--1/2 mile may not be so.

Hazel is a maid for Benjamin and Taylor. Her job invovles cooking and cleaning and other household chores. Benjamin is a prominent local attorney and his position requires a great deal of entertaining. Hazel's employment agreement includes free meals, valued at 200/mo, room and board valued at 400/mo and a salary of 1800 per month. What must she include in her gross income?

Only her salary. Meals are lodging are furnished FOR THE CONVENIENCE OF THE EMPLOYER & ON EMPLOYERS PREMISES. The lodging is required as a condition of employment

Jan is a sales representative for Bike Line bicycle shops. Bike Line enjoys a healthy gross profit percentage of 28% on all of its bikes. As an employee Jan receives a 20% courtesy discount on anything that she purchases. Jan purchased a $500 Lotus racing bike for $400. Must Jan include the $100 employee discount in her gross income? Question 14. Assume that Jan was entitled to a 30% discount, and paid only $350 for the bicycle. How much must Jan include in gross income?

Portion of employee's discount that is excluded from gross income is the portion EQUAL to employer's gross profit percentage (here 28%)in the ordinary course of the line of business of the employer in which the employee is performing services. 1. First determine gross profit percentage=28% 2. Plug in dollar amount of item discounted: $500 3. Multiply GPP (.28) x Retail Cost of Item Discounted ($500)=$140 (allowable dollar amount to be discounted for tax purposes ) 4. Subtract 140 (allowable discount exclusion amount) from $500=$360 (amount Jan would have to pay with excludable discount) 5. Subtract what Jan paid from what she was supposed to pay (350-360=$10). 6. That is the amount she must report as income on her taxes/

Capital Gain or Capital Loss

The profit or loss from the sale of stocks, bonds, options, real estate and other capital assets

Susan works for an accounting firm. Her firm held a retreat in CA addressing auditing procedures and techniques. Cost to the company per employee was $2,200 which included the costs of Susan's hotel room, meals, instruction, materials. Susan incurred additional costs of $550 for airfare and $50 for caps and tips. How much should she include as gross income.

These expenses would be excluded from income because they are necessary working expenses. If Susan paid them without reimbursement would not be able to claim b/c Congress suspended misc itemized deductions.

What are the rules for expenses incurred in the production of income?

Things like rent and utilities are deducted in the year they were incurred. If the expense creates an asset that will beyond the year the expense was incurred (sign machine) the expense must be capitlized--allocated across the years it is expected to produce income, taxpayer deducts a portion of the cost each year. If the taxpayer's asset does not have a limited useful life (land), the taxpayer is not permitted to deduct it until she sells it or exchanges it.

Exemption

This is an amount that the IRS lets you subtract from your income to reflect all the people who count on your income. Exemptions can be claimed for yourself, your spouse and your dependents. The IRS allows a set amount for each exemption and, as with deductions; this total is subtracted from your adjusted gross income to come up with your final, lower earnings amount upon which you must figure your tax bill. Your personal exemption amount is in addition to any deductions, either standard or itemized, that you claim. Example: AGI 48,144 CHILD CARE EXEMTION $600 Total=Taxable income to use on your tax bill. This is addition to standard or itemized deductions.

Jack is a retired employee of airline companies. His company allows him free airfare provided space available. If makes 2 trips equal to $1,000, must he include that in his gross income?

Under Section 132, benefits provided to retired employees are treated as though they are provided to employees. The airline did not incur any substantial costs in permitting Jack to fly for free. Thus, he should exclude it from income.

estimated tax

What the taxpayer expects to owe in taxes over the course of the year, generally paid quarterly with vouchers.

In year 10, Tad exchanges the land of Greenacre for a parcel of land in another state. Tad bought the land in year 1 for $75,000. The exchange in kind qualifies for the non-recognition rule of 1031. At the time of the exchange, Greenacre is worth $300,000. In year 15, Tad sells it for $500,000. What amount does he include in his gross income in year 10 and year 15?

Year 10=The realized gain is amount bought for-amount exchanged sold for $75K. Realized gain is reported unless nonregonition rule applies like in this case. Tad includes nothing from the sale in his year 10 income. Year 15=The realized gain on the sale is $75,000 subtracted from the amount sold for, 500,000, totaling 425K. Tad includes this 425K in his year 15 income.

In year one, Ellie pays $300 for an antique dresser at an estate sale. In year 3, Ellie is discovers 10K in the back. When does she have to report it as income?

Year 3

In year 3 Ellie buys a dresser for $300. That same year she discovers the dresser is worth $10,000. Later in year 5 she sells the dresser for $12,000. What amount does she have to include income in year 3 and year 5?

Year 3=nothing as she did not sell the property. In year 5 when she sells she will report the difference of 12,000-300 as income.

Peter is an orderlee at hospital works for 3 to 11, gets $5 for meals. No nearby restaurants. Excludable as income?

Yes excludable because furnished on employee's premise and for the employers convenience.

Donald is a manager of the hotel. He is offered either lodging at the hotel or a 5,000 increase in salary. If chooses to accept the free lodging, will he be taxed on it?

Yes, because Donald is no longer required to accept the lodging as a condition of his employment.

Tad sells Greenacre in year 10 for $75,000. Tad bought Greenacre for 75K. What amount does Tad include in his gross income from this sale?

Zero. He has realized no gain since the amount realized is 75K. If he had realized a loss, he would not report this on his income taxes at all.

casualty loss

a loss caused by complete or partial destruction of an event (FIRE)

earned income credit

a tax credit to employed individuals whose income and modified gross income is less than a certain amount

adjustment to income

an expense that can be deducted even if the taxpayer does not itemized expenses

personal exemptions are

deducted separately from standard or itemized deductions.

Below the line deductions

either standard or itemized deductions. standard is a flat rate dependant on your filing status and itemized deductions are specific items enumerated in the code. The resulting figure from this is taxable income

alternative minimum tax

method of determining income tax devised to ensure that at least a minimum amount of tax is paid by high income corporate and individual taxpayers (including estates and trusts) who reap large tax savings by making use of certain tax deductions, exemptions, losses, and credit.

Capital gain

monetary gain from the sale of a capital asset (stock?). Capital gain is short term if the asset sold was held by the taxpayer for a year or less before selling the asset. Other than short term rates, the precise rate depends on the asset sold. Maximum rate is 15 percent. High pracket tax payers pay less on income received on capital gain than ordinary gain. Example: owe 35% of income on gain if ordinary, 15% of gain if gain is capital.

gross income

money made from all sources derived, before taxes, wages, salaries, fringe benefits, etc all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home

charitable contribution

money or gifts donated to a qualified charity

employment expenses

ordinary and necessary expenses used to task revolving around employment

fringe benefits

payments to employees other than wages or salary 9 out of 10 times excluded from salary unless you violate them

dependant

person who meets five tests of dependancy and thus qualifies as a dependant

Marginal rate

rate applicable to last dollar amount of income

Capitalized Expenses

recorded as an asset rather than as an expense, expenditure appears on the balance sheet, rather than the income statement. expensing the cost over future periods reduces significant fluctuations in income, recover some of the expenses over a period of years, recover some over the sale of the asset

credits

reductions in tax liability allowed by Congress for various purposes, like credits you get from a store. After you calculate tax bill, you can use the credit to reduce the amount you owe to Uncle Sam. More valuable than deduction b/c come right of money you owe rather than reducing the amount of taxed income.

child or dependant care credit

tax credit in the amount of a percentage of funds expended on the child

Average rate of taxation

the up to amount, taxable income as a whole. Calculate by dividing total tax liability by your total taxable income (tax rate of 25% of income up to certain amount) Example: $17,500 (total taxes owed based on average and marginal calculations)/$45,000 (total taxable income)=.38888=38.89%

depreciation

the wear and tear of an item for use in a business

deductions

variable amounts that you can subtract, or deduct, from your agi to arrive at your taxable income. If a taxpayer has 30,000 income and 8,000 deductions then he would pay taxes only on the 30,000. Some deductions like student loan interest, moving expenses are listed on form 1040A or form 1040.

compensation

wages, tips, salaries, or benefits

Example of capitalized asset

Taxpayer pays $30,000 to buy land, spends 100K to construct a factory on the land. Neither the 30K or 100K is IMMEDIATELY deductible from any income. The structure is a depreciable asset whose cost can be recovered over the first 39 years of its productive life.

T pays tax rate of 25% of their taxable income (gross income-deductions) up to their first $20,000. The income ABOVE $20,000 is taxed at 50%. T has $50,000 in taxable income. What is her total tax liability?

1. Calculate 25% of 20,000 for dollar amount of tax liability (average rate)= .25 x 20,000=$5,000 2. Next, subtract up to amount from taxable amount to get the marginal rate. 50,000-20,000=30,000 3. Use specified rate to find marginal tax liability--"exceeding amount": .50 x 30,000=$15,000. 4. Add dollar amount from average rate to marginal tax for a total of $20,000.

T pays tax rate of 25% of their taxable income up to their first $20,000. The income ABOVE $20,000 is taxed at 50%. T has $50,000 in income. Except T is entitled to $5,000 in businesses expenses. What is T's taxable income? What is his taxable income with a $500 dollar credit?

1. Calculate TAXABLE income by factoring in SPECIFIED DEDUCTION: $50,000-$5,000 (deduction)=$45,000 2. Calculate average rate/"up to amount" of income to be taxed on: .25 x 20,000=$5,000 3. Subtract up to/AVERAGE DOLLAR AMOUNT $20,000 from TOTAL INCOME to get Marginal Dollar Amount taxed on: $45,000-$20,000=$25,000 4. Multiply marginal amount (dollar amount to be taxed on exceeding specified number) by marginal rate (percentage of that dollar amount taxed on): .50 x 25,000= $12,500 5. Add number derived from avg perc rate (25%) x up to amount ($20,000) total [$5,000) and avg marg rate (50%) x marginal dollar amount ($30,00) [$15,00]. [$5,000+$15,000]=$20,000. Total taxes owed before credits. 6. Subtract credit ($500) from total taxes owed ($20,000)=($19,500). TOTAL TAXES OWED: $19,500

Guide for computing tax liability:

1. Calculate gross income (income from all sources) 2. Subtract above the line deductions. After these expenses deducted, you have your ADJUSTED GROSS INCOME. 3. Subtract BELOW THE LINE deductions. Either standard or itemized. Resulting figure is TAXABLE INCOME. 4. Apply the tax rate schedule, (example 20% up tof first $20,000 [average] then 50% for any amount after that [marginal]). 5. Subtract from total dollar amount calculated from 1-4 any CREDITS.

Example 2: T pays tax rate of 25% of their taxable income up to their first $20,000. The income ABOVE $20,000 is taxed at 50%. T has $50,000 in income. What is T's average rate of taxation in percentage?

1. Find total tax liability by adding avg rate (.25) x threshold/up to dollar amount ($20,000) + marginal rate (.50)x($50,000-20,000)=$17,500. 2. Divide ($17,500 (tax liability)/$50,000 (total income)=.35=35%

calender year

12 consecutive months beg Jan 1 end Dec 31

fiscal tax year

12 consecutive months ending on the last day of any month other than December, or a 52-53 week year.

Betsy buys raw land as an investment for $400,000. In year 10, Betsy sells the land for 2 million. When can she include it on her taxes as gross income?

She can include it on her taxes when the gain is realized, when she sells or exchanges the property. Her amount realized is the amount she receives from the sale. Here, she realized 2 million from the sale. She will subtract what she bought it for, her adjusted basis (400,000) and get 1.6 millon. She will include the 1.6 million as in her income for year 10.

Standard/ Itemized Deductions

Standard deduction flat rate based on marital status and how many kids you have, itemized are certain deductions other than personal, including property taxes and income or sales tax or charitable contributions, home mortage interest. No records for standard

Effective/average rate

Tax liability (total taxes owed)/total taxable income for the year (50,000).

Head of the Household

filing status is for unmarried individuals who provide a home for certain other persons. You are considered unmarried for this purpose if any of the following applies: (a) You were legally separated according to your state law under a decree of divorce or separate maintenance at the end of the tax year, but, if at the end of the tax year, your divorce was not final (an interlocutory decree), you are considered married; (b) You are married but lived apart from your spouse for the last 6 months of the tax year and you meet the other rules under Married persons who live apart definition; (c) You are married to a nonresident alien at any time during the year and you do not choose to treat him or her as a resident alien.

Married Filing Jointly

filing status used by couple's married at the tax year filing one return

married fired separately

filing status used by couple's married filing separate returns

adjusted gross income

gross income minus allowable reductions

earned income

income derived from personal services--wages, tips, bonus and other types of compensation