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When to file?

Due date April 15

Can extend 6 months to October 15

Still must make estimated payment by April 15
Filing Status options

Married Filing Jointly

Married Filing Separately

Qualifying Widow(er) (Surviving Spouse)

Head of Household
Single Filing Requirements
Single or legally separated as of 12/31

Status as of 12/31 decides status
Married Filing Jointly Requirements
If married during year can file MFJ,

If divorced during year CANNOT file MFJ

(status at 12/31 decides)

If one spouse dies during year, a joint return is
Qualifying Widow(er) (Surviving Spouse)
Available 2 years subsequent to spouse death
provided a dependent child is involved, and no

Must maintain household for whole taxable year
was principal

residence of child (inc. step; blood or adoption)

Widower = Whole Year
Head of Household Filing Requirements
1) Individual is not married, is legally separated,
or lived apart for >6 months at end of year

2) Not a Qualifying Widow(er)

3) Not a Nonresident Alien

4) Maintains a residence for > half the year, that
is principal residence of

a) Dependent son or daughter (Divorced Mom)

b) Father or Mother (not required to live with TP)
(Nursing Home)

c) Dependent Relative (must live with TP) (Not
Freeloading Friends)

Head of Household = Half Year
Personal Exemptions
If you are claimed on another persons return, not
allowed the personal exemption

Folks use it, you lose it
Married Taxpayers (MFJ and MFS)
Each spouse gets an exemption in MFJ

If MFS, to get both on one, spouse must meet
two tests:

1) spouse has no gross income

2) spouse not claimed by another taxpayer
Birth or death during the year exemption?
If someone dies or is born, get the exemption for
the whole year, no proration
Phaseout of Exemptions
Reduces Exemptions by 2% for every $2,500 or
portion of for GI exceeding

MFJ = 305,050

HoH= 276,650

Single = 254,200

MFS= 152,525

MFJ makes 317,050: 317,050
305,050=12/2.5=4.8 round to 5 (always up).
5x2%=10%, 100%10%=90% of exemptions
Dependency Exemptions
People not Pets

CARES = Qualifying Child

SUPORT = Qualifying Relative
CARES Method for Qualifying Child
Close Relative

Age Limit = 19 or 24 (college)

Residency = must have same principal residence >
half year

Eliminate Gross income test = does not apply to a

Support Test Changes = can not contribute more
than half their own support.
SUPORT Method for Qualifying Relative
Support Test = supply more than 50% of the
support for year

Under Exemptions amt of Taxable GI = less than
$3,950 taxable, not (Soc. Sec, Tax Exempt int, tax
exempt scholarship)

Precludes Dependent filing Joint Return

Only citizens of USA, Mexico, or Canada


Taxpayer lives with individual for whole year
Gross Income Event
Realization vs Recognition
Realized Real World

Recognition Record
4 types of income characterization
1. Ordinary

2. Portfolio

3. Passive (Rental Activity)

4. Capital
8 items included in Salaries and Wages
1. Money

2. Property (FMV)

3. Cancellation of Debt

4. Bargain Purchases

5. Guaranteed Payments to a Partner

6. Taxable Fringe Benefits

7. Partially Taxable Fringe Benefits (Portion of Life
Ins. Premiums above $50K in coverage)

8. Nontaxable Fringe Benefits
Nontaxable Fringe Benefits Include
Life Insurance Proceeds, Accident, Medical, and
Health Insurance (employer paid), De Minimis
Fringe Benefits, Meals and Lodging, Employer
Payment of Employee's Education Expenses,
Qualified Tuition Reductions, Qualified Employee
Discounts, Qualified Pension, Profit Sharing, and
stock bonus plans, and Flexible spending
Qualified Pension, Profit Sharing, and Stock Bonus
Plan Parts
Payments made by employer (nontaxable)

Benefits Received (taxable)
Interest Income (4 types)
1. Taxable Int. Income (GR All Interest income is
taxable unless specifically excluded)

2. Tax Exempt interest income

3. Unearned Income of a Child under 18 (kiddie

4. Forfeited Interest Adjustment
Taxable interest income
Federal, industrial development, and corporate

Premiums for opening a savings account, Interest
paid by fed, state, or local gov't for late payment
of a refund
Tax Exempt interest
State and local government bonds/obligations,

Bonds of a US possession,

Series EE Bonds (Educational Expenses),

VA Insurance
Unearned Income of a child under 18
Kiddie Tax

under 18 (or 24 if parent provides > half support)

taxed at parents higher rate

Dividend income (sources and taxability)
E&P/Current=Distribute at CY End

E&P/Accumulated=Distribution Date

Return of Capital=No E&P

Capital Gain Distribution=No E&P and No Basis
Three categories of Dividend income
1. Taxable Dividends

2. Tax Free Distributions

3. Capital Gain distributions
Taxable Dividends (Amount and Rates)
Cash=Amount Received


Qualified Dividend Holding Period: must be held
more than 60 days during the 120 period that
begins 60 days before dividend date

Tax Rates: 0% (low income 10 or 15 ordinary),
15% (most), 20% (high 39.6 ordinary bracket)
Tax Free Distributions (4 types)
Return of Capital

Stock Split

Stock Dividend (unless option for cash or

Life Insurance Dividend
State and Local Tax Refunds (taxable vs
If itemized prior year=state and local refund is

If standard deduction (1040EZ) in prior
year=nontaxable state and local refund
Payments from a divorce (spouse receiving)
Alimony is Income, and must be:

legally required

in cash or equivalent (pay cc bills or college fees)

must end at death

Child Support is:

Nontaxable and taken first if Deadbeat dad"
Property Settlements are:
Business income or loss (location/Formula)
On the Schedule C

Gross Business Income

Business Expenses

=Profit or Loss
Expenses Included in Schedule C
COGS, Salaries Paid to Others (not yourself), State
and Local Business Taxes Paid,

Office Expenses, Actual Auto expenses,

Business Meals and Entertainment (50%), Deprec.
of business assets,

Interest on business loans (incurred and paid"),
Employee Benefits,
Legal and prof. fees,
debts under accrual"
Nondeductible on Schedule C
Salaries to the sole proprietor,

federal income tax,

personal portion of: auto, travel, vacation,
personal meals, interest expense, state and local
tax expense,

health insurance of sole proprietor,

charitable contributions
Two taxes on Net Business Income (Schedule C)

What about loss?
Income Tax, and

Federal SelfEmployment Tax

Loss has 2 year carryback and 20 year carry
Uniform Capitalization Rules

1) Types of Property?

2) Capitalized Vs. Period Expense
3 Types of Property:

1) Produced for Use (Tangible)

2) Produced for Sale (Tangible)

3) Acquired for Resale (Tangible) preceding 3
years average gross receipts less than 10 million

Capitalize: Direct Materials, Direct Labor, OH

Expense: Selling, General, and Admin, R&D
IRA Income Taxation
Must be 59.5 years old to withdraw (if not 10%
penalty Tax, unless exception)

Traditional Deductible IRA Distributions are
ordinary income

Nondeductible (Traditional, Roth)

Traditional Principal (non tax), accum earnings

Roth nothing taxed
IRA Income Penalty Exceptions

Home Buyer (1st time, up to 10K)

Insurance (medical

Medical Expenses (excess of 10% AGI)




Rental of Vacation Home
If rented less than 15 days: rental income is

If rented 15 days or more, & used for personal for
greater of 14 days or 10% of rental days:
expenses are prorated and deductible to the
extent of income
Taxable Miscellaneous Income (4 types)
1) Prizes and Awards FMV is included unless, won
without entering and given to charity

2) Gambling: Winning included in GI, Losses only
to extent of winnings

3) Business Recoveries

4) Punitive Damages
Partially Taxable Miscellaneous Items (3 items)
1) Degree seeking Student: Scholarships
excludable unless used for room and board or
service required

2) Scholarships rewarded to nondegree seeking

3) Tuition Reduction
Nontaxable Miscellaneous Items (7)
1) Life Insurance Proceeds

2) Gifts and Inheritance

3) Medicare Benefits

4) Workers Compensation (Unemployment Comp
is taxable)

5) Personal Injury or Illness Award

6) Accident Insurance

7) Foreign Earned Income Exclusion
When is a Nonqualified option taxed?
At the grant date when there is a readily
ascertainable value, otherwise, taxed when
Generally, a taxpayer must file a return if his or
her income is equal to or greater than:
the personal exemption + the regular standard
deduction + additional standard deduction (for
taxpayers age 65+ or blind) [except for married
persons filling separately]
which individuals must file income tax returns
even if their income is lower than the general
rule" requirement?"
1. net earnings from selfemployment are $400
or more

2. can be claimed as dependents on another
taxpayer's return, have unearned income, and
gross income of $1000(2014) or more

3. receive advanced payments of earned income
How can an individual receive an automatic six
month extension to file? File Form 4868 by April 15
When do taxpayers who are out of the country
Automatic twomonth extension just by including
documentation, and can request the other
extensions under the same rules as for other
in a _____ state, a husband and wife who elect to separate property state
file using the married filing separately status must
report their own income, exemptions, credits and
deductions on their own individual income tax
in a ____ state, most of the income, deductions,
credits, etc., are split 50/50. community property state
what are the two requirements to have qualifying
widower (surviving spouse)" status?"
1. two years after spouse's death

2. principal residence for dependent child
what are the requirements for the principal
residence for dependent child" requirement for
surviving spouse status"
the surviving spouse must maintain a household
that, for the whole taxable year, was the principal
place of abode of a son, stepson, daughter, or
stepdaughter (whether by blood or adoption).
The surviving spouse must also be entitled to a
dependency exemption for such individual.
what are conditions to be considered a father or
mother" under the head of household
not required to live with the taxpayer, provided
the taxpayer maintains a home that was the
principal residence of the parent for the entire
year. maintaining a home means contributing
over half the cost of upkeep. This means rent,
mortgage interest, property taxes, insurance,
utility charges, repairs, and food consumed in the
what are conditions to be considered a
dependent relative" under the head of household
parents, grandparents, brothers, sisters, aunts,
uncles, nephews, and nieces (step and inlaws
included) qualify as relatives.

must live with taxpayer.

cousins, foster parents, and unrelated
dependents do not qualify.
how can a married taxpayer filing separately
claim his spouse's personal exemption?
if the spouse has no gross income,

not claimed as a dependent of another taxpayer
if the parents of a child are able to claim the child
but do not no one else may claim the child unless
that taxpayer's AGI is higher than the AGI of the
highest parent
what type of relationships qualify under close
relative" requirement of qualifying child status for
dependency exemptions?"
taxpayer's son, daughter, stepson, stepdaughter,
brother, sister, stepbrother, stepsister, or a
descendent. adopted children and foster children
what is the age limit to be considered a qualifying
child for dependency exemptions?
younger than the taxpayer, under age 19 (or 24 in
college), no limit to permanently disabled (school
attendance at night does not qualify)
what are the residency and filing requirements to
be considered a qualifying child for dependency
child must have the same principal place of abode
as the taxpayer for more than one half of the tax

cannot file joint tax return for the year (unless
filed only for a refund claim)
How much money can a child earn to be
considered a qualifying child for dependency
exemptions? any amount
what is the support test to be considered a
qualifying child for dependency exemptions?
child must not contribute more than onehalf of
his support (doesn't need to be by parents
what is the support test to be considered a
qualifying relative for dependency exemptions?
the taxpayer must have supplied more than one
half of the support. scholarships are not included.
social security and state welfare payments are
included to the extent that such amounts are
actually expended for support purposes
how do multiple support agreements work for
dependency exemptions?
when two or more taxpayers contribute more
than half support, the contributing taxpayers
(who must be qualifying relatives or lived the
entire year with), one gets it. contributor must
have given more than 10% of support and meet
other dependency tests.
what is the multiple support declaration that joint
contributors are required to file? form 2120
a person may not be claimed as a dependent
unless the dependent's gross income is _______ less than the exemption amount ($3950 in 2014)
a taxpayer will lose the exemption for a married
dependent who files a joint return unless
the joint return is filed solely for a refund of all
taxes paid or withheld for the taxable year
what are the citizen/residency requirements of
qualifying relatives for dependency exemptions?
only citizens of the u.s. or residents of the u.s.,
mexico, or canada.
how can kissing cousins or foster beer be counted
as an exemption? if they live with the taxpayer the entire year.
how are children of divorced parents treated for
exemption purposes?
whoever has custody of the child for a greater
period of time (financial support irrelevant). if
same, parent with higher AGI.
what is form 8322
written declaration that waives the right of a
custodial parent to take the exemption for a
child. must be attached to noncustodial parents
return. custodial can revoke by giving one years
notice and copy form 8322 claiming the
revocation on their return.
what can you get for being 65+ or blind?
additional standard deduction (not an additional
if an event is taxable, what is the income and
basis? fair market value
_____ requires the accrual or receipt of cash,
property, or services, or change in the form or
the nature of the investment (a sale or exchange) realization
_____ means that the realized gain must be
included on the tax return recognition
what are the four characterizations of income ordinary, portfolio, passive, capital
what falls under ordinary income?
salaries and wages, state and local tax refunds,
alimony, IRA and pension income, self
employment (schedule C) income, unemployment
compensation, social security, prizes, the taxable
portion of scholarships and fellowships, gambling
income, and anything else.
what falls under portfolio income?
income a taxpayer would earn on his portfolio of
assets, such as interest and dividends.
what is passive income?
activity in which taxpayer did not actively
only ______ may offset passive income. passive losses
how are net passive losses treated?
not deductible on tax returnsuspended and
carried forward until passive income exists to
offset it, unless an exception exists.
what can you get for being 65+ or blind?
additional standard deduction (not an additional
if an event is taxable, what is the income and
basis? fair market value
_____ requires the accrual or receipt of cash,
property, or services, or change in the form or
the nature of the investment (a sale or exchange) realization
_____ means that the realized gain must be
included on the tax return recognition
what is passive income?
activity in which taxpayer did not actively
only ______ may offset passive income. passive losses
how are net passive losses treated?
not deductible on tax returnsuspended and
carried forward until passive income exists to
offset it, unless an exception exists.
what are two types of passive income?
rental income and royalties/ beneficiaries of
trusts and investments in Partnerships, LLCs, and
S Corporations
life insurance premiums: under ____ plans only,
premiums above the first $______ of coverage
are taxable income to the recipient and normally
included in W2 wages. nondiscriminatory plans only; $50,000
the proceeds of a life insurance policy paid
because of the death of the insured re general
excluded from the gross income of the
the interest income element on deferred payout
arrangements if fully taxable.
For policies issued after 8/17/06, if a life
insurance policy is companyowned (COLI), the
beneficiary may exclude from gross income
benefits received only up to _____
the total amount of premiums and other amounts
paid by the policy holderany excess would be
taxable. [many exceptions apply family]
accident, medical and health insurance
premium payments are ______ the employee's excludable from
income when the employer paid the insurance
accident, medical, and health insurance
amounts paid to the employee under the policy
are includable in income unless such amounts
1. reimbursement for medical expenses actually
incurred by the employee

2. compensation for the permanent loss or loss of
use of a member or function of the body
what are de minimis fringe benefits?
benefits that are so minimal that they are
impractical to account for and may be excluded
from income
what are examples of nontaxable fringe
life insurance proceeds; accident, medical, and
health insurance; de minimis fringe benefits;
meals and lodging; employer payment of
employee's educational expenses; qualified
tuition reductions; qualified employee discounts;
qualified pension, profitsharing and stock bonus
plans; flexible spending arrangements stems;
economic recovery payments
up to _____ may be excluded from gross income
of payments made by employer on behalf of an
employee's educational expenses. the exclusion
applies to ____ level education. $5,250; both undergrad and grad level education
grad students may exclude tuition reduction only
they are engaged in teaching or research
activities and only if the tuition reduction is in
addition to the pay for the teaching or research.
to be excludable, tuition reductions must be
offered on a ____ basis. nondiscriminatory
to what extent are merchandise discounts
limited to the employer's gross profit percentage.
any excess must be reported as income.
to what extent are service discounts excludable?
limited to 20% of the FMV of the services. any
excess discount must be reported as income.
the value of employerprovided parking up to
___ (in 2014) per month may be excluded
$250. available even if the parking benefit is
taken by the employee in place of taxable cash
the value of employerprovided transit passes up
to ___ (for 2014) per month may be excluded $130
generally, payments made by an employer to a
qualified pension, profit sharing, or stock bonus
plan are ____ to the employee at the time of
contribution not income
benefits received the amount that is exempt
from tax (plus any income earned on such
amount) is taxable to the employee when?
in the year in which the amount is distributed or
made available to the employee
what is a flexible spending arrangement stem
plan that allows employees to receive a pretax
reimbursement of certain (specified) incurred
employees have the ability to elect to have part
of their salary (generally up to $____ per year)

deposited pretax into a flexible spending
account. the employee has the option to use the
deposited funds to pay for _____ and/or ____
costs and submits claims to the plan admin for
qualified healthcare and/or qualified dependent
care costs
flex spending arrangement funds not used
within ____ after the yearend or not claimed
within a period of time (usually ____ months) are
forfeited. 2.5 months; 6 months
are economic recovery payments taxable? not taxable.
what is the general rule for interest? all interest is taxable, unless specifically excluded
is interest income from federal bonds taxable? yes
is interest income from industrial development
bonds taxable? yes
are premiums received for opening a savings
account (prizes and awards) taxable? at what
value? yes, at FMV
is interest income from part of the proceeds from
an installment sale taxable? yes
is interest on state and local bonds/obligations
taxable? no
are mutual fund dividends for funds invested in
taxfree bonds taxable? no
is interest on the obligation of a possession of the
US taxable? no
when is interest of series EE bonds tax exempt?
1. used to pay for higher education (reduced by
taxfree scholarships, of the taxpayer, spouse or

2. there is taxpayer or joint ownership (spouse)

3. the taxpayer is over age 24 when issued; and

4. the bonds are acquired after 1989
is there a phaseour for allowable tax exempt
interest income from series EE yes
is interest on veterans administration insurance
taxable? no
what are the four examples of tax exempt
interest income
state and local gov bonds/obligations; bonds of a
u.s. possession; serious EE; veterans
Administration insurance
what is the purpose of kiddie tax?
prevent people from putting their unearned
income to their kids to have a lower tax liability
how is the kiddie tax calculated?
child's total unearned income (from dividends,
interest, rents, royalties, etc.( and subtracting
$2000 (the childs allowable 2014 standard
deduction of $1000 (or investment expense, if
greater) + $1000 (which is taxed at the child's
when can parents elect to include on their own
return the unearned income of the applicable
provided the income is between $1000 and
$10,000 and consists only of interest and
what happens with forfeited interest? (early
withdrawal of savings)
the bank credits the interest to the taxpayer's
account and then, in a separate transaction,
removes certain interest as a penalty. the interest
received is taxable, but the amount forfeited is
also deductible as an adjustment in the year the
penalty is incurred. (theoretically netted, but not
what are the four examples of distributions that
are exempt from gross income?
1. return of capital

2. stock split

3. stock dividend (unless cash or other property
option/taxable FMV)

4. life insurance dividend
how to account for a stock dividend of the same
stock. original basis is divided by total shares
how to account for a stock dividend of a different
original basis is allocated based on the relative
FMV of the different stock.
how are capital gain distributions treated?
distributions by a corp that has no e&p, and for
which the shareholder has recovered his entire
basis, are treated as taxable gross income
the receipt of a state or local income tax refund in
a subsequent year is not taxable if _______.
the taxes paid did not result in a tax benefit in the
prior year (itemize or standard deduction)
payments for the support of a spouse are ____ to
the spouse receiving the payments are are
______________ by the contributing spouse income; deductible to arrive at agi
is child support taxable? no
if the divorce settlement provides for a lump
sum payment or property settlement by a spouse,
that spouses gets ____ for payments made, and
the payments are _____ of the spouse receiving
the payment no deduction; not includible in the gross income
for business income, must use ____ method for
inventory accrual
types of business expenses

2. salaries and commissions (paid to others)

3. state and local bus tax paid

4. office expenses

5. actual auto expenses, or standard mileage rate

6. business meal & entertainment at 50%

7. depreciation of business assets

8. interest expense on business loans (when
incurred and paid)

9. employee benefits

10. legal and professional services

11. bad debts (accrual tax payer only)
which salaries and commissions are considered
business expenses? ones paid to others, not to yourself
when can business meal and entertainment
expenses be 100% deductible? when all proceeds go to benefit a charity
interest expense paid in advance by a cash basis
taxpayer cannot be deducted until ________ the tax year/period to which the interest relates
what bad debt write off method is used for tax
direct write off method, rather than allowance
what are nondeductible expenses for schedule c?
1. salaries paid to the sole proprietor

2. federal income tax

3. personal portions of stuff

4. bad debt expense of a cash basis taxpayer (who
never reported the income)

5. charitable contributions
where are charitable contributions reported? itemized deduction on schedule A
what are the two taxes on net business income? income tax and fed selfempoyment (S/E) ax
an adjustment to income is allowed for _______
of S/E tax (medicare plus social security) paid
onehalf (which is 7.65% of up to 115,500 of self
emplyment income in 2014 plus 1.45% of self
employment income thereafter)
all self employment is subject to the ______ tax,
but only up to $115,500 in 2014 is subject to the
______ tax
2.9% medicare tax, 12.4% social security tax;
Total 15.3%
how is a net taxable business loss treated?
a business with a loss may deduct the loss against
other sources of income. when the loss exceeds
these amounts, the excess net operation loss is
permitted as a carryover

2 year carryback, 20 year carryforward
unless an exemption exists for a taxpayer or a
contract, longterm contracts must be accounted
for using the ____ method to determine taxable
income for a particular contract percentageofcompletion
which contracts are exempt from the longterm
requirement that they use percentageof
1. small contractors (no more than 2 yrs)

2. home construction contractors

3. contract that includes land and where less than
10% of the total contract costs relates to the
actual construction of property on the land

4. services performed by architects, engineers,
etc (contracted to perform services but are not
generally responsible for the final product under

5. services performed under warranty and
maintenance agreements related to the long
term contract
unless an exemption exists for a taxpayer or a
contract, those involved in longterm contracts
must use _______ to account for their longterm
projects in construction.
cost allocation rules (essentially the Uniform
Capitalization Rules)
which contracts are exempt from the cost
allocation rules required for tax for longterm
construction contracts? small contractor and home construction.
Small contractor and home construction
contractors are required to allocate _______
related to the contract to the costs of the project production period interest
home construction projects that are not also
small constructions projects must use ______ uniform capitalization rules
in cost allocation rules for longterm construction
contracts, interest for the production period need
not be capitalized if_______________
the total cost of the project is $1 mil or less and
the project is estimated to take less than 12
months to complete
for cash basis taxpayers, the starting date of
production is generally the date on which the
contractor ____
incurs costs (other than the startup engineering,
design, etc. costs that are excluded from cost
allocation) under the contract.
for accrual basis taxpayers the starting date is
the later of the date for cash basis taxpayers or
the date the taxpayer has incurred at least 5% of
the total costs initially estimated under the
the end date of the production period is generally
the date on which _____
the work under the contract is complete (per
contract provisions) or on the date the taxpayer
has incurred at least 95% of the total costs
expected under the contract
what is the costtocost method of calculating
the percentageofcompletion?
ratio of the total cumulative costs incurred to
date at the end of the tax year divided by the
total expected costs to be incurred under the
the ______ method is required to be used for
Alternative Minimum Taxation, regardless of the
method used for regular tax (except for home
construction contracts) percentageofcompletion
even if the percentageofcompletion method is
used for regular tax purposes, there are still likely
to be differences in the calculation of taxable
income because ___________
the calculation of alternative minimum taxable
income must take into account not only the
method of income recognition, but also other
alternative minimum tax rules (e.g. depreciation
_________ must be calculated using the
percentage of completion method, even if the
corporation uses the completedcontract method
for regular tax purposes. corporate earnings and profits.
in order for the manufacture of personal property
to qualify as longterm contract, not only must
the contract not be completed within the year it
was started, but it also must be ____________
for the manufacture of a unique" item (i.e., an
item that is made specifically for a customer and
could not be sold to others, is not generally part
of a taxpayer's normal inventory, and requires
significant preproduction costs)"
if a taxpayer performs services for a contractor
that is required to account for a longterm
contract entered into with a related party using
the percentageofcompletion method, the
taxpayer (even those providing engineering or
design services) must also use the percentage of
completion method because of _____, unless the
exception exists where ______
because of the related party impact. the
exception is where over 50% of the 3year
average annual gross receipts of the same items
stem from unrelated parties.
most farmers use the ___ basis of accounting. cash
how does the cash basis work for calculating
farming income?
inventories of produce, livestock, etc., are not
considered. gross income includes the cash and
the value of all other items received from the sale
of produce, livestock that has been raised by the
farmer, and for livestock or other items a farmer
may have bought, profit is computed by
subtracting the purchase price from the sales
which farmers are required to use the accrual
certain corporate and partnership farmers as well
as all farming tax shelters.
how does the accrual basis work for calculating
farming income?
value of inventories at year end

+ proceeds received from sales

value of inventories at the beginning of the year

cost of inventory purchased during the year

= gross profit
whether on a cash or accrual method of
accounting, taxpayers who sell stock or sell
securities on an established securities market
must recognized gains and losses as of the ___
date, not the ____ date. as of the trade date, not the settlement date.
generally, retirement money cannot be
withdrawn until the individual reaches the age of
____ or the individual elects _______________
59.5; elects to receive equal periodic distributions
over his life expectancy.
what is RMD?
required minimum distribution (for IRAs) by age
when a person retires the funds will be taxed as
______ when received
ordinary income (regardless of what type of
income, such as capital gain, was earned while
the funds were invested)
are qualified benefits received from a roth IRA
taxable? no
what is taxable in a traditional nondeductible
principal not taxable. accumulated earnings
taxable when withdrawn
what is the penalty for withdrawing on an IRA
10% penalty tax (on top of any increase in regular
income tax) if the individual has not met an
there is no penalty if the premature distribution
on an IRA was used to pay for:
H home buyer (1st time) $10,000 max exclusion
(w/in 120 days)

I insurance (medical) if you're unemployed
longer than 12 weeks / self employed

M medical expenses in excess of 7.5% of AGI

D disability (permanent/indefinite)

E Education

D Death
excess contribution to an IRA plan are subject to
______________ until the excess is corrected cumulative 6% excise tax each year
if an annuitant lives longer than expected, then
further payments are _____. fully taxable
if an annuitant dies before all the payments are
collected, the unrecovered portion is a _______
on the annuitant's final income tax return
miscellaneous itemized deduction not subject to
the 2% AGI floor.
Schedule _ is used to compute supplemental
income and/or loss from rental real estate,
royalties, partnerships and lLLCs, S corps, estates,
trusts Schedule E
what is the basic formula for the determination of
net rental income or loss?
gross rental income

+ prepaid rental income

+ rental cancellation payment

+ improvement inlieuofrent

rental expenses

= Net rental income / loss
rental of vacation home rented less than 15
days what are the tax implications?
rental income excluded from income. treated as
personal residence. mortgage interest and real
estate taxes are allowed as itemized deductions.
depreciation, utilities, and repairs are not
rental of vacation home rented 15 or more days
what are the tax implications?
treated as personal/rental residences. expenses
are prorated between personal and rental use.
(taxes prorated by annual period, utilities and
depreciation by annual usage). rental use
expenses are deductible only to the extent of
rental income.
how are nondeductible PALs treated?
passive activity losses can only be offset by
passive income! carryforward foreverif still
unused, suspended losses become fully tax
deductible in the year the property is disposed of
if the taxpayer becomes a material participant in
the passive activity, how are unused passive
losses treated?
the can be used to offset the taxpayer's active
income in the same activity.
who are the taxpayers subject to passive activity
loss rules?
individuals, estates, trusts, personal service corps,
and closely held C corps
an individual may deduct rental activity losses if: mom and pop exception, real estate professional
what is the mom and pop exception of the
passive activity loss disallowed net loss
taxpayers ay deduct up to $25,000 per year of net
passive losses attributable to rental real estate
annually if the individuals are actively
for the carryforward after the mom and pop
exception, an estate can qualify for the ___ years
following the decedent's death if the decedent
actively participated in the operation 2 years
what is the phaseout for the mom and pop
reduced by 50% of the excess of the taxpayer's
AGI (without consideration of this loss deduction)
over 100,000. (so up to $150,000)
what are the conditions to be considered a real
estate professional (so that the rental activities
are not considered passive and the taxpayer can
fully deduct losses from the rental activities
against other income)?
1. more than 50% of the taxpayer's personal
services during the year are performed in real
property businesses

2. the taxpayer performs more than 750 hours of
services in real property businesses during the
the taxpayer must include in gross income the full amount
___ amount received for unemployment
are social security benefits included in income?
mayyyybe, depends on how much you make! (5
levels of provisional income)
what is provisional income?
AGI + taxexept interest + 50% of social security
if you are low income, how much of your social
security benefits are taxable?
zero. provisional income: less than $25,000
single, $32,000 MFJ
if you are upper income, how much of your social
security benefits are taxable?
85%. provisional income: more than $34,000
single, $44,000 married
what do you need to add to your AGI to end up at
1. income excluded for foreign earned income

2. exclusion or deduction claimed for foreign

3. interest income from series EE bonds that you
were able to exclude bc you paid qualified higher
education expenses

4. deduction claimed for student loan interest or
qualified tuition and related expenses

5. any employerpaid adoption expense you

6. any deduction you claimed for an annual (non
rollover) contribution to a regular IRA
an exclusion from income for certain prizes and
awards applies where the winner is _________
where the winner is selected for the award
without entering into a contest and assigns the
award directly to a gov'tal unit or charity
when can gambling losses be deducted?
only to the extent of gambling winnings.
allowable amount is deductible on schedule A as
an itemized deduction, but the amount is not
subject to the 2% floor.
to decide whether a business recovery is
excludible, one must determine _______
what the damages were paid in lieu of. (if for lost
profit, then it's income)
when are punitive damages taxable?
fully taxable as ordinary income if received in a
business context or for loss of personal
reputation. also if personal injury case, except in
wrongful death cases
how are graduate teaching assistants and
research assistants who receive tuition reductions
they are taxed on the reduction if it is their only
compensation, but not if the reduction is in
addition to other taxable compensation.
does gross income include property received
from a gift or inheritance? no
what is the taxable portion of a gift?
any income received from such property (interest
income, rental income, etc)
are medicare benefits included in gross income? no
when can you exclude from gross income
payments received (even with multiple
recoveries) from accident insurance?
if the individual paid all premiums for the
taxpayers working abroad may exclude from
gross income up to $____ of their foreignearned
income. in order to qualify for the exclusion, the
taxpayer must satisfy one of the two tests:
$99,200. bonafide residence test (for an entire
taxable year), physical presence test (present for
330 full days our of any 12consecutive month
is treasury stock a capital asset? no
are copyrights, literary music or artistic
compositions that have been purchased capital
assets? yes
is section 1231 assets capital? no
how is the gain/loss calculated when you sell
property that was gifted to you?
if the fmv is higher, then selling price basis.

if fmv value is lower, then gain = selling price
basis and

loss = fmv selling price.

anything in between is no gain or loss.
how do you calculate gifted property
Lesser of

Donor's adjusted basis at the date of the gift


FMV at the date of gift.
what is the holding period when you receive
property as a gift?
normally assume the donor's holding period.
unless the FMV is used (as a loss basis) as the
basis of the fit, the holding period starts as of the
date of the gift.
what is the alternative valuation date for
inherited property?
the earlier of 6 months after death or the date of
what is the general rule for inherited property
Property acquired by the bequest or inheritance
generally takes as its basis the stepup (or down)
to FMV at the date of the decedent's death
how is the holding period determined for
property acquired from a decedent?
automatically considered to be longterm
property regardless of how long it has actually
been held.
a gain is not taxed for the following:
H Homeowner's exclusion

I Involuntary Conversions

D Divorced Property Settlement

E exchange of LikeKind Business/Investment

I Installment Sale

T Treasury and capital Stock Transactions
What is the dollar amount of the homeowner's
exclusion from gross income for gain?
$500,000 for married couples filing a joint return
and certain surviving spouses;

$250,000 for single, married filling separately,
and head of household
who qualifies for the homeowner's exclusion
from gross income for gain?
taxpayer owns and used the property as a
principal residence for two years or more during
the 5 year ending period ending on the date of
the sale or exchange. either spouse for a joint
return must meet the ownership requirement,
but both spouses must meet the use requirement
with respect for the property. may not use
exclusion more than once every 2 yrs (could get
partial if other reasons though)
how are involuntary conversions treated for
nonrecognition treatment is given because the
reinvestment of proceeds restores him to the
position he held prior to the conversion. if the
taxpayer does not reinvest all the proceeds, his
gain on the transaction will be recognized to the
extent of the unreinvested amount.
in an involuntary conversion, when must property
be reinvested by?
personal property = 2 years from year end,
business property = 3 years
in an involuntary conversion, when the gain
exceeds $100,000, __________
property acquired from related parties and
certain close relatives don't qualify as
replacement property
how are losses dealt with in an involuntary
conversion? losses are recognized!
nonrecognition treatment is accorded to like
kind" exchange of property used in the trade or
business or held for investment, EXCEPT:"
inventory, stock, securities, partnership interests,
and real property in different countries
how do you determine the amount of income to
report in an installment sale for the year? earned revenue = cash collections x GP %
how are treasury and capital stock transactions
by a corporation treated for tax purposes?
sales of stock by corporation, repurchase of stock
by corp, and reissue of stock are exempt from
gain and losses are disallowed. essentially
corporations are precluded from tax benefits or
income taxes resulting from dealing in their own
which losses on sales of property are
W wash sale loss

R related party transactions

P Personal loss
what is a wash sale?
when a security is sold for a loss and is
repurchased within 30 days before or after the
sale date
who falls under a related party?
brothers and sisters, husband and wife, lineal
descendants, entities that are more than 50%
owned by individuals, corps, trusts, and/or
capital gains taxes are imposed on all sales of
nondepreciable property between all related
parties except:
1. husband and wife (basis is merely transferred)

2. individual and a 50% controlled corp or
partnership (where the gain is taxed as ordinary
what are the basis rules for selling property under
related party transactions? same as giftbasis rules
no deduction is allowed for the loss on a non
business disposal or loss. an itemized deduction
may be available in the category of ______ casualty and theft
what is the holding period and tax rate for short
term capital gains?
one year or less, tax rate is treated as ordinary
long term gains on ________ are taxed at 28%
(for taxpayers not in the 10%, 15% or 25% tax
collectibles, antiques, and small company (section
1202) stock
individual taxpayers realizing a net long or
shortterm capital loss may only recognize
(deduct) a max of ___ of the amount realized
from other types of gross income (ordinary
income, passive income, or portfolio income) $3,000
for individuals, what is the carryback of a net
capital loss?
no carryback. but you can carry forward an
unlimited time until exhausted.
how is a personal (nonbusiness) bad debt
a shortterm capital loss in the year debt
becomes totally worthless
how are worthless stock and securities treated
under net capital losses?
the cost (or other basis) of worthless stock or
securities is treated as a capital loss, as if they
were sold on the last day of the taxable year in
which they became totally worthless
what are the netting procedures for capital gains
and losses for individuals?
gains and losses are netted within each tax rate
group, creating net shortterm and longterm
gains or losses by rate group. resulting short
term and longterm loses are then offset against
short term and longterm gains (respectively)
beginning with the highest tax rate group and
continuing to the lower rates
how are net capital gains for c corps treated?
added to ordinary income and taxed at the
regular rate (do not get the benefit of lower
capital gains rates). section 1231 gains are
entitled to capital gain treatment
how are net capital losses for c corps treated?
corporations may not deduct any capital loss
from ordinary income. only use capital losses
against capital gains. net capital losses are carried
back 3 years and forward 5 years as a short term
capital loss.
how are section 1231 assets treated in a business
in terms of gains and losses?
gains treated as capital" assets used in the
business while losses are treated as ordinary