WGU C237 Taxation I

Describe the history of taxation in the US

unconstitutional 1895

Sources of Tax Law-Legislative Branch

- Internal Revenue Code (Top)

- Congressional Committee Reports

Describe the criteria of an equitable tax structure Equity

Is it Fair

Simplicity

understandability

Economy

minimal compliance and administrative costs

-

Convenience

no burden of records and compliance

Certainty

Stability and certainty of amount of taxes

Regressive

decreases as tax base increases

Proportional

flat tax

Progressive

tax increases as tax base increases

Gross Income

Total income - Exclusions

Taxable income

Gross income-Deductions-Exemptions

Income before tax credits

Taxable income x tax rate

Total tax liability

Income before tax credits-tax credits

balance due or refund

total tax liability - Prepayments

Distinguish between various types of taxes

State Tax

Local Income

Franchise Tax

Wealth transfer tax

Gift tax

Federal Estate tax

Property tax

Federal excise tax - customs

Sales Tax

Identify different types of entities that are subject to taxation in the US

-Tax paying entities

Individuals

C Corps

-Flow through Entities

sole proprietorship

Partnerships

S Corps

LLC

LL Partnerships

Trusts

Describe the administrative procedures of the IRS

Enforcement procedures - verify accuracy and audit

Statute of limitations - 3 years; up to 6 years if off by 25%; no limit for civil fraud

Describe various components of a tax practice

Tax Compliance and Procedure

Tax Research

Tax Planning and Consulting

Financial planning

Define each component of the individual income tax formula

Income

Exclusion - any nontaxable income

Deductions - for AGI - expenses connected with business; from AGI - personal expenses

Adjusted Gross Income

Itemized Deductions and Standard Deductions

Personal exemption

Taxable Income

Tax Rates and Gross Tax

Credit and prepayments - some credits are refundable

Identify three conditions that must be met for income to be taxable

Economic benefit

Realization of Income

Recognition of Income

Identify the primary accounting methods for individual tax purposes

cash receipts and disbursements method

accrual method

hybrid method

Define gross income in accordance with IRC Sec 61a

all income from whatever source derived, including (but not limited to) the listed items of income. or income reduced by exclusions

Explain tax planning strategies individuals can use to minimize their tax liabilities

Shifting Income

Maximizing Itemized Deductions

MFJ vs MJS

Splitting Income

Identify terms that the IRS does not define as income

Unrealized Income

Self-Help Income

Rented value use of personal property

Gross sale price of property

Identify various types of major statutory exclusions from gross income

Gifts and Inheritance

Life Insurance

Welfare

Certain scholarships

qualified adoption expenses

person injury payments

discharge from indebtedness

5 Identify the difference between a realized gain and a recognized gain

Realized G/L - Amount Realized - Adjusted Basis

Recognized gain = amount actually reported on tax =< Realized gain

Cost basis

Cash + FMV + Shipping, installation, insurance in transit

Gift Gain/Loss

Basis = the donor's A/B

Gifts-generally carry donors basis

Bequeth = on date of death

Gift Tax added to Donor's A/B

= Gift tax paid x (FMV at time of give - Donor's A/B)/ (Gift - Annual Exclusion)

Basiss for business purposes

= lower of FMV on conversion or Owner's A/B

Calculate property basis

Initial Basis + Capital additions - Capital recoveries = Adjusted basis

All property is a capital asset except

Inventory; Accts rcvable; supplies, letters; copyrights;1231 assets

calculate the tax treatment of capital gains and losses

3000 max moss per year; excess carried forward

For AGI

Above the line -page 1 of 1040

business deductions; moving expenses, IRA's; SE health insurance; teacher expenses; 1/2SE tax; alimony

From AGI

Below the line; exemptions, greater of itemized deductions or standard deduction

Identify examples of businesses and investment expense deductions

-must be because of profit motivated activity

-must be ordinary and necessary

-must show profit in 3 out of last 5 years

Lobbying and Political contributions

not deductible; unless at the local level when involved directly in the taxpayers business

Startup business

Current ded = lessor of

Actual amounts spent or $5000 with phase out for amounts over $50,000. Rest must be capitalized and amortized over 180 months starting in month business begins

explain the restrictions applied to expense deductions

not allowed unless specifically allowed

must meet criteria before an expenditure can be deducted (ex. medical threshold)

Overall limitation for wealthy taxpayers for itemized deductions

Capitalization vs expense

must capitalize if:

1 Provides permanent improvement that increases value

2 Restores property to normal usage

Regular maintainence is a deduction

Identify the time period when an expense becomes a deduction

Determine deductions from Adjusted gross income

itemized deduction vs standard deductions

7 Identify the times of medical expenses that qualify as itemized deductions

Diagnose, cure, Treat, prevent

long-term care

Medical care insurance

Transportation

Affects structure or function of the body

Describe the limits on the amount of qualified medical expenses that can be deducted

auto mileage - 23.5 cents per mile

meals - 50%

lodging $50 per night/$50 for companion if necessary

10% AGI

Identify the types of taxes and interest that qualify as itemized deductions

S&L, Foreign real property taxes

S&L, personal property based on value

S&L Foreign Income

S&L Sales tax if elected

S&L Taxes for T orB or income property

Identify examples of deductible charitable contributions

Govt's

501c3 org

War Veterans Post

Churches

Schools

Hospitals

Certain private operating foundations

Describe the limits on the amount of qualified contributions that can be deducted

20% - capital gain to private

30% - capital gain property

50% - public charity

Can be carried over for 5 years

Identify types of misc itemized deductions

Schedule A; Can only ded amounts that exceed 2% AGI

Tax Advice

Unreimb Employee expenses

Expenses in Producing Investment Income

Itemized Ded Thresholds

MFJ - $300,000

Single - $250,000

Head of Household - $275,000

MFS - $150,000

Determine what constitutes a loss for tax purposes

casualty losses

T or B must be realized and recognized

fire, storm, shipwreck, theft

Explain the tax treatment for a bad debt`

Must be worthless - business can be partially worthless

Must use specific write-off method

Describe the different types of exemptions for an individual tax return

Identify the different types of filing statuses

single, married filing jointly, married filing separate, head of household

Determine the optimum filing status for different individuals

Calculate an individuals tax liability using the tax table

Alternative Minimum Tax

Ensures taxpayers pay a fair share of taxes irrespective of exclusions, deductions, and credits

Pay greater of regular or AMT

Identify various tax credits for individuals

Explain the difference between refundable and non refundable tax credits

Describe tax withholding requirements and limitations

FICA - $180,000 limit

Explain when an individual should use a 1040, 1040EZ, 1040A, or 4868 form

Identify when a given individual income tax is due

Explain the difference between GAAP cost recovery and tax depreciation

Describe common expenses that may appear on forms 2106 and 2106EZ

Explain the rules applicable to individuals under the Individual shared tax responsibility provisions of the ACA

2% income 2015 2.5%2016

15 Describe the tax research process

1 Determine the facts

-closed facts - done

-open facts - not done, still changeable

2 Identify the Issues

3 Locate the applicable authorities

4 Evaluate the authorities; choose to follow where the authorities conflict

5 Analyze the facts in terms of the applicable authorities

6 Communicate conclusions and recommendations to the client

Describe the various sources of tax law

Treasury Regulations

Judicial Cases

Treasury Publications

determine the relative weight of each tax law source in relation to one another

/Supreme Court\

/US Court of appeals\

/District Court, Court of claims, Tax court\

Apply various tools to assist in tax research

Keyword, Index, Citation, Contents

to finance civil war

1861

Income tax reinstated but ruled

1894

16th amendment

1913

WWII mass tax

1940

pay as you go withholding

1943

Internal revenue code

1986

Sources of tax law Executive

Income Tax Regulations

- Revenue Rulings

- Revenue Procedures

- Letter Rulings

sources of tax law Judicial

- Court Decisions