Taxes Test 2

Is receiving gifts Income?

never, the gift giver needs to file form 709 (gift tax return) if their gifts given exceed 19k for one year) 

How much can you give in gifts over the course of your lifetime

15 million dollars

Is inheritance taxed?

never taxed; and all the assets are always deemed long-term; this helps with capital gains as it can only be taxed up to 20% and you get the fair market value in terms of what it is worth

Is Life Insurance Proceeds taxable/income?

If I get a lump sum check, there is no income tax

If I put it somewhere and take it out in intervals over time, then a percentage of it is income (exclusion ratio) based on my life expectancy and how much I take out per year 

Cash Surrender Values (Income?)

Insurance policies allow you to put money towards life insurance and this value is the amount of money that I put into this; it is not income if I withdraw it bc it is me taking out my own money that I put in 

Scholarships (Income?)

it is income when it goes towards housing and meals, but not income if it goes towards education expenses (such as tuition & textbooks) 

Compensatory Damages (Income?)

this is not income, It is the court just replacing what you lost 

Punitive damages (Income?)

These are recognized as income 

True or False: If a judge gives me a check for surgery (punitive damages) for lets say 100k, and I get an optional surgery with the money on top of the mandated one, then the optional one makes that money spent become recognized as income 

True, it is income

Is workers comp income?

no

Are unemployment checks income?

yes

NYC Pied-A-Terre Tax

this is a tax on nonresidents of NYC who have a house here, the goal is to tax the rich who own houses in NYC but don’t use it much

HSA Plans Triple Tax Benefit

Money goes in tax-free

Grows tax-free

can be withdrawn tax free

BUT you need to have a highly deductible medical plan to qualify for an HSA account

True or False: I can put money into my HSA for my entire life

FALSE: I no longer can after I’m 65

True or False: If I let my HSA grow and use it on non-medical expenses it is then income?

TRUE, it is then recognized as income

Child and Dependent Care (Fringe Benefit)

my employer could provide me with a stipend to pay for child care

Fringe Benefit Definition

an amount received that is not recognized as income 

Athletic Facilities (Fringe Benefit)

if I am granted free access to a gym/facility, that money is not income 

Tuition Assistance (Fringe benefit) 

5,250 is the max an employer can give me and be tax-free (for the year), anything over this amount is taxed, the employer receives a deduction for this 

Health Insurance (Fringe Benefit)

If an employer is paying for my health/dental insurance, it is not recognized as income 

In reality, it totally should be bc they are paying it for me, but it is NOT income 

Flexible Spending Amount (Fringe Benefit)

Setting aside x amount of money for parking, and commuting, this money is not taxable

No Additional Cost (Fringe benefit)

If it does not cost my employer anything extra, it is this fringe benefit (ex: I work as a flight attendant and the company provides employees with free flights)

Employee Discounts (Fringe benefit)

As long as the company’s markup is more than the discount, it is not income BUT (ex: it takes American eagle 60 bucks to make it and you only pay 40, it is income of 20 bucks)

Service Discounts (Fringe Benefit)

works the same as employee discounts: As long as the company’s markup is more than the discount, it is not income

Working Conditions (Fringe Benefit)

anything that you need to do your job that is provided by the employer is not income to the employee ex: they give you money to buy and maintain your uniform 

HOWEVER, let's say I work in corporate and they give me a 2k allowance to buy suits, since I can wear these suits out of the workplace it is income 

De Minimis (Fringe Benefit)

it means small, or of little importance, so if a company gives me a small benefit it is not income ex: using their phone, printer, or wifi, these are di minimis 

Are moving expenses deductible?

They are no longer deductible UNLESS;

you are an active duty soldier/are in the military

Retirement Planning Services

tax exempt, free financial planning for my retirement provided by the company I work for

Foreign Earned Income

any money that is earned in a foreign country is taxed in the US, the US government has the power to tax any income (worldwide income) 

Exception to the “worldwide income tax” rule

If your foreign earned income is less than around 130k(changes every year) you don’t need to pay tax on it BUT:

you have to be in that foreign country for 330 days out of a 12 month period to be eligible for this 

Foreign Tax Credit (another exception to worldwide income tax)

this will reduce the amount that you paid in America (this is used to avoid double taxation) and it will be a credit on your US tax return (line 3 schedule 3), this is you cancelling out what you paid in tax in the foreign country so that you do not pay it twice ex: if I pay 5k in Canada then I get a 5k foreign credit tax credit for my US return 

Interest on SALT (muni) bonds

federal Level: they are tax-exempt bc the governments benefit more from borrowing from people than from banks bc they have to pay less in interest to the person 

State Level: As long as the citizen is a resident of that state, they do not recognize muni bond interest as income  

What is a 529 plan

it is a college savings plan; it is a way to save for college 

If I take this money out and it is not used for college expenses, this money will be taxed as income (only by the state, not by federal)  

However, the federal gov will allow a 529 to be spent on any level of education, the state gov will not, it is only for college in the state's eyes 

Eligibilities with a 529 account

If child A doesn’t want to go to college but child B does, I can transfer the money to the other child OR the parents can use the money to go back to school if wanted to 

I can also transfer this money to a ROTH 

The capital gains on a 529 are also tax-free, let's say I put in 120k over the course of 12 years and it grew to 370k, this money is all tax-free 

Income from Discharging Debt

I owe the credit card company money, I owe them 10k but we agree (me and the company) that will I pay only 4k 

That remaining discharged/forgiven 6k is recognized as income 

Exceptions to Discharge of Debt (the discharged money not being called income)

 Bankruptcy: this forgiven money will not be income to this person 

Insolvency (means that liabilities  are greater than assets) 

Primary Principle Home: if mortgage debt is forgiven under my primary home, money received is not income 

What amount is not deductible in terms of charity

The first half of a percent (0.5%) of my agi is not deductible for charity ex: my agi is 100k, the first 500 of charity that I give (assuming I itemize) is not deductible 

 

Business Loss Deductible Amount Limits (2026)

Single: 256k

Married Filing Joint: 512k

Note: Before 2018 they were fully deductible

If a person is operating an illegal activity, the income needs to be reported and the expenses are limited to…

Costs of goods sold (COGS)

Max Political Contribution (in terms of deductibility)

Maximum contribution is up to 2k

If you go greater than this max amount, then none of it is deductible

Executive Compensation

you provide money to the CEO or CFO and are looking to provide them with compensation for the year, up to a million dollars of this is deductible, anything over a million is no longer deductible 

Acquiring a Business Criteria

If you are in the same business as what you are acquiring, the expenses incurred to acquire the next business are fully deductible (ex: I have a car wash in NY and I want to  buy another car wash in CA) 

If I am not in the same business (let's say I want a laundromat), these expenses are not deductible 

Hobby Losses Deductibility Criteria

If a business is deemed to be a hobby, these losses are no longer deductible, a business is deemed a hobby when it is not profitable for a bunch of years bc what actual business can survive multiple years of not making money?

If 3 out of the last 5 years, you lost money, the government assumes that the "business" is a hobby, bc the government assumes that business owner would not resume this business if it was supposed to operate as a real business (unless the business owner can prove otherwise) 

The Augusta Rule

If you rent out your vacation home for 14 days or less out of the year, you do not have to report that income, no matter how much you make

Regular Rental Home Criteria

the taxpayer uses it for one month in the summer and it is rented for the other 11 months, You have to report all of this income and you were entitled to deductions (mortgage interest and all other deductions) 

Split-Use Property Criteria

If its 50/50 ( 6 months living, 6 months rented), all the income must be reported and you are only allowed to deduct expenses for the one half of the year that it is rented 

Cut-Off btwn Split-Use & Augusta Rule

10% of the year

What is a Related Party

mom, dad, brother, sister, uncle, aunt, grandma, grandpa, cousins do not count

Related Party Transaction Criteria

If you sell to a related party at a loss, those losses are not deductible bc you are selling to a related party 

When it comes to gains, the gain is taxable and included in income, just like any other gain would be 

However, the relative who buys the property could reduce any gain recognized on the sale of the item by the amount of the disallowed loss (example in notes)

True or False: If I have interest on tax exempt income, it is not deductible because Im not paying taxes on the income 

True

Direct Write-off Method

When debt becomes uncollectible, that's when it is writen off 

How are Bad Debt Expenses Taken Care Of

using the direct write off method

Loans with Related Parties

You need to charge an adequate interest rate (AFR)

Related Party with a Corporation

Definition: You and a corporation/partnership are "related parties" if you own 50% or more (directly or through family attribution like marriage).

Family Attribution: Spouses' shares are combined (e.g., if H owns 45% and W owns 55%, both are treated as owning 100%).

Rule on Losses: Losses are disallowed on sales between related parties (cannot take the tax deduction).

Rule on Gains: Gains are fully recognized and taxed (no escape hatch for profits).

Silver Lining for Losses: If the related buyer later sells the asset to an outside third party at a gain, they can offset it using your old disallowed loss.

ex: they sell it for 50k and my 40k related party gain was offset, they make 10k (50-40=10)

Worthless Stock Deduction

Allows you to deduct how much you lost on the stock (so what I put in) as ordinary income instead of a capital loss being that the stock went to $0

If its a regular stock, max deduction is 3k per yr

If section 1244 stock, I can do up to 50k

Section 1244 stock (small businesses)

You have to be the original owner to get the privilege

Capital of the corporation is $1,000,000 or less 

If you sell it you can deduct up to $50,000 Single and $100,000 MFJ as ordinary loss 

Anything excess is capital losses so the max is 3k deductible amongst what’s left

Section 1202 Stock: Larger Corporation/Start-ups (C-Corp) 

If you founded a company/were an original investor, and it does really well/blows up, 100% of the gains are tax-free if you hold the stock for 5+ years

Casualty Losses (Section165C) (think a natural disaster destroys the house)

If you have a casualty/theft loss, you have to itemize (casualty losses are on schedule A)

Has to be a sudden/unexpected loss 

It has to be in a presidentially declared disaster area 

Any reimbursement, reduces the deduction

Theft Losses (165C)

f you have a casualty/theft loss, you have to itemize (casualty losses are on schedule A)

Has to be a sudden/unexpected loss  

Any reimbursement, reduces the deduction

Casualty Loss Tax Math

$\text{Deduction} = (\text{Unreimbursed Loss} - \$100) - (10\% \times \text{AGI})$

You take away 100 bucks of what you lost and then subtract that from 10% of your agi

This final amount will be what you put on schedule A

R and D Expense Options

Deduct the expense in the year incurred OR

Take a 30% credit in that year OR

they can take the expense over the course of 5 years 

There is this option bc r and d costs put you in the negative bc its an expense and if these expenses are incurred before the product makes any money, taking a deduction is pointless 

 

Net Operating Losses (NOL)

You can carry back an NOL 2 years 

You can carry forward an NOL 20 years 

Cost Segregation Study

I can deduct the depreciation of a home that I rent out by using straight-line depreciation over 27 and a half years
cost of rental property/27.5 = depreciation expense 

New Charity Rule (as of 2026)

Even if I take the standard deduction, I can deduct 1k if I file single or 2k married filing jointly in blank

(Section 357-1) Contributing Assets into a Company

Allows me to contribute assets into a company tax-free 

“Business Meals” Criteria

To take a 50% deduction for a business meal, the expense must meet 5 strict tests:

Ordinary & Necessary (§ 162): Directly connected to carrying on a trade or business.

Not Lavish or Extravagant: The cost must be reasonable under the circumstances.

Taxpayer or Employee Present: You or an employee must physically attend the meal.

Business Contact: The meal is with a current/prospective client, customer, employee, vendor, or professional advisor.

Active Business Purpose: Clear business purpose or discussion before, during, or after the meal

“Business Expense” Criteria

Carried on in a Trade or Business:

• The expense must connect to an existing, active trade or business.

• It cannot be an exploratory cost or personal hobby.

Ordinary:

• Common and accepted in your specific line of work or industry.

• Does not have to occur every day, but must be a normal hazard or practice in that field.

Necessary:

Appropriate and helpful to the business.

• Does not have to be strictly "indispensable" or essential.

Paid or Incurred During the Tax Year:

• Must match your accounting method (cash vs. accrual) for the current tax period.

Reasonable in Amount:

• Cannot be lavish, extravagant, or an disguised personal payment (e.g., unreasonable owner salaries)

Examples of Business Expenses

business meals, business travel, getting new software/technology for the office, paying your employees

Examples of Non-Deductible Business Expenses

personal expenses, buying tickets to something, fines/parking tickets,