Taxation Topic 3

What is the individual income tax formula?

A calculation to determine taxable income and total tax owed by individuals

What is gross income?

All income received unless specifically excluded by law

What are capital assets?

Property like stocks, bonds, real estate for personal use, or artwork that is not used in business inventory.

What is an example of a capital asset?

stocks or personal real estate

What is an example of a non capital asset?

Inventory or business equipment

What are deductions?

expenses subtracted from income to reduce taxable income

What is the tax rate for capital gains?

Long-term capital gains receive lower preferential tax rates compared to ordinary income

What is the limitation for capital loss deductions

capital losses can offset capital gains with up to 3,000

What is the tax planning strategy for capital assets?

Timing the sale of assets to minimize taxes owed on gains

What is property acquisition and cost recovery?

Recovering the cost of property through depreciation or other deductions over time

What is cost recovery?

Deducting the cost of long term property over time, typically through depreciation

How is initial basis determined?

by adding the purchase price and all acquisition costs of an asset

What are additional costs after an asset is placed into service?

improvements that increase the value of the asset and its basis

What does expense or depreciate mean?

Choosing between deducting the full cost immediately or spreading it over several years

What is depreciation?

deducting the cost of an asset over its useful life for tax purposes

What is depreciation for personal property?

gradually deducting the cost of items like equipment or vehicles used in business

what is the depreciation convention for personal property?

IRS rules for when depreciation begins, often assuming half year of use in the first year

what is an example of personal property depreciation?

depreciating a business laptop over five years using IRS guidelines

What is real property depreciation?

deducting the cost of buildings or land improvements over time

what are special rules in depreciation?

additional options like bonus depreciation or section 179 deductions for eligible assets

what is disposition?

the sale, exchange or disposal of property

how is adjusted basis determined?

by taking the initial basis, adding improvements and subtracting depreciation

what is a realized gain or loss?

the difference between the selling price of an asset and its adjusted basis

what is the character of gain or loss?

the classification that determines if a gain or loss is taxed as ordinary income or capital gain

what is depreciation recapture?

a rule that taxes part of the gain from selling depreciated property as ordinary income

what is a provision that affects the rate at which gains are taxed?

special tax rules based on the type of asset or how long it was held

what are nonrecognition transactions?

certain exchanges where gains or losses are deferred and not taxed immediately