tax ch 5-6 quiz

realized income

income/loss from engaging in transaction with measurable change in property rights

recognized income

income/loss included on a taxpayer’s tax return (taxable/deductible)

deferred

income/loss will be recognized in a future tax period

excluded

income/loss will never be recognized by a taxpayer

gross income

except as otherwise provided in the tax code, all income from whatever source derived

1. they receive an economic benefit

2. income is realized

3. no tax provisison allows the taxpayer to exclude or defer the income

tax payers recognize income when 3 conditions are met

no

does the form of receipt (cash, property, services) affect the realization or reconginition of income

fair market value

taxpayers who trade goods/services must recognized the _________ of what they receive as income

return of capital principle

this principle allows taxpayers to reduce the sale proceeds by their unrecovered investment (ex. the tax basis) in the property to determine the realized gain from the sale

tax basis

the amount of your capital investment (what you paid for the asset)

sales proceeds - tax basis

under return of capital principle, realized gain =

earned, incurred

accrual method":
income recognized when it is _____

expenses recognized when they are ______

• used by big companies

received, paid

cash method:

income recognized when it is ______

expenses deducted when _______

• used by small companies

constructive receipt doctrine

income is deemed realized if

• it is unconditionally available even without physical possession and

• there are no restrictions or limits over taxpayer’s control of the income

claim of right doctrine

• income is realized if a taxpayer receives income and there are no restrictions on the taxpayers use of the income (ex. no definite obligation to repay)

assignment of income doctrine

• income from services → taxpayer who provides the services recognizes the income

• income from an income producing asset → taxpayer who owns the asset recognizes the income

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earned income

• income from services

• ex. wages, salaries, independent contractor earnings, business income, unemployment benefits

unearned income

• income from property

• dividends from stocks, interest, rents, royalities, annuities, gain/loss from sale of property

annuity

investment that pays a stream of equal payments over time

• can be fixed or paid over a persons life

nontaxable return of capital and taxable income components

two components of an annuity

og investment / expected value of annuity = return of capital % (Non tax)

annuity exlusion ratio

number of payments x pmt amount

for a fixed annuity, expected value =

expected return multiple from irs x annual pmt amount

for a lifetime annuity, expected value =

entirely included in gross income

for a lifetime annuity, a taxpayer who lives beyond the expected return multiple- additional payments?

investment is deducted on final income tax return as itemized deduction

for a lifetime annuity, when taxpayers die before full investment is returned, amount unrecovered is

sale proceeds

(selling expenses)

(basis investment in property sold)

= gain/loss realized on sale

how do you compute the gain/loss on a property dispositon?

flow through entities

income flows through to partners/shareholders, retains to its underlying tax characteristics

• owners are taxed on income regardless of whether cash is distributed to them

• common ex, are s corps and partnerships

return of capital

cash distributions in flow through entities are generally seen as ______ and not included in income

alimony

• a transfer of cash is made under a written agreement

• payments cannot be designated as something else

• the payments cannot continue after death of recipient

• if spouses are legally seperated they cannot live in same house

IS, IS

for pre 2019 divorce, alimony ____ taxable to receipent and ____ deductive for the person paying it

IS NOT, IS NOT

for 2019 and later divorce, alimony ____ taxable to receipent and ____ deductive for the person paying it

yes

are prizes, awards, gambling included in income

1. taxpayer was selected without any action to enter

2. taxpayer is not required to render substantual future services as condition to receive award AND

3. taxpayer immediately transfers the away to a government unit or qualified charity

3 conditions for scientific/literary/charitable awards to be excluded from income

<1M or 500k if mfs

the value of medals/prize money received by team usa athletes for competing in the olympics/paralympic games are excluded if AGI

income, solvency

leder forgives debt →

• only taxable to extent of _____ following forgiveness of debt

• taxpayer is insolvent before and after discharge

• discharges of student loans until 2026

two exceptions to dscharge of indebtedness as income

1. subsidize/encourage specific activities

2. to be fair to taxpayers

2 reasons congress allows exclusions and deferrals

ownership test

tax payer must have owned residence for up to 2 or more years in the last 5 years

use test

property must have been used as taxpayers primary residence for 2 or more years in last 5 years

fringe benefits

medical, dental, life insurance, parking, day care, empoyee discouns that are exclusions

qualifying expenditures

investment income earned in 529 plans are coverdell education savings accounts are exclusions as long as earnings used to pay for _________

series EE bonds

• interest deferred until bond is redeemed and is exempt from state income tax

• exempt from federal income tax if spent on tuition and fees or reinvested in a quialified tuition program

• exclusion is subject to a phase out

gifts

wealth transfers made during life

inheritnences

wealth transfers made after death

gift and estate, income

gift and inheritences are subject to _______ tax, not _____ tax

estate, income

life insurance proceeds are subject to ____ tax, not ____ tax

1. maximum exclusion

2. itemized deduction for foreign taxed paid

3. foreign tax credit for foreign taxes paid

to prevent double taxation from a foreign cuntry and the us, us tax law allows:

bona fide resident

resident of the foreign country for the entire tax year

physical presence

live in the foreign country for 330 full days in a consecutive 12 month period

(number of days inside country / 365 or 366 ) x max exclusion

qualified exclusion for physical presence =

medical

reimbursement of ______ expenses from a health or accident insurance policy are nontaxable

disability insurance

if taxpayer purchases insurance directly → the cost of the policy is not deductible and any disability benefits are excluded from gross income

1. deductions for agi (above the line)

2. deductions from agi (below the line)

two types of deductions

1. deductions directly related to business activities

2. deductions indirectly related to business activities

3. deductions subsidizing specific activities

3 general deductions for agi

business activities

• activities that are 1. motivated by profit and 2. require a relatively high level of involvment or effort from the taxpayer

investing activities

activities that are 1. motivated by profit 2. do not require a high degree of taxpayer involvement or effort

trade and business expenses

• directly related to business activities

• deductible when they are ordinary and neccesary for trade/business activity

• losses on disposition of business assets are subject to certain limitations r

• reported on schedule C

E

• directly related to business activities

• flow through, rental, royalty expenses

• reported on schedule _

NO

are losses on personal property deductible

net capital losses

for AGI, ______ are deductible limited to 3k/year

are not, i

expenses related to hobbies ____ deductible, income _____ taxable

de facto

activity is a _____ business if it makes profit 3/5 consecutive years and expenses are deductible

excess business loss

excess of aggregate business expenses over the sum of

1. business gross income

2. 256k or 512k mfj

net operating loss

excess business loss is not deductible in current year, and is carried forward as _____

80%

net operating loss can offset up to ____ of taxable income in future years

educator expenses

• deduction indirectly related to business activities

• eligible educator k-12

health savings account

• deduction indirectly related to business activities

• individuals covered by a high deductible health plan can contribute up to 4400/8750 for fam

• to the extent that contributions are used to pay for qualified medical expenses, then money paid is never subject to tax

• distribution from this NOT used to pay for qualified medical expense is subject to income tax and 20% penalty

moving expenses

• deduction indirectly related to business activities

• only deductivle if armed forces moving for a miltiary order

self emlployment tax deduction

• deduction indirectly related to business activities

• ½ of self employment taxes paid (the employer portion) are deductible for AGI

self employed health insurance deduction

• deduction indirectly related to business activities

• health insurance premium paid by self employed taxpayer are deductible for agi

• exception: premiums are not deductible if the self employed taxpayer is eligible to participate in their/their spouses employer provided health plan

• exception: premiums only deductible to the extent of self employment income. if there is not sufficient self employment se income, remaining premiums can be deduucted as itemized deduction

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alimony

• deduction for AGI- specific activity

• only deductible for a pre 2019 divorce

educational loans

• deduction for AGI- specific activity

• intended to encourage and subsidize higher education.

• loan proceeds must be used on qualified education expense to attent a postsecondary institution of higher education

• maximum deduction 2500 subject to a phase out

• phase out is applied to lesser of 2500 or actual interest paid

charitable cash contribution

• deduction for AGI- specific activity

• not property donations

• deduction is limited to 1k or 2k mfj

standard or itemized

for from AGI, taxpayer can select between ____ and ____ deductions, whichever is greater

extended

standard deductions were _____ as part of OBBBA

itemized deductions

• generally personal in nature but allowed to:

  • subsidize desirable activities (home ownership, charitable contributions)

  • provide relief to taxpayers whose ability to pay taxes has been involuntarily reduced (medical expenses, etc)

1. medical

2. taxes

3. interest

4. charitable contributions

5. casualty losses

list 5 common itemized deductions

itemized deduction: medical expenses

• purpose: provide relief to taxpayers whose ability to pay taxes has been reduced due to health related circumstances/costs

• qualifying: payments for care, prevention, diagnosis, cure of injury, disease, bodily function that are NOT REIMBURSED by health insurance or paid for through a flexible spending account

• ex: prescription medication, medical aids, payments to medical providers, health insurance premiums (if not deducted for agi by self employed taxpayer)

• NO cosmetic surgery deductible expenses

itemized deduction: taxes

• state, local, and foreign income taxes

  • taxpayers may elect to deduct state and local taxes instead of income

• real estate taxes on property held for personal or investment purposes

• personal property taxes that are assed on the VALUE of the property

• total deduction limited to 40400 (20200 mfs) 25-29 from obbba

  • will return to 10k (5k mfj) in 2030

  • foreign income taxes not limited

itemized deduction: interest

• mortgage interest: interest paid on loans secured by a qualified residence is deductible. applies to first and second home

  • interest on acquisition indebtedness is deductible, but only interest on the first

    • 1M (500K mfs) if indebtedness incurred before 12/15/17

    • 750k (375k) if indebtedness incurred after 12/15/17

  • if mortgages exceed the limit, the deduction is based on the averahge mortgage balance

(loan limit/average balance) x interest paid

for mortgages that exceed the limit, the deduction =

1M, 500k mfs

interest limit if indebtedness incurred on or before 12/15/17

750k (350k mfs)

interest limit if indebtedness incurred after 12/15/17

itemized deduction: interest

• investment interest: interest paid on loans to purchase INVESTMENT assets such as stocks, bond, land, art

  • deduction limited to a taxpayers net investment income

    • investment income - deductible investment expenses (other than for interest)

  • excess investment interest can be carried forward indefinitely

investment income - deductible investment expenses

net investment income =

1. cash/property must be made to a qualified domestic chartiable organization

2. contribution is substantiated by written records

two requirements to be met to deduct a charitable contribution

fmv

itemized deductions: charity: for capital gain property, can deduct the _____ of contributed property

the fmv or the adjusted basis

for itemized deductions: charitable orginary income property: can deduct the LESSER of wgat

0.05%

itemized deduction charitable limitation: deduction limited to the amount exceeding ____ of the tazpayers AGI

• tax benefit for top bracket earners is capped at the max rate of 35%

public charity

charity that is publicly supported, such as churches and schools

private operating foundation

a privately sponsored foundation that funds and conducts charitable activities

private non operating foundation

a privately sponsored foundation that disburses funds to other charities

excess contributions are carried forward for up to 5 years

what happens when a taxpayer makes charitable contributions in excess of the AGI limitations

casualty loss

loss due to a federally declared disaster

• must deduct this loss in the year of disaster

• the decline in value of property resulting from the casualty or

• the taxpayers tax basis in the damaged asset

the amount of the tax loss from any specific disaster is the lesser of

100, 10%

for casualty losses

• each casualty loss must exceed ____

• and the sum of all casualty losses for the year must exceed ___ of AGI

90

miscellaneous itemized deduction: gambling ____% of losses are deductible to the extent of gambling winnings

qualified business income deduction

exists to provide a level playing field for corporations and flow throughs trying to grow because the flow through has less after tax money to reinvest to grow the business

pass through income x 20%

QBI deduction: prelimitation deduction =