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State the basic tax formula

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339 Terms


State the basic tax formula

Gross income

-deductions for AGI


-Deductions from AGI (standard or itemized deductions)


=Taxable Income

X Tax rate

= tax liability

-credits and prepayments

= tax due/refund

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Identify the various filing statuses

Single Married filing jointly Married filing separately Head of household Widower

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What are the criteria for filing single?

-Unmarried or legally separated from spouse at the end of the tax year -Does not qualify for another filing status

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What are the criteria for filing married filing jointly?

At the end of the tax year -married and living together -married and living apart but not legally separated or divorced

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What are the criteria for filing married filing separately?

at year-end of tax year: -married and -if one spouse wants to be responsible only for own tax or -both spouses don't agree to file a joint return

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What are the criteria for filing head of household?

-individual is not married, legally separated, or is married and has lived apart from spouse for last 6 months of year -not qualifying widow -must be US citizen -maintained a home, for more than half taxable year, is principle residence of -qualifying child -dependent relative who resides with tp or -dependent parent, regardless of residence

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What are the criteria for qualifying widow(er)?

-unmarried at end of tax year and -surviving spouse must maintain a household, for entire year, principal residence of qualifying child -surviving spouse must be entitled to dependency exemption for child -qualifies for this status for two years after year of death of spouse

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Qualifying Child

CARES Close relative Age limit (19/24) Residency and filing requirement Eliminate gross income text Support test changes

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Qualifying Relative

SUPORT Support- (over 50%) Under personal exemption of TAXABLE gross income Precludes dependent filing a joint tax return test Only citizens Relative (half year) Taxpayer resides with full year

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What are requirements for a multiple support agreement?

-two or more people together provide more than 50% of support, but no one contributes more than 50% -to claim the exemption a person must provide more than 10% of support and meet other dependency tests -multiple support agreement must be filed

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When should a cash basis tax payer report income?

Report income in year in which income is either actually or constructively received, whether in cash or property

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Define gross income

Includes all income from whatever source derived, unless specifically excluded

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What are the four categories of individual income?

Ordinary (wages, salaries) Passive (real estate investment, limited partnership income, S-corp) Portfolio (dividends, interest) Capital

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Name some nontaxable fringe benefits (exclusions)

de minimis fringe benefit qualified tuition reduction qualified employee discounts employer paid accident, medical and heath insurance

unless specifically excluded by law, fringe benefit is includable in gross income

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Are life insurance premiums paid by an employer taxable to an employee?

Premiums on the first $50,000 (face amount) of group term life insurance are not includable in gross income Over $50,000 should be included. Calculated form IRS table

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Give some examples of exempt interest

-State and municipal bonds -Bonds of US Possession -Series EE bonds -Veterans Administration Insurance

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What is the tax treatment of unearned income of a child who falls under the "kiddie tax" rules?

Net unearned income of a dependant child who falls under kiddie tax rules taxed at parent's higher rate.

Net unearned income= child's total unearned income less child's standard deduction (1050) less additional 1050 which is taxed at childs rate

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State the tax treatment of property settlements in a divorce

Transfering spouse gets no deduction for payment made or property transferred Payment not includable in gross income of spouse receiving payment or property

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What are the requirements for alimony to be deducible by the paying former spouse and includable by the recipient?

-Payments must be legally required by a written agreement -Must be in cash or its equivalent -Payments can't extend beyond death of payee -Can't be made to members of same household -No joint tax return filed Child support must be paid first

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When are funds in a nondeductible IRA taxable?

-Only the interest is taxable when withdrawn -Principal nontaxable -Pro rata applied to determine taxable amount

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What is the formula to determine the excludable portion of an annuity?

Investment in contract/ age factor in months = excludable amount in current year

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If annuitant lives longer than factor, further payments fully taxable

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In premature distributions of an IRA, what are the exceptions to penalty tax?


Home- up to $10,000 1st & 2nd Home

Insurance- medical- unemployed or self employed

Medical expenses excess of 10% AGI


Education expenses



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What are the rules to determine taxable Social Security Benefits?

Taxpayers into 5 categories based on level of provisional income, defined as AGI plus tax-exempt interest plus 50% Social security benefits

-Low income - no social security benefits taxable -Lower middle income- less than 50% taxable -Middle Income (25k/32k) 50% taxable -Upper middle income 50-85% taxable -Upper income (over 34/44) 85% taxable

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Are scholarships and fellowships includable in gross income?

No for degree seeking student as long as amounts spent on tuition, fees, books, supplies (not room and board) and can't work for it

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What are the tests for foreign-earned income exclusion?

bona fide residence test (an entire taxable year) physical presence test (330 full days out of 12 consecutive months)

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List some nontaxable misc. income items (exclusions)

Life insurance proceeds Gifts and inheritances Medicare benefits Worker's compensation Personal physical injury or illness award Accident insurance- premiums paid by taxpayer Foreign earned income exclusion

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Describe self-employment tax

-all net self employment subject to 2.9% medicare tax -only self employment income up to 118,500 subject to 12.4% social security tax -computed on 92.35% of income -adjustment to income for 1/2 of self employment tax paid

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On what property do the uniform capitalization rules apply?

-real or tangible personal property produced by taxpayer for use in trade or business, sale to customers or for resale -Exception doesn't apply to property for resale if tax payer's gross receipts don't exceed 10 million for last 3 tax years

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How is rental income from a vacation house treated?

-Less than 15 days: treat as personal residence -15 or more days and personal use is 14 days or 10% of days rented: allocate rental expenses to extent of rental income -if rented 15 or more days and personal use is not more than 14 days or 10% of days rented: treat as rental property

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Define passive activity. Give some examples

Passive activity is any activity in which the taxpayer doesn't materially participate Rental activities, interests in limited partnerships, S-corporations Note- rental activities are passive by definition even if tax payer does materially participate

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What is the tax treatment of nondeductible passive activity losses?

-held in suspension -used to offset passive income in future years (indefinitely) -fully tax deductible in year property is disposed of

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Name four categories of business entities

Partnership S-corporation Sole proprietorship C-Corporation

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Describe the tax treatment of guaranteed payments

-Distributive deductions to partners via the partnership K-1 -Taxable income to partner receiving the payments

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What is meant by fiduciary accounting?

Used in trusts and estates, and it is centered on the classification of all receipts and disbursements as either principal (corpus) or income

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Describe the employee and employer taxation of nonqualified employee stock options

Employee Taxation- -Readily ascertainable value: employee recognizes as ordinary income in that amount in year granted -No readily ascertainable value: recognizes as ordinary income based on fair value of stock purchased minus amount paid for option on exercise date Employer Taxation -Deduct as business expense in same year employee recognizes ordinary income

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Describe employee and employer taxation of incentive stock options (ISOs)

Employee Taxation -not taxed as compensation. basis is exercise price plus any amount paid for option. gain/loss on sale is capital Employer taxation: -no tax deduction

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Describe the employee and employer taxation of Employee Stock Purchase Plans (ESPPs)

Employee Taxation -not taxed as compensation. basis is exercise price plus amount paid for option. g/l on sale is capital Employer Taxation: -no tax deduction

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List deductions for AGI

-Educator expenses -IRA -Student loan interest -Tuition and fess deduction -Health Savings Account -Moving expenses -1/2 Self Employment FICA -Self Employed health insurance -Self employed retirement -Interest withdrawal penalty -Alimony paid -Attorney fees paid in certain discrimination and whistle-blower cases -Domestic production activities deduction

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Which is a deduction for AGI: Child support or alimony

Alimony paid

Child support is not alimony and is not deductible by payor or taxable to recipient

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What are the limits on IRA Deductions

$5,500 per spouse per year or individual's compensation

When spouse is an active participant in an employer retirement plan, allowable deduction to arrive at AGI is phased out proportionally for modified AGI between 61-71 (98-118 MFJ) Phase out percentage is 20% of maximum IRA deduction (AGI less base)

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What are limits on nondeductible IRAs

Lesser of $5500, individual's compensation. Limit not contributed to other regular and Roth IRAs Earnings on such contributions accumulate tax free until withdrawn

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What is the time limit on Coverdell education savings accounts?

Any amounts remaining when beneficiary reaches the age of 30 must be distributed

-must be distributed to beneficiary, taxable, and 10% penalty or -rollover to another family member with no 10% penalty

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What are the limits on deductions to Keogh plans?

For self-employed taxpayers and their employees. Deductible amount 20% of earnings of self-employment before keogh deduction, or 53,000 Maximum annual contribution may exceed deductible amount for year. limited to lesser of 53,000 or 100% net earnings if compensation is less.

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Describe self employed deductions (adjustments) for AGI

Self-employment tax (50%) Self employed health insurance (100%)

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What are requirements for moving expenses to be deductible?

-Must be moving 50 miles further commute -Must stay 39 weeks

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What is the additional deduction for elderly and/blind?

$1,550 (single or HOH), $1,250 (MFJ or QW) Both $3,100 and $2,500

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What taxpayers are not eligible to use the standard deduction?

-One spouse itemizes on a separate return -TP dual-status or nonresident alien -Taxpayer has short tax year -Limited to $1,050 (or earned income plus $350 up to basic standard deduction amount) if can be claimed on another person's return

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Identify the major classes of itemized deductions

Medical and dental expenses Taxes paid Interest paid Gifts to chair Casualty and theft loses Misc. itemized deductions subject to 2% floor Misc itemized not subject to 2% floor

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What are the limitations on medical expenses?

-Deductible to extent they exceed 10% of AGI -Self employed individuals may deduct 100% of medical insurance premiums from gross income -Dependent for medical expenses must only meet support, relationship and citizenship or residency tests

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Identify taxes that are deductible as itemized deductions

RIPS State and local -Real estate -Income tax -Property taxes or -Sales tax -Foreign taxes (deduct or take credit)

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List types of interest that are deductible and nondeductible

(HIPPE) -Home interest -Interest on loans for investment purposes- limited to net investment income -Prepaid interest -Personal consumer interest not deductible -Educational loan interest adjustment not itemized

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What are limitations on charitable contribution deductions?

-Overall limit 50% of AGI -Cash may be all 50% -Long term capital gain property (deduct at FMV) limited to 30% of AGI or remaining amount to reach 50% after cash contributions -CF 5 years -Substantiation requirement

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What is the limit on nonbusiness casualty and theft losses

Partial loss: deduction is based on decrease in FMV not to exceed AB Full loss: deduction is AB Losses reduced by -insurance recovery -100 per casualty/theft event -10% of AGI

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Identify some miscellaneous deductions subject to 2% of AGI floor

Unreimbursed employee business expenses Educational expenses not deducted above AGI Uniforms Business gifts ($25/person/year) Business use of home Employment agency fees Expense of investors Subscriptions to professional journals Tax preparation fee

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Identify some miscellaneous expenses NOT subject to the 2% of AGI floor

Gambling losses Federal estate tax paid on income in respect of a decedant

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Identify some tax credits

Nonrefundable credits -foreign tax credit -child and dependent care credit -elderly or disabled credit -education credits -adoption credit -retirement plan contribution credit -general business credit -long term unused minimum tax credits Refundable credits -Child tax credit -earned income credit -withholding taxes -excess social security paid (2 jobs)

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What are the child/dependent care credit limitations?

Up 35% of eligible expenditures or $3,000 max ($6,000 for two or more dependents) Maximum of 15,000 AGI reduced by 1% for each $2000 over. Minimum of 20% -Qualifying child must be 13 or under

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Describe tax credit for elderly or disabled

-Either 65 or totally and permanently disabled and have disability income -Single or married and only one over 65, 15% of $5,000 reduced by nontaxable social security benefits received and half of AGI over $7,500 or $10,000 if married -If married and both over 65, 15% of 7,500 reduced by nontaxable social security benefits received and half of AGI over $10,000 -Claim credit to extent of tax liability

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State the limitations of the American Opportunity Tax Credit

For 2016, the credit for the first four years of post secondary education is limited to $2,500. 100% of first 2,000 and 25% of second 2,000

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What are the eligibility requirements for the retirement plan contribution credit?

-at least 18 years by end of tax year -not a full time student -not a dependent -income limits apply

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State formula to determine the amount of the foreign tax credit

-Can claim either deduction or credit -taxable income from foreign operations/world wide taxable income X US tax liability before credit

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State the limitation of work opportunity tax credit

-40% of first %6,000 wages per employee paid during first year of employment -40% of first $3,000 paid to certain summer youth

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Describe Child tax credit

$1,000 per qualifying child -Qualifying Child same as CARES but must be under 17 years -Reduced by $50 for each $1000 exceeds $110,000 MFJ, $75,000 unmarried, 55,000 MFS

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What are eligibility requirements for Earned Income Credit

-Live in US for more than half tax year -Meet certain low earned income thresholds -Not have more than a specified amount of disqualified income -Be over 25 and under 65 if no qualifying children -File joint return if married

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Who must make estimated tax payments?

-$1,000 or more tax liability and withholding less than lesser of 90% of current year's tax or 100% of last years tax (110% if AGI over 150,000)

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Describe IRS requirement to make estimated quarterly tax payments?

Taxpayer required to make quarterly tax payments if both of the following conditions are met -amount of taxes owed expected to be $1000 or more -taxpayer's withholding is less than lesser of -90% of current years tax or -100% of prior year's tax If est. payments have been insufficient to avoid a penalty, a taxpayer can increase withholding from wages before year end and withholding will be considered to have been paid evenly throughout the year

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State the AMT formula and Tax Rate

Taxable income +/- adjustments

  • preferences -exemption allowance ($83,800 MFJ $53,900 single, $41,900 MFS) = AMTI X Tax rate (26%, 28% if AMTI over 186,300) = AMT

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Name some adjustments for AMTI calculations

PANIC TIME +/- PANIC Passive activity losses Accelerated depreciation Net operating loss Installment income of a dealer Contracts- must use percentage completion


Tax deductions

Interest deductions on home equity loans some

Misc. deductions not allowed

Exemptions- personal and standard

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Name some tax preference items for AMTI Calculations

Pre 1987 accelerated depreciation Private activity bond interest income Percentage depletion

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What credits are allowed against the AMT?


Foreign tax credit

Adoption Credit

Child and dependent care credit/ child tax credit Contributions to retirement plans credit

Educational credit

Residential energy credit

Small business health care tax credit

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What is the net investment income tax?

Applies 3.8% to certain net investment income of individuals who have income over statutory threshold amounts ($250,000 MFJ, $200,000 otherwise)

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In general, how is the donee's basis of a gift determined? How is the holding period determined?

-Donee's basis is same as donor's basis -Carryover basis may be increased for gift tax paid on appreciation of gift -Holding period includes donor's holding period unless basis becomes FMV, then starts at date of the gift

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What is the basis of a gift for determining gain or loss in a sale transaction?

-for gain on sale: gift basis is donor's rollover basis -for loss on sale: gift basis is FMV at date of gift -if sales price is between donor's rollover basis of gift and FMV at date of gift, no gain or loss recognized

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What is the gift basis used to calculate depreciation?

Lower of -donor's AB at date of gift or -FMV at date of gift Note: depreciable basis is determined separately from gift/loss basis

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In general, how is the basis of inherited property determined? How is holding period determined?

Basis lower of: -FMV at date of death or -FMV at alternate lower valuation date -6 months from date of death or -disposal date Holding period: deemed long term automatically

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When is a gain not taxed?

HIDE IT Home owner's exclusion Involuntary conversions Divorce property settlements Exchange like kind property Installment sale Treasury and capital stock transactions by corporation

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Identify the major tax provisions of involuntary conversions of property

-Gain may be deferred if insurance proceeds are reinvested in property that is similar or related in service or within 2 years for personal property or 3 years for business property -realized gain exists when insurance proceeds are greater than adjusted basis in converted property -gain not recognized if proceeds reinvested in qualified replacement property -basis is cost of replacement property less any gain not recognized -losses are recognized in involuntary conversions -basis is replacement cost when losses are recognized -holding period includes period that original property was held

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What is the exclusion amount on the recognition of gain on the sale of personal residence, provided the criteria for exclusion are met?

$250,000 single $500,000 married

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Identify the criteria for the exclusion provision on the sale of a personal residence

-taxpayer must have owned and used the property as the principal residence for 2 years or more during the 5 year period ending on the date of the sale or exchange. -periods of nonqualified use cause a portion of the gain to be taxable -either spouse can meet ownership, but both must meet use test -taxpayers may be eligible for prorated exclusion if sale is due to change in place of employment, heath or unforeseen circumstances, when claimed within the previous two years -no age requirement -no rollover to another house required -renewable

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Name the criteria for a classification as a like-kind exchange

-tangible real or personal property and -used in trade or business or -held for investment (except inventory, stock and securities)

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In a like-kind exchange, what is the basis of the property received?

FMV like kind property received - deferred gain + deferred loss

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Identify nondeductible losses

Wash sales Related party transactions And Personal loss

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What is the tax treatment given to wash sales?

-losses disallowed if same security is bought within 30 days before or after sale -disallowed loss increases basis of property -gains are taxable

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What is the tax treatment of capital gains/losses for individual taxpayers?

-net capital losses deducted up to $3,000 per year against ordinary income. excess carried forward -capital gains fully taxable at lower rates

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What are the corporate capital gain/loss rules for C-corporations?

Net capital gains -added to ordinary income and taxed at regular rate net capital losses- carried back 3 and forward 5 . deducted from capital gains

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What are section 1231 assets?

Depreciable or real property used in trade or business and held over 12 months net 1231 gains and losses. if gains- treat as long term capital gain if loss- treat as ordinary loss

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What is the tax treatment of Section 1245 assets?

-recapture all accumulated depreciation as ordinary income -any excess gain is 1231 gain

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Identify the tax treatment given 1250 assets for individuals

Any amount equal to the lesser of a) the recognized gain on the sale of sec 1250 asset or b) the accumulated depreciation on 1250 asset is taxed at max rate of 25% -any gain excess capital

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What is the Section 291 rule for corporations?

Recaptured as ordinary is 20% of lesser of recognized gain or the accumulated depreciation -any gain in excess of that amount is allowed capital gain treatment under sec. 1231

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What is the tax treatment for sales to related parties?

-no deduction is allowed for losses on sales -on later resale, any gain recognized is reduced (but not below 0) by the previous disallowed loss

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What is the recovery method for 3, 5, 7, and 10 year property under MACRS?

Double declining balance, don't consider estimated salvage value

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What is the half year convention?

-use 6 months of depreciation for year of acquisition and year of disposal

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What is the mid-quarter convention?

if greater than 40% of the taxpayer's property (other than real property) is placed in service during the last three months of tax year -treats all personal property placed in service during any quarter as being placed in service in mid-point of that quarter

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What is the mid-month convention?

-used for calculating depreciation of real property -treated as placed in service in the middle of the month of acquisition/disposal month

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