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169 terms

Tax exam 1 (chapter 1-5)

STUDY
PLAY
Filing status determines
-tax rate schedule to use to compute tax liability
-amount of the standard deduction
-eligibility for certain tax credits
Filing status depends on...
whether the taxpayer is married or single
five different filing statuses
1) married filing jointly
2) married filing separately
3) qualifying widow or widower (surviving spouse)
4) single
5) head of household
is the taxpayer married?
- determined on the last day of the tax year
- if a spouse dies during the tax year, a joint return is filed in the year of death
- gov't doesn't recognize same sex marriage
filing statuses for married taxpayers
1) married filing joint (MFJ)
2) married filing separate returns (MFS)
3) abandoned spouse considered unmarried
MFJ
-both parties jointly and severally liable for tax liability
-combine all incomes, exclusions, and deductions
-2 personal exemptions
MFS
-married but file separate returns
-no joint and several liability
-tax rate schedules and standard deduction amounts are generally one-half of those MFJ
-typically not beneficial from tax perspective
-may be beneficial for non-tax reasons
-if one spouse itemizes deductions, the other spouse must also itemize deductions (even if less than the standard deduction)
When would MFS be better than MFJ?
-if you need to file separately
- to be claimed as dependent
- to keep finances completely separate
- divorce proceedings
-large income disparity may make it beneficial
Filing status for single taxpayers
- S-single
- qualifying widow(er) or surviving spouse
-HOH (head of household) [abandoned spouse]
Single
unmarried taxpayers are required to file as single unless they qualify as head of household or surviving spouse
Qualifying widow or widower
-available for the 2 years following the year of spouse's death
-must remain unmarried for 2-year period
-surviving spouse must maintain household for dependent child for the whole year
-use MFJ tax tables but are not considered to be married (still receive only one personal exemption)
-dependent child cannot be foster child
Head of household (HOH)
-not as beneficial as MFJ or qualifying widow(er)
-more beneficial than single or MFS
-gives tax benefit to those single taxpayers w/ dependents
-unmarried at end of year
-not a qualifying widow(er)
-pay more than half the costs of keeping up a home during the year
-lived in taxpayer's home w/ a "qualifying person" for more than half of the year
HOH- qualifying person
-qualifying child
-qualifying relative who is taxpayer's mother or father
-qualifying relative who is not the taxpayer's mother or father
qualifying relative- parent
-parent does not need to live with the taxpayer
-taxpayer must pay > half cost of maintaining separate household for taxpayer's mother or father
-parent must qualify as taxpayer's dependent
qualifying relative- non parent
- person must have lived with taxpayer for more than half the year
-must qualify as taxpayer's dependent
-must be related to taxpayer through qualified family relationship [if related only because lived with taxpayer for entire year, not a qualified person]
Abandoned spouse
treated as unmarried and is eligible for head of household if
- spouse has not lived in home for last 6 months of year AND
- spouse who stay in home pays > half the cost of maintaining a household that serves as principal abode for qualifying child
- does not file a joint return with spouse
individual income tax formula
gross income
minus: FOR AGI deductions
equals: adjusted gross income
minus: FROM AGI deductions:
- greater of (a) standard deduction or (b) itemized deductions and
- personal and dependency exemption
equals: taxable income
times: tax rates
equals: income tax liability
minus: credits
minus: prepayments
equals: taxes due or (refund)
what is income?
- realized when it results from a transaction between the taxpayer and another party
- if realized, then is it recognized?
income recognition
-means to report the income on the tax return and pay tax onit
- if recognized for tax purposes is called gross income
- character of recognized income determines tax treatment
gross income
- all inclusive gross income concept
- from whatever source derived
- all realized income is included in gross income unless there is a specific exclusion
exclusions - income recognition
each exclusions is associated with an IRC section
- excluded income- never included in taxable income
- municipal bond interest
- gain on sale of personal residence
- inheritances
- some employee benefits
Deferrals
the timing of when some income is reported is affected by deferral provisions in the code
- installment sales
- like-kind exchanges
capital assets
all assets except
- a/r
-inventory
-assets used in trade or business
capital gains and losses
-longterm capital gains taxed at 0% or 15%
- shortterm capital gains taxed at ordinary rates
- net capital losses (losses in excess of gains for year)
- $3000 deductible against ordinary income for year
- losses in excess of $3000 carried forward
exclusions vs deductions
exclusions= income concept
deductions = expenditure concept
legislative grace
no deductions are allowed except by code selection
FOR AGI deductions
all taxpayers receive benefits
"above the line" deductions
-deducted in determining AGI
-always reduce taxable income dollar for dollar
more beneficial for tax purposes than FROM AGI deductions
FROM AGI deductions
itemized deductions or standard deductions (only taxpayers who itemize benefit from these deductions)
personal and dependency exemptions
"below the line" deductions
- deducted from adjusted gross income to determine taxable income
- greater of standard deduction or itemized deductions
- personal and dependency deductions
why might a from AGI deduction not reduce taxable income?
Standard deductions amts
2012 standard deduction amts
- $11,900 MFJ
- $11,900 qualifying widow(er)
- $5,950 MFS
- $8,700 HOH
- $5,950 S
increased standard deduction
-the basic standard deduction is increased if the taxpayer is elderly or blind ($1150 if married and $1450 if single)
limitation on standard deduction
if taxpayer qualifies as another taxpayer's dependent, the taxpayer's standard deduction is limited to the larger of:
- earned income plus $300
- $900
but not more than the regular standard deduction
personal exemptions
for the taxpayer and spouse if MFJ
each taxpayer gets a personal exemption (exception: a taxpayer who qualifies as another taxpayer's dependent is not allowed a personal exemption)
dependency exemptions
for those who qualify as the taxpayers' dependents
tax calculation
US uses a progressive tax rate schedule
some items are taxed at preferential rates
- longterm capital gains
-qualified dividends
-tax on these items is calculated separately from income taxed at ordinary rates
other taxes include
alternative minimum tax
self employment tax
tax credits
reduce tax liability dollar for dollar
payments already made towards tax liability including...
- income taxes withheld from wages by employer
- estimated tax payments made during the year
- taxes overpaid in prior year and applied toward current year's liability
if prepayments exceed tax liability after credits, taxpayer receives a refund
Dependency requirements for all dependents
to claim an individual as a dependent, all dependents must meet 3 tests:
- dependent must have a social security number
- dependent must be a citizen of the US , Canada, or Mexico
- a married dependent must not file a joint return with his or her spouse
married dependent exception
a taxpayer can be claimed as a dependent if they file a MFJ if:
- the MFJ return reports 0 liability
- if they filed separately, neither spouse would have any tax liability
dependent debate
illegal immigrants filing tax returns (using ITIN's), claiming child tax credits for children, relative, neices/nephews in mexico [up to 10-12 dependents per return]
- collecting up to $14,000 in refunds
-- IRS reaction [says this is completely legal and encouraged to do]
qualifying child tests
1) relationship test
2) age test
3) residence (abode) test
4) support test
relationship test - QC
eligible children include
- the taxpayer's children and siblings
- any decedents of the above
age test - QC
child must be younger than the taxpayer and either
- under age 19 at EOY
- under age 24 at EOY and full time student
- permanently and totally disabled
residence test - QC
must have the same principal residence as the taxpayer for more than half of the year
- temporary time away is counted as living at the taxpayer's home
support test - QC
child may not provide more than one-half of his or her own support during the year
- scholarships of actual child (not grandchild, for example) are excluded from support computation
Tiebreaking rules - QC
-parents first
-days living with each parent if parents living apart
-higher AGI
dependency exemption for a qualifying relative
must not be a qualifying child and satisfy
- relationship test
- gross income test
- support test
relationship test - QR
a dependent must be a relative of the taxpayer or a member of the taxpayer's household for the entire year
- more inclusive than qualifying child test
relatives are:
- parents and their ancestors (also stepparents)
- children and their descendants (also stepchildren)
- siblings (also stepbrothers and stepsisters)
- aunts and uncles
- nephews and nieces (not cousins)
support test - QR
the taxpayer must furnish more than 50% of the dependent's support
- support is broadly defined
--includes almost any amt spent for an individual's benefit
-support includes welfare payments and social security benefits (even though they are not taxable)
-support does not include scholarships when the individual is the taxpayer's child
exceptions to the support test - QR
multiple support agreements
- more than half of an individual's support is provided by a group of people who are relatives and supply more than 50% of the individual's support
- anybody supporting more than 10% individually is eligible
- the group can agree which one of the group members will claim the exception
primary sources of tax law
statutory authority (congress)
administrative authority (US treasury)
judicial authority (courts)
statutory authority
US constitution
tax treaties
committee reports
internal revenue code
US constitution
-general authority to tax is in article I, sec. 7
- specific authority to levy income taxes is by the 16th amendment (passed in 1913)
- ability to tax income directly w/o approval by the states
tax treaties
US has tax treaties with many other countries that describe how residents of the 2 countries will be taxed on income from the other country
-tax treaties override the IRC
committee reports
as a tax bill makes it way through the legislative process, reports are prepared that describe the purpose of the legislation
--house ways and means committee
--senate finance committee
--joint conference committee
provides insight into understanding and interpreting law
Internal Revenue Code
title 26 of US code
- contains all federal statutes relating to tax
- the IRC is the most authoritative source of tax law
Organization of the IRC
The IRC is title 26 of the US code
- subtitles
- chapters
- subchapters
- parts
- sections
sections are the organizing unit of the IRC
citing the IRC
sec. 63
sec. 63(c)(2)
IRC Sec. 63(c)(2)
administrative authority
treasury department (treasury regulations)
internal revenue service (rev. rulings and rev. procedures)
Regulations
treasury department's official interpretation of the IRC
3 forms:
final, temporary, proposed
3 purposes:
interpretative, procedural, legislative
revenue rulings
represent the IRS position on a specific factual situation
- rev. rulings are binding on the IRS until they are revoked
rev. rul. are published in the Cumulative Bulletin
revenue procedures
issued to explain internal IRS procedures and routine matters (i.e. standard mileage rate, depreciation tables)
revenue procedures are published in the cumulative bulletin
private letter rulings
-issued by the IRS to specific taxpayers requesting guidance on a tax matter
- binding on the IRS only with regard to the requesting taxpayer
judicial authority
trial level
- US tax court (also small claims division)
- US district court
- US court of claims
appellate level
- US court of appeals
--district circuits
--federal circuit
-supreme court
tax court
national court
tax experts
do not pay tax 1st
US district court
local court
possible jury trial
generalists
pay tax 1st
US court of federal claims
national court
generalists
pay tax 1st
appeals to US circuit court of appeals for the federal circuit
citing court cases
- tax court decisions are designated as regular decisions or memorandum decisions
- regular tax court decisions are published by the US government in reports of the United States Tax Court (TC)
-- cited as J.B. Linderman, 60 TC 609 (1973)
-memorandum decisions are not published by the gov't, but are published by private publishers
-the RIA citation is:
-- Kenneth J. Nissley, T.C. Memo 2000-178
for all other courts RIA publishes decisions in American Federal Tax Reports (AFTR2d)
--the RIA citation
----waxler towing v. US, 48 AFTR2d 81-5274 (W.D. Tn. 1981)
----or (Fed. Cl., 1993)
----or (5th Cir., 1991)
----or (S. Ct., 1997)
citators
history of a court case
- which trial court and all appeals (if any)
- what happened at appeal (affirmed, reversed, remanded, or modified)
- all other cases or rev. rulings that cite the case are listed
history of revenue rulings
- has it been revoked, modified, or superseded?
- is this rev. ruling revoking, modifying or superseding another rev. ruling?
secondary sources of tax law
-tax services
--RIA checkpoints
-textbooks
-professional journals
-IRS publications
IRC: Primary or Secondary?
Primary
Tax article in USA Today primary or secondary?
secondary
article on supreme court opinion
secondary
supreme court opinion
primary
RIA federal tax coordinator
secondary
treasury regulations
primary
Tax research
step 1: understand the facts
step 2: identify issues
step 3: locate relevant authorities
step 4: analyze tax authorities
step 5: communicate the results
tax memo layout
facts- only state the relevant facts
issues- question format, professional tone
conclusion- your proposed solution
analysis- the reasoning, a recommendation
tax planning
structuring transactions to maximize the taxpayer's aftertax wealth while achieving the taxpayer's non-tax goals
timing strategies
when tax rates are constant across years
- defer income
- accelerate deductions
when tax rates change across years
- shift income to low tax years
- shift deductions to high tax years
doctrine of constructive receipt
- a cash method taxpayer reports income in the period that it is received or constructively received
- income is constructively received when it is made unconditionally available to the taxpayer w/o restrictions
Limitations of timing strategies
-doctrine of constructive receipt
-the tax deduction often cannot be accelerated w/o the actual cash outflow that generates the deduction
-deferral strategy may not be optimal if:
-- tax payer has cash flow needs
-- continuing investment generates low returns
-- subjects taxpayer to unnecessary risk
income shifting strategies
-transactions that shift income b/w family members
- transactions that shift income b/w owners and their businesses
- transactions that shift income across jurisdictions
transactions b/w family members
parents shift income to children
-employing children in a family business
-shifting investment income to children
transactions b/w owners and businesses
use of a corp in tax planning
- incorporating a sold proprietorship
- shifting income from corp to owner through tax deductible expenses
--compensation, rent, interest
shifting income across jurisdictions
different states w/in the US
different countries
limitations on income shifting
assignment of income doctrine
- "the one who earned the income is taxed on it regardless of who receives the proceeds"
related party rules
- "IRS scrutinizes these transactions because they are other not "arms-length transactions"
conversion strategies
tax rates can vary across different activities
- ordinary income is taxed at ordinary rates
- longterm capital gains are taxed at preferential rates
- some income is tax exempt
to implement the conversations strategy, you must:
- understand the differences in tax treatment across various types of income, expenses, and activities and
- have some ability to alter the nature of the income or expense to receive the more advantageous tax treatment
implicit taxes
indirect taxes that result from tax advantage government grants to certain transactions
example:
- gm bond 10%
- state of iowa bond 8%
assuming 20% tax rate, investors are indifferent
- 2% difference is "implicit tax"
business purpose doctrine
a transaction must have a business purpose (other than tax avoidance) to be respected for tax purposes
- IRS has the power to disallow business expenses for transactions that don't have a business purpose
substance over form doctrine
when evaluating the legitimacy of a transaction, the IRS can look through the legal formalities to the substance of the transaction
- IRS can reclassify a transaction according to its substance (instead of its form)
step transaction doctrine
the IRS can collapse a series of transactions into one and determine the tax consequences of the arrangement in its entirety
- normally transactions that take place more than a year apart will be respected
economic substance doctrine
transactions must meet 2 criteria
- transaction must meaningfully change a taxpayer's economic position
- taxpayer must have a substantial purpose (other than tax avoidance) for the transaction
taxpayer filing requirements
- corps: must file regardless of taxable income
- estates and trusts: required to file if gross income exceeds $600
- individuals: filing is determined by taxpayer's filing status, age, and gross income
who has to file a tax return?
individual filing requirement is based on gross income
- must file if gross income is more than amt of standard deduction plus personal exemption(s)
- increase personal exemption for age but not blindness
tax return due date
individuals: 15th day of 4th month following end of tax year (usually april 15th)
corps: 15th day of the 3rd month following the end of tax year (march 15th for calendar year corps)
filing and payment requirements
- due dates on a saturday, sunday, or holiday are extended to next business day
- individuals and corps are allowed to apply for an automatic 6 month extension
---tax payments are due by the original due date of the return regardless
failure to file and pay penalties
combined penalty of 5% of balance due per month late for 5 months
- failure to file by itself is 5% per month of total tax due
- failure to pay by itself is .5% per month of total tax owed
penalties normally do not exceed 25% of tax due
statutes of limitations
the time in which the taxpayer can file an amended return or the IRS can assess a tax deficiency
- generally ends 3 years from the later of:
1)the date the tax return was actually filed or
2) the tax return's original due date
IRS computer programs used
- Discriminant function (DIF) system [scoring system] -based on most misused deductions/errors/$amts
- document perfection (checks for math errors etc) - 5 million return audited, 2011
- information matching programs (compares tax return data with other IRS information)- 4.7 million returns audited, 2011
IRS audit criminal prosecution
- 2011 1842 criminal investigations closed
-- 49% led to indictments
-- 37% closed w/o prosecutions
-- 14% not prosecuted despite IRS recommendation
87% of indictments led to conviction
77% of convictions led to incarceration
- avg. sentence:25 months
correspondence examinations
most common audit
- conducted by mail and are generally limited to 1 of 2 items on the return
- roughly 70% of all audits conducted are correspondence examinations
office examinations
second most common audit
- conducted in the local IRS office and tends to be broader in scope
field examinations
least common audit
- held at the taxpayer's place of business and an last months to years
when the audit is concluded
revenues agent's report is prepared by the agent with the proposed adjustments and balance due or overpayment
- taxpayer may agree w/ adjustments
- if taxpayer doesn't agree, will try to resolve w/ agent's supervisor or appeals officer at that time
---if not resolved, a preliminary notice of deficiency will be sent (30 days letter)
30 day letter
taxpayer has 30 days from date of notice of deficiency to request conference with appeals office (called filing a protest)
--an appeals officer has authority to settle on behalf of the IRS
if unable to settle, the appeals office issues a statutory notice of deficiency (90 day letter)
90 day letter
tax payer has 90 days to file a petition w/ tax court
- if a petition is not filed w/in 90 days, the deficiency is assessed and demand for payment is made
- after the 90 day period, the taxpayer cannot contest the assessment w/o paying the tax. filing a claim for refund, and institution a refund suit in District Court or the Court of Federal Claims
tax professional responsibilities
- tax professionals are subject to various statutes, rules, and codes of conduct
---AICPA code of professional conduct
---AICPA statement on standards for tax services
----IRS circular 230
----State board of Accountancy Statutes
failure to comply with statutes can result in being admonished, suspended, or barred from praticing
tax payer and tax practitioner penalties
a taxpayer and tax practitioner will not be subject to an underpayment penalty if:
- there is substantial authority that supports the tax return position or
- if there is a reasonable basis for the position and it is disclosed on the taxpayer's tax return
definition of tax
- payment to gov't required by law
- pursuant to the gov'ts power to tax
- to be used for public or governmental purposes
- special benefits are not received for making payment
- payment is not a penalty under other powers of government
taxes do not include
-fees or charges for specific goods or services
- regulatory fees
- fines or penalties
basic tax formula
t= r x b
tax=rate x base
tax base
the item, event, or value that a tax is levied upon - often "taxable income"
criteria for evaluating tax systems
sufficiency
equity
---horizontal
---vertical
certainty [easy to find out when/where/how much to pay]
convenience [easy to pay and collect]
economy [gov't has low costs of collection, taxpayer has low costs of compliance]
sufficiency
to be a good tax, it should raise enough revenue to supply the necessary public goods
- gov't needs to forecast tax revenues and taxpayer behavior to match revenue with expenses
---income effect
---substitution effect
income effect
taxpayer engages in more income producing activities to generate the same amt of after tax income
substitution effect
taxpayer engages in fewer income producing activities because the after tax value of working is less than the value of leisure
equity
a good tax should be fair, in general a fair tax is based on ability to pay
horizontal equity
those with equal ability to pay should pay the same percentage of tax
vertical equity
those with a greater ability to pay should pay a greater percentage of income in tax
average tax rate definition
total tax / taxable income
effective tax rate definition
total tax / total income
marginal tax rate definition
rate at which the next increment of income will be taxed
change in tax / change in taxable income
what is included in gross income?
definition of gross income for tax purposes
- IR sec. 61(a) "gross income means all income from whatever source derived"
-reg. 1.61 (a) "includes income realized in any form, whether in money, property, or services"
taxpayers recognize gross income when
(1) they receive an economic benefit
(2) they realize the income, and
(3) the tax law does not provide for exclusion or deferral
economic benefit
think of as "revenue" or "gain" in financial accounting perspective
- loan proceeds no economic benefit because they represent a liability
realization
no income or loss is recognized until it arises from a transaction with another party
recognition
-this is the amt of realized income or loss that is reported on the tax return
-all realized income unless exclusion or deferral applies
form of receipt
-includes all sources of economic benefit
-not just cash
-report FMV of property or services received
return of capital concept
taxpayer receives his investment back tax free
-cost of asset is "tax basis"
-return of capital does not represent economic benefit
tax benefit rule
refunds or recoveries of amounts previously paid by the taxpayer are taxable only if the taxpayer received a tax benefit from the payment in a prior year
- receiving a tax benefit means that the taxpayer deducted the item and it reduced the taxpayer's tax liability
accounting methods
corp- accrual method
individuals- cash method
when do you recognize income?
individuals- the period you actually receive it
receipt is defined as when it is made unconditionally available to you
claim of right doctrine
Income recognized when there are no restrictions on use of income (no obligation to repay)
- if potentially have to pay back bonus (clawback provision), you report income in the year you received it
assignment of income doctrine
-income from services is taxed to the service provider
-income from property is taxed to the owner of the property
community property systems
half of the income earned from services of one spouse included in gross income of the other spouse
- half of the income from property held as community property by the married couple is included in the gross income of each spouse
earned income
income from services
- income from labor most common source of gross income
includes non-cash compensation
-report FMV of non-cash items
unearned income
income from property
- include gain or losses from sale of property, dividends, interests, rents, royalties, and annuities
depends on type of income and type of transaction generating income
property dispositions
sales proceeds
less: selling expenses
= amount realized
less: basis (investment) in property sold
gain(loss) on sale
income from flow-through entities
-the most common flow-through entities are partnerships and S corporations
-a taxpayer reports his share of the partnership or S corp income when it is earned by the entity (not when it is distributed to him)
annuities and pensions
an annuity is a series of payments that will continue for a specified time period or until an individual's death
- tax rules for annuities are based on the return of capital concepts
calculate an exclusion amount based on the taxpayer's investment and expected return
exclusion ratio
original investment / expected value of annuity
- the percentage exclusion ratio is the portion of payment that is excluded
annuities over lifetime
must use IRS tables based on the life expectancy
- if you live longer than life expectancy, entire payment amount is gross income beyond life expectancy
- if you die before life expectancy, the unrecoverable investment taken on final return
pension plan payments
are purchased with pre-tax dollars are 100% taxable when received
- payments from a qualified employer's retirement plan or traditional IRA with fully deductible contributions
alimony
is income to the payee and deductible FOR AGI by the payer
- property settlements and child support are not income to the payee and are not deductible by the player
-if alimony payments stop or reduce in amount when child reaches a certain age, all or a portion of the payments will be treated as child support
- if payor is behind in payments, apply payments received first to child support, then to alimony
alimony requirements
-cash payment (can be made to a third party but must be in cash
- payments are pursuant to a written divorce or separation decree
- payor and payee must live apart
- payments must cease upon death of payee
alimony recapture
there is an incentive for the person paying to treat a property settlement as alimony
- property settlements are generally large dollar amounts
recapture occurs in year 3 if year 2 and year 3 alimony amounts are much smaller than year 1
prizes and awards
prizes are only excluded if:
- recipient designates that the prize be paid to a qualified charity, and
- prize is for a religious, charitable, scientific, artistic, literary or civil achievement and
-recipient did not "solicit" the prize (by entering a contest, writing an essay, etc)
- recipient does not need to perform substantial services as a condition of the prize
employee achievement awards
employee achievement awards are excluded from gross income of the employee if:
- given for a safety achievement or years of service
- the award is of tangible personal property and under $400 in value (not cash)
- not excluded if disguised compensation
gambling winnings
must include gross amount of winnings in gross income
- can deduct gambling losses to the extent of gambling losses, but as a FROM AGI deduction
- professional gamblers can deduct losses as a FOR AGI deduction
social security benefits
a portion of social security benefits (but never more than 85%) must be included in gross income for moderate and higher income taxpayers
-taxable amount depends on modified AGI and filing status
discharge of indebtedness
-debt forgiven must be included in gross income
- if you are insolvent before and after debt forgiveness, discharge is not taxable
- if the discharge makes taxpayer solvent, the taxpayer recognizes taxable income to the extent of solvency
imputed income
- bargain purchases of employee from employer
- services: employees may exclude up to 20% employer provided discount
- goods: employees may exclude entire amount as long as item purchased at higher than employers cost
imputed interest
-imputed interest rules only apply to zero interest (or below market) loans greater than $10,000
-compute imputed interest amount using the federal rate
-assume the interest was
---paid to the lender as interest and
---imputed amount given back to the borrower by the lender
-lender reports interest income and borrower reports interest expense
-relationship between parties determines treatment of imputed amount given back
-interest expense deductibility depends on use of borrowed funds in case of individual
-business use - for AGI deduction
-personal use - no deduction
common exclusions
-municipal bond interest
-gain on sale of personal residence
-scholarships and educational subsidies
-fringe benefits
gain of sale of personal residence
-up to $250,000 if filing single ($500,000 if MFJ and both spouses meet "use" test)
must have:
- owned residence for 2 of past 5 years
- used for residence as primary residence for 2 of past 5 years
qualify for exclusion every 2 years
scholarships and fellowships
-scholarships and fellowships are excluded for degree-seeking students
-amount of exclusion is limited to the cost of tuition, books, lab fees, and other direct costs
-student cannot be required to perform services
educational subsidies
-exclude from gross income earnings on 259 college plan if you use earnings to pay for qualifying educational expenses
-can exclude interest income on series EE savings bonds if used for higher education expenses
employee fringe benefits
-any payments made by an employer to an employee, or on behalf of an employee, will be taxed as compensation unless a code provision allows for the time to be excluded
-to qualify for exclusion, benefits must generally be offered on a non-discriminatory basis
most common fringe benefits
-health insurance (medical/dental)
-up to $50,000 in group term life insurance premiums
-de minimis fringe benefits
-qualified transportation fringe
-employer retirement contributions
-qualified moving expenses
-flexible spending accounts
-meals/lodging for convenience of an employer
-employee educational assistance
-dependent care benefits
exclusions to avoid double taxation
-gifts and inheritances
-life insurance proceeds
-foreign earned income
gifts and inheritances
-gifts and inheritances are excluded from the recipients gross income
-may be subject to transfer tax, but not income tax
-subsequent income from gifted (or inherited) property is not excluded under this provision
life insurance proceeds
beneficiaries may exclude life insurance proceeds from gross income
-only the principal may be excluded
---if beneficiary receives periodic payments, the interest portion is taxable
-use straight line method to calculate exclusion
---example: if total principal is $100,000 and beneficiary will receive 10 yearly installments, exclude $10,000 per year
foreign earned income
-up to $95,100 of foreign earned income in 2012 may be excluded from gross income
-employer provided housing exclusion up to certain dollar amount also excluded
-taxpayer must be live in foreign country 330 days in 12 month period
sickness and injury exclusions
-workers' compensation
-payments for personal injury
-health care reimbursement
-disability insurance
unemployment compensation and workers' compensation
unemployment income is included in gross income
- workers' compensation is excluded from gross income
damages from a lawsuit for personal injury
-compensatory damages received for personal injury ma be excluded from income if for a physical injury or illness
---includes emotional distress damages if associated with physical injury
punitive damages are always taxable, even for physical injury
healthcare reimbursement
all reimbursement taxpayer receives from health or accident insurance policy for medical expenses paid is excluded from income
- tax benefit rule may require recognition if you deducted medical expenses in prior year
sick pay and disability insurance payments
-sick pay (from employer) is taxable
-disability or wage continuation payments are excluded only if the taxpayer (not taxpayer's employer) paid the premiums on the policy with after-tax dollars
disability insurance
-if both an employee and employer contribute to pay premiums
-employers portion is taxable fringe benefit:
---still after tax dollars, exclude entire amount
-employers portion is nontaxable fringe benefit:
---a portion of each payment (% of premiums paid by employee) is excluded