Acct 351 Midterm

(New Tax Amount - Old Tax Amount) / (New Taxable Income - Old Taxable Income)

Total Tax / Taxable Income

Total Tax / (Taxable + Nontaxable Income)

1) Sufficiency

2) Equity

3) Certainty

4) Convenience

5) Economy

Enough tax revenues to pay for governmental expenditures

Is the tax burden distributed fairly across taxpayers

Should be able to determine when to paytax, where to pay tax, and how much tax is due

Tax system should be designed to facilitatethe collection of tax revenues without undue hardship on the taxpayer orgovernment

Should minimize the compliance andadministration costs associated with the tax system

Two taxpayers in similar situations should paythe same tax

Taxpayers with greater ability to pay tax pay morethan taxpayers with less ability to pay

Gross Income

-For AGI Deductions

=AGI

-Standard Deduction or Itemized Deductions)

-Personal and Dependency Exemptions)

=Taxable Income

* Tax Rates

=Income Tax Liability

+Other Taxes

=Total Tax

-Credits

-Prepayments

=Taxes due (or refund)

May only be deducted if the taxpayer does not qualify as a dependent

Up to $4,050 per person

1) Must be citizen of US or resident of US, Canada, or Mexico

2) Must not file joint return with spouse unless no tax liability if filed separately

3) Must be qualifying child or qualifying relative

1) Relationship - Must be child, sibling, or descendent

2) Age - <19, or <24 and a full-time student

3) Residence test - share residence for >1/2 the year

4) Support test - Provide >1/2 living expenses

1) Relationship - descendant or ancestor, sibling, nephew, uncle, in-laws, those who share residence for an entire year

2) Support - provide >1/2 expenses

3) Gross Income -

1) Taxpayers are legally married as of the least day of the year

2) When one spouse dies, the surviving spouse is still considered married for that year

1) Within 2 years of death

2) Remain unmarried

3) Pay >1/2 costs of maintaining household where depending CHILD lived for entire year

1) Unmarried at end of year

2) Not a qualifying widow(er)

3) Pay >1/2 support for home

4) QC or QR living in residence for >1/2 year

Gains or losses on the disposition orsale of capital assets

Taxpayer owned the capital asset formore than one year before selling it

Gaintaxed at 15% (20% for high-income taxpayers, 0% for low-income tax payers)

Taxpayer owned the capital asset for one year or lessbefore selling it

Gaintaxed at ordinary tax rates

A loss on the sale of a capital asset(no matter how long the taxpayer held the asset before selling) generates a FOR AGI deduction for the taxpayer in the year of sale

Net losses limitedto $3,000 deduction for the year (remaining is carried forward)

Personal-use assets (car, house) can not be deducted

Deducted from gross income to find AGI

Tend to be related to business/investing activities

"Above the line"

Deducted from AGI to find taxable income

Tend to be personal in nature

Deduction “below the line”

Generally less valuable that for AGI deductions

1)Withholdings

2) Estimatedtax payments (paid directly to IRS)

3) Taxesthe taxpayer overpaid on the prior tax return that the taxpayer elects to applyas an estimated payment for the current tax year

Taxpayers recognizegross income when:

-They receiveeconomic benefit

-They realizeincome

-No tax provisionallows them to exclude or defer the income from gross income for that year

Income is realizedwhen:

-A taxpayerengages in a transaction with another party

-The transactionresults in a measurable change in property rights

Cost or capital investment in underlyingproperty

When tax payers sell property, they are allowed toreduce the sale proceeds by their unrecovered investment in the property todetermine the realized gain from the sale

A refund is not typically included in gross incomebecause it usually represents a return of capital

Net refund andpurchase price to reduce net cost of asset

If a refund is made for an expenditurededucted in the PREVIOUS year the refunded is included in gross income

states that a taxpayer realizes and recognizesincome when it is actually (constructively) received

1) The income hasbeen credited to the taxpayer’s account

2) The income isunconditionally available to the taxpayer

3) The taxpayer isaware of the income’s availability

4) There are norestrictions on the taxpayer’s control of the income

Incomehas been realized if the taxpayer receives income and there are no restrictionson the taxpayer’s use of income (no obligation to repay the amount)

All assets other than:

-Accounts receivable

-Inventory and other assets held for sale

-Short term assets used in trade or business

require a relatively high level of involvementor effort

investment activities are profit motivatedactivities that don’t require a highdegree of involvement or effort

For AGI

Deductible expenses must be appropriate and helpfulfor generating a profit

For AGI

For AGI

Net loss deduction limited to $3,000, remainder carries forward

For AGI

Any expenses and losses incurred by the entitypass through to the entity owners

For AGI

For AGI

For AGI

Self-employed tax payers are allowed to deduct theemployer portion of the self-employment tax they pay

For AGI

Limited to $2,500 per taxpayer per year

From AGI

19 cents per mile

From AGI

Cost of meals and lodging at other types offacilities such as nursing homes are deductible only when the principal purposefor the stay is medical care rather than convenience

The deduction of medical expenses is limited to theamount of unreimbursed qualifying medical expenses paid during the year REDUCEDby 10% of the taxpayer’s AGI

From AGI

Individuals may deduct as itemized deductions paymentsmade during the year for the following taxes:

-State, local, andforeign income taxes

-Real estate taxeson property held for personal or investment purposes

-Personal propertytaxes that are assessed on the valueof the specific property

From AGI

-Acquisition Indebtedness – is any debt secured by the taxpayer’s qualifyingresidence that is incurred in acquiring, constructing, or substantiallyimproving the residence

-Home-Equity Indebtedness – any other debt secured by the taxpayer’s qualifyingresidence

From AGI

Qualified charitable organizations includeorganizations that engage in educations, religious, scientific, governmental,and other public activities

From AGI

The deduction for capital gain property that is tangible personal property is limited tothe adjusted basis of the property ifthe charity used the property for a purpose that is unrelated to its charitable purpose

These misc. deductions are summed together and aredeductible only to the extent that their sum exceeds 2% of the taxpayer’s AGI

-Employee Business Expense

-Business Travel and Transportation

-Employee expense reimbursements

-Investment expenses

-Tax preparation fees

-Hobby losses

The first 250,000 (500,000 if married filing jointly) is excluded as long as:

-Owned it for at least 2 of the 5 years prior to sale

-Lived in it for at lease 2 of the 5 years prior to sale

Not deductible or recognizable

Realize entire amount forgiven

Not recognizable if taxpayer remains insolvent

Not recognizable