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Dependency Exemption

Qualifying child age < 19 or fulltime student <


24. Qualifying relative member of household,
gross income<$3,900, taxpayer supports >
Estimated Tax Payments
[Line 63 1040]
Health Insurance Premiums and
Reimbursement
NOT included in gross income
Alimony
Included [line 11 if received/31a if paid]
Child Support
NOT included

premises, i.e. oil rig. If CASH allowance, than


included in income.
Gambling Winnings Included in Other
Income [Line 21]
Gambling Losses Sch. A Other Misc, limited
to income
Self-employment Tax
Included, Social Security tax rate of 12.4%
applies to first $113,700 of net self-employment
income, Medicare Tax rate of 2.9% applies to all
net self-employment income. HALF (50%) of the
self-employment tax is allowed as a deduction
on 1040 [Line 27] [Use form SE]

Bad debts
Deduction limited to accounts receivable or
income reported on sales that is no longer
collectible (business) (Ordinary deduction) [Line
27a]
Non-business Bad Debt
May claim $3,000 S.T. capital loss and carry
remaining forward
Capital Losses
nonbusiness bad debts. Limited to $3,000
deduction against ordinary income in current yr.
Excess unused deduction may be carried
forward. [Line 13 1040] [Sch. D]

Gifts
NOT included [unless in business setting]

Car Mileage
rate .565 x business miles commuting and
nonbusiness (both nondeductible) mileage
reported in PART IV Sch. C [Line 9 Sch. C]
(Included in the standard car mileage rate is
gas, oil, insurance, repairs, maintenance, and
depreciation. ADD toll fees and business parking
to total after .565 x miles calculation) [Line 9]

Home Office Expenses


deductible if used on regular basis, separate
structure, business storage, or exclusive use by
clients. Deduction may NOT reduce net income
from business below 0. Unused deductions may
be carried forward. If home office is used for
business & personal expenses NO deduction
allowed. [Line 30 Sch. C] [Form 8829]

Inheritances
NOT included

Inventories & COGS


Part III, Sch. C

Home/office allocation sq ft. business/total


sq. ft x rent/utilities/etc.

Taxable Interest [Line 8a] [transferred from


Sch. B]

Meals and Entertainment


Can deduct 50% (business) [Line 24b]

Municipal Bond Interest excluded from


taxable income [line 8b]

Lodging
100% deduction [Line 24a] Travel Expenses
include: airfare, laundry, taxi, hotel

Net Operating Loss


Net operating loss from 1 yr. can be used as a
deduction in another yr. ONLY losses from
trade/business, casualty & theft or confiscation
losses can generate a net operating loss. [Line
12 1040]

Prizes & Awards


Included [Line 21] Exception: employee awards
of tangible personal property

Unemployment Compensation included


[line 19]
Ordinary Dividends Included, taxable in
year received [line 9a]
Qualified Dividends or qualified ordinary
dividends are a category of Ordinary Dividends
taxed at different rates. [Line 9b] Tax Bracket
15% - 0% tax rate on qualifying dividends. Tax
bracket 25-35% - 15% tax rate on qualifying

Dues & Subscriptions (Licenses)


Deductible if professional (i.e. no country club
dues) [Line 23]
Business Education Maintaining or
improving existing skills at uni, course, or
seminar is deductible. (exception: must not lead
to new trade/skill) [Line 27a]
Clothing & Uniforms deductible if for
business [Line 27a]

Dividend Interest included [line 9]


Scholarships nontaxable for tuition, fees,
books, and course required materials, TAXABLE
as room and board
Meals and Lodging NOT included if
furnished by employer and needed for job or on

Business Gifts
may deduct $25/done (husband+wife=1
donee). NOT deductible if taxpayers
supervisor/higher-level. Incidentals like
giftwrapping not subject to $25 ceiling [Line
27a]

Hobby Losses
expenses are deductible. May NOT show a loss
for a hobby/personal enjoyment. Any profits
from hobbies must be included in taxable
income. [Line 21] Can deduct expenses
otherwise on Sch. A
Not a hobby 750 (200 460 250)
= 160 loss against income
Income^ - ^depr. ^supplies
taxes personal property
Hobby 750 250 = 500 income depr. and supplies (only 500 deductible
^Automatically deductible on Sch. A
Other Income
[Line 6 Sch. B] of business
Mortgage interest of business
[Line 16a Sch. C]

Rental Income
taxable and reported on [Line 3 - Sch. E] [Line
17 1040]. Take monthly rental income x 12,
less expenses (ie. Real estate taxes, mortgage
interest, depreciation, home owners dues,
utilities, etc.)
Vacation homes
Rented<15 days: nondeductible personal
expenses (mortgage interest and real estate
taxes allowed on Sch. A itemized reductions).
Rented>14 and used for personal < 10% of
days rented, whichever is greater, deductions
NOT limited to income and may take a loss.
[Sch. E] Rented > 14 days and used for personal
> 10% days rented, or 14 days whichever is
greater, allocable rental expenses to the extent
of income. PERSONAL PORTION of interest and
taxes to personal use of property is deductible
on [Sch. A]
Passive Loss Limitations
passive losses (i.e. rental real estate income
and LLP) cannot be used to offset either active
(wages, self emp income) and portfolio income
(dividends and interest). Unused passive
losses/credits are carried over. May deduce
$25,000 of rental property losses against other
income. If AGI (before IRA and passive, or rental
losses: modified AGI [Line 17]) > $100,000,
the amount that exceeds 100k is multiplied by
50% and subtracted from 25,000. [f. 8582]
Real Estate Rental as Trade/Business Considered active if > 750hrs of service and
> 50% personal service. In this case, can
deduct a loss.
Self-employed Health Insurance Deduction
can take deduction for medical and dental
insurance for taxpayer, spouse and dependent
children, children under 27, medicare
premiums, long-term care subject to limitations
(a table) [Line 29]
Health Savings Account Contributions to
HSAs are a deduction to AGI and limited to
certain $ amounts depending on age and
whether covers family or individual. Earnings
and unused contributions are not taxed. Also
carried forward. Once individuals qualify for
Medicare (age 65) not allowed to contribute to
HSA. [Line 25]

Distributions from HSA Once taxpayer is


65, can take distributions from HSA tax-free to
cover medical expenses.
Moving Expenses deductible [Form 3903] if
changing job sites, at least 50+miles. Mileage
rate for moving .24, traveling includes lodging
NOT meals. Qualified expenses (moving
household goods, personal effects, mileage,
lodging) covered by employer NOT reported as
part of gross income. But non-qualified
expenses covered are included in income (i.e.
employer covers meals).
IRA annual contributions deductible [Line
32] $5,500 limit
IRA retirement distributions taxable. ROTH
IRA not deductible/taxable. Max annual
contribution that can be made is $5,500 (plus
$5500 for spouse with no income). Age > 50
additional $1000 allowed.
Direct Transfers retirement to another planno tax implications (excluded)
401K Plan can contribute lesser of 20% of
salary or $17,500
Medical Expense deductible (i.e. medical
insurance premiums, unreimbursed hospital
bills, doctor bills, hearing aids, nursing home,
prescriptions, etc.) unless unnecessary cosmetic
surgery, swimming pool, cost of travel for
general improvement. Mileage rate for
transportation is .24 [Line 1 Sch. A]
Interest deductible (i.e. mortgage interest,
investment interest) NOT deductible-automobile
interest, credit card interest [Line 10-15 Sch. A]
Taxes deductible [Line 5-9 Sch. A], (i.e.
property taxes on personal residence [Line 6],
state and local taxes [Line 5b], state income tax
[5a] real estate property taxes [Line 6], sales
taxes [5b], Income tax preparation fee [Line 22
Sch. A], taxes on personal property [Line 7]
(exise/gas NOT deductible, also foreign taxes if
payer elects a foreign tax credit) have to choose
income or sales tax
Certificate of Deposit from Bank [Line 8a]

Charitable contributions must be made in


cash or property. For donated property the
deduction is equal to the fair market value if
used for primary use. 50% limitation of AGI.
(NOT incl. political party, labor unions,
international) [Line 16]
Casualty and Theft Losses
[Form 4684] deductible. reduced by insurance
proceeds. Has to be sudden and payer not
willful. Deduction in FMV not to exceed the
basis.
Job Expenses [Line 21] Form 2106, subject to
2% AGI limitation. 50% meals/entertainment
Child Tax Credit Is $1,000 per qualifying
child. Child must be < 17. Phase out starts
when AGI reaches $110,000 [Line 51]
Child and Dependent Care Credit See table
for applicable % of qualified expenses.
(normally 20% of qualified expenses if AGI >
43k) Children must be < 17 yrs, and claimed as
dependent. The maximum amount of qualified
expenses is $3,000 for one dependent, and
$6,000 for two or more. Dependent must be <
13 yrs or be dependent/spouse incapable of
self-care. Qualified dependent care expenses
are limited to the lesser of either spouses
income (i.e. if qualified expense $5000 but
spouses income $2000 can only take credit on
$2000 x total AGI %.) [Line 48 - 1040] [Form
2441]
American Opportunity Credit provides tax
relief for qualified higher education expenses.
100% of 1st $2,000 of tuition, fees, books,
course materials, and 25% of the next $2,000
for a max of $2,500 per student. (available for
first 4 yrs). If the credit exceeds tax liability, the
credit is 40% refundable ($1000= 0.4 x 2,500)
Lifetime Learning Credit
20% of tuition and fees up to $10,000. Books
not qualified expense unlike AOC. Credit is
available for courses at eligible institutions.
Students can be enrolled in just 1 course and
still get credit.
Foreign Tax Credit
Taxpayer allowed credit for income earned in
foreign country. 1st calculate total foreign taxes
paid. Then calc: net foreign income/total income

x U.S. tax liability = limitation. Foreign tax credit


= lesser of the foreign taxes paid or the
limitation, carry forward or back unused taxes.
[Line 47]
Simplified Deduction Office Expense
The allowable square footage is the smaller of
the portion of a home used in a qualified
business use of the home, or 300 square feet.
The prescribed rate is $5.00.

Prepaid rental income treated on cash basis


Prepaid interest expense treated on accrual
Land
No depreciation allowednot subject to
obsolescence

Assets used for personal use < fifty percent


business use; includes cars, computers,
entertainment, other vehicles etc.
Depreciation deduction must be calculated
using straight-line. The special election to
expense is not allowed.

Depreciation
Cost basis minus election to expense, max of
five hundred k, equals depreciable amount. Plus
bonus depreciation, half of depreciable amount,
plus regular depreciation, MACRS x other half of
depreciable amount and limited to income.

Limitation on depreciation of Automobiles


For cars acquired in current tax year the
maximum depreciation is given in the table plus
eight k bonus depreciation.
Cost basis X business proportion X MACRS,
limited to given numbers on table.

Purchased automobile in current year


Depreciation expense for current year = Bonus
(half of cost basis X business use %) plus
MACRS (other half of cost basis X MACRS X
business use %)
Depreciation expense for next year different
business use = MACRS (other half of cost basis
X MACRS X new business use %), limited to auto
limitation X new business use %

Intangible Assets Section 197


Amortized over a fifteen-year period, beginning
with the month of acquisition. Includes:
goodwill, going-concern, licenses, covenants not
to compete, permits, etc. EXCLUDED: interests
in corporation, trust, partnership, estate, land,
computer software available for purchase, films,
sound recordings, self-created intangibles
Cost basis/fifteen years X mo. Left in
year/ total months in year

Straight-line Depreciation
Cost basis minus salvage value divided by total
# of months multiplied by months left in the
year

California vs. Texas Community Problem


CA: Half of all incomeexcluding separate
property investments, which are entirely
taxable to individual
TX: Half of all income
Short-period Corporation Tax
Annualize the income, divide by months left in
year and multiply by total months in a year. Use
tax rate schedule to calculate tax, then divide
by total months in year and multiply by months
left in the year
Cash-basis Income
Rental income treated on cash basis
Pre-paid rent (rent paid) and prepaid interest
expenses treated on accrual basis

Straight-line MACRS Cost basis X annual %


rates from straight-line
table
Accelerated MACRS Cost basis X annual %
rate from accelerated
depreciation table Use
year
Straight-line Real Property Use #mo. to
find rate, X cost basis.
i.e Sep is nine. Also .0
Election to Expense under Section 179
Applies to both new and used property. Must be
personal property (not real estate) placed in
service in current tax year, and used in
business. Maximum of five hundred k, limited to
income, the rest is carried over to later years.
Bonus Depreciation
Fifty percent deduction on cost on new/original
use property (not real e.) placed into service in
current tax year
Limitation on Listed Property

Accrual-basis Income

Related Parties tax Restriction


Includes sale of property at a loss, and unpaid
expenses and interest between family, and
individual with > half ownership in corporation.
When property is later sold to unrelated
party, the disallowed loss will offset
gain of sale. If property is sold later to
an unrelated party at less than the
related party transaction there is now a
realized loss, which can be deducted
subject to any capital loss limitations
Robert owns forty of T, and forty of R, T owns
sixty of R, Robert owns (forty X sixty) + forty
direct interest equals sixty four percent total
ownership interest.
Capital Gains (Losses) Table
Calculate net short-term gain or loss for each
year, do the same for long-term gain or loss. For
the first year, current ST gain/loss should equal
end of year gain or loss. Maximum capital loss
deduction is three thousand. Deduct first from
net short-term loss. The remaining loss should
be carried forward. All of long-term loss should
be carried forward. End of year net short term
gain (loss) for second year should be the net of
prior years ST carry forward and current year
ST gain/lossdo the same for end of year net LT
gain/loss. If there is no ST loss deduction, than

take max of three thousand for LT deduction. LT


loss carry forward should equal the net of end of
year ST gain and LT loss minus LT loss
deduction.
Long-term capital gains are treated as qualified
dividends and taxed that way.
Ordinary income equals given taxable income
plus end of year ST gain. End of year LT gain tax
at qualified dividend rate.
End of year net ST and LT if dissimilar
Capital Asset
All property owned by taxpayer except
inventory, accounts receivable, and Section
1231 Assets
assets excluded from capital assets generate
ordinary income or loss
Section 1231 Assets
Depreciable or real property used in business,
timber, livestock, coal, crops.
Selling a commercial building for cash,
note, given adjusted basisinstallment
sale
Recognizing total gain on property in year of
sale: taxable gain equals cash + note (# years
X $) minus adjusted basis
Installment sale method = total gain (What you
sold it for adjusted basis) / contract price
(cash + FMV note) X cash collections
Installment method year after sale: do NOT
include interest. Total gain / contract price
*should be the same as before, X cash
collections for year
Installment Sale Method
Gross Profit % = Gross Profit/Contract Price
*change calc to four decimal places [Gross
Profit=Total Gain]
Gross Profit = (cash Selling price + note
receivable + mortgage*do not include interest)
- adjusted basis [other selling costs/exp.]
Contract Price = note receivable + selling price
in cash (not included mortgage)
Installment Sale Income = Cash payments
received during year X Gross Profit %
Adjusted Basis
Cost basis + improvements depreciation
Recomputed Basis
Adjusted basis + depreciation (
improvements?)

Inherited capital asset (i.e. stock)


Selling price cost basis = gain/loss If gain,
the inheritors basis = grandpas cost basis. If
loss the inheritors basis = the lesser of
grandpas basis or FMV on date of gift. There is
only a difference in cost basis on gain/loss when
FMV < grandpas adjusted basis. If stock is sold
for an amt. between grandpas basis and FMV to
date no gain/loss is recognized on the sale.
Calculate Corporate Tax Liability
Use the corporate tax rate table and just solve
for the tax liability like you normally would.
Capital Losses
If a corporation has a long-term capital loss that
is carried back, it is treated as a short-term
capital loss. A corporation can carry a capital
loss forward 5 years. Capital losses of a
corporation must be used to offset capital gains
and net capital losses may not be deducted
from the ordinary income of a corporation.
Corporations are not allowed to deduct net
capital losses against ordinary income.
Gains on Section 123 not capital assets
Gains on Section 1231 assets may be treated as
long-term capital gains, while losses in some
cases may be deducted as ordinary losses.
Includes: Depreciable or real property used in
business, land timber, coal, iron, livestock,
crops.
When losses > gains, all gains are treated as
ordinary income and all loses are fully
deductible as ordinary losses.
Ordinary Income under Section 1245
1245 recapture potential = accumulated
depreciation
= lesser of recomputed basis adjusted basis;
or selling price adjusted basis
Casualty Gain/LossDestroyed by Fire
When Insurance reimbursement > casualty loss
= gain
If losses > gains, the excess loss is treated as
itemized deduction on Sch. A, and Limited of
ten percent of AGI
If gains > losses, net short term and long-term
gains/losses. The resulting amts. are included w/
other capital gains/losses

To calculate loss: Take lesser of adjusted basis


or FMV Insurance Reimbursement hundred
dollar floor
To calculate gain: Insurance reimbursement
adjusted basis
Net losses and gains; if net gaineach gain/loss
is treated as capital gain/loss; If net
losstreated as itemized deduction Sch. A, etc.
Completely destroyed no insurance=ordinary
loss
Like-kind Exchange
Taxpayer exchanges property for other property
of a like-kind.
Realized gain = FMV of property received +
cash received + liability assumed basis given
up
Realized gain = FMV of property received +
cash received adjusted basis in property given
up
Recognized gain (or boot received) = cash
received + liability assumed
Basis in property received = basis in property
given up recognized gain + recognized gain
Partnership Contribution
Basis in partnership interest = basis of the
property contributed + share of taxable income
partner distributions received
In an equal partnership
Recognized gain(loss) = half of the cash
received adjusted basis of contributed
property/land
Basis in partnership interest = basis of property
contributed + gain recognized liability
assumed by the other partner (half of mortgage
or loan)
Recognized income or loss with cash and
services (other partner = FMV partnership
interest cash contributed
Basis in property received = adjusted basis +
gain
Basis in partnership interest = beginning basis
+ %(Income expenses)
Partnership Income
Guaranteed payments + proportion of income
Involuntary conversion
Realized gain on involuntary conversion =
insurance proceeds adjusted basis

Recognized gain on involuntary conversion =


cash received amount reinvested in new
property
Recognized gain on involuntary conversion =
Insurance proceeds new building cost

Sale of Personal Residence


Maximum exclusion on sale of personal
residence of two fifty k if single, and double that
if married. In the case of an employment related
move the exclusion is prorated.

The basis of the new building or property = cost


of new property portion of gain not recognized
Basis of new building or property = new
building cost (purchase price) (Purchase price
adjusted basis)

Gain realized on the sale of residence = selling


price expenses capital improvements cost
basis
Recognized gain = Realized gain two fifty k
exclusion

Ordinary Income
Sales Less salaries, rent, depreciation, etc.
Income that needs to be separately
reported
Gain on sale of business property, interest
income, charitable contributions, partner
distributions, foreign tax, etc.