FILING STATUS Qualifying widow with dependent child For the two years following the year in which

the spouse died; 50% maintaining cost; dependent child (must be child) must stay in the principal home for entire year Dependent child, stepchild, adopted childe or foster child Head of household Unmarried or abandoned person More than 50% maintaining cost Dependent only need to stay more than half the year Maintaining cost exclude ! clothing, education, medical expense, life insurance, rental value of home, value of taxpayers service Include! Rent, mortgage interest, taxed, insurance on home, repairs, utilities and food

EXEMPTION First should test whether it is qualifying child, if not then test relative Qualifying child Relationship test: son, daughter, stepson/daughter, foster child, brother, sister, step brother/sister, half brother/sister and descendant of such individual (grandchild, niece, nephew) ---- (in-law are not included) Must live with taxpayer more than half year Age test: under 19 / under 24 full time student for at least 5 month / disable Not support him/herself more than 50% (scholarship will not be considered as selfsupport) Citizen test US, Canada, Mexico Not file a joint return Qualifying relative More broad relationship, parents, uncles, in-law Foster parents and cousin are not relative If person is unrelated, it must stay with taxpayer entire year (member of household) Taxpayer support more than 50% Citizenship test Not file joint return Spouse will never be dependent FILLING STATUS Qualifying widow with dependent child for the two years after the death of spouse maintain at least 50% of cost of household for the entire year

 dependent child must stay must live in household for entire year Head of household for a single person provide more than 50% cost of maintaining household dependent must live in household for over half the year also could claim if provide more than 50% of cost for parents in separate home (only apply to parents) Support to maintain household: INCLUDE: rent, mortgage interest, tax, insurance on home, repair, utilities, and food EXCLUDE: rental value of home, clothing, education, medical expense, life insurance, vacation, transportation, value of taxpayers service Filing joint return married even if at the last day of the year even if only one spouse has income nonresident alien, both must elect to taxed as US citizen can have different accounting method but must has the same tax year GROSS INCOME 1. Salary record the FMV when received (stock) 2. Tips more than 20, record when it report (next month) less than 20, record when it receive 3. Employee death benefit paid by an employer must be included in the recipients gross income 4. Net rental income Passive income (not subject to self-employment tax) No matter what accounting method, prepaid rent must be reported in the year received and prepaid expense must be prorated Lease cancelation payment is also rent income Security deposit general is not income unless nonrefundable Lease improvement is exclude ( unless are made in lieu of rent ) If rental result in a loss passive loss (only can be deducted when has passive income) can carry forward indefinitely If actively participate in management, it will be actively loss (up to 25,000 deduction) phase out (50% of excess 100,000 part if AGI exceed 150,000) 5. Partners share of Partnership Income from Schedule E

If material participant, income is ordinary income and loss is fully deductible (work more than 500 hours a year) If passive partner, passive income and passive loss Limited partner is passive partner Passive income only from rental and partnership Dividend, interest and capital gains is portfolio income

EXCLUSION FROM GROSS INCOME 1. Employee Benefits Group term life insurance exclude 50,000 Medical insurance premiums Accident and health benefits permanent injury/reimbursement for medical care Educational assistance exclude 5250 Dependent care assistance exclude 5000 Qualified adoption expense exclude 13,360 2. Interest State and local bond is exclude (municipal bond ) Bonds of a U.S. possession (Puerto Rico) exclude Educational saving bond (Series EE) may be excluded if bond are used to pay qualified education expense and issued after 1989 to who is more than 24 years old Interest from U.S. treasury notes and bonds and from all tax refunds 3. Dividends Cash dividend (both domestic and foreign) include Stock dividend on common stock exclude Stock dividend on preferred stock are include and value at FMV of distribution Dividend on unmatured life insurance policies are excluded unless they exceed accumulated premiums paid 4. Tax Refund Federal tax refunds are never included State tax refund include to the extent the itemized deductions exceed the standard deduction 5. Alimony Must include in recipients GI (deductible by payor) Alimony must be paid by cash and terminate upon the death of recipient Payment for child support neither deductible or includible

Payment should firstly allocate to child support then any remainder to alimony 6. Annuities Exclusion ratio cost of annuity/expected return * payment (cost must be from employee) Additional payment besides cost recovery are includible If annuitant dies before the total cost is recovered, the unrecovered cost can be deducted as miscellaneous itemized deduction (not subject to 2% limitation) 7. Life insurance proceeds Proceeds are paid by reason of death are excluded If the proceeds are received in installment, the excess part of face of policy is interest and included 8. Gifts and Inheritances all are excluded 9. Welfare payment exclude 10. Foster child payment exclude to the extent of care expense 11. Unemployment compensation all include 12. Social security benefits exclude low-income taxpayer (provisional income is less than 25,000) include if more than 60,000, include 85% of ssb 13. Prizes and award Include EXCLUDE if recipient was selection without action and amount is paid directly to a government unit or tax-exempt organization 14. Scholarship and Fellowship Exclude if used for tuition, course-related fee, book, equipment Include if for service, such as teaching and research

ACCOUNTING METHOD Cash-based method Recognize income when received and expense deduct when paid Payment by check as long as the check is honored by the bank Payment by credit card at the time of the charge Who can use cash-based method Corporation if have annual average gross income less than 5,000,00 for any prior three-year period and do not have inventories for sale to customers Small business taxpayer with less than 1 million. Accrual method Right to receive payment and obligation to pay (prepaid income must be reported in the year received + prepaid expense must be prorated over time)

SOLE PROPRIETOR (line 12, FROM Schedule C) Business with inventory and average annual gross receipts in excess of 1 million Business expenses are deductible Business meal and entertainment 50% deductible Business gift limit to 25 per recipient per year (deduction) Charitable contribution and state income tax must be itemized on Schedule A ( so it is not included in self-employment earnings) Non-deductible: violation of law (fines, bribes) Paid due to social and athletic club (not deductible) Self-employment tax on net business income If net business income more than 400, self-employment taxed must be paid. (92.35% * net business income) - * 10.4% (up to 106,800) and * 2.9% Net Operating loss (if the loss make taxpayers income become negative, loss will carry back 2 year and forward 20 years) DEDUCTIONS 1. Educator expense up to 250 for unreimbursed expense used in the classroom eligible at least 900 hours 2. Unreimbursed Moving expense Distance and time test to get deduction At least 50 mile greater (old house to new job) than distance between old house and old job 39 weeks out of 12 month (self-employment 78 weeks out of 24 month) no former job, new job must be at least 50 miles from former residence direct moving expense (meal are never deductible) 3. Self-employed individuals health insurance premium Deductible 4. Penalty on Early withdrawal of saving 5. Student Loan Interest deduction 2,500 maximum for qualified education loans 6. Tuition and fee deduction Single: <=65,000 4,000 deduction 65,000~80,000 2,000 deduction Married filing jointly (double) Qualified fee is required for enrollment (books, activity, room does not include) 7. Cost involving discrimination suits 8. Retirement plan 401(K) plan contribute up to 16,500 (22,000 if older than 50 years old) contribution could reduce salary reported in GI withdraw after 59.5 without penalty (10%) self-employed retirement plan (Keogh) contribution lesser 49,000 or 100% earning/ deduction lesser 49,000 or 25% of earnings

IRA Contribution lesser 5,000 or 100% of compensation (>50, up to 60,000) Contribution deduction Both are not in any plan retirement plan, fully deduction Both in pension, (combined AGI <90,000 fully deduction, AGI>110,000 no deduction) Only one in pension, for who in pension, applied combined AGI 90,000, for who not in pension, combined AGI <169,000 ~ 179,000) If single person, deduction range 56,000 ~ 66,000 Contribution made by April 17th Distribution from (income) After 59.5, no 10% penalty Must start to withdraw after 70.5 Roth IRA Contribution not deductible/ distribution tax free Contribution: lesser 5,000 or 100% compensation (6,000 >50 y) Deduction: 107,000~122,000 - single 169,000 ~ 179,000 joint filers 70.5 y Education IRA Contribution 2,000 until beneficiary reach 18 Non deductible and tax free for education expense Not for education expense should include in GI and have 10% penalty

STANDARD DEDUCTION (Module 35 page 30) for dependent, basic standard deduction limit to the greater of 950 or 300 plus earned income additional standard deduction (>65 y or blind) ITEMIZED DEDUCTION 1. MEDICAL EXPENSE The deduction expense: only for prescribed medicine medical insurance premium (medical insurance premium paid by employer exclude from income) lodging ($50 per night each eligible) transportation equipment (wheelchairs) Dependent test is different. Do not need to meet the gross income AND joint return test, still need relationship, citizenship and support test o deduction: medical expense medical insurance reimbursement 7.5%AGI

2. TAX state and local income taxed deductible (withheld, estimated, payment for prior year) real property tax (depend on the number of days holding) foreign income tax foreign real estate tax personal property tax 3. INTEREST EXPENSE interest on personal use is not deductible acquisition of indebtedness acquire, improve, construct home 1,00,000 home equity indebtedness secured by home, regardless how it will be used (100,00) mortgage point penalty payment investment interest = limit to net investment income 4. Charitable Contributions subject to a 50% or 30% of AGI limitation cash 50% AGI LTCG FMV 30%of AGI STVG/inventory Lesser(FMV, basis) 50% AGI If it is a tangible personal capital gain property (LTCG) to a unrelated charity organization. Lesser of basis or FMV (50% AGI) Capital Assets (Assets held for investment, personal-used assets) Appraisal fees (deductible as miscellaneous itemized deduction 2%) 5. Casualty and Theft Losses Nonbusiness property Lesser (decrease in FMV, basis) insurance reimbursement 100 floor 10% of AGI If reimbursement is greater than basis, casualty gain will be treat as capital gain Business property partially destroyed Lesser (decrease in FMV, basis) - insurance reimbursement Business property completely destroyed Basis insurance reimbursement 6. MISCELLANEOUS DEDUCTION No floor gambling losses ( to extent to gambling gain), unrecovered cost of annuity, impairment-related work expense for disable employees 2% AGI floor

o Unreimbursed employee expenses transportation and travel; education expenses to maintain or improve skill in present job; business gift 25 per recipient; union dues and dues to professional organization o Tax preparation and advice fee o Investment-related expenses o Appraisal fees (charitable contribution) TAX CREDITS 1. Foreign tax credit (Foreign taxable income/Worldwide taxable income) * US tax on worldwide income carry back one-year and forward 10 year 2. Child and dependent care Taxpayer must maintain a household for a qualifying individual (dependent under 13) and (dependent or spouse is physically or mentally disable) Up to 3000 per qualifying individual and 6000 for more than one. Also limited earned income of low-wage spouse (if spouse is disable or student 250 per month) 35% of expense (AGI<15,000) 20% (minimum) (AGI >= 43,000) 3. American opportunity Credit (40% refundable) 100% of first $2,000 + 25% next $2,000 (up to $2,500 a year per student) per student basis available for each first your years of undergraduate education 4. Lifetime Learning Credit 20% of first 10,000 per taxpayer basis 5. Child tax credit 1,000 for each dependent child (< 17 y) 6. Adoption credit (refundable) Adoption expense adoption fee, court costs, attorney fee (in the year adoption finalized) Maximum credit 13,360 Eligible child (<18 y; physically or mentally disabled) 7. Earned income credit Age 15-65, not claim as dependent already Must has a full 12-month tax year 8. Estimated tax payment Estimated payment due dates 4/15, 6/15, 9/15 and 1/15 Penalty will be imposed for underpayment of tax unless o Tax due for current year is <$1,000

o At least 90% of the current years was withheld o 100% of the prior years tax was withheld. If prior year AGI exceeds 150,000, 110% of the prior tax must be withheld. 9. Statute of Limitation Assessment for tax deficiency normal 3 years after later of (1) date return was filed (2) due date 6 years if GI omission more than 25% Claims for refund must file a claim within 3 years from date return was filed / 2 years from payment of tax 1040X Form 10.Net Operating Loss Negative taxable income + excess of capital losses over capital gains + personal exemptions + excess of nonbusiness deductions over nonbusiness income Standard deduction or itemized deduction + contribution to a selfemployed retirement plan is treated as nonbusiness deduction Casualty losses and rental losses are business deduction Dividends, interest and capital gains are nonbusiness income ///// salary and rent are business income Alternative Minimum tax Regular taxable income Add back state and local income, real estate tax, miscellaneous deduction Add back personal and dependency exemptions and standard deduction Add back mortgage interest unless (it is used to buy, build or improve principal or second home) Medical expense is using 10% floor (add back 2.5%) Add FMV of stock over exercise price + Tax preferences tax-exempt interest on certain private activity bonds related expense excess of accelerated over straight-line depreciation = Alternative minimum taxable income - Exemption (74,450) = 26% = Tentative AMT - AMT credit = Tentative minimum tax

- regular tax liability = AMT PROPERTY TRANSACTIONS 1. realized gain or loss one sale of an asset Cash + FMV of property received + assumption of seller liabilities by buyer - Selling expense _____________________________________________ - adjustment basis of property sold or exchange _____________________________________________ realized gain (or loss) 2. Type of asset Ordinary (inventory, account receivables, business assets held <= 1 year) Capital assets (held for investment, personal-use assets) Section 1231 assets (business assets > 1 year)

3. Basis calculation for assets received as gifts When no gift tax are paid donees income tax basis Donees basis = Donors adjusted basis Exception: FMV < donors basis gain basis: adjusted basis/ loss basis: lesser (FMV, Adjust basis) When gift taxes are paid donees income tax basis Donees income tax basis = adjusted basis + gift tax on appreciation of property Tax on appreciation property = [(FMV Adj. Basis)/(FMV 13,000)] * gift tax paid 4. Basis as an inheritance Beneficiarys basis = FMV of the property at the date of death Alternate valuation date (basis the earlier of FMV of the property 6 months after death or FMV at the date of sale or distribution during 6 months. If property give to the decedent within one year before death, and property back to donor/spouse, the beneficiary basis is the decedents basis before death Property has to be long-term regardless time

5. CAPITAL ASSET Schedule D Property held for investment / personal property Computation of capital gain/loss o Net LTCG with LTCL and net STCG and STCL o Then net these two together Sale of capital asset o Net long-term capital gains are taxed at a rate of 15% (0% if individual in 15% and 10% bracket) o Net short-term capital gain ( tax at the regular tax rate) (if from sale of collectibles is maximum rate of 28%) o Net capital loss rules: can offset ordinary income up to $3,000 15,000 married separately) STCL apply before LTCL Exceed part will be carried over for an unlimited period of time with their identity. (long-term losses carry over offset gain in 28% first) o Short-term capital losses before long-term capital losses o If excess losses result, they then are shifted to the category carrying the highest tax rate (Booklet Module 36 P6) o For corporation: Capital loss are only allowed to offset capital gain Net capital loss only carry back three years, and forward 5 years ( all is treated as SLCL) Sale or Exchange of Principle residence o Loss is not deductible o Realized gain: selling price sales expense adjusted basis of old residence o Sales income exclusion: Single: up to 250,000 if (1) owns and accupies the residence as a principle residence for aggregate at least 2 of the 5 years preceding the sales Married jointly: up to 500,000 if 1) either souse meets the ownership requirement and 2) both spouse meet the use requirement. o Gain in excess of these 250,000 (500,000) limitation must be included in income as capital gain o If individual does not meet (2-year ownership/ use requirement), a pro rata () amount exclusion applied if the sales or

exchange is due to change in place of employment, health, or unforeseen circumstances. o If taxpayer sold another residence at a gain and excluded all or part of that gain from income within two year, gain from sale of a principal residence generally cannot be excluded. Nonbusiness Bad Debts Deduct as STCL regardless holding period Wash Sales o Definition (1) Stock or securities sold at loss and (2) within 30 days before or after sales, substantially identical stock are purchased in the same corporation o Wash sales loss is not deductible but ass to the basis of new stock (disallowed loss) o Gain must be recognized o Example!!!! share module 36 P9) 100share 12 50share 100share Loss 50share loss 12 share basis Incentive stock option (ISO) o No income will be recognized when option is received or exercised (different as Alternative Minimum Tax) ---- recognition of excess of FMV over amount paid upon exercised o LTCG hold stock at least 2 years after received (granted) and must hold the stock for at least one year after the exercise date o If not meet the above requirements, ordinary income to the extent that FMV exceed option price will be recognized. Remainder ( short-term / long-term capital gain) o Deduction = amount of ordinary income

6. SECTION 1231 ASSETS & DEPRECIATION Section 1231 asset should be depreciated (except land) DEPRECIATION Using declining-balance method UNLESS personalty is used 50% or more for personal purpose. 3,5,7 and 10 years use DB 200% 15 and 20 use DB 150% Convention o half-year convention - personal property

o mid-quarter convention

Recognition of Gains and Loss on Business Property 1. Business less for one year ordinary 2. Business property > 1the classification of gain & loss Section 1245 before 1232 o Depreciable tangible and intangible business property not building/ construction component) o to the extent of all depreciation or post-1980 cost recovery deduction. o Only gain will be recognized under 1245. Loss will direct go to 1231 o Notice! 1245 ordinary income would be limited to the recognized gain (lesser of recognized gain & depreciateion) Section 1250 o Apply to all real property besides 1245 property (such as building, construction component) o If property is held < 1 year, all gain is recaptured as ordinary income to the extent of all depreciation o If property > 1 year, gain is recaptured as ordinary income to the extent that depreciation that excess of straight-line Section 291 o If corporation recognized 1250 property instead of 1245, additional amount will be recaptured. (20% of the additional amount that would have been ordinary income if the property were 1245) Section 1232 o The remaining part of gain o Sales of exchange, casualty, theft or condemnation o Recognition has two steps 1) Net all casualty and theft gains and loss. If loss > gain, treat all of them as ordinary gains and loss and do not net them with other 1231 item If gain > loss, net gain is combined with other 1231 2) Net all other section 1231 gains and loss If loss > gain, treat all gain and losses as ordinary If gain > loss, all 1231 net gain as LTCG EXEMPT ORGANIZATIONS 1. this type of corp. is organized under Act of Congress does not require an application. declare exempt under internal revenue code all other exempt organization must make written application for exempt statues approved by IRS

2. organization is organized for the exclusive purpose of holding title to property, collecting income from that property, and turning over the net income to an exempt organization 3. Corporation include a community chest/fund; foundation for religious, charitable, scientific, public safety, literary or educational purpose. (no benefit for private shareholder/individual, no attempt to influence legislation, no directly participate in any political campaign) 4. Private foundation - foreign corporation may be qualified Four categories may exclude: maximum charitable dudction broadly publicly-supported organization supporting organizations public safety testing organization Must fill return (Form 990-PF) to disclose 5. although they are tax-exempt, but tax will be imposed on unrelated business income / debt-financed income 6. UNRELATED BUSINESS INCOME Related income o Note! any activity where all the work is performed by unpaid work (volunteers) is related income o trade or business carried for convenience of the students or member of a charitable, religious or scientific organization Filing Form 990-T for tax 1,000 is allowed for deduction from UBI. >1,000 is subject to tax exclude income Return due 15th of fifth month three types of organizations do not have an annual filling requirement o religious or internally supported organization o certain organization annual gross receipt < 5,000 (educational, religious, public-type, fraternal, children&animal) o Organization gross receipt < 50,000 fail to file the required return for 3 continued years, the tax-exempt status will be revoked

FEDERAL GIFT TAX Gift tax formulation Gross Gifts (Cash + FMV of property) - annual exclusion (up to 13,000)

- unlimited exclusion for college tuition/medical expense (should directly paid to university or hospital) - unlimited exclusion for gifts to political organizations - charitable gift deduction - marital deduction (for spouse) Taxable gifts for current year Current years gift tax Taxable gifts for current year +taxable gifts from prior years total taxable gifts Tax on total taxable gifts (35%) - gift taxes paid on prior gifts - unified transfer tax credit (1,730,800) current years gift tax 1. Definition of gift When donor has relinquished control and no longer has the power to change its disposition If husband and wife elect to split their gifts Due on 4/15 2. Gift tax consequence of establish a trust revocable trust person has the control power gift is not made at the time of the creation Irrevocable trust completed gift is made at the time trust is created Gift will be present value if distribution is annually and begins in the year trust in create - annual exclusion 13,000 will applied Gift will be future interest if gift is received at some specific time in the future annual exclusion is not applied 3. Receipt of gift pays no tax gift basis = donors basis + gift tax paid 4. Generation-skipping transfer tax tax applied when individual transfer property to a person who is two or more generations younger than the donor or transferor.

FEDERAL ESTATE TAX (return due 9 month after death) FORM 706 when taxpayer dies, his estate may have to pay an estate tax 1. Federal estate tax formula

alternative value will be selected if it reduces both the total gross estate and the estate tax Gross estate (cash + FMV of property at the date of death/alternative value 6 month after death) - funeral expense - medical expense (subject to 7.5%) (paid within one year of death, executor files a waiver) - administration expense - debt and mortgage - casualty losses - marital deduction (unlimited) - charitable bequests (unlimited) - state estate tax Taxable estate + Post-76 adjusted taxable gift (after 1976) ==== TOTAL TAXABLE LIFT & DEATH TRANSFERS tax on total lift and death transfers gift tax paid on lifetime after 1976 unified tax credit (1,730,800) other credit Estate tax payable

2. GROSS ESTATE FMV of property 1) if property is held by tenancy in common (), only FMV of the decedents share included 2) if property is held by spouse joint, split 50/50 of FMV 3) if property is held by decedent and some else other than spouse in joint tenancy with right of survivorship ------ FMV * percentage of total cost furnished by decedent Cash Insurance proceed (also all payable to decedents estate/executor) incomplete gifts revocable transfer INCOME TAX RETURN 1. In the year of death estate FORM 1040 due 4/15 if decedent is cash-basis ==== only cash received and expense paid before death can be reported

Estate must file FORM 1041 to include all income earner before death but received after death (IRD) all expense incurred before death but paid after death (ERD) should deduct in FORM 1041 executor and administration fees also can be deductible may be exempted form making estimated tax payments for its first two tax ys using either calendar year / fiscal year 2. Income taxation of a trust all irrevocable trust must file form 1041 Exemption estate = 600 simple trust = 300 (all income must be distributed annually) complex trust = 100 (income maybe accumulated) income distribution deduction maximum deduction is limited to DNI (distributable net income) also the maximum that the beneficiaries will have to report as income DNI interest, dividend and rental income but does not include capital gain must filing FORM 1041 if gross income > 600 using calendar year

ETHIC & PROFESSIONAL RESPONSIBILITIES IN TAX SERVICES 1. tax return preparer vs. tax practitioner prepares should register with IRS ad obtain identification number(PTIN) {circular 230} penalty if part of tax understatement is due to a lack of substantial authority penalty equal greater of 1,000 or 50% of income received penalty may be avoided if there was a reasonable basis. (at least 20% probability of being sustained on its merits) 2. failure to provide a completed copy of tax return to taxpayer $50 each (maximum penalty of $25,000 per calendar year) 3. Failure to retain record properly must keep for 3 ys, either copy or . $50 each failure (maximum 25,000) 4. negotiation of refund check $500 each check 5. Penalty for any one aiding & abetting understatement of tax liability