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Principles of Taxation

Principles of Taxation. Chapter 16 Tax Consequences of Personal Activities. Objectives. Taxable and nontaxable gratuitous receipts Divorce, alimony, child support Taxation of Social Security benefits Itemized deductions for medical, taxes, charity Casualty and theft

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Principles of Taxation

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  1. Principles of Taxation Chapter 16 Tax Consequences of Personal Activities

  2. Objectives • Taxable and nontaxable gratuitous receipts • Divorce, alimony, child support • Taxation of Social Security benefits • Itemized deductions for medical, taxes, charity • Casualty and theft • Hobby income and expenses • Home owning benefits • AMT

  3. Gratuitous Receipts • Prizes and awards are taxable. • Some exceptions if give to charity. • Scholarships are excluded to the extent spent on what? • Gifts, inheritances, life insurance proceeds excluded. • See AP1, 3.

  4. Settlements and Government Payments • Legal settlements taxable unless compensation is for what? • Are the following taxable? • Workers’ compensation payments? • Unemployment compensation payments? • Need-based payments like welfare ? • Social security? • See AP4.

  5. Divorce • Property settlements are excluded - like gifts. What basis does the receiving spouse have? • Alimony is taxable to __________, deductible to __________. • Is child support taxable or deductible? • See AP 2.

  6. Sales of Personal Use Assets • Personal use assets may not be depreciated. • Are losses deductible? • What character do most gains on personal use assets have? (Except literary, musical, artistic creations.)

  7. Personal Expenses - Medical • Deduct excess of unreimbursed expenses over 7.5% of AGI. • Qualifying medical include: • See AP 5.

  8. Personal Expenses - Taxes • What kinds of taxes may you deduct? • What kinds of taxes may you NOT deduct?Costs of tax compliance (e.g. CPA) are miscellaneous expenses deductible if > ____% AGI in aggregate. • See AP7.

  9. Charity • General limit - deduct up to ____% of AGI for cash donation (less for capital assets). • carryover excess for ____ years. • Deduction amount: • LT capital assets = ______ of property • other property = lesser of ____ or______. • Special rules, limits for donations to foundations, capital gain property. • See AP8.

  10. Tax Subsidies for Education • EE Savings Bonds - interest excluded to the extent used for tuition and fees. (Rich phase-out begins $83650 MFJ in 2001.) • Hope scholarship credit - 1st 2 years of college. Max $_______ per year per student based on tuition/fees. • Lifetime learning credit = 20% of tuition/feesx Max $5000 per year = total maximum credit of $______/yr. • Hope and Lifetime phase out begins $80,000 MFJ. • Education IRA - withdrawals spend on education are tax-free. • Interest on qualified education loan is deductible for first 60 months of payments - max $2500 per year. Phase-out begins $60,000 MFJ.

  11. Personal Losses • Loss on disposition of a personal assets is NOT deductible. • Gains on disposition of a personal assets IS taxable. • Casualty and theft losses • Loss = lesser of (___________or decline in ______) -__________________ • Deduction = Loss - $1____ per casualty - ____% AGI. See AP 11. • Hobby deductions limited to hobby income • Not a hobby if profits in____ of 5 years

  12. Home Ownership • Benefit of not paying rent is economic income, but is NOT taxed. • Interest deduction • interest on acquisition debt up to $_____ million • interest on home equity debt up to $___________ • deduction available for principal residence and one other personal residence (not a primary rental property) • See AP15.

  13. Home Ownership • Vacation home rental activity • Treated as a vacation home if the personal use exceeds the greater of _____ days or _____% of rental days. • Expenses are limited to rental income (NO LOSS). • Carryforward excess expenses. • See Chapter 15 for rules if rental property is NOT a vacation home.

  14. Home Ownership • Exclude gain on sale if home is principal residence_____ years out of 5 years ending on date of sale. • Exclude only one gain every 2 years. • $_______________ MFJ, $250,000 other • See AP 16, 17.

  15. Itemized Deductions as AMT Adjustments • Medical allowed only > 10% agi. • Tax deduction disallowed. • Miscellaneous itemized deductions disallowed. • Home equity debt interest disallowed.

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