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the american college: hs 321 income taxation

Objectives. Define capital asset, and identify items not treated as capital assets.Explain how capital-gain and -loss rules apply to the sale or exchange of a capital asset, and describe the special rule for taxation on the sale or exchange of depreciable or real property used in a trade or business..

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the american college: hs 321 income taxation

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    1. The American College: HS 321Income Taxation Class 9: Chapters 14 and 15 Section 1221 Capital Assets and The Alternative Minimum Tax

    3. Objectives Summarize the relationship between an asset’s classification and its tax treatment for a sale or exchange. Explain how the alternative minimum tax (AMT) is applied and the special AMT rules that apply to corporations.

    4. Introduction to Chapter 14

    5. Primary IRC Sections Sec. 1221 Capital asset defined Sec. 1222 Other terms relating to capital gains and losses Sec. 1223 Holding period of property Switched order with slide 6Switched order with slide 6

    6. Section 1221: Capital Asset Defined All property is a capital asset except: Stock-in-trade (inventory) Depreciable property and real property used in T/B Copyrights; literary or artistic compositions; letters of memoranda; if held by:

    7. Section 1221: Capital Asset Defined Copyrights; literary or artistic compositions; letters or memoranda; if held by TP who created it or For letters, memoranda, etc., held by a TP for whom it was created or A TP whose basis in such property is determined by the basis of a TP in the above

    8. Section 1221: Capital Asset Defined All property is a capital asset except: Trade accounts and notes receivable U.S. Gov’t publications acquired at less than public selling price

    9. Requirements for Capital Gains and Losses

    10. Requirements for CG or CL Treatment Qualifying property (Sec. 1221) Sale or exchange required Switched order with slide 11Switched order with slide 11

    11. Requirements for CG or CL Treatment Exceptions Abandonment (no sale or exchange) produces ordinary loss, if deductible. Worthless stock treated as a sale or exchange as of the last day of the taxable year in which it became worthless. Casualties or thefts of personal use assets, if gain is involved.

    12. Section 1223: Holding Period Rules

    13. Holding Period Rules Secs. 1223 & 1(h)(8) Short Term: Held 12 months or less; taxed as ordinary income Long Term: Held over 12 months; taxed at either 28%, 25%, or 15% (5% for TPs in 10% or 15% bracket) Removed Holding Period SlideRemoved Holding Period Slide

    14. Capital Asset Tax Rates for Individuals

    15. Tax Rates for Capital Assets for Individuals Maximum Type of Asset in Tax Rate this Category Individual’s Gains on sale or disposition Marginal Rate (Net remaining losses are deducted from ordinary income up to $3,000 per year.)

    16. Tax Rates for Capital Assets for Individuals Maximum Type of Asset in Tax Rate this Category 28% Long-term gains on • Collectibles (ex., coins, stamps, & artwork) • Qualified small business stock

    17. Tax Rates for Capital Assets for Individuals Maximum Type of Asset in Tax Rate this Category 25% Long-term gains on real estate sales or dispositions, including recapture 15% All other gains on sales or dispositions of long- term capital assets Removed pervious slide with duplicate 25%Removed pervious slide with duplicate 25%

    18. Netting for Capital Gains and Losses

    19. Netting of CG & L for Individuals Only NET long-term capital gains get favorable tax treatment (max. rates of 28%, 25%, or 15%)

    20. Netting of CG & L for Individuals The three-step netting process: Group transactions by rate categories Net gains & losses on sale or disposition of capital assets within each of the 4 rate categories 1. Net short-term gains are taxed at the individual’s marginal rate.

    21. Netting of CG & L for Individuals Use net losses from any category to reduce gains in higher rate categories, except for STCG. 1. Any remaining net loss is deductible up to $3,000 per year. Net short-term losses are deducted before long-term losses.

    22. Thrust of IRC Section 1231

    23. Thrust of IRC Section 1231: “The Best of Both Worlds” Section 1231 applies to: Depreciable Assets used in a T/B or for the production of income and held longer than 12 months If such property is held 12 months or less, ordinary income treatment applies Switched order with slide 27Switched order with slide 27

    24. Thrust of IRC Section 1231: “The Best of Both Worlds” Generally: Gain will be taxed as LONG-TERM capital gain and loss will be treated as ordinary loss

    25. Quiz Questions

    26. Short Quiz On the sale of depreciable real property held for more than one year and used in the taxpayer’s trade or business, all gains and losses are treated as capital gains and losses. True False

    27. Short Quiz Sec. 1231 property used in a trade or business receives very preferential tax treatment; that is, gains from the sale of such property are capital gains while losses are fully deductible against ordinary income. True False

    28. AMT for Individuals and Corporations

    29. Who is Subject to the AMT? Individuals, estates, and trusts are subject to the Individual AMT. Large corporations are subject to the Corporate AMT.

    30. Who is Subject to the AMT? “Small” corporations with less than $5,000,000 in average annual gross receipts for a 3-year period are not subject to Corporate AMT. If later, gross receipts exceed $7,500,000, the “small” corporation becomes subject to the AMT.

    31. AMT Formula for Individuals & Corporations Regular Taxable Income ± AMT adjustments – AMT NOL (must recompute regular NOL; 90% of AMTI Maximum) = AMT adjusted taxable income + AMT Preferences

    32. AMT Formula for Individuals & Corporations Regular Taxable Income = Alternative Minimum Taxable Income (AMTI) – Statutory exemption = AMTI base (TMTI) x AMT tax rate Switched order with slide 36Switched order with slide 36

    33. AMT Formula for Individuals & Corporations – AMT foreign tax credit = Tentative AMT (TMT) Regular tax liability (tax before credits; not including ITC recapture) Reduced by = Foreign tax credit = Nonrefundable personal tax credits

    34. AMT Formula for Individuals & Corporations = Lesser of business credits or 25% of Tentative AMT = Minimum tax (if min. tax <0, min. tax not applicable) – Refundable credits (Tax Credits for Children and Adoption) = Tax Due or Refund

    35. AMT Adjustments

    36. AMT Adjustments Adjustments reflect timing differences and may be positive or negative. Major adjustments for both individual and corporate AMT

    37. AMT Adjustments Major adjustments for both individual and corporate AMT Depreciation: Must use ADS. 1. Real Estate: 40-year SL; 2. Personalty: 150% DB/SL; MACRS lives used after 1998; NOLs: must be recomputed under AMT.

    38. AMT Adjustments Major adjustments for both individual and corporate AMT G/L on Asset Dispositions: use AMT G/L (rates on AMT capital gains are same as for regular tax). Mining exploration and development costs: capitalize and amortize over 10-yr. Period. Long-term contracts: use percentage of completion for ALL long-term contracts. Previously came after discussion breakPreviously came after discussion break

    39. AMT Adjustments: Continued

    40. AMT Adjustments Adjustments for individuals only Itemized deductions: 1. No deduction for taxes 2. No misc. itemized deductions 3. Medical expenses deductible only if >10% of AGI No standard deduction No personal or dependency exemptions For incentive stock options: include difference between FMV and option price Deductions spelled outDeductions spelled out

    41. AMT Adjustments Adjustments for corporations only The “ACE” adjustment: 1. Purpose of the ACE adjustment 2. Computation Step 1: Compute ACE (special formula). Step 2: The “ACE adjustment” is 75% of ACE in excess of AMTI, computed before this adjustment item.

    42. AMT Preferences Major preferences: Some tax-exempt interest (such as private activity bonds) Accelerated depreciation on certain property placed in service before 1987 (ACRS)

    43. AMT Rates AMT Exemptions removed from courseAMT Exemptions removed from course

    44. AMT Rates Rates for individuals, estates, trusts AMT base But The tax Of the over not over liability is amount over $0 $175,000 26% $0 $175,000 $45,500 $175,000 +28% Capital AMTCapital AMT

    45. AMT Rates Rates for MFS (26% on $87,500; 28% over $87,500) Rates for long-term capital gains and qualified dividends are the same as for regular tax purposes Rate for C corporations (20%) Rate (no s) third bulletRate (no s) third bullet

    46. Quiz Questions

    47. Short Quiz The AMT rate for individual taxpayers is 20 percent. True False

    48. Short Quiz A “small” corporation that is exempt from the AMT will later lose its exemption if its 3-year average gross receipts exceed $5 million. True False

    49. Short Quiz The ACE preference may subject corporations to the AMT on items that are not included in gross income for purposes of the regular income tax. True False

    50. Minimum Tax Credit Example

    51. Minimum Tax Credit Example Credit for amount of AMT paid in previous years (with some adjustments) May not reduce regular tax liability below the tentative minimum tax for the year

    52. Minimum Tax Credit Example Last year, X pays $10,000 for the AMT. In the current year, X’s regular tax liability is $50,000, and her AMT liability is $46,000.

    53. Minimum Tax Credit Example Current year regular tax liab. $50,000 Tentative min. tax credit $10,000 Limitation (50,000 – 46,000) $4,000 Allowable min tax credit ($4,000) Total tax due $46,000 The $6,000 of remaining credit may be carried forward indefinitely.

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