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BA 128A Agenda 2/1

BA 128A Agenda 2/1. Questions from lecture Review Assignment I2-52,55, I3-48 Additional problems I2-46,47 I3-35,39,40,41. Kiddie Tax . $700 standard deduction, $700 statutory deduction taxed at the child’s tax rate

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BA 128A Agenda 2/1

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  1. BA 128A Agenda 2/1 • Questions from lecture • Review • Assignment I2-52,55, I3-48 • Additional problems I2-46,47 I3-35,39,40,41

  2. Kiddie Tax • $700 standard deduction, $700 statutory deduction taxed at the child’s tax rate • If the dependent has both earned and unearned income, figure out the taxable income and then the unearned income • Tax = Taxable Income - Net unearned income at child’s rate; net unearned income at parent’s rate.

  3. Capital Gains and Losses • Net STCG and STCL • Net LTCG and LTCL • Then, net ST and LT together • First, loss is netted against gains within the same tax rate group • Second, excess and short term loss is netted against the highest tax bracket capital gain first • If the net is a capital gain, gain is taxed at different rates according to different asset classification

  4. Accounting method • Cash receipts and disbursement method (constructive receipt principal) • advantages: simpler, greater tax planning • Accrual method • concept of earned • Hybrid method (accrual basis for purchase and sales of goods, cash basis for all other income and expenses • Who is required to use accrual method?

  5. Gross Income • Compensation (fringe benefits excluded)_ • Business income (service income, manufacturing income- sales - COGS) • Interest Income (EE Bonds - defer or tax free) • Rents and Royalties • prepaid rent is taxed in the year of receipt • Lessee’s improvements

  6. Gross Income (cont) • Cash dividends/Stock dividends/constructive dividends • Alimony - deductible by payor and inclusive for payee; alimony recapture • Pensions - amount contributed is deductible • Annuities - cost can be recovered; exclusion ratio

  7. Other Gross Income • Income from flow through entities • S-corp, partnership • Price Awards, Gambling winnings, treasury finds, illegal activities • Unemployment compensation and Social Security benefits

  8. Social Security Benefits • Provisional Income = AGI (excluding SS benefits) + Tax-exempt interest - Foreign earned income + 50% of SS benefits • Calculation depends on filing status PI3-23

  9. Insurance Proceeds • Proceeds from destruction of property included in GI only if proceeds > adjusted basis of property • Proceeds from guarding against profit loss is taxable • Involuntary conversion - if proceeds are reinvested in a qualified replacement property, not GI

  10. Choosing bonds for tax-planning • Assume risk is the same, choose tax-free bonds if Interest of tax free bonds > (1-marginal tax rate)* interest of taxable bonds • Tax deferred bonds • tax bracket • present value of money

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