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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: • tuition, books, fees, equipment required by institution • Gifts, inheritances, life insurance proceeds excluded. • See AP1, 3

  4. Settlements and Government Payments • Legal settlements taxable unless compensation for physical injury or illness. • Workers’ compensation payments are EXCLUDED. • Unemployment compensation payments are TAXABLE. • Need-based payments like welfare are EXCLUDED. • Social security is excluded or taxed at 50% or 85% depending on income level. • See AP4.

  5. Divorce • Property settlements are excluded - like gifts. Carryover basis. • Alimony is taxable to recipient, deductible to payor. • Child support is NOT taxable nor deductible. • See AP 2.

  6. Sales of Personal Use Assets • Personal use assets may not be depreciated. • Losses are not deductible. • Gains are generally capital. (Except literary, musical, artistic creations)

  7. Personal Expenses - Medical • Deduct excess of unreimbursed expenses over 7.5% of AGI. • Qualifying medical includes: • doctors, dentists, chiropractors • clinics, hospitals, long-term care facilities • medical aids • prescription drugs • medical insurance premiums • See AP 5.

  8. Personal Expenses - Taxes • Deduct state income taxes and property taxes. • Do NOT deduct sales taxes, payroll tax, gift/estate tax, federal taxes. • Costs of tax compliance (e.g. CPA) are miscellaneous expenses deductible if > 2% AGI in aggregate. • See AP7.

  9. Charity • General limit - deduct up to 50% of AGI for cash donation (less for capital assets). • carryover excess for 5 years • Deduction amount: • LT capital assets = FMV of property • other property = lesser of FMV or basis. • 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 $83,650 MFJ in 2001) • Hope scholarship credit - 1st 2 years of college. Max $1500 per year per student based on tuition/fees. • Lifetime learning credit = 20% of tuition/feesx Max $5000 per year. • 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 (adjusted basis or decline in FMV) - insurance proceeds. • Deduction = Loss - $100 per casualty - 10% AGI. See AP 11. • Hobby deductions limited to hobby income. • Not a hobby if profits in 3 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 $1 million • interest on home equity debt up to $100,000 • 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 14 days or 10% 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 2 years out of 5 years ending on date of sale. • Exclude only one gain every 2 years. • $500,000 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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