Individual Tax

Individual Taxation Qualifying Child Tests 1. Age (<19, <24 if student, no limit if disabled) 2. Adobe (live with >1/2 year) 3. Support (child provides < ½ of own support) 4. Residency (US, Canada, Mexico) 5. Joint Return (can’t file a joint return if owing taxes on it) Qualifying Relative Tests 1. Relationship (parents, grandparents, stepsiblings, stepparents, nephew, immediate in-laws, bum if living w/you for ENTIRE YEAR, NO COUSINS/FOSTER PARENTS) 2. Support (person claiming the dependent provide over ½ for the relative) 3. Gross Income (<$3,500- the standard exemption. No GI test if under age limit) 4. Joint Return 5. Residency Qualifying Widow(er) • Provide >50% cost of maintaining house • Dependent child lives with for entire year • May file as widower for 2 years after death of spouse • Allows for only 1 personal exemption (can’t claim dead person) Elderly/Disabled Credit = Must be very poor to claim (AGI of 15K+ disqualifies in most cases) AMT Credit = can offset regular tax liability in future years (but not offset AMT) Farm Line of Credit (Sole proprietor) = Form 1040, NOT Schedule F Employer provided Death Benefit = Included in Gross Income Series EE Bonds- If used for tuition of dependent, then tax-exempt! If not, then the interest is taxable IRA Early Withdraw Penalties • Pay regular income tax + 10% penalty • Must be over 59 ½ years old to avoid penalty • REQUIRED TO W/D @ age 70 ½ • Exceptions: HIMDEAD ○ Homebuyer (1st time); $10,000 max ○ Insurance (medical) if unemployed or self-employed ○ Medical expenses >7.5% of AGI ○ Disabled permanently ○ Educational Expenses (College) ○ and ○ Death

Individual Taxation IRA Rules – $5K per spouse allowed, can deduct for AGI – If AGI exceeds a threshold (~100K) and covered by employee pension plan, then no deduction is allowed – $6K limit if 50 or older – Limited to compensation received (includes alimony!) Section 179- Not allowed if NOL occurs • May carry forward forever and use in future years, once operating @ a profit • Report on form 4562- Depreciation & Amortization, & fully deductible on Schedule C Foreign Taxes = deduction OR credit, at option of taxpayer

Deductions • Roth IRA = NOT Deductible • Penalties on late payment = NOT Deductible • Health Insurance Premiums paid = Itemize (7.5% AGI floor) • Life Insurance Premiums = NOT Deductible • Vehicle Repairs, insurance, gasoline, maintenance = Line 9 of Schedule C- “Car and Truck Expenses” ○ (Depreciate car with other biz equipment and lump together w/Section 179 expense) • M&E: 50% deductible on Schedule C • Professional Journals used for biz = FULLY deductible on Schedule C • Ad Volerem/Property Taxes = fully deductible as Itemized deduct • Home Equity Interest = fully deductible as Itemized deduct ○ Limit = $100K indebtedness (secured by principal home) ○ Limited to FMV of residence reduced by acquisition indebtedness related to that residence • Homeowner’s Insurance = NOT deductible • Qualifying contributions to simplified EE pension plan = Fully deductible ‘for’ AGI • Real Property tax = Fully deductible as itemized (even if not principal residence) • Estate Tax attributable to income of decedent = Itemize (2% AGI) • Loss on sale of residence = NOT deductible (considered personal loss) Schedule E = Rental real estate, royalties, partnerships, S Corps, Estates, Trusts

Individual Taxation • “Supplemental Income or Loss” Retainer Fees for Attorney = Include in Schedule C Selling stocks – recognize gain/loss on trade date (whether cash or accrual basis) Dividends from mutual funds investing in tax-free govt obligations = not taxable Interest Income on State/Local Govt Bonds = not taxable Interest on Federal Tax Refund = taxable, report on Schedule B (interest & divs) Uniform Capitalization Rules = capitalize costs associated w/preparing INV • Effect: 1st year- increase inventory value, reduce operating exp’s = higher NI • Exception for ‘goods acquired for resale’: Only need to apply if taxpayer’s average annual gross receipts for previous 3 years exceeds $10m • INCLUDE: Direct materials/labor, indirect costs, utilities, repairs, maintenance, engineering, design, spoilage, indirect labor, warehousing, insurance, repacking, pensions, admin supplies • DON’T INCLUDE: Advertising, marketing, selling exp’s, officer compensation, administrative, research Taxpayer withholds, but owes no tax & doesn’t file = must file for refund w/in 2 years from date TAX WAS PAID Merchandise Inventory = Accrual method required! Net Passive Activity Losses (PAL’s) • Can only be used to offset passive income • Applies to Individuals, estates, trusts, PSC’s, closely held C Corps • Can carryforward indefinitely until used up • If taxpayer becomes active (materially participates) -> may be used to offset active income • Unused PAL’s = fully tax deductible in the year of equipment disposal • EXCEPTIONS: (for real estate, allowed to offset active income) ○ Mom & Pop: Deduct up to $25K in rental income if actively participate  Phase-out: $25K reduced by 50% of amt exceeding AGI of $100K. Completely phased out at AGI of $150K ○ Real Estate Professional (may fully deduct against regular income)

Individual Taxation Social Security Income 1. Poor: No S.S. benefits are taxable (income below: $25K single, $32K MFJ) 2. Lower-Middle: Less than 50% of benefits are taxable 3. Middle: 50% benefits are taxed (income up to: $25K single) 4. Upper-Middle: 50-65% are taxable 5. Upper: 85% (maximum) of benefits are taxable (MAGI > $34KS; $44K MFJ) Accrual Basis Income Formula Beg A/R + Sales – Cash collections – Ending A/R AMT • Medical expenses: >10% AGI • No exemptions allowed? May be different