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EA Exam LiteEA Exam Lite

Part 1Part 1

IndividualsIndividuals

22

Topic 1Topic 1

Overview: The Overview: The Individual Tax Individual Tax

Computation FormatComputation Format

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1A Sorting Those Deductions1A Sorting Those Deductions

Basic Components of Individual Formula:Basic Components of Individual Formula:Gross ReceiptsGross Receipts((Statutory ExclusionsStatutory Exclusions))Gross IncomeGross Income((Deductions for Adjusted Gross IncomeDeductions for Adjusted Gross Income))Adjusted Gross IncomeAdjusted Gross Income(Personal Exemption Deductions)(Personal Exemption Deductions)((Larger of Itemized or Standard DeductionLarger of Itemized or Standard Deduction))Taxable IncomeTaxable Income

Figure 1Figure 1 – A helpful guide for deductions – A helpful guide for deductions

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1B Format Example With AMT1B Format Example With AMT

Figure 2Figure 2 – A comprehensive example with – A comprehensive example with both regular tax and AMT computationsboth regular tax and AMT computations

Note impact of:Note impact of: AGI floors on itemized deductionsAGI floors on itemized deductions Phaseouts of exemption and itemized deductionsPhaseouts of exemption and itemized deductions AMT computation starts with regular taxable AMT computation starts with regular taxable

income and adjusts for differencesincome and adjusts for differences The “permanent” column is used to compute the The “permanent” column is used to compute the

AMT credit (which is only for timing differences)AMT credit (which is only for timing differences)

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Topic 2Topic 2

Itemized Deductions: Itemized Deductions: A Broad BrushA Broad Brush

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2A Medical Expenses - Family 2A Medical Expenses - Family

DeductionDeduction – Those of TP, spouse, dependent (7.5%) – Those of TP, spouse, dependent (7.5%) DependentDependent – Ignore gross income & filing status tests – Ignore gross income & filing status tests Expense Expense – Must be for specific disease/illness– Must be for specific disease/illness NonqualifiedNonqualified – Over the counter drugs, cosmetic – Over the counter drugs, cosmetic

surgery (unless deformity), health club dues, mealssurgery (unless deformity), health club dues, meals

Capital Expenditures Increasing Value of PropertyCapital Expenditures Increasing Value of Property – – Deduct only to extent of not increasing the value of Deduct only to extent of not increasing the value of the property (e.g., elevator, swimming pool, etc.)the property (e.g., elevator, swimming pool, etc.)

Question 1Question 1

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2B State, Local & Foreign Taxes2B State, Local & Foreign Taxes

Personal Property TaxesPersonal Property Taxes – Deduct if based on value – Deduct if based on value Taxes on RealtyTaxes on Realty – Deductible only by owner, always – Deductible only by owner, always

based on actual period of ownership (not payment; based on actual period of ownership (not payment; allocate deduction, adjust selling price and basis)allocate deduction, adjust selling price and basis) Assessments – Not deductible if add to value (e.g., – Not deductible if add to value (e.g.,

sidewalks) sidewalks) Sales Tax OptionSales Tax Option – May – May elect elect to deduct state & local to deduct state & local

sales taxes rather than state & local income taxes sales taxes rather than state & local income taxes (increase table amount by taxes on large purchaes)(increase table amount by taxes on large purchaes)

Question 2Question 2

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2C Interest Expense 2C Interest Expense

Interest Expense on InvestmentsInterest Expense on Investments – Deduction is – Deduction is limited to limited to net investment incomenet investment income; excess is carryover; excess is carryover

Qualified Acquisition IndebtednessQualified Acquisition Indebtedness – Interest on 1 – Interest on 1stst $1M loans secured by home (two homes) and spent $1M loans secured by home (two homes) and spent on home; pre-10/14/87 debt qualifies, reduces $1M on home; pre-10/14/87 debt qualifies, reduces $1M

Home Equity IndebtednessHome Equity Indebtedness – Interest on 1st $100,000 – Interest on 1st $100,000 of loans secured by home (two homes qualify) but of loans secured by home (two homes qualify) but NOT spent on home; no limit on pre-10/14/87 debtNOT spent on home; no limit on pre-10/14/87 debt

PointsPoints – On a primary residence are deductible – On a primary residence are deductible Question 3Question 3

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2D Charitable Deductions2D Charitable Deductions

DeductibleDeductible – Cash, property, & credit card to listed – Cash, property, & credit card to listed orgs. (not needy ind’s); services not deductibleorgs. (not needy ind’s); services not deductible

Out-of-Pocket ExpOut-of-Pocket Exp – Deduct ($.14 per mile) – Deduct ($.14 per mile) Overall LimitOverall Limit – 50% of AGI for both (5 yr c/o) – 50% of AGI for both (5 yr c/o) Public LimitPublic Limit – 50% of AGI (deduct first) – 50% of AGI (deduct first) Private LimitPrivate Limit – 30% of AGI (deduct last) – 30% of AGI (deduct last) Special RulesSpecial Rules – Property (30% or 50% rules), and – Property (30% or 50% rules), and

stringent $ limit documentation rulesstringent $ limit documentation rules Question 4Question 4

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2E Casualty & Theft Losses2E Casualty & Theft Losses

CasualtyCasualty – Fire, storm, shipwreck or other sudden destruction – Fire, storm, shipwreck or other sudden destruction Temporary Living ExpensesTemporary Living Expenses – Taxable, reduce by excess cost – Taxable, reduce by excess cost Initial DeductionInitial Deduction – – LesserLesser of (1) cost or (2) decrease in FMV of (1) cost or (2) decrease in FMV

of property (could be repairs); reduce by insuranceof property (could be repairs); reduce by insurance Personal Loss FloorsPersonal Loss Floors - $100 per casualty/theft, and 10% AGI - $100 per casualty/theft, and 10% AGI

on on totaltotal net personal C&T loss net personal C&T loss Business LossesBusiness Losses – No floors, and if completely destroyed, – No floors, and if completely destroyed,

deduct adjusted basis of propertydeduct adjusted basis of property Casualty in Federally Declared Disaster AreaCasualty in Federally Declared Disaster Area – May elect to – May elect to

deduct on prior-year returndeduct on prior-year return Question 5Question 5

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2F Miscellaneous Itemized Deduct.2F Miscellaneous Itemized Deduct.

Miscellaneous Itemized Miscellaneous Itemized NotNot Subject to 2% Floor Subject to 2% Floor– – Impairment-related work expense Impairment-related work expense Deductions against Income in Respect of a DecedentDeductions against Income in Respect of a Decedent Unrecovered annuity or pension costs of decedentUnrecovered annuity or pension costs of decedent Gambling losses of amateur, to extent of winningsGambling losses of amateur, to extent of winnings Limited expenses of certain performing artistsLimited expenses of certain performing artists

Miscellaneous Itemized Subject to 2% FloorMiscellaneous Itemized Subject to 2% Floor: : Investment expenses for other than rent or royalty incomeInvestment expenses for other than rent or royalty income Allocated investment fees of nonpublic mutual funds (public funds net Allocated investment fees of nonpublic mutual funds (public funds net

these on Form 1099-DIV)these on Form 1099-DIV) Tax return preparation and litigation feesTax return preparation and litigation fees Legal fees related specifically to tax adviceLegal fees related specifically to tax advice Certain hobby expenses Certain hobby expenses

Question 6Question 6

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Topic 3Topic 3

Travel & Travel & Entertainment Entertainment

ExpensesExpenses

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3A Meals and Entertainment3A Meals and Entertainment

Deductible EntertainmentDeductible Entertainment – Either – Either directly relateddirectly related (bus. (bus. discussion during entertain) or discussion during entertain) or associated withassociated with (before or (before or after)after)

TicketsTickets - - Entertainment if TP present, either as gift or Entertainment if TP present, either as gift or entertainment if TP is not present)entertainment if TP is not present)

50% Disallowance50% Disallowance – On M&E to ultimate payor – On M&E to ultimate payor Entertainment FacilitiesEntertainment Facilities – Maintenance cost not ded. – Maintenance cost not ded. Country Club MembershipsCountry Club Memberships – Not deductible, but any direct – Not deductible, but any direct

costs incurred at facility (e.g., lunch) may becosts incurred at facility (e.g., lunch) may be GiftsGifts - $25 limit per donee per year ($400/$600 for service - $25 limit per donee per year ($400/$600 for service

awards); related party rules applyawards); related party rules apply Question 7Question 7

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3B Transportation and Auto Exp.3B Transportation and Auto Exp.

Deductible Commuting CostsDeductible Commuting Costs – Office to client, or – Office to client, or between two jobs, incremental costs for tools/equip.between two jobs, incremental costs for tools/equip.

Auto Auto – Deduct – Deduct larger larger of actual or standard mileageof actual or standard mileage Actual CostsActual Costs – All actual operating costs (gas, oil, – All actual operating costs (gas, oil,

insurance, depreciation), prorate for business usage insurance, depreciation), prorate for business usage Std. Mileage RateStd. Mileage Rate - - $.485$.485 per business mile per business mile Parking & FeesParking & Fees – If business, add to either method – If business, add to either method Actual Costs & Accelerated DepreciationActual Costs & Accelerated Depreciation – May not – May not

switch to Standard Mileage Methodswitch to Standard Mileage Method

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3C Travel Expenses 3C Travel Expenses

Travel ExpensesTravel Expenses – Includes transportation, meals, – Includes transportation, meals, lodging, incidentals while “away from home” on bus.lodging, incidentals while “away from home” on bus.

Tax HomeTax Home – Workplace, determined by time spent, – Workplace, determined by time spent, activity, & total income; may be personal residence activity, & total income; may be personal residence Temporary LocationTemporary Location – In travel status unless (1) more – In travel status unless (1) more than one year, or (2) indefinite; in both cases, tax than one year, or (2) indefinite; in both cases, tax home has moved to new locationhome has moved to new location

Transportation CostsTransportation Costs – For domestic travel, – For domestic travel, deductible if trip is “primarily business” (bus. days > deductible if trip is “primarily business” (bus. days > personal days); travel days are business dayspersonal days); travel days are business days

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Topic 4Topic 4

Tax Credits for Tax Credits for Individuals: A Broad Individuals: A Broad

BrushBrush

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4A Child & Dependent Care Credit4A Child & Dependent Care Credit

Credit Credit – Qualified amount x Qualified percentage – Qualified amount x Qualified percentage Qualified Amount – Smallest of:Qualified Amount – Smallest of: Actual qualifying child care expensesActual qualifying child care expenses $3,000 (one dependent), $6,000 (two or more)$3,000 (one dependent), $6,000 (two or more) Earned income of Earned income of lesserlesser earning spouse (impute at $250/ earning spouse (impute at $250/

$500 mo. for each month spouse is disabled or f/t student)$500 mo. for each month spouse is disabled or f/t student) Qualified PercentageQualified Percentage – –

35% if AGI <= $15,00035% if AGI <= $15,000 decreases 1% for each additional $2,000 AGI decreases 1% for each additional $2,000 AGI constant at 20% once AGI > $43,000constant at 20% once AGI > $43,000

Question 8Question 8

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4B Credit for Elderly & Disabled4B Credit for Elderly & Disabled

CreditCredit – For (1) taxpayers age 65 or older with – For (1) taxpayers age 65 or older with limited social security, or (2) permanently limited social security, or (2) permanently disabled individuals of any agedisabled individuals of any age

Formula for Credit – 15% of: Formula for Credit – 15% of: Initial Amount*=$5,000 S, $7,500 MJ, $3,750 MSInitial Amount*=$5,000 S, $7,500 MJ, $3,750 MS Less any social security payments receivedLess any social security payments received Less ½ AGI > $7,500 S, $10,000 MJ, $5,000 MSLess ½ AGI > $7,500 S, $10,000 MJ, $5,000 MS

* Disabled substitute disability pay, if smaller* Disabled substitute disability pay, if smaller• Question 9Question 9

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4C Earned Income Tax Credit 4C Earned Income Tax Credit

E/I CreditE/I Credit – Refundable if no tax due (up to 60% adv) – Refundable if no tax due (up to 60% adv) MarriedMarried – Must file MJ; if divorced, custody parent – Must file MJ; if divorced, custody parent ClaimantClaimant – May not be a “qualifying child” – May not be a “qualifying child” Investment Income Limit for CreditInvestment Income Limit for Credit - $2,900 - $2,900 Qualifying ChildQualifying Child –Natural/step/ foster/ adopted, if < –Natural/step/ foster/ adopted, if <

age 19 or F/T student < age 24, lived with TP > ½ yr age 19 or F/T student < age 24, lived with TP > ½ yr Qualifying Earned IncomeQualifying Earned Income – Deferred comp, meals & – Deferred comp, meals &

lodging, excluded fringes (but lodging, excluded fringes (but notnot alimony, unemp) alimony, unemp) Computation Computation – Max for >1; phaseouts apply– Max for >1; phaseouts apply Question 10Question 10

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4D Child Tax Credit 4D Child Tax Credit

Child Tax CreditChild Tax Credit - $1,000 for qualifying child - $1,000 for qualifying child < age < age 1717 (natural/step/foster, brother/sister & (natural/step/foster, brother/sister & step, or direct descendant of any of these); step, or direct descendant of any of these); limited to tax liabilitylimited to tax liability

Phaseout of CreditPhaseout of Credit - $.50 for each $1,000 AGI - $.50 for each $1,000 AGI > $110,000 (MJ), $75,000 (S or HH), $55,000 > $110,000 (MJ), $75,000 (S or HH), $55,000 (MS)(MS)

Refundable PortionRefundable Portion – 15% of taxpayer’s – 15% of taxpayer’s earned income (+ combat pay) > $11,750earned income (+ combat pay) > $11,750

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4E Hope Scholarship & Lifelong 4E Hope Scholarship & Lifelong Learning Credits Learning Credits

CreditsCredits – For higher education expenses other than – For higher education expenses other than room & board; claimed by person eligible to take room & board; claimed by person eligible to take exemption (even if paid by dependent)exemption (even if paid by dependent)

Hope Scholarship CreditHope Scholarship Credit – Up to $1,650 per student – Up to $1,650 per student for for first 2 yearsfirst 2 years of post-secondary education expenses of post-secondary education expenses (100% of first $1,100, 50% of next $1,100)(100% of first $1,100, 50% of next $1,100)

Lifelong Learning CreditLifelong Learning Credit – 20% – 20% per TPper TP for first for first $10,000 of expenses for all other courses$10,000 of expenses for all other courses

AGI PhaseoutAGI Phaseout – $94,000-$114,000 MJ ($47,000- – $94,000-$114,000 MJ ($47,000-$57,000 other) $57,000 other)

Question 11Question 11

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4F Other Individual Credits4F Other Individual Credits

Adoption CreditAdoption Credit – Credit for qualified adoption – Credit for qualified adoption expenses up to $11,390 per child under age 19 or expenses up to $11,390 per child under age 19 or incapacitated, AGI phase out, maximum if special incapacitated, AGI phase out, maximum if special needs, regardless of actual costsneeds, regardless of actual costs

Elective Deferrals CreditElective Deferrals Credit – 50% for up to $2,000 to – 50% for up to $2,000 to IRA or 403(b); phaseouts of % begin at $30,000IRA or 403(b); phaseouts of % begin at $30,000

Residential Energy CreditsResidential Energy Credits – – $500$500 – For nonbusiness energy property, with specified – For nonbusiness energy property, with specified

maximums of $200 (windows), $50 (circulating fans), $150 maximums of $200 (windows), $50 (circulating fans), $150 (boilers), $300 (energy-efficient building property)(boilers), $300 (energy-efficient building property)

30% of up to $2,000 Cost30% of up to $2,000 Cost – Alternative home solar equip. – Alternative home solar equip.

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Topic 5Topic 5

Determining the Determining the

Adjusted BasisAdjusted Basis

of Propertyof Property

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5A Basis of Purchased Property 5A Basis of Purchased Property

Adjusted BasisAdjusted Basis = Cost + Installation + Capital = Cost + Installation + Capital Improvements – Depreciation/Cost RecoveryImprovements – Depreciation/Cost Recovery

Taxes & Closing CostsTaxes & Closing Costs – Add to basis – Add to basis Above-Mkt. PriceAbove-Mkt. Price – If bus., excess is goodwill – If bus., excess is goodwill Liabilities AssumedLiabilities Assumed – Always in basis – Always in basis

Property as CompensationProperty as Compensation – FMV of property – FMV of property received is taxable, and that becomes basisreceived is taxable, and that becomes basis

SecuritiesSecurities – Use specific ID; otherwise, FIFO – Use specific ID; otherwise, FIFO flow; if stock split, reallocate cost to all flow; if stock split, reallocate cost to all

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5B Basis of Stock Dividends and 5B Basis of Stock Dividends and Securities Securities

Stock DividendsStock Dividends – Nontaxable; spread original cost – Nontaxable; spread original cost over old & new shares (tack holding periods); if over old & new shares (tack holding periods); if blocks of securities, allocate within each blockblocks of securities, allocate within each block

Fractional SharesFractional Shares – Allocate basis (relative FMVs) – Allocate basis (relative FMVs) Stock DividendsStock Dividends – Different Class – if nontaxable, – Different Class – if nontaxable,

allocate old cost by relative FMVs of both stocksallocate old cost by relative FMVs of both stocks Proportionate Stock RightsProportionate Stock Rights – If nontaxable, allocation – If nontaxable, allocation

if FMV rights > 15% FMV of stockif FMV rights > 15% FMV of stock Question 12Question 12

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5C Basis – Gift Property5C Basis – Gift Property

Gift Basis – GainGift Basis – Gain – Always use donor’s basis – Always use donor’s basis Gift Basis – LossGift Basis – Loss – Use – Use lesser lesser of (1) donor’s basis or of (1) donor’s basis or

(2) FMV of gift at date of gift(2) FMV of gift at date of gift If FMV < Donor’s BasisIf FMV < Donor’s Basis – And amount realized is – And amount realized is

betweenbetween the two possible bases, no gain or loss the two possible bases, no gain or loss Gift-Tax Add-OnGift-Tax Add-On – To donor’s basis, portion of gift – To donor’s basis, portion of gift

tax related to appreciation in value (100% for pre-77) tax related to appreciation in value (100% for pre-77) Donor Holding PeriodDonor Holding Period – Tacks if donor basis used – Tacks if donor basis used Figure 3Figure 3 Questions 13 and 14Questions 13 and 14

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5D Basis – Inherited Property 5D Basis – Inherited Property

General RuleGeneral Rule – FMV at date of death (state valuation – FMV at date of death (state valuation if no federal estate tax return)if no federal estate tax return)

Jointly –HeldJointly –Held – FMV on inherited portion – FMV on inherited portion Alternate Valuation Date (AVD)Alternate Valuation Date (AVD) – 6 months after – 6 months after

date of death; elect only if (1) value of adjusted gross date of death; elect only if (1) value of adjusted gross estate decreases, and (2) estate tax decreasesestate decreases, and (2) estate tax decreases

Distributed Prior to AVDDistributed Prior to AVD – Use FMV @ distribution – Use FMV @ distribution Holding PeriodHolding Period – – AutomaticallyAutomatically long-term for all long-term for all Question 15Question 15

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5E Basis of Personal Property 5E Basis of Personal Property Converted to Business UseConverted to Business Use

Basis for GainBasis for Gain – Always cost of property – Always cost of property Basis for LossBasis for Loss – – LesserLesser of (1) cost or (2) FMV of (1) cost or (2) FMV

of property on date of conversionof property on date of conversion Loss BasisLoss Basis – Is always the depreciation basis – Is always the depreciation basis Date of ConversionDate of Conversion – Determines the cost – Determines the cost

recovery method (e.g., ACRS, MACRS, etc.)recovery method (e.g., ACRS, MACRS, etc.) Question 16Question 16

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Topic 6Topic 6

Netting Capital Gains Netting Capital Gains & Losses& Losses

of Individualsof Individuals

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6A Capital Asset Definition 6A Capital Asset Definition

Capital Asset DefinitionCapital Asset Definition – – NEVER NEVER includes:includes: Property held for resale (e.g., inventory)Property held for resale (e.g., inventory) Property used productively in a trade or businessProperty used productively in a trade or business Copy, literary or artistic composition (c/o basis)Copy, literary or artistic composition (c/o basis) Ordinary accounts or notes receivableOrdinary accounts or notes receivable U.S. Government. publications issued at a discountU.S. Government. publications issued at a discount Commodities and derivatives, hedges, business suppliesCommodities and derivatives, hedges, business supplies

What is a Capital AssetWhat is a Capital Asset? – Personal assets and ? – Personal assets and Investment propertiesInvestment properties

Question 17Question 17

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6B Capital Gain and Loss Netting 6B Capital Gain and Loss Netting Process Process

3-Step Process3-Step Process – (1) Net all S/Ts, (2) Net all L/Ts (> – (1) Net all S/Ts, (2) Net all L/Ts (> 1 yr.), (3) if same sign, add separately to income; if 1 yr.), (3) if same sign, add separately to income; if opposite signs, add net difference to incomeopposite signs, add net difference to income

Final ResultFinal Result – 4 Basic Rules (for final net result): – 4 Basic Rules (for final net result): S/T Capital GainS/T Capital Gain – Treat as ordinary income – Treat as ordinary income S/T Capital LossS/T Capital Loss - $3,000 offset against ordinary income - $3,000 offset against ordinary income L/T Capital GainL/T Capital Gain – 15% max. rate (5% if 10/15 bracket) – 15% max. rate (5% if 10/15 bracket) L/T Capital LossL/T Capital Loss - $3,000 offset against ordinary income - $3,000 offset against ordinary income

Figures 4 and 5Figures 4 and 5

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6C Preferential Tax Rates for Long-6C Preferential Tax Rates for Long-term Capital Gains term Capital Gains

If Net L/T GainIf Net L/T Gain – Determine appropriate rates – Determine appropriate rates 15% (or 5%)15% (or 5%) - Basic rate for most L/T capital gains - Basic rate for most L/T capital gains 25%25% - For “unrecaptured Sec. 1250 gain” on realty - For “unrecaptured Sec. 1250 gain” on realty 28%28% - For collectibles, Sec. 1202 stock gain, - For collectibles, Sec. 1202 stock gain, allall c/o’s c/o’s Netting Process – Four columns for 4 ratesNetting Process – Four columns for 4 rates::

If 15% Nets to a LossIf 15% Nets to a Loss – Net against 28% result first – Net against 28% result first If S/Ts Net to a LossIf S/Ts Net to a Loss – Net against 28% result first – Net against 28% result first If 28% Nets to a LossIf 28% Nets to a Loss – Net against 25% result first – Net against 25% result first If 25% Nets to a LossIf 25% Nets to a Loss – Net against any 15% gain result – Net against any 15% gain result

Figures 6 and 7Figures 6 and 7 Question 18Question 18

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6D Tax Treatment of Net Capital 6D Tax Treatment of Net Capital Losses Losses

$3,000$3,000 – Maximum combined ordinary income offset – Maximum combined ordinary income offset for net S/T and net L/T losses each yr. (use S/T first)for net S/T and net L/T losses each yr. (use S/T first)

$1,500$1,500 – Married – filing separately limit – Married – filing separately limit If Taxable Income < Capital LossIf Taxable Income < Capital Loss – Full limit (up to – Full limit (up to

$3,000) still assumed utilized in computing carryover$3,000) still assumed utilized in computing carryover Capital Loss CarryoverCapital Loss Carryover – Indefinite (retain character) – Indefinite (retain character) Decedent’s ReturnDecedent’s Return – No carryovers possible – No carryovers possible Question 19Question 19

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Topic 7Topic 7

Vacation Home Vacation Home Rentals Under Sec. Rentals Under Sec.

280A280A

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7A Sec. 280A Basic Classifications 7A Sec. 280A Basic Classifications

Sec. 280A – 3 Basic Vacation Home RulesSec. 280A – 3 Basic Vacation Home Rules:: De MinimisDe Minimis – Ignore income and expenses if rental – Ignore income and expenses if rental

days < 15 days < 15 Insignificant Personal UsageInsignificant Personal Usage – If <= larger of 14 – If <= larger of 14

days or 10% days rented, deduct loss (passive?)days or 10% days rented, deduct loss (passive?) Significant Personal UseSignificant Personal Use – If > larger of 14 days – If > larger of 14 days

or 10% days rented, deductions limited to income or 10% days rented, deductions limited to income (carryover any unused losses to future years)(carryover any unused losses to future years)

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7B Sec. 280A Loss Limitations7B Sec. 280A Loss Limitations

If Limit AppliesIf Limit Applies – Deduct (1) interest/taxes/casualty – Deduct (1) interest/taxes/casualty & theft losses first, then (2) non-depreciation & theft losses first, then (2) non-depreciation expense, then (3) depreciationexpense, then (3) depreciation

Allocations of Expenses to Rental & /PersonalAllocations of Expenses to Rental & /Personal – IRS – IRS (days actually used), Bolton (365 days for int./taxes)(days actually used), Bolton (365 days for int./taxes)

Co-owner Use & SwapsCo-owner Use & Swaps – Count as personal days – Count as personal days Repair Days (substantial)Repair Days (substantial) – Not personal days – Not personal days Figure 8Figure 8 Questions 20 and 21Questions 20 and 21

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Topic 8Topic 8

Individual Individual Retirement Retirement AccountsAccounts

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8A IRAs – Qualification 8A IRAs – Qualification Requirements Requirements

RequiredRequired – Earned comp., < age 70½ at year end – Earned comp., < age 70½ at year end SpousesSpouses – Each has account (total comp. limit) – Each has account (total comp. limit) ContributionsContributions – Up to due date (no extension); owner – Up to due date (no extension); owner

cannot be trustee (bank or fiduciary is OK)cannot be trustee (bank or fiduciary is OK) Investments in IRAInvestments in IRA – Not allowed in saving bonds or – Not allowed in saving bonds or

collectibles (except U.S. gold or silver coins OK)collectibles (except U.S. gold or silver coins OK) Rollovers Rollovers – If w/d, redeposit w/i 60 days; no loans – If w/d, redeposit w/i 60 days; no loans DeathDeath – IRA included in estate, can only be rolled – IRA included in estate, can only be rolled

over by spouse, can combine with spouse, basis c/oover by spouse, can combine with spouse, basis c/o

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8B IRAs – Earned Compensation 8B IRAs – Earned Compensation

““EarnedEarned” – Limit on IRA contribution/deduction ” – Limit on IRA contribution/deduction Does Not IncludeDoes Not Include - Deferred comp, unearned sources - Deferred comp, unearned sources

(int, div, etc.), or a limited partner’s share of income(int, div, etc.), or a limited partner’s share of income IncludesIncludes – Wages/salary/commissions, S/E income – Wages/salary/commissions, S/E income

(less ½ SE tax & other retirement contributions), (less ½ SE tax & other retirement contributions), taxable alimony & separate maintenance paymentstaxable alimony & separate maintenance payments

S/E LossS/E Loss – Does not offset salary for limit – Does not offset salary for limit Question 22Question 22

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8C IRAs – Prohibited Transactions 8C IRAs – Prohibited Transactions

Prohibited TransactionsProhibited Transactions – Plan and D/Q Person: – Plan and D/Q Person: Transfer income/assets to “disqualified” person Transfer income/assets to “disqualified” person Fiduciary acting in its own self-interestFiduciary acting in its own self-interest Consideration to fiduciary from plan partyConsideration to fiduciary from plan party Any acts between plan/disqualified Person (sell, lending)Any acts between plan/disqualified Person (sell, lending)

IRA RuleIRA Rule – If prohibited transaction, lose IRA status – If prohibited transaction, lose IRA status as of 1as of 1stst day of year, treated as distribution of cash day of year, treated as distribution of cash (FMV of account) as of first(FMV of account) as of first of year of year

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8D IRAs –Maximum Contribution & 8D IRAs –Maximum Contribution & Deduction Deduction

Maximum ContributionMaximum Contribution – Lesser of $4,000 per spouse ($5,000 – Lesser of $4,000 per spouse ($5,000 if 50 or older), or taxpayers’ combined earned income if 50 or older), or taxpayers’ combined earned income

Maximum DeductionMaximum Deduction – Dependent on other plan participation: – Dependent on other plan participation: Neither Spouse ParticipatesNeither Spouse Participates – Maximum $4,000/$5,000 each – Maximum $4,000/$5,000 each Both Spouses ParticipatesBoth Spouses Participates – Reduce $4,000/$5,000 by $.40 (or – Reduce $4,000/$5,000 by $.40 (or

$.50) for each $1 AGI > $52,000 (S), $83,000 (MJ), $0 (MS)$.50) for each $1 AGI > $52,000 (S), $83,000 (MJ), $0 (MS) One Spouse ParticipatesOne Spouse Participates – If covered, same as both; if not – If covered, same as both; if not

covered, AGI phaseout over $156,000-$166,000 [$200 min.]covered, AGI phaseout over $156,000-$166,000 [$200 min.] Figure 9Figure 9 Question 23Question 23

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8E Roth IRAs [R]8E Roth IRAs [R] Roth IRARoth IRA – No age limit, contribute up to $4,000/$5,000; – No age limit, contribute up to $4,000/$5,000;

nondeductible, but no tax on withdrawals after 5-year period; nondeductible, but no tax on withdrawals after 5-year period; reduce $4,000/$5,000 by contributions to regular IRAreduce $4,000/$5,000 by contributions to regular IRA

Phaseout – MJ($156,000-$166,000), S($99,000-$114,000)Phaseout – MJ($156,000-$166,000), S($99,000-$114,000) Tax-Free DistributionsTax-Free Distributions – After 5 yrs if age 59½, disabled, or – After 5 yrs if age 59½, disabled, or

first-time home buyingfirst-time home buying Regular IRARegular IRA – May be converted to Roth if AGI < $100,000; – May be converted to Roth if AGI < $100,000;

recognize deferred income at conversionrecognize deferred income at conversion RecharacterizationsRecharacterizations – Possible if trustee to trustee – Possible if trustee to trustee Question 24Question 24

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8F Educational (Coverdell) IRA 8F Educational (Coverdell) IRA

Educational IRAEducational IRA – Designate as such, for education – Designate as such, for education expenses of beneficiary (child < 18)expenses of beneficiary (child < 18)

ContributionsContributions - $2,000 maximum total per child, - $2,000 maximum total per child, nondeductible; AGI phaseouts @$95,000/$190,000 nondeductible; AGI phaseouts @$95,000/$190,000

Amounts SpentAmounts Spent – Nontax. if for qualified education – Nontax. if for qualified education exp; any excess taxed @ regular rate + 10% exp; any excess taxed @ regular rate + 10%

Req. WithdrawalReq. Withdrawal – Within 30 days of beneficiary – Within 30 days of beneficiary reaching age 30, or date of death if beforereaching age 30, or date of death if before

ExceptionsExceptions – Special needs, military adv. – Special needs, military adv. Question 25Question 25

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8G Sec. 401(k) Plans – Basic 8G Sec. 401(k) Plans – Basic RequirementsRequirements

CODA CODA – Employee choice - cash or deferred annuity– Employee choice - cash or deferred annuity ContributionsContributions – Excluded, 100% vested, deferred – Excluded, 100% vested, deferred

taxes, tax-free accumulationstaxes, tax-free accumulations NondiscriminationNondiscrimination - Tests for highly comp. - Tests for highly comp. Sec. 403(b) PlanSec. 403(b) Plan – Similar plan for educators – Similar plan for educators Maximum ContributionMaximum Contribution - $15,500 per year ($20,500 - $15,500 per year ($20,500

if age 50 or older) – not excluded from payroll taxif age 50 or older) – not excluded from payroll tax Overall Limit on ContributionOverall Limit on Contribution – Lesser of 25% comp – Lesser of 25% comp

or $45,000, or $45,000, less less all contributions to qualified plansall contributions to qualified plans

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Topic 9Topic 9

Federal Gift Tax –Federal Gift Tax –

A Quick and Dirty A Quick and Dirty OverviewOverview

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9A 9A RequirementsRequirements to File a Gift to File a Gift Tax Return Tax Return

Certain “Gifts” Are Not Gifts for Gift Tax Purposes:Certain “Gifts” Are Not Gifts for Gift Tax Purposes: Tuition paid for someone elseTuition paid for someone else Medical expense paid for someone else Medical expense paid for someone else Political contributions Political contributions Gifts to spouse or charity Gifts to spouse or charity Gifts to 3Gifts to 3rdrd party < $12,000 (if present interest) party < $12,000 (if present interest)

SpousesSpouses – No “joint return,” but may elect to split gifts – No “joint return,” but may elect to split gifts Generation-Skipping Transfer TaxGeneration-Skipping Transfer Tax – Any gift to “skip” (2 – Any gift to “skip” (2

generations younger), tax at maximum rate, $2,000,000 generations younger), tax at maximum rate, $2,000,000 exemption exemption

Question 26Question 26

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9B Types of Gifts9B Types of Gifts Types of GiftsTypes of Gifts – Include bargain sales, release of – Include bargain sales, release of

general power of appointment, forgiveness of debt general power of appointment, forgiveness of debt (family), below-market loans, beneficiary (family), below-market loans, beneficiary assignment, property settlements in divorce, assignment, property settlements in divorce, exchanging single annuity for joint annuityexchanging single annuity for joint annuity

Donee DisclaimerDonee Disclaimer – Donor must receive from donee – Donor must receive from donee within 9 months of gift; if so, no gift has been madewithin 9 months of gift; if so, no gift has been made

Due DateDue Date – By April 15 – By April 15thth after year end (penalties after year end (penalties exist for late filing and/or payment)exist for late filing and/or payment)

Deceased DonorDeceased Donor – Due date is earlier of (1) gift tax – Due date is earlier of (1) gift tax due date (2) estate tax due date (plus extensions)due date (2) estate tax due date (plus extensions)

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9C Computing Taxable Gifts9C Computing Taxable Gifts Gift-SplittingGift-Splitting – By married couple, splits gifts in half; – By married couple, splits gifts in half;

((must must file 709)file 709) Annual ExclusionAnnual Exclusion - $12,000 per donee per year for - $12,000 per donee per year for

gifts of gifts of present interestpresent interest (currently enjoy) (currently enjoy) Marital DeductionMarital Deduction – Unlimited for any gift to (U.S. – Unlimited for any gift to (U.S.

citizen) spouse that is not a citizen) spouse that is not a terminable interestterminable interest Charitable DeductionCharitable Deduction – Unlimited for gifts of present – Unlimited for gifts of present interests to recognized charitiesinterests to recognized charities

CreditsCredits - $345,800 unified credit, prior gift taxes paid - $345,800 unified credit, prior gift taxes paid Figures 10, 11, and 12Figures 10, 11, and 12 Question 27Question 27

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Topic 10Topic 10

Federal Estate Tax – Federal Estate Tax –

A Quick and Dirty A Quick and Dirty OverviewOverview

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10A Estate Tax – Minimum 10A Estate Tax – Minimum Requirements to FileRequirements to File

Form 706Form 706 – Due 9 months after date of death – Due 9 months after date of death Gross EstateGross Estate – FMV of all properties owned – FMV of all properties owned

by decedent at deathby decedent at death Required FilingRequired Filing – If sum of gross estate and – If sum of gross estate and

lifetime gifts > $2,000,000 (the exemption lifetime gifts > $2,000,000 (the exemption equivalent of unified credit for the estate tax)equivalent of unified credit for the estate tax)

Unified CreditUnified Credit – Different for gifts & estates – Different for gifts & estates Questions 28 and 29Questions 28 and 29

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10B Gross Estate – Inclusion 10B Gross Estate – Inclusion Rules Rules

Gross EstateGross Estate – FMV of all property at death, – FMV of all property at death, including any outstanding loans and notes including any outstanding loans and notes

Incomplete Transfer InclusionsIncomplete Transfer Inclusions - - Life insurance proceeds (if payable to estate or Life insurance proceeds (if payable to estate or

retained incidents of ownership, e.g., loans, etc.)retained incidents of ownership, e.g., loans, etc.) Life insurance proceeds (if transfer within 3 years)Life insurance proceeds (if transfer within 3 years) Any transfers within 3 yrs. with reversionary int.Any transfers within 3 yrs. with reversionary int. Gift taxes paid on gifts within 3 yrs. of deathGift taxes paid on gifts within 3 yrs. of death

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10C Deductions From the Gross 10C Deductions From the Gross Estate Estate

Marital DeductionMarital Deduction – Unlimited deduction for – Unlimited deduction for bequests of nonterminable interest prop. (also bequests of nonterminable interest prop. (also for for QTIP electionQTIP election terminable interest property) terminable interest property)

Charitable DeductionCharitable Deduction – Unlimited for – Unlimited for contributions to recognized charitiescontributions to recognized charities

Administrative ExpAdministrative Exp. – Legal & Acct’g. fees. – Legal & Acct’g. fees OthersOthers – Liabilities against property, casualty – Liabilities against property, casualty

or theft loss funeral costs,, last illness expenses or theft loss funeral costs,, last illness expenses (latter two may be on 1040 or 1041 instead)(latter two may be on 1040 or 1041 instead)

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10D Computation of the Estate 10D Computation of the Estate TaxTax

Estate TaxEstate Tax – Computed on a cumulative basis: – Computed on a cumulative basis: Add lifetime gifts to gross estate, Add lifetime gifts to gross estate, Compute tax on total, thenCompute tax on total, then offset total tax with any gift taxes paid and unified offset total tax with any gift taxes paid and unified

credit credit Extensions to File/PayExtensions to File/Pay – Are available – Are available Some CreditsSome Credits – Are available (see next slide) – Are available (see next slide)

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10E Credits Against the Estate Tax10E Credits Against the Estate Tax

$780,800 Unified Credit$780,800 Unified Credit - Available to each estate to - Available to each estate to offset tax; equivalent of a $2,000,000 exclusionoffset tax; equivalent of a $2,000,000 exclusion

Prior Gift Taxes Paid CreditPrior Gift Taxes Paid Credit – Allowed because total – Allowed because total tax includes lifetime gifts in basetax includes lifetime gifts in base

Prior Transfer Taxes CreditPrior Transfer Taxes Credit – Mitigates multiple – Mitigates multiple estate inclusions within 10 years; sliding % inclusion estate inclusions within 10 years; sliding % inclusion depending on interval between the two deaths(100% depending on interval between the two deaths(100% within 2 yrs, 20% drop for each 2 years, 0% for 10)within 2 yrs, 20% drop for each 2 years, 0% for 10)

Foreign Death Tax CreditForeign Death Tax Credit – For amounts paid – For amounts paid Figure 13Figure 13

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Questions?Questions?

As Time PermitsAs Time Permits

Contact:Contact:

John EverettJohn Everett

Professor of AccountingProfessor of Accounting

Virginia Commonwealth UniversityVirginia Commonwealth University

jeverett@vcu.edujeverett@vcu.edu