2011 Regulation 1 Text Update

8/2/2019 2011 Regulation 1 Text Update

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This first page gives a listing of the corrected lecture text pages that follow. Print these corrected

pages and insert in the Regulation textbook.

REGULATION

Date Added Lecture Page Number Description

03/14/2011 R-1 9 Text change; Add text

03/14/2011

06/27/2011

R-1 10

(1) Changed number from $3,750 to $3,700

(2) Add text (Income Tax Law Update)

03/14/2011 R-1 13 Add text

03/14/2011

06/27/2011

R-1 23 (1) Delete text


03/14/2011

06/27/2011

R-1 24 (1) Renumber outline; Add text


03/14/2011 R-1 28 Add text

03/14/2011

06/27/2011

R-1 29 (1) Add text


03/14/2011

06/27/2011

R-1 54 (1) Delete text


03/14/2011

06/27/2011

R-1 55 (1) Renumber outline

(2) Delete text; Add text (Income Tax Law Update)

06/01/2011 R-1 18 Text change

06/27/2011 R-1 19 Add text (Income Tax Law Update)



06/27/2011 R-1 67 Text change; delete text (Income Tax Law Update)


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Becker Professional Education | CPA Exam Review Regulation 1

2010 DeVry/Becker Educational Development Corp. All rights reserved. R1-9

E. Head of Household

Head of household status entitles certain taxpayers to pay lower taxes. The lower tax results

from a larger standard deduction and "wider" tax brackets. To qualify, the following

conditions must be met:

1. The individual is not married, is legally separated, or is married and has lived apartfrom his/her spouse for the last six months of the year as of the close of the taxable

year.

2. The individual is not a "qualifying widow(er)."

3. The individual is not a nonresident alien.

4. The individual maintains as his or her home a household that, for more than half the

taxable year, is the principal residence of:

a. A Dependent Son or Daughter(or descendent)

(1) Legally adopted children, stepchildren, and descendents qualify as sons

and daughters.

(2) Working Families Act: The definition of head-of-household conforms with

the uniform definition of a child. To qualify for head-of-household status,

the child must either be a qualifying child or qualify as the taxpayer's

qualifying relative.

(3) Divorced Parents: Assuming all other requirements are met, a custodial

parent is entitled to the head of household status even if the custodial

parent has waived the right to the dependency exemption by completing a

Form 8332.

b. Father or Mother(not required to live with taxpayer)

A dependent parent is not required to live with the taxpayer, provided the

taxpayer maintains a home that was the principal residence of the parent for the

entire year. Maintaining a home means contributing over half the cost of upkeep.

This means rent, mortgage interest, property taxes, insurance, utility charges,

repairs, and food consumed in the home.

c. Dependent Relatives (must live with taxpayer)

Parents, grandparents, brothers, sisters, aunts, uncles, nephews, and nieces (as

well as stepparents, parents-in-law, etc.) qualify as relatives. A dependent

relative (other than a father or mother) must live with the taxpayer. Note that

cousins, foster parents, and unrelated dependents do not qualify.

5. Summary

Dependent

Lives with

Taxpayer

Child or Descendent Yes Yes

Parents Yes No

Relative Yes Yes

P A S S K E Y

In order to avoid confusing the required time period for different filing statuses, just remember:

Widow/widower = Whole year

Head of household = Half a year (more than)


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Regulation 1 Becker Professional Education | CPA Exam Review

R1-10 2010 DeVry/Becker Educational Development Corp. All r ights reserved.

I N D I V I D U A L T A X A T I O N

E x e m p t i o n s

I. PERSONAL EXEMPTIONS

Generally, an individual is entitled to a personal exemption that is indexed annually for inflation. For

2010, this amount is $3,650 ($3,700 for 2011). The new law (2010 Tax Relief Act) provides that the

'no phase-out' of personal exemptions will continue for years 2011 and 2012.

A. Persons Claimed as Dependents

Persons eligible to be claimed as dependents on another's tax return will not be allowed a

personal exemption on their own returns.

B. Married Taxpayers

1. Each Spouse Receives Personal Exemption

Each married taxpayer claims his or her own personal exemption on the joint or

separate return, as the case may be. The exemption for a spouse is always

considered to be a personal exemption (not a dependency exemption), even if the

spouse does not work.2. Spouse as Personal Exemption on a Separate Return

Usually, a married taxpayer filing separately is entitled to claim only his or her own

personal and dependency exemption. However, a married taxpayer filing separately

may claim his or her spouse's personal exemption if both of the following tests are met:

a. The taxpayer's spouse has no gross income; and

b. The taxpayer's spouse was not claimed as a dependent of another taxpayer.

C. Birth or Death During Year

If a person is born or dies during the year, he or she is entitled to either a personal or a

dependency (as appropriate) exemption for the entire year. Exemptions are not prorated.

P A S S K E Y

The CPA Examination will intentionally test on the qualifications for exemptions (both personal and

dependency). The actual dollar amounts (which change each year due to indexing) are rarely tested.

Exemptions


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2010 DeVry/Becker Educational Development Corp. All rights reserved. R1-13

b. Non-taxable Income

(1) Social Security (at low income levels)

(2) Tax-exempt interest income (state and municipal interest income)

(3) Tax-exempt scholarships

3. Precludes Dependent Filing a Joint Return

A taxpayer will lose the exemption for a married dependent who files a joint return

unless the joint return is filed solely for a refund of all taxes paid or withheld for the

taxable year (i.e., the tax is zero).

Married children may be claimed as dependents provided they do not file joint returns

with their spouses (except to claim a refund of all taxes paid) and provided they satisfy

all other requirements for dependency.

4. Only Citizens of the United States or Residents of the United States, Mexico, orCanada

The dependent must be either a citizen of the United States or a resident of the United

States, Mexico, or Canada.

5. Relative

Children, grandchildren, parents, grandparents, brothers, sisters, aunts and uncles,

nieces and nephews (as well as stepchildren, in-laws, etc.) can be claimed as

dependents. Children include legally adopted children, foster children, and

stepchildren. Foster parents and cousins must live with the taxpayer the entire year.

Remember: A child born at any time during the year may be claimed as a dependent

(i.e., the deduction is not prorated).

6. Taxpayer Lives with the Individual (if Non-relative) for the Whole Year

A non-relative member of a household (i.e., a person living in the taxpayer's home for

the entire year) may be claimed as a dependent, provided the taxpayer's relationship

with that person does not violate local law.

C. Children of Divorced Parents

1. General Rule Custodial Parents

Generally, the parent who has custody of the child for the greater part of the year takes

the exemption (determined by a "time" test, not the divorce decree). It does not matter

whether that parent actually provided more than one-half of the child's support. If the

parents have equal custody during the year, the parent with the higher adjusted grossincome will claim the exemption.

SUPORT

SUPORT

SUPORT

SUPORT


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2010 DeVry/Becker Educational Development Corp. All rig hts reserved. R1-23

Dividends

Parents may elect to include on their own return the unearned income of the applicable

child provided the income is between $950 and $9,500 and consists solely of interest

and dividends. This chart also applies for year 2011.

2010 Child's

Unearned TaxIncome Rate

0 $950 0%

$951 $1,900 Child's

$1,901 and over Parent's

4. Forfeited Interest (Adjustment) Penalty on Withdrawal from Savings

Forfeited interest is a penalty for early withdrawal of savings (generally on a time

deposit, such as a certificate of deposit, at a bank). The bank credits the interest to the

taxpayer's account and then, in a separate transaction, removes certain interest as a

penalty for withdrawing the funds before maturity. The interest received is taxable on

the taxpayer's income tax return, but the amount forfeited is also deductible as an

adjustment in the year the penalty is incurred. Thus, the taxpayer only pays tax on theamount of interest actually received. Note, however, that the amount of forfeited

interest is reported separately and not netted with interest income on the tax return.

C. Dividend Income

1. Source Determines Taxability

The source of the distribution dictates the character. The following four sources exist:

a. Earnings & Profits/Current = Distribute by Current Year End

b. Earnings & Profits/Accumulated = Distribution Date

c. Return of Capital = No Earnings & Profits

d. Capital Gain Distributions = No Earnings & Profits / No Basis

2. Three Categories of Dividends

a. Taxable Dividends

All dividends that represent distributions of a corporation's earnings and profits

(similar to retained earnings) are includible in gross income.

(1) Taxable Amount (to shareholder receiving)

(a) Cash = Amount Received

(b) Property = Fair Market Value

(2) Special (Lower) Tax Rate

(a) Qualified Dividends Holding Period

The stock must be held for more than 60 days during the 120-day

period that begins 60 days before the ex-dividend date (the date on

which a purchased share no longer is entitled to any recently

declared dividends).

(b) Disqualified Dividends

(i) Employer stock held by an ESOP

Deletion oforiginal outlinepoints (i) and (ii)


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(ii) Amounts taken into account as investment income (for

purposes of the limitation on investment expenses)

(iii) Short sale positions

(iv) Certain foreign corporations

(v) Dividends paid by credit unions, mutual savings banks,

building and loan associations, mutual insurance companies,

and farmer's cooperatives.

(c) Tax Rates (2010, 2011 and 2012)

(i) 15% Most taxpayers

(ii) 0% Low income taxpayers (those in the 10% or 15% income

tax bracket)

Note: For 2011 and 2012 qualified dividends will continue to be taxed at the year

2010 tax rates set forth above in item (c).

b. Tax-free Distributions

The following items are exempt from gross income:

(1) Return of Capital

Return of capital exists when a company distributes funds but has no

earnings and profits. The taxpayer will simply reduce (but not below zero)

his/her basis in common stock held.

(2) Stock Split

When a stock split occurs, the shareholder will allocate the original basis

over the total number of shares held after the split.

(3) Stock Dividend (unless cash or other property option/taxable FMV)

Unless the shareholder has the option to receive cash or other property

(which would then be taxable at the FMV of the dividend), the basis of the

shares after distribution depends on the type of stock received.

(a) Same stockoriginal basis is divided by total shares

(b) Different stockoriginal basis is allocated based on the relative FMV

of the different stock

(4) Life Insurance Dividend

Dividendscaused by ownership of insurance with a mutual company(premium return).

c. Capital Gain Distribution

Distributions by a corporation that has no earnings and profits, and for which the

shareholder has recovered his or her entire basis, are treated as taxable gross

income.


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Regulation1 BeckerProfessionalEducation|CPAExamReview

R128 2010DeVry/BeckerEducationalDevelopmentCorp. Allrightsreserved.

1. Gross Income

Those items that would normally be revenue in a trade or business or other self-

employed activity (such as director or consulting fees) are included as part of gross

income on Schedule C.

Cash=AmountReceived(cashbasis) Property=FairMarketValue

CancellationofDebt

2. Expenses

Expensesinclude those items that one would expect to find in business, such as:

a. Cost of goods (inventory is expensed when sold).

b. Salaries and commissions paid to others.

c. State and local business taxes paid.

d. Office expenses (e.g., supplies, equipment, and rent).

e. Actual automobile expenses (depreciation expense is limited to only that portion

used for business) or a standard mileage rate (50 per mile in 2010 and 51 per

mile in 2011).

f. Business meal and entertainment expenses at 50% (when all proceeds go to

benefit a charity, 100% may be deductible as an itemized deduction for

charitable contributions).

g. Depreciation of business assets

h. Interest expense on business loans (interest expense paid in advance by a cashbasis taxpayer cannot be deducted until the tax year/period to which the interest

relates).

i. Employee benefits.

j. Legal and professional services.

k. Bad debts actually written off for an accrual basis taxpayer only (the direct write

off method, not the allowance method, is used for tax purposes).

3. Nondeductible Expenses (on Schedule C)

a. Salaries paid to the sole proprietor (they are considered a "draw").

b. Federal income tax.

c. Personal portion of:

(1) Automobile, travel, and vacation expenses.

(2) Personal meals and entertainment expenses 100% of country club dues

are nondeductible.

(3) Interest expense This may be reported as an itemized deduction if

mortgage interest or investment interest is paid.


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(4) State and local tax expense Report as an itemized deduction on

Schedule A.

(5) Health insurance of a sole proprietor While this is not reported on

Schedule C as an expense, it is reported as an adjustment to arrive at AGI.

d. Bad debt expense of a cash basis taxpayer (who never reported the income).

e. Charitable contributions Report as an itemized deduction on Schedule A.

P A S S K E Y

The CPA examination often attempts to confuse the candidate by providing personal itemized

deductions as expenses of a sole proprietorship. It is important to only subtract business expenses

from business income. Expenses that qualify as itemized deductions and/or other adjustments are

deducted elsewhere on the personal income tax return.

4. Net Business Income or Loss

a. Net Business Income is Taxable

There are two taxes on net business income:

(1) Income tax.

(2) Federal self-employment (S/E) tax.

(a) An adjustment to income is allowed for one-half (which is 7.65% of

up to $106,800 of self-employment income in 2010 and 2011 plus

1.45% of self-employment income thereafter, if applicable) of S/E tax

(Medicare plus Social Security) paid.

(b) This allows the sole proprietor the ability to "deduct" the employer

portion of the S/E tax as an adjustment to gross taxable income (of

which the net Schedule C amount is a part).

(c) All self-employment income is subject to the 2.9% Medicare tax, but

only up to $106,800 in 2010 and 2011 is subject to the 12.4% Social

Security tax (i.e., a total of 15.3% on self-employment earnings up to

$106,800 in 2011).

The new law provides that for year 2011 the 12.4% rate is reduced to

10.4% rate. However, the deduction for one-half the self-

employment tax will continue to be 7.65% of self-employment

income up to $106,800 and 1.45% of self-employment income in

excess of $106,800.

b. Net Taxable Loss

A business with a loss may deduct the loss against other sources of income.

When the loss exceeds these amounts, the excess net operating loss is

permitted as a carryover (at taxpayer's election, it may be used as a carryforward

only):

(1) 2-year carryback (possibly up to 5 years for 2009-2011)

(2) 20-year carryforward


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3. Inherited Property Basis

Following are the rules for years after 2010.

a. General Rule Date of Death FMV Becomes Basis

For years after 2010, property acquired by bequest or inheritance generally takesas its basis the step-up (or down) to the fair market value at the date of the

decedent's death. An estate of a decedent dying in 2010 can elect to apply the

post-2010 law requiring step-up (or step-down) basis.

b. Alternate Valuation Date

If validly elected by the executor, the fair market value on the alternate valuation

date (the earlier of 6 months later or the date of distribution/sale) may be used to

value all of the estate property. The alternate valuation date is only available if

its use lowers the entire gross estate and estate tax (although individual assets

may go up or down during the period). [Note: Estate taxation is covered in detail

in lecture R4.]

If the alternate valuation date is validly elected, the asset is valued using FMV at

the earlier of:

(1) Distribution date of asset; or

(2) Alternate valuation date (earlier of 6 months after death or date of

distribution/sale).

E X A M P L E

Testator died owning property worth $60,000 and in which he had a basis of $20,000. His son

inherited the land and subsequently sold it for $55,000. The son will recognize a loss of $5,000

($60,000 basis minus $55,000 proceeds). The gain inherent in the property at the time of the

testator's death goes unrecognized.

c. Holding Period

Property acquired from a decedent is automatically considered to be long-term

property regardless of how long it actually has been held.

E X A M P L E - B A S I S O F I N H E R I T E D P R O P E R T Y ( y e a r s a f t e r 2 0 1 0 )

1. Assume a taxpayer inherited property from a decedent. The FMV at date of death was

$20,000. The property was worth $15,000 six months later, and was worth $22,000 when it

was distributed to the taxpayer eight months later. It had a cost basis to the deceased of

$5,000.

What is the basis of inherited property to the taxpayer:a. If the alternate valuation date was not elected? $20,000

b. If the alternate valuation date was elected? $15,000

2. Assuming the beneficiary sold that property for $25,000, compute the capital gain:

a. Assuming the alternate valuation date was not elected. $5,000 = 25,000 - 20,000

b. Assuming the alternate valuation date was elected. $10,000 = 25,000 - 15,000Deletion of text


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d. Year 2010 General Rule

Inherited property resulting from a death in the year 2010 will have a basis equal

to the lesser of the adjusted basis of the property in the hands of the decedent on

the date of death or the fair market value of the property on the date of death.

e. Year 2010 Gain Exclusion

Executors are allowed to increase the basis of estate property by up to $1.3

million (in effect, exempting $1.3 million of gains on subsequent sale of the

property) and $3 million to a surviving spouse. An estate of a decedent dying in

2010 can elect to apply the post-2010 law requiring step-up or step-down basis.

If the estate makes the election, then d. above does not apply and e. above does

not apply.

P A S S K E Y

R E A L I Z E D * , B U T N O T R E C O G N I Z E D , G A I N S O R L O S S E S

AMOUNT REALIZED

Money Received (boot)

C.O.D. (boot)

FMV Property

Less: Selling Expenses

< ADJUSTED BASIS OF ASSET SOLD >

Purchase = Cost

Gift = Rollover Cost

Inherited = Step-up FMV

GAIN

Homeowners Exclusion

Involuntary Conversion

Divorce Property Settlement

Exchange of Like Kind (Business)

Installment Sale

Treasury Capital & Stock

OR

LOSS

Wash Sale Losses

Related Party Losses

And

Personal Losses

* All realized gains and losses are recognized (i.e., reported on the tax return) unless "HIDE IT" or "WRaP" applies.

Deletion of text


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5. Guaranteed Payments to a Partner

Guaranteed payments are reasonable compensation paid to a partner for services

rendered (or use of capital) without regard to the partner's ratio of income. This earned

compensation is also subject to self-employment tax.

6. Taxable Fringe Benefits (non-statutory)

The fair market value of a fringe benefit not specifically excluded by law is includable in

income. For example, an employee's personal use of a company car is included as

wages in an employee's income. Further, the amount included is subject to

employment taxes and withholding.

7. Partially Taxable Fringe Benefits Portion of Life Insurance Premiums

Premiums paid by an employer on a group-term life insurance policy covering his

employees are not income to the employees up to the cost on the first $50,000 of

coverage per employee (non-discriminatory plans only). Premiums above the first

$50,000 of coverage are taxable income to the recipient and normally included in W-2

wages. (This amount is calculated from an IRS table, and it is not the entire amount of

the premium in excess of the $50,000 coverage.)

8. Non-taxable Fringe Benefits

a. Life Insurance Proceeds

The proceeds of a life insurance policy paid because of the death of the insured

are generally excluded from the gross income of the beneficiary.

(1) The interest income element on deferred payout arrangements is fully

taxable.

(2) Accelerated death benefits received by a terminally ill insured (certified that

the insured is expected to die within 24 months) are not taxable, or a

chronically ill insured (or requiring assisted living), if the proceeds are used

to pay for long-term care.

(3) For policies issued after 8/17/06, if the policy is company-owned (COLI),

the beneficiary may exclude from gross income benefits received only up

to the total amount of premiums and other amounts paid by the

policyholderany excess would be taxable. Of course, exceptions apply.

If proper notice and consent requirements are met and the insured was a

qualified highly compensated officer, director, or employee and a U.S.

citizen or resident, proceeds were paid to a member of the insured's family,

the beneficiary is a family member or another individual (not the

policyholder), or the beneficiary is a trust for the benefit of the insured's

family (or the estate of the insured), the gross income inclusion

requirement for the COLI is not applicable.b. Accident, Medical, and Health Insurance (employer paid)

Premium payments are excludable from the employee's income when the

employer paid the insurance premiums, but amounts paid to the employee under

the policy are includable in income unless such amounts are:

(1) Reimbursement for medical expenses actually incurred by the employee

(2) Compensation for the permanent loss or loss of use of a member or

function of the body.

FringeBenefits


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c. De Minimis Fringe Benefits

De minimis fringe benefits are so minimal that they are impractical to account for

and may be excluded from income. An example is an employee's personal use

of a company computer.

d. Meals and Lodging

The gross income of an employee does not include the value of meals or lodging

furnished to him or her in kind by the employer for the convenience of the

employer on the employer's premises. Additionally, in order to be nontaxable,

the lodging must be required as a condition of employment.

e. Employer Payment of Employee's Educational Expenses

Up to $5,250 may be excluded from gross income of payments made by

employer on behalf of an employee's educational expenses. The exclusion

applies to both undergraduate and graduate level education.

f. Qualified Tuition Reductions

Employees of educational institutions studying at the undergraduate level who

receive tuition reductions may exclude the tuition reduction from income.

Graduate students may exclude tuition reduction only if they are engaged in

teaching or research activities and only if the tuition reduction is in addition to the

pay for the teaching or research. To be excludable, tuition reductions must be

offered on a nondiscriminatory basis.

g. Qualified Employee Discounts

Employee discounts on employer-provided merchandise and service are

excludable as follows:

(1) Merchandise Discounts

The excludable discount is limited to the employer's gross profit

percentage. Any excess must be reported as income.

(2) Service Discounts

The excludable discount on services is limited to 20% of the fair market

value of the services. Any excess discount must be reported as income.

(3) Employer-provided Parking

The value of employer-provided parking up to $230 (for 2010 and 2011)

per month may be excluded. The exclusion is available even if the parking

benefit is taken by the employee in place of taxable cash compensation.

(4) Transit Passes

The value of employer-provided transit passes up to $230 (for 2010 and

2011) per month may be excluded.

h. Qualified Pension, Profit-sharing, and Stock Bonus Plans

(1) Payments Made by Employer (non-taxable)

Generally, payments made by an employer to a qualified pension, profit-

sharing, or stock bonus plan are not income to the employee at the time of

contribution.


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1. Taxable Interest Income

a. Federal bonds.

b. Industrial development bonds.

c. Corporate bonds.

d. Premiums received for opening a savings account (e.g., prizes and awards) are

included at FMV.

e. Part of the proceeds from an installment sale is taxable as interest.

f. Interest paid by federal or state government for late payment of tax refund is

taxable.

g. For certain taxpayers and certain bonds, the amortization of a bond premium is

an offset (reduction) to the interest received and a reduction to the bond's basis,

and the amortization of a bond discount is an addition to the interest received

and an addition to the bond's basis.

2. Tax Exempt Interest Income (reportable but not taxable)

a. State and Local Government Bonds/ObligationsInterest on state and local bonds/obligations is tax exempt. Further, mutual fund

dividends for funds invested in tax-free bonds are also tax exempt.

b. Bonds of a U.S. Possession

Interest on the obligation of a possession of the United States is tax exempt.

c. Series EE (U.S. savings bond)

(1) Interest on Series EE Savings Bonds is tax exempt when:

(a) It is used to pay for higher education, reduced by tax-free

scholarships, of the taxpayer, spouse, or dependents;

(b) There is taxpayer or joint ownership (spouse);

(c) Taxpayer is over age 24 when issued; and(d) The bonds are acquired after 1989.

(2) Phase-out starts when modified AGI exceeds an indexed amount. (For

2010, phase-out begins at $70,100 for single and head of household and

at $105,100 for married filing joint. There is no exclusion for those using

the married filing separately status.) 2011 phase-outs for Series EE bond

interest income exclusion begin at $71,100 for single and head of

household and at $106,650 for MFJ filers. MFS filers cannot claim any

exclusion.

d. Veterans Administration Insurance

Interest on Veterans Administration Insurance is tax exempt.

3. Unearned Income of a Child Under 18 ("kiddie tax")

The net unearned income of a dependent child under 18 years of age (or, a child over

age 18 to under age 24 who does not provide over half of his/her own support and is a

full-time student) is taxed at the parent's higher tax rate. Net unearned income is

calculated by taking the child's total unearned income (from dividends, interest, rents,

royalties, etc.) and subtracting $1,900: the child's allowable 2010 standard deduction of

$950 (or investment expense, if greater) plus an additional $950 (which is taxed at the

child's rate). Although the income in excess of $1,900 is taxed at the parent's marginal

tax rate, it is nonetheless reported on the child's tax return. The $950 and $1,900

amounts also apply for year 2011.


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BeckerProfessionalEducation|CPAExamReview Regulation1

2010DeVry/BeckerEducationalDevelopmentCorp. Allrightsreserved. R147

P. Nontaxable Miscellaneous Items

1. Life Insurance Proceeds (non-taxable)

The proceeds of a life insurance policy paid because of the death of the insured are

excluded from the gross income of the beneficiary.

a. The interest income element on deferred payout arrangements is fully taxable.

b. If the proceeds are used to pay for long-term care, accelerated death benefits

received by an insured who is terminally ill (provided there is certification that the

insured is expected to die within 24 months), is chronically ill, or requires

assisted living) are not taxable.

2. Gifts and Inheritances (non-taxable)

Gross income does not include property received from a gift or inheritance; however,

any income received from such property (e.g., interest income, rental income, etc.)

after the property is the in the hands of the recipient is taxable.

3. Medicare Benefits (non-taxable)

Exclude from gross income basic Medicare benefits received under the Social Security

Act.

4. Workers' Compensation (non-taxable)

Exclude from gross income compensation received under a workers' compensation act

for personal injury or sickness.

5. Personal (Physical) Injury or Illness Award (non-taxable)

Exclude from gross income damages received as compensation for personal (physical)

injury or illness.

6. Accident Insurance Premiums Paid by Taxpayer(non-taxable)

Exclude from gross income all payments received (even with multiple recoveries) if theindividual paid all premiums for the insurance.

7. Foreign-earned Income Exclusion

Taxpayers working abroad may exclude from gross income up to $91,500 (2010) and

$92,900 (2011) of their foreign-earned income. In order to qualify for the exclusion, the

taxpayer must satisfy one of the following two tests:

a. Bona Fide Residence Test

The taxpayer must have been a bona fide resident of a foreign country for an

entire taxable year.

b. Physical Presence Test

The physical presence test requires that the taxpayer must have been present in

the foreign country for 330 full days out of any 12-consecutive-month period

(which may begin on any day).

Note:Theexclusioncannotexceedthetaxpayer'sforeignearnedincomereducedbythetaxpayer'sforeign

housingexclusion(maximum$27,450in2010,or30%ofthe$91,500($92,900in2011)maximumforeign

incomeexclusion). Further,theamountofexcludedincomeandhousingisusedtodeterminetheincometax

rate(andalternativeminimumtaxrate)forthetaxpayerfortheyear(i.e.,althoughitisnottaxed,the

excludedincomecouldcauseotherincometobetaxedathigherrates,asiftheexcludedincomewere

taxable).

LifeInsuranceProceeds


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2010 D V /B k Ed ti l D l t C All i ht d R1 67

(1) Loss Rules

Loss is recognized only to the extent that the future sale price is lower than

the acquiring relative's purchase price (FMV).

(2) No Gain or Loss Rules

No gain or loss is recognized when the future sale price is between the two

related parties' purchase prices.

f. Holding Period

The holding period starts with the new owner's period of ownership.

P A S S K E Y

The purchasing relative's basis rules are the same as the gift tax rules:

Sell higher Use "Relative's Basis" to determine gain.

Sell between No gain or loss

Sell lower Use "Purchase Price" to determine loss.

3. Personal Loss

No deduction is allowed for the loss on a non-business disposal or loss. An itemized

deduction may be available in the category of casualty and theft.

E. Individual Capital Gain and Loss Rules

1. Net Capital Gains Rules

a. Long-term

(1) Holding period More than one year.

(2) Tax rate 15% is the maximum, use 0% if taxpayer is in the 10% or 15%

income tax bracket.

Note: The above rules are in effect for years through 2012. As of the date of this

publication, for tax years 2013 and forward:

The maximum long-term capital gains rate that will be in effect is 20% (not 15%).

The long-term capital gains tax rate for taxpayers in the 15% or 10% brackets will be

10%, not 0%.

There will be a special "five-year" gain rule in effectfor property held more than

five years, the maximum capital gains rates will be 18% (instead of 20%) and 8%(instead of 10%).

b. Short-term

(1) Holding period One year or less.

(2) Tax rate Treated as ordinary income.

HoldingPeriod

WRAP

Lower Purchase

Price by Relative

Relative's Basis

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2011 Regulation 1 Text Update

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Transcript of 2011 Regulation 1 Text Update