Regulation 1 GROSS INCOME INCLUDED 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Wages Interest Dividends FMV State Tax Refunds (1040 ez) Alimony Received Business Income apital Gains/ Loss IRA Income Pension & Annuity Rental Income/Loss K-1 Income/Loss Unemployment Compensation Social Security Benefits Prize, Punitive, Gambling Winnings

GROSS INCOME NOT INCLUDED 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Employer Paid Medical / EE / 401k / Trust FSAS Contribution < 5000 Interest on State , Local, and US Bonds Interest on Series EE Return of Capital ( No E&P) Stock Split or Dividend (Unless Cash ) Life Insurance Dividends Child Support Divorce Property Settlement IRA: H.I.M.D.E.A.D. Net PAL Loss

SELF-EMPLOYED SCHEDULE C INCOME 1. 2. 3. 4. 5. 6. 7. 8. 9. y COGS State and local taxes Meals & entertainment expenses @ 50% Interest Expense on Business Loans Bad Debt Written Off Owners Personal Salary Federal Income Taxes Personal Portions of Meals and Ent. Health Insurance

IRA Income. 10% penalty for early and not over the age of 56. Non-Deductible IRA only the gains are taxed not the principle (prorated as well). Traditional IRA - taxed when. Roth IRA is taxed when income is withdrawn. Income for IRAs is not taxed when HIMDEAD. o Homeowners Exclusion o Insurance

y y y y

y y y y

o Medical o Disability o Education o And o Death Annuities are partially taxable and partially non-taxable unless annuitant outlives life expectancy then full amount is taxed. Schedule E includes items like PAL rental income, royalties, partnership interest. Rental Income is always passive; Prepaid rent and non-refundable deposits are considered rental income as well. PALs general rule is that it is not deducted against ordinary income. You cannot carry back a loss but you can take it forward 20 years. If you are a mom and pop exception you can exclude up to 25,000 of your PALs. Unemployment Compensation is taxable; Workers Comp is not taxable Gambling winnings no net losses allowed. You have to report the entire gain. Scholarships and Fellowships you receive are not taxable if they are used for books, fees, and tuition. Gifts and inheritances are not taxable to the beneficiary.

CAPITAL GAINS AND LOSSES y Real Property is actual property like real land and real buildings. Personal Property is your own personal property like an automobile, investments, machinery and equipment, any investment not held in inventory for sale to customers. CAPITAL ASSETS (real + pers.) NON-CAPITAL ASSETS o o o o o o o o o o o o o o o o o o o o o o o Non-Capital Assets include: inventory, 1231 Property is tangible property used in business, accounts receivable, original works, treasury stock. Adjusted Basis GR is its the cost or purchase price at FMV. For Gift the GR is rollover previous owners basis. You use the lower FMV at date of gift if selling for a loss. Inherited property basis is the STEP UP or STEP DOWN to fmv at date of death unless alt. valuation date is elected - + 6 Months or the date it was disposed of. Holding Period L-term or S-term. Gains Excluded HIDEIT o Home buyer must own ownership and one of you use 2 of 5 yrs. o Installment Sale o Divorce Property Settlements o Exchange of Like Kind Property o Involuntary Conversion Boot is taxed when using insurance. Must re-inv 2 or 3

y y

y y

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Nondeductible Losses WRaP it up and throw it out because you cant use them o Wash Sale stock bought 30 days before or after you sold same stock o Related Parties Same as gift rules. o Personal Property

REGULATION 2 ADJUSTMENTS, STANDARD DEDUCTIONS, AND ITEMIZED DEDUCTIONS ADJUSTMENTS Anyone anytime automatically always allowed any amount that qualifies as an adj. Adjustments to Gross Income; adjustments to arrive at AGI or deductions for AGI or above the line deductions. a) Adjustments on 1040. They include: i) Educators Expenses; 250/500 k-12 ii) IRA; 5000/10000/2000/1000 deductible (rich & retirement plan) Roth(none) non(prin no taxed) iii) Student Loan Interest; 2500 limit qual. Exp. iv) Tuition & Fees 4000 any excess is itemized v) Health Savings Acct 3050/6150(fam) + 1000 if 55 vi) Moving Expenses; if 50+ and 75% = travel, lodging, transporting house and personal effects vii) Self-employment FICA (your social security) not on sch. C viii) Self-employment health insurance; not C ix) S/E retirement plans (Keogh); not C = <of 49000 or 20% * (net business income S/E tax) x) Early interest withdrawal penalty entire amount ok. Do not net against Schedule B xi) Alimony; deductible for payor / income for payee; required+cash(equiv.)+not beyond death; 1st child xii) Other less frequent b) Educator Expenses if you are an eligible educator meaning K 12 teachers, instructor, counselor, principle or someone who aids the school more than 900 hrs. during the school year. Then you can deduct $250 / 500 for each qualifying educator. c) IRAs. We are talking about putting $ into the plan not out like previously. Only the Deductible IRA gets an adjustment. All of them say the contribution amounts are lesser of $5000 / $10000 or your compensation. Your deduction has to be combined with all other IRAs except Coverdells. Earnings always accumulate tax-free :

i)

Deductible IRAs This is the only type where you get an adjustment aka. Deduction, but withdrawals are fully taxable because you got that deduction. If you are rich ($55-66 for single) and have a retirement plan then you are not allowed. If you dont qualify you can put it in your wifes that is unless neither of you are super rich ($177 MFJ). You can super-size your IRA contribution (adjustment) for another $1000 if you are over 50 by Dec. 31st Roth IRAs No tax impact for now or later. No deductions no nothing. There is a robin hood rule.

ii)

iii)

Non Deductible IRAs This is your last resort and there is no phase out. You have the same contribution limit; lesser of 5 or comp. You dont get that adjustment to start so when you do decide to withdraw the earnings are taxable. The principle is non-taxable. You would choose this type if you were not eligible for the other forms.

iv) Coverdale Education Savings Account (educational IRA). This one is for grandma and grandpa. You cant take a deduction for putting money in and the max. contribution per beneficiary is $2000 annually. Again this is not combined with other IRA limits. The best part is you when you withdraw (distribution) for a qualified educational expense (even for elementary up) then both the principle and interest are tax-free. By the time you reach 30 you have to of used it all. The beneficiary must be under 18.

Tax Adjustment Max. Contr. 2010 Accumulate deferred (tax free) Withdraw Principal Withdraw Earnings

Traditional Deductible Yes 5000 Yes Taxable Taxable

Catch-Up Yes 1000 Yes Taxable Taxable

Roth No 5000 Yes Non-Taxable Non-Taxable

Non-deductible No 5000 Yes Non-Taxable Taxable

Coverdell Education No 2000 Yes Non-Taxable Non-Taxable

d) Student Loan Interest Limited to $2,500 and must be solely for qual. Educational exp. The excess is personal interest and not deductible. R.Hood > 80,000 e) Tuition & Fee Deduction You can take a $4,000 adjustment. Anything above this is an educational expense itemized deduction. R.Hood.

f)

Health Savings Account You can make pre-tax contributions of up to $3,050 / $6,150 (fam.) increased by $1000 if you reach age 55 during year.

g) Moving Expenses Work related. Has to be 50 miles further AND you have to work there for 75% of the year. If so you can only deduct direct moving costs: travel, lodging, and transporting house items and personal effects to new location. Not Deductible meals, pre-move house hunting, exp for breaking lease, temp living expenses.

h) Self Employment FICA Tax You pay both halves of this social security tax so you are able to take 50% of ss/medicare (fica) tax. i) Self-Employed Health Insurance Expense This is fully deductible and NOT deductible on Sch. C

j)

Self-Employment Retirement / Keogh (Profit Sharing) Plans You can deduct the lesser of $49,000 or 20% x Net Business Income Self Employment Tax

k) Early Interest Withdrawal Penalty (Interest Income) The entire penalty amount is deductible. e.g the penalty for withdrawal of CD before maturity. You do not net this against interest income on Sch. B.

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Alimony/Spousal Support When you make an alimony payment to a former spouse it is Deductible for you and income for the payee (your ex). Legally required, cash or equiv. Not beyond death. Remember Child Support is non-taxable to the payee and non-deductible to payor. If you have a deadbeat dad the payment applies first to child support. Property Settlements are non-taxable and non-deductible as well.

STANDARD DEDUCTION You can take the standard instead of itemized. There is an additional deduction must be age 65 or older or blind. They try and trick you asking if this entitles you to an additional exemption. It does not. There is no additional dependency exemption. If married fiing separately if the taxpayer and spouse both do not itemize.

ITEMIZED DEDUCTIONS We are subtracting items after AGI. Schedule A = Personal Itemized deductions, Schedule C = business, and Schedule E = rental. These are below the line or deductions from AGI. The exam likes to test your ability to identify itemized from a group of adjustments and vice versa. 1. 2. 3. 4. 5. 6. Medical: allowed expenses. insurance -7.5% Taxes : (state/local) real estate, income, personal prop., income or general sales; FIB Interest: Home (mil/100) net tax. Inv income Pers. Consumer Pre allocated Ed = adj Charity: $ 50%; general prop <of basis/FMV; LT prop. <of 30%/remaining to reach 50 after cash Casualty: (<of lost cost/basis or decline in FMV) <insurance reimburs> <100> <10%> = Loss Misc. 2%: Overnight Trav. + Meals + Lodging + Trans (home -> office/2nd job) + M&E @ 50%

1.

Medical Expenses Who qualifies? You have me, your spouse, or a dependent that gets over half of support from me. That dependent has to meet the SUPPORT test except under $ of taxable income and Precludes joint return. Most individuals are cash basis so the item needs to have been incurred as an expense and paid or charged during this year. i. Qualified Medical Expenses ii. <Insurance Reimbursement> iii. Qualified Medical Expense Paid iv. <7 % AGI> v. Deductible Medical Expenses DEDUCTIBLE EXPENSES Medicine and drugs Doctors Medical and accident insurance Required surgery Transportation to medical facility Physically handicapped costs NON-DEDUCTIBLE EXPENSES Elective surgery, cosmetic , ss tax for medicare Life insurance Health club memberships Personal Hygiene Capital expenditures (up to increase in FMV)

2.

State, Local, and Foreign Taxes: not federal taxes Cash basis deducts in the year paid NOT the year it applies to.
a. Real Estate Taxes i. Legally obligated ii. You must Prorate taxes for this deduction iii. Taxes paid in protest are deductible buy recov. Is included in Income iv. Do not include street, sewer, and sidewalk assessment taxes: not special assessment Income taxes i. Estimated taxes paid ii. Withheld taxes from paychecks iii. Assessments paid for prior years tax Personal Property Taxes Sales Tax you have to elect to deduct state and local income taxes OR general sales taxes. If you chose sales tax its the total you paid or an IRS table + tax for a big purchase

b.

c. d.

e.

Non-Deductible Taxes F I B i. F federal taxes (including SS) ii. I heritance taxes for states aka. federal estate pick-up tax iii. B usiness ( on Sch. C) and rental property Taxes (Sch. E)

3.

Interest Expense - H I P P E
a. Home Mortgage Interest i. Home Acquisition - deductible up to 1,000,000 for first and second home ii. Home Equity used for anything not used to buy/build/improve can deduct lesser of $100,000 or (Propertys FMV outstanding acquisition debt (i)) = equity in home. Investment Interest Expense you can deduct the interest you pay a bank loan to make some investments. You can take up to net taxable investment income. Think of gambling loss rules. You cant have negative $ as deduction. Remember interest on state bonds would not be taxable investment income here. Personal (Consumer) Interest is Not Deductible these are the kind of things like personal loans for items, life insurance, or credit cards.

b.

c.

d. e.

Prepaid Interest (allocate to proper period) Deduct these when incurred and paid. Educational Loan Interest (adjustment/not itemized deduction) subject to $2500. Excess is personal interest and non-deductible

4.

Charitable Contributions must be to an organization not needy families you or political. No services. Cash/Check = when paid and Credit Card = when charged. Only in the year the contribution was made. There is a carry over for 5 years. Similar to rules for medical deductions. a. Overall limit = 50 % AGI i. Cash = 50 % ii. General Property = < of basis or FMV (at date of gift)

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iii. Long-T appreciated prop. Uses fmv. threshold = < of 1. 30% AGI or 2. The remaining amount to reach 50% after cash contributions < less the amount for any consideration gained >

Casualty and Theft Losses - (10% AGI test) it must be sudden and unexpected. a. Smaller Loss = < of (Lost Cost/Adjusted Basis or Decreased FMV) b. < Insurance Recovery> c. Taxpayers Loss d. <$100> ___________ e. Eligible Loss f. < 10% AGI >________ g. Deductible Loss Misc. Itemized Deductions (2% AGI Test) Self-employment expenses deduct on Schedule C
a. Unreimbursed employee business expenses i. Travel, Meals and Lodging overnight ii. Transportation Expenses (100% deductible) the only travel that is not-deductible is home office/second job iii. Meals and Entertainment (50% deductible) Educational Expenses (those not deducted above AGI) remember this is not educational interest expense which is an adjustment. This is when you maintain or improve the skills for trade or business. Must be job related and meet the requirements for retention of the job. Disqualified if meet the minimum job requirements or qualified for new trade Uniforms Business Gifts - $25 per recipient per year Expenses of investors Subscriptions to professional journals Tax prep fees Activites not engaged in for profit(hobbies) No deduction Other Misc. Deductions (no 2% AGI Test) - gambling losses deductible to the extent of winnings

6.

b.

c. d. e. f. g. h. i.

TAX CREDITS Recognize which credits apply to individuals or business and which ones are refundable. Qualified dividends and long-term capital gains are taxed at regular income rates. On the back half of the `1040 Refundable Tax Credits: 1. 2. 3. 4. 5. 6. 7. 8. 1. 2. Child Tax Credit Earned income; Adoption Credit W-2 withholding; Excess SS withheld by > 2 employers; Long-term unused minimum tax credits; Partial Hope Scholarship credit; Making Work Pay credit;

Child and dependent Care Credit; 20%-35% for proper expenditures; maximum of 1-3000, 2 of more 6000. Both parents are working and paying someone to babysit, nursery school, day care. Not Grammar School Elderly and/or permanently disabled; 15% credit w/ 5000 base and must be > 65 or disabled.

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5000 base < all social security > < 1/2 of (AGI-7500) > Balance X 15%________ Credit

Educational Tax Credits / American Opportunity Credit (hope). For first for years of school and multiple kids are ok. For 2010 the max credit is $2500. Lifetime Learning Credit; $2000 maximum for education expenses except books. Only one per year allowed for unlimited # of yrs. Can use both together but not for same expenses no double dipping with Coverdell education savings account. AOC & Lifetime in the same year is OK Qualified Tuition Programs; Exempt from federal taxes

5.

ITEM INCOME EXCLUSION US savings bond EE Employer paid educational expenses Scholarships & fellowships ADJUSTMENTS Educator expense Coverdell education savings account Student loan interest deduction Tuition and feeds deduction ITEMIZED DED. Educational expenses CREDITS Hope Scholarship credit Lifetime Learning Credit MISCELLANEOUS 529 (Qualified Tuition Program)

GENERAL RULE Exclude interest income Exclude from income Exclude from income

LIMIT Must pay educational expenses Up to $5,250 Only tuition ,fees, and books

Deduct above the line Non-deductible Deduct above the line Deduct above the line Maintain and improve First four years After first four years No deduction no Income

250/500 2000 2500 4000 Subject to 2% AGI test 2500 per person 2000 maximum Gift Tax Rules

6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Adoption Credit; max per child of $13,170. Not child of spouse or surrogate. No medical exp. Retirement Savings Contribution Credit; not only and adjustment but you get a credit. Foreign Tax Credit; <of foreign taxes or 300 (ink from forg.) / 1000 (Total Income) x 100 US tax General Business Credit(GBC) Work Opportunity Credit; undesirables to hire; 40% of first 6000 in wages Child Tax Credit; 1000 credit for each CARES under age of 17 Earned Income Credit, refundable credit. the pathetic credit Withhold tax (paycheck credit) Excess FICA (SS tax withheld); excess created by two or more jobs taking full FICA from you Small business healthcare credit; 35% of employers cost

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Small employer pension plan startup costs; 500 per year Health coverage tax credit; up to 80% of buying your own health insurance Residential energy credit; 30% of qualified expenses Long-Term Unused Min. Tax Credits;

ALTERNATIVE MINIMUM TAX (AMT) AND OTHER ITEMS

Regular Taxable Income +/- Adjustments + Preferences AMTI (Alternative Minimum Taxable Income) < Exemption > AMT Base x Tax Computation Tentative AMT Tax < Credits > Tentative Minimum Tax < Regular Income Tax > AMT

1. 2.

The does and does not go into the exemption formula; The AMT exemption amounts: EXEMPTION AMOUNT $33,750 $45000 $22500 EXCESS (x 25%) $112500 $150000 $75000

FILING STATUS SINGLE MFJ MFS

So for a joint exemption: AMTI < 150000 > Excess X 25% Reduction

$45000 (exemption amount) Reduction = AMT Exemption

3.

Distinguish adjustments from preferences; adj = PANICTIME, preferences = PPP, a. Passive Activity Losses b. Accelerated depreciation (post 1986 purchases) c. Net Operating loss of individual d. Installment income of a dealer

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Contracts - % of completion vs. completed contract Tax deductions Interest deductions on some home equity loans Medical deductions (10% AGI) Miscellaneous deductions not allowed Exemptions (personal and standard Not home mortgage or charity

l. Private activity bond interest income m. Percentage depletion the excess over adjb of property n. Pre-1987 accelerated depreciation 4. 5. The AMT credit carrygorward period (compared to reg. tax) ; forward indefinitely Credits available to reduce AMT (not regular tax) FACCE a. Foreign b. Adoption c. Child d. Contributions to retirement e. Earned income