Individual Taxation

Qualifying Child Tests

1. Age (<19, <24 if student, no limit if disabled)
2. Adobe (live with >1/2 year)
3. Support (child provides < ½ of own support)
4. Residency (US, Canada, Mexico)
5. Joint Return (can’t file a joint return if owing taxes on it)

Qualifying Relative Tests

1. Relationship (parents, grandparents, stepsiblings, stepparents,
nephew, immediate in-laws, bum if living w/you for ENTIRE YEAR,
NO COUSINS/FOSTER PARENTS)
2. Support (person claiming the dependent provide over ½ for the
relative)
3. Gross Income (<$3,500- the standard exemption. No GI test if
under age limit)
4. Joint Return
5. Residency

Qualifying Widow(er)
• Provide >50% cost of maintaining house
• Dependent child lives with for entire year
• May file as widower for 2 years after death of spouse
• Allows for only 1 personal exemption (can’t claim dead
person)

Elderly/Disabled Credit = Must be very poor to claim (AGI of 15K+

disqualifies in most cases)

AMT Credit = can offset regular tax liability in future years (but
not offset AMT)

Farm Line of Credit (Sole proprietor) = Form 1040, NOT Schedule F

Employer provided Death Benefit = Included in Gross Income

Series EE Bonds- If used for tuition of dependent, then tax-exempt!

If not, then the interest is taxable
IRA Early Withdraw Penalties
• Pay regular income tax + 10% penalty
• Must be over 59 ½ years old to avoid penalty
• REQUIRED TO W/D @ age 70 ½
• Exceptions: HIMDEAD
○ Homebuyer (1st time); $10,000 max
○ Insurance (medical) if unemployed or self-employed
○ Medical expenses >7.5% of AGI
○ Disabled permanently
○ Educational Expenses (College)
○ and
○ Death
Individual Taxation

IRA Rules
– $5K per spouse allowed, can deduct for AGI
– If AGI exceeds a threshold (~100K) and covered by employee
pension plan, then no deduction is allowed
– $6K limit if 50 or older
– Limited to compensation received (includes alimony!)

Section 179- Not allowed if NOL occurs

• May carry forward forever and use in future years, once
operating @ a profit
• Report on form 4562- Depreciation & Amortization, & fully
deductible on Schedule C
Foreign Taxes = deduction OR credit, at option of taxpayer

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

Schedule E = Rental real estate, royalties, partnerships, S Corps,

Estates, Trusts
Individual Taxation
• “Supplemental Income or Loss”

Retainer Fees for Attorney = Include in Schedule C

Selling stocks – recognize gain/loss on trade date (whether cash or

accrual basis)

Dividends from mutual funds investing in tax-free govt obligations =

not taxable

Interest Income on State/Local Govt Bonds = not taxable

Interest on Federal Tax Refund = taxable, report on Schedule B
(interest & divs)

Uniform Capitalization Rules = capitalize costs associated w/preparing

INV
• Effect: 1st year- increase inventory value, reduce operating exp’s
= higher NI
• Exception for ‘goods acquired for resale’: Only need to
apply if taxpayer’s average annual gross receipts for previous 3
years exceeds $10m
• INCLUDE: Direct materials/labor, indirect costs, utilities, repairs,
maintenance, engineering, design, spoilage, indirect labor,
warehousing, insurance, repacking, pensions, admin supplies
• DON’T INCLUDE: Advertising, marketing, selling exp’s, officer
compensation, administrative, research

Taxpayer withholds, but owes no tax & doesn’t file = must file for
refund w/in 2 years from date TAX WAS PAID

Merchandise Inventory = Accrual method required!

Net Passive Activity Losses (PAL’s)

• Can only be used to offset passive income
• Applies to Individuals, estates, trusts, PSC’s, closely held C
Corps
• Can carryforward indefinitely until used up
• If taxpayer becomes active (materially participates) -> may
be used to offset active income
• Unused PAL’s = fully tax deductible in the year of equipment
disposal
• EXCEPTIONS: (for real estate, allowed to offset active income)
○ Mom & Pop: Deduct up to $25K in rental income if actively
participate
 Phase-out: $25K reduced by 50% of amt exceeding
AGI of $100K. Completely phased out at AGI of $150K
○ Real Estate Professional (may fully deduct against regular
income)
Individual Taxation
Social Security Income
1. Poor: No S.S. benefits are taxable (income below: $25K single,
$32K MFJ)
2. Lower-Middle: Less than 50% of benefits are taxable
3. Middle: 50% benefits are taxed (income up to: $25K single)
4. Upper-Middle: 50-65% are taxable
5. Upper: 85% (maximum) of benefits are taxable (MAGI > $34K-
S; $44K MFJ)

Accrual Basis Income Formula

Beg A/R
+ Sales
– Cash collections
– Ending A/R

AMT
• Medical expenses: >10% AGI
• No exemptions allowed? May be different