Federal Income Tax Outline

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Tax and the Financial Planner a. Tax is a part of the subset of financial planning b. Tax Savings are not the whole story i. Is a consideration among many considerations ii. Reflect financial goals not just the tax savings c. Tax avoidance: i. avoid paying more taxes ii. encouraged iii. find legal methods to lower the person s tax ability d. Tax evasion: i. reduction of taxes through illegal means ii. criminal penalties e. Tax free: i. investing where money invested and interest earned will never be taxed ii. choose an investment and whatever earned on it will never be taxed 1. Ex: Municipal Bond 2. Ex: Roth IRA/Roth 401(k)/tax free earnings f. Tax deferred: i. Paying later is better than paying now ii. Taking money would have paid in taxes & saving it iii. Invest money you would lose in taxation and earn interest iv. Enabling self to pay later and use money now to accumulate earnings/savings v. Invest money that would have been lost in tax 1. Ex: 401(k) a. Salary reduction where remaining money is placed into annuities/401(k)/IRA 2. Rule of 72 a. Divide by interest rate = how long it will take money to double g. Tax Attitude i. Think about tax ramifications year round ii. Think about long-term multi-year approach to planning iii. Maximize deductions and minimize income iv. A dollar today is more than a dollar in the future 1. Ex: Putting off tax History of Federal Income Tax a. Founders believed that there should never be a tax on income i. Too personal for government to know one s business b. But during Civil War, the North had a problem funding military

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i. Began to tax income ii. Repealed after Civil War (Pollock v. Farmers Loan and Trust Co.) th c. 16 Amendment (1913) i. Government can tax income ii. Large majority of people were not taxed until 1941 (WWII) iii. Since WWII, federal income tax is paid by 90% of population 1. Not just elite paying taxes anymore iv. System where people tell the government what they owe 1. Withholdings a. W-4 Form b. Withhold taxes from income (federal/state/local) c. Employer withholds taxes d. W-2 sent to employees stating what was withheld e. Self-employed i. File quarterly with the IRS 1. 1099 Form a. Clients send that they gave person income that year i. If over $600.00 2. Put what person thinks they owe based on the laws as perceived a. Government does not tell you what you owe Tax Policy Overview a. Tax law is a compilation of many different things b. To be fair, need complexity c. Social engineering fuels the tax policy i. Ex: Excise/sin taxes = taxes which curtail certain social behavior d. Give accelerated deductions to further certain policy i. Ex: 1. research and development costs to find a cure for cancer 2. interest deduction for personal mortgage 3. tax breaks for purchasing a home e. Economic Considerations i. Stop inflation/stop recession/control economy ii. Code is used to control economy f. Social Considerations i. Promoting social goals through tax code g. Political Considerations i. Tax code is driven by political considerations h. Revenue Considerations i. Administrative Feasibility Considerations i. Limits on certain deductions 1. Ex: medical bills ii. Standard deduction set j. Influence of the courts

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V.

i. Courts participate in setting tax policy ii. Look at substance over form Tax Structure a. Tax Base i. Income that is taxed b. Progressive Tax Rate i. Federal is done this way 1. The more money you earn, the more you pay ii. Higher rate of tax, the more your tax base iii. As income increases, the tax rate increases c. Proportional Tax Rate i. Rate remains constant whatever the tax rate is ii. As income increases, the tax rate remains the same d. Regressive Tax Rate i. As income increases, the tax rate decreases e. FICA (Federal Income Contribution Act) i. Paid at a rate of 6.25% up to a taxable wage base 1. Old Age Retirement/Survivor Benefits/Disability Benefits (OASD) ii. 1.45% rate on all income 1. Health Insurance/Medicare (HI) iii. Social Security system 1. No deductions/exemptions a. Everyone pays it flat tax f. Taxable Wage Base i. For 2008 = $102,000 ii. Pay taxes up to this amount g. Marginal Tax Rate i. Tax on the last dollar earned h. Effective Tax Rate i. What the person owes on every dollar made ii. Lower than the marginal tax rate iii. Formula = Tax/Gross Income i. Average Tax Rate i. Formula = Tax/Taxable Income Tax Formula a. Income i. Broadly conceived ii. Every item of value b. Less Exclusions i. Child Support payments ii. Fringe Benefits iii. Gifts iv. Inheritance v. Life insurance policy upon another s death

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e. f.

g.

h. i.

j.

k. l.

vi. Scholarships Gross Income i. Formula = Income Exclusions Less Deductions for Adjusted Gross Income (AGI) i. Above the Line deductions 1. Used whether or not itemized a. Contributions to IRA b. Moving expenses c. Qualified Interest on education loans Adjusted Gross Income i. Formula = Gross Income Above the Line Deductions Less the Greater of: i. The standard deduction or total itemized deductions ii. Standard Deduction: 1. $10,900 for MFJ 2. $5,450 for S iii. Total Itemized Deductions 1. 1040 Tax Form 2. Schedule A Deductions 3. Below the Line Deductions iv. Subject to the Marginal Tax Rate 1. Interest on home mortgages 2. Real estate taxes 3. Charitable contributions Less Personal and Dependency Exemptions: i. Personal Exemption for Self ii. Exemption for Spouse iii. Dependent Persons Taxable Income Figure the tax i. No state/FICA/local taxes ii. This is federal income tax Less Tax Credits and Prepaid/Withheld Taxes i. Tax credits 1. Dollar for dollar reduction in taxes a. Hope Credit/Lifetime Learning Credit/Corporations/Earned Income Credit Tax Owed or Refund Due Standard Deduction: i. Regular Standard Deduction Amount for 2008 1. $10,900 MFJ 2. $5,450 S a. Poverty level i. If under the above amount, do not need to file

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ii. Additional Standard Deduction 1. IF: a. Over 65 (65 or older at the end of the year) AND/OR b. Blind 2. Additional Deduction: a. $1,050 MFJ b. $1,350 S Eligibility i. Ineligible for Standard Deduction 1. IF a. MFS is ineligible of spouse if filing itemized i. Cannot get both benefits b. Non-resident Aliens c. People not filing yearly i. File in short accounting periods Personal and Dependency Deductions i. Exemption Amount for 2008 1. $3,500 a. Self b. Spouse c. Dependent Dependents i. Qualifying child or qualifying relative ii. Social security is excluded from income iii. Formula: 1. Are they a relative? a. Child/sibling/grandchild/niece/nephew 2. Age? a. Under 19 at the end of the year? b. Under age 24 and a student? c. Any age if person is disabled? 3. Support requirement? a. Dependent cannot provide more than their own support 4. Resided with Taxpayer? a. Absences for school count as time lived with 5. Citizen Test? 6. Unmarried Test? a. Can be married but not MFJ 7. Claimed as a Dependent on Another s Return? Exclusions are not included in taxable income at all Deductions are taken at the taxpayer s marginal rate i. Ex: 1. $5,000 person s marginal tax rate of 30% = can deduct $1500 Phase-Out Exemptions

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i. Congress wants to take away from the wealthiest % of Americans 1. In order to get more money, tax fairly wealthy people and assess tax exemptions ii. Exemptions get phased out if taxpayer s AGI is over threshold limit s. Who Must File A Tax Return i. Formula to Determine: 1. Basic Standard Deduction a. $5,450 2. Add Additional Standard Deduction a. $1,350 (if over 65) 3. Add Personal Exemption a. $3,500 4. If earn $8,950 or less = do not have to file a tax return 5. If you have taxes withheld from federal or state a. File a return in order to get a refund ii. Basic SD + Additional SD (if over 65) + Personal Exemption Gross Income Defined Code Section 61 a. General Rule: i. All income from whatever source(s) derived 1. Goods/services/accommodations/meals = income ii. Regulation 1.61 1. Services/property b. Test for Determining Income: i. Is there an accession to wealth? 1. Gain, economic benefit ii. Corresponding Liability for the Return? 1. Loan/security deposit 2. Gain but immediate liability iii. Adjusted Purchase Price? 1. Pre/Post Adjustment iv. Is it realized? v. Imputed Income? vi. Is there a Fair Market Value? 1. Someone who is willing to pay for it c. Cesarini v. US i. Bought a piano ii. Filed a tax return 1. Included piano as income 2. Then filed an amended return iii. Court: 1. Piano is income and not eligible for a refund iv. Argument: 1. Not gross income 2. Even if it is, should have been filed when purchased (due to S/L)

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3. Capital gain v. Treasure trove is income 1. There is a financial benefit bestowed upon Old Colony v. Commissioner i. President of Company makes a million dollars ii. Company agrees to pay taxes for him iii. Paying his taxes in return for his services iv. This is compensation for services 1. Not a gift v. Paying employee s taxes is income Commissioner v. Glenshaw Glass Company i. Is income ii. Accession to Wealth Discount is not income Sales from illegal drugs i. Is income ii. Illegal nature does not matter 1. It is all income from whatever sources derived If paid a salary, is income i. Because rendering services Buy one, Get one is not income i. Coupon is not income Rebate is not income i. Renogiatied or discounted purchase price is not income 1. Sometimes, before or after purchase Adjusted Purchase Price is not income Ski Miles i. IRS says it is income but cannot be taxed because it is too difficult to keep track of ii. Selling Sky Miles is income iii. Ex: 1. Employer pays for flights and employee gets Sky Miles a. Is income to the employee Income is when you realize the income i. Not recognized income until the taxpayer realizes it Income Not Income Income not realized Adjusted Purchase Price Loans

Illegal profits Discharge of Indebtedness Below Market Loans o. Below market loans are income i. Not arm s length transaction ii. Seems like compensation (in case of employer/employee) p. Accession to Wealth

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v. w. x. y. z.

i. Not accession to wealth if performing the service yourself ii. Formula: 1. Accessed wealth a. Is service income? i. Yes iii. Barter is income 1. Moving forward on economic level iv. If a gain and benefitting economically Imputed Income i. Self-services ii. Not income Discharge of Indebtedness i. Is income because it is a less clear gain (is a gain) ii. US v. Kirby Lumber Company 1. Have income for selling bonds and buying them back iii. Zarin v. Commissioner 1. Extended credit to a casino patron 2. Discharged 3 million debt for $500,000 3. Court: a. No indebtedness i. If it were indebtedness it would be income ii. But it is disputed here 4. Contested (no validity to the debt) 5. For income, it has to be a valid debt Security Deposit i. Is not income ii. Ex: 1. Landlord/Tenant 2. Security Deposit is in bank account growing no interest a. Analogous to a loan i. Corresponding debt ii. Obligation to repay mitigates the gain or increase in value Loans i. Not income Recovery of Capital Doctrine i. Invested capital is not taxed until realized ii. Not recognized until realized In order to have income, need fair market value Income when sold i. Value is not taxed until transaction occurs where it would be taxed Salary is income Stock is a realized possession Income:

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Cash Property Services Meals Accomodations Barter 1. Exchange of Services aa. Helvering v. Independent Life Insurance Company i. Owner lives in house ii. No renter iii. Imputed income 1. Rental value of building used by the owner is not income bb. Revenue Ruling 79-24 i. Barter 1. Both taxpayers pay taxes cc. Scenarios: i. A gift received from hosting a Tupperware Party 1. Income ii. Travel Agent hosting a tour and is on tour for free 1. Income is a gain iii. Money to not open a law office? 1. Income iv. Selling blood 1. Income v. Deposit on a Beer Keg 1. Not income to the beer distributor Income Attribution a. If you earn income, then you are taxed on it i. Income earner/property owner b. Tax Benefit Rule i. If no tax benefit from last year, then do not have to include it this year ii. Is income if tax benefit in the prior year iii. Benefit applies to last year 1. If benefit last year, then include it 2. If no benefit last year, then do not include it iv. Tax if receive benefit v. Phelan Sullivan Corp. v. US 1. Donated 2 tracts of property 2. Counted as a tax benefit 3. Restrictions on property a. Property returned 4. Corp. argues it is not income 5. It is income a. Derived a tax benefit from donation then, now it is income

i. ii. iii. iv. v. vi.

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When is Income Included in Tax a. Affects tax liability for a particular year i. Push income forward and delay paying taxes b. Section 446: i. (a): For individual 1. Calendar year a. Cash Method i. Once it is received, it is income 2. Cash Method Business a. Do not follow calendar year i. Accrual Method ii. (b): 1. Clearly reflects income a. Does it reflect income? iii. (c): 1. Cash Method & Accrual Method iv. (d): 1. If 2 businesses, can use 2 different methods c. Section 451: i. Under Cash Method: 1. Gross income taxed in the year it is received d. Regulation 1.446-1(c)(1)(i): Cash Method i. Was cash actually received or constructively received? ii. Include in year of actual or constructive receipt a. Actual receipt i. Physically have it b. Constructive receipt i. 1.451-2(a) 1. Could have used it a. Credited to account b. Set apart for the person c. Made available to draw upon at anytime d. Could have drawn upon it if notice of intention given ii. There has to be no impediment to obtainment 1. Need access to it for it to be income iii. Exception: 1. Substantial limitations or restrictions a. No constructive receipt if so iii. All items which constitute gross income a. Whether in the form of cash, property or services iv. Cash Equivalent 1. Check or credit card

a. Same as cash e. Regulation 1.446-1(c)(1)(ii): Accrual Method i. Rule: 1. Income is earned when all the events have occurred which fix the right to receive income and the income can be determined with reasonable accuracy a. Receipt of income is not the key i. All events occurred is the key ii. Test: 1. Have the events occurred that fix the right to receive the income AND 2. Can the amount be determined with reasonable accuracy/certainty a. Exception: i. Claim of Right Doctrine 1. If taxpayer receives income without restriction then claim of right ii. Circumvents reasonable certainty element iii. If you have the money even in dispute, it is income in taxable year iii. Earlier of Rule 1. All events occur at the earlier of payment due, payment made or services rendered iv. If Cash Method Payee or Accrual Method Payor: 1. Section 267: a. (a): not gaining interfamilially b. (a)(2): Exceptions i. Family Attribution Rules 1. Related Parties 2. Attribute to the Relation Ownership 3. Cannot gain the system when parties are related a. Not an arm s length transaction v. Spring City Foundry Co. v. Commissioner 1. Good sold, income in that year a. General Accrual Rule vi. Georgia School Book Depository 1. Accrual Based-Taxpayer 2. Free textbook Act for public schools 3. Lottery to pay for textbooks 4. Books delivered but no proceeds yet 5. Argument: a. Not income because not received yet 6. Court:

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a. All events occurred that have fixed the right to receive income i. Rendered services ii. Payment was due 7. Is income vii. Artnell Co. v. Commissioner 1. Exception to the General Rule 2. Account for season tickets when the game is played (services rendered) 3. Pay for services in the 2nd year 4. Not income in the 1st year f. Kahler v. Commissioner i. Given a check on 12/31 ii. Check is cash equivalent iii. Court: 1. It is income a. Do not have to be able to cash it g. Hornung v. Commissioner i. Football player ii. Given a car as MVP (1961) iii. Received car in 1962 iv. No actual receipt v. No constructive receipt 1. It was set apart for him but no keys or title 2. He had a substantial limitation or restriction a. Car is in locked dealership in NY b. He just played game in Wisconsin 3. Geographically impossible for him to get it h. Knowledge Limitation i. If not aware of it, it is a limitation i. Contractual Limitation i. K is a limitation j. Claim of Right Doctrine i. If taxpayer receives income without restriction then claim of right allows for taxing that income ii. Circumvents reasonable accuracy element of all events test 1. If taxpayer has the money, even if there is a dispute, it is income to the taxpayer Gift and Inheritance Exclusion a. Section 102 i. General Rule: 1. (a):

a. Gift, bequests (in will), devise (through intestate), inheritance (through intestate) = exclusions from gross income b. Want to argue a familial relationship because then it will be excluded from gross income i. Employer-employee looks too much like disguised compensation 2. (b)(1): a. Income created from the gift/bequest/devise/inheritance is included in gross income b. Income derived from property is not excluded 3. (c): a. Gift from employer to employee is gross income i. Not excluded from gross income 1. Disguised compensation b. Dividends in gift stocks/securities is income 4. 102 does not apply to prizes and awards ii. Commissioner v. Duberstein 1. Duberstein gives Berman referrals for business 2. Berman gives Duberstein a Cadillac 3. Gift under 102(a) 4. Duberstein Rule: a. Facts and circumstances determination b. Gift proceeds from: i. Detached and disinterested generousity ii. Like impulses iii. Out of: 1. Affection 2. Respect 3. Admiration 4. Charity or 5. Like impulses c. AND Subjective standard i. What donor is thinking d. Whether it is a gift depends on donor s intent 5. Berman had impure motives a. Took it as a business deduction b. No heart involved c. Expensive item i. Suggests compensation or bribe d. Not employee-employer relationship e. Facts do not indicate disinterested generousity 6. Test for determining if a Gift: a. Look at subjective intent of donor

i. Disinterested generousity 1. Not what reasonable person would think a. Objective inquiry into subjective intent b. Factors: i. Value ii. Occasion iii. Relationship iv. Lack of alterative motive v. Personalization/thoughtfulness vi. Business relationship vii. Transcend business and friendship viii. Sentimentality ix. Circumstances X. Inheritance & Gift Tax a. Estate & Gift Tax i. Section 2035 et. seq. 1. Gifts are subject to gift tax if: a. More than $12,000 i. Exception: 1. Tuition 2. Tax is on the gift giver a. File gift tax return Fringe Benefits a. Section 132 b. General Rule: i. Exclude from income if qualify under fringe benefits c. 132 i. (b): 1. No additional cost service a. Ex: Employee works for US Air b. Wants to take wife & mother on airline i. He flies for free (value of $250.00) c. Plane is full ii. Service offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing the services AND ???????????????????? d. Test for Determining Fringe Benefit: i. Is it a service? ii. Provided by an Employer? iii. Is to an Employee? iv. Is such service for sale to customers? 1. Service the Employer provides to the public v. Employee performing services?

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1. Has to be in that line of business vi. Employer can incur no substantial additional cost 1. Including foregone revenue a. Receiving no income vii. Do not care if employee had to pay something e. 132(h) i. Regulation 1.132-1: 1. Definition of Employee a. No additional cost services and qualified discounts b. Employee has to be in the line of business i. Currently employed ii. Retired or disabled 1. Former employee iii. Widow/Widower of Former Employee 1. Deceased employee 2. Retired/disabled employee ii. A partner is an owner, not an employee 1. But considered an employee for fringe benefits purpose iii. Spouse or dependent child iv. For air transportation, parents are included f. Regulation 1.132-2: i. Gross income does not include the value of no additional cost services 1. No substantial additional costs ii. Requires: 1. Excess capacity services a. Hotel accommodations b. Transportation by aircraft/train/bus/subway/cruise line c. Telephone/cable services i. Theoretically indefinite d. Is income if bumping paying customers i. Have to make offer to sell to customers 2. Test: a. Would activity go on with or without employee? b. Is the activity ongoing? i. Would it have happened anyway? 3. Non-excess capacity services a. May be eligible for a qualified employer discount of up to 20% of the value of the service provided b. Ex: i. Facilitation by a stock brokerage firm of the purchase of stock 1. Not eligible for a fringe benefit a. On a consumer s time

i. Unlike plane that would fly with an empty seat b. Is income if bumping paying customers i. Have to make offer to sell to customers g. Regulation 1.132-4: i. Line of Business Limitation 1. Employee must perform substantial services a. If not, it is income 2. In the business a. Connected to the business 3. Issue arises when crossing over subsidiaries h. 132(c) i. Qualified Employee Discount 1. Employee Discount with respect to property or services 2. Does not exceed: a. Property = ????????????? b. Services = 20% Discount ii. 132(c)(2): 1. Go through if an employee to determine income after discount 2. Gross Profit Percentage a. Formula i. Aggregate sales price (price sold for) aggregate cost (price bought for)/aggregate sales price (price sold for) ii. Ex: ABC Jewelry sells pearls to employee 1. Pearls normally sell for $3,000 2. Sold to employee for $2,500 3. $3,000 - $2,500 = $500/$3,000 =2/3 4. 2/3 x $3,000 = $500.00 a. $2,500 excluded from income b. $500 included in income i. Regulation 1-132.3(2): i. Qualified Property or Services 1. Offered to customers for sale in the line of business ii. Exceptions: 1. No discounts apply to: a. Real property i. Land and anything permanently attached b. Stocks j. 132(d): i. Working Condition Fringe 1. Can be excluded if employee would have had to pay for it

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a. For working purposes 2. Employee means: a. Employee b. Partner c. Director d. Independent Contractor k. Code Section 162: i. If spend money to make money, can deduct money spent ii. Cost of doing business 1. Ordinary and necessary cost of doing business l. Regulation 1.132(5) i. General Rule: 1. Money spent on an employee to further business is deductible for the employer m. 132(e)(1): i. De Minimus Fringe Benefit 1. General Rule: a. Property or service b. Value of which, after taking into account the frequency with which provided to the employee, is so small as to make accounting for it unreasonable or administratively impracticable i. Ex: using the office fax machine for personal use 2. Employee Measured Frequency a. How often the employer provides similar fringes to every other employee b. Insignificant in the grand scheme but can be income to certain employee receiving the benefit i. Not de minimus to the employee 3. Employer Measured Frequency a. Occassional Use i. Mostly for business b. Gifts low in value c. 102(c) N/A unless disguised compensation n. 132: i. Allows gifts to employees upon retirement Meals and Lodging a. Section 119 i. General Rule: 1. Meals and lodging are excluded if: a. Furnished to employee, spouse or any dependent children b. Furnished by the employer on behalf of the employer c. For the convenience of the employer d. Meals are furnished on the business premise

e. Lodging: i. Accepted by the employee ii. On the business premise of the employer iii. As a condition of employment ii. 119(b): 1. Regardless of K or legislative mandate, look at the substance over form a. Show that it is a condition of employment iii. Regulation 1-119.1 1. No disguised compensation 2. Needs to be a substantial non-compensatory business reason 3. Convenience of the employer to be on-call 4. On-call: a. Need the employee to get on the job expeditiously b. Serious business reason c. Prediction that the event will occur d. Available at any time to service clients to do what it is that employee is hired to do e. An outside unpredictable force that affects the business that employee has to be ready to handle f. Something needs to be done in an urgent situation and employee is there for that purpose i. In a natural business situation g. Business is open and ready for the public to come in 5. Ex: a. ER staff/waitress/firefighter/bank teller likely on call b. College professor is likely not on call 6. Employee is restricted to a short meal period iv. 3rd Circuit says groceries are meals; 9th Circuit disagrees v. Business Premises Test: 1. For Lodging: a. Lodging as a condition of employment i. Have to reside there as a condition of employment b. Ex: i. Maintenance Person/Property Manager ii. Live In Staff 1. Maid/Nurse/Caretaker iii. Secure Facility Prizes and Awards a. Section 74 i. General Rule: 1. Prize or award is included in income 2. Must be tangible personal property 3. Value of which is not more than $400.00

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4. Transfer by employer to employee for a. Length of service b. Service c. Safety achievement 5. And awarded as part of a meaningful presentation 6. Is not disguised compensation 7. Ex: a. McDonnell i. Sales convention to HI ii. Husband had K with employer so that he and his wife went iii. His job in HI was to babysit other employees iv. Not a prize 1. He was there to work 2. Opposed to employees who did win sales prizes of the trip v. Court: 1. Part of his job a. Substantial business purpose ii. Exceptions: 1. Transfer to Charity a. Assume charity is under 501(c) b. Charity i. Prize or award was made primarily in recognition of: 1. Religious 2. Charitable 3. Scientific 4. Educational 5. Artistic 6. Literary 7. Civic Achievement 2. But only if: a. Recipient had no voluntary entering b. Recipient was not required to render substantial future services as a condition to receipt c. Transfer pursuant to a designation 3. Ex: a. Professor writes a scholarly article award to top 3 cash prize of $1,000 b. Would be included in income but may fall under exception: i. If he receives the prize and donates it to charity ii. Does he transfer it to a 501(c) organization?

iii. Award given as educational achievement iv. Selected without voluntary 1. Enter contest through submission? a. Debatable v. Submitted an article and there is a prize to win vi. But submission to publish vii. No action on his part to enter contest 1. His motivation was not to enter contest a. Primary reason was to advance scholarship in the field i. Promote scholarly research in the field b. Prize was secondary and does not matter 4. Ex: a. Submitting a photo as an amateur photographer i. Likely debatable ii. Trying to get noticed and enter contest b. Prize from Price is Right i. Cannot exclude from income 1. Required action on person s part to participate 2. Entered to win 5. To enter: a. Selected without any action on part to enter the contest or to receive prize/award b. 74(c): i. Employment Achievement Awards 1. Not included in gross income a. Section 274(j) 2. Cannot exceed $400.00 a. Not indexed for inflation purposes Scholarships a. Section 117 i. General Rule 1. Scholarships/grants are excluded ii. Have to be: 1. Educational organization a. Defined in Section 170 i. Regular faculty and curriculum AND ii. Regularly enrolled body of students iii. Where educational activities are carried on 2. Qualified scholarship used for tuition and related expenses a. Tuition

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b. Required fees c. Required books d. Required supplies e. Required equipment 3. Not excluded: a. Room and board b. Travel research c. Clerical help i. Not part of the required educational experience 4. Candidate for a degree a. Includes someone in primary/secondary/undergraduate/graduate/professional school i. Grades 1-12, College, Masters, Doctorate or Professional b. Full-time or part-time iii. Exception: 1. Student Athlete a. Requiring student to play sport in order to receive money b. Scholarship would be if the student was not required to play the sport (can choose to) iv. Section 127: 1. Employer can pay for schooling and taxpayer can exclude $5,250 Exclusion of Return of Capital a. Cannot transfer a loss by gift i. Income shifting b. Formula: i. Gain/Loss = Amount Realized Adjusted Basis c. Gift Rules: i. Donee takes the basis of the donor if sell the gift for more 1. Ex: a. Purchase stock for $20 b. Gift to son at $10 value c. Son sells the stock for $25 d. Son makes a $5 gain in income 2. If the stock goes down, the donee s basis is the donor s basis at the time of transfer ii. Rule applies to gifting a loss 1. Donee is then in the donor s basis at the time purchased 2. Loss but regains 3. Time of transfer 4. Between neither gain nor loss d. Transfer of Property by Gift i. If value has increased:

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iv. v.

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1. Donee s basis is donor s basis 2. Ex: a. Amount realized of $50 (donor) b. Fair market value is $30 (donee) i. Gift it at value of $30 ii. Increases to value of $80 iii. Donee gets donor s basis at amount realized c. If value exceeds donor s basis then donor = donee 3. Ex: a. Gift it at FMV of $30 b. Value is $10 c. Donee s basis = FMV at transfer d. No gain nor loss Look to what basis to attribute and what result will be Income is recognized when realized 1. Date of transfer 2. Sale of item What it is purchased for = the cost basis 1. No inflation Ex: 1. Land is bought by mother for $100,000 2. Given to daughter at value of $125,000 3. Daughter sells it for $150,000 4. Tax consequence for daughter is $50,000 gain Ex: 1. Bought for $100,000 2. Gift at $75,000 3. Sold for $125,000 4. Gain is $25,000 Ex: 1. Bought for $100,000 2. Gift at $75,000 3. Depreciates to $50,000 4. Sold for $50,000 5. Loss is $25,000 Ex: 1. Bought for $100,000 2. Gift at $75,000 3. Sold for $85,000 4. No loss nor gain 5. In between situation

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Decedent a. Beneficiary who receives property will get a stepped-up basis i. Receive basis as if it were transferred at the FMV at the date of death

1. Ex: a. Parents purchase home for $50,000 b. FMV at their death is $300,000 c. Child s basis is $300,000 d. No tax paid on $250,000 gain Life Insurance Exclusion a. Section 101(a): i. Exclude from the income the amount received as a beneficiary of a life insurance policy b. Types of Insurance: i. Term Insurance: 1. Lasts for a fixed term and re-ups each period a. Premium increases with age 2. Pure insurance protection 3. No investment element 4. Pay a premium to insurance company and receive a face amount on the policy (death benefit) 5. At death, face amount is paid to beneficiary 6. Cannot cash out a term policy ii. Whole-Life Insurance 1. Invest money in addition to pure insurance protection 2. Portion of the premium goes to pay death benefit and 3. Portion is set aside a. Inside buildup i. Tax-deferred investment 4. Receive a cash value from additional portion a. Dividends 5. Possibility of tax event if policy is cashed in and cash value is higher than premium paid a. Tax the cash amount c. Transfer for Valuable Consideration Rule i. Transfer value of policy for services ii. Person rendering services/receiving policy will pay taxes on that policy d. Policy is part of the gross estate and counts toward cap e. Cross-Purchase Buy Sell Agreement i. Partner buys insurance equal to another person s life in order to buy the decendent s interest out ii. Not 101(a): 1. No transfer for valuable consideration a. Premiums paid on the policy f. Transfer for Value Rule?????????????????? g. Ex: i. Face value of policy = $100,000 ii. Age of spouse = 50

XVII.

iii. Life expectancy = 30 years iv. $10,000 yearly in payments from insurance company v. 2/3 included as income (interest from insurance company) 1. $6,666.67 included vi. 1/3 excluded exclusion ratio = 1/3 1. $3,333 excluded h. Annuities i. Keep the exclusion ratio for the remainder of your life i. Exception: i. If terminally ill: 1. The insurance company can pay out to person tax-free 2. Living Benefit a. Excluded income j. Annuity Contracts i. Deferred Annuity 1. Investment device a. Put money in b. Money will grow tax-free in the policy c. Tax later i. 95% get cashed out taxable event ii. Immediate Annuity 1. Begins now 2. Retirement scenario 3. Take an annuity 4. Monthly check until death iii. Similar to Life Insurance taxation 1. Annuity taxed based upon an exclusion ratio XVIII. Compensation for Injuries and Sickness Exclusion a. Section 104 i. General Rule 1. Workers Compensation benefits are excluded from income a. Rationale i. Workers Compensation payments are a poor excuse for wages b. 104(a): i. Compensatory damages based on a physical injury/physical sickness will be excluded from income 1. Could be a settlement agreement or jury verdict ii. Exception: 1. Things are not on account of physical injury/physical illness are included in income a. Any non-physical settlement will be included b. Anything coming from a physical settlement will be excluded

XIX.

c. Exception: i. Punitive damages are included in income 1. Exception: a. Punitive damages are excluded for an unlawful death if it is the only form of recovery d. Accident/Health Insurance Payments i. General Rule: 1. If employer made a contribution to pay for insurance or employer paid directly to employee then it is included for income 2. Medical insurance payment provided under employment plan is excluded from income a. Anything unnecessary does not qualify 3. Payment for the permanent loss or function of the body or permanent disfigurement is excluded from income 4. Long-term care insurance a. Paid per diem b. Under thresholds, premiums paid by employer are excluded c. Receipt of the income is excluded 5. Exception: a. If employee bought the insurance (premium paid by employee) then any money paid to employee is excluded from income e. 105(b): i. Any client who receives payments for medical care/from medical insurance can exclude those payments 1. Spouse and children allowed f. 105(c): i. Sick day payments are excluded g. Reimbursement treated as a sales or exchange i. Ex: 1. Damaged car in an accident h. Disability Benefits paid by employer: i. Premium paid by employer is excluded ii. If employer pays for it then receipt of payment is included in income Divorce i. Section 1041 1. No gain nor loss transferred by a spouse 2. Transferee takes the transferor s basis 3. No tax consequences a. Family is viewed as an economic unit 4. No transferable tax a. Spouse who receives takes over the basis of the spouse who gave

5. Filing status: a. If divorced, then file HOH or Single 6. If divorce is pending at the end of the year, still file jointly a. But will lose ability to deduct alimony 7. Legal expenses for divorce: a. Cannot be deducted i. Personal in nature b. Ex: i. If have a business and seek an attorney for advice, in normal course of business then would be deductible 1. But divorce is too personal c. Exception: i. People giving tax advice is deductible ii. Bracket-Shifting Concept: 1. Shift to spouse in lower tax bracket so person paying pays less taxes iii. Alimony Payments/Separate Maintenance Payments under Domestic Relations Order: 1. Payor spouse deducts payments a. As above the line deductions 2. Payee spouse includes payments as income a. Income is considered earned income iv. Alimony: 1. Cash or cash equivalent or money order a. Allowing spouse to live in rental home is not alimony 2. Received under divorce or separation agreement 3. Cannot be designated as anything but alimony 4. Spouses must live in separate households 5. Payment cannot be required after the payee s death a. Payments cease upon death 6. Cannot file a joint tax return 7. Cannot be a transfer of services or property v. Owner and beneficiary of life insurance policy 1. Premiums paid are considered income a. Deductible to payor b. Includable as income to payee vi. Property Settlements 1. Section 1041 2. Transfers between spouses a. Transferee gets the basis of the transferor 3. Excluded from the income of the recipient (payee) a. No deduction, no inclusion b. Multi-Support Agreement

XX.

XXI.

i. 2 people contributed to over the support of the relative ii. Choose which taxpayer may claim the relative Child Support a. General Rule: i. The custodial parent will be given the right to claim the child 1. Custodial parent deducts the child a. $3500.00 2. Can reverse a. Non-custodial parent can have deduction i. Would be beneficial if non-custodial parent has a higher marginal tax rate ii. Not deductible by the payor and not includable by the payee b. Is excluded from the income of the recipient (payee) c. Key is to structure more as alimony than child support i. Frontload alimony for deductibility purposes d. Even if the amount is not fixed at agreement, child support can be determined Investor Item Exclusions a. Section 121: i. General Rule: 1. If taxpayer purchases a house and it appreciates, any gain can be excluded up to $500,000 for MFJ or $250,000 for Single a. Unlimited amount of times ii. Rules: 1. Cannot be done more frequently than once every 2 years 2. Have to own and occupy the home as principal residence for 2 of the 5 years prior to the sale a. If enter a nursing home, allowed to count time in nursing home as time counted in home for up to one year b. If unable to meet 2 year requirement because of 121(b)(3): i. Change of place of employment ii. Health iii. Unforeseen circumstances 3. Residence is broadly defined a. Do not need a replacement house iii. Interest 1. Payment to a lending institution in which they give you money for the use of your money a. Get your basis back plus interest 2. General Rule: a. Any interest received is income 3. Exception: a. Exempt interest if invest in state or local bond that qualifies under 103 i. Bond

1. State or local government needs money a. Will guarantee rate of return on bond 2. Will enable client to get interest tax-free a. Otherwise, income from bonds and interest on them will be taxed b. Exception: i. State or local bond iv. Dividend 1. A share of the company s profits 2. Buy stocks to acquire dividends, not for an increase in the stock 3. General Rule: a. Dividends are taxable income 4. Return of capital is not income 5. Assets held for one year will not be taxed as ordinary income a. Will be taxed as capital gains i. Apply capital gains rate not marginal tax rate 1. Capital gain rates are lower b. Educational Savings Bonds i. Section 135 ii. Can be used if income is low enough iii. Tax-free method to pay for qualified educational expenses iv. Issued to a person 24 years or older 1. Beneficiary can be the child v. Most people do not use bonds to save for college 1. Common gift item vi. 529 Plan: 1. Method to save for college 2. 2 Types: a. Prepaid Tuition Plan i. Purchase credits at a university at today s dollar 1. Not taxed on interest earned or the inflation of the tuition b. Savings Plan i. Money to State Attorney General ii. Prepaid investment product taxpayer buys 1. Mutual funds iii. Pay money to people who are guardians of the tuition fund 1. They invest for the taxpayer 2. Earnings are excluded from income as long as they are used for qualified tuition a. Unlike scholarships, includes room and board

XXII.

3. Popular way to save for college educations a. Interests are tax-free if used for qualified expenses vii. 530 Plans 1. Types: a. Educational IRAS b. Coverdell ESAs 2. Contribute money 3. No tax consequences in that year 4. Earnings on that money are tax-free a. Tax-exempt bonds b. 530 plans 5. Earns interest tax-free 6. Income has to be low enough 7. Money is in taxpayer s direction a. Taxpayer can get to invest funds Fundamentals of Tax Research a. Legislative passes code sections i. Code sections are the law 1. Only challenge them to the extent that they violate constitutional rights ii. Final Regulations 1. Issued by the IRS, Treasury Department stare decisis a. Interpretative general regulations and be upheld by the court b. Legislative unassailable IRS Commissioner issues regulations b. Challenge the interpretation to the statutory intent c. Key to reading regulations: examples they give and how relate to client d. IRS regulations begin with 1 ex: 1.401 = 1 signifies it is tax code and then section e. Final regulations are in IR Bulletin becomes cumulative bulletin i. CCH Commerce Clearing House ii. RIA Research Institute of America f. Tax is Title 26 of the US Code g. Proposed Regulations i. Regulatory agency such as IRS wants to propose a rule ii. Notice and Comment iii. Publish in IR Bulletin iv. No stare decisis not precedential 1. But IRS acts upon them as if they are law v. Can be proposed for a long time

h. Temporary Regulations i. Need some sort of structure to what will happen with code section ii. Urgency i. IRS issues revenue rulings i. Not the full effect of a final or temporary regulation ii. IRS s interpretation of facts iii. Are assailable in court but usually well-done (not overthrown likely) j. Can be citated i. Reg.Rule.-years k. Revenue Procedures l. Private Letter Ruling i. How the IRS will apply the law to client s situation ii. Write to the IRS about situation 1. IRS will give answer iii. Precedential to person, not anyone else 1. Never binding m. Technical Advice Memorandum (TAMs) i. Issued by the national office of the IRS n. Determination Letters o. Chief Counsel Memorandums p. IRS Announcements and News Releases q. IRS Publications XXIII. IRAs a. Traditional IRAs i. Before tax basis ii. Active participant b. Roth IRAs i. Amount can contribute remains at $5,000 1. Exceptions: a. If 50 or older, additional $1,000 b. Cannot contribute anything if no earned income i. Unearned income = dividends, stock portfolios ii. No such prohibition for age can contribute to a Roth IRA if have earned income iii. Same phase outs 1. Single = 105,000 floor 120,000 ceiling 2. MFJ = 166,000 floor 176,000 ceiling 3. Married Filed Separately = 0 and 10,000

iv. In early stages, Roth v. After-tax basis vi. No deduction no immediate tax benefit 1. Never taxed on the money vii. Distributions for a Roth IRA tax-free 1. 1st year since made the first contribution 2. Exceptions: a. Always take principal out and not be taxed on it b. Age 59 , take money out penalty free (assuming at 5 year requirement) c. Beneficiary can get the money if deceased d. If become disabled e. 1st time Homebuyer can take out $10,000 viii. If no qualifying distribution, there is a 10% excise tax (absent the principal) c. IRA Rollovers i. Rollover money rather than take it as a distribution ii. Traditional IRA once a year, within 60 days roll it over iii. Trustee to trustee transfer banks transfer (no limitation changes the provider) iv. Restrictions on rollovers with Roth 1. Cannot convert IRAs into Roth IRAs unless income is under 100,000 v. Direct rollover d. IRAs Funded i. Can be funded in almost every investment 1. Cannot be funded in insurance, collectibles, prohibited transactions a. Some exceptions: specified gold, platinum and silver U.S. coins, some bullion e. Most IRAs are invested in mutual funds or CDs or stocks and bonds XXIV. Business Deductions a. Above the Line Deductions i. Individual taxpayers who happen to have a business ii. Not corporate tax iii. In order to get a deduction, there has to be a code section 1. Only the Legislature can grant this

b. c.

d.

e. f.

iv. Trade and business deductions applied to individuals but these seem deductions apply to corporations v. A lot of deductions for businesses Code Section 162(a) Requirements to deduct: i. Ordinary and necessary ii. Expense paid during the taxable year iii. Carrying on a trade or business Welch v. Helvering i. Petitioner is secretary of a grain business ii. Forced into bankruptcy and debts discharged iii. Opened own business iv. Paying debts of a company whose debts were discharged in bankruptcy (in order to re-establish himself, he needed to do this for his business) v. Commissioner rules these are not deductible vi. Rule/Standards: Necessary = appropriate and helpful; ordinary = common, customary, usual and accepted (businesses do it) vii. In this case, business do not do this Code Section 262: i. Personal expenses are not deductible Scenarios i. Lawsuit 1. If own a law practice, never sued for 20 years, client now sues hire another attorney to defend you a. Is this a deductible business expense? i. Necessary = is helpful ii. Ordinary = customary in the business, but not customary for the individual ii. Wedding 1. Planning a wedding father is in business for himself invite certain 20 clients to the wedding a. Can deduct dinner costs for clients? i. Necessary = helpful to father ii. Ordinary = inviting clients to child s wedding 1. Seems too personal in nature iii. Not deductible 1. Would likely fail on the ordinary/customary prong

iii. Ex: 1. Client owns talent agency discovers someone puts him up in his home and buys him clothing a. Is the $6,000 deductible for the food, shelter, clothing, talent lessons? i. Is necessary ii. Ordinary/customary? b. Yes putting money into business c. Yes buying suit for a client 2. Clothing are likely a no personal in nature (are adaptable to street use) g. Deductibility under Code Section 162: ordinary and necessary h. Ordinary = customary, what the business does i. Necessary = appropriate and helpful (helpful is a low hurdle to meet) j. Level of expertise required for job is the difference in allowing deductions necessary vs. mandatory k. Has to be a direct correlation to the business (for deduction) directly related i. If already a professional athlete, then likely a business deduction (i.e., golf lessons for a golf pro) less likely a deduction for an amateur XXV. Production of Income Expenses a. Can deduct money you spend to make money b. Arise with profit activities c. Code Section 212 i. Ordinary and necessary test what is reasonable ii. Expenses for the production or collection of income 1. Paying stockbroker to make trades iii. Passive income expenses for the management, conservation or maintenance of property held for the production of income 1. Apartment not actively managing (switch to 162 if actively engaged) iv. Expenses made in conjunction with determining if tax owed 1. Tax advice d. Reasonable correlation to the cost i. Owning 2 shares of 50 dollar stock and spending 2,000 to attend convention not qualify XXVI. Capital Expense a. Regulation 1.263(a)(1)

i. Capital expenditure = deduction but parceled out over time; it has to be capitalized over time ii. Keys to a Capital Expenditure: 1. 1) Substantially prolongs the useful life or 2. 2) adapts property to a different use or 3. 3) adds to the value a. Ex: buy tractor 10 year use, $10,000 take it over time iii. In the real world, Code Section 179 (allows for deduction in one lump sum rather than capital expenditure over time) b. Midland Empire Packing Co. v. Commissioner i. Meat packing plant ii. Concrete lining in basement to oilproof it against an oil nuisance created by a neighboring refinery iii. Is it deductible as a business expense? 1. It is ordinary and necessary 2. Is it a deduction (repair) or capital expenditure? a. Deductibility is not in question but the how and where is in question iv. Is not increasing the value 1. Restoring the value, not increasing the value Scenarios i. Own a barber shop broken window replace it 1. Repair deduct immediately ii. Replace window with better one 1. Capital expenditure improved value iii. New roof repair deduct immediately iv. New roof for business capital expenditure (extended useful life, not restored the useful life) Repairs had to be something wrong and fixing it (has to be a problem for a repair to be necessary) i. Maintain the essential nature of it but upgrade ii. Substantial change which increases the value would be a capital expenditure 162 is when you are actively engaged in the business; 212 is when the production of income Income when there is actual or constructive receipt (Cash Method) When are Expenses Recognized

c.

d.

e. f. g.

i. Cash Method Overview 1. Deductible when expenses are paid 2. Expenses are deductible when paid (assuming deductible under 162) does not matter when the payment is received 3. Cash equivalent (credit card/check) is the same as cash 4. Payment type does not matter ii. What Constitutes Payment of an Expense? iii. Prepayment 1. Pre-payment on rentals 1 year in advance 2. Magazine subscriptions 10 years in advance iv. Capitalization Requirement v. Accrual Method Overview 1. All events test all events have fixed the liability and the amount can be determined with reasonable accuracy 2. Have all the events occurred which fix the right to liability? a. Does not matter when it is paid b. Has the liability been fixed? h. Progressive slot machine is an absolute liability i. Contested Liabilities: not income unless all the events have occurred and the amount can be determined with reasonable accuracy i. Restrictions on the rule = if it is reasonable or not j. Deductibility under the Accrual Rule i. Liability is fixed when all the events have occurred which fix the liability XXVII. Tax Credits a. Making work pay credit: new credit for 2009/2010 i. Credit is a dollar for dollar reduction in tax ii. Refundable tax credit regardless of owing 0 taxes, get credit get the credit whether or not owe taxes 1. Single = 400 (if income, 400 or lesser of 6.2% of earned income = .62 X applicable income) a. Depends on earned income 2. MFJ = 800 iii. Phased out 1. Floor a. Single 75,000 b. MFJ 150,000 2. For every dollar over the threshold, lose 2%

iv. Cannot get it if non-resident alien (not U.S. citizen who doesn t live here); claimed on someone else s return; if estate and trust v. Credit does not work like a deduction 1. A credit is better a. This is the tax I owed and the credit is taken off the tax owed vi. 2 types: 1. Refundable tax credit a. Get a refund b. Use the credit whether or not owe taxes i. EX: earned income tax credit (if income is low enough) 1. Sort of like a welfare payment going to people who owe little or no taxes 2. Non-refundable a. Entitled to the credit as long as owed taxes (not that you have to pay the IRS but owed taxes) b. Credit up to the limit of taxes payed b. First Time Homebuyer Tax Credit i. 2 tax credits ii. If MFJ, tax credit of 7,500 (everyone gets 7,500) iii. The lesser of 7,500 or 10% of price of home iv. 1st time homebuyer = purchasing home from April 9, 2008 to July 1, 2009 v. Is a phase out no credit for people who earn too much 1. Floor 75,000 for single; ceiling 95,000 2. MFJ floor 150,000; ceiling 170,000 vi. Phase out stop giving tax benefit to someone whose income is too high vii. Close to ceiling, more likely credit is almost phased out viii. Phase out percentage 1. (Income floor)/(Ceiling Floor) ix. Considered a 1st time homebuyer if haven t owned a home in the last 3 years x. With buying a home, comes buying accessories for the home home ownership drives the economy xi. If not in home for 3 years, then repay credit over 15 years c. New change: i. Credit is 8,000 (4,000 if MFS) ii. AND it does not have to be repaid

iii. Refundable credit dollar for dollar credit on taxes assuming living in a house for 3 years iv. January 1, 2009 November 30, 2009 v. Can take it on 2008 return d. Tax credit is not income XXVIII. Carrying On a Business a. Code Sec 195 i. Special rules if have a business or starting up a business as far as deductions 1. Marketing reports/travel expenses/legal expenses/engineering expenses/accounting services a. Tax treatment depends on current business in, business being investigated (type of business) and whether the acquisition takes place b. RULE = if in the same or similar business, all investigation costs are deductible in the year paid whether or not start the new business i. Ex: current flower shop to a new flower shop c. Business is not similar if it is retail; business is similar if the objects/products sold are substantially similar i. Ex: bakery wants to open a restaurant similar, food service d. If dissimilar business then no deduction e. If buy a dissimilar business, capitalize everything and deduct it over 5 years b. What is carrying on a business? i. Morton Frank 1. Wanted to enter the newspaper business 2. Traveled to find location 3. Settled in Phoenix for a time because interested in newspaper there 4. Have to be in the business to take a business deduction a. He was not in the business XXIX. Reasonable Salaries a. Case Study o Reasonable o Unreasonable o Smart stock prices have o Outside the range of the increased substantially since he joined industry standard (only 5,000 over the

the company justify over the margin salary based on results His salary is only 1/100 of annual sales

o o XXX.

Dividends paid Experience

range but for someone with little experience, should not be at the top of the range) o Need some questions answered do not know the size and complexity of the business and the company s salary policy regarding all employees o Inexperienced rather young employee o

Independent Contractors and Employee Distinctions a. Distinctions i. ICs are not covered by workman s compensation, not covered by social security ii. If self-employed, pay both the employer and employee side iii. If IC, not eligible for benefit plans (health plans/vacation, etc.) iv. ICs not protected by federal law on wages or hours worked or by OCCHA v. Not unemployment claim if unemployed vi. Discrimination laws do not apply in the same manner vii. Not wrongful dismissal charges b. Business expenses are deductible for ICs c. Feeling that ICs pad their deductions d. 20 Factors to determine if the person is an IC or employee: e. 1) Instructions i. More closer the person who hired you has, the closer you are to an employee 1. When: chose date and time 2. Where: has to be on this campus 3. How: academic freedom prevails ii. Doesn t seem that the control is here over professor iii. Likely is an IC f. 2) Training i. Training program the person has to go through to ensure policies; pairing with another worker for training purposes 1. More structure, more an employee ii. Didn t receive training in tax in order to teach iii. Likely is an IC g. 3) Integration

i. Not so much the subject-matter that is integrative but the professorstudent relationship experience that is integrative into the business operations ii. Is likely an employee h. 4) Services Rendered Personally i. Likely an employee i. 5) Hiring, Supervising, and Paying Assistants i. Likely does not have any assistants that pay or hire ii. Close call between an IC and an employee could go either way j. 6) Continuing Relationship i. If have continuing relationship then more likely an employee ii. Likely an employee 7) Set Hours of Work i. If told when to perform/hours set, more likely an employee ii. If able to work on own, more likely an IC iii. Not necessarily the hours and the classroom but the time spent on own grading/prepping iv. Likely an IC likely controlled what needed to do 8) Full Time Required (When) i. Substantially full-time to the business or the services performed ii. More hours work at the place, more likely an employee iii. Likely an IC 9) Doing Work on Employer s Premises (Where) i. The more required to work on a specific premises/place(s), the more likely employee ii. Required to teach at this campus, in this building, in this classroom for teaching iii. Prepping/grading allowed to be done elsewhere iv. Close call between IC and employee 10) Order or Sequence Set (How) i. The more likely to follow the worker s own pattern, the more likely an IC ii. If the employer sets the agenda then more likely an employee iii. The more order and control, the more likely an employee iv. Has academic freedom v. Likely an IC 11) Oral or Written Reports i. Worker submit regular reports indicates a degree of control

k.

l.

m.

n.

o.

p.

q.

r.

s. t.

u.

v.

w.

x.

y.

ii. Professor does not submit regular reports 1. Student Evaluations not generated by professor 2. Submission of grades not an issue iii. Likely an IC 12) Payment by Hour, Week, Month i. Method of payment increments ii. The more paid for performance of a job, more likely an IC iii. Likely an IC 13) Payment of Business and/or Traveling Expenses i. The more control the employer has over travel expenses, the more likely an employee ii. No reimbursement for professor for travel expenses iii. Likely an IC 14) Furnishing of Tools and Materials i. The more the significant the tools and materials provided, more likely an employee ii. School furnishes markers/classroom/computer/blackboard iii. Likely an employee did not bring tools in they are provided by school 15) Significant Investment i. Likely not applicable here 16) Realization of Profit or Loss i. If there is significant risk or loss, then more likely an IC ii. Likely an employee 17) Working for More than One Firm at a Time i. If you work for more than one person, generally not an employee ii. Likely an IC 18) Making Service Available to the General Public i. If able to offer services directly to the public, more likely to be an IC ii. Likely an IC 19) Right to Discharge i. A worker is an employee if the employer has the control to discharge them ii. Likely an IC 20) Right to Terminate i. If the worker has a right to end their relationship at any time without incurring liability, more likely an employee ii. Likely an IC Issue is control

z. Adjunct professors are employees (part-time employees but considered employees nonetheless) i. Not considered ICs ii. Likely integration is the more important factor aa. Why is the adjunct professor different than the person one hires to remodel kitchen? bb. What is the difference between a professor and a maintenance person? i. Continuing relationship XXXI. Travel Expenses a. Transportation, meals and lodging while away from home in the pursuit of a trade or business b. Sec. 162(a)(2): ordinary and necessary expenses of travel, cannot be extravagant or lavish c. Away from home = has to be overnight; longer than a day s work but does not have to be 24 hours; must require rest/sleep (mostly evening hours), some relief from work; must be temporary i. Fees incurred: 1. Hotel 2. Rental car 3. Tolls or parking 4. Food 5. Taxis 6. Phone calls/internet connection 7. Airfare 8. Laundry expenses d. Travel Away From Home i. The tax home is the area which the taxpayer gets their principal source of revenue or income 1. In most cases, it is where the person lives 2. If expected leave is less than one year, can deduct expenses a. If it more than 2 years, it is not a temporary situation and travel expenses are non-deductible 3. Nature of the job, length of employment, whether keep home in other place facts and circumstances ii. If stay is expected to be one year or less, then travel expenses are deductible iii. Travel/Vacation Blur 1. GR: Time spent while in trade or business is allowable

a. Time not there is not allowable 2. Transportation expenses if the trip was primarily business is covered a. Any for child/spouse cannot be covered iv. Rosenspan v. US 1. Rosenspan was a jewelry salesman 2. Originally from Brooklyn a. Wife died sold the home 3. On the road 300 days a year a. Wanted to deduct expenses (mileage/motel/meals) 4. Uses other peoples addresses 5. Court finds that he has no tax home a. Duplication of living expenses i. If spent money to make money if have a home in one place and traveling v. Andrews v. Commissioner 1. Owned a swimming pool construction business in New England 2. Opens a horse farm in Florida 3. He is trying to take everything in Florida and his use of it as a business deduction 4. He is duplicating expenses a. But he can t have 2 tax houses i. Court s criteria for picking one: 1. More time in a place, more likely it is your home for tax purposes ii. Also focus on domicile 5. Can only have one tax home cannot have both 6. Time in relation to time elsewhere vi. Code Sec. 274 (a-c) 1. (a)(1)(A): if the activity is one of entertainment, amusement or recreation; if activity is directly related to or associated with the business and immediately following or preceding; business discussion has to be central in some way 2. (a)(1)(B): facility cannot exceed cost of activity in above 3. (a)(2)(A)(B)(C): dues are not deductible; facility used for personal use is not deductible, have to show used primarily for trade or business

4. (a)(3): No membership fees are deductible (club is for networking purposes and not for business primarily) 5. (b)(1): Cannot deduct more than $25 for gifts for an individual in a taxable year a. Donative intent can give gifts in a business situation and deduct them if have a donative intent 6. (b)(1)(A): Pens/notepads/items with business name imprinted on it 7. (b)(2)(A): partnership and individuals in that partnership gift cannot exceed $25 to any one individual 8. (c)(1): any individual who travels outside of the US away from home in pursuit of a trade or business or in pursuit of a passive investment (212), no deduction shall be allowed under 162 (ordinary and necessary business deductions) or under 212 for a. If it usually allowed but the Secretary says it is not allowed then it is not allowed 9. (c)(2)(A) and (B): Exception: Deductible if outside of the US for business for less than a week or if leisure time while away is less than 25% of the trip 10. (d): Substantiation required a. Not deductible unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer s own statement through: receipts/records/logs b. If not reimbursed (self-employed), can deduct as business expense 11. Non-substantiation can be padded abuse can be rampant 12. Reimbursement excluded from income but not deductible as business expense because employer reimburses employee XXXII. Education Expenses a. Code Sec. 274(m)(2): Expenses for travel as a form of education are not deductible i. Can deduct education expenses if they maintain or improve existing skills for present job ii. To meet requirements of employer or law, are deductible iii. Education for the minimum requirements of the job are not deductible iv. If it qualifies for a new trade or business, not deductible b. Reg. 1.162-5

XXXIII. Car Interest & Tax Provisions a. Buy a qualified motor vehicle, get an above the line deduction for any interest paid Nov. 12, 2008 Jan. 1, 2010 b. Qualified vehicle: i. Passenger car or light truck up to 8500 pounds 1. Exception: motor home purchases are also eligible ii. Cannot exceed $49,500 iii. Phase out: 1. 125,000 -135,000 = single 2. 250,000 260,000 = MFJ iv. Can deduct state and local taxes v. Sales taxes are deductible 1. Or interest on a car loan is deductible c. Law does not address leasing a vehicle XXXIV. Business Meals & Entertainment a. Code Section 274 i. Business deduction under 162 ii. However, highly abused area 1. 274(m)(1): only get 50% of price paid for meals and entertainment expenses 2. Receipts and records are required 3. 2 tests to determine whether truly business: a. Directly related to or associated iii. Entertainment: 1. Sporting events 2. Recreational activities 3. Shows/concerts 4. Amusement parks iv. Cost of meals, taxes, tips, parking fees, cover charges, if any, and costs of tickets v. Directly related to test: 1. Entertainment has to be directly related to the entertainment has to go on during the entertainment a. Must discuss business motive vi. Associated with test: 1. Entertainment surrounds the event of a business discussion 2. Comes before or after a bonafide business discussion

3. Meeting does not have to occur in traditional business setting vii. Cannot be lavish and extravagant 1. Has to be reasonable under the circumstances 2. It is a fact and circumstances determination viii. Have to be present ix. Entertainment facilities are non-deductible 1. Yachts, club fees x. 50% limitation does not apply to transportation applies to food and entertainment 1. Transportation is 100% deductible xi. Under 162: 1. Uniforms means uniforms a. Police officers, etc. 2. A suit fits into ordinary daily use and is not deductible a. If it is adaptable into ordinary, daily use then it is not deductible XXXV. Hobby Loss Rules i. If it is a hobby and spend money on it, can exclude any income made (provided that you spent more than you made) ii. If it is a business and have a loss but make a profit, can discuss loss against income b. Reg. 1.183-2 i. Activity not engaged in for profit = any activity other than one for which deductions are allowable under 162 and 212 ii. (b): Relevant factors 1. One factor is not determinative 2. It is a facts and circumstances test 3. Overall iii. Factors: iv. 1) Manner in which taxpayer carries on activity profit motive or pleasure motive 1. Acting in a business-like manner, more likely a business a. If similar to comparable businesses, more likely a business v. 2) Expertise of the taxpayer 1. If taxpayer knows how it operates or has studied or has an expert to due diligence for him 2. Advice and does not act in that manner, it looks less like a business

vi. 3) Time and effort expanded by the taxpayer in the activity 1. More time spent, more likely business 2. Withdrawal from job to conduct activity = more business vii. 4) Expectation that assets used in activity may appreciate in value 1. Anticipation of making money in the future viii. 5) Success of the taxpayer in carrying on other similar or dissimilar activities 1. Success even within this business is more indicative of a business motive than personal pleasure ix. 6) Taxpayer s history of income or losses with respect to the activity 1. Continuation x. 7) Amount of occasional profits, if any, which are earned 1. Ratio of money made vs. money spent xi. 8) Financial status of the taxpayer 1. If the activity is the central point of the taxpayer then it is more a business (could be part-time though) xii. 9) Elements of personal pleasure or recreation 1. Personal elements to the activity = hobby 2. No other appeal than profit = business 3. No exclusive intent to make profit xiii. Failure is not indicative of a lack of a business motive xiv. More than a hobby much more involved in the activity than most people would be a. Hobbies can provide a supplemental income XXXVI. Public Policy a. Code Section 162(c) i. Illegal bribes, kickbacks and other payments 1. GR: illegal bribes/kickbacks are not deductible a. Not even if considered ordinary and necessary business expense, customary 2. If you could contractually accomplish the goal then it may be ok 3. Law must be generally enforced 4. Money received for referring a client/patient/customer ii. 162(c)(2) b. Code Section 162(e)(1) i. Denial of Deduction for certain lobbying and political expenditures 1. No deductions for lobbying, political campaign for candidate for public office, influencing the public or executive branch official

2. Political contributions and lobbying expenses are not deductible a. Some exceptions exist for local political contributions c. Code Section 162(f) i. Fines and penalties 1. No deduction for any fine or penalty paid to a government for violation of the law XXXVII. Tax Ethics i. Where do ethics come from? 1. Internal register 2. Ethics from client(s) or firm 3. Business culture ii. Profession and reputation can be destroyed iii. Ethical base should come from internally as well as externally b. Circular 230 Code of Ethics i. Professional Responsibility Issues 1. Rules governing the practice before the IRS a. Attorneys, CPAs ii. If not an attorney, need to properly submit records or information in a matter before the IRS if they ask for it, must give it to them iii. No attorney-client protection for non-compliance, omission or error iv. Exercise due diligence in preparing the return 1. Investigate facts and circumstances v. Advertising guidelines vi. No charging unconciousable fees vii. Cannot accept an appraisal on its value if doesn t make sense viii. If a reasonable possibility of success then can bring forth a matter 1. Reasonable possible of success = 50% ix. Do not have to turn a client in have to advise client x. Cannot promote a falsehood must do due diligence c. Preparer Penalties i. Fines for preparing a bogus return ii. Blacklisted by IRS any return done by preparer will be audited iii. Can be paid to pay for every dollar cheated by 3, 4, 5 times the dollar XXXVIII. Residence as Rental a. If rented for 60 days, then included in GI (Rule = if rented for less than 15 days, no inclusion in GI or deducts allowed

b. If rented out for more than 14 days and also used for personal purposes for the greater of more than 14 days or more than 10% of the number of days during the year for which the home is rented them deductions are allowed c. Code Section 280A i. Cannot deduct the expenses while they occupy the home as a residence 1. Exception = for trade or business 2. Can deduct for business d. GR does not to the rental (because the rental is income-producing activity, i.e. business expenses are deductible) expenses are deductible for the rental e. Twohey case: facts and circumstances determination i. Substantial work qualified for repairs and maintenance exception to the rule limiting personal occupation of a vacation home to 14 days f. Rent is income i. If fall in between, can exclude income g. # days rented/# days used = % X total maintenance expenses = amount of maintenance expenses deductible as attributable to rental XXXIX. Medical Expenses a. Code Section 213 i. 213(a) 1. Paid during the taxable year 2. Not compensated by insurance or otherwise a. Do not include in income amounts reimbursed 3. Medical care of the taxpayer, spouse or a dependent (paying the expenses of another) 4. Such expenses exceed 7.5% of adjusted gross income a. Gross income minus above the line deductions 5. Specifically applies to the chronically ill or fragile elderly a. Most people do not meet the eligibility for deductions ii. 213(b) 1. Prescribed drug or insulin iii. 213 (c)(1) 1. If taxpayer dies during the taxable year, those expenses for that year are deductible iv. 213(d)(1) 1. Medical care means amounts paid for: a. Diagnosis b. Treatment/cure c. Mitigating Disease

2.

3. 4. 5.

d. Treatment or Prevention Does not matter what the doctor says it is a facts and circumstances determination a. Not decisive Incurred for specific medical purposes Alleviate or prevent a physical or mental defect Primarily for and essential to the medical care a. Transportation i. Planes, trains, ambulances, buses, taxis, etc. b. Lodging is also deductible c. As long as there is no pleasure purpose primary purpose test

6. Qualified long-term care services a. Ex: hospice no treatment, just keep person comfortable b. Could be a nursing home c. Cannot perform ADLs i. Dementia, etc. d. Not included: i. In-patient rehab post surgery (skilled nursing facility) 7. Elderly clients when turn 65 are eligible for Medicare a. Part A = hospital insurance; skilled nursing facility; hospice; home health care b. Part B = doctor visits; specialists i. Premium paid dependent upon income 1. About 25% of the cost of Medicare c. Part D = prescription drug portion of Medicare 8. For insurance a. Anything paid to insurance company for medical expenses i. copay on prescriptions b. Long-term care insurance premium 9. Capital Expenditures a. Things that have more than a useful life of a year are spread across the years i. Ex: elevators, window air conditioners, swimming pool 10. Examples:

a. 1) Husband and wife build a fall-out shelter on the advice of their doctor to protect them from gamma radiation spent around $10,000 i. Not deductible 1. Only possible argument is for the prevention of disease but the possibility of a nuclear fall-out is remote b. 2) Central air-conditioning ($3,000 system) doctor said it would help the hay fever for mother and 2 children i. Not deductible 1. Difficult to determine personal use versus treatment of condition c. 3) Minor son who steals cars doctor recommended a change of environment and go to a boarding school deduct tuition and expenses related to transportation i. GR = medically necessary schools are deductible ii. Here, change of environment does not constitute a medical expense 1. No deduction d. 4) Fertile man wants to have in-vitro fertilization for no particular purpose i. Not deductible e. 5) Woman with thinning hair could deduct expense of wigs i. Stigma of a woman being bald and also for cancer patients f. 6) Child with congenital tooth disease could deduct clarinet lessons for therapeutic condition doctor said it was therapeutic for alleviating the condition g. 7) Joining a gym for cardiac rehab purposes is deductible other reasons are not deductible h. 8) Cosmetic surgery is not deductible unless necessary to restore body to pre-accident state i. 9) Hair removal by electrolysis is deductible i. Motive though? j. 10) Husband has sinus problems couple advises them to travel together and go to more favorable climates i. Not deductible for transportation/expenses

1. Cases are split on this some circumstances will allow k. 11) Father tried to deduct depreciation of the value of his car for taking his son to psychiatrist i. Not deductible couldn t ascertain the depreciation of personal use versus travel purposes 1. But can deduct travel expenses

b. Scenarios i. Cost of a funeral? 1. No ii. Birth control pills? 1. Yes iii. Psychoanalysis 1. Yes iv. Medical treatment for drug/alcohol condition 1. Yes v. Maternity clothes 1. No vi. Abortion 1. Yes a. Medical procedure affects the body vii. Whirlpools ordered by a doctor 1. Yes viii. Weight Watchers Fees 1. Yes if recommended by doctor ix. Diet Food 1. No x. Nutritional Supplements 1. No xi. Bottled Water 1. No xii. Braille Books 1. Yes

xiii. xiv.

xv. xvi. XL.

a. Many of the things a person would need if had a medical condition would be deductible Artificial Teeth 1. Yes Health Club Dues 1. No a. Exception: part of care treatment post-surgery Cosmetic surgery 1. No Guide Dog (and its maintenance) 1. Yes

Taxes a. Code Section 164(a) i. Can deduct state, local and real property taxes (land and anything permanently attached thereto) 1. School district taxes on millage a. A mill = 1/1000 2. Assess house (formula for # of bathrooms/fence/attached garage/shed/square feet/finished basement) a. Assessment does not correlate to fair market value ii. Can deduct personal property tax (on tangible property based on value such as car) iii. Difference between a tax and a fee = is key to this section iv. Federal taxes are not deductible nor are SS or FICA or sales taxes v. Fees are not deductible 1. Dog license is a fee 2. Car inspection is a fee 3. Hunting license is a fee 4. Bridge toll is a fee vi. Fee = paid for usage; personal benefit derived b. Scenarios i. Estate taxes? 1. No a. One time hit on estate b. Coordination of federal and state tax 2. But GST (generation-skipping tax) and estate tax ii. Custom duties? 1. No

XLI.

XLII.

iii. Certificate of occupancy to sell house have to fix sidewalk before certificate is issued? 1. Fee iv. Can deduct state sales tax if not deducting real estate taxes 1. Or if not using Schedule A Interest a. Interest defined as money paid on a principal (when not using money opportunity costs someone pays you to use your money now) i. If obtain a mortgage, closing fees/title search/escrow amounts/etc., pay up to 3 points (1% of mortgage) 1. Pre-paid interest (as points but not application) as a GR are interest a. Not closing costs, title search fees b. Personal Interest i. GR = personal interest is not deductible 1. Ex: interest on credit card is not deductible ii. Business interest is deductible 1. Ex: interest on business credit card as ordinary and necessary cost of doing business iii. Exceptions: 1. Qualified residence interest interest in buying a home (buying/remodeling/constructing) a. Any interest paid on a mortgage under a million dollars is deductible under Schedule A (rate of interest) c. Acquisition Indebtedness i. Deductible if the interest paid on a mortgage under a million ii. Over a million. half d. Home Equity i. Equity in home because paying down mortgage over time ii. Can borrow for any purpose iii. Can deduct interest on loan not over $100,000 iv. Points deductible over time if refinance home 1. Take interest deduction over the life of the mortgage a. If buy for the 1st time (and no refinancing), points are immediately deductible v. Can take the interest on 2 homes e. Student Loan Interest Charitable Contributions

a. Code Section 170(a) i. GR = deduction is allowed for charitable contribution (under Schedule A) b. Code Section 170(b) i. To Whom charitable contributions can be made (170(b)(1)(A) 1. (i) Church 2. (ii) Educational institution a. Traditional and online institutions 3. (iii) hospitals and medical research a. Directly engaged in the continuous active conduct of medical research in conjunction with a hospital b. Ex: public hospital; Mercy hospital; coalition for AIDS research 4. (iv) Endowment Funds 5. (v) Government 6. (vi) Not for profit organizations; American Cancer Society; SPCA: United Negro College Fund; Salvation Army; Red Cross charitable donation for educational/artistic, etc. 7. Has to be a qualified organization under 501(c) 8. Need donative intent from Duberstein a. Give out of affection, respect, kindness, charity, like impulses, etc. 9. Cannot get anything tangible in return for charitable contribution a. Tangible = cannot be quid pro quo i. Benefit received for charitable contribution cannot be grossly disproportionate 1. Ex: $ 150 to PBS and get a $20 umbrella in return gift for contribution seems nominal c. Code Section 170(c) d. Scenarios Charitable or Not i. Political Contributions 1. No ii. Lobbying Expense 1. No likely an agenda 2. Could be yes if applied for 501(c) qualification if 100% for public good iii. Value of Time (Pro Bono work) 1. No 2. Services can never be deduced

XLIII.

Miscellaneous Deductions i. Fall under Schedule A ii. Have to exceed 2% of AGI to claim them the aggregate of the deductions 1. Once meet deductions, there is no limit to the amount of the deduction a. But this is not likely to happen for many people b. Unreimbursed Business Expenses 1) Professional Dues i. Have employer pay under 132 ii. But unreimbursed dues are subject to the 2% floor c. 2) Unreimbursed Employee Expenses luncheon, entertainment i. Employer not paying for meal/uniform ii. Uniform = if what is given is adaptable to street use then no business deduction 1. Here, uniform is not adaptable to street use subject to 2% floor iii. Tools bought for profession if employer does not reimburse d. 3) Tax Preparation Fees e. 4) Uniforms f. 5) Protective Clothing g. 6) Travel h. 7) Job Hunting Expenses i. Resume Done i. 8) Gambling Losses up to Gambling Winnings i. Take the loss up to the amount you won

j.

Transportation Expenses i. If employer reimburses for transportation expenses, it is not included in the person s income by the business ii. Tolls & parking/taxi expenses/fares iii. Could take all the expenses for the year on vehicle (gas/oil changes/inspection/insurance/tires/maintenance issues/depreciation) 1. Keep records and run a ratio Business miles/total miles a. Get the ratio and take rate of total expenses for vehicle expended during that year iv. Log of business miles X applicable federal number for the year 1. This does not allow for depreciation

v. Have to own/lease the vehicle and drive it and keep records k. When going from home to main employment, cannot deduct that commute i. Not deductible to drive to work and to drive from work to home l. Going from home to temporary work site and then from temporary work site to home = is deductible i. Provided have a main office somewhere (home office does not qualify) 1. Ex: repair man going from house to house is not deductible m. Going from home to second employment = not deductible i. From second job to home = not deductible n. Regular employment to temporary work site = deductible i. Going from temporary work site to main employment = deductible o. Going from first main employment to second employment = deductible i. Going from second employment to first main employment = deductible p. Going from temporary work site to second employment = deductible i. Going from second employment to temporary work site = deductible XLIV. Moving Expenses i. Above the Line Deduction 1. Before the Adjusted Gross Income is calculated ii. Have to meet certain criteria iii. 1) Taxpayer s move must be related to a new or changed job location iv. 2) Distance test 1. New job must be at least 50 miles further from old home to old job 2. Old commute + 50 miles v. 3) Time test 1. Be there 39 weeks out of the next 12 months? 2. Take moving expenses when you move 3. If IC: a. 78 weeks out of the next 24 months vi. If reimbursed then do not get a deduction (if employer paid) 1. If employer paying for it, not included in income vii. Lodging during the move = deducible 1. On the way to the new destination viii. Temporary living = not deductible 1. Waiting to rent an apartment or for house to be finished ix. Transportation of household goods/moving expenses = deductible 1. Moving a pet is household goods (airline) 2. Truck rental to move (U Haul)

x. xi. xii. xiii. xiv. xv. xvi.

xvii.

XLV.

xviii. Tax Credits a. Credit = dollar for dollar reduction in tax owed b. Deduction = reduction in taxes based on tax bracket c. Earned Income Tax Credit i. Refundable Credit given whether or not have income d. Credit for Dependent Care Expenses i. Section 21 1. (a): Allowance of Credit a. (2): Applicable Percentage Defined i. Applicable percentage is 35% reduced (not below 20%) by 1% for each percentage point for each $2,000 by which taxpayer s AGI exceeds $15,000

3. Airline/rail transportation/mileage for vehicle House Hunting Trip = not deductible Gym membership pre-paid/theater tickets = not deductible Selling/buying of residences = not deductible 1. Title search/title insurance/appraisals/closing costs/selling costs In-transit storage = deductible 1. Beyond in-transit storage = not deductible Meals during moving = not deductible 1. Theory is that one needs to eat anyway Students can deduct their 1st move after school above the line deduction assuming meet time and distance test Time Test: 1. Be there 39 weeks in the next 12 months 2. Do not have to wait a year to take moving expenses 3. Doubled to 78 weeks in the next 24 months if an independent contractor (working on their own) Distance Test: 1. New job must at least be 50 miles further from the old home than the new job was 2. Has to be 50 miles away from the home 3. 50 miles plus old commute 4. Distance between old home and new job is at least 50 miles farther than the distance between old home and old job a. Plus old commute 5. Just entering work force at least 50 miles from old home Only one spouse needs to qualify for deduction

e.

f. g. h.

ii. (b) Definitions of Qualifying Individual and Employment-Related Expenses For purposes of this section: iii. (1) Qualifying Individual 1. (A) Dependent who is under age 13 during the taxable year 2. (B) Dependent who is physically or mentally incapable of caring for himself AND has same residence as taxpayer for more than 50% of the taxable year 3. (C) Spouse of taxpayer who is physically or mentally incapable of caring for himself AND has same residence as taxpayer for more than 50% of the taxable year iv. (2) Employment- Related Expenses 1. (A) In General Amounts paid for: a. (i) Expenses for household services b. (ii) Expenses for care of qualifying individual v. (c) Dollar Limit on Amount Creditable Amount of employment-related expenses incurred in the taxable year shall not exceed: 1. (1) $3,000 for one qualifying individual 2. (2) $6,000 for 2 or more qualifying individuals Credit for Qualified Adoption Expenses 23 i. Non-refundable credit for non-recurring cost associated with the adoption of a child ii. Talking about expenses to adopt someone including (but not limited to): 1. Fee 2. Court Costs 3. Attorney Fees 4. Social Service Review Costs 5. Transportation Costs iii. Can t be violating a federal/state law when deducting a fee iv. Does NOT apply to surrogate parenting v. Can t be reimbursed by employer vi. General Rule: Child must be under 18 1. Exception: Severely disabled person over 18 vii. 2009 Max Credit = $12,150 1. Special needs child NO limit 2. Phased out over $20,000 viii. Deductible when you spend the money year before, year of, year after Child Tax Credits 24 Credit for Elective Deferrals and IRA Contributions 25B Ex: i. 2.) Taxpayers who are married and have 3 qualifying children earn wages of $18,000 in 2006. This is Taxpayer s only income for the year. Taxpayers file a joint return and use the standard deduction. Assuming there are no inflation adjustments and considering only the 32 credit, what are Taxpayer s consequences for the year?

1. $18,000 MFJ standard deduction for 2006 = X amount a. Taxpayer has 3 qualifying children $3,556 credit i. Child Tax Credits i. Code Section 24 ii. GR: $1,000 per child iii. Threshold amount 1. Phase-out: For every $1,000 above threshold limit, deduct $50 from applicable amount 2. Threshold: $75,000 (S), $110,000 (MFJ) and $55,000 (MFS) 3. For each fraction thereof, round up ($1,001 rounds up to $2,000) iv. Qualifying Child 1. Children under the age of 17 2. U.S. citizen, national or resident of US 3. Claim child as a dependent v. MFJ, 4 children, $140,000 in modified AGI 1. Phase-out at $110,000 2. $30,000 over threshold 3. $4,000 for children (un-phased out) 4. $1,500 due to phase-out ($30,000/$1,000 x 50) 5. $2,500 deduction allowed vi. Change in new tax law 1. Deals with clients at the lower end of the spectrum 2. Increased the eligibility for lower income people a. Lowered the amount so it easier for people to obtain vii. Retirement Savings Credit 1. Income below threshold a. $50,000 (MFJ), $25,000 (S) 2. Cannot be claimed by another as a dependent 3. Cannot be a student j. Education Planning k. Hope Scholarship Tax Credit i. Encourage education ii. Jobs change throughout a lifetime iii. Per student tax credit for the first 2 years of post-secondary education iv. Changing to American Opportunity Tax Credit (2009/2010) 1. 100% of the 1st $2,000 and 25% of the next $2,000 (cap is $2,500) 2. Under the new law, get it for 4 years 3. Per child credit

4. Ratable Phase out: a. $80,000 - $90,000 for S or HOH b. $160,000 - $180,000 for MFJ c. MAGI applicable floor/ceiling-floor d. Single income = $83,000 e. $83,000 - $80,000 = $3,000/$90,000 - $80,000 = $10,000 f. $3,000/$10,000 = 30% g. 30% x $2500.00 = $750.00 h. $2500.00 - $750.00 = $1750.00 5. 40% of credit is refundable (even if do not owe taxes, can get credit) but not for students if between 18 and 24 and paying for self v. Cannot get both Hope Credit and Lifetime Learning Credit vi. Tuition is a qualified education expense 1. Fees associated with cost of enrollment (student activity fee) 2. Course related books, supplies and equipment vii. New law: 1. Computers and computer equipment are qualified education expenses viii. Room and board is not included in qualified education expenses 1. Insurance is not included 2. Transportation not included ix. Qualified Student 1. At least time (school determines what is time enrollment) l. Lifetime Learning Credit i. Applies more broadly ii. Phase out the same as Hope iii. $2,000 per household, not per student iv. Is available for graduate school and continuing education v. Felony drug conviction does not apply to this credit but it does apply to the Hope Credit vi. Available for all education vii. Do not have a time required viii. Same definition of qualified expenses ix. Credit is non-refundable 1. Not carved out as a 40% exception (refundable) m. Student Loan Interest i. $55,000 -$ 70,000 (S)

ii. Phase out: 1. MAGI floor/ceiling-floor 2. Subtract amount phased out from MAGI iii. $2,500 deduction for student loan interest iv. Above the line deduction v. Could be for self, spouse or dependent vi. Includes interest paid on room and board, transportation 1. Greater of what one pays or what the school would have charged for room and board n. Tuition and Fees Deduction i. You cannot use with Hope or Lifetime Learning Credit ii. Deduct $4,000 for qualified higher education expenses if AGI is = $65,000 or under (S) or $80,000 (MJF) iii. Cannot take it with MFS XLVI. Retirement Planning a. Knowledge Gap People don t know what they are doing 1. This is true for any area of law you are doing ii. System itself is not a perfect system 1. The retirement system is one cog b. Social Security i. Rule 1: Most people will be eligible for it 1. 6.2% up to the taxable wage base 2. 1.45% on all income c. Most people will get a fairly generous benefit from social security i. Right now you can get $25,000 max these are the top wage earners d. Viable e. No one who understands social security thinks that it is going away or going to die i. There are academic reports that say people believe that it is more likely they will see an alien than receive social security benefits ii. No politician has ever talked about changing it iii. Could argue it is the greatest anti-poverty program in the entire world f. Intended to provide a base of coverage not intended to help you eat 7 days a week g. Get benefits at the earliest possible age of 62 i. Born 1967 or after you get it at 67 if you take it at 62, you only get 70% of it h. Good Things to Know: i. For low income clients social security is never taxed, for some over a certain range it is partially taxed, for those at the high end 15% is excluded from tax

ii. If you are covered by the system and something happens to you, your survivors get benefits under the system i. SEP Plan i. Simplified plan j. 401(k) Plans i. Get to invest money that you might have paid in taxes ii. More necessary to put money in when you are younger money will grow larger if you put it away when you are younger iii. Now have Roth 401(k)s iv. Need only like 70-80% of the money that you were earning before retirement v. When you go down to 80% it might not be so bad because you will no longer have FICA taken out k. Annuities i. Compete with mutual funds ii. Take a certain percentage of your money and buy yourself a paycheck for the rest of your life l. Retirement distributions are taxed 72T i. If you take money out before you are supposed to, you get hit with a 10% tax m. Under some plans you MUST start taking your money at age 70