tax consequences of personal activities 17-1 chapter 17 mcgraw-hill/irwin copyright © 2013 by the...
Post on 03-Jan-2016
215 Views
Preview:
TRANSCRIPT
Tax Consequences of
Personal Activities
17-1
Chapter 17
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
17-17-22
Gross IncomeGross Income
• Section 61 states that gross income means all income from whatever source derived – even income from personal activities
17-17-33
Gratuitous ReceiptsGratuitous Receipts
• Prizes and awards are included in gross income
• Scholarships are excluded to the extent spent on:• Tuition, books, fees, equipment
required by institution
• Gifts, inheritances, and life insurance death benefits are excluded from gross income
17-17-44
Legal Settlements and Government PaymentsLegal Settlements and Government Payments
• Legal settlements are included in gross income unless compensation for physical injury or illness
• Workers’ compensation payments are excluded• Unemployment compensation payments are included• Need-based payments such as welfare and food stamps
are excluded• Social security:
• 85%, 50%, or 0% included in gross income depending on income level
17-17-55
DivorceDivorce
• Property settlements are nontaxable• Transferred property
takes a carryover basis
• Alimony is taxable to the recipient, deductible above-the line by the payer
• Child support is neither taxable nor deductible
17-17-66
Personal Use Assets and Personal Use Assets and Personal ExpensesPersonal Expenses
• Personal use assets• Personal use assets may not be depreciated• Gains on sale are generally capital gain• Losses on sale are not deductible
• No deduction is allowed for personal, living, or family expenses except for:• Medical expenses• Local, state, and foreign income tax payments• Home mortgage interest• Charitable contributions
17-17-77
Personal Expenses - MedicalPersonal Expenses - Medical
• Taxpayers may deduct the excess of unreimbursed expenses over 7.5% of AGI as an itemized deduction
• Qualifying medical expenses include:• Clinics, hospitals, long-term care facilities• Medical aids (e.g., hearing aids, crutches)• Prescription drugs• Medical insurance premiums• Doctors, dentists, chiropractors
17-17-88
Personal Expenses - TaxesPersonal Expenses - Taxes
• Individuals are allowed an itemized deduction for:• Real or personal property taxes paid on nonbusiness
assets• Either state and local sales taxes or state and local
income taxes
• Costs of tax compliance (e.g. tax preparation fees) are miscellaneous itemized deductions
17-17-99
Personal Expenses – Charitable ContributionsPersonal Expenses – Charitable Contributions
• General limit – Itemized deduction limited to 50% of AGI for cash donation (less for capital assets) • Carryover excess as an itemized deduction for 5 years
• Deduction amount• LT capital assets = FMV of property• Other property = lesser of FMV or basis
17-17-1010
Tax Subsidies for EducationTax Subsidies for Education
• EE Savings Bonds• Deduction for qualified tuition and fees • Deduction for interest on qualified education loans• American Opportunity Credit• Lifetime Learning Credit• Coverdell education savings accounts• Qualified tuition programs
17-17-1111
Casualty LossesCasualty Losses
• Casualty and theft losses• Loss equals lesser of adjusted basis or
decline in FMV of property resulting from casualty or theft• Loss reduced by insurance
reimbursement
• Loss in excess of $100 floor per casualty is deductible
• Deduction limited to excess of aggregate losses over 10% AGI
17-17-1212
Hobby and Gambling LossesHobby and Gambling Losses
• Activity not entered into for profit (hobby)• Revenue is included in gross income• Expenses are miscellaneous itemized deductions
limited to the amount of revenue from hobby• If the activity generates a profit in 3 of 5 years, the IRS
presumes it is a business and losses are deductible
• Gambling losses• Itemized deduction but not miscellaneous• Limited to gambling winnings
17-17-1313
Home Mortgage InterestHome Mortgage Interest
• Qualified residence interest is an itemized deduction• Interest on acquisition debt up to $1 million • Interest on home equity debt up to $100,000
• Deduction is available for mortgage on principal residence and one other personal residence
17-17-1414
Vacation Home RentalVacation Home Rental
• Residence is subject to vacation home rules if the owner’s days of personal use exceed the greater of 14 days or 10% of rental days
• Expenses attributable to rental days are deductible to the extent of rental revenues• Vacation home rental can’t generate a net loss deductible
against other income • Nondeductible loss carries forward
17-17-1515
Gain on Sale of Principal ResidenceGain on Sale of Principal Residence
• $250,000 exclusion of gain on sale of home• Owner must have used the home as a principal residence for two
years out of the five years ending on date of sale• Exclusion doubled to $500,000 for MFJ
• Exclusion applies to only one sale in a two-year period
• Owners who sell a home but don’t satisfy the above requirements may be eligible for a reduced exclusion if the sale was necessitated by:• Change of employment• Health reasons• Unforeseen circumstances
17-17-1616
Itemized Deductions as AMT AdjustmentsItemized Deductions as AMT Adjustments
• Medical deductions are allowed only to the extent they exceed 10% AGI
• Deductions for state and local taxes are disallowed • Miscellaneous itemized deductions are disallowed• Interest on home equity debt is disallowed
top related