Tax Accounting

Income- includes all the taxpayers income, both taxable and nontaxable except as otherwise provided,
all income from whatever source derived. Does not include a return of capital, borrowed funds or
unrealized gains.
2 types of deductions- Deductions in arriving at adjusted gross income (AGI) and Deductions from AGI.
Also additions to income before AGI and a few after in arriving at taxable income
Deductions for AGI are not available if 1040 EZ is used. Only ones for 1040A are certain payments to an
IRA, fees for college tuition and related expenses, interest on student loans.
AGI serves as the basis for computing percentage limitations on certain itemized deductions such as:
medical expenses, charitable contributions, certain causality losses. Medical expenses are only
deductible if they exceed 10% AGI (10% floor), 7.5% if over 65
Deductions from AGI include the greater of : itemized deductions, or the standard deductions and
personal and dependency exemptions ($3,900)
Standard deduction is the sum of basic standard deduction, and additional standard deductions (65 and
over, blind) more taxpayers over 65 take the standard deduction
5 filing statuses: Single, Married, filing jointly (MFJ), Surviving spouse (widow), Head of Household,
Married, filing separately. Status affects tax brackets.
(MFJ) Married as of last day of taxable year or spouse dies during taxable year. When a spouse dies
during the year, marital status is determined as of the date of the death.
Widow- same tax rate brackets as married, filing jointly. Can file for 2 years after death if taxpayer
maintains a home in which a dependent child lives.
MFS- may reduce taxes when separated but not divorced or large differences in income between
spouses
Head of Household (HH)- unmarried as end of the year or abandoned spouse. Must pay> half the cost
for a dependent for >half the year. Dependent must satisfy either qualifying child or the qualifying
relative category. HH may be claimed if taxpayer maintains a separate home for their parents.
Widow may file for HH if no joint return, paid>half the cost of a home, Spouse did not live in home last 6
months, child lived there>half the year (can claim child as dependent)
MFJ, or surviving spouse has highest standard deduction
Taxpayers that cant use the standard deduction- MFS when either spouse uses itemized deductions,
aliens, individual filing return for tax year of less than 12 months
Dependents have a basic standard deduction of $1,000 or $350 plus earned income but cant exceed the
normal $6,100. Additional standard deduction is still available (blind, 65 years old)
Personal and dependency exemption amounts- $3,900, one per taxpayer (two personal exemptions
when MFJ) and for each dependent. Gross income must be less than exemption amount.

Dependency exemption- same as personal exemption except for a dependent (either a qualifying child
or a qualifying relative)
Qualifying child- relationship, abode > the year, illness and education dont count, age<19, 24 if
student, no age if disabled, >1/2 support
Qualifying relative- Relationship (most relatives), gross income, support.
Support test- taxpayer must provide more than 50% of the qualifying relatives support. Exceptions are
multiple support agreements, children of divorced parents.
Multiple support agreements- allows one member not providing>50% to claim an individual. Just must
be>10%. General rule is the parent having custody of the child for the greater part of the year is entitled
to the exemption.
In addition into fitting into either the qualifying child or relative category must not have filed a joint
return and must pass citizenship/residency tests. Adopted child need not be a citizen as long as their
principal abode is with a U.S. citizen.
Phase out exemptions- 2% for each fraction thereof.
$1,000 child tax credit is allowed for each dependent child under the age of 17.
Form 4868 is extension to file
Tax liability is computed using either the tax table method or the tax rate schedule. Most use tax table,
use tax rate schedule if files a short period return, or individuals whose taxable income exceeds
$100,000 (ceiling).
Net Unearned Income (NUI) of a child is taxed at parents rate. Child under 19, 24 if student.
(Form 8615) Kiddie Tax doesnt apply if the child has earned income that exceeds half of his or her
support, child is married and files joint return, or if both parents are deceased.
Unearned income includes- taxable interest, dividends, capital gains, rents, royalites, pension and
annuity income and unearned income from trusts.
Gains and losses from property transactions- must be realized, a measurable transaction must have
occurred. All gains are recognized unless specific tax provision. Generally loss on the sale of personal use
are not recognized.
Once recognized gains or losses must be classified as ordinary (short-term) or capital (long term).
Ordinary gains are fully taxable. Ordinary losses are fully deductible.
Capital gains- short term- 35%, long term- 28%, All other long term gains depends on tax bracket. It is
reduced by one bracket.
Net capital losses of individuals are deductible for AGI up to $3,000 yearly. Excess capital losses are
carried over to the next year.

Chapter 4
Gross Income includes all income from whatever source derived, unless specifically excluded under the
code. Income is recognized when realized. Recognized whether it is in the form of cash or cash
equivalents.
3 primary methods of accounting for tax purposes- cash receipts and disbursements method (common
for individual), accrual method (common for C-Corps more compliance with GAAP but not taxes), hybrid
method- mix of cash and accrual.
Cash Receipts method- income is recognized in the year it is actually or constructively received in cash or
cash equivalent.
Accrual method- advance payment for services to be performed after year-end is included in income in
the year following receipt. Prepaid receipts are recognized in the year received, or when earned.
Hybrid Method- A combination of cash and accrual methods, generally used when inventory is a
material income-producing factor.
Income received by an agent- income received by the taxpayers agent is considered to be received by
the taxpayer. A cash basis principal must recognize the income at the time it is received.
(cash basis) Original Issue Discount interest is taxable when earned each year rather when interest is
received. Series E and EE bonds are not subject to the OID rules.
Claim of right doctrine- requires amounts received to be included in income even though the amount is
in dispute and might be returned to the payor at a later date. If payment has not been received, no
income is recognized until the claim is settled.
Dividends- unlike interest dividends do not accrue. Dividends received after 2012 are taxed at the same
marginal rate as net capital gains (one tax bracket down).
A partnership is not a separate taxable entity. Data necessary for determining each partners distributive
share of partnerships income and deductions on schedule E. Because a partner pays tax on income as
the partnership earns it, distributions are treated under as capital rules (distributions must exceed
investment to be taxable). Same as LLC and S Corporations (schedule E again).
Estates and Trust- taxed on the income that is actually distributed not on what is earned. Schedule E
Income in Community- former spouse income, interest, and dividends is taxable to you in the year you
are divorced if you live in a community property state. If divorced in October, I am responsible for 2/12
of my income and half of 10/12 of mine and wifes income.
Alimony (court ordered) - payments are for cash not property, dont live together at the time payments
are made, no obligation to make the payments after the death of the payee, payment is independent of
children.
Alimony is deductible by payor, included in gross income. Reverse for payments (deductible).
Transfer of personal property is not taxable- no recognized gain or loss for transferor

Child support is not taxable- if child reaches 21 and support stops that is deemed as child support not
alimony
Interest is imputed using federal government rates. Imputed interest= difference between the amount
that would have been charged at the federal rate and the amount charged. De minimis loans of < 10,000
between any parties can be ignored. 100,000 or less is limited to borrowers net interest and dividends.
$0 if <$1,000
Annuity income- purchaser pays fixed amount for the right to receive future stream of payments.
Partially a return of capital (not taxable) and interest (taxable). Once all capital is returned any payments
after is taxable as interest. Exclusion ratio= Investment in annuity/expected payments under annuity.
Prizes and awards- general rle FMV of item is included in income. Exceptions: award is for achievement,
tax exempt org. to receive it, did not enter or ask for the award, future services are not required to
receive it. Exception- $400-$1600, you refuse the award.
Life insurance- excludes premiums paid by employers on first $50,000 of coverage. Premiums on excess
coverage are included in gross income.
Unemployment compensation is taxable in full at the federal level. States vary but often allow
exclusions. The standard deduction will protect about $10,000-16,500 from being taxed.
Social security- up to 85% may be taxable. Based on MAGI. MAGI= AGI(excluding social security)
+foreign earned income exclusion + tax Exempt interest.