McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Principles of Taxation Chapter 16 Tax Consequences of Personal Activities

Slide 16-2 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Objectives  Taxable and nontaxable gratuitous receipts  Divorce, alimony, child support  Taxation of Social Security benefits  Itemized deductions for medical, taxes, charity  Casualty and theft  Hobby income and expenses  Home owning benefits  AMT

Slide 16-3 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Gratuitous Receipts  Prizes and awards are taxable.  Some exceptions if give to charity.  Scholarships are excluded to the extent spent on what?  Gifts, inheritances, life insurance proceeds excluded.  See AP1, 3.

Slide 16-4 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Settlements and Government Payments  Legal settlements taxable unless compensation is for what?  Are the following taxable?  Workers’ compensation payments?  Unemployment compensation payments?  Need-based payments like welfare ?  Social security?  See AP4.

Slide 16-5 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Divorce  Property settlements are excluded - like gifts. What basis does the receiving spouse have?  Alimony is taxable to __________, deductible to __________.  Is child support taxable or deductible?  See AP 2.

Slide 16-6 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Sales of Personal Use Assets  Personal use assets may not be depreciated.  Are losses deductible?  What character do most gains on personal use assets have? (Except literary, musical, artistic creations.)

Slide 16-7 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Personal Expenses - Medical  Deduct excess of unreimbursed expenses over 7.5% of AGI.  Qualifying medical include:  See AP 5.

Slide 16-8 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Personal Expenses - Taxes  What kinds of taxes may you deduct?  What kinds of taxes may you NOT deduct? Costs of tax compliance (e.g. CPA) are miscellaneous expenses deductible if > ____% AGI in aggregate.  See AP7.

Slide 16-9 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Charity  General limit - deduct up to ____% of AGI for cash donation (less for capital assets).  carryover excess for ____ years.  Deduction amount:  LT capital assets = ______ of property  other property = lesser of ____ or______.  Special rules, limits for donations to foundations, capital gain property.  See AP8.

Slide McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Tax Subsidies for Education  EE Savings Bonds - interest excluded to the extent used for tuition and fees. (Rich phase-out begins $83650 MFJ in 2001.)  Hope scholarship credit - 1st 2 years of college. Max $_______ per year per student based on tuition/fees.  Lifetime learning credit = 20% of tuition/feesx Max $5000 per year = total maximum credit of $______/yr.  Hope and Lifetime phase out begins $80,000 MFJ.  Education IRA - withdrawals spend on education are tax-free.  Interest on qualified education loan is deductible for first 60 months of payments - max $2500 per year. Phase-out begins $60,000 MFJ.

Slide McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Personal Losses  Loss on disposition of a personal assets is NOT deductible.  Gains on disposition of a personal assets IS taxable.  Casualty and theft losses  Loss = lesser of (___________or decline in ______) -__________________  Deduction = Loss - $1____ per casualty - ____% AGI. See AP 11.  Hobby deductions limited to hobby income  Not a hobby if profits in____ of 5 years

Slide McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Home Ownership  Benefit of not paying rent is economic income, but is NOT taxed.  Interest deduction  interest on acquisition debt up to $_____ million  interest on home equity debt up to $___________  deduction available for principal residence and one other personal residence (not a primary rental property)  See AP15.

Slide McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Home Ownership  Vacation home rental activity  Treated as a vacation home if the personal use exceeds the greater of _____ days or _____% of rental days.  Expenses are limited to rental income (NO LOSS).  Carryforward excess expenses.  See Chapter 15 for rules if rental property is NOT a vacation home.

Slide McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Home Ownership  Exclude gain on sale if home is principal residence_____ years out of 5 years ending on date of sale.  Exclude only one gain every 2 years.  $_______________ MFJ, $250,000 other  See AP 16, 17.

Slide McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Itemized Deductions as AMT Adjustments  Medical allowed only > 10% agi.  Tax deduction disallowed.  Miscellaneous itemized deductions disallowed.  Home equity debt interest disallowed.