Tax Formula and Tax Determination;

Tax Formula and Tax Determination;
An Overview of Property Transactions © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture (slide 1 of 2)
Aleha maintains a household in which she lives with her Unemployed husband (Trevor) Stepdaughter (Paige) A family friend (Terrah) She provides more than half of the support of both Paige and Terrah Terrah was fatally injured in an automobile accident in February Aleha paid for her hospitalization and funeral expenses Paige, an accomplished gymnast, graduated from high school last year Paige has a part-time job but spends most of her time training and looking for an athletic scholarship to the ‘‘right’’ college 2 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture (slide 2 of 2)
In March, Trevor left for parts unknown and has not been seen or heard from since Aleha sold her wedding rings to a cousin who was getting married The rings cost $11,800 The rings were sold for their approximate value of $9,000 Based on these facts, what are Aleha’s income tax concerns for the current year? Read the chapter and formulate your response 3 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Income - Broadly Defined
Includes all the taxpayer’s income, both taxable and nontaxable Essentially equivalent to gross receipts It does not include a return of capital or receipt of borrowed funds © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Partial List of Exclusions from Gross Income
© 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gross Income The Internal Revenue Code defines gross income broadly as ‘‘except as otherwise provided , all income from whatever source derived’’ Gross income does not include unrealized gains © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Partial List of Gross Income Items

Deductions - Individual Taxpayers
Individual taxpayers have two categories of deductions: Deductions for adjusted gross income (AGI) Deductions from adjusted gross income © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Deductions For AGI (slide 1 of 2)
Sometimes known as above-the-line deductions On the tax return, they are taken before the ‘‘line’’ on the tax return designating AGI © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Deductions For AGI (slide 2 of 2)
Deductions for AGI include: Ordinary and necessary expenses incurred in a trade or business One-half of self-employment tax paid Alimony paid* Certain payments to an IRA and Health Savings Accounts Unreimbursed moving expenses* Fees for college tuition and related expenses Interest on student loans The capital loss deduction, and Others * The Tax Cuts and Jobs Act suspended and/or modified these deductions for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026. © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Adjusted Gross Income (AGI)
AGI is an important subtotal Serves as the basis for computing percentage limitations on certain itemized deductions such as Medical expenses Charitable contributions Certain casualty losses For example, medical expenses are deductible only to the extent they exceed 7.5% of AGI This limitation might be described as a 7.5% “floor” under the medical expense deduction © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Deductions From AGI (slide 1 of 3)
Deductions from AGI include: The greater of: Itemized deductions, or The standard deduction Personal and dependency exemptions* *Exemption deductions are not allowed from 2018 through 2025 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The standard deduction is the sum of two components: Basic standard deduction Amount allowed is based on taxpayer’s filing status Additional standard deductions Available for taxpayers who are Age 65 or over, and/or Blind Two additional standard deductions are allowed for a taxpayer who is age 65 or over and blind Amount allowed depends on filing status © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Standard Deduction (slide 1 of 2)
The basic standard deduction amount depends on filing status of taxpayer © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Standard Deduction (slide 2 of 2)
Additional standard deduction For taxpayers age 65 or older and/or legally blind © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Determining Standard Deduction
Examples (2018 tax year): Taxpayer is single, blind, and age 65 or older SD = $12,000 (BSD) + $1,600 (ASD) + $1,600 (ASD) = $15,200 Taxpayers are married, filing jointly, one blind, and both age 65 or older SD = $24,000 (BSD) + $1,300 (ASD) + $1,300 (ASD) + $1,300 (ASD) = $27,900 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Taxpayers Ineligible For Standard Deduction
Certain taxpayers cannot use the standard deduction: Married, filing separately, when either spouse itemizes deductions Nonresident aliens Individual filing return for tax year of less than 12 months because of change in annual accounting period © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Standard Deduction Limit for Person Claimed as Dependent
Individual claimed as dependent has a basic standard deduction in 2018 limited to the greater of: $1,050 $350 plus earned income (but not exceeding the basic standard deduction) Additional standard deduction amount(s) still available © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Examples of SD Limit (slide 1 of 2)
Dependent’s Standard Deduction (2018 tax year): A blind child who earns $200 and is claimed by parents as a dependent SD = $1,050 (BSD) + $1,600 (ASD) = $2,650 A child who earns $1,500 and is claimed by parents as a dependent SD = $1,850 [greater of $1,050 or ($350 + $1,500 earned income)] © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Examples of SD Limit (slide 2 of 2)
Dependent’s Standard Deduction (2018 tax year) A child who earns $11,800 and can be claimed by parents as a dependent SD = $12,000 [greater of $1,050 or ($350 + $11,800 earned income) limited to the $12,000 standard deduction for a single taxpayer] © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Personal and Dependency Exemption Amounts
2018: $0 per exemption 2017: $4,050 per exemption The TCJA effectively eliminates personal & dependency exemptions after 2017 by reducing the exemption amount to zero. In other areas of the law that reference the exemption amount, the dollar amount to be used is $4,150 (adjusted for inflation). Effective for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026. Before 2018, the deduction was allowed for personal and dependency exemptions One per taxpayer (two personal exemptions when married, filing jointly) and for each dependent Exception: Individual claimed as dependent by another taxpayer does not receive a personal exemption © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Dependents (slide 1 of 2) Under the Internal Revenue Code, there are two types of dependents—a qualifying child or a qualifying relative Unique tests apply to each type of dependent A qualifying child must meet the following tests: Relationship Residence Age Support © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Dependents (slide 2 of 2) Congress has tried to establish a uniform definition of qualifying child for purposes of: Head-of-household filing status Earned income tax credit Child and dependent tax credit Credit for child and dependent care expenses © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Relationship Test The child must be the taxpayer’s:
Son or daughter Stepson or stepdaughter Brother or sister Stepbrother or stepsister Half brother or half sister, or A descendant of such individual (e.g., grandchildren, nephews, nieces) A child who has been adopted, or whose adoption is pending, qualifies A foster child may also qualify © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Residence Test A qualifying child must live with the taxpayer for more than half of the year Temporary absences from the household due to special circumstances (e.g., illness, education) are not considered © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Age Test The child must be under age 19 or under age 24 in the case of a student A student is a child who, during any part of five months of the year, is enrolled full time at a school or government-sponsored on-farm training course Individuals who are disabled are not subject to the age test © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 15 Qualifying Child
Return to the facts of The Big Picture on p. 3-1 Does Paige meet the requirements of a qualifying child as to Aleha? Paige satisfies the relationship and residence tests, but the answer to the age test remains unclear Since she is not a full-time student or disabled, she must be under 19 to meet the age test 29 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Support To be a qualifying child, the individual must not be self-supporting Cannot provide more than one-half of his or her own support In the case of a full-time student, scholarships are not considered to be support © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Tiebreaker Rules In situations where a child may be a qualifying child for more than one person Tiebreaker rules specify which person has priority in claiming the child as a dependent © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Qualifying Relative A qualifying relative can be a dependent if the following tests are met: Relationship Gross income Support © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Relationship Test The relationship test for a qualifying relative is more expansive than for a qualifying child. Also included are the following relatives: Lineal ascendants (e.g., parents, grandparents) Collateral ascendants (e.g., uncles, aunts) Certain in-laws (e.g., son-, daughter-, father-, mother-, brother-, and sister-in-law) The relationship test also includes unrelated parties who live with the taxpayer © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 20 Qualifying Relative
Return to the facts of The Big Picture on p. 3-1 Is Terrah a qualifying relative? Although Terrah is unrelated to Aleha, she qualifies as Aleha’s dependent by being a member of the household Since Terrah is a dependent, Aleha can also claim the medical expenses she paid on Terrah’s behalf The funeral expenses are not deductible 34 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gross Income Test Dependent’s gross income must be less than the exemption amount ($4,150 for 2018 and $4,050 for 2017) © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 23 Dependency Exemptions
Return to the facts of The Big Picture on p. 3-1 Assuming that Paige is not a qualifying child, can she be a qualifying relative? She meets the relationship and support tests, but what about the gross income test? If her income from her part-time job is less than $4,150 in 2018, she does qualify as Aleha’s dependent. 36 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Support Test Taxpayer must provide more than 50% of the qualifying relative’s support Only amounts expended are considered in the support test Scholarships are not considered in the support test Two exceptions to the support test: Multiple support agreements Children of divorced parents © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Multiple Support Agreements
Allows one member of a group providing more than 50% of support to claim individual even though no one person provides more than 50% support Eligible parties must provide more than 10% of support Each eligible party must meet all other dependency requirements Example - Allows children of elderly parent to claim exemption for parent when none individually meets the 50% support test © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Children of Divorced Parents
Special rules apply if the parents meet the following conditions: They would have been entitled to claim the individual as a dependent had they been married and filed a joint return They have custody (either jointly or singly) of the child for more than half of the year Under the general rule, the parent having custody of the child for the greater part of the year (i.e., the custodial parent) is entitled to claim the dependent General rule does not apply if A multiple support agreement is in effect Custodial parent issues a waiver in favor of the noncustodial parent © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Other Rules for Determining Dependents
In addition to fitting into either the qualifying child or the qualifying relative category, a dependent must also meet: The joint return test The citizenship or residency tests © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Joint Return Test Dependent cannot file a joint return with spouse unless: Filing solely for refund of tax withheld No tax liability exists for either spouse © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Citizenship or Residency Test
Dependent must be a U.S. citizen or a resident of U.S., Canada, or Mexico for some part of the calendar year in which the taxpayer’s tax year begins An exception provides that an adopted child need not be a citizen or resident of the U.S. (or a contiguous country) as long as his or her principal abode is with a U.S. citizen © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Tests for Dependents (Summary)

Child and Dependents Tax Credits (slide 1 of 3)
Child and dependent tax credits are provided to individual taxpayers based on the number of their qualifying children and dependents A $2,000 tax credit is allowed for each qualifying child (including stepchildren and foster children). To be eligible for the credit, the child must be Under age 17, A U.S. citizen, and A dependent of the taxpayer In addition, a Social Security number must be provided for any qualifying child © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A $500 tax credit is allowed for each dependent of the taxpayer (other than a qualifying child) Examples of dependents qualifying for this credit include Children over age 16 (including full-time students under age 24), Children without a Social Security number, Parents of the taxpayer, and “Members of the household” For purposes of the dependent tax credit, these qualifying relatives must be a U.S. citizen, a U.S. national, or a U.S. resident The child tax credit is subject to phaseout based on a taxpayer’s adjusted gross income; the dependent tax credit is not subject to a phaseout © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Refundable Portion of Child Tax Credit For all taxpayers with qualifying children (regardless of how many), the child tax credit is refundable to the extent of the lesser of: $1,400 of the child tax credit for each qualifying child, or 15% of the taxpayer’s earned income in excess of $2,500 The $1,400 amount will be adjusted for inflation beginning in 2019 The $2,500 amount will not be inflation adjusted The dependent tax credit is nonrefundable © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Filing Status There are 5 filing statuses
Single Married, filing jointly Surviving spouse (qualifying widow or widower) Head of household Married, filing separately Filing status affects tax rate brackets, standard deduction, and other amounts © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Single Filing Status Includes a taxpayer who is unmarried or separated from spouse by a divorce decree or separate maintenance agreement and does not qualify for another filing status Marital status is determined as of the last day of the tax year When a spouse dies during the year, marital status is determined as of the date of death © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Married Filing Jointly (MFJ) Filing Status
Married as of last day of taxable year, or Spouse dies during taxable year © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Surviving Spouse Filing Status
Same tax rate brackets as married, filing jointly File as surviving spouse for 2 years after death of spouse if taxpayer maintains a home in which a dependent child lives For the year of death, surviving spouse is treated as being married Thus, a joint return can be filed if the deceased spouse’s executor agrees © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Married Filing Separately Filing Status
Married but not filing a return with spouse and not abandoned spouse © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Head of Household (HH) Filing Status
Must be unmarried as of end of year or an abandoned spouse Must pay more than half the cost of maintaining a household which is the principal home of a dependent for more than half of tax year A dependent must satisfy either the qualifying child or the qualifying relative category A qualifying relative must also meet the relationship test © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 40 Head-of-Household Filing Status
Return to the facts of The Big Picture on p. 3-1 Assuming that Aleha can be treated as single (i.e., not married), can Terrah qualify Aleha for head-of-household filing status? The answer is no Even though Terrah can be claimed as Aleha’s dependent, she does not meet the relationship test for head-of-household status Terrah qualified as a dependent under the member-of the-household test 53 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Exception to the Head of Household Requirements
Head of Household may be claimed if taxpayer maintains a separate home for his or her parents At least one parent must qualify as a dependent © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Abandoned Spouse Allows married taxpayer to file as Head of Household if taxpayer: Does not file a joint return Paid more than half the cost of maintaining a home Spouse did not live in home during last 6 months of tax year Home was principal residence of taxpayer’s child for more than half of year Can claim child as a dependent © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 43 Abandoned Spouse Filing Status
Return to the facts of The Big Picture on p. 3-1 Can Aleha qualify as an abandoned spouse? Yes, if she can claim Paige as a dependent—either as a qualifying child or as a qualifying relative If so, Aleha can use head-of-household filing status If not, her filing status is married person filing separately 56 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Filing Requirements (slide 1 of 2)
General Rule: Tax return must be filed if gross income is ≥ the standard deduction The additional standard deduction for being age 65 or older is considered in determining the filing requirement Except in the case of dependents, the additional standard deduction for blindness does not apply for this determination Special rules apply for dependents and self-employed taxpayers © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Filing Requirements (slide 2 of 2)
Tax return of an individual is due on or before the 15th day of the 4th month after taxpayer’s year end Most individuals are calendar year taxpayers; as a result, the due date is April 15 May obtain a 6 month extension of time to file Excuses a taxpayer from penalty for failure to file, not from penalty for failure to pay If more tax is owed, extension request (Form 4868) should be accompanied by check for balance of tax due © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Taxes Rates Tax liability is computed using either the Tax Table method or the Tax Rate Schedule method Most taxpayers use the Tax Tables The Tax Tables must be used if taxable income is below $100,000 Certain taxpayers may not use the Tax Table method including: An individual who files a short period return Individuals whose taxable income exceeds the maximum (ceiling) amount in the Tax Table An estate or trust For 2018, the tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37% © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Kiddie Tax (slide 1 of 4) Under the kiddie tax, net unearned income (NUI) of a child is taxed using special rules Child must be under age 19 at end of year (or under age 24 if a full-time student) NUI generally equals unearned income less $2,100 (2018 tax year) The kiddie tax does not apply if The child has earned income that exceeds half of his or her support, If the child is married and files a joint return, or If both parents are deceased © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Kiddie Tax (slide 2 of 4) Unearned income includes: Taxable interest
Dividends Capital gains Rents Royalties Pension and annuity income, and Unearned income from trusts © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Kiddie Tax (slide 3 of 4) Computing net unearned income in 2018:
Less: $1,050 Less: The greater of: i) $1,050 ii) Allowable itemized deductions connected with production of unearned income Equals: Net unearned income © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Kiddie Tax (slide 4 of 4) If a child is subject to the “kiddie tax,” the tax computation depends on whether the child has any earned income (and, if so, how much earned income) Child with No Earned Income. If the child has no earned income, the child’s tax is determined using the Estate and Trust Tax Rate Schedule Child with Earned Income. If a child has earned income, a modified Single Tax Rate Schedule is used If a child has both interest income and qualified dividend income (QDI) in net unearned income, the interest income is taxed as ordinary income; the QDI (along with any net capital gain) is taxed at the preferential 0%, 15%, or 20% rates. © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gains and Losses from Property Transactions (slide 1 of 3)
In order for gains (losses) to be recognized (included in gross income), they must be realized: Amount realized – adjusted basis = Realized gain (loss) Amount realized = selling price – costs of disposition Adjusted basis = cost + capital additions – cost recovery © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

All realized gains are recognized unless a specific tax provision provides otherwise (e.g., nontaxable exchanges) Realized losses may or may not be recognized depending on the circumstances Generally, losses on the sale or disposition of personal use property are not recognized © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Once recognized gains or losses have been determined, they must be classified as ordinary or capital Ordinary gains are fully taxable Ordinary losses are fully deductible Capital gains and losses are subject to special tax treatment © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gains and Losses from Capital Asset Transactions (slide 1 of 2)
Capital assets are defined as any property other than: Inventory, Accounts Receivable, and Depreciable property or real property used in a business Most personal use assets owned by individuals are capital assets Losses on these assets are not deductible © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gains and Losses from Capital Asset Transactions (slide 2 of 2)
Gains and losses from capital asset transactions must be netted Net gains and losses by holding period If excess losses result, they are shifted to the category carrying the highest tax rate © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Maximum Tax Rates for Net Capital Gains of Individuals

Treatment of Capital Losses
Net capital losses of individuals are deductible for AGI up to $3,000 yearly Excess capital losses are carried over to the next tax year When carried over, capital losses retain their classification as short- or long-term © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 62 Treatment Of Net Capital Loss
Return to the facts of The Big Picture on p. 3-1 Aleha’s sale of her wedding rings resulted in a realized capital loss of $2,800 $9,000 (selling price) - $11,800 (cost basis) Because they were personal use property, Aleha cannot deduct the loss 71 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Refocus On The Big Picture (slide 1 of 4)
Aleha’s major concern is her filing status If she qualifies as an abandoned spouse, she is entitled to file as head of household If not, she is considered to be a married person filing separately In order to be an abandoned spouse, Aleha must be able to claim Paige as a dependent 72 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

To be a dependent, Paige must meet the requirements of a qualifying child or a qualifying relative For qualifying child purposes, Paige must meet either The age test (i.e., under age 19) The full-time student (under age 24) test Paige is not a full-time student - is she under age 19? If so, she is a qualifying child If Paige is not a qualifying child, is she a qualifying relative? Here, the answer depends on meeting the gross income test How much did Paige earn from her part-time job? If her earnings are under $4,150, she satisfies the gross income test 73 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

If Paige can be claimed as a dependent, Aleha is an abandoned spouse entitled to head-of-household filing status If not, she is a married person filing separately Terrah can be claimed as Aleha’s dependent because she is a member of the household It does not matter that she died in February The dependency exemption amount need not be apportioned and is allowed in full Because Terrah is her dependent, Aleha can claim the medical expenses she paid on Terrah’s behalf The funeral expenses, however, are not deductible 74 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Does Terrah qualify Aleha for head-of-household filing status? No; although she is a dependent, Terrah does not meet the relationship test The sale of the wedding rings results in a capital loss of $2,800 ($9,000 – $11,800) Because the loss is for personal use property, it cannot be claimed for tax purposes 75 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Dr. Donald R. Trippeer, CPA
If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: Dr. Donald R. Trippeer, CPA SUNY Oneonta © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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