Determine Gross Income

Subtract Above The Line Deductions= AGI

AGI- Itemized or Stand. Deductions=Taxable Incom

Multiply by tax rate=Tentative tax Liability

Subtract and available credits= Final Tax Liability

Any income or any clearly realized accession to wealth- FMV of all property and services unless excluded

Includes Prizes and awards, windfalls, cancelled debts (not renegotiated prices or gifts of cancellation).  

Realization-Increased or decreased value of an asset is not realized until sale or other disposition

Property acquired under a "Claim of right" must be reported during year received, if unrestricted.

Amount realized- adjusted basis= gain or loss

Gift= take donee's basis

Cost Basis Rule- if by purchase, basis is cost of property + any money pd and borrowing incurred w/ purchase.  

Ordinary Income

v

 Capital Income

Ordinary- salary, rent, interest, royalties, inventory sales

Capital- stocks, bonds, real estate held for investment

Unless a broker or real estate agent= inventory

Life insurance proceeds, Inheritances, gifts (if detached and disinterested), compensatory damages, property damage reimbursements, interest on municipal bonds, scholarship money, Fringe benefits

Not excluded: gifts from employers, punitive, non-physical damages, emotional distress, 

1) Ordinary and necessary business expenses

2) Interest on biz loans used to operate

3) State and local taxes by businesses

4) Capital Expenses (spread over years of asset's economic benefit)

5) Depreciation- businesses- deduct wear and tear

6) Bad debts of a business

7) Capital Losses (against capital gains)

8) Moving Expenses- for work if over 75 miles

Below the Line Deductions (Itemized)

or 

Standard Deduction

1) Home mortgage interest (up to 1 million)

2) State and local taxes for individuals

3) Unreimbursed casualty losses-to extent exceeding 10% of AGI

4) Unreimbursed medical expenses- to extent exceeding 7.5% of AGI

5) FMV of property donated to charity

6) Business expenses

7) Miscellaneous deductions- to extent exceeding 2% of AGI

Alimony 

v

Child Support

Alimony is GI for spouse receiving, deductible by spouse paying if:

1) Pursuant to a written separation agreement

2) Do not live together

3) Ends at death

4) Cannot be in Kind

Child support is not deductible, but to the extent child support is reduced to increase alimony, it is child support in disguise and should be treated like child support (look for the offset).  

Cash Method of Accounting

v.

Accrual Method of Accounting

Cash Method- income when payment received and deductions when make payments.  Received when funds are made available to draw upon.  

Accrual method- when all events (other than actual payment) have occurred that gives right to receive payment, and amount can be determined with reasonable certainty