1. Affects most business and many common personal decisions
2. Important to understand marginal tax rate (MTR) when choosing between two decision alternatives.
3. Common decisions affected by current tax laws

After-tax benefit of income= cash inflow x (100%-MTR)

(If the inflow is not taxable, the ATB equals the before tax benefit)

After-tax cost of the outflow= cash outflow X (100%-MTR)

(If the outflow is not taxable, the ATC equals the before tax cost)

1. Buy or rent home
2. Finance auto or obtain a home equity loan
3. Start your own business
4. Make gifts or include in will
5. Repair or buy new business machine
6. Invest in stocks or bonds
7. Invest in tax free or taxable income
8. Getting married
9. Overtime work versus leisure time
10. Timing of income or deduction recognition
11. Accounting elections

1. Congressional Branch and Internal Revenue Code
2. Administrative Branch/Treasury/Internal Revenue Service
3. Judicial Branch

1. House, Ways, Means committee writes tax legislation
2. House passes bill
3. senate finance committee crafts parallel bill
4. Senate passes bill
5. Join conference committee makes compromises and passes bill at conference level
6. House and Senate vote again
7. President signs bill or vetoes the bill

1. Treasury Regulations
2. Revenue Rulings and Letter Rulings
3. Revenue Procedures
4. Technical Advice Memorandum

1. Original Court
2. Appellate Courts
3. Supreme Court

1. Referred to as "below line deductions"
2. Greater of Total Itemized Deductions or Standard Deductions

1. First component is a fixed amount and dependent on filing status and whether the taxpayer is a dependent with investment income (Filing Status Table)
2. Those who are either blind or 65 or older
3. State or local real estate taxes paid during the year up to 500 single and 1000 joint
4. Dependent's standard deduction equals the greater of $950 or his/her income +300, but cannot exceed $5700 (unless over 65 or blind)

1. Married taxpayer filing a separate return when their spouse itemizes
2. Nonresident aliens

1. A specified deduction is allowed for each qualifying exemption. There are two classifications of exemption: personal and dependency
2. For 2010 the exemption amount is $3650
3. Persons who qualify as dependents cannot qualify for their own personal exemption; those filing dependents can receive their exemption

1. Use tax table if taxable income is less than $100,000
2. If income exceeds $100,000 tax rate schedule is used.
3. Capital gain income and/or dividend income that portion will be taxed at the applicable preferential tax rates
4. If a student has not reached 18 by the end of the taxable year, and has investment income exceeding $1,900, a special procedure is followed
5. Some situations there is a penalty for being married.

1. Tax credit is a reduction in tax liability as contrasted to a reduction in taxable income
2. Some of the personal tax credits are discussed in below
3. Can only reduce income tax to 0, not below

1. The most common types of prepayments are income tax withholding sand quarterly estimated tax payments
2. Refundable Credits are treated like prepayments

1. Gross income exceeds the sum of the standard deduction + personal exemption (blindness and dependency not considered)
2. Their self-employment income is greater or equal to $400

1. Generally April 15th
2. There is an automatic extension of 6 months, but this only for filing the return not the time of paying taxes
3. Interest on underpayment of taxes is 3% above the federal short-term rate

1. Generally three years after the later of (1) due date or (2) date field
2. Six years if omitted more than 25% gross income
3. None if file a fradulent return

1. Dependency exemption
2. Chld credit
3. Earned income credit
4. Dependent care credit
5. Hea dof house-hold filing status

1. Child has not attained a specified age
2. Child cannot provide over 50% of his or her own support except for purposes of hte arne dincome credit
3. Chidl ahs a specified relationship to the taxpayer
4. Child has the same principal place of abode as the taxpayer for more than one half of the taxable year
5. Must be a citizen of US, Canada, or Mexico; or adopted alien

1. Under 19 or under 24 in case of a full-time student
2. No age limitation for an individual who is totally and permanently disabled

1. Son, daughter, stepson, stepdaughter, or descendant of any of the preceeding
2. Brother, sister, stepbrother, stepsister, or descedant of any of the preceeding
3. An individual legally adopted by the taxpayer or an individual who is lawfully placed with the taxpayer for legal adoption
4. A foster child who is placed with the taxpayer by an authorized placemtn agency or by judgment, decree, or other court decree

1. Absences due to illness
2. education
3. business
4. vacation
5. military service

This is typically for divorcees or MFS tax payers

1. The actual child's parent
2. The child's parent residing with the child
3. The noncustodial parent may claim the child if the other parent attaches a waiver of exemption ot the tax return (filed by parent claiming exemption)
4. Child's parent with the higher AGI: if hte parents have joint custody and it cannot be determined where the child lives the longest time
5. Taxpayer with highest AGI: if none of the individuals who claim the child is the child's parent

1. Gross Income Test
2. Support Test
3. Relationship or Residence Test
4. Joint Return Test
5. Citizenship Test

1. Lodging Costs
2. Direct items such as food, clothing education, transportation, medical
3. Aproportionate share of indirect expenses not included in the lodging
4. Taxpayer's Support Percentage= Taxpayer Support/ Total support expenditure for and by Dependents

A multiple support agreement can be filed; in order to do this the following must apply:

1. No one person can have contributed more than 50% of support
2. Group of individuals who meet all dependency requirements except the support requiremnt must provide more than 50% of support
3. Eligible "supporter" must have contributed more than 10% of support
4. Each eligible supporter other than the taxpayer claiming the exemption deduction must file a written declaration that they will not claim the deduction

1. Parent (step) or grandparent
2. Children age 19 and older (24 if full-time student)
3. Nieces or nephews
4. Aunts or uncles
5. In-laws
6. Member of taxpayer's household the entire tax year (ie. cousins)

1. Head of Houshold
2. Qualifying Widow/Widower (Surviving Spouse)
3. Married Filing Jointly
4. Married Filing Seperately
5. Single

1. Must be unmarried or be an abandoned spouse
2. Must maintain a household where a qualified individual lives

1. Spouse did not live with Taxpayer during the last half of the year
2. Dependent child who lives with the Taxpayer more than half of the year
3. Taxpayer must furnish more than 50% of the maintenance of the home

1. Taxpayer qualifies to file a joint reutnr in year spouse dies
2. Qualifies as suriving spouse for the two years following the year that spouse dies
3. Must maintain a home for a dependent child who lives with you

1. Must be married the last day of the tax year
2. Neither spouse can be a nonresident alien

1. Medical Expenses
2. Taxes
3. Qualified residece interest expense
4. Investment interest expense
5. Charitable contributions
6. Miscellaneous itemized deductions

1. Prescribed drugs and insulin
2. Haelth and dental insurance premiums
3. Doctor and dentist bills
4. Eyeglasses and other aids
5. Transportation at either 16.5 cents per mile or actual expenses; plus tolls and parking
6. Meals and lodging (meals @50%; lodging $50/person/night)
7. Hospital charges
8. Certain expenditure if primarily for the medical care of the qualifying sick person
9. Nursing home costs, for medical purposes
10. Deduction equals the sum of all eligible expenses< 7.5% of AGI

1. Real estate tax (must be pro-rated during year of sale)
2. State income tax (if greater than sales tax)
3. Sales taxes (if greater than state income tax)

1. Federal income tax
2. Estate & Gift taxes
3. Social security and self-employment taxes (half of self-employment tax is deductible as a For AGI deduction)
4. Excise taxes
5. Assessments
6. Special privilege levies

1. Acquisition debt and home equity debt secured by the taxpayer's residence
2. Acquisition indebtedness is limited to $1,000,000 of debt (not interest expense) on the taxpayer's principal and/or one second residence
3. Interest on home equity debt qualifies as residence interest on debt up to $100,000
4. Qualified mortgage insurance in connection with acquisition debt, premiums paid by December 31,2010 are treated as interest

1. Property must be donated to a qualified charitable organization
2. The IRS publishes a listing of tax-exempt entitites, which is helpful with determining the status of an entity
3. Several deduction limitations depending on:
   1. Type of entity the contribution is made to
   2. Type of property contributed
   3. Elections made by the taxpayer

1. Home office expenses
2. Professional dues nad subscriptions
3. Investment related expenses (consulting fees, safety-deposit box fee, subscriptions)
4. Qualified job-hunting expenses
5. Tax preparation and planning fees
6. Business expenses (business, travel, transportation, meals, and entertainment)

All of these deductions are limited to the sum of qualified expenses in excess of 2% of AGI

1. Child Tax Credit
2. Earned Income Tax Credit (EITC) for low income workers
3. Child and Dependent Care Credit
4. American Opportunity Credit
5. The Lifetime Learning Credit

1. The credit is $1000 per "qualifying child"
2. "Qualifying child" is the same as in the dependent exemption except for (a) the child has not reached age 17 by the end of the taxpayer's tax year and (b) the child must be a Citizen or resident of the US
3. The credit is phased out in $50 increments for each $1000 of "modified adjusted gross income" (MAGI) above a threshold amount; (a) $110,000 for MFJ, (b)$55,000 for MFS, and (c) $75,000 for Single Taxpayers
4. Credit is generally limited to the taxpayer's income tax liability
5. Child credit is refundable to the extent of 15% of the taxpayer's earned income in excess of $3000

A refundable credit to provide a tax break to low income taxpayers who are working and therefore have earned income

1. Taxpayers without children should: (1) the woker must be greater or equal to 25 and under 65 (2) the worker must not be able to be claimed as a dependent and (3) the worker must have a principal residence in teh US for more than one half of the year
2. Taxpayers with children should: (1) Be the taxpayer's child (married child must qualify as a dependent) (2) Must live with the taxpayer for more than one half of the year

1. Maximum credit calculated by multiplying the taxpayer's earned income (up to the maximum amount) by a credit percentage
2. The credit is reduced (phased-out) by multiplying  a percentage by the larger of (1) the taxpayer's earned income or (2) AGI, in excess of a threshold amount
3. The maximum earned income, maximum credit percentage, phaseout perentage, andd phaseout threshold amount depends on whether the taxpayer has no children, one child, or two or more children (in table)

1. Non refundable credit that provides tax relief to parents who must work and pay for dependent care while working
2. Credit ranges from @0% to 35% of the first $3000 ($6000 for two or more children)
3. This credit is also further limited to the taxpayer's earned income

1. Payments must be incurred so as to enable taxpayer to go to work
2. Household Services including housekeeping, nursing, cooking & babysitting
3. Outside services; (a) overnight summer camps DNA, (b) Adult day care for incapacitated dependent or spouse must ive in taxpayer's home for a least 8 hours a day
4. Payments to relative qualify unless: (a) relative is taxpayer's child<19 or (b) Relative is a dependent
5. Amount of qualifying expenses is reduced by exclusions under the dependent care assistance program

1. Dependent < 13
2. Disabled dependent or disabled spouse

1. This credit applies to the first four years of a student's post-secondary education
2. Up to 40% of the creidt is refundable unless the taxpayer claiming the credit is a child who has unearned income subject ot hte &quot;kiddie tax&quot;
3. This credit is available for qualified expenses for education furnished in academic periods beginning after that date
4. Qualified tuition and related fees include only out-of-pocket expenses required for the enrollment or attendance of the taxpayer, taxpayer's spouse, or dependent
5. The student must pursue a course of study on at least a half-time basis for at least one academic period during the year and must not have been convicted  of a  felony for the posession or distribution of controlled substances

1. This equals 20% of qualified tuition and related fees, up to $10,000
2. Most of the rules pertaining to the HOpe Credit apply to the Lifetime Learning Credit

The following are some differences between the two:

1. Qualified expenses include tuition and fees for all undergraduate and graduate-level instruction (compared to first two years)
2. It will not vary based on the number of eligible students
3. Qualified expenses also include any course of instruction at an eligible educational institution to acquire or improve job skills of the student, irrespective of the student's enrollment status

$20,000 for MFJ

$10,000 for all other taxpayers

LLC $50,000 to $60,000 Single

$100,000- $120,000 JF

Hope $80,000-$90,000 Single

$160,000 to $180,000 JF