CPA Review

1
CPA Review

• Individual Tax

2
Tax Formula

• Income (broadly conceived) xx,xxx
• Less Exclusions (x,xxx)
• Gross Income
  xx,xxx
• Less Deductions for adjusted
  gross income (x,xxx)
• Adjusted gross income xx,xxx
• Less The greater of -
• Total itemized deductions or
  standard deduction (x,xxx)
• Personal and dependency
  exemptions (x,xxx)
• Taxable income
  xx,xxx

3
Gross Income

• Broadly defined as
• all income from whatever source derived.

4
Exclusions

• Meals and lodging (employers convenience)
• Military allowances
• Ministers dwelling rental value allowance
• Railroad retirement benefit
• Scholarships (limited)
• Social security benefits (ltd)
• Veterans benefits
• Welfare payments
• Workers comp. benefits

• Accident insurance proceeds
• Annuities (cost element)
• Bequests, inheritances
• Child support payments
• Cost-of-living allow (military)
• Damages for personal injury
• Gifts received
• Gp. term life ins. prem. paid by employer
  (50,000 cov.)
• Municipal bond interest inc.
• Life insurance proceeds

5
Deductions for AGI

• Ordinary necessary expenses incurred in a trade
  or business.
• One-half of self-employment tax paid.
• Alimony paid to taxpayers ex-spouse.
• Certain payments to an individual retirement
  account (deductible).

6
Deductions for AGI

• Moving expenses.
• Forfeited interest penalty for premature
  withdrawal of time deposits.
• Capital losses.

7
Adjusted Gross Income

• Charitable 50 of AGI ceiling.
• Medical deductions 7.5 AGI floor
• Casualty losses 10 AGI floor
• 2 miscellaneous deductions
• Used as benchmark to limit itemized deductions
• Used as benchmark to limit exemptions

8
Basic Standard Deduction

• Filing status 1999 2000
• Single 4,300 4,400
• MFJ, SS 7,200 7,350
• HH 6,350 6,450
• MFS 3,600 3,675

9
Additional Standard Deduction for Age over 65 and
Blindness

• Filing status 1999 2000
• Single 1,050 1,100
• MFJ, SS 850 850
• HH 1,050 1,100
• MFS 850 850

10
Standard Deduction Limitations

• If TP is claimed as a dependent on another
  persons return, the std. ded. is limited to
• For 2000, the greater of 700 or the individuals
  earned income for the year plus 250, not to
  exceed the std ded for normal filing status
• No personal exemption allowed for individuals
  taken as dependent on another TPs tax return.

11
Itemized Deductions

• Medical expenses in excess of 7.5 of AGI.
• State and local income taxes.
• Real estate taxes.
• Personal property taxes.
• Interest on home mortgage (not to exceed interest
  on 1,000,000).

12
Itemized Deductions

• Investment Interest (limited to investment
  income).
• Charitable contributions (specified percentage
  limits).
• Casualty and theft losses in excess of 10 of AGI
  (100 floor).
• Miscellaneous expenses (to the extent expenses
  exceed 2 of AGI).

13
Itemized Deduction Phaseout

• If AGI exceeds 128,950 for 2000 (64,475 if MFS)
  then TP is subject to a limitation on itemized
  deductions. Limitation applies to
• taxes, mortgage interest, charitable
  contributions, 2 misc itemized deduction
• Itemized deductions are reduced by the lesser of
  
• 3 of the excess of AGI over threshold
• 80 of the itemized deductions affected by limit

14
Dependency Exemptions

• Five (5) Tests (2,750 each for 1999) (2,800 for
  2000)
• Support
• Relationship or Member of Household
• Gross Income
• Joint Return
• Citizen or Resident

15
Phaseout of Exemptions (1996)

• 2000
• Single
  128,950
• Head of Household 161,150
• Married Filing Joint 193,400
• Married Filing Separ. 96,700
• Qualifying Widow(er) 193,400

16
Filing Status

• Single.
• Married Filing Jointly.
• Married Filing Separately.
• Head of Household.
• Qualifying Widow(er) With Dependent Child.

17
Head of Household

• Qualifying Person
• An unmarried child - need not be a dependent.
• A married child must be a dependent unless
  claimed by the noncustodial parent under a
  written court agreement.
• Parents may be claimed as the qualifying person
  for Head of Household, even when not a member of
  the household.

18
Qualifying Widow(er) with Dependent
Child(Surviving Spouse)

• 2 years following the year of death of a spouse.
  
• The taxpayer has a child who qualifies as a
  dependent for the year.

19
Kiddie Tax

• Applies to any unearned income of a minor under
  14.
• Taxed at parents' highest marginal rate.
• Parents may elect to report the child's unearned
  income that exceeds 1,300 (1997) on the parent's
  own tax return.

20
Kiddie Tax

• Computed as follows
• Unearned Income
• Less The greater of
• 700
• Lesser of 700 or amount of allowable itemized
  deduction directly connected to the production of
  unearned income.
• Equals Net unearned income

21
Income in Community Property States

• One-half of the earnings of each spouse is
  considered owned by the other spouse.

22
Included in Gross Income

• Alimony and Separate Maintenance Payments
• Child Support is Not Included
• Imputed Interest on Below-Market Loans
• Income From Annuities
• Group Term Life Insurance
• Unemployment Compensation
• Social Security Benefits
• Punitive damages and compensatory damages for
  nonphysical injuries

23
Alimony Separate Payments

• Deductible by the payor and are includible in the
  gross income of recipient.
• The payments are in cash.
• The agreement does not specify that payments are
  not alimony.
• The recipient and payor are not members of the
  same household at the time the payments are made.
• There is no liability to make the payments for
  any period after the death of the payee.

24
Child Support

• Money received for child support is not
  includible in income by the recipient and is not
  deductible by the payor.

25
Imputed Interest on Below-Market Loans

• Gift Loans - made out of love, affection, or
  generosity.
• Compensation-related loans - employer loans to
  employees.
• Corporation-shareholder loans - A corporation's
  loan to its shareholders
• Tax avoidance loans - loans that significantly
  affect the borrower's or lender's Federal tax
  liability.

26
Imputed Interest on Below-Market Loans

• There are exceptions and limitations to the
  imputed interest laws.
• No interest is imputed on gift loans of 10,000
  or less.
• On loans of 100,000 or less between individuals,
  interest cannot exceed the borrower's net
  investment income. If net investment income does
  not exceed 1,000, no interest is imputed on
  loans of 100,000 or less.

27
Income From Annuities

• Annuities and pensions starting prior to
  11/19/96
• Exclusion ratio applied to amounts (called
  rents) received on contract to determine amount
  excludable
• Exclusion ratio (investment in
  contract/expected return under contract

28
Income from Annuities

• Annuities and pensions starting after 11/18/96
• Use simplified method
• Exclusion amount is investment in contract
  divided by number of anticipated monthly payments
  (table amount based on age)
• Only actual cost is excludible even if TP
  outlives calculated life expectancy
• If TP dies before cost is recovered, remaining
  cost is deducted on final tax return

29
Group Term Life Insurance

• An individual can exclude premiums on the first
  50,000 of group term life insurance provided by
  an employer.

30
Unemployment Compensation

• Unemployment benefits are included in gross
  income.

31
Social Security Benefits

• As much as 85 of benefits can be included.
• Two base amounts are established
• First Base Amount.
• 32,000 for married individuals filing a joint
  return.
• 0 for married taxpayers who do not live apart
  for the entire year but file a separate return.
• 25,000 for all other taxpayers.

32
Social Security Benefits

• Second Base Amount.
• 44,000 for married individuals filing a joint
  return
• 0 for married taxpayers who do not live apart
  for the entire year but file a separate return.
• 34,000 for all other taxpayers.

33
Social Security Benefits

• Exceeds the 1st set but not the 2nd, then lesser
  of
• .50 (Social Security Benefits).
• .50 (MAGI .50(Social Security) - base amount).
• Exceeds the 2nd set of base amounts, then lesser
  of
• .85 (Social Security Benefits).
• Sum of
• .85 (MAGI .50(Social Security) - base amount).
• Plus, lesser of
• Amount included using 1st formula
• 4,500 (6,000 MFJ)

34
Gross Income - Exclusions

• Gifts, bequests, inheritances
• Scholarships
• Life insurance proceeds
• Compensation for personal, physical injuries
• Employer provided benefits
• Investment Related
• Exclusions for the Elderly
• Tax Benefit Rule

35
Employer Provided Benefits

• Accident and Health Plans
• Meals and Lodging
• Group Term Life Insurance
• Employee Death Benefits (REPEALED)

36
Employer Provided Benefits

• Medical Reimbursement Plans
• Child and Dependent Services
• Athletic Facility Provided to Employees
• Educational Assistance

37
Employer Provided Benefits

• Cafeteria Plans
• No Additional Cost Services
• Qualified Employee Discounts
• De Minimus Fringes
• Qualified Transportation Fringes
• Qualified Moving Expenses

38
Deductions and Losses

• Deductions for AGI v. from AGI
• Must be ordinary, necessary and reasonable

39
Disallowance Possibilities

• Public Policy Limitations
• Political Contributions - not deductible
• Investigation of a Business
• Hobby Losses
• Rental of Vacation Homes

40
Investigation of a Business

• If TP is in the same or similar business to the
  one being investigated, the expenses are
  deductible whether TP acquires business or not.
• If TP is NOT in the same or similar business to
  one being investigated and the TP does acquire
  the business, the expenses are capitalized and
  amortized (60 month minimum). If TP does not
  acquire the business, the expenses are
  nondeductible.

41
Hobby Losses

• The key is whether or not there is intent to earn
  a profit (regardless of actual results). Hobby
  losses are not deductible against ordinary income
  from other sources, but business/trade losses
  are.
• Hobby income reported on front of 1040 and hobby
  expenses are reported on Schedule A other
  miscellaneous itemized deductions subject to a 2
  floor.

42
Rental of Vacation Homes

• Primarily Personal Use (rental of less than 15
  days)
• Report no income and no expenses
• Mixed Use
• Allocate expenses between personal and rental,
  report on Sch E, no loss allowed
• Primarily Rental Use (personal use didnt exceed
  the greater of 14 days or 10 rental days)
• Allocate expenses between personal and rental,
  report on Sch E, loss is allowed

43
Other Deductions and Losses

• Bad debts
• Deposits in insolvent institutions
• Worthless securities
• Casualty losses

44
Bad Debts

• Specific Charge-Off Method.
• Business vs. Nonbusiness Bad Debts.
• Business bad debts are deductible as an ordinary
  loss in year incurred.
• Nonbusiness bad debts are considered short term
  capital losses.
• Loans Between Related Parties.
• Collateral, collection efforts, intent, interest
  paid, etc.

45
Worthless Securities

• Deemed to be capital losses occurring on last day
  of year.
• Small Business Stock (Section 1244).

46
Losses of Individuals

• Casualties refer to losses meeting three
  criteria
• Identifiable event.
• Property damage results.
• Event is sudden, unusual and unexpected.
• When To Deduct Casualty Losses.
• Loss is deductible in the year the loss occurs.

47
Losses of Individuals

• The deduction for losses of personal use property
  is reduced by both the 100 floor and by 10 of
  AGI.

48
Election to Expense Assets

• Section 179 allows a write-off of up to 19,000
  (1999), 19,500 (2000).
• The allowance is reduced dollar-for-dollar for
  any amount over 200,000.
• The 179 limits increase each year beginning in
  1997 up to a maximum of 25,000 in 2003

49
Employee Expenses

• Transportation
• Travel
• Moving
• Education
• Entertainment
• Home Office

50
Transportation

• Expenditures.
• Are Itemized Deductions.
• Employee not required to be in travel status.
• Commuting.
• Excludes expenses between residence and job.
• Between two jobs
• Expenses for one way are deductible

51
Travel

• Tax Home
• What Is Included
• Transportation, meals, lodging, and incidentals
  while away from home on business.
• Expenditure expenses and miscellaneous itemized
  deductions subject to the 2 hurdle.
• Overnight stay generally required (rest).
• Meals are limited to a 50 deduction.

52
Temporary Assignments

• A Temporary assignment must be less than one
  year.
• The taxpayers household cannot be moved to the
  new location.

53
Comb. Business/Pleasure Travel

• Domestic.
• Must be primarily for business purposes.
• Transportation fully deductible.
• Other expenses allocated.

54
Comb. Business Pleasure Travel

• Foreign - An allocation is required between
  business and personal travel unless
• The total time is 7 days or less
• Less than 25 of the time was spent on personal
  travel
• The taxpayer has no control over the schedule
• The desire for vacation is not a major factor in
  deciding to take the trip.

55
Moving

• A new job must be at least 50 miles farther from
  the old residence than the old job.

56
Moving Expenses Included

• Moving of household goods and personal effects.
• Travel to the new location (including lodging and
  out of pocket travel or 10 cents per mile).
• No meal deduction is allowed.
• No pre house hunting expenses are deductible.
• No temporary living expenses are deductible.

57
Education Expenses

• To maintain or improve existing skills in the
  present job.
• To meet legally imposed or employer requirements
  to retain current job.

58
Entertainment

• Entertainment expenses are subject to the 50
  reduction.
• Meals.
• Entertainment.
• Including cover charges and parking.
• Including entertainment room rentals.

59
Exceptions - 50 Reduction

• Transportation (i.e. cab fare).
• If the full value of expenditure is included in
  employees compensation.
• If the value is de minimus.
• If it is a company event.
• If TP subject to DOT hours of service limits
• In 1998 and 1999, can deduct 55 meals
• Increases to 80 by year 2008

60
Restrictions

• Business meals.
• Either directly related to or assoc. with a
  business meeting.
• Must be reasonable cost.
• Taxpayer must be present at the meal.
• Club dues.
• No deduction allowed.

61
Restrictions

• Tickets for Entertainment.
• Eligible amount is limited to face value of the
  tickets plus tax (but not fees).
• Skybox amount limited to number of seats
  available times price of regular seats.
• Subject to 50 deductibility.

62
Restrictions

• Business gifts.
• Limited to 25 per person per year.
• Gifts less than 4 and promotional items (i.e.
  pens with business name) are excluded from
  limits.
• Additional deductions allowed for incidental
  costs (i.e. engraving, delivery, gift wrapping).
• No deduction allowed for gifts to superiors or
  employers.

63
Home Office (Pre 1999)

• Must be exclusive and regularly used for
  business, and either
• Must be principal place of business or
• Place of business used by clients, patients, or
  customers.

64
Home Office

• Deductions and Limits.
• Requires allocation of total household expenses.
• Cannot exceed net income of business.
• First deduct expenses that would be allowed
  anyway.

65
Office in Home (years after 1998)

• Principal place of business
• includes home office used for administrative and
  management activities if taxpayer has no other
  fixed location for these activities
• can qualify even if the income-generating
  activities are performed elsewhere

66
Employee Expenses

• Accountable Plans.
• Requires adequate accounting of all expenditures.
• Employee must return any unused allowance.
• Itemized receipts for all expenditures over 25.
• If employee does not comply, the Non-accountable
  Plan rules are used.

67
Employee Expenses

• Non-accountable Plans.
• All reimbursements are income to the employee.
• Deductions are the same as for unreimbursed
  expenses.

68
Other itemized deductions

• Medical
• Taxes
• Interest
• Charitable Contributions
• Miscellaneous other subject to 2 floor
• Other miscellaneous expenses

69
Medical Expenses

• Subject to 7.5 of AGI floor.
• Diagnosis, cure, mitigation, treatment,
  prevention, etc.
• Nursing home expenditures MAY be allowed if
  medical care is primary reason.
• Tuition for a special school MAY be allowed.

70
Medical Expenses-Not Covered

• Unnecessary cosmetic surgery, funerals, weight
  loss, stop smoking, etc.
• Nursing home costs if non medical reason for
  being in home
• Special schools that do not provide special
  facilities.

71
Capital Expenditures

• Expenditures are of a medical nature.
• Expenditures are on the advice of a physician.
• Facilities are used primarily by patient alone.
• Facilities are built at a reasonable expense.
• Operating and maintenance expenditures are also
  allowable.
• Appraisal costs for determining the change in
  value are also allowable.

72
Transportation Lodging

• These expenditures are allowed as medical
  expenses.
• Lodging also included with some restrictions.
• Limited to 50 per night for each person.
• No meal deduction allowed with one exception.

73
Health Insurance Premiums

• Expenditures for premiums are deductible.

74
Taxes

• Property Taxes.
• Deductible for person the taxes are imposed on
  regardless of who pays them.
• Assessments.
• Not typically included in local real property
  taxes.
• Apportionment for real estate transfers.
• Based on the number of days each held the
  property during the tax yr.

75
Interest

• Investment Interest.
• Deduction for investment interest is limited to
  net investment income.
• Carryover of disallowed investment interest
  allowed indefinitely.

76
Interest

• Qualified Residence Interest.
• Paid or incurred on debt for a qualified
  residence of the taxpayer.
• Acquisition indebtedness also includes
  construction and substantial improvements.
• Home equity loans are also covered.
• Qualified residence includes a primary residence
  and one other residence.

77
Limits on deductible home mortgage interest

• Maximum allowable indebtedness is 1,000,000 (for
  married filing jointly).
• Home equity loan debt cannot exceed FMV less
  acquisition indebtedness.
• Home equity loan debt cannot exceed 100,000.

78
Tax Exempt Securities

• No deduction is allowed for interest paid to
  acquire tax exempt securities.

79
Charitable Contributions

• Criteria for a Gift
• Donative intent.
• Lack of consideration from donee.
• Acceptance by donee.

80
Ordinary Income Property

• Inventory, taxpayer created art, ordinary assets
  not eligible for LTCG treatment.
• Deduction amount equals FMV less ordinary income
  potential (lower of FMV or basis)

81
Capital Gain Property (LTCG)

• Deduction amount equals FMV.
• Stocks, bonds, real estate, etc.
• Exception for capital gain portion of property
  given to some foundations.
• Exception for capital gain portion of tangible
  personalty (to any organization) if use is
  unrelated to charitys function.

82
Contribution Limits

• Fully deductible for amounts less than or equal
  to 20 of AGI.
• Above 20 of AGI, the deduction may be 20,30 or
  50.
• No deductions over 50 of AGI.
• Carryover up to 5 years is available for
  disallowed amounts

83
Contribution Limits

• 50 - Contributions of cash and ordinary income
  property to qualified charities (except private
  non-operating foundations).
• 30 -
• Contributions of capital gain property (FMV) to
  qualified charities, and
• Cash and ordinary income property to private non
  operating foundations.
• 20 - Contributions of capital gain property to
  private non operating foundations

84
Miscellaneous Itemized Deductions

• 2 AGI floor applies to
• Section 212 expenditures.
• Unreimbursed employee expenses.
• Professional dues and subscriptions.
• Union dues and uniforms.
• Employment related education expense.
• Malpractice insurance premiums.
• Job hunting expenses.
• Home office expenses.

85
Miscellaneous Itemized Deductions

• 2 AGI floor applies to
• Legal, accounting and tax prep. fees.
• Hobby expenses.
• Investment expenses.
• Custodial fees for income producing property.
• Collection fees for dividends or interest.
• Appraisal fees for casualty losses or charitable
  contributions.

86
Miscellaneous Itemized Deductions

• Not subject to 2 AGI floor.
• Impairment related work expenses for handicapped.
• Gambling losses (to the extent of gambling
  winnings).
• Certain terminated annuity payments.

87
Alternative Minimum Tax

• Backup to the income tax.
• May have to pay if taxable income exceeds
• 45,000 if married filing a joint return
• 33,750 if filing status is single or head of
  household.
• 22,500 if married filing separate

88
Adjustments to Taxable Income

• Add back personal exemptions.
• The following itemized deductions are allowed
  when computing AMT
• Medical expenses in excess of 10 of AGI.
• Casualty losses.
• Gambling losses.
• Charitable contributions.
• Qualified interest.

89
Preferences

• The AMT is designed to take back all or part of
  the tax benefits derived through the use of these
  tax preferences.
• Deduction for certain depletion.
• Tax-exempt interest on certain private activity
  bonds.
• Accelerated depreciation on certain property
  placed in service before 1987.

90
Earned Income Credit

• Encourage economically disadvantaged individuals
  to join the work-force.
• The maximum credit for 1997 (with one child) is
  2,210. Phaseout begins at income of 11,930 and
  ends at 25,760 (one child). In addition, each
  child must meet all three of the following tests
  Relationship, Residency, Age.

91
Child and Dependent Care Expense Credit

• Keep a home
• Have earned income
• The dependent is under the age of 13 or either of
  the spouses is physically or mentally
  incapacitated.
• Tax credit has a ceiling of 2,400 for one
  qualifying child and 4,800 for two.

92
Amount of Child and Dependent Care Credit

• AGI Rate
• 10,000 or less 30
• gt10,000 lt 12,000 29
• gt12,001 lt 14,000 28
• . ...
• gt26,001 lt 28,000 22
• gt28,001 lt 30,000 21
• More than 30,000 20

93
New Welfare to Work CreditPart of General
Business Credit

• Credit for wages paid to long-term family
  assistance recipients
• 18 consecutive months of assistance
• no longer qualify for assistance
• First two years of employment
• 35 qualified first-year wages
• 50 of qualified second-year wages
• On first 10,000 of wages each year
• maximum 8,500 for any employee
• Cash plus certain benefits
• Effective begin work aft 1997 bef 5/1/99

94
New Child Tax Credit

• A child tax credit of 400 (1998) and 500 (years
  after 1998)
• child, stepchild, foster child under 17 claimed
  as dependent
• phased out of 50 for each 1000 over threshold
  of 110,000 (MFJ), 75,000 unmarried individuals,
  55,000 (MFS)
• non-refundable unless 3 or more children

95
New Higher Education Credit

• Hope Credit (Nonrefundable)
• For first two years of individuals
  post-secondary education (after 1997)
• 100 of first 1,000 and 50 next 1,000
• 1,500 annual limitation, 3,000 overall limit
• Must be enrolled 1/2 normal full-time for one or
  more semester during year
• Convicted drug related felons dont qualify
• Phase out 80,000-100,000(MFJ) and
  40,000-50,000 for individuals

96
New Higher Education Credit

• Lifetime Learning (LL) - nonrefundable
• Equal to 20 of 5,000 (10,000 aft 2002) of
  post-secondary expenditures paid during year
• generally limited to tuition and academic fees
• Effective for expenses after 6/30/98
• Elective
• If Hope credit claimed cant use LL
• If married must file MFJ
• Phase out 80,000-100,000(MFJ) and
  40,000-50,000 for individuals

97
Individual Retirement Accounts

• Contribution ceiling is lesser of 2,000 (4,000
  for spousal IRAs) or 100 of earned income
• Deductible IRA contribution may be reduced if
  taxpayer or spouse covered by a qualified plan
• Nondeductible IRA may be made to extent of
  remaining ceiling
• Income accrues on account tax deferred

98
Individual Retirement Accounts

• If taxpayer or spouse is covered by a qualified
  plan, IRA deduction is phased out within the
  adjusted gross income ranges listed below
• Phase-out begins
  Phase-out ends
• Single HH 25,000 35,000
• MFJ 40,000 50,000
• MFS 0
  10,000
• Increased in 1998 and after
• Increased in 1998 and after

99
Individual Retirement Accounts

• Simplified employee pension (SEP) plans
• Employer contributes to employees IRA
• Contribution limited to lesser of 30,000 or 15
  of compensation
• Subject to most restrictions of qualified plans

100
Individual Retirement Accounts

• Spousal IRAs
• Both spouses have earned income, ceiling is
  4,000 or combined earned income
• One spouse has earned income, ceiling is 4,000
  or earned income of that spouse
• Contribution to individual spousal account may
  not exceed 2,000
• Must file jointly to use spousal IRA rules

101
Individual Retirement Accounts

• Excess contributions subject to 6 excise penalty
  tax
• Distributions before age 59 1/2 generally subject
  to 10 penalty tax
• Exceptions
• pay for medical expenses in excess of 7.5 AGI
  or pay for health insurance for unemployed
  individual and family members
• After 1997 pay for qualified higher education
  expenses of taxpayer, spouse, child, grandchild
• After 1997 up to 10,000 for first time home
  buyer distribution

102
Individual Retirement Accounts

• Rollovers
• Distribution from qualified plan transferred
  within 60 days to IRA (or another qualified plan)
  not includible in gross income
• One tax-free rollover from IRA within 12-month
  period
• Direct transfers not subject to this limitation
• Employers must withhold 20-percent of any
  lump-sum distribution that is not direct transfer
  

103
IRA New Law

• For active participants (both spouses)
• Phase-out begins Phase-out ends
• Single HH 32,000 42,000
• MFJ 52,000 62,000
• MFS 0
  10,000
• With gradual increases to 50,000 - 60,000 in
  2005
• With gradual increases to 80,000 - 100,000
  in 2005
• A taxpayer who is not an active participant but
  whose spouse is will have a phase out range of
  150,000 - 160,000 after 1997

104
Roth IRA (After 1997)

• Contributions are nondeductible
• Earnings accumulate tax-free
• Qualified distributions are tax-free
• Contributions are limited to a total of 2,000
  for regular(deductible) IRA, old nondeductible
  IRA and Roth IRA
• Max contribution is phased out
• Single 95,000 - 110,000
• MFJ 150,000 - 160,000

105
Roth IRA (after 1997)

• Qualified distributions are
• after age 59 1/2
• on death or disability
• qualified first time home buyer 10,000 lifetime
  limit
• No qualified distributions can be made until
  taxpayer has had a Roth IRA for five years
• distributions need not start at 70 1/2

106
Pre-1976 Tax Shelter Heaven

• Susan invests 30,000 for a 20 interest in a
  mink breeding tax shelter. The Pship took the
  150,000 cash and, with 850,000 of nonrecourse
  financing, bought very rare mink stock only found
  in the Himalayans. The depreciation, interest
  expense and other deductions for the shelter
  amounted to 300,000, of which Susans share was
  60,000. This resulted in a two for one write
  off for Susan.
• ENTER AT RISK RULES!!!!!!

107
TRA 1986 - Passive Activity Loss Rules

• Death blow for tax shelters
• Divides income into three pots active, passive
  and portfolio
• Can only offset passive losses against passive
  income, not active or portfolio income

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What is a passive activity?

• Two conditions for a passive activity (Section
  469).
• Any activity where the taxpayer does not
  materially participate.
• Rental activities, even if the taxpayer does
  materially participate (exception for material
  participation in real estate)

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Passive Activities Defined

• Material participant
• 500 hours of participation
• 100 or more hours and the most of any of the
  participants
• Unless excepted by the Code, all rental
  activities are deemed passive.

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Portfolio Income

• Interest, dividends, annuities and royalties.
• Gain/loss from disposition of property which
  produces portfolio income or is held for
  investment.

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Active income

• Wages, salaries
• Profit from trade or business where TP is a
  material participant
• Gain/loss from disposition of assets used in
  active trade or business

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Examples

• Fob makes 80,000 as governor. He also has
  dividend income of 12,000. During the year he
  acquires an interest in a limited partnership
  which produces a 3,000 loss. How much of the
  loss can he deduct (assume no at risk limitation)?

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Apply at risk, then PAL rules

• Virginias husband recently died and left her a
  large sum of money. She takes 100,000 and
  invests it in a partnership that produces psychic
  hotline programs on TV. She is NOT a material
  participant. The partnership produces a loss for
  the year, her share being 120,000. How much is
  disallowed under the at risk rules and how much
  is disallowed under the passive activity rules?
• What if Virginia becomes a material part.?

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Suspended Losses/Carryovers

• The at-risk rules are applied before the passive
  loss rules. If a loss is not allowed because of
  the at-risk limitations then it is not a
  suspended loss under the passive loss rules but
  rather the suspended under the at-risk rules.

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Types of Audits

• A correspondence audit.
• An office audit.
• A field audit.
• A TCMP-Taxpayer Compliance Measurement Program.

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Statute of Limitations

• 3 years from the filing date of the return or due
  date if later.
• 6 years if 25 of gross income is unreported.
• No statute of limitations for failure to file or
  if a fraudulent return is filed.

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Interest and Penalties

• Interest runs from unextended due date.
• Penalties.
• Failure to file 5 per month up to 25.
• Failure to pay .5 per month up to 25.
• Negligence penalty 20 of underpayment for
  intentional disregard of rules and regulations
  without intent to defraud.
• If both filing and pay penalties apply, the file
  penalty is reduced by the pay penalty