Taxes_Chapter_02_PPT - Income Tax Fundamentals 2010 edition...

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Income Tax Fundamentals 2010 edition Gerald E. Whittenburg Martha Altus-Buller 2010 Cengage Learning
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Gross income is “All income from whatever source derived” All sources of income are included unless specifically excluded (see Table 2) Non-cash items included at fair market value Note: Income from illegal activities is includable in  gross income 2009 Cengage Learning
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Example Keeley’s income items for 2009 are: Wages $45,000 Bonus (noncash) 8,000 Bond interest 1,200 Dividends 850 Limited partnership loss (9,000) Rental real estate income 6,500 What is Keeley’s income by category and total gross income? 2009 Cengage Learning
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Example Keeley’s income items for 2009 are: Wages $45,000 Bonus 8,000 Bond interest 1,200 Dividends 850 Limited partnership loss (9,000) Rental real estate income 6,500 What is Keeley’s income by category and in total? Solution Her active income = $53,000 (45,000 + 8,000) Her portfolio income = $ 2,050 (1,200 + 850) Her passive loss = ($ 2,500) ((9,000) + 6,500) Her total gross income = $55,050 Note: the passive loss cannot offset active or portfolio income 2009 Cengage Learning
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If total interest income >$1,500 must report on Schedule B (1040) or Schedule 1 (1040A) Fair market value of gifts/services a taxpayer receives for making long-term deposits or opening an account are taxable interest 2009 Cengage Learning
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Series EE bonds Purchase at discount and then redeem 0 Interest taxed each year as value increases 0 Interest taxed in year of maturity or year bonds are cashed in (whichever is earlier) Series HH bonds Issued at face value 0 Pay interest semiannually and it’s taxed each year or at maturity 0 Treasury stopped issuing 8/04 Series I bonds Purchase for face value 0 Earnings are adjusted semiannually for inflation 0 Interest taxed each year or at maturity 2009 Cengage Learning
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3 kinds of dividends Ordinary dividends 0 Most common 0 Return of net income to shareholders 0 Schedule B (1040) when total dividend income > $1,500 Nontaxable distributions 0 Return of original investment - not paid from corporation’s earnings and profits 0 Not included in taxpayer’s income 0 Reduces basis in stock Capital gain distributions (CGD) 0 When stock reaches zero basis, further distributions are CGD 0 Report on page 1 of 1040 or Schedule D 2009 Cengage Learning
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2003 and 2006 Tax Acts resulted in lower tax rates for qualifying dividends Defined: “Qualifying dividends” are those that are received by an individual who has held stock for more than 60 days during the 120-day period beginning 60 days before stock’s ex-dividend date If not qualifying, dividends taxed at ordinary rates Regular tax bracket Qualifying Dividend Rate 2008-2010 10%, 15% 0% Higher brackets 15% 2009 Cengage Learning
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Alimony is deductible to payer and taxable to payee Alimony payments must meet five requirements as follows (if subject to divorce agreement after 1984) Must be in cash and received by ex-spouse Must be made in connection with written instrument Can’t continue after death of ex-spouse Can’t be designated as anything other than alimony Parties may not be members of the same household 2009 Cengage Learning
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