[eBook] [PDF] For Fundamentals of Taxation for Individuals A Practical Approach 2024 Edition By Gregory Carnes, Suzanne Youngberg

[eBook] [PDF] For Fundamentals of Taxation for Individuals A Practical Approach 2024 Edition By Gregory Carnes, Suzanne Youngberg

 

Part I Introduction to Income Taxation

1 The Professional Practice of Taxation 1-1

1.1 The Basics of Tax Planning 1-4

The IRS: An Uninvited Third Party 1-4

The Goal of Tax Planning 1-5

Considering Tax Costs and Non-Tax Costs 1-6

1.2 Individual Income Tax Formula 1-7

1.3 Tax Compliance vs. Tax Planning 1-15

Closed vs. Open Transactions 1-16

Marginal Tax Rates, Average Tax Rates, and Effective Tax Rates 1-17

Tax Planning Opportunities 1-20

1.4 Tax Avoidance vs. Tax Evasion 1-28

Tax Evasion 1-28

Spotlight on the Law: Is the Tax Law Unconstitutional? 1-29

Tax Ethics 1-30

1.5 Tax Rules vs. GAAP 1-32

1.6 Goals of Tax Policymakers 1-33

Raise Revenue 1-34

Social Objectives 1-34

Economic Objectives 1-35

Equity Objectives 1-35

Political Objectives 1-37

1.7 Other Taxes Paid by Individuals 1-38

Other Federal Taxes 1-38

State and Local Taxes 1-39

Implicit Taxes 1-40

1.8 Professional Taxation as a Career 1-41

The Role of a Tax Professional 1-41

Characteristics of Successful Tax Professionals 1-42

2 Fundamentals of the Federal Income Tax System 2-1

2.1 Taxpayer Activities: Trade or Business, Investment, or Personal Use 2-4

Trade or Business 2-4

Investment Activities 2-5

Personal Activities 2-7

2.2 Classification of Assets 2-10

Ordinary, Section 1231, and Capital 2-10

Spotlight on the Law: Classification of an Asset: Sell Now or Later? 2-11

Realty vs. Personalty 2-12

Holding Period 2-13

2.3 Basis 2-14

What Is Basis? 2-14

Recovery of Basis 2-15

2.4 Foundations of Income 2-17

An All-Inclusive Definition of Income 2-18

Realization of Income 2-18

Income and Basis 2-19

2.5 Foundations of Deductions 2-21

Is an Expenditure Deductible? 2-21

Where Are Expenses Deductible? 2-23

2.6 Introduction to Property Transactions 2-24

Gains and Losses from Sales and Dispositions 2-24

Deferred Gains and Losses 2-26

Excluded Gains and Losses 2-31

3 Tax Authority, Research, Compliance Rules, and Professional Responsibilities 3-1

3.1 Sources of Tax Authority 3-5

Legislative Sources of Tax Authority 3-6

Administrative Sources of Tax Authority 3-8

Judicial Sources of Tax Authority 3-11

Spotlight on the Law: Impact of Filing a Petition Late 3-13

Secondary Sources of Tax Authority 3-16

3.2 Locating and Evaluating Authority 3-17

Weighting of Tax Authority 3-17

The Research Process 3-18

3.3 Compliance Responsibilities 3-20

Filing Requirements 3-20

Taxpayer Penalties 3-22

3.4 Tax Professional Responsibilities 3-31

Circular 230 3-31

Statements on Standards for Tax Services (ssts) 3-34

3.5 Tax Practice and Procedure 3-37

Audit Process 3-38

Appeals Process 3-40

Other Audit Issues 3-40

Signing a Return 3-41

4 Dependents and Filing Status 4-1

4.1 Dependents—Introduction and Qualifying Child 4-3

General Rules for Dependency 4-4

General Rules for Qualifying Child 4-4

Tiebreaker Rules 4-7

Unmarried Parents 4-8

Spotlight on the Law: Can I Claim My Dog as a Dependent? 4-10

4.2 Qualifying Relative and Other Dependency Rules 4-11

General Rules for Qualifying Relative 4-11

Other Dependency Rules 4-13

4.3 Filing Status—Introduction 4-16

General Rules for Married Filing Jointly (MFJ) and Single 4-17

Married Filing Separately (MFS) 4-19

Innocent Spouse Relief 4-20

4.4 Head of Household and Qualifying Widow(er) 4-21

General Rules for Head of Household Status 4-21

Qualifying Widow(er) 4-25

4.5 Dependent on Another Return and Kiddie Tax 4-28

Standard Deduction for a Dependent 4-28

Kiddie Tax 4-29

4.6 Filing Requirements 4-32

Part II Income

5 Framework for Income Recognition 5-1

5.1 All-Inclusive Approach to Income 5-4

Determining Income Recognition 5-5

Form of Receipt 5-5

Treasure Trove Principle 5-6

Spotlight on the Law: Great Catch but Beware of the Taxes! 5-7

5.2 Judicial Doctrines 5-8

Constructive Receipt Doctrine 5-9

Tax Benefit Rule 5-10

Claim of Right Doctrine 5-12

Assignment of Income Doctrine 5-13

5.3 Accounting Methods and Periods—Income 5-14

Cash vs. Accrual Method of Accounting 5-14

Recovery of Capital 5-16

Installment Sales 5-17

Income from Community Property 5-22

Change in Accounting Method 5-23

5.4 Business Income for Individuals 5-24

Sole Proprietorships and Single Member LLCs 5-25

Rental Real Estate 5-26

Royalty Income: Investment or Business? 5-27

Income from Other Pass-Through Entities: Partnerships, Limited Liability Companies (LLCs), and S Corporations 5-27

Advanced Topic—Drilling Down 5-28

5.5 Qualified Business Income Deduction 5-30

Qualified Business Income 5-30

Rental Real Estate 5-31

Determining the Qualified Business Income Deduction (Steps 1–5) 5-31

Determining the Qualified Business Income Deduction (Steps 6–7) 5-36

Determining the Qualified Business Income Deduction (Step 8) 5-38

Advanced Topics—Drilling Down 5-39

6 Income from Personal Activities 6-1

6.1 Income from Prizes, Awards, and Scholarships 6-6

Taxable Prizes and Awards 6-6

Exclusion for Awards for Recognition of Civic or Other Achievements 6-7

Exclusion for Olympic Medals 6-7

Scholarships 6-8

6.2 Divorces 6-10

Alimony 6-10

Child Support 6-12

Property Transfers 6-12

Inadequate Payments of Alimony or Child Support 6-13

6.3 Income and Basis Issues for Gifts and Inheritances 6-14

Income Tax Consequences of Gifts and Inheritances 6-15

Basis and Holding Period Issues for Property Received as Gift 6-16

Basis and Holding Period Issues for Inheritances 6-21

Basis and Issues for Property Converted from Personal Use 6-22

Advanced Topic—Drilling Down 6-24

6.4 Income from Injuries and Other Damage Awards 6-26

Determining the Tax Implications of Damage Awards: Key Questions 6-27

Legal Fees and Damage Awards 6-29

6.5 Income from Death of a Taxpayer 6-31

General Rule 6-31

Exceptions to the General Rule 6-32

Advanced Topic—Drilling Down 6-34

6.6 Forgiveness of Debt 6-35

Love or Generosity 6-36

Bankruptcy 6-36

Insolvency 6-38

Real Property Used in a Trade or Business 6-38

Other Debt Forgiveness 6-38

Spotlight on the Law: Is Debt Forgiveness Always Equitable? 6-39

6.7 Other Inclusions and Exclusions 6-40

Foster Child Payments 6-41

Government Assistance Program Payments (Welfare) 6-41

Parsonage 6-41

Income in Respect of a Decedent (IRD) 6-42

Jury Duty Pay 6-43

Unemployment Compensation 6-43

Advanced Topic—Drilling Down 7-45

7.7 Distribution Rules 7-47

Withdrawals from a Traditional IRA 7-47

Withdrawals from a Roth IRA 7-48

Distributions from Other Qualified Plans 7-49

Required Minimum Distributions 7-49

Rollovers 7-50

Annuities 7-50

7.8 Social Security Benefits 7-54

Spotlight on the Law: Taxation of Social Security Benefits 7-56

7.9 Foreign Earned Income 7-57

Part II (Ch. 5–7): Comprehensive Tax Return Problem

7 Income from Services 7-1

7.1 Wages and Tip Income 7-6

Wages 7-7

Tip Income 7-8

7.2 Income from Insurance-Related Fringe Benefits 7-9

Discrimination Rules 7-9

Employer-Purchased Health, Disability, and Long- Term Care Insurance 7-10

Life Insurance Premiums 7-12

Insurance Benefits Received 7-14

7.3 Income from Other Fringe Benefits 7-18

Personal Expenses Paid by Employer 7-18

Food and Lodging 7-19

Working Condition Fringe Benefits 7-20
De Minimis Fringe Benefits 7-21

No-Additional-Cost Services 7-21

Employee Discounts 7-22

Nominal Gifts 7-22

Safety and Length of Service Achievement Awards 7-22

Transportation and Parking 7-23

Other Fringe Benefits 7-23

Cafeteria Plans 7-25

7.4 Stock Options 7-27

Nonqualified Stock Options 7-29

Incentive Stock Options 7-29

Advanced Topics—Drilling Down 7-32

7.5 Reimbursement of Employee Business Expenses 7-34

Scenario 1: Accountable Plan 7-34

Scenario 2: Nonaccountable Plan 7-35

7.6 Retirement Plans 7-36

Section 401(k) Plans 7-36

Pension Plans 7-37

Self-Employed Plans 7-38

Individual Retirement Accounts 7-38

Part III Deductions

8 Framework for Deductions 8-1

8.1 Types of Activities 8-4

Trade or Business Activity 8-4

Investment/Production of Income Expenses 8-6

Personal Expenses 8-7

8.2 Disallowance of Deductions 8-8

Disallowed Expenses 8-8

Adequate Substantiation 8-11

Benefit of the Taxpayer 8-12

8.3 Types of Deductions 8-13

Spotlight on the Law: Insurance Fraud Payback: Deductible or Not Deductible? 8-14

8.4 Accounting Methods for Deductions 8-15

Prepaid Expenses 8-15

Prepaid Interest 8-16

All-Events Test and Economic Performance 8-17

Payments to a Related Party 8-19

Advanced Topic—Drilling Down 8-20

8.5 Capital Expenditure vs. Repair 8-22

8.6 Accounting for Inventories 8-24

Small Businesses 8-24

Large Businesses 8-25

9 Deductions for AGI and Itemized Deductions 9-1

9.1 Deductions for AGI 9-5

Educator Expenses 9-6

Health Savings Account 9-7

Moving Expenses 9-8

50% of Self-Employment Tax 9-8

Qualified Plan and IRA Contributions 9-9

Self-Employed Health Insurance Deduction 9-9

Penalty on Early Withdrawal of Savings 9-10

Alimony Paid 9-10

Student Loan Interest 9-10

Higher Education Tuition and Fees 9-11

Attorney’s Fees for Discrimination Lawsuits 9-11

Jury Duty Pay 9-12

Charitable Contributions 9-12

9.2 Deductions from AGI: Itemized Deductions vs. Standard Deduction 9-14

9.3 Medical Expenses 9-16

Qualified Medical Expenses 9-17

Other Medical Expense Rules 9-18

Medical Expense Calculation 9-19

9.4 Taxes 9-20

General Rules 9-20

$10,000 Limit 9-22

Spotlight on the Law: The Angst of the SALT Deduction Limitation 9-22

Sales Taxes 9-22

Taxes that Are Not Deductible 9-24

9.5 Interest 9-25

Home Mortgage Interest 9-25

Investment Interest Expense 9-28

Personal Interest 9-29

Other Rules Regarding Interest 9-30

9.6 Charitable Contributions 9-30

Was the Donation Made to a Qualified Charitable Organization? 9-31

Contribution of Services 9-31

Contributions of Cash or Property 9-33

Is There Appropriate Substantiation of the Donation? 9-35

Did the Donor Receive Anything of Value in Return for the Contribution? 9-35

What Limitations Apply to the Amount of the Donation? 9-36

Special Rules for Charitable Contributions 9-38

Nondeductible Contributions 9-38

9.7 Casualty Losses 9-42

Definition of a Casualty Loss 9-42

Casualty Loss Computation 9-42

Casualty Gains and Losses 9-43

9.8 Other Itemized Deductions 9-45

Deductible Other Expenses 9-45

Nondeductible Miscellaneous Expenses 9-45

Advanced Topic—Drilling Down 9-46

10 Business Expenses 10-1

10.1 Business Expense Requirements 10-4

Sole Proprietorship 10-4

Employee Business Expenses 10-4

New Business Investigation Expenses 10-6

10.2 Transportation and Travel Expenses 10-8

Transportation Mode vs. Travel Mode 10-8

Transportation Rules 10-8

Travel Expense Rules 10-9

Business Travel Mixed with Personal Travel 10-10

Travel When Not Away from Home 10-11

Other Travel-Related Limits 10-12

10.3 Entertainment and Education Expenses 10-14

Entertainment 10-14

Spotlight on the Law: Meals and Entertainment: Difference in Tax Treatment 10-15

Education 10-16

10.4 Business Interest 10-18

10.5 Bad Debts 10-21

Cash Method vs. Accrual Method 10-21

Business Bad Debts 10-21

Nonbusiness Bad Debts 10-22

10.6 Net Operating Losses 10-23

Pre-2018 NOLs 10-24

NOLs in 2018, 2019, and 2020 10-24

Post-2020 NOLs 10-24

NOL Computation 10-25

10.7 Excess Business Losses 10-29

11 Limitations on Business Losses and Expenses 11-1

11.1 Business Use of a Home 11-4

Qualification as a Home Office 11-4

Spotlight on the Law: The Home Office Rule 11-5

Evaluating Home Office Deductions 11-6

Simplified Method for Home Office Deduction 11-9

11.2 Hobby Losses 11-11

Definition of a Hobby 11-11

Evaluating the Tax Consequences of Hobbies 11-13

11.3 Vacation Homes 11-14

Personal Category for a Vacation Home 11-15

Rental Category for a Vacation Home 11-16

Personal/Rental Category for a Vacation Home 11-17

11.4 Basis and At-Risk Limitations 11-23

Basis Hurdle 11-23

At-Risk Hurdle 11-24

11.5 Passive Loss Rules 11-25

Tax Consequences of Passive Losses 11-25

Material Participation 11-27

Limited Partners and Rental Activities 11-29

Rental Real Estate 11-30

Selling an Activity with Suspended Passive Losses 11-31

Use of Suspended Losses at Death 11-31

Passive Credits 11-32

Advanced Topic—Drilling Down 11-33

11.6 Losses from Partnerships and S Corporations 11-34

Advanced Topics—Drilling Down 13-24

13.3 Amortization 13-26

Computing Tax Amortization 13-27

Defining Amortizable Intangible Assets 13-27

13.4 Depletion 13-29

Part III (Ch. 8–11): Comprehensive Tax Return Problem

Part IV Taxation of Property Transactions

12 Taxation of Investment Income 12-1

12.1 Interest Income 12-4

Municipal Interest Income 12-4

Series EE and Series I Bonds 12-6

Bond Premiums and Discounts 12-7

Spotlight on the Law: Is an Interest-free Loan Treated as a Loan or a Gift? 12-9

Advanced Topics—Drilling Down 12-10

12.2 Dividend Income 12-14

General Rules for Dividends 12-14

Qualified Dividend Income 12-15

Evaluating the Tax Consequences of Dividend Distributions 12-16

Stock Dividends 12-18

Constructive Dividends 12-20

12.3 Capital Gains and Losses 12-22

Capital Asset Definition 12-22

Netting Capital Gains and Losses 12-23

Long-Term Capital Gain Rates 12-27

Ordering Rule for Netting Capital Losses 12-29

Advanced Topics—Drilling Down 12-32

12.4 The 3.8% Net Investment Income Tax 12-36

Defining the Net Investment Income Tax 12-36

Computing the Net Investment Income Tax 12-37

13 Cost Recovery of Property 13-1

13.1 General MACRS Rules 13-5

Personalty (Personal Property) 13-5

Realty (Real Property) 13-12

Spotlight on the Law: Is It Ever Possible to Depreciate Land? 13-14

13.2 Additional Cost Recovery Rules 13-15

Bonus Depreciation 13-15

Section 179 Election 13-17

Automobile Depreciation 13-20

Other Depreciation Systems 13-24

14 Taxation of Assets Used in a Trade or Business 14-1

14.1 Distinguishing Section 1231 Assets from Ordinary and Capital Assets 14-4

Review of Ordinary and Capital Assets 14-4

Section 1231 Assets 14-4

14.2 Identifying Types of Section 1231 Assets 14-7

Spotlight on the Law: Impact of Identifying a Business Asset 14-9

14.3 Netting Section 1231 Gains and Losses 14-10

14.4 Section 1245 Depreciation Recapture 14-15

Defining Section 1245 Assets 14-16

Evaluating Section 1245 Depreciation Recapture 14-16

14.5 Section 1250 Depreciation Recapture 14-20

Defining Section 1250 Assets 14-21

Evaluating Section 1250 Depreciation Recapture 14-22

Reporting Sales of Business Assets: Form 4797 14-26

Advanced Topic—Drilling Down 14-27

15 Property Transactions: Nonrecognition of Gains and Losses 15-1

15.1 Related-Party Losses 15-4

Defining Related Party 15-4

Evaluating Related-Party Transactions 15-4

Advanced Topic—Drilling Down 15-8

15.2 Wash Sales 15-9

Defining a Wash Sale 15-9

Evaluating a Wash Sale 15-10

Spotlight on the Law: Do Wash Sale Rules Apply to Assets Held in an IRA? 15-15

15.3 Like-Kind Exchanges 15-15

Defining Like-Kind Exchanges 15-15

Evaluating Like-Kind Exchanges 15-16

Boot 15-19

Advanced Topics—Drilling Down 15-22

15.4 Involuntary Conversions 15-26

Defining an Involuntary Conversion 15-26

Evaluating an Involuntary Conversion 15-28

15.5 Loss on Sale of Personal Use Assets 15-32

15.6 Sale of Principal Residence 15-33

Defining a Principal Residence 15-33

Evaluating the Sale of a Principal Residence 15-36

Advanced Topics—Drilling Down 15-38

Part IV (Ch. 12–15): Comprehensive Tax Return Problem

Part V Other Individual Topics

16 Personal Tax Credits 16-1

16.1 Introduction to Personal Tax Credits 16-4

Credit vs. Deduction 16-5

Nonrefundable vs. Refundable Credits 16-5

16.2 Child Tax Credit 16-7

Refundability 16-8

Tax Compliance 16-9

16.3 Credit for Other Dependents (Family Tax Credit) 16-10

16.4 Child and Dependent Care Credit 16-11

Defining the Child and Dependent Care Credit 16-12

Computing the Child and Dependent Care Credit 16-14

16.5 Earned Income Tax Credit (EITC) 16-18

Defining a Qualifying Child 16-20

Other Rules for the EITC 16-21

Computing the Earned Income Tax Credit 16-21

Tax Compliance 16-23

16.6 Education Credits 16-25

General Guidelines for Education Tax Benefits 16-26

American Opportunity Tax Credit (AOTC) 16-26

Spotlight on the Law: Who Can Claim the American Opportunity Tax Credit? 16-28

Lifetime Learning Credit (LLC) 16-28

Comparison of the AOTC and the LLC 16-30

Tax Compliance 16-31

16.7 Other Personal Tax Credits 16-32

Adoption Credit 16-32

Retirement Savings Contributions Credit (Saver’s Credit) 16-34

Credit for the Elderly or the Disabled 16-35

Energy Credits 16-36

Premium Tax Credit 16-38

Foreign Tax Credit 16-38

17 Alternative Minimum Tax and Other Taxes 17-1

17.1 Alternative Minimum Tax (AMT) 17-4

Formula for Computing the AMT 17-5

Adjustments 17-7

Preferences 17-9

Reconciling Taxable Income and AMT Income 17-10

Other AMT Items 17-11

17.2 Social Security, Medicare, and Self-Employment Taxes 17-17

Independent Contractor vs. Employee 17-18

Self-Employment Income 17-18

Self-Employment Tax Computation 17-19

Social Security and Medicare Taxes for Employees and Employers 17-22

Excess Social Security Tax Credit 17-22

17.3 Other Taxes 17-24

Nanny Tax 17-24

Spotlight on the Law: The Nanny Tax 17-25

Additional Medicare Tax 17-26

Parts II–V (Ch. 4–17): Comprehensive Tax Return Problem

Part VI CPA Evolution: Core – Tax

18 Business Entity Topics: CPA Exam Core – Taxation and Regulation 18-1

18.1 Corporations: Taxable Income Computation and Special Deductions 18-5

Corporate Income Tax Formula 18-5

Corporate Deductions 18-8

Spotlight on Becoming a CPA 18-18

18.2 Other Corporate Tax Issues 18-19

Capital Gains and Losses 18-19

Accounting Methods and Periods 18-20

Reconciliation of Book Income and Taxable Income 18-21

Net Operating Losses 18-24

Reconciliation of Retained Earnings 18-26

Corporate Alternative Minimum Tax 18-27

18.3 Business Tax Credits 18-29

Foreign Tax Credit 18-29

General Business Credit 18-30

Business Energy Credits 18-38

18.4 S Corporations 18-40

What is an S Corporation? 18-40

S Corporations vs. C Corporations 18-42

Eligibility Rules for S Corporations 18-43

Election Requirements 18-45

Termination of the S Election 18-46

Taxation of S Corporation Income 18-48

Shareholder’s Basis In S Corporation Stock 18-54

Other S Corporation Issues 18-57

18.5 Partnerships and Limited Liability Companies 18-61

What is a Partnership? 18-61

Taxation of Partnership Income 18-65

Partner’s Basis in Partnership Interest 18-68

18.6 Tax-Exempt Organizations 18-71

Types of Tax-Exempt Organizations 18-71

Eligibility to be Tax-Exempt 18-72

Filing Requirements 18-72

Unrelated Business Income 18-72

Part VI (Ch. 18): Comprehensive Tax Return Problem

Appendix A Tax Formula Items A- 1

Appendix B Tax Forms B- 1

Glossary G- 1

Index I- 1

 

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