MGMT 227-Week 1-Online 1-2019 PDF

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Notes for week one of the tax class are contained in this file....

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MGMT 227 – WEEK ONLINE 2 – LECTURE NOTES Individual Taxation: Tax Formula & Filing, Gross Income I.

TAX FILING A. Who Must File: Taxpayers who earn… 1. > than Standard Deduction ($ 12,000 STP or $ 24,000 MFJ) 2. Self Employed > $ 400 B. When to File:

4/15  10/15 (1 extension allowed)

C. Filing Status: Usually measured by TP status on 12/31… 1. Single: Unmarried or legally separated 2. Married Filing Jointly (MFJ): Married at year’s end or married and spouse died during the year. 3. Married Filing Separately (MFS) : H & W can elect. 4. Surviving Spouse: “Qualifying Widow(er) with dependent child only. 3 year scenario…. a. b. c. d.

Year of Death: MFJ Year 2: Surviving Spouse Year 3: Surviving Spouse Year 4: Either Single or HOH

5. Head of Household (HOH): Requires… a. Unmarried last day of year or an abandoned spouse b. Resident or citizen c. Pays ½ of household expenses for SELF +  Unmarried Child (even if not dependent)  Married Child (MUST be dependent)  Parent (even if lives in another house)  Dependent relative (not including cousin) 1

d. Abandoned Spouse: Married, but lived apart from spouse last 6 months of year + dependent child at home II.

EXEMPTIONS & DEPENDENTS: Eliminated by the TCJA of 2017

III.

ALTERNATIVE MINIMUM TAX A. Basic Formula: Taxable Income + Adjustments (lost deductions) ---------------------AMTI - Exemption ($ 70.3K STP or $ 104.4K MFJ) ---------------------Final AMTI X Tax Rates (26 or 28%) ---------------------AMT B. TP pays the higher of AMT and Regular Income Tax C. Adjustments: For non-business TP’s, they “lose” the following deductions (which are added to increase Alternative Taxable Income): TI MME-

Taxes (itemized deductions of local income & property taxes) Interest on Home Mortgage (Home Equity Loans only) Medical Expense AGI floor raised to 10% AGI Miscellaneous Itemized Deductions (e.g. MBA tuition ded.) Exemptions & Standard Deduction

D. Also – certain tax-exempt amounts (like Incentive Stock Options) count as Gross AMT Income. E. 2018 Exemptions: $ 104,400 for MFJ and $ 70,300 for STP. But, exemption gets phased out for TP’s with AMTI > $500,000 (STP) or $ 1M (MFJ) – at rate of $ 1 for every $4 above the threshold. F. Tax Rate is 26% of first $ 191,500 and 28% of amounts > $ 191,500 2

IV.

GROSS INCOME A. Defined: Income from whatever source derived B. Must be realized AND recognized (give example of Municipal Bond income or taxable exchange) C. TAX YEAR: Must be realized/recognized during the elected tax year: 1. Calendar Year: Most individuals, S corporations 2. Fiscal Year: If business (often a corporation) can show a “business purpose” (e.g. 25% or more of income in last 2 months of fiscal year) D. Timing of Recognition: Depends on Reporting Method – see chart at top of next page.

When recognized?

CASH

ACCRUAL

INCOME

When Received

When Earned

DEDUCTION

When Paid

When Incurred (if paid no later than 3/15 of following year)

E. NEXT ISSUE IS INCLUSIONS VS. EXCLUSIONS

1. SEE INCOME INCLUSIONS / EXCLUSIONS CHART We will review in class together 2. Business Income: 3

a. Bus. Income – Deductible Expenses = Gross Income b. Business Losses: (1) Net Operating Loss (NOL):  Results in 0 tax for the TP  Carryback (CB) 2, Carryforward (CF) 20 years  Must CB first, unless irrevocable waiver filed (2) Passive Activity Income/Losses: TP is a passive investor. Will discuss in investment taxation section. (3) Capital Losses: Max deduction of $ 3K per year; TP may CF unused losses indefinitely 3. Section 1202 Stock: To qualify: Invest in co. with ≤ $50 million in assets. Only original SH’s qualify (didn’t buy it or receive it from someone else). Must hold stock for 5 years. Benefit: Exclude 100% (50% if stock acquired pre-2009, 75% if stock acquired in 2009 & 2010 or 100% if acquired in late 2010 and beyond). Cannot exclude any more than 100% of THE GREATER OF…  $ 10 Million or  10 Times the basis of stock sold.

GROSS INCOME CHART ON NEXT PAGE 4

INCOME INCLUSIONS / EXCLUSIONS CHART INCLUDE

EXCLUDE

1. Compensation

1. Fringe Benefits

Wages/Salary Money/Property Received Debt cancelled Tips, Bonuses Life Insurance (if > 50K cov.)

Health & Accident Insurance Meals & lodging (if for employer) Education expenses (up to $ 5,250) Employee discounts, diminimus Employer Pension Contributions Life Insurance (if < $50K coverage) _____________________________________________________________ 2. Life Insurance Cashed

2. Life Insurance - Beneficiary

(Unless TP terminally ill) Proceeds received by Beneficiary _______________________________________________________________ 3. Interest

3. Municipal Bond Interest

Bank Local Government Bond Federal Bond Fed Series EE if used… Corporate Securities  in adult TP’s name Any Tax Refund Interest  for education of self/dep _______________________________________________________________ 4. Cash Dividends – (0, 15, 20% rates)

4. Stock Dividends/Splits/Exchanges

If backed by corporate E&P

Unless SH first given a choice to take cash or stock dividend _______________________________________________________________ 5. Alimony…must be

5. Child Support

a. Cash b. Parties live apart c. Per court order or divorce agreement d. Payable until death No longer includable in 2019

If Spouse pays less than full amount of Alimony & C.S. apply payments first to C.S.

5

INCLUDE

EXCLUDE

6. Annuity Income: % of amount recovered > investment

6. Annuity Income: % amount recovered < investment

7. Rental Income: Rent, Pre-Paid 7. Rental Income: Vacation home rented Rent, lease cancel. fee, Tenant < 15 days per yr.; Security Deposit (if Improvements (TI) – if rent adjusted refundable); TI (no rent adjustment) _______________________________________________________________ 8. Unemployment Benefits; Disability 8. Disability Benefits from Benefits from Employer-Paid Plan Self Paid Plan _______________________________________________________________ 9. Prizes, Awards, Gambling

9. Merit Award if donated to charity (e.g. Nobel Prize) -OREmployee award (property $ 104,100 (2018) 13. Foreign Income: ≤ $ 104,100 _______________________________________________________________ 14. State Income Tax Refund (if TP previously itemized)

14. Federal Income Tax Refund:

15. Social Security Benefits Include 50% - if TP AGI Medium Include 85% - if TP AGI High

15. Social Security Benefits Exclude if TP AGI “low” (< $25K)

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