ACCT 450 Personal Tax

9/8/15

Welcome!!

Laboring on Labor Day!!

Chapter 1 Wrap Up

Tax Administration P. 1-20

The Audit Process
o Selecting Returns
DIF Score
Paul & Donnas Story
High Income Schedule C
The Inventor
A new Twist LLCs
o Types of Audits
Correspondence Most Common
Missing info 1099
Heres an example
Office Audit
Rob & Tracys Story
Field Audit
Usually a business
What Usually Happens
But Sometimes
The Christmas Tree Farm
The Client Who Wouldnt Shut Up!!!
o The Results (RAR)
No Change Yay!!
Refund Oh, oh I messed up!!
The Agent says the client owes more money-Boo!!
Options
Client Agrees
Client Appeals
Appeals Division of the IRS
Tax Court or District Court
Big Difference!!

Statute of Limitations
o Generally 3 years
o What Date to use???
o Omit 25% of REVENUE = 6 years
o Dont file or fraud = FOREVER!!

Interest & Penalties

Tax Practice
o
o

Ethics
Statutory Penalties on Preparers

Understanding the Tax Law

o Revenue Neutrality
o Sunset Provisions Oh the games we play!!!
o Economic Considerations
Sec. 179
Encourage Certain Activities Credits
Encourage Certain Businesses DPAD Fracking
Encourage Small Business S Corps
o

Social Considerations - Where to begin???

Equity Considerations

Homework Questions???

Chapter 3 Calculating the Tax

The following formula is used to compute taxable income for individual taxpayers
(see Figure 3.1 in the text):
Income (broadly conceived)

$xx,xxx

Less: Exclusions
Gross income

(x,xxx)
$xx,xxx

Less: Deductions for adjusted gross income (AGI)

Adjusted Gross Income

(x,xxx)

$xx,xxx

Less: The greater of

Total itemized deductions
or standard deduction
Less: Personal and dependency exemptions
Taxable income

(x,xxx)
(x,xxx)
$xx,xxx

Tax on taxable income

$ x,xxx

Less: Tax credits

(xxx)

Tax due (or refund)

xxx

Lets see what it really looks like!!

a.
Computation of tax. Once taxable income has been computed,
the additional tax due to the government or the refund due to the
taxpayer can be computed.
Tax on taxable income (from Tax Table or Tax Rate Schedules)

Credits and prepayments

= Amount owed (or refund due)

b.

Most individuals use the Tax Table for computation of the tax.

Income (broadly conceived). This includes all income of the taxpayer, both taxable
and nontaxable
a.
This concept of income is essentially equivalent to gross
receipts, but does not include a return of capital or a receipt of
borrowed funds.
b.
Many receipts (e.g., borrowed funds) are not reported on the tax
return at all.

Exclusions. Congress has chosen to allow taxpayers to exclude certain items of income for
various reasons (see Chapters 4 and 5 for details). Some examples are listed below. See
Exhibit 3.1 in the text (Partial List of Exclusions from Gross Income) for other
examples.
Accident insurance proceeds
Child support payments
Gifts
Inheritances
Life insurance paid on death of insured
Welfare payments
Unemployment compensation (to a limited extent)
Gross Income. Section 61(a) of the Code defines gross income broadly as all
income from whatever source derived. Some examples of gross income items are
listed below. See Exhibit 3.2 in the text (Partial List of Gross Income Items) for
other examples.
Alimony

Compensation for services

Dividends
Embezzled funds
Gains from illegal activities
Prizes
Salaries
Tips and gratuities
Deductions for Adjusted Gross Income. Included are trade or business expenses,
reimbursed employee business expenses, one-half of self-employment tax paid,
alimony paid, traditional IRA and Keogh contributions, forfeited interest penalty,
moving expenses, capital losses, qualified interest on education loans, and other
items.
a.
Deductions for AGI are deductible whether the taxpayer itemizes
or not, while itemized deductions will benefit the taxpayer only if total
itemized deductions exceed the standard deduction.
b.
Deductions for AGI are also designated as above-the-line
deductions. This reflects that the deductions are claimed before
(above-) AGI (-the-line) is reached. They are also referred to as
page 1 expenses since they are reported on page 1 of Form 1040.
Adjusted Gross Income. This is an important subtotal applicable to individual
taxpayers, but not to corporations. It is commonly used to limit itemized
deductions. Floors and ceilings are stated as a percentage of AGI.
a.
Floor. Casualty losses are deductible only to the extent they
exceed 10% of AGI.
Other examples include:
(1)
Medical expenses are deductible only to the extent they
exceed 7.5% of AGI. See Example 4 in the text.
(2)
Some miscellaneous itemized deductions are deductible
only if they exceed 2% of AGI. See chapters 9 and 10.
b.

Ceiling. The deduction for charitable contributions may not

exceed 50% of AGI.

c.

AGI is the last line of page 1 and the first line of page 2 of Form

1040.

Itemized Deductions. Included are medical expenses, various (but not all) state,
local, and foreign taxes, home mortgage interest, investment interest, charitable
contributions, and miscellaneous expenses.
a.
A taxpayer should elect to itemize only if itemized deductions
exceed the standard deduction (see item 14. below).
b.

Itemized deductions are reported on Schedule A of Form 1040.

c.
See Exhibit 3.3 in the text (Partial List of Itemized Deductions)
for additional examples.
Review the list of nondeductible expenditures appearing on p. 3-7 of the text.
a.
Because they have no tax effect, these expenditures are not
mentioned as a component of the tax formula. Also, they are not
reported on tax returns (e.g., Form 1040).

Homework
o Read Chapter 3
o Do Chapter 3 - 1,8,10,12,20,23