April 2nd, 2012 
Alexander Glaser 
Prizes are taxable income
Scholarships may be excluded
Gifts are not taxable
Inheritance is not taxable
Insurance proceeds are not taxable
Legal settlements are taxable
-unless due to injury or illness
Divorce
No gain or loss on transfer of property
Alimony is taxable and deductible
Child support is not taxable
Government transfer of wealth
Need based payments is nontaxable
Unemployment is taxable
Social Security
0%, 50% and 85%
Collectible Assets
Gain on sale of capital is taxable
28% for items held over a year
Standard tax rate for less than a year
Personal Expenses
No tax deduction unless:
Medical expense
Local, state and foreign tax
Charity
Medical Expenses
Expenses – .075(AGI) = deduction
Local, state and foreign taxes
Can deduct either state and local income tax OR sales tax
Can deduct cost of filing taxes
Example on pg 536
Deducted local property tax
Charity can be deducted up to 50% of AGI
If property is donated:
Long term capital asset deduction is equal to FMV
If not a capital asset, deduction is the lesser of FMV or basis
Tax subsidies
Can excluded interest earned on EE savings bond
Can report qualified tuition expenses as above the line, limited to $4000
- Not allowed anymore
Can above the line deduction interest on qualified education loans, up to $2500
American Opportunity credit is $2500 based on cost of 4 yr education
Lifetime learning credit is based on 20% tuition expense, up to $2000
CAN NOT claim deduction and credit on the same expenses
Can contribute up to $2000 per yr for tax exempt Coverdell savings acct
Can contribute to tax exempt qualified tuition programs sponsored by the govt
Losses on sales of personal assets
Personal losses is non-deductible
Casualty and theft losses
Lesser of tax basis or decrease in value
Reduced by $100
Reduced by insurance reimbursements
Example:
I lost $10,000 on damaged car
Casualty loss = 10,000
Insurance proceeds = (2,000)
Unreimbursed loss = 8,000
$100 floor = (100)
Deduction is $7,900
Hobby and gambling
Deduction for expenses is limited to revenue
Miscellaneous deductions subject to 2% limitation
Deduction – .02(AGI) = miscellaneous itemized deduction
Gambling is not classified as miscellaneous and therefore not subject to 2% rule
Losses can be deducted to the extent of gains
Home ownership
Beneficial to own a home
Home mortgage interest deduction
Deduction for mortgage is up to $1 million
Deduction for equity debt is up to $100,000
Example: Mortgage is $600,000
Second mortgage is $120,000
Interest payment is $55,000
Qualifying debt for deduction is: $600,000 and $100,000 = $700,000
($700,000 qualifying debt / $720,000 total debt) x $55,000 = deduction
Can only do this for primary residence and one other residence
Vacation Homes:
If rented out: can deduct expenses of maintaining up to revenue amount
Also allowed depreciation deduction based on the number of rental days
Aggregation of these is limited to gross rents – mortgage interest and prop taxes in rental period
Example:
Family uses vacation home on weekends and june and july. Rents it out during August and September
Rent revenue: $6,400
Mortgage interest and prop tax for august and September: $3,505
Maintenance expense for august and September: $3,760
Depreciation for August and September: $1,200
Gross rents: 6400
Interest and property tax deduction: (3505)
Equals: 2895
Maintenance deduction: (2895) limited to rents
Depreciation deduction: 0
Net rental income: 0
Gain on sale of residence
Not income if house was used for 2 years of 5.
-exclusion only applies for one sale every 2 years
-limited to $250,000 or $500,000 for mfj
May apply for a 6 month extension for filing taxes
- Does not extend time to pay taxes
Payments made late is charged an interest by the government
-federal short term rate + 3%
Govt has 45 days to refund excess or else pay interest
Same rate
Corporation overpayment rate depends on size of overpayment
$10,000 or less = short term + 2%
$10,000 or more = short term + .5%
Late filing and late payment penalty
5% of the balance due for each month
Have to pay 5% of balance due + interest
5% rate runs for 5 months and then drops to .5% for up to 45 months
Statute of limitations- just because govt cashes check or mails refund does not mean they certify its accuracy
IRS has 3 years to find mistakes
If an omission is greater than 25% of gross income, IRS has 6 years
Audit Process
DIF score determines which filings are examined
Correspondence exam is easy and over the phone or mail
Office exam is at IRS office conducted by auditor
Field exam is at the home by a revenue agent
Deficiency is difference in what was paid and what was supposed to be paid
Interest charge
Corporations may deduct deficiencies as expense
Taxpayer Bill of Rights- 1989
Bill of Rights 2- 1996
Bill of Rights 3 –
National taxpayer Advocate – aid taxpayers
Noncompliance penalties
People who challenge IRS on basis of legal grounds can be fined $5,000 for frivolous return
Negligence- no effort made to be correct – 20% of understatement fee
Civil fraud- attempt to cheat government- 75% fine on understatement
Criminal Fraud- tax evasion
Tax return preparer penalties
Must sign the tax returns
Include id number
Give clients copies of completed returns
Retain copies
$50 fine for not signing
Max penalty is $25,000
Penalty for messing up w/o excuse is greater of $1,000 or 50% of payment to prepare
If intentional it is $5,000 or greater of 50%
Contesting audit result
Litigation
Us tax court if taxpayer refuses to pay deficiency
Us court of federal claims or us district court if paid but decides to sue
Jury = district court
May appeal to 13 u.s. circuit court of appeals
May appeal to supreme court
Small Tax case division: deficiency of 50k or less. $60 filing fee
IRS collection procedures
Taxpayer that cannot pay may request an installment agreement
-must accept if payment is under $10,000
-gives 3 years
If taxpayer cannot ever pay they can take an offer in compromise
Innocent spouse rule- protects joint filers
Must be spouse’s fault
Must have not known about incorrect filing
Inequitable to hold souse responsible
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