Exam # 1 Study Guide Chapter 1: Overview of Taxes, Audit ProcessTransfer Tax: Tax on donor, not donee Gift Tax: living transfer of property; $14,000/yr/donee exclusion ($28,000 if joint), unlimited marital & charity deduction, once in a lifetime exemption for gifts & estate of $5,340,000 Estate Tax: combine with taxable gifts; to derive taxable estate, you are entitled to subtract contributions to spouse& charity. Only eligible for exemption if not used for gift tax purposes.Sales Tax: applied by state w/additional amnt imposed by city levelUse Tax: prevents avoidance of sales tax (same rate as sales tax- use or consumption of personal property)FICA Tax: employee & employer--social security tax (6.2% up to $117,000) & medicare tax (1.45% unlimited); .9% med. tax on earned income above $200,000 for single & HOH and $250,000 for joint (only employees & on combined earned income of both spouses)Payment Requirements: must pay by normal filing date (April 15); unpaid taxes = fed short-term rate + specified %. Gov is not required to pay interest on refund within 45 days after the filing due date for return, otherwise same rate as underpayments.Late-Filing and Late-Payment Penalty: fail to file an income tax return = 5% penalty/mo of the unpaid balance up to 25% of tax balance due. After 5 mo, drops to ½%/mo of balance due in addition to interest due – no penalty for failure to file a tax return when no balance is due, can wave penalty charge , but not interest charge.Statute of Limitations: period of time where audit may be conducted or taxpayer may amend their return for a refund. Any tax imposed must be assessed w/in 3 yrs. of the filing or return due date (whichever is later) ; a claim for refund must be filed win 3 yrs from date the return was filed (due date). Exceptions: no return filed or return = fraudulent, no statute of limitations & if taxpayer omits an amnt of gross income in excess of 25% of GI stated on return, statute of limitations is increased to 6 yrs. ACCTG 435 1st EditionNoncompliance Penalties: Negligence Penalty: 20% (disregard of rules & Regs), Civil Fraud Penalty: 75% of portion of tax underpayment due to fraud, Criminal Fraud: fines & imprisonmentChapter 2: Working With the Tax LawStatutory Sources: 1.Statutory: IRC (laws passed by congress) section #- key reference # for code 2. Administrative: treasury dpt regs (carry most weight) revenue rulings & procedures, other admin. pronouncments 3. Judicial: Tax Court- only hears tax cases, don’t have to pay disputed tax first- more expertise than district court- can apply to small cases division of u.s. tax court if claim is <$50,000 but cannot be appealed by either party (no attorney), District Court- must pay tax first then sue for refund, allowed to trial by jury (decides issues of fact, not law) Federal Claims- claims & tax claims against U.S. , pay tax first, sue for refund.  Losing party may appeal to US Court of Appeals, but only Federal Claims can be heard by The Court of Appeals for the Federal Circuit.Marginal Tax Rates: ATR or Amnt= BTRx(1-marginal tax rate); BTR= ATR/(1-MTR)Chapter 3: Tax Determination, ExemptionsBasic Model: Standard Deduction vs. Itemized Deduction: taxpayer can deduct, from AGI, greater of itemized deductions or standard deductions. Standard Deduction: Married Joint (surviving spouse)-$12,400, HOH-$9,100, Single-$6,200, Not married: 65 and over $1550, legally blind $1550 Married: 65 and over $1200, legally blind (for each taxpayer)- $1200Personal & Dependency Exemptions: $3950 deduction for each exemption, personal = taxpayer & spouse, if spouse diesduring year, taxpayer still receives an exemption for spouse that year, if divorce or legal separation, no exemption for spouse. Dependency exemption for qualifying child or relative – for both tests, must meet citizenship test (Mexico & Canada too) & if married, can only file to get a refund Qualifying child: must be taxpayers child, step, grand or foster child, sibling, or niece/nephew, must live with taxpayer for more than half the year, must be under age 19 or under 24 (if full-time student (college 5 mo/yr)), child must provide less than ½ of their own support (scholarships excluded) Qualifying Relative: must be relative (parent, uncle/aunt, in law) or live with taxpayer, provided over ½ support, multiple-support agreement if contribute more than 10% of total support , gross income must be less than amnt ofexemption (only taxable scholarship, and not SS payments)Married Filing Joint: if married at end of year or spouse dies during end of year, MFJ also available for surviving spouse (2yrs after year in which spouse dies if maintains home for dependent child)Head of Household: qualifying child or relative living w/taxpayer Exceptions: noncustodial parent claims child (otherwisecan claim child), parents do not have to live with taxpayer, if abandoned spouse, must maintain home for dependent child and spouse can’t live with taxpayer for last six months of year.Claimed as Dependent on someone’s return: may claim a standard deduction equal to the greater of 1) $1000 or 2) person’s earned income plus $350 up to standard deduction amnt of $6200 (for single individual) If Under 19 (or under 24 as full time student): for unearned income, once the std. deduction is used up, the first $1000 of unearned income is taxed at childs rate and unearned income in excess of that amnt is taxed at parents rateChapter 4: Gross IncomeCash Equivalent Concept: if the taxpayer is pain in kind (shares of stock, car, credits in club) use FMV of property/servicesreceived to measure incomeConstructive Receipt: taxable income if money is made available to taxpayer w/out substantial restrictions (bank interestcredited to acct or employer making last paycheck available to you even if check is not picked up)Claim of Right Doctrine: income is includable when received even though it might be required to repay the amnt at some future date. (illegal transactions – extortion or insurance commissions paid in advance). If required to repayincome, that year the amnt repaid may be deducted to extent it was previously included as income (if >3,000, taxpayer can choose between greater of tax reduction due to deduction or amnt of excess tax paid due to prior inclusion)Hybrid Basis: combination of cash & accrual methods use accrual basis for inventories and cash basis for other expense items.Assignment of Income: cannot assign income to