Exam #2 Study GuideChapter 5:Gross Income (Inclusions & Exclusions)Gifts & Inheritances: tax free (GI does not include gifts, bequest, devise & inheritance)Panhandlers are gifts , tips are not gifts (taxable income), liquor/fruit given to employees/customers up to $25/yr/recipient are deductible to giver and nontaxable to recipient. Scholarships & Fellowships: excluded from GI the portion of scholarship used for tuition, fee’s & books (not living expense) ; Fellowship: given @ graduate level, render no serviceLife Insurance Proceeds: exempt from federal income tax EXCEPTIONS: 1.Rights assigned to beneficiary for considerationand insured dies, then taxpayer possibly has taxable income = [proceeds from policy – (consideration + future premiums)]—exemption to this: policy is not taxable if policy is assigned to business in order to facilitate the funding of “buy-sell/out” agmts. 2. Policy is cashed in prior to death of insured and proceeds received exceed premiums paid. – If beneficiary leaves proceeds of insurance policy with insurance company, interest received on life insurance proceeds is taxable.Dividends from insurance companies = nontaxable return on capitalMeals & Lodging: to be excluded from taxable income, meals must be furnished for employer’s convenience and on employer’s premises (restaurant hospital employee eating a meal on premises) lodging must be both & a condition of employment (mngr of apt complex required to live on premises to be accessible to tenants) Cafeteria Plans: allow employee to choose between additional cash and fringe benefits such as health/life insurance, dpdt. Care assistance. If cash option is chosen- taxable; other options = non-taxable income Chapter 6: Deductions & Losses – In General For AGI:alimony payments, trade/business expenses, travel/transportation expense of self employed, moving expense, (books, tuition, trans/travel IF reimbursed by employer or if self-employed), higher education expense From AGI:unreimbursed travel expenses of employee, charitable payments, rentals for safe deposit box in which stocks/bonds are keptHobby Loss Rules: assumed to be for profit if have net income in 3 outta 5 yrs. If hobby, expenses are deductible to the extent of income from hobby. 1. Amounts deductible regardless of activity such as property taxes & interest 2. Amounts deductible if activity was for profit but only if amnts do not affect adjusted basis 3.Amnt that affect adj. basis such as depreciation (2&3 only deductible FROM AGI as miscdeduc. Subject to 2% AGI limitation)Investigation or Start-Up Costs of a Business: if taxpayer operates same or similar type of business, all investigation or start-up costs are deductible regardless of whether or not business is acquired. If not in that type of business: 1. Fails to aquire business – costs not deductible 2. Aquires business- costs must be capitalized, then first $5000 amt is immediatelydeducted and remainder is amortized over a period of not less than 15yrs. (phased out $ for $ if investigation costs exceed $50,000)Section 212: determines deductibility of ordinary/necessary expenses attributable to production/collection of income. Deductible expenses: 1.For production/collection of income (safety deposit box, invstmags, invst counselor fees) NOT include invst interest expense 2. For mngt, conservation, or maintenance of property held for production of income (rental prop, royalties) 3. In connection w/determination, collection or refun of any tax -- #2: rental prop expenses or expenses related to royalties are deductible FOR AGI. #1&3: these expenses classified as part of tier two misc deductions. These only deductible FROM AGI and subject to 2% of AGI limitationPrepaid Interest (points): capitalized EXCEPT points incurred when new residence is purchased or improvements madeChapter 9: Deductions- employee expensesTransportation:not cost of overnight trip or commuting; $.56/mile + parking, tolls, taxes & interest (if self-employed) OR actual operating cost: depreciation from tables, gas, insurance, repairs/maintenance, pkg, tolls, taxes, interestTravel:(occurred when away from home)meals, lodging laundry, incidental expenses,deduct 50% meals & entertainment.Must be primarily business to deduct transportation but can still deduct direct bus expenses. Count days devoted to business including travel daysEducational Expenses: deductible if maintain/improve existing skills required in taxpayers present job ; not deductible if qualify taxpayer for new trade/business (CPA review course/bar exam/pursuit of degree) If not reimbursed or self employed, expenses are deductible only as itemized deduction subject to 2% AGI. Only 50% of mealsACCTG 435 1st EditionHigher Education Expense:tuition & fees only, choose between deduction & credit, not for someone who is a dependent on someone else’sreturn . $4,000 deduction for AGI no more than $65,000 ($130,000joint) $2000 deduction with AGI between $65,001-$80,000 (130,001-160,000 joint)Same education expenses cannot be used for deduction & HOPE (1st four yrs of undergrad)Home Office Deduction: must be used on regular/exclusive basis for business and be either only business location or place used for patients/clients to meet or separate structure site of home office; all home office expenses = misc itemized deductions subject to 2% floor except those such as interest (other it. Deduc) may deduct other expenses basedon percent of residence devoted to home (utility, depreciation, rent, )Safe Harbor Provision: deduct $5/sqft of office space up to 300sq ft. for as much as $1500 in deductionsMoving Expenses: deductible to employee, distance of new job must be at least 50miles further than old residence was from former place of employment, must be employed for 39 weeks in the 12mo period following the move (78 weeks in 2yr period if self employed) waived if disabled, transferred by employer or involuntarily dismissed. 1. Expenses of movinghousehold & personal belongings 2. Expense of traveling to new residence (w/direct route) flat rate of $.235/mile or deduction based on out-of-pocket transportation expenses also in route lodging but NOT cost of meals.Chapter 10: Itemized DeductionsMedical Expenses: unreimbursed expenses deductible only to extent that exceed 10% AGI (7.5% for 65+) such as out-of-pocket expenses for hospitals, doctors, dentists, rx drugs, health insurance premiums CANNOT DEDUCT nonprescription meds, programs for health