Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Principles of Taxation Chapter 16 Tax Consequences of Personal Activities

Slide 16-2 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Objectives  taxable and nontaxable gratuitous receipts  divorce, alimony, child support  taxation of Social Security benefits  itemized deductions for medical, taxes, charity  casualty and theft  hobby income and expenses  home owning benefits  AMT

Slide 16-3 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Gratuitous receipts  Prizes and awards are taxable  some exceptions if give to charity  Scholarships are excluded to the extent spent on:  tuition, books, fees, equipment required by institution  Gifts, inheritances, life insurance proceeds excluded.  See AP1, 3

Slide 16-4 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Settlements and government payments  Legal settlements taxable unless compensation for physical injury or illness.  Workers’ compensation payments are EXCLUDED.  Unemployment compensation payments are TAXABLE.  Need-based payments like welfare are EXCLUDED.  Social security is excluded or taxed at 50% or 85% depending on income level.  See AP4

Slide 16-5 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Divorce  Property settlements are excluded - like gifts. Carryover basis.  Alimony is taxable to recipient, deductible to payor.  Child support is NOT taxable nor deductible.  See AP 2.

Slide 16-6 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Sales of personal use assets  Personal use assets may not be depreciated.  Losses are not deductible.  Gains are generally capital. (Except literary, musical, artistic creations).

Slide 16-7 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Personal Expenses - Medical  Deduct excess of unreimbursed expenses over 7.5% of AGI  Qualifying medical includes:  doctors, dentists, chiropractors  clinics, hospitals, long-term care facilities  medical aids  prescription drugs  medical insurance premiums  See AP 5

Slide 16-8 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Personal Expenses - Taxes  Deduct state income taxes and property taxes  Do NOT deduct sales taxes, payroll tax, gift/estate tax, federal taxes.  Costs of tax compliance (e.g. CPA) are miscellaneous expenses deductible if > 2% AGI in aggregate.  See AP7

Slide 16-9 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Charity  General limit - deduct up to 50% of AGI for cash donation (less for capital assets).  carryover excess for 5 years  Deduction amount:  LT capital assets = FMV of property  other property = lesser of FMV or basis.  Special rules, limits for donations to foundations, capital gain property.  See AP8

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Tax Subsidies for Education  EE Savings Bonds - interest excluded to the extent used for tuition and fees. (Rich phase-out begins $79650 MFJ in 1999)  Hope scholarship credit - 1st 2 years of college. Max $1500 per year per student based on tuition/fees.  Lifetime learning credit = 20% of tuition/feesx Max $5000 per year.  Hope and Lifetime phase out begins $80,000 MFJ  Education IRA - withdrawals spend on education are tax-free.  Interest on qualified education loan is deductible for first 60 months of payments - max $1000 per year. Phase-out begins $60,000 MFJ

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Personal Losses  Loss on disposition of a personal assets is NOT deductible.  Gains on disposition of a personal assets IS Taxable.  Casualty and theft losses  Loss = lesser of (adjusted basis or decline in FMV) - insurance proceeds  Deduction = Loss - $100 per casualty - 10% AGI. See AP 11.  Hobby deductions limited to hobby income  Not a hobby if profits in 3 of 5 years

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Home Ownership  Benefit of not paying rent is economic income, but is NOT taxed.  Interest deduction  interest on acquisition debt up to $1 million  interest on home equity debt up to $100,000  deduction available for principal residence and one other personal residence (not a primary rental property)  See AP15

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Home Ownership  Vacation home rental activity  treated as a vacation home if the personal use exceeds the greater of 14 days or 10% of rental days  expenses are limited to rental income (NO LOSS).  carryforward excess expenses.  See Chapter 15 for rules if rental property is NOT a vacation home.

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Home Ownership  Exclude gain on sale if home is principal residence 2 years out of 5 years ending on date of sale.  Exclude only one gain every 2 years.  $500,000 MFJ, $250,000 other  See AP 16, 17

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Itemized deductions as AMT adjustments  Medical allowed only > 10% agi  Tax deduction disallowed  Miscellaneous itemized deductions disallowed  Home equity debt interest disallowed