BA 128A Agenda 2/1 Questions from lecture Review Assignment I2-52,55, I3-48 Additional problems I2-46,47 I3-35,39,40,41

Kiddie Tax $700 standard deduction, $700 statutory deduction taxed at the child’s tax rate If the dependent has both earned and unearned income, figure out the taxable income and then the unearned income Tax = Taxable Income - Net unearned income at child’s rate; net unearned income at parent’s rate.

Capital Gains and Losses Net STCG and STCL Net LTCG and LTCL Then, net ST and LT together First, loss is netted against gains within the same tax rate group Second, excess and short term loss is netted against the highest tax bracket capital gain first If the net is a capital gain, gain is taxed at different rates according to different asset classification

Accounting method Cash receipts and disbursement method (constructive receipt principal) –advantages: simpler, greater tax planning Accrual method –concept of earned Hybrid method (accrual basis for purchase and sales of goods, cash basis for all other income and expenses Who is required to use accrual method?

Gross Income Compensation (fringe benefits excluded)_ Business income (service income, manufacturing income- sales - COGS) Interest Income (EE Bonds - defer or tax free) Rents and Royalties –prepaid rent is taxed in the year of receipt Lessee’s improvements

Gross Income (cont) Cash dividends/Stock dividends/constructive dividends Alimony - deductible by payor and inclusive for payee; alimony recapture Pensions - amount contributed is deductible Annuities - cost can be recovered; exclusion ratio

Other Gross Income Income from flow through entities –S-corp, partnership Price Awards, Gambling winnings, treasury finds, illegal activities Unemployment compensation and Social Security benefits

Social Security Benefits Provisional Income = AGI (excluding SS benefits) + Tax-exempt interest - Foreign earned income + 50% of SS benefits Calculation depends on filing status PI3-23

Insurance Proceeds Proceeds from destruction of property included in GI only if proceeds > adjusted basis of property Proceeds from guarding against profit loss is taxable Involuntary conversion - if proceeds are reinvested in a qualified replacement property, not GI

Choosing bonds for tax-planning Assume risk is the same, choose tax-free bonds if Interest of tax free bonds > (1-marginal tax rate)* interest of taxable bonds Tax deferred bonds –tax bracket –present value of money