 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-1 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Tax Consequences of Personal Activities Chapter 16

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-2Objectives  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

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-3 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

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-4 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

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-5Divorce  Property settlements are excluded - like gifts. Carryover basis.  Alimony is taxable to recipient, deductible to payor.  Child support is NOT taxable nor deductible.  See AP2.

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-6 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).

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-7 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 AP5

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-8 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

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-9Charity  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

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-10 Tax Subsidies for Education  EE Savings Bonds - interest excluded to the extent used for tuition and fees. Rich phaseout.  Deduct $4,000 qualified tuition expenses if AGI < $130,000 MFJ.  Interest on qualified education loan is deductible for first 60 months of payments - max $2500 per year. Rich phaseout.  Hope scholarship credit - 1st 2 years of college. Max $1500 per year per student based on tuition/fees. Rich phaseout.  Lifetime learning credit = 20% of tuition/fees; $2000 credit max / yr. Rich phaseout.  Education savings account (Coverdell plan or section 529 state-sponsored plan) - withdrawals spent on education are tax-free.

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-11 Personal Losses  Loss on disposition of a personal assets is NOT deductible. Gains on disposition of 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 AP11.  Hobby deductions limited to hobby income  Not a hobby if profits in 3 of 5 years

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-12 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

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-13 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.

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-14 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

 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-15 Itemized Deductions as AMT Adjustments  Medical allowed only > 10% agi  Tax deduction disallowed  Miscellaneous itemized deductions disallowed  Home equity debt interest disallowed