CPA Regulation Notes - Chap

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CPA Regulation Notes - Chapter 1 http://www.scribd.com/doc/16907314/CPA-Regulation-Notes-Chapter-1
Individual Taxation – Filing Status
Must file tax return if income is equal to or greater than sum of:
Personal exemption + Standard deduction + Additional standard deduction for over 65 or blind
Exceptions:
- Earned from self-employment at least $400
- Can be claimed as dependents on another taxpayer’s return, have unearned income, and gross income of $900
- Who receive advance payments of earned income credit
Filing due date: April 15
Automatic six-month extension. Must file extension by April 15. Even with extension, due date for tax payments if April 15.
Filing Status:
Single/End of Year Test: Single on December 31 OR Legally separated
Joint Returns/End-of-Year Test: (even if married and living apart, but not legally separated/divorced) Married on
December 31. If one spouse dies during the year, a joint return may be filed.
Married Filing Separately
Qualifying Widow(er) (surviving spouse)
o For two years after spouse’s death: uses joint tax return standard deduction and rates (not the exemption for
deceased spouse)
o Principal residence for dependent child: The surviving spouse must maintain a household that, for the whole
entire taxable year, was the principal place of abode of a son, stepson, daughter, or stepdaughter (blood or
adoption).
Head of Household – Following conditions:

o Not married or legally separated, or married and lived apart from spouse for last six months. Not a “qualifying
widower”. Not a non-resident alien. Maintains as his or her home a household that, for more than half the
taxable year, is the principal residence of:
Son/Daughter (Working Families Act): example: divorced mom
Father or Mother (not required to live with): example: nursing home
Dependent Relatives (must live with): Cousins, foster parents, and unrelated dependents do NOT
qualify.
Required time period for different filing statuses:

W – Widow = Whole year
H – Head of household = H alf a year (more than)
Individual Taxation – Exemptions

/ 14 Generally, an individual is entitled to a personal exemption that is indexed annually for inflation. For 2008 = $3500.
Persons eligible to be claimed as dependents on another’s tax return will not be allowed a personal exemption on their
own returns.
Each spouse receives personal exemption.
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- Taxpayer’s spouse has no gross income AND

- AND taxpayer’s spouse was not claimed as a dependent of another taxpayer.
If a person is born or dies during the year, he or she is entitled to a personal exemption for the entire year. Exemptions
are not prorated.
Dependency exemptions: a taxpayer is entitled to an exemption for each qualifying child and relative, based on the
requirements.
Qualifying Child
C – Close relative
A – Age limit
R – Residency requirements
E – Eliminate gross income test
S – Support test changes
Qualifying Relative
S – Support (over 50%) test
U – Under a specific amount of (taxable) gross income test
P – Precludes dependent filing a joint tax return test
O – Only citizens (residents of U.S./Canada or Mexico) test
R – Relative Test
OR
T – Taxpayer lives with individual for whole year test – If NOT related
Taxpayers must obtain SSN for any dependent who has attained the age of one as the close of the tax year
Qualifying Child
C – Close relative: be the taxpayer’s (step)child, (step)sibling, descendants, legally adopted, foster child
A – Age limit: under 19 (age 24 if full-time student). No age limit for permanently disabled child.
R – Residency requirements: same household as taxpayer for more than half of the tax year
E – Eliminate gross income test: gross income test (SUPORT) does not apply
S – Support test changes: child did not contribute more than half of his support. Requirement that taxpayer (parent)
provides over half of support is eliminated.
Qualifying Relative
S – Support (over 50%) test: Taxpayer must supplied more than 50% of support of the person in order to claim him as
dependent. Support means the actual expenses incurred by or on behalf of the dependent.
• If two or more people support more than 50%, only one can claim the dependent (must contribute more than
10%).
• General rule: Custodial parents have the right to claim (instead of non-custodial). If both parents equally
contribute, then the one with higher AGI.
U – Under exemption amount of (taxable) gross income: person’s gross (taxable) income must be less than the exemption
amount ($3500 for 2008).
• Taxable income: Social Security (low income levels), tax-exempt interest income (state and municipal interest),
tax exempt scholarships – (Tax-free income is OK)
• No income test if meet age limit - C ARES
P – Precludes dependent filing a joint tax return test: can`t claim dependent if they file joint tax return with someone else,
/ 14 UNLESS the joint return is filed solely for a refund of all taxes paid or withheld for the taxable year (tax is zero).
O – Only citizens (residents of U.S./Canada or Mexico) test
R – Relative Test: does NOT include cousins or foster parents. Cousins and foster parents must live with taxpayer the
entire year.
OR
T – Taxpayer lives with individual for whole year test – If NOT related
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Phase-out of personal and dependency exemptions: by 2% of each $2,500 increment by which AGI exceeds certain
thresholds based on filing status – R1-15 (threshold amounts and example)
Individual Taxation – Gross Income
Gross Income:
Event Income Basis
Taxable = FMV FMV
Non-taxable = N-0-N-E NBV
Realization = Real World. Accrual or receipt of cash, property, or services, or a sale or exchange
Recognition = Record for tax purposes.
Accrual method: recognition is when earned

Cash method: recognition is when actually or constructively cash or FMV property is received
***Whether on cash basis or accrual basis, taxpayers who sell stock and securities in the market must recognize gains
and losses on the trade date.***
Salaries and wages included in Gross Income:

→ Money
→ Property = FMV
→ Cancellation of debt
→ Bargain purchases
o Ex. if property is sold for less than FMV, the difference is income
→ Taxable fringe benefits (non-statutory)
o Ex. Employee’s personal use of company car is considered employee’s income. Amount is subject to
employment taxes and withholding.
→ Portion of life insurance premiums. Non-discriminatory plans only.
o Premiums above the first $50,000 of coverage are taxable income to the recipient and normally included in
W-2 wages.
→ Life insurance proceeds paid are excluded from income of beneficiary
→ Interest income from life insurance proceeds on a deferred payout arrangement is fully taxable
→ Accelerated death benefit received my terminally ill (dying within 24 months) is not taxable
→ Accident, medical, and health insurance (employer paid):
o premium payments are excludable from employee’s income when the employer paid the insurance premiums
→ De Minimis fringe benefits: benefits so minimal may be excluded.
o Employee’s personal use of company computer
→ Meals and lodging by the employer for the convenience of the employer on the employer’s premises is not taxable to
the employee.
→ Employer payment of employee’s educational expenses of up to $5250 may be excluded from gross income. Could
be for undergraduate or graduate school
→ Qualified tuition reductions at undergraduate level may be excluded from income. At graduate level, only if students
are engaged in teaching or research activities and if the reduction is in addition to the pay for the teaching or
research.
→ Qualified employee discounts are excludable from taxable income for:
o Merchandise discounts: limited to employer’s gross profit percentage. Excess is income
o Service discounts: limited to 20% of FMV. Excess is income
/ 14 o Employer-provided parking: $220/month for 2008
o Transit passes: employer provided pass up to $115/month for 2008
→ Qualified pension, profit-sharing, and stock bonus plans
o Payments made by employer are non-taxable
o Benefits received are taxable
→ Flexible spending arrangements (FSA): allows employees to receive a pre-tax reimbursement of certain expenses
o Employees can elect to have up to $5000 per year deposited pre-tax into a FSA.
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Interest Income:
→ Taxable interest:
o Federal bonds, premiums received for opening a savings account are included at FMV, part of proceeds from
instalment sale
o Interest paid by federal or statement government for late payment of tax refund is taxable.
→ Tax-exempt interest: reportable, but not taxable.
o State and local government bonds/obligations
o Bonds of a U.S. possession
o Series EE (U.S. Savings bond)= interest is tax-exempt when:
EE = used for Educational Expenses
There is taxpayer or joint ownership (spouse)
Taxpayer is over age 24 when issued
They are acquired after 1989
Phase-out starts when modified AGI exceeds an indexed amount
o Interest on veterans administration insurance
→ Unearned income of a child under 18 Kiddie Tax
o Net unearned income of an under 18 child (or under 24 = fulltime student), is taxed at his parent’s higher tax
rate.
Total unearned income – child’s standard deduction of $900 = taxable income
2008 Child’s Unearned Income Tax Rate
0 – $9000 0%
$901 – $1800 child’s rate
$1801 and over parent’s rate
→ Forfeited interest (adjustment): penalty on withdrawal from savings
o If included as income when earned, then the forfeited interest is deductible as an adjustment in the year
incurred
o Do not net with interest income
Dividend Income:
→ Source determines taxability:
o Earnings & profit / Current = By Year End
o Earnings & profit / Accumulated = Distribution Date
o Return of Capital = No Earnings and Profits
o Capital Gain Distributions = No E&P / No Basis
→ Three Categories of Dividends = all dividends if are distributions of corporation’s E&P, it is included in gross income
o Taxable amount (to shareholder receiving)
Cash = Amount received
Property = FMV
o Special (lower) tax rate: 15% for most taxpayers and 0% for those in the 15% or lower tax bracket
Stock must be held for 60 days during the 120 day period, beginning 60 days before the ex-dividend
date
Tax-free distributions: exempt from gross income
Return of capital: company distributes funds but has no earnings and profits. Taxpayer will
reduce (but not below zero) his basis in the stock held
Stock split: shareholder will allocate the original basis over the total number of new shares
Stock dividend:
◊ If shareholder had option to receive cash or property, but chose dividend, then it will
be taxable at FMV
/ 14 ◊ If no option, just simply received stock dividend:
• Same stock = original basis is divided by total shares
• Different stock = original basis is allocated based on their cumulative FMVs
Life insurance dividend = Dividend caused by ownership of insurance with a mutual
company (premium return)
o Capital Gain Distribution: corporation has no earnings and profits, and the shareholder has recovered his
entire basis, then distribution is treated as taxable gross income

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CPA Regulation Notes - Chapter 1

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Individual Taxation – Filing Status

Filing due date: April 15

Single/End of Year Test: Single on December 31 OR Legally separated

Married Filing Separately

Qualifying Widow(er) (surviving spouse)

Head of Household – Following conditions:

Required time period for different filing statuses:

Individual Taxation – Exemptions

Each spouse receives personal exemption.

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Becker – 2009 Edition Chapter 1 Page 1 of 14

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- Taxpayer’s spouse has no gross income AND

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Becker – 2009 Edition Chapter 1 Page 2 of 14

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Individual Taxation – Gross Income

Accrual method: recognition is when earned

Salaries and wages included in Gross Income:

Becker – 2009 Edition Chapter 1 Page 3 of 14

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Becker – 2009 Edition Chapter 1 Page 4 of 14

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CPA Regulation Notes - Chapter 1

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