Tax Rules
Ch. 14: Taxation of Individuals
Filing status:
Married Joint, Married Separate, Head of household, Single
Married last day of the year
Head of household – non-surviving spouse, maintains home for dependent, unmarried
Exceptions: Survivng spouse files MJ for year of death
2 additional years if have dependents
Abandoned spouse is not married if >6 months
Individual Tax Formula:
Total income – for AGI deductions = AGI; AGI – Std/itemized deduction – exemptions = taxable income; TI*tax rate = Income tax liability; ITL + Other taxes = Total Tax Liability; TTL – Credits and prepayments = taxes due/refund
For AGI deductions – above the line; usually business expenses; always reduces TI
From AGI deductions – below the line ; may affect taxable income
Itemized – bunching to increase above std deduction
Exemptions – Personal for taxpayer and spouse; Dependents
Special tax rates – Net LT Gains; Qualifying Dividends; 0%, 15%,20%
Ignores:
Self-employment – factor in SS tax already paid and withheld if also employee; half deductible
Net Investment Income tax (ch. 16) – for high AGI and unearned income; [min(NII, AGI-threshold)] * 3.8%
Threshold – 250k for joint, 200k for single
Additional Medicare
Phase-out effects
Credits:
Child Credit = $1K per child under 17 as of Dec. 31.
Dependent care credit - <13; physically incapable; 20-30% of child care costs
Earned income credit – credit reduces income tax liability to 0, refunds rest of the amount excess of tax.
Marriage penalty – difference b/t MFJ tax and 2 Single taxes; AGI - standard deduction and exemption

Dependents:
Qualifying child
Relationship – child, sibling, relative’s children, adopted, step kids
Residence – lives with over half the year, if away at college waive residence
Age - <19; if full-time student <24, if disabled waive age
Support – QC does not proved >half support
Qualifying “relative”
Relationship – biological relationship or lives with over half the year
Support – taxpayer provides >half of support
Gross income - <personal exemption
Payment and Filin g Requirement?

Ch. 17: Tax Consequences of Personal Activities
Nontaxable Personal receipts:
Scholarships spent on education
Gifts, inheritances, and life insurance
Excluded from gross/taxable income. May be included in Taxable Estate (ch. 16)
Legal Settlements and Gov. Payments:
Need-based (injury, illness, worker’s compensation, welfare) = nontaxable
Unemployment compensation, SS if not low-income, is taxable
Divorce:
Property settlements are nontaxable; carryover basis
Alimony taxable to recipient; deductible for AGI
Child support nontaxable nor deductible
Personal expenses (Itemized):
Personal use assets NOT depreciated unless used in business.
Losses nondeductible because not appreciated
Gains are generally Capital
Personal expenses do not allow for deductions
Itemized deductions and Personal expense exceptions:
Medical – deduct excess of unreimbursed costs over 10% of AGI
Taxes – Deduct half SE Tax (for AGI, not itemized); From AGI deduction:
Deduct real or personal property taxes on personal assets
Elect to deduct state & local sales OR income taxes
Costs of tax compliance + aggregate misc. expenses; >2% AGI
Charitable Contributions – 50% of AGI for donations; carryover excess 5 yrs
LT Capital assets – FMV of property, good for appreciated LT assets
Other property – lesser of FMV or basis
Home Ownership
Acquisition debt limited to 1 million
Home equity debt limited to 100k (this + acquisition debt = allowed)
Allowed Debt/total debt * total interest = deductible home mortgage interest
Vacation Homes
Treated as vacation if personal use exceeds max[14 days, 10% of rental days]
Deduction based on rental period
Aggregate of depreciation and maintenance expenses = deduction; limited to Gross rental revenue – mortgage interest and property tax
Allowed to carry forward depreciation and maintenance expenses
Gain on sale of principal residence exclusion (not itemized, just special rule):
Exclude 250,000 if