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Tax
Seton Hall Unversity School of Law
Kaye, Tracy A.

Prof KAY
Tax
Fall 2011
 
 
 
FORMULAS
 
 
*Whenever you see anything that says “do you want to pay now or later” or see money moving through at different points in time, think PV applies
 
Qualified Residence Interest = ((Total interest) x (Adjusted Purchase Price)) / (Total average balance of debts)
 
            QRI = ((TI) x (APP)) / (TABD)
 
            *Look for when the debt exceeds the adjusted purchase price; Need to know
            the interest in order to do the calculation, so look for a problem with total
            debt exceeding APP and interest
 
            *Then subtract the QRI from the total interest; the remaining interest is
            Personal interest and not deductible
 
            *Qualified residence interest = below the line deduction
 
Alimony: Calculate Excess Payments
            a = total alimony paid in year 1
            b = total alimony paid in year 2
            c = total alimony paid in year 3
            Y = excess alimony payments from 2nd post separation year
            X = excess alimony payments from 1st post separation year
            Y = b – (c + 15,000)
            X = a – ((b + c – Y)/2 + 15,000)
            ADD X and Y to determine what the payor must add to income and what the
            payee may deduct from income in 3rd year
                        Remember, must net the alimony paid out in 3rd year against what is
                        to be included in income and vice versa for payee
 
Straight line depreciation
            Basis/depreciation term = depreciation amount per year
            Then deduct that depreciation from the basis and use that number as the
            basis for the next year’s calculation
 
Declining Value Method 
1.      Take the cost of the property or its basis
2.      Subtract the salvage value
3.      Divide by the recovery period (same as straight line)
4.      Multiply this by the relevant percent (i.e.: 200% for double declining balance depreciation)
5.      Use this amount as depreciation in the first year
6.      For year 2:
a.       Subtract 5 from 1
b.      Repeat steps 1-5, but use the amount from 6A instead of the original cost in step 1
7.      Repeat for subsequent years
8.      In the last year of useful life, depreciate the remaining balance of the basis
 
 
 
 
 
I.                    Income and Debt
a.       Formula for taxable income:
                                                               i.      Formula:
1.      AGI = GI less exclusions from gross income less above the line deductions
2.      Taxable income = AGI less deductions/exemptions (standard or itemized)
3.      TAX = taxable income times tax rate (§1) less tax credits
b.      OR (Same formula)
                                                               i.      Gross Income §61
                                                             ii.      MINUS above the line deductions
1.      Wages, salaries
2.      Annuities §72
3.      Alimony §71, 1041
4.      Interest §61
5.      Prizes, awards §74
6.      Illegal/gains §61
7.      Gain or loss §1001
8.      Fringe benefits §119, 132
a.       Employer provided meals and housing
9.      Gifts, inheritance §102
10.  Compensation for personal injury and sickness §104
11.  Gain from sale of principal residence §121
12.  Dependent care assistance §129
13.  Alimony §71, 215
14.  IRA contributions §219 62(a)(7)
15.  Interest on student loans §221
16.  Higher education expenses §222
                                                           iii.      = AGI
                                                           iv.      AGI MINUS Below The Line deductions/exemptions
1.      Personal exemptions §151
a.       Every person is entitled to $3700 regardless of whether filing itemized or standardized
b.      Every person on the return plus all dependents are entitled to the $3700
                                                                                                                                       i.      Divorced parents: general rule: only the custodial parent can claim the exemption
                                                                                                                                     ii.      Exception: the non-custodial parent can get the exemption if the custodial parent releases the exemption to them (must be done every year)
                                                                                                                                   iii.      (Important for income shifting = shift the exemption to the person with the higher income)
c.       Example: A and B are married filing jointly and have 3 children: are entitled to 5 exemptions
d.      Essentially every person included on the return gets an exemption
2.      Then choose: standard or itemized:
a.       Standard §63 (take whichever is greater)
                                                                                                                                       i.      Standard deduction: single: $5800
                                                                                                                                     ii.      Married filing jointly: $11,600
                                                                                                                                   iii.      Head of household: $8500
3.      If itemized, can deduct all of the following, if applicable
a.       Home mortgage interest §163(h)(3)
b.      Non business taxes §164
c.       Non business casualty or theft losses §165
d.      Medical and dental §213
                                                                                                                                       i.      Extraordinary medical expenses
                                                                                                                                     ii.      Can deduct expenses paid for TP himself, spouse dependents to the extent that it exceeds 7.5% of AGI
e.       Nonbusiness interest § 163, 461
f.        Employee business expense §162
g.       Investor’s expense §212
h.      Charitable contributions §170, 1011
i.         Child/dependent care §21
j.         Child tax credits §24
k.       Hope and lifetime learning credits §25A
l.         EIT

     Income tax does not pressure property owners to transact sooner
2.      Property owners are more able to time their income (and their taxes) than are wage earners who depend on wage income
a.       Goes against the doctrine of constructive receipt
b.      Constructive receipt = if you have the right to get the income, it’s as if you got the income (even if you did not take the income)
g.       Haig-Simons definition Income = consumption + change in wealth
                                                               i.      Wealth = value of all your property
                                                             ii.      Idea is that you look at wealth in the beginning, then look at how much is consumed; wealth should go down by how much you consume; BUT if your wealth goes up, then there must have been income = looks at change in wealth (how much it goes up) and that change is your income
1.      If the change in your wealth is the same as what yo consumed = no income
2.      If wealth goes up = income
                                                           iii.      Example: W started the year with a house worth 100K and no other assets.  During the year, W sold his house and sepnt 60K.  At the end of the year, his total assets were worth 140K
1.      Under the Haig-Simons definition, W had 100K income
a.       Started with 100K (wealth)
b.      Consumed: 60K
c.       Ended with 140K
d.      So: Income = Consumption (60K) + change in wealth (40K)
e.       So, income = 100K
h.      Income from the Discharge of Indebtedness
                                                               i.      General Rule: Discharge/forgiveness from indebtedness is income
1.      What counts as indebtedness: statute says that indebtedness means any debt for which the TP is liable (recourse loan) or subject to which the TP holds property (non recourse loan)
2.      Non recourse loan – secured by a pledge of collateral, usually real property 
3.      Recourse loan – non backed by collateral from the borrower; debtor is liable for the entire value
4.      Example: Kirby Lumber Co.
a.       Kirby borrowed 12 million; sold the bonds for 12 million; repurchased 1 million of the debt but paid only 862,000 for the 1 million (difference of 138,000)
b.      Court said that Kirby had taxable income of 138,000
c.       Holding: “If the corp purchases and retires any such bonds at a price less than the issuing price or face value the excess of the issuing price or face value over the purchase price is gain or income from the taxable year”