Federal Income Tax Outline

Individual Income Tax
Fall 2016
Professor Adam Smith
 
VOCABULARY
28% rate gain: Gain from the sale of collectibles and, generally, the taxable part of your gain from the sale of qualified small business stock held more than 5 years.
Accrual method: Accounting method that reports income when earned (not necessarily received) and expenses when incurred (not necessarily paid), as opposed to the cash method.
Adjusted basis: The original cost of property, plus certain additions and improvements, minus certain deductions such as depreciation allowed or allowable and casualty losses.
Adjusted gross income: Gross income reduced by certain amounts, such as a deductible IRA contribution or student loan interest
Alimony: Payment to a spouse or former spouse under a divorce or separation instrument. The payments do not have to be made directly to the ex-spouse. For example, payments made on behalf of the ex-spouse for expenses specified in the instrument, such as medical bills, housing costs, and other expenses can qualify as alimony. Alimony does not include child support or voluntary payments outside the instrument. The person paying alimony can subtract it as an adjustment to income; the person receiving alimony must treat it as income.
Amortization: A ratable deduction for the cost of certain intangible property over the period specified by law. Examples of costs that can be amortized are goodwill, agreement not to compete, and research and mining exploration costs.
Amount realized: The total of all money received plus the fair market value of all property or services received from a sale or exchange. The amount realized also includes any liabilities assumed by the buyer and any liabilities to which the property transferred is subject, such as real estate taxes or a mortgage.
Basis: Basis is the amount of your investment in property for tax purposes. The basis of property you buy is usually the cost. Basis is used to figure gain or loss on the sale or disposition of investment property.
Bonus depreciation: An additional amount of deductible depreciation that is awarded above and beyond what would normally be available. Bonus depreciation is always taken right away, in the first year that the depreciable item is placed in service. This type of incentive is offered either as an additional incentive or as a measure of relief for small businesses that want to buy additional equipment. The actual amount of bonus depreciation varies from year to year, but it is offered on top of the maximum allowable Section 179 expensing limits and standard first-year depreciation.
Business expenses: Business expenses are amounts that are ordinary and necessary to carry on a business.
Capital gains: Almost everything owned and used for personal or investment purposes is a capital asset. Examples are a home, home furnishings, and stocks or bonds held in a personal account. When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for is a capital gain or a capital loss.
Capitalization: Adding costs, such as improvements, to the basis of assets.
Cancellation of debt: If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Cash method: Accounting method that reports income when constructively received (not earned) and expenses when paid (not incurred), as opposed to the accrual method.
Casualty loss: A loss that results from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption.
Class life: A number of years that establishes the property class and recovery period for most types of property under the General Depreciation System (GDS) and Alternative Depreciation System (ADS).
Constructive receipt of income: When an amount is credited to the taxpayer's account or made available to the taxpayer (or taxpayer's agent) without restriction.
Convention: A method established under the Modified Accelerated Cost Recovery System (MACRS) to determine the portion of the year to depreciate property both in the year the property is placed in service and in the year of disposition.
Depreciation: An annual deduction that allows taxpayers to recover the cost of property used in a trade or business or held for the production of income. The amount of depreciation depends on the basis of the property, its recovery period, and the depreciation method.
Depreciation recapture: Amount of depreciation or section 179 deduction that must be reported as ordinary income when property is sold at a gain.
Dividend: A distribution of money or other property made by a corporation to its shareholders out of its earnings and profits.
Exemptions: Amount that taxpayers can claim for themselves, their spouses, and eligible dependents. There are two types of exemptions-personal and dependency. Each exemption reduces the income subject to tax. While each is worth the same amount, different rules apply to each.
Filing statuses: Five taxpayer categories that determine the amount of tax and/or tax credits that apply to different taxpayers. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) with Dependent Child. Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits, and your correct tax. If more than one filing status applies to you, choose the one that will result in the lowest amount of tax.
Gross income: Money, goods, services, and property a person receives that must be reported on a tax return. Includes unemployment compensation and certain scholarships. It does not include welfare benefits and nontaxable Social Security benefits.
Itemized deductions: Deductions allowed on Schedule A (Form 1040) for medical and dental expenses, taxes, home mortgage interest and investment interest, charitable contributions, casualty and theft losses, and miscellaneous deductions. They are subtracted from adjusted gross income in figuring taxable income. Itemized deductions cannot be claimed if the standard deduction is chosen.
MACRS: Modified Accelerated Cost Recovery System, a method for calculating a taxpayer's depreciation deduction that uses the property's placed-in-service date, recovery period, and depreciable basis.
Net capital gain: The excess of net long-term capital gain over any net short-term capital loss.
Net investment income: The total of all investment income (other than tax-exempt income) reduced by the sum of: (1) Any adjustments to income related to the investment income, plus (2) The larger of: (a) $1,050 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29, that are directly connected with producing the investment income, or (b) $2,100.
Net operating losses (NOL): If your deductions for the year are more than your income for the year (line 41 of your Form 1040 is a negative number), you may have a net operating loss (NOL). You can use an NOL by deducting it from your income in another year or years.
Phase-out: The amount of credit or deduction allowed is reduced when modified adjusted gross income (MAGI) is greater than a specified amount of income.
Points: Term used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may be called loan origination fees, maximum loan charges, loan discount, or discount points.
Qualified 5-year gain: Long term capital gain from property held more than five years and sold or otherwise disposed of before May 6,