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Exam 1 cheat sheet
Federal Income Tax-Individual (University of Houston)
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Filing Status
Married Joint – married on last day of year (if spouse dies, surviving is married at year end unless remarries)
Married Sep – if one itemizes, other must as well
Qualify Widow (SS) – 2 years after death (unless remarried within 2 years)
Must maintain (pay > 50% of cost) house for dependent (not foster and lived there entire year)
Head of House – unmarried at year end, not QW, pay > 50% of keeping home, live with qualifying person for > 6 mo.
QP: qualifying child or qualifying relative (live > 6 mo, qualify dependent, related (no unrelated))
unless parent: not live with taxpayer, taxpayer pay > 50% of maintaining sep. house, parent qualify as dependent
Treated as unmarried if abandoned: married at end of year, no joint return, pay > 50% of house with QC for > 6mo., live apart from
spouse for last 6 mo. of year
Example
Assume Shawna (Rhonda’s sister) lived with the Sniders, but Shawna paid more than half the costs of maintaining a separate apartment that
is the principal residence of her mother, Hazel, whose gross income is $1,500. In these circumstances, what is Shawna’s filing status?
Because Shawna provided more than half of Hazel’s support during the year, and because Hazel’s gross income was only $1,500,
she qualifies as Shawna’s dependent (as a qualifying relative). Shawna also paid more than half the costs of maintaining a separate
household that is the principal place of abode for her mother.
Income effect: same after-tax dollars with new rate:
What if Hazel’s gross income was $12,000?
After-tax income = Pre-tax income * (1-marg. tax
A: File single, because Gross income > $4,150 and not dependent
rate)
Substituion effect: replace income with activities
Gross Income (realized and recognized)
Included
Gain (realized – basis) on cap. assets taxed, don’t deduct loss
Taxpayer who earns must recognize
Included
Annuities – nontaxable % of pmt = original invest / expected value
(#payments * payment amt) PER YEAR
SS Benefits up to 85%
Unemployment benefits
Salary, wage, bonuses
Gifts in business setting (corvette)
Finding cash
Gambling
Alimony: before 2019 included, after 2019 excluded
Compensation for lost income
Punitive damages (punish)
Employee discounts above avg. gross profit %
Imputed Income – Mkt int % - actual % = taxable income (only > 10,000)
Excluded
Child support, property settlements
Prizes/awards if scientific/literary and transferred to charity
Compensation for injury & eDistress arising from injury
Cost of medical treatment of eDistress
Employee discounts up to avg. gross profit %
Gifts&inheritance
Life insurance proceeds
Workers comp, personal injury
Healthcare reimbursement
Fringe Benefits (noncash benefits)
Nontaxable Fringe Benefits
Group-Term Life Insurance (exclude first $50,000, divide rest by
1,000 and multiply by amount in IRS table)
Health and Accident Insurance and Benefits
Meals and Lodging for the Convenience of the Employer (on premesis)
Employee Educational Assistance (up to $5,250)
Dependent Care Benefits (up to $5,000 age <13 or unable to care
for selves)
No-Additional-Cost Services (free travel, hotel rooms)
Qualified Employee Discounts
Working Condition Fringe Benefits
De Minimis Fringe Benefits (small occasional benefits)
Qualified Transportation Fringe (up to $260/mo)
Qualified Moving Expense Reimbursement
Cafeteria Plans and Flexible Spending Accounts (FSAs) (up to
$2,650 healthcare and $5,000 dep. care, removed from GI)
Excluded
Gain on sale of home (<= $250k, $500k married joint)
Live 2/5 years ending on sale date & use as princ. Residence 2/5yr
Education only if used on books, tuition, fees, supplies (room&board tax.)
If exchange for services, not excludible
Foreign earned income – max $103.9k, $14,456 provided foreign housing
but only if exceed $16,624 if resident of foreign country OR live in foreign
country 330 days in consecutive 12mo
Karl is considering a transfer to an overseas affiliate where he will be paid $145,000
per year. He will be in residence 180 days in 2018 and 160 days in 2019. How much
of the expected $145,000 salary can Karl exclude in 2018?
Ans: $51,238 [$103,900 full exclusion × 180/365 (days in foreign country/days in
year)].
His employer will also provide him with housing valued at $24,000 each year. Tax c
onsequences for 2018?
A: He can exclude $3,637 =(($24,000-16,624)*180/365)
Disability insurance
Constructive Receipt
Taxpayer must recognize income when it is actually or
constructively received
Constructive Receipt = income is unconditionally available to the
taxpayer, no restrictions on control
Claim of Right
Income recognized when there are no restrictions on use of
income (e.g., no obligation to repay)
E.g. rent deposit, loan
After tax rate of return bonds: % interest income – (%ii * % tax)
Tax benefit – how much your total deductions > standard deduction
Lesser of refund or excess of itemized – standard
Only include in GI if you did not itemize (itemize < st. ded)
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Gross Income
- Deductions for AGI
= Adjusted Gross Income (AGI)
- Greater of Itemized deductions or
Standard Deduction
- Personal and Dependency Exemptions
= Taxable Income
x Tax Rate (from tables)
= Federal Income Tax Liability
- Credits and Prepayments
= Tax Due or Refund
Marginal Tax:  liability /  taxable income
What will next $ be taxed at?
Average Tax: tax due / taxable income
Effective tax: tax due / total income
Horizontal Equity – 2 taxpayers in same situations
pay same tax
Vertical – taxpayers with greater ability to pay
more, pay more
Evaluating Tax Systems
Sufficiency – meet needs of gov?
Equity – how is it dist. across taxpayers?
Certainty – taxpayers know when, where, how to calc. and pay?
Convenience – collected without undue hardship?
Simplicity
Economy – compliance and administration costs minimized?
Consent – able to pay vs willing to pay
LTCG added to total liability separately
Discriminant Function (DIF) – scoring system
Document perfection – math errors
Information matching – compares tax return data with other
data
Statute of Limitations
3 years from later of filing or original
date
6 years if omitted >25% AGI
No limit with fraud
Tax Court: national, do not pay taxes first
Primary Authorities:
US District: local, pay first
Statutory: IRC
US CoFed. Claim: national, pay first
Judicial: courts (interpret IRC) follow decisions of
courts before (stare decisis)
Administrative: IRS, revenue rulings (how will act in
situation), revenue procedure (explain IRS practices),
Letter rulings (taxpayer asks)
Secondary authorities:
Tax services, tax articles (coordinators, posts)
Tax avoidance – use laws to pay minimal tax
(planning) 
Evasion – deliberately violate law
Recognized – must report unless otherwise stated
Realized – measurable change in property rights
(transaction)
Qualifying Child
R (child, sibling, descendants, inc. step & foster)
A (< 19 or < 24 and full-time student or disabled)
R (live with taxpayer > 6mo or full-time student)
S (child can’t make > 50% of support excl. scholarship)
Qualifying Relative
R (descendant/ancestor, sibling, nieces and nephews, aunts
and uncles, in-law, unrelated who lives in home entire year)
includes step
S (taxpayer pays > 50% of living expenses excl. scholarship)
G (relative makes < $4,150)
Income Shifting: one taxpayer/jurisdiction to another
Conversion: converting income from one type to another
Tax Planning Examples:
Timing: defer income or accelerate deductions
Suppose Leonardo can choose to pay mortgage interest of $1,000 in December of
2018 (and deduct it for his 2018 taxes), or he can pay it in January of 2019 (and
deduct it one year later on his 2019 taxes). Which should he prefer? Suppose his
marginal tax rate is 25%.
Taxable income before deduction: 10,000 = 2,500 tax
With deduction, 2,250 owed = 250 savings
Reese, a calendar-year taxpayer, uses the cash method of accounting for her sole
proprietorship. In late December, she received a $20,000 bill from her accountant
for consulting services related to her small business. Reese can pay the $20,000
bill any time before January 30 of next year without penalty. Assume Reese’s
marginal tax rate is 32 percent this year and next year, and that she can earn an
after-tax rate of return of 12 percent on her investments.
What is the after-tax cost (Pretax cost – PV savings) if she pays the $20,000 bill in
December?
20,000*.32 = $6,400 in tax savings
$20,000 bill – 6,400 savings = 13,600 after-tax cost
What is the after-tax cost if she pays the $20,000 bill in January?
$20,000 x .32 = $6,400 savings, one year from now.
 present value of 6,400 with 12 percent return = 6,400x.893 = $5,715
$20,000 – 5,715 = 14,285 after-tax cost
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