Tax Homework – Quick Notes (Chapter 2)
1. Tax Liability & Credits
Taxable Income = AGI – greater of (Standard Deduction OR Itemized).
Tax owed: use IRS tax brackets.
Credits:
• Nonrefundable → reduces liability, not below zero.
• Refundable → reduces liability, can create refund.
Deduction vs Credit:
• Deduction lowers taxable income.
• Credit directly reduces tax (always more valuable at the same $ amount).
2. Basis in Property
Basis = purchase cost + costs to place in service + capital improvements.
Exclude maintenance/repairs (do not extend useful life).
Included: purchase price, delivery/setup, safety tests, foundation, upgrades,
accessibility modifications.
3. Adjusted Basis (Property Sale)
Adjusted Basis = Original Cost + Capital Improvements – Accumulated Depreciation.
Repairs/painting = not capitalized.
Capital improvements = roof replacement, remodeling, etc.
4. Order of Tax Benefit
Step 1: Immediate expensing (deduct in current year).
Step 2: Depreciation (spread over years).
Step 3: Sale of asset (delayed benefit).
5. Unrealized Gains
Increase in property value is not taxable until realized (sold/disposed).
6. Realization of Income
Occurs when value is received in exchange.
Not always cash → can be bartering, debt relief, property exchange.
Not all realized income is taxable (can be excluded/deferred).
7. Standard vs Itemized Deduction
Take the greater of Standard or Itemized.
Itemized includes: medical (over 7.5% of AGI), mortgage interest, state/local taxes,
charity.
If Itemized < Standard → use Standard Deduction.
8. Reasonable Compensation (Family Employees)
Deductible wage must equal reasonable market value of service.
Excess is treated as a gift (non-deductible).
9. Vehicle Expense Allocation
Deductible if business/investment use:
• Schedule C → Self-employed business.
• Schedule E → Rental properties.
Deductions are above-the-line (for AGI).
Personal use is not deductible.
10. Capital Gains & Losses
Net gains and losses together.
If loss > gain → maximum $3,000 loss deductible against ordinary income.
Excess loss carries forward.