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 in basis: 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
1. Immediate expensing (deduct in current year).
2. Depreciation (spread over years).
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 → includes 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 = 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.