I REALLY NEED HELP WITH TAX!!!

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goosey
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I REALLY NEED HELP WITH TAX!!!

Postby goosey » Mon Dec 19, 2011 4:48 pm

I already had a breakdown and cried. I freakin HATE TAX.

our professor did an awesome job of tecahing us each individual topic, but didn't spend much time on how to put it all together and now that I try to figure it out, I am freaking out.

what are the above the line deductions??

business expenses are above the line---business expenses can either be capitalized or expenses rt away. so depreciation deductions are what we can consider "business expense" for that year?

losses from the sale or exchange of property---these can only be deducted if they are NON personal use, right? so basically if it is a business exchange etc then its above the line, otherwise you cant take it into account?

then capital gains and losses---you include the gains in income obviously [though you are taxed at a dif rate] but capital losses [long term vs short term..the whole shebang] are deducted above the line as well, in whatever amt are permitted?

are causualty and theft losses itemized?


I just dont get what is an itemized deduction and what deducted above the line. I am sooo frustrated!!!!

also, can somebody explain the earned income tax credit to me

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monkey85
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Re: I REALLY NEED HELP WITH TAX!!!

Postby monkey85 » Mon Dec 19, 2011 4:58 pm

PM-ing you.

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I.P. Daly
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Re: I REALLY NEED HELP WITH TAX!!!

Postby I.P. Daly » Mon Dec 19, 2011 5:00 pm

I registered for tax I next semester. Should I drop it?

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goosey
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Re: I REALLY NEED HELP WITH TAX!!!

Postby goosey » Mon Dec 19, 2011 5:03 pm

I.P. Daly wrote:I registered for tax I next semester. Should I drop it?



dont ever listen to somebody that is studying for a tax final :) bc...I am registered from estate and gift tax next semester and am like 2 seconds away from hitting "drop"

with a clear head, absolutely not. its important...no matter what area you want to practice in, tax is in the background either pushing you towards one resolution or the other. you cannot hide from it. i would rather go through this right now as a 2L than be a clueless practioner

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I.P. Daly
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Re: I REALLY NEED HELP WITH TAX!!!

Postby I.P. Daly » Mon Dec 19, 2011 5:12 pm

Great points. Thanks for the advice, and good luck!

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smokyroom26
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Re: I REALLY NEED HELP WITH TAX!!!

Postby smokyroom26 » Mon Dec 19, 2011 5:28 pm

Breathe, goosey, breathe. You will be OK. I think I remember you saying you had Chirelstein, from a different thread. Have you read it through cover-to-cover? I found that to be extremely helpful, as opposed to just skipping around in it. To your questions:

Read § 62. The deductions listed in § 62, and ONLY the deductions listed in § 62, are above-the-line. Any deduction that is NOT specifically listed in § 62 is a below-the-line deduction (and therefore also an itemized deduction) by default.

As far as business expenses, they are generally ATL. However, a significant exception to this rule are business expenses incurred by an employee and unreimbursed by her employer, which are BTL. See § 62(a)(2)(A).

§ 212 deductions, on the other hand, are BTL by default. A significant exception to that rule are expenses related to property held for the production of rent or royalties, even when not used in a trade/biz. See § 62(a)(4).

One helpful thing to keep in mind about ATL v. BTL deductions is that ATL deductions are favored by Congress - those particular kinds of deductions are "better" in Congress' view. ATL deductions are great, because (1) they are NEVER subject to the § 67 two-percent floor, and (2) they lower your adjusted gross income and make it more likely that your BTL miscellaneous itemized deductions will survive the § 67 two-percent floor.

Think of the process of determining whether something is deductible as a straight line. This applies to every type of loss. First: (1) is the loss realized? (2) is the loss recognized? (3) is there a deduction allowance provision? (4) is there a deduction disallowance provision, or other limiting provision concerning the deduction? (5) if the deduction is allowed, is it ATL or BTL [go to § 62 and see if it is of the type listed]?

For example, concerning capital losses. Let's say you have a capital loss, from the sale/exchange of a capital asset, that is realized and recognized (steps (1) and (2)). The deduction allowance provision is § 165. Let's assume that the capital loss falls under § 165(c)(2), meaning it is held for investment but not connected with a trade/biz. So we are allowed to take this deduction (step 3). However, are there any disallowances or limitations (step 4)? Well, § 165(f) tells us that capital losses are permitted only to the extent allowed in § 1211 and § 1212. So we head there. Let's assume your taxpayer is an individual. According to § 1211, the allowable deduction for capital losses is limited to the amount of capital gains in the taxable year, plus $3,000 (or the excess of such losses over gains - that's a fancy way of saying that if the excess capital losses are less than $3,000, you don't get to take the whole $3,000). So, if your taxpayer has $10k of capital losses and $6k of capital gains, he will only get to take $9k in capital loss deductions under § 1211. OK, so now we know the limits placed on the deduction. Is the deduction ATL or BTL (step 5)? We go to § 62 to answer this question, and see that under § 62(a)(3), losses from the sale or exchange of property are ATL deductions (because they are listed in § 62!).

Taxability is a 5-step process:
1. What is GI? (all income from whatever source derived)
2. What is AGI? (GI minus § 62 ATL deductions)
3. What is TI? (AGI minus (1) personal exemptions AND (2) EITHER the standard deduction OR itemized BTL deductions)
4. What is tentative tax? (taxable income times tax rate)
5. What is your final tax? (tentative tax minus any credits)

To your question about itemized deductions: there are two kinds of "itemized" deductions. The way I think of it is - "Itemized Deductions" are ALL BTL DEDUCTIONS, the giant umbrella of deductions that MIGHT be subject to the 2% floor. "Miscellaneous Itemized Deductions" are the subgroup of Itemized Deductions that are ACTUALLY subject to the § 67 2% floor - and the way we determine whether or not a deduction is a Miscellaneous Itemized Deduction is by reading § 67(b). ALL Itemized Deductions which are NOT listed in § 67(b) are Miscellaneous Itemized Deductions subject to the floor. (This means that most IDs are MIDs!)

Finally, depreciation deductions are not expenses. Depreciation is essentially a way of recouping your initial investment in an asset. While the owner of an asset would prefer that the cost of that asset is fully deductible in the year of purchase, depreciation is a way the Treasury (which would prefer that the cost of an asset is never deductible) splits the difference with the taxpayer by providing that some dollars are taxed now, but some are also taxed later.

I hope this helps. We didn't cover the earned income tax credit.

Geist13
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Re: I REALLY NEED HELP WITH TAX!!!

Postby Geist13 » Mon Dec 19, 2011 5:44 pm

goosey wrote:I already had a breakdown and cried. I freakin HATE TAX.

our professor did an awesome job of tecahing us each individual topic, but didn't spend much time on how to put it all together and now that I try to figure it out, I am freaking out.

what are the above the line deductions??

business expenses are above the line---business expenses can either be capitalized or expenses rt away. so depreciation deductions are what we can consider "business expense" for that year?

losses from the sale or exchange of property---these can only be deducted if they are NON personal use, right? so basically if it is a business exchange etc then its above the line, otherwise you cant take it into account?

then capital gains and losses---you include the gains in income obviously [though you are taxed at a dif rate] but capital losses [long term vs short term..the whole shebang] are deducted above the line as well, in whatever amt are permitted?

are causualty and theft losses itemized?


I just dont get what is an itemized deduction and what deducted above the line. I am sooo frustrated!!!!

also, can somebody explain the earned income tax credit to me


I too am studying tax, freaking out and hate it. Taking tax is literally the worst thing I've done in law school. I should have just taken a class I wanted to take.

Re: your questions.

above the line deductions are deductions which are taken out of gross income to determine adjusted gross income. They differ from below the line deductions in that they are generally taken at a dollar for dollar amount and aren't subject to external limitations like the 2% AGI floor. Knowing whether or not a deduction is taken above the line is easy. Look at IRC 62(a). It lists a bunch of deductions. If a deduction is listed here you know it is an above the line deduction. The most common examples are business/trade deductions (162) Property loss deductions (like 165) and deductions attributable to rents and royalties (like dual use rentals in 280A).

depreciation and business expenses --> I have no idea. We spent like 10 minutes on depreciation and I have no idea what we're supposed to know about it.

Losses from the sale or exchange of property: There are major types three types. business/trade losses, personal losses from activities engaged in for profit (stocks are one example, investment real estate is another, but real estate that was used personally is not an example), and nonbusiness theft and casualty losses. There's also something about wager losses but I'm not too familiar with that one. As far as deductibility, they are all deductible, but there are lots of limitations; that's the whole purpose of 165 it tells you these things are deductible and then gives you the limits on those deductions. These deductions are taken above the line because "losses from the sale or exchange of property" is specifically listed in 62(a)(3). However theft and casualty losses are not losses from a sale, so they are not taken above the line. Instead they are taken below the line. Moreover, theft and casualty is listed in 67(b)(3), which means that they are a miscellaneous itemitzed deduction. This means that they are subject to the 2% floor of AGI. Basically that means that in the aggregate, all the items listed in 67(b) are only deductible to the extent that they exceed 2% of AGI. Think about it this way. If your AGI is $500. And you have $13 in miscellaneous itemized deductions, you can only claim $3 of those deductions because 2% of $500 is $10. Basically you can't use 67(b) deductions to escape paying your taxes.

As far as above the line v. itemized. look at 62 for above the line. these are taken out of gross income. Then look to 67. Everything listed there gets added together (aggregated). then calculate 2% of AGI (AGI = Gross income - above the line deductions). You can only take 67 itemized deductions to the extent that they exceed that 2% figure.

If you have any other questions just ask. This really helps me work it out in my own mind.

We didn't do earned income credit.

As far as capital losses being deducted above the line. Um, there's no 62 provision that just says "captial losses." However 62(b)(3) does say losses from sale or exchange of property, which usually capital losses will fall into I guess, unless the loss is not from a sale or exchange. I'm not positive about that though

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goosey
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Re: I REALLY NEED HELP WITH TAX!!!

Postby goosey » Mon Dec 19, 2011 5:59 pm

smokyroom26 wrote:Breathe, goosey, breathe. You will be OK. I think I remember you saying you had Chirelstein, from a different thread. Have you read it through cover-to-cover? I found that to be extremely helpful, as opposed to just skipping around in it. To your questions:

Read § 62. The deductions listed in § 62, and ONLY the deductions listed in § 62, are above-the-line. Any deduction that is NOT specifically listed in § 62 is a below-the-line deduction (and therefore also an itemized deduction) by default.

As far as business expenses, they are generally ATL. However, a significant exception to this rule are business expenses incurred by an employee and unreimbursed by her employer, which are BTL. See § 62(a)(2)(A).

§ 212 deductions, on the other hand, are BTL by default. A significant exception to that rule are expenses related to property held for the production of rent or royalties, even when not used in a trade/biz. See § 62(a)(4).

One helpful thing to keep in mind about ATL v. BTL deductions is that ATL deductions are favored by Congress - those particular kinds of deductions are "better" in Congress' view. ATL deductions are great, because (1) they are NEVER subject to the § 67 two-percent floor, and (2) they lower your adjusted gross income and make it more likely that your BTL miscellaneous itemized deductions will survive the § 67 two-percent floor.

Think of the process of determining whether something is deductible as a straight line. This applies to every type of loss. First: (1) is the loss realized? (2) is the loss recognized? (3) is there a deduction allowance provision? (4) is there a deduction disallowance provision, or other limiting provision concerning the deduction? (5) if the deduction is allowed, is it ATL or BTL [go to § 62 and see if it is of the type listed]?

For example, concerning capital losses. Let's say you have a capital loss, from the sale/exchange of a capital asset, that is realized and recognized (steps (1) and (2)). The deduction allowance provision is § 165. Let's assume that the capital loss falls under § 165(c)(2), meaning it is held for investment but not connected with a trade/biz. So we are allowed to take this deduction (step 3). However, are there any disallowances or limitations (step 4)? Well, § 165(f) tells us that capital losses are permitted only to the extent allowed in § 1211 and § 1212. So we head there. Let's assume your taxpayer is an individual. According to § 1211, the allowable deduction for capital losses is limited to the amount of capital gains in the taxable year, plus $3,000 (or the excess of such losses over gains - that's a fancy way of saying that if the excess capital losses are less than $3,000, you don't get to take the whole $3,000). So, if your taxpayer has $10k of capital losses and $6k of capital gains, he will only get to take $9k in capital loss deductions under § 1211. OK, so now we know the limits placed on the deduction. Is the deduction ATL or BTL (step 5)? We go to § 62 to answer this question, and see that under § 62(a)(3), losses from the sale or exchange of property are ATL deductions (because they are listed in § 62!).

Taxability is a 5-step process:
1. What is GI? (all income from whatever source derived)
2. What is AGI? (GI minus § 62 ATL deductions)
3. What is TI? (AGI minus (1) personal exemptions AND (2) EITHER the standard deduction OR itemized BTL deductions)
4. What is tentative tax? (taxable income times tax rate)
5. What is your final tax? (tentative tax minus any credits)

To your question about itemized deductions: there are two kinds of "itemized" deductions. The way I think of it is - "Itemized Deductions" are ALL BTL DEDUCTIONS, the giant umbrella of deductions that MIGHT be subject to the 2% floor. "Miscellaneous Itemized Deductions" are the subgroup of Itemized Deductions that are ACTUALLY subject to the § 67 2% floor - and the way we determine whether or not a deduction is a Miscellaneous Itemized Deduction is by reading § 67(b). ALL Itemized Deductions which are NOT listed in § 67(b) are Miscellaneous Itemized Deductions subject to the floor. (This means that most IDs are MIDs!)

Finally, depreciation deductions are not expenses. Depreciation is essentially a way of recouping your initial investment in an asset. While the owner of an asset would prefer that the cost of that asset is fully deductible in the year of purchase, depreciation is a way the Treasury (which would prefer that the cost of an asset is never deductible) splits the difference with the taxpayer by providing that some dollars are taxed now, but some are also taxed later.

I hope this helps. We didn't cover the earned income tax credit.



thanks!!!!

yeah i do have chirelstein..i skipped around as I outlined and may just skim it cover to cover now

scottschreiber
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Re: I REALLY NEED HELP WITH TAX!!!

Postby scottschreiber » Tue Dec 20, 2011 8:41 pm

Anyone have any advice on how to learn all of Fed Tax in a night?

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goosey
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Re: I REALLY NEED HELP WITH TAX!!!

Postby goosey » Wed Dec 21, 2011 12:51 pm

scottschreiber wrote:Anyone have any advice on how to learn all of Fed Tax in a night?



law in a flash and/or e&e

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geekrocker37
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Re: I REALLY NEED HELP WITH TAX!!!

Postby geekrocker37 » Wed Dec 21, 2011 2:10 pm

Highly recommend cali exercises too. That's actually my professor who created them, and I'd say they give a nice overview on basic ideas.

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goosey
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Re: I REALLY NEED HELP WITH TAX!!!

Postby goosey » Wed Dec 21, 2011 7:30 pm

does 465 apply only to business activity or also to investment activity?




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