Individual Income Tax Overview and Dependents and Filing Status

Federal Tax 1

Exam 1 Review

Chapter 4

Individual Income Tax Overview, Dependents, and Filing Status

Learning Objectives:

  1. Describe the formula for calculating an individual taxpayer’s taxes payable or refund
  2. Explain the requirements for determining who qualifies as a taxpayer’s dependent
  3. Determine a taxpayer’s filing status

LO1: Describe the formula for calculating an individual taxpayer’s taxes payable or refund

  • Can calculate taxable income from individual tax formula

Components of the Individual Tax Formula:

Gross Income:

  • All-inclusive income concept: all income from whatever source
  • Includes realized income (income generated from transactions with a second party where property rights changes are measurable)
  • Exclusions:
    • Realized income that is exempted from income taxation, therefore not part of gross income
  • Deferrals:
    • Realized income that will be taxed as income in a later year

Character of Income (or loss):

  • Ordinary: Taxed at ordinary rates provided in the tax rate scheudles, or that offsets income taxed at these rates
  • Capital: Gains or losses on the disposition or sale of capital assets.
    • Not included:
      • A/R from sale of goods or services
      • Inventory and other assets held for sale in the ordinary course of business
      • Assets used in a trade or business including supplies
    • Qualified dividend: Shareholders receiving dividends from corporations

Deductions: Two types

  • For AGI Deductions: Above the Line
    • Gross Income minus For AGI Deductions = Adjusted Gross Income (AGI)AGI minus from AGI deductions = Taxable Income
    • Deductions associated with business activities and certain investing activities
  • From AGI Deductions: Below the line
    • AGI minus from AGI deductions = Taxable Income
    • Take the larger of the standard deductions (add 1300 if over 65 years old for married or 1600 for single and head of household) or total itemized deductions and subtract that from AGI for Taxable Income
  • AGI is a reference point often used in determining the extent to which taxpayers are allowed to claim certain tax benefits

Tax Credits:

Child Tax Credit:

  • $2,000 per qualifying child (under the age of 17 at year end)
  • and $500 credit for other qualifying dependents

Tax prepayments: subtracted from total tax and credits

  • Withholding (income taxes withheld from the taxpayer’s salary or wages by their employer)

LO2: Explain the requirements for determining who qualifies as a taxpayer’s dependent

Dependency Requirements: To qualify as a dependent of another, an individual:

  1. Must be a citizen of the United States or a resident of the United States, Canada, or Mexico
  2. Must not file a joint return with his or her spouse unless there is no tax liability on the couple’s joint return and there would not have been any tax liability on either spouse’s tax return if they had filed separately
  3. Must be considered either a qualifying child or qualifying relative of the taxpayer

Qualifying child: Four Tests:

  1. Relationship Test: Must be an eligible relative of the taxpayer. These include
    1. Child or descendent of a child. For this purpose, a child includes a taxpayer’s adopted child, stepchild, and eligible foster child Ex: Son or Grandson
    2. Sibling or descendent of sibling. For this purpose, a sibling includes a taxpayer’s half-brother, half-sister, step brother, or step sister Ex: Sister or Sister’s Grandchild
  2. Age Test:
    1. Must be younger than the taxpayer and either
      1. Under age 19 at the end of the year or
      2. Under age 24 at the end of the year and a full-time student. A person is a full-time student if she was in school full-time during any part of each of five calendar months during the calendar year. An individual of any age who is permanently and totally disabled is deemed to have met the age test.
    2. Residence Test:
      1. Same principal residence as the taxpayer for more than half the year. Time that the child or the taxpayer is temporarily away from the taxpayer’s home because the child or taxpayer is ill, is pursuing an education, or has other special circumstances is counted as though the child or taxpayer were living in the taxpayer’s home.
    3. ***Support Test***:
      1. Start with this test
      2. Must not have provided more than half of his or her own support (living expenses) for the year.
        1. Food, school lunches, toilet articles, and haircuts
        2. Clothing
  • Recreation
  1. Medical and Dental Care
  2. Child care expenses
  3. Allowances and gifts
  • Wedding costs
  • Lodging
  1. Education (scholarships are excluded)

Tiebreaking Rules: For when one person could be a qualifying child to more than one taxpayer

  • Parent is entitled to claim dependent (mother over grandparents)
  • If qualifying child for both parent, the parent with whom the child has resided for the longest period of time during the year has priority.
    • Noncustodial parent (parent does not live with child) in divorce cases can claim qualifying child if the custodial parent signs waver and attaches to returns
  • Lastly, the taxpayer with the highest AGI has priority for claiming the child as the dependent

***Move onto the Qualifying Relative test when the person fails the Qualifying Child tests***

Qualifying Relative: Three Tests (Broader in Scope)

  1. Relationship Test: All relatives except cousins
    1. Qualifying Family Relationship and Qualifying Relative “Member of the Household”:
      1. A descendant or ancestor of the taxpayer (Ex: Adopted Child, Stepchild, Eligible Foster Child, and a parent includes stepmother and stepfather
      2. A sibling of the taxpayer (includes step brother and sister)
  • A son or daughter of the brother or sister of the taxpayer (cousins do not qualify)
  1. A sibling of the taxpayer’s mother or father (Ex: Uncles and Aunts)
  2. An in-law (mother in law, father in law, sister in law, son in law)
  3. Member of the Household: A person has the same principal place of abode as the taxpayer for the entire year (even if they do not pass qualifying family relationship) pass relationship test
  1. Support Test: If taxpayer has paid more than 50% they have priority
    1. Taxpayer pay more than half the qualifying relatives support/living expenses
    2. If person in question has support from multiple taxpayers than follow these rules (siblings support elderly parents)
      1. No one taxpayer paid over one-half of the individual’s support
      2. The taxpayer and someone else provided more than half the support and the taxpayer and someone else would have been allowed to claim the individual except for the fact they did not provide over half support
  • The taxpayer contributed over 10% of the support
  1. Each other person who provided over 10% of the support provides a signed statement to the taxpayer agreeing not to claim the individual as a dependent
  1. Gross Income Test: ***START WITH THIS TEST***
    1. Gross Income is less than $4,150

LO3: Determine a taxpayer’s filing status:

Filing Status: determines at year end whether a taxpayer must file a tax return, appropriate tax rate schedules, standard deduction amounts, and certain deduction and credit limitation thresholds

Five Statuses:

  • Married Filing Jointly
    • Taxpayers are legally married as of the last day of the year
    • When one spouse dies during the year the surviving spouse is still considered to be married for tax purposes during the year of the spouse’s death
    • Both spouses responsible for paying the joint tax
    • Combine their income and deductions
  • Married Filing Separately
    • Taxpayers are legally married as of the last day of the year
    • Generally no tax advantage, usually a disadvantage
    • Each spouse responsible for their own tax
    • If one spouse deducts itemized deductions, the other spouse is required to deduct itemized deductions even if his or her standard deduction amount is more than the total itemized deductions
  • Qualifying widow or widower (surviving spouse)
    • Surviving spouse can file as a qualifying widow or widower for two years after the year of the spouse’s death if the surviving spouse remains unmarried and maintains a household for a dependent child (pay over half the cost of maintaining a household)
  • Single
    • Unmarried taxpayers at year-end who do not qualify for head of household
  • Head of Household (good rates but less favorable than qualifying widow or married filing jointly), look at exhibit 4-9
    • Unmarried taxpayers or taxpayers considered to be unmarried at year end
    • Not be a qualifying widow or widwer
    • Must pay more than half of the costs of maintaining a house in which a qualifying person lives for more than half of the tax year or must pay more than half of the costs for maintaining a separate household for a parent who qualifies as a taxpayer’s dependent
      • Multiple support agreements do not allow Head of Household filing, must file Single
      • Invalid if person is only a dependent if they are a “member of the household”
    • If taxpayer allows waives dependent to another person, they can still file as Head of Household.

Special Case: Married Individuals Treated as Unmarried (Abandoned Spouse)

If Taxpayer is:

  • Married at the end of the year (or is not legally separated from the other spouse)
  • Does not file a joint tax return with the other spouse
  • Pays more than half the costs of maintaining his or her home for the entire year and is principal residence for a child (who qualifies as a dependent) for more than half the year
  • Taxpayer lived apart from the other spouse for the last six months of the year (illness, education, business, vacation, or military service counts as still living in the residence)

Then they can file as Head of Household.

  • Primary objective is to provide tax relief for abandoned spouse

Chapter 5

Gross Income and Exclusions

3 Requirements to have Gross Income:

  • Economic Benefit
    • Ex: receive an item of value such as cash, property, debt relief
  • Realization Principle
    • Income only exists when there is a transaction with another party resulting in a measurable change in property rights
    • Allows income to be measured objectively
  • No tax provision allows them to exclude or defer the income from gross income for that year

Concepts / Judicial Doctrines:

  • Form of Receipt:
    • Realize income whether they receive money, property, or services in a transaction. (does not just have to be cash for the realization and recognition of gross income)
  • Return of Capital Principle:
    • Taxpayers are allowed to recover the cost of the property tax-free
    • Tax Benefit Rule Exception: a refund of an amount deducted in a previous period is only included in income to the extent that the deduction reduced taxable income. (2017 expense of $400, refund of $200 in 2018 would be income because of a tax benefit)

Tax Benefit for Refunds Calculation:

  • Constructive Receipt:
    • Taxpayers must recognize income when it is actually or constructively received.
    • Basically, when they are credited, or when the income is made available.
  • Claim of Right Doctrine:
    • Income has been realized if a taxpayer receives income and there are no restrictions on the taxpayer’s use of the income (does not have an obligation to repay the amount)
  • Assignments of income:
    • Earned income is taxed to the taxpayer providing the service, and that income from property is taxed to the individual who owns the property when the income accrues
    • Stop taxpayers from transferring taxation on their

Earned vs Unearned Income:

  • Earned income stems from effort, Unearned is generated from property
  • Earned is taxed more harshly
  • Earned
    • Salary, Wages Fees
  • Unearned
    • Sale of property, dividends, interest, rents, royalties, annuities

Some Specific Types of Income:

Annuities: Term or  CALCULATION

  • An investment that pays a stream of equal payments over time.
  • Often used to generate fixed income during retirement.
  • Use the annuity exclusion ratio for both term and life to determine what portion is a nontaxable return of capital

For Fixed Annuities:

  • Expected value is the payment amount x number of payments per year x number of years
  • Return of capital percentage gives you amount that is excluded

For Life Annuities:

  • Expected value is the expected return multiple multiplied by the annual payment amount
  • If Taxpayer lives longer than expected, the extra payments are included in the taxpayer’s gross income.
  • If Taxpayer dies earlier, the unrecovered investment is deducted on the final return.

Annuity Problems:

  1. Determine if the annuity is term or life
  2. If Term: Use # Of years
  3. If Life: Use IRS Table
  4. Calculate return of capital
  5. Subtract Return of capital from payment amount to get taxable income per payment

Income from Flow Through Entities: handout on BB

  • Flow Through Entities: legal entities, like partnerships, limited liability companies, and S corporations, that do not pay income tax. Income and Losses from flow through entities are allocated to their owners.
  • Each partner or shareholder reports his or her share of the entity’s income and deductions, generally in proportion to his or her ownership percentage on his or her individual tax return

Alimony: (PRE 2019 payment is included in Gross Income, Later than 2019 is excluded)

  • Alimony Requirements:
    • Support payment of cash made to a former spouse.
    • The payment must be made under a written separation agreement or divorce decree that does not designate the payment as something other than alimony,
    • the payment must be made when the spouses do not live together,
    • and the payments must cease no later than the recipient dies
  • Pre-Jan 1, 2019, if the payment meets the definition of alimony then it is included in the gross income of the person receiving it and is deductible for AGI by the person paying it.
  • Post 2019, payments are not included in gross income and are not deductible
  • Child Support and Property Settlement is excluded from gross income and cannot be deducted

Prizes / Awards / Gambling Winnings:

  • All are included in gross income
  • Awards:
    • Nontaxable awards for employees is $400 of tangible property other than cash, cash equivalents, gift cards, gift coupons or gift certificates
    • If the taxpayer did not enter or want the award then it can be excluded (rare)
  • Gambling:
    • Report the gross amount of winnings

Social Security Benefits:

Main Point: SS Benefits of Taxpayers with relatively low taxable income are not taxable, 85% of SS Benefits of Taxpayers with moderate to high taxable income are taxable

Single Taxpayers:

  • Nontaxable when: Modified AGI + 50% of SS Benefits <= $25,000
    • Modified AGI is regular AGI plus tax-exempt interest income, excluded foreign income and certain other deductions for AGI
  • If Modified AGI + 50% of SS Benefits is greater than $25000 but less than or equal to $34,000, than taxable SS benefits are the lesser of 50% SS benefits or 50 % Modified AGI + 50% of SS Benefits - $25,000)
  • If Modified AGI + 50% of SS Benefits is greater than $34,000, than taxable SS benefits are the lesser (a) 85% of SS Benefits or (b) ) 85% of Modified AGI + 50% of SS Benefits - $34,000 plus the lesser of (1) 4,500 or (2) 50 % of SS benefits

Imputed Income:

  • Income from an economic benefit the taxpayer receives indirectly rather than directly. The amount of the income is based on comparable alternatives
  • Ex: Goods sold by an employer to an employee at a discount or Below-Market Loans
  • Employees may exclude:
    • A discount on employer-provided goods as long as the discount does not exceed the employer’s gross profit percentage on all property offered for sale to customers and
    • Up to 20 percent employer provided discounts on services
  • Imputed interest rules apply to $10000 or more

Discharge of Indebtedness: CALCULATION

  • Taxpayer’s debt is forgiven by a lender, the taxpayer must include the amount of debt relief in gross income
  • Not taxable when the discharge still makes the taxpayer insolvent before and after forgiveness
  • Ex: 30,000 debt, discharge causes taxpayer to be solvent by 10000, must include $10,000 in Gross Income

Exclusion Provisions:


  • Common name for state and local government debt

Gain on Sale of Residence:

  • Covered in chapter 7


  • Excluded if:
    • Money is used for school
    • Not Focused on Athletics
    • If Excess exists after payment of things needed for school, then excess is in her gross income

Gifts and Inheritances:

  • A gift is the transfer of property if the transferor is alive, inheritance if the transferor is dead
  • Subject to federal transfer tax, not the income tax (Federal Gift Tax and Federal Estate Tax)
  • The giver gets taxed
  • Gifted property that generates income is NOT excluded

Life Insurance Proceeds:

  • When owner of life insurance policy dies, the beneficiary receives the death benefit proceeds.
  • Proceeds are excluded from Gross Income
  • If transfer of value occurs, THEN it is not excluded
  • Accelerated death benefits (terminal illness) are not taxable)

Workers Compensation:

  • Excluded
  • Receive benefits when they are unable to work because of a work-related injury

Payments associated with physical injury:

  • Excluded
  • Emotional distress excluded only if it is tied to physical injury
  • Punitive damages are included to GI

Reimbursement from Health Care Plans:

  • Excluded
  • Tax benefit rule may require inclusion of reimbursements of medical expenses that were deducted by the taxpayer in a prior year


  • Pays the insured for wages lost due to injury or disability
  • Cost of policy is not deductible
  • More restrictive, depends on who paid for the policy
    • If Employer paid, then included in GI
    • If split, then percentage paid by taxpayer is excluded
    • If Premium are taxable compensation to the employee, then the policy is considered to have been purchased by the employee
    • If premium paid for by the employer is a nontaxable fringe benefit, then it is considered to be bought by employer.

Fringe Benefits (Part of Ch 5 and 12)

  • Noncash benefits provided to an employee as a form of compensation. As a general rule, fringe benefits are taxable. But some ARE excluded from gross income

Group-Term Life Insurance: CALCULATION

  • Term life Insurance provided by an employer to a group of employees
  • When paid by the employer:
    • Less than 50K is excluded
    • Over 50K , cost of excess is included in gross income
  • Computation of Annual Taxable Benefit

Medical Insurance Premiums Paid by Employer:

  • Excluded from GI

Disability Insurance Premiums Paid By Employer

  • Excluded from GI

Meals and Lodging for Convenience of the employer

  • Included in GI unless for the convenience of the employer and on the premises of the employer’s business

Employee Educational Assistance: paid by employer

  • Exclude up to $5,250, any excess is income

Dependent Care Benefits: paid by employer

  • Excluded up to $5000
  • For child care under 13 or disabled physically or mentally

SEC 132 Fringes:

  • No additional cost services:
    • Excluded from GI
    • Marginal costs
    • Benefit is no additional cost, excluded
    • Must work for that line for business
    • Example works for an airline, free flight, if there is space (no additional cost, the plane was going to fly with or without them)
  • Qualified Employee Discount: CALCULATION
    • Nontaxable fringe benefit that provides a discount on employer goods (not to be discounted below the employer’s cost) and services (up to a 20 percent discount) to employees
    • For services: if discount is more than 20% than it is included
    • For Products: discount is compared to gross profit %
      • Retail price x Gross profit percentage = allowable discount
      • If more than allowable discount than it is income
      • FIND THE EXCESS BETWEEN DISCOUNT AND GPP multiply by selling price
    • Recognized as income when cost with discount is less than actual cost
  • Working Condition Fringe Benefit:
    • Excluded
    • Licensing costs or dues (CPA or bar fees)
    • Telephones or computers provided to employees for business EXCLUDED
  • Deminimis Fringe Benefits:
    • A nontaxable fringe benefit that allows employees to receive occasional or incidental benefits tax-free

Chapter 7


Investment Income:

  • Income received from portfolio type investments. Portfolio income includes capital gains and losses, interest, dividend, annuity, and royalty income not derived in the ordinary course of a trade business.
  • Capital Gains and Dividends subject to preferential tax rate are not treated as investment income unless the taxpayer elects to have this income taxed at ordinary tax rates

Passive Investments:

  • Direct or indirect investments in a trade or business or rental activity in which the taxpayer does not materially participate
  • Generate operating income (taxed at ordinary rates) and losses (either deducted annually at ordinary rates or deferred and deducted later at ordinary rates)
  • Losses from passive investments are subject to limitations

Portfolio Income: Come from dividends, interest, royalties, annuities, or capital gains

  • Interest Income: CDs, Savings Accounts, Bonds
    • Taxed at ordinary rates
    • The principal is the maturity value or face value
    • Recognized when it is received
  • Purchased Interest:
    • Buy a bond between interest dates
    • Reduces interest income when you receive payment of the security
    • Cannot Deduct from other securities
  • Discounts:
    • Accrued Market Discount:
      • Recognized as interest income, not capital gain
      • Not amortized usually
      • At maturity, it is additional interest income
    • Original Issue Discount:
      • Every year recognize income (amortized)
      • Amortization calculation is not tested
    • Premiums: issuing bond for more than their maturity value (better rates)
      • Default Treatment:
        • At maturity is a capital loss
      • Election:
        • Amortize the premium
      • Series EE redeem them at maturity or earlier
      • Dividend Income: from Corporations
        • Income when it is received
        • Gets lower (preferential rates) if it is qualified
          • Domestic company or foreign company listed on domestic exchange
          • Certain holding period of at least 30 days
        • Stock dividends
          • Additional shares of stock as a dividend
            • Not income (gross)
            • Allocate old cost basis to new shares
            • Holding Period is equal to old shares
            • Old Cost Basis / Total # of Shares = Cost basis of new shares (part of old basis is used in new share cost basis
          • Stock Splits:
            • Is not gross income, not income until sold
            • Allocate Basis
            • Holding period same as old shares

Capital Gains and Losses:

  • Capital Assets: An asset other than an asset used in a trade or business or an asset such as an account or note receivable acquired in a business from the sale of services or property
    • Typically investment-type or personal-use assets (artwork, corporate stock, bonds, home)
    • Assets other than (used in a trade or business)
      • Inventory or other property held for sale in the ordinary course of a trade or business
      • Depreciable or real property used in a trade or business
      • Trade Accounts or Notes Receivable
      • Certain Copyrights whose personal efforts created them
      • S. Government publications acquired other than by purchase at the price at which they were sold to the general public.
    • When non-capital assets are sold, any gain or loss is treated as non-capital gain income. Taxed as ordinary income. s
  • Gains are deferred for tax purposes until the taxpayer sells or disposes of the assets
    • Generally taxed at preferential rates relative to ordinary income
    • Provides incentive to invest in activities that stimulate the economy
  • Losses have limits in the amount that is deducted
  • Tax Basis: the amount of a taxpayer’s unrecovered cost of or investment in an asset
    • When a capital asset is sold more than the tax basis than they recognize a capital gain, capital loss for when sold less than tax basis
  • Short-Term Capital Gains or Losses:
    • Capital assets that are sold with a holding period of a year or less
  • Long-Term Capital Gains or Losses:
    • Capital assets that are sold with a holding period of more than a year
    • LTCG are taxed at preferential rates, rates depend on filing status and taxable income
  • Gain from collectibles: 28% rate

When a taxpayer sells a property, ask these 3 questions:

  1. What is the amount of gain or loss realized?
    1. Amount realized – Adjusted Basis = Realized Gain or Loss
    2. Amount realized: sum of money plus the fair market value of property received
    3. Adjusted Basis: an asset’s original basis increased by any capital improvement and reduced by any depreciation
      1. Original basis is determined by how the asset was acquired
        1. If purchase, basis is cost plus expense of purchase
        2. If inherited, basis is FMV on the date of death of decedent
          1. Holding period is always LONG-TERM
        3. If gifted, basis is generally the carryover basis (ORIGINAL COST) of the donor, but if the FMV is less than the carryover basis and asset is sold for a loss, then the FMV on the gifted date is the basis
          1. If the property is sold below FMV at the time of gift, the basis is FMV
          2. If the property is sold greater than the donor’s basis, the basis is the donor’s basis
          3. If the property is sold above FMV, but below donor’s cost basis, there is no gain or loss to the seller
        4. If acquired by property settlement, the basis to the transferee is the adjusted basis of the transferor
      2. How much of the gain or loss is recognized?
        1. Entire gain is recognized unless it is specifically excluded or deferred
          1. Partial Exclusion of gain on sale of residence
        2. Losses must be allowable in order to recognize (deduct)
          1. Not allowable losses:
            1. Losses on wash sales
            2. Losses on the sale of personal use assets
            3. Losses on sales to related parties
          2. What is the character of the gain or loss recognized?
            1. Character determine the rates at which gains are taxed and the extent to which losses are deducted. Capital gains and losses receive special treatment
            2. Net Capital Gains : Taxed at 0, 15, 20%, Collectibles at 28%

How to determine if a sale is a net capital gain (NCG): The Netting Process:

  1. Net (sum up) all long-term capital transactions
  2. Net (sum up) all short-term capital transactions
  3. For long term transactions, the sum will either be a Net Long-Term Capital Gain (NLTCG) or Net Long-Term Capital Loss (NLTCL)
  4. For Short term transactions, the sum will either be a Net Short-Term Capital Gain (NSTCG) or Net Short-Term Capital Loss (NSTCL)
  5. Net the Short Result and the Long Results Together
  6. IF the result is a gain, there are only 3 possible outcomes:
    1. Net Short Term Gain in excess of a long term loss – (this will be ordinary income – no NCG)
    2. Net Long term Gain in excess of short term loss – Termed “Net Capital Gain” (NCG) and is taxed favorably with preferential rates
    3. Both a NLTCG and a NSTCG (The NLTCG is a NCG and is taxed favorably, the NSTCG is taxed at ordinary rates)
  7. If the results are losses:
    1. Losses are generally deducted to the extent of any gains ($3,000. This $3,000 (maximum amount) allowable loss will reduce the taxpayer’s gross income
    2. Losses in excess of $3,000 allowable amount are carried over to the subsequent year and will be included in the netting process, USE THE FULL LOSS FROM PREVIOUS YEAR THAT WAS NOT DEDUCTED FROM INCOME
    3. The NSTCL is used first and then the NLTCL after. Character is determined by this for future years

2018 Tax Rates that Apply to “Net Capital Gains”

  • Net Capital Gains and Qualified Dividends get preferential rates
  • NCG and Qualified Dividends are included in taxable income

Calculate Tax when taxable income includes both ordinary and preferential rates:

  1. Split the taxable income into the portion taxed at ordinary and the portion taxed at preferential rates
  2. Calculate the tax on ordinary portion in the normal matter
  3. Calculate the tax on the preferential portion by using the preferential tax rate schedule
    1. If a portion of preferential NCG is at lower bracket then split it into two
      1. TI= 100,000, NCG = 70,000, Ordinary Income = 30,000, Preferential 8,600 at 0 % (because 8600 brings the 30000 to the threshold) and 61400 at 15%
    2. Add the two up

Home Sales – Possible Exclusions for Gains (capital asset)

  • If sale is at a loss, it will be non-deductible (personal use)
  • For a gain on sale of a principal residence, an exclusion is allowed for up to 250,000 (500,000 for married filing jointly) of the gain realized on the sale of a principal residence
    • Must have both owned and occupied the home being sold for at least two of the five years prior to the sale
    • Can use exclusion every two years
    • For Joint 500,000 exclusion
      • A joint return is filed
    • Either spouse meets ownership requirement
    • BOTH spouses must meet the use requirement


  • Wash sale is when a taxpayer sells a stock at a loss and either buys or sells identical stock within 30 days before or after the sale of such stock.
  • Prevents taxpayer from deducting loss

Sale to a related party (for losses)

  • If a taxpayer sells property to a family member or entity controlled by the taxpayer for losses
  • Loss will not be allowable
  • Loss is not added to the basis of the stock received by the seller.
  • Buyer when re selling can only reduce gain up to the realized loss of the original seller.


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