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    Tax and GAAP Differences

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    Answer 12 of these questions. Where applicable, show all work/computations, and use examples for partial credit. Format your submission in accordance to APA writing style guidelines.

    1. What are some of the major differences between GAAP and income tax accounting?

    2. What are all the possible filing statuses? What characteristics distinguish each of the filing statuses?

    3. When is a taxpayer required to file a federal income tax return? What are the consequences of failing to file a tax return that you were otherwise required to file? When would a taxpayer with no income tax liability and no withholding want to file a tax return?

    4. What types of income disqualify taxpayers from claiming the EIC?

    5. What is the definition of being self-employed? What distinguishes a self-employed individual from an employee? Why is this distinction important? Explain.

    6. Suppose you live 60 miles from your old place of business, but you have changed jobs with a new job site 100 miles away from your old residence. You buy a new home one-mile from your new business. Are you qualified for a moving expense deduction? Explain the requirements for moving expense deductions.

    7. A taxpayer receives a $40,000 capital gains distribution in December from a mutual fund. Assuming no estimated tax payments were made during the year and his only withholdings were from his W-2, what can the taxpayer do to avoid an underpayment penalty? How can this taxpayer avoid this situation in future years?

    8. When could overpayment of Social Security taxes occur? How does one go about getting a refund of excess Social Security payments?

    9. Joe Smith paid $500.00 to attend a fund raiser for a qualified charity 100 miles from home. At the fund raiser he purchased a painting at a silent auction for $1000.00. The fair market value of the painting was $250.00 and the dinner was $50.00. While at the fund raiser he met the governor and contributed $500.00 to the governor's re-election campaign. How much can Joe claim as a charitable contribution deduction? Why?

    10. How is the write-off of a bad debt handled on the tax return? How does the debtor have to handle the forgiveness of the debt? Why?

    11. How is basis determined? What events can adjust basis up or down? How does tax basis differ from GAAP accounting basis?

    12. Are you qualified to claim a home office deduction if you have another full-time office? Explain.

    13. What is the difference between a tax credit and a tax deduction? Which is preferable? What is the difference between a refundable and non-refundable tax credit?

    14. What is the difference between tax avoidance and tax evasion?

    15. What are some year-end tax planning strategies you (personally) can employ to minimize your next year's tax liability?

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    Solution Preview

    Question 1
    Some of the major differences between GAAP and income tax accounting are result to:
    1. Permanent differences
    These differences create permanent or non-reversible differences in income tax.
    For example, GAAP book interests on municipal bonds as part of income while income tax accounting doesn't. Another example is GAAP includes premiums of officers' life insurances as a business expense while income tax accounting doesn't.
    2. Temporary differences
    Some of the major differences result to temporary differences in book and taxable income. For example, GAAP recognizes sales from installment sales as they become due, whereas tax accounting does only when cash is collected. Another example is GAAP considers allocation for warranty expense as expense while tax accounting does only when this expense is actually paid.

    Question 4
    The types of income disqualified for earned income tax credits are:
    ? Interest and dividends
    ? Social security and railroad retirement benefits
    ? Welfare benefits
    ? Pensions or annuities
    ? Veterans' benefits (including VA rehabilitation payments)
    ? Workers' compensation benefits
    ? Alimony
    ? Child support
    ? Unemployment compensation (insurance)
    ? Taxable scholarship or fellowship grants that were not reported on IRS Tax Form W-2
    ? Variable housing allowance for the military
    ? Earnings for work performed while an inmate at a penal institution.

    Question 5
    The Internal Revenue Service defines a self employed as either of the following:
    ? Sole proprietor
    ? Independent contractor
    ? A partner of a partnership
    ? Whenever an individual is in business by her or himself
    This distinction is important because a self-employed individual pays self-employment tax whereas a n employed tax payer pays a different set of taxes. The self-employment tax is the self-employment contributions tax act or SECA which is equivalent to the Federal Insurance Contributions Act or FICA paid by employed taxpayers - both are used to pay for the Social Security and Medicare premiums. Oftentimes, self-employed taxpayers pay more for their SECA than what their employed counterpart pay for FICA.

    Question 6
    First, qualified moving expenses are:
    1. cost of packing household goods and personal properties
    2. cost of shipping household goods and personal ...

    Solution Summary

    The solution determines the differences between income tax accounting and GAAP.