GREGORY A. CARNES is the Raburn Eminent Scholar of Accounting at the University of North Alabama. He served as Dean of Sanders College of Business and Technology for 11 years. With a passion for education and taxation, he has dedicated his career to teaching accounting students and guiding them toward successful careers. Specializing in tax, he has taught for over 25 years in CPA review programs and professional tax seminars. In addition to his teaching, he is an accomplished author of tax textbooks and over 30 academic articles. SUZANNE YOUNGBERG joined the faculty at Northern Illinois University as a full-time member in 2000 and is currently teaching in the accounting graduate and undergraduate programs. Prior to NIU, she worked for five years in the tax department of a medium-sized public accounting firm and then maintained her own tax practice for 30 years specializing in Individual and small business compliance and strategic tax planning. Suzanne received her Bachelor of Science in Accountancy from NIU and her Master of Science in Taxation from DePaul University.

• DEDICATION IIIBRIEF CONTENTS VLEARNING THE BIG PICTURE OF TAX TO BE A VALUED PROFESSIONAL VIWHAT ARE OUR STORIES? VIIWHAT MAKES OUR APPROACH TO LEARNING TAX DISTINCTIVE? IXASSESSMENT XIIICONNECTING TO THE PROFESSION XVIAN INTERACTIVE, MULTIMEDIA LEARNING EXPERIENCE XVIIIPREPARING FOR THE CPA EXAM XIXFOR INSTRUCTORS XXACKNOWLEDGMENTS XXITABLE OF CONTENTS XXIIIPart I Introduction to Income Taxation1 The Professional Practice of Taxation 1-11.1 The Basics of Tax Planning 1-41.2 Individual Income Tax Formula 1-71.3 Tax Compliance vs. Tax Planning 1-151.4 Tax Avoidance vs. Tax Evasion 1-271.5 Tax Rules vs. GAAP 1-311.6 Goals of Tax Policymakers 1-331.7 Other Taxes Paid by Individuals 1-381.8 Professional Taxation as a Career 1-412 Fundamentals of the Federal Income Tax System 2-12.1 Taxpayer Activities: Trade or Business, Investment, or Personal Use 2-42.2 Classification of Assets 2-102.3 Basis 2-142.4 Foundations of Income 2-172.5 Foundations of Deductions 2-212.6 Introduction to Property Transactions 2-243 Tax Authority, Research, Compliance Rules, and Professional Responsibilities 3-13.1 Sources of Tax Authority 3-53.2 Locating and Evaluating Authority 3-173.3 Compliance Responsibilities 3-203.4 Tax Professional Responsibilities 3-313.5 Tax Practice and Procedure 3-364 Dependents and Filing Status 4-14.1 Dependents—Introduction and Qualifying Child 4-34.2 Qualifying Relative and Other Dependency Rules 4-114.3 Filing Status—Introduction 4-164.4 Head of Household and Qualifying Widow(er) 4-214.5 Dependent on Another Return and Kiddie Tax 4-284.6 Filing Requirements 4-32Part II Income5 Framework for Income Recognition 5-15.1 All-Inclusive Approach to Income 5-45.2 Judicial Doctrines 5-85.3 Accounting Methods and Periods—Income 5-145.4 Business Income for Individuals 5-245.5 Qualified Business Income Deduction 5-306 Income from Personal Activities 6-16.1 Income from Prizes, Awards, and Scholarships 6-66.2 Taxable Prizes and Awards 6-66.3 Exclusion for Awards for Recognition of Civic or Other Achievements 6-76.4 Income from Injuries and Other Damage Awards 6-266.5 Income from Death of a Taxpayer 6-316.6 Forgiveness of Debt 6-356.7 Other Inclusions and Exclusions 6-407 Income from Services 7-17.1 Wages and Tip Income 7-67.2 Income from Insurance-Related7.3 Income from Other Fringe Benefits 7-217.4 Stock Options 7-307.5 Reimbursement of Employee Business Expenses 7-377.6 Retirement Plans 7-397.7 Distribution Rules 7-507.8 Social Security Benefits 7-577.9 Foreign Earned Income 7-60Part II (Chapters 5–7): Comprehensive Tax Return Problem 7-72Part III Deductions8 Framework for Deductions 8-18.1 Types of Activities 8-48.2 Disallowance of Deductions 8-88.3 Types of Deductions 8-138.4 Accounting Methods for Deductions 8-168.5 Capital Expenditure vs. Repair 8-228.6 Accounting for Inventories 8-249 Deductions for AGI, Itemized Deductions, and Additional Deductions 9-19.1 Deductions for AGI 9-59.2 Itemized Deductions: General Rules 9-149.3 Medical Expenses 9-179.4 Taxes 9-219.5 Interest 9-269.6 Charitable Contributions 9-319.7 Casualty Losses 9-429.8 Other Itemized Deductions 9-4710 Business Expenses 10-110.1 Business Expense Requirements 10-410.2 Transportation and Travel Expenses 10-810.3 Entertainment and Education Expenses 10-1410.4 Business Interest 10-1810.5 Bad Debts 10-2110.6 Net Operating Losses 10-2310.7 Excess Business Losses 10-2911 Limitations on Business Losses and Expenses 11-111.1 Business Use of a Home 11-411.2 Hobby Losses 11-1111.3 Vacation Homes 11-1411.4 Basis and At-Risk Limitations 11-2311.5 Passive Loss Rules 11-2511.6 Losses from Partnerships and S Corporations 11-34Part III (Chapters 8–11): Comprehensive Tax Return Problem 11-48Part IV Taxation of Property Transactions12 Taxation of Investment Income 12-112.1 Interest Income 12-412.2 Dividend Income 12-1412.3 Capital Gains and Losses 12-2212.4 The 3.8% Net Investment Income Tax 12-3713 Cost Recovery of Property 13-113.1 General MACRS Rules 13-513.2 Additional Cost Recovery Rules 13-1513.3 Amortization 13-2713.4 Depletion 13-3014 Taxation of Assets Used in a Trade or Business 14-114.1 Distinguishing Section 1231 Assets from Ordinary and Capital Assets 14-414.2 Identifying Types of Section 1231 Assets 14-714.3 Netting Section 1231 Gains and Losses 14-1014.4 Section 1245 Depreciation Recapture 14-1514.5 Section 1250 Depreciation Recapture 14-2015 Property Transactions: Nonrecognition of Gains and Losses 15-115.1 Related-Party Losses 15-415.2 Wash Sales 15-915.3 Like-Kind Exchanges 15-1515.4 Involuntary Conversions 15-2615.5 Loss on Sale of Personal Use Assets 15-3215.6 Sale of Principal Residence 15-33Part IV (Chapters 12–15): Comprehensive Tax Return Problem 15-52Part V Other Individual Topics16 Personal Tax Credits 16-116.1 Introduction to Personal Tax Credits 16-416.2 Child Tax Credit 16-716.3 Credit for Other Dependents (Family Tax Credit) 16-1016.4 Child and Dependent Care Credit 16-1116.5 Earned Income Tax Credit (EITC) 16-1816.6 Education Credits 16-2516.7 Other Personal Tax Credits 16-3317 Alternative Minimum Tax and Other Taxes 17-117.1 Alternative Minimum Tax (AMT) 17-417.2 Social Security, Medicare, and Self-Employment Taxes 17-1717.3 Other Taxes 17-24Part VI CPA Evolution: Core—Tax18 Business Entity Topics: CPA Exam Core—Taxation and Regulation 18-118.1 Corporations: Taxable Income Computation and Special Deductions 18-518.2 Other Corporate Tax Issues 18-2018.3 Business Tax Credits 18-3118.4 S Corporations 18-4218.5 Partnerships and Limited Liability Companies 18-6318.6 Tax-Exempt Organizations 18-7318.7 State and Local Taxation 18-76Part VI (Chapter 18): Comprehensive Tax Return Problem 18-109APPENDIX A Tax Formula Items A-1APPENDIX B Tax Forms B-1GLOSSARY G-1INDEX I-1

GREGORY A. CARNES is the Raburn Eminent Scholar of Accounting at the University of North Alabama. He served as Dean of Sanders College of Business and Technology for 11 years. With a passion for education and taxation, he has dedicated his career to teaching accounting students and guiding them toward successful careers. Specializing in tax, he has taught for over 25 years in CPA review programs and professional tax seminars. In addition to his teaching, he is an accomplished author of tax textbooks and over 30 academic articles. SUZANNE YOUNGBERG joined the faculty at Northern Illinois University as a full-time member in 2000 and is currently teaching in the accounting graduate and undergraduate programs. Prior to NIU, she worked for five years in the tax department of a medium-sized public accounting firm and then maintained her own tax practice for 30 years specializing in Individual and small business compliance and strategic tax planning. Suzanne received her Bachelor of Science in Accountancy from NIU and her Master of Science in Taxation from DePaul University.

• DEDICATION IIIBRIEF CONTENTS VLEARNING THE BIG PICTURE OF TAX TO BE A VALUED PROFESSIONAL VIWHAT ARE OUR STORIES? VIIWHAT MAKES OUR APPROACH TO LEARNING TAX DISTINCTIVE? IXASSESSMENT XIIICONNECTING TO THE PROFESSION XVIAN INTERACTIVE, MULTIMEDIA LEARNING EXPERIENCE XVIIIPREPARING FOR THE CPA EXAM XIXFOR INSTRUCTORS XXACKNOWLEDGMENTS XXITABLE OF CONTENTS XXIIIPart I Introduction to Income Taxation1 The Professional Practice of Taxation 1-11.1 The Basics of Tax Planning 1-41.2 Individual Income Tax Formula 1-71.3 Tax Compliance vs. Tax Planning 1-151.4 Tax Avoidance vs. Tax Evasion 1-271.5 Tax Rules vs. GAAP 1-311.6 Goals of Tax Policymakers 1-331.7 Other Taxes Paid by Individuals 1-381.8 Professional Taxation as a Career 1-412 Fundamentals of the Federal Income Tax System 2-12.1 Taxpayer Activities: Trade or Business, Investment, or Personal Use 2-42.2 Classification of Assets 2-102.3 Basis 2-142.4 Foundations of Income 2-172.5 Foundations of Deductions 2-212.6 Introduction to Property Transactions 2-243 Tax Authority, Research, Compliance Rules, and Professional Responsibilities 3-13.1 Sources of Tax Authority 3-53.2 Locating and Evaluating Authority 3-173.3 Compliance Responsibilities 3-203.4 Tax Professional Responsibilities 3-313.5 Tax Practice and Procedure 3-364 Dependents and Filing Status 4-14.1 Dependents—Introduction and Qualifying Child 4-34.2 Qualifying Relative and Other Dependency Rules 4-114.3 Filing Status—Introduction 4-164.4 Head of Household and Qualifying Widow(er) 4-214.5 Dependent on Another Return and Kiddie Tax 4-284.6 Filing Requirements 4-32Part II Income5 Framework for Income Recognition 5-15.1 All-Inclusive Approach to Income 5-45.2 Judicial Doctrines 5-85.3 Accounting Methods and Periods—Income 5-145.4 Business Income for Individuals 5-245.5 Qualified Business Income Deduction 5-306 Income from Personal Activities 6-16.1 Income from Prizes, Awards, and Scholarships 6-66.2 Taxable Prizes and Awards 6-66.3 Exclusion for Awards for Recognition of Civic or Other Achievements 6-76.4 Income from Injuries and Other Damage Awards 6-266.5 Income from Death of a Taxpayer 6-316.6 Forgiveness of Debt 6-356.7 Other Inclusions and Exclusions 6-407 Income from Services 7-17.1 Wages and Tip Income 7-67.2 Income from Insurance-Related7.3 Income from Other Fringe Benefits 7-217.4 Stock Options 7-307.5 Reimbursement of Employee Business Expenses 7-377.6 Retirement Plans 7-397.7 Distribution Rules 7-507.8 Social Security Benefits 7-577.9 Foreign Earned Income 7-60Part II (Chapters 5–7): Comprehensive Tax Return Problem 7-72Part III Deductions8 Framework for Deductions 8-18.1 Types of Activities 8-48.2 Disallowance of Deductions 8-88.3 Types of Deductions 8-138.4 Accounting Methods for Deductions 8-168.5 Capital Expenditure vs. Repair 8-228.6 Accounting for Inventories 8-249 Deductions for AGI, Itemized Deductions, and Additional Deductions 9-19.1 Deductions for AGI 9-59.2 Itemized Deductions: General Rules 9-149.3 Medical Expenses 9-179.4 Taxes 9-219.5 Interest 9-269.6 Charitable Contributions 9-319.7 Casualty Losses 9-429.8 Other Itemized Deductions 9-4710 Business Expenses 10-110.1 Business Expense Requirements 10-410.2 Transportation and Travel Expenses 10-810.3 Entertainment and Education Expenses 10-1410.4 Business Interest 10-1810.5 Bad Debts 10-2110.6 Net Operating Losses 10-2310.7 Excess Business Losses 10-2911 Limitations on Business Losses and Expenses 11-111.1 Business Use of a Home 11-411.2 Hobby Losses 11-1111.3 Vacation Homes 11-1411.4 Basis and At-Risk Limitations 11-2311.5 Passive Loss Rules 11-2511.6 Losses from Partnerships and S Corporations 11-34Part III (Chapters 8–11): Comprehensive Tax Return Problem 11-48Part IV Taxation of Property Transactions12 Taxation of Investment Income 12-112.1 Interest Income 12-412.2 Dividend Income 12-1412.3 Capital Gains and Losses 12-2212.4 The 3.8% Net Investment Income Tax 12-3713 Cost Recovery of Property 13-113.1 General MACRS Rules 13-513.2 Additional Cost Recovery Rules 13-1513.3 Amortization 13-2713.4 Depletion 13-3014 Taxation of Assets Used in a Trade or Business 14-114.1 Distinguishing Section 1231 Assets from Ordinary and Capital Assets 14-414.2 Identifying Types of Section 1231 Assets 14-714.3 Netting Section 1231 Gains and Losses 14-1014.4 Section 1245 Depreciation Recapture 14-1514.5 Section 1250 Depreciation Recapture 14-2015 Property Transactions: Nonrecognition of Gains and Losses 15-115.1 Related-Party Losses 15-415.2 Wash Sales 15-915.3 Like-Kind Exchanges 15-1515.4 Involuntary Conversions 15-2615.5 Loss on Sale of Personal Use Assets 15-3215.6 Sale of Principal Residence 15-33Part IV (Chapters 12–15): Comprehensive Tax Return Problem 15-52Part V Other Individual Topics16 Personal Tax Credits 16-116.1 Introduction to Personal Tax Credits 16-416.2 Child Tax Credit 16-716.3 Credit for Other Dependents (Family Tax Credit) 16-1016.4 Child and Dependent Care Credit 16-1116.5 Earned Income Tax Credit (EITC) 16-1816.6 Education Credits 16-2516.7 Other Personal Tax Credits 16-3317 Alternative Minimum Tax and Other Taxes 17-117.1 Alternative Minimum Tax (AMT) 17-417.2 Social Security, Medicare, and Self-Employment Taxes 17-1717.3 Other Taxes 17-24Part VI CPA Evolution: Core—Tax18 Business Entity Topics: CPA Exam Core—Taxation and Regulation 18-118.1 Corporations: Taxable Income Computation and Special Deductions 18-518.2 Other Corporate Tax Issues 18-2018.3 Business Tax Credits 18-3118.4 S Corporations 18-4218.5 Partnerships and Limited Liability Companies 18-6318.6 Tax-Exempt Organizations 18-7318.7 State and Local Taxation 18-76Part VI (Chapter 18): Comprehensive Tax Return Problem 18-109APPENDIX A Tax Formula Items A-1APPENDIX B Tax Forms B-1GLOSSARY G-1INDEX I-1