2nd finance exam Flashcards
a type of tax structure in which the larger the amount of tax income, the highter the rate at which it’s taxed
progressive tax structure
5 filing categories for taxpayers
- single taxpayers
- married filing jointly
- married filing separately
- head of household
- qualifying widow/widower with dependent child
married couples may file separately (report only his or her income, deductions, and exemptions) if it means they have less tax to pay from that income
the total of all of a taxpayer’s income (before any adjustments, deductions, or exemptions) subject to federal taxes, it includes active, portfolio, and passive income
gross income
income !!!!earned on the job!!!!!, such as wages and salaries, bonuses, and tips, also includes most other forms of noninvestment income, such as pension income and alimony
Active income
earnings- interest, dividends, and capitals gains (profits on the sale of investments)- generated from most types of investment holdings; includes savings accounts, stocks, bonds, mutual funds, options, and futures
portfolio income
a special category thart includes income derived from real estate, limited partnerships, and other forms of tax shelter
passive income
level of earnings and number of witholding allowances claimed on W-4
factors that determine federal witholding (amount of federal income tax withheld from your paycheck)
deductions from AGI based on the number of people supported by the taxpayer’s income
exemptions
calculate tax rates, tax credits, tax forms and schedules, and the procedures for determining tax liability
calculating amount of taxable income
the amount of income remaining after subtracting all allowable adjustments to income from gross income
AGI (adjusted gross income)
directly reduces, dollar for dollar, the amount of taxes due
tax credit
deductions and exemtions can only reduce the amount of taxable income (tax credeit is better
occures whenever a capital asset (stock, bond, or real estate* are sold for more than its original cost
capital gain (if you purchased stock for 5 and sold it for 6 you have a capital gain of 1*
capital gains are taxed at different rates depending on different holding rates (short term gains from sale or exchange held for less than 12 months are taxed at the same rates as ordinary income, long term gains from the sale or exchange of property held for more than 12 months are typically taxed less
in excess of 7.5 itemized percent of AGI in 2zero18
itemized deduction of medical and dental expenses
itemized deuction- state, local, and foreign income (or if greater, state sales tax and property taxes, state and local personal property
limited to total deduction of ten thousand
itemized deduction residential mortgage interest on principal amounts of seven fifty thousand or less of acquisition indebtedness
deductible for seven fifty thousand, interest on refinanced mortgages may be deductible with the same limit if the term of the original acquisiton mortgage (interest on home equity loans no longer deductible
casualty losses that are uninsured are deductble for tax years 2018-2025 only to the extent they are attributable to a federally declared disaster area so if you total a then thousand dollar car and have no insurance youre out of luck
moving exenses are NOT deductible but your employer could reimburse you and that would be included on your taxable income
basic accumulations required, dollar amounts
form 1040
filing status, income, tax rates
schedules
lists different filing statuses, taxable income, and tax rate
tax rate schedules
tax payments required on income not subject to withholding that are paid in 4 installments
estimated taxes often given to lawyers, buisness owners, and investors and consultants
exam to validate return accuracy
tax audit, can be prepared by saving records
- national and local tax services
- certified public accountants
- enrolled ageents
- tax attorneys
- IRS will compute taxes whose taxable income is less than 100000 and do not itemize deductions
what assistance/tax prep services does the irs provide
use various ways to reduce shift or defer taxes
advantages of using tax preparation software
reduce taxes legally
tax avoidance
failing to accurately report income and deductions
tax evasion
list all possible deductions that can be used
maximize deduction
shift portion of income and taxes to a lower tax bracket
income shifting
interest income earned on municipal bonds and earnings on money put into a roth IRA
tax free income
investment vehicles allows you to accumulate tax-free earnings, resulting in much higher savings.
ex. income earned in a traditional IRA
tax deferred
This schedule is used by filers to report itemized deductions.
itemized deductions: state/local income on sales taxes, property taxes, charitable donations, mortgage interest
schedule A form 1040 (itemized deductions)
This schedule is used by filers to report interest and ordinary dividend income.
Schedule B (Form 1040), Interest and Ordinary Dividends
used to report income or loss from a business operated or profession practiced as a sole proprietor; includes recent updates, related forms, and instructions on how to file.
Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)
used instead of Schedule C by qualifying small businesses and statutory employees with expenses of $5,000 or less.
Schedule C-EZ (Form 1040), Net Profit from Business (Sole Proprietorship)
used to report sales, exchanges or some involuntary conversions of capital assets, certain capital gain distributions, and nonbusiness bad debts.
Schedule D (Form 1040), Capital Gains and Losses
used to report income from rental properties, royalties, partnerships, S corporations, estates, trusts, and residual interests in REMICs.
Schedule E (Form 1040), Supplemental Income and Loss
used by filers who claim the earned income credit to give the IRS information about the qualifying child.
Schedule EIC(stands for earned income credit (Form 1040 or 1040-SR), Earned Income Credit
used to report farm income and expenses.
Schedule F (Form 1040), Profit or Loss From Farming
used by household employers to report household employment taxes.
Schedule H(h is for household employment…) (Form 1040), Household Employment Taxes
used to figure your income tax by averaging all or part of your taxable income from your trade or business of farming or fishing.
Schedule J (Form 1040), Income Averaging for Farmers and Fishermen
used to figure the credit for the elderly or the disabled.
Schedule R (Form 1040), Credit for the Elderly or the Disabled
used by self-employed persons to figure the self-employment tax due on net earnings.
Schedule SE(literally stands for self emloyment (Form 1040), Self-Employment Tax
used to figure the additional child tax credit. The additional child tax credit may give you a refund even if you do not owe any tax.
Schedule 8812 (Form 1040), Credits for Qualifying Children and Other Dependents
tax credits are NOT dollar for dollar reductions in taxable income, they are deductions from a taxpayeer’s tax liability that directly reduce her taxes DUE rather than taxable income
qualified dividends are taxed at the highest capital gain rates
tax liability on capital gain computer on 150,000
Murray can use the section 121 exclusion that reduces his capital gains by $250,000 (it would have been $500,000 if he was married), because he owned the house for 35 years (ownership test) and lived there for the past two years (use test).
Murray’s taxable capital gains = $400,000 - $250,0000 = $150,000
tax credit can result from adopting a child!!!, health care, electric vehicle, homeowner, income and savings credits, dependent credits, etc.
tips recieved are subject to federal income tax
a tax return filed to adjust for information recieved after the filing date of the taxpayer’s original return or to correct erroos
amended return
taxable income is calculating by subtracting adjustments, the larger of itemized/standard deductions, and exemptions from gross income
the law establishing the combined old age, survivor’s, disability, and hospital insurance tax levied on both employer and employee
FIFCA/social security tax
taxes based on the level of earnings and the number of witholding allowances claimed- that an employer deducts from the employee’s gross earnings each pay period
federal withholding taxes
a blanket deduction that depends on the taxpayer’s filing status, age, and vision, and can be taken by a taxpayer whose total itemized deductions are too small
minimums for paying taxes (single person earning more than 12,000 and maried couple earning more than 24,000) change based on inflation
1000 to almost 10,000 –> 10%
38,700- 59526 –> 12%
842501-157300 –> 24%
157501 to 200000-» 35
over 500,000 pay 37%
