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Taxation > Basic taxation > Flashcards

Basic taxation Flashcards

1
Q

Gross income

A

Income broadly conceived minus any exclusions

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2
Q

AGI

A

Gross income less any deductions
think AGI adjusted gross income - you’re adjusting the gross w/deductions

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3
Q

After you find AGI what do you do

A

Take out the greater of itemized deductions or standard deduction

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4
Q

Taxable income is

A

AGI less the greater of itemized or standard deduction

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5
Q

Tax liability is

A

Taxable income - then calculate tax based on bracket - then subtract any credits

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6
Q

2 other forms besides 1040

A

1040EZ and 1040A

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7
Q

1040EZ

A
  • easiest to use
  • income just from wages, tips, salary
  • no income adjustments claimed
  • income less than 100k annually
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8
Q

What salary would you make to use 1040EZ

A

less than 100k

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9
Q

1040A

A
  • if you don’t meet EZ requirements
  • only deductions student loan int and IRA contributions
    -DDs NOT itemized
  • only claim certain tax credits
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10
Q

What are the deductions you can take if you use 1040A?

A

student loan int and IRA contribs

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11
Q

Are DDs itemized on 1040A?

A

No

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12
Q

When would you use form 1040?

A

if you can’t use EZ or A

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13
Q

Basic income tax formula

A

Income broadly conceived
less exclusions from gross income
subtract adjustments for AGI
then subtract great of itemized or standard DDs
= taxable income

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14
Q

Filing status

A

impacts tax liability on the return
- affects phaseout limits for certain items
- determines tax table used

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15
Q

Single filer

A

-unmarried, separated or divorced

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16
Q

Married individuals who live apart from spouse as of last day of tax yr & maintain household for dependent child should file how

A

Head of household

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17
Q

Married Filing Jointly

A

-marriage recognized in state of domicile
-can file even if one spouse has 0 income/DDs
-can’t be legally separated/divorced on last day of tax yr
-spouse dies can still file jointly

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18
Q

If you are legally separated/divorced on the last day of the tax year can you still file as MFJ?

A

no

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19
Q

Married filing separately

A

-each spouse reports own income/DDs/Credits
-if you’re getting divorced
-if you don’t want to assume t/joint and several liability of filing jointly
-Some DDs not available

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20
Q

Married filing separately in a community property state

A

must report 1/2 combined community income/DDs in addition to separate income/DDs - this has a big impact

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21
Q

Head of Household

A

-Unmarried
-maintain household for child or family member (elderly parent)
-rates in between MFJ and Single Filer
-include dependents SS#

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22
Q

Qualifying Widow(er) w/dependent child or surviving spouse

A

-spouse died within last 3 years
-if spouse died in 2019 first you’d use MFJ then next 2 years use Qualifying Widow/Surviving spouse
-Put dependent SS# on return
-uses joint income rates but only 1 personal exemption

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23
Q

GAT

A

Gross income
AGI
Taxable Income

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24
Q

To use qualifying widower/surviving spouse the person had to have passed away within how many years?

A

3

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25
Q

Gross Income

A

ALL income from WHATEVER source derived except for those sources specifically excluded by the tax code

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26
Q

Some items not taxable as regular income could fall under what tax

A

Alternative Minimum Tax - private activity muni bond

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27
Q

Receipt of any economic benefit outside of what, are taxable?

A

Outside of exclusions like gifts

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28
Q

Inclusions

A

items included in gross income - figure out what items to include, then total those up to arrive at gross income

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29
Q

If you’re self employed, sole proprietor, GP in a partnership, what portion of FICA tax do you pay?

A

BOTH portions 15.3%

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30
Q

OASDI is also called

A

Social Security

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31
Q

How many parts of FICA

A

2 parts - Social Security 12.4%
and Medicare 2.9%

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32
Q

What is the Medicare % of FICA?

A

2.9%

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33
Q

What is the Social Security % of FICA

A

12.4%

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34
Q

Total FICA %

A

15.3%

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35
Q

Additional medicare tax levied on what

A

net earnings from self employed, sole proprietorship, or partner

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36
Q

Do wage earners pay all of the 12.4% FICA and 2.9% Medicare?

A

No they split with employer

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37
Q

Is additional Medicare tax split with employer?

A

No

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38
Q

What is the additional Medicare tax?

A

.9% - not split with employer

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39
Q

What Sched does Self Employed use?

A

Self employed uses 1040 sched C

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40
Q

Can you deduct alimony paid?

A

Yes you can deduct it from Gross income for AGI

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41
Q

Gambling losses are deductible up to what?

A

Deductible up to the amount of winnings

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42
Q

Can you deduct state income tax paid?

A

Yes

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43
Q

100% schedule C income - 7.65% deductible SE tax =

A

92.35% subject to federal income tax

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44
Q

What do you multiply self employment income by to arrive at taxable income?

A

.9235

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45
Q

Tom has 32,500 in sched C income. 98,500 of W2 income. He paid 6k in SE health ins premiums. What is his AGI?

A

32,500 + 98,500 = 131,000 total income
Sched C income 32,500 * .0765 = $2,486.25 SE deduction
+ $6,000 SE Health ins = $8,486
131,000 - 8,486 = $122,514

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46
Q

SALT stands for what

A

state and local taxes

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47
Q

In 2023 Tom paid 3k state income tax, 8k property taxes, 20k mortgage interest. What are his total itemized deductions and should he take the standard deduction or itemized?

A

Total is 10k (max SALT) + 20k mort interest
= 30k
greater than 13,850 standard deduction
If he went with standard he’d have $16,150 more income exposed to taxation

48
Q

Tom Example
Schedules = $32,500
(sched C, Sched E, Sched F, etc)
Gross Wages = $98,500
(w-2s)
Adjustments $8,486 ($6,000 SE health ins premiums + 2,486 SE Deduction

A

All above the line
FROM THAT you would take your itemized or standard deduction.
In tom’s case it was 10k SALT + 20k Mort Int.
30k itemized deduction

49
Q

Does sched E qualify for QBI?

A

Not unless you’re a real estate professional

50
Q

Do REITS qualify for QBI?

A

Yes because they’re pass thru

51
Q

Tom has Sched C income of $32,500 what is his QBI deduction?

A

$32,500 * .2 = $6,500

52
Q

Tom’s AGI
$32,500 sched C + 98,500 W-2 - 2,846 SE deduction - 6,000 SE Health Ins = $122,514 What do you subtract from this to get taxable income?

A

$122,514 - $30,000 itemized deduction - $6,500 QBI = $86,014

53
Q

Date is Jan 7 2024
Tom total withholding of 15k
Qual tuition expense of 8,000
What is tom’s 2023 tax liability?
Should he make a Q4 payment by 1/5/24?
Taxable income = $86,014

A

SE Tax = 32,500 * 15.3 = 4,973
10% Bracket = 11,000 * .1 = 1,100
12% bracket = 33,725 * .12 = 4,047
22% bracket = 86,014 - 44,726 = 41,288
41,288 * .22 = 9,083
Tax Liability = 1,110 + 4,047 + 9,083 + 4,973 = $19,203
Tax Credit = 8,000 * .2 = 1,600 (20% of the first 10k)
19,203 - 1,600 - 15,000 (withholding) = 2,603 underpaid
Yes tom should make an estimated payment of 2,603

54
Q

Client is single taxpayer and has the following itemized deductions:
Mort Int: $5,218
Charity: $2,200
State Income Tax: $9,120
Gambling losses (to the extent of winnings): $1,500
Property Tax: $7,480

What is the total itemized deduction?

A

5,218 + 2,200 + 10k + 1,500 = $18,918

SALT has 10k cap

55
Q

Jane had self employment income of $140,000. She also worked part time teaching at a local college and earned $60k W-2 wages. What is her self employment tax?

A

She’s over the threshold so it’s the complex method
140,000 * .9235 * .029 = $3,749 medicare
160,200 (oasdi limit) - 60,000 = 100,200
100,200 * .124 (oasdi rate 12.4%) = $12,425
$12,425 + $3,749 = $16,174

56
Q

If self employment * .9235 + W2 wages is over the OASDI limit what do you do

A

Calculate medicare and OASDI separately

SE * .9235 * .029 = Medicare portion
160,200 - W2 Wages = Y * .124 = Oasdi portion

57
Q

Client earned $68k self employment wages. He also received a cash distribution of $35k from a 10% interest in an S corp. Calculate his SE tax for 2023

A

Since he’s under the threshold you use the simple method.

68,000 * .9235 * .153 = $9,608

There are no W2 wages and the distribution from the S corp wouldn’t be included in self employment taxes

58
Q

Client marginal tax bracket is 24% and has itemized deduction for $4,000. What is the equivalent credit?

A

$4,000 * .24 = $960

To calculate equivalent tax credit of a deduction you multiply the deduction by the tax bracket

59
Q

John and Mary file jointly and have marginal tax bracket of 35% and avg tax rate is 27%. Son, age 16, has W2 wages of $3,400 and $3,000 interest income from a taxable bond fund. How much of the sons income will be taxed using the parents rate?

A

$3,000 - $2,600 = $400

Any unearned income over 2600 is taxed at the parents MARGINAL tax rate

Think MARGINAL MARRIED

60
Q

John and Mary file jointly and have marginal tax bracket of 35% and avg tax rate is 27%. Son, age 16, has W2 wages of $3,400 and $3,000 interest income from a taxable bond fund. What is the son’s total tax liability?

A

The son’s standard deduction is the greater of either $1,300 or $3,850 (Earned income + 450) not to exceed otherwise allowable amount of $13,850
Therefore the son’s taxable income is $3,400 + $3,000 - $3,850 = $2,550
Of this amount, $400 (3000 - 2600 = 400) is taxable at the parents’ tax rates $400 * .35 = $140
The remaining $2,100 ($2600 - $500) is taxable at the child rate $2100 * .1 = $210
2 amounts added together = son’s liability

$385

61
Q

Once you find AGI what do you take out?

A

Deductions (itemized or standard) and QBI

62
Q

What is one thing you aren’t taxed on but you need to report?

A

Tax exempt interest income

63
Q

Is form 1040 exactly like the tax formula?

A

No, you don’t have to report things that you are excluding from income

64
Q

What is one thing that revenue includes but income does not?

A

Return of capital - so in the case of property sale, you only report the profit, not the entire proceeds of the sale

65
Q

Are borrowed funds included in income?

A

No - they constitute a liability

66
Q

Which of the following does income NOT include
A. Non-taxable income
B. Return of capital
C. Gains in the sale of property

A

return of capital

67
Q

Exclusion

A

source of income that is omitted from the tax base - any item of income that the tax law treats as non-taxable

68
Q

What are 2 things that can reduce taxable income?

A

Exclusions and deductions

69
Q

Is gross income an item on form 1040?

A

No

70
Q

You adjust FOR AGI and FROM AGI

A

generally adjustments FOR AGI are expenses connected with a trade or business

adjustments FROM AGI are personal expenses

71
Q

Where would losses for the sale or exchange of property and deductions attributable to rents and royalties fall above or below?

A

ABOVE because they are related to business

72
Q

Is the standard deduction the same for everyone?

A

No it varies based on taxpayers filing status

73
Q

For most taxpayers, which is higher, standard or itemized deduction?

A

standard is greater for most taxpayersR

74
Q

Tax cuts and jobs act of 2018 eliminated what re: exemptions

A

eliminated the use of personal exemptions for each taxpayer, spouse, and dependents, however dependents must still be reported

75
Q

QBI Deduction happens where?

A

Below the line, FROM agi

76
Q

QBI is

A

qualified business deduction 20% of pass thru business - taken FROM agi. You can take this regardless of if you take the standard or itemized deductions

77
Q

Can you always take the 20% QBI?

A

No there are limitations based on the type of job you have (people who make a lot of money)

78
Q

QBI Restriction for S Corps

A

If above income limits, the benefit is limited to 50% of W2 wages or 20% of net income being passed thru on the K-1

79
Q

If you have AGI, what do you deduct to find taxable income?

A

Greater of itemized or standard deduction, and 20% of QBI if applicable to get taxable income

80
Q

Dividend and capital gain rate is 0% for taxpayers whose taxable income is <

A

$47,025 Single Filer
$94,050 MFJ
$63,000 HoH

81
Q

Tax credits and prepayments are

A

amounts that can be subtracted from the gross tax to arrive at the net tax due or refund due

82
Q

Credits are classified in 2 ways

A

refundable and nonrefundable

83
Q

Refundable tax credits

A

allowed to reduce the taxpayers tax liability to zero AND
if some credit remains, refundable (paid) by the gov’t to the taxpayer

prepayments of tax, like withholding of wages and other means

84
Q

Nonrefundable tax credits

A

allowances for various social, economic and political reasons. (i.e. child and dependent care credit)
May reduce liability to zero.
Excess not paid to taxpayer

85
Q

If credits exceed liability, will the excess be paid to the taxpayer?

A

No

86
Q

Which are better credits or deductions?

A

Credits are better because they reduce dollar for dollar
Deductions are based on your marginal tax bracket

87
Q

If a taxpayer is in the 24% marginal tax bracket, would they prefer $100 of tax credits or $300 of tax deductions?

A

To determine the preference between tax credits and tax deductions, let’s calculate the actual tax savings for each scenario.

  1. Tax Credits:
    Tax Credit Amount: $100
    Tax Savings = Tax Credit Amount
    = $100
  2. Tax Deductions:
    Tax Deduction Amount: $300
    Tax Savings = Tax Deduction Amount × Marginal Tax Rate
    = $300 × 0.24
    = $72

Comparing the tax savings:
- Tax Credits: $100
- Tax Deductions: $72

Since $100 of tax credits provide greater tax savings than $300 of tax deductions, the taxpayer would prefer the $100 of tax credits.

88
Q

Where are the most valuable deductions located?

A

Above the line

89
Q

When would you itemize?

A

When the total of itemizing is greater than the standard

90
Q

When would you deduct medical expenses?

A

ITEMIZED
You can deduct medical expenses over the threshold of 7.5% AGI

91
Q

Why would a homeowner itemize vs a renter taking the standard deduction?

A

Homeowners may choose to itemize deductions rather than take the standard deduction because they typically have higher deductible expenses related to homeownership. Some of these deductible expenses include:

Mortgage Interest
Property Taxes
Mortgage Insurance Premiums
Home Equity Loan Interest
Home Office Expenses

92
Q

Casualty Losses limit

A

losses in excess of 10% of AGI - as long as they’re part of declared federal disaster

93
Q

Who decides the amount of the standard deduction?

A

Congress

94
Q

What parts of the taxpayer factor into the standard deduction?

A

filing status, age and vision/eyesight

95
Q

Standard deduction rates (included on exam)

A

Single filer - $14,600
MFJ and Surviving Spouses - $29,200
MFS - $14,600
HoH - $21,900

96
Q

When is a taxpayer considered to be 65?

A

The day before their 65th birthday

97
Q

Special rule for age/blindness

A

Have to be 65 during the tax year
Blindness is no greater than 20/200 vision or 20 degree field of vision

98
Q

Who typically itemizes?

A

High income, Homeowners

99
Q

Client is single homeowner, has property taxes of $8,000, $3,000 in state income tax, charitable contributions of $1,000 and Mortgage int of $9,000. AGI is $60,000. Would she take the standard or itemized deduction?

A

$60k - 20k (10k SALT - 1k charity - 9k mort int) = 40k taxable income

Standard deduction would be $14,600

She would itemize as that would be higher

100
Q

3 instances where you can’t take standard deduction

A
  • Filing return for < 12 months bc of change in accounting period
  • MFS Spouse itemizes - you have to itemize as well
  • Non resident alien
101
Q

Individuals are required to use the tax table unless

A

unless taxable income exceeds the maximum income in the table - in that case you use the tax rate schedule provided by the IRS and compute your own tax

102
Q

Five Filing statuses but only 4 rate schedules why?

A

MFJ and surviving spouse will use the same schedule or tax table

103
Q

If I have no dependent children at home can I use the surviving spouse status?

A

No, you have to have a dependent child at home

104
Q

In the year of your spouse’s death, how would you file and what income would you report?

A

You will still file MFJ in the year of death and report both income

105
Q

What type of taxpayer would benefit more from a deduction, high or low income?

A

High income because they would have a higher marginal rate

106
Q

Foreign Tax Credit

A

to mitigate effects of double taxation on foreign source income

107
Q

3 Qualifications for Child and Dependent Care Credit

A
  • have earned income
  • be paying dependent care expenses so you can work
  • keep home for qualifying individual
108
Q

If you have AGI of $15,000 or less, how much child or dependent care credit can you get?

A

35%

109
Q

If you have AGI over $43,000 how much child and dependent care credit can you get?

A

20%

110
Q

At Risk Rules (passive activity)

A

At-Risk Rules:

  • Taxpayers can only deduct losses on business activities up to their amount “at-risk”.
  • At-risk amount includes adjusted basis in the entity and any personally liable debt.
  • Qualifying non-recourse financing increases basis.
  • If loss isn’t allowed due to at-risk rules, taxpayer can carry over unused loss.
  • Options for using unused loss: wait until basis is restored sufficiently or until the activity is disposed of.
111
Q

Passive Activity Limitation (PAL) Rules:

A
  • Introduced in 1986 to limit taxpayers from using losses and credits from passive activities to offset non-passive income.
  • Passive activities are those where taxpayer doesn’t have an active role.
  • PAL rules prevent excessive “paper losses” from offsetting actual income.
112
Q

PAL Rules Prevent what

A

prevent excessive “paper losses” from offsetting actual income.

113
Q

If loss isn’t allowed due to at-risk rules

A

taxpayer can carry over unused loss

114
Q

What does the at-risk amount include

A

includes adjusted basis in the entity and any personally liable debt.

115
Q

Failure to Pay

A

.5% up to a max of 25%
Different than failure to file

Taxation (15 decks)

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