Basic taxation Flashcards
Gross income
Income broadly conceived minus any exclusions
AGI
Gross income less any deductions
think AGI adjusted gross income - you’re adjusting the gross w/deductions
After you find AGI what do you do
Take out the greater of itemized deductions or standard deduction
Taxable income is
AGI less the greater of itemized or standard deduction
Tax liability is
Taxable income - then calculate tax based on bracket - then subtract any credits
2 other forms besides 1040
1040EZ and 1040A
1040EZ
- easiest to use
- income just from wages, tips, salary
- no income adjustments claimed
- income less than 100k annually
What salary would you make to use 1040EZ
less than 100k
1040A
- if you don’t meet EZ requirements
- only deductions student loan int and IRA contributions
-DDs NOT itemized - only claim certain tax credits
What are the deductions you can take if you use 1040A?
student loan int and IRA contribs
Are DDs itemized on 1040A?
No
When would you use form 1040?
if you can’t use EZ or A
Basic income tax formula
Income broadly conceived
less exclusions from gross income
subtract adjustments for AGI
then subtract great of itemized or standard DDs
= taxable income
Filing status
impacts tax liability on the return
- affects phaseout limits for certain items
- determines tax table used
Single filer
-unmarried, separated or divorced
Married individuals who live apart from spouse as of last day of tax yr & maintain household for dependent child should file how
Head of household
Married Filing Jointly
-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
If you are legally separated/divorced on the last day of the tax year can you still file as MFJ?
no
Married filing separately
-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
Married filing separately in a community property state
must report 1/2 combined community income/DDs in addition to separate income/DDs - this has a big impact
Head of Household
-Unmarried
-maintain household for child or family member (elderly parent)
-rates in between MFJ and Single Filer
-include dependents SS#
Qualifying Widow(er) w/dependent child or surviving spouse
-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
GAT
Gross income
AGI
Taxable Income
To use qualifying widower/surviving spouse the person had to have passed away within how many years?
3
Gross Income
ALL income from WHATEVER source derived except for those sources specifically excluded by the tax code
Some items not taxable as regular income could fall under what tax
Alternative Minimum Tax - private activity muni bond
Receipt of any economic benefit outside of what, are taxable?
Outside of exclusions like gifts
Inclusions
items included in gross income - figure out what items to include, then total those up to arrive at gross income
If you’re self employed, sole proprietor, GP in a partnership, what portion of FICA tax do you pay?
BOTH portions 15.3%
OASDI is also called
Social Security
How many parts of FICA
2 parts - Social Security 12.4%
and Medicare 2.9%
What is the Medicare % of FICA?
2.9%
What is the Social Security % of FICA
12.4%
Total FICA %
15.3%
Additional medicare tax levied on what
net earnings from self employed, sole proprietorship, or partner
Do wage earners pay all of the 12.4% FICA and 2.9% Medicare?
No they split with employer
Is additional Medicare tax split with employer?
No
What is the additional Medicare tax?
.9% - not split with employer
What Sched does Self Employed use?
Self employed uses 1040 sched C
Can you deduct alimony paid?
Yes you can deduct it from Gross income for AGI
Gambling losses are deductible up to what?
Deductible up to the amount of winnings
Can you deduct state income tax paid?
Yes
100% schedule C income - 7.65% deductible SE tax =
92.35% subject to federal income tax
What do you multiply self employment income by to arrive at taxable income?
.9235
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?
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
SALT stands for what
state and local taxes
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?
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
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
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
Does sched E qualify for QBI?
Not unless you’re a real estate professional
Do REITS qualify for QBI?
Yes because they’re pass thru
Tom has Sched C income of $32,500 what is his QBI deduction?
$32,500 * .2 = $6,500
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?
$122,514 - $30,000 itemized deduction - $6,500 QBI = $86,014
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
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
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?
5,218 + 2,200 + 10k + 1,500 = $18,918
SALT has 10k cap
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?
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
If self employment * .9235 + W2 wages is over the OASDI limit what do you do
Calculate medicare and OASDI separately
SE * .9235 * .029 = Medicare portion
160,200 - W2 Wages = Y * .124 = Oasdi portion
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
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
Client marginal tax bracket is 24% and has itemized deduction for $4,000. What is the equivalent credit?
$4,000 * .24 = $960
To calculate equivalent tax credit of a deduction you multiply the deduction by the tax bracket
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?
$3,000 - $2,600 = $400
Any unearned income over 2600 is taxed at the parents MARGINAL tax rate
Think MARGINAL MARRIED
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?
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
Once you find AGI what do you take out?
Deductions (itemized or standard) and QBI
What is one thing you aren’t taxed on but you need to report?
Tax exempt interest income
Is form 1040 exactly like the tax formula?
No, you don’t have to report things that you are excluding from income
What is one thing that revenue includes but income does not?
Return of capital - so in the case of property sale, you only report the profit, not the entire proceeds of the sale
Are borrowed funds included in income?
No - they constitute a liability
Which of the following does income NOT include
A. Non-taxable income
B. Return of capital
C. Gains in the sale of property
return of capital
Exclusion
source of income that is omitted from the tax base - any item of income that the tax law treats as non-taxable
What are 2 things that can reduce taxable income?
Exclusions and deductions
Is gross income an item on form 1040?
No
You adjust FOR AGI and FROM AGI
generally adjustments FOR AGI are expenses connected with a trade or business
adjustments FROM AGI are personal expenses
Where would losses for the sale or exchange of property and deductions attributable to rents and royalties fall above or below?
ABOVE because they are related to business
Is the standard deduction the same for everyone?
No it varies based on taxpayers filing status
For most taxpayers, which is higher, standard or itemized deduction?
standard is greater for most taxpayersR
Tax cuts and jobs act of 2018 eliminated what re: exemptions
eliminated the use of personal exemptions for each taxpayer, spouse, and dependents, however dependents must still be reported
QBI Deduction happens where?
Below the line, FROM agi
QBI is
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
Can you always take the 20% QBI?
No there are limitations based on the type of job you have (people who make a lot of money)
QBI Restriction for S Corps
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
If you have AGI, what do you deduct to find taxable income?
Greater of itemized or standard deduction, and 20% of QBI if applicable to get taxable income
Dividend and capital gain rate is 0% for taxpayers whose taxable income is <
$47,025 Single Filer
$94,050 MFJ
$63,000 HoH
Tax credits and prepayments are
amounts that can be subtracted from the gross tax to arrive at the net tax due or refund due
Credits are classified in 2 ways
refundable and nonrefundable
Refundable tax credits
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
Nonrefundable tax credits
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
If credits exceed liability, will the excess be paid to the taxpayer?
No
Which are better credits or deductions?
Credits are better because they reduce dollar for dollar
Deductions are based on your marginal tax bracket
If a taxpayer is in the 24% marginal tax bracket, would they prefer $100 of tax credits or $300 of tax deductions?
To determine the preference between tax credits and tax deductions, let’s calculate the actual tax savings for each scenario.
- Tax Credits:
Tax Credit Amount: $100
Tax Savings = Tax Credit Amount
= $100 - 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.
Where are the most valuable deductions located?
Above the line
When would you itemize?
When the total of itemizing is greater than the standard
When would you deduct medical expenses?
ITEMIZED
You can deduct medical expenses over the threshold of 7.5% AGI
Why would a homeowner itemize vs a renter taking the standard deduction?
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
Casualty Losses limit
losses in excess of 10% of AGI - as long as they’re part of declared federal disaster
Who decides the amount of the standard deduction?
Congress
What parts of the taxpayer factor into the standard deduction?
filing status, age and vision/eyesight
Standard deduction rates (included on exam)
Single filer - $14,600
MFJ and Surviving Spouses - $29,200
MFS - $14,600
HoH - $21,900
When is a taxpayer considered to be 65?
The day before their 65th birthday
Special rule for age/blindness
Have to be 65 during the tax year
Blindness is no greater than 20/200 vision or 20 degree field of vision
Who typically itemizes?
High income, Homeowners
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?
$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
3 instances where you can’t take standard deduction
- Filing return for < 12 months bc of change in accounting period
- MFS Spouse itemizes - you have to itemize as well
- Non resident alien
Individuals are required to use the tax table unless
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
Five Filing statuses but only 4 rate schedules why?
MFJ and surviving spouse will use the same schedule or tax table
If I have no dependent children at home can I use the surviving spouse status?
No, you have to have a dependent child at home
In the year of your spouse’s death, how would you file and what income would you report?
You will still file MFJ in the year of death and report both income
What type of taxpayer would benefit more from a deduction, high or low income?
High income because they would have a higher marginal rate
Foreign Tax Credit
to mitigate effects of double taxation on foreign source income
3 Qualifications for Child and Dependent Care Credit
- have earned income
- be paying dependent care expenses so you can work
- keep home for qualifying individual
If you have AGI of $15,000 or less, how much child or dependent care credit can you get?
35%
If you have AGI over $43,000 how much child and dependent care credit can you get?
20%
At Risk Rules (passive activity)
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.
Passive Activity Limitation (PAL) Rules:
- 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.
PAL Rules Prevent what
prevent excessive “paper losses” from offsetting actual income.
If loss isn’t allowed due to at-risk rules
taxpayer can carry over unused loss
What does the at-risk amount include
includes adjusted basis in the entity and any personally liable debt.
Failure to Pay
.5% up to a max of 25%
Different than failure to file
