Bryant - Course 4. Tax Planning. 3. Income Tax Calculations Flashcards
What does income NOT include?
- A return of capital.
- Gains in the sale of property.
- Non-taxable income.
A return of capital.
Income included both taxable and non-taxable income. However, it does not include a return of capital.
If a taxpayer is in the 32% marginal tax bracket, (s)he would prefer _ ______??_______.
- $300 of tax deductions
- $100 of tax credits
$100 of tax credits
The taxpayer would prefer the tax credits. The $300 of deductions will result in a tax savings of $96 ($300 x 0.32), whereas the $100 of credits will result in a tax savings of $100.
If you perform services for another person and she pays you by giving you a new computer, the fair market value of that computer is income to you.
- False
- True
True
Gross income is almost everything of value received by a taxpayer during the taxable year. In fact, the law states that everything of value a taxpayer receives during the year is income unless the taxpayer can establish that it is not income. The amount of that income is the value of what is received.
Income, from whatever source derived, minus exclusions, whether reported or not, equals what?
- Taxable Income
- Gross Income
- Reported Income
- Adjusted Gross Income
Gross Income
Income from whatever sources derived minus exclusions whether reported or not equals Gross Income.
A single taxpayer provided the following information for 2023:
Salary = $30,000
Interest on local government bonds (qualifies as a tax exclusion) = $4,050
Standard deduction = $13,850
Allowable itemized deductions = $14,600
What is their taxable income?
- $15,400
- $22,300
- $2,450
- $26,300
$15,400
Salary + local government bond interest (municipal bonds) = Income derived from all sources ($30,000 + $4,050 = $34,050)
less local government bond interest (municipal bonds) ($30,000 - $4,050 = $30,000)
less the greater of the standard deduction (Single = $13,850) or itemized deduction ($14,600) = Taxable income
$30,000 - $14,600 = $15,400
Taxable income equals $15,400.
List Deductions for Adjusted Gross Income Listed in IRC Section 62
- Trade and business deductions
- Reimbursed employee expenses and certain expenses of performing artists
- Losses from the sale or exchange of property
- Deductions attributable to rents and royalties
- Certain deductions of life tenants and income beneficiaries of property
- Contributions to retirement plans (Keoghs and IRAs) and certain distributions
- Penalties forfeited because of premature withdrawal of funds from time savings accounts
- *One-half of self-employment taxes paid
- *Portion of health insurance costs incurred by a self-employment person
- Alimony (only for divorces prior to 01/01/2019)
- Moving expenses (only for members of the Armed Forces)
- Certain required repayments of supplemental unemployment compensation
- Jury duty pay remitted to an individual’s employer
- Certain environmental expenditures (reforestation and clean fuel)
- Interest on education loans
- Contributions to medical savings accounts and health savings accounts
*Though not actually mentioned in Section 62, self-employment taxes and health insurance costs of self-employed persons are defined by Sections. 164(f) and 162(l) respectively as trade or business deductions thereby indirectly enabling taxpayers to deduct portions of these amounts for AGI.
What equals Net Investment Income (NII)?
Net Investment Income (NII) equals “Gross Investment Income” less eligible investment-related expenses.
What 3 things make up Gross Investment Income?
Gross Investment Income (by default) will be:
1. interest
2. non-qualifying dividend income (taxable securities only)
3. short-term capital gains
Net Investment Income (NII) is important for two reasons. What are they?
- Borrower’s NII is needed to calculate how much the lender imputes as interest income in certain situations where no interest was charged for a loan or an artificially low rate of interest was used (i.e., below market loans).
- NII is that investment interest paid, such as margin interest paid within a margin account, is deductible in the current year only to the extent of NII.
Any investment interest incurred that exceeds the current year’s NII would have to be carried over to the following year.
What is the Itemized Deduction Floor for medical expenses?
There are adjusted gross income floors associated with itemized deductions. AGI floors represent amounts for which a deduction is allowable only if it exceeds the floor amount.
**Medical expenses: Only medical expenses over 7.5% of AGI are deductible.
**
What is the Itemized Deduction Floor for casualty losses?
There are adjusted gross income floors associated with itemized deductions. AGI floors represent amounts for which a deduction is allowable only if it exceeds the floor amount.
Casualty losses: After deducting $100 per loss, only casualty losses in excess of 10% of AGI are deductible. Only for federally declared disaster areas.
For 2023, what are the standard deduction amounts for the different filing statuses?
- Unmarried individuals, other than head of household: $13,850
- Married couples filing joint returns and surviving spouses: $27,700
- Married people filing separate returns: $13,850
- Heads of households: $20,800
How does the standard deduction amount change if over 65yo or blind, for married and single individuals?
In 2023, a married taxpayer’s standard deduction is:
* increased by $1,500 if they are age 65+ OR blind
* $3,000 if the taxpayer is age 65+ and blind
* or has a spouse who is age 65+ or blind (for a maximum possible increase of $6,000 for a married couple).
If an unmarried taxpayer is age 65 or older or blind, their standard deduction is:
* increased by $1,850 ($3,600 if the taxpayer is age 65+ and blind).
The standard deduction is greater than total itemized deduction for most taxpayers.
- False
- True
True.
High-income taxpayers are more likely to itemize than lower-earning taxpayers simply because they incur more expenses that can be itemized.
The standard deduction is unavailable to three categories of taxpayers. List the 3.
The standard deduction is unavailable to three categories of taxpayers:
- An individual filing a return for less than twelve months because of a change in an accounting period.
- A married taxpayer filing a separate return in instances where the other spouse itemizes.
- Non-resident aliens.
A special rule applies to any individual who is a dependent of another taxpayer.
In 2023, the standard deduction of the dependent is limited to (what 2 things?):
In 2023, the standard deduction of the dependent is limited to the greater of:
- the dependent’s earned income plus $400 (not to exceed $13,850), or
- $1,250.
This limitation aims to prevent parents from shifting unearned income, such as interest and dividends, to their children to avoid paying tax on such income. Without this rule, children could use the standard deduction to offset income from interest and dividends.
What are the 3 sets of rules used to determine whether the kiddie tax applies?
- Before a child turns 18, the kiddie tax applies if the unearned income exceeds the $1,250 threshold.
- For the year the child turns 18 (and only that year), the kiddie tax applies if the child’s earned income is less than or equal to one-half of his or her support and unearned income exceeds the $1,250 threshold.
- From the year that a child turns 19 up to and including the year the child turns 23, the kiddie tax applies only if a child is a full-time student, the child’s earned income is less than or equal to one-half of his or her support, and unearned income exceeds the $1,250 threshold.
To qualify as a dependent, an individual must meet the definition of either a qualifying child or a qualifying relative. All dependents must meet several requirements.
What are the Four requirements common to all dependents?
All dependents must:
1. Have a qualifying identification number: Every dependent must have a Social Security number, and that number must be reported on the return.
2. Meet a citizenship test: Dependents must be U.S. citizens or nationals, or residents of the U.S., Canada, or Mexico for some part of the year.
3. Meet a separate return test: Married dependents cannot file joint returns. However, a taxpayer is entitled to the exemption if the dependent files a joint return solely to claim a refund of tax withheld (i.e., there is no tax on the joint return and there would have been no tax on two separate returns. Married dependents should weigh the taxes that would be saved by the family from an exemption against the taxes that would be saved by filing a joint return. Depending on the circumstances, either alternative may be more beneficial.
4. Not themselves claim another person as a dependent.
What are the additional requirements that must be met to be considered a qualifying child?
To claim a dependency exemption for an individual who is considered a qualifying child, the following additional requirements must be met:
1. A relationship test.
2. An age test.
3. An abode test.
4. A support test.
What are the additional requirements that must be met to be considered a qualifying relative?
To be eligible, dependents must meet the common requirements above and three additional requirements:
1. Relationship test.
2. Gross income test.
3. Support test.
How do you meet the support test?
**To meet this test, you must have paid more than half of the person’s living expenses for the year.
**
Living expenses include:
* education,
* food,
* lodging,
* medical bills,
* dental care,
* vacations,
* clothes,
* books, and
* other items.
What is included in the Gross Income Test?
Therefore, nontaxable scholarships, tax-exempt bond interest, and nontaxable Social Security benefits are not considered, but** salary, taxable interest, and rent are considered in deciding whether the person meets this test**.
What is the important exception that applies to the gross income test?
The gross income test is waived for a child of the taxpayer who is either under the age of 19, or, if a full-time student, under the age of 24.
How do you meet the age test to claim a dependent?
A qualifying child must be:
* under age 19,
* a full-time student under age 24,
* or a permanently and totally disabled child.
A child is considered to be a student if he or she is in full-time attendance at a qualified educational institution during at least five months of the year. To be full-time, a student must carry the number of hours or courses the educational institution requires a student to take to be considered full-time.
How do you meet the relationship test to claim a dependent?
**To be claimed as a dependent, a person must either be related to the taxpayer or reside with the taxpayer for the entire tax year.
**
Both immediate family and extended family relationships meet this test.
Immediate family relationships include those based on blood, adoption, or marriage, and extended family relationships include only those based on blood or adoption.
On a joint return, the dependent needs to be related to only one spouse.
Once established, an immediate family relationship is not terminated by death or divorce.
Extended family relationships include what?
- Grandparents and their ancestors
- Grandchildren and their descendants
- Aunts and uncles
- Nephews and nieces
How do you meet the abode test to claim a dependent?
A qualifying child must have the same principal abode as the taxpayer for more than half of the year.
A noncustodial parent meets this requirement if the custodial parent agrees in writing.
Dependency Qualification Requirements are those amounts spent on a dependent who satisfies all five dependency tests. These rules will only help to determine child tax credit eligibility.
What are they?
They are:
* Support Test: The taxpayer provides over 50% of the dependent’s support.
* Joint Return Test: A taxpayer may not claim a dependency exemption for a married dependent who files a joint return.
* Relationship Test: A dependent is related to the taxpayer or resides with the taxpayer for the entire tax year.
* Citizenship Test: Dependent must be a U.S. citizen, national or resident, or be a resident of Canada or Mexico.
Simon, age 22, is a college student and is partially supported by his aunt and uncle. He also receives more than half of his support from his parents. Simon earned $16,000 from a summer job. His aunt and uncle can claim Simon as a dependent.
- True
- False
False
Only Simon’s parents may claim him as a dependent because the gross income test is waived and all other tests are met. Even though Simon earned more than the standard deduction amount of $13,850 (2023), he would not be able to claim himself as a dependent on his return. One of the critical details of this test is that the dependent must be a child of the taxpayer. Thus, if Simon’s aunt and uncle support him (rather than his parents), the aunt and uncle could not claim Simon because the gross income test is not met.
Christopher is the 12-year-old son of James and Caroline. James and Caroline are divorced. Who decides who will claim a child tax credit for Christopher?
- Decided by James
- Decided by Caroline
- Decided by special rules set by Congress
- Decided by Social Security
Decided by special rules set by Congress
In case of divorce or separation special rules determine which parent will receive child tax credits for children. Congress sets these rules. This is done to avoid disputes between the parents.
When discussing with your client his tax situation, you mention he may elect a standard deduction of $13,850 (2023). Your client gives you his expenditures for the year, which include the following:
Medical expenses = $5,300
Property taxes = $4,900
Mortgage interest = $5,500.
Your client’s AGI for the year is $74,320. Would you advise him to take the standard or itemize his deductions when filing his return?
- Itemized Deduction
- Standard Deduction
Standard Deduction
When you calculate your client’s itemized deduction, it is less than the standard deduction, and you would utilize the standard deduction.
Medical expenses are allowed only in the amount greater than 7.5% of AGI. $74,320 x 0.075 = $5,574. Since there were only $5,300 of medical expenses, the client’s costs do not exceed 7.5% of AGI, and, as a result, no medical expense deduction is allowed. The remaining expenditures of $4,900 + $5,500 = $10,400 in itemized deductions.
Because the standard deduction is greater ($13,850 in 2023), it would be used when filing the client’s taxes.
What are the seven tax brackets applicable to individual taxpayers?
- 10%
- 12%
- 22%
- 24%
- 32%
- 35%
- 37%
What are the five different filing statuses and four rate schedules and/or tax tables?
There are five different filing statuses but only four rate schedules and/or tax tables, because married couples filing jointly and certain surviving spouses use the same rate schedule or tax table. The five statuses are:
- Married filing jointly / Surviving spouse
- Head of household
- Single (now being referred to as “unmarried”)
- Married filing separately
What are the tests required to file a joint return by a couple?
- They must be legally married as of the last day of the tax year. Whether a couple is married depends on the laws of the state of residence. Couples in the process of divorce are still considered married until the date the divorce becomes final. A couple need not be living together in order to file a joint return. A joint return can be filed if one spouse dies during the year as long as the survivor does not remarry before year-end. The executor of the estate must agree to the filing of a joint return.
- They must have the same tax year-end (except in case of death).
- Both spouses must be U.S. citizens or residents. An exception allows a joint return if the nonresident alien spouse agrees to report all of his or her income on the return.
What specific conditions must the widow or widower meet to file a joint return as a surviving spouse?
A widow or widower can file a joint return for the year his or her spouse dies if the widow or widower does not remarry.
For the two years after the year of the death, the widow or widower can file as a surviving spouse only if he or she meets specific conditions. The surviving spouse (sometimes called a qualifying widow or widower) must:
- Have not remarried as of the year-end in which surviving spouse status is claimed.
- Be a U.S. citizen or resident.
- Have qualified to file a joint return in the year of death.
- Have at least one dependent child living at home during the entire year, and the taxpayer must pay over half of the expenses of the home.
