Ch 2: Calculate Tax, High Incomes Flashcards
2013 tax brackets?
7 tax brackets get progressively higher with income
10%, 15, 25, 28, 33, 35, 39.6%
Individuals are required to use the tax table unless…
Income exceeds maximum income in table (currently $100K)
5 filing statuses?
1 married filing jointly 2 surviving spouse 3 head of household 4 single 5 married filing separately
Community property law
Allocates community income equally btw husband and
Wife regardless of which spouse earns the income
Non community property states
Income belongs to spouse who produces income
Results in higher tax rates
If congress adopted a truly proportional tax system, would it be necessary to have 4 different tax rate schedules?
No, all taxable income would be taxed at same rate
Joint return requirements
1 legally married or common law marriage on last day of
Tax year
2 must have same tax year end (except in death)
3 both must be citizens or residents
How do tax rates go up for married couples or go down?
Go up if both husband and wife make equal amounts of
High earnings
Go down if one spouse is a big earner and the other isn’t
Surviving spouse
Can file this status for 2 years after the year the spouse dies
4 Conditions to qualify as surviving spouse?
1 have not remarried in year where surviving spouse is
Claimed
2 be US citizen/resident
3 qualified to file joint return in year of death
4 have at least 1 son or daughter living at home during entire
Year and provide more than half their support
2 Benefits of surviving spouse filing status?
1 Entitles tax payer to lower joint return tax rate schedule
2 a higher joint return standard deduction in year spouse died
can include spouse exemption
4 Conditions to meet head of household filing status?
1 unmarried at end of tax year (exceptions apply to marriage
To nonresident aliens and abandoned spouses)
2 not be surviving spouse
3 be US citizen or resident
4 pay over half the costs of maintaining household where
Dependent lives for half the year
An individual can’t claim head of household status in…
Year their spouse died
2 exceptions to claim head of household?
1 in divorce, can claim head of household when qualifying
Child lives with tax payer more than half the year when child
Is not their dependent
2 can be head of household when maintain separate home
For parent
7 charges included in maintaining the household?
1 property taxes 2 mortgage interest 3 rent 4 utility charges 5 upkeep and repairs 6 property insurance 7 food consumed in house
7 common expenses not included in maintaining the house hold?
1 clothing 2 education 3 medical treatment 4 vacations 5 life insurance 6 transportation 7 value of services provided by tax payer
Single tax payer definition?
Unmarried individual who does not qualify as surviving
spouse or head of house hold
Tax rates progress more rapidly
Married filing separately
Married individuals that choose to file separate returns
Must use separate rate schedule
Leads to higher tax rates
3 disadvantages of married filing separately?
1 taxpayer may lose all or part of benefits of deduction for
Individual retirement accounts
2 lose child care credit
3 lose earned income credit
Abandoned spouse
Tax relief for otherwise paying married and separate
Abandoned spouse 3 requirements?
1 Taxpayer lived apart from spouse for last 6 Months of year
2 taxpayer pays over half costs of maintaining house and
Has son/daughter living there for over half the year
3 taxpayer is US citizen or resident
Under current law, what 3 rules curtail the advantages of shifting income to dependents?
1 dependents don’t receive personal exemption on own
returns
2 (2013) dependent’s standard deduction is reduced to
greater of $1,000 or dependent’s earned income + $350
3 tax on unearned income of child under age 18 (or 24)
Is figured by reference to parent’s tax rate if higher
Than child’s rate
Unearned income
Dividends, interest, capital gains, rents, royalties
When does the kiddie tax apply at age before and during age 18 and 19 to 23?
Before: kid tax applies if unearned income exceeds $2,000
18: if child provides less than half his support and kid tax applies if unearned income exceeds $2,000
19 to 23: if child is full time student, if child provides less than half his support and kid tax applies if unearned income exceeds $2,000
How does earned income negate the kiddie tax?
When it is more than half the support the kiddie tax doesn’t
Apply
Jane and Jill have 3 dependent teen age children. Jane operates a retail business and Bill farms. They have earned income of $200,000 each year. Can they use compensation paid to children as tax saving device?
Yes, assuming compensation paid to each child is less
Than amount of standard deduction
And parents provide over half their support
What tax schedule do proprietors prepare returns on, farmers?
Schedule C = proprietors
Schedule F = farmers
C corporations
Regular corporations treated as separate entities for tax
purposes
The corporate tax formula does not contain… 4 things
1 adjusted gross income figure
2 personal exemption
3 dependency exemption
4 standard deduction
S corporations
Not treated as separate entities for tax purposes (flow
through entities)
S corporation share holders report respective shares
Of s corporations income on individual returns
2 main Requirements of S corporations?
1 no foreign share holders
2 report ordinary income and special items separately
Tax formula for C corporations?
Income from whatever source derived
Minus: exclusions
Gross income
Minus: deductions
Taxable income
Times: tax rates
Gross tax
Minus: credits and prepayments
Net tax payable/refund due
Partnerships
Flow through entities where partners report respective
shares of partnerships income on tax returns Even if income
isn’t distributed
Capital assets
Investment property (stocks, bonds) Personal use property (personal residence or automobile)
New income tax provisions enacted on high income tax payers from affordable care act?
- 9% payroll tax on earned income over $200,000 ($250k m.c.)
- 8% tax on lesser of investment income (interest, dividends, capital gains) or AGI in excess of $200,000 (250k married coup.)
Affordable care act 2013 effect on personal and dependency
Exemptions and itemized deductions
Personal and dependency exemptions phased out at 2 %
For every $2,500 over AGI for single,( $1,250 married)
Itemized deductions reduced up to 80%, reduced at rate
Of 3% of AGI in excess above threshold
The net unearned income of children under the age of 24 is…
Taxed at parents’ tax rate
Prevents upper income parents from minimizing family’s
Tax
Assigned income
When someone has corporation pay dividend to someone else
They still pay taxes on that dividend
Shifting income
Families can often reduce taxes by shifting income to
Other family members who are in lower tax brackets
Splitting income
Consists of creating additional taxable entities, especially
Corporations to reduce individual’s effective tax rate
Maximizing itemized deductions
Timing expenditures properly can increase deductions
In the innocent spouse provision, the innocent spouse is relieved of liability for tax on unreported income if… 3 things
(can elect to… Under what circumstance) 1 of the things
1 amount is attributable to erroneous items of other spouse
2 innocent spouse was unaware of understatement of tax
3 innocent spouse elects relief within 2 years after IRS
begins collection activities (when aware of understatement
But not it’s amount)
Separate liability election
Separated, divorced, filing separately or widowed is can elect
only Liable for portion of understatement attributable to him
Time limit for changing to a joint/Ammended joint return
3 years
3 situations where tax payers must file regardless of gross income above?
1 tax payers who receive advanced payments of earned
Income credit
2 taxpayers with net self employment income of $400
3 taxpayers who can be claimed as a dependent who
Have over $1,000 in unearned income or total income
Over standard deduction
Return due dates, individuals and corporations?
Individuals April 15th, ext. oct. 15th
Corporations: March 15th, ext. Sept. 15th
A due date that falls on Saturday,Sunday or holiday is
Automatically extended to next business day
Form 7004
Gives corporations a 6 month extension
Gives partnerships a 5 month extension
Partnerships and corporations are required to file taxes even if they…
Don’t have gross income
Form 4868
Allows individuals to file six month extension
Form 1040EZ
Available to single taxpayers and married filing jointly tax
Payers
Tax payers have taxable income of under $50,000 (from salaries and wages, no more than $1500 interest income and Claim no dependents
Form 1040A
Available to taxpayers with more involved returns
May deduct IRA contributions, may claim credits for
withholding
Individual taxpayers report information to the IRS based on…
Social security numbers
EIN
Employer identification number
Employer identification numbers
Used by corporations, other taxpayers, tax exempt entities
Individuals who employ others use both…
Social security number and employer identification
