Ch 2: tax formula, deductions Flashcards
Tax formula for individuals
Income from whatever source derived
Minus: exclusions
Gross income
Minus: deductions for adjusted gross income
Adjusted gross income
Minus: deductions from adjusted gross income:
Greater of itemized deductions or standard deduction
Personal and dependency exemptions
Taxable income
Times: tax rates
Gross tax
Minus: credits and prepayments
Net tax payable or refund due
AGI
Adjusted gross income
Income
Includes bot taxable and non taxable income
Includes income from any source
Does not include return of capital
Exclusion
Any item of income that tax law says is not taxable
Gross income
Income reduced by exclusions
Allowable deductions
Business and investment expenses
Personal expenses that are specifically provided for in the
IRC
2 categories of deductions
1 Deductions for adjusted gross income
2 deductions from adjusted gross income
Deductions for adjusted gross income
Expenses connected with trade or business
Deductions from adjusted gross income
Personal expenses that congress has chosen to allow
Adjusted Gross Income (AGI)
Measure of income that falls btw gross income and taxable
Income
Used for many tax computations, especially to impose
Limitations
2 categories of deductions from adjusted gross income are?
1 itemized deductions or the standard deduction
2 personal and dependency exemptions
Congress Specified personal expenses that can be deducted 2 examples
Charitable contributions and medical expenses
Taxpayers are allowed to itemize expenses related to… 3 things
1 the production or collection of income
2 management of property held for production of income
3 determination, collection or refund of any tax
Taxpayers have a choice of claiming either…
Itemized deductions or the standard deduction
Standard deduction varies depending on… 3 things
1 taxpayers filing status
2 age
3 vision
Personal exemption
Generally allowed for each tax payer, their spouse and
For each dependent
Both personal and dependency exemptions are equal to what amount in 2013?
How is this amount adjusted in future years?
$3,900
Adjusted annually for increases in cost of living
Taxable income
Adjusted gross income reduced by deductions from AGI
Amount of income that is tax
Refundable tax credits, 8 items
1 withholding from wages and back-up withholding 2 estimated tax payments 3 excess social security taxes paid 4 earned income credit 5 regulated investment company credit 6 payments made with extension request 7 overpayment of prior year's tax 8 child credit
Non refundable tax credits, 8 items
1 adoption expense credit 2 credit for elderly and disabled 3 foreign tax credit 4 child and dependent care credit 5 business energy credit 6 research and experimentation credit 7building rehabilitation credit 8 American opportunity lifetime learning credits
Define tax credits, what do they include?
Amounts that can be subtracted from gross tax to arrive at
Next tax due or refund date
Include prepayments
Refundable tax credits
Allowed to reduce taxpayer’s tax liability to zero and if
Credit remains are refunded by government to taxpayer
Non refundable tax credits
Allowances that have been created by Congress for
Various social, economic and political reasons
Ex. Child and dependent care credits
Itemized deductions, when are they claimed?
Claimed only if total of such expenses exceeds standard
Deduction
Itemized deductions: 9 special itemized personal expenses
1 medical expenses 2 taxes 3 investment and residual interest 4 charitable contributions 5 casualty and theft losses 6 employee expenses 7 production or collection of nonbusiness 8 management property held for income production 9 determination of tax or refund
4 itemized deduction floors?
1 medical expenses
2 causality losses
3 miscellaneous itemized deductions
4 overall floor
Itemized deduction floor: medical expenses
Only medical expenses in excess of 10% AGI are deductible
In 2013 for taxpayers under age 65,
7.5% for over 65 through 2016
Itemized deduction floors: Casualty losses
Only casualty losses in excess of 10% of AGI are deductible
Itemized deduction floors: miscellaneous itemized deductions
Only miscellaneous itemized deductions in excess of 2%
Of AGI are deductible
Itemized deduction floors: overall floor
Reduces total itemized deductions, only applies to high
Income tax payers
Standard deduction
Amount set by congress varies year to year
Depends on taxpayers filing status, age and vision
IRC
Internal Revenue Code
The standard deduction is unavailable to 3 categories of tax payers?
1 individual filing return in period of less than 12 months
B/c change in accounting period
2 married tax payer filing separate return in instance where
Other spouse itemizes
3 nonresident aliens
Personal exemption, who is not allowed to use their personal exemption
Every taxpayer is allowed a personal exemption of $3,900
In 2013
Those claimed as dependents are not entitled to a personal
Exemption
To qualify as a dependent an individual must meet the definition of…
A qualifying child or qualifying relative
4 requirements common to all dependents?
1 have qualifying identification #
2 meet citizenship test
3 meet separate return test
4 not themselves claim another person as a dependent
Dependents that file tax returns may…
Not claim personal or dependency exemptions on their returns
4 requirements for claiming w dependency exemption for a qualifying child?
1 relationship test
2 age test
3 abode test
4 support test
Qualifying child dependency exemption: relationship test
Eligible children include biological, adopted, foster,
stepchildren, siblings and half siblings
Qualifying children dependency exemption: age test
Under age 19,
full time student under age 24, in school at least 5 months/yr.
Qualifying child dependency exemption: abode test
Qualifying children must live in household of tax payer for
1/2 a year
Dorms for students count
Support test
Qualifying child may not provide more than half of his support
Dependency exemption for qualifying relative 3 requirements
1 Relationship test
2 gross income test
3 support test
Dependency exemption other relatives: relationship test
Who does not meet the relationship test?
Related to tax payer (parents, in laws, step parents, siblings,
Aunts/uncles, older children, niece/nephew)
Or reside in taxpayer’s household for entire year
Cousins don’t meet relationship test
Other relatives dependency exemption: gross income test
What sources of gross income are considered in this test?
Dependents gross income must be less than exemption
amount for the year ($3,900 in 2013)
Gross income considered: salary, taxable interest, rent
What items are not considered in the gross income test?
Non taxable scholarships, tax exempt bond interest,
No taxable social security benefits
Dependency exemption qualifying relative: support test
What counts and doesn’t count as support?
Taxpayer provides more than half the support
Welfare and social security benefits count as support
Scholarships don’t count as support
What counts as providing support? 8 common items
Amounts spent for food, clothing, shelter, medical care,
dental care, television, automobile and education
3 tie breaker rules for tax payers to claim someone as a dependent?
1 qualifying child rules have priority over other relative rules
2 parents have priority over other individuals
3 if first 2 tiebreakers don’t apply, exemption is rewarded to
Taxpayer with highest AGI
Multiple support declaration (Form 2120), eligibility?
enable taxpayer to claim dependency exemption in Situations where taxpayer doesn’t provide over 1/2 support of dependent
Eligible if contribute more than 10% of the support and
Meet all requirements claiming dependency exemption
Other eligible supporters must agree in writing who can
Claim the exemptiom
Release of Claim to Exemption for Child of Divorced or Separated Parents (Form 8332)
Enable noncustodial parent to claim an exemption
Who gets a dependency exemption in a divorce?
The tax payer that has custody for greater part of the year
Of child, unless specified by written agreement
Ig share child equally, the parent with the higher AGI gets the exemption
Child credit, threshold for joint, single, married filing separately
Individual taxpayers may claim a child credit of $1000 for
(each parent gets $1000 per child)
Each qualifying child (under age 17)
Credit is reduced by $50 for every $1,000 the taxpayer’s
Adjusted gross income exceeds the threshold
Thresholds: joint: $110,000, single: :$75,000, married
Filing separate $55,000
The child credit is refundable…
To 15% of taxpayers income in excess of $3,000 til 2017
