Ch 3 and 4 review

Question 1

purpose of tax planning

Answer 1

maximize after-tax wealth

Question 2

Is tax the only factor in decision making?

Answer 2

No also must consider nontax factors

Question 3

What are the three approaches to tax planning?

Answer 3

Timing, income shifting, conversion

Question 4

what is timing in tax planning

Answer 4

considering when to report income and deduction/ expenses

Question 5

what is income shifting in tax planning

Answer 5

trying to shift income from higher taxpayers to lower tax tacpayer

Question 6

what is the kiddie tax

Answer 6

individuals were income shifting to their children so now unearned income is taxed at the marginal rate

Question 7

When tax rates are constant what do you want to do with deduction?

Answer 7

accelerate into earlier years as you don’t know if they will exist in future years

Question 8

When tax rates are constant what do you want to do with income?

Answer 8

defer into later years

Question 9

When tax rates are decreasing what do you want to do with deduction?

Answer 9

accelerate into earlier years as deductions will count the most when tax rate is higher

Question 10

When tax rates are decreasing what do you want to do with income?

Answer 10

defer into later years as you end up paying less taxes on income since tax rate ins lower in later years

Question 11

What is assignment of income doctrine

Answer 11

whoever earns the income is taxed on it; NOT who receives the income

Question 12

formula for: after tax rate of return=

Answer 12

before tax rate of return * (1-tax rate)

Question 13

Business purpose doctrine

Answer 13

if a transaction has no substantial business purpose other than the avoidance or reduction of federal tax, the tax law will not regard the transaction

Question 14

Step-transaction doctrine

Answer 14

ensures that federal tax liability is based on a realistic view of the substance of the entire transaction instead of viewing steps of a transaction in isolation

Question 15

Substance-over-form doctrine

Answer 15

what actually happened in transaction

Question 16

Economic substance doctrine

Answer 16

what happened economically in transaction; have to have purpose in the transaction rather than just avoiding tax

Question 17

What is tax avoidance

Answer 17

legal reduction in explicit taxes

Question 18

What is tax evasion

Answer 18

willful attempt to defraud the government

Question 19

What is tax aggressiveness

Answer 19

Subjective amount that falls between tax evasion and tax tax avoidance

Question 20

What form do individuals file for a US individual Income Tax Return

Answer 20

Form 1040

Question 21

What is gross income

Answer 21

income “from whatever source derived”

Question 22

Is gross income taxable?

Answer 22

taxable unless specifically excluded

Question 23

Is gross income currently taxable?

Answer 23

taxable unless specifically deferred (<1 year is short term) and >1 year is long term)

Question 24

What are the two characters of capital?

Answer 24

Ordinary and capital

Question 25

What rates are ordinary income taxed at

Answer 25

ordinary rates

Question 26

What rates are ordinary income taxed at

Answer 26

ordinary or preferential

Question 27

Above the line deductions are also known as what

Answer 27

For AGI

Question 28

Above the line deductions are usually ________ related

Answer 28

business

Question 29

What is a child tax credit

Answer 29

$2000 for qualifying dependent children under the age of 17

Question 30

The child tax credit is partially refundable up til what amount?

Answer 30

$1700

Question 31

First requirements that an individual must meet for depedency

Answer 31

• joint return test
• citizen or resident test
• dependent taxpayer test

Question 32

What is the joint return requirement for dependency

Answer 32

person you’re trying to claim cannot file joint return if they’re filing with someone else

Question 33

What is the citizen or residence test for dependency

Answer 33

US citizen or resident of US, Canada or Mexico

Question 34

Second thing is determining dependency is …..

Answer 34

whether they are a qualifying child or qualifying relative

Question 35

Qualifying child additional requirements (4)

Answer 35

relationship test, age test, residence (or abode) test, support test

Question 36

What is the relationship test for qualifying child

Answer 36

child must be your son, daughter, stepchild, adopted child, or foster child, or a descendant of any of them; or brother, sister, half-sister, stepbrother, or stepsister or a descendant of any of them

Question 37

what is the support test for qualifying child

Answer 37

the taxpayer pays at least half of a prospective dependents’ annual living expenses

Question 38

what is the age test for qualifying child

Answer 38

whoever you are trying to claim must be under 19 by year end or less than 24 and full time in school; different if person is disabled

Question 39

what is the residence (or abode) test for qualifying child

Answer 39

child must live with you at least 6 months of the years
- exceptions: medical and schooling

Question 40

what are the qualifying relative additional requirements (3)

Answer 40

• relationship test
• gross income test
• support test

Question 41

what is the relationship test for qualifying relative

Answer 41

person must be in lineal descendant or ancestor (sibling, in-law, niece, nephew, aunt, uncle, or anyone other than the taxpayer’s spouse

Question 42

what is the gross income test for qualifying relative

Answer 42

cannot have more than 5050 income

Question 43

what is the support test for qualifying relative

Answer 43

taxpayer must provide more than half of the prospective dependent’s living expenses during the year

Question 44

What are the 5 filing statuses

Answer 44

1. married filing jointly
2. surviving spouse
3. head of household
4. single
5. married filing separately

Question 45

If an individual’s spouse died during the year what filing status would they file under

Answer 45

married (not surviving spouse yet)