Chapter 1 - Individual Tax Income Flashcards
Items that make up gross income:
US PARK CAB SO WIDI:
Wages Interest Dividends State Tax Refunds Alimony Received Business Income Capital Gain/Loss (can deduct up to $3,000 for losses max.) IRA Income [received] Pension and Annuity [received] Rental Income/Loss K-1 Income/Loss Unemployment Compensation Social Security Benefits Other Income [gamble winnings]
Individual Taxation formula:
Gross Income
Less: Adjustments [Deduction to arrive at AGI]
——————-
Adjusted Gross Income [AGI]
Less: Greater of standard deduction or itemized deduction
Less: Exemption $3,950 x Self, spouse, dependents
——————-
Taxable Income
Federal Income Tax [Greater of regular tax or Alternative Min. Tax] Less: Tax credits Other Taxes Less: Payments ----------------- Tax Due or Tax Refund
Items making up adjustments (“anyone is automatically always allowed any amount as an adjustment in any time, any year”):
Educator Expenses IRA Student Loan Interest Expenses Tuition & Fee Deduction Health Saving Account Moving Expenses One-Half Self-Employment FICA Self-Employed Health Insurance Self-Employed Retirement Interest Withdrawal Penalty Alimony Paid
Items making itemized deductions (“team tested together”):
Medical (in excess of 10% of AGI) Taxes - State/Local (income/sale & property) Interest Expense (Home & Investment) Charity (up to 50% o AGI) Casualty/Theft (in excess of 10% of AGI) Miscellaneous (in excess of 2% off AGI) Other Miscellaneous
When should taxpayer file a return? Exceptions to the general rule?
If his or her income is equal or greater than the sum of:
- personal exemption
- regular standard deduction (except MFS)
- additional standard deduction for taxpayers over 65 or blind (except MFS)
Exceptions:
- Taxpayer’s net earnings from self-employment is $400+
- Taxpayer is claimed as dependent on another tax return and has gross income of $1,000
- Taxpayer received advance payments of earned income credit
Individual file due date and extension is:
April 15. Automatic 6 months extension to October 15.
Note: payment for tax is still due on 4/15 even if extension is applied.
Filing Statuses:
- Single (12/31 decides the status)
- Joint Returns (12/31 decides the status) –> if spouse dies during the year, can file as joint return for that year
- Qualifying Widow(er)/Surviving spouse with dependent child (go up to 2 years AFTER death, not for year of death) –> dependent must live with them for the WHOLE tax year
- Head of Household –> child or descendent of divorced parents, father or mother in nursing home, and relatives must live with them for more than HALF the year
How many times can a dependent be claimed for personal exemptions?
Once. If folks use it, you lose it.
Married Taxpayers Personal Exemption amounts:
Each spouse receive one exemption along with any dependency ones.
For married filing separately, taxpayer cannot claim spouse’s exemption unless both condition are met: the spouse has no gross income AND spouse is claimed as dependent on anyone else’s return.
How is personal exemption accounted for if birth or death occurred during the year?
Taxpayer is still entitled for the birth or death of the dependent/spouse for that year.
Phase-out Personal exemption:
2% for every $2,500 of AGI over the limit.
Joint/Surviving Spouse: $305,050
Head of Household: $276,650
Single: $245,200
MFS: $152,525
Ex: Joint return AGI of $317,050 only gets 90% of exemption.
Dependency Exemption Requirement:
Qualify Child (CARES) OR Qualifying Relative (SUPORT)
Close Relative Support Test (50%+)
Age Limit (19 or 24 in college) Under Taxable Gross Income
Test (SS, tax-exempt income)
Residency and Filing Requirement Precludes dependent filing a
joint tax return test
Eliminate Gross Income Test Only citizens (US, Mexico,
Canada) test
Support Test Changes Relative Test (need not live
the taxpayer) OR
Taxpayer lives with individual
for whole tax year
In the event of property transferred to the taxpayer in exchange for service provided, how is that treated for gross income?
FMV of the property is taxable.
Event Income Basis
Taxable = FMV => FMV
Nontaxable = N-O-N-E => NBV
What are the 4 “baskets” of income?
- Ordinary (salaries, wages, alimony, etc.)
- Portfolio (interest in dividend income)
- Passive (rental activity) - passive losses can offset passive income
- Capital (sales of capital assets create capital gains and losses)
Specific items of income and exclusions
- Salaries and Wages
- Interest Income - Schedule B for Interest Income and Ordinary Dividends
- Dividend Income
- State and Local Tax Refunds
- Payments Pursuant to a Divorce
- Business Income or Loss, Schedule C or C-EZ
What makes up salaries and wages?
Money, Property (FMV), Cancellation of Debt, Bargain Purchases, Guaranteed Payments to a Partner, Taxable Fringe Benefits, Partially Taxable Fringe Benefits - Portion of Life Insurance premiums (first $50,000 of fringe benefit is nontaxable, remaining is taxed based on IRS tables), Nontaxable Fringe Benefits (life insurance proceeds, accident/medical/health care insurance), De Minimis Fringe Benefits, Meals and Lodging, Employer Payment of Employee's Educational Expenses, Qualified Tuition Reductions Qualified Employee Discounts, Qualified Pension/Profit-Sharing/Stock Bonus Plans, Flexible Spending Arrangements (FSAs)
Taxable interest income consist of: (Schedule B)
Federal bonds
Industrial development bonds
Corporate bonds
Premiums received for opening a saving account (FMV)
Process parts from installment sales - taxable as interest
Interest paid by federal/state gov’t for late pmt of tax refund
Tax-exempt Interest Income consist of: ( Schedule B)
State/Local gov’t bonds/obligations (including muni bonds)
Bonds of a U.S. possession
Series EE (Educational Expenses) –>phase-out starts when AGI exceeds an indexed amount
Veterans Administration Insurance
Kiddie Tax aka unearned Income of a child under 18 (Schedule B??)
Net unearned income of dependent child under 18 or under 24 if full time college student, is taxed at the parent’s higher tax rate
Calculated by taking child’s income - 2x given standard deduction (1st for SD, 2nd for child’s tax rate = end balance to be taxed at parent’s highest rate
4 Types of sources that determines taxability:
- E & P/Current = Distribute by current year-end
- E & P/Accumulated = Distribution date
- Return of Capital = No E&P (tax free)
- Capital Gain Distributions = No E&P/Basis
3 Categories of Dividends:
- Taxable dividends
- Tax-Free Distributions (Nontaxable)
a. Return of Capital (No E&P)
b. Stock Split
c. Stock Dividend
d. Life Insurance Dividend - Capital Gain Distribution - (taxable gross income) corporate distribution has no E&P but the shareholder was able to recover his or her entire basis.
State and Local Tax Refunds Treatment:
- if itemized in prior year = state/local refund is taxable
2 standard deductions used in prior year = nontaxable state/local refund
Note: 1040EZ = used standard deduction. Interest income is taxable
