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Income Tax > Chapter 14 - The Individual Tax Formula > Flashcards

Chapter 14 - The Individual Tax Formula Flashcards

1
Q

Define Above-The-Line Deduction

A

An allowable deduction for an individual taxpayer that can be subtracted from the total income to compute AGI. They are specified on page 1 of Form 1040.

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2
Q

Define Adjusted Gross Income (AGI)

A

Total income less adjustments as computed on page 1, Form 1040. AGI is an intermediate step in the calculation of individual taxable income.

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3
Q

Define Bunching

A

A tax planning technique to concentrate itemized deductions into one year so that the total exceeds the standard deduction for the year. This maximizes the value of their itemized deductions.

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4
Q

Define Child Credit

A

A credit based on the number of the taxpayer’s dependent children under age 17. Only possible to be refundable for low-income families.

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5
Q

Define Dependent

A

A member of a taxpayer’s family or household who receives more than half of his or her financial support from the taxpayer. Must be a citizen or resident of the US, Mexico, or Canada.

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6
Q

Define Dependent Care Credit

A

A credit based on the taxpayer’s cost of caring for dependents either under age 13 or physically or mentally incapable of caring for themselves.

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7
Q

Define Earned Income Credit

A

A refundable income tax credit that offsets the impact of the payroll tax on low-income workers.

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8
Q

Define Estimated Tax Payments

A

Quarterly installment payments of estimated current year tax liability required of both corporate and individual taxpayers.

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9
Q

Define Excess Social Security Tax Withholding Credit

A

An overpayment of employee Social Security tax allowed as a credit against income tax.

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10
Q

Define Exemption Amount

A

A dollar amount allowed as a deduction from AGI for each taxpayer and dependent. The dollar amount is indexed annually for inflation.

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11
Q

Define Filing Status

A

A classification for individual taxpayers reflecting marital and family situation and determining the rate schedule for the computation of tax liability.

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12
Q

Define Head of Household

A

Filing status for an unmarried individual who maintains a home for a child or dependent family member.

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13
Q

Define Itemized Deduction

A

An allowable deduction for an individual taxpayer that cannot be subtracted in the calculation of AGI.

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14
Q

Define Joint and Several Liability

A

Each spouse on a joint tax return is individually liable for the entire tax for the year.

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15
Q

Define Joint Return

A

A return filed by husband and wife reflecting the combined activities for the year.

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16
Q

Define Kiddie Tax

A

The tax on a child’s unearned income based on the child’s parents’ marginal rate.

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17
Q

Define Qualifying Child

A

A child (or specified family member) who has the same principal residence as the taxpayer, who does not provide more than one-half of his or her own financial support, and who is less than 19 years old or a student less than 24 years old.

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18
Q

Define Qualifying Relative

A

A specified family member or member of the taxpayer’s household who receives more than one-half of his or her financial support from the taxpayer and whose annual gross income is less than the exemption amount.

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19
Q

Define Safe-Harbor Estimate

A

Estimated current year tax payments based on the preceding year’s tax liability that protect the taxpayer from the underpayment penalty.
Individuals with AGI of $150,000 or less in the preceding year may pay current tax equal to 100% of the preceding year’s tax. AGI In excess of $150,000 pays 110%.

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20
Q

Define Separate Return

A

A return filed by a married individual reflecting his or her independent activity and tax liability for the year. The tax liability is based on the married filing separately rate schedule.

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21
Q

Define Single Taxpayer

A

An unmarried individual who is neither a surviving spouse nor a head of household.

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22
Q

Define Standard Deduction

A

A deduction from AGI based on filing status. The standard deduction amounts are indexed annually for inflation.

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23
Q

Define Surviving Spouse

A

Filing status that permits a widow or widower to use the married filing joint rate schedule for two taxable years following the death of a spouse.

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24
Q

Define Total Income

A

The sum of income recognized by an individual during the year and listed on page 1, Form 1040.

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25
Q

Under what situation would individuals not have to pay their quarterly estimated tax payment?

A

If their income is made up of only (enough) money that has employment taxes automatically taken out. In which case they are essentially paying their estimated tax payment with every tax period.

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26
Q

How is it determined if an individual can file a joint return?

A

If they are married on the last day of the taxable year.

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27
Q

What is required for a window(er) to qualify as a surviving spouse?

A

If they maintain a home for a dependent child.

28
Q

Which years can in relation to their spouse’s death can a window(er) that qualifies as a surviving spouse still use the married filing jointly rate structure.

A

The year their spouse died (they get this whether they qualify for surviving spouse or not).
Also the next two full tax years.

29
Q

If a window(er) did qualify for surviving spouse, what could make them lose the qualification?

A

If they remarry within the two years.

30
Q

What common situation that might make a married couple file separately?

A

If they are still married but otherwise separated leading independent lives.

31
Q

Why would (re)marriage end someone’s head of household qualification?

A

Because after that they can file jointly instead.

32
Q

What filing status to income earning minors use?

A

Regardless of age they would be under qualify as single taxpayers, even if the income is collected and controlled by their parents.

33
Q

What is a pragmatic way to approach the computation of individual taxable income?

A

To observe how the computation is presented on Form 1040.

34
Q

What is an person attesting to when they sign their tax return?

A

That the information on it is ‘true, correct, and complete’

35
Q

What are the four procedural steps to commutate taxable income that is contained on pages 1 and 2 of Form 1040?

A

Step 1 - Calculate Total Income
Step 2 - Calculate Adjusted Gross Income
Step 3 - Subtract Standard Deduction or Itemized Deductions
Step 4 - Subtract Exemption Amount

36
Q

How is Adjusted Gross Income calculated?

A

= (Total Income) - (above the line deductions)

37
Q

What is Adjusted Gross Income reduced by? (3rd step)

A

The greater of a standard deduction or allowable itemized deductions.

38
Q

What is the standard deduction a function of?

A

The individual’s filing status.

-Different statuses have different standard deduction sizes)

39
Q

What is an individual who has reached the age of 65 by the last day of the year entitled to (in relation to tax calculation)?

A

An additional deduction.

40
Q

Besides a person older than 65, who else is entitled to an additional deduction?

A

An individual who is legally blind.

41
Q

How is the increase of the basic and additional standard deduction decided?

A

It is indexed to inflation

42
Q

What would make a person’s basic standard deduction limited?

A

If that individual is claimed on another person’s tax return.

43
Q

For a person getting a limited standard deduction, what may the basic standard deduction not exceed?

A

The greater of

1) $1,000 (as of 2013), or
(2) the dependent’s earned income (not interest income, etc)+ $350 (2013 #

44
Q

What is the benefit of itemized deductions if a person takes the standard deduction?

A

The itemized deductions yield no tax benefit.

45
Q

Which type of deduction, above-the-line or itemized always reduced taxable income?

A

The above-the-line deductions

46
Q

When does a cash basic taxpayer recognize deductions?

A

In the year of payment.

47
Q

How does overall limitation on the total itemized deductions allowed to high-income taxpayers work?

A

Individuals with AGI in excess of a threshold amount must reduce their total itemized deductions by 3% of the excess AGI. Such reductions are limited to 80% of total deductions.

48
Q

What is every individual, regardless of income level, allowed to deduct?

A

At least 20% of their total itemized deductions.

49
Q

What can a dependent not do?

A

File a joint return with a spouse unless such return was filed only as a refund claim.

50
Q

What is the formula summarizing the four-step procedure for calculating individual taxable income?

A 
Total Income
- Above-the-line deductions
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Adjusted Gross Income
- Standard or itemized deductions
- Exemption amount
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Taxable Income
51
Q

What is the closest gauge of a taxpayer’s disposable income?

A

Adjusted Gross Income

52
Q

What is the purpose of subtracting the standard deduction and exemption amount from adjusted gross income?

A

To shelter a base amount of disposable income from tax.

53
Q

What is the marriage penalty dilemma?

A

The fact that for the higher tax brackets a married couple must pay more in taxes than their combined taxes had they made exactly half of their total joint income each.

54
Q

How is the marriage penalty dilemma avoided for lower-income individuals?

A

The amount of income in the 10% and 15% brackets for married couples is exactly twice the amount of income in these brackets for single taxpayers. Furthermore, the standard deduction for married couples is exactly twice the standard deduction for single taxpayers.

55
Q

What is impossible of a progressive tax?

A

Being both marriage neutral and horizontally equitable.

56
Q

Why would a person’s apparent marginal tax rate equal their actual marginal rate?

A

If an additional dollar of AGI triggers a decrease in one or more deductions or credits, the tax cost of such dollar is greater than the apparent marginal rate would suggest.

57
Q

What is the only way to calculate the incremental tax from a proposed transaction?

A

“run the numbers” by incorporating the tax consequences of the transaction into a complete tax calculation.

58
Q

When would a Kiddie tax not apply to a person who otherwise would be hit with it?

A

It doesn’t apply to a child if both parents are deceased at the close of the year, or
if the child files a joint return with a spouse

59
Q

Does everyone who has a qualified dependent receive a child credit? Why

A

No.
The credit is reduced by $50 for every $1000 increment (or portion thereof) that a person’s AGI exceeds that of a the threshold in place.

60
Q

What is the purpose of the dependent care credit?

A

To provide tax relief to people who must incur the qualifying costs to be gainfully employed.

61
Q

On what is the limit on which the annual cost of the dependent care credit is based? 4

A
  • The taxpayer’s earned income for the year.
  • On a joint, the limit is based on the lessor of the husband’s or wife’s earned income.
  • The cost is further limited to $3,000 if the taxpayer has only one dependent and $6,000 if the taxpayer has two or more dependents.
62
Q

What income related tax are even low-income families not sheltered from? Why?

A
  • The employment payroll tax.

- It is levied starting with the first dollar of wages or salary earned.

63
Q

What credit helps offset the burden of employment payroll taxes for low-income families?

A

The Earned Income Credit.

64
Q

What is the earned income credit based off of?

A

A % of the individual’s earned income.

The % itself depends on how many, if any, children the individual has.

65
Q

Why does the earned income credit differ from most other credits?

A

It is refundable.

66
Q

What are the due dates for estimated tax payments?

A

April 15, June 15, September 15 of the current year, the last installment is due on Jan 15 of the following year

67
Q

Who paying estimated tax payments would incur a penalty?

Due to the uncertainty in estimating the tax owed for the year, what protects people against incurring that penalty?

A
  • Individuals who fail to make timely payments of at least 90% of their current tax in the form of withholding and quarterly payments.
  • The Safe-Harbor Estimate

Income Tax (11 decks)

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