Chapter 2 – Basics Of Income Taxation

Question 1

What is the definition of gross income?

Answer 1

All items of income, from whatever source derived.

Question 2

What are some items that are specifically included in your gross income? Name 5

Answer 2

1- compensation for services
2- business income
3- investment income
4- rents and royalties
5- pension and annuities

Question 3

When does constructive receipt occur?

Answer 3

When a taxpayer has control over the actual funds without restrictions.

Question 4

The purpose of this doctrine is to prevent “individual” taxpayers from unilaterally determining the tax year in which an item of income is received.

Answer 4

Constructive Receipt Doctrine

E.g. Cash Method Of Accounting

Question 5

A portion of an employee’s compensation that is set aside to be paid at a later date.

Answer 5

Deferred compensation

Question 6

This doctrine allows compensation in form of cash and/or property.

Answer 6

Economic Benefit Doctrine

Question 7

This doctrine applies when and employee does not have a choice of whether or not to take income.

Answer 7

Economic Benefit

Question 8

Will the Economic Benefit Doctrine apply for property with a measurable value or a promise to pay, or maybe both?

Answer 8

Only when the employee receives something with a parent, measurable value.

Question 9

If a taxpayer assigns income to someone else, like their child, will the taxpayer be taxed for the income or the child be taxed for the income?

Answer 9

The taxpayer

Question 10

Name a way that a taxpayer can get around the “Assignment of Income Doctrine”?

Answer 10

They would have to gift the ownership of the property to the person that’s receiving the income for the property.

Question 11

If a State Farm executive is promised a salary increase if sales were to grow at 50% for the year, would this count under Economic Benefit Theory?

Answer 11

No. But if State Farm “deferred compensation” to the executive then it would count under the Economic Benefit Doctrine.

Question 12

What is the income tax formula for individuals?

Answer 12

1. All Income
Less Exclusions
2. Gross Income
Less Deductions
3. Adjusted Gross Income
Less the greater of Itemized or Standard Deductions
Less Personal and Dependent Exemptions 
4. Finally getting to Taxable Income

Question 13

Deductions for AGI are often referred to as…

Answer 13

“Above the line” deductions

Question 14

Name 5 examples of “above the line” deductions for AGI.

Answer 14

1- trade or business expenses
2- alimony
3- losses from property transactions (selling stock where you loss money)
4- retirement plan contributions
5- moving expenses

Question 15

Taxpayers age 65 or older, or blind, or entitled to an increase in their…

Answer 15

standard deduction.

Question 16

If a taxpayer is claimed as a dependent on another taxpayer’s tax return, their standard deduction will be subject to a…

Answer 16

special limitation.

Question 17

An exemption is allowed for…

Answer 17

1- individual taxpayer
2- spouse
3- any dependents

Question 18

________________ are phased out based on adjusted gross income.

Answer 18

Exemptions

Question 19

_______________________ is allowed for qualifying children or qualifying relatives.

Answer 19

Dependency exemption

Question 20

What are the qualifications for a “child exemption” under the relationship test?

Answer 20

child, step child, adopted child, foster child, sibling, or descendant

Question 21

What are the qualifications for a “child exemption” under the abode test?

Answer 21

The person lives in your home for more than half the year.

Question 22

What are the qualifications for a “child exemption” under the age test?

Answer 22

Under age 19 or under age 24 and a full-time student.

Question 23

What are the qualifications for a “child exemption” under the support test?

Answer 23

The individual must not have provided more than half of their own support.

Question 24

What are the qualifications for a “relative exemption” under the relationship test?

Answer 24

Everything for a “qualified child” as well as parents, aunts, uncles, and unrelated folks living in your home. Parents can count even if they’re living elsewhere.

Question 25

What are the qualifications for a “relative exemption” under the support test?

Answer 25

I would have to provide over half the support for the relative.

Question 26

What are the qualifications for a “relative exemption” under the gross income test?

Answer 26

Your relative’s gross income for the year must be less than the exemption amount.

Question 27

Joint Return Test

Answer 27

The individual cannot file a joint income tax return.

Question 28

Which parent is entitled to an exemption?

Answer 28

custodial parents

Question 29

How can a noncustodial parent claim an exemption for a child?

Answer 29

If the custodial parent signs a written declaration.

Question 30

Your marital status is determined as of…

Answer 30

the last day of the tax year, which is December 31, unless your spouse dies that year.

Question 31

This marital filing status is used if your spouse dies.

Answer 31

Surviving Spouse

Question 32

How many years can the “surviving spouse marital status” be used?

Answer 32

2 years or when remarried

Question 33

What are the requirements for filing your marital status under a “surviving spouse”?

Answer 33

I must maintain a household which is the principal place residence for my dependent child.

Question 34

This filing status is for a taxpayer who has a “qualifying person” living with them or a qualifying parent that lives in the home or maybe in a nursing home.

Answer 34

Head of Household

Question 35

What is the due date to file your tax returns?

Answer 35

April 15

Question 36

What is the filing due date for corporations?

Answer 36

March 15

Question 37

Most tax returns can be a extended for…

Answer 37

six months.

Question 38

Tax rates are progressive, starting at 10% going up to…

Answer 38

39%

Question 39

Tax brackets are different for each…

Answer 39

filing status.

Question 40

Someone’s effective tax rate may exceed the marginal tax rate due to deductions being…

Answer 40

phased out.

Question 41

This tax rule would cause all of a child’s “unearned income” to be taxed at the parents rate.

Answer 41

kiddie tax

Question 42

How many parents have to be living for the kiddie tax rule to apply?

Answer 42

1 parent

Question 43

The kiddie tax rule applies if a child earned income is less than _____ of their support or more than $__________ of the child’s income.

Answer 43

50%

$2,000

Question 44

How old does a child have to be in order for the kiddie tax to apply?

Answer 44

Under 19 or under 24 and full time student.

Question 45

Charitable contributions is not a deduction used to get your…

Answer 45

adjusted gross income.