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Survey Of Taxation > Chapter 2: Determination Of Tax > Flashcards

Chapter 2: Determination Of Tax Flashcards

1
Q

Tax formula for individuals

A

Income (all sources)
- exclusions (nontaxable income, generally not on 1040)
= Gross income (line 9)
- adjustments FOR AGI (line 10a-c)
= Adjusted gross income (AGI line 11)
- greater of itemized (schedule A) or standardized deductions (line 12)
- charitable contributions deduction (non itemizer) (10b)
- qualified business income deduction (13)
= Taxable income (15)
x tax rates or rate (from tax table or schedule)
= Gross tax
- tax credits
= Net tax liability
- prepayments
= Balance due or retund

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2
Q

Income

A

Taxable and nontaxable income

NOT including “a return of capital” (so for sale of property only gain, not entire proceeds =income)

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3
Q

Exclusion

A

Any time income tax law says is not taxable

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4
Q

Gross income

A

Income reduced by exclusions: income from taxable sources reported on the return

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5
Q

Major income exclusions

A
  • gifts and inheritances
  • life insurance proceeds
  • welfare and certain other transfer payments
  • certain scholarships and fellowship
  • personal physical injury settlements
  • worker’s comp
  • medical expense reimbursements
  • certain employee fringe benefits (health plan premiums, group term life insurance premiums, meals and lodgings, employee discounts, dependant care)
  • certain foreign -earned income
  • interest on state and local gov bonds
  • certain interest on series EE bonds
  • certain improvements by lessee to lessor’s property
  • alimony and maintenance payments (agreements after 2018)
  • child support
  • property settlements from divorce
  • gain on sale of a personal residence
  • qualified distributions from Roth IRA
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6
Q

Unexpected items included in gross income

A

Income from life insurance and endowment contracts

Income from discharge of indebtedness

Income in respect of a decedent

Income from interest in an estate or trust

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7
Q

Deductions for adjusted gross income

A

Above the line deductions

Generally expenses connected with trade or business
- contributions to certain retirement plans
- reimbursed employee expenses
- losses from sale or exchange of property
- penalties forfeited due to premature withdrawal of funds from time savings accounts
-jury duty pay remitted to employer
- interest on student loans
- contributions to an HSA

Also
- half of self employment taxes paid
- health insurance costs incurred if self employed

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8
Q

Deductions from AGI

A

Personal expenses allowable by law

1) larger of itemized or standard deduction
2) 2021 only- deduction of cash charitable contributions for non-itimizers up to $300
3) Qualified business income deduction

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9
Q

AGI

A

Adjusted gross income

Used in many tax computations

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10
Q

Personal and dependency exemptions

A

Suspended for 2018-2025

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11
Q

Qualified business income deduction

A

20% or qualified business income deducted from AGI by taxpayers other than c corps

Can be claimed with itemized or standard deduction

Qualified business income excludes income from accounting, consulting financial services and other activities

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12
Q

Taxable income

A

AGI reduced by deductions from AGI

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13
Q

Current tax rates (2021)

A

Seven tax brackets

10%
12
22
24
32
35
36

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14
Q

Income taxed at special rates

A

Qualified dividends
Long term capital gains
(Both reduced rates)

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15
Q

Tax credits

A

Amounts the taxpayer subtracts from gross tax to arrive at tax liability

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16
Q

Refundable tax credits

A

Can reduce the taxpayer’s liability to zero with any balance beyond that refundable

Earned income credit
Child tax credit and credits for other dependants (in some cases)
American opportunity credit (partially)

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17
Q

Nonrefundable tax credits

A

Can reduce tax liability to 0 but any additional balance not refunded

Balance may sometimes be carried back or applied to later tax yeara

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18
Q

Example nonrefundable tax credits

A

Adoption expense credit
Credit for the elderly and disabled
Foreign tax credit
Child and dependant care credit
Business energy credit
General business credit
Child tax credit and credits for other dependants (some cases)
American opportunity credit (partial)
Lifetime learning credit

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19
Q

Prepayments of tax

A

Amounts taxpayer pats to government prior to filing tax return

Includes:
- withholding from wages
- estimated tax payments
- overpayment of prior years tax that taxpayer applies to current year tax
- payments made with extension request

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20
Q

Itemized deductions (incomplete list)

A

Medical expenses
State and local income and property tax
Home mortgage interest
Charitable contributions
Residential interest and investment interest (limited)
Casualty and theft losses from federally declared disaster

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21
Q

Medical expense itemized deduction

A

Only portion EXCEEDING 7.5% of AGI

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22
Q

State and local tax max deduction

A

Generally up to $10,000 (married filing joint)

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23
Q

Home mortgage interest deduction restrictions

A

Interest on up to $75,000 of loans

($1M for debt incurred before 12/16/2017)

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24
Q

Charitable contributions maximum deduction

A

Generally 60% of AGI but 100% for 2020 and 2021

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25
Q

Standard deduction

A

Varies by filing status. Adjusted yearly

2021:
Married filing jointly or surviving spouse - $25,100

Head of household - $18,800

Single or married filing separately - $12,550

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26
Q

Standard deduction for elderly and blind

A

Standard deduction increases if elderly and/or blind by $1350 (in 2021 for each elderly/ blind person

Elderly & blind $2700

Max married blind elderly couple $5400

If HOH or single taxpayer elderly/blind $1700 decrease for each

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27
Q

IRS definition of elderly

A

Taxpayer attains age of 65 before end of tax year

Considered 65 on the day BEFORE their 65th birthday

For deceased taxpayer if reached 65 before death

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28
Q

IRS definition of blind

A

Determined on last day of tax year or date of death

Corrected vision in the better eye of no better than 20/200 or a field of bo greater than 20 degrees

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29
Q

Who is likely to itemized

A

High income taxpayers

Taxpayers who own homes (mortgage interest and property taxes)

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30
Q

Non itemizer charitable contribution deduction

A

For 2021 up to $300

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31
Q

Taxpayers who cannot use the standard deduction

A
  • individual filing a return for a period of less than 12 months due to change in accounting period
  • married taxpayer filing separately whose spouse itemizes
  • nonresident aliens
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32
Q

Dependent standard deduction

A

For 2021

Standard deduction limited to the greater of:
- dependents earned income plus $350
Or
- $1100

(Keeps parents from shifting unearned income to children to avoid taxes)

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33
Q

Requirements for all dependents (child or relative)

A
  • citizenship test (us citizen or national or residents of US, Canada or Mexico for some part of the year)
  • joint return (married dependant cannot file a joint return unless filing solely for a refund)
  • person claiming dependent cannot themselves be a dependent of someone else
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34
Q

Requirements for qualifying children dependents

A

Relationship test
Age test
Abode test
Support teat

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35
Q

Relationship test for qualifying child

A

Eligible children include:
Taxpayers children (natural, adopted, foster, step)
Taxpayer’s siblings (including half sibs and step sibs)
Descendents of any of the above

Adopted children: if legally adopted or legally placed in a home for adoption

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36
Q

Age test for qualifying child

A

Under 19
Or under 24 if a full time student (full time attendance at least 5/12 months)
Or permanently and totally disables

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37
Q

Abode test for qualifying child

A

Qualifying child must have same principal abode as taxpayer for more than half the year

Non-custodial parent can meet this requirement if custodial parent agrees in writing

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38
Q

Support test for qualifying child

A

Qualifying child may not provide more than 1/2 their own support during the year (rest need not have been supplied by filing taxpayer)

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39
Q

Requirements for qualifying relative dependents

A

Relationship test
Gross income test
Support test
Not a qualifying child
(If meets qualifying child tests that status is predominant)

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40
Q

Relationship test for qualifying relatives

A

Must either be related to the taxpayer (including specified in-laws)

OR reside in the taxpayer’s household for the entire year

On a joint return qualifying relative only has to be related to one spouse. Once established, a relationship is not terminated by death or divorce

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41
Q

Gross Income test for qualifying relatives

A

(2021) qualifying relatives gross income must be less than $4,300

Nontaxable income not considered

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42
Q

Support test for qualifying relatives

A

Taxpayer normally provides more than 1/2 of a qualifying relative’s financial support in a year

Includes welfare and social security benefits excluded by gross income

Savings not counted in support test

Support does not include value of services supplied by taxpayers to dependent

Generally measured at cost of items (goods and services) purchased

Lodging = fair market value or fair rental value

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43
Q

Lump sum support by a taxpayer for two or more individuals

A

Allocated among individuals on a pro rata basis unless proof exists to the contrary

44
Q

Tie breaker rules for dependency

A

When more than one person can claim someone as a dependent

  • if dependant is someone’s qualifying child that takes priority over someone who can claim them as qualifying relative
  • parents have priority over other individuals (generally goes to parent with whom child spends longer portion of the year)
  • if neither of the above then taxpayer with highest AGI claims the dependent
45
Q

Multiple support declaration

A

Form 2120
Overrides normal dependant rules

Enables a taxpayer to claim a dependent for whom they do not provide over half of the support

used when a group collectively provides over 1/2 support but no single person over 1/2 alone. Provides written documentation that all other supporting relatives waive their right to claim the person as a dependant so designated person can claim them

Group members eligible if paid over 10% of qualifying relatives support (and meets all other criteria)

People who would not qualify to claim do not need to waive right

Cannot be moved to pass qualification as a dependant FROM a person for whom dependent is a qualifying child TO a person for whom the dependent is a qualifying relative

46
Q

Release/revocation of release of claim to exemption for child by custodial parent

A

Form 8332

Can enable a non-custodial parent to claim their child as a dependent

Signed form attached to non-custodial spouse’s return

May be part of separation agreement

May be filed every year or just once if relinquishes right for all future years

47
Q

Child tax credit and credit for other dependents

A

$2,000 for each qualifying child under 17

$500 for each qualifying dependent

Reduced by $50 for each $1,000 (or fraction thereof) by which taxpayers AGI exceeds $200,000 (400,000 if married filing jointly)

Partially refundable credit: (2021 numbers) refund limited to lesser of:
- 15% of earned income in excess of 2,500
Or
- $1,400 per qualifying child under 17 (1 or 2 children. For 3+ children limit increased to excess of taxpayers social security tax paid over the earned income credit for the year)

CHECK FOR CHANGES!

48
Q

Exception to requirement to use the tax table

A

Taxable income greater than or equal to maximum amount in the tax table (currently 100,000)

Filing a short period return because of a change in accounting period

49
Q

Filing status options

A

Married filing jointly
Surviving spouse
Head of household
Single
Married filing separately

50
Q

Community property law

A

Allocates community income equally between spouses regardless of which spouse earned the income

51
Q

Married filing jointly status

A
  • couple must be legally married by the last day of the tax year (includes common law marriages but not annulled marriages)
  • marriage recognized by any us state, possession or territory
  • spouses who file joint returns must have same tax year-end (except in cases of death)
  • both spouses must be US citizens or residents (exception if non-resident alien spouse agrees to report all of their income on the return)
52
Q

Married filing jointly vs single tax brackets

A

Width of the married filing jointly tax bracket is twice as wide as the single tax bracket (at least for 10% and 12%)

53
Q

Surviving spouse filing status

A

A joint return filed by the surviving spouse the year their spouse dies + two years after the year of death if they qualify

  • not remarried as of the year end in which surviving spouse status is claimed
  • US citizen or resident
  • qualified to file a joint return in year of death
  • has one dependent child living at home for the entire year for whom the taxpayer paid over half expenses
54
Q

Filing as surviving spouse

A

Year of death: file joint return with the income spouse earned before death
Two years following death: surviving spouse status conditions are met, only surviving spouses income reported but can use joint rate schedule and deduction amount

55
Q

Head of household filing status

A

Tax rates increase more rapidly than married filing joint but more slowly than single

Conditions:
- unmarried the last day of the tax year (exceptions for marriages to nonresident aliens and abandoned spouses) spousal death doesn’t count
- not be a surviving spouse
- be a US citizen or resident
- pay over half the costs of maintaining their home in which a dependent lives for more than half of the tax year

56
Q

Exceptions to head of household maintenance cost requirement

A
  • if a taxpayer maintains a household in which a qualifying child lives more than half the year but the child is not their dependent
  • or taxpayer maintains a separate household for a dependent parent

In either case taxpayer can file as head of household

57
Q

Costs excluded from “costs of maintaining a household”

A

Clothing
Education
Medical treatment
Vacations
Life insurance
Transportation
Value of services provided by taxpayer

58
Q

Costs excluded from “costs of maintaining a household”

A

Clothing
Education
Medical treatment
Vacations
Life insurance
Transportation
Value of services provided by taxpayer

59
Q

Married filing separately status

A

If can file jointly but choose not to

Schedule rates increase more rapidly than other individual rate schedules

60
Q

Abandoned spouse

A

A married individual can claim head of household status if:
- taxpayer lived apart from their spouse for the last six months of the year
- taxpayer pays over half the cost of maintaining the household in which a dependent child lives for over half the year (even if they have an agreement for the noncustodial parent to claim the child as a dependent)
- is a US citizen or resident

61
Q

Children with unearned income Kiddie tax qualifications

A
  • under 18
    Or
  • 18 and earned income is less than or equal to 1/2 of their total support
    Or
  • 19-24 and a full time student AND child’s earned income is less than or equal to one half of their total support
  • unearned income over $2,200
62
Q

Standard deduction for dependents

A

The greater of:
Earned income + $350
Or
$1,100

Up to a max of the single standard deduction

63
Q

Computing child’s net unearned income

A

Unearned income
Less statutory deduction ($1,100)
Less greater of standard or itemized deductions directly connected with production of unearned income
= Net unearned income (not less than 0)

64
Q

Computation of child’s tax

A

Net unearned income x marginal tax rate of child’s parents (may be multiple rates if child’s unearned income would change their tax rate.)

Plus: taxable income (calculated as normal for dependent including the unearned income) exceeding net unearned income x child’s tax rate

= Child’s income tax

65
Q

Kiddie tax for parents of multiple children with unearned income

A

Net unearned income times marginal tax rate of parents is down for the children’s aggregate income and then allocated proportionally to children

66
Q

Dividend and long term capital gains income and kiddie tax

A

Lower tax rates apply

67
Q

Parents of a child subject to kiddie tax may elect to include child’s income on their own return if

A

Child’s gross income comes solely from interest and dividends

Income does not exceed given amount for year ($11,000 in 2021)

No withholding or estimated payment made using child’s SSN

Form 8814

68
Q

Additional Medicare tax

A

0.9% on earned income over $200,000 ($250,000 for married couples)

69
Q

Net investment income tax

A

3.8% tax on the lesser of investment income or AGI in excess of $200,000 ($250,000 married filing jointly)

70
Q

Sole proprietorship taxes

A

Income/loss reported on 1040 schedule C and taxed with individual income

71
Q

C corporation taxes

A

Aka regular corporations

Corporation taxed on Corp. taxable income (can deduct business expenses, charitable contributions, but not distributions, no qualified business income deduction)

Shareholders taxed ONLY on dividends paid out (lower tax rates apply)

Flat tax (21% 2018 forward)

No itemized or standard deduction

72
Q

Tax formula for c corps

A

Income from whatever source derived
Minus: exclusions
= Gross income
Minus: deductions
= Taxable income
Times: tax rate
= Gross tax (income tax before credits)
Minus: tax credits
= Net tax liability
Minus: prepayments
= Balance due or refund

73
Q

S corporation taxes

A

Flow through entities: corporation’s income not taxed but shareholders are required to report respective share of S corp income on their individual return even if that income is not distributed

S corp return Form 1120-S filed as an informational return. Computes ordinary income and special items (special items reported separately so they pass to shareholders with status intact)

74
Q

S Corporation conditions

A

All shareholders must consent to S corp election
No foreign shareholder
Report ordinary income and special items separately and shareholders report respective share in each

75
Q

S corp losses

A

Generally can be deducted by shareholders up to their respective bases in the corporation’s stock (+ some other rules)

76
Q

Partnership taxes

A

Flow through entities (partners report respective share of income even if income not distributed)

File informational returns, form 1065

Ordinary income and special items reported separately and passed in proportion to partners

77
Q

Losses from a partnership

A

Pass through to partners and can generally be deducted on the partner’s return subject to certain limitations

78
Q

Qualified business income deduction

A

The deduction allows eligible taxpayers to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction. (Some limitations)

79
Q

Considerations for chosing a business structure

A
  • self employment and social security taxes (sole proprietorships & partnerships generally pay self employment tax)

Distributions expected (c corp: higher distributions = greater double taxation)

80
Q

Capital gain or loss

A

Gain or loss from sale or exchange of capital asset

81
Q

Capital asset

A

Assets held for a certain time NOT INCLUDING items specified by section 1221 (inventory, trade receivables, certain properties created by taxpayer, business property)

Ex: investment property, personal-use property

82
Q

Tax treatment of capital gains and losses

A

Distinguishes gains and losses from capital appreciation from ordinary business operations

Divided into long term (property held over one year) and short term

Long term gains have special rates , short term gain taxes with other income

Capital losses can be deducted against capital gains plus up to $3,000 of other income

83
Q

Capital loss carryover

A

Capital loss in excess of $3,000 can be carried over and offset against future capital gains (or deducted from other income, subject to $3,000 limitation)

84
Q

2021 long term capital gains tax

A

Taxable income not over $40,400; capital gains tax free (0%)

Taxable income > $40,400, not over $445,850: 15%

Taxable income over $445,850: 20%

For single filers (thresholds different for MFJ and HOH)

85
Q

Shifting Income

A

Ordinarily ownership of the property must be transferred in order to shift income (cannot just assign income to be paid to another, original earner will still owe tax)

(Shifting of income to young children often subject to kiddie tax)

86
Q

Splitting income

A

Creating additional taxable entities (often corporations) to reduce an individual’s effective tax rate

87
Q

Bunching

A

Practice of deferring or accelerating certain payments eligible to be itemized deductions in order to create a sufficient amount to itemize in a given year (only works for certain things like charitable contributions or medical expenses

88
Q

Consideration for filing joint or separate returns as spouses

A

If one spouse earned more than half their combined income filing separately will increase the total income tax

Filing separately may allow for increased deductions (lower AGI threshold for medical expenses)

89
Q

Joint income tax liability

A

Couples who file joint returns are jointly liable for taxes owed (concern if separate)

Each spouse is liable for the entire tax and any penalties imposed

90
Q

Innocent spouse provision

A

Innocent spouse relieved of joint tax liability if:
- amount is attributable to erroneous items of other spouse
- innocent spouse did not know & had no reason to know there was an understatement of tax (or didn’t know extent of understatement: relief limited to unknown amounts)
- it would be inequitable to hold innocent spouse liable
- innocent spouse elects relief within two years of irs beginning collections

91
Q

Separate liability election

A

Couples who file joint returns and are subsequently divorced, widowed, or separated may make a separate liability selection within two years of irs beginning collections.

May be made by both spouses. Electing spouse liable only for portion of understatement attributable to them.

Invalid if spouse responsible for errors transfers assets to innocent spouse to avoid payment

92
Q

Electing to change to a joint return

A

Spouses who file separate returns for a given year may elect to change to a joint return by filing an amended joint return

Can be done after due date. Must be within three years of due date with extensions

(Cannot change from joint to separate after due date)

93
Q

Who must file

A

Individuals whose gross income exceeds their standard deduction (including additional deduction for age)

94
Q

Taxpayers who must file even if gross income is less than standard deduction

A
  • dependents with unearned income over $1,100 or total gross income over the standard deduction
  • who owe the 0.9% additional Medicare tax or 3.8% net investment income tax
  • who have net self-employment income of $400 or kore
95
Q

Tax deadline for individuals and c corps

A

15th day of the 4th month following close of tax year

Corps must file even if no gross income

96
Q

Tax deadline for partnerships and s corps

A

15th day of the 3rd month following the close of the tax year

Must file even if no gross income

97
Q

Tax deadline for partnerships and s corps

A

15th day of the 3rd month following the close of the tax year

Must file even if no gross income

98
Q

Tax deadlines on weekends or holidays

A

Automatically extended to next non-weekend/holiday

99
Q

Filing for an automatic extension

A

Six month extension

Individuals : form 4868
Partnerships and s corps; form 7004
C corps: also 7004 but extension is six or seven months depending on year-end

100
Q

Extension

A

Is an extension to FILE, not an extension to pay taxes owed. Must remit extension with an estimated amount of anything not prepaid.

Interest and penalty may apply for payments after deadline

101
Q

Form 1040 schedule 1

A

Income not reported on form 1040 + deductions for AGI

102
Q

Form 1040 schedule 2

A

Alternative minimum tax and excess of advance premium tax credit repayment

Also other taxes and penalties (early withdrawal penalties, self employment tax)

103
Q

Form 1040 schedule 3

A

Nonrefundable tax credits (child care credit, Education credit), + tax paid when requesting filing extension

104
Q

Form 1040-SR

A

May be filed by individuals over 65. Reflects the larger standard deductions

105
Q

EIN

A

Employer identification number

Used to identify corporations, other taxpayers, and tax-exempt entities

106
Q

Reporting forms matched to taxpayers report by cross-referencing tax ID

A

1099-R (pensions and annuities)
W-2 (wages and salaries)
1099-DIV (dividends)
1099-INT (interest)
1099-B (sale of a security)
1099-G (unemployment compensation, tax refunds)
1099-MISC (miscellaneous income)

Some have reporting thresholds

Survey Of Taxation (14 decks)

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