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CFP Taxes > Chapter 3 > Flashcards

Chapter 3 Flashcards

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1
Q

Taxable Income =

A

Income- Deductions

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2
Q

Tax Liability =

A

Taxable Income x Tax Rate

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3
Q

Final Tax Due =

A

Tax Liability- Applicable Credits

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4
Q

What are the most common forms used for reporting individual taxes

A

Form 1040EZ- single or unmarried individuals with no dependent and taxable income is less than 100,000. Form 1040A- Income greater than 100,000 and does not itemize and only certain credits. Form 1040- everyone else.

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5
Q

Income

A

Gross amount received, but it does not include the proceeds of borrowed money or a return on investment dollars, sometimes referred to as return of capital or return of adjusted taxable basis.

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6
Q

Income Example: David borrowed 20,000 from a bank and sold an investment for 12,000. He had no other receipts. He had purchased the investment five years earlier for 5,000. How much income does David have?

A

12,000(sales price)-5,000 investment= 7,000 income.

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7
Q

Cap, West, Work

A

Cap-return on capital. W(whole life)e(education)s(support)t(transfers). Work(work fringe benefits).

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8
Q

Gross income includes:

A

grains from sell of assets, royalty income, alimony received, interest income, rental income, dividend income, unemployment compensation benefits, distributions from retirement plans, compensation(salaries and wages), gross income from self employment.

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9
Q

Deductions

A

Can be subtracted from gross income arriving at taxable income.

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10
Q

What are the two categories of deductions.

A
  1. Deducts for(before) adjusted gross income. Above the line. 2. Deductions from (after adjusted gross income. Below the line deductions.
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11
Q

What are some common deductions for AGI?

A

Alimony Paid, contributions to traditional iras, tuition for higher education subject to limitations, interest paid on student loans subject to limitations. 1/2 self employment tax, business expense for non-employees, rental or royalty income expenses, losses from sale of business property, qualified moving expenses, self employed health insurance retirement contributions.

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12
Q

Adjusted Gross Income

A

Gross income less deductions.

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13
Q

4Samish

A

4 S’s. 1/2 self employment tax. Self employed health insurance. Self employed retirement contributions. …Self employed business expense. A= alimony. M=moving expense. I=IRA. S=student loan interest. H= HSA

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14
Q

Deductions from AGI

A

Deductions that are subtracted from the AGI subtotal. Often called bellow the line deductions.

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15
Q

ID vs SD

A

If ID is greater than SD, used ID. If you are blind 1550 would apply to SD.

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16
Q

Standard Deduction of Married Filing Jointly

A

12,600

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17
Q

Standard deduction of married filing separately.

A

6300

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18
Q

Surviving spouse deduction

A

12,600

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19
Q

Head of Household deduction

A

9300

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20
Q

Single Deduction

A

6300

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21
Q

Additional Standard Deduction

A

An additional standard deduction is allowed for each taxpayer or spouse who is either 65 years or older, and or blind.

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22
Q

What is the additional standard deduction for married filing jointly, married filing separately, and surviving spouse.

A

1250

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23
Q

What is the additional standard deduction for head of household or single

A

1550

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24
Q

What taxpayers cannot use the SD?

A

Married, filing separately, when either spouse itemizes deductions. Nonresidential alien or dual status alien. Individual filing return for tax year of less than 12 months because of change in annual accounting period.

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25
Q

What are some common itemized deductions?

A

Miscellaneous expenses that exceed 2% of AGI, charitable contribution, tax return preparation fees, home mortgage interest, unreimbursed employee expenses, investment interest, medical and dental expenses in excess of 10% of AGI, state and local income taxes, real property taxes on home, property taxes on the value of a car. Certain investment expenses.

26
Q

What are some situations in which a taxpayer is not allowed to use the standard deduction and must use an itemized deduction?

A
  1. Married individual who files a separate return cannot use the standard deduction if the spouse of that person uses an itemized deduction. 2. A nonresidential alien is not allowed to use the standard deduction. 3. An individual who files a tax return less than 12 months because of a change in annual accounting period is not allowed to use the standard deduction.
27
Q

Are personal and dependent exemptions deduction from AGI?

A

Yes

28
Q

What is the inflation-adjusted amount allowed as a deduction for each personal and dependency exemption?

A

4050 for 2016

29
Q

Are taxpayers normally allowed to claim a personal exemption?

A

Yes

30
Q

T/F are married couples using MFJ filing status allowed to claim two personal exemptions?

A

Yes

31
Q

T/F A person who can be claimed as a dependent by another taxpayer is allowed to take a personal exemption deduction on their tax return.

A

False.

32
Q

Qualifying Child

A

Meets all four tests. A relationship text, and abode test, an age test, and a support test.

33
Q

Qualifying Children Relationship

A

In order to satisfy the relationship test, a qualifying child of a taxpayer must be:
1. The taxpayer’s child. 2. A descendent of the taxpayer’s child. 3. The taxpayer’s brother, sister, stepbrother, stepsister, half brother, half sister or. 4A descendent of the taxpayer’s brother, sister, stepbrother, stepsister, half brother, or half sister.

34
Q

Abode Test

A

To meet the abode test, a qualifying child must live with the taxpayer for more than half the year.

35
Q

Qualifying child age test

A

A qualifying child must either be under the age of 19 as of the end of the calendar year or a student under the age of 24 as of the end of the calendar year in order to satisfy the age test. Disabled individuals are not subject to the age test.

36
Q

Support Test

A

The support test is satisfied if a qualifying child does not provide more than one-half of his or her own support during the year.

37
Q

What are two tests that a relative must pass before being considered a qualifying relative.

A

Joint return test and a citizenship and residency test.

38
Q

Qualifying Relative relationship test

A

To satisfy the relationship test for a qualifying relative, the potential dependent of the taxpayer must be: the taxpayer’s child or a descendent of a child, the taxpayer’s brother, sister, stepbrother, or stepsister, the taxpayer’s parent or ancestor, the taxpayer’s stepmother or stepfather, a child of the taxpayer’s sibling, a sibling of the taxpayer’s parent, a son in law, daughter in law, father in law, mother in law, brother in law, sister in law, any other individual for the taxable year of the taxpayer.

39
Q

Qualifying relative- Gross income test

A

To meet the gross income test, a dependent’s gross income must be less than the exemption amount (4050 for 2016) for the year. This contrasts with a qualifying child, for whom there is no such test.

40
Q

Qualifying Relative- Support Test

A

To satisfy the support test, the taxpayer must provide more than one-half of the support of a dependent. Only amounts expended are considered in the support test. Scholarships are not considered in the support test. Two exemptions to the support test: multiple support agreements or children of divorced parents.

41
Q

Multiple Support Agreements

A

One half of the support of a dependent is deemed to be paid by one taxpayer if: the taxpayer provides more than 10 percent of the potential dependent’s support, two or more person’s who individually provide more than 10 percent of the dependent’s support also provide more than 50 percent of the individuals total support and meet all other requirements to claim the individual as a dependent and sign a statement agreement not to claim exemption for the potential dependent for the year.

42
Q

Children of Divorced Parents

A

A special rule grants the dependency exemption to the noncustodial parent if the divorce (or separate maintenance) decree so specifies the custodial parent issues a waiver. To qualify under this special rule, the parent must: provide more than half of the support, have custody of the child for more than half of the year.

43
Q

Non qualifying child test

A

In order to be claimed as a qualifying relative, a dependent cannot be a qualifying child of any taxpayer for the tax year.

44
Q

Joint Return Test

A

To satisfy the joint return test, a married dependent must not file a joint return with a spouse unless a tax return is filled only to claim a refund for tax withheld if neither spouse is otherwise required to file a tax return, and if no tax liability would exist for either taxpayer on separate returns.

45
Q

Citizenship or Residency Test

A

A dependent must be a citizen or national of the United States or resident of the United States, Canada, or Mexico during some part of the year. If you are a U.S. citizen or U.S. national who has legally adopted a child who is not a U.S. citizen, U.S. resident alien, or U.S. national, this test is met if the child lived with you as a member of your household all year. This also applies if the child was lawfully placed with you for legal adoption. Children usually are citizens or residents of the country of their parents. If you were a U.S. citizen when your child was born, the child may be a U.S. citizen even if the other parent was a nonresident alien and the child was born in a foreign country.

46
Q

Minimum Basic Standard Deduction vs Standard Deduction

A

BSD=earned income plus 350. If greated than 1050 but not greater than maximum, choose bsd.

47
Q

Taxable Income

A

Taxable income is the tax base on which the income tax is calculated. The tax rates currently range from 10 percent to 39.6 percent.

48
Q

Credits

A

Federal income taxes should be withheld by an employer from the employee’s wage or salary and sent to the government during the year. This provides the government with revenues throughout the year and taxes the employee when the employee has the wherewithal to pay.

49
Q

Credit for Estimated Tax Payments

A

A credit is allowed for estimated tax payments made throughout the year. Various other tax credits are allowed to reduce the tax calculated on taxable income.

50
Q

List of Tax Credits

A

Foreign tax credit, credit for child and dependent care expenses. credit for the elderly or disabled, education credits, retirement savings contribution credit, residential energy credits, child tax credit, earned income credit, additional child tax credit, various business and investment credits.

51
Q

What are some common tax accounting methods?

A

A tax year is normally a period of 12 months. Cash receipts and disbursement method. Accrual method. Percentage of completion

52
Q

Married Filing Jointly

A

The determination of whether a taxpayer is married is normally made as of the close of the tax year. If a spouse dies during the taxable year, the widow can still be MFJ if the surviving spouse does not remarry before the end of the year. If the person does remarry they file MFJ with new spouse and MFS for the dead spouse.

53
Q

Filing Status- Abandoned Spouse

A

The abandoned spouse filing status is one situation in which a legally married taxpayer will be allowed to use a filing status (head of household) generally reserved for unmarried taxpayers. Head of household requirements: married, files a separate tax return from the spouse, maintains as his/her home a household which for more than one-half of the taxable year is the principal place of abode of a child who is a dependent. Furnishes over one-half of the cost of maintaining the household, and the taxpayer is abandoned- the spouse is not a member of the household during the last six months of the year.

54
Q

Filing Status Unmarried

A

An unmarried taxpayer, as determined on the final day of the tax year, may be able to file as surviving spouse, head of household, or single.

55
Q

Filing Status Surviving Spouse

A

The surviving spouse filing status affords the same basic standard deduction and tax rates as MFJ filing status. Surviving spouse requirements: the taxpayer’s spouse must have died during either of the two preceding tax years, the taxpayer must maintain a household as his home which is also the principal residence of a child, the taxpayer has not remarried, and the taxpayer and spouse were eligible to file a joint return for the spouse’s year of death.

56
Q

Filing Status Head of Household

A

The head of household (HH) filing status provides a basic standard deduction and tax bracket sizes that are less favorable than the surviving spouse filing status, but better than the single filing status. Requirements: the taxpayer must maintain a household as his home which is also the principal residence for more than half the year for: a qualifying child of the taxpayer, or a qualifying relative who is a dependent of the taxpayer.

57
Q

HH Special Rule

A

In order to use the HH filing status, a qualifying child or qualifying relative must normally live with the taxpayer. However, a taxpayer may also qualify for the HH status by maintaining a separate household for their father or mother who qualifies as the taxpayer’s dependent.

58
Q

Filing Status- Single

A

The single filing status must be used by an unmarried taxpayer who is not eligible to use the surviving spouse or head of household filing status.

59
Q

Kiddie Tax

A

Some of the unearned income of a child under the age of 19 or a full-time student under the age of 24 may be subject to income tax at the parents’ marginal tax rate. The amount of unearned income subject to tax at the parents’ rate is called net unearned income. NUI is equal to unearned income less the sum of 2,100. The first 2100 for 2016 of unearned income of a child is not taxed at the parents’ tax rate. If it is taxed, it will be taxed at the child’s rate.

60
Q

Filing the Tax Return

A

The return must normally be submitted and any tax due must be paid by April 15. An automatic 6 month extension of time to file is normally available to a taxpayer who files form 4868. An extension of time to file does not grant an extension of time to pay.

CFP Taxes (15 decks)

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