Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFP: Income Tax Planning > Chapter 3: Fundamentals of Income Tax > Flashcards

Chapter 3: Fundamentals of Income Tax Flashcards

You may prefer our related Brainscape-certified flashcards:
CFP® flashcards
1
Q

tax formula

A

income - deductions = taxable income
and then
taxable income x tax rate = tax liability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

taxable income

A

determined by subtracting allowable deductins from income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

form 1040

A

where individuals report their income, deductions and other info required for the calculation of the federal tax liability

  • all taxpayers required to file Form 1040
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

schedules 1 through 3 of a form 1040

A

are only filed if necessary

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

income

A

broadly defined: is the total amount of money and the fair market value of property, services or other accretions to wealth received, but it does not included borrowed money or a return of invested $

wages, business income, gains, interest, rents, royalties, dividends, pensions, IRD, life insurance (unless exempt), prizes & awards, group term>$50,000, unemployment comp, social security, alimony rec for divorces final b4 1/1/19

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Exclusions

A

income items that are not subject to income tax
- each exclusion must be specifically authorized by Congress and set forth in the IRC or must be determined by the courts to be outside the definition of income as that term is used in the 16th Amendement to the US Constitution

most exclusions from gross incoome are allowed by IRC Sections 101 through 150

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Federal Income Tax Formula

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

partial list of exclusions (subtracted from income)

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Gross Income

A
  • includes all income items that must be reported on the federal income tax return and that are subject to the federal income tax
  • incldues all income as broadly defined, less exclusions

  • UNLESS: the IRC contains a specific provision excluding a particular item from income
  • all income from whatever source derived
  • money, property, barter
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

items included in Gross Income

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

deductions for AGI (above the line deductions)

A
  • subtracted from GI in arriving at taxable income
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

for individual taxpayers, deductions are divided into 2 categories

A
  1. deductions for (before) AGI (above the line)
  2. deductions from (after) AGI (below the line)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

above the line deductions

A

deductions for (before) AGI

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

below the line deductions

A

deductions from AGI

  • also called “itemized deductions” or Schedule A deductions
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

partial list of deductions for AGI (ATLD)

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Adjusted Gross Income (AGI)

“the line”

A
  • GI reduced by above the line deductions (ATLD)
  • AGI is used to determine:
    • limitations on several BTLD,
    • limitations on several income tax credits
    • phase-out of tax benefits

  • AGI is a concept that applies to individual tax returns, it does NOT apply to corporate or other entity tax returns
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

BTLD from AGI

A
  • those deductions that are subtracted from AGI
  • consist of the greater of:
    • the standard deduction or
    • certain allowable itemized deductions or the sum of the following:
      • medical expenses, interest, taxes, casualty losses, charitable deductions, misc itemized deductions
    • qualified business income deductions (QBI)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

what are the 5 ways to reduce tax?

A
  1. exclusions
  2. deductions (ATL, BTL & the line)
  3. use the correct filing status
    • Single, better to see if you can file as head of household to reduce tax
    • married filed jointly, sometimes it’s better to file as married filed separately
  4. marginal tax rates
    • invest in dividend paying stocks instead of bonds bc interest income is taxed at the Ordinary tax rates as high as 37% but dividends are taxed @ capital gains rates, which the max rate rn is 20% + possibly 3.8% sirtax so a 20ish% max tax rate is lower
  5. tax credits
    • take advantage while they are around/available to you. government offers them to try and incentivize your behavior
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

standard deductions

A

a standard amount used to offset AGI that is specified by Congress
- its adjusted for inflation on an annual basis
- includes a basic standard deduction + additional stand deduct amounts for taxpayers aged 65 or older and for taxpayers who are blind (can receive stand deduct from both age & blindness together)
- allowed for taxpayer and spouse, not the dependents

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

3 situations where a taxpayer is not allowed to use the standard deduction and must itemize deductions

A
  • a married individual filing separately cannot use the stan deduc if the spouse itemizes deductions
  • nonresident aliens are not permitted to use the stand deduct
  • an individual who fiels a tax return for less than 12 months bc of a change in the taxpayers annual accounting period is not permitted to use the stand deduct
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

itemized deductions

A

taxpayer may choose to deduct specific allowable itemized deductions rather than the stand deduct
- they are BTLD or from AGI, & are clainmed on Schedule A when they exceed the total stand deduction and thus reduce taxable income more than the stand deduct

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

partial list of itemized deductions

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

what is the maximum total of state and local income taxes, real property on home & property taxes based on the value of a car combined?

A

what # can they not exceed, its $10,000

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

personal exemptions

A
  • TCJA 2017 suspended personal exemptinos untl tax years beginning after Dec 31, 2025
  • they come back in 2026
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

qualified business income (QBI) deduction

A
  • subject to certain limitations, the deduction = 20% of qualified business income
  • this deduction is not an itemized deductionand may not be deducted in calculating AGI
  • is a BTLD that is not impacted by the standard deduction
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

taxable income

A
  • the tax base upon which the income tax is calculated
  • determined by reducing the taxpayers AGI by (1) the greater of the standard deduction or the taxpayers itemized deductions & (2) the QBI, or Section 199A deduction
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

tax rates on taxable income

`

A
  • the income tax is determined by applying certain tax rates to taxable income
  • aftert 2017, the tax rates range from 7 - 37% (not including any applicable Affordable Care Act surtaxes)
  • the amount of taxable income subject to tax at each rate (each tax bracket) depends on the filing status of the taxpayer
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

marginal tax rate

A

the highest bracket in whcih the taxpayer falls
- this is the rate that will apply to the next dollar of income earned

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

effective (average) tax rate

A
  • the average rate of tax paid, factoring in the payments at various marginal brackets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

additional standard deductions (can be 1 or both of them)

A
  • allowed for taxpayer & spouse (not dependent)
    • age 65 or older
    • blind
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

self-employed earned income

A

the income earned by a self-employed person & certain other business and investment inceom is not subject to tax withholding by an employer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

estimated tax payments

A

taxpayer with income not subject to withholding is often requried to may estimated tax payemtns to the treasury department quarterly

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

other tax credits

A

these are allowed to reduce the tax calculated on taxable income:
(insert table from page 79 here)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Credit for Qualified Retirement Savings

A

when you put $ into a retirement account & you’re married & your income is below $73,000, you get to claim a 20% credit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

basic rules of income taxation

A
  • accounting periods
  • tax accounting methods
  • filing status
  • personal and dependency exemptions (repealed TCJA 2017)
  • standard dedution for a dependent
  • kiddie tax
  • filing requirements
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

tax accounting periods

tax periods

A
  • tax year is normally 12 months
    • individuals use calendar year
    • some taxpayers (usually businesses) use fiscal year
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

tax accounting methods

accounting methods

A
  • cash receipts & disbursements (cash method)
    • applies to individual taxpayers
  • accrual method
  • hybrid method
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

tax year

A

52-53 week tax year may end on a specified day of the week that falls closest to the last day of the last month of the tax year for reporting purposes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

tax accounting methods

A

method must be used consistently for year to year unless a format change in accounting method is made.

such changes would require:
- the approval of the IRS
- income adjustments in the year of the change

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

what do taxpayers with more than 1 business do tax accounting method wise?

A

a taxpayer who owns more than one business is allowed to select a different overall accounting method for each business

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

accounting methods

cash receipt and disbursement (cash) method

A
  • most individuals use this method
  • income items (or revenues) are reported on a tax return for the year in which they are RECEIVED in cash & expenses are deducted in the year in which they are PAID with cash
  • “cash” includes:
    • currency, checks, & similar payments & payments made via debt transactions (using credit card)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

cash receipt and disbursement (cash) method

what are the exceptions that apply to the cash method of accounting?

A
  1. the doctrine of constructive receipt
  2. original issue discount bonds
  3. cash received with an obligation to repay
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

exceptions that apply to the cash method of accounting

the doctrine of constructive receipt

under the cash receipt and disbursement (cash) method

A

one of the three key tax principles,states that a cash method taxpayer must report income when its constructively received.
- constructive receipts occur when income is credited to a taxpayers account or when it is made available to the taxpayer without restriction
- taxpayer does NOT NEED to take possession of income for it to be contructively received

underlies most of the retirement planning rules, and must be avoidedto allow defferal of income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

exceptions that apply to the cash method of accounting

original issue discount bonds (OID)

under the cash receipt and disbursement (cash) method

A
  • a special application of constructive receipt more commonly known as a “zero coupon bond”
  • the interest that accrues on the bond each year is deemed to be constructively received by the taxpayer and is included in the taxpayers income
  • OID’s generate phantom income
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

exceptions that apply to the cash method of accounting

cash received with an obligation to repay

under the cash receipt and disbursement (cash) method

A

if a taxpayer receives cash, but has an obligation to repay the payor, the cash is not included in gross income
- may occur when a landlord receives a deposit for an apartment
- if landlord has an obligation to return the deposit when the renter moves out, the cash received is not included in gross income
- if deposit is really a form of prepaid rent, it must be recognized as gross income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

accrual method of accounting

A

many businesses uses accrual method since it providesa better match between income and the expenses associated with producing that income than the cash receipts and disbursements method of accounting
- income (revenue) is normally reported when it is earned, & expenses are normally deducted when they are incurred

The “All Events” test is commonly used to determine income inclusion (income is includible when all events occurred that:
- fix the taxpayers right to receive the income
- allow the amount of income to be determined with reasonable accuracy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

what are the exceptions to the accrual method of accounting?

A
  • prepaid income (its included when received)
  • advance payments for goods & services
  • the claim of right doctrine
48
Q

claim of right doctrine

A
  • amounts received are subject to tax even if in dispute
  • if payment has not been received & is disputed, no income recognition
49
Q

hybrid accounting method

A

use of the accrual method for inventories and property, plant, equipment and then the cash method for everything else
- hybrid method is commonly used in conjunctino with special types of transactions or arrangements such as with long-term contracts

50
Q

Filing status categories for individuals

A
  • married filing jointly
  • qualifying widow(er)/surviving spouse
  • married filing separately
  • head of household/abandoned spouse
  • single
    • unmarried individuals (other than surviving spouses and heads of households)
51
Q

filing status

A

filing status of a taxpayer is used to determine the amount of the taxpayers standard deduction, the tax rate schedule (tax table) to be used & the eligibility of the taxpayer to use various tax benefits

52
Q

marital status

A
  • determination of marital status of taxpayer is made as of the close (last day) of the tax year ( December 31st for cash basis taxpayer
  • if a taxpayers spouse dies during the year; the marital status of the taxpayer is determined on the date of the spouses death
  • married person normally has two filing status options: file jointly or separately
53
Q

if a person is not married, what status can they qualify for

A
  • surviving spouse
  • head of household
  • single
54
Q

married filing jointly

A
  • married as of the last day of the taxable year
  • spouse dies during the taxable year
55
Q

surviving spouse (qualifying widow(er))

A

allowed for 2 years after death of spouse if taxpayer maintains a home in which a dependent child lives

56
Q

married filing separately

A
  • often increases overall taxes
  • typically used when:
    • spouses are separated
    • one spouse suspects the other is not reporting income
    • tax minimization purposes
57
Q
A

if you marry a non-resident alien (someone from overseas), you cant file a joint return

58
Q

Abandoned spouse

A
  • legally married, taxpayer will be allowed to use a filing status generally reserved for unmarried taxpayers (Head of Household)
59
Q

To be eligible to file as an abandoned spouse (therefore using the Head of Household filing status), the taxpayer must meet all of the following requirements:

A
  • the taxpayer must be married
  • must file a separate tax return from spouse
  • just maintain as they are home a household, which, for more than 1/2 of the taxable year is the principal place of abode of a child you can be claimed as a dependent
  • must furnish over 1/2 of the cost of maintaining the household
  • the spouse must not be a member of the household during the last six months of the tax year
60
Q

Married filing separately

A
  • might be necessary if the spouses are separated at the end of the year or if the taxpayer is not sure that their spouse is accurately reporting income
  • might be used for tax minimization purposes by permitting one spouse to deduct more of their unusually large medical expenses for the tax year
61
Q

HOH more favorable

A

Head of household status is more favorable than filing as married filing separately

62
Q

unmarried taxpayers

A

A taxpayer, who is not married on the final day of the tax year, might be able to file as surviving spouse, head of household or single
- the tax benefits for the surviving spouse filing status are the most favorable, those for head of household or next, and those for the single filing status, are the least favorable

63
Q

Surviving spouse/qualifying widower

A

Affords the same, basic standard deduction and tax rates as the married, filing, jointly filing status
- eligibility for this filing status is not something that most people desire as the spouse of the taxpayers must have died within the 2 preceeding tax years of a taxpayer to be eligible

64
Q

A taxpayer must meet all of the following requirements to qualify as a surviving spouse/qualifying widower

A
  • the taxpayers spouse must have died during either of the two preceeding tax years
  • the taxpayer must maintain/pay more than half the cost of a household as their home, which is also the principal place of residence of a dependent child (son, stepson, daughter, stepdaughter)
  • the taxpayer has not remarried
  • the taxpayer and spouse were eligible to file a joint return for the spouses year of death
65
Q

Head of household filing status

A

HOH provides a basic standard deduction and tax bracket sizes that are less favorable to the taxpayer than those for the surviving spouse, but more favorable than those for the single filing status

66
Q

Head of household filing status requirements

A

HOH filing status can be used by an unmarried taxpayer who is not a surviving spouse and who meets the following requirements:
- the taxpayer must maintain a household as their home, which is also the principal place of residence for more than half the year for:
- a qualifying child of a taxpayer, who may be claimed as a qualifying dependent of a taxpayer
- an unmarried qualifying child, who lives with the taxpayer, but is not a dependent of taxpayer
- a qualifying relative who; 1) is claimed as a qualifying dependent of the taxpayer and 2) is actually related to the taxpayer

67
Q

Additional requirements for HOH status

A

While a dependent relative may be someone unrelated to the taxpayer for purposes of determining dependency deductions, HOH status cannot be claimed if the taxpayers only dependents are those who are unrelated by blood or marriage

68
Q

Exceptions for the requirement for HOH status

A

Maintain a separate house for parents if at least one parent qualifies as a dependent

69
Q

The taxpayer is not allowed to use the head of household filing status if:

A
  • if a married child taxpayer lives with the taxpayer, but cannot be claimed as a dependent of a taxpayer either because the child files a joint return with their spouse or fails to meet a citizenship or residency test
70
Q

Single filing status

A

Must be used by an unmarried taxpayer, who is not eligible to use the surviving spouse nor head of household filing status
- provides the least desirable basic standard deduction and tax brackets for an unmarried taxpayer

71
Q

Personal and dependency exemption

A

TCG a 2017 suspended the deduction of personal and dependency exemptions for tax years 2018 through 2025
- well, no deduction exists for personal and dependency exemptions during this period, the classification of individuals as dependence still necessary to take advantage of other tax benefits

72
Q

Personal exemptions

A

For tax years before 2018 and after 2025 each taxpayer was permitted to take one personal exemption
- a married couple, filing, jointly, therefore was allowed 2 personal exemptions

73
Q

during what period are personal exemptions not claimed

A
  • during the period from 2018 through 2025, when a deduction for personal exemptions is suspended, personal exemptions may not be claimed and will not generate a tax benefit for the taxpayer
74
Q

Dependency exemptions

A
75
Q

Dependency tests

A

Taxpayers can claim as a dependent each person who is considered a qualifying child for qualifying relative
- qualifying child might not be the taxpayers child at all
- a qualifying relative in some cases is not a relative of a taxpayer

76
Q

All dependence must satisfy the following

A

The joint return test & citizenship or residency test.
- in addition to the four tests or tests, anyone who may be claimed as a dependent on the qualifying child for qualifying relative classifications these two additional tests as well

77
Q

A qualifying child must meet all the requirements of the following 4 tests as well as the additional 2 tests as tests for dependency

A
  1. relationship test
  2. abode test
  3. age test
  4. support test
  5. Joint return test
  6. citizenship/residency test
78
Q

qualifying child test

relationship Test

In order to satisfy the relationship test, a qualifying child must be:

A
  • taxpayers child
  • a descendent of the taxpayers child
  • The taxpayers brother, sister, stepbrother, stepsister, halfbrother, half sister
  • a descendent of the taxpayers brother, sister, stepbrother, stepsister, brother, or halfsister
  • omce a relationship is established by marriage, it continues even if there is a change in marital status

Stated differently a qualifying child is a taxpayer sibling, a descendent of the taxpayer counter. Space note that a cousin is not a qualifying child.
- taxpayers child may be a natural child, a stepchild, an adopted child, or an eligible foster child

79
Q

qualifying child test

Abode Test

A
  • To satisfy the abode test, a qualifying child must live with the taxpayer for more than half of the year
  • the tax payer, and the dependent, even doing temporary absence, duty, special circumstances, such as illness, education, business, vacation, or military service
80
Q

qualifying child test

age test

A
  • a qualifying child, must either be under the age of 19 and younger than the taxpayer as of the end of the calendar year, or a student under the age of 24 7 younger than the taxpayer as of the end of the calander year in order to satisfy the age test

a child who is permanently and totally disabled meets the age test, regardless of their age

81
Q

qualifying child test

support test

A
  • the support test is satisfied as a qualifying child does not provide more than 1/2 of his or her own support during the year
  • if a child is the taxpayers’ child, and is a full-time student, amounts received as scholarships are not considered to be support
  • If more than one person is eligible to claim another person as a dependent under the qualifying child rules, the tiebreaker rules apply
82
Q

tie breaker rules

A
  • under the tiebreaker rules, when a child lives with each parent for the same amount of time, or if the taxpayers eligible to claim the person as a qualifying dependent are not the parents, the taxpayer with the higher adjusted gross income claims the child as a qualifying dependent
  • this rule is only important to determine which taxpayer claims the child for filing status, and applicable tax credits
83
Q

Children of divorced, or separated parents

A
  • because of the abode test, a child of divorced or separated parents is normally the qualifying child of the custodial parent
  • if all four of the following requirements are met, however, the child will be treated as the qualifying child of the non-custodial parent:
    1. The parents are divorced or legally separated under a decree of divorce or separate maintenance, are separated under a written separation agreement or they live apart at all times during the last six months of the year
    2. the child receives over 1/2 of their support for the year from their parents
    3. the child is in the custody of the parents for more than half the year
    4. the custodial parent signs, a statement that the custodial parent will not claim a child as a dependent for the year, and the non-custodial parent attaches the statement to the return using Form 8332
84
Q

qualifying relative

A
  • in addition to the joint return test, and the citizenship or residency test, a qualifying relative must meet the following 4 tests to qualify as a dependent of a taxpayer:
    • relationship test,
    • gross income test
    • support test
    • not a qualifying child test
85
Q

qualifying relative test

relationship test

To satisfy the relationship test for a qualifying relative, the potential dependent of a taxpayer must be the following

A
  • The taxpayers child, or a descendent of the taxpayers child
  • they must be the taxpayers brother, sister, stepbrother, or stepsister
  • or they must be the taxpayers, father, mother, or an ancestor, such as a grandparent
  • the taxpayers stepfather or stepmother
  • a son (nephew) or a daughter (niece) of a brother or a sister of a taxpayer
  • a brother (uncle), or sister (aunt) of the father or mother of the taxpayer
  • son-in-law, daughter in law, father-in-law, mother-in-law, brother-in-law or sister in law of the taxpayer
  • for any other individual, that may be a totally unrelated person, who, for the taxable year of the taxpayer, has the same principal place of a bowed as the taxpayer, and is a member of the taxpayers household. A person who was married to the taxpayer during part of the year does not qualify.
86
Q

relationship test additional info in terms of a qualifying relative

A

Note that a child of the taxpayer, who does not meet the requirements to be a qualifying child, may still meet the requirements to be a qualifying relative of a taxpayer
- again that a cousin does not meet the relationship test
- individuals who are not actually related to the taxpayer may still meet the relationship test if they live with the taxpayer as a member of the taxpayers household

87
Q

general tests for dependency

joint return test

A
  • a married pendant must not file a joint return with a spouse, unless:
    • return is filed to claim refund
    • neither spouse is required to file a return
    • no tax liability exists for either spouse on separate returns
88
Q

general tests for dependency

citizenship/residency test

A
  • must be a citizen or national of the US, or
  • be a resident of the US, Canada or Mexico
89
Q

qualifying relative test

gross income test

A
  • dependent’s gross income < exemptino amount referenced in Section 152(d)(1)(B), which is $4,700 in 2023
90
Q

qualifying relative test

support test

A
  • taxpayer must provide more than half of the dependents support
91
Q

qualifying relative test

not a 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

92
Q

qualifying relative test

not a qualifying child test special rules:

A

Special rules apply to a person who may be claimed as a qualifying dependent by another taxpayer
- a person who is a dependent of another taxpayer:
- may not claim themselves as a dependent
- may have a reduced basic standard deduction
- is required to file a tax return based on different rules from the gross income test used by taxpayers who cannot be claimed as a dependent
- is not allowed to claim any dependents

93
Q

support test: multiple support agreements

multiple support agreements

A

Sometimes no individual taxpayer provides more than 1/2 the support of a potential dependent.
- a group providing more than half support may claim a person as a dependent even though no one taxpayer provides more than half of the dependents support
- under these circumstances, over one-half of the support is deemed to be paid by one taxpayer if:
- the taxpayer provides more than 10% of the potential dependents support
- each eligible party must meet all other dependency requirements
- historically, the qualifying person had to sign agreement not to claim the personal exemption for the year. no personal exemption after 2017

94
Q

support test: children of divorced parents

children of divorced parents

A
  • for post-1984 divorce decrees, custodial parent entitled to claim child as a dependent
    • noncustodial parent may claim children as dependents if custodial parent signs a “release of claim to exemption” (no exemption after 2017)
  • if child lives with both parents an = amount of time, the parent with the higher AGI gets to claim the child as a dependent
95
Q

standard deduction of a dependent

A
  • a taxpayer who is a dependent of another will have a limited standard deduction = to THE GREATER OF:
    • $1,250 in 2023 OR
    • $400 + earned income (but not exceeding normal standard deduction amount for a single taxpayer which is $13,850)
  • if age 65+ or blind, can still use additional stnadard deduction amounts
96
Q

kiddie tax

A
  • unearned income of a child under the age of 19 or 24 if a fulltime student and qualifies as a dependent by their parents may be subject to income tax at the higghest marginal tax rate of the childs parents
97
Q

kiddie tax unearned income includes what

A
  • interest
  • dividends
  • royalties
  • pension and annuity income
  • rents
  • capital gains ditributions
  • gains from dealings in property
  • unearned income from trusts

essentially includes all income that is not generated from work related activities

98
Q

kiddie tax

Net Unearned Income (NUI)

A
  • of a child under 19 with a living parent (up to age 24 if full time student and can be claimed as a dependent) is taxed at the income tax rates attributable to the parent
  • NUI is determined by the following:
    • subtracting the great of either the basic standard deduction of $1,250 for 2023 for unearned income
    • and then the next $1,250 for 2023 of income which is taxed at the childs marginal rate

look at slide 22 in chapter 3 notes on goodnotes

99
Q

kiddie tax breakdown

A
  • if the Net unearned income of a child that qualifies, is more than $2,500 (the $1,250 from standard deduction + $1,250 of amount taxed @ childs rate) then the excess is taxed at the parents rate. also known as the kiddie tax
  • if the NUI is < $2,500, then there is no kiddie tax
100
Q

how to avoid kiddie tax

A
  • avoid anything that produces interest or capital gains
  • invest in savings bonds (so we can defer it to the future)
  • invest in growth securities (that dont pay dividends and just appreciate in value)
  • invest in tax exempt municipal bonds
101
Q

return filing requirements

tax return filing requirements

A
  • must file if gross income > standard deductions + personal exemption (personal exemption is $0 for 2018-2025)
  • the additional deductions for blind taxpayers does NOT apply. Blind people dont count
  • the age additional deduction of being older than 65 years still applies. age test does apply

use age test, if older than 65, an additional $1,500
DONT use blind test. blindness does not apply here

102
Q

return filing requirements

return filing dates

A
  • calander year taxpayers file on or before April 15th of following year
  • partnerships & S Corporations file on or before the 15th day of the 3rd month following the close of the calendar or fiscal year
  • regular corporate taxpayers (C Corporations) must file on or before the 15th day of the 4th month following the close of the calendar or fiscal year
103
Q

return filing requirements

applications for extension must be filed by when?

A
  • filed by the due date for the return
  • an automatic 6 month extension is available
104
Q

Federal Insurance Contribution Act (FICA)

A
  • provides for old age, survivors, disability & hospital insurance
  • social security wage base limit is $160,200 for 2023
    • 12.4% total (6.2% to employee & 6.2% match by employer)
  • medicare tax** not subject to wage base limit**
    • 2.9% total (1.45% to employee & 1.45% match by employer)
105
Q

additional tax

3.8% Medicare Tax (Obamacare)

A
  • applies to the lesser of:
    • Net Investment Income or
    • MAGI over threshold amount:
      • MFJ: $250,000
      • MFS: $125,000
      • Single: $200,000

Note: threshold amounts are NOT indexed for inflation (which is a bad thing bc inflation is driving all of our income up causing them to now be a subject to this tax because income has been boosted from inflation)

106
Q

under the 3.8% Medicare Tax

Net Investment Income includes:

A

includes:
- portfolio income
- income from passive activities
- gains on disposition of property (rental property)
- DOES NOT include distributions from qualified plans or IRA’s

107
Q

High Income Medicare Tax

A
  • additional medicare tax equal to 0.9% of wages during any taxable year beginning after December 31, 2012, and which are in excess of:
    • MFJ: $250,000
    • MFS: $125,000
    • Single: $200,000
  • this medicare tax is PAID BY EMPLOYEES, not employers
  • applies to wages, compensation or self-employment income
  • Note: threshold amounts are NOT indexed for inflation
108
Q

Federal Unemployment Tax Act (FUTA)

A
  • paid by the EMPLOYER ONLY
  • 6% on the first $7,000 of employees wages
109
Q

self employment tax

A
  • FICA tax on earnings up to the wage base of $160,200 for 2023
    • Total = 15.3%
    • the self employed individual has to pay the employee half of 7.65% and the employer half of 7.65%
  • 2.9% beyond the wage base for Medicare tax
  • self-employed worker not required to pay FUTA on himself but is required to pay FICA
  • self-employed individuals must also pay the additional Medicare tax imposed by the Affordable Care Act if applicable
110
Q

Basic 5 Tax Planning Principles

A
  1. receive income in a tax-exempt (excludible) form
  2. shift income to related taxpayers in lower marginal tax brackets
  3. generate income that is taxed at favroabel capital gains tax rates
  4. defer income taxes until later
  5. use tax credits to reduce tax liability
111
Q

helping clients AVOID taxes without EVADING them is a hallmark of sound financial advice

A
  • against the law to EVADE paying income taxes
  • a long standing ladnmark US Supreme Court decision states that it is ok to legally AVOID paying income taxes
112
Q

FICA

A
  • Imposed on both employer and employee
  • Has 2 components: Social Security and Medicare
  • A child under 18 who works for his or her parents is **not subject to FICA **
  • A spouse employed by another spouse is subject to FICA
113
Q

FUTA

A
  • Imposed only on the employer
  • Administration of FUTA is shared by Federal and state governments
    • Compliance requires following guidelines issued by both state and Federal regulatory authorities
114
Q

exception to the accrual method of accounting: Prepaid Income

A
  • Prepaid income is not reported under the accrual method until goods or services are provided to the customer
  • Prepaid income such as prepaid interest & prepaid rent MUST BE INCLUDED in income when the payment is RECEIVED
115
Q

exceptions to the accrual method of accounting: Advance Payment for Goods & Services

A
  • When a business owner receives advance payment of GOODS to be delivered in future, an accrual basis seller must report revenue ONLY WHEN DELIVERY OF GOODS IS MADE & REVENUES ARE EARNED
  • for tax purposes, the SELLER is generally allowed similar treatment if the seller elects such treatment and if the same method is used for both tax & financial reporting purposes
116
Q

exceptions to the accrual method of accounting: Advance Payment for SERVICES

A

When advance payments are received for services to be performed in the future, an unusual rule applies:
- an accrual method taxpayer is allowed to use the regular accrual method for the year in which the prepayment is received, but the remainder of the prepayment must be included in gross income for the following year

CFP: Income Tax Planning (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions