Chapter 3: Fundamentals of Income Tax Flashcards

Question

qualified business income (QBI) deduction

Answer 1

- 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

Answer 2

- 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

Answer 3

- 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

Answer 4

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

Answer 5

- the average rate of tax paid, factoring in the payments at various marginal brackets

Answer 6

- allowed for taxpayer & spouse (not dependent) - age 65 or older - blind

Answer 7

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

Answer 8

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

Answer 9

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

Answer 10

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

Answer 11

- accounting periods - tax accounting methods - filing status - personal and dependency exemptions (repealed TCJA 2017) - standard dedution for a dependent - kiddie tax - filing requirements

Answer 12

- tax year is normally 12 months - individuals use calendar year - some taxpayers (usually businesses) use fiscal year

Answer 13

- cash receipts & disbursements (cash method) - applies to individual taxpayers - accrual method - hybrid method

Answer 14

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

Answer 15

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

Answer 16

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

Answer 17

- 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)

Answer 18

1. the doctrine of constructive receipt 2. original issue discount bonds 3. cash received with an obligation to repay

Answer 19

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

Answer 20

- 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

Answer 21

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

Answer 22

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

Answer 23

- prepaid income (its included when received) - advance payments for goods & services - the claim of right doctrine

Answer 24

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

Answer 25

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

Answer 26

- 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)

Answer 27

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

Answer 28

- 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

Answer 29

- surviving spouse - head of household - single

Answer 30

- married as of the last day of the taxable year - spouse dies during the taxable year

Answer 31

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

Answer 32

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

Answer 33

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

Answer 34

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

Answer 35

- 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

Answer 36

- 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

Answer 37

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

Answer 38

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

Answer 39

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

Answer 40

- 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

Answer 41

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

Answer 42

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

Answer 43

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

Answer 44

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

Answer 45

- 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

Answer 46

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

Answer 47

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

Answer 48

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

Answer 49

- 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

Answer 50

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

Answer 51

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

Answer 52

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

Answer 53

- 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 ## Footnote 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

Answer 54

- 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

Answer 55

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

Answer 56

- 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

Answer 57

- 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

Answer 58

- 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

Answer 59

- 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

Answer 60

- 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.

Answer 61

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

Answer 62

- 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

Answer 63

- must be a citizen or national of the US, or - be a resident of the US, Canada or Mexico

Answer 64

- dependent's gross income < exemptino amount referenced in Section 152(d)(1)(B), which is $4,700 in 2023

Answer 65

- taxpayer must provide more than half of the dependents support

Answer 66

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

Answer 67

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

Answer 68

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

Answer 69

- 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

Answer 70

- 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

Answer 71

- 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

Answer 72

- 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

Answer 73

- 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 ## Footnote look at slide 22 in chapter 3 notes on goodnotes

Answer 74

- 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

Answer 75

- 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

Answer 76

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

Answer 77

- 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

Answer 78

- filed by the due date for the return - an automatic 6 month extension is available

Answer 79

- 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)

Answer 80

- 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)

Answer 81

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

Answer 82

- 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

Answer 83

- paid by the EMPLOYER ONLY - 6% on the first $7,000 of employees wages

Answer 84

- 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

Answer 85

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

Answer 86

- 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

Answer 87

- **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**

Answer 88

- 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

Answer 89

- 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

Answer 90

- 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

Answer 91

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