Chapter 3 - Fundamentals of Income Taxation Flashcards
Individuals report their income, deductions and other information required for the calculation of the federal tax liability on
Form 1040
Includes taxpayer and dependent information and basic tax formula calculation through the calculation of taxable income.
Form 1040 page 1
A basic tax formula calculation, from taxable income through credits and payments with refund or payment information, and signature lines
Form 1040 page 2
Additional income - alimony, unemployment, business income and rental income - and adjustment information - student loan interest, self employment tax and educator expenses
Form 1040 schedule 1
Calculation of additional taxes including Alternative Minimum Tax, Affordable Care Act Advance Premium Tax Credit repayment, self employment tax and penalties on early distributions from pension plans and IRA
Form 1040 schedule 2
Non-refundable tax credits other than the child tax credit and the other dependent credit and other payments and refundable credits other than the earned income credit, American Opportunity credit or additional child tax credit
Form 1040 schedule 3
Deductions for (before) adjusted gross income
Above the line deductions
Deductions from (after) adjusted gross income
Below the line deductions
The greater of the standard deduction or certain allowable itemized deductions and the qualified business income
Below the line deductions
A standard amount used to offset AGI that is specified by Congress
Standard deduction
Allowed for a taxpayer or spouse - not a dependent - who is 65 years of age or older or blind
Additional standard deduction
NOT for dependents
Three situations where a taxpayer is not allowed to use the standard deduction and must itemize
- Married individual who files a separate return cannot use a standard deduction if the spouse itemizes
- Non-resident alien and a dual status alien is not allowed to use a standard deduction
- An individual who files a tax return for less than 12 months because of a change in annual account period
Determined by reducing the taxpayer’s AGI by the greater of the standard deduction or the taxpayer’s itemized deductions
Taxable income
Highest tax bracket a taxpayer falls in
Marginal tax rate
The average rate of tax paid factoring in the payments at various brackets
Effective tax rate
Three accounting methods for reporting income and deductions
- Cash receipts and disbursements - Cash method
- Accrual Method
- Hybrid Method
Under this method of accounting, income items are reported on a tax return for the year in which they are received in cash and expenses are deducted in the year in which they are paid in cash.
Cash receipts and disbursements (Cash Method)
3 common exceptions to the cash method of accounting
- Doctrine of constructive receipt
- Original issue discount bonds
- Cash received with an obligation to repay
Occurs when income is credited to a taxpayer’s account or when it is made available to the taxpayer without restrictions (ex - interest income credited to a client’s account after the bank closes on the last day of the tax year)
Doctrine of constructive receipt
Interest accrued on a zero coupon bond accrues each year is deemed to be constructively received by the taxpayer
Original issue discount
If a taxpayer receives cash but has an obligation to repay the payor the cash is not included in gross income
cash received with an obligation to repay
Method used by many businesses. Income (revenue) is normally reported when it is earned and expenses are normally deducted when they are incurred.
Accrual method
4 exceptions to accrual method
- Prepaid income
- Advance payment for goods
- Advance payment for services
- Claim of right doctrine
Taxpayer must report the entire payment in gross income in the year of the payment even though part or all of the payment may have to be repaid to the customer. If the customer is repaid in a later year the taxpayer is allowed a tax deduction in the year of repayment
The claim of right doctrine
