Chapter 3 Reading Notes Flashcards
How to find Gross Income using tax formula
Income - Exclusions
How to find adjusted Gross Income
Gross Income - Deductions
How to find taxable income
Adjusted Gross Income - greater of itemized deductions or standard deductions - personal and dependency exemptions
How to find tax due (or tax refund)
Tax on taxable income - tax credits
What is total tax formula
Income - exclusions = gross income - deductions = adjusted gross income - greater of total itemized deductions or standard deductions - personal or dependency exemptions = taxable income * tax rate = tax on taxable income - tax credits = tax due ( or refund)
What are the types of income taken out of the
income tax base called, which will then give you the adjusted gross profit
Exclusions
Give some examples of some exclusions
Accident insurance proceeds Annuities (cost element) Bequests Child support payments Cost-of-living allowance (for military) Damages for personal injury or sickness Gifts received
Individual taxpayers have two categories of deductions:
(1) deductions for adjusted
gross income (deductions to arrive at adjusted gross income) and (2) deductions
from adjusted gross income
medical expenses are deductible only to
the extent they exceed
7.5 percent of AGI
For ASI deductions is mostly what 2 expenses
business expenses and investment expenses
Assets - Liabilities
= net worth
What are the 6 types of personal itemized deductions
- medical expenses
- taxes
- interest expenses
- Casualty/Losses (ex: house burns down)
- Charitable contributions
- Misc
What is the standard deduction for
If your single you get a deduction of 5950. A married couples is 11,900. If you income is lower you don’t have to pay taxes
People that get
- get 2 exemptions
- If GI < 19,500 (deductions) they don’t need to file a tax return because they have no taxable income
Married Couple without children
- standard deduction for dependent child is
greater of 950 or Earned Income + 300
earned income is
income you earn by the sweat of your brow
Give examples of unearned income
investment gains, dividends
2 ways to claim someone as your dependent
qualifying child test and qualifying relative test
6 things you must meet to pass qualifying child test
o must be a relative
o Abode (must live in the household for greater than half of the year)
o Age must be less than 19. If full time student less than 24 years old.
o Dependent cannot provide more than one half of his one support
o US Citizen or resident of Canada or mexico
o Parents or whoever Cannot file a joint return
5 things you must meet to pass qualifying relative test
o Must be a relative (much broader than the qualifying child test. Member of household would work on this even if they aren’t related)
o Depedent GI must be less than 3800
o Tax payer must provide more than one half of the support of the dep
o US citizen or resident of Canada or Mexico
o Parent or whoever can’t file a joint return
What are the 2 types of exemptions
personal and dependent
charitable contribution deductions
may not
exceed 50 percent of AGI.
Casualty/losses will be deducted if it’s over
10% of AGI
Exemptions are allowed for the (3 things)
taxpayer, for the taxpayer’s spouse, and for each dependent
of the taxpayer.
As a general rule, personal expenditures are disallowed as deductions in arriving at
taxable income. However, Congress allows specified personal expenses as itemized
deductions. Such expenditures include
medical expenses, certain taxes and interest,
and charitable contributions.
In addition to the 6 personal expenses, taxpayers are allowed itemized deductions
for expenses related to (2 things)
(1) the production or collection of income and (2) the management
of property held for the production of income.
For AGI Deductions ( 3 of them)
Business expenses, investment expenses, misc
What is the abode test
Must live in the household for more than half the year
______ doesn’t have to meet age requirements in qualifying child test.
disabled person
Deductions for adjusted gross income (AGI) are sometimes known as
above-theline
deductions because on the tax return they are taken before the “line” designating
AGI.
AGI is an important subtotal that is the basis for computing percentage limitations
on certain itemized deductions, such as
medical expenses, charitable contributions,
and certain casualty losses
How much are personal and dependency exemptions for 2012
3800
In addition to these personal expenses, taxpayers are allowed itemized deductions
for expenses related to
(1) the production or collection of income and (2) the management
of property held for the production of income.
Trade or business
expenses, which are deductions
for AGI
In addition to these personal expenses, taxpayers are allowed itemized deductions
for expenses related to (1) the production or collection of income and (2) the management
of property held for the production of income.5 These expenses, sometimes
referred to as
nonbusiness expenses
is specified by Congress and depends on the filing status of
the taxpayer.
standard deduction
Is a set amount depending on what the filing status is
Standard Deductions
Define surviving spouse
Same things as filing married jointly. It says if your spouse dies you can file as surviving spouse if you have a dependent child and it provides same benefits as filing as married jointly
The standard deduction is the sum of two components:
the basic standard deduction
and the additional standard deduction
A taxpayer who is age 65 or over or blind qualifies for an
additional standard deduction of $1,150 or $1,450, depending on filing status
The following individual taxpayers cannot use the standard deduction and therefore
must itemize. (3 cases)
• A married individual filing a separate return where either spouse itemizes
deductions.
• A nonresident alien.
• An individual filing a return for a period of less than 12 months because of a
change in the annual accounting period.
When filing his or her own tax return, a dependent’s basic standard deduction
for 2012 is limited to the greater of
$950 or the sum of the individual’s earned
income for the year plus $300
However, if the sum of the individual’s earned
income plus $300 exceeds the standard deduction
the standard deduction is limited
to the basic standard deduction of a person who is not a dependent, depending on what status they file under.
The structure of the individual income tax return
(Form 1040, 1040A, or 1040EZ)
is available for either a qualifying child or a
qualifying relative.
dependency exemption
relationship test for qualifying child
Must be descendent or brother or sister or half brother or sister or any of their descendant. Can’t be anybody older.
In some situations, a child may be a qualifying child to more than one person.
In this event, what happens.
the tax law specifies which person has priority in claiming the dependency
exemption.
A qualifying relative’s gross income must be less than the
exemption amount of 3800
If a dependent is married, the supporting taxpayer (e.g., the parent of a married
child) generally is not permitted a dependency exemption if
the married individual
files a joint return with his or her spouse
If a dependent is married, the supporting taxpayer (e.g., the parent of a married child) generally is not permitted a dependency exemption if the married individual files a joint return with his or her spouse. The joint return rule does not apply,
however, if the following conditions are met. ( 3 of them)
The reason for filing is to claim a refund for tax withheld.
• No tax liability would exist for either spouse on separate returns.
• Neither spouse is required to file a return.
As to the relationship tests, the qualifying relative category is
more expansive
Nonrelated persons who are members
of the household are also included in what test
the qualifying relative
In the case of a qualifying child, support
is
not necessary. What is required in that case is that the child not be
self-supporting.
The qualifying child category has no ________ limitation, whereas the
qualifying relative category has no ________
gross income; age restriction
allows a $1,000
for each dependent child (including stepchildren and eligible foster children)
under the age of 17
child tax credit
In addition to providing a dependency exemption, a child of the taxpayer also
may generate a tax credit called the
child tax credit
Marital status is determined as of
as of the
last day of the tax year, except when a spouse dies during the year. In that case,
marital status is determined as of the date of death.
Taxpayers in common law states did not have this
income-splitting option, so
their taxable income was subject to higher marginal rates. This inconsistency in
treatment was remedied by the joint return provisions. The progressive rates in the
joint return Tax Rate Schedule are constructed based on the assumption that
income is earned equally by the two spouses.
It generally is advantageous for
married individuals to
file a joint return, because the combined amount of tax is
lower. However, special circumstances (e.g., significant medical expenses incurred
by one spouse subject to the 7.5 percent limitation) may warrant the election to file
separate returns
The joint return rates also apply for two years following the death of one spouse, if
the surviving spouse maintains a household for a dependent child. The child must
be a son, stepson, daughter, or stepdaughter who qualifies as a dependent of the
taxpayer.
Unmarried individuals who maintain a household for one or more dependents
may qualify to use the
head-of-household rates
To qualify for head-of-household rates, a taxpayer must pay
more than half the
cost of maintaining a household as his or her home. The household must also be
the principal home of a dependent. Except for temporary absences (e.g., school,
hospitalization), the dependent must live in the taxpayer’s household for over half a year
These rules allow a married taxpayer to file as not married, and thus either
as single or head of household
abandoned spouse rules
Abandoned spouse rules can be applied if what 4 requirements are meant.
-The taxpayer does not file a joint return.
• The taxpayer paid more than one-half the cost of maintaining his or her
home for the tax year.
• The taxpayer’s spouse did not live in the home during the last six months of
the tax year.
• The home was the principal residence of the taxpayer’s son, daughter, stepson,
stepdaughter, foster child, or adopted child for more than half the year,
and the child can be claimed as a dependent.
An individual must file a tax return if certain minimum amounts of gross income
have been received. The general rule is that a tax return is required for every individual
who has gross income that
equals or exceeds the sum of the exemption
amount plus the applicable standard deduction
Form 1040EZ cannot be used if the:
- Taxpayer claims any dependents;
- Taxpayer (or spouse) is 65 or older or blind; or
- Taxable income is $100,000 or more.
Taxpayers who itemize deductions from AGI cannot use Form 1040A, but must
file Form 1040 (the long form).
Tax returns of individuals are due on or before
the fifteenth day of the fourth
month following the close of the tax year.
Thus, the filing requirement for a dependent who has no unearned income is
the
total of the basic standard deduction plus any additional standard deduction. The basic standard deduction is 5950
Eligible
taxpayers compute taxable income (as shown in Figure 3.1) and must determine
their tax by reference to the Tax Table. The following taxpayers, however, may not
use the Tax Table method. ( list 3)
• An individual who files a short period return (see Chapter 16).
• Individuals whose taxable income exceeds the maximum (ceiling) amount in
the Tax Table. The Tax Table addresses taxable incomes below $100,000 for
Form 1040.
• An estate or a trust
To reduce the tax savings that result from shifting income from parents to children
the net unearned income (commonly called investment income) of certain children
is taxed as if it were the parents’ income
How do you find net unearned income of dependent child.
Unearned income Less: $950 Less: The greater of • 950 of the standard deduction or • The amount of allowable itemized deductions directly connected with the production of the unearned income Equals: Net unearned income
What are the 4 filing statuses
Married Joint (surviving spouse)
Head of household
single
married separates
What does married joint mean.
o means your married
o If your married on the last day of the year, you were married the whole year
o Most favorable tax bracket
o If your spouse dies you are single, but you can still file as married joint if you file as surviving spouse if you have a dependent.
o If spouse has abandoned you
- You can’t file a married joint because you don’t know where he is and don’t know how much income he has and he can’t even sign it.
- Only if spouse that left is gone for at least the 6 months
- File under this for the abandoned spouse if there’s a dependent child.
- The innocent spouse files under the married separately.
o mostly for divorced people that have a dependent
o Unmarried individuals who maintain a household for one or more dependents
head of household
What is required for your dependent when trying to qualify for head of household status
Except for temporary absences (e.g., school,
hospitalization), the dependent must live in the taxpayer’s household for over half the year. The dependent must be either a qualifying child or a qualifying relative
who meets the relationship test
o still married, but choose to file separately
o rates are twice as much as married joint
married separates
Kiddie Tax
- If you a dependent child under 19 or under 24 for full time student. Any unearned income you have over 1900 is taxed at the highest rate.
In a _________ ______the income is split even if only one spouse makes the money. You divide the income by 2 and that’s the income you use for each person on the qualifying child and relative test.
community property state
If the child is married and lives in the house and they get the full refund then the mother and father can still
file the child as dependent even though they filed a joint return because the child gets the full refund already so there’s no double benefits
If a dependent makes more than the basic standard deduction (5950 for single) it is
not deducted above 5950. It can not be deducted over the basic standard deduction.
A scholarship doesn’t matter when deciding if somebody passes the
qualifying relative test. Even if it’s above the 3800 amount
Would the wife include an ex-husband’s personal exemption.
Not in the year of divorce, but yes in the year after.
Andy & Paige are married. Andy makes 8,000 and they both live with Andy’s mother in Washington, which is a community property state. Paige makes nothing. Would page qualify under the qualifying relative test.
No because Andy’s 8,000 would be split and Paige would be under 4,000, which is above 3800
Andy & Paige are married. Andy makes 8,000 and they both live with Andy’s mother in Iowa, which is a common law state. Paige makes nothing. Would page qualify under the qualifying relative test.
Yes because income doesn’t split under common law.
Winston lives alone, but he maintains a household in which his parents live. The
mother qualifies as Winston’s dependent, but the father does not. What filing status does he have.
head of household. As long as one parent is his dependent, that is enough
Winston lives alone, but he maintains a household in which his married daughter,
Karin, lives. Both Karin and her husband (Winston’s son-in-law) qualify as Winston’s
dependents. What filing status
he must use single filing. Qualifying as head of household requires the dependent be a member of taxpayer’s household, except in the case of the taxpayer’s parent(s)
If your wife abandons you and you have no idea where she is and you don’t have any children, but you do have a dependent mother-in-law, what do you file under.
Married filing separately. He can’t file under head of household because he doesn’t have a dependent child.
If your husband dies in 2010 and the wife has an 18 year old son, how many exemptions are there.
- 2 personal and 1 dependent
What about the next year.
Must be single cuz the boy will be over 18 and the mother won’t be able to file under surviving spouse anymore because the boy doesn’t qualify because of age under child and under gross income under relative test
The boy becomes a student the next year. What about then
The wife can qualify under surviving spouse now because she was one more year and the boy is under 24 and a student.
