Chapter 3: Tax Formula and Tax Determination; An Overview of Property Transactions Flashcards
Abandoned spouse
The abandoned spouse provision enables a married taxpayer with a dependent child whose spouse did not live in the taxpayer’s home during the last six months of the tax year to file as a head of household rather than as married filing separately.
Child tax credit
A tax credit based solely on the number of qualifying children under age 17. The maximum credit available is $1,000 per child. A qualifying child must be claimed as a dependent on a parent’s tax return to qualify for the credit. Taxpayers who qualify for the child tax credit may also qualify for a supplemental credit. The supplemental credit is treated as a component of the earned income credit and is therefore refundable. The credit is phased out for higher-income taxpayers. § 24.
Collectibles
A special type of capital asset, the gain from which is taxed at a maximum rate of 28 percent if the holding period is more than one year. Examples include art, rugs, antiques, gems, metals, stamps, some coins and bullion, and alcoholic beverages held for investment.
Dependency exemption
See personal and dependency exemptions.
E-file
See E-file.
Filing status
Individual taxpayers are placed in one of five filing statuses each year (single, married filing jointly, married filing separately, surviving spouse, or head of household). Marital status and household support are key determinants. Filing status is used to determine the taxpayer’s filing requirements, standard deduction, eligibility for certain deductions and credits, and tax liability.
Head of household
An unmarried individual who maintains a household for another and satisfies certain conditions set forth in § 2(b). This status enables the taxpayer to use a set of income tax rates that are lower than those applicable to other unmarried individuals but higher than those applicable to surviving spouses and married persons filing a joint return.
Itemized deductions
Personal and employee expenditures allowed by the Code as deductions from adjusted gross income. Examples include certain medical expenses, interest on home mortgages, state income taxes, and charitable contributions. Itemized deductions are reported on Schedule A of Form 1040. Certain miscellaneous itemized deductions are reduced by 2 percent of the taxpayer’s adjusted gross income. In addition, a taxpayer whose adjusted gross income exceeds a certain level (indexed annually) must reduce the itemized deductions by 3 percent of the excess of adjusted gross income over that level. Medical, casualty and theft, and investment interest deductions are not subject to the 3 percent reduction. The 3 percent reduction may not reduce itemized deductions that are subject to the reduction to below 20 percent of their initial amount.
Kiddie tax
Passive income, such as interest and dividends, that is recognized by a child under age 19 (or under age 24 if a full-time student) is taxed to him or her at the rates that would have applied had the income been incurred by the child’s parents, generally to the extent the income exceeds $2,100 for 2016. The additional tax is assessed regardless of the source of the income or the income’s underlying property. If the child’s parents are divorced, the custodial parent’s rates are used. The parents’ rates reflect any applicable alternative minimum tax and the phaseouts of lower tax brackets and other deductions. § 1(g).
Marriage penalty
The additional tax liability that results for a married couple when compared with what their tax liability would be if they were not married and filed separate returns.
Multiple support agreement
To qualify for a dependency exemption, the support test must be satisfied. This requires that over 50 percent of the support of the potential dependent be provided by the taxpayer. Where no one person provides more than 50 percent of the support, a multiple support agreement enables a taxpayer to still qualify for the dependency exemption. Any person who contributed more than 10 percent of the support is entitled to claim the exemption if each person in the group who contributed more than 10 percent files a written consent ( Form 2120). Each person who is a party to the multiple support agreement must meet all of the other requirements for claiming the dependency exemption. § 152(c).
Personal exemptions
The tax law provides an exemption for each individual taxpayer and an additional exemption for the taxpayer’s spouse if a joint return is filed. An individual may also claim a dependency exemption for each dependent, provided certain tests are met. The amount of the personal and dependency exemptions is $4,050 in 2016 ($4,000 in 2015). The exemption is subject to phaseout once adjusted gross income exceeds certain statutory threshold amounts.
Qualifying child
An individual who, as to the taxpayer, satisfies the relationship, abode, and age tests. To be claimed as a dependent, such individual must also meet the citizenship and joint return tests and not be self-supporting. §§ 152(a)(1) and (c).
Qualifying relative
An individual who, as to the taxpayer, satisfies the relationship, gross income, support, citizenship, and joint return tests. Such an individual can be claimed as a dependent of the taxpayer. §§ 152(a)(2) and (d).
Standard deduction
The individual taxpayer can either itemize deductions or take the standard deduction. The amount of the standard deduction depends on the taxpayer’s filing status (single, head of household, married filing jointly, surviving spouse, or married filing separately). For 2016, the amount of the standard deduction ranges from $6,300 (for single) to $12,600 (for married, filing jointly). Additional standard deductions of either $1,250 (for married taxpayers) or $1,550 (for single taxpayers) are available if the taxpayer is blind or age 65 or over. Limitations exist on the amount of the standard deduction of a taxpayer who is another taxpayer’s dependent. The standard deduction amounts are adjusted for inflation each year. § 63(c).
