Chapter 3 - The Tax Formula Flashcards
Who needs to file (6)?
If you meet any of these requirements:
- Gross income >= standard deduction + old age addition. (Note, blindness deduction doesn’t apply to this calculation except with dependents).
- Anyone who wants a refund.
- Self-employed individuals who made $400 or more.
- Married filing separately if Gross income >= $4150.
- Dependents w/ unearned income >= $1050.
- Received distribution from Health Savings Account (HSA).
What are the types of filing status (5)?
- Single
- Head of household
- Married filing jointly
- Married filing separately
- Surviving spouse (Qualifying widow, widower)
Is filing status a choice?
No
Filing status: Head of household rules?
Single person or abandoned spouse. Pays >= 1/2 the cost of maintaining the principal residence (lives there >= 1/2 the year) of qualifying dependent.
Filing status: Surviving spouse rules?
Use married filing jointly rates. Must be married on date of death, not remarried by end of year. Can use for two more years if >= one child or stepchild.
The Tax Formula for Individuals (12).
- +
- -
- =
- -
- =
- -
- (-)
- (-)
- =
- +, x
- -
- =
- Income –Courts have defined income as any increase in wealth.
- Less Exclusions:Items congress has specifically excluded from income.
- Equals: Gross Income.
- Less: For AGIDeductions.
- Equals: Adjusted Gross Income “AGI”
- Less: the greater of standard deduction or itemized deductions (From AGIDeductions)
- Less: Personal and Dependency Exemptions(Suspended from 2018 to 2025 –TCJA)
- Less: Deduction for qualified business income (Applies from 2018 to 2025 –TCJA)
- Equals: Taxable Income
- Tax on taxable income –Tax Liability
- Less: credits, and pre-payments (withholdings or estimated tax payments)
- Tax or Refund Due
Define Income (step 1/12). List three exclusions (step 2/12). Income minus exclusions is (step 3/12)?
All income from whatever source derived. Any increase in wealth.
Exclusions
- Unrealized gains/losses
- Return of capital (Return of Capital Doctrine)
- Receipt of borrowed funds
There’s more than just listed here.
Income minus exclusions is Gross Income
List of Deductions FOR AGI (10), (step 4/12)
- Trade of business expenses
- Rent and royalty expenses
- Capital loss deduction
- Alimony paid
- Retirement contributions
- Qualified moving expenses
- Unreimbursed employee business expenses
- 50% of self-employment taxes
- Self-employed medical insurance premiums
- Interest on qualified student loans
What is AGI (step 5/12)?
Total income subject to tax, minus specific things that shouldn’t be taxed.
What are deductions FROM AGI (step 6/12)? When can standard deduction not be used (3)?
Greater of standard or itemized deduction.
Can’t use standard deduction when…
- Married filing separately if a spouse itemizes.
- Nonresident aliens.
- Tax year less than 12 months because of change in account period for individual (idk).
Things included in itemized deductions (4)?
- Medical expenses.
- Taxes up to $10,000.
- Interest paid.
- Charitable contributions.
What is itemized deduction phase-out?
When income goes above a certain amount, itemized deductions start becoming worth less.
Standard deduction rules for dependents (greater of what)?
$1050 or Earned income + $350 up to standard deduction for single individual.
What are dependents important for in 2018 (now that step 7/12 has been suspended) (3)?
- Child tax credit.
- Dependent credit
- Child and dependent care credit.
Qualifying Child Tests - Age Test? (3 rules)
- Under 19.
- Full-time student under 24.
- Permanently and totally disabled.
Note: Can’t be older than taxpayer
Qualifying Child Tests - Support Test? (1 rule)
- Must provide more than 50% of the child’s support.
Note: Doesn’t include scholarships.
Qualifying Child Tests - Relationship Test? (3 rules)
- All your children, including adopted, pending adoption, and foster children.
- All siblings, including step and half-siblings.
- Descendents of any of those.
Qualifying Child Tests - Principal Residence Test? (1 rule)
- Must live with taxpayer more than half the year.
Note: Includes temp absences, also look at divorce/separation agreement. Needs to be filed with IRS.
Qualifying Child Tests - Citizenship/Residency Test? (2 rules)
- Must be U.S. citizen or resident of U.S., Canada, or Mexico for part of the year.
- Lives with the taxpayer in another country.
Qualifying Child - Marriage rule?
Dependent can’t file a joint return with his or her spouse unless no tax owed or filing just for a refund of withholdings.
Qualifying Child - Tiebreaker rules (3)?
- Natural Parent
- Who did child live with most number of days?
- Person with highest AGI.
Note: More info in book.
Qualifying Relative Tests - Relationship Test? (4)?
- parents + grandparents and beyond (lineal ascendants)
- Uncles and Aunts (collateral ascendants).
- Certain in-laws (son, daughter, father, mother, brother, sister)
- Someone that has lived with taxpayer all year.
Qualifying Relative Tests - Gross Income Limit?
Can’t exceed the phased out exemption amount ($4050).
Qualifying Relative Tests - Support Test?
Must have provided over 50% of actual support
Qualifying Relative Tests - Citizenship/Residency Test?
Same as qualifying child.
Tax Credits Lists (step 11/12) - Non-Refundable? (6)
- Foreign Tax Credit
- Child/Dependent care expenses.
- Child tax credit
- Retirement savings credit
- Residential energy credit
- Other credits from business activities
Tax Credits Lists (step 11/12) - Refundable? (6)
- Earned income credit
- Additional child tax credit
- American opportunity credit
- Net premium tax credit
- Fuel tax credit
- Other refundable credits
What counts as capital for capital gains?
Basically use your intuition on this one. Not property in businesses, copyrights, inventory items, receivables, etc.
One-year rule: Less than a year - ordinary rates.
More than a year - Capital gains rate - 20%, 15%, 0%.
When does the Kiddie Tax Apply (4)?
- One or both of child’s parents alive
- One or both in a higher tax bracket
- Child doesn’t file joint return with spouse
- Child’s net unearned income above a threshold ($2100 for 2018). Above amount is taxed.
Kiddie Tax Age tests (3)?
Meet one.
- Not >= 18
- Not >=19 and has earned income <50% of support
- Not >= 25 and is full-time student and has earned income <50% of support.
Notes on Tax payments (step 12/12)?
- Prior year overpayment credited
- Federal income tax withheld on two forms, W-2 and 1099
- Estimated tax payments made during the year (??).
