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Fed Tax > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

Marginal Tax Rate?

A

The tax rate that applies to the next increment of a taxpayer’s taxable income. OR the amount of additional tax paid for every additional dollar earned.

(new total tax - old total tax) / (new taxable inc - old taxable inc)

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2
Q

Average Tax Rate?

A

Taxpayer’s average level of taxation on each dollar of taxable income.
Total Tax amount / Total Income

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3
Q

Effective Tax Rate

A

taxpayer’s average rate of taxation on each dollar of total income (both taxable & nontaxable)

Total tax / Total Income

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4
Q

Federal Taxes Types

A
  • income taxes
  • employment & unemployment taxes
  • excise taxes
  • transfer taxes
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5
Q

State & Local Taxes Types

A
  • Sales & Use Tax
  • Property Taxes
  • Income taxes
  • Excise taxes (drugs, alcohol)
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6
Q

Types of Taxes

A
  1. Federal Taxes
  2. State & Local Taxes
  3. Implicit taxes (taxes implied on the price)
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7
Q

Gross Income

A

defined as all realized income from whatever source derived, less (minus) specified exclusions or deferrals

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8
Q

FOR AGI deductions

A

“Deductions above the line”

because they determine AGI. They tend to be associated with business activities and certain investing activities

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9
Q

ADI (adjusted gross income)

A

important because itemized deductions are partially phased out for taxpayers with AGI over a certain threshold

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10
Q

FROM AGI deductions

A

“deductions below the line”

because they are deducted AFTER AGI has been determined. Tends to be personal in nature

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11
Q

Tax Liability

A

calculated using either tax table (taxable income under $100k) or a tax rate schedule

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12
Q

Tax Credits

A

directly reduce taxes owed, dollar for dollar

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13
Q

Examples of Income

A
  1. Ordinary
  2. Capital
  3. Tax Exempt (exclusions)
  4. Tax Deferrals
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14
Q

Examples of Deductions FOR AGI

A
  1. ded for adjusted gross income (AGI)
    - alimony (pre 2019)/rental & royalty expenses/contributions to qualified retirement accounts/health insurance deductions for SELF EMPLOYED taxpayers/1/2 of SE taxes paid/business expenses/losses on dispositions of assets used in a trade or business/capital losses (up to $3k)
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15
Q

Examples of Deductions FROM AGI

A
  1. Greater of itemized or standard deduction

Itemized deductions:
- medical & dental expenses
- charitable contributions
- state & local property taxes
- mortgage interest paid
- misc deductions

  1. 20% of taxpayer’s QBI (qualified business income)
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16
Q

Qualifying Child (must have):

A
  1. age test
  2. relationship test
  3. residence test
  4. support test
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17
Q

Dependency Requirements (qualifying child):

A
  1. must be a US citizen or resident of US, Canada, or Mexico
  2. must not file joint return with spouse
  3. must be considered either a QUALIFYING CHILD or QUALIFYING RELATIVE of taxpayer
  4. dependent not claimed as dependent by someone else
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18
Q

Dependency Requirements (qualifying relative):

A
  1. relationship test
  2. support test (taxpayer pays more than half of their exp)
  3. gross income test (dependents GI is less than $5,050
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19
Q

Filing Status’

A
  1. single
  2. Married filing jointly
  3. Married filing separately
  4. head of household
  5. qualifying widow(er)
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20
Q

section 61 (a)

A

Gross income means all income from whatever source derived.
Why is it so broad? to maximize revenue and drive economy

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21
Q

Reg. section 1.61 (a)

A

Gross income includes income realized in ANY form, whether in money, property, or services

22
Q

Tax Basis

A

Cost of an asset or investment

23
Q

Return of capital principle

A

means tax basis is EXCLUDED when calculating realized income; Because return of capital does not represent an economic benefit

24
Q

when to recognize income

A
  1. individual taxpayers file tax returns for a calendar year period
    a. corporations often use the FISCAL year-end
    b. the method of accounting generally determines the calendar year in which realized income is recognized and included in gross income
  2. accounting methods
    a. corporations: accrual method of accounting
    b. individuals: cash method
  3. receipt of income
    a. actual receipt
    b. constructive receipt
25
constructive receipt
1. income is unconditionally available to taxpayer 2. taxpayer is aware of the incomes availability 3. no restriction on the taxpayers control over the income
26
Types of income
1. income from services (earned income) - wages/salaries/tips - W-2 - business (self-employed) income - schedule C 2. income from property (unearned income) - interest - dividends -gains or losses from sale of property -rents, Royalties - annuities 3. income from other sources (eg., alimony) - alimony (if divorce is before 2019) - income from flow-through entities - prizes, awards, and gambling winnings - social security benefits - discharge of indebtness
27
What is a tax exempt interest?
interest received from state & local government bonds (eg., municipal bonds)
28
Dividends
distributions made to shareholders from a corporate's AFTER tax earnings reported on 1099-DIV amount recognized in GI = full amount of dividend received
29
Qualified dividends
1. they are received from domestic, taxable entity, or qualified foreign entity 2. taxpayer's holds stock for more than 60 days during the 121-day period beginning 60 days before ex-dividend date
30
Gain/Loss realized (not necessarily recognized) = ?
= sales proceeds - selling expenses - tax basis in property
31
rental amount recognized in AGI = ?
= rental income received - operating expenses - depreciation
32
annuity
an investment that pays a stream of equal payments over time
33
annuity exclusion ratio =
original investment / expected value of annuity = return of capital percentage
34
fixed term annuity (EVA) expected value annuity
= annual payment * number of payments
35
annuity recognized in GI =
(1 - annuity exclusion ratio) * annuity payments during the year
36
alimony
defined as transfer of cash made under a written separation agreement or divorce decree - property divisions and child payments DO NOT QUALIFY as alimony
37
the spouse paying the alimony deduct payments as deductions ___
For AGI
38
Amount recognized in GI for prize, awards, and gambling winnings =
fair market value of prize or award
39
when to exclude prize, awards or gambling winnings in GI
1. if its for scientific, literary, charitable achievement (eg., Nobel Prize) 2. for employee length of service or safety management ($400 limit/emp/yr)
40
discharge of indebtedness
taxpayer's debt is forgiven by a lender
41
amount recognized in GI for discharge of indebtedness =
amount of debt relief
42
Exclusion Provisions (to encourage particular activities):
1. Municipal bonds 2. education related exclusions (eg., scholarships, tuition fees, grants for books) 3. sale of personal residence ($250k for single / $500k for MFJ) 4. certain fringe benefits (eg., health insurance, life insurance premium, meals on site)
43
Exclusion Provisions (to mitigate double taxation):
1. gifts and inheritances 2. life insurance proceeds 3. foreign income
44
Exclusion provision (to support social policy):
1. compensation for personal injury 2. workers compensation 3. health care reimbursement for medical expenses 4. disability insurance
45
Ownership & use test for personal residence
1. taxpayer must OWN the residence and use the property for 2 years during the 5 year period on the date of sale 2. for MFJ, either spouse can meet the ownership test and both spouses must meet the use test
46
Fringe Benefits:
1. Medical and dental health insurance 2. De minimis (small) benefits 3. life insurance coverage 4. meals provided to employees 5. employee educational assistance programs (up to $5,250 of employer-provided edu assistance benefits covering tuition fees, books 6. qualified employee discounts
47
Directly related deductions for AGI:
1. rental and royalty expenses 2. trade or business expenses 3. losses from sales of business assets 4. expenses and losses from flow through entities
48
Indirectly related deductions for AGI:
1. alimony paid 2. health insurance deductions for self-employed taxpayer's (UNLESS taxpayer is eligible for an employer-sponsored health insurance through spouse's job) 3. self-employment tax deduction 4. deductions for IRA & HSA 5. penalty for early withdrawal of savings
49
A net capital loss is deducted ___ AGI but limited to $___
1. FOR AGI 2. $3,000
50
tax credits 3 categories:
1. nonrefundable personal (use it or lose it) 2. refundable personal 3. business
51

Fed Tax (2 decks)

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