Fundamental Tax Law

Question 1

Executive Sources

Answer 1

• US Department of Treasury issues the following:
  
  • Proposed regulations (not binding on taxpayers)
  • Temporary regulations (are binding)
  • Final regulations (are binding)
  • Legislative regulations (highest binding)
• IRS
  
  • Revenue rulings - intrerpretation
  • Revenue procedure - procedures
  • PLR - for single taxpayer
  • TAM
  • Determination letter

Question 2

Judicial Sources

Answer 2

• Tax court - does not have to pay deficiency
• Small cases - less than 50k, cannot be appealed
• US district court/US court of federal claims - must pay tax deficiency before going to court
  
  • Can be appealed

Question 3

Judicial decisions

Answer 3

• Set tax law precedent for all taxpayers in the COURT’S JURISDICTION ONLY
• US Supreme court ruling set the law for EVERYONE in the country

Question 4

Primary sources

Answer 4

• IRC (Legislative)
• Treasury regulations and IRS (Executive)
• Court decisions (Judicial)

Question 5

Secondary sources of info

Answer 5

• Newletters, books, research artiles, textbooks and other publications

Question 6

Accounting methods for income and expenses - Cash method

Answer 6

• Cash method
  
  • Report all income in year they are actually or construcutively received (not having physical possession of it but getting money in their account)
  • Expenses are deducted in the year they are PAID (12-month rule for expenses paid in advance)
    
    • Earlier of 12-months from date of payment of end of next tax year

Question 7

Accrual method

Answer 7

• If inventory is necessary to account for income, taxpayer must use ACCRUAL for purchases and sales (can use cash method for other income)
• Income is reported for when it is EARNED rather than when it is received
• Expenses are reported for when they are INCURRED rather than when they are paid

Question 8

Basic tax formula

Answer 8

Taxable income

• excluded income

= Gross income

• Deduction for AGI

= AGI

• Standard/itemized deductions

= Taxable income (base rate)

X tax rates = tax

Then credits

Question 9

Who is required to file tax return (when it comes to gross income)

Answer 9

• When gross income is EQUAL TO OR ABOVE standard deduction for each filing status

Question 10

Qualifying widow status

Answer 10

• Can be filed as MFJ for up to TWO TAX YEARS immediately following year of death of deceased spouse
• MUST HAVE QUALIFYING DEPENDENT CHILD claimed on tax return

Question 11

Head of household status

Answer 11

• Not married on last day of tax year
• Paid for MORE THAN HALF the cost of keeping up the home for qualifying person
• Qualifying person LIVED with taxpayer for more than HALF THE YEAR (exception is for dependent parents)
• Qualifying person includes:
  
  • Qualfiying child (can be married as long as you can still claim them as depedent)
  • Parents (as long as they are depdent on you)
  • Qualifying relative if lived with you more than half the year

Question 12

Personal and dependency exemptions

Answer 12

• Not allowed until 2026

Question 13

Qualifying child requirements

Answer 13

• Relationship
  
  • children, siblings and decedants of them
• Age
  
  • Under 19 at end of year
  • Must be YOUNGER than taxpayer (or spouse)
  • A student under 24 if in college
  • Permannetly and totallly disabled regardless of age
• Residency
  
  • Lived with taxpayer more than half the year (there are temporary absences)
• Support
  
  • Child did not provide more than half of their own support
• Joint Return
  
  • Did not file joint return for year unless it’s for a refund of taxes paid

Question 14

Qualifying relative dependent

Answer 14

• Not a qualifying child of another person
• Relationship
  
  • A lot more than qualifying child
• Residency
  
  • Lived with taxpayer ALL YEAR as member of household
• Gross income
  
  • Gross income less than 4300 for year
• Support
  
  • Taxpayer provides more than half of perosn’s total support during year

Question 15

Kiddie tax

Answer 15

• Only applies to QUALIFYING CHILD OF TAXPAYER
• For children with unearned income (such as dividends and interest) more than 2200/year
• Will be taxed at parent’s marginal rate on the amount over that amount
• EXCEPTION
  
  • If child provides more than half of their own support through EARNED INCOME OR
  • They are NOT under 19 or 24 (full-time students)
  • THEN NOT SUBJECT TO KIDDIE TAX

Question 16

Capital loss carryforward

Answer 16

• After 3k is netted against ordinary income
  
  • The rest is carried forward until they are exhausted

Question 17

failure-to-file penalty

Answer 17

• 5% per month up to 25%

Question 18

failure to pay penalty

Answer 18

.5% up to 25%

Question 19

Underpayment penalty - how to avoid

Answer 19

• Total withholding and estimated tax payments were at least as much as the prior tax year (110% for higher earners) and all required estaimted tax payments are paid on time
• 90% of the total tax for the year is paid on time
• Taxpayer did not have tax liability in prior year
• Total tax minus withholding and credits less than $1000

Question 20

Accuracy penalty

Answer 20

usually 20% of underpayment

Question 21

Fraud penalty

Answer 21

75% of underpayment and possible jail time

Question 22

Progressive vs regressive tax rates

Answer 22

• Progressive (ours) - takes a proportionally higher tax as income increases than lower-income households
• Regressive - THE OPPOSITE - lower-income households pay a proportinally higher percentage of their income in taxes than higher-income households

Question 23

Effective tax rate

Answer 23

Measures the average tax indivdiudals pay on their entire income (the proportion of their income that goes to taxes)

= total taxes / total income

Will always be LOWEr than marginal tax rate

Question 24

Marginal tax rate

Answer 24

Usually based on tax rate tables

Tax incurred (or saved) / amount of marginal income (or deduction)

If you are looking to receive 1000 from an investment, calculate that 1000 in the tax brackets and then divide by 1000 to get marginal tax rate