Income Tax Flashcards
Which amendment to the Constitution provides basically legal authority for imposition of federal income tax
16th amendment
What are the four basic functions of income tax
Revenue projection, economic, social, or regulatory
What are the three Central branches of government
Legislative executive and judicial
What does the legislative branch do?
Taxation must be based on statutes. Congress enacts federal tax laws
What does the executive branch do
The president of the United States as chief executive branch delegates his authority for the enforcement of tax laws to the Department of treasury. The treasury in turn, delegates most of its authority in the federal tax area to the internal revenue service.
Private rulings
Interpretation of an uncertain point of law that arises when a taxpayer requests in and administrative interpretation
Revenue rulings
IRS interpretation of an uncertain point of based on the stated set of facts that usually involve a problem comment to a number of taxpayers
Statutory notice of deficiency
Legal notice issued by the commissioner of internal revenue if no agreement is reached between a taxpayer and appeals following an income tax audit
Tax court
Text payers may not receive a jury trial but have their cases heard without prepayment of an assessed deficiency
US District Court
A jury trial is available but taxpayer must prepay the assessed deficiency and then sue for refund
Supreme Court
The “law the land” and can only be changed if the Supreme Court reverses itself or if Congress enacts a statute in contravention to the Supreme Court decision
Gross income
Anything a taxpayer receives that is economically considered income and is subject to taxation unless there is a provision in the Internal Revenue Code that says otherwise
Constructive receipt doctrine
Doctrine concerning the issue of women item of income taxed. It deals with techniques that taxpayers me used to attempt to do for taxation of income for later year
Economic benefit theory
The issue of what items are subject to taxation. It provides that income may be taxed even in the cases when that tax payer does not actually receive it, so long as the taxpayer has current, real, and measurable rights to receive something of value
Assignment of income
The issue of two items of income our text. The concept of “the fruit and the tree” discussed in the text is a significant illustration of this doctrine. Basically the taxpayer who owns the “tree” the asset that generates the income, is taxable on the “fruit” the income generated by the asset
US Court of Federal claims
Appeals from decisions for this court or take into the Court of Appeals for the Federal Circuit
Kiddie tax
A text law that prevents families from shifting large amounts of unearned income to children and making the shift effective for income tax purposes; applies to the night unearned income of children under specific age
Below – the – line deductions
Deductions taken from adjusted gross income in determining taxable income
Phaseout
A provision of tax law that gradually takes away a beneficial tax provision as the taxpayers income increases; Reduction in tax benefits including personal and dependency exemptions and deductions do the taxpayers AGI exceeding certain specified limits
Above – the – line deductions
Deductions taken from gross income in determining adjusted gross income
Head of household
Filing status allowed for “unmarried couldn’t text Bears meeting specified marital status, household, and qualifying person requirements
Taxable income
For individuals, adjusted gross income minus itemize deductions and personal exemptions
Adjusted gross income (AGI)
Gross income minus all allowable above the line deductions
Standard deduction
Specified amount indexed annually for inflation that may be cleaned in calculating taxable income by taxpayers who do not itemize their deductions
Steps in the tax research process
One establish facts Two determine tax issues three Loki authority Four determine appropriate conclusion five communicate results six follow up
Tax legislation process
All revenue bills begin with the House of Representatives then House Ways and Means Committee take an amended bill to the house for adoption and then bills adopted by Senate finance committee then forwarded to the Senate for passage; A joint conference develops a compromise version then compromise version is passed by both houses finally the legislation is sent to the president to be signed into law
Tax formula for individuals
Income minus exclusions equals gross income minus above the line deductions for AGI equal AGI; then AGI minus itemized deductions or standard deduction minus personal and dependency exemptions equals taxable income
Deductions from AGI
Alimony
Trade or business of a self-employed person
Property held for production of encumbrance royalties
Losses on sale or exchange of property
Reimbursed and unreimbursed employee business expenses
Moving expenses
Medical expenses
State and local income and property tax
Interest on primary or secondary residence
Charitable contributions
Deductions cut back
Applies when AGI exceeds specified amount adjusted annually for inflation beginning
That’s only very high taxpayers
No more than 80% of affected itemized deductions can be lost
That does not apply to medical gambling losses investment interest ductions and casualty theft losses (magic)
AGI limits individual itemized deductions
Medical expenses 10% most
Casualty and theft losses 10%
Miscellaneous item my deductions 2% for most
Text shifting techniques and stopper laws
Special rules for using standard deductions prevent these planning techniques:
One spouse takes all itemized deductions and filed married filing separately other spouse take standard deduction
Child claimed as a dependent on parents return has unearned income and takes full standard deduction
Special rules on exemption prevents parents from taking dependency exemptions for child while the child files tax return and claims an exemption for him or herself
Kiddie tax restricts parents from shifting income to children who are in a lower tax bracket
Special rules for exemption in the standard deduction
Taxpayers not eligible to use the standard deduction:
Person who files married filing separately if spouse itemizes another return
Nonresident aliens
When to file
Individuals partnerships by 4th month, 15th
Automatic six-month extension with form 4868
Corporations by 3rd month, 15th day
Alimony payments
Must meet tax definition in order to be deductible by the payer.
If they are deductible they are correspondingly includable in gross income of the payee
It is important to understand front loading rules
Above the line deductions
Deductions taken from gross income in determining adjusted gross income
Accelerated cost recovery system
Applies to depreciable assets placed in service between January 1 1981 and December 31, 1986 for determining the recovery of investment capital for income tax purposes
Accumulated earnings tax
A tax imposed on corporation that is formed are used for the purpose of avoiding personal income tax with respect to shareholders by permitting earnings and profits to accumulate instead of being distributed. It is designed to tax only earnings retain be on the reasonable needs of the business
ACE adjustment
Adjusted current earnings
Gross income minus all allowable above the line deductions
Acquisition indebtedness
Any indebtedness that is incurred in acquiring constructing or substantially improving a qualified residents that is secured by such residence
Activities of daily living ADLs
Personal care activities that include eating toileting transferring bathing dressing and Continence. An individual’s ability to perform these activities is relevant in determining whether long-term care expenses are qualified for income tax purposes
Adjusted basis
The original basis in the property for income tax purposes minus depreciation plus capital expense
Adjusted gross income AGI
Gross income minus all Allowable above the line deductions
Aggregate theory
The theory of partnership taxation in which a partnership is considered and An aggregate of individual owners who have bound themselves together with the intention of sharing gains and losses; under this theory the partnership itself has no existence separate and apart from its members
Alternative minimum tax AMT
Separate and parallel method of calculating income tax liability. The purpose of this method is to prevent taxpayer from reducing his tax liability below reasonable levels
