Income Tax Calculations Flashcards
Tax equivalent yield
tax-free rate/(1-tax bracket)
LT capital gains rate
20% for investments held for more than one year
How much can be deducted per year for net loss?
$3k, anything over can be carried over
Exclusions from income tax base
Gifts and inheritances
Life insurance proceeds
Welfare and certain other transfer payments
Certain scholarships and fellowships
Certain payments for injury and sickness
Personal physical injury settlements
Worker’s compensation
Medical expense reimbursements
Certain employee fringe benefits
Health plan premiums
Group term life insurance premiums (limited)
Meals and lodging
Employee discounts
Dependent care
Certain foreign-earned income
Interest on state and local government bonds
Certain interest of Series EE bonds
Certain improvements by a lessee to lessor’s property
Child support payments
Alimony (divorces after 12/31/2018 only)
Property settlements pursuant to a divorce
Gain from the sale of a personal residence (limited)
Gross income
Compensation for services, including salary, fees, commissions, fringe benefits, and similar items
Gross income derived from dealings in property
Gains derived from dealings in property
Interest
Rents
Royalties
Dividends
Alimony and separate maintenance payments (only for divorces prior to 1/01/2019)
Annuities
Income from life insurance and endowment contracts
Pensions
Income from the discharge of indebtedness
Distributive share of partnership gross income
Income in respect of a decedent
Income from an interest in an estate or trust
Deductions for Adjusted Gross Income
Above the line deductions (Schedule 1, part 2):
Trade and business deductions
Reimbursed employee expenses and certain expenses of performing artists
Losses from the sale or exchange of property
Deductions attributable to rents and royalties
Certain deductions of life tenants and income beneficiaries of property
Contributions to retirement plans (Keoghs and IRAs) and certain distributions
Penalties forfeited because of premature withdrawal of funds from time savings accounts
*One-half of self-employment taxes paid
*Portion of health insurance costs incurred by a self-employment person
Alimony (only for divorces prior to 01/01/2019)
Moving expenses (only for members of the Armed Forces)
Certain required repayments of supplemental unemployment compensation
Jury duty pay remitted to an individual’s employer
Certain environmental expenditures (reforestation and clean fuel)
Interest on education loans
Contributions to medical savings accounts and health savings accounts
Qualified Business Income Deduction
Net income from qualified trade/business including sole proprietor, S-Corp shareholder, or partner in an LLC/partnership entity. Lesser of 20% of QBI OR taxable income (not including capital gains); limits are $182,100-$232,100 for individuals and $364,200-$464,200 for couples, and phaseout applies to health, law, accounting, financial services, consulting, etc; and to non-service business entities ( lesser of 20% of QBI or the greater of 50% of the W-2 wages of the business or the sum of 25% of W-2 wages plus 2.5% of the unadjusted basis of all qualified property in the business.)
Deductions from AGI
Can choose between standard (many) or itemized expenses related to:
- production or collection of income
- management of property held for producing income
- determination, collection or refund of any tax
Taxable Income
AGI - Itemized or Standard Deductions
Nonrefundable tax credits
Allowances such as child and dependent care credit; however if it exceed s the tax liability, none of the excess will be paid to the taxpayer.
Difference between deduction and credit
Deduction is taxed at marginal tax rate whereas credit offsets liability dollar for dollar
Income, from whatever source derived, minus exclusions, whether reported or not, equals what?
Gross Income
Where are above the line deductions found?
Schedule 1, Form 1040: trade or business expenses, expenses relating to property held for the production of income (such as rental property), alimony from pre-2019 separations, IRA contributions, net capital losses
Where are itemized deductions found?
Schedule A, Form 1040L Medical expenses (in excess of 7.5% AGI in 2023)
Certain taxes (Cap of $10k in 2023)
State, local, and foreign income and real property taxes
State and local personal property taxes
State and local sales taxes if an election is made to deduct these taxes instead of deducting state and local income taxe
Residential interest and investment interest (limited)
Charitable contributions (limited)
Other miscellaneous deductions:
Federal estate tax attributable to income in respect of a decedent
Gambling losses to the extent of winnings
Amortization of bond premium
Amounts restored under a claim of right
Net Investment income (NII)
Gross investment income less eligible investment-related expenses (used to calculate how much the lender imputes as interest income; also investment interest paid is only deductible for the current year to the extent of NII)
Itemized deductions
Specified personal expenses such as medical expenses, taxes, investment/residual interest, charitable contributions, and casualty/theft losses (for federally declared disaster areas)
Itemized deduction floors
Medical expenses: Only medical expenses over 7.5% of AGI are deductible.
Casualty losses: After deducting $100 per loss, only casualty losses in excess of 10% of AGI are deductible. Only for federally declared disaster areas.
Special rules for standard deductions
Increase of $1,500/$3,000 (up to $6k) for married elderly taxpayers is available if they turn 65 the same tax year/up to Jan 1 of next OR/AND are blind, determined as of the last day of the tax year- or $1,850/$3,600 if single
Loss of standard deduction
Standard deduction is not available to:
-individual filing a return for less than 12 months because of a change in accounting method,
-married filing separate where one is itemizing
- non-resident aliens
Limitation on the Standard Deduction
Greater of $1,250 or dependent’s earned income + $400 (not to exceed $13,850)
Requirements for dependency qualification
- Have SSN
- meet citizenship test: must be U.S. citizens or nationals, or residents of the U.S., Canada, or Mexico for some part of the year
- meet a separate return test
- can’t claim someone else as dependent
Requirements for qualifying children
A relationship test.
An age test.
An abode test.
A support test.
Requirements for qualifying relatives
Relationship test.
Gross income test.
Support test.
Support test
must have paid more than half of the person’s living expenses for the year
Gross income test
salary, taxable interest, and rent can’t exceed a certain amount
Age test
under age 19,
a full-time student under age 24,
or a permanently and totally disabled child.
Relationship Test
relationships include those based on blood, adoption, or marriage, and extended family relationships include only those based on blood or adoption
Abode test
A qualifying child must have the same principal abode as the taxpayer for more than half of the year
When discussing with your client his tax situation, you mention he may elect a standard deduction of $13,850 (2023). Your client gives you his expenditures for the year, which include the following:
Medical expenses = $5,300
Property taxes = $4,900
Mortgage interest = $5,500.
Your client’s AGI for the year is $74,320. Would you advise him to take the standard or itemize his deductions when filing his return?
When you calculate your client’s itemized deduction, it is less than the standard deduction, and you would utilize the standard deduction.
Medical expenses are allowed only in the amount greater than 7.5% of AGI. $74,320 x 0.075 = $5,574. Since there were only $5,300 of medical expenses, the client’s costs do not exceed 7.5% of AGI, and, as a result, no medical expense deduction is allowed. The remaining expenditures of $4,900 + $5,500 = $10,400 in itemized deductions.
Because the standard deduction is greater ($13,850 in 2023), it would be used when filing the client’s taxes.
Tests for joint return
- legally married as of last day of tax year
- must have same tax year-end
- both must be US citizens/residents (exception if nonresident alien agrees to report all income on return)
Surviving spouse- for 2 yrs after death must not have re-married and have qualified the year of death and have at least one dependent child living at home during the entire year and taxpayer must pay over half of the expenses of the home; otherwiese can file married separate on year of death
Conditions for HoH
-unmarried as of last day of tax year (unless abandoned spouse or is married to nonresident alien)
-not be surviving spouse
-US citizen/resident
-pay over half the costs of maintaining home as household in which a dependent lives for more than half the tax year
Married Filing Separately (MFS)
Individual income in a married separate from HH in overall income- more compressed marginal tax bracket, tax credits that are greatly reduced / eliminated. In IRA (0-$10k, deductibility) and Roth IRAs
Viable strategy if high income earners and one is carrying heavy student loan debt. (If file jointly, HH income can cause higher payments on loan; whereas with MFS, income based repayment plan, payments are lower). If one works in public service role, there is a public service forgiveness plan, when debt is forgiven, nothing is recognized as ordinary income the year it is forgiven.
Purpose of tax credits
Implement tax policy objectives such as increasing employment, energy conservation, promoting socially desired activities, providing tax relief for low income taxpayers and working couples with dependent children, mitigate double taxation
Child and Dependent Care Credit & Requirements
-Incurred to enable taxpayer to be employed
-Maintain HH for a dependent under 13 or an incapacitated dependent/spouse
35% of qualifying expense (after ceiling limitations of $3,000 individual/ $6,000 family), reduced by 1%for each $2,000 of AGI> $15,000, but no lower than 20% (after $45,000). Exclusions of up to $5,000 reduces the eligible expenses for computing the credit.
Child Tax Credit & Requirements
Parents w/dependents under 17 can claim a credit of up to $2,000/child
-2023 credit is partially refundable as there is an earnings threshold to start claiming on the up to $1,500 portion known as Additional Child Tax Credit
-For 2022-2025, child must be eligible to be claimed as a dependent and live at the same residence for more than half the year and cannot provide more than half their own financial support. Must have SSN. Parents must have AGI <200,000 for single filers and <400,000 MFJ. For every $1,000 in excess, the credit is reduced by $50
American Opportunity Tax Credit (AOTC)
$2,500 credit for max of 4 years/student (100%of first $2,000 of tuition and fees, plus 25% of the second $2,000 in tuition and fees
-academic period is treated as taxable year of payment
- must pursue at least half of the normal FT load for course of study
- not available to convicted students
- qualified tuition and related expenses eligible for the credit must be reduced by amounts received under other sections of tax law
-phase-out for taxpayers filing joint is $160-180k ($80-90k for others)
Lifetime Learning Tax Credits
20% of a max of $10k /yr of qualified expenses at taxpayer level:
-available for unlimited years and can be used for any course that helps acquire/improve job skills
-spans over a $20k range for taxpayers filing jointly with MAGI of $160-180K ($10 for other taxpayers with MAGI phaseout $80-90k)
Withholding and Estimated tax rules
- salaries, fees, bonuses, dismissal payments, commissions, vacation pay, and taxable fringe benefits are subject to withholding
- Exemptions for Certain employees such as agricultural laborers, ministers, household employees, newspaper carriers under 18, and tips of less than $20 a month from an employer
-Exemptions for certain fringe benefits.
-Special rules for lump-sum pension plan or annuity payments. Federal income tax withholding is mandatory for such payments unless the individual elects to not have tax withheld.
Kiddie Tax
-Parent’s highest marginal tax rate applied to child’s net unearned income; earned income is taxed according to single taxpayer’s bracket
- Net unearned income is subject to Kiddie Tax if:
1. the child is under age 19 by the end of the tax year or is a full-time student under age 24;
2. the child has at least one living parent by the end of the tax year;
3. the child’s unearned income is more than twice the minimum standard deduction allowed to dependents ($1,250; and
4. the child doesn’t file a joint return
Self-employment taxes
7.65% adjustment on net earnings (obtained by multiplying SE income by .9235)
OASDI of 12.4% is capped at $160,200 (Only total earnings of $160,200 is subject to OASDI tax)
Medicare of 2.9% is applied to the whole amount. If Income is >200k Ind or $250k married, then an additional .9% Medicare tax applies
If SE net earnings x .9235 is less than or equal to $160,200, then:
SE taxes due= Taxpayers SE net earnings x .9235 x.135
If SE net earnings x .9235>160,200. then:
-(Net SE earnings x .9235 x .029)+(Net SE earnings x .9235 x .124)
Net Investment Income Tax
Individuals, estates, and trusts are subject to a 3.8% surtax on net investment income, and is applied to the lesser of NII or excess of MAGI over $250k for MFJ ($200K single)
A limited credit is provided for all elderly individuals who have attained age 60 before the end of the tax year and individuals who receive insubstantial Social Security benefits.
FALSE: A limited, personal, nonrefundable credit is provided for certain low-income elderly individuals who have attained age 65 before the end of the tax year. It is also applicable to individuals who retired because of a permanent and total disability and who receive insubstantial Social Security benefits.
For 2023, Jane had self-employment income of $100,000. Additionally, Jane worked part-time teaching at a local college and earned $40,000 in W-2 wages. Calculate Jane’s self-employment tax.
The first step is to determine if the SE earnings X 0.9235 plus the W-2 wages exceed $160,200 (2022).
Because the result, [($100,000 x 0.9235) + $40,000 (W-2 income) = $132,350], is less than the maximum Social Security wage base of $160,200, Jane’s net earnings from self-employment, $92,350, are subject to 15.3% SE tax. ($100,000 x 0.9235 x 0.153 = $14,130).
Gross income
Income from whatever source derived - exclusions.
waived for
a child of the taxpayer who is either under the age of 14 or a full-time student, under the age of 24.
Loss limitations
deductibility of the losses to the partner’s adjusted basis in his or her partnership interest as determined at the end of the partnership’s tax year is limited and carries forward once basis is reduced to 0
Passive Activity Loss Limitation
partner may not deduct passive loss against earned or portfolio income, but may deduct the loss only against other passive income.
Transactions between Partner and Partnership
-Losses are not allowed on sales/exchanges between a partner and the partnership, or between two partnerships where the partner owns more than a 50% interest
-Gains are treated as ordinary income instead of capital gain if the partner owns more than s 50% interest in the partnership and if the exchanged asset is not a capital asset
Partnership Distributions
A distribution of cash or property from the partnership to a partner is generally treated as a tax-free return of capital:
-Liquidating distribution: The partnership may desire to liquidate a partner’s entire interest due to retirement, death or other business reasons. In such cases, the liquidating distribution is treated as a sale or exchange of the partnership interest.
Non-liquidating distribution: Distribution may result in reduction of partner’s capital interest in partnership. Does not result in a taxable gain/loss to partner unless the distribution includes cash/marketable securities in excess of partner’s basis in the partnership interest
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S Corporation requirements
- domestic corporation
- max of 100 shareholders
-only citizens/resident aliens, estates, certain trusts and certain tax-exempt organizations can be shareholders - Only one class of stock may be issued and outstanding. Multiple classes may only be used if the only difference is voting rights
-cannot maintain special tax statuses - if it has an 80%/+ owned subsidiary, it cannot file a consolidated tax return with that subsidiary as there are special rules for a QSSS (Qualified subchapter S Subsidiary)
S Corporation Election requirements
All shareholders on the S election date must consent and the corporation must file Form 2553. To be effective for the election year, the S election and consent form must be filed on or before the fifteenth day of the third month of the election year.
-IRS can waive the election deadline/grant relief for improper elections if reasonable cause/inadvertent
S Corporation Termination Rules
- for voluntary revocation, need consent from shareholders owning >50% of S Corporation’s stock: revocation is effective for the entire year if made on or before the 15th day of the 3rd month of the tax year; otherwise, the termination is effective the 1st day of the next tax year unless a prospective termination date is specified.
- involuntary revocation if S Corporation fails to meet its qualifications or has excessive passive investment income in a 3 year period
-may not re-elect S-Corporations status for 5 yrs
Tax Credits
- Child and dependent care expenses
-child tax credit ($2k per child under 17) %400 credit for qualifying dependents, phaseout at $200k for single and $400k for MFJ
-American Opportunity Tax Credit (undergrads/partially refundable )
-Lifetime Leaning tax credit (non refundable)
-Adoption tax credit (AOTC)
-Foreign tax credit
-Earned income tax credit (refundable)
Income from whatever source derived minus exclusions equals ______________.
gross income.
Which of the following requirements must be met to claim a dependency exemption for an individual who is considered a qualifying child?
A relationship test
An age test
An abode test
A support test
The standard deduction is available to which category of taxpayers
Individuals over 65 and blind
Standard deduction is not available to
-An individual filing a return for a period less than twelve months because of a change in an accounting period.
-A married taxpayer filing a separate return in instances where the other spouse itemizes.
-Non-resident aliens.
Child support payments are categorized as ____________.
An exclusion is a source of income that is omitted from the tax base, whereas a deduction is an expense that is subtracted in arriving at taxable income.
Child support is categorized as an exclusion.
Javier, age 16, is interested in investing. He owns a mutual fund he was given by his grandmother with a current value of $30,000. The fund generates $3,000 per year in tax-exempt income. Javier also has a part-time job and earns $6,000 per year. What amount of Javier’s income is subject to kiddie tax at his parent’s marginal income tax rate?
The mutual fund generates unearned income but the income is tax-exempt and will not trigger kiddie tax.
Maqsood has net earnings from self-employment of $500,000. For 2023, what is the Social Security portion of the self-employment tax (SE) Maqsood will pay?
The self-employment tax is 15.3% (12.4% Social Security + 2.9% Medicare). The Social Security portion is assessed up to the Social Security wage base of $160200 (2023). .124 x $160200 = $19865
The reservist expense deduction applies to members of the Reserves and allows deduction of travel, meals, and lodging costs if the individual is _____________.
Member of the Reserves are able to deduct expenses (travel, meals, lodging) if performing services & 100+ miles from home.
When both criteria are met, the Reservist will use the federal per diem rate.
Edith is a 21-year-old full-time student who is claimed as a dependent on her parent’s income tax return. This year, investments within her UTMA account generated $7,400 of non-qualifying dividends and $2,250 of taxable interest. Edith’s parents are in the 32% marginal tax bracket, while Edith is in the 10% bracket.
Calculate the ‘kiddie tax’ due on Edith’s unearned income this year.
Edith had $9,650 ($7,400 [dividends] + $2,250 [interest]) of net unearned interest income. The ‘Kiddie Tax’ can be calculated as follows:
The first $1,250 is tax-free (dependent’s standard deduction amount)
The next $1,250 is taxed at the Edith’s tax rate (10%)
$1,250 x 0.10 = $125,
And the remaining $7,310 is taxed at the parent’s tax rate (32%)
$7,150 x 0.32 = $2,288 (Kiddie Tax!)
Tommy, a CPA, has $60,000 of earned income, $2,000 of interest from CDs, qualified dividends of $3,000, and $4,000 of margin interest. How much of the margin interest is deductible?
The investment interest expense deduction pool is $4,000 (from the margin interest). This is deductible as a Schedule A (below-the-line) deduction up to net investment interest. In this case, only the $2,000 from his CDs qualify. If Tommy had “opted out” of the long-term capital gains treatment associated with the qualified dividends, $4,000 worth of investment interest would be deductible (it cannot exceed the expenses).
