Income Tax Fundamentals and Calculations Flashcards
Filing status
- US citizen or permanent resident may be required to file
- 5 statuses
1. single
2. MJS
3. MFJ
4. head of household
5. qualifying widower
Head of household
maintains principal residence and provides more than 50% of child support
Qualifying windower
- file MFJ in year of death
- file QW for 2 years after as long as there is a qualifying child and they don’t remarry
Gross income - inclusions
W CU BOAT TRIPP
- - ordinary dividends - sched. B
- taxable interest - sched. B
- business income (loss) - sched. C
- capital gains (loss) - sched. D
- real estate - sched. E
- putative damages (except wrongful death)
- wages, salary, tips
- IRA distributions
- pensions and annuities
- alimony before 2019
- unemployment
- taxable SSA
Gross income - exclusions
- gifts
- inheritances
- child support
- municipal bond interest
- workers comp
- compensatory damages
Tax calculation order
Gross income
- adjustments above line
= Adjusted Gross Income (AGI)
- deductions below line
= Taxable Income
* tax rates
= Taxable Calculation
- credits plus other taxes
= Tax Liability
- quarterly payments and withholding
= Net Tax Due
Fringe benefits - tax free
- premiums the employer pays to health plan for employee, spouse, dependents
- insurance premiums employer pays on group life up to $50k
-company car for business use only - commuter highway vehicle and transit pass (300/month cap)
- up to $5k paid by employer for dependent care (2,500 MFS)
- employer provided education assistance up to $5,250
- employer assistance for adoption expense up to $10k
- parking spots (300/month cap)
- discount on company products not to exceed employees gross profit percentage
- overtime meal, cab fare, theatre, sporting
- discounts on services limited to 20% of selling price charged to customers
Fringe benefits - taxable
- health insurance premiums paid by self employed, partners, more than 2% owners of S corp - 100% is deductible so long costs don’t exceed net income from business
- can include medical, dental, LTC, but NOT disability
- insurance premiums employer pays on LI above $50k death benefit if plan is nondiscriminatory
Adjustments
SHARESS PKM
AGI is total income (gross income) less adjustments
- IRA contributions
- student loan interest (limit 2500)
- Keogh or SEP
- self employment tax (.07065)
- alimony prior to 2019
- self employment health insurance
- moving expenses - military
- penalty for early withdrawal
- HSA
- $4000 education expense
Modified Adjusted Gross Income (MAGI)
AGI plus tax exempt interest, non taxable SSA, student loan interest, others
- for exam MAGI will be used with tax exempt interest to determine if SSA is taxable
Standard / Itemized deductions
AGI is reduced by greater of standard deduction or itemized
- standard provided in tax tables
- 1,500 extra or over 65 or blind.
Itemized deductions (sched A)
SALT MMMICC
- medical, dental, LTC expenses (>7.5%)
- state and local sales tax (10k limit)
- personal property tax (10k limit)
- real estate taxes (10k limit)
- mortgage insurance qualified residence (< 100k AGI)
- home mortgage interest
- charitable gifts
- investment interest
- casualty loss (federally declared disaster area)
Qualified residence interest rules
- after Dec 15 2017
- if proceeds of mortgage loan are used to buy, build, or improve home and this mortgage plus others total more than 750k (375 S) only interest paid on 750k is deductible
- must itemize
- 750k includes principal and HELOC
- interest on mortgage over 1M before 2017 is grandfathered
- not qualified: refinance loan to be more than debt prior, used to pay CC, car, tuition
Ordinary/ qualified dividends
Qualified: taxed at LTCG rate
Investment interest deduction
- interest paid on indebtedness for property held for investment typically margin interest
- max deduction is limited to net investment income
Investment income
- interest, non qualified dividends, royalties, STG
- have to elect out of reduced LTG rates for qualified or long term gains
- assume ordinary unless stated
Investment advisor fees (repealed)
after TCJA 2017, cannot deduct investment advisor fees
Casualty loss (sched. A)
- only claimed for unreimbursed loss from federally declared disaster
- complete or partial destruction of property from sudden, unexpected, unusual damage
- Eg. earthquake, fire, hurricane
- amount is reduced by insurance proceeds received, only unreimbursed is deductible
- $100 floor reduction
- aggregate loss in excess of 10% AGI deductible
- How to calculate
1. use lesser of basis or FMV
2. subtract insurance coverage
3. subtract $100 floor
4. subtract 10% of AGI
Misc. deductions (sched. A)
- repealed
- suspended from 2018 to 2025
Home office deduction for employees (suspended)
- before TCJA could claim deduction on itemized misc. deduction
- can still if self employed and meeting rules
- rules for self employment office deduction
1. use home exclusively and on regular basis
2. used to conduct admin or management activities of business
3. no other fixed location where substantial admin or management activities takes place
Gross income limit
home office deduction is limited to gross income derived from activity reduced by all other deductible expenses
gross income - deductible expenses = home office deduction allowed
Meals and entertainment expense
- after TCJA most nondeductible unless falling under specific exemption
- meals only if business is conducted and not lavish
- parties for employees deductible
- business meals 50% deductible
- meals while travelling 50% deductible
- tickets to sports not deductible
Personal and dependency exemptions (suspended)
- $0
Tax Liability - rate schedule
- will be included on test