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
Marginal tax rate
- percentage applying to the last dollar of taxable income
Medicare taxes
- medicare tax rate applicable to wages over 200k (250k MFJ, 125k MFS) will increase to 2.35% (1.45% + .9%)
- employers are required to withhold and report Medicare tax at the 2.35% rate on wages over 200k
- 200k or less: medicare tax is 1.45%
- additional 3.8% medicare tax will be applied to investment income for taxpayers with annual income of more than 200k (250k MFJ)
- investment income includes LTCG, distributions from non qualified annuities
Qualifying dividend and LTCG rates
10 -12% bracket: 0%
22-35% bracket: 15%
35-37% bracket: 20%
Kiddie tax
- intended to discourage shifting of income to kids at lower rates
- applies when children have unearned income greater than 2,500 with at least one parent
Calculations
1. kid gets 1250 deduction
2. next 1250 taxed at child’s income tax rate of 10% (125)
3. over 2500 taxed at parents marginal rate
4. if child has earned income over 1250, earned income plus 400 is used in step 1
Calculation of standard deduction for child with earned and unearned income
- standard deduction is greater than 1250 unearned income or earned income plus 400
- never more than single deduction (13850)
Self employment tax
- pay their own SS and Medicare tax
- pay both employer and employee halves of the tax
- amount of tax is based on net earnings of employment or taxable income
- doesn’t include the following: dividends or interest, gains, real estate, rent, distributive share of partnership, wages from S corp, k-1 distributions from s corp
- income included: net sched. C income, k-1 partnership income, board of directors fees, part time earnings 1099
Self employment tax calculation
- taxable wage base will not exceed $160,200 (only for medicare)
Steps:
1. calculate total self employment income
2. subtract 7.65% or multiply by .9235
3. multiply remainder by 15.3%
shortcut: combine steps 2 and 3, multiply income by .1413 and round up
Credit for child and dependent care (until 13)
- credit is percentage of expenses actually paid for care of a dependent
- qualifying expenses are limited to 3k for one dependent and 6k for two or more
- depending on income, credit percentage of 20% to 35% applies (multiply 20% for exam)
Child tax credit
- can claim credit of 2k for each qualifying child under 17
- reduced by $50 for each 1k above 400k MAGI (MFJ) and 200k (s)
- up to 1,600 per child is a refundable tax credit
- $500 family credit for each dependent who is not a qualifying child (17 older, disabled parent, need to provide more than 50% support)
Foreign tax credit
- us taxpayer who pays income tax to foreign government in allyship with US may deduct or credit them dollar for dollar
Retirement savings contributions credit
- for low to moderate earners
- credit is 50%, 20%, or 10% of retirement plan/ RA contributions depending on persons AGI
- no credit for taxpayers over $73,000
- maximum credit is $2k (s), $4k (MFJ)
Adoption credit
To qualify
1. adopted child and paid out of pocket expenses
2. tax credit is directly related to amount spent on expenses
Not Qualifying expenses: surrogate costs, adopting spouses child
- max credit is 15,950 ( guaranteed if child is special needs)
- phased out for MAGI 239,230 - 279, 230
When to claim adoption credit
- when adoption was finalized and whether child is us citizen or from another country (only in year adoption became final)
- expenses paid in year after adoption can be claimed for tax year actually paid
Credit for elderly and permanently disabled
- credit for individual who reaches 65
- under 65 with permanent disability and receives disability income
Earned income credit (refundable)
- credit for certain people in low paying jobs and have earned income under certain amounts
Tax deduction vs tax credit
- deduction is worth more to a high bracket payer
- credit is worth more to low bracket payer
deduction * tax bracket = tax equivalent credit
tax credit / tax bracket = equivalent deduction
