Intro to Tax Law (Class)

Question 1

What is the formula for calculating federal income tax liability?

Answer 1

Gross Income - deductions =taxable income
x tax rate

This formula illustrates how gross income, deductions, and tax rates interact to determine tax liability.

Question 2

What are the two fundamental elements of tax?

Answer 2

• Rate of tax
• Tax base

The tax base refers to what the tax rate is applied to, which in this case is taxable income.

Question 3

What is the highest current federal income tax rate?

Answer 3

37%

This rate applies to the highest income brackets.

Question 4

What comprises taxable income?

Answer 4

• What goes in (benefits)
• What comes out (deductions)

Taxable income is essentially the net result of benefits received minus allowable deductions.

Question 5

Define gross income.

Answer 5

Any benefit an individual (taxpayer) derives

Examples include wages and dividends from stocks.

Question 6

Do you need to receive money to have a benefit for gross income?

Answer 6

No

Gross income can include benefits that do not involve cash transactions.

Question 7

What are exclusions to gross income?

Answer 7

• Gifts
• Borrowed money

Congress has designated these items as excluded from gross income despite being considered benefits.

Question 8

Are personal expenses deductible?

Answer 8

No

Personal expenses are generally not deductible, with certain exceptions like medical expenses and charitable donations.

Question 9

What is a qualified residence interest?

Answer 9

Interest on the loan secured by a mortgage

This interest can be deducted under specific conditions.

Question 10

What is a mortgage?

Answer 10

An interest in property used to secure a loan

A mortgage allows the lender to take possession of the property if payments are not made.

Question 11

What are the two elements of making level payments on a mortgage?

Answer 11

• Principal
• Interest

The principal is the amount borrowed, while interest is the cost of borrowing that amount.

Question 12

What is a realization event?

Answer 12

A sale of the property

Taxation on gains from property is deferred until a realization event occurs.

Question 13

What is the tax treatment on gains derived from property?

Answer 13

Taxed on the difference between selling price and original basis

For example, if a property bought for $10K is sold for $25K, the taxable gain is $15K.

Question 14

What is the special rule regarding tax exclusion on home sale gains?

Answer 14

If owned for at least 2 of the past 5 years, married couples can exclude $500K, singles $250K

This exclusion applies to gain on the sale of a primary residence.

Question 15

What does it mean for an exclusion to not go into gross income?

Answer 15

It is not considered in the calculation of gross income

Exclusions directly reduce taxable income, thus impacting tax liability.