Lesson 1 (Ch. 3) Flashcards
Expanded Tax Formula
Income Less: Exclusions = Gross Income Less: Deductions for AGI (above the line deductions) = Adjusted Gross Income Less: Itemized or Standard Deduction (below the line) Less: personal and dependency expemptions* Less: 20% QBI Deduction* = Taxable Income x Applicable Tax Rates Less: Tax Credits = Tax Liability
What is included as income?
Everything unless it is specifically excluded by the tax code.
Exclusions from Gross Income
Interest income from Muni Bonds Gifts Child support payments Inheritance Scholarships Roth distributions Death benefits Alimony (post 2018)
Deductions for AGI (above the line)
Business expenses Trad IRA contributions Rental income expenses Tuition for higher ed Student loan interest HSA contributions Contributions to qualified plans Losses to sale of a business property Alimony paid (post 2018)
Deductions from AGI (below the line)
the greater of standard deduction or itemized deductions AND 20% QBI deduction
When MUST a taxpayer itemize?
- Taxpayer files for less than 12 months because of change in their accounting period.
- Married Individual filling separately can’t use standard deduction if their spouse itemizes
- Nonresident alien
Common Itemized Deductions
Charitable contributions Mortgage interest Investment interest expense SALT Real property taxes on home Property taxes on value of car Medical in excess of 7.5% AGI
Can use this tax filing status if you’re married as of the last day of the taxable year or your spouse dies during the taxable year (for up to 2 years if widow maintains a home with a dependant)?
Married Filing Joint
This tax filing status is typically used when…
- Spouses are separated
- One spouse suspects the other is not reporting income
- Tax minimization purposes
Married Filing Separately
This filing status is available for taxpayers who are unmarried as of end of year or qualify as an abandoned spouse. In addition, they must pay more than ½ the cost of maintaining a household for a dependent relative for more than ½ the tax year.
Head of Household
What are the four test a qualifiying child must meet?
Relationship Test
A qualifying child of a taxpayer may be:
The taxpayer’s child,
A descendant of the taxpayer’s child,
The taxpayer’s brother, sister, stepbrother, stepsister, half brother, half sister, or
A descendant of the taxpayer’s brother, sister, stepbrother, stepsister, half brother, or half sister.
Once a relationship is established by marriage, it continues even if there is a change in marital status.
Abode Test
A child must live with the taxpayer for more than half the year
Temporary absences (i.e. away at college) do not count
Age Test
Under 19 years old as of the end of a calendar year, or a student under the age of 24
Must be a full-time student during 5 months of the year
Support Test
The child must not provide more than half of his or her support during the year
If the child is a full-time student, scholarships are not considered
In addition to the joint return and residency tests, a qualifying relative must meet all of the following tests
Relationship Test
As you will see, the relationship test for a qualifying relative is much more broad than for a qualifying child.
The taxpayer’s child or a descendant of a child,
The taxpayer’s brother, sister, stepbrother, or stepsister,
The taxpayer’s parent or ancestor,
The taxpayer’s stepmother or stepfather,
A child of the taxpayer’s sibling,
A sibling of the taxpayer’s parent,
A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law of the taxpayer
Any other individual (who may be a totally unrelated person) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household. A person who was married to the taxpayer during part of the year does not qualify.
Gross Income Test
The dependent’s gross income must be less than the exemption amount referenced in Section 152(d)(1)(B), which is $4,300 in 2020. Even though personal and dependency exemptions have been suspended, this gross income test still remains in effect.
Support Test
The taxpayer must provide more than half of the dependent’s support.
What is the standard deduction for dependants?
the greater of:
$1,100 (2020)
or
$350 plus earned income (cannot exceed single filer SD - $12,400)
What is the kiddie tax rule?
the net unearned income (over a certain threshold) is taxed at the parents’ marginal tax rate. For 2020, this threshold is $2,200, which is broken out into two parts.
The first $1,100 represents the basic standard deduction (for unearned income)
The second $1,100 of unearned income is taxed at the dependent’s marginal tax rate
