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ac 371 > Midterm > Flashcards

Midterm Flashcards

1
Q

Marginal Tax Rate

A

Change in total tax / change in taxable income

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2
Q

Average Tax Rate

A

Total Tax / Taxable Income

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3
Q

Effective Tax Rate

A

Total Tax / Total Income

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4
Q

Implicit Tax

A

?

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5
Q

Which of the following constitute a tax?

a. payment for drivers license
b. payment required (by government) house appraisal
c. payment for hotel use of 1% of bill to pay for city projects
d. payment for rental car use of 3% of bill to pay for the roads

A

a. no
b. no
c. yes
d. yes

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6
Q

How do implicit taxes help achieve certain social or economic objectives?

A

The tax benefit associated with the tax-favored asset increases the demand for the asset. Increased demand drives up the price, which in turn reduces its before tax benefit.

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7
Q

Of corporations, estates and trusts, and individuals, who has to file?

A
  • Corporations: all must file regardless of taxable income
  • Estates and trusts: required to file if gross income exceeds $600.
  • Individuals: filing is determined by taxpayer’s filing statue, age, and gross income.
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8
Q

When are corporations tax return due date?

A

15th day of the 3rd month following the end of tax year

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9
Q

When are individual tax returns due?

A

15th day of the 4th month. Usually April 15th

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10
Q

Due dates on a Sat. Sun. or holiday are extended to ___.

A

the next business day.

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11
Q

individuals are allowed to file for an automatic _____

A

six-month extension

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12
Q

Statute of limitations:

A

the time in which the taxpayer can file an amended return or the IRS can assess a tax deficiency.

Generally end 3 years from the later of (1) the date the tax return was actually filed, or (2) the tax return’s original due date.

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13
Q

In general, why is a taxpayer’s return selected for audit?

A

The IRS believes that tax return has a high probability of being incorrect.

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14
Q

What are three types of audits?

A

(1) Correspondence examinations (2) Office examinations (3) Field examinations

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15
Q

Describe a correspondence examination audit:

A

most common audit, conducted by mail and are generally limited to 1 or 2 items on the return.

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16
Q

Describe an office examination audit:

A

second most common audit, conducted in the local IRS office and tends to be broader in scope;

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17
Q

Describe a field examination audit:

A

least common audit, held at the taxpayer’s place of business and can last months to years.

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18
Q

Primary Authorities:

A 
Statutory sources (e.g., Internal Revenue Code)
Judicial Sources (the courts)
Administrative souces (IRS pronouncements)
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19
Q

Second Authorities

A

Unofficial tax authorities such as tax services and tax articles.

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20
Q

Are the following primary (p) or secondary (s) sources?

  1. Internal Revenue Code
  2. Tax article in USA today
  3. Article on Supreme Court Opinion
  4. Supreme Court Opinon
  5. RIA Federal Tax Coordinator
  6. Treasury Regulations
A
  1. P
  2. S
  3. S
  4. P
  5. S
  6. P
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21
Q

What does it mean to be excluded from income?

A

Realized income that is permanently excluded from taxation.

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22
Q

Are the following income items excluded or deferred?

  1. Interest income on municipal bonds.
  2. Gain on sale of personal residence (subject to limits)
  3. Life insurance proceeds
A

1-3 Exclusions.

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23
Q

If 2 people are married and one spouse dies, what filing status does the widow get to claim in the year that the spouse dies?

A

Married Filing Jointly

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24
Q

How many years can a spouse claim qualifying widow(er) status?

A

2

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25
Q

What makes a taxpayer qualify for Head of household?

A
  1. Unmarried at the end of the year.
  2. Not be qualifying widow(er)
  3. Pay more than half the cost of keeping up a home
  4. have a qualifying person live in the taxpayer’s home for more than half a year.
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26
Q

When you sell a capital asset, you calculate the gain using the formula:

A 
Sale proceeds
Less: Selling expenses
= amount realized
Less: Basis (investment) in property sold
= Gain/ Loss on sale
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27
Q

Characteristics of Alimony payments:

A
  1. Transfer of cash made under a written separation agreement or divorce decree.
  2. The separation/ divorce decree doesn’t designate the payment as something other than alimony.
  3. In the case of legally separated / divorces, the spouses don’t live together.
  4. The payments cannot continue after the death of the recipient.
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28
Q

Alimony is NOT:

A
  1. Property division

2. Child support payments

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29
Q

There are 2 scenarios where prizes / awards are excluded from income. Describe each.

A
  1. Awards are scientific, library, charitable achievements such as the Nobel Prize only if (1) the recipient without any action on his part to enter the contest or proceeding, (2) the recipient is not required to render substantial future service to receive the prize, (3) the payer of the prize transfers the prize to a governmental unit or qualified charity.
  2. Employee award for length of service or safety achievement limited to $400 of tangible property per employee per year. Award is not included if circumstances suggest it is disguised compensation.
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30
Q

Scholarships are excluded from a student’s gross income as long as they cover the following expenses:

A

Tuition, fees, books, and supplies. Exclusion applies only if scholarship doesn’t require work.

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31
Q

If a student gets a scholarship to perform research or teaching assistant duties, is the scholarship taxable?

A

yes

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32
Q

For moving expenses to be deductible, you need to meet two tests:

A
  1. Distance test.

2. Time test associated with the move.

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33
Q

What types of expenses associated with moving are NOT deductible?

A
  1. Meals during the move.

2. Costs associated with house hunting trips.

34
Q

What is the maximum amount of student loan interest you can deduct?

A

2500

35
Q

If your filing status is single and your income is between $65,000 and $80,000, you get to deduct a portion of the student loan interest that you pay. the phase out calculation is based on the lesser of the amount that you actually pay or ___

A

$2500

36
Q

What are 2 types of interest that a taxpayer can take as an itemized deduction?

A
  1. Interest paid on acquisition indebtedness and home-equity indebtedness secured by a qualified residence.
  2. Interest paid on loans used to purchase investment assets such as stocks, bonds, or land.
37
Q

A taxpayer can only deduct interest to the extent they have investment. If I have $500 of investment income and $750 of investment interest expense, how much can I take as a deduction for investment interest?

A

500

38
Q

What are the 4 common misc. itemized deductions subject to a 2% floor?

A

Employee business expenses, investment expenses, tax prep fees, hobby losses.

39
Q

What is number one of the 4 common misc. itemized deductions subject to a 2% floor?

A

Employee business expenses: costs of professional dues, uniforms, union dues, and subscriptions to publications related to employment. Travel costs for business purposes are deductible, as well as 1/2 of the cost of meals, and lodging expenses.

40
Q

What is number two of the 4 common misc. itemized deductions subject to a 2% floor?

A

Investment expenses: common ones include expenses associated with investment income or property, investment advisory fees, safe-deposit box fees, subscriptions to investment-related publications.

41
Q

What is number three of the 4 common misc. itemized deductions subject to a 2% floor?

A

Tax Preparation Fees: Ordinary and necessary expenses incurred in connection with determining tax obligations imposed by federal, state, municipal, or foreign authorities. While most common tax prep fees are the costs of preparing tax returns, you may also deduct other related expenses such as the cost of property appraisals for tax purposes and the costs of contesting tax liabilities.

42
Q

What is number four of the 4 common misc. itemized deductions subject to a 2% floor?

A

Hobby losses: Hobby expenses are deductible only to the extent of the revenue generated by the hobby. If an activity is determined to be a hobby, the taxpayer must include the revenue from the activity in gross income and may deduct the expenses to the extent of the gross income from the activity as itemized deductions. When hobby expenses exceed revenue, the expenses must be deducted in a particular sequence. 1st you deduct expenses that are deductible anyways such as mortgage interest or property taxes. Then, taxpayers deduct all other hobby expenses except depreciation expenses. Finally, deduct depreciation expense.

43
Q

Where does hobby income get recorded?

A

Revenue is recorded in gross income.

44
Q

What are misc. itemized deductions not subject to AGI floor?

A

Gambling losses and casualty and theft losses.

May deduct gambling losses to the extent of winnings.

45
Q

How do you calculate kiddie tax?

A
  1. Calculate the taxable income using the standard deduction of $1,050.
  2. Calculate the net unearned income using the gross unearned income and subtracting $2,100.
  3. The lesser of (1) and (2) is used to calculate the kiddie tax. multiply this amount by the parent’s tax rate.
  4. Tale the difference between (1) and (2). This amount is taxed at the child’s tax rate.
  5. Add (3) and (4) together to get the total tax liability.
46
Q

What are the phase-out and fling status for the child tax credit?

A

MFJ: $110,000
MFS: $55,000
HoH & S: $75,000

47
Q

4 steps to calculate the child tax credit:

A
  1. Determine the excess AGI by subtracting the threshold amount.
  2. Divide the excess AGI in (1) by $1000 and round up to the next whole number.
  3. Multiply the amount from (2) by $50.
  4. Subtract the amount from (3) from total credit before phase-out (limited to $0) to determine the allowable child tax credit.
48
Q

Dependent Care Credit is based on the lesser of:

A
  1. the total amount of the dependent care expenditures for the year.
  2. the taxpayer’s earned income including wage, salary, or other taxable employee compensation, or net earnings from self-employment.

$3000 for 1 qualifying person, $6000 for 2 or more.

49
Q

American opportunity credit can be used for how long and by whom? what is the max amount of this credit?

A

4 years of post-secondary education.

$2,500

50
Q

How do you calculate the American opportunity credit?

A

100% of the first $2,000 of qualified expenses, and 25% of the next $2,000 of qualified expenses.

51
Q

Lifetime Learning Credit can be used for….

What is the max. amount of this credit?

To calculate the credit, you used …

A

Any education expense including professional or graduate school.

$2,000

20% of expenses up to $10,000

52
Q

For / From

Items related to business activities

A

For

53
Q

For / From

Rent and royalties expenses

A

For

54
Q

For / From

Moving expenses

A

For

55
Q

For / From

Health Insurance deductions for self-employed taxpayers

A

For

56
Q

For / From

Self-employment tax deduction (1/2 of social security and medicare paid)

A

For

57
Q

For / From

Qualified student loan interest (subject to limit)

A

For

58
Q

For / From

Qualified tuition and fees deduction (subject to limit)

A

For

59
Q

For / From

Medical Expenses

A

From

60
Q

For / From

State/ Local taxes

A

From

61
Q

For / From

Real estate taxes for your personal residence

A

From

62
Q

For / From

Personal property taxes

A

From

63
Q

For / From

Mortgage interest

A

From

64
Q

For / From

Investment interest

A

From

65
Q

For / From

Charitable contributions

A

From

66
Q

For / From

Casualty/ Theft losses

A

From

67
Q

What are the floors for medical expenses?

A

10% for taxpayers under 65. 7.5% for 65+.

68
Q

What is not included in medical expenses?

A

Over the counter drugs

69
Q

When can you not count a medical expense?

A

When you have been reimbursed for it.

70
Q

How to calculate tax liability if taxable income includes qualified dividends.

A
  • Total income less qualified dividends = (A)
  • Multiply (A) times the tax rate to get the tax liability on ordinary income (B)
  • Multiply the qualified dividends times 15% to get the tax liability on dividends (C).
  • Add (B) & (C) to get the total tax amount due.
70
Q

Interest you receive on what kind of bond is taxable?

A

Corporate

71
Q

Interest received on which bonds are not taxable?

A

State / local bond

72
Q

For most people ___ > ___

A

Average tax rate > effective tax rate

73
Q

Are growths on qualified higher education expenses taxable?

A

No

74
Q

What are 529 Plans?

A

Qualified higher education expenses

75
Q

T/F

Expenses on 529 plans are taxable

A

False

76
Q

If you have $1000 / year in investment income and $800 / year in investment interest, how much can you take as an expense?

A

$800

77
Q

If you have $1000 per year in investment income and $5000 per year in investment interest how much can you take as an expense

A

$1000

78
Q

When are medical expenses deductible?

A

If the 10% floor is greater than income

79
Q

If you have an LLC. that has a net income of $100,000 and there are four partners, what happens?

A

Each will have 25% of flow through income that they’ll be taxed on. Even if they get $0 they s till have to report income of 25,000.

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